nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒04‒17
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The financial accelerator and monetary policy rules By Günes Kamber; Christoph Thoenissen
  2. Inflation Targeting and Financial Stability By Michael Woodford
  3. Cyclical Co-movement between Output, the Price Level, and Inflation By Joseph Haslag; Yu-Chin Hsu
  4. Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics By Ansgar Rannenberg
  5. The Macroeconomic Effects of Reserve Requirements By Glocker, Ch.; Towbin P.
  6. Inflation Forecast Contracts By Gersbach, Hans; Hahn, Volker
  7. Inflation and Unit Labor Cost By Robert G. King; Mark W. Watson
  8. Firm Entry, Endogenous Markups and the Dynamics of the Labor Share By Andrea Colciago; Lorenza Rossi
  9. A note on excess money growth and inflation dynamics: evidence from threshold regression By Saumitra, Bhaduri; Raja, Sethudurai
  10. Deep habits in the New Keynesian Phillips curve By Thomas A. Lubik; Wing Leong Teo
  11. "Shadow Banking and the Limits of Central Bank Liquidity Support: How to Achieve a Better Balance between Global and Official Liquidity" By Thorvald Grung Moe
  12. Does Financial Development Cause Higher Firm Volatility and Lower Aggregate Volatility? By Shalini Mitra
  13. Design and Implementation of a Common Currency Area in the East African Community By Thomas Kigabo RUSUHUZWA; Paul Robert MASSON
  14. Capital Controls with International Reserve Accumulation: Can this Be Optimal ? By Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis
  15. A Macroeconomic Analysis of Energy Subsidies in a Small Open Economy: The Case of Egypt By Gerhard Glomm; Juergen Jung
  16. Macroeconomic Surprises and Stock Returns in South Africa By Rangan Gupta; Monique Reid
  17. On Introduction of Sound Money By Volodymyr Vysochansky
  18. International Capital Flows with Limited Commitment and Incomplete Markets By Jurgen von Hagen; Haiping Zhang
  19. Why do banking crises occur? The American subprime crisis compared with the Norwegian banking crisis 1987-92 By Sverre Knutsen
  20. A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks By Leonid Kogan; Dimitris Papanikolaou
  21. Does habit formation always increase the agents' desire to smooth consumption? By Emmanuelle Augeraud-Veron; Mauro Bambi
  22. Exchange rate variation and fiscal balance in Nigeria: a time series analysis By SANGOSANYA, Awoyemi O.; ATANDA, AKINWANDE A,
  23. An Evaluation of the Revenue side as a source of fiscal consolidation in high debt economies By Banerjee, Ritwik
  24. Banking Bubbles and Financial Crisis By Jianjun Miao; PENGFEI WANG
  25. Unemployment accounts By Setty, Ofer
  26. Assessing uncertainty in Europe and the US: is there a common uncertainty factor? By Sauter, Oliver
  27. Revisiting the growth-inflation nexus: a wavelet analysis By Saumitra, Bhaduri
  28. Monetary Transmission in Pakistan: The Balance Sheet Channel By Shabbir, Safia
  29. Stock Market Bubbles and Unemployment By Jianjun Miao; PENGFEI WANG; Lifang Xu
  30. Microeconomic Sources of Real Exchange Rate Variability By Mario J. Crucini; Christopher I. Telmer
  31. Türkiye'de Aşırı Kredi Genişlemeleri ve Belirleyicileri By Binici, Mahir; Köksal, Bülent
  32. Investment for Patience in an Endogenous Growth Model By Taketo Kawagishi
  33. The macroeconomic effect of the information and communication technology in Hungary By Peter Sasvari
  34. Effects of Global Liquidity on Commodity and Food Prices By Ansgar Belke; Ingo Borden; Ulrich Volz
  35. Infrastructures institutionnelles et développement financier en zone CEMAC By Mpabe Bodjongo, Mathieu Juliot
  36. Measuring sovereign contagion in Europe By Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon
  37. Transition in the MENA Region: Challenges, Opportunities and Prospects By Vladimir Gligorov; Peter Havlik; Sandor Richter; Hermine Vidovic
  38. From the Neoliberal crisis to a new path of development By Russo, Alberto
  39. Financial Development and Remittances in Africa and the Americas: A Panel Unit-Root Tests and Panel Cointegration Analysis. By Bichaka Fayissa; Christian Nsiah
  40. Bank firm nexus and its impact on firm performance: an Indian case study By Saumitra, Bhaduri; Sunanda, Rathi

  1. By: Günes Kamber; Christoph Thoenissen (Reserve Bank of New Zealand)
    Abstract: The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al (1999), is analysed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.
