nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒05‒15
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Price stability and financial imbalances: rethinking the macrofinancial framework after the 2007-8 financial crisis By Panzera, Fabio S.
  2. Monetary Policy, Asset Prices and Adaptive Learning By Vicente da Gama Machado
  3. Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic By Roman Horváth; Michal Franta; Marek Rusnák
  4. Monetary Policy and Rational Asset Price Bubbles By Jordi Galí
  5. Revisiting the Great Moderation using the Method of Indirect Inference By Minford, Patrick; Ou, Zhirong
  6. Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory By Thomas I. Palley
  7. Central Bank Independence and Macro-prudential Regulation By Fabian Valencia; Kenichi Ueda
  8. Lessons from the Great Recession: Need for a New Paradigm By Shaikh, Salman
  9. Business Cycle Synchronization During US Recessions Since the Beginning of the 1870's By Nikolaos Antonakakis
  10. The Relevance of Haavelmo’s Macroeconomic Theorizing for Contemporary Policy Making By Chand, Sheetal K.
  11. Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics By Francesco Bianchi
  12. Is Fiscal Stimulus a Good Idea? By Ray C. Fair
  13. Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment By Sylvain Leduc; Daniel Wilson
  14. Economic (in)stability under monetary targeting By Luca Sessa
  15. Investigating the business cycle properties of tourist flows to Barbados By Mayers, Sherry-Ann; Jackman, Mahalia
  16. The curious case of Indian agriculture By Banik, Nilanjan; Biswas, Basudeb
  17. The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective By Eckhard Hein; Achim Truger; Till van Treeck
  18. Skill-Biased Technological Change and the Business Cycle By Almut Balleer; Thijs van Rens
  19. Nonlinear zdventures at the zero lower bound By Jesús Fernández-Villaverde; Grey Gordon; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  20. The Dynamic Effects of Fiscal Stimulus in a Two Sector Open Economy By Ross Guest; Anthony J. Makin
  21. Money is an Experience Good: Competition and Trust in the Private Provision of Money By Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
  22. How Important is the Intensive Margin of Labor Adjustment? By Thijs van Rens
  23. A Sticky-Dispersed Information Phillips Curve: a model with partial and delayed information By Marta Areosa; Waldyr Areosa; Vinicius Carrasco
  24. The Instability of the Banking Sector and Macrodynamics: Theory and Empirics By Stefan Mittnik; Willi Semmler
  25. Monetary Policy Flixibility in floating Exchange Rate Regimes: Currency Denomination and Import Shares By Troeger, Vera
  26. The analytics of SVARs: a unified framework to measure fiscal multipliers By Dario Caldara; Christophe Kamps
  27. A Model of Rule-of-Thumb Consumers With Nominal Price and Wage Rigidities By Sergio Ocampo Díaz
  28. Prudential Policy for Peggers By Stephanie Schmitt-Grohe; Martin Uribe
  29. Structural Unemployment By Benedikt Herz and Thijs van Rens
  30. Hoarding of International Reserves and Sterilization in Dollarized and Indebted Countries : an effective monetary policy? By Layal Mansour
  31. A Model of Rule-of-Thumb Consumers With Nominal Price and Wage Rigidities By Sergio Ocampo Díaz
  32. Labour market regimes and unemployment in OECD countries By Simon Sturn
  33. What does financial volatility tell us about macroeconomic fluctuations? By Marcelle Chauvet; Zeynep Senyuz; Emre Yoldas
  34. A Model of Shadow Banking By Nicola Gennaioli; Andrei Shleifer; Robert Vishny
  35. A Microfoundation for Normalized CES Production Functions with Factor-Augmenting Technical Change By Jakub Growiec
  36. The Nature of Countercyclical Income Risk By Fatih Guvenen; Serdar Ozkan; Jae Song
  37. Forecasting national recessions using state level data By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  38. Remittances Channel and Fiscal Impact in the Middle East, North Africa, and Central Asia By Yasser Abdih; Christian Ebeke; Adolfo Barajas; Ralph Chami
  39. Selective hiring and welfare analysis in labor market models By Christian Merkl; Thijs van Rens
  40. Understanding Bubbly Episodes By Vasco Carvalho; Alberto Martín; Jaume Ventura
  41. Tobin’S Q Versus Cape Versus Caper: Predicting Stock Market Returns Using Fundamentals and Momentum By Ed Tower
  42. Misallocation and Productivity Effects of the Smoot-Hawley Tariff By Eric W. Bond; Mario J. Crucini; Tristan Potter; Joel Rodrigue
  43. Tax Avoidance, Human Capital Accumulation and Economic Growth By María Jesús Freire-Serén; Judith Panadés i Martí
  44. Recognizability and Liquidity of Assets By Young Sik Kim; Manjong Lee
  45. Matching, Wage Rigidities and Efficient Severance Pay By Fella, Giulio
  46. The Impact of Financialization on Income Distribution in the USA and Germany: A Proposal for a New Adjusted Wage Share By Petra Duenhaupt
  47. An endogenously clustered factor approach to international business cycles By Neville Francis; Michael T. Owyang; Özge Savascin
  48. The World of Forking Paths: Latin America and the Caribbean Facing Global Economic Risks By Andrew Powell
  49. Anglo-Saxon Capitalism in Crisis? Models of Liberal Capitalism and the Preconditions for Financial Stability By Konzelmann, S.; Fovargue-Davies, M.
