nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒05‒29
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary and Fiscal Policy Interactions in an Emerging Open Economy Exposed to Sudden Stops Shock: A DSGE Approach By Aliya Algozhina
  2. The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence By Farmer, Roger E A
  3. How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical? By Frankel, Jeffrey A.
  4. Matching efficiency and business cycle fluctuations By Francesco Furlanetto; Nicolas Groshenny
  5. The Optimal Inflation Rate and Firm-Level Productivity Growth By Henning Weber
  6. Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model By Kollmann, Robert
  7. Disentangling the Channels of the 2007-2009 Recession By James H. Stock; Mark W. Watson
  8. Euro Area Money Demand and International Portfolio Allocation: A Contribution to Assessing Risks to Price Stability By De Santis, Roberto A; Favero, Carlo A.; Roffia, Barbara
  9. Wage Rigidity and Job Creation By Haefke, Christian; Sonntag, Marcus; van Rens, Thijs
  10. Macroeconomic Instability and the Incentive to Innovate By Serena Masino
  11. Monetary Policy in Emerging Markets: A Survey By Frankel, Jeffrey A.
  12. Nonlinear Adventures at the Zero Lower Bound By Fernández-Villaverde, Jesús; Gordon, Grey; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
  13. How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices By Carlo Rosa
  14. Slow Recoveries: A Structural Interpretation By Galí, Jordi; Smets, Frank; Wouters, Rafael
  15. Synchronization between the business cycles of Mexico and the United States. New evidence from the analysis of regional coincident indexes By Marcelo Delajara
  16. A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America By Frankel, Jeffrey A.
  17. Exchange rate regimes and fiscal multipliers By Born, Benjamin; Juessen, Falko; Müller, Gernot
  18. Evaluation of the Effects of Reduced Personal and Corporate Tax Rates on the Growth Rates of the U.S. Economy By Jacques Kibambe Ngoie; Arnold Zellner
  19. Costs and benefits of Slovakia entering the euro area. A quantitative evaluation. By Juraj Zeman
  20. The new CFS Divisia monetary aggregates: design, construction, and data sources By Barnett, William A.; Liu, Jia; Mattson, Ryan S.; van den Noort, Jeff
  21. Slow Recoveries: A Structural Interpretation By Jordi Galí; Frank Smets; Rafael Wouters
  22. Managing Currency Pegs By Schmitt-Grohé, Stephanie; Uribe, Martín
  23. Jamel, a Java Agent-based MacroEconomic Laboratory By Pascal Seppecher
  24. Technical Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks" By Garth Heutel
  25. Diverse Degrees of Competition within the EMU and their Implications for Monetary Policy By Patrick Brämer; Horst Gischer; Toni Richter; Mirko Weiß
  26. A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers By Mertens, Karel; Ravn, Morten O
  27. Estimating the inflation threshold for South Africa By Temitope L.A. Leshoro
  28. Business Cycle Synchronization of Turkey with Euro Area and the US : What Has Changed After 2001? By Huseyin Cagri Akkoyun; Mahmut Gunay; Bahar Sen-Dogan
  29. The role of fiscal delegation in a monetary union: a survey of the political economy issues By Costain, James; de Blas, Beatriz
  30. Prudential Policy for Peggers By Schmitt-Grohé, Stephanie; Uribe, Martín
  31. Assessing the impact of different nominal anchors on the credibility of stabilisation programmes By Prazmowski, Peter A.; Sánchez-Fung, José R.
