nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒02‒27
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy By Cristiano Cantore; Paul Levine; Giovanni Melina; Bo Yang
  2. Public Debt, Distortionary Taxation, and Monetary Policy By Alessandro Piergallini; Giorgio Rodano
  3. Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
  4. The effects of monetary policy shocks in credit and labor markets with search and matching frictions By Giuseppe Ciccarone; Francesco Giuli; Danilo Liberati
  5. Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model By Salvatore Nistico'
  6. Fiscal Dominance and the Long-Term Interest Rate By Philip Turner
  7. Monetary Policy and Stock-Price Dynamics in a DSGE Framework By Salvatore Nisticò
  8. Identifying Fiscal Policy (In)effectiveness from the Differential Adoption of Keynesianism in the Interwar Period By Nicolas-Guillaume Martineau; Gregor W. Smith
  9. Default Risk on Government Bonds, Deflation, and Inflation By Oguro, Kazumasa; Sato, Motohiro
  10. Efficiency of monetary and fiscal policy in open economies By Chan Wang; Heng-fu Zou
  11. Did the Fed and ECB react asymmetrically with respect to asset market developments? By Hoffmann, Andreas
  12. Non-Ricardian Aspects of Fiscal Policy in Chile By Luis Felipe Céspedes; Jorge Fornero; Jordi Galí
  13. Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measure By Robert Kollmann; Werner Roeger; Jan in'tVeld
  14. Macroeconomic Effects of Structural Fiscal Policy Changes in Colombia By Hernando Vargas; Andrés González; Ignacio Lozano
  15. Labour Market and Fiscal Policy By Slim Bridji and Matthieu Charpe
  16. Uncertain Fiscal Consolidations By Huixin Bi; Eric M. Leeper; Campbell B. Leith
  17. The Household Effects of Government Spending By Francesco Giavazzi; Michael McMahon
  18. Do Minimum Wage Increases Cause Inflation? Evidence from Vietnam By Nguyen, Cuong
  19. The Great Shift: Macroeconomic projections for the world economy at the 2050 horizon By Jean Fouré; Agnès Bénassy-Quéré; Lionel Fontagné
  20. Macroeconomic Effects of Corporate Default Crises: A Long-Term Perspective By Kay Giesecke; Francis A. Longstaff; Stephen Schaefer; Ilya Strebulaev
  21. Fiscal Issues in Financial Crisis By Vladimir Gligorov
  22. The relationship between the objectives and tools of macroprudential and monetary policy By David Green
  23. Macroeconomic effects of loss aversion in a signal extraction model By Giuseppe Ciccarone; Enrico Marchetti
  24. Fiscal Consolidation: Part 2. Fiscal Multipliers and Fiscal Consolidations By Ray Barrell; Dawn Holland; Ian Hurst
  25. Lessons of the European Crisis for Regional Monetary and Financial Integration in East Asia By Volz, Ulrich
  26. The "Out of Sample" Performance of Long-run Risk Models By Wayne E. Ferson; Suresh K. Nallareddy; Biqin Xie
  27. Transitions in the German labor market: Structure and crisis By Krause, Michael U.; Uhlig, Harald
  28. Minsky’s Financial Instability Hypothesis and the Leverage Cycle By Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis
  29. U-MIDAS: MIDAS regressions with unrestricted lag polynomials By Foroni, Claudia; Marcellino, Massimiliano; Schumacher, Christian
  30. Welfare Improving Taxation on Savings in a Growth Model By Xin Long; Alessandra Pelloni
  31. The impact of ICT on the Italian productivity dynamics By E. et al. Saltari
  32. Funding under Borrowing Limits in International Portfolios By Tommaso Trani
  33. A Matching Model of Endogenous Growth and Underground Firms By Gaetano Lisi; Maurizio Pugno
  34. Political economy of sub-national spending in India By Parag, Waknis
  35. Leaders’ Impact on Public Spending Priorities: The Case of the German Laender By Bernd Hayo; Florian Neumeier
  36. Country Portfolios with Heterogeneous Pledgeability By Tommaso Trani
  37. Determinants of carry trades in Central and Eastern Europe By Hoffmann, Andreas

  1. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (University of Surrey); Bo Yang (University of Surrey)
    Abstract: A New-Keynesian model with deep habits and optimal monetary policy delivers a fiscal multiplier above one and the crowding-in effect on private consumption obtainable in a Real Business Cycle model à la Ravn et al. (2006). Optimized Taylor-type or price-level interest rate rules yield results close to optimal policy and dominate a conventional Taylor interest rate rule. Private consumption is crowded out only if the Taylor rule is sub-optimal and then negates the fiscal stimulus by responding strongly to the output gap, or if the ability to commit is absent. At the zero lower bound private consumption is always crowded in across simple rules.
