nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒03‒08
eighty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary Policy in a New Keynesian Model with Endogenous Growth By Barbara Annicchiarico; Lorenza Rossi
  2. Central Banks Quasi-Fiscal Policies and Inflation By Seok Gil Park
  3. Precautionary demand for money in a monetary business cycle model By Telyukova, Irina A.; Visschers, Ludo
  4. Sovereign Risk, Fiscal Policy, and Macroeconomic Stability By Giancarlo Corsetti; André Meier; Keith Kuester; Gernot J. Mueller
  5. Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule By Conrad, Christian; Eife, Thomas A.
  6. Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective? By Pelin Berkmen
  7. Macrofinancial Modeling at Central Banks: Recent Developments and Future Directions By Jan Vlcek; Scott Roger
  8. Price Subsidies and the Conduct of Monetary Policy By Mohamed Safouane Ben Aissa; Nooman Rebei
  9. Macroprudential Rules and Monetary Policy when Financial Frictions Matter By Jeannine Bailliu; Césaire Meh; Yahong Zhang
  10. Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008–09? By Selim Elekdag; Harun Alp; Subir Lall
  11. Interactions Between Sovereign Debt Management and Monetary Policy Under Fiscal Dominance and Financial Instability By Hans J. Blommestein; Philip Turner
  12. Real wages and monetary policy: A DSGE approach By Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
  13. The Barnett Critique After Three Decades: A New Keynesian Analysis By Michael T. Belongia; Peter N. Ireland
  14. Reserve Requirements for Price and Financial Stability - When Are They Effective? By Glocker, C.; Towbin, P.
  15. Money as Indicator for the Natural Rate of Interest By Helge Berger; Henning Weber
  16. Transmission Lags and Optimal Monetary Policy By Alessandro Flamini
  17. Interest rates close to zero, post-crisis restructuring and natural interest rate By Cizkowicz, Piotr; Rzonca, Andrzej
  18. Sudden Floods, Macroprudention Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  19. Interest Rate Control Rules and Macroeconomic Stability in a Heterogeneous Two-Country Model By Fujisaki, Seiya
  20. "The European Central Bank and Why Things Are the Way They Are: A Historic Monetary Policy Pivot Point and Moment of (Relative) Clarity" By Robert Dubois
  21. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  22. Endogenous Market Structures and Labor Market Dynamics (New version) By Andrea Colciago; Lorenza Rossi
  23. Real Business Cycles with Capital Maintenance By Alice Albonico; Sarantis Kalyvitis; Evi Pappa
  24. Fiscal Policy in an Unemployment Crisis By Rendahl, P.
  25. Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions By Hanan Morsy; Florence Jaumotte
  26. The role of money and monetary policy in crisis periods: the Euro area case By Benchimol, Jonathan; Fourçans, André
  27. The role of money and monetary policy in crisis periods: the Euro area case By Jonathan Benchimol; André Fourçans
  28. O Impacto da Comunicação do Banco Central do Brasil sobre o Mercado Financeiro By Marcio Janot; Daniel El-Jaick de Souza Mota
  29. Greater Moderations By John W. Keating; Victor J. Valcarcel
  30. Macro Shocks and Real US Stock Prices with Special Focus on the "Great Recession" By Rangan Gupta; Roula Inglesi-Lotz
  31. Managing Non-core Liabilities and Leverage of the Banking System: A Building Block for Macroprudential Policy Making in Korea By Ali Alichi; Sang Chul Ryoo; Cheol Hong
  32. What's so Great about the Great Moderation? A Multi-Country Investigation of Time-Varying Volatilities of Output Growth and Inflation By John W. Keating; Victor J. Valcarcel
  33. The Household Effects of Government Spending By Giavazzi, Francesco; McMahon, Michael
  34. Understanding and Modelling Reset Price Inflation By Engin Kara
  35. Sacrifice Ratios and Inflation Targeting: The Role of Credibility By Nicolás De Roux; Marc Hofstetter
  36. A comment on "The effect of a common currency on the volatility of the extensive margin of trade" By Luís Alexandre Barbosa Guimarães
  37. The Time Varying Effects of Permanent and Transitory Shocks to Real Output By John W. Keating; Victor J. Valcarcel
  38. Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? By Pau Rabanal; Juan F. Rubio-Ramirez
  39. Inflation convergence in Central and Eastern Europe with a view to adopting the euro By Juan Carlos Cuestas; Luis A. Gil-Alana; Karl Taylor
  40. Do we need fiscal rules? By Catherine Mathieu; Henri Sterdyniak
  41. Los efectos macroeconómicos del lavado de dinero By Slim, Sadri
  42. Prudential Liquidity Regulation in Developing Countries: A Case Study of Rwanda By Sarah Sanya; Wayne Mitchell; Angelique Kantengwa
  43. Can Public Sector Wage Bills Be Reduced? By Pïerre Cahuc; Stephane Carcillo
  44. Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances By Bertrand Gruss; Jose L. Torres
  45. Fiscal Rules and the Sovereign Default Premium By Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
  46. Global versus local shocks in micro price dynamics By Andrade, P.; Zachariadis, M.
  47. A structural interpretation of the impact of the great recession on the Austrian economy using an estimated DSGE model By Gerhard Fenz; Lukas Reiss; Martin Schneider
  48. Expansionary Effect of an Anticipated Fiscal Policy on Consumption in Japan By Hiroshi Morita
  49. An Assessment of Malaysian Monetary Policy during the Global Financial Crisis of 2008-09 By Selim Elekdag; Harun Alp; Subir Lall
  50. A New Model of Trend Inflation By Joshua C C Chan; Gary Koop; Simon M Potter
  51. Business Cycles and Household Formation: The Micro vs the Macro Labor Elasticity By Sebastian Dyrda; Greg Kaplan; José-Víctor Ríos-Rull
  52. Asymmetric Dependence in the US Economy: Application to Money and the Phillips Curve By Chollete, Loran; Ng, Cathy
  53. The European Crisis Deepens By Peter Boone; Simon Johnson
  54. Revisiting the “Productivity-Hours Puzzle” in the RBC Paradigm: The Role of Investment Adjustment Costs By Alice Albonico; Sarantis Kalyvitis; Evi Pappa
  55. Treasury Bills and/or Central Bank Bills for Absorbing Surplus Liquidity: The Main Considerations By Obert Nyawata
  56. Barbados: Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities By Charles Amo Yartey
  57. Precautionary Savings in the Great Recession By Ashoka Mody; Franziska Ohnsorge; Damiano Sandri
  58. The European way out of recession By Bec, F.; Bouabdallah, O.; Ferrara, L.
  59. Are Core Inflation Directional Forecasts Informative? By Tito Nícias Teixeira da Silva Filho
  60. Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession By Nicola Cetorelli; Linda S. Goldberg
  61. Breakeven inflation rates and their puzzling correlation relationships By Cette, G.; De Jong, M.
  62. Mortgage Amortization and Amplification By Chiara Forlati; Luisa Lambertini
  63. The European Way Out of Recessions By Frédérique Bec; Othman Bouabdallah; Laurent Ferrara
  64. More Pain, No Gain for Greece: Is the Euro Worth the Costs of Pro-Cyclical Fiscal Policy and Internal Devaluation? By Mark Weisbrot; Juan Antonio Montecino
  65. Does Inequality Lead to a Financial Crisis? By Michael D. Bordo; Christopher M. Meissner
  66. Lessons of the European Crisis for Regional Monetary and Financial Integration in East Asia By Ulrich Volz
  67. Fiscal Rules: Theoretical Issues and Historical Experiences By Charles Wyplosz
  68. Revenue decentralization and inflation: a re-evaluation By Baskaran, Thushyanthan
  69. Probability Distributions or Point Predictions? Survey Forecasts of US Output Growth and Inflation By Clements, Michael P
  70. A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management By Hans J. Blommestein; Anja Hubig
  71. Un Indicatore per la Lombardia e per le Province di Milano e Pavia (Nuova versione) By Donatella Baiardi; Carluccio Bianchi
  72. Forecasting Inflation Using Constant Gain Least Squares By Antipin, Jan-Erik; Boumediene, Farid Jimmy; Österholm, Pär
