nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒12‒19
71 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function By Jens Klose
  2. The financial accelerator and monetary policy rules By Gunes Kamber; Christoph Thoenissen
  3. Technology news and the U.S. economy: Time variation and structural changes By Berg, Tim Oliver
  4. Does Money Matter for Inflation in Ghana? By Arto Kovanen
  5. Fiscal discipline and economic growth – the case of Romania By Ionut Dumitru; Razvan Stanca
  6. Bank of Japan’s Monetary Easing Measures: Are They Powerful and Comprehensive? By W. Raphael Lam
  7. Monetary Credibility Effects on Inflation Dynamics: A Macrohistorical Case Study. By Claude Diebolt; Mamoudou Toure; Jamel Trabelsi
  8. External Shocks and Monetary Policy in a Small Open Oil Exporting Economy By Jean Pierre Allegret; Mohamed Tahar Benkhodja
  9. International transmission of shocks, money illusion and the velocity of money By Sousa, Teresa
  10. Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR By Alina Carare; Adina Popescu
  11. What Can Low-Income Countries Expect from Adopting Inflation Targeting? By Edward R. Gemayel; Sarwat Jahan; Alexandra Peter
  12. Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk By Blommestein, H.J.; Eijffinger, S.C.W.; Qian, Z.
  13. Search Frictions, Financial Frictions and Labor Market Fluctuations in Emerging Economies By Sumru Altug; Serdar Kabaca; Meltem Poyraz
  14. Loose commitment in medium-scale macroeconomic models: theory and applications By Davide Debortoli; Junior Maih; Ricardo Nunes
  15. Optimal disinflation under learning By Timothy Cogley; Christian Matthes; Argia M. Sbordone
  16. Policy Response to External Shocks: Lessons from the Crisis By Carlos Capistrán; Gabriel Cuadra; Manuel Ramos Francia
  17. News Shocks and Asset Price Volatility in General Equilibrium By Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
  18. Fiscal Policy Discretion, Private Spending, and Crisis Episodes By Agnello, L.; Furceri, D.; R.M, Sousa.
  19. When credit bites back: leverage, business cycles, and crises By Òscar Jordà; Moritz Schularick; Alan M. Taylor
  20. Japanfs Deleveraging since the 1990s and the Bank of Japanfs Monetary Policy: Some Comparisons with the U.S. Experience since 2007 By Kazuo Ueda
  21. Bank Leverage Regulation and Macroeconomic Dynamics By Ian Christensen; Césaire Meh; Kevin Moran
  22. Monetary Policy Transmission in Ghana: Does the Interest Rate Channel Work? By Arto Kovanen
  23. Do Mood Swings Drive Business Cycles and is it Rational? By Paul Beaudry; Deokwoo Nam; Jian Wang
  24. Great Moderation or Great Mistake: Can rising confidence in low macro-risk explain the boom in asset prices? By Broer, Tobias; Kero, Afroditi
  25. A New Keynesian IS Curve for Australia: Is it Forward Looking or Backward Looking? By Antonio, Paradiso; Kumar, Saten; Rao, B Bhaskara
  26. Optimal labor-market policy in recessions By Philip Jung; Keith Kuester
  27. Are recoveries from banking and financial crises really so different? By Greg Howard; Robert Martin; Beth Anne Wilson
  28. Do mood swings drive business cycles and is it rational? By Paul Beaudry; Deokwoo Nam; Jian Wang
  30. International recessions By Fabrizio Perri; Vincenzo Quadrini
  31. On the Stability of Money Demand in Ghana: A Bounds Testing Approach By Jihad Dagher; Arto Kovanen
  32. The Macroeconomics of Fiscal Policy and Public Capital. By Duarte Bom, P.R.
  33. Detecting multiple breaks in long memory: The case of US inflation By Hassler, Uwe; Meller, Barbara
  34. Price-Level Targeting - A Real Alternative to Inflation Targeting? By Jiri Bohm; Jan Filacek; Ivana Kubicova; Romana Zamazalova
  36. Inflation Dynamics in Asia: Causes, Changes, and Spillovers from China By D. Filiz Unsal; Carolina Osorio
  37. A new monthly chronology of the US industrial cycles in the prewar economy. By Amélie Charles; Olivier Darné; Claude Diebolt; Laurent Ferrara
  38. A chronology of turning points in economic activity: Spain 1850-2011 By Travis J. Berge; Òscar Jordà
  39. Can Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America By Luis Ignacio Jácome; Tahsin Saadi Sedik; Simon Townsend
  40. Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices By Fröhling, Annette; Lommatzsch, Kirsten
  41. Housing and debt over the life cycle and over the business cycle By Matteo Iacoviello; Marina Pavan
  42. A Quantitative Model of Sovereign Debt, Bailouts and Conditionality By Fabian Fink; Almuth Scholl
  43. The role of expectations in U. S. inflation dynamics By Jeffrey C. Fuhrer
  44. The Great Depression in Belgium: an Open-Economy Analysis. By Luca Pensieroso
  45. A dynamic computable general equilibrium model with working capital for Honduras: By Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
  46. Fiscal shocks, public debt, and long-term interest rate dynamics By Marattin, Luigi; Paesani, Paolo; Salotti, Simone
  47. Can standard preferences explain the prices of out-of-the-money S&P 500 put options? By Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
  48. Safeguarding Banks and Containing Property Booms: Cross-Country Evidence on Macroprudential Policies and Lessons from Hong Kong SAR By Ashvin Ahuja; Malhar Nabar
  49. Has gold been a hedge against inflation in France from 1949 to 2011? Empirical evidence of the French specificity. By Thi Hong Van Hoang
  50. A real-time historical database for the OECD By Adriana Z. Fernandez; Evan F. Koenig; Alex Nikolsko-Rzhevskyy
  51. "$29,000,000,000,000: A Detailed Look at the Fed's Bailout by Funding Facility and Recipient" By James Felkerson
  52. Economic literacy and inflation expectations: evidence from a laboratory experiment By Mary A. Burke; Michael Manz
  53. Assessing Sustainability of the Irish Public Debt By Kumar, Saten; Paradiso, Antonio
  54. Size and quality of public sector and economic growth changes occurring in the former communist EU countries By OBREJA-BRASOVEANU, Laura
  55. "Is the Recovery Sustainable?" By Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
  56. The Expanding Social Safety Net By Casey B. Mulligan
  57. A cross-country quarterly database of real house prices: a methodological note By Adrienne Mack; Enrique Martínez-García
  58. Did the US macroeconomic conditions affect Asian stock markets? By Seema Narayan; Paresh Kumar Narayan
  59. A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets By Acharya, Viral V.; Skeie, David
  60. Informalidad, productividad y crecimiento: Análisis preliminar de las fuentes de datos en Latinoamérica y el Caribe y las metodologías de análisis By Daniel Artana; Sebastián Auguste
  61. A Retrospective Approach on Government Response to Increasing Public Debt: Empirical Evidence for European Countries By Stoian, Andreea
  62. The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland By Geneviève Verdier; Olivier Basdevant; Luis-Felipe Zanna; Dalmacio Benicio; Borislava Mircheva; Susan Yang; Joannes Mongardini
  63. Does oil price matter for Indian stock markets? By Chittedi, Krishnareddy
  64. Demographic Divide and Labor Migration in the Euro-Mediterranean Region By Tosun, Mehmet S.
  65. Housing Finance in Mexico: Current State and Future Sustainability By Marco Lopez-Silva; Raul Abreu-Lastra; Alberto Saracho-Martinez; Agustin Paulin-Hutmacher
  66. Aggregate Impacts of a Gift of Time By Jungmin Lee; Daiji Kawaguchi; Daniel S. Hamermesh
  67. The Exchange Rate and Interest Rate Differential Relationship: Evidence from Two Financial Crises By Li, Kui-Wai; Wong, Douglas K T
  68. Natural resource wealth: the challenge of managing a windfall By van der Ploeg, Frederick; Venables, Anthony J.
  69. Hostages, Free Lunches and Institutional Gaps: The Case of the European Currency Union By Günter Franke
  70. Collateral Constraints and Legal Protection of Lenders: A Macroeconomic Perspective By Kunieda, Takuma; Shibata, Akihisa
  71. On two theories of value and distribution By Naqvi, Nadeem

  1. By: Jens Klose
    Abstract: This paper uses two-dimensional asymmetric Taylor reaction functions for 16 OECD-countries to account for different reactions to the inflation rate and output by central banks before or after an election of the fiscal authorities in the respective country. Important for such an investigation is not only the period before or after an election takes place but also whether the inflation rate and output are below or above their target or potential value because this information shows whether the central bank systematically deviates from the Taylor rule. Using a Panel-GMM we observe that in the OECD-countries there are political business cycles in monetary policy with respect to the inflation and output response. However, the supporting time horizon differs between both exogenous indicators and state of variables.
