nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒04‒23
thirty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Reserves, Liquidity and Money: An Assessment of Balance sheet Policies By Jagjit S. Chadha; Luisa Corrado; Jack Meaning
  2. Ensuring price stability in post-crisis Asia: lessons from the recovery By Andrew Filardo
  3. Monetary Policies and Nigerian Economy:Simulations from Dynamic Stochastic General Equilibrium(DSGE)Model By Nwaobi, Godwin
  4. Commodity Prices and Inflation Expectations in the United States By Oya Celasun; Lev Ratnovski; Roxana Mihet
  5. National and Provincial Inflation in Canada: Experiences under Inflation Targeting By Graham M. Voss; M. Chaban
  6. Macro-financial linkages: Evidence from country-specific VARs By Paolo Guarda; Philippe Jeanfils
  7. Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions By Jagjit S. Chadha; James Warren
  8. Assessing DSGE Models with Capital Accumulation and Indeterminacy By Vadim Khramov
  9. Fiscal policy and the great recession in the Euro area By Günter Coenen; Roland Straub; Mathias Trabandt
  10. The changing role of expectations in US monetary policy: A new look using the Livingston Survey By Banerjee, A.; Malik, S.
  11. Global Food Price Inflation and Policy Responses in Central Asia By Mariusz A. Sumlinski; A. J. Al-Eyd; David Amaglobeli; Bahrom Shukurov
  12. Dissent Voting Behavior of Central Bankers: What Do We Really Know? By Roman Horváth; Kateøina Šmídková; Jan Zápal; Marek Rusnák
  13. The impact of macro news and central bank communication on emerging European forex markets By Balázs Égert; Evžen Kočenda
  14. Transparency and Monetary Policy Effectiveness By Romain Baeriswyl; Camille Cornand
  15. Trade and Financial Spillover on Hong Kong SAR from a Downturn in Europe and Mainland China By Papa N'Diaye; Ashvin Ahuja
  16. The High-Frequency Response of the Rand-Dollar rate to Inflation Surprises By Greg Farrell; Shakill Hassan; Nicola Viegi
  17. Inflation Expectations of the Inattentive General Public By Monique Reid
  18. The Euro – A “MUST” for Small European States? By Renate Ohr; Mehmet Özalbayrak
  19. Latvia's Internal Devaluation: A Success Story? By Mark Weisbrot; Rebecca Ray
  20. Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia By Jaromir Benes; Alfredo Baldini; Mai Dao; Rafael Portillo; Andrew Berg
  21. Is Paper Money Just Paper Money? Experimentation and Local Variation in the Fiat Paper Monies Issued by the Colonial Governments of British North America, 1690-1775: Part I By Farley Grubb
  22. Debt Deleveraging and the Exchange Rate By Benigno, Pierpaolo; Romei, Federica
  23. The Laffer Curve in an Incomplete-Markets Economy By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
  24. Wage Discrimination over the Business Cycle By Biddle, Jeff E.; Hamermesh, Daniel S.
  25. Import protection, business cycles, and exchange rates : evidence from the great recession By Bown, Chad P.; Crowley, Meredith A.
  26. Turkey: Slowdown? Or even recession? By Josef Pöschl
  27. Robust Delegation with Uncertain Monetary Policy Preferences By Marco M. Sorge
  28. Dynamic analysis of reductions in public debt in an endogenous growth model with public capital By Noritaka Maebayashi; Takeo Hori; Koichi Futagami
  29. Protectionism Isn’t Counter-Cyclic (anymore) By Rose, Andrew K
  30. Forecasting house price inflation: a model combination approach By Sarah Drought; Chris McDonald
  31. Cyclical Labour Market Adjustment in New Zealand: The Response of Firms to the Global Financial Crisis and its Implications for Workers By Fabling, Richard; Maré, David. C
  32. Financial Inclusion and Financial Stability : Current Policy Issues By Alfred Hannig; Stefan Jansen
  33. Financial Inclusion and Financial Stability : Current Policy Issues By Alfred Hannig; Stefan Jansen
  34. Unemployment Dynamics in Central Europe: A Labor Flow Approach By Vladislav Flek; Martina Mysíková
  35. On involuntary unemployment: notes on efficiency-wage competition By Guerrazzi, Marco
  36. Rent Building, Rent Sharing: A Panel Country-Industry Empirical Analysis By Askenazy, Philippe; Cette, Gilbert; Maarek, Paul

  1. By: Jagjit S. Chadha; Luisa Corrado; Jack Meaning
    Abstract: The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves; monetary and fiscal policy instruments; Basel III
    JEL: E31 E40 E51
    Date: 2012–04
  2. By: Andrew Filardo
    Abstract: Asian central banks have adopted monetary policy frameworks over the past decade that have, by and large, worked well both to ensure price stability during the pre-crisis period and to navigate the shoals during the recent international financial crisis. Inflation concerns in recent years nonetheless raise the possibility that existing monetary policy frameworks in Asia may be contributing to procyclical inflation swings. Three particular aspects of the policy environment are highlighted. They include the approach of monetary policy to commodity price cycles, to the uneven global recovery and to the new financial stability mandates.