  50. Institutions and credit By Farla, Kristine
  51. Income Inequality and Savings: A Reassessment of the Relationship in Cointegrated Panels By Tuomas Malinen
  52. Laffer Strikes Again: Dynamic Scoring of Capital Taxes By Holger Strulik; Timo Trimborn
  53. Competition, Markups, and the Gains from International Trade By Chris Edmond; Virgiliu Midrigan; Daniel Yi Xu
  54. Floating Exchange Rates as Employment Protection By Yu-Fu Chen; Gylfi Zoega
  55. Testing for linear and threshold cointegration under the spatial equilibrium condition By Araujo-Enciso, Sergio Rene
  56. Revisiting the effects of remittances on bank credit: a macro perspective By Richard P.C. Brown; Fabrizio Carmignani
  57. Volatile world market prices for dairy products - how do they affect domestic price formation: The German cheese market By Weber, Sascha A.; Salamon, Petra; Hansen, Heiko
  58. Does infrastructure really cause growth?: the time scale dependent causality nexus between infrastructure investments and GDP By Krüger, Niclas
  59. Gradual Green Tax Reforms By Carlos de Miguel; Baltasar Manzano

  1. By: Panzera, Fabio S.
    Abstract: During the two decades preceding the 2007-8 financial crisis, both advanced and emerging market economies experienced larger credit growth and asset price fluctuations than in the more distant past. These phenomena were largely due to the establishment of credible inflation targeting regimes, whose excessive focus on medium-run price stability bred unsustainable credit and asset price dynamics, to the detriment of financial stability over longer time horizons. As the financial crisis spread to the whole economy in the late 2008, many economists came to believe that monetary policy should actively lean against financial imbalances - thus challenging the canonical New Keynesian paradigm. This paper reviews the relevance of that paradigm in light of the recent financial crisis, arguing that the whole macrofinancial stability framework, rather than monetary policy per se, needs to be considered anew. In particular, some macro-prudential tools and a counter-cyclical tax on private debt could be useful instruments to counter overly credit expansion and, accordingly, smooth asset price fluctuations.
    Keywords: inflation targeting ; New Keynesian consensus ; financial imbalances ; macro-prudential regulation ; counter-cyclical tax on debt
    JEL: E32 E58 G01 G18
    Date: 2011–12–15
  2. By: Vicente da Gama Machado
    Abstract: Following recent episodes of financial distress, the interaction between monetary policy and asset price fluctuations has gained renewed attention. Here, we assess the role of asset price misalignments in monetary policy in an adaptive learning context. Our model first extends Bullard and Mitra (2002), including an additional role for asset prices. From the point of view of the E-Stability criterion, commonly used in the learning literature, we find that a response to stock prices is not desirable under both a forward expectations policy rule and an interest rate rule responding to contemporaneous values. Heterogeneous beliefs about the dynamics of asset price fluctuations, inflation and the output gap are introduced and we also evaluate an optimal monetary policy rule including a weight on asset prices. Overall we find that the Taylor principle remains important over all interest rate rules analysed and that central banks should act cautiously when considering the introduction of stock prices in monetary policy.
    Date: 2012–04
  3. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Franta (Czech National Bank); Marek Rusnák (Czech National Bank)
    Abstract: We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the 1996-2010 period by employing a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks changes over time, with a focus on the period of the recent financial crisis. Furthermore, we augment the estimated system with a lending rate and credit growth to shed light on the relative importance of financial shocks for the macroeconomic environment. Our results suggest that output and prices have become increasingly responsive to monetary policy shocks, probably reflecting financial sector deepening, more persistent monetary policy shocks, and overall economic development associated with disinflation. On the other hand, exchange rate pass-through has weakened somewhat over time, suggesting improved credibility of inflation targeting in the Czech Republic with anchored inflation expectations. We find that credit shocks had a more sizeable impact on output and prices during the period of bank restructuring with difficult access to credit. In general, our results show that financial shocks are less important for the aggregate economy in an environment of a stable financial system.
    Keywords: Monetary policy transmission; Sign restrictions; Time-varying parameters
    JEL: E44 E52
    Date: 2012–04
  4. By: Jordi Galí
    Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an OLG model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
    Keywords: monetary policy rules, stabilization policies, asset price volatility
    JEL: E44 E52
    Date: 2011–11
  5. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation — among them monetary policy shocks the Fed injected into inflation.
    Keywords: Great Moderation; Shocks; Monetary policy; Optimal Timeless Rule; Taylor Rule; Indirect Inference; Wald statistic
    JEL: E42 E52 E58
    Date: 2012–05
  6. By: Thomas I. Palley
    Abstract: The financial crisis and Great Recession have prompted a rethink of monetary policy and central banking. The status quo insider rethink focuses on the role of monetary policy in dealing with asset bubbles; making the central bank the banking system supervisor; and how to deal with the problem of the zero lower bound to nominal interest rates. This paper presents an outsider reform program that focuses on central bank governance and independence; reshaping the economic philosophy of central banks to be more intellectually open-minded; major monetary policy reform that includes adoption of an inflation target equal to the minimum unemployment rate of inflation (MURI) and implementation of asset based reserve requirements; and regulatory reform that addresses problems of flawed incentives, excessive leverage, and maturity mismatch.The proposed outsider reform program is rooted in a rethink of macroeconomic theory compelled by the crisis. There are some overlaps between the insider and outsider reform programs but they are more form than substance. That is dangerous because it can confuse debate if similarity of form is mistaken for similarity of substance.The insider program makes no changes to macroeconomic theory and is uncritical of the Federal Reserve's past actions. From its perspective, any failings of the Federal Reserve have been unwitting sins of omission. The outsider program fundamentally challenges existing macroeconomic theory and is also highly critical of the Federal Reserve. From its perspective the failings of the Federal Reserve have included significant sins of commission rooted in political capture, cognitive capture and intellectual hubris.The outsider critique can be taken even further. The Federal Reserve is already legally mandated to pursue maximum employment with price stability. However, it needs institutional transformation that makes it think of itself as an agent for helping realize the "American Dream". That means it should have a duty to shape the allocation of credit and the financial system in ways that ensure growth, full employment and a fair shake for all.
    Date: 2011
  7. By: Fabian Valencia; Kenichi Ueda
    Abstract: We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
    Keywords: Central bank autonomy , Central banks , Economic models , Monetary policy ,
    Date: 2012–04–23
  8. By: Shaikh, Salman
    Abstract: The ongoing sovereign debt crisis in Europe and U.S. is challenging the conventional wisdom and is creating fears of a double dip recession in 2012. Massive levels of debt and consumption beyond means and speedy financial innovation with lax regulation has put major economies in a deep hole. Monetary policy with ease in rates had been ineffective to say the least in generating new jobs in last few years when interest rates were kept at near zero level since 2008 in U.S. Fiscal stimulus again targeted the undisciplined financial sector which did not use the stimulus for extending credit to the private sector as much as was required. With business cycle fluctuations, mounting consumer and fiscal debt is unsustainable and one lesson of the crisis is that business cycles are for real and here to stay. The securitization of consumer debt magnified the losses and created negative unjust effects on savers and taxpayers which had nothing to do with the mess in the first place. In this backdrop, a new paradigm is needed which put the focus back on productive enterprise, brings recovery with job creation, limit and regulate speculative financial institutions and instruments and improve corporate governance by influencing the incentives more deeply and proactively.