    Keywords: Political business cycle; monetary policy; Taylor rule; asymmetries; Panel- GMM
    JEL: E32 E43 E52 E58
    Date: 2011–10
  2. By: Gunes Kamber; Christoph Thoenissen
    Abstract: The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al. (1999), is analyzed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-speci fic volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.
    Date: 2011–12
  3. By: Berg, Tim Oliver
    Abstract: This paper examines the time varying impact of technology news shocks on the U.S. economy during the Post-World War II era using a structural time varying parameter vector autoregressive (TVP-VAR) model. The identification restrictions are derived froma standard new Keynesian dynamic stochastic general equilibrium (DSGE) model and hold for a wide range of parameter constellations. In addition, the set of restrictions is sufficient to discriminate technology news shocks from other supply and demand side disturbances - technology surprise shocks among them. Overall, there is little evidence that the variance of technology news shocks or their transmission to real activity and inflation has changed over time. However, I detect significant time variation in the endogenous monetary policy reaction to technology news shocks; responding strongly to inflation most of the time, but less during the Great Inflation period. The evidence of this paper thus supports the hypothesis that the high inflation rates of the mid and late 1970s were the result of bad policy rather than bad luck.
    Keywords: technology news shocks; business cycles; monetary policy; DSGE models; structural time varying parameter VARs
    JEL: E32 E52 C11
    Date: 2011
  4. By: Arto Kovanen
    Abstract: Money has only limited information value for future inflation in Ghana over a typical monetary policy implementation horizon (four to eight quarters). On the other hand, currency depreciation and demand pressures (as measured by the output gap) are shown to be important predictors of future price changes. Inflation inertia is high and inflation expectations are largely based on backward-looking information, suggesting that inflation expectations are not well anchored and hence more is needed to strengthen the credibility of Ghana’s inflation-targeting regime.1
    Keywords: Capital markets , Cross country analysis , Demand for money , Economic models , Emerging markets , Inflation targeting , Interest rates , Monetary policy ,
    Date: 2011–11–22
  5. By: Ionut Dumitru (Faculty of Finance and Banking, Bucharest University of Economics); Razvan Stanca
    Abstract: The fiscal and budgetary policy should play a key role to alleviate the impact of the business cycle on the real economy. Procyclical fiscal policy is particularly undesirable in developing countries, as it not only exacerbates the business cycle, but also the high output volatility hurts the poorest people with low safety net. This paper assesses the structural budget deficit in Romania during 2000- 2009 and evaluates the role of the fiscal policy during the business cycle. The paper concludes that the fiscal policy in Romania was highly procyclical, exacerbating the economic cycle. In order to escape from this procyclicality, Romania needs deep structural reforms in order to restore the sustainability of the public finances and put Romania on a sustainable growth path.
    Keywords: structural budget balance, procyclicality of fiscal policy, fiscal discipline
    Date: 2011–08
  6. By: W. Raphael Lam
    Abstract: With policy rates near the zero bound, the Bank of Japan (BoJ) has introduced a series of unconventional monetary easing measures since late 2009 in response to lingering deflation and a weakening economy. These measures culminated in a new Asset Purchase Program under the Comprehensive Monetary Easing (CME) which differs from typical quantitative easing in other central banks by including purchases of risky asset in an effort to reduce term and risk premia. This note assesses the impact of monetary easing measures on financial markets using an event study approach. It finds that the BoJ’s monetary easing measures has had a statistically significant impact on lowering bond yields and improving equity prices, but no notable impact on inflation expectations.
    Keywords: Capital markets , Central banks , Financial assets , Monetary policy , Private sector ,
    Date: 2011–11–15
  7. By: Claude Diebolt (BETA/CNRS, Université de Strasbourg & Humboldt-Universität zu Berlin.); Mamoudou Toure (BETA/CNRS, Université de Strasbourg.); Jamel Trabelsi (BETA/CNRS, Université de Strasbourg.)
    Date: 2012
  8. By: Jean Pierre Allegret; Mohamed Tahar Benkhodja
    Abstract: To investigate the dynamic effect of external shocks on an oil exporting economy, we estimate, using Bayesian approach, a DSGE model based on the features of the Algerian economy. The main purpose is to investigate the dynamic effect of four external shocks (oil price shock, USD/EUR exchange rate shock, international inflation shock and international interest rate shock) and to examine the appropriate monetary policy strategy for Algerian economy, given its structural characteristics and the pattern of the external shocks. We analyze the impulse response functions of our external shocks according to alternative monetary rules. The welfare cost associated with each monetary policy rule has been considered. Our main findings show that, over the period 1990Q1-2010Q4, core inflation monetary rule allows better to stabilize both output and inflation. This rule also appears to be the best way to improve a social welfare.
    Keywords: Monetary policy, external shocks, oil exporting economy, Algeria, DSGE model.
    JEL: E3 E5 F4
    Date: 2011
  9. By: Sousa, Teresa
    Abstract: Money illusion is frequently invoked and frequently resisted by economists. Resisted as it contradicts the maximizing paradigm of microeconomic theory and invoked since a tendency to think in nominal rather than real terms becomes evident in the behavior of agents. This paper rationalizes money illusion in an stylized open economy model considering that private agents learn nominal aggregate demand at a level different from the one imposed by rationality. We find that the welfare effects of a productivity shock are increasing in the degree of money illusion and decreasing in the degree of openness of the economy. Furthermore we introduce a velocity of money shock revisiting the Quantity Theory of Money within the open economy micro-founded framework. An incomplete information game between Home and Foreign policymakers with monetary policy rules is developed, where sudden unstable financial conditions arise in one country, to find that allowing for velocity shocks reinforces the need for optimal monetary policy rules and to open the economies in order to avoid welfare costs. --
    Keywords: Optimal monetary policy,open economy,international transmission mechanism,money illusion,velocity of money,nominal rigidities
    JEL: E31 E52 F42
    Date: 2011
  10. By: Alina Carare; Adina Popescu
    Abstract: We document the transmission of monetary policy and risk-premium shocks in Hungary, by applying recent advances in the Bayesian estimation of large VAR models. The method allows extracting information from over 100 series, opening the "black box" of the transmission mechanism to provide the most comprehensive description to date of the impact of these two shocks on the economy under the inflation-targeting regime. We find novel evidence that most of the channels of transmission are operational in Hungary, in spite of large liability euroization and high foreign ownership of banks and corporations. Due to financial stability concerns, monetary policy responds procyclically to risk-premium shocks. We also find that the use of such a large panel of data improves inflation forecasting performance over smaller models and renders this model suitable for policy purposes.
