nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒01‒25
39 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The term structure of inflation compensation in the nominal yield curve By Mehmet Pasaogullari; Simeon Tsonevy
  2. Are unconventional monetary policies effective? By Urszula Szcserbowicz;
  3. Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment By Grossi, Michele; Tamborini, Roberto
  4. Expectations-driven cycles in the housing market By Lambertini, Luisa; Mendicino , Caterina; Punzi , Maria Teresa
  5. The Nature of Financial and Real Business Cycles: The Great Moderation and Banking Sector Pro-Cyclicality By Balázs Égert; Douglas Sutherland
  6. Monetary Policy and Share Pricing Business in Nigeria By ADESOYE, A. Bolaji; ATANDA, Akinwande Abdulmaliq
  7. Employment Protection and Business Cycles in Emerging Economies By Lama, Ruy; Urrutia, Carlos
  8. Central Bank Forecasts as an Instrument of Monetary Policy By Paul Hubert;
  9. How is Tax Policy Conducted over the Business Cycle? By Carlos A. Vegh; Guillermo Vuletin
  10. Do central banks forecast influence private agents ? Forecasting performance vs. signals By Paul Hubert;
  11. Are the Effects of Monetary Policy Asymmetric in India? Evidence from a Nonlinear Vector Autoregression Approach By Goodness C. Aye; Rangan Gupta
  12. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  13. News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle By Lilia Karnizova
  14. Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It By Frantisek Brazdik; Michal Hlavacek; Ales Marsal
  15. War, Inflation, Monetary Reform and the Art Market By Geraldine David; Kim Oosterlinck
  16. Real Sector Imbalances and the Great Recession By Mark Setterfield
  17. An Equilibrium Asset Pricing Model with Labor Market Search By Lars-Alexander Kuehn; Nicolas Petrosky-Nadeau; Lu Zhang
  18. Exogenous Information, Endogenous Information and Optimal Monetary Policy By Luigi Paciello; Mirko Wiederholt
  19. Is Monetary Policy a Growth Stimulant in Nigeria? A Vector Autoregressive Approach By ADESOYE, A. Bolaji; MAKU, Olukayode E.; ATANDA, Akinwande Abdulmaliq
  20. Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod By Schwarzmüller, Tim; Stähler, Nikolai
  21. A Bayesian evaluation of alternative models of trend inflation By Todd E. Clark; Taeyoung Doh
  22. Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations By Rossana Merola; Douglas Sutherland
  23. Forecast combination for discrete choice models: predicting FOMC monetary policy decisions By Laurent Pauwels; Andrey Vasnev
  24. Theory and empirics of an affine term structure model applied to European data By Jakas, Vicente
  25. Directed Search over the Life Cycle By Guido Menzio; Irina A. Telyukova; Ludo Visschers
  26. The multiplier principle, credit-money and time By Gechert, Sebastian
  27. Propagation Shocks to Food and Energy Prices: an International Comparison By Michael Pedersen
  28. Self – Employment, Labor Market Rigidities and Unemployment Over the Business Cycle By Gonzalo Castex; Miguel Ricaurte
  29. Warrant Economics, Call-Put Policy Options and the Fallacies of Economic Theory By Hatgioannides, John; Karanassou, Marika
  30. Fiscal Consolidation: Part 5. What Factors Determine the Success of Consolidation Efforts? By Margit Molnar
  31. Technical Appendices to "An application of business cycle accounting with misspecified wedges" By Masaru Inaba; Kengo Nutahara
  32. Government Expenditure and Household Consumption in Bangladesh through the Lens of Economic Theories: An Empirical Assessment By Mahmud, Mir Nahid; Ahmed, Mansur
  33. Communal Responsibility and the Coexistence of Money and Credit under Anonymous Matching By Lars Boerner; Albrecht Ritschl
  34. Découplage de modèle économique lent/rapide By Aurélien Hazan
  35. International Shock Transmission after the Lehman Brothers Collapse. Evidence from Syndicated Lending By de Haas, Ralph; van Horen, Neeltje
  36. Finance-dominated capitalism, re-distribution and the financial and economic crises - a European perspective By Hein, Eckhard
  37. Housing market and current account imbalances in the international economy By Punzi, Maria Teresa
  38. Welfare improving taxation on savings in a growth model By Long Xin; Pelloni Alessandra
  39. On the measurement of social progress and well being: some further thoughts By Jean Paul Fitoussi; Joseph Stiglitz

  1. By: Mehmet Pasaogullari; Simeon Tsonevy
    Abstract: We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation.
