nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒02‒01
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Strategic monetary and fiscal policy interaction in a liquidity trap By Ali al-Nowaihi; Sanjit Dhami
  2. Selective Hiring and Welfare Analysis in Labor Market Models By Steffen Ahrens, Dennis Snower
  3. Monetary policy and unemployment in open economies By Engler, Philipp
  4. Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia By Joseph D. ALBA; Wai-Mun CHIA; Donghyun PARK
  5. Aggregate hours worked in OECD countries: new measurement and implications for business cycles By Lee E. Ohanian; Andrea Raffo
  6. The Relationship between Inflation, output growth, and their Uncertainties: Evidence from selected CEE countries By Mubariz Hasanov; Tolga Omay
  7. Optimal monetary policy in a two country model with firm-level heterogeneity By Dudley Cooke
  8. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  9. How inflationary is an extended period of low interest rates? By Charles T. Carlstrom; Timothy S. Fuerst; Matthias Paustian
  10. International Macroeconomic Policy: When Wealth Affects People's Impatience By Wang Peng; Heng-fu Zou
  11. Quantity rationing of credit By Waters , George A.
  12. Liquidity when it matters: QE and Tobin’s q By Driffill, John; Miller, Marcus
  13. Monetary Policy Implications of Financial Frictions in the Czech Republic By Jakub Rysanek; Jaromir Tonner; Osvald Vasicek
  14. Inflation dynamics when inflation is near zero By Jeffrey C. Fuhrer; Giovanni P. Olivei; Geoffrey M. B. Tootell
  15. An Equilibrium Asset Pricing Model with Labor Market Search By Kuehn, Lars-Alexander; Petrosky-Nadeau, Nicolas; Zhang, Lu
  16. A chronology of turning points in economic activity: Spain, 1850-2011 By Travis J. Berge; Òscar Jordà
  17. Capital Controls and Foreign Exchange Policy By Marcel Fratzscher
  18. Bayesian estimation of NOEM models: identification and inference in small samples By Enrique Martínez-García; Diego Vilán; Mark Wynne
  19. Basel Accord and financial intermediation: the impact of policy By Martin Berka; Christian Zimmermann
  20. Real and Monetary Policy Convergence: EMU Crisis to the CFA Zone By Simplice A, Asongu
  21. Nonlinearity and Structural Stability in the Phillips Curve: Evidence from Turkey By Mubariz Hasanov; Aysen Arac; Funda Telatar
  22. ABD Kira Enflasyonu ve Konut Fiyat Dinamikleri By Yavuz Arslan; Birol Kanik
  23. The Great Recession and bank lending to small businesses By Judit Montoriol-Garriga; J. Christina Wang
  24. Political Ideology and Economic Growth in a Democracy : The French Experience, 1871 - 2009. By François Facchini; Mickaël Melki
  25. Leverage, liquidity and crisis: A simulation study By Antoine Godin; Stephen Kinsella
  26. Collateral Crises By Gary B. Gorton; Guillermo Ordonez
  27. The Safe-Asset Share By Gary B. Gorton; Stefan Lewellen; Andrew Metrick
  28. Selective Hiring and Welfare Analysis in Labor Market Models By Christian Merkl, Thijs van Rens
  29. Credit Supply versus Demand: Bank and Firm Balance-Sheet Channels in Good and Crisis Times By Jimenez Porras, G.; Ongena, S.; Peydro, J.L.; Saurina, J.
  30. The macroeconomic consequences of migration diversion: evidence for Germany and the UK By Timo Baas; Herbert Brücker
  31. Developing a composite index of economic activity for Australia By Chindamo, Phillip
  32. Macroeconomic shocks and the probability of being employed By Tom Kornstad, Ragnar Nymoen and Terje Skjerpen
  33. Learning Within Rational-Expectations Equilibrium By Thomas W.L. Norman
  34. Technological Innovation, Resource Allocation, and Growth By Leonid Kogan; Dimitris Papanikolaou; Amit Seru; Noah Stoffman

  1. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: Given the recent experience, there is growing interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. Using the Dixit-Lambertini (2003) framework of strategic policy interaction between the Treasury and the Central Bank, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target is given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as a Stackelberg leader, is given optimal output and inflation targets. This solution achieves the optimal rational expectations pre-commitment solution. This result holds true for a range of specifications about the Treasury's behavior. However, when there is the possibility of a liquidity trap, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one. 