  32. The ECB as Lender of Last Resort for Sovereigns in the Euro Area By Buiter, Willem H.; Rahbari, Ebrahim
  33. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. By Farhi, Emmanuel; Tirole, Jean
  34. Do Welfare Policies Matter for Labor Market Aggregates? Quantifying Safety Net Work Incentives since 2007 By Casey B. Mulligan
  35. Implications of Wealth Heterogeneity For Macroeconomics By Christopher D. Carroll
  36. Current Account Imbalances in Europe By Lane, Philip R.; Pels, Barbara
  37. Human capital formation and economic development in Pakistan: an empirical analysis By Chani, Muhammad Irfan; Hassan, Mahboob Ul; Shahid, Muhammad

  1. By: Aliya Algozhina
    Abstract: The monetary and fiscal policy interactions have gained a new research interest after the 2008 crisis due to the global increase of fiscal debt. This paper constructs a macroeconomic model of joint fiscal and monetary policy for an emerging open economy taking into account its structural uniqueness. In particular, the two instruments of monetary policy, interest rate and foreign exchange intervention; the two instruments of fiscal policy, government consumption and government investment; and a sudden stops shock through the collateral constraint of foreign borrowings are modeled here in a single DSGE framework. The parameters are calibrated for the case of Hungary using data over 1995Q1-2011Q3. The impulse response functions show that government consumption is unproductive and increases fiscal debt as opposed to government investment, foreign exchange intervention positively affects net exports but does not stimulate an economy per se causing inflation, and a negative shock to the upper bound of leverage ratio in the collateral constraint of foreign borrowings generates a sudden stops crisis for the emerging world. Monetary and fiscal policy intimately interact in the short and medium run such that there is an immediate response of monetary instruments to fiscal shocks, while fiscal instruments adjust to monetary shocks in the medium run.
    Keywords: Monetary Policy, Fiscal Policy, Emerging Open Economy, Sudden Stops, Collateral Constraint
    JEL: E63 F41 G01
    Date: 2012–05
  2. By: Farmer, Roger E A
    Abstract: This paper has three parts. First, I provide a theoretical framework to explain how rational expectations models, where the central bank follows a conventional monetary policy rule, can be used to understand the history of interest rates and inflation in the period between 1951 and the Great Recession of 2008. Second, I use the framework developed in the first part of the paper to illustrate how the purchase of assets other than treasuries, for example, mortgage backed securities and long bonds, can influence inflation expectations when the interest rate is zero. Third, I show that the beginning of unconventional monetary policy in 2008 coincided with a significant increase in inflation expectations. I extend existing models of monetary policy by adding explicit markets for financial securities. Using this extended framework, I show that the purchase of assets, other than short term treasury bills, has a differential impact on the prices of risky securities. Unconventional monetary policy is an important tool in a central bank’s arsenal that can and should be used to help prevent deflation in the wake of a financial crisis.
    Keywords: inflation; interest rates; unconventional monetary policy; zero lower bound
    JEL: E31 E4
    Date: 2012–05
  3. By: Frankel, Jeffrey A.
    Abstract: Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile’s structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks.
    Date: 2011
  4. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: A large decline in the e¢ ciency of the U.S. labor market in matching unemployed workers and vacant jobs has been documented during the Great Recession. We use a simple New Keynesian model with search and matching frictions in the labor market to study the propagation of matching e¢ ciency shocks. We show that the transmission of these disturbances and their importance for business cycle fluctuations depend crucially on the form of hiring costs and on the presence of nominal rigidities.
    Keywords: Resource curse, Political economy.
    JEL: E32 C51 C52
    Date: 2012–04–30
  5. By: Henning Weber
    Abstract: Empirical data show that firms tend to improve their ranking in the productivity distribution over time. A sticky-price model with firm-level productivity growth fits this data and predicts that the optimal long-run inflation rate is positive and between 1.5% and 2% per year. In contrast, the standard sticky-price model cannot fit this data and predicts optimal long-run inflation near zero. Despite positive long-run inflation, the Taylor principle ensures determinacy in the model with firm-level productivity growth, and optimal inflation stabilization policies are standard. In a two-sector extension of this model, the optimal long-run inflation rate weights the sector with the stickier prices more heavily
    Keywords: Optimal monetary policy, indeterminacy, heterogenous firms, firm entry and exit
    JEL: E31 E32 E52 E61
    Date: 2012–05
  6. By: Kollmann, Robert
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. During the Great Recession (2007-09), banking shocks accounted for about 20% of the fall in US and EA GDP, and for more than half of the fall in EA investment and employment.