    Keywords: Inflation targeting ; Monetary policy - Great Britain
    Date: 2011
  2. By: Urszula Szcserbowicz (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Keywords: unconventional monetary policy,inflation expectations,long-term interest rates, Libor-OIS spread, announcements effects
    JEL: E43 E44 E52 E58
    Date: 2011–07
  3. By: Grossi, Michele; Tamborini, Roberto
    Abstract: In this paper, the authors present a New Keynesian quantitative model with endogenous investment and a stock-market sector to shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and what indicator may be expected to generate better stabilization performance. For comparative purposes, the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of Bernanke-Gertler (1999, 2000) and assess performance of five policy rules. Two of these are traditional Taylor rules (i.e., do not incorporate financial indicators) that differ in the relative weight they put on output and inflation gaps. The other three are financial Taylor rules. These involve the addition of one financial indicator in each case. Specifically, the deviation from trend of stock prices, of Tobin's q (the rate of change in stock prices relative to capital stock) and of investment. The authors obtain results that are at variance with Bernanke-Gertler, first, because the best performing rule of the traditional rules is output aggressive instead of inflation aggressive and, second, because the financial rule with Tobin's q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobin's q and the traditional but output aggressive rule. --
    Keywords: New Keynesian models,monetary policy,stock markets and bubbles
    JEL: E5 E52
    Date: 2011
  4. By: Lambertini, Luisa (EPFL, College of Management); Mendicino , Caterina (Banco de Portugal, Departamento Estudos Economicos); Punzi , Maria Teresa (University of Nottingham)
    Abstract: Survey data suggests that news of changes in business conditions are significantly related to house prices and consumers' beliefs of favorable buying conditions in the housing market. This paper explores the transmission of "news shocks" as a source of boom-bust cycles in the housing market. News on shocks originated in different sectors of the economy can generate booms in the housing market in accordance with the average behavior in the data; expectations on monetary policy and in inflationary shocks that are not fulfilled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market fluctuations we find that favorable credit conditions that are expected to be reversed in the near future generate boom-bust cycle dynamics in line with the most recent episode. Further, credit conditions also affect boom-bust cycles generated by news shocks originated in other sectors of the economy. In particular, lower loan-to-value ratios reduce the severity of expectations-driven cycles and the volatility of household debt, aggregate consumption and GDP.
    Keywords: boom-bust cycles; credit frictions; housing market
    JEL: E32 E44 E52
    Date: 2012–01–11
  5. By: Balázs Égert; Douglas Sutherland
    Abstract: This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector’s pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour.<P>Cycles économiques et financiers : la grande modération et la pro-cyclicalité du secteur bancaire<BR>Ce papier analyse la nature des cycles économiques et financiers dans les pays de l'OCDE en utilisant des séries annuelles, trimestrielles et mensuelles. Il analyse d'abord les principales caractéristiques du cycle, y compris la durée, l'amplitude, l'asymétrie et les changements de ces paramètres au cours des expansions et contractions. Il étudie ensuite le degré de synchronisation des cycles économiques et financiers entre les pays de l'OCDE, mais aussi des variables économiques et financières dans un pays donné, et évalue dans quelle mesure la synchronisation des cycles a changé au fil du temps. Enfin, le papier fournit quelques éléments nouveaux sur les facteurs de la grande modération et étudie la pro-cyclicité du secteur bancaire en utilisant des données agrégées et des banques individuelles. Les principaux résultats montrent que l'amplitude du cycle réel diminuait durant la grande modération, mais les cycles des prix des actifs ont été de plus en plus volatiles. Cela était en partie liée à l'évolution du secteur bancaire qui avait tendance à accentuer le comportement pro-cyclique.
    Keywords: financial markets, banking system, real business cycles, financial cycles, great moderation, marchés financiers, système bancaire, cycles économiques, cycles financiers, grande modération
    JEL: E32 E44
    Date: 2012–01–09
  6. By: ADESOYE, A. Bolaji; ATANDA, Akinwande Abdulmaliq
    Abstract: The anatomy of Nigerian financial system is composed of the money and capital markets. Monetary policy is a framework used by the apex bank to regulate the flow of loanable funds in the economy, though the pricing of equity used by private investors to raise capital from the economy is carried out at the capital market end of the system. As earlier empirical studies have shown the relationship between monetary policy and stock market, this study provide a precise insight in the mechanism of interaction that co-exist between monetary policy and share pricing in Nigeria. The study identified money supply and interest rate (credit creation) as the main channels through which monetary policy influence sharing pricing in an open economy like Nigeria.
    Keywords: Monetary Policy; Share Pricing; Monetary instruments; Money supply; Equity/capital market; money market; financial system; IPO pricing; Nigeria
    JEL: G12 G15 E52 G0
    Date: 2012
  7. By: Lama, Ruy (International Monetary Fund); Urrutia, Carlos (Centro de Investigación Económica, ITAM)
    Abstract: We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.
    Date: 2012–01
  8. By: Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Abstract: Policymakers at the Federal Open Market Committee (FOMC) publish macroeconomic forecasts since 1979. Some studies find that these forecasts do not contain useful information to predict these macroeconomic variables compared to other forecasts. In this paper, we examine the value of publishing these FOMC forecasts in two steps. We assess whether they influence private forecasts and whether they may be considered as a policy instrument. We provide original evidence that FOMC forecasts are able to influence private expectations. We also find that FOMC forecasts give information about future Fed rate movements, affect policy variables in a different way from the Fed rate, and respond differently to macro shocks.