    JEL: E32 E52
    Date: 2012–02
  2. By: Michael Woodford
    Abstract: A number of commentators have argued that the desirability of inflation targeting as a framework for monetary policy analysis should be reconsidered in light of the global financial crisis, on the ground that it requires neglect of the implications of monetary policy for financial stability. This paper argues that monetary policy may indeed affect the severity of risks to financial stability, but that it is possible to generalize an inflation targeting framework to take account of financial stability concerns alongside traditional stabilization objectives. The resulting framework can still be viewed as a form of flexible inflation targeting; in particular, the paper proposes a target criterion that would still imply an invariant long-run price level, despite fluctuations over time in risks to financial stability or even the occurrence of occasional financial crises.
    JEL: E52
    Date: 2012–04
  3. By: Joseph Haslag (Department of Economics, University of Missouri-Columbia); Yu-Chin Hsu (Department of Economics, University of Missouri-Columbia)
    Abstract: Over time, there has been a dramatic change in our understanding of the relationship between the price level and output over the business cycle. For several decades, the conventional wisdom maintained that the price level are procyclical. Arguably, the biggest development in our understanding came about because Lucas (1977) offered a transformative elegant definition of the business cycle itself. Armed with the definition that business cycles are deviations in output from trend, researchers applied new econometric techniques to re-consider key business-cycle facts. In this paper, we concentrate on two related sets of business-cycle facts. More specifically, we consider the contemporaneous correlation between the price level and output and between the inflation rate and output. Of course, the relationship between the price level and inflation is tautological; the inflation rate is the time derivative of the log of the price level. The existing evidence indicates a very interesting pair of observations; namely, that the price level is countercyclical and the inflation rate procyclical.
    Keywords: business cycle, phase shifts, time-varying correlations, spectral analysis
    JEL: E31 E32
    Date: 2012–04–03
  4. By: Ansgar Rannenberg (Deutsche Bundesbank, Economics Department)
    Abstract: The paper adds a moral hazard problem between banks and depositors as in Gertler and Karadi (2011) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke, Gertler and Girlchrist (1999, BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows the model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated simulation of a bank balance sheet shock produces a downturn of a magnitude similar to the "Great Recession".
    Keywords: Financial accelerator, bank leverage, DSGE model
    JEL: E44 G21
    Date: 2012–04
  5. By: Glocker, Ch.; Towbin P.
    Abstract: Monetary authorities in emerging markets are often reluctant to raise interest rates when dealing with credit booms driven by capital inflows, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.
    Keywords: Reserve Requirements, Capital flows, Monetary Policy, Business Cycle.
    JEL: E58 E52 F32 F41
    Date: 2012
  6. By: Gersbach, Hans; Hahn, Volker
    Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.
    Keywords: central banks; incentive contracts; inflation forecast targeting; inflation targeting; intermediate targets; transparency
    JEL: E58
    Date: 2012–04
  7. By: Robert G. King (Boston University, Department of Economics); Mark W. Watson (Department of Economics and Woodrow Wilson School, Princeton University)
    Abstract: We study two decompositions of inflation, , motivated by a New Keynesian Pricing Equation. The first uses four components: lagged , expected future , real unit labor cost ( ), and a residual. The second uses two components: fundamental inflation (discounted expected future ) and a residual. We find large low-frequency differences between actual and fundamental inflation. From 1999-2011 fundamental inflation fell by more than 15 percentage points, while actual inflation changed little. We discuss this discrepancy in terms of the data (a large drop in labor's share of income) and through the lens of a canonical structural model (Smets-Wouters (2007)).
    Date: 2012–01
  8. By: Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: Recent U.S. evidence suggests that the response of the labor share to a productivity shock is characterized by countercyclicality and overshooting. These findings cannot be easily reconciled with existing business cycle models. We extend the standard model of search and matching in the labor market by considering strategic interactions among an endogenous number of producers. This leads to countercyclical price markups. While Nash bargaining is sufficient to capture the labor share countercyclicality, we show that countercyclical markups are key to address the overshooting.
    Keywords: Endogenous Market Structures, Oligopolistic Competition, Firms' Entry, Search and Matching Frictions, Labor Share Overshooting.
    JEL: E24 E32 L11
    Date: 2012–03
  9. By: Saumitra, Bhaduri; Raja, Sethudurai
    Abstract: We test the effect of excess money growth on inflation using Threshold Regression technique developed by Hansen (2000). The empirical test is conducted using annual data from India for the period from 1953-54 to 2007-08. The results clearly exhibits that the relationship is not linear and without a strong credit growth, excess money growth has lesser inflationary effects.
    Keywords: Excess Money Growth; Quantity Theory of Money; Inflation and Threshold Regression
    JEL: E51
    Date: 2012–04–11
  10. By: Thomas A. Lubik; Wing Leong Teo
    Abstract: We derive and estimate a New Keynesian Phillips curve (NKPC) in a model where consumers are assumed to have deep habits. Habits are deep in the sense that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner as it introduces expected and contemporaneous consumption growth as well as the expected marginal value of future demand as additional driving forces for inflation dynamics. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable variables. The resulting series is considerably more volatile than unit labor cost. General Methods of Moments (GMM) estimation of the NKPC shows an improved fit and a much lower degree of indexation than in the standard NKPC. Our analysis also reveals that the crucial parameters for the performance of the deep habit NKPC are the habit parameter and the substitution elasticity between differentiated products. The results are broadly robust to alternative specifications.