    Keywords: Deep habits, Optimal monetary policy, Price-level rule, Zero lower bound
    JEL: E30 E62
    Date: 2012–02
  2. By: Alessandro Piergallini (Faculty of Economics, University of Rome "Tor Vergata"); Giorgio Rodano (University of Rome “La Sapienza”)
    Abstract: Since Leeper’s (1991, Journal of Monetary Economics 27, 129-147) seminal paper, an extensive literature has argued that if fiscal policy is passive, i.e., guarantees public debt stabilization irrespectively of the inflation path, monetary policy can independently be committed to inflation targeting. This can be pursued by following the Taylor principle, i.e., responding to upward perturbations in inflation with a more than one-for-one increase in the nominal interest rate. This paper analyzes an optimizing framework in which the government can only finance public expenditures by levying distortionary taxes. It is demonstrated that households’ market participation constraints and Laffer-type effects can render passive fiscal policies unfeasible. For any given target inflation rate, there exists a threshold level of public debt beyond which monetary policy independence is no longer possible. In such circumstances, the dynamics of public debt can be controlled only by means of higher inflation tax revenues: inflation dynamics in line with the fiscal theory of the price level must take place in order for macroeconomic stability to be guaranteed. Otherwise, to preserve inflation control around the steady state by following the Taylor principle, monetary policy must target a higher inflation rate.
    Keywords: Public Debt; Distortionary Taxation; Monetary and Fiscal Policy Rules.
    JEL: E63 H31 H63
    Date: 2012–02–07
  3. By: Giovanni Dosi (Sant'Anna School of Advanced Studies); Giorgio Fagiolo (Sant'Anna School of Advanced Studies); Mauro Napoletano (Observatoire Francais des Conjonctures Economiques); Andrea Roventini (Department of Economics, University of Verona)
    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: 2012–02
  4. By: Giuseppe Ciccarone; Francesco Giuli; Danilo Liberati
    Abstract: By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and bank sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of output and wages to a monetary shock, and that the transmission of monetary policy shocks to output and inflation is more relevant than suggested by the recent literature.
    Keywords: interest rate pass-through,search and matching, credit market frictions.
    JEL: E43 E13 E24 E44
    Date: 2012–01
  5. By: Salvatore Nistico' (University of Rome La Sapienza and LUISS Guido Carli University)
    Abstract: In a DSGE model with non-ricardian agents, a' la Blanchard-Yaari, stock-price fluctuations affect the dynamics of aggregate consumption through wealth effects. This wealth effects can be characterized as an additional dynamic distortion with respect to the social planner allocation, related to the cross sectional consumption dispersion that the decentralized allocation implies. By exploiting the specific cross-sectional distribution that the model implies for individual financial wealth, this paper derives the welfare criterion consistent with this economy, and shows that it features an additional target besides output-gap and price stability: financial stability. The ultimate implication is that price stability is no longer necessarily optimal, even absent cost push shocks. Given the quadratic form of the welfare criterion, some fluctuations in output and inflation will be optimal as long as they reduce the volatility of financial wealth.
    Keywords: Monetary Policy, DSGE Models, Stock Prices, Wealth Effects.
    JEL: E12 E44 E52
    Date: 2011
  6. By: Philip Turner
    Abstract: Very high government debt/GDP ratios will increase uncertainty about inflation and the future path of real interest rates. This will reduce substitutability across the yield curve. In such circumstances, changes in the short-term/long-term mix of government debt held by the public will become more effective in achieving macroeconomic objectives. In circumstances of imperfect substitutability, central bank purchases or sales of government bonds have been seen historically as a key tool of monetary policy. Since the mid-1990s, however, responsibility for government debt management has been assigned to other bodies. The mandates of the government debt manager could have the unintended consequence of making their actions endogenous to macroeconomic policies. There is evidence that decisions on the maturity of debt have in the past been linked to both fiscal and monetary policy. Recent Quantitative Easing (QE) by the central bank must be analysed from the perspective of the consolidated balance sheet of government and central bank.