    Keywords: Bayesian econometrics; financial crisis; global banking; investment; real activity
    JEL: E44 F36 F37 G21
    Date: 2012–05
  7. By: James H. Stock; Mark W. Watson
    Abstract: This paper examines the macroeconomic dynamics of the 2007-09 recession in the United States and the subsequent slow recovery. Using a dynamic factor model with 200 variables, we reach three main conclusions. First, although many of the events of the 2007-2009 collapse were unprecedented, their net effect was to produce macro shocks that were larger versions of shocks previously experienced, to which the economy responded in an historically predictable way. Second, the shocks that produced the recession primarily were associated with financial disruptions and heightened uncertainty, although oil shocks played a role in the initial slowdown and subsequent drag was added by effectively tight conventional monetary policy arising from the zero lower bound. Third, while the slow nature of the recovery is partly due to the shocks of this recession, most of the slow recovery in employment, and nearly all of the slow recovery in output, is due to a secular slowdown in trend labor force growth.
    JEL: E24 E32 E37 E44
    Date: 2012–05
  8. By: De Santis, Roberto A; Favero, Carlo A.; Roffia, Barbara
    Abstract: This paper argues that a stable broad money demand for the euro area over the period 1980-2011 can be obtained by modelling cross border international portfolio allocation. As a consequence, model-based excess liquidity measures, namely the difference between actual M3 growth (net of the inflation objective) and the expected money demand trend dynamics, can be useful to predict HICP inflation.
    Keywords: Euro area money demand; inflation forecasts; monetary policy; portfolio allocation
    JEL: E4 E44
    Date: 2012–05
  9. By: Haefke, Christian; Sonntag, Marcus; van Rens, Thijs
    Abstract: Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage stickiness in the data. We also show, however, that a little wage rigidity goes a long way in amplifying the response of job creation to productivity shocks.
    Keywords: business cycle; search and matching models; wage rigidity
    JEL: E24 E32 J31 J41 J64
    Date: 2012–05
  10. By: Serena Masino
    Abstract: This paper investigates the channels through which macroeconomic volatility prevents or hinders innovative investment undertakings financed by the domestic business sector. The analysis is based on a sample of 48 countries, representing all levels of development, and uses various measures of macroeconomic instability, such as political, real and monetary volatility. The results suggest a negative impact of macroeconomic instability on the share of R&D financed by the domestic business sector. These outcomes highlight the desirability of counter-cyclical policy interventions aiming to prevent the avoidance or abandonment of private R&D undertakings in unstable macroeconomic environments.
    Date: 2012
  11. By: Frankel, Jeffrey A.
    Abstract: The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets.
    Date: 2011
  12. By: Fernández-Villaverde, Jesús; Gordon, Grey; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
    Abstract: Motivated by the recent experience of the U.S. and the Eurozone, we 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, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we 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: New Keynesian models; Nonlinear solution methods.; Zero lower bound
    JEL: E30 E50 E60
    Date: 2012–05
  13. By: Carlo Rosa
    Keywords: Assets (Accounting) ; Federal Reserve System ; Bank of England ; Stock - Prices ; Bonds - Prices ; Federal funds rate
    Date: 2012
  14. By: Galí, Jordi; Smets, Frank; Wouters, Rafael
    Abstract: An analysis of the performance of GDP, employment and other labor market variables following the troughs in postwar U.S. business cycles points to much slower recoveries in the three most recent episodes, but does not reveal any significant change over time in the relation between GDP and employment. This leads us to characterize the last three episodes as slow recoveries, as opposed to jobless recoveries. We use the estimated New Keynesian model in Galí-Smets-Wouters (2011) to provide a structural interpretation for the slower recoveries since the early nineties.
    Keywords: estimated DSGE models; Jobless recoveries; Okun's law; U.S. business cycle
    JEL: E32
    Date: 2012–05
  15. By: Marcelo Delajara
    Abstract: In this paper we analyze the synchronization between the business cycles of US and Mexican regions. Regional economic activity in Mexico is measured using regional coincident indexes recently developed at Banco de México, while US aggregate economic activity is measured with the national coincident index of the Federal Reserve Bank of Philadelphia. The framework for the empirical analysis is the structural linear times series model. We find a regional pattern in the covariance between cyclical disturbances in the US and in the Mexican regions: it is higher in the Northern than in the Central and Southern regions of the country. We also find that the elasticity of Mexican regional economic activity with respect to the US's aggregate economic activity exhibits a similar pattern. Moreover, while the variance of the business cycles in the Northern, North-Central, and Central regions is mostly associated with shocks to the US economy, in the Southern region it is mostly related to specific shocks to the Mexican economy.