    Date: 2011
  11. By: Thorvald Grung Moe
    Abstract: Global liquidity provision is highly procyclical. The recent financial crisis has resulted in a flight to safety, with severe strains in key funding markets leading central banks to employ highly unconventional policies to avoid a systemic meltdown. Bagehot's advice to "lend freely at high rates against good collateral" has been stretched to the limit in order to meet the liquidity needs of dysfunctional financial markets. As the eligibility criteria for central bank borrowing have been tweaked, it is legitimate to ask, How elastic should the supply of central bank currency be? Even when the central bank has the ability to create abundant official liquidity, there should be some limits to its support for the financial sector. Traditionally, the misuse of the fiat money privilege has been limited by self-imposed rules that central bank loans must be fully backed by gold or collateralized in some other way. But since the onset of the crisis, we have seen how this constraint has been relaxed to accommodate the demand for market support. My suggestion is that there has to be some upper limit, and that we should work hard to find guidelines and policies that can limit the need for central bank liquidity support in future crises. In this paper, I review the recent expansion of central bank liquidity support during the crisis, before discussing the collateral polices related to central banks' lender-of-last-resort and market-maker-of-last-resort policies and their rationale. I then examine the relationship between the central bank and the treasury, and the potential threat to central bank independence if they venture into too much risky balance sheet expansion. A discussion about the exceptional growth of the shadow banking system follows. I introduce the concept of "liquidity illusion" to describe the fragility upon which much of the sector is based, and note that market growth has been based largely on a "fair-weather" view that central banks will support the market on rainy days. I argue that we need a better theoretical framework to understand the growth in the shadow banking system and the role of central banks in providing liquidity in a crisis. Recently, the concept of "endogenous finance" has been used to explain the strong procyclical tendencies of the global financial system. I show that this concept was central to Hyman P. Minsky's theory of financial instability, and suggest that his insights should be integrated into the ongoing search for a better theoretical framework for understanding the growth of the shadow banking system and how we can limit official liquidity support for this system. I end the paper with a summary and a discussion of some of the policy issues. I note that the Basel III "package" will hopefully reduce the need for central bank liquidity support in the future, but suggest that further structural reforms of the financial sector are needed to ease the tension between freewheeling private credit expansion and the limited ability or willingness of central banks to provide unlimited official liquidity support in a future crisis.
    Keywords: Financial Regulation; Financial Stability; Monetary Policy; Central Bank Policy
    JEL: E44 E52 E58 G28
    Date: 2012–04
  12. By: Shalini Mitra (University of Connecticut)
    Abstract: The period before the financial crisis was characterized by unprecedented calm in the U.S. and other developed countries. Volatility of aggregate output growth declined in the U.S. beginning in the early 1980's until the fall of 2007 (the phenomenon has been widely called the Great Moderation). Meanwhile micro level evidence suggests increasing volatility at the firm level over the last 60 years including the period of the Great Moderation. I conduct a quantitative analysis of the role played by financial development in the divergence of firm and aggregate volatilities. In a DSGE setting based on Kiyotaki and Moore (1997) type borrowing constraints I show that financial development is associated with increasing firm growth volatility and declining aggregate volatility. The reason for the divergence is a decline in correlation of the firm with the aggregate as financial development occurs. Classification-JEL: D21, D58, E27, E32
    Keywords: Great Moderation, Firm-Level Volatility, Borrowing Constraints, Heterogenous Firms, Business Cycle
    Date: 2012–03
  13. By: Thomas Kigabo RUSUHUZWA; Paul Robert MASSON
    Abstract: The East African Community (EAC) has fast-tracked its plans to create a single currency for the five countries making up the region, and hopes to conclude negotiations on a monetary union protocol by the end of 2012. While the benefits of lower transactions costs from a common currency may be significant, countries will also lose the ability to use monetary policy to respond to different shocks. Evidence presented shows that the countries differ in a number of respects, facing asymmetric shocks and different production structures. Countries have had difficulty meeting convergence criteria, most seriously as concerns fiscal deficits. Preparation for monetary union will require effective institutions for macroeconomic surveillance and enforcing fiscal discipline, and euro zone experience indicates that these institutions will be difficult to design and take a considerable time to become effective. This suggests that a timetable for monetary union in the EAC should allow for a substantial initial period of institution building. In order to have some visible evidence of the commitment to monetary union, in the meantime the EAC may want to consider introducing a common basket currency in the form of notes and coin, to circulate in parallel with national currencies.