  73. How Do Laffer Curves Differ Across Countries? By Mathias Trabandt; Harald Uhlig
  74. It's So Hard to Get Good Help By Dean Baker
  75. Expected and unexpected bond excess returns: Macroeconomic and market microstructure effects By Fricke, Christoph
  76. The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era By Christina D. Romer; David H. Romer
  77. The Effect of the Minimum Wage on the Average Wage in France (in French) By Cette, G.; Chouard, V.; Verdugo, G.
  78. Faut-il des règles de politique budgétaire By Catherine Mathieu; Henri Sterdyniak
  79. Central Banks and Gold Puzzles By Joshua Aizenman; Kenta Inoue
  80. Cointegration, causality and Wagner’s law with disaggregated data: evidence from Turkey, 1968-2004 By Kucukkale, Yakup; Yamak, Rahmi
  81. Crisis Prevention and Management - What Worked in the 2008/2009 Crisis? By Becker, Torbjörn

  1. By: Barbara Annicchiarico; Lorenza Rossi (Department of Economics, University of Pavia)
    Abstract: We study monetary policy in a New Keynesian (NK) model with endogenous growth and knowledge spillovers external to each firm. We find the following results: (i) technology and government spending shocks have different effects on growth; (ii) disinflationary monetary policies entail positive effects on growth; (iii) the optimal long-run inflation rate is zero; (iv) the Ramsey dynamics implies deviation from full inflation targeting in response to technology and government spending shocks; (v) the optimal operational rule is backward looking and responds to inflation and output deviations from their long-run levels.
    Keywords: Monetary Policy, Endogenous Growth, Disinflation, Ramsey Problem, Optimal Simple Rules
    JEL: E32 E52 O42
    Date: 2012–02
  2. By: Seok Gil Park
    Abstract: Although central banks have recently taken unconventional policy actions to try to shore up macroeconomic and financial stability, little theory is available to assess the consequences of such measures. This paper offers a theoretical model with which such policies can be analyzed. In particular, the paper shows that in the absence of the fiscal authorities’ full backing of the central bank’s balance sheet, strange things can happen. For instance, an exit from quantitative easing could be inflationary and central banks cannot successfully unwind inflated balance sheets. Therefore, the fiscal authorities’ full backing of the monetary authorities’ quasi-fiscal operations is a pre-condition for effective monetary policy.
    Keywords: Central bank policy , Economic models , Fiscal policy , Inflation , Monetary policy ,
    Date: 2012–01–17
  3. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models,the only uncertainty aecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and nd that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: precautionary demand for money; business cycle fluctuations; money velocity fluctuations
    JEL: E32 E40 E41
    Date: 2011–12
  4. By: Giancarlo Corsetti; André Meier; Keith Kuester; Gernot J. Mueller
    Abstract: This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a “sovereign risk channel†through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.
    Keywords: Economic stabilization , Fiscal policy , Monetary policy , Risk premium , Sovereign debt ,
    Date: 2012–01–26
  5. By: Conrad, Christian; Eife, Thomas A.
    Abstract: In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation-gap persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
    Keywords: inflation-gap persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule
    JEL: C22 E31 E52 E58
    Date: 2012–02–17
  6. By: Pelin Berkmen
    Abstract: This paper asks whether the BoJ’s recent experience with unconventional monetary easing has been effective in supporting economic activity and inflation. Using a structural VAR model, the paper finds some evidence that BoJ’s monetary policy measures during 1998-2010 have had an impact on economic activity but less so on inflation. These results are stronger than those in earlier studies looking at the quantitative easing period up to 2006 and may reflect more effective credit channel as a result of improvements in the banking and corporate sectors. Nevertheless, the relative contribution of monetary policy measures to the variation in output and inflation is rather small.
    Keywords: Central banks , Credit , Current account balances , Deflation , Japan , Monetary policy ,
    Date: 2012–01–09
  7. By: Jan Vlcek; Scott Roger
    Abstract: This paper surveys dynamic stochastic general equilibrium models with financial frictions in use by central banks and discusses priorities for future development of such models for the purpose of monetary and financial stability analysis. It highlights the need to develop macrofinancial models which allow analysis of the macroeconomic effects of macroprudential policy tools and to evaluate elements of the Basel III reforms as a priority. The paper also reviews the main approaches to introducing financial frictions into general equilibrium models.
    Keywords: Central banks , Economic models , Monetary policy , Monetary transmission mechanism ,
    Date: 2012–01–20
  8. By: Mohamed Safouane Ben Aissa; Nooman Rebei
    Abstract: This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods. The main result of this paper is that strict headline inflation targeting could be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these. In addition, several country cases exhibit lower performance of both headline and core inflation stabilization, the two most common policies in modern central banks' practices. For practical monetary policy design, we numerically identify country specific thresholds for the degree of government intervention in price setting under which core inflation targeting turns out to be the optimal choice in the context of implementable Taylor rules.
    Keywords: Economic models , Inflation targeting , Monetary policy , Prices , Subsidies ,
    Date: 2012–01–18
  9. By: Jeannine Bailliu; Césaire Meh; Yahong Zhang
    Abstract: This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.
    Keywords: Economic models; Financial markets; Financial stability; Monetary policy framework
    JEL: E42 E50 E60
    Date: 2012
  10. By: Selim Elekdag; Harun Alp; Subir Lall
    Abstract: Korea was one of the Asian economies hardest hit by the global financial crisis. Anticipating the downturn that would follow the episode of extreme financial stress, the Bank of Korea (BOK) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 325 basis points. But did it work? This paper seeks a quantitative answer to the following question: Were it not for an inflation targeting framework underpinned by a flexible exchange rate regime, how much deeper would the recession have been? Taking the most intense year of the crisis as our baseline (2008:Q4–2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.1 percent contraction, the outturn would have been -2.9 percent if the BOK had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -7.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BOK helped substantially soften the impact of the global financial crisis on the Korean economy. These counterfactual experiments are based on an estimated structural model, which, along with standard nominal and real rigidities, includes a financial accelerator mechanism in an open-economy framework.
    Keywords: Economic growth , Economic indicators , Economic models , Economic recession , Exchange rate regimes , Financial crisis , Fiscal policy , Flexible exchange rate policy , Global Financial Crisis 2008-2009 , Inflation targeting , Korea, Republic of , Monetary policy , Monetary transmission mechanism ,
    Date: 2012–01–10
  11. By: Hans J. Blommestein; Philip Turner
    Abstract: This paper argues that serious fiscal vulnerabilities arising from many years of high government debt will create new and complex interactions between public debt management (PDM) and monetary policy (MP). The paper notes that, although their formal mandates have not changed, recent balance sheet policies of many Central Banks (CBs) have tended to blur the separation of their policies from fiscal policy (FP). The mandates of debt management offices (DMOs) have usually had a microeconomic focus (viz, keeping government debt markets liquid, limiting refunding risks etc). Such mandates have usually eschewed any macroeconomic policy dimension. For these reasons, all clashes in policy mandate between CBs and DMOs have been latent and not overt.
    Keywords: monetary policy, debt, debt management, sovereign debt, central banks and their policies, policy objectives, policy designs and consistency, policy coordination
    JEL: E52 E58 E61 H63
    Date: 2012–02–20
  12. By: Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
    Abstract: Economists have long investigated the cyclical behavior of real wages in order to draw inferences regarding the relative stickiness of prices and wages. Recent studies have adopted techniques intended to identify monetary shocks and examined the response of real wages and output or employment to such shocks. A finding that real wages are procyclical in response to a positive monetary policy shock, for example, is taken as evidence that prices are stickier than wages. In this paper, we show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Accordingly, examining the response of real wages is not enough to sort out the relative stickiness of prices and wages. We use two prominent DSGE models to help us address this issue. These models incorporate both sticky wages and prices but in different ways. The first model (Huang, Liu, and Phaneuf, American Economic Review, 2004) is relatively simple and is not intended for policy analysis. Its relative simplicity allows us to approach the issues both analytically and through simulations. The second model (Smets and Wouters, American Economic Review, 2007) is a relatively complex model of the U.S. economy with many frictions and intended to be useful for policy analysis. Because of its complexity, we must rely principally on simulation exercises. Using these models we offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, we cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock.