    Keywords: Monetary Policy, Forecasts, FOMC, Influence, Policy signals, Structural VAR.
    JEL: E52 E58
    Date: 2011–11
  9. By: Carlos A. Vegh; Guillermo Vuletin
    Abstract: It is well known by now that government spending has typically been procyclical in emerging economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and hence cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960-2009 that comprises corporate income, personal income, and value-added tax rates. We find that, by and large, tax policy is acyclical in industrial countries but procyclical in developing countries. We show that the evidence is consistent with a model of optimal fiscal policy under uncertainty.
    JEL: E32 E62 H20
    Date: 2012–01
  10. By: Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Abstract: Focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy. The main contribution of this paper is to assess whether central bank forecasts influence private forecasts. The response is positive for inflation forecasts in Sweden, the UK and Japan. To disentangle the sources of influence of central banks, two concepts are proposed: endogenous influence, which is due to more accurate central bank forecasts, and exogenous influence, which is due to central bank signals on either future policy decisions or private information. Original empirical evidence on the central bank forecasting performance relative to private agents is provided, and estimates show that in Sweden, more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals. The publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations: forecasting or policymaking.
    Keywords: Monetary Policy; Imperfect Information; Communication; Endogenous Influence; Exogenous Influence.
    JEL: E52 E58
    Date: 2011–10
  11. By: Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper uses Indian quarterly data for the period of 1960:Q2-2011:Q2 to test for nonlinearity in a standard monetary vector autoregression (VAR) model comprising of output, price and money, using an estimation strategy that is consistent with wide range of structural models. We find that positive and negative monetary policy shocks have an immediate short-live and a delayed persistent asymmetric effect on output and price respectively. In addition, we show that compared to a linear VAR, the nonlinear VAR has a bigger impact of a monetary policy shock on output and price. In general, we conclude that there are clear gains from modelling monetary policy using a nonlinear VAR framework.
    Keywords: Asymmetric Effects, Monetary Policy, Linear and Nonlinear VAR, India
    JEL: C32 E23 E31 E51 E52
    Date: 2012–01
  12. By: Guido Ascari; Giorgio Fagiolo; Andrea Roventini
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, DSGE Models, RBC Models
    JEL: C1 E3
    Date: 2012–01–18
  13. By: Lilia Karnizova (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995–2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate “the productivity prospects”: a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession.
    Keywords: boom-bust cycles; news shocks; investment; expectations; preferences for wealth
    JEL: E21 E22 E27 E32
    Date: 2012
  14. By: Frantisek Brazdik; Michal Hlavacek; Ales Marsal
    Abstract: This survey gives insight into the ongoing research in financial frictions modeling. The recent financial turmoil has fueled interest in operationalizing financial frictions concepts and introducing them into tools for policy makers. The rapid growth of the literature on these issues is the motivation for our review of the presented approaches. The empirical facts that motivate the inclusion of financial frictions are surveyed. This survey provides a description of the basic approaches for introducing financial frictions into dynamic stochastic general equilibrium models. The significance and empirical identification of the financial accelerator effect is then discussed. The role of financial frictions models in CNB monetary and macroprudential policy is also described. It is concluded that given the heterogeneity of the approaches to financial frictions it is beneficial for the conduct of monetary policy to focus on the development of satellite approaches. The role of financial frictions in DSGE models for macroprudential policy is also discussed, as these models can be used to generate stress-testing scenarios. It can be concluded that DSGE models with financial frictions could complement current stress-testing practice, but are not able to replace stress tests.
    Keywords: DSGE models, financial accelerator, financial frictions.
    JEL: E21 E22 E27 E59
    Date: 2011–12
  15. By: Geraldine David (Universite Libre de Bruxelles); Kim Oosterlinck (Universite Libre de Bruxelles)
    Abstract: During World War II, the art market experienced a massive boom in occupied countries. The discretion, the inflation proof character, the absence of market intervention and the possibility to resell artworks abroad have been suggested to explain why investing in artworks was one of the most interesting opportunities under the German boot. On basis of an original database of close to 4000 artworks sold between 1944 and 1951 at Giroux, one of the most important Art Gallery in Brussels, this paper analyzes, the price movements on the Belgian art market following the liberation. Market reactions following the war are used to understand which motivations played the most important role in investorsÕ decisions. Prices on the art market experienced a massive drop. This huge price decline is attributed to two elements: fear of prosecution for war profits and the monetary reforms set into place in October 1944.