    Keywords: EAC monetary union, fiscal surveillance, optimum currency areas, parallel currencies, regional integration
    JEL: E42 E58 E61 F33 F55
    Date: 2012–04–04
  14. By: Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis
    Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.
    Keywords: reserve accumulation; capital controls; Ramsey planner; credit constraints
    JEL: E58 F36 F41
    Date: 2011–12
  15. By: Gerhard Glomm (Indiana University); Juergen Jung (Towson University)
    Abstract: We construct a dynamic general equilibrium model to analyze the effects of large energy subsidies in a small open economy. The model pays special attention to domestic energy production and consumption, trade in energy at world market prices, as well as private and public sector production including the provision of public infrastructure. The model is calibrated to data from Egypt and then used to study policy reforms such as reductions in energy subsidies with corresponding reductions in consumption taxes, labor taxes, capital taxes, or increases in infrastructure investment. We calculate the new steady states, the transition paths to the new steady state and the size of the associated welfare losses or gains. In response to a 15 percent cut in energy subsidies, GDP may fall as less energy is used in production. Excess energy is exported and capital imports are reduced. Welfare in consumption equivalent terms can rise by up to 0.6 percent of GDP. Gains in output can be realized only if the government re-invests into infrastructure.
    Date: 2012–04
  16. By: Rangan Gupta (Department of Economics, University of Pretoria); Monique Reid (Department of Economics, Stellenbosch University)
    Abstract: The objective of this paper is to explore the sensitivity of industry-specific stock returns to monetary policy and macroeconomic news. The paper looks at a range of industry-specific South African stock market indices and evaluates the sensitivity of these indices to a various unanticipated macroeconomic shocks. We begin with an event study, which examines the immediate impact of macroeconomic shocks on the stock market indices, and then use a Bayesian Vector Autoregressive (BVAR) analysis, which provides insight into the dynamic effects of the shocks on the stock market indices, by allowing us to treat the shocks as exogenous through appropriate setting of priors defining the mean and variance of the parameters in the VAR. The results from the event study indicate that with the exception of the gold mining index, where the CPI surprise plays a significant role, monetary surprise is the only variable that consistently negatively affects the stock returns significantly, both at the aggregate and sectoral levels. The BVAR model based on monthly data however, indicates that, in addition to the monetary policy surprises, the CPI and PPI surprises also affect aggregate stock returns significantly. However, the effects of the CPI and PPI surprises are quite small in magnitude and are mainly experienced at shorter horizons immediately after the shock.
    Keywords: Bayesian Vector Autoregressive Model, Event Study, Macroeconomic Surprises, Stock Returns
    JEL: C22 C32 E31 E44 G1
    Date: 2012–04
  17. By: Volodymyr Vysochansky (Uzhhorod University)
    Abstract: World financial crisis unveiled the precarious position of modern monetary system based on a centralized fiat money supply and fractional-reserve banking. The scale of the crisis and the threat of major inflation, which has already become a reality on commodities markets, confirm the instability of the monetary system. In order to define weak spots of the system and consider possible solutions on how to address them it is necessary to revise the nature of its elements, and in particular of money. The paper is devoted to the issues of money with commodity backing and approaches of its introduction. Model of self-adjusting money creation/redemption based on ETF technology and respective stock and commodity exchange infrastructure is proposed as an incentive to stimulate discussion about potential improvement of the modern monetary system.
    Keywords: money, commodities, exchange-traded funds, monetary system regulation
    JEL: E4 E5 G1
    Date: 2012–03–27
  18. By: Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University)
    Abstract: Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output.
    Keywords: E44, F41
    Date: 2012–01
  19. By: Sverre Knutsen (Norwegian Business School and Norges Bank (Central Bank of Norway))
    Abstract: This paper analyses the causes of banking crises by the way of a historical comparative case study. Moreover, the analysis draws on theories elaborated by the economist Hyman Minsky. The evidence presented suggests that the fundamental causes of the compared crises are found in the macroeconomic boom-bust fluctuation and the building up of asset market bubble(s) preceding the breakdown and the crisis. We also find boom-bust cycles as depicted in a basic Minsky-cycle, where financial instability and the outbreak of crisis is a consequence of an unbalanced mix of hedge, speculative and Ponzi financial positions. In both cases we have observed a pattern where stabilizing or thwarting institutions, as Minsky denoted them, were eroded over time. Each case demonstrates that structural economic shifts were interacting with major institutional changes and created processes that effectively removed institutional stabilizers. Hence, systemic risk was allowed to fill up the financial system. These processes were essential for building up financial imbalances of such a magnitude that the particular booms ended in systemic banking crises.