    Keywords: Business cycles, coincident indexes, co-movement, Mexico, United States.
    JEL: E32 E37 R11
    Date: 2012–05
  16. By: Frankel, Jeffrey A.
    Abstract: Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards.
    Date: 2011
  17. By: Born, Benjamin; Juessen, Falko; Müller, Gernot
    Abstract: Does the fiscal multiplier depend on the exchange rate regime and, if so, how strongly? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. Three results stand out. First, while government spending multipliers are larger under fixed exchange rate regimes, the difference relative to floating exchange rates is smaller than what traditional Mundell-Fleming analysis suggests. Second, there is little evidence for the specific transmission channel which is at the heart of the Mundell-Fleming model. Third, the New Keynesian model provides a satisfactory account of the evidence.
    Keywords: exchange rate regimes; fiscal multiplier; fiscal policy; monetary policy; New Keynesian model; Panel VAR
    JEL: E62 F41
    Date: 2012–05
  18. By: Jacques Kibambe Ngoie (Department of Economics, University of Pretoria); Arnold Zellner (Booth School of Business, University of Chicago)
    Abstract: Using several variants of a Marshallian Macroeconomic Model (MMM), see Zellner and Israilevich (2005) and Ngoie and Zellner (2012), this paper investigates how various tax rate reductions may help stimulate the U.S. economy while not adversely affecting aggregate U.S. debt. Variants of our MMM that are shown to fit past data and to perform well in forecasting experiments are employed to evaluate the effects of alternative tax policies. Using quarterly data, our one-sector MMM has been able to predict the 2008 downturn and the 2009Q3 upturn of the U.S. economy. Among other results, this study, using transfer and impulse response functions associated with our MMM, finds that permanent 5 percentage points cut in the personal income and corporate profits tax rates will cause the U.S. real GDP growth rate to rise by 3.0 percentage points with a standard error of 0.6 percentage points. Also, while this policy change leads to positive growth of the government sector, its share of total real GDP is slightly reduced. This is understandable since short run effects of tax cuts include the transfer of tax revenue from the government to the private sector. The private sector is allowed to manage a larger portion of its revenue while government is forced to cut public spending on social programs with little growth enhancing effects. This broadens private economic activities overall. Further, these tax rate policy changes stimulate the growth of the federal tax base considerably which helps to reduce annual budget deficits and the federal debt.
    Keywords: Marshallian Macroeconomic Model, Disaggregation, Transfer Functions, Impulse Response Functions, U.S. Fiscal Policy Analysis
    JEL: E27
    Date: 2012–05
  19. By: Juraj Zeman (National Bank of Slovakia, Research Department)
    Abstract: Entering monetary union brings both benefits and costs. The loss of an independent monetary policy, including the loss of exchange rate policy, constrains the ability to stabilize the domestic economy in the event of asymmetric shocks. This leads to more volatile business cycles and hence lower utility of risk-averse agents in the economy. On the other hand, the common currency reduces transaction costs, thus increasing trade and growth. The objective of this article is to quantitatively evaluate these costs and benefits, using an estimated two-country DSGE model for Slovakia and the euro area.
    Keywords: monetary union, costs and benefits, two-country DSGE
    JEL: E E F F42
    Date: 2012–04
  20. By: Barnett, William A.; Liu, Jia; Mattson, Ryan S.; van den Noort, Jeff
    Abstract: The Center for Financial Stability (CFS) has initiated a new Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM). The Director of the program is William A. Barnett, who is the originator of Divisia monetary aggregation and more broadly of the associated field of aggregation-theoretic monetary aggregation. The international section of the AMFM web site is a centralized source for Divisia monetary aggregates data and research for over 40 countries throughout the world. The components of the CFS Divisia monetary aggregates for the United States reflect closely those of the current and former simple-sum monetary aggregates provided by the Federal Reserve. The first five levels, M1, M2, M2M, MZM, and ALL, are composed of currency, deposit accounts, and money market accounts. The liquid asset extensions to M3, M4-, and M4 resemble in spirit the now discontinued M3 and L aggregates, including repurchase agreements, large denomination time deposits, commercial paper, and Treasury bills. When the Federal Reserve discontinued publishing M3 and L, the Fed stopped providing the consolidated, seasonally adjusted components. Also the Fed no longer provides the interest rates on the components. With so much of the needed component quantity and interest-rate data no longer available from the Federal Reserve, decisions about data sources needed in construction of the CFS aggregates have been far from easy and sometimes required regression interpolation. This paper documents the decisions of the CFS regarding United States data sources at the present time, with particular emphasis on Divisia M3 and M4.