    Keywords: Great Recession; Great Depression; Financial Crisis; Credit Crunch; Subprime Mortgage Crisis; Housing Market Bubble; Securitization; Leveraging; Shadow Banking
    JEL: E02 E44 E63
    Date: 2012–02–01
  9. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper examines the synchronization of business cycles across the G7 countries during US recessions since the 1870's. Using a dynamic measure of business cycle synchronization, results depend on the globalisation period under consideration. On average, US recessions have significantly positive effects on business cycle co-movements only in the period following the breakdown of the Bretton Woods system of fixed exchange rates, while strongly decoupling effects among the G7 economies are documented during recessions that occurred under the classical Gold Standard. During the 2007-2009 recession, business cycles co-movements increased to unprecedented levels.
    Keywords: Dynamic conditional correlation, Business cycle synchronization, Recession, Globalisation
    JEL: E3 E32 F4 F41 N10
    Date: 2012–04
  10. By: Chand, Sheetal K. (Neapolis University, Cyprus.)
    Abstract: The recent great financial crisis and the ensuing deep recessions have placed in sharp relief the fundamental issue of how financial factors, including financial instability, interact with the real economy. In order to understand the nature of these interactions and formulate policies that would help contain adverse outcomes it is essential to have an adequate conceptual framework. Unfortunately, the standard DSGE approach is deficient in this regard. This paper contends that Haavelmo’s macroeconomic theorizing provides a better starting point for forging the required integration between the financial and real sectors. The paper extends the basic Haavelmo model to the contemporary scene and uses it to shed light on policy solutions to the current predicament.
    Keywords: financial crisis; investment; monetary and fiscal policies
    JEL: E22 E44 E52 E63
    Date: 2012–02–27
  11. By: Francesco Bianchi
    Abstract: The evolution of the U.S. economy over the last 50 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, the behavior of the Federal Reserve is identifi…ed by repeated fluctuations between a Hawk- and a Dove- regime, instead of by the traditional pre- and post- Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late '70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a set of tools to handle some of the technical difficulties that arise in rational expectation models with Markov-switching regimes.
    Date: 2012
  12. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: The results in this paper, using a structural multi-country macroeconometric model, suggest that there is at most a small gain from fiscal stimulus in the form of increased transfer payments or increased tax deductions if the increased debt generated must eventually be paid back.  The gain in output and employment on the way up is roughly offset by the loss in output and employment on the way down as the debt from the initial stimulus is paid off. This conclusion is robust to different assumptions about monetary policy. To the extent that there is a gain, the longer one waits to begin paying the debt back the better.   Possible caveats regarding the model used are that 1) monetary policy is not powerful enough to keep the economy at full employment, 2) potential output is taken to be exogenous, 3) any permanent effects on asset prices and animal spirits from a stimulus are not taken into account, and 4) the model does not have the feature that in really bad times the economy might collapse without a stimulus.
    Keywords: Fiscal stimulus, Multipliers
    JEL: E17
    Date: 2012–05
  13. By: Sylvain Leduc; Daniel Wilson
    Abstract: We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.
    JEL: E62 H54 R11
    Date: 2012–05
  14. By: Luca Sessa (Bank of Italy)
    Abstract: Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring.
    Keywords: local indeterminacy, monetary targeting, real effects of money, money-in-the-utility-function, money-in-the-production-function
    JEL: E5 E58 E52 E41
    Date: 2012–03
  15. By: Mayers, Sherry-Ann; Jackman, Mahalia
    Abstract: This paper evaluates whether the tourism cycles of Barbados can be regarded as a direct consequence of business cycles of the UK, US, Canada and Barbados. The cyclical components of the series are extracted using the structural time series framework by Harvey, 1989, and the interrelations between the variables are evaluated using innovation accounting. The variance decompositions suggests that shocks to the source country business cycle series can explain up to 25 percent of the future variation of the Barbadian tourism cycle. Shocks to the Barbadian business cycle only seem to significantly affect the Canadian tourist cycle. This implies that for tourist arrivals from the US and UK are more influenced by economic developments in their respective home countries, rather than those of Barbados. Finally, Granger-causality tests indicate that past values of the source country business cycles can help better predict present values tourist arrivals to Barbados, while past values of the Barbadian cycle only Granger-cause the Canadian tourist cycle. An interesting observation is that there appears to be some delay in the reaction of the tourism cycle to the business cycles. Thus, policy makers should take advantage of the delay between the two cycles, and adopt some form of countercyclical policy to soften the impact of negative income shocks in the UK, US or Canada on the Barbadian economy.
    Keywords: Tourism; Business Cycle; Barbados
    JEL: E32 N16 L83
    Date: 2011
  16. By: Banik, Nilanjan; Biswas, Basudeb
    Abstract: This paper examines association between the cyclical component of agricultural output and rainfall in India. When the cause of food inflation is because of supply shortage driven by inadequate rainfall and poor irrigation facilities, then a contractionary monetary policy may lead to stagflation. Considering agricultural output and rainfall data from four states in India we find evidence in favor of association.
    Keywords: Agriculture output; Beveridge-Nelson Decomposition; Rainfall; India
    JEL: E31
    Date: 2012–04–28
  17. By: Eckhard Hein; Achim Truger; Till van Treeck (Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation)
    Abstract: The financial and economic crisis in the Euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the Euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilisation have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the Euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilising wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-Euro area policy coordination.
    Date: 2011
  18. By: Almut Balleer; Thijs van Rens
    Abstract: Over the past two decades, technological progress in the United States has been biased towards skilled labor. What does this imply for business cycles? We construct a quarterly skill premium from the CPS and use it to identify skill-biased technology shocks in a VAR with long-run restrictions. Hours fall in response to skill-biased technology shocks, indicating that at least part of the technology-induced fall in total hours is due to a compositional shift in labor demand. Skill-biased technology shocks have no effect on the relative price of investment, suggesting that capital and skill are not complementary in aggregate production.