    Keywords: liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules.
    JEL: E63 E52 E58 E61
    Date: 2011–06
  2. By: Steffen Ahrens, Dennis Snower
    Abstract: We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and the latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent
    Keywords: inflation, long-run Phillips curve, fairness, inequity aversion
    JEL: D03 E20 E31 E50
    Date: 2012–01
  3. By: Engler, Philipp
    Abstract: After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Lüchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Galí (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as highlighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model. --
    Keywords: open economy macroeconomics,monetary policy,unemployment
    JEL: E24 E52 F32 F41
    Date: 2011
  4. By: Joseph D. ALBA (Joseph D. ALBA Nanyang Technological University, Singapore); Wai-Mun CHIA (Wai-Mun CHIA Nanyang Technological University, Singapore); Donghyun PARK (Donghyun PARK Asian Development Bank (ADB), The Philippines)
    Abstract: East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.
    Date: 2011–12–01
  5. By: Lee E. Ohanian; Andrea Raffo
    Abstract: We build a dataset of quarterly hours worked for 14 OECD countries. We document that hours are as volatile as output, that a large fraction of labor adjustment takes place along the intensive margin, and that the volatility of hours relative to output has increased over time. We use these data to reassess the Great Recession and prior recessions. The Great Recession in many countries is a puzzle in that labor wedges are small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger.
    Date: 2011
  6. By: Mubariz Hasanov (Hacettepe University, Department of Economics); Tolga Omay (Cankaya University, Department of International Trade Management)
    Abstract: In this paper, we examine causal relationships among inflation rate, output growth rate, inflation uncertainty and output uncertainty for ten Central and Eastern European transition countries. For this purpose, we estimate a bivariate GARCH model that includes output growth and inflation rates for each country. Then we use conditional standard deviations of inflation and output to proxy nominal and real uncertainty, respectively, and perform Granger-causality tests. Our results suggest that inflation rate induces uncertainty about both inflation rate and output growth rate, which is detrimental for real economic activity. On the other hand, we find that output growth rate reduces macroeconomic uncertainty. In addition, we also examine and discuss causal relationships among remaining variables.
    Keywords: Inflation; Output growth; Uncertainty; Granger-Causality Tests; Transition Countries
    JEL: C32 C51 C52 E10 E30
    Date: 2012
  7. By: Dudley Cooke
    Abstract: This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation.
    Keywords: Price levels ; Macroeconomics - Econometric models
    Date: 2012
  8. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa))
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, 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 sta- tistical 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
  9. By: Charles T. Carlstrom; Timothy S. Fuerst; Matthias Paustian
    Abstract: Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.
    Keywords: Interest rates ; Interest rate risk
    Date: 2012
  10. By: Wang Peng (Institute for Advanced Studies, Wuhan University); Heng-fu Zou (Institute for Advanced Studies, Wuhan University; CEMA in Central University of Finance and Economics)
    Abstract: Under a modified neo-classical framework, this paper reexamined the effect of international macroeconomic policies by rejecting the routine assumption of a constant rate of time preference. In the model presented here, we suppose the holdings of real financial wealth will affect people's impatience which has far-reaching implications towards various core issues in international macroeconomics. The introducing of wealth into instantaneous discounting function yields intriguing dynamics of consumption, real balances, and foreign bond holdings. One interesting feature of our model is that stationary rate of time preference no longer necessarily equals real interest rate. We also find that central bank's foreign exchange intervention is not super-neutral even if households capitalize all transfers from the government, which contradicts Obstfeld(1981) in that the distribution of the economy¡¯s claims on the rest of the world between the public and the central bank is relevant to the economic performance. The monetary policy affects the real factors, but how the economy behaves in the long run and in the short run differs a lot from Uzawa(1968) and Obstfeld(1981).