    Keywords: real wages, monetary policy, DSGE models
    JEL: E32 D52 E10
    Date: 2012–02–29
  13. By: Michael T. Belongia; Peter N. Ireland
    Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of shocks. Finally, the analysis characterizes the optimal monetary policy response to disturbances that originate in the financial sector.
    JEL: C43 E32 E41 E52
    Date: 2012–03
  14. By: Glocker, C.; Towbin, P.
    Abstract: Reserve requirements are a prominent policy instrument in many emerging countries. The present study investigates the circumstances under which reserve requirements are an appropriate policy tool for price or financial stability. We consider a small open economy model with sticky prices, financial frictions and a banking sector that is subject to legal reserve requirements and compute optimal interest rate and reserve requirement rules. Overall, our results indicate that reserve requirements can support the price stability objective only if financial frictions are important and lead to substantial improvements if there is a financial stability objective. Contrary to a conventional interest rate policy, reserve requirements become more effective when there is foreign currency debt.
    Keywords: Reserve Requirements, Monetary Policy, Financial Stability, Capital Flows, Business Cycle.
    JEL: E58 E52 F41 G18
    Date: 2012
  15. By: Helge Berger; Henning Weber
    Abstract: The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.
    Keywords: Central banks , Demand for money , Economic models , Interest rates , Monetary policy , Money ,
    Date: 2012–01–10
  16. By: Alessandro Flamini (Department of Economics, University of Pavia)
    Abstract: Real world monetary policy is complicated by long and variable lags in the transmission of the policy to the economy. Most of the policy models, however, abstracts from policy lags. This paper presents a model where transmission lags depend on the behaviour of a two-sector supply side of the economy and focuses on how lag length and variability affect optimal monetary policy. The paper shows that optimal monetary policy should respond more to the sector with the shortest transmission lag and that the presence of production links among sectors amplifies this response. Furthermore, the shorter or more variable the aggregate transmission lag, the more active the overall policy and the larger the response to the sector with the shortest transmission lag. Finally, the relative strength of the response to inflation and output gap depends on the intensity of the sectoral production links, and on the length of the transmission lags. Only with reasonable production links should the optimal policy respond more to in?ation than to the output gap in line with the empirical evidence.
    Keywords: Inflation targeting; monetary policy transmission mechanism; policy transmission lags; multiplicative uncertainty; Markov jump linear quadratic systems; optimal monetary policy.
    JEL: E52 E58 F41
    Date: 2012–02
  17. By: Cizkowicz, Piotr; Rzonca, Andrzej
    Abstract: Central banks seem not to account for the influence of interest rates close to zero on the natural interest rate after the bursting of the asset bubble which triggered financial crisis. We claim that this omission may have deleterious consequences. Should interest rates close to zero persistently decrease natural interest rates, that would mean fall in TFP growth and more limited central bank’s capacity to influence aggregate demand and price dynamics. We explain that interest rates close to zero may persistently reduce the natural interest rate because in economy requiring post-crisis restructuring they impede that process and facilitate forbearance lending, which crowds viable economic agents out of credit through a number of channels. To reduce these risks central bank could voluntarily set the lower bound for interest rates cuts at, say, 2%. The bound appropriate for a given economy should be a function of its growth and interest rates in the pre-crisis period. We argue that irrespective of central bank’s credibility such a change in the monetary policy conducting in economies requiring post-crisis restructuring would bring better outcomes than keeping there interest rates close to zero.
    Keywords: interest rates close to zero; monetary policy; new Keynesian analytical framework; restructuring; credit
    JEL: E58 E51 G34 E50
    Date: 2011–12
  18. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012–02
  19. By: Fujisaki, Seiya
    Abstract: We analyze relations between several types of interest rate control rules and equilibrium determinacy using a two-country model featuring preference and production parameters that may differ between countries, in which two kinds of goods are tradable. Such heterogeneity may violate the Taylor principle, which implies that aggressive monetary policy is desirable to attain determinate equilibrium. We evaluate the forms of interest rate control needed to attain macroeconomic stability in consideration of the heterogeneity.
    Keywords: heterogeneity; Taylor rule; open economy; equilibrium determinacy
    JEL: E52 F41
    Date: 2012–03–01
  20. By: Robert Dubois
    Abstract: Not since the Great Depression have monetary policy matters and institutions weighed so heavily in commercial, financial, and political arenas. Apart from the eurozone crisis and global monetary policy issues, for nearly two years all else has counted for little more than noise on a relative risk basis. In major developed economies, a hypermature secular decline in interest rates is pancaking against a hard, roughly zero lower-rate bound (i.e., barring imposition of rather extreme policies such as a tax on cash holdings, which could conceivably drive rates deeply negative). Relentlessly mounting aggregate debt loads are rendering monetary- and fiscal policy-impaired governments and segments of society insolvent and struggling to escape liquidity quicksands and stubbornly low or negative growth and employment trends. At the center of the current crisis is the European Monetary Union (EMU)-a monetary union lacking fiscal and political integration. Such partial integration limits policy alternatives relative to either full federal integration of member-states or no integration at all. As we have witnessed since spring 2008, this operationally constrained middle ground progressively magnifies economic divergence and political and social discord across member-states. Given the scale and scope of the eurozone crisis, policy and actions taken (or not taken) by the European Central Bank (ECB) meaningfully impact markets large and small, and ripple with force through every major monetary policy domain. History, for the moment, has rendered the ECB the world's most important monetary policy pivot point. Since November 2011, the ECB has taken on an arguably activist liquidity-provider role relative to private banks (and, in some important measure, indirectly to sovereigns) while maintaining its long-held post as rhetorical promoter of staunch fiscal discipline relative to sovereignty-encased "peripheral" states lacking full monetary and fiscal integration. In December 2011, the ECB made clear its intention to inject massive liquidity when faced with crises of scale in future. Already demonstratively disposed toward easing due to conditions on their respective domestic fronts, other major central banks have mobilized since the third quarter of 2011. The collective global central banking policy posture has thus become more homogenized, synchronized, and directionally clear than at any time since early 2009.
    Keywords: Eurozone; Monetary Policy; Fiscal Policy; European Central Bank; European Monetary Union; Debt Monetization; Euro; Basel; Sovereign Debt; Credit Default Swaps; Liquidity; Solvency; Deleveraging; LTRO
    JEL: E02 E31 E42 E44 E51 E52 E58 E61 E62 E63 F36 H63
    Date: 2012–03
  21. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa))
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential- Power Distributions, Laplace Distributions, DSGE Models, RBC Models.
    JEL: C1 E3
    Date: 2012–01
  22. By: Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We propose a model characterized by strategic interactions among an endogenous number of producers and search and matching frictions in the labor market. In line with U.S. data: (i) new firms account for a relatively small share of overall employment, but they create a relevant fraction of new jobs; (ii) firms’ entry is procyclical; (iii) price mark ups are countercyclical, while aggregate profits are procyclical. In response to a technology shock the labor share decreases on impact and overshoots its long run level. Also the propagation on labor market variables is stronger than in the standard search model. We argue that the countercyclicality of the price mark up is the key mechanism for our results.
    Keywords: Endogenous Market Structures, Job Creation, Firms’ Entry, Search and Matching Frictions
    JEL: E24 E32 L11
    Date: 2011–11
  23. By: Alice Albonico (Department of Economics and Quantitative Methods, University of Pavia); Sarantis Kalyvitis (Department of International and European Economic Studies, Athens University of Economics and Business); Evi Pappa (Departament de Economia y d’Historia Economica, Universitat Autonoma de Barcelona and CEPR)
    Abstract: We develop a stochastic general equilibrium model in which maintenance endogenously affects the capital depreciation rate. The model performs well in generating maintenance series that match closely existing survey-based measures for Canada. Maintenance is procyclical and comoves almost always with output. Investmentspecific shocks are the only disturbances that induce a negative correlation between output and maintenance. This feature is crucial for the identification of such shocks in the short run. We use Bayesian estimation to obtain the time profile of equipment capital depreciation in Canadian manufacturing. The depreciation rate has been quite volatile and procyclical over the last 50 years.
