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on Macroeconomics |
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Issue of 2012‒02‒20
63 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini |
| Abstract: | This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the "Keynes meeting Schumpeter" formalism presented in Dosi et al. (2010). To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a "Schumpeterian" innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect positively long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one "regime" with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises. |
| Keywords: | agent-based Keynesian models, multiple equilibria, fiscal and monetary policies, income distribution, transmission mechanisms, credit constraints |
| JEL: | E32 E44 E51 E52 E62 |
| Date: | 2012–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2012/03&r=mac |
| By: | Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects heavily constrain the policy rate response to inflation from above, so that inflation tar- geting policies may not be capable of ensuring REE uniqueness. In such cases, it is advisable to combine inflation responses with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and avoids expectations of higher inflation to become self-fulfilling. |
| Keywords: | Monetary Policy;Cost Channel;Asset Prices;Determinacy;E-stability. |
| JEL: | E31 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012010&r=mac |
| By: | Ahrens, Steffen; Snower, Dennis J. |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201201&r=mac |
| By: | Ali, Heba |
| Abstract: | Inflation as a phenomenon has witnessed remarkable changes starting from mid-eighties of the last century. Inflation rates have become less persistent, less responsive to supply side shocks. In addition, the relative importance of demand pull inflation as one of the major determinants of inflation has decreased due to efficient monetary policies that have been adopted by central banks all over the world to reduce inflation based on anchoring inflation expectations. Moreover, the slope of Phillips curve has flattened as many factors have appeared to be more influential on inflation rather than output gap, namely inflation expectations. These changes constitute in the new economic literature what so called “Inflation Dynamics”. In this context, this study focuses on analyzing inflation dynamics in Egypt in (1980-2009) in order to identify to what extent “Inflation Dynamics” in Egypt is different from or similar to those witnessed globally. The study applied a Vector Auto Regressive model (VAR) and other econometrics models to analyze “Inflation Dynamics” in Egypt in three sub periods: the 1980s, the 1990s and the first decade of the new millennium. The study concluded that Inflation Dynamics in Egypt is completely different from those observed globally. Inflation rates in Egypt have become more persistent especially starting from 2000; Inflation shocks are now lasting longer and have a long-term impact on the future inflation paths. On the other hand, demand bull inflation still considers one of the most important inflation determinants, as it is solely responsible for explaining 30% of the changes in inflation rates. In addition, the study confirmed that inflation rates in Egypt have become more responsive to supply side shocks starting from 2006. As for the slope of Phillips curve, the study confirmed that similar to the changes observed globally, the slope of Phillips Curve for the Egypt economy has flattened reflecting the increasing importance of other inflation determinants rather than output gap. |
| Keywords: | Inflation; Inflation dynamics; Inflation persistence; The Egyptian economy; Demand-pull inflation; Cost-push inflation; Inflation expectations; markets and prices rigidities; Phillips curve; Government debt; Monetary policies; Vector Auto Regression (VAR) |
| JEL: | E31 |
| Date: | 2011–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36331&r=mac |
| By: | Ahrens, Steffen (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy) |
| 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 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 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6302&r=mac |
| By: | Dong Jin Lee (University of Connecticut); Jai Hyung Yoon (Andong National University) |
| Abstract: | This paper empirically explores the New Keynesian Phillips Curve (NKPC)in multiple quantiles and examines the risk structure of the inflation process focusing on the asymmetric monetary policy. The estimation results support the canonical NKPC in upper quantiles while the hybrid version fits better with mid-quantiles. We find evidence of an asymmetric risk such that a decrease in the expected inflation reduces the risk in the sense of dispersive order and vice versa. This result implies that tightening rather than easing money is more effective in reducing risks. Structural break tests detect a break in all quantiles around 1983. Post-break data still support the asymmetric pattern. JEL Classification: C32, E31, E52 Key words: New Keynesian Phillips Curve, multiple quantile estimation, asymmetric monetary policy, structural break |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-03&r=mac |
| By: | Jerome Creel (Observatoire Francais des Conjonctures Economiques); Paul Hubert (Observatoire Francais des Conjonctures Economiques); Francesco Saraceno (Observatoire Francais des Conjonctures Economiques) |
| Abstract: | This paper contributes to the debate on fiscal governance for the European Monetary Union, assessing the different fiscal rules currently discussed. We simulate a small scale macroeconomic model with forward looking agents, augmented with a public finances block. We account for both the positive (output stabilization) and negative (via risk premia) effects of debt and deficit. By the appropriate choice of the exogenous fiscal variables, in the fiscal block, we replicate the working of the rules embedded in the so-called "fiscal compact": a balanced budget rule (the "new golden rule"), and the debt reduction rule (to reach 60% of GDP in 20 years). We compare these rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment. We evaluate the performance in terms of output loss during a fiscal consolidation, as well as following demand and supply shocks in steady state. All rules guarantee long run sustainability. The investment rule emerges robustly as the one guaranteeing the lower output loss, followed by the status quo. The "fiscal compact" rules appear to be recessionary |
| Keywords: | Fiscal Rules, Small scale Macroeconomic Models, golden rule, fiscal consolidation, EMU economic governance, fiscal compact, Dynare |
| JEL: | C63 E62 E63 H61 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1204&r=mac |
| By: | Beaudry, Paul; Portier, Franck |
| Abstract: | Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a gains from trade approach can easily explain why changes in perceptions about the future (including news about the future and risk shocks) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption. -- |
| Keywords: | business cycle,investment,heterogeneous agents |