    Keywords: skill-biased technology, skill premium, VAR, long-run restrictions, capital-skill complementarity, business cycle
    JEL: E24 E32 J24 J31
    Date: 2011–05
  19. By: Jesús Fernández-Villaverde; Grey Gordon; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
    Abstract: Motivated by the recent experience of the U.S. and the Eurozone, the authors describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, the authors found that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, the authors document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.
    Keywords: Keynesian economics ; Nonlinear theories ; Interest rates
    Date: 2012
  20. By: Ross Guest; Anthony J. Makin
    Abstract: In 2009-10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis of 2008-09. This paper analyses the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods – traded (T) and non-traded (N) goods, which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labour supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.
    Date: 2011–09
  21. By: Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
    Abstract: We study the interplay between competition and trust as efficiency- enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.
    Keywords: E40, E50, E58, E60
    Date: 2011–05
  22. By: Thijs van Rens
    Abstract: Using new quarterly data for hours worked in OECD countries, Ohanian and Raffo (2011) argue that in many OECD countries, particularly in Europe, hours per worker are quantitatively important as an intensive margin of labor adjustment, possibly because labor market frictions are higher than in the US. I argue that this conclusion is not supported by the data. Using the same data on hours worked, I nd evidence that labor market frictions are higher in Europe than in the US, like Ohanian and Raffo, but also that these frictions seem to affect the intensive margin at least as much as the extensive margin of labor adjustment.
    Keywords: hours worked, intensive margin labor adjustment
    JEL: E24 E32
    Date: 2011–10
  23. By: Marta Areosa; Waldyr Areosa; Vinicius Carrasco
    Abstract: We study the interaction between dispersed and sticky information by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky-information. We compute the unique equilibrium of the game induced by the firms' pricing decisions and derive the resulting Phillips curve. The main effect of dispersion is to magnify the immediate impact of a given shock when the degree of stickiness is small. Its effect on persistence is minor: even when information is largely dispersed, a substantial amount of informational stickiness is needed to generate persistence in aggregate prices and inflation.
    Date: 2012–04
  24. By: Stefan Mittnik; Willi Semmler
    Abstract: This paper studies the issue of local instability of the banking sector and how it may spillover to the macroeconomy. The banking sector is considered here as representing a wealth fund that accumulates capital assets, can heavily borrow and pays bonuses. We presume that the banking system faces not only loan losses but is also exposed to a deterioration of its balances sheets due to adverse movements in asset prices. In contrast to previous studies that use the financial accelerator – which is locally amplifying but globally stable and mean reverting – our model shows local instability and globally multiple regimes. Whereas the financial accelerator leads, in terms of econometrics, to a one-regime VAR we demonstrate the usefulness of a multi-regime VAR (MRVAR). We estimate our model for the US with a MRVAR using a constructed financial stress index and industrial production. We also undertake an impulse-response study with an MRVAR which allows us to explore regime dependent shocks. We show that the shocks have asymmetric effects depending on the regime the economy is in and the size of the shocks. As to the recently discussed unconventional monetary policy of quantitative easing we demonstrate that the effects of monetary shocks are also dependent on the size of the shocks.
    JEL: E2 E6 C13
    Date: 2011–09
  25. By: Troeger, Vera (University of Warwick)
    Abstract: This paper argues that the degree of monetary flexibility a government enjoys does not only depend on the implemented monetary institutions such as exchange rate arrangements and central bank independence but also on the economic and financial relationships with key currency areas. I develop a formal theoretical framework explaining the degree of monetary independence in open economies under flexible exchange rate regimes by trading relations and financial integration. The model suggests that a) higher import shares from the key currency area increase the imported inflation when monetary authorities try to offset an exogenous shock by cutting back the interest rate while the base country does not encounter a similar shock, and b) the more cross border assets of a country are denominated in the base currency the higher the exchange rate effects of interest rate differences to the interest rate of the key currency area. The presented empirical evidence largely supports the theoretical predictions.
    Date: 2012
  26. By: Dario Caldara; Christophe Kamps
    Abstract: Does fiscal policy stimulate output? SVARs have been used to address this question but no stylized facts have emerged. We derive analytical relationships between the output elasticities of fiscal variables and fiscal multipliers. We show that standard identification schemes imply different priors on elasticities, generating a large dispersion in multiplier estimates. We then use extra-model information to narrow the set of empirically plausible elasticities, allowing for sharper inference on multipliers. Our results for the U.S. for the period 1947-2006 suggest that the probability of the tax multiplier being larger than the spending multiplier is below 0.5 at all horizons.
    Date: 2012
  27. By: Sergio Ocampo Díaz
    Abstract: This document presents a dynamic stochastic general equilibrium model with rule of thumb (Non-Ricardian) agents and both nominal price and wage rigidities. The model follows closely that of Galí et al. (2004) and expands it to include a second way form of heterogeneity (besides the Non-Ricardian agents), namely the nominal wage stickiness á la Calvo, as in Erceg et al. (2000). Special attention is given to the algebraic details of the model. The model is calibrated and its dynamics are explored trough the analysis of impulse response functions.
    Keywords: DSGE, nominal rigidities, rule of thumb consumers. Classification JEL: E32, E37, C68.
    Date: 2012–05
  28. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: This paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy in this model and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period.
    JEL: E31 E62 F41
    Date: 2012–05
  29. By: Benedikt Herz and Thijs van Rens
    Abstract: Structural unemployment is due to mismatch between available jobs and workers. We formalize this concept in a simple model of a segmented labor market with search frictions within segments. Worker mobility, job mobility and wage bargaining costs across segments generate structural unemployment. We estimate the contribution of these costs to fluctuations in US unemployment, operationalizing segments as states or industries. Most structural unemployment is due to wage bargaining costs, which are large but nevertheless contribute little to unemployment fluctuations. Structural unemployment is as cyclical as overall unemployment and no more persistent, both in the current and in previous recessions.