    Keywords: Divisia monetary aggregates; monetary aggregation; index number theory; financial aggregation; data source
    JEL: E51 E52 C80 E41
    Date: 2012–05–19
  21. By: Jordi Galí; Frank Smets; Rafael Wouters
    Abstract: An analysis of the performance of GDP, employment and other labor market variables following the troughs in postwar U.S. business cycles points to much slower recoveries in the three most recent episodes, but does not reveal any significant change over time in the relation between GDP and employment. This leads us to characterize the last three episodes as slow recoveries, as opposed to jobless recoveries. We use the estimated New Keynesian model in Galí-Smets-Wouters (2011) to provide a structural interpretation for the slower recoveries since the early nineties.
    JEL: E32
    Date: 2012–05
  22. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.
    Keywords: capital controls; Currency pegs; downward nominal wage rigidity; pecuniary externality.
    JEL: E31 E62 F41
    Date: 2012–05
  23. By: Pascal Seppecher (CEMAFI - Centre d'Etudes en Macroéconomie et Finance Internationale - Université de Nice Sophia Antipolis (UNS), GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université de Nice Sophia Antipolis (UNS))
    Abstract: This paper presents a computational macroeconomic model which closely associates Keynesian thinking and an agent-based approach. This model is original because we do not introduce any causality between macroeconomic variables. Instead of postulate macroeconomic properties, we want to understand them by the methodic reconstruction of the conditions of their emergence, starting from their most elementary foundations: the interactions between individual agents. This model is the model of a dynamic out-of-equilibrium economy composed of two principal sets of agents (firms and households) associated with two main functions (production and consumption). The agents are not representative agents or aggregates but autonomous individuals in direct and indirect interactions, each of them pursuing its own purposes, acting according to their individual state and their local environment, without worrying about the general equilibrium of the system and without any overriding control.
    Keywords: Agent-based computational economics ; Heterogeneous agents ; Endogenous money ; Monetary macroeconomics ; Bounded rationality
    Date: 2012–05–14
  24. By: Garth Heutel (University of North Carolina Greensboro)
    Abstract: Technical appendix for the Review of Economic Dynamics article
    Date: 2011–07
  25. By: Patrick Brämer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Horst Gischer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Toni Richter (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Mirko Weiß (German Savings Banks Association)
    Abstract: Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. We enhanced the ECB MFI interest rate statistics by calculating a lending rate average weighted by loan volumes for each EMU member country. Employing a modified Lerner Index, our unique data set enables us to calculate banks' price setting power in the national lending business alone, instead of measuring market power for banks' total business. For 12 countries, we ultimately show that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model, we investigate to what extent loan rate variations can be explained by changing degrees of market power during the period 2003-2009. Significant cross-country differences can be observed. We find that changes in the national degree of competition considerably affect funding conditions in the individual countries and therefore hinder a homogeneous transmission of ECB monetary policy.
    Keywords: banking competition; European Monetary Union; Lerner Index; monetary policy
    JEL: E43 E52 E58 L16
    Date: 2012–03
  26. By: Mertens, Karel; Ravn, Morten O
    Abstract: Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large. Using narrative measures as proxies for structural shocks to total tax revenues in an SVAR, we estimate tax multipliers at the higher end of the range: around two on impact and up to three after 6 quarters. We show that earlier findings of lower multipliers can be explained by an output elasticity of tax revenues assumption that is contradicted by empirical evidence or by failure to account for measurement error in narrative series of tax shocks.