| JEL: | E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:12002&r=mac |
| By: | Magdalena Szyszko (Wyższa Szkoła Bankowa w Poznaniu, Katedra Bankowości i Rynku Finansowego) |
| Abstract: | This paper focuses on the associations between the inflation forecasts of the central bank and inflation expectations of the households. The first part is of a descriptive nature. It gives the theoretical background of modern monetary policy focusing on the role of expectations. It also presents the idea of inflation forecast targeting. Then the framework of the inflation forecast targeting in four countries: the Czech Republic, Hungary, Poland and Romania is presented. The empirical part of the study is an attempt to find associations between the inflation forecasts results and inflation expectations of consumers derived on the basis of surveys. The theory gives sound background for the existence of such relationships.The interdependences are tested in several ways. The last part of the paper focuses on the results and conclusions. |
| Keywords: | inflation forecasts, inflation forecasts targeting, inflation expectations |
| JEL: | E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:105&r=mac |
| By: | Philipp Engler (Freie Universität Berlin) |
| 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, Luchinger, 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 Gali (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 high-lighted 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: | 2011–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2011_8&r=mac |
| By: | Christian Glocker (WIFO); Pascal Towbin |
| Abstract: | When dealing with credit booms driven by capital inflows, monetary authorities in emerging markets are often reluctant to raise interest rates, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective. |
| Keywords: | Reserve Requirements, Capital Flows, Monetary Policy, Business Cycle |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2012:i:420&r=mac |
| By: | Marcello Pericoli (Bank of Italy) |
| Abstract: | This paper uses the celebrated no-arbitrage affine Gaussian term structure model applied to index-linked and standard government bonds to derive expected inflation rates and inflation risk premia, in the euro area and in the US. Maximum likelihood estimates show that the model describes the evolution of the nominal and real term structures by using three latent factors which can be interpreted as two real factors and one inflation factor. These provide important information on expected inflation and inflation risk premia. The results highlight some striking differences between the euro area and the US. In the US, forward inflation risk premia become sizable around the start of the late-2000s financial crisis and considerably increase just before the adoption of the first unconventional monetary policy measures in March 2009. By contrast, in the euro area forward inflation risk premia remain unchanged even after the adoption of the unconventional monetary policy measures following the most acute phases of the financial crisis, in October 2008 and in May 2010. However, long-term inflation expectations have been well anchored over the past years. |
| Keywords: | real and nominal term structure, inflation risk premium, affine term structure, Kalman filter |
| JEL: | C02 G10 G12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_842_12&r=mac |
| By: | Jordi Galí (CREI, Universitat Pompeu Fabra and Barcelona GSE); Frank Smets (European Central Bank, CEPR and University of Groningen); Rafael Wouters (National Bank of Belgium) |
| Abstract: | We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations. |
| Keywords: | nominal rigidities, unemployment fluctuations, Phillips curve, wage markups shocks, output gap. |
| JEL: | D58 E24 E31 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:106&r=mac |
| By: | Pedro Leão |
| Abstract: | In most countries, discretionary fiscal policy has often been pro-cyclical: instead of dampening the business cycle, actual discretionary policy has mostly magnified it. This paper proposes a mechanism that allows discretionary fiscal policy to be counter-cyclical. This involves the creation of a Budget Agency which carries out expenditures that, in addition to increasing its debt, also raise its saleable assets - and, therefore, do not reduce the net value of its balance-sheet. One example is the construction, during a downswing, of housing and office buildings that will be sold in the subsequent upswing. Besides real estate investment, the Budget Agency may also undertake “balance-sheet neutral” expenditures in two other sectors responsible for the bulk of business cycle fluctuations: business investment and durable consumption. |
| Keywords: | stabilization, discretionary fiscal policy, business cycle. |
| JEL: | E32 E62 E63 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp022012&r=mac |
| By: | Guido Ascari (University of Pavia); Giorgio Fagiolo (Sant'Anna School of Advanced Studies); Andrea Roventini (OFCE-Sciences-po,Sant'Anna School of Advanced Studies) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1201&r=mac |
| By: | Michael B. Devereux; Ozge Senay; Alan Sutherland |
| Abstract: | Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions. |
| JEL: | F3 F33 F4 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17796&r=mac |
| By: | Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi |
| Abstract: | We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate. |
| Keywords: | local currency pricing, optimal monetary policy, CPI inflation, fixed exchange rate, Bayesian estimation |
| JEL: | E52 E62 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:558&r=mac |
| By: | Lars E.O. Svensson |
| Abstract: | In the summer of 2010, the Federal Reserve’s and the Swedish Riksbank’s inflation forecasts were below the former’s mandate-consistent rate and the latter’s target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank’s policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse. Thus, the Federal Reserve appears to have followed its mandate in the summer of 2010, and subsequent adverse economic shocks contributed to weak performance of the U.S. economy. In contrast, the Riksbank appears to have deviated from its mandate, but favorable circumstances contributed to an economic outcome with better performance than might have been expected based on policy choices. |
| JEL: | E42 E43 E47 E52 E58 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17823&r=mac |
| By: | Robert Kollmann; Werner Roeger; Jan in'tVeld |
| Abstract: | A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment. |
| Keywords: | State support for banks; financial crises; fiscal stimulus; real activity |
| JEL: | E62 E63 G21 G28 H25 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/108554&r=mac |
| By: | Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Ayşegül Şahin |