    Keywords: Central banking, international financial crisis, monetary policy frameworks in Asia, commodity prices, financial stability and monetary policy
    Date: 2012–04
  3. By: Nwaobi, Godwin
    Abstract: Traditionally, the task of monetary management is usually performed by the monetary authority on behalf of government. However, a key challenge in monetary management is how to deal with uncertainty. Thus, the relevant policy questions must include how best the available instruments of monetary policy be deployed in shock prone mature stabilizers. Therefore, the basic thrust of this paper is to evaluate monetary policy - tradeoffs using a dynamic stochastic general equilibrium(DSGE)model estimated on data for Nigeria.
    Keywords: dynamic; stochastic; general; equilibrium; dsge; nigeria; monetary management; shocks; var; monetary policy; fiscal policy; exchange rate; central bank
    JEL: D50 C68 C63 C50 E58
    Date: 2012–04–17
  4. By: Oya Celasun; Lev Ratnovski; Roxana Mihet
    Abstract: U.S. monetary policy can remain extraordinarily accommodative only if longer-term inflation expectations stay well-anchored, including in response to commodity price shocks. We find that oil price shocks have a statistically significant, but economically small impact on longer-term inflation compensation embedded in U.S. Treasury bonds. The estimated effect is larger for the post-crisis period, and robust to controlling for measures of liquidity risk premia. Oil price shocks are also correlated with the variance of longer-term inflation expectations in the University of Michigan Survey of Consumers in the post-crisis period. These results are not attributable to looser monetary policy - oil price increases were associated with expectations of a faster monetary tightening after the crisis. Overall, the findings are consistent with some impact of commodity prices on long-term inflation expectations and/or on inflation rate risk.
    Keywords: Agricultural prices , Commodity prices , External shocks , Inflation , Monetary policy , Oil prices , Price increases ,
    Date: 2012–03–27
  5. By: Graham M. Voss (Department of Economics, University of Victoria); M. Chaban
    Abstract: We examine the behaviour of national and provincial inflation in Canada under inflation targeting to determine the extent to which the inflation targeting regime adopted by the Bank of Canada in the 1990s has anchored inflation expectations. Inflation expectations are well anchored when there are no predictable departures of inflation from target at sufficiently distant horizons. To examine this condition, we consider the out of sample prediction of monthly inflation with specific focus on whether deviations from the 1-3% target band are consistently predictable. We find support for well anchored inflation expectations at the national level and some but not all provinces.
    Keywords: Inflation, monetary policy, inflation targeting, forecasting
    JEL: E31 E58
    Date: 2012–04–13
  6. By: Paolo Guarda; Philippe Jeanfils
    Abstract: This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-todeposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.
    Keywords: vector autoregression, business cycle, financial shock, asset prices, credit
    JEL: C32 E32 E44 E51
    Date: 2012–03
  7. By: Jagjit S. Chadha; James Warren
    Abstract: Using the business cycle accounting (BCA) framework pioneered by Chari, Kehoe and McGratten (2006) we examine the 2008-09 recession in the UK. There has been much commentary on the financial causes of this recession, which we might have expected to shock the equation governing the intertemporal rate of substitution in consumption. However, the recession appears to have been mostly driven by shocks to the efficiency wedge in total production, rather than the intertemporal consumption, labour or spending wedge. From an expenditure perspective this result is consistent with the observed large falls in both consumption and investment during the recession. To assess this result we also simulate artificial data from a DSGE model in which asset price shocks dominate and find no strong role for the intertemporal consumption wedge using the BCA method. This result does not imply that financial frictions did not matter for the recent recession but that such frictions do not necessarily impact only on the intertemporal rate of substitution in consumption.