    Keywords: Central banks , External shocks , Hungary , Inflation targeting , Monetary policy , Monetary transmission mechanism , Risk premium ,
    Date: 2011–11–08
  11. By: Edward R. Gemayel; Sarwat Jahan; Alexandra Peter
    Abstract: Inflation targeting (IT) is a relatively new monetary policy framework for low-income countries (LICs). The limited number of LICs with an IT framework and the short time that has elapsed since the adoption of this framework explains why there are no previous empirical studies on the performance of IT in LICs. This paper has made a first attempt at filling this gap. It finds that inflation targeting appears to be associated with lower inflation and inflation volatility. At the same time, there is no robust evidence of an adverse impact on output. This may explain the appeal of IT for many LICs, where building credibility of monetary policy is difficult and minimizing output costs of reducing inflation is imperative for social and political reasons.
    Keywords: Albania , Armenia , Cross country analysis , Developed countries , Emerging markets , Ghana , Inflation targeting , Low-income developing countries , Monetary policy ,
    Date: 2011–11–30
  12. By: Blommestein, H.J.; Eijffinger, S.C.W.; Qian, Z. (Tilburg University, Center for Economic Research)
    Abstract: This paper constructs a macro-finance model with two types of borrowers: entrepreneurs who engage in productive activities and gamblers who play in lotteries. It links a central bank's interest rate policy to expected cash ows of both types of borrowers. Via this link we study how the interactions between various shocks and different monetary policy rules affect the quality of the borrower pool faced by financial intermediaries. We find that if the economy is hit by an expansionary monetary policy shock, in the long run the proportion of entrepreneurs in the borrower pool will be persistently lower than the steady state level. This worsening of the borrower pool is more serious if the central bank does not react to output uctuations. By contrast, not reacting to output uctuations in case of a negative productivity shock avoids a persistent worsening of the borrower pool in the long run.
    Keywords: Monetary Policy;Adverse Selection;Financial Crisis
    JEL: E44 E52 G01
    Date: 2011
  13. By: Sumru Altug (Koc University and CEPR); Serdar Kabaca (Department of Economics, University of British Columbia); Meltem Poyraz (University of Virginia)
    Abstract: This paper examines the role of the extensive and intensive margins of work in the context of business cycles in emerging markets with a financial friction. The earlier literature analyzed the role of search frictions with only an extensive margin of work and showed that such a framework can address the distinguishable business-cycle characteristics of emerging markets such as highly volatile consumption, countercyclical net exports, highly volatile wages and pro-cyclical wages. One of our contributions is to show that in the presence of an endogenous hours choice, search frictions fail to predict not only these characteristics but also the positive co-movement of hours worked per worker and employment with output. This occurs due to the strong income effect on hours worked. On the other hand, introducing a financial friction, namely working capital, significantly increases the performance of the model and suggests frictions in both labor markets and financial markets are necessary for explaining emerging market business cycles.
    Keywords: search frictions, emerging markets, business cycles, working capital
    JEL: F41 E44 J40
    Date: 2011–12
  14. By: Davide Debortoli; Junior Maih; Ricardo Nunes
    Abstract: This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.
    Date: 2011
  15. By: Timothy Cogley; Christian Matthes; Argia M. Sbordone
    Abstract: We model transitional dynamics that emerge after the adoption of a new monetary policy rule. We assume that private agents learn about the new policy via Bayesian updating, and we study how learning affects the nature of the transition and the choice of a new rule. Temporarily explosive dynamics can emerge when there is substantial disagreement between actual and perceived policies. These dynamics make the transition highly volatile and dominate expected loss. The emergence of temporarily explosive paths depends more on uncertainty about policy-feedback parameters than about the long-run inflation target. For that reason, the central bank can at least achieve low average inflation. Its ability to move feedback parameters away from initial beliefs, however, is more constrained.
    Keywords: Monetary policy ; Bayesian statistical decision theory ; Inflation (Finance)
    Date: 2011
  16. By: Carlos Capistrán; Gabriel Cuadra; Manuel Ramos Francia
    Abstract: Emerging economies have been subject to abrupt reversals in capital inflows, which have adverse consequences for economic activity and financial stability. An important question for policymakers is how to respond to a sudden loss of external financing and its negative effects on the domestic economy. The experience of emerging economies through the recent financial crisis shows that those economies with relatively better economic fundamentals were able to implement countercyclical policies. This paper provides a simple analytical framework to rationalize this evidence. In particular, it addresses this issue by developing a small-scale macroeconomic model of the New Keynesian type. Numerical exercises illustrate how both credible monetary and fiscal policies increase policymakers’ degrees of freedom to respond to adverse external shocks.
    Keywords: Reversals in capital flows, emerging economies, monetary policy, fiscal policy.
    JEL: E52 E62 F32 F41
    Date: 2011–12
  17. By: Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: This paper studies equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1998) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. This paper shows that introducing news shocks in canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of new shocks. In addition, it is shown that neglecting to account for policy news shocks (e. g. , policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.
    JEL: E32 F30 F40 G11
    Date: 2011–06
  18. By: Agnello, L.; Furceri, D.; R.M, Sousa.
    Abstract: In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for– in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run – especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability.
    Keywords: Fiscal policy discretion, GDP growth, private consumption, private investment, crowding-in, crowding-out.
    JEL: E0 E6
    Date: 2011
  19. By: Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
    Keywords: Business cycles ; Financial crises
    Date: 2011
  20. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper discusses the backgrounds for the stagnant behavior of the Japanese economy during the last two decades and the failure of the Bank of Japan (BOJ) to turn the economy around. I argue that the policy authorities did not act quickly enough to mitigate the pain of the deleveraging process in the aftermath of the burst of land and stock price bubble in the early 1990s. Thus, the process became overly severe and protracted. The economy increasingly became vulnerable to negative external shocks and the decline in its population. Use of non-conventional monetary policy measures after deflationary expectations became entrenched substantially weakened their power to stimulate the economy. The U.S. economy since 2007 has exhibited many of the features seen for the Japanese economy during the last two decades; hence, the talk of the Japanization of the U.S. economy. There are, however, many dissimilarities as well as similarities between the two episodes. These are also discussed along with the analysis of Japanfs two lost decades.Popular discussions of Japanfs stagnation often focus on persistent deflation. Figure 1 shows core CPI inflation and a representative property price index for Japan and the U.S. since the peak of property prices, with the peak (T=0) assumed to be 1990 for Japan and 2006 for the U.S. In addition, it also plots investment in structures relative to GDP in Japan. Inflation in Japan has been in negative territory since 1998.1 There has been, however, no tendency for the deflation to accelerate. The cumulative decrease in the index since the late 1990s has been only about 5%. Thus, the classic debt-deflation type dynamic has not been a major cause of economic stagnation. In contrast, declines in property prices in Japan since the peak has been large and protracted-cumulating in a 60% decline at the time of writing. They led to significant deleveraging by financial institutions and non-financial corporations, which put downward pressure on aggregate demand for goods and services, especially, investment in structures, the component of aggregate demand most sensitive to property prices. The figure shows that its movements have been highly correlated with those of property prices.2 As may be seen from the figure, this component of aggregate demand alone subtracted about 0.4% per year from GDP growth during the 1990s. Such a negative feedback loop among asset prices, economic activity and, as we discuss below, financial instability has been the key feature of Japanfs stagnation. It is also interesting to note that both CPI inflation and property prices in the U.S. since the recent financial crisis have followed closely that of Japan in the 1990s, but inflation has so far avoided plunging into negative territory. Adjustment in asset prices and real investment were to some extent inevitable given the extent of the excesses created during the bubble period. The deleveraging process, however, became extremely protracted as a result of a forbearance game played by policymakers and financial institutions. Banks kept lending for a while to zombie companies in order to avoid recognition of losses on their balance sheets, and the authority stayed away for years from making the tough decision to recapitalize the banks. This resulted in a huge buildup of bad loans and eventually in a serious credit crunch in the late 1990s, which aggravated the declines in asset prices and deleveraging by banks and nonfinancial corporations. Banks increasingly became risk averse and stopped lending to risky, but promising projects. The economy slowly, but steadily lost momentum and could not grow out of the negative shocks generated by external financial crises in the late 1990s and 2000s, and the declines in its population that started in the 2000s. Deflation of the general price level did play a part in this process as well. It has hindered the effectiveness of monetary easing. This is ironic because monetary policy normally is a tool for avoiding deflation. Either the deleveraging forces outweighed the capacity of monetary policy to stimulate the economy or the BOJ easing came a bit too late. The BOJ tried to reverse the disinflation trend with fairly aggressive rate cuts - a conventional monetary policy tool-- and brought the policy rate to near zero by late 1995, effectively hitting the zero lower bound (ZLB) constraint on interest rates. Deflation, however, developed in response to economic weakness. The real interest rate has stayed at higher levels than desirable, and undermined the power of a zero interest rate to stimulate the economy, although it did not throw the economy into a deflationary spiral. Since the late 1990s, the BOJ has adopted a variety of non-conventional monetary policy measures. They have supported the financial system and prevented deflation from becoming worse, but have not turned the economy around. As I argue below, non-conventional measures work by reducing risk premiums and long-short interest rate spreads. The long period of economic stagnation had lowered these spreads to minimum levels and limited the effectiveness of such measures as was the case for conventional measures. In the following I will describe in more detail the deleveraging experience in Japan and then turn to discussing the experience of the BOJ to turn the economy around. Comparisons with the U.S. experience since 2007 are offered at each stage of the discussion
    Date: 2011–12
  21. By: Ian Christensen; Césaire Meh; Kevin Moran
    Abstract: This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority.