    Keywords: structural unemployment, mismatch, dispersion labor market conditions, worker mobility, job mobility, wage rigidities
    JEL: E24 J61 J62
    Date: 2011–07
  30. By: Layal Mansour (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: The primary aim of this paper is to explore the effectiveness of Hoarding International Reserves and Sterilization in dollarized and indebted countries such as Turkey and Lebanon, by measuring the sterilization coefficient, and the offset coefficient. It also focuses on exploring the link between the sources of Reserves and the external debt. Using monthly data collected from the International Monetary Fund and from the Central Banks of Turkey and Lebanon between January 1994 and February 2011, we applied a 2SLS regression models and we identified explanatory variables that enabled us to estimate the aforementioned coefficients. Our results showed that despite their theoretical practice of sterilization policy, economic constrains of these countries contribute to weaken the efficacy expected from monetary policies.
    Keywords: Monetary policy, International Reserve, Sterilization, Foreign Liabilities,Dollarized countries, Turkey, Lebanon
    JEL: E52 E58 F30 F34
    Date: 2012
  31. By: Sergio Ocampo Díaz
    Abstract: This document presents a dynamic stochastic general equilibrium model with rule of thumb (Non-Ricardian) agents and both nominal price and wage rigidities. The model follows closely that of Galí et al. (2004) and expands it to include a second way form of heterogeneity (besides the Non-Ricardian agents), namely the nominal wage stickiness á la Calvo, as in Erceg et al. (2000). Special attention is given to the algebraic details of the model. The model is calibrated and its dynamics are explored trough the analysis of impulse response functions.
    Date: 2012–05–07
  32. By: Simon Sturn (Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation)
    Abstract: Until now there exists no consensus view on the determinants of unemployment. Whereas some empirical papers find that mainly labour market institutions explain unemployment, others argue that this correlation is not robust. One explanation for these contradictory results is that labour market institutions affect unemployment in varying labour market regimes differently. Due to institutional complementarities and a trade-off between external and internal flexibility, certain labour market institutions show different impacts on unemployment depending on the general institutional arrangement. Support for this is found when testing for the impact of labour market institutions on unemployment in different labour market regimes with panel data for 20 OECD countries in the period 1982 to 2003. While external labour market flexibility shows the expected impact on unemployment in some countries, this is not the case in corporatist countries, which are characterised by high internal flexibility and good labour relations. Taking account of the regime is therefore crucial for successful labour market policy. Additionally, high real interest rates and restrictive monetary and fiscal policy in downturns are found to increase unemployment, suggesting that policy makers should react actively to economic downturns.
    JEL: E3 E6 H1
    Date: 2011
  33. By: Marcelle Chauvet; Zeynep Senyuz; Emre Yoldas
    Abstract: This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of aggregated and industry-level stock volatility, and bond market volatility from daily returns. We model log financial volatility as composed of a long-run component that is common across all series, and a short-run component. If volatility has components, volatility proxies are characterized by large measurement error, which veils analysis of their fundamental information and relationship with the economy. We find that there are substantial gains from using the long term component of the volatility measures for linearly projecting future economic activity, as well as for forecasting business cycle turning points. When we allow for asymmetry in the long-run volatility component, we find that it provides early signals of upcoming recessions. In a real-time out-of-sample analysis of the last recession, we find that these signals are concomitant with the first signs of distress in the financial markets due to problems in the housing sector around mid-2007 and the implied chronology is consistent with the crisis timeline.
    Date: 2012
  34. By: Nicola Gennaioli; Andrei Shleifer; Robert Vishny
    Abstract: We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.
    Keywords: securitization, neglected risk, financial fragility
    JEL: E51 E44 G2
    Date: 2011–05
  35. By: Jakub Growiec
    Abstract: We derive the aggregate normalized CES production function from idea-based microfoundations where firms are allowed to choose their capital- and labor-augmenting technology optimally from a menu of available technologies. This menu is in turn augmented through factor-specific R&D. The considered model yields a number of interesting results. First, normalization can be maintained simultaneously at the local and at the aggregate level, greatly facilitating interpretation of the aggregate production function's parameters in terms of the underlying idea distributions. Second, in line with earlier findings, if capital- and labor-augmenting ideas are independently Weibull-distributed then the aggregate production function is CES; if they are independently Pareto-distributed, then it is Cobb-Douglas. Third, by disentangling technology choice by firms from R&D output, one can draw a clear-cut distinction between the direction of R&D and the direction of technical change actually observed in the economy, which are distinct concepts. Finally, it is argued that the Weibull distribution should be a good approximation of the true unit factor productivity distribution (and thus the CES should be a good approximation of the true aggregate production function) if a \technology" is in fact an assembly of a large number of complementary components.
    Keywords: CES production function, normalization, Weibull distribution, direction of technical change, directed R&D, optimal technology choice
    JEL: E23 E25 O47
    Date: 2011–09
  36. By: Fatih Guvenen; Serdar Ozkan; Jae Song
    Abstract: This paper studies the cyclical nature of individual income risk using a confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual income growth during recessions into “between-group” and “within-group” components. To study the former, we group individuals along several observable characteristics at the time a recession hits. We find two variables to be excellent predictors of fortunes during a recession. First, prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings. Second, we estimate “individual betas” (analogous to “stock betas” in finance) and examine their out-of-sample predictive power. We find that the earnings of high-beta individuals (those that exhibited higher sensitivity to prior recessions and expansions) fall significantly more during subsequent recessions. Next, we turn to within-group differences. Contrary to past research, we do not find the variance of idiosyncratic income shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses—large upward income movements become less likely—whereas the bottom end expands—large drops in income become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. Finally, we find that the cyclical nature of income risk is dramatically different for the top 1 percent compared with all other individuals—even relative to those in the top 2 to 5 percent.