    Keywords: Art market, Art Investment, WWII, Belgium, Post-war, Monetary reforms
    JEL: N14 N44 Z11
    Date: 2012–01
  16. By: Mark Setterfield (Department of Economics, Trinity College)
    Abstract: While much attention has been focused on the financial woes of the US economy in the wake of the Great Recession, this chapter focuses on an important real sector imbalance: the failure of real wages to keep pace with productivity growth over the past three decades. This imbalance is shown to create a structural flaw in the aggregate demand generating process that threatens to undermine future macroeconomic performance. The chapter reflects on the policy responses necessary to remedy this situation, and the likelihood that the US will succeed in avoiding a future of secular stagnation.
    Keywords: Real wage growth, productivity growth, aggregate demand, household debt, Great Recession
    JEL: E21 E24 E25 E61 E66
    Date: 2012–01
  17. By: Lars-Alexander Kuehn; Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: Search frictions in the labor market help explain the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces a sizeable equity premium of 4.54% per annum with a low interest rate volatility of 1.34%. The equity premium is strongly countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, search frictions, combined with a small labor surplus and large job destruction flows, give rise endogenously to rare disaster risks a la Rietz (1988) and Barro (2006).
    JEL: G12 J23
    Date: 2012–01
  18. By: Luigi Paciello (EIEF); Mirko Wiederholt (Northwestern University)
    Abstract: This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy.
    Date: 2011
  19. By: ADESOYE, A. Bolaji; MAKU, Olukayode E.; ATANDA, Akinwande Abdulmaliq
    Abstract: This paper critically examines the dynamic interaction between monetary policy tools in stimulating economic growth, as well as stabilizing the economy from external shocks in Nigeria. The paper considered key monetary time series variables and real growth of output in formulating Vector Autoregressive (VAR) models which showed interdependence interaction between the period of 1970 and 2007. The time series properties of the selected variables are examined using the Augmented Dickey-Fuller unit root test and the results revealed that only growth of real output and broad money supply are stationary at levels, while saving, lending and exchange rates were found stationary at first difference. The long-run dynamic interaction was established through the Johansen’s Trace and Maximum Eigenvalue tests. The pair-wise Granger-Causality test conducted showed that the growth rate of real output is not a leading indicator for any monetary variables. Other innovation accounting tests were also carried out like impulse responses function to test for the response of growth in real output to innovation shock on monetary variables. Also, the forecast error variance decomposition (FEVD) is used to decompose the monetary shock on the growth rate of real output in Nigeria. Proper policy recommendations were proffered based on the results emanated from the econometric analyses.
    Keywords: Monetary policy; Monetary Instruments; Economic growth; VAR; Impulse shock response; Variance decomposition
    JEL: C51 C32 E0 E52 E00
    Date: 2012
  20. By: Schwarzmüller, Tim; Stähler, Nikolai
    Abstract: This paper uses an extended version of 'FiMod - A DSGE Model for Fiscal Policy Simulations' (Stähler and Thomas, 2011) with endogenous job destruction decisions by private firms to analyze the effects of several currently discussed labor market reforms on the Spanish economy. The main focus is on the firms' hiring and firing decisions, on the implications for fiscal balances and on Spain's international competitiveness. We find that measures aiming at reducing (policy-induced) outside option of workers, such as a decrease in unemployment benefits, public wages or, to a lesser extent, public-sector employment, seem most beneficial to foster output, employment, international competitiveness and fiscal balances. Decreasing the unions' bargaining power also accomplishes this task, however, at a lower level and at the cost of higher job turnover. Our simulation suggests that reforming employment protection legislation does not seem to be a suitable tool from the perspective of improving international competitiveness. All measures imply (income) redistribution between optimizing and liquidity-constrained consumers. Our analysis also suggests that those reforms that are beneficial for Spain generate positive spillovers to the rest of EMU, too. --
    Keywords: general equilibrium,fiscal policy simulations,labor market search
    JEL: E24 E32 E62 H20 H50
    Date: 2011
  21. By: Todd E. Clark; Taeyoung Doh
    Abstract: With the concept of trend inflation now widely understood as to be important as a measure of the public's perception of the inflation goal of the central bank and important to the accuracy of longer-term inflation forecasts, this paper uses Bayesian methods to assess alternative models of trend inflation. Reflecting models common in reduced-form inflation modeling and forecasting, we specify a range of models of inflation, including: AR with constant trend; AR with trend equal to last period's inflation rate; local level model; AR with random walk trend; AR with trend equal to the long-run expectation from the Survey of Professional Forecasters; and AR with time-varying parameters. We consider versions of the models with constant shock variances and with stochastic volatility. We first use Bayesian metrics to compare the fits of the alternative models. We then use Bayesian methods of model averaging to account for uncertainty surrounding the model of trend inflation, to obtain an alternative estimate of trend inflation in the U.S. and to generate medium-term, model-average forecasts of inflation. Our analysis yields two broad results. First, in model fit and density forecast accuracy, models with stochastic volatility consistently dominate those with constant volatility. Second, for the specification of trend inflation, it is difficult to say that one model of trend inflation is the best. Among alternative models of the trend in core PCE inflation, the local level specification of Stock and Watson (2007) and the survey-based trend specification are about equally good. Among competing models of trend GDP inflation, several trend specifications seem to be about equally good.