    Keywords: Business Cycle Accounting; Major Recessions; TFP; Financial Frictions
    JEL: E31 E40 E51
    Date: 2012–04
  8. By: Vadim Khramov
    Abstract: The simulated results of this paper show that New Keynesian DSGE models with capital accumulation can generate substantial persistencies in the dynamics of the main economic variables, due to the stock nature of capital. Empirical estimates on U.S. data from 1960:I to 2008:I show the response of monetary policy to inflation was almost twice lower than traditionally considered, as capital accumulation creates an additional channel of influence through real interest rates in the production sector. Versions of the model with indeterminacy empirically outperform determinate versions. This paper allows for the reconsideration of previous findings and has significant monetary policy implications.
    Keywords: Capital accumulation , Economic models , Monetary policy ,
    Date: 2012–03–21
  9. By: Günter Coenen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Mathias Trabandt (Board of Governors of the Federal Reserve System, Division of International Finance, 20th Street and Constitution Avenue N.W, Washington, DC 20551, USA.)
    Abstract: How much did fiscal policy contribute to euro area real GDP growth during the Great Recession? We estimate that discretionary fiscal measures have increased annualized quarterly real GDP growth during the crisis by up to 1.6 percentage points. We obtain our result by using an extended version of the European Central Bank’s New Area- Wide Model with a rich specification of the fiscal sector. A detailed modeling of the fiscal sector and the incorporation of as many as eight fiscal time series appear pivotal for our result. JEL Classification: C11, E32, E62.
    Keywords: Fiscal policy, DSGE modelling, Bayesian inference, euro area.
    Date: 2012–03
  10. By: Banerjee, A.; Malik, S.
    Abstract: Using a Bayesian structural vector autoregression (TVP-SVAR) with time-varying parameters and volatility we investigate monetary policy in the United States, in particular its interaction with the formation of inflation expectations and the linkages between monetary policy, inflation expectations and the behaviour of CPI inflation. We use Livingston Survey data for expected inflation, measured at a bi-annual frequency, actual inflation, unemployment and a nominal interest rate to estimate the VAR and show the significant changes that have occurred in the responses of these variables to monetary policy shocks or to shocks to expected and actual inflation. In so doing, we generalize the analysis undertaken by Leduc, Sill and Stark (2007) to allow for a more nuanced and detailed look at questions such as the impact of different chairmanship regimes at the Federal Reserve Board, the role of good policy versus good luck, and second round inflation effects. While some of the questions asked have a relatively long history, the methods used to undertake our investigations are very new, and the time-varying structure allows us to offer a more detailed picture. In using these methods we also undertake a substantial technical discussion to unearth the appropriateness of the TVP-SVAR models hitherto estimated in the literature, in particular the role of the choice of priors in determining the outcome of the estimations. As we discuss in the paper, this is an important issue which has remained rather hidden in the discussions surrounding the estimation of TVP-SVARs, yet may have a substantially important role to play in determining the results obtained.
    Keywords: monetary policy, expectations, inflation, time variation, VARs, impulse responses.
    JEL: E52 E31 C32
    Date: 2012
  11. By: Mariusz A. Sumlinski; A. J. Al-Eyd; David Amaglobeli; Bahrom Shukurov
    Abstract: This paper examines the implications of elevated global food prices for inflation in select Central Asian economies - Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan. The findings suggest that global food inflation has significant short-run effects that build over time. Inflation outcomes simulated under alternative global wheat price assumptions underscore these vulnerabilities, and suggest that sustained administrative measures are unlikely to prove effective. In line with structural economic features, the interest rate channel of monetary policy is found to be limited, arguing for a broad policy strategy to control more expansive inflationary pressures. Looking ahead, measures to enhance supply responses, deepen domestic financial markets, develop adequate social safety nets, and increase central bank independence are warranted.
    Keywords: Agricultural prices , External shocks , Fiscal policy , Inflation , Monetary policy , Price increases ,
    Date: 2012–03–22
  12. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Kateøina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (London School of Economics); Marek Rusnák (Czech National Bank)
    Abstract: We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank.