    Keywords: real business cycle, technology shocks, endogenous capital depreciation, maintenance
    JEL: E22 E32 E37
    Date: 2011–06
  24. By: Rendahl, P.
    Abstract: This paper argues that the effectiveness of fiscal policy may increase markedly during periods of low nominal interest rates and high, persistent, unemployment. An increase in government spending boosts economic activity and reduces the unemployment rate both in the present and in the future. As a less disconcerting future spurs a rise in private consumption, unemployment falls even further and triggers an additional rise in private demand, and so on. In a stylized model, I show that the marginal impact of government spending on output is equal to the reciprocal of the elasticity of intertemporal substitution. In a more realistic framework, the effect is somewhat attenuated and displays significant nonlinearities with respect to the depth of the crisis as well as the size of the stimulus package. But in a severe recession with an unemployment rate of eight percent or above, the fiscal multiplier is equal to 1.5.
    Keywords: Fiscal multiplier; Fiscal policy; Liquidity trap; Unemployment inertia
    JEL: E24 E60 E62 H12 H30 J23 J64
    Date: 2012–02–28
  25. By: Hanan Morsy; Florence Jaumotte
    Abstract: While inflation differentials in a monetary union can be benign, reflecting a catch-up process, or an adjustment mechanism to asymmetric shocks or different business cycles, they may also indicate distortions related to inefficiencies in domestic product and labor markets that amplify or make more persistent the impact of shocks on inflation. The paper examines the determinants of inflation differentials in the euro area, with emphasis on the role of country specific labor and product market institutions. The analysis uses a traditional backward-looking Phillips curve equation and augments it to explore the role of collective bargaining systems, union density, employment protection, and product market regulation. The model is estimated over a panel dataset of 10 euro area countries over the period 1983-2007. Results show that high employment protection, intermediate coordination of collective bargaining, and high union density increase the persistence of inflation. Oil and raw materials price shocks are also more likely to be accommodated by wage increases when the degree of coordination in collective bargaining is intermediate. These results are robust to different estimation methods, model specifications, and outliers. The paper suggests that reforming labor market institutions may improve the functioning of the euro area by reducing the risk of persistent inflation differentials.
    Date: 2012–01–31
  26. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area; Money; DSGE forecasting
    JEL: E31 E51 E58
    Date: 2012–02–01
  27. By: Jonathan Benchimol (Economics Department - ESSEC Business School); André Fourçans (Economics Department - ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We …find that money has a rather signi…ficant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we …find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area ; Money ; DSGE forecasting
    Date: 2012–02–01
  28. By: Marcio Janot; Daniel El-Jaick de Souza Mota
    Abstract: In inflation targeting regimes, the transparent communication of monetary policy is an important instrument to reduce uncertainties and coordinate market expectations. This paper examines how the financial market reacts to the Central Bank of Brazil communication and shows that there is significant reduction in the volatility of future interest rates after the release of the minutes of the Monetary Policy Committee (COPOM) and the Inflation Report. On the other hand, these forms of communication do not significantly affect the slope of the yield curve, the exchange rate and the stock market index (Ibovespa).
    Date: 2012–01
  29. By: John W. Keating (Department of Economics, The University of Kansas); Victor J. Valcarcel (Department of Economics, Texas Tech University)
    Abstract: We decompose a 219 year sample of U.S. real output data into permanent and transitory shocks. We find reductions in volatility of output growth and inflation, starting in the mid 1980s, consistent with the “Great Moderation” noted by many others. More importantly, we find periods of even more substantial reduction in volatilities. Output growth and inflation volatilities fell by 60% and 76%, respectively, from shortly after World War II until the mid 1960s. We label this period the Postwar Moderation. Also, the largest reduction in inflation volatility occurred during the Classical Gold Standard period. Results from our empirical model suggest that aggregate supply shocks account for most of the changes in output growth volatility while aggregate demand shocks account for most of the changes in inflation volatility. The timing of the Postwar Moderation, which began almost immediately after passage of the Employment Act of 1946, suggests that policy played a crucial role in this period’s impressive decline in volatilities.
    Keywords: The Great Moderation, stochastic volatility, structural VAR
    JEL: E30 E31 E65
    Date: 2012–02
  30. By: Rangan Gupta (Department of Economics, University of Pretoria); Roula Inglesi-Lotz (Department of Economics, University of Pretoria)
    Abstract: In this paper, we examine the effects of money supply, portfolio, aggregate spending, and aggregate supply shocks on real US stock prices in a structural vector autoregression framework using quarterly data for the period of 1947:1-2011:3. Overall, the empirical results indicate that each macro shock has important effects on real stock prices, with aggregate supply shocks playing an important role, besides portfolio shocks. The real stock price impulse responses to the various macro shocks conform to the standard present-value equity valuation model, and hence, our identification based on long-run restrictions can be viewed as appropriate. An historical decomposition indicates that the decline in the real stock prices during the "Great Recession" is mainly due to a slowdown in US productivity, after investors had decided to carry out exogenous portfolio shifts out of stocks. In general, we conclude that during the "Great Recession" the declining stock prices resulted due to a series of unfavourable shocks emanating from different sectors of the US economy.
    Keywords: Real Stock Prices, Structural Vector Autoregression, Great Recession
    JEL: C32 E44 G12
    Date: 2012–02
  31. By: Ali Alichi; Sang Chul Ryoo; Cheol Hong
    Abstract: Korea has been active in implementing targeted macroprudential policies to address specific financial stability concerns. In this paper, we develop a conceptual model that could serve as a building block for the broader framework of macroprudential policy making in Korea. It is assumed that the policy maker imposes taxes on key aggregate financial ratios in the banking system to mitigate excessive leverage over the economic cycle. The model is calibrated for Korea. The results illustrate how countercyclical tools, such as simple taxes on key financial ratios, could be incorporated to enrich the broader macroprudential policy framework in the Korean context.
    Keywords: Banking systems , Debt , Economic models , Monetary policy ,
    Date: 2012–01–24
  32. By: John W. Keating (Department of Economics, The University of Kansas); Victor J. Valcarcel (Department of Economics, Texas Tech University)
    Abstract: Changes in volatility of output growth and inflation are examined for eight countries with at least 140 years of uninterrupted data. Time-varying parameter vector autoregressions are used to estimate standard deviations of each variable. Both volatilities rise quickly with World War I and its aftermath, stay relatively high until the end of World War II, and then drop rapidly until the mid- to late 1960s. This Postwar Moderation typically yields the largest decline in output growth volatilities. For all countries, volatilities of both output growth and inflation fall more during this Postwar Moderation than during the Great Moderation, and often the difference is huge. Both volatilities typically reach their lowest levels following the Great Moderation. The Great Moderation often counteracts an increase in volatility that took place in the 1970s, particularly for inflation. In nearly all the countries in our sample, the recent financial crisis has eliminated the stability gains associated with the Great Moderation, and sometimes it has even eroded gains made during the Postwar Moderation. Periods in which a fixed exchange rate system was widespread are associated with relatively low volatilities for both variables. Based on our structural VAR identification, permanent shocks to output account for nearly all of the fluctuations in the volatility of output growth while shocks that have only a temporary effect on output explain most of the fluctuations in inflation volatility. These last two findings suggest that changes in the volatility for each variable are primarily driven by a fundamentally different type of disturbance.
    Keywords: The Great Moderation, The Postwar Moderation, stochastic volatility, permanent-transitory shock decompositions, Markov Chain Monte Carlo, structural vector autoregressions.
    JEL: E30 E31 E65
    Date: 2012–02
  33. By: Giavazzi, Francesco (Universita Bocconi, MIT, CEPR & NBER); McMahon, Michael (University of Warwick, CEP (LSE) & CAMA (ANU))
    Abstract: This paper provides new evidence on the effects of scal policy by studying, using household-level data, how households respond to shifts in government spending. Our identi cation 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 e ects 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. Key words: Fiscal Policy ; PSID ; Household Consumption ; Labor Supply JEL classification: E62 ; E21 ; E24 ; D12
    Date: 2012
  34. By: Engin Kara
    Abstract: Bils, Klenow and Malin (forthcoming) (BKM) constructed a measure of reset price inflation (i.e. the rate of change of all "desired" prices) for the US. They argue that the existing pricing models cannot explain the observed reset inflation and aggregate inflation. In this paper, I show that a model that can account for the heterogeneity in contract lengths we observe in the data matches the data on both series. I also show that the BKM measure of reset inflation is a flawed measure of the concept they wish to measure and can be quite misleading.