    JEL: E24 E32 E44 J21 J31
    Date: 2012–05
  37. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: A large literature studies the information contained in national-level economic indicators, such as financial and aggregate economic activity variables, for forecasting U.S. business cycle phases (expansions and recessions.) In this paper, we investigate whether there is additional information regarding business cycle phases contained in subnational measures of economic activity. Using a probit model to predict the NBER expansion and recession classification, we assess the forecasting benefits of adding state-level employment growth to a common list of national-level predictors. As state-level data adds a large number of variables to the model, we employ a Bayesian model averaging procedure to construct forecasts. Based on a variety of forecast evaluation metrics, we find that including state-level employment growth substantially improves short-horizon forecasts of the business cycle phase. The gains in forecast accuracy are concentrated during months of national recession. Posterior inclusion probabilities indicate substantial uncertainty regarding which states belong in the model, highlighting the importance of the Bayesian model averaging approach.>
    Keywords: Recessions ; Business cycles ; Economic conditions
    Date: 2012
  38. By: Yasser Abdih; Christian Ebeke; Adolfo Barajas; Ralph Chami
    Abstract: This paper identifies a remittances channel that transmits exogenous shocks, such as business cycles in remittance-sending countries, to the public finances of remittance-receiving countries. Using panel data for remittance-receiving countries in the Middle East, North Africa, and Central Asia, three types of results emerge. First, remittances appear to be strongly procyclical vis-à-vis sending country income. Second, remittances tend to be spent on consumption of both imported and domestically produced goods, rather than on investment. Third, shocks in the sending countries are transmitted via remittances to the public finances - specifically, tax revenues - of receiving countries. In the case of the 2009 global downturn, this impact was particularly strong for several countries in the Caucasus and Central Asia, whereas in the subsequent recovery in 2010 virtually all receiving countries benefitted from an upturn in remittance-driven tax revenues.
    Keywords: Business cycles , Capital inflows , Cross country analysis , Demand , External shocks , Middle East and Central Asia , North Africa , Private consumption , Tax revenues , Workers remittances ,
    Date: 2012–04–25
  39. By: Christian Merkl; Thijs van Rens
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard labor market models, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a standard search and matching model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–09
  40. By: Vasco Carvalho; Alberto Martín; Jaume Ventura
    Keywords: bubbles, dynamic inefficiency, economic growth, financial frictions, pyramid schemes
    JEL: E32 E44 O40
    Date: 2012–02
  41. By: Ed Tower
    Abstract: This paper predicts the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER—trend earnings calculated using regressions of log earnings on time. The CAPER is superior to the CAPE. But q emerges as by far the best of the predictors. Two versions of the model are built. The one with momentum predicts a 29% fall in real wealth over the eight years from end 2010. The one without momentum predicts real wealth to increase over all time horizons, but even after fifteen years, only a 32% increase in real wealth.
    Keywords: CAPE, CAPER, Tobin’s q, momentum, stock market
    Date: 2012
  42. By: Eric W. Bond; Mario J. Crucini; Tristan Potter; Joel Rodrigue
    Abstract: Using a newly created microeconomic archive of U.S. imports at the tariff-line level for 1930-33, we construct industry-level tariff wedges incorporating the input-output structure of U.S. economy and the heterogenous role of imports across sectors of the economy. We use these wedges to show that the average tariff rate of 46% in 1933 substantially understated the true impact of the Smoot-Hawley (SH) tariff structure, which we estimate to be equivalent to a uniform tariff rate of 70%. We use these wedges to calculate the impact of the Smoot Hawley tariffs on total factor productivity and welfare. In our benchmark parameterization, we find that tariff protection reduced TFP by 1.2% relative to free trade prior to the Smoot Hawley legislation. TFP fell by an additional 0.5% between 1930 and 1933 due to Smoot Hawley. We also conduct counterfactual policy exercises and examine the sensitivity of our results to changes in the elasticity of substitution and the import share. A doubling of the substitution elasticities yields a TFP decline of almost 5% relative to free trade, with an additional reduction due to SH of 0.4%.
    JEL: E6 F1 F13
    Date: 2012–05
  43. By: María Jesús Freire-Serén; Judith Panadés i Martí
    Abstract: Human capital accumulation may negatively affect economic growth by increasing tax avoidance and reducing effective tax rates and productive public investment. This paper analyzes how the endogenous feedback between human capital accumulation and tax avoidance affects economic growth and macroeconomic dynamics. Our findings show that this interaction produces remarkable growth and welfare effects.
    Keywords: tax avoidance, tax non-compliance, Economic growth
    JEL: E62 H26 O30 O40 O41
    Date: 2011–12
  44. By: Young Sik Kim (Department of Economics & SIRFE, Seoul National University Seoul, Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper incorporates the recognizability of assets explicitly into the standard search model of exchange to determine the liquidity returns as an equilibrium outcome. Assuming that money is universally recognizable but bond is not, the two types of the single-coincidence meetings arise?one where both money and bond are accepted and the other where only money is accepted as medium of exchange?depending on a seller¡¯s strategy of accepting or rejecting the bond of unrecognized quality and a buyer¡¯s strategy of carrying the counterfeit bond. The equilibrium restrictions imply that the liquidity differentials between money and bond tend to increase with the recognizability problem. With the relatively mild recognizability problem, there only exists an equilibrium where all the buyers bring the authentic bond to the decentralized market and sellers always accept the bond of unrecognized quality, and hence money and bond become equally liquid. As the recognizability problem becomes sufficiently severe, there only exists an equilibrium where some buyers bring the counterfeit bond, but sellers randomize between accepting and rejecting the bond of unrecognized quality. Money commands higher liquidity than bond by providing the additional liquidity service when sellers reject the bond of unrecognized quality as well as when they recognize the counterfeit bond. The coexistence of money and bond requires a higher full (liquidity augmented) return for bond than money, implying a positive liquidity premium.
    Keywords: recognizability, liquidity, asset prices
    JEL: E40
    Date: 2012
  45. By: Fella, Giulio
    Abstract: This paper studies the effect mandated severance pay in a matching model featuring wage rigidity for ongoing, but not new, matches and Pareto efficient spot renegotiation of mandated severance pay. Severance pay matters only if real wage rigidities imply inefficient separation under employment at will. In such a case, large enough severance payments reduce job destruction and increase job creation and social efficiency, under very mild conditions. Efficient renegotiation implies that severance pay never results in privately inefficient labour hoarding and that its marginal effect is zero when its size exceeds that which induces the same allocation that would prevail in the absence of wage rigidity. These results hold under alternative micro-foundations for wage rigidity.