    Keywords: monetary policy, voting record, dissent
    JEL: E52 E58
    Date: 2012–02
  13. By: Balázs Égert; Evžen Kočenda
    Abstract: We analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. In doing so, we first estimate standard and extended versions of the monetary model to capture deviations from the long-term monetary equilibrium. In the second stage, we employ a high-frequency GARCH model that includes accurately identified macroeconomic news, central bank communication and emerging market risk and allows for non-linear behavior as regards the deviation from equilibrium. Surprisingly, there is little support for non-linearity in the data. During the pre-crisis period (2004–2007) the major CEE currencies generally respond to macroeconomic news in an intuitive manner that corresponds to exchange rate-related theories. During the crisis (2008–2009), the responsiveness breaks down and the currencies react to news on the key economic indicator (real GDP growth). There is a lack of responsiveness to central bank communications during the pre-crisis period but all currencies react to central bank verbal interventions during the crisis. Our results show that the CEE currencies react to both macroeconomic news and central bank communications but this responsiveness differs during the pre-crisis and crisis periods. Detailed responses vary across the currencies and we conjecture that the exchange rate regime and the extent to which particular currencies are traded on the international forex market are potential explanations behind these differences.
    Keywords: exchange rate, macroeconomic news, central bank communication, monetary model, Central Europe, European Union
    JEL: E31 F31 O11 P17
    Date: 2012
  14. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilising the price level and stabilising the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilisation of the output gap too heavily in its objective function.
    Keywords: Information, monetary policy, transparency
    Date: 2011
  15. By: Papa N'Diaye; Ashvin Ahuja
    Abstract: Hong Kong SAR was hit hard by the global financial crisis, which started out in the U.S. and spilled over to the rest of the world. Three years later, vulnerabilities in the euro area’s financial system and concerns over a hard landing in Mainland China have started to weigh on Hong Kong’s growth prospects. Against this backdrop, this paper aims to quantify the trade and financial spillovers on Hong Kong SAR’s economy from a downturn in the euro area and Mainland China. Based on simulations using a version of the Global Integrated Monetary and Fiscal (GIMF) model and a Global VAR (GVAR) that includes both balance sheet and standard macroeconomic indicators, Hong Kong SAR’s output growth could fall by as much as 1½ times the decline in euro area output growth given its high dependence on external trade and many links with the global financial system. A worsening of the crisis in the euro area could reduce Hong Kong SAR’s output by as much as 4-4½ percent below baseline during the first two years after the shock, pushing Hong Kong SAR back into recession and possible deflation. In the event of a hard landing in China, the model simulations suggest that Hong Kong SAR would be on a sustained downturn with output growth falling by about 3 percentage points below baseline in the first two years. Should these events materialize, countercyclical fiscal response could help cushion, but not fully offset, the impact of slower growth in the euro area or China.
    Keywords: Banks , China , Europe , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Hong Kong SAR , International trade , Spillovers ,
    Date: 2012–03–20
  16. By: Greg Farrell; Shakill Hassan; Nicola Viegi
    Abstract: We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around (…five minutes before, …five minutes after) official infl‡ation announcements, and show that the rand appreciates (respectively, depreciates) on impact when in‡flation is higher (respectively, lower) than expected. The effect only applies after the adoption of infl‡ation targeting, and is stronger for “good” news. Our …ndings are rationalizable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) in‡flation targeting policy in South Africa; and can be used to monitor changes in currency market perceptions about the monetary policy regime.
    Keywords: high-frequency exchange rates; in‡flation surprises; Taylor rules; in‡flation targeting; credibility.