    Date: 2011–05
  7. By: Salvatore Nisticò (Università degli Studi di Roma “La Sapienza" and LUISS Guido Carli)
    Abstract: This paper analyzes the role of stock prices in driving Monetary Policy for price stability in a Non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the exible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the exible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective.
    Keywords: Monetary Policy, DSGE Models, Stock Prices, Wealth Effects.
    JEL: E12 E44 E52
    Date: 2012–02–10
  8. By: Nicolas-Guillaume Martineau (Universite de Sherbrooke); Gregor W. Smith (Queen's University)
    Abstract: Differences across countries or decades in the countercyclical stance of fiscal policy can help identify whether the growth in government spending affects output growth and so speeds recovery from a recession. We use the heterogeneity in the government-spending reaction functions across twenty countries in the interwar period to identify this effect. The main finding is that the growth of government spending did not have a significant effect on output growth, so that there is little evidence that this central aspect of fiscal policy played a stabilizing role from 1920 to 1939.
    Keywords: fiscal policy, business-cycle history, Great Depression, interwar economy
    JEL: E32 E65 N10
    Date: 2012–01
  9. By: Oguro, Kazumasa; Sato, Motohiro
    Abstract: This paper analyzes the impact of deflation and inflation on the real interest rates of GBs using an overlapping generations model with the relationship between the real interest rate of GBs and the fiscal consolidation rule. We find that deflation may lower the real interest rate of GBs to the same level of public debt to capital, even if the fiscal consolidation rule is the same, as opposed to the conventional view that the real interest rate of GBs is determined independent of deflation if the Fisher equation holds. Our results are consistent with how the real interest rates of Japanese GBs react in periods of deflation. This paper also addresses the impact of fiscal inflation (i.e., monetizing all parts of the GB’s default using monetary policy). We calculate the expected fiscal inflation when the default rate in the event of fiscal consolidation is raised. The fiscal inflation may be extremely high if the extent of the required tax increase in fiscal consolidation is low. Initial inflation accelerates the expected fiscal inflation, but initial deflation suppresses it.
    Keywords: Overlapping generations model, real interest rate, fiscal consolidation rule, default risk, fiscal inflation
    JEL: E17 H30 H5 H60 E62 H63
    Date: 2012–02
  10. By: Chan Wang (CEMA, Central University of Finance and Economics); Heng-fu Zou (CEMA, Central University of Finance and Economics)
    Abstract: This paper investigates the efficiency of monetary and fiscal policy in two-country general equilibrium model with monopolistic competition and price stickiness. Comparing the efficiency of global monetary policy that replicates the real allocations with flexible wages before and after introducing stochastic government spending, we conclude that stochastic government spending is vital, the global monetary policy replicating the real allocations with flexible wages will turn from being efficient to being inefficient when some conditions are satisfied. When the stochastic government spending is present, we also find that the monopoly distortions are essential for the efficiency of the global monetary policy that replicates the real allocations with flexible wages. Complete removal of the monopoly distortions will cause the efficient global monetary policy replicating the real allocations with flexible wages to be inefficient when some conditions are satisfied. Fiscal policy is found to be unable to replicate the real allocations with flexible wages.