    Keywords: Severance pay; renegotiation; wage rigidity
    JEL: E24 J65 J64
    Date: 2012–02–29
  46. By: Petra Duenhaupt (Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation)
    Abstract: Over the recent decades, the USA has witnessed major changes in corporate governance partly due to an overall increase in financialization. The most pronounced development is the escalation of management salaries caused by the rise of stock options. On theoretical grounds, this trend was fostered by advances in the economic discipline of agency theory. In practice, changes in tax laws contributed to promoting the change. Empirical evidence shows that income concentration has increased at the top.This paper contributes to the ongoing debate about income shares by introducing a new adjusted wage share. Arguing that top incomes are closer to profits than to wages, top incomes are removed from the calculation of the indicator. The presented evidence shows that the wage share and the adjusted wage share start to diverge by the end of the 1980s, exactly at the time when the compensation practices of corporations changed considerably. Although shareholder value orientation has increased in Germany as well, business owners are still at the top of the income hierarchy. Therefore, the adjustment of the German wage income share for top management salaries shows only minor discrepancies, which, however, are in the same direction as in the US.
    JEL: E3 E6 H1
    Date: 2011
  47. By: Neville Francis; Michael T. Owyang; Özge Savascin
    Abstract: Factor models have become useful tools for studying international business cycles. Block factor models [e.g., Kose, Otrok, and Whiteman (2003)] can be especially useful as the zero restrictions on the loadings of some factors may provide some economic interpretation of the factors. These models, however, require the econometrician to predefine the blocks, leading to potential misspecification. In Monte Carlo experiments, we show that even small misspecifica- tion can lead to substantial declines in t. We propose an alternative model in which the blocks are chosen endogenously. The model is estimated in a Bayesian framework using a hierarchi- cal prior, which allows us to incorporate series-level covariates that may influence and explain how the series are grouped. Using similar international business cycle data as Kose, Otrok, and Whiteman, we find our country clusters differ in important ways from those identified by geography alone. In particular, we find that similarities in institutions (e.g., legal systems, language diversity) may be just as important as physical proximity for analyzing business cycle comovements.
    Keywords: Business cycles ; Economic conditions
    Date: 2012
  48. By: Andrew Powell
    Abstract: This report details the divergent paths that the world economy may take and their potential effects on Latin America and the Caribbean. Scenarios are constructed employing a modeling exercise that captures the trade, financial and other linkages between the region and the rest of the world. While vulnerabilities remain and external shocks have been and remain critical, the region enjoys many strengths and has developed a growing arsenal of policy tools. What is the balance of vulnerabilities versus strengths? How can countries address the existing vulnerabilities? How can they perfect their policy tools and minimize the effect of external crises?
    JEL: E52 E62 F34 N16
    Date: 2012–03
  49. By: Konzelmann, S.; Fovargue-Davies, M.
    Abstract: The return to economic liberalism in the Anglo-Saxon world was motivated by the apparent failure of Keynesian economic management to control the stagflation of the 1970s and early 1980s. In this context, the theories of economic liberalism, championed by Friederich von Hayek, Milton Friedman and the Chicago School economists, provided an alternative. However, the divergent experience of the US, UK, Canada and Australia reveals two distinct 'varieties' of economic liberalism: the 'neo-classical' incarnation, which describes American and British liberal capitalism, and the more 'balanced' economic liberalism that evolved in Canada and Australia. In large part, these were a product of the way that liberal economic theory was understood and translated into policy, which in turn shaped the evolving relationship between the state and the private sector and the relative position of the financial sector within the broader economic system. Together, these determined the nature and extent of financial market regulation and the system's relative stability during the 2008 crisis.
    Keywords: Corporate governance, Regulation, Financial market instability, liberal capitalism, Varieties of capitalism
    JEL: E44 G38 N10 N20 P16 P17 P52
    Date: 2011–06
  50. By: Farla, Kristine (UNU-MERIT / MGSOG, Maastricht University)
    Abstract: It is well-known that the extent of credit lent to private agents differs widely between countries. The `financial deepening' of the economy offers opportunities as well as financial risks. This study investigates the extent to which institutional characteristics are re- lated to countries' level of credit depth. The findings suggest that the formalization of property rights, contracting, and competition institutions is positively related to an increase in the level of credit to the private sector. This result remains robust when controlling for the effect of financial policy. The effect of institutional characteristics on banks' lending capacity and investment is mixed. However, overall, institutional formalization has a positive impact on credit deepening and investment.
    Keywords: Institutions, Financial Development, Property Rights, Contract, Competition
    JEL: E44 G18 O11 O43
    Date: 2012
  51. By: Tuomas Malinen
    Abstract: The effect of income inequality on savings and consumption has remained an open empirical issue despite several decades of research. Results obtained in this study indicate that income inequality and private consumption are both I(1) non-stationary variables that are cointegrated, and inequality has had a negative effect on private consumption in Central-European and Nordic countries. Results for Anglo-Saxon countries are inconclusive. These findings suggest that previous empirical research may have produced biased results on the effect of inequality on savings by assuming that inequality would be a stationary variable.
    Keywords: Panel Cointegration, Top 1% Income Share, Private Consumption, Gross Savings
    JEL: E21 C22 C23
    Date: 2011–09
  52. By: Holger Strulik; Timo Trimborn
    Abstract: We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.
    Keywords: Corporate Taxation, Capital Gains, Tax Allowances, Revenue Estimation, Laffer Curve, Dynamic Scoring.
    JEL: E60 H20 O40
    Date: 2011–09
  53. By: Chris Edmond; Virgiliu Midrigan; Daniel Yi Xu
    Abstract: We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation, i.e., large inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.
    JEL: E23 F1 O4
    Date: 2012–05
  54. By: Yu-Fu Chen; Gylfi Zoega
    Abstract: Floating exchange rates allow central banks to respond to aggregate demand fluctuations by changing their interest rates. However, such fluctuations create inertia in the labour market by increasing the cost of hiring and firing workers. A regime of flexible exchange rates can cause rigidities in labour markets similar to those caused by legalised firing restrictions. Exchange rate volatility makes firms wait before hiring new workers and firing existing ones. Thus the adoption of a common currency has effects very similar to the removal of employment-protection legislation and other direct restrictions on hiring and firing. Exchange-rate volatility is more harmful for the entry of new firms than employment-protection legislation, particularly promising, high-risk ventures.