    Keywords: Bayesian statistical decision theory ; Inflation (Finance) - Mathematical models ; Forecasting
    Date: 2011
  22. By: Rossana Merola; Douglas Sutherland
    Abstract: During the economic and financial crisis, fiscal positions across the OECD countries deteriorated sharply. This raises the question of what level of primary deficit would ensure long-term sustainability and what degree of consolidation is needed. The purpose of this paper is to gauge the scale of fiscal consolidation that will be needed to ensure long-term sustainability. The analysis uses so-called fiscal gaps to provide a simple metric for how much consolidation is needed under a series of different assumptions and scenarios. The aim is to highlight the scale of the problems, how they differ across countries and the uncertainties surrounding the estimates. A first set of results suggest that lower debt targets provide greater room for manoeuvre to react to shocks in the future. A second set of results shows that growth-enhancing structural reforms | especially reforms of pension systems | can mitigate budget pressures resulting from ageing populations and hence contribute to fiscal consolidation. Furthermore, raising efficiency in the provision of health care and education can reduce budgetary pressures. Finally, achieving debt objectives under shocks to interest rates or to government spending would require additional tightening in most of the OECD countries.<P>Consolidation budgétaire : Partie 3. Projections à long terme et calcul des écarts budgétaires<BR>Durant la crise économique et financière, la position budgétaire des pays de l’OCDE s’est nettement dégradée. La question se pose dès lors de savoir quel niveau de déficit primaire assurerait la viabilité à long terme et quel degré d’assainissement est nécessaire. Ce document a pour objet d’évaluer l’ampleur de l’effort de consolidation budgétaire à consentir pour assurer la viabilité à long terme. L’analyse s’appuie sur les « écarts budgétaires », qui permettent de mesurer simplement l’ampleur de l’assainissement nécessaire suivant divers scénarios et hypothèses. L’objectif est de mettre en lumière l’échelle des problèmes, les différences qui existent d’un pays à l’autre et les incertitudes qui entourent les estimations. Une première série de résultats semble indiquer que des objectifs de dette plus bas offrent une plus grande marge de manoeuvre pour réagir aux chocs dans l’avenir. Une seconde série de résultats montre que des réformes structurelles propres à renforcer la croissance – en particulier les réformes des systèmes de retraite – peuvent atténuer les pressions budgétaires dues aux vieillissement des populations et, partant, contribuer à l’assainissement des finances publiques. Par ailleurs, rehausser l’efficience dans la prestation de services de santé et d’éducation peut atténuer les pressions budgétaires. Enfin, des chocs affectant les taux d’intérêt ou les dépenses publiques nécessiteraient un resserrement budgétaire plus sévère dans la plupart des pays de l’OCDE.
    Keywords: ageing populations, long-term projections, fiscal consolidation, long-term public finance sustainability, public social expenditure, vieillissement de la population, projections à long terme, consolidation budgétaire, viabilité des finances publiques à long terme, dépenses sociales publiques
    JEL: E62 H50 H68 J11
    Date: 2012–01–10
  23. By: Laurent Pauwels (The University of Sydney Business School); Andrey Vasnev (The University of Sydney Business School)
    Abstract: This paper provides a methodology for combining forecasts based on several discrete choice models. This is achieved primarily by combining one-step-ahead probability forecast associated with each model. The paper applies well-established scoring rules for qualitative response models in the context of forecast combination. Log-scores and quadratic-scores are both used to evaluate the forecasting accuracy of each model and to combine the probability forecasts. In addition to producing point forecasts, the effect of sampling variation is also assessed. This methodology is applied to forecast the US Federal Open Market Committee (FOMC) decisions in changing the federal funds target rate. Several of the economic fundamentals influencing the FOMC decisions are nonstationary over time and are modelled in a similar fashion to Hu and Phillips (2004a, JoE). The empirical results show that combining forecasted probabilities using scores mostly outperforms both equal weight combination and forecasts based on multivariate models.
    Keywords: Forecast combination, Probability forecast, Discrete choice models, Monetary policy decisions
    Date: 2011–06
  24. By: Jakas, Vicente
    Abstract: The basic asset pricing equation is adapted to include the effects of unemployment, consumers’ expectations, the price level and money supply on money market rates and government bond yields. Expected consumption growth is modelled using European unemployment figures and Eurostat Consumer Confidence Index. The price level is incorporated in the aggregate marginal utility function using production price index (PPI) as a proxy. An affine term structure model is derived using a state space system with an observation equation which links observable yields to these macroeconomic variables and a state equation which describes the dynamics of these variables. Unemployment and consumer confidence index will have a shift and a slope effect on the yield curve, for front-end yields moving faster than in the long end. Production price index exhibits a twist effect (flattening or steepening of the curve) which results in front-end yields shifting in opposite directions to the long end of the curve. This empirical work shows that yields are negatively correlated to money supply, as expected in classical IS-LM models. And that money supply exhibits a slope effect, with the front-end of the curve shifting faster than the longer end.