    JEL: E31 E52 F30 F31
    Date: 2012
  17. By: Monique Reid
    Abstract: The majority of academic research on central bank communication has analysed a central bank’s audience as a single group. Analyses, especially empirical research have focused almost exclusively on a central bank’s interaction with the financial markets, facilitated by the availability of high-quality, high-frequency asset price data. In practice, a central bank’s audience is heterogeneous, and recognising this is advantageous for both modelling purposes and effective central bank communication. Many central banks use a range of communication tools to reach their various audiences, but little formal analysis has been conducted to guide policy design and communication strategies. Gathering and processing information are costly for the general public, so they make rational decisions that limit the time and resources they allocate to these tasks. As a result, aggregate inflation expectations of the public as a whole can be described as ‘stick' in that the spread of information about inflation expectations through the economy is not instantaneous. A body of literature has emerged over the past decade, led by Mankiw and Reis (2001), who developed the Sticky Information Phillips Curve (SIPC), and Carroll (2002, 2003), who proposed microfoundations for the SIPC. This paper follows Carroll (2002, 2003) in adopting epidemiological models to provide insight into how the general public in South Africa forms its inflation expectations. This enables an estimation of the speed at which the South African general public updates its inflation expectations (information stickiness). Agent-based models, which explain the complex aggregate inflation expectations of the general public from the agent level upwards, are then used to verify these estimates of information stickiness and explore the microfoundations of aggregate inflation expectations
    Keywords: South Africa, sticky information, inflation expectations, inattentive general public
    JEL: D82 D83 E31 E52 E58
    Date: 2012
  18. By: Renate Ohr; Mehmet Özalbayrak
    Abstract: This paper deals with the question of what impact membership of the European Monetary Union (EMU) has had on small European states. We will also analyze whether or to what extent a large number of small member states affect the EMU itself when they vastly outnumber the large countries. We conclude that the small countries in the European Union are far from creating a homogeneous group. They differ in the length of EU membership, income per capita, membership and non-membership of the EMU, production structure, foreign trade policy, and stability readiness. However, they do share some characteristics, particularly their relatively high openness, through which domestic macroeconomic variables are easily influenced by external shocks. The welfare gains of a small country joining the eurozone depend on the extent to which the benefits (if existent) of higher financial credibility outweigh the loss of autonomous monetary policy. Finally, with regard to their significance in the EMU, in no case should cutbacks be made for small countries concerning the stability requirements.
    Keywords: Euro, European Monetary Union, economic integration, small open economy
    JEL: E42 E5 F15 F33 F55 O52
    Date: 2012–01–31
  19. By: Mark Weisbrot; Rebecca Ray
    Abstract: Advocates of an economic strategy of “internal devaluation” have recently pointed to Latvia as an example of successful macroeconomic policy. The Latvian economy is projected to grow by four percent in 2011. They argue that the Latvian government, along with the European authorities (including the International Monetary Fund ­ IMF), pursued the correct macroeconomic policies by maintaining Latvia’s fixed exchange rate and implementing pro-cyclical fiscal policies (that shrunk the economy further) and sometimes pro-cyclical monetary policies. They argue that these were the best policies ­as opposed to counter-cyclical, expansionary fiscal and monetary policies, accompanied by devaluation­ designed to promote a rapid economic recovery. The data, however, contradict the notion that Latvia’s experience provides an example of successful internal devaluation. This paper looks at the Latvian case and provides further evidence that this can be a very costly strategy and one that does not work. The social and economic costs in Latvia were enormous, and the loss of income much greater than most countries that had crisis-driven devaluations. Countries with crisis-driven devaluations also recovered vastly faster, on average, than did Latvia. Furthermore, net exports contributed little or nothing to Latvia's recovery, which seems to have been facilitated instead by the abandonment of pro-cyclical macroeconomic policies.
    Keywords: latvia, europe, devaluation, procyclical, countercyclical, imf,
    JEL: E E6 E52 F F34 F14
    Date: 2011–12
  20. By: Jaromir Benes; Alfredo Baldini; Mai Dao; Rafael Portillo; Andrew Berg
    Abstract: We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries.
    Date: 2012–04–05
  21. By: Farley Grubb
    Abstract: The British North American colonies were the first western economies to rely on legislative-issued fiat paper monies as their principal internal media of exchange. This system arose piecemeal. It was monetary experimentation on a grand scale. In the absence of banks and treasuries that exchanged local fiat monies at fixed rates for specie monies (outside monies) on demand, colonial governments experimented with other ways to anchor their fiat monies to real values in the economy. These mechanisms included tax-redemption, interest-bearing notes, land-backed mortgage loans, sinking funds, and legal tender laws. The structure and performance of these mechanisms are explained. <i>"[The colonies] cannot keep Gold and Silver among them sufficient for the Purposes of their internal Commerce... Paper Bills called Bills of Credit or Paper Money have therefore in the colonies long been substituted for real Money. Various Ways of issuing these and on different Foundations, have at different Times been thought of and practised.... On the whole no Method has been found to give any Degree of fixed, steady, uniform Value to Bills of Credit in America,..." (Benjamin Franklin, 13 Feb. 1767)</i>
    JEL: E42 E50 F31 G10 H60 K29 N11 N21 N41
    Date: 2012–04
  22. By: Benigno, Pierpaolo; Romei, Federica
    Abstract: Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances.