    Keywords: Financial Crises, business cycles, Institutional Stabilizers, Structural Economic
    JEL: E32 E51 G01 G18 N10 N12 N14
    Date: 2012–03–20
  20. By: Leonid Kogan; Dimitris Papanikolaou
    Abstract: We provide a theoretical model linking firm characteristics and expected returns. The key ingredient of our model is technological shocks embodied in new capital (IST shocks), which affect the profitability of new investments. Firms' exposure to IST shocks is endogenously determined by the fraction of firm value due to growth opportunities. In our structural model, several firm characteristics - Tobin's Q, past investment, earnings-price ratios, market betas, and idiosyncratic volatility of stock returns – help predict the share of growth opportunities in the firm's market value, and are therefore correlated with the firm's exposure to IST shocks and risk premia. Our calibrated model replicates: i) the predictability of returns by firm characteristics; ii) the comovement of stock returns on firms with similar characteristics; iii) the failure of the CAPM to price portfolio returns of firms sorted on characteristics; iv) the time-series predictability of market portfolio returns by aggregate investment and valuation ratios; and v) a downward sloping term structure of risk premia for dividend strips. Our model delivers testable predictions about the behavior of firm-level real variables – investment and output growth – that are supported by the data.
    JEL: E22 E32 G12
    Date: 2012–04
  21. By: Emmanuelle Augeraud-Veron; Mauro Bambi
    Abstract: In the literature, habit formation has been often introduced to enhance the agents' desire to smooth consumption over time. This characteristic was found particularly useful in solving the equity premium puzzle and in matching several stylized facts in growth, and business cycles theory as, for example, the high persistence in the U.S. output volatility. In this paper we propose a definition of habit formation, which is ``general'' relative to the assumptions on the intensity, persistence, and lag structure, and we unveil two mechanisms which point to the opposite direction: habits may reduce the desire of smoothing consumption over time and then may potentially decrease the power of a model in explaining the previously mentioned facts. More precisely, we propose a complete taxonomy of the rich dynamics which may emerge in an AK model with external addictive habits for all the feasible combinations of the intensity, persistence and lag structure characterizing their formation and we point out to the region in the parameters' space coherent with less smoothing in consumption. An economic explanation of these mechanisms is suggested and the robustness of our results in the case of internal habits verified. Finally and crucially habit formation always reduces the desire of consumption smoothing once the model is calibrated to match the average U.S. output and utility growth rates observed in the data.
    Keywords: Habit formation; endogenous fluctuations, delayed functional differential equations.
    JEL: E00 E30 O40
    Date: 2012–04
    Abstract: Exchange rate remains one of the principal determinants of a nation’s external balance and fiscal status of most emerging economies. How better its fluctuation is managed has a long way to go with the performance of major macroeconomic variables in a country. It is behind this backdrop that this paper tries to examine the effects of exchange rate fluctuation on fiscal deficit crisis in Nigeria between 1980 and 2008. The period is so chosen as it covers the range of time that witnessed the greatest fluctuation’s in the external value of the nation’s legal tender (naira). The regression analysis reveals that exchange rate has impacted negatively on fiscal deficit over the period under consideration. The Augmented Dickey-Fuller (ADF) unit root test reveals that all the time series variables employed are non-stationary at levels; both the intercept and deterministic trend. Appropriate policies are therefore recommended on how best to reposition the economy in the face of continuing devaluation of naira.
    Keywords: Exchange rate; Fiscal deficit; Macroeconomic variables
    JEL: E31 C22 F31 B41
    Date: 2012–04–10
  23. By: Banerjee, Ritwik
    Abstract: Unsustainable levels of debt for some European economies is causing enormous strain in the Euro area. How to tide over the debt crisis seems to be the most important objective the European policy makers are currently facing. We use a dynamic general equilibrium closed economy model to compute the dynamic Laffer Curves for Portugal, Ireland, Greece and Spain for different class of taxes. We conclude that there exists scope for considerable revenue generation by raising certain class of taxes. Thus revenue generation, along with fiscal consolidation holds key for debt reduction.
    Keywords: fiscal consolidation; dynamic laffer curve; tax revenue; fiscal policy
    JEL: E62 E61 O52
    Date: 2012–04–07
  24. By: Jianjun Miao (Department of Economics, Boston University, CEMA, Central University of Finance and Economics, and AFR, Zhejiang University); PENGFEI WANG (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.)
    Abstract: This paper develops a macroeconomic model with a banking sector in which banks face endogenous borrowing constraints. There is no uncertainty about economic fundamentals. Banking bubbles can emerge through a positive feedback loop mechanism. Changes in household confidence can cause the collapse of bubbles, resulting in a financial crisis. Credit policy can mitigate economic downturns but also incur an efficiency loss. Bank capital requirements can prevent the formation of banking bubbles by limiting leverage. But a too restrictive requirement leads to less lending and hence less production.