    Keywords: Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy
    JEL: E44 E52 G21
    Date: 2011
  22. By: Arto Kovanen
    Abstract: This paper analyzes interest rate pass-through in Ghana. Time series and bank-specific data are utilized to highlight linkages between policy, wholesale market, and retail market interest rates. Our analysis shows that responses to changes in the policy interest rate are gradual in the wholesale market. Prolonged deviation in the interbank interest rate from the prime rate illustrate the challenges the Bank of Ghana faces when targeting a short-term money market interest rate. Asymmetries in the wholesale market adjustment possibly relate to monetary policy signaling, weak policy credibility, and liquidity management. In the retail market, pass-through to deposit and lending interest rates is protracted and incomplete.1
    Keywords: Banks , Central bank policy , Financial systems , Interest rates , Monetary policy ,
    Date: 2011–11–23
  23. By: Paul Beaudry; Deokwoo Nam; Jian Wang
    Abstract: This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i.e., variants of the maximum forecast error variance approach). We find that there is a very close link between the two, suggesting that agents' feelings of optimism and pessimism are at least partially rational as total factor productivity (TFP) is observed to rise 8-10 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs. Overall, we argue that mood swings account for over 50% of business cycle fluctuations in hours and output.
    JEL: E1 E2 E32
    Date: 2011–12
  24. By: Broer, Tobias; Kero, Afroditi
    Abstract: The fall in US macroeconomic volatility from the mid-1980s coincided with a strong rise in asset prices. Recently, this rise, and the crash that followed, have been attributed to overconfidence in a benign macroeconomic environment of low volatility. This paper introduces learning about the persistence of volatility regimes in a standard asset pricing model. It shows that the fall in US macroeconomic volatility since the mid-1980s only leads to a relatively small increase in asset prices when investors have full information about the highly persistent, but not permanent, nature of low volatility regimes. When investors infer the persistence of low volatility from empirical evidence, however, Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices.
    Keywords: Asset Prices; Great Moderation; Macroeconomic Risk
    JEL: D83 E32 E44 G12
    Date: 2011–12
  25. By: Antonio, Paradiso; Kumar, Saten; Rao, B Bhaskara
    Abstract: This paper estimates the forward looking, backward looking and an extended version of the New Keynesian IS curve for Australia. The validity of these models is investigated by imposing the constraint on real rate of interest and as well as when the constraint is relaxed. Two measures of output gap viz. GAP1 (constructed using the unobserved components approach) and GAP2 (constructed using a quadratic trend) are utilized. Our results suggest that the baseline backward looking and forward looking models are overwhelmingly rejected by the data. Evidence strongly supports for the extended backward looking model (with GAP2) being relevant for monetary policy analysis.
    Keywords: New Keynesian IS curve; Backward looking; Forward looking; Australia
    JEL: C02 C12
    Date: 2011–11–25
  26. By: Philip Jung; Keith Kuester
    Abstract: The authors examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort they first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. The authors derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Their propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. The authors find this confirmed in a calibration targeted to the U.S. economy.
    Keywords: Unemployment ; Labor market ; Business cycles
    Date: 2011
  27. By: Greg Howard; Robert Martin; Beth Anne Wilson
    Abstract: This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.
    Date: 2011
  28. By: Paul Beaudry; Deokwoo Nam; Jian Wang
    Abstract: This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i.e., variants of the maximum forecast error variance approach).> ; We find that there is a very close link between the two, suggesting that agents' feelings of optimism and pessimism are at least partially rational as total factor productivity (TFP) is observed to rise 8–10 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs. Overall, we argue that mood swings account for over 50 percent of business-cycle fluctuations in hours and output.
    Keywords: Macroeconomics
    Date: 2011
  29. By: Stefano D'Addona (University of Roma Tre); Christos Giannikos (Zicklin School of Business)
    Abstract: Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This paper provides a simple extension to the prior literature where we study an economy that follows a regimes switching process both in the mean and the volatility, in conjunction with Epstein-Zin preferences for the consumers. We provide a detailed theoretical and numerical analysis of the model’s predictions. We also show that a reasonable parameterization of our model conveys reasonable financial figures. Furthermore, we provide evidence in support of the necessity to model the decline of macroeconomic risk in this particular class of models.
    Keywords: Asset Pricing, Real Business Cycle Models, Recursive Preferences, Markov Switching Models
    JEL: G12 E32 E23
    Date: 2011
  30. By: Fabrizio Perri; Vincenzo Quadrini
    Abstract: The 2007–2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions around the date of Lehman bankruptcy. At the same time countries also experienced large and synchronized tightening of credit conditions. We present a two-country model with financial market frictions where a credit tightening can emerge as a self-fulfilling equilibrium caused by pessimistic but fully rational expectations. As a result of the credit tightening, countries experience large and endogenously synchronized declines in asset prices and economic activity (international recessions). The model suggests that these recessions are more severe if they happen after a prolonged period of credit expansion.
    Date: 2011
  31. By: Jihad Dagher; Arto Kovanen
    Abstract: This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand for Ghana. The results provide strong evidence for the presence of a stable, well-identified long-run money demand during a period of substantial changes in the financial markets. The empirical evidence points to complex dynamics between money demand and its determinants while suggesting that deviations from the equilibrium are rather short-lived.1
    Keywords: Capital markets , Demand for money , Inflation targeting , Monetary policy ,
    Date: 2011–11–22
  32. By: Duarte Bom, P.R. (Universiteit van Tilburg)
    Date: 2011
  33. By: Hassler, Uwe; Meller, Barbara
    Abstract: Multiple structural change tests by Bei and Perron (1998) are applied to the regression by Demetrescu, Kuzin and Hassler (2008) in order to detect breaks in the order of fractional integration. With this instrument we tackle time-varying inflation persistence as an important issue for monetary policy. We determine not only the location and significance of breaks in persistence, but also the number of breaks. Only one significant break in U.S. inflation persistence (measured by the long-memory parameter) is found to have taken place in 1973, while a second break in 1980 is not significant. --
    Keywords: Fractional integration,break in persistence,unknown break point,inflation dynamics
    JEL: C22 E31
    Date: 2011
  34. By: Jiri Bohm; Jan Filacek; Ivana Kubicova; Romana Zamazalova
    Abstract: This paper reviews price-level targeting in the light of current theoretical knowledge and past practical experience. We discuss progress in the economic debate on this issue, starting with the traditional arguments discussed in the early 1990s, moving to Svensson’s seminal paper in the late 1990s and ending with the most recent literature from the beginning of the new millennium. We devote special attention to the issues of the zero interest rate bound, time consistency and communication. Practical experience from Sweden in the 1930s and Czechoslovakia in the first few years after WWI is used to illustrate the advantages and disadvantages of price-level targeting. Finally, the similarities of price-level and inflation developments with hypothetical outcomes under price-level targeting are investigated in selected inflation-targeting countries.