    Keywords: Macroeconomic releases; Term structure of interest rates; Dynamic factors; Affine term structure models
    JEL: E43 E12 G12 E52 E44
    Date: 2011–07
  25. By: Guido Menzio; Irina A. Telyukova; Ludo Visschers
    Abstract: We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.
    JEL: E24 J63 J64
    Date: 2012–01
  26. By: Gechert, Sebastian
    Abstract: We analyze the simple fiscal multiplier and extend it in terms of a credit-money framework and in terms of a time dimension, making it applicable to time series data. In order to take care of a credit-money framework, we complement the sources and uses of funds that are available along the multiplier process. In order to tackle the issue of time, we introduce a time component, which captures the time duration of a multiplier round. We argue that both attempts are incomplete on their own, but together they form a new version of the multiplier depending on the time duration of a multiplier period and a leakage that comprises net debt settlement and net accumulation of receivables. While the comparative-static stability condition of the multiplier can be dropped in this framework, our integrated multiplier reveals a dynamic stability condition for the multiplier process. Moreover, the integrated multiplier can be applied to evaluate income effects of transitory stimulus packages for a given time span. Multiplier effects are not calculated via identification of public spending shocks and GDP effects, but via determination of the behavioral parameters.
    Keywords: fiscal multiplier; credit-money; dynamic stability; stockflow relation
    JEL: E62 E12 E20
    Date: 2012–01–13
  27. By: Michael Pedersen
    Abstract: The present paper analyzes propagation of shocks to food and energy prices in 46 countries with data from the period 1999-2010. The empirical evidence suggests that in only one of the countries considered, a shock to the price of either energy or food shows no propagation to the prices of the goods and services included in the core inflation measure. In general, the propagation effect of food price shocks is larger than that of energy price shocks. Emerging economies are more affected by propagation than advanced ones. The results advocate that policy makers concerned with price stability should pay special attention to shocks affecting domestic food prices.
    Date: 2011–12
  28. By: Gonzalo Castex; Miguel Ricaurte
    Abstract: In a general equilibrium context, we analyze the impact of changes in institutional labor market conditions, such as access to financing and efficiency, on the composition of employment and unemployment, considering the nature of formal labor contracts and the entrepreneurial capacity of the labor force. We extend the Mortensen - Pissarides model to allow for two types of formal job contracts: temporary and permanent; and we also allow for self-employment. We show that labor market efficiency as well as access to selfemployment financing played a key role in the evolution of employment in Chile during the last 15 years. Additionally, and not surprisingly, tougher access to financing adversely affects self-employment
    Date: 2011–12
  29. By: Hatgioannides, John (City University London); Karanassou, Marika (University of London)
    Abstract: In this paper we aim to trace the roots of the ongoing economic mayhem and to unmask the chorus of the tragedy which plays on the world stage. The main thesis of our work is that, despite the triumphant rhetoric praising the merits of perfect competition, the global fields of the dysfunctional market system have mushroomed in what we call Warrant Economics for the Free-Market Aristocracy. Warrant Economics unfolds in two symbiotic tenets that constitute the subtle architecture of the neoliberal edifice: (i) the systemic creation and preservation of inequality via Call-Put policy options, and (ii) the systemic exploitation of inequality via novel and toxic forms of securitisation. In effect, the power structure of insiders’ capitalism that we describe, trough the costless appropriation of an intricate cobweb of Call-Put structures, has distorted competition and accelerated economic concentration. We view the income distribution effect, which favours the top 1%, and the business concentration effect, which gravitates competition towards oligopolistic/monopolistic industries, as the two sides of the Warrant Economics coin. We argue that the Warrant Economics state of capitalism has been legitimised by a degenerating research programme blossomed under the fallacy that economics is the “physics of society”. In this faculty of thought, we perceive the Great Recession as a symptom of Warrant Economics, rather than as a tsunami-like event.