| Abstract: | We build a general equilibrium model that features uninsurable idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. The model is calibrated to match the average levels of gross flows across the three labor market states: employment, unemployment, and non-participation. We use it to study the implications of two kinds of aggregate shocks for the cyclical behavior of labor market aggregates and flows: shocks to search frictions (the rates of job finding and job loss) and shocks to the return on the market activity (any factors affecting aggregate productivity). We find that both kinds of shocks are needed to explain the labor market data, and that an active labor supply channel is key. A model with friction shocks only, calibrated to match unemployment fluctuations, accounts for only a small fraction of employment fluctuations and has counterfactual cyclical predictions for participation. |
| JEL: | E24 J22 J64 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17779&r=mac |
| By: | Lahura, Erick (Banco Central de Reserva del Perú) |
| Abstract: | In order to quantify the effects of monetary policy, this paper employs an alternative empirical measure of monetary policy shocks based on market expectations obtained from media and survey information in Peru. Using monthly data for the period 2003-2011, we use the proposed measure as a variable representing exogenous variation in monetary policy and evaluate its dynamic impact on output and prices. The results show a coherent picture of the effects of monetary policy compared to alternative approaches in terms of both the magnitude and the timing of the effects. |
| Keywords: | Monetary policy shocks, media, survey |
| JEL: | E52 E58 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-005&r=mac |
| By: | Yasuo Hirose; Takushi Kurozumi |
| Abstract: | Recent studies attempt to quantify the empirical importance of news shocks (ie., anticipated future schocks) in business cycle fluctuations. This paper identifies news schocks in a dynamic stochastic general equilibrium model estimated with not only actual data but also forecast data. The estimation results show new empirical evidence that antecipated future technology shocks are the most important driving force of U.S. business cycles. The use of the forecast data makes the anticipated shocks play a much more important role in fitting model-implied expectations to this data, since such shocks have persistent effects on the expectaions and thereby help to replicate the observed persistence of the forecasts. |
| JEL: | E30 E32 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-01&r=mac |
| By: | Leo Krippner |
| Abstract: | With nominal interest rates near the zero lower bound (ZLB) in many major economies, it has become untenable to apply Gaussian affine term structure models (GATSMs) while ignoring their inherent theoretical deficiency of non-zero probabilities of negative interest rates. In this article I propose correcting that deficiency by adjusting the entire GATSM term structure with an explicit function of maturity that represents the optionality associated with the present and future availability of physical currency. The resulting ZLB-GATSM framework remains tractable, producing a simple closed-form analytic expression for forward rates and requiring only elementary univariate numerical integration (over time to maturity) to obtain interest rates and bond prices. I demonstrate the salient features of the ZLB-GATSM framework using a two-factor model. An illustrative application to U.S. term structure data indicates that movements in the model state variables have been consistent with unconventional monetary policy easings undertaken after the U.S. policy rate reached the ZLB in late 2008. |
| JEL: | E43 G12 G13 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-05&r=mac |
| By: | Graf Lambsdorff, Johann; Schubert, Manuel; Giamattei, Marcus |
| Abstract: | We carry out an experiment on a macroeconomic price setting game where prices are complements. Despite relevant information being common knowledge and price flexibility we observe significant deviation from equilibrium prices and history dependence. In a first treatment we observe that equilibrium values were obtained in the long run but at the cost of a very slow adjustment and thus history dependence. By reporting a business indicator in a simpler form, subjects were given the chance to coordinate their prices by help of a heuristic in a second treatment. This option was widely taken, bringing about excess volatility and a deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe, contrary to theoretical predictions, the one-round ahead (publicly known) shock is significant, but future inflation is not. Our findings cast light on price dynamics when subjects have limited computational capacities. -- |
| Keywords: | Inflation Persistence,Staggered Prices,Sticky Reasoning,New Keynesian Phillips Curve |
| JEL: | E31 C92 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:upadvr:v6311&r=mac |
| By: | Marcello Pericoli (Bank of Italy) |
| Abstract: | Estimates of the real term structure for the euro area implied by French index-linked bonds are obtained by means of a smoothing spline methodology. The real term structure allows computation of the constant-maturity inflation compensation, which is compared with the surveyed inflation expectations in order to obtain a rough measure of the inflation risk premium. The comparison between the inflation compensation and the inflation swap shows that the two variables are closely interlinked but differently affected by illiquidity during periods of stress. The methodology used in this paper is quite effective at capturing the general shape of the real term structure while smoothing through idiosyncratic variations in the yields of index-linked bonds. Real interest rates tend to be quite stable at longer horizons and the average 10-year real rate from 2002 to 2009 is close to 2 per cent. Furthermore, evidence is found that inflation compensation was held down in the period 2008-09 by an increase in the liquidity premium of index-linked bonds. |
| Keywords: | index-linked bond, real term structure, inflation compensation, inflation risk premium, smoothing spline |
| JEL: | C02 G10 G12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_841_12&r=mac |
| By: | Laurence M. Ball |
| Abstract: | From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money-financed tax cut and an inflation target of 3-4%. Yet, since U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke has taken more cautious actions. This paper asks when and why Bernanke changed his mind about zero-bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the FOMC meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision-making. |
| JEL: | E52 E58 E65 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17836&r=mac |
| By: | Francesco Giavazzi; Michael McMahon |
| Abstract: | This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall. |
| JEL: | E62 E21 E24 D12 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-02&r=mac |
| By: | Pavlina R. Tcherneva |