    Keywords: Current Account adjustment
    JEL: E40
    Date: 2012–04
  23. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Abstract: This paper is a quantitative investigation into the characteristics of the Laffer curve in a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents. We show that the shape of the Laffer curves related to taxes on labor, capital and consumption dramatically changes depending on which of transfers or government debt are adjusted to make the government budget constraint hold. When transfers are adjusted, the Laffer curve has the traditional shape. However, when debt is adjusted, the Laffer curve looks like a horizontal S, in which case fiscal revenues can be associated with up to three diferent levels of taxation. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete.
    Keywords: , , , , , , , Laffer Curve, Incomplete Markets, Labor Supply, Precautionary Savings, Public Debt
    JEL: E6 H6
    Date: 2012–04
  24. By: Biddle, Jeff E. (Michigan State University); Hamermesh, Daniel S. (University of Texas at Austin)
    Abstract: Using CPS data from 1979-2009 we examine how cyclical downturns and industry-specific demand shocks affect wage differentials between white non-Hispanic men and women, Hispanics and non-Hispanic whites, and African-Americans and non-Hispanic whites. Women's relative earnings are harmed by negative shocks; the wage disadvantage of African-Americans drops with negative shocks, which have slight negative effects on Hispanics' relative wages. Negative shocks also increase the earnings disadvantage of bad-looking workers. A theory of job search suggests two opposite-signed mechanisms that affect these wage differentials. It suggests greater absolute effects among job-movers, which is verified using the longitudinal component of the CPS.
    Keywords: gender, race, ethnicity
    JEL: E29 J71
    Date: 2012–03
  25. By: Bown, Chad P.; Crowley, Meredith A.
    Abstract: This research estimates the impact of macroeconomic fluctuations on import protection policies over 1988:Q1-2010:Q4 for the United States, European Union, and three other industrialized economies. First, estimates on a pre-Great Recession sample provide evidence of three key relationships for the US and EU. Increases in domestic unemployment rates and real appreciations in bilateral exchange rates led to substantial increases in antidumping and related forms of import protection. Furthermore, economies historically imposed these bilateral import restrictions on trading partners going through their own periods of weak economic growth. Second, estimates from the pre-Great Recession model predict a major trade policy response during 2008:Q4-2010:Q4, given the realized macroeconomic shocks. New US and EU trade barriers were projected to cover up to an additional 15 percentage points of nonoil imports, well above the baseline level of 2-3 percent of import coverage immediately preceding the crisis. Third, re-estimating the model on data from the Great Recession period illustrates why the realized trade policy response differed from model predictions based on historical data. While exchange rate movements played an important role in limiting new import protection, the US and EU also"switched"from their historical behavior during the Great Recession and shifted new import protection toward trading partners experiencing economic growth and away from those that were contracting.
    Keywords: Currencies and Exchange Rates,Free Trade,Economic Theory&Research,Trade Law,Trade Policy
    Date: 2012–04–01
  26. By: Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The growth of Turkey's economy was over 10% year-on-year in some quarters of the period 2010-2011. It may have decelerated recently, but it is not yet certain that this will lead to a more or less soft type of ‘landing’; a swift resumption of growth is feasible. In 2011, thanks to high real growth and a rate of inflation between 5% and 10%, growing budget revenues offered a nice opportunity to increase expenditures and decrease the budget deficit at the same time. This 'pro-active' fiscal policy will continue. The central bank, too, supports GDP expansion by keeping the policy rate low. However, this job is a bit tricky. The rate of inflation should not climb over 10%, and the exchange rate should remain rather stable. The high deficit in the current account is a main source of vulnerability. In the case of no major adverse external shock, growth is likely to accelerate again in 2013-2014.
    Date: 2012–03
  27. By: Marco M. Sorge
    Abstract: Recent research has renewed interest in the exploration of the optimal design of monetary policy institutions in the presence of uncertainty. In this paper, we revisit the rationale for delegation to a weight-conservative central banker when the social planner’s knowledge about the true preferences of delegates is ex ante ambiguous and he exhibits a preference for robustness. In this context, a robust (worst-case oriented) delegation strategy is intended to minimize the maximum welfare loss over the uncertainty set, when no prior probability distribution for the preference bias (conservatism-gap) is available. We find that both over and underconservatism may emerge with respect to the certainty case, for robust delegation is shown to be model-dependent. Most importantly, under reasonable model’s parameterizations, Rogoff’s principle is reversed: it is optimal for society to appoint a weight-liberal central banker.