    Keywords: fiscal policy; measurement error; narrative identification; tax changes; vector autoregressions
    JEL: E20 E32 E62 H30
    Date: 2012–05
  27. By: Temitope L.A. Leshoro
    Abstract: How detrimental is inflation to growth in South Africa? At what level? Motivated by the adoption of inflation targeting by many countries, this paper sets out to empirically determine the threshold level of inflation in South Africa. This study adopts quarterly time series data spanning over the period 1980:Q2 to 2010:Q3. The threshold regression model developed by Khan and Senhadji (2001) was used in this study. The econometric technique used is the Ordinary Least Squares (OLS) and the model was re-estimated using the two-stage least squares instrumental variable (2SLS-IV) to check for robustness. The results show that the inflation threshold level occurs at 4 percent. At inflation levels below and up to 4 percent there is a positive but insignificant relationship between inflation and growth. The relationship becomes negative and significant when the inflation rate is above 4 percent. The tests of robustness support these findings.
    Keywords: Inflation, GDP Growth, Threshold level, South Africa.
    JEL: E31 C12 C22
    Date: 2012
  28. By: Huseyin Cagri Akkoyun; Mahmut Gunay; Bahar Sen-Dogan
    Abstract: In this paper, we make a detailed spectral analysis of the comovement of cycles of Turkish economy with cycles of euro area and the US. Relation between cycles may change with frequency, hence correlation of cycles at short, medium and long run may differ. Also, the correlation in different frequencies may change over time. Structural transformation observed in the Turkish economy after 2001 should also be taken into account in the analysis of business cycle synchronization. So, we use wavelet methodology that enables us to decompose cycles into different frequencies and also the method can deal with non-stationary data with structural change. We find that correlations of Turkish cycles with the cycles of euro area and the US increased after 2001. Moreover, although trade intensity of Turkish economy with euro area is much higher than with the US, in general, correlations of Turkish cycles with the US cycles are not lower than the euro cycles. Therefore, our results suggest that attention should not be limited to direct trade channel when analyzing effect of international developments on the Turkish economy.
    Keywords: Business Cycle, Wavelet, Structural Change
    JEL: E32 F40
    Date: 2012
  29. By: Costain, James (Banco de España.); de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica), Universidad Autónoma de Madrid.)
    Abstract: Current proposals to address the European sovereign debt crisis envision some sort of fiscal union to complement the Economic and Monetary Union, backed by stronger sanctions against countries that deviate from budget balance. We argue that sanctions are an indirect approach to balancing budgets, and that member states, and Europe as a whole, could instead consider delegating effective fiscal instruments with a direct budgetary impact to an independent authority. Outside of a fiscal union, a solvent country could establish an independent fiscal authority at the national level, with a mandate to maintain long-term budget balance. Delegating a few powerful fiscal instruments to an institution of this type could cut off speculation about fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union, delegating one or more fiscal levers of each Eurozone member state to a national or European fiscal authority could eliminate moral hazard without relying on sanctions per se. Many fiscal instruments can serve to balance budgets, but in the context of a monetary union the chosen instrument should ideally be one that increases competitiveness when recession looms. The instrument should also be one that is quick and simple to adjust, with a large budgetary impact and minimal redistributional consequences. For consistency with these criteria, we argue that fiscal adjustments should operate on the spending side, rather than the revenue side, and that spending adjustments should affect the prices the government pays, instead of the quantities of goods and services it purchases. We discuss in detail how a system of this sort could be implemented.
    Keywords: Fiscal delegation; public spending; sovereign debt; monetary union.
    JEL: E32 E62 E63 F41 H63
    Date: 2012–05
  30. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    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 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.
    Keywords: capital controls; currency pegs; downward wage rigidity; pecuniary externality
    JEL: E31 E62 F41
    Date: 2012–05
  31. By: Prazmowski, Peter A. (American Chamber of Commerce of the Dominican Republic); Sánchez-Fung, José R. (Kingston University)
    Abstract: The paper compares the impact of announcing exchange-rate-based versus money-based stabilisation programmes in a cross-section of countries. The analysis finds that the effect of announcing exchange-rate-based programmes is more credible, in terms of reducing inflation inertia, than the outcome associated with implementing money-based programmes. But the gap between the magnitudes of the impacts from implementing the different strategies has been falling since the 1970s.