    Keywords: Banking Bubble, Multiple Equilibria, Financial Crisis, Self-ful?lling Prophecy, Credit Policy, Capital Requirements, Borrowing Constraints
    JEL: E2 E44 G01 G20
    Date: 2012–01
  25. By: Setty, Ofer
    Abstract: Unemployment Accounts (UA) are mandatory individual saving accounts that can be used by governments as an alternative to the Unemployment Insurance (UI) system. I study a two tier UA-UI system where the unemployed withdraw from their unemployment account until it is exhausted and then receive unemployment benefits. The hybrid policy provides insurance to workers more efficiently than a traditional UI because it provides government benefits selectively. Using a structural model calibrated to the US economy, I find that relative to a two tier UI system the hybrid policy leads to a welfare gain of 0.9%.
    Keywords: Unemployment Accounts; Unemployment Insurance; Job-search; Moral hazard; Mechanism Design; Optimal Policy;
    JEL: E24 J65 J64 E61
    Date: 2012–04–12
  26. By: Sauter, Oliver
    Abstract: This paper is an empirical investigation of uncertainty in the Euro Zone as well as the US. It conducts a factor analysis of uncertainty measures starting in 2001 until the end of 2011. For this purpose I use survey-based data provided by the ECB and the Federal Reserve Bank of Philadelphia as well as the stock market indices VSTOXX and VIX, both measures of implied volatility of stock market movements. Each measure shows an increase in uncertainty during the last years marked by the financial turmoil. Given the rise in uncertainty, the question arises whether this uncertainty is driven by the same underlying forces. For the Euro Zone, I show that uncertainty can be separated into driving forces of short and long-term uncertainty. In the US there is a sharp distinction between uncertainty that drives stock market and “real” variables on the one hand and inflation (short and long-term) on the other hand. Combing both data sets, factor analysis delivers (1) an international stock market factor, (2) a common European uncertainty factor and (3) an US-inflation uncertainty factor.
    Keywords: monetary policy; uncertainty; survey forecast; forecast disagreement; factor analysis
    JEL: E5 E3
    Date: 2012–03
  27. By: Saumitra, Bhaduri
    Abstract: Motivated by the concern that the recent surge in inflation could retard growth, the paper revisits the nexus between inflation and growth from the perspective of an emerging economy, India. Examining this relationship using a wavelet multi resolution analysis with varying time scale decomposition suggests a strong and persistent negative relationship between growth and inflation for a short time scale, while it is not significant for a longer time scale.
    Keywords: Inflation Growth Wavelet
    JEL: E31
    Date: 2012–04–10
  28. By: Shabbir, Safia
    Abstract: Using data of non-financial listed firms over a period of 1999-2010, this paper investigates the effectiveness of balance sheet channel in monetary transmission mechanism in Pakistan. By classifying firms as SME and large, this paper finds a strong evidence for the existence of net worth channel in Pakistan. A tight monetary policy worsens the net worth of both the SME and large firms, with SME getting more hit thereby further affecting their cash flows, short-term borrowing, and revenues.
    Keywords: Monetary Policy; Monetary Transmission; Firm; Models with Panel Data
    JEL: E52 E50 C33 H32
    Date: 2012–04–02
  29. By: Jianjun Miao (Department of Economics, Boston University, CEMA, Central University of Finance and Economics, and AFR, Zhejiang University); PENGFEI WANG (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.); Lifang Xu (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.)
    Abstract: This paper introduces endogenous credit constraints in a search model of unemployment. These constraints generate multiple equilibria supported by self-fulfilling beliefs. A stock market bubble exists through a positive feedback loop mechanism. The collapse of the bubble tightens the credit constraints, causing firms to reduce investment and hirings. Unemployed workers are hard to find jobs generating high and persistent unemployment.
    Keywords: stock market bubbles, unemployment, self-fulfilling beliefs, credit constraints, multiple equilibria
    JEL: E24 E44 J64
    Date: 2012–01
  30. By: Mario J. Crucini; Christopher I. Telmer
    Abstract: We provide three sets of variance decompositions on microeconomic international relative price data. The first shows that the overall distribution of absolute deviations from the Law of One Price (LOP) is dominated by cross-sectional variation in long-term averages, not by time-series variation around the long-term averages. The second shows that time-series variation in changes in LOP deviations is dominated by idiosyncratic, goods-specific variation, not by aggregate variation such as that arising from nominal exchange rates. The third shows that time-series and cross-sectional variance are connected across goods. Goods that exhibit high cross-sectional variance also exhibit high time-series variance. Moreover, when this connection is made conditional on the tradeability of a goods, a two-factor structure for the goods-specific cross-section is revealed. We argue that this factor structure, in addition to our other variance decompositions, is informative for the construction of models that can synthesize the micro and macroeconomic behavior of relative prices.
    JEL: E3 F31 F4
    Date: 2012–04
  31. By: Binici, Mahir; Köksal, Bülent
    Abstract: Using different credit measures, this study identifies the credit booms in Turkey that have occurred after December 2002, and examines their determinants. We find that the primary factors that have a strong correlation with the probability of a credit boom are the changes in the slope of the yield curve, reel exchange rate, US interest rate and net capital inflows. The results imply that these factors should be considered as important elements in forecasting such events that could threaten financial stability.