    Keywords: New open-economy macroeconomics, Efficiency of monetary policy, Stochastic government spending, Monopoly distortions
    Date: 2012–02–13
  11. By: Hoffmann, Andreas
    Abstract: This paper studies the monetary policy of the Federal Reserve (Fed) and the Bundesbank / European Central Bank (ECB) with respect to stock or/and foreign exchange markets from 1979 to 2009. I find that Fed policy changed over time, dependent on the chairman of the Fed. During the Greenspan era stock markets mattered for the Fed. In this period, the Fed lowered interest rates when stock prices fell, but did not raise interest rates in the boom. This asymmetry potentially put a downward pressure on interest rates. For the ECB, the exchange rate to the dollar played a role in monetary policy decisions until 2006. While I do not find evidence of asymmetric monetary policy with respect to the stock market, the ECB may be argued to indirectly have followed asymmetric US monetary policy via the exchange rate channel. --
    Keywords: monetary policy,Taylor rule,asset prices
    JEL: E52 E61
    Date: 2012
  12. By: Luis Felipe Céspedes; Jorge Fornero; Jordi Galí
    Abstract: This paper examines non-Ricardian effects of government spending shocks in the Chilean economy. We first provide evidence on those effects based on vector autoregressions. We then show that such evidence can be accounted for by a model that features: (i) a sizeable share of non-Ricardian households (i.e. households which do not make use of financial markets and just consume their current labor income); (ii) nominal price and wage rigidities; (iii) an inflation targeting scheme, and (iv) a structural balance fiscal rule that represents the particular Chilean fiscal rule. The model is estimated employing Bayesian techniques. Finally, we use model simulations to demonstrate the countercyclical effects of the Chilean fiscal rule as compared with a zero-deficit rule.
    Date: 2012–02
  13. 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 crisis; financial stimulus; real activity
    JEL: E62 E63 G21 G28 H25
    Date: 2012–02
  14. By: Hernando Vargas; Andrés González; Ignacio Lozano
    Abstract: In the past decade the Colombian Economic Authorities undertook a series of measures that reduced the structural fiscal deficit, decreased the Government currency mismatch and deepened the local fixed-rate public bond market. This paper presents some evidence suggesting that these improvements had important effects on the behavior of the macroeconomy. They seem to have permanently reduced the sovereign risk premium, increased the reaction of output to Government expenditure shocks and strengthened the response of market interest rates to monetary policy shocks.
    Date: 2012–02–08
  15. By: Slim Bridji and Matthieu Charpe (ILO, International Labour Organization, Geneva)
    Abstract: This paper discusses fiscal policy using a DSGE model with search and matching in the labour market. Fiscal policy is effective mainly via its impact through the labour market. Although public intervention tends to crowd out private consumption, public spending also improves the matching between unemployed workers and job vacancies. The mechanism modelled in this paper shares similarity with Baxter & King (1993) and Leeper et al. (2010). The model produces positive fiscal multipliers on impact and in the short term and consistently reproduces the reaction to a spending shock of the main labour market variables such as wages,employment or labour market tightness. These results are similar with that of Monacelli et al. (2010) except that the transmission channel does not depend on the downward adjustment of the reservation wage of workers. The size of the fiscal multiplier increases with the elasticity of matching to spending and is also negatively related with the steady state spending to GDP ratio in the presence of diminishing marginal returns on spending. For large value of the multiplier, there is a crowding in of consumption and investment. Lastly, this model produces output multipliers larger than 1 in the presence of nominal price rigidities.
    Keywords: Fiscal policy, search, matching
    JEL: E24 E32 E62
    Date: 2012–02–16
  16. By: Huixin Bi; Eric M. Leeper; Campbell B. Leith
    Abstract: The paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain. Drawing on the evidence in Alesina and Ardagna (2010), we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts. We find that the composition of the fiscal consolidation, its duration, the monetary policy stance, the level of government debt and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and/or successful in stabilizing government debt.
    JEL: E3 E31 E52 E62
    Date: 2012–02
  17. 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.
    Keywords: Fiscal policy, PSID, household consumption, labor supply
    JEL: E62 E21 E24 D12
    Date: 2012–02
  18. By: Nguyen, Cuong
    Abstract: It is often argued that minimum wage increases can lead to increased inflation. This paper examines the impact of minimum wage increases on inflation in Vietnam during the 1994-2008 period. Inflation is measured by a monthly overall Consumer Price Index (CPI) and a monthly food CPI. It is found that the minimum wage increases did not increase inflation. Since the minimum wage increases often took place one or two months before the Vietnamese New Year festivals, observed increases in monthly inflation after the minimum wage increases were caused by increased consumption demand during the New Year festivals, not by the minimum wage increases.