| Abstract: | This paper augments the basic Post-Keynesian markup model to examine the effects of different fiscal policies on prices and income distribution. This is an approach a la Hyman P. Minsky, who argued that in the modern era, government is both "a blessing and a curse," since it stabilizes profits and output by imparting an inflationary bias to the economy, but without stabilizing the economy at or near full employment. To build on these insights, the paper considers several distinct functions of government: 1) government as an income provider, 2) as an employer, and 3) as a buyer of goods and services. The inflationary and distributional effects of each of these fiscal policies differ considerably. First, the paper examines the effects of income transfers to individuals and firms (in the form of unemployment insurance and investment subsidies, respectively). Next, it considers government as an employer of workers (direct job creation) and as a buyer of goods and services (indirect job creation). Finally, it modifies the basic theoretical model to incorporate fiscal policy a la Minsky and John Maynard Keynes, where the government ensures full employment through direct job creation of all of the unemployed unable to find private sector work, irrespective of the phase of the business cycle. The paper specifically models Minsky's proposal for government as the employer of last resort (ELR), but the findings would apply to any universal direct job creation plan of similar design. The paper derives a fundamental price equation for a full-employment economy with government. The model presents a "price rule" for government spending that ensures that the ELR is not a source of inflation. Indeed, the fundamental equation illustrates that in the presence of such a price rule, at full employment inflationary effects are observed from sources other than the public sector employment program. |
| Keywords: | Minsky; Kalecki Model; Alternative Fiscal Polices; Income Transfers; Investment Subsidies; Direct Job Creation; Employer of Last Resort; Inflation; Income Distribution |
| JEL: | E12 E24 E25 E31 E62 H11 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_706&r=mac |
| By: | Francisco J. Buera; Benjamin Moll |
| Abstract: | We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find that in all three model variants a credit crunch shows up as a different wedge: efficiency, investment, and labor wedges. Furthermore, all three model variants have an undistorted Euler equation for the aggregate of firm owners. These results highlight the limitations of using representative agent models to identify sources of business cycle fluctuations. |
| JEL: | E32 E44 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17775&r=mac |
| By: | Simplice A, Asongu |
| Abstract: | Purpose – The purpose of this paper is to examine the effects of financial dynamic policy options in money, credit, efficiency and size on consumer prices. Soaring food prices have marked the geopolitical landscape of developing countries in the past few years. Design/methodology/approach – The estimation approach used is a Two-Stage-Least Squares Instrumental Variable technique. Instruments include: legal-origins; income-levels and religious-dominations. The first-step consists of justifying the choice of the estimation approach with a Hausman-test for endogeneity. In the second-step, we verify that the instrumental variables are exogenous to the endogenous components of explaining variables(financial dynamic channels) conditional on other covariates(control variables). In the third-step, the validity of the instruments is examined with the Sargan overidentifying restrictions test. Robustness checks are ensured by: (1) use of alternative indicators of each financial dynamic; (2) estimation with robust Heteroscedasticity and Autocorrelation Consistent(HAC) standard errors; and (3) adoption of two interchangeable sets of instruments. Findings – Findings broadly reveal the following: (1) money(depth) and credit(activity) which are in absolute measures have positive elasticities of inflation; while (2) financial efficiency and size in relative measures have negative elasticities of inflation. Social implications – This paper helps in providing monetary policy options in the fight against soaring consumer prices. By keeping inflationary pressures on food prices in check, sustained campaigns involving strikes, demonstrations, marches, rallies and political crises that seriously disrupt economic performance could be mitigated. Originality/value – As far as we have perused, there is yet no study that assesses monetary policy options that could be relevant in addressing the dramatic surge in the price of consumer commodities. |
| Keywords: | Banks; Inflation; Development; Panel; Africa |
| JEL: | O55 E31 O10 G20 P50 |
| Date: | 2012–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36175&r=mac |
| By: | Waqas, Muhammad; Awan, Masood Sarwar |
| Abstract: | The purpose of this study is to check the Ricardian Equivalence Hypothesis in case of Pakistan by using annual data for the period of 1973-2009. Government expenditure, private consumption expenditure, tax revenue, government debt, disposable income, government budget deficit and wealth are the variables which are used for analysis. Cointegration results show a long run relationship among the variables. Results of structural form consumption function invalidate the Ricardian Equivalence Hypothesis in case of Pakistan. These results draw attention towards the significance of fiscal policies in boosting private consumption and controlling budget deficits, which are the prime goals of stabilization policies in Pakistan. |
| Keywords: | Fiscal policy; Ricardian Equivalence; Government debt; Pakistan |
| JEL: | E62 K34 H6 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35375&r=mac |
| By: | Ek, Susanne (Uppsala University) |
| Abstract: | This paper studies optimal unemployment benefit levels and optimal proportional income tax rates over the business cycle. Previous research suggests that policy makers should make unemployment insurance (UI) dependent on the business cycle because the UI system can be used to smooth consumption across different economic states. However, high benefits increase unemployment. An alternative way to redistribute income is to vary tax rates over the business cycle. In this paper, we develop an equilibrium search and matching model with risk-averse workers and two states, namely, a good and a bad state. The model yields potential ambiguity concerning the welfare effects of business cycle-dependent UI. The model is calibrated to United States (U.S.) labor market data. The numerical results suggest that higher benefits in the bad state are optimal, but the benefit differential is small. A more efficient way for policy makers to redistribute income over the business cycle is to decrease taxes in the bad state. Compared to an optimal uniform system, however, differentiation yields small welfare gains. Nevertheless, imposing two tax rates strictly dominates imposing two benefit levels. This finding is robust to a wide range of sensitivity checks. |
| Keywords: | job search, business cycles, unemployment insurance, time-varying benefits and taxes |
| JEL: | E32 H24 J64 J65 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6308&r=mac |
| By: | AfDB |
| Date: | 2012–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:adb:adbwps:375&r=mac |
| By: | Brian M. Peterson |
| Abstract: | This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’ Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010. |
