nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒06‒05
sixty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. News, Credit Spreads and Default Costs: An expectations-driven interpretation of the recent boom-bust cycle in the U.S. By Christopher M. Gunn; Alok Johri
  2. Arithmetic is absolute: euro area adjustment By Guntram B. Wolff
  3. Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity? By Jess Benhabib; George W. Evans; Seppo Honkapohja
  4. Realised and Optimal Monetary Policy Rules in an Estimated Markov-Switching DSGE Model of the United Kingdom By Chen, Xiaoshan; MacDonald, Ronald
  5. Ordering policy rules with an unconditional welfare measure By Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
  6. The impact of Macroeconomic Fundamentals on Stock Prices revisited: An Evidence from Indian Data By Pramod Kumar, Naik; Puja , Padhi
  7. Slow Recoveries: A Structural Interpretation By Jordi Galí; Frank Smets; Rafael Wouters
  8. Ordering Policy Rules with an Unconditional Welfare Measure By Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
  9. Wage Rigidity and Job Creation By Christian Haefke; Marcus Sonntag; Thijs van Rens
  10. On Measuring the Efficiency of Monetary Policy By Briec, Walter; Gabillon, Emmanuelle; Lasselle, Laurence
  11. Fixed interest rates over finite horizons By Blake, Andrew
  12. Jobs in a recession By Pascal Michaillat
  13. Modelos de Estimación de la Brecha de Producto: Aplicación al PIB de la República Dominicana. By Francisco, Ramirez
  14. Neutral technology shocks and employment dynamics: results based on an RBC identification scheme By Mumtaz, Haroon; Zanetti, Francesco
  15. The Stagnation Regime of the New Keynesian Model and Current US Policy By Evans, George W.
  16. The Dynamics of UK and US Inflation Expectations By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  17. Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters By Koop, Gary; Onorante, Luca
  18. Why recession and depression policies differ By Stravelakis, Nikos
  19. Joint estimates of automatic and discretionary fiscal policy for the OECD By Darby, Julia; Melitz, Jacques
  20. Fiscal policy and lending relationships By Giovanni MELINA; Stefania VILLA
  21. Schumpeter in a matrix: a Stock Flow Consistent analysis of technological change By Alessandro Caiani; Antoine Godin; Stefano Lucarelli
  22. Optimal labor-income tax volatility with credit frictions. By Abo-Zaid, Salem
  23. Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis By Florackis, Chris; Kostakis, Alexandros; Kontonikas, Alexandros
  24. Ambiguous Business Cycles By Cosmin Ilut; Martin Schneider
  25. Non-rational expectations and the transmission mechanism By Harrison, Richard; Taylor, Tim
  26. Misperceptions, heterogeneous expectations and macroeconomic dynamics By Harrison, Richard; Taylor, Tim
  27. Forecasting Inflation Using Dynamic Model Averaging By Koop, Gary; Korobilis, Dimitris
  28. Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System By Nellie Zhang
  29. Indian money market dynamics By Nath, Golaka; Raja N, Aparna
  30. Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  31. Do Institutions and Culture Matter for Business Cycles? By Sumru Altug; Fabio Canova
  32. Labor share, Informal sector and Development By Paul Maarek
  33. Why price inflation in developed countries is systematically underestimated By Kitov, Ivan
  34. Andrzej Torój - Poland and Slovakia during the crisis: would the euro (non-)adoption matter? By Andrzej Torój
  35. UK Macroeconomic Forecasting with Many Predictors: Which Models Forecast Best and When Do They Do So? By Koop, Gary; Korobilis, Dimitris
  36. Time-consistent fiscal policy under heterogeneity: Conflicting or common interests? By Angelopoulos, Konstantinos; Malley, James; Philippopoulos, Apostolis
  37. The impact of fiscal consolidation on economic growth. An illustration for the Spanish economy based on a general equilibrium model By Pablo Hernández de Cos; Carlos Thomas
  38. The effects of oil shocks on government expenditures and government revenues nexus in Iran (as a developing oil-export based economy) By Dizaji, S.F.