    Keywords: DSGE models, reset inflation, GE, Calvo, price-level targeting.
    JEL: E32 E52 E58
    Date: 2011–11
  35. By: Nicolás De Roux; Marc Hofstetter
    Abstract: Two recent papers (Gonçalves and Carvalho, 2009; and Brito, 2010) hold contradictory views regarding the role of inflation targeting during periods of disinflation. The first paper claims that inflation targeting reduces sacrifice ratios—i.e., the ratio of output losses to the change in trend inflation—during disinflations; the second paper refutes this result. We show here that inflation targeting only matters if disinflations are slow. The credibility gains of a fast disinflation make inflation targeting irrelevant for reducing the output-inflation trade-off.
    Date: 2012–02–07
  36. By: Luís Alexandre Barbosa Guimarães (Faculdade de Economia, Universidade do Porto)
    Abstract: In this paper I comment on Auray, Eyquem, and Pontineau (2012). I show that their introduction of sticky-prices into Ghironi \& Melitz (2005) framework is incorrect and generates a bias in simulation results. Additionally, I find that, by introducing sticky-prices into Ghironi \& Melitz (2005) framework in a correct way, the model is able to account for the empirical findings of Auray, Eyquem, and Pontineau (2012). Finally, I also find that if central banks target a data-consistent CPI inflation, results improve quantitatively.
    Keywords: Pricing-to-market; Local currency pricing; Extensive Margin; Monetary Union; Monetary Policy
    JEL: E32 E52 F41
    Date: 2012–03
  37. By: John W. Keating (Department of Economics, The University of Kansas); Victor J. Valcarcel (Department of Economics, Texas Tech University)
    Abstract: Annual changes in volatility of U.S. real output growth and inflation are documented in data from 1870 to 2009 using a time varying parameter VAR model. Both volatilities rise quickly with World War I and its aftermath, stay relatively high until the end of World War II and drop rapidly until the mid to late-1960s. This Postwar Moderation represents the largest decline in volatilities in our sample, much greater than the Great Moderation that began in the 1980s. Fluctuations in output growth volatility are primarily associated with permanent shocks to output while fluctuations in inflation volatility are primarily accounted for by temporary shocks to output. Conditioning on temporary shocks, inflation and output growth are positively correlated. This finding and the ensuing impulse responses are consistent with an aggregate demand interpretation for the temporary shocks. Our model suggests aggregate demand played a key role in the changes in inflation volatility. Conversely, the two variables are negatively correlated when conditioning on permanent shocks, suggesting that these disturbances are associated primarily with aggregate supply. Our results suggest that aggregate supply played an important role in output volatility fluctuations. Most of the impulse responses support an aggregate supply interpretation of permanent shocks. However, for the pre-World War I period, we find that at longer horizons a permanent increase in output is generally associated with an increase in the price level that is frequently statistically significant. This evidence suggests aggregate demand may have had a long-run positive effect on output during the pre-World War I period.
    Keywords: The Great Moderation, stochastic volatility, permanent-transitory decompositions, Markov Chain Monte Carlo, structural vector autoregressions.
    JEL: E30 E31 E65
    Date: 2012–02
  38. By: Pau Rabanal; Juan F. Rubio-Ramirez
    Abstract: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good model, as described in Heathcote and Perri (2002), can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. Finally, we show that the introduction of adjustment costs in production and in portfolio holdings allows us to reconcile theory and this feature of the data.
    Keywords: Business cycles , Economic models , Real effective exchange rates ,
    Date: 2012–01–17
  39. By: Juan Carlos Cuestas (University of Sheffield); Luis A. Gil-Alana (University of Navarra); Karl Taylor (University of Sheffield)
    Abstract: In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
    Keywords: Central and Eastern Europe , euro adoption, inflation convergence, non-linearities
    JEL: E31 E32 C22
    Date: 2012–01
  40. By: Catherine Mathieu (Observatoire Francais des Conjonctures Economiques); Henri Sterdyniak (Observatoire Francais des Conjonctures Economiques)
    Abstract: The public finances crisis has brought binding fiscal rules proposals back to the forefront. The paper analyses their justifications and specifications, either in a classical or in a Keynesian framework. In the recent period there is no evidence that public deficits were caused by fiscal indiscipline and induced too high interest rates; there is no evidence that economically relevant rules can be designed. The paper provides in analysis of fiscal rules implemented either at country level (like the UK golden rule), or at the EU level (the Stability and Growth Pact). The paper shows that fiscal rules did not work before and during the crisis. The paper discusses the EU project, the New Fiscal Pact, which risks to paralyse fiscal policies and to prevent economic stabilisation. The priority today is not to strengthen public finance discipline but to question economic developments which make public deficits necessary to support output. Keywords :fiscal policy, fiscal rules Classification-JEL : E62
    Date: 2012–02
  41. By: Slim, Sadri
    Abstract: The purpose of this research is to study the presence of illegal economy and money laundering processes from a macroeconomic perspective to analyze their economic effects and propose a conceptual framework that identifies its impact in terms of the mechanisms identified. Thus, considering the FATF typology, we analyze the real and monetary effects of each mechanism outlined, differentiating the effects on closed economy generated by elementary and washing circuits of organized crime, from the effects of money laundering in open economy relevant mechanisms of transnational crime.
    Keywords: Money laundering; illegal economy;
    JEL: O17 E26 K42 E4
    Date: 2011
  42. By: Sarah Sanya; Wayne Mitchell; Angelique Kantengwa
    Abstract: This paper analyses the prudential liquidity management framework, in particular the quantitative indicators employed by the central bank of Rwanda in response to the domestic liquidity crisis in 2008/09. It emphasises that the quantitative methods used in the monitoring and assessment of systemic liquidity risk are inadequate because they did not signal the liquidity crises ex-post. There are quick gains to be made from augumenting the liquidity risk indicators with more dynamic liquidity stress tests so that compliance will be achieved through lengthening the maturities of both assets and liabilities on the balance sheet as opposed to simply holding more liquid assets. The paper recommends that policy emphasis shift toward reforms that strengthen systemic liquidity risk assesment, monetary policy implementation as well as improve the efficiency of Rwanda’s financial system.
    Keywords: Bank supervision , Banking sector , Developing countries , Liquidity management , Monetary policy ,
    Date: 2012–01–20
  43. By: Pïerre Cahuc; Stephane Carcillo
    Abstract: This paper analyzes the relation between public wage bills and public deficits in the OECD countries from 1995 to 2009. The paper shows that fiscal drift episodes, characterized by simultaneous increases in the GDP shares of public wage bills and budget deficits, are more frequent during booms and election years, but not during recessions, except for the 2009 exceptionally strong recession. The emergence of fiscal drift episodes during booms and election years is less frequent in countries with more transparent government, more freedom of the press, as well as in countries with presidential regimes and less union coverage. Inversely, fiscal tightening episodes, characterized by simultaneous decreases in the GDP shares of public wage bills and budget deficits, occur less often during booms than during recessions. The emergence of fiscal tightening episodes during recessions and election years is less frequent in countries with more union coverage.
    JEL: E62 H76 J45
    Date: 2012–03
  44. By: Bertrand Gruss; Jose L. Torres
    Abstract: In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.
    Date: 2012–01–31
  45. By: Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
    Abstract: This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.
    Keywords: Debt restructuring , Economic models , Fiscal policy , Risk premium , Sovereign debt ,
    Date: 2012–01–25
  46. By: Andrade, P.; Zachariadis, M.
    Abstract: A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. We find that global shocks have more persistent effects on prices as compared to local ones e.g. prices respond faster to local macro shocks than to global micro ones, implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. Global macro shocks have the most persistent effect on prices, with the majority of goods and locations sharing a single source of trend over time stemming from these shocks. Finally, both local macro and local micro shocks are associated with relatively fast price convergence.
    Keywords: global shocks, local shocks, micro shocks, macro shocks, price adjustment, micro-macro gap, price-setting models, micro prices.