    Keywords: Minimum wages; inflation; CPI; Vietnam
    JEL: E31 J38 J21 J23
    Date: 2011–03–20
  19. By: Jean Fouré; Agnès Bénassy-Quéré; Lionel Fontagné
    Keywords: GDP projections, long run, global economy
    JEL: E23 E27 F02 F47 A A A
    Date: 2012–02
  20. By: Kay Giesecke; Francis A. Longstaff; Stephen Schaefer; Ilya Strebulaev
    Abstract: Using an extensive new data set on corporate bond defaults in the U.S. from 1866 to 2010, we study the macroeconomic effects of bond market crises and contrast them with those resulting from banking crises. During the past 150 years, the U.S. has experienced many severe corporate default crises in which 20 to 50 percent of all corporate bonds defaulted. Although the total par amount of corporate bonds has often rivaled the amount of bank loans outstanding, we find that corporate default crises have far fewer real effects than do banking crises. These results provide empirical support for current theories that emphasize the unique role that banks and the credit and collateral channels play in amplifying macroeconomic shocks.
    JEL: E3 E32 E44 G01 G21 G33
    Date: 2012–02
  21. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Fiscal constraint is potentially lax in catching-up economies, but it has not been abused by most countries considered in this paper. Fiscal risks are significant currently, but sustainability and structural balances are not threatened as a rule, if the return to potential growth rates is to be achieved in the medium run. The risks to countercyclical public financing could be discouraged by a comprehensive EU stabilization policy of some sort. Early euro adoption, absent credible stabilization policy, is not the first best policy option for fiscal policy targets.
    Keywords: public debt, sustainability, No-Ponzi game criterion, private debt, foreign debt
    JEL: E62 G18
    Date: 2011–09
  22. By: David Green
    Abstract: No Abstract is available.
    Date: 2011–05
  23. By: Giuseppe Ciccarone; Enrico Marchetti
    Abstract: We add some elements of prospect theory to an analytically tractable version of Lucas’s “islands†model and show that the inclusion of reference dependence, declining sensitivity and loss aversion into the agents’ utility function leads to three main results. First, the equilibrium labor supply and the natural level of output are negatively affected by the presence of behavioral elements, whereas the cyclical response of output to a monetary shock remains unaltered. Second, the expected utility of a representative agent is generally lower than that obtained when loss aversion is absent. Third, the presence of loss aversion eliminates the paradoxical increase in expected utility that may be generated, in the standard model, by an increase in monetary policy uncertainty.
    Keywords: Prospect Theory, Behavioral economics, Signal extraction.
    JEL: E32 E52 D81
    Date: 2011–10
  24. By: Ray Barrell; Dawn Holland; Ian Hurst
    Abstract: This paper looks at various aspects of fiscal consolidation in 18 OECD economies. The prospects for fiscal consolidation depend upon the problems the country may face with its debt stock, the political will to deal with these problems and on the costs of consolidation. The analysis is based on a series of simulations using the National Institute Global Econometric Model, NiGEM. The properties of the NiGEM model are discussed first. Although the model is estimated it has a strong role for expectations and can be run under different modes of expectations formation. This allows a decomposition of the factors that might affect the results. Temporary and permanent shifts in fiscal policy are assessed as well as the potential impact of fiscal consolidation plans under different monetary and fiscal feedback rules and different modes of expectations formation. If fiscal policy is expected to be tightened in the future, then long rates will fall now, and perhaps even induce a short-term expansion of output. Expansionary fiscal contractions of this sort are rare, however, and none are anticipated with the programmes that are investigated.<P>Consolidation budgétaire : Partie 2. Multiplicateurs budgétaires et assainissement des finances publiques<BR>Ce document examine divers aspects de l’assainissement des finances publiques dans 18 pays de l’OCDE. Le potentiel de consolidation budgétaire dépend du montant de la dette d’un pays et des problèmes qui peuvent en résulter, de la volonté politique de traiter ces problèmes et des coûts du redressement. L’analyse s’appuie sur un ensemble de simulations fondées sur le modèle économétrique mondial de l'Institut de recherche économique et sociale du Royaume-Uni (NiGEM). Les auteurs examinent en premier lieu les caractéristiques du modèle NiGEM. Même si ce modèle procède par estimation, il conditionne fortement les anticipations et peut être appliqué à différents modes de formation des anticipations. Cela permet de décomposer les facteurs susceptibles d’influer sur les résultats. Les auteurs évaluent ensuite les modifications temporaires et permanentes de la politique budgétaire, ainsi que l’impact potentiel des plans de redressement budgétaire selon différentes règles de rétroaction budgétaire et monétaire et différents modes de formation des anticipations. Si l’on s’attend à un durcissement de la politique budgétaire à l’avenir, les taux longs baisseront immédiatement, ce qui pourrait même induire une expansion à court terme de la production. Néanmoins, les contractions budgétaires expansionnistes de ce type sont exceptionnellement rares, et les programmes étudiés n’en prévoient aucune.