    Keywords: Credit booms; financial stability; logit model; Turkey
    JEL: E32 E51 E44 G21
    Date: 2012–01–01
  32. By: Taketo Kawagishi (Kyoto University)
    Abstract: This paper explores a one-sector AK model in which time preference depends on private investment in future-oriented resources along the lines of Becker and Mulligan (1997). Assuming that time preference is also affected by the social level of such investment and that of consumption, we show that multiple balanced growth path (BGP henceforth) equilibria can exist, and provide the conditions for multiple BGP equilibria. Furthermore, we clarify that the equilibrium path is indeterminate in the high-growth BGP equilibrium, while it is determinate in the low-growth BGP equilibrium. We also discuss the effect of a subsidy policy to private investment in future-oriented resources on an endogenous growth rate.
    Keywords: One-sector AK model; Endogenous time preference; Multiple balanced growth path equilibria; Subsidy policy
    JEL: E32 H23 O40
    Date: 2012–04
  33. By: Peter Sasvari
    Abstract: It was not until the beginning of the 1990s that the effects of information and communication technology on economic growth as well as on the profitability of enterprises raised the interest of researchers. After giving a general description on the relationship between a more intense use of ICT devices and dynamic economic growth, the author identified and explained those four channels that had a robust influence on economic growth and productivity. When comparing the use of information technonology devices in developed as well as in developing countries, the author highlighted the importance of the available additional human capital and the elimination of organizational inflexibilities in the attempt of narrowing the productivity gap between the developed and developing nations. By processing a large quantitiy of information gained from Hungarian enterprises operating in several economic sectors, the author made an attempt to find a strong correlation between the development level of using ICT devices and profitability together with total factor productivity. Although the impact of using ICT devices cannot be measured unequivocally at the microeconomic level because of certain statistical and methodological imperfections, by applying such analytical methods as cluster analysis and correlation and regression calculation, the author managed to prove that both the correlation coefficient and the gradient of the regression trend line showed a positive relationship between the extensive use of information and communication technology and the profitability of enterprises.
    Date: 2012–04
  34. By: Ansgar Belke; Ingo Borden; Ulrich Volz
    Abstract: This paper investigates the relationship between global liquidity and commodity and food prices applying a global cointegrated vector-autoregressive model. We use different measures of global liquidity and various indices of commodity and food prices for the period 1980–2011. Our results support the hypothesis that there is a positive long-run relation between global liquidity and the development of food and commodity prices, and that food and commodity prices adjust significantly to this cointegrating relation. Global liquidity, in contrast, does not adjust, it drives the relationship.
    Keywords: Commodity prices; food prices; global liquidity; cointegration; CVAR analysis
    JEL: E52 E58 C32
    Date: 2012–03
  35. By: Mpabe Bodjongo, Mathieu Juliot
    Abstract: This dissertation proposes to evaluate the impact of institutional development on the financial development in the Central Africa Economic and Monetary Community (CAEMC).An econometric and statistical approach is used in order to realise this objective. According to the methodology suggested by Demirguc-Kunt & Levine (1996) and by Chouchane Verdier (2004), the statistical approach makes it possible to build the financial development indice of the countries of the mentioned zone. This statistical approach reveals the delay by these countries in term of financial development compared to other countries. Following the methodology proposed by Demetriades & Luintel (1996)and by Ito (2005), the econometric approach, with the aid of sargan test and the Arrelano & Bond (1991)test on our dynamic panel data, highlights the negative impact of the weakness of the level of institutional development on the financial development.It can explain why financial liberalization is only slightly beneficial with the financial development.
    Keywords: Libéralisation financière ; développement financier ; développement institutionnel ; CEMAC ; données de panels dynamiques
    JEL: E0 P51 N2 G0 C33
    Date: 2012
  36. By: Massimiliano Caporin (Univerista' di Padova); Loriana Pelizzon (Univerista' Ca' Foscari Venezia and MIT Sloan); Francesco Ravazzolo (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Roberto Rigobon (MIT Sloan and NBER)
    Abstract: This paper analyzes the sovereign risk contagion using CDS spreads for the major euro area countries. Using several econometric approaches (non linear regression, quantile regression and Bayesian quantile with heteroskedasticity) we show that propagation of shocks in Europe's CDS's has been remarkably constant even though in a signi cant part of the sample periphery countries have been extremely a ected by their sovereign debt and scal situations. Thus, the integration among the di erent countries is stable, and the risk spillover among countries is not a ected by the size of the shock.