| Keywords: | Asset pricing; Business fluctuations and cycles |
| JEL: | E3 R2 R21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-3&r=mac |
| By: | Wong, Shirly Siew-Ling; Abu Mansor, Shazali; Puah, Chin-Hong; Liew, Venus Khim-Sen |
| Abstract: | Early detection of a turning point in a business cycle is crucial, as information about the changing phases in business cycles enables policy makers, the business community, and investors to cope better with unexpected events brought about by economic and business situations. The Malaysian economy is fortunate to own a publicly accessible composite of leading indicator (CLI) that is presumed capable of tracing the business cycle movement and thus contributes to the creation of an early signaling tool for short-term economic forecasting. Certainly, the usefulness of this CLI in monitoring the contemporary economic and business condition in Malaysia will be empirically appealing to the nation. Even though the present study can display the ability of the Malaysian CLI to trace the business cycle and offers advanced detection of business cycle turning points, the evidence of diminishing lead times foreseen by the CLI significantly weaken the fundamental function of a leading index as an early tool to signal economic vulnerability. |
| Keywords: | Business Cycle; Composite Leading Indicator; Early Signaling Tool |
| JEL: | E32 E17 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36649&r=mac |
| By: | Joon-Ho Hahm; Frederic S. Mishkin; Hyun Song Shin; Kwanho Shin |
| Abstract: | This paper examines macroprudential policies in open emerging economies. It discusses how the recent financial crisis has provided a rationale for macroprudential policies to help manage the economy and the need for policymakers to monitor the financial cycle and systemic risks. It also discusses one particularly promising measure of the state of the financial cycle, the growth of non-core liabilities of the financial sector, and evaluates macroprudential policy frameworks. The paper uses Korea as an example and conducts an empirical evaluation of non-core liabilities of Korean banks as a measure of the financial cycle. |
| JEL: | E44 E52 E58 G28 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17780&r=mac |
| By: | Christiane Baumeister; Gert Peersman |
| Abstract: | We use vector autoregressions with drifting coefficients and stochastic volatility to investigate how the dynamic effects of oil supply shocks on the U.S. economy have changed over time. We find a substantial decline in the short-run price elasticity of oil demand since the mid-eighties. This finding helps explain why an oil production shortfall of the same magnitude is associated with a stronger response of oil prices and more severe macroeconomic consequences over time, while an oil price increase of the same magnitude is associated with a smaller decline in oil production and smaller losses in U.S. output in more recent years. We also show that oil supply shocks more recently account for a smaller fraction of the variability of the real price of oil, implying a greater role for oil demand shocks. Notwithstanding this time variation, the overall cumulative effect of oil supply disruptions on the U.S. economy has been modest. Oil supply shocks contributed to some extent to the 1991 recession and slowed the economic boom of 1999-2000, but they do not explain other U.S. recessions nor do they help explain the "Great Inflation" of the 1970s and early 1980s. |
| Keywords: | Econometric and statistical methods; International topics |
| JEL: | E31 E32 Q43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-2&r=mac |
| By: | Schlicht, Ekkehart |
| Abstract: | The paper generalizes Feldstein's criticism (Perceived Wealth in Bonds and Social Security, 1976) of Barro's analysis (Are Government Bonds Real Net Wealth?, 1974) for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold Barro expectations: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations. -- |
| Keywords: | Barro-Ricardo equivalence,Ricardian equivalence,fiscal policy,debt,taxation,rational expectations |
| JEL: | E2 E12 E6 H6 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201213&r=mac |
| By: | Shekhar Aiyar; Charles W. Calomiris; Tomasz Wieladek |
| Abstract: | The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique dataset. In the UK, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. It is found that regulated banks (UK-owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one-third of the initial impulse from the regulatory change. |
| JEL: | E32 E51 F30 G21 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17822&r=mac |
| By: | Schlicht, Ekkehart |
| Abstract: | This note generalizes Feldstein’s (1976) criticism of Barro’s(1974) analysis for the case that the interest rate exceeds the growth rate. This is done by considering an economy in steady state where all agents hold “Barro expectations”: they believe that government debt must necessarily be repaid and therefore leave the present value of their income streams unchanged. In this scenario, a change in the mode of taxation affects the present value of disposable income in the private sector. This violates their Barro expectations. |
| Keywords: | Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations |
| JEL: | E2 E12 E6 H6 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12715&r=mac |
| By: | Atif R. Mian; Amir Sufi |
| Abstract: | A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results. Using the relation between non-tradable sector job losses and demand shocks and assuming Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the effect of aggregate demand channel on total employment. Our estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the lost jobs in our data. |
| JEL: | E2 E32 E51 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17830&r=mac |
| By: | Michael Plante (Federal Reserve Bank of Dallas); Nora Traum (North Carolina State University) |
| Abstract: | We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead in- vestment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2012-002&r=mac |
| By: | Leonid Kogan; Dimitris Papanikolaou |
| Abstract: | We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns. IST shocks reflect technological advances embodied in new capital goods. Using a structural model, we show that IST shocks have a differential effect on the two fundamental components of firm value, the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, risk premia on firms with abundant growth opportunities are different from those on firms with limited growth opportunities. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns. Our model replicates the failure of the conditional CAPM to capture the value premium. Our empirical tests confirm the model's predictions for asset returns and investment rates. |
| JEL: | E22 E32 G12 O3 O4 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17795&r=mac |
| By: | Essers, Dennis |