    JEL: E17 E37 E62
    Date: 2012–02–22
  25. By: Volz, Ulrich (Asian Development Bank Institute)
    Abstract: The debt crisis in several member states of the euro area has raised doubts on the viability of European Economic and Monetary Union (EMU) and the future of the euro. While the launch of the euro in 1999 stirred a lot of interest in regional monetary integration and even monetary unification in various parts of the world, including East Asia, the current crisis has had the opposite effect, even raising expectations of a break-up of the euro area. Indeed, the crisis has highlighted the problems and tensions that will inevitably arise within a monetary union when imbalances build up and become unsustainable. This note discusses the causes of the current European crisis and the challenges that EMU countries face in solving it. Based on this analysis, it derives five lessons for regional financial and monetary cooperation and integration in East Asia.
    Keywords: european crisis; euro area; european monetary union; financial integration; east asia
    JEL: E42 F33 F36 G01
    Date: 2012–02–23
  26. By: Wayne E. Ferson; Suresh K. Nallareddy; Biqin Xie
    Abstract: This paper studies the ability of long-run risk models to explain out-of-sample asset returns during 1931-2009. The long-run risk models perform relatively well on the momentum effect. A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short run consumption shocks in the models are empirically important for the models’ performance. The models’ average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.
    JEL: E21 E27 G12
    Date: 2012–02
  27. By: Krause, Michael U.; Uhlig, Harald
    Abstract: Since the so-called Hartz IV reforms around 2005 and during the global crisis of 2008/2009, the German labor market featured mainly declining unemployment rates. We develop a search and matching model with heterogeneous skills to explore the role of structural and cyclical policies for this performance. Calibrating unemployment benefits to approximate legislation before and after the reforms, we find a large reduction in unemployment and its duration, with the transition concluding after about three years. During the crisis, the extended use of short-time labor subsidies that prevent jobs from being destroyed is likely to have prevented strong increases in unemployment. --
    Keywords: German Hartz IV reforms,search and matching,unemployment benefits,labor subsidies
    JEL: E24 E32 J64
    Date: 2011
  28. By: Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis
    Abstract: Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming more optimistic about the future prospects of the economy. Default is inevitably harsher when a bad shock occurs after periods of good news. Commonly used measures to forecast risk in the system, such as VIX, fail to capture this phenomenon, as they are also biased by optimistic expectations. Competition among financial institutions for better relative performance exacerbates the boom-bust cycle. We explore the relative advantages of alternative regulations in reducing financial fragility, and suggest a novel criterion for improvement of aggregate welfare.
    Date: 2011–09
  29. By: Foroni, Claudia; Marcellino, Massimiliano; Schumacher, Christian
    Abstract: Mixed-data sampling (MIDAS) regressions allow to estimate dynamic equations that explain a low-frequency variable by high-frequency variables and their lags. When the difference in sampling frequencies between the regressand and the regressors is large, distributed lag functions are typically employed to model dynamics avoiding parameter proliferation. In macroeconomic applications, however, differences in sampling frequencies are often small. In such a case, it might not be necessary to employ distributed lag functions. In this paper, we discuss the pros and cons of unrestricted lag polynomials in MIDAS regressions. We derive unrestricted MIDAS regressions (U-MIDAS) from linear high-frequency models, discuss identification issues, and show that their parameters can be estimated by OLS. In Monte Carlo experiments, we compare U-MIDAS to MIDAS with functional distributed lags estimated by NLS. We show that U-MIDAS generally performs better than MIDAS when mixing quarterly and monthly data. On the other hand, with larger differences in sampling frequencies, distributed lag-functions outperform unrestricted polynomials. In an empirical application on out-of-sample nowcasting GDP in the US and the Euro area using monthly predictors, we find a good performance of U-MIDAS for a number of indicators, albeit the results depend on the evaluation sample. We suggest to consider U-MIDAS as a potential alternative to the existing MIDAS approach in particular for mixing monthly and quarterly variables. In practice, the choice between the two approaches should be made on a case-by-case basis, depending on their relative performance. --
    Keywords: mixed data sampling,distributed lag polynomals,time aggregation,now-casting
    JEL: E37 C53
    Date: 2011
  30. By: Xin Long (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labor to capital will increase the employment rate in equilibrium. This has opposite e¤ects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the benefits of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, the optimal tax rate on capital will be sizable.