    Keywords: international macroeconomic policy, impatience, foreign exchange, monetary policy
    JEL: D90 F3 F4
    Date: 2012
  11. By: Waters , George A. (Bank of Finland Research and Illinois State University)
    Abstract: Quantity rationing of credit, when firms are denied loans, has greater potential to explain macroeconomic fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market confidence leads to a temporary change in the interest rate, but a persistent change in the fraction of firms receiving financing, which leads to a persistent fall in real activity. Empirical evidence confirms that credit market confidence, measured by the survey of loan officers, is a significant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not.
    Keywords: quantity rationing; credit; VAR
    JEL: E10 E24 E44 E50
    Date: 2012–01–17
  12. By: Driffill, John (Birkbeck, University of London); Miller, Marcus (University of Warwick)
    Abstract: When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality – but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced – as reported by FRBNY for the US economy using a calibrated DSGE-style framework modified to include such frictions. In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped- down macro model of inter-temporal optimisation subject to credit constraints.
    Keywords: Credit Constraints; Temporary Equilibrium; Liquidity Shocks
    Date: 2011
  13. By: Jakub Rysanek; Jaromir Tonner; Osvald Vasicek
    Abstract: As the global economy seems to be recovering from the 2009 financial crisis, we find it desirable to look back and analyze the Czech economy ex post. We work with a Swedish New Keynesian model of a small open economy which embeds financial frictions in light of the financial accelerator literature. Without explicitly modeling the banking sector, this model serves as a tool for understanding how a negative financial shock may spread to the real economy and how monetary policy may react. We use Bayesian techniques to estimate the model parameters to adjust the model structure closer to the evidence stemming from Czech data. Our attention focuses on a set of experiments in which we generate ex post forecasts of the economy prior to the 2009 crisis and illustrate that the monetary policy response to an upcoming crisis implied by the model with financial frictions is stronger on account of an increasing interest rate spread.
    Keywords: Bayesian methods, financial frictions.
    JEL: C53 E32 E37
    Date: 2011–12
  14. By: Jeffrey C. Fuhrer; Giovanni P. Olivei; Geoffrey M. B. Tootell
    Abstract: This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and long-run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of mild deflation going forward. In addition, our micro evidence on wages suggests no obvious downward rigidity in the firm's wage costs, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may provide little offset to deflationary pressures in the current U.S. situation, despite some circumstantial evidence that this channel might have been at work in the past.
    Keywords: Inflation (Finance) ; Deflation (Finance) ; Deflation (Finance) - Japan
    Date: 2011
  15. By: Kuehn, Lars-Alexander (Carnegie Mellon University); Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Zhang, Lu (OH State University)
    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: E21 E24 E40 G12
    Date: 2011–12
  16. 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.
    Date: 2011
  17. By: Marcel Fratzscher
    Abstract: The empirical analysis in the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued currencies. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and increased output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy framework and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.
    Date: 2011–12
  18. By: Enrique Martínez-García; Diego Vilán; Mark Wynne
    Abstract: The global slack hypothesis (e.g., Martínez-García and Wynne [2010]) is central to the discussion of the trade-offs monetary policy faces in an increasingly more open world economy. Open-Economy (forward-looking) New Keynesian Phillips curves describe how expected future inflation and a measure of global output gap (global slack) affect the current inflation rate.> ; This paper studies the (potential) weak identification of these relationships in the context of a fully specified structural model using Bayesian estimation techniques. We trace the problems to sample size, rather than misspecification bias. We conclude that standard macroeconomic time series with a coverage of less than forty years are subject to potentially serious identification issues, and also to model selection errors. We recommend estimation with simulated data prior to bringing the model to the actual data as a way of detecting parameters that are susceptible to weak identification in short samples.
    Keywords: Macroeconomics - Econometric models
    Date: 2012
  19. By: Martin Berka; Christian Zimmermann
    Abstract: This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough. We find that active monetary policy increases loan volume even when the economy is in good shape; introducing active capital requirement policy can be effective as well if it implies tightening of regulation in bad times. This is performed with an heterogeneous agent economy with occupational choice, financial intermediation and aggregate shocks to the distribution of entrepreneurial returns.