    Keywords: Floating Exchange Rates, Labour-market Flexibility
    JEL: E32 J23 J24 J54
    Date: 2011–09
  55. By: Araujo-Enciso, Sergio Rene
    Abstract: Economic theory states that the spatial equilibrium condition is a region where prices can be or not cointegrated. It is when prices are within such a region when they are no cointegrated, when prices are in its boundaries they are not only cointegrated but also fulfilling the Law of One Price (LOP). Nonetheless the econometric techniques assume a mean reverting process in order to test for cointegration, either linear or non linear. This research shows that in the absence of such mean reverting process by using prices in pure equilibrium, cointegration (linear and non linear) is often rejected. Such findings go in line with the Band Threshold Autoregressive Model where the neutral band is a region of no cointegration. Furthermore it can be concluded that the economic concept of perfect market integration (LOP) by itself is not sufficient for testing cointegration with some of the current econometric methods.
    Keywords: Spatial Equilibrium Condition, Testing Cointegration, Demand and Price Analysis, Risk and Uncertainty, C15, E37,
    Date: 2012–02–23
  56. By: Richard P.C. Brown (School of Economics, The University of Queensland); Fabrizio Carmignani (School of Economics, The University of Queensland)
    Abstract: We investigate the effect of remittances on bank credit in developing countries. Understanding this link is important in view of the growing relevance of remittances as a source of external finance and of the beneficial impact that financial intermediation is likely to have on economic growth. Using a simple theoretical formalization, we predict the relationship to be U-shaped. We test this prediction using panel data for a large group of developing and emerging economies over the period 1960-2009. The empirical results suggest that at initially low levels of remittances, an increase in remittances reduces the volume of credit extended by banks. However, at sufficiently high levels of remittances, the effect becomes positive. The turning point of the relationship occurs at a level of remittances of about 2.5% of GDP.
    Date: 2012
  57. By: Weber, Sascha A.; Salamon, Petra; Hansen, Heiko
    Abstract: Since the stepwise reduction of intervention prices combined with watered down conditions and suspended export refunds, respectively, the EU dairy industry faces new challenges regarding wild price fluctuations originally caused in third countries. In the past, the EU domestic market was insulated as far as possible from world markets. However, today global prices could affect prices even at the level of consumers, but more directly at the level milk producers. Volatility noticeable increased with the price peak in 2007, followed by the drop in 2008, and a new price boost in 2010. Additionally, reduced security in marketing of butter and skimmed milk powder led to higher processing share of cheese which is not only exported but also increasingly consumed within the EU. Analyzing time series data of dairy products’ prices illustrates price fluctuations at different levels of the supply chain. Particularly, retail prices are less volatile than milk producer prices. Therefore, it is often assumed that retailers do not completely pass on downward movements of producer prices to consumers or, vice versa, and assumption encouraging debates on market power, margins and price transmission in the supply chain. German retailing is characterized by a high of market concentration and by a predominance of discounters, displaying a leading position in price negotiations with dairies or wholesalers. Thus, it can be argued that retailers adversely affect dairies who, in turn, affect milk producers. From this follows price transmission asymmetries differ across different levels of the supply chain, and volatile world market prices induced may affect the lower part of the supply chain negatively. However, price transmission has been analyzed in various studies before, mostly analyzing price transmissions between retailing and consumer level. Thus, they abstract from effects of intermediate levels (wholesale, world market). Therefore, the objective of this paper is to investigate the transmission of milk prices from the farm to the retail level and to detect possible asymmetries, leading in the case of world market price fluctuations to additional problems in the German supply chain. The focus is on the German cheese market whereby regime specific effects are tested e.g., the reduction of EU market support which has major impacts on price transmission. Additionally, the change in the product mix and the increased export orientation of German dairies also affect price transmission. In the analysis monthly data from January 1990 to October 2011 for producer prices of raw milk, wholesale and consumer prices for cheese as well as prices in international trade with cheese are considered. Institutional prices were generated on a monthly basis, thus, capturing dates of change in intervention prices and of export refunds. Applying a subset of model specifications based on error-correction representation asymmetries are studied, whereby the seasonal pattern of data is filtered out.
    Keywords: Price transmission, Cointegration, Granger-causality, Dairy, Risk and Uncertainty, C1, E3, E6, F3, Q1,
    Date: 2012–02–23
  58. By: Krüger, Niclas (VTI)
    Abstract: This paper investigates the relationship between infrastructure investments and economic activity in Sweden for the period 1800-2000. In order to overcome the problem of endogeneity, independent time scales are used to analyze the relationship. The paper also examines the dynamics between the variables by testing for causality in the Granger sense and constructing a vector autoregressive model separately for each time scale. The finding is that the causality nexus between growth and transport infrastructure investment is timescale-dependent since it reverses in a comparison of the short-run dynamics (2-4 years) and the longer-run dynamics (8-16 years). This causality reversal is unique for infrastructure investments compared to investments in other sectorsof the economy.
    Keywords: Infrastructure; GDP growth; Investment; Time scale decomposition
    JEL: E22 E32 N70
    Date: 2012–05–04
  59. By: Carlos de Miguel; Baltasar Manzano (Universidade de Vigo and Economics for Energy)
    Abstract: Green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system. However, reforms often imply accepting sacrifices in the short-run and bring about the risk of potential political opposition. Within this framework, the debate on whether to implement green tax reforms in one-step or gradually becomes of great interest. In this paper we use a calibrated dynamic general equilibrium model to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue-neutral framework. Our findings show that, although an environmental dividend is always granted, the efficiency dividend depends on the type of reform, its size and how gradually it is implemented. Thus, one-step reforms that produce an efficiency dividend would imply large efficiency costs in the short-run. In this case, the reform could only produce efficiency gains in the short-run if it is implemented gradually, although such gains would end up disappearing in the long-run.
    Keywords: Green Tax Reform, General Equilibrium
    JEL: E62 Q43 H23
    Date: 2011–09

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