    Keywords: Capital Income Taxes, R&D, Growth Effect, Welfare Effect
    JEL: E62 H21 O41
    Date: 2012–01–27
  31. By: E. et al. Saltari
    Abstract: The last twenty years have seen a marked slowdown of the Italian productivity growth rate. The literature has underlined the role of international factors, such as globalization and adoption of the euro. In this paper we emphasize the role and dynamics of capital accumulation investigating the impact of the introduction of information technology on capital and production in the Italian economy and the extent to which that is being affected by skills in the labour force. The model is specified and estimated as continuous-time general disequilibrium framework. It presents original features: it analyzes the effects of the introduction of the ICT technology on the Italian economy not in a partial equilibrium context of a single market but from a macro point of view where input markets interact; it does not assume that these markets instantaneously clear but rather that there are imperfections and frictions; it does not impose the condition that the economy necessarily converges to a steady state. The model behaves quite well in replicating the dynamics of the Italian economy. It also shows however that there remains some structural inefficiency that worsened in recent years. In fact, our main finding shows that there exists a permanent gap between “optimal†and actual output which increased in the latter part of the sample period. While a fraction of this gap can be attributed to unavoidable (market and non market) adjustment costs some is associated to efficiency losses.
    Keywords: Technological adoption, Disequilibrium models, Continuous-time econometrics.
    JEL: E22 O33 C51
    Date: 2011–11
  32. By: Tommaso Trani (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: I develop an open economy portfolio model to study how leveraged investors' wholesale funding affects the international transmission of shocks. Under binding borrowing limits, there is a link between the international investment positions of integrated economies as investors diversify the asset side of their balance sheets. Building on this mechanism, I introduce the liability side, allowing investors sell domestic and foreign bonds and capturing changes in counterparty risk in a stylized way (i.e., debt-to-asset ratios are specific to each borrower and time-varying). I model and parameterize these ratios, conditional on portfolio choice. I can solve for portfolios taking advantage of the link between assets and liabilities which is implied by the borrowing constraints. Equilibrium portfolios feature home funding bias, which is justified by a crucial interaction between the terms of trade and the tightness of the borrowing constraints. Dynamically, this interaction implies that the source of debt which is most sensitive to shocks is foreign funding. In fact, any shock creates a wedge between the cost of funding in different countries; the value of collateral must adjust accordingly through asset prices. Yet, asset prices are mainly affected by financiers' concern for counterparty risk: impact effects are deep and in line with the terms of trade effect. Combined, these effects have somehow novel implications for the net foreign asset positions. The cumulative effects have instead more mixed results on fluctuations.
    Keywords: borrowing limits, counterparty risk, ?nancial ?ows, international ?nancial markets, international lending, macroeconomic interdependence
    JEL: E21 F32 F34 F41 G15
    Date: 2012–02–14
  33. By: Gaetano Lisi; Maurizio Pugno
    Abstract: A matching model will explain both unemployment and economic growth by considering the underground sector and human capital. Three problems can thus be simultaneously accounted for: (i) the persistence of the underground sector, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that entrepreneurial ability is heterogeneous, skill accumulation determines productivity growth, job-seekers choose whether to invest in education. The conclusions are that the least able entrepreneurs, whose number is endogenous, set up underground firms, employ unskilled labour, and do not contribute to growth. If the monitoring rate is sufficiently low, underground employment alleviates unemployment, but the economy grows at lower rates.
    Keywords: Matching models, endogenous growth, underground economy, entrepreneurship, unemployment.