    JEL: E31 F4 C23
    Date: 2012
  47. By: Gerhard Fenz; Lukas Reiss; Martin Schneider
    Abstract: In this paper we present an analysis of the impact of the great recession of the years 2008 and 2009 on the Austrian economy. For this purpose, we utilize the new estimated DSGE model of the OeNB for the Austrian economy within the Euro area. This model is a small open-economy version of Smets & Wouters (2003), where the domestic economy is linked to a highly stylized representation of the rest of the Euro area via trade and financial flows. The model identifies foreign demand and confidence shocks as the main transmission channels. Moreover the risk premium shock contributed significantly to the downturn of the Austrian economy. In contrast price shocks (price markup and raw material shocks) were supportive throughout the crisis. The strong resilience of the Austrian labour market during the crisis and the subsequent upswing is reected in a series of negative technology shocks. JEL classification:
    Date: 2012–01–30
  48. By: Hiroshi Morita
    Abstract: This paper investigates the effect of an anticipated fiscal policy on consumption in Japan. I identify an anticipated increment in public investment by using the excess stock returns on the construction industry and by applying the sign restriction VAR. The result shows that GDP and consumption respond to a public investment shock positively. Further, I demonstrate that the empirical facts are consistent with the New Keynesian model that has a high elasticity of labor supply and a large share of Non-Ricardians.
    Keywords: Fiscal Policy, Fiscal Foresight, Sign Restriction VAR
    JEL: E62 H30
    Date: 2012–01
  49. By: Selim Elekdag; Harun Alp; Subir Lall
    Abstract: Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM’s monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.
    Date: 2012–01–30
  50. By: Joshua C C Chan; Gary Koop; Simon M Potter
    Abstract: This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.
    Date: 2012–02
  51. By: Sebastian Dyrda; Greg Kaplan; José-Víctor Ríos-Rull
    Abstract: We provide new evidence on the the cyclical behavior of household size in the United States from 1979 to 2010. During economic downturns, people live in larger households. This is mostly, but not entirely, driven by young people moving into or delaying departure from the parental home. We assess the importance of these cyclical movements for aggregate labor supply by building a model of endogenous household formation within a real business cycle structure. We use the model to measure how much more volatile are hours due to two mechanisms: (i) the presence of a large group of mostly young individuals with non-traditional living arrangements; and (ii) the possibility for these individuals to change their living situation in response to aggregate conditions. Our exercise assumes that older people living in stable households have a Frisch elasticity that is consistent with the micro evidence that is based on such people. The inclusion of people living in unstable households yields an implied aggregate, or macro, Frisch elasticity that is around 45% larger than the assumed micro elasticity.
    JEL: E32 J10 J22
    Date: 2012–03
  52. By: Chollete, Loran (UiS); Ng, Cathy (Ryerson University)
    Abstract: .
    Keywords: Asymmetric Dependence; Copula; Extreme Event; Money Neutrality; Phillips Curve; Systemic Downturn
    JEL: C14 E20 E30 E40
    Date: 2012–01–12
  53. By: Peter Boone (Peterson Institute for International Economics); Simon Johnson (Peterson Institute for International Economics)
    Abstract: Successive plans to restore confidence in the euro area have failed. A combination of misdiagnosis, lack of political will, and dysfunctional politics across 17 nations have all contributed to the failure so far to stem Europe's growing crisis. Proposals currently on the table also seem likely to fail. Boone and Johnson say the euro area faces two major problems: First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession, thus increasing the financing needs of troubled nations well into the future. Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the European Central Bank, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.
    Date: 2012–01
  54. By: Alice Albonico (Department of Economics, University of Pavia); Sarantis Kalyvitis (Department of International and European Economic Studies, Athens University of Economics and Business); Evi Pappa (European University Institute, Department of Economics)
    Abstract: Conventional RBC models have been heavily criticized for their inability to generate the estimated negative correlations of hours and productivity in response to technology shocks ('productivity-hours puzzle'). In this paper we show that by just enhancing the standard frame- work with investment adjustment costs can resolve the 'productivity-hours puzzle'.
    Keywords: technology shocks; productivity-hours puzzle; investment adjustment costs; wealth effect.
    JEL: E22 E32
    Date: 2012–02
  55. By: Obert Nyawata
    Abstract: This paper discusses the challenging question of whether central banks should use treasury bills or central bank bills for draining excess liquidity in the banking system. While recognizing that there are practical reasons for using central bank bills, the paper argues that treasury bills are the first best option especially because positive externalities for the financial sector and the rest of the economy. However, the main considerations in the choice should be: (i) operational independence for the central bank; (ii) market development; and (iii) the strengthening of the transmission of monetary policy impulses.
    Date: 2012–01–31
  56. By: Charles Amo Yartey
    Abstract: This paper uses the balance sheet approach to analyze macroeconomic vulnerabilities in Barbados between 2006 and 2009. It discusses the financial position of the economy and its main sectors and the sectors’ exposure to changes in exchange rates. The main finding of the analysis is that the balance sheet of the aggregate economy has been weakened by the recent deterioration in the balance sheet of the nonfinancial public sector. Macroeconomic vulnerabilities have increased in Barbados since 2006 due to the high public debt and the deterioration in the net financial position with nonresidents. The private sector, however, maintained a healthy position and seems resilient to shocks. The paper also finds the balance sheet of the nonfinancial public sector has deteriorated significantly reflecting weak fiscal performance. While the central government is highly vulnerable to exchange rate shock, debt rollover risks are likely to be limited since most of external liabilities are long term and most domestic liabilities are held by the National Insurance System.
    Keywords: Budget deficits , Capital inflows , Corporate sector , Economic growth , External sector , Financial sector , Fiscal policy , Private sector , Public sector , Tourism ,
    Date: 2012–01–26
  57. By: Ashoka Mody; Franziska Ohnsorge; Damiano Sandri
    Abstract: Heightened uncertainty since the onset of the Great Recession has materially increased saving rates, contributing to lower consumption and GDP growth. Consistent with a model of precautionary savings in the face of uncertainty, we find for a panel of advanced economies that greater labor income uncertainty is significantly associated with higher household savings. These results are robust to controlling for other determinants of saving rates, including wealth-to-income ratios, the government fiscal balance, demographics, credit conditions, and global growth and financial stress. Our estimates imply that at least two-fifths of the sharp increase in household saving rates between 2007 and 2009 can be attributed to the precautionary savings motive.
    Date: 2012–02–06
  58. By: Bec, F.; Bouabdallah, O.; Ferrara, L.
    Abstract: This paper proposes a two-regime Bounce-Back Function augmented Self-Exciting Threshold AutoRegression (SETAR) which allows for various shapes of recoveries from the recession regime. It relies on the bounce-back effects first analyzed in a Markov-Switching setup by Kim, Morley and Piger [2005] and recently extended by Bec, Bouabdallah and Ferrara [2011a]. This approach is then applied to post-1973 quarterly growth rates of French, German, Italian, Spanish and Euro area real GDPs. Both the linear autoregression and the standard SETAR without bounce-back effect null hypotheses are strongly rejected against the Bounce-Back augmented SETAR alternative in all cases but Italy. The relevance of our proposed model is further assessed by the comparison of its short-term forecasting performances with the ones obtained from a linear autoregression and a standard SETAR. It turns out that the bounce-back models one-step ahead forecasts generally outperform the other ones, and particularly so during the last recovery period in 2009Q3-2010Q4.
    Keywords: Threshold autoregression, bounce-back effects, asymmetric business cycles.
    JEL: E32 C22
    Date: 2012
  59. By: Tito Nícias Teixeira da Silva Filho
    Abstract: Core inflation is under attack. Empirically, experts have become increasingly disappointed with its actual performance. Theoretically, while some claim that it is a key inflation predictor others argue that, by construction, that cannot be one of its main properties, at least in the short run. Even if true, core inflation could still be useful if it provides good directional inflation forecasts. The evidence presented here using U.S., Canadian and Brazilian data shows that this does not seem to be the case. Directional forecasts are often no better than a coin toss, especially from the level model. The gap model’s forecasts are wrong, on average, at least 20% of the time. More crucially, they are usually no better than a simple moving average of headline inflation.