    Keywords: Sovereign Risk, Contagion
    JEL: E58 F34 F36 G12 G15
    Date: 2012–04–10
  37. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper discusses the transition agenda and provides the key economic characteristics of selected Middle East and North Africa countries (MENA) in comparison with selected Central, East and Southeast European countries (CESEE). We intend to identify some regularities in transition processes and to draw policy lessons for MENA countries. Among the key challenges facing the MENA region are job creation, fighting corruption, public sector reforms and trade diversification; the way towards a functioning market economy should not necessarily be as long and controversial as in the CESEE. MENA countries had been implementing market-oriented reforms for more than a decade. Together with free trade agreements concluded with the EU, these reforms have contributed to an increase of FDI inflows. Still, MENA countries have been lagging behind in terms of export performance, competitiveness and restructuring. Numerous impediments to trade and FDI in the MENA region need to be overcome, yet the transition will not require a radical overhaul of the existing system. The sine qua non condition is to achieve high per capita GDP growth. There is no guarantee for success – as illustrated by the experience of CESEE. Moreover, the current global crisis makes policy implementation not easier. If anything, future scenarios must reckon with a slow process of improvements and many backlashes. Transitions and sustainable reforms need to be anchored in a supportive international environment. In the case of many CESEE countries, the EU provided such an anchor. In the case of MENA, such a strong anchor is missing. A newly designed international involvement and especially the strengthened role of the EU will play a crucial role. A comprehensive EU-MENA trade agreement, possibly with an intra-MENA (and Turkey) Customs Union arrangement, would be beneficial to both MENA and the EU.
    Keywords: transition, integration, foreign trade, FDI, labour market
    JEL: E24 F13 F53 O2 O43 O57 P52
    Date: 2012–01
  38. By: Russo, Alberto
    Abstract: In our view, the causes of the crisis are tied to the political change towards a Neoliberal phase from the 1970s on: a wide process of “deregulation” – from the labour market to the globalisation of production, from the national to the international finance – has allowed a partial recovery in the profitability of the capitalist system, contrasting the post-war decline of the profit rate which led to the 1970s “stagflation”. The same key elements of the Neoliberal model – deregulation, financialisation, globalisation – have eventually led to a large crisis as a result of the huge increase of inequality, financial instability, and trade imbalances. In this perspective, the “financial crisis” is the signal of underlying problems concerning the global process of capital accumulation. It is now necessary to support a recovery of the public intervention (“top down”) in order to create the conditions for an economic restart that, in turn, would strengthen the construction of a radical alternative (from the “bottom up”) to the Neoliberal course. A wider access to education should be the key to this progressive strategy aimed at supporting a more egalitarian and green path of development. A radical rethinking of bequest taxation and, in general, of the taxation on wealth would have a clear symbolic value in this perspective, providing, at the same time, the material basis for extending the right to a “universal education”.
    Keywords: capital accumulation; deregulation; crisis; austerity; public intervention
    JEL: E66 P17 G01
    Date: 2012–04–10
  39. By: Bichaka Fayissa; Christian Nsiah
    Abstract: In view of the sizable increase in recorded migrant workers’ remittances to developing countries from $70 billion in 2000 to $167 in 2005, this study investigates the long-run relationship between remittances and financial services development (FSD) and control variables including exchange rate (ERS), the size of migrant stock (MSK), the domestic per capita income (DPC) in the receiving country and foreign per capita income (FPC) in the main host country. We use a newly developed panel fully modified OLS (PFMOLS) on annual panel data over the 1985-2007 period for 44 countries consisting of 25 from Africa and 19 from the Americas. It is found that financial development, exchange rate stability, and the size of migrant stock have positive and statistically significant effect on remittances in both regions and in each of the regions. The study has important policy implications for the role of the financial services development through domestic credit expansion by the banking industry as well as increased competition among money transfer operations and exchange rate stability in order to promote the continuation of remittance inflows as a major source of economic growth in Africa and the Americas. The study also shows that there are regional differences in the impact and magnitude of the determinants of remittances.
    Keywords: Workers’ Remittances, Transaction Cost Factors, Per Capita income, Unit-Root tests, Error Correction Model, PFMOOLS, Panel Data, Africa and the Americas
    JEL: E21 F21 G22 J61 O16
    Date: 2012–03
  40. By: Saumitra, Bhaduri; Sunanda, Rathi
    Abstract: The paper examines the role of banking relationships on firm performance for a sample of Indian manufacturing firms. The two variables used to portray banking relationships are: the extent of bank borrowing and the number of banking relationships maintained by a firm. Analysis suggests that while the extent of bank borrowing has a negative impact on firm performance, the multiple banking relationships maintained by a firm positively enhances firm performance. In addition, firm performance plays an important role in influencing bank borrowing and the number banking relationships a firm maintains. While banking relationships are positively impacted by firm performance, results suggest nonlinearity between bank financing and firm performance, suggesting the possibility of a potential debt overhang concern. This implies that firms with low growth opportunities tend to borrow more from banks due to lack of other opportunities to finance their investments. However, firms beyond a certain threshold of profitability tend to employ lesser debt to finance their investments in order to prevent the wealth transfer from shareholders to creditors.
    Keywords: Bank Firm Realationship India
    JEL: E52
    Date: 2012–04–10

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