| Abstract: | While some developing countries appear to have been largely unaffected by the Great Recession that originated in advanced economies, others took a severe blow in 2008-2009. A number of recent studies have attempted to explain the observed heterogeneity of developing country growth performances during the latest global financial and economic crisis by linking it to pre-crisis macro-economic and financial country features - with rather mixed success. In this newly emerging body of research, surprisingly little attention has, however, been paid to institutional differences between countries, and the variation in political institutional arrangements more particularly. The current paper takes a first shot at bridging this hiatus by gauging the impact of democracy on the crisis growth of developing countries. From a theoretical point of view, and as suggested in the political economy literature, democracy could be either growthretarding or growth-enhancing in times of economic crisis, the overall effect ultimately being an empirical question. Using a cross-section sample of more than 100 non-advanced countries and controlling for a range of macroeconomic, financial and standard institutional factors as well as pre-crisis trends, we find evidence suggesting that, on the whole, democratic country features are negatively correlated with growth performance during the 2008-2009 global crisis. Our findings are seemingly robust to the use of various sets of controls, different estimators, several country subsamples and alternative measures of democracy and crisis growth. |
| Keywords: | Global Financial Crisis, Growth, External Shocks, Democracy |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:iob:wpaper:2012002&r=mac |
| By: | Spruk, Rok |
| Abstract: | In the past 20 years, the Slovenia has been praised as the richest former socialist country, having accomplished the advancement from borrower into donor status at the World Bank and having entered the European Monetary Union as the first country from former socialist block. In the due course of transition to market, Slovenia adopted the gradualist approach to economic reform, emphasizing gradual privatization, excessive regulation of the labor market and financial sector as well as the slow stabilization of public finances. In this paper, we review macroeconomic performance of Slovenia in past two decades in a comparative perspective. The paper outlines the growth trajectory of Slovenia from the onset of Habsburg Empire to the present. We showed that until 1939, Slovenia has almost fully converged to the income per capita frontier of Austria and Italy while the income per capita diverged substantially in the period 1945-1990 from Western European frontier. We review the contours of labor market protectionism, state dominance in banking and financial sector and emergence of the corporate oligarchy as the main symptoms of stalled economic performance given a substantial differential in income per capita between Slovenia and EU15. Moreover, we demonstrate how former communist elites transformed into powerful networks of interest groups which preserved status quo from socialist period through systemic blockade of key economic reforms to stabilize public finances in the light of age-related pressures and to boost productivity growth and structural change. |
| Keywords: | post-socialist transition; macroeconomic stabilization; economic growth; political economy; Slovenia |
| JEL: | E02 N13 P27 P16 N14 |
| Date: | 2012–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36268&r=mac |
| By: | Spruk, Rok |
| Abstract: | In the past 20 years, the Slovenia has been praised as the richest former socialist country, having accomplished the advancement from borrower into donor status at the World Bank and having entered the European Monetary Union as the first country from former socialist block. In the due course of transition to market, Slovenia adopted the gradualist approach to economic reform, emphasizing gradual privatization, excessive regulation of the labor market and financial sector as well as the slow stabilization of public finances. In this paper, we review macroeconomic performance of Slovenia in past two decades in a comparative perspective. The paper outlines the growth trajectory of Slovenia from the onset of Habsburg Empire to the present. We showed that until 1939, Slovenia has almost fully converged to the income per capita frontier of Austria and Italy while the income per capita diverged substantially in the period 1945-1990 from Western European frontier. We review the contours of labor market protectionism, state dominance in banking and financial sector and emergence of the corporate oligarchy as the main symptoms of stalled economic performance given a substantial differential in income per capita between Slovenia and EU15. Moreover, we demonstrate how former communist elites transformed into powerful networks of interest groups which preserved status quo from socialist period through systemic blockade of key economic reforms to stabilize public finances in the light of age-related pressures and to boost productivity growth and structural change. |
| Keywords: | post-socialist transition; macroeconomic stabilization; economic growth; political economy; Slovenia |
| JEL: | E02 N13 P27 P16 N14 |
| Date: | 2012–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36304&r=mac |
| By: | Merkl, Christian (University of Erlangen-Nuremberg); van Rens, Thijs (CREI and Universitat Pompeu Fabra) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6294&r=mac |
| By: | Calcagnini, Giorgio; Farabullini, Fabio; Giombini, Germana |
| Abstract: | The paper analyzes the role of guarantees on loan interest rates before and during the recent financial crisis in Italian firm financing. The paper improves on existing literature by distinguishing between real and personal guarantees. Further, the paper investigates the potential different role of guarantees in the bank-borrower relationship during the recent financial crisis. This paper draws from individual Italian bank and firm data taken from the Banks’ Supervisory Reports to the Bank of Italy and the Central Credit Register over the period 2006-2009. Our analysis demonstrates that collateral affects the cost of credit of Italian firms by systematically reducing the interest rate of secured loans, while personal guarantees increase it. These effects are amplified during the crisis. Furthermore, guarantees are a more powerful instrument for ex-ante riskier borrowers than for safer borrowers. Indeed, riskier borrowers obtain significantly lower interest rates on secured loans than interest rate they would be charged on unsecured loans. |
| Keywords: | financial crisis; guarantees; lending relationship |
| JEL: | E43 D82 G21 |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36682&r=mac |
| By: | OKPARA, GODWIN CHIGOZIE |
| Abstract: | This paper investigated the impact of Foreign Direct Investment on some selected macro-economic variables such as real GDP, gross fixed capital formation and unemployment. Data for the variables were sourced from the Central Bank of Nigeria’s Statistical Bulletin. For the assessment of this impact, the author used co-integration and error correction model to arrive at a parsimonious result which revealed that foreign direct investment though impacts positively and significantly on the gross fixed capital formation and the real GDP, has not made any positive and significant impact on the reduction of unemployment in Nigeria. The researcher therefore calls for putting in order the Country’s social, political and economic environment for foreign investment to yield dividends that will be enormous enough as to significantly reduce unemployment and engender instant growth on real GDP. |