    Keywords: Inflation stabilisation; credibility; nominal anchors; IMF programmes
    JEL: E31 E63 F41
    Date: 2012–01–17
  32. By: Buiter, Willem H.; Rahbari, Ebrahim
    Abstract: The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated €3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its SMP purchases of periphery sovereign debt in the secondary markets. It has also contributed, through the deeply subsidised bank funding it provided through the 3-year LTROs, half of a mechanism to purchase periphery sovereign debt in the primary issue markets. The other half has been financial repression requiring banks in Italy and Spain to purchase more of their own government’s debt than they would voluntarily and at below-market yields. We expect that, once Spain and Italy are under troika programmes, the Eurosystem will also lend to these sovereigns indirectly, through loans by the national central banks to the IMF which on-lends them to these sovereigns. We recommend that, to increase its effectiveness as LoLR, the ESM be given a banking license. To reduce the illegitimate and unaccountable abuse of the ECB/Eurosystem as a quasi-fiscal actor, we propose that all its credit risk-related losses be jointly and severally guaranteed/indemnified by the 17 euro area member states.
    Keywords: Central bank; EMU; Financial repression; Lender of Last Resort; Quasi-fiscal activities; Seigniorage
    JEL: E02 E31 E42 E43 E44 E63 G21 G28 H12
    Date: 2012–05
  33. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The paper shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision.
    Keywords: monetary policy, funding liquidity risk, strategic complementarities, macro-prudential supervision
    JEL: E44 E52 G28
    Date: 2012–02
  34. By: Casey B. Mulligan
    Abstract: Inflation-adjusted spending on means-tested subsidies has increased sharply since 2007, and most of the growth was due to changes in eligibility rules, and increases in subsidies per eligible person, rather than increases in the number of people who would have been eligible under pre-recession subsidy rules. In 2007, the non-elderly parts of the safety net paid about $10,000 in benefits per person-year that non-elderly heads of household or spouses were unemployed. By the end of 2009, the annual subsidy rate per person-year unemployed was up to $16,000. As a result, the average private returns to employment are substantially less than they were in 2007. One result of the paper is a monthly time series for the overall safety net’s marginal income tax rate from the point of view of the average marginal worker.
    JEL: E24 H31 I38
    Date: 2012–05
  35. By: Christopher D. Carroll
    Abstract: Today’s dominant strain of macroeconomic models supposes that aggregate consumption can be understood by assuming the existence of a ‘representative agent’ whose behavior rationalizes observed outcomes. But representative agent models yield embarrassingly implausible (and empirically inaccurate) descriptions of consumption behavior. When push comes to shove, real-world forecasters (including those at the Fed) properly disregard these implications. As a result, consumption forecasting remains very much a seat-of-the-pants enterprise. I will argue that if the representative agent assumption is replaced with a model that generates wealth heterogeneity that matches the empirical data, the improved model can provide a sensible analysis of economic questions like "What might the consumption response be to economic stimulus payments?"
    Date: 2012–05
  36. By: Lane, Philip R.; Pels, Barbara
    Abstract: The European crisis is partly attributable to the sharp increase in external imbalances across Europe during the pre-crisis period. We examine current account imbalances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current account imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.
    Keywords: current account; EMU; Europe
    JEL: E63 F41
    Date: 2012–05
  37. By: Chani, Muhammad Irfan; Hassan, Mahboob Ul; Shahid, Muhammad
    Abstract: There is widely accepted concept in economic theory that human capital plays positive role in determining national income. Formation or accumulation of human capital and economic development for human welfare are the major targets of economic policy of each country. This study investigates the casual relationship between economic development and formation of human capital in Pakistan. Based on endogenous growth theory, this study empirically test the standard growth model consisting of Gross Domestic Product (GDP) per capita as a dependent variable and human capital formation, investment in physical capital and labor force as independent variables. Auto Regressive Distributive Lag (ARDL) bound testing approach to co-integration is used to check the long run equilibrium relationship between the variables included in the model. For checking the causal relationship between economic development and human capital formation, Pair-wise Granger Causality test is utilized using the time series data ranging from 1972 to 2009. The results of the co-integration show that the variables are co-integrated. They have long run stable equilibrium relationship. The results of the causality test show that there is bidirectional causal relationship between economic development and human capital formation.
    Keywords: Human capital formation; physical capital; welfare; education; health; labour force; cointegration; unit root
    JEL: E24 J24 O40
    Date: 2012

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