    Date: 2011
  20. By: Simplice A, Asongu
    Abstract: A major lesson of the EMU crisis is that serious disequilibria result from regional monetary arrangements not designed to be robust to a variety of shocks. The purpose of this paper is to assess these disequilibria within the CEMAC, UEMOA and CFA zones. In the assessments, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth. We also provide the speed of convergence and time required to achieve a 100% convergence. But for financial intermediary size within the CFA zone, findings for the most part support only unconditional convergence. There is no form of convergence within the CEMAC zone. The broad insignificance of conditional convergence results have substantial policy implications. Monetary and real policies which are often homogenous for member states are thwarted by heterogeneous structural and institutional characteristics which give rise to different levels and patterns of financial intermediary development. Therefore member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of monetary policies.
    Keywords: CFA Zone; Currency Area; Convergence; Policy Coordination
    JEL: F15 F42 O55 F36 P52
    Date: 2012–01–19
  21. By: Mubariz Hasanov (Hacettepe University, Department of Economics); Aysen Arac (Hacettepe University, Department of Economics); Funda Telatar (Hacettepe University, Department of Economics)
    Abstract: In this paper, we investigate possible nonlinearities in the inflation–output relationship in Turkey for the 1980–2008 period. We first estimate a linear bivariate model for the inflation rate and output gap, and test for linearity of the estimated model against nonlinear alternatives. Linearity test results suggest that the relationship between the inflation rate and output gap is highly nonlinear. We estimate a bivariate timevarying smooth transition regression model, and compute dynamic effects of one variable on the other by generalized impulse response functions. Computed impulse response functions indicate that inflation–output relationship in Turkey during the analyzed period was regime dependent and varied considerably across time.
    Keywords: Phillips Curve; Nonlinearity; Structural Stability
    JEL: C32 C51 E31
    Date: 2012
  22. By: Yavuz Arslan; Birol Kanik
    Abstract: [TR] Bu notta Amerika Birlesik Devletleri (ABD) konut piyasasi, uzun ve kisa donem goreli kira hareketleri ve ipotekli konut kredisi faiz oranlari kullanilarak analiz edilmektedir. Ilk olarak, OECD verileri kullanilarak cesitli ulkelerdeki kira ve TUFE enflasyonu arasindaki uzun donemli iliski incelenmistir. Incelenen ulkelerin buyuk bir kisminda uzun donemde kira enflasyonunun TUFE enflasyonundan daha yuksek oldugu tespit edilmistir. Ayrica, konut piyasasi fiyat dinamiklerinin en etkin belirleyicilerinden olan ipotekli konut kredisi faiz oranlari, kira enflasyonuyla birlikte Gordon fiyatlama formulunde kullanilarak Gordon fiyat endeksi olusturulmus ve endeksin gerceklesen fiyatlarla iliskisi incelenmistir. Endeks, artan kira enflasyonu ve dusuk konut kredi faiz oranlari ile yuksek degerlere ulasmakta ve konut fiyatlarinin onumuzdeki donemde artabilecegine isaret etmektedir. [EN] In this note, we analyze the US housing market by considering short-term and long-term relative rent inflation and mortgage rates. First, we investigate the long-term relationship between CPI and rent inflation for different countries by using OECD data. Rent inflation has been higher than the CPI inflation in the long run for most of the studied countries. Moreover, we use rent inflation with long-term mortgage rates to construct Gordon house price index and compare the index with the housing data. Taking into account the past data and the Gordon house price index, the recent increase in the rent inflation implies that US housing prices could increase in the upcoming months.