    Keywords: Delegation; Conservative central bank; Preference uncertainty; Minmax policy.
    JEL: E52 E58
    Date: 2012–04–05
  28. By: Noritaka Maebayashi (Graduate School of Economics, Osaka University); Takeo Hori (College of Economics, Aoyama Gakuin University); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large.
    Keywords: Reductions in public debt, Debt policy rule, Public capital, Endogenous Growth
    JEL: E62 H54 H63
    Date: 2012–04
  29. By: Rose, Andrew K
    Abstract: Conventional wisdom holds that protectionism is counter-cyclic; tariffs, quotas and the like grow during recessions. While that may have been a valid description of the data before the Second World War, it is no longer accurate. In the post-war era, protectionism has not actually moved counter-cyclically. Tariffs and non-tariff barriers do not systematically rise during cyclic downturns; if anything, they tend to fall. I document this new stylized fact with a wide panel of data, using a variety of measures of protectionism and business cycles. I also provide some hints as to why protectionism is no longer counter-cyclic.
    Keywords: barrier; business cycle; data; empirical; international; panel; policy; recession; tariff; trade
    JEL: E32 F13
    Date: 2012–04
  30. By: Sarah Drought; Chris McDonald (Reserve Bank of New Zealand)
    Abstract: In this paper we use a range of statistical models to forecast New Zealand house price in ation. We address the issue of model uncertainty by combining forecasts using weights based on out-of-sample forecast performance. We consider how the combined forecast for house prices performs relative to both the individual model forecasts and the Reserve Bank of New Zealand's house price forecasts. We find that the combination forecast is on par with the best of the models for most forecast horizons, and has produced lower root mean squared forecast errors than the Reserve Bank's forecasts.
    JEL: E17 E37
    Date: 2011–11
  31. By: Fabling, Richard (Motu Economic and Public Policy Research); Maré, David. C (Motu Economic and Public Policy Research)
    Abstract: This paper examines the dynamics of employment adjustment in New Zealand, focusing on the response of firms to the 2008/09 Global Financial Crisis. We use data from Statistics New Zealand’s prototype Longitudinal Business Database (LBD) to examine firms’ employment responses to output shocks before and after the crisis, and to investigate variations in job and worker flows. We discuss the resilience of the NZ labour market to economic shocks, and the possible role of labour market policy settings. Finally, we discuss preliminary findings on the differential impact of labour market adjustment on workers – by earnings level, age, gender, and tenure – and outline potential further work along these lines. Our analysis of firm microdata highlights three key features of New Zealand labour market adjustment to the 2008/09 crisis. First, there was considerable heterogeneity across firms, both before and after the crisis, in the size of output shocks that firms faced, the amount of employment adjustment in response to any given output shock, and in the size of worker flows given the firm’s employment adjustment. Second, the crisis not only moved the distribution of output shocks faced by firms, but also altered the relationship between output shocks and changes in job and worker flows and employment. Third, the impact of the observed firm-level dynamics had an uneven impact on workers, with greater employment losses for low wage workers, young workers, and workers with low job tenure.
    Keywords: Global Financial Crisis; labour market adjustment; output shock; unemployment; job flows; worker flows
    JEL: E24 E32 J63
    Date: 2012–04
  32. By: Alfred Hannig (Asian Development Bank Institute (ADBI)); Stefan Jansen
    Abstract: The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion. In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights : —Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid financial behavior throughout financial crises, keeping deposits in a safe place and paying back their loans. —Institutional risk profiles at the bottom end of the financial market are characterized by large numbers of vulnerable clients who own limited balances and transact small volumes. Although this profile may raise some concerns regarding reputational risks for the central bank and consumer protection, in terms of financial instability, the risk posed by inclusive policies is negligible. —In addition, risks prevalent at the institutional level are manageable with known prudential tools and more effective customer protection. —The potential costs of financial inclusion are compensated for by important dynamic benefits that enhance financial stability over time through a deeper and more diversified financial system. In the following pages, we present the current state of financial inclusion globally. We also explore some trends in financial inclusion and what the most effective policies are to favor it. In doing so, we suggest that innovations aimed at countering financial exclusion may help strengthen financial systems rather than weakening them.