    Keywords: Communication, deflation, price-level targeting, time inconsistency, zero bound.
    JEL: E31 E52 E58
    Date: 2011–10
  35. By: Stefano D'Addona (University of Roma Tre); Ilaria Musumeci (University of Roma Tre)
    Abstract: We analyze the current state of the monetary integration in Europe focusing on the UK position regarding the European Monetary Union. The interest rates decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor Rule. The comparison of the monetary conducts provides a useful feedback when looking for the differences claimed by the British government as motivating the UK refusal to join the European Monetary Union. Testing for a forward looking behavior and possible asymmetries in the policy responses, we show evidence supporting the opt-out by the UK monetary authorities.
    Keywords: Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing.
    JEL: E32 E52
    Date: 2011
  36. By: D. Filiz Unsal; Carolina Osorio
    Abstract: The perception that Asia’s inflation dynamics is driven by idiosyncratic supply shocks implies, as a corollary, that there is little scope for a policy reaction to a build-up of inflationary pressures. However, Asia’s fast growth and integration over the last two decades suggest that the drivers of inflation may have changed, and that domestic demand pressures may now play a larger role than in the past. This paper presents a quantitative analysis of inflation dynamics in Asia using a Global VAR (GVAR) model, which explicitly incorporates the role of regional and global spillovers in driving Asia’s inflation. Our results suggest that over the past two decades the main drivers of inflation in Asia have been monetary and supply shocks, but also that, in recent years, the contribution of these shocks has fallen, whereas demand-side pressures have started to emerge as an important contributor to inflation in Asia.
    Keywords: Asia , China , Commodity prices , Cross country analysis , Demand , Economic models , Inflation , Spillovers ,
    Date: 2011–11–08
  37. By: Amélie Charles (Audencia Nantes, School of Management, 8 route de la Jonelière, 44312 Nantes Cedex 3.); Olivier Darné (LEMNA, University of Nantes, IEMN–IAE, Chemin de la Censive du Tertre, BP 52231, 44322 Nantes.); Claude Diebolt (BETA/CNRS, Université de Strasbourg.); Laurent Ferrara (Banque de France, International Macroeconomics Division.)
    Date: 2012
  38. By: Travis J. Berge; Òscar Jordà
    Abstract: This paper codifies in a systematic and transparent way a historical chronology of business cycle turning points for Spain reaching back to 1850 at annual frequency, and 1939 at monthly frequency. Such an exercise would be incomplete without assessing the new chronology itself and against others —this we do with modern statistical tools of signal detection theory. We also use these tools to determine which of several existing economic activity indexes provide a better signal on the underlying state of the economy. We conclude by evaluating candidate leading indicators and hence construct recession probability forecasts up to 12 months in the future.
    Keywords: Business cycles ; Spain
    Date: 2011
  39. By: Luis Ignacio Jácome; Tahsin Saadi Sedik; Simon Townsend
    Abstract: This paper investigates whether developing and emerging market countries can implement monetary policies similar to those used by advanced countries during the recent global crisis - injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin America during 1995-2007. The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.
    Keywords: Banking sector , Cross country analysis , Developing countries , Emerging markets , Financial crisis , Financial systems , Latin America , Monetary policy ,
    Date: 2011–11–08
  40. By: Fröhling, Annette; Lommatzsch, Kirsten
    Abstract: We investigate output sensitivity of inflation in the euro area through a disaggregated analysis using price indices at the COICOP 4-digit level and compare cyclical sensitivity of a newly created index of cyclically sensitive items (ICSP) with that of headline HICP and core price indices. We also relate the ICSP to the first common factor extracted from the disaggregated prices, which best reflects the common dynamics of the underlying price indices. Our results indicate that two thirds of the items in the euro area HICP are cyclically sensitive. Categories most robustly related to the business cycle are food items (processed and unprocessed), non-durable industrial goods and services related to recreation. Output sensitivity of the ICSP is significantly higher than that of headline inflation. The difference in output sensitivity is most striking between the ICSP and core inflation because of the rather strong cyclical sensitivity of processed and unprocessed food prices (both in prevalence and the estimated parameter of output sensitivity). The index of cyclically sensitive prices is highly correlated with the first common factor. Given the weak factor structure of disaggregated prices, however, we conclude that the domestic business cycle is an important determinant of inflation but it is only one among a number of nearly equally important factors. --
    Keywords: Output sensitivity,inflation,disaggregated price indices,heterogeneity,euro area,factor analysis
    JEL: E31
    Date: 2011
  41. By: Matteo Iacoviello; Marina Pavan
    Abstract: We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age pro.les of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and .nd that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical financial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.
    Date: 2011
  42. By: Fabian Fink (Department of Economics, University of Konstanz, Germany); Almuth Scholl (Department of Economics, University of Konstanz, Germany)
    Abstract: International Financial Institutions provide temporary balance-of-payment support contingent on the implementation of specific macroeconomic policies. While several emerging markets repeatedly used conditional assistance, sovereign defaults occurred. This paper develops a dynamic stochastic model of a small open economy with endogenous default risk and endogenous participation rates in bailout programs. Conditionality enters as a constraint on fiscal policy. In a quantitative application to Argentina the model mimics the empirical duration and frequency of bailout programs. In equilibrium, conditional bailouts generate high and volatile interest spreads. A Laffer-curve in conditionality reflects the trade-off between fostering fiscal reform and creating incentives for non-compliance.
    Keywords: sovereign debt, sovereign default, interest rate spread, fiscal policy, bailouts, conditionality
    JEL: E44 E62 F34
    Date: 2011–11–30
  43. By: Jeffrey C. Fuhrer
    Abstract: A growing body of literature examines alternatives to the rational expectations hypothesis in applied macroeconomics. This paper continues this strand of research by examining the role survey expectations play in the inflation process and reports three principal findings. One, short-run inflation expectations appear to play a significant role in explaining U.S. inflation over the past 20–25 years. Two, long-run expectations generally do not appear to have a direct influence on U.S. inflation over the same period, although these longer expectations enter indirectly as a key determinant of the short-run expectations. The restrictions implied by "trend inflation" models of inflation are generally rejected in the data. Three, by employing a "survey operator," this paper develops a first pass at a structural model that incorporates the features discussed above and assesses its performance in explaining inflation in the postwar period.
    Keywords: Inflation (Finance) ; Rational expectations (Economic theory)
    Date: 2011
  44. By: Luca Pensieroso (Chargé de Recherches FRS - FNRS, IRES, Université catholique de Louvain.)
    Date: 2012
  45. By: Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
    Abstract: In this paper we develop a dynamic real-financial computable general equilibrium (CGE) model for Honduras that incorporates working capital. The model is designed to be useful as a development tool and to be used by policymakers who deal with short-run macro and trade issues. Our model extends previous modeling work on Honduras in several ways. First, it uses a new, updated social accounting matrix (SAM) for the country. Second, it is a recursive dynamic model that incorporates unemployment of labor in the short run. Most CGE models are not useful for short-run analysis because they are comparative static models that assume full employment. We specify a fixed minimum wage and an informal sector and use a recursive dynamic framework to solve for the short-run adjustment process that occurs as the economy responds to shocks. Finally, the model introduces working capital as an additional factor of production, complementary to physical capital, which allows us to examine the impact of monetary shocks that affect the supply of credit on the balance of payments, employment, and real income during periods of adjustment.