| Keywords: | foreign direct investment; economic growth; unemployment rate; co-integration; vector error correction model |
| JEL: | E22 C12 C87 B22 C32 C13 J21 F21 C22 C01 |
| Date: | 2012–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36319&r=mac |
| By: | Steven J. Davis; R. Jason Faberman; John C. Haltiwanger |
| Abstract: | We measure job-filling rates and recruiting intensity per vacancy at the national and industry levels from January 2001 to September 2011 using data from the Job Openings and Labor Turnover Survey. Construction makes up less than 5 percent of employment but accounts for more than 40 percent of the large swings in the job-filling rate during and after the Great Recession. Leisure & Hospitality accounts for nearly a quarter of the large drop in recruiting intensity during the Great Recession. We show that industry-level movements in job-filling rates and recruiting intensity are at odds with the implications of the standard matching function in labor search theory but consistent with a generalized function that incorporates an important role for recruiting intensity per vacancy. |
| JEL: | E24 J63 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17782&r=mac |
| By: | Viral V. Acharya; Nada Mora |
| Abstract: | Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding squeeze sought to attract deposits by offering higher rates. Banks offering higher rates were also those most exposed to liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as well as with fundamentally weak balance-sheets (as measured by their non-performing loans or by subsequent failure). Such rate increases have a competitive effect in that they lead other banks to offer higher rates as well. Overall, the results present a nuanced view of deposit rates and flows to banks in a crisis, one that reflects banks not just as safety havens but also as stressed entities scrambling for deposits. |
| JEL: | E4 G01 G11 G21 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17838&r=mac |
| By: | Ariel Burstein; Javier Cravino |
| Abstract: | Do theoretical welfare gains from trade translate into aggregate measures of economic activity? We calculate the changes in real GDP and real consumption that result from changes in trade costs in a range of workhorse trade models, following the procedures outlined by statistical agencies in the United States. Our main findings are as follows: First, real GDP and measured aggregate productivity rise in response to reductions in variable trade costs if GDP deflators capture the decline in trade costs. Second, with balanced trade in each country, changes in world real consumption and changes in world real GDP (i.e.: weighting the change in each country by its nominal GDP) in response to changes in variable trade costs coincide, up to a first-order approximation, with changes in world theoretical (welfare-based) consumption. The equivalence between measured consumption and theoretical consumption holds country-by-country under stronger conditions. Third, for given trade shares and changes in variable trade costs, changes in real GDP and changes in world real consumption are approximately equal in magnitude across the models we consider. |
| JEL: | E01 F1 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17767&r=mac |
| By: | David Matesanz Gomez; Guillermo J. Ortega; Benno Torgler |
| Abstract: | This paper analyses synchronization in business cycles across the European Union (EU) since 1989. We include both old and new European Union members and countries which are currently negotiating accession, as well as potential European Union members. Our methodological approach is based on the correlation matrix and the networks within, which allows us to summarize the individual interaction and co-movement, while also capturing the existing heterogeneity of connectivity within the European economic system. The results indicate that the synchronization of the old EU countries remained stable until the current financial crisis. Additionally, the synchronization of the new and potential members has approached to the old EU members although we observe the existence of different synchronization levels and dynamics in output growth in single countries as well as in groups of countries. Some countries have achieved an important degree of co-movement (such as the Baltic Republics, Hungary, Slovenia and Iceland), while others have experienced reduced synchronization, or even desynchronization (such as Romania, Bulgaria and even Greece and Ireland). |
| Keywords: | Business cycle synchronization; European Union countries; EU candidates; complex systems; network topology |
| JEL: | E32 C45 O47 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2012-01&r=mac |
| By: | David Matesanz Gomez; Guillermo J Ortega; Benno Torgler (QUT) |
| Abstract: | This paper analyses synchronization in business cycles across the European Union (EU) since 1989. We include both old and new European Union members and countries which are currently negotiating accession, as well as potential European Union members. Our methodological approach is based on the correlation matrix and the networks within, which allows us to summarize the individual interaction and co-movement, while also capturing the existing heterogeneity of connectivity within the European economic system. The results indicate that the synchronization of the old EU countries remained stable until the current financial crisis. Additionally, the synchronization of the new and potential members has approached to the old EU members although we observe the existence of different synchronization levels and dynamics in output growth in single countries as well as in groups of countries. Some countries have achieved an important degree of co-movement (such as the Baltic Republics, Hungary, Slovenia and Iceland), while others have experienced reduced synchronization, or even desynchronization (such as Romania, Bulgaria and even Greece and Ireland). |
| Keywords: | Business cycle synchronization, European Union countries, EU candidates, complex systems, network topology. |
| JEL: | E32 C45 O47 |
| Date: | 2012–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:qut:dpaper:277&r=mac |
| By: | Turhan, Ibrahim M.; Kilinc, Zubeyir |
| Abstract: | Turkey was not affected by the financial crisis as much as the advanced economies and managed to rapidly exit the turmoil. The reasons behind the strong response and quick recovery of the Turkish economy were its low country risk and low currency risk premiums. This study shows the foundations of these low risk premiums and compares some measures of these risks of the Turkish economy with peer countries. Second, this paper demonstrates that all of Turkey’s economic sectors were very strong before the crisis and sustained this strength during the course of the crisis. Finally, it discusses the policies that have already been taken and planned to be taken by Turkey’s economic authorities. The government seems to be very determined in keeping fiscal discipline as tight as necessary while not being excessive |