    Keywords: financial inclusion, Financial Stability, financial crisis, financial innovation, Institutional risk
    JEL: E44 G15 G18 G20 G21 G28
    Date: 2011–12
  33. By: Alfred Hannig (Asian Development Bank Institute (ADBI)); Stefan Jansen
    Abstract: The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion. In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights : —Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid financial behavior throughout financial crises, keeping deposits in a safe place and paying back their loans. —Institutional risk profiles at the bottom end of the financial market are characterized by large numbers of vulnerable clients who own limited balances and transact small volumes. Although this profile may raise some concerns regarding reputational risks for the central bank and consumer protection, in terms of financial instability, the risk posed by inclusive policies is negligible. —In addition, risks prevalent at the institutional level are manageable with known prudential tools and more effective customer protection. —The potential costs of financial inclusion are compensated for by important dynamic benefits that enhance financial stability over time through a deeper and more diversified financial system. In the following pages, we present the current state of financial inclusion globally. We also explore some trends in financial inclusion and what the most effective policies are to favor it. In doing so, we suggest that innovations aimed at countering financial exclusion may help strengthen financial systems rather than weakening them.
    Keywords: financial inclusion, Financial Stability, financial crisis, financial innovation, Institutional risk
    JEL: E44 G15 G18 G20 G21 G28
    Date: 2011–12
  34. By: Vladislav Flek (University of Finance and Administration); Martina Mysíková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We analyze labor market flows and unemployment in the Czech Republic (CR), Slovakia and Poland over the period 2004–2007. Relative involvement of working-age population in gross labor market flows is approximately five times lower in central Europe than in the U.S. /UK. Yet, compared to neighboring countries, the CR suffers more from unemployment rigidity, as evidenced most convincingly by a relatively weakernet flowof workers from unemployment to employment. This net flow alone would cut the unemployment rate in Poland more than twice as fast as in the CR. The CR lags behind in creating jobs forthe unemployed, particularly for men, individuals with primary education, and for the 55–65 age group.
    Keywords: EU-SILC, labor market flows, longitudinal data, unemployment
    JEL: E24 J60 J63 J64
    Date: 2012–03
  35. By: Guerrazzi, Marco
    Abstract: This paper introduces a model of efficiency-wage competition along the lines put forward by Hahn (1987). Specifically, I analyse a two-firm economy in which employers screen their workforce by means of increasing wage offers competing one another for high-quality employees. The main results are the following. First, using a specification of effort such that the problem of firms is concave, optimal wage offers are strategic complements. Second, a symmetric Nash equilibrium can be locally stable under the assumption that firms adjust their wage offers in the direction of increasing profits by conjecturing that any wage offer above (below) equilibrium will lead competitors to underbid (overbid) such an offer. Finally, the exploration of possible labour market equilibria reveals that effort is counter-cyclical.
    Keywords: Efficiency-Wages; Wage Competition; Nash Equilibria; Effort
    JEL: E12 E24 J41 C72
    Date: 2012
  36. By: Askenazy, Philippe (Paris School of Economics); Cette, Gilbert (Bank of France); Maarek, Paul (University of Cergy-Pontoise)
    Abstract: Through panel estimates using OECD country-industry statistics, this paper aims to clarify the determinants of rent creation and the mechanisms of rent sharing, and the role of market regulations in these processes. The empirical analysis is carried out in two steps. The first explains the rent creation process. For each country-industry-year observation, the size of rents, measured by the value added price relative to the GDP price, is assumed to depend solely on direct anti-competitive regulations on services and goods. The second step explains the rent sharing process. Three destinations of rents are distinguished for each country-industry-year observation: upstream industries, capital and labour. The main empirical findings are as follows. Regarding the rent creation, direct anti-competitive regulations are associated with a very significant rise in rent size. Concerning the rent sharing, the capital share in value added appears to i) increase with rent size, decrease with anti-competitive regulation in upstream sectors and increase with the industry specific output gap; ii) decrease with the national output gap, increase with the national employment rate and decrease with employment protection regulation; iii) increase with the interaction of rent size and the unemployment rate and decrease with the interaction of rent size and employment protection regulations. These results confirm the existence of three destinations for rents. They also show that the magnitude of each destination depends on the market power of its beneficiary. All these results are robust to a variety of sensitivity checks.
    Keywords: rents, capital share, prices, market regulations, output gap, unemployment
    JEL: E25 J20 J30
    Date: 2012–03

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