    Date: 2012–01
  60. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: Foreign banks pulled significant funding from their U.S. branches during the Great Recession. We estimate that the average-sized branch experienced a 12 percent net internal fund “withdrawal,” with the fund transfer disproportionately bigger for larger branches. This internal shock to the balance sheets of U.S. branches of foreign banks had sizable effects on their lending. On average, for each dollar of funds transferred internally to the parent, branches decreased lending supply by about 40 to 50 cents. However, the extent of the lending effects was very different across branches, depending on their pre-crisis modes of operation in the United States.
    JEL: E44 F36 G32
    Date: 2012–02
  61. By: Cette, G.; De Jong, M.
    Abstract: It is generally assumed that the two Fisher components of the interest rate -the real interest and the inflation- evolve independently over time, considering that they are driven by unrelated economical events. However, the market pricing of those components deduced from newly-available bond data does not provide conclusive evidence. While studying the price behaviour of inflation-linked (real) bonds beside nominal bonds in the major fixed-income markets, we observe that the real bond yields and the yield differentials, the breakeven inflation rates, have the propensity to be positively correlated between each other across the various countries, yet are pushed into a negative correlation relationship due to market-related price distortions. As long as those distortions are local, the net result is near-zero correlation within countries; when they become global, as in the heat of the current crisis, the correlations turn negative worldwide. In this paper insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.
    Keywords: inflation-linked bonds, breakeven inflation, Fisher hypothesis.
    JEL: E43 G15
    Date: 2012
  62. By: Chiara Forlati (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: Mortgages characterized by negative or low early amortization schedules amplify the macroeconomic effects of a housing risk shock. We analyze the role of mortgage amortization in a two-sector DSGE model with housing risk and endogenous default. Mortgage loan contracts extend to two periods and have adjustable rates. The fraction of principal to be repaid in the first period can vary. As the fraction of principal to be paid in the first period falls, steady-state mortgages and leverage increase and the impact of a housing risk shock on consumption and output is amplified. Borrowers prefer negative amortization. If free to choose the amortization schedule, borrowers would repay most of the principal in the last period of the contract. Low early repayments of principal allow borrowers to hold on to their housing stock and postpone default to the second period having incurred small sunk costs.
    Keywords: Housing, Mortgage default, Mortgage risk
    JEL: E32 E44 G01 R31
    Date: 2012–02
  63. By: Frédérique Bec; Othman Bouabdallah; Laurent Ferrara (THEMA, Universite de Cergy-Pontoise; Banque de France, DGEI-DCPM; Banque de france, DGEI-DERIE-SEMSI)
    Abstract: This paper proposes a two-regime Bounce-Back Function augmented Self-Exciting Threshold AutoRegression (SETAR) which allows for various shapes of recoveries from the recession regime. It relies on the bounce-back effects first analyzed in a Markov-Switching setup by Kim, Morley and Piger [2005] and recently extended by Bec, Bouabdallah and Ferrara [2011a]. This approach is then applied to post-1973 quarterly growth rates of French, German, Italian, Spanish and Euro area real GDPs. Both the linear autoregression and the standard SETAR without bounce-back effect null hypotheses are strongly rejected against the Bounce-Back augmented SETAR alternative in all cases but Italy. The relevance of our proposed model is further assessed by the comparison of its short-term forecasting performances with the ones obtained from a linear autoregression and a standard SETAR. It turns out that the bounce-back models one-step ahead forecasts generally outperform the other ones, and particularly so during the last recovery period in 2009Q3-2010Q4.
    Keywords: Threshold autoregression, bounce-back effects, asymmetric business cycles. JEL classification: E32, C22.
    Date: 2011
  64. By: Mark Weisbrot; Juan Antonio Montecino
    Abstract: This week the Greek government reached agreement with the European authorities and the IMF for 130 billion euros in lending, as part of a new adjustment package to replace the current IMF program that began in May of 2010. Although the agreement should allow the government to avoid default in March, there are grave doubts as to whether the agreed upon program will lead the country to a point where it returns to growth, has a sustainable debt burden, and can borrow from private markets. The most important problem with the commitments that Greece has made in the past two years is that its fiscal policy is pro-cyclical – that is, the government has been, and is committed to, tightening its budget while the economy is in recession.
    Keywords: greece, euro, europe, devaluation, procyclical, countercyclical, imf,
    JEL: E E6 E5 E52 F F3 F34 F1 F14
    Date: 2012–02
  65. By: Michael D. Bordo; Christopher M. Meissner
    Abstract: The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.
    JEL: E51 N1
    Date: 2012–03
  66. By: Ulrich Volz (Asian Development Bank Institute (ADBI))
    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 breakup 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, regional cooperation, Monetary cooperation
    JEL: E42 F33 F36 G01
    Date: 2012–02
  67. By: Charles Wyplosz
    Abstract: Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, or to cut spending. Solving the fiscal discipline problem requires internalizing this externality. This calls for adequate institutions or for rules, or both. This paper reviews the various types of solutions that have been discussed in the literature and surveys a number of experiments. With the European debt crisis in mind, the paper pays particular attention to the common pool problem that emerges in federal states. The main conclusions are the following. First, rules are unlikely to exist unless they come with supporting institutions. Second, fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help. Third, because institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.
    JEL: E61 E62 H62 H77
    Date: 2012–03
  68. By: Baskaran, Thushyanthan
    Abstract: A problematic feature of the existing empirical literature on the relationship between revenue decentralization (RD) and inflation is the use of inaccurate measures for RD. Using a newly constructed measure for RD that accounts for over-time changes in sub-national tax autonomy, this paper finds that RD leads to lower inflation.
    Keywords: Fiscal decentralization; Inflation; Sub-national tax autonomy
    JEL: E31 H29 H71
    Date: 2011
  69. By: Clements, Michael P (University of Warwick)
    Abstract: We consider whether survey respondents’probability distributions, reported as histograms, provide reliable and coherent point predictions, when viewed through the lens of a Bayesian learning model, and whether they are well calibrated more generally. We argue that a role remains for eliciting directly-reported point predictions in surveys of professional forecasters. Key words: probability distribution forecasts ; point forecasts ; Bayesian learning JEL classification: C53
    Date: 2012
  70. By: Hans J. Blommestein; Anja Hubig
    Abstract: This paper examines the analytical underpinnings of the standard micro portfolio approach to public debt management (PDM) that aims at minimising longer-term cash-flow based borrowing costs at an acceptable level of risk. The study concludes that two technical key assumptions need to hold for the standard micro portfolio approach to yield optimal (i.e. cost-minimising) results. We argue that these assumptions do not hold in the current borrowing environment characterized by fiscal dominance with complex links between PDM and monetary policy (MP). By using the principles of portfolio theory we demonstrate that in this borrowing environment, cost-risk optimality requires the use of a broader cost concept than employed in the standard micro portfolio approach. This new concept (referred to as effective borrowing costs) incorporates not only the cash flows of the debt portfolio itself, but also those related to primary borrowing requirements. The resulting broader cost measure includes therefore the interactions with the budget. Finally, the paper demonstrates that the standard cost-risk framework of the micro portfolio approach is nested within this new, broader cost concept.
    Keywords: public debt management, fiscal policy, monetary policy, sovereign risk, central banks, sovereign debt, government borrowing
    JEL: E52 E58 E62 H63
    Date: 2012–02–20
  71. By: Donatella Baiardi (Department of Economics and Quantitative Methods, University of Pavia); Carluccio Bianchi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: This paper aims to construct a high-frequency coincident indicator of economic activity for Lombardy and for the provinces of Milan and Pavia, by using the dynamic factor model approach introduced by Stock e Watson (1998a e 1998b). The principal component analysis is first used to summarize the information contained in a large dataset in a limited number of common factors capable of capturing the main features of local business fluctuations. The EM (Expectation Maximization) algorithm then allows to compute the desired territorial indicators by taking into account the official annual data on regional GDP or provincial valueadded growth.