    JEL: E26 J6 J24 L26
    Date: 2012–01–03
  34. By: Parag, Waknis
    Abstract: Many states in India have time and again elected a multiparty or a coalition government. Research so far has shown that these differences in political cohesiveness of the ruling political entity has influenced the spending choices of the state governments. However, the evidence is not completely conclusive. Different authors have used different measures of political fragmentation deriving opposite results for their effect on state government spending. There are also differences in the way economists and political scientists have dealt with the issue econometrically. This is coupled with a lack of a theoretical model of choice of public spending under alternative political regimes in the Indian context. I address these gaps in the literature by first building a theoretical model of spending policies of a state government. In this model, extensiveness and intensity of credit constraints influences equilibrium voting policies and hence the spending policies of governments in power. The resulting predictions are then comprehensively tested using data on seventeen Indian states over the period of twenty years. The econometric analysis provides substantive evidence for the importance of political factors in determining government spending. Specifically, we find that that politically less cohesive governments tend to spend more on education than their more cohesive counterparts. There is also some evidence on electoral cycles in health expenditure. Further, the analysis supports the model’s underlying notion of credit constrained voters determining the spending policies of the government via the degree of political cohesiveness of the government in power.
    Keywords: political economy; government spending; credit constraints and voting; differentiated election platforms; coalition governments in India
    JEL: E62 H72
    Date: 2012–02–20
  35. By: Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg)
    Abstract: We examine determinants of the composition of public expenditure in the German Laender (states) over the period 1993–2008, as the Laender exhibit a high degree of institutional and political homogeneity and are endowed with extensive fiscal competences. Our prime contribution is an investigation into how political leaders’ socioeconomic background influences public spending priorities. Applying sociological theory, we link preferences for the composition of public spending to social status. In contrast to approaches relying on political budget cycles or partisan theory, we find strong and theory-consistent evidence that prime ministers tend to favour fiscal policies supporting the social class in which they are socialised. Governments led by prime ministers from a poor socioeconomic background spend significantly more on social security, education, health, infrastructure, and public safety.
    Keywords: Leadership, socioeconomic status, social rivalry, public expenditure composition.
    JEL: E62 H75 H76
    Date: 2012
  36. By: Tommaso Trani (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: In a two-country portfolio model with leverage constraints, I focus on private assets in order to understand how their behaviour can justify an expected excess return as well as the flight-to-safety observed in the data. The specific goal is to study how much these phenomena are explained by the fact that investors cannot always borrow the same amount of resources pledging domestic assets as pledging foreign collateral. Modeling the leverage constraints accordingly, I propose a methodology to deal with this heterogeneous pledgeability and solve for country portfolios. The central feature of this approach is that any idiosyncratic shocks generate an expected excess returns which compensate the current effects of the shock on the relative riskiness of local versus foreign collateral. The resulting portfolio solution shows that, in equilibrium, investors care for this risk and renounce to a part of the expected excess return - favouring current borrowing. The main consequences are: the home equity bias is smaller than in a model where assets are homogeneously pledgeable; the ex post dynamics of the relative premium paid on collateralized assets contribute to the cross-border transmission of shocks. Given these dynamics, idiosyncratic shocks to the pledgeability of local assets affect the value of external claims and liabilities of the country hit by the shock in such a way that its net foreign assets match those observed in the data during times of flight-to-safety.
    Keywords: portfolio choice, riskiness of pledged collateral, return di¤erentials, macroeconomic interdependence
    JEL: E44 F32 F41 G11 G15
    Date: 2012–02–12
  37. By: Hoffmann, Andreas
    Abstract: In this paper, I analyze determinants of carry trade returns in Central and Eastern Europe (CEE). I show that carry trades to CEE were lucrative due to interest rate spreads between the funding and investment currency from 2004 to 2006. They became unprofitable when liquidity risk and exchange rate volatility increased after 2007. The analysis suggests that the exchange rate regime of the CEE economy matters for carry trade returns. Overall, exchange rate stabilization, particularly via managed floats, seems to allow for the highest profit opportunities. --
    Keywords: carry trades,emerging markets,exchange rates
    JEL: E32 E44 F31 G11
    Date: 2011

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