    Keywords: CGE models, economic growth, working capital, Computable general equilibrium (CGE) modeling,
    Date: 2011
  46. By: Marattin, Luigi (University of Bologna (Italy)); Paesani, Paolo (University of Rome-Tor Vergata (Italy)); Salotti, Simone (National University of Ireland, Galway (Ireland))
    Abstract: Public Finances worldwide have been severely hit by the 2008-2009 Great Recession, stimulating the debate on the consequences of growing fiscal imbalances. Building on Paesani et al. (2006), this paper focuses on the USA, Germany and Italy over the 1983-2009 period and studies the effects of fiscal shocks and government debt accumulation on long-term interest rates, both nationally and across borders. Based on a atheoretical framework, the empirical analysis disentangles permanent and transitory components of interest rates dynamics finding that sustained debt accumulation leads, at least temporarily, to higher long-term interest rates. The is particularly true for the Italian case. There is also evidence of significant cross-country linkages, mainly between Italy and the USA.
    Keywords: Public debt; long-term interest rates; cointegration; common trends.
    JEL: E60 H63
    Date: 2011–04–13
  47. By: Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
    Abstract: The 1987 stock market crash occurred with minimal impact on observable economic variables (e.g., consumption), yet dramatically and permanently changed the shape of the implied volatility curve for equity index options. Here, we propose a general equilibrium model that captures many salient features of the U.S. equity and options markets before, during, and after the crash. The representative agent is endowed with Epstein-Zin preferences and the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. In reaction to a market crash, the agent updates her beliefs about the distribution of the jump component. We identify a realistic calibration of the model that matches the prices of shortmaturity at-the-money and deep out-of-the-money S&P 500 put options, as well as the prices of individual stock options. Further, the model generates a steep shift in the implied volatility ‘smirk’ for S&P 500 options after the 1987 crash. This ‘regime shift’ occurs in spite of a minimal impact on observable macroeconomic fundamentals. Finally, the model’s implications are consistent with the empirical properties of dividends, the equity premium, as well as the level and standard deviation of the risk-free rate. Overall, our findings show that it is possible to reconcile the stylized properties of the equity and option markets in the framework of rational expectations, consistent with the notion that these two markets are integrated.
    Keywords: Money ; Macroeconomics ; Pricing
    Date: 2011
  48. By: Ashvin Ahuja; Malhar Nabar
    Abstract: We assess the effectiveness of macroprudential policies against a number of different indicators of property sector activity and financial stability. At the cross-country level the use of LTV caps decelerates property price growth. Both LTV and DTI caps slow property lending growth. LTV caps also affect a broader range of financial stability indicators in economies with pegged exchange rates and currency boards. For Hong Kong SAR, LTV policy tends to be forward looking, with caps lowered to counter downward movements in mortgage rates, and higher growth in mortgage loan and volumes of transactions. The reduction in caps appears to respond to small and medium size flat price appreciation, and contributes to a decline in high-end volume growth after a year and total transactions volume growth after 1½–2 years. Price growth responds favorably after 2 years. The evidence suggests LTV tightening could affect property activity through the expectations channel rather than through the credit channel.
    Date: 2011–12–05
  49. By: Thi Hong Van Hoang (Professeur assistant en Finance au Groupe Sup de Co Montpellier Business School, Montpellier Recherche en Management, 2300 avenue des Moulins, 34185 Montpellier.)
    Date: 2012
  50. By: Adriana Z. Fernandez; Evan F. Koenig; Alex Nikolsko-Rzhevskyy
    Abstract: Ongoing economic globalization makes real-time international data increasingly relevant, though little work has been done on collecting and analyzing real-time data for economies other than the U.S. In this paper, we introduce and examine a new international real-time dataset assembled from original quarterly releases of 13 quarterly variables presented in the OECD Main Economic Indicators from 1962 to 1998 for 26 OECD countries. By merging this data with the current OECD real-time dataset, which starts in 1999, researchers get access to a standard, up-to-date resource. To illustrate the importance of using real-time data in macroeconomic analysis, we consider five economic applications analyzed from a real-time perspective.
    Keywords: Macroeconomics - Econometric models ; Forecasting
    Date: 2011
  51. By: James Felkerson
    Abstract: There have been a number of estimates of the total amount of funding provided by the Federal Reserve to bail out the financial system. For example, Bloomberg recently claimed that the cumulative commitment by the Fed (this includes asset purchases plus lending) was $7.77 trillion. As part of the Ford Foundation project "A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis," Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed's bailout of the financial system—the most comprehensive investigation of the raw data to date. This working paper is the first in a series that will report the results of this investigation. The extraordinary scope and magnitude of the recent financial crisis of 2007-09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function. The purpose of this paper is to provide a descriptive account of the Fed's response to the recent financial crisis. It begins with a brief summary of the methodology, then outlines the unconventional facilities and programs aimed at stabilizing the existing financial structure. The paper concludes with a summary of the scope and magnitude of the Fed's crisis response. The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.
    Keywords: Global Financial Crisis; Fed Bailout; Lender of Last Resort; Term Auction Facility; Central Bank Liquidity Swaps; Single Tranche Open Market Operation; Term Securities Lending Facility and Term Options Program; Maiden Lane; Primary Dealer Credit Facility; Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility; Commercial Paper Funding Facility; Term Asset-backed Securities Loan Facility; Agency Mortgage-backed Security Purchase Program; AIG Revolving Credit Facility; AIG Securities Borrowing Facility
    JEL: E58 E65 G01
    Date: 2011–12
  52. By: Mary A. Burke; Michael Manz
    Abstract: We present new experimental evidence on heterogeneity in the formation of inflation expectations and relate the variation to economic literacy and demographics. The experimental design allows us to investigate two channels through which expectations-formation may vary across individuals: (1) the choice of information and (2) the use of given information. Subjects who are more economically literate perform better along both dimensions—they choose more-relevant information and make better use of given information. Compared with survey data on inflation expectations, fewer demographic factors are associated with variation in inflation expectations, and economic literacy in most cases accounts for demographic variation in expectations.
    Keywords: Inflation (Finance) ; Financial literacy
    Date: 2011
  53. By: Kumar, Saten; Paradiso, Antonio
    Abstract: This paper utilizes a small-scale econometric model to study the dynamics of the Irish debt-to-GDP ratio. The role of world GDP growth, domestic GDP growth, real effective exchange rate, interest rate and primary balance is analyzed in the debt dynamics. We find that the Irish economy will recover to its normal path by 2015. Policy interventions for higher primary balance and output growth, and the external positive scenarios for variables such as the world GDP growth, rate of interest and real effective exchange rate are desirable to help further reduce the debt path.
    Keywords: Debt to GDP ratio; Irish economy; Sustainability
    JEL: E62 H68 C30 H63
    Date: 2011–12–05
  54. By: OBREJA-BRASOVEANU, Laura (Universidade Portucalense)
    Abstract: The impact of fiscal policy on economic growth is a complex and contradictory topic in finance debates. Government influences real economy through the impact of public revenues and expenditures on the quantity and quality of production factors, labor and capital. High taxation for supporting big public sector can impede growth. On the other hand, some of the public expenditures can stimulate growth. These opposite effects of the public sector’s intervention through fiscal policy raise the debate about the performance of public sector in stimulating economic growth. The size and the quality of public sector is a reflection of the past and current political decisions. Ex-communist countries face the challenge of reconstructing the public sector, in order to correspond to the requirements of the market economy, but also to ensure a stable macroeconomic and social environment. The aim of this paper is to analyze the differences between developed EU countries and former communist EU countries regarding the public sectors and economic growth.