    Keywords: income distribution, monopoly, securitisation, Call-Put policy options, Warrant Economics, Great Recession, sovereign debt
    JEL: E66 G01 G10
    Date: 2011–12
  30. By: Margit Molnar
    Abstract: The global economic and financial crisis exacerbated the need for fiscal consolidation in many OECD countries. Drawing lessons from past episodes of fiscal consolidation, this paper investigates the economic environments, political settings and policy measures conducive to fiscal consolidation and debt stabilisation using probit, duration, truncated regression and bivariate Heckman selection methods. The empirical analysis builds on the earlier literature and extends it to include new aspects that may be of importance for consolidating governments. The empirical analysis confirms previous findings that the presence of fiscal rules – expenditure or budget balance rules – is associated with a greater probability of stabilising debt. Crucial in determining the causal link behind the association, the results also reveal an independent role for such rules over and above the impact of preferences for fiscal prudence. Also, while the analysis confirms that spending-driven adjustments vis-à-vis revenue-driven ones are more likely to stabilise debt, it also reveals that large consolidations need multiple instruments for consolidation to succeed. Sub-national governments, in particular state-level governments can contribute to the success of central government consolidation, if they co-operate. To ensure that state-level governments do co-operate, having the right regulatory framework with the extension of fiscal rules to sub-central government levels is important.<P>Consolidation budgétaire : Partie 5. Quels sont les facteurs qui conditionnent la réussite des efforts d'assainissement budgétaire ?<BR>La crise economique et financiere mondiale a exacerbe l.imperatif d.assainir les finances publiques dans de nombreux pays de l.OCDE. Tirant les enseignements des episodes passes de reequilibrage budgetaire, ce document analyse les facteurs economiques, politiques et strategiques favorables a l.assainissement des finances publiques et a la stabilisation de la dette en utilisant la methode des probits, les modeles de duree, de regression tronquee et de selection en deux etapes de Heckman. L.analyse empirique s.inspire de travaux anterieurs qu.elle enrichit en integrant d.autres aspects qui peuvent etre importants pour les autorites qui optent pour une trajectoire d.assainissement budgetaire. Cette analyse empirique confirme les resultats anterieurs qui montraient que l.existence de regles budgetaires . regles de depenses ou d.equilibre budgetaire . est associee a une plus forte probabilite de stabilisation de la dette. Essentiels pour determiner le lien de causalite qui sous-tend cette association, les resultats revelent par ailleurs que ces regles jouent un role independant au-dela des effets d.une politique axee sur la prudence budgetaire. En outre, l.analyse confirme que les mesures de restriction des depenses sont plus susceptibles de stabiliser la dette que celles fondees sur l.augmentation des recettes, mais elle revele egalement que, pour reussir, les reequilibrages de grande ampleur doivent s.appuyer sur de multiple instruments. Les autorites infranationales, et notamment les autorites regionales ou des Etats, peuvent contribuer au succes des efforts deployes par l.administration centrale en cooperant. Pour garantir cette cooperation, il est important de disposer d.un cadre reglementaire adequat qui applique les regles budgetaires aux autorites infranationales.
    Keywords: taxation, fiscal federalism, fiscal rules, fiscal consolidation, government spending, dépenses publiques, règles budgétaires, fédéralisme budgétaire, consolidation budgétaire, taxation
    JEL: E62 H2 H5 H6 H7
    Date: 2012–01–10
  31. By: Masaru Inaba (Kansai University); Kengo Nutahara (Senshu University)
    Abstract: Technical appendices for the Review of Economic Dynamics article
    Date: 2012
  32. By: Mahmud, Mir Nahid; Ahmed, Mansur
    Abstract: The relationship between government and household consumption remains to be one of the contentious issues in both theories and empirics, though its’ immense importance in fiscal policy formulation. Like theories, the empirical studies regarding the relationship between government and household consumption provide opposing results. In this backdrop, the present study examines public-private consumption relationship for Bangladesh economy through the lens of economic theories using the cointegration and error correction modeling strategies to tackle the problem of non-stationary data. Two different variant of cointegration technique have been employed and in either case a valid long run positive relationship has been found. However, the error correction model has found an inverse relationship between public and private consumption in the short run. Finally, we test for Granger causality and find no long run causal relationship between government consumption and household consumption. In general, our finding goes with the Barro-Ricardian equivalence hypothesis of government spending that household consumption is unrelated with government consumption decision in the long-run.
    Keywords: Government Consumption; Household Consumption; Ricardian Equivalence; Cointegration
    JEL: E62 H31 H5 E21 H3
    Date: 2012–01–16
  33. By: Lars Boerner (Free University of Berlin); Albrecht Ritschl (London School of Economics and CEPR)
    Abstract: Communal responsibility, a medieval institution studied by Greif (2006), supported the use of credit among European merchants in the absence of modern enforcement technologies. This paper shows how this mechanism helps to overcome enforcement problems in anonymous buyer/seller transactions. In a village economy version of the Lagos and Wright (2005) model, agents trading anonymously in decentralized markets can be identified by their citizenship and thus be held liable for each other. Enforceability within each village's centralized afternoon market ensures collateralization of credit in decentralized markets. In the resulting equilibrium, money and credit coexist in decentralized markets if the use of credit is costly. Our analysis easily extends itself to other payment systems like credit cards that provide a group identity to otherwise anonymous agents.