    Date: 2012
  23. By: Judit Montoriol-Garriga; J. Christina Wang
    Abstract: This paper investigates whether small firms have experienced worse tightening of credit conditions during the Great Recession than large firms. To structure the empirical analysis, the paper first develops a simple model of bank loan pricing that derives both the interest rates on loans actually made and the marginal condition for loans that would be rationed in the event of an economic downturn. Empirical estimations using loan-level data find evidence that, once we account for the contractual features of business loans made under formal commitments to lend, interest rate spreads on small loans have declined on average relative to spreads on large loans during the Great Recession. Quantile regressions further reveal that the relative decline in average spread is entirely accounted for by loans to the riskier borrowers. These findings are consistent with the pattern of differentially more rationing of credit to small borrowers in recessions as predicted by the model. This suggests that policy measures that counter this effect by encouraging lending to small businesses may be effective in stimulating their recovery and, in turn, job growth.
    Keywords: Recessions ; Small business - Finance ; Bank loans
    Date: 2011
  24. By: François Facchini (Centre d'Economie de la Sorbonne); Mickaël Melki (Centre d'Economie de la Sorbonne)
    Abstract: This paper examines the influence of political ideology on economic growth in the French democracy since 1871. It does so by addressing three main issues : the property and the reliability of a political ideology index in the long-run, the robustness of the relationship between ideology and growth and the specific channels through which political ideology affects economic performance. The main conclusion is that, compared with right-wing parties in power, left-wing governments have promoted equity at the expense of economic growth. It also appears that the main channel through which political ideology has impacted economic performance all along the French democratic experience is the budgetary tool (i.e. fiscal and redistributive policies) which influenced employment and income inequalities. By contrast, there seems to be less or even no empirical support for explanations based on the monetary policy or regulation, such as trade policies or the labor market regulation.
    Keywords: French economic history, 19th century, 20th century, political ideology, partisanship, growth, government performance, fiscal policy, public spending, unemployment, inequality.
    JEL: E6 O43 H11 N13
    Date: 2012–01
  25. By: Antoine Godin; Stephen Kinsella
    Abstract: We study the interactions of banks and ?rms within a leverage cycle to understand how capacity utilisation and capital investment interact with funding costs, leverage by banks and ?rms, and liquidity. We show in a simulation study that when ?rms can grow and die by becoming insolvent, and when banks can grow and die as their bad debts increase to unsustainable levels, the real economy cycles around a leverage cycle.
    Keywords: Leverage, capital investment, capacity utilization, simulation modeling.
    JEL: E22 E32 E37
    Date: 2012
  26. By: Gary B. Gorton; Guillermo Ordonez
    Abstract: Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.
    JEL: E2 E20 E32 E44 G01 G2 G20
    Date: 2012–01
  27. By: Gary B. Gorton; Stefan Lewellen; Andrew Metrick
    Abstract: We document that the percentage of all U.S. assets that are “safe” has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5, and the main supplier of safe financial debt has shifted from commercial banks to the “shadow banking system.” We analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe-asset share and its role within the overall economy.
    JEL: E02 E41 E44 E52 G2 G21
    Date: 2012–01
  28. By: Christian Merkl, Thijs van Rens
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–01
  29. By: Jimenez Porras, G.; Ongena, S.; Peydro, J.L.; Saurina, J. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Banking crises involve periods of persistently low credit and economic growth. Banks’ balance sheets are then weak but so are those of non-financial corporate borrowers. Hence, a crucial question is whether credit growth is low due to supply or to demand factors. However convincing identification has been elusive due to a lack of detailed loan application-, bank-, and firm-level data. Access to a dataset of loan applications in Spain that is matched with complete bank and firm balance-sheet data covering the period from 2002 to 2010 allows us to identify bank and firm balancesheet channels. We find robust evidence showing that bank balance-sheet strength determines the success of loan applications and the granting of loans in crisis times. The heterogeneity in firm balance-sheet strength determines loan granting in both good and crisis times, although the potency of this firm balance-sheet channel is the largest in the latter period. Our findings therefore hold important implications for both theory and policy.
    Keywords: bank lending channel;credit supply;business cycle;credit crunch;capital;liquidity.