    Keywords: fiscal policy; size of public sector; quality of public sector; economic growth
    JEL: E62 H11 O10
    Date: 2011–05–30
  55. By: Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
    Abstract: Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office's most recent "no-change" scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent. In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario. An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.
    Date: 2011–12
  56. By: Casey B. Mulligan
    Abstract: Inflation-adjusted spending on means-tested subsidies have increased sharply since 2007, and most of this growth was due to changes in eligibility rules, and increases in subsidies per eligible person, rather than increases in the number of people who would have been eligible under pre-recession subsidy rules. The non-elderly parts of the safety net have increased from about $10,000 per year of non- or under-employment by non-elderly household heads and spouses in 2007 to almost $15,000 per year in 2010, adjusted for inflation. From 2007 to 2010, inflation-adjusted safety net spending increased $35,000 for every added year of non-employment or under-employment. As a result, the average private returns to employment are substantially less than they were in 2007.
    JEL: E24 H31 H41 I38
    Date: 2011–12
  57. By: Adrienne Mack; Enrique Martínez-García
    Abstract: We build from (mainly) publicly available national sources a database of (nominal and real) house prices—complemented with data on private disposable income (PDI)—for 19 advanced countries at a quarterly frequency, starting in the first quarter of 1975. We select a house price index for each country that is consistent with the U.S. FHFA quarterly nationwide house price index for existing single-family houses (formerly called OFHEO house price index), and extend the country series back to 1975 with available historical data whenever necessary. Each house price index is seasonallyadjusted over the entire sample period and then rebased to 2005 = 100.> ; The house price indexes are expressed in nominal terms, and also in real terms using the personal consumption expenditure (PCE) deflator of the corresponding country. PDIs are always quoted in per capita terms using working age population of the corresponding country and can be similarly expressed in real terms with the PCE deflator. We aggregate all 19 countries in our database, weighted by their purchasing power parity-adjusted GDP shares in 2005, to compute an average (nominal and real) house price series and an average (nominal and real) per capita PDI series.
    Keywords: Macroeconomics - Econometric models ; Income ; Gross domestic product
    Date: 2011
  58. By: Seema Narayan; Paresh Kumar Narayan
    Abstract: The aim of this paper is to examine the impact of US macroeconomic conditions—namely, exchange rate and short-term interest rate—on the stocks of seven Asian countries (China,India, the Philippines, Malaysia, Singapore, Thailand, and South Korea). Using daily data for the period 2000 to 2010, we divide the sample into pre-crisis period (pre-August 2007) and crisis period (post-August 2007) we find that in the short-run interest rate has a statistically insignificant effect on returns for all countries except the Philippines in the crisis period,while except for China, regardless of the crisis, depreciation had a statistically significant negative effect on returns. When the long-run relationship among the variables is considered,for four of the seven countries (India, Malaysia, Philippines, Singapore, and Thailand) while there was cointegration in the pre-crisis period, in the crisis period there was no such relationship, implying that the financial crisis has actually weakened the link between stock prices and economic fundamentals.
    Keywords: Interest Rate; Exchange Rate; Financial Crisis; Depreciation
    Date: 2011–11–21
  59. By: Acharya, Viral V.; Skeie, David
    Abstract: Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank transactions, such as in one-month and three-month LIBOR markets. We provide an explanation of such stress in term lending by modelling leveraged banks’ precautionary demand for liquidity. When adverse asset shocks materialize, a bank’s ability to roll over debt is impaired because of agency problems associated with high leverage. In turn, a bank’s propensity to hoard liquidity is increasing, or conversely its willingness to provide term lending is decreasing, in its rollover risk over the term of the loan. High levels of short-term leverage and illiquidity of assets can thus lead to low volumes and high rates for term borrowing, even for banks with profitable lending opportunities. In extremis, there can be a complete freeze in inter-bank markets.
    Keywords: bank liquidity; bank loans; debt; financial leverage; interbank market; risk management
    JEL: E43 G01 G21
    Date: 2011–12
  60. By: Daniel Artana; Sebastián Auguste
    Abstract: El presente trabajo presenta un enfoque metodológico que permita medir a nivel de planta y sectores informalidad y productividad en forma conjunta de forma tal de poder entender mejor y testear las distintas hipótesis sobre la relación entre ambas variables. Se destaca que la decisión de ser formal o informal en general no es dicotómica, sino que es un matiz, y se decide en qué grado cumplir con las reglas. De todas las reglas, el informe pone énfasis en la informalidad impositiva. Se destaca que debido a la tecnología de evasión y de monitoreo de las agencias tributarias, distintas firmas pueden evadir en forma diferente en cada impuesto. De esta forma se requiere contar con una medida global de informalidad impositiva, en lugar de una medida de informalidad laboral, que ha sido lo más usual. La metodología se desarrolla teniendo en cuenta el uso de Censos Industriales. Estos Censos están sido crecientemente utilizados en la literatura económica para medir y analizar productividad, pero en general no han sido utilizados para medir informalidad. La metodología propuesta es una aproximación útil para entender la relación entre informalidad y productividad.
    Keywords: Economía :: Productividad, Sector público :: Estadísticas demográficas y sistemas de información, Economía :: Política fiscal
    JEL: E26 H26 O4
    Date: 2011–05
  61. By: Stoian, Andreea (Bucharest Academy of Economic Studies)
    Abstract: Many researchers have been focused for decades on the issue of public debt considering its effect on fiscal sustainability in the long run. There is a recent body of research showing that the current financial crises will lead to a considerable increase of public debt in a number of advanced economies. Many European countries have confronted with large and increasing public debt stocks that overrated GDP. Considering that, the question on how government should address this problem arises. Theoretically speaking, governments should increase/decrease primary surplus/deficit, and the response should be immediate. The aim of this paper is to investigate government’s reaction to increasing public debt for European Union countries. Fiscal reaction function is employed on annual data spanned mostly on 1980.2012. Empirical evidence shows various results. In the case of Germany fiscal policy is pro-cyclical, but the results reveal no significant reaction of government to changes in public debt. For Belgium and Denmark the test shows a long run relationship between cyclically adjusted primary balance and public debt and error correction term indicates the existence of adjustment mechanism in the short term for assessing primary surplus. In the cases of Spain and France the response is opposite as expected and parameters point out on difficulties in achieving a cointegrated relation. For Greece and Italy test rejects any cointegration relationship and the use of fiscal rule reveals that government has difficulties in generating primary surplus. This conclusion is also valid in the case of Portugal and the UK. In the cases of Sweden and Ireland government has the ability to generate primary surplus larger than the required one that stabilizes public debt.
    Keywords: public debt; fiscal policy; primary balance; fiscal reaction function; fiscal sustainability
    JEL: E62 H62 H63
    Date: 2011–05–30
  62. By: Geneviève Verdier; Olivier Basdevant; Luis-Felipe Zanna; Dalmacio Benicio; Borislava Mircheva; Susan Yang; Joannes Mongardini
    Abstract: Botswana, Lesotho, Namibia, and Swaziland face the serious challenge of adjusting not only to lower Southern Africa Customs Union (SACU) transfers because of the global economic crisis, but also to a potential further decline over the medium term. This paper assesses options for the design of the needed fiscal consolidation. The choice among these options should be driven by (i) the impact on growth and (ii) the specificities of each country. Overall, a focus on government consumption cuts appears to minimize the negative impact on growth, and would be appropriate given the relatively large size of the public sector in each country.