    Keywords: Communal responsibility, anonymous matching, money demand, credit, bills of exchange
    JEL: E41 D51 N2
    Date: 2011–01
  34. By: Aurélien Hazan (SAMM - Statistique, Analyse et Modélisation Multidisciplinaire (SAmos-Marin Mersenne) - Université Paris I - Panthéon Sorbonne)
    Abstract: La compréhension des phénomènes économiques nécessite de prendre en compte plusieurs échelles de temps simultanément. Nous étudions le cas d'un modèle simple d'épargne, où plusieurs échelles de temps caractéristiques coexistent. Nous montrons qu'il est possible de séparer les contributions lentes et rapides confondues dans une même variable observée en nous appuyant d'une part sur une linéarisation de la dynamique (stochastique et nonlinéaire) autour d'un point d'équilibre, et d'autre part sur un découplage via la transformation de Chang, issue de la théorie de la commande. Les modèles d'équilibre calculable, plus généraux et de grande dimension, tels que les modèles DSGE employés par de nombreuses institutions financières, pourraient bénéficier de ces outils autant pour accélérer leurs simulations que pour l'analyse statistique de données réelles.
    Keywords: macroéconomie ; épargne ; Solow ; Ramsey ; découplage ; slow/fast ; multiéchelle ; filtrage
    Date: 2011–06–24
  35. By: de Haas, Ralph; van Horen, Neeltje
    Abstract: After Lehman Brothers filed for bankruptcy in September 2008, cross-border bank lending contracted sharply. To explain the severity and variation in this contraction, we analyze detailed data on cross-border syndicated lending by 75 banks to 59 countries. We find that banks that had to write down sub-prime assets, refinance large amounts of long-term debt, and experienced sharp declines in their market-to-book ratio, transmitted these shocks across borders by curtailing their lending abroad. While shocked banks differentiated between countries in much the same way as less constrained banks, they restricted their lending more to small borrowers.
    Keywords: Cross-border lending; bank-funding shocks; crisis transmission
    JEL: E51 F36 G21
    Date: 2012–01–17
  36. By: Hein, Eckhard
    Abstract: In this paper the euro crisis is viewed as the most recent episode of the crisis of finance-dominated capitalism. Therefore, two major features of finance-dominated capitalism, the increasing inequality of income distribution and the rising imbalances of current accounts, are analysed for a set of major Euro area countries. Against this background the euro crisis is examined, and it is shown that the economic policy reactions of European governments and institutions, narrowly interpreting the crisis as a sovereign debt crisis caused by irresponsible behaviour of some member country governments, are misguided and will lead to deflationary stagnation and an increasing risk of disintegration of the Euro area. For this reason, finally an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and economic policy strategies is outlined. It is argued that, on the one hand, an institution which convincingly guarantees public debt of Euro area member countries and, on the other hand, an expansionary macroeconomic policy approach, in particular in the current account surplus countries of the Euro area, need to be introduced.
    Keywords: Finance-dominated capitalism; distribution; financial and economic crisis; European economic policies
    JEL: E64 E25 E58 E65 E63 E61
    Date: 2012–01–12
  37. By: Punzi, Maria Teresa (Bank of Finland Research)
    Abstract: This paper presents a two-sector, two-country model showing that inflation in the housing market, a low personal savings rate, and a construction investment boom can contribute to a large current account deficit. In the model, demand by a group of households in the domestic country is constrained by the availability of collateral. This implies more procyclical debt capacity because constrained households can borrow against the increase in the value of their houses during an expansion. A higher degree of financial liberalization and development helps constrained households reach higher loan-to-value ratios, thus relaxing their borrowing constraints. The resulting higher net worth and lower need for savings imply a worsening current account.
    Keywords: housing market; current account; international economy
    JEL: E21 E32 F32 F41 J22
    Date: 2012–01–10
  38. By: Long Xin; Pelloni Alessandra
    Keywords: Capital Income taxes, R&D, growth effect, welfare effect
    JEL: E62 H21 O41
    Date: 2011–12
  39. By: Jean Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Joseph Stiglitz (Columbia University)
    Abstract: Two years after the delivery of the report on The Measurement of Economic Performances and Social Progress (Stiglitz-Sen-Fitoussi),this paper provides some further reflections on the subject. Since 2008, when the work of the Commission began, the world has experienced several dramatic events which all call into question our measurement systems and the policies which were grounded on them: the financial crisis of 2007-2008, the grave events in Japan, the Sovereign debt crisis, and the revolutions in the Arabic world. In particular, the Japanese earthquake and its aftermath underlines three central shortcomings of our metrics: the measurement of the economic product,the measurement of well being, and the measurement of sustainability. For economists, these concerns are especially important, because we often rely on statistical (econometric analyses) to make inferences about what are good policies. Those inferences are only as reliable as the metrics that they are based on. Our statistical systems should tell us whether or not what we are doing is sustainable, economically, environmentally, politically, or socially and whether proposed policies will in fact enhance well-being . There would be little sense in pursuing policies aimed at increasing some widely used metric like GDP ifsuch policies lead to a decrease in well being.
    Keywords: 1- Economic indicators 2- Gross Domestic Products 3-Social indicators 4- Well being 5- Sustainability
    JEL: E01 E30 G10 I32 Q50 Q54
    Date: 2011–10

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