    Keywords: Coincident Economic Activity Indicators, Italian Regions, Diffusion Indexes
    JEL: E32 C32 C82
    Date: 2012–01
  72. By: Antipin, Jan-Erik (National Institute of Economic Research); Boumediene, Farid Jimmy (Ministry of Finance); Österholm, Pär (Sveriges Riksbank)
    Abstract: This paper assesses the usefulness of constant gain least squares when forecasting inflation. An out-of-sample forecast exercise is conducted, in which univariate autoregressive models for inflation in Australia, Swe-den, the United Kingdom and the United States are used. The results suggest that it is possible to improve the forecast accuracy by employing constant gain least squares instead of ordinary least squares. In particular, when using a gain of 0.05, constant gain least squares generally outper-forms the corresponding autoregressive model estimated with ordinary least squares. In fact, at longer forecast horizons, the root mean square forecast error is reliably lowered for all four countries and for all lag lengths considered in the study.
    Keywords: Out-of-sample forecasts; Inflation
    JEL: E31 E37
    Date: 2012–02–01
  73. By: Mathias Trabandt; Harald Uhlig
    Abstract: We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt-Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
    JEL: E0 E13 E2 E3 E62 H0 H2 H3 H6
    Date: 2012–02
  74. By: Dean Baker
    Abstract: There is a growing chorus of policy analysts and pundits telling the country that we could have millions more jobs in manufacturing, if only we had qualified workers. This claim has the interesting feature that it places responsibility for the lack of jobs on workers, not on the people who get paid to manage the economy (e.g. the Fed, Congress, the White House). This issue brief looks at data that contradicts the suggestion that so many people are out of work because they lack skills.
    Keywords: manufacturing, employment, skills, education
    JEL: E E2 E24 L6 J J2 J21 J24 J3 J31
    Date: 2012–02
  75. By: Fricke, Christoph
    Abstract: This paper shows that order flow determines future bond excess returns. This effect cannot be captured by macroeconomic or forward rate information. To understand how these variables influence future bond excess returns, we decompose excess returns into expected and unexpected excess returns. Expected returns crucially depend on the available information set which is spanned by order flow, forward rates and macroeconomic variables. Thus, the predictability of bond excess returns stems from the strong linkage of expected excess returns to available economic information and order flow. The analysis of unexpected excess returns reveals contemporaneous order flow and changes of the economic environment as main drivers.
    JEL: E43 E44 E47 G14
    Date: 2012–02
  76. By: Christina D. Romer; David H. Romer
    Abstract: This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.
    JEL: E62 H24 H31 N42
    Date: 2012–02
  77. By: Cette, G.; Chouard, V.; Verdugo, G.
    Abstract: This study investigates the impact of minimum wage (SMIC) increases on the average wage in France. We use two series of average wage: the average hourly blue-collar wage rate (SHBO) and the average wage per capita (SMPT). We combine these series with aggregate data for the overall economy over four decades from 1970 to 2009, going from the SMIC first implementation (in 1970) to the change in the annual calendar of mandatory increases (in 2009) from the 1st of July to the 1st of January by the law of the 3rd December 2008. We provide three original contributions with respect to the existing literature. First, our study is based on data from a much longer period of time which gives us more information. Second, the models we estimate allow for a very gradual impact of the minimum wage on the average wage, while previous studies often assumed only an immediate impact. Third, we differentiate the impact of minimum wage increases on the average wage by distinguishing between the effects of each of the three sources of increase. Our results confirm the advantages of this approach. Because of the discretionary increases of the minimum wage from the government (the so-called “coup de pouces”), the minimum wage increased more rapidly than the average wage over the period 1970-2009. Our estimates suggest that the impact on the average wage of minimum wage increases is strong. This impact is larger than in previous studies because our models take into account the existence of dynamic diffusion effects. Finally, minimum wage increases related to the legal indexation to half of the increase in the purchasing power of the SHBO have a large effect on the SHBO itself. This result suggests that a feedback effect between the minimum wage and the SHBO is possible and could trigger the dynamics between these series. As a consequence of the legal system of revaluation of the minimum wage and of the impact of these increases on the average wage, France is probably one of the industrialized countries where competitiveness is the most threatened by inflation volatility.
    Keywords: Minimum Wage, Average Wage, France.
    JEL: E24 J31 J58
    Date: 2012
  78. By: Catherine Mathieu (Observatoire Francais des Conjonctures Economiques); Henri Sterdyniak (Observatoire Francais des Conjonctures Economiques)
    Abstract: En raison de la crise des dettes publiques, les projets visant à instaurer des règles budgétaires sont revenus au premier plan. Le document analyse leurs justifications et les spécifications proposées, dans un cadre néo-classique, puis dans un cadre keynésien. Il n'y a aucune preuve que, au cours de la dernière période, les déficits publics ont été causés par de l’indiscipline fiscale et induit des taux d'intérêt trop élevés. Aucune des règles proposées n’est économiquement satisfaisante, c’est-à-dire capable d’indiquer la politique optimale face à tous les chocs. Le papier propose une analyse des expériences de règles budgétaires, nationales (comme la règle d'or au Royaume-Uni) ou européenne (comme le Pacte de stabilité et de croissance) ; il montre qu'ils n’ont pas fonctionné avant et pendant la crise. La dernière section discute du projet européen, le «nouveau pacte budgétaire », qui risque de paralyser les politiques budgétaires et d'empêcher la stabilisation économique. L'urgence aujourd'hui n'est pas d'augmenter la discipline des finances publiques, mais de remettre en question les évolutions économiques qui rendent les déficits publics nécessaires.
    Keywords: politique budgétaire, régles budgétaires
    JEL: E62
    Date: 2012–02
  79. By: Joshua Aizenman; Kenta Inoue
    Abstract: We study the curious patterns of gold holding and trading by central banks during 1979-2010. With the exception of several discrete step adjustments, central banks keep maintaining passive stocks of gold, independently of the patterns of the real price of gold. We also observe the synchronization of gold sales by central banks, as most reduced their positions in tandem, and their tendency to report international reserves valuation excluding gold positions. Our analysis suggests that the intensity of holding gold is correlated with ‘global power’ – by the history of being a past empire, or by the sheer size of a country, especially by countries that are or were the suppliers of key currencies. These results are consistent with the view that central bank’s gold position signals economic might, and that gold retains the stature of a ‘safe haven’ asset at times of global turbulence. The under-reporting of gold positions in the international reserve/GDP statistics is consistent with loss aversion, wishing to maintain a sizeable gold position, while minimizing the criticism that may occur at a time when the price of gold declines.
    JEL: E58 F31 F33
    Date: 2012–03
  80. By: Kucukkale, Yakup; Yamak, Rahmi
    Abstract: Recent developments in time series analysis have encouraged the economists to re-examine their findings about the Wagner’s Law. That is why, the aggregation in public expenditures may lead some contradictions, disaggregated analyses should perform to have more consistent results. In this paper, the cointegration and causal relationships have re-examined between public expenditure and economic growth by using disaggregated annual data over the period of 1968-2004 for Turkish economy. Obtained results show that there is no common trend between these variables in the long-run. In the short-run, however, there is a strong and bidirectional causal relationship between public investment expenditures and economic growth.
    Keywords: Wagner's Law; Cointegration; Causality; disaggregated data; public expenditures; economic growth
    JEL: E62 O23 C12 B22
    Date: 2012–02–19
  81. By: Becker, Torbjörn (Stockholm Institute of Transition Economics)
    Abstract: This paper takes a systematic look at the economic impact of the crisis that started in earnest in the fall of 2008 across countries and regions. Despite warnings of growing domestic and external imbalances in many countries years ahead of the crisis, the massive impact of the crisis came as a surprise to most. By correlating economic performance in the crisis with an extensive set of early warning, country insurance, and policy indicators, this paper provides some lessons on crisis prevention and management for the future. Although significant efforts have been made to develop robust early warnings systems, the paper shows the mixed success of some commonly analyzed indicators in predicting economic outcomes in this crisis. The only robust early warning indicator was increases in real estate prices while international reserves seem to have insured against the worst crisis outcomes on average. However, much work on building a robust early warning system remains and the analytical and empirical challenges in this area are substantial. The issues confronting early warning systems are also relevant to the more recent field of macro prudential supervision and regulation. Nevertheless, the cost of crises is massive and preventing future ones with better regulation, policies and supervision based on solid research must be a top priority among policy makers and academics alike.
    Keywords: Economic crisis; crisis prevention; early warning indicators
    JEL: E66
    Date: 2012–02–15

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