    Keywords: Customs duties , Economic models , Fiscal consolidation , Fiscal policy , Government expenditures , Revenues , Southern Africa ,
    Date: 2011–11–15
  63. By: Chittedi, Krishnareddy
    Abstract: This paper investigates the long run relationship between oil prices and stock prices for India over the period April 2000- June 2011. We employ Auto Regressive Distributed Lag (ARDL) Model that takes into consideration the long run relationship. The results obtained suggest that volatility of stock prices in India have a significant impact on the volatility of oil prices. But a change in the oil prices does not have impact on stock prices.
    Keywords: Oil Prices; Stock prices; ARDL cointegration
    JEL: E44 G10
    Date: 2011–11–02
  64. By: Tosun, Mehmet S. (University of Nevada, Reno)
    Abstract: This paper provides a demographic outlook of the Euro-Mediterranean region and then shows the economic and fiscal consequences of such demographic differences within a two-region model with international labor mobility. International labor mobility is also examined through an externalities framework where brain drain from migration could be taxed by the home countries. Taxing the brain drain has a substantial limiting effect on labor migration and a small negative effect on per worker growth. On the other hand, it could be a solution to the negative externality problem associated with brain drain. It is also found that such tax can raise substantial tax revenue for the SMCs which could be used to enhance human capital in the region.
    Keywords: demographic divide, demographic deficit, population aging, youth bulge, labor mobility, brain drain, overlapping generations, endogenous tax policy, Mediterranean region
    JEL: E62 F22 H23 H24 H41
    Date: 2011–12
  65. By: Marco Lopez-Silva; Raul Abreu-Lastra; Alberto Saracho-Martinez; Agustin Paulin-Hutmacher
    Abstract: In 2001, Mexico introduced a comprehensive federal housing policy package. The results have been quantitatively impressive; however, there are qualitative concerns. It is also uncertain whether current subsidy programs have negative financial implications for participating mortgage issuers, as poorer applicants with lower job stability are injected into the pool of borrowers. This paper addresses that question by analyzing a large database provided by INFONAVIT, Mexico’s principal mortgage issuer, which contains information on borrowers’ repayment behavior. It is found that borrowers who received subsidies do not show higher default rates than borrowers who received no financial assistance. Borrowers receiving subsidies actually take longer to show their first default than borrowers not receiving subsidies. Therefore, current subsidy programs do not seem to have negative financial implications for participating mortgage institutions.
    JEL: G18 G21 G28 H81 R31 R38 R51
    Date: 2011–11
  66. By: Jungmin Lee; Daiji Kawaguchi; Daniel S. Hamermesh
    Abstract: How would people spend additional time if confronted by permanent declines in market work? We examine the impacts of cuts in legislated standard hours that raised employers’ overtime costs in Japan around 1990 and Korea in the early 2000s. Using time-diaries from before and after these shocks, we show that these shocks were effective—per-capita hours of market work declined discretely. The economy-wide drops in market work were reallocated solely to leisure and personal maintenance. In the absence of changing household technology a permanent time gift leads to no increase in time spent in household production by the average individual.
    JEL: E20 J11 J22
    Date: 2011–12
  67. By: Li, Kui-Wai; Wong, Douglas K T
    Abstract: This paper examines the contemporaneous and inter-temporal interaction between real exchange rate and real interest rate differential in the two financial crises of 1997 and 2008 by using data from thirteen countries from different world regions. The empirical result shows that negative contemporaneous relationship exists in most countries. In addition, there is little evidence on a systematic inter-temporal relationship between the real interest rate differential and the real exchange rate, and an absence of consistent result in supporting a negative relationship among the thirteen economies. An extremely low change in the conditional correlation between real interest rate differential and real exchange rates can be found in small countries.
    Keywords: Contemporaneous; inter-temporal relationship; exchange rate; interest rate differential; financial crisis
    JEL: E43 O57 C22 F31
    Date: 2011–12
  68. By: van der Ploeg, Frederick; Venables, Anthony J.
    Abstract: Many countries have failed to use natural resource wealth to promote growth and development. They have been damaged by volatility of revenues, have failed to save a sufficiently high proportion of their resource revenues and failed to make high return investments to support diversification of their economies. This paper explores the reasons for these failures and discusses policies to improve performance.
    Keywords: absorptive capacity; Dutch disease; fiscal rules; managing windfalls; public investment; resource curse; volatility
    JEL: E60 F34 F35 F43 H21 H63 O11 Q33
    Date: 2011–12
  69. By: Günter Franke (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper argues that the strong member states of the European Currency Union are hostages of a financially distressed member state so that they are compelled to provide financial support. Moreover, due to the dynamics of the interaction game, a debt relief is a free lunch for the distressed country. This fosters moral hazard of distressed countries. In the absence of capital market control, European politics do not effectively monitor fiscal politics of member states. The lack of a long term strategy of the European Currency Union to deal with distressed states has undermined the credibility of politics. This lack is also explained by a lack of a European Insolvency Charter. A viable Union requires such a charter with rules for handling distress. Moreover, politics should determine a mechanism to coordinate politics and capital markets in their monitoring of fiscal and economic policy of member states.
    Keywords: European Currency Union, European Insolvency Charter, hostages, free lunch, externalization hypothesis
    JEL: E62 F36 F53 H30 H60
    Date: 2011–11–20
  70. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: We identify countries that establish collateral-based lending systems with a small-open-economy version of Nobuhiro Kiyotaki and John Moore’s (1997) model. We find that 47 countries in 1980s and 48 countries in 1990s out of 98 countries establish collateral-based lending systems. We also investigate the origin of collateral-based lending systems and find that if a country offers good legal protection for lenders, then a collateral-based lending system is more likely to be embedded in that country.
    Keywords: Credit constraints; Collateral-based lending; Legal protection of lenders; Kiyotaki-Moore model
    JEL: E51 F41 K10 E10
    Date: 2011–09–29
  71. By: Naqvi, Nadeem
    Abstract: This paper compares the theory of value and distribution of Arrow and Debreu [1954] with that of Sraffa [1960]. I consider such versions of the two models that capture their salient features, without aiming at the greatest possible generality, so as to isolate the precise nature of the differences between the two conceptions of the same economic reality, and inter alia, to quarantine both the sources and the entailments of the differences in the two theories that respectively purport to determine the values of commodities and distribution of income in society. Both theories are complete and consistent. Sraffa’s model is based exclusively on factual information, so it achieves less in terms of determining endogenous variables. The Arrow-Debreu is based on counterfactual information regarding additional production scenarios that are unobserved, in addition to the factual information that Sraffa has, so it achieves more by way of determination of endogenous variables. In terms of entailments, in Sraffa's theory there is an insufficiency of determinants in the economic grounds of society, thereby requiring the political component of society to also play an influential role in the joint determination of values and distribution. In the Arrow-Debreu model this determination is made complete solely in the economic sphere of society, rendering this theory purely economic, rather than political-economic, as in Sraffa. Both the information content difference at source, and the purely-economic versus political-economic difference in the entailments of what it takes to determine values and distribution, render the two theories radically different. In addition, (1) the prices in the two theories are different both in terms of definitions and values, and (2) since Sraffa’s model has only one set of numbers on the observed production of commodities by means of commodities and labor for a single year, it is impossible to define constant returns to scale, while in the Arrow-Debreu model, this property is admissible, and possible to define, because their model’s information base is sufficiently larger than Sraffa’s. Further, Sraffa’s theory is invariant to (a) the interpretation of prices – market-clearing, long-period, or whatever, (b) multiplicity of profit rates across industries, instead of a uniform rate of profit, and (c) presence or absence of general aggregate demand functions for commodities, and is (d) more general than the Arrow-Debreu theory because it is based on weaker assumptions, in the sense of a strictly smaller information set, so that it is only to be expected that the Arrow-Debreu theory would be capable of determining more endogenous variables in the model of an economy. (416 words)
    Keywords: theory of value; income distribution; general equilibrium; capital; constant returns to scale; rate of profit
    JEL: E25 D33 E11 D51
    Date: 2011–12–09

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