    JEL: E32 E44 E5 G21 G28
    Date: 2012
  30. By: Timo Baas (Institute for Employment Research (IAB) and Free University of Berlin); Herbert Brücker (University of Bamberg, Institute for Employment Research (IAB) and IZA)
    Abstract: This paper examines the macroeconomic consequences of the diversion of migration flows away from Germany towards the UK in the course of the EU’s Eastern Enlargement. The EU has agreed transitional periods for the free movement of workers with the new member states from Central and Eastern Europe. The selective application of migration restrictions during the transitional periods has resulted in a reversal of the pre-enlargement allocation of migration flows from the new member states across the EU. Based on a forecast of the migration potential under the conditions of free movement and of the transitional arrangements, we employ a CGE model with imperfect labour markets to analyse the macroeconomic effects of this diversion process. We find that EU Eastern enlargement has increased in the GDP per capita in the UK substantially, but that the diversion of migration flows towards the UK has reduced wage gains and the decline in unemployment there. The effects of the EU Eastern enlargement are less favourable for Germany, but the diversion of migration flows has protected workers there against a detrimental impact on wages and unemployment.
    Keywords: EU Eastern enlargement, international migration, computable equilibrium model, wage-setting.
    JEL: F15 F22 C68 J61 J30
    Date: 2012–01
  31. By: Chindamo, Phillip
    Abstract: This Economics Research Note outlines the development of a monthly Ai Group 'composite' index of economic activity for Australia. A simple weighted composite index is outlined, covering the three Ai Group performance indices as well proxies for the rural and mining sectors using available monthly data. This simple index shows that the economy has been generally in a slight contractionary phase in recent months, consistent with benign recent official data on the Australian economy.
    Keywords: Business indices
    JEL: E32
    Date: 2012–01–18
  32. By: Tom Kornstad, Ragnar Nymoen and Terje Skjerpen (Statistics Norway)
    Abstract: Macroeconomic theories take polar views on the importance of choice versus chance. At the micro level, it seems realistic to assume that both dimensions play a role for individual employment outcomes, although it might be difficult to separate these two effects. Nevertheless the choice and chance dimension are seldom treated symmetrically in models that use micro data. We estimate a logistic model of the probability of being employed among married or cohabitating women that are in the labor force. Besides variables that measure individual characteristics (choice), we allow a full set of indicator variables for observation periods that represent potential effects of aggregate shocks (chance) on job probabilities. To reduce the number of redundant indicator variables as far as possible and in a systematic way, an automatic model selection is used, and we assess the economic interpretation of the statistically significant indicator variables with reference to a theoretical framework that allows for friction in the Norwegian labor market. In addition, we also estimate models that use the aggregate female and male unemployment rates as ‘sufficient’ variables for the chance element in individual employment outcomes. Data are for Norway and span the period 1988q2-2008q4.
    Keywords: Job probability; Automatic model selection; Random utility modeling
    JEL: C21 J21 J64
    Date: 2012–01
  33. By: Thomas W.L. Norman
    Abstract: Models of macroeconomic learning are populated by agents who possess a great deal of knowledge of the “true” structure of the economy, and yet ignore the impact of their own learning on that structure; they may learn about an equilibrium, but they do not learn within it. An alternative learning model is presented where agents’ decisions are informed by hypotheses they hold regarding the economy. They periodically test these hypotheses against observed data, and replace them if they fail. It is shown that agents who learn in this way spend almost all of the time approximating rational-expectations equilibria.
    Keywords: Rational-expectations equilibrium, Learning, Hypothesis testing
    JEL: E00 D83 D84
    Date: 2012
  34. By: Leonid Kogan; Dimitris Papanikolaou; Amit Seru; Noah Stoffman
    Abstract: We explore the role of technological innovation as a source of economic growth by constructing direct measures of innovation at the firm level. We combine patent data for US firms from 1926 to 2010 with the stock market response to news about patents to assess the economic importance of each innovation. Our innovation measure predicts productivity and output at the firm, industry and aggregate level. Furthermore, capital and labor flow away from non-innovating firms towards innovating firms within an industry. There exists a similar, though weaker, pattern across industries. Cross-industry differences in technological innovation are strongly related to subsequent differences in industry output growth.
    JEL: E32 G14 O3 O4
    Date: 2012–01

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