| Keywords: | financial crises; global economic crisis; Turkey; economic policies; financial markets |
| JEL: | E66 E58 G28 G01 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31214&r=mac |
| By: | Zhao, Kai |
| Abstract: | In this paper, I argue that an important cause of the postwar baby boom in the US was the dramatic reduction in government debt (via income taxation) in the two decades following WWII. A reduction in government debt (via income taxation) increases fertility by changing the tax burden of different generations. A higher current income tax increases fertility by lowering after-tax wage and therefore the opportunity cost of child-rearing (when the cost of child-rearing involves parental time). A lower government debt level implies a lower tax burden on children in the future and thus a higher lifetime utility for them, which also increases current fertility if parents have Barro-Becker type preferences (the children's utility is included in the parents' utility function). The United States government accumulated a large amount of debt from WWII. The debt-GDP ratio peaked at 108% in 1946, and the debt level was reduced significantly (via taxation) in the following two decades. The debt-GDP ratio was only 35% in 1966. In a quantitative Barro-Becker model with government debt, I show that a reduction in government debt (financed by income taxation) such as the one experienced by the postwar US can generate a significant increase in fertility, which in magnitude accounts for 48% of the postwar baby boom in the US. |
| Keywords: | Fertility; Baby boom; Government debt; WWII |
| JEL: | E62 E0 J11 |
| Date: | 2011–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36330&r=mac |
| By: | Liu, Jing; Cao, Shutao |
| Abstract: | This paper studies the industry productivity dynamics in China’s manufacturing sector from 1998 to 2007, and in particular, explores to what extent the privatization of state-owned enterprises (SOEs) contributes to the aggregate productivity growth. Our results show that, though non-SOEs on average are more productive than SOEs, the average productivity growth among SOEs is greater than the privately-owned firms. Industry concentration, taxation, and credit market all account for this difference in growth between SOEs and non-SOEs. In addition, industry productivity growth is mainly attributed to the growth of non-SOEs, entry of non-SOE firms, and the exit of SOEs. However, non-SOE firms that are transformed directly from SOEs make a small but negative contribution to industry productivity growth. |
| Keywords: | Productivity Growth, Industry Dynamics, Ownership Change, Reallocation |
| JEL: | E6 D24 O4 |
| Date: | 2011–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34601&r=mac |
| By: | Chen, Shiu-Sheng |
| Abstract: | This paper examines the currency manipulation policy in the foreign exchange markets of thirteen emerging countries using a structural vector autoregressive (SVAR) framework to link the dynamics of real exchange rates and foreign reserves. It is found that for Korea, Singapore, and Taiwan, exchange rate shocks are the main source of fluctuations in foreign reserves over all time horizons. Empirical evidence suggests that these countries intervene substantially in the foreign exchange markets in order to promote export competitiveness. |
| Keywords: | Official Intervention; Foreign Reserves |
| JEL: | E58 F31 |
| Date: | 2012–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36184&r=mac |
| By: | Valerie A. Ramey |
| Abstract: | This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity. |
| JEL: | E24 E62 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17787&r=mac |
| By: | Gregory H. Bauer; Antonio Diez de los Rios |
| Abstract: | We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate. We show that it is important to impose restrictions (including global asset pricing, carry trade fundamentals and maximal Sharpe ratios) on the prices of risk to obtain plausible decompositions of forward curves. The forecasts of interest rates and exchange rates from the restricted model match those from international survey data. Unspanned macroeconomic variables are important drivers of international term and foreign exchange risk premia as well as expected exchange rate changes. |
| Keywords: | Asset Pricing; Exchange rates; Interest rates |
| JEL: | E43 F31 G12 G15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-5&r=mac |
| By: | Laura Bartiloro (Banca d'Italia); Luisa Carpinelli (Banca d'Italia); Paolo Finaldi Russo (Banca d'Italia); Sabrina Pastorelli (Banca d'Italia) |
| Abstract: | The financial crisis that started in August 2007 has led to a worsening in the conditions of credit supply to customers. Since the second half of 2008, several measures have been adopted in order to sustain access to credit for both firms and households, such as debt moratoria, provisions of guarantees on specific types of loans, and various forms of incentives to increase the supply of lending. The initiatives aimed at firms have been sizeable, involving financial resources up to as much as 5 per cent of total bank loans granted between the beginning of 2009 and September 2011. The corresponding value for households has been more modest, slightly above 1 per cent; this is mainly because of the strict qualification requirements applied to some of the initiatives and to their limited financial endowment. |
| Keywords: | access to credit, debt moratoria, guarantee provisions |
| JEL: | E65 G28 H81 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_111_12&r=mac |
| By: | Yun Jung Kim; Linda Tesar; Jing Zhang |
| Abstract: | Using Korean firm-level data on publicly-listed and privately-held firms together with firm exit data, we find strong evidence of the balance-sheet effect for small firms at both the intensive and extensive margins. During the crisis, small firms with more short-term foreign debt are more likely to go bankrupt, and experience larger sales declines conditional on survival. The extensive margin accounts for a large fraction of small firms’ adjustment during the crisis. Consistent with many studies in the literature, large firms with larger exposure to foreign debt paradoxically have better performance during the crisis at both the intensive and extensive margin. |
| JEL: | E44 F32 F34 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17756&r=mac |
| By: | Le Blanc, Julia; Scholl, Almuth |
| Abstract: | We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households' savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate welfare gains for high and middle income earners but welfare losses for low income earners. In the presence of rare stock market disasters, individual accounts with default portfolio allocation crowd out direct stockholding and substantially reduce welfare. -- |
| Keywords: | individual retirement accounts,household portfolio choice,consumption and saving over the life-cycle |
| JEL: | E21 H55 G11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201133&r=mac |