  39. "The Mediterranean Conundrum: The Link between the State and the Macroeconomy, and the Disastrous Effects of the European Policy of Austerity" By C. J. Polychroniou
  40. The ins and outs of unemployment in a two-tier labor market By José I. Silva; Javier Vázquez-Grenno
  41. Forecasting UK GDP growth, inflation and interest rates under structural change: a comparison of models with time-varying parameters By Barnett, Alina; Mumtaz, Haroon; Theodoridis, Konstantinos
  42. Net job creation in the U.S. economy: lessons from monthly data, 1950-2011 By Abo-Zaid, Salem
  43. Volatility, the Macroeconomy and Asset Prices By Ravi Bansal; Dana Kiku; Ivan Shaliastovich; Amir Yaron
  44. AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends By Max Gillman
  45. Unions in a Frictional Labor Market By Leena Rudanko; Per Krusell
  47. Local Spending, Transfers and Costly Tax Collection By Fernando Aragon
  48. Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities By Alexandru MINEA; Antoine PARENT
  49. China's Economic Growth, Structural Change and Lewisian Turning Point (Japanese) By FUKAO Kyoji; Tangjun YUAN
  51. Marriage Stability, Taxation and Aggregate Labor Supply in the U.S. vs. Europe By Holter, Hans A; Chakraborty, Indraneel; Stepanchuk, Serhiy
  52. Real GDP per capita since 1870 By Kitov, Ivan; Kitov, Oleg
  53. Dynamics of Current Account Deficit: A Lesson from Pakistan By Syed tehseen, jawaid; Raza, Syed Ali
  54. Understanding Liquidity and Credit Risks in the Financial Crisis By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  55. A note on macro-financial implications of mobile money schemes By Mas, Ignacio; Klein, Michael
  56. Real GDP per capita since 1870 By Ivan Kitov; Oleg Kitov
  57. On Identification of Bayesian DSGE Models By Koop, Gary; Pesaran, M. Hashem; Smith, Ron P.
  58. A Comparison Of Forecasting Procedures For Macroeconomic Series: The Contribution Of Structural Break Models By BAUWENS, LUC; KOOP, GARY; KOROBILIS, DIMITRIS; ROMBOUTS, JEROEN V.K.
  59. Die Unabhängigkeit von Zentralbanken - Ökonomische Begründung, Messung und Zukunftsperspektive By Jerger, Jürgen; Röhe, Oke
  60. The Contribution of Housing to the Dynamics of Inequalities By Modibo Sidibé
  61. Modelling Breaks and Clusters in the Steady States of Macroeconomic Variables By Chan, Joshua C.C.; Koop, Gary

  1. By: Christopher M. Gunn; Alok Johri
    Abstract: The years leading up to the "great recession" were a time of rapid innovation in the financial industry. This period also saw a fall in credit spreads and a boom in liquidity and asset prices that accompanied the boom in real activity, especially investment. In this paper we argue that these were not unrelated phenomena. The adoption of new financial products and practices led to a fall in the expected costs of default which in turn engendered the flood of liquidity in the financial sector, lowered interest rate spreads and facilitated the boom in asset prices and economic activity. When the events of 2007-2009 led to a re-evaluation of the effectiveness of these new products, agents revised their expectations regarding the actual efficiency gains available to the financial sector and this led to a withdrawal of liquidity from the financial system, a reversal in credit spreads and asset prices and a bust in real activity. We treat the efficiency of the financial sector as an exogenous process governing bankruptcy (monitoring) costs facing intermediaries in a costly state verification framework and study the impact of "news shocks" regarding this process. Following the expectations driven business cycle literature, we model the boom and bust cycle in terms of an expected future fall in bankruptcy costs which are eventually not realized. The build up in liquidity and economic activity in expectation of these efficiency gains is then abruptly reversed when agent's hopes are dashed. The model generates counter-cyclical movements in the spread between lending rates and the risk-free rate which are driven purely by expectations, even in the absence of any exogenous movement in intermediation costs as well as an endogenous rise and fall in asset prices and leverage.
    Keywords: expectations-driven business cycles, intermediation shocks, credit shocks, financial intermediation, financial innovation, news shocks, business cycles, costly state verification, leverage, financial accelerator
    JEL: E3
    Date: 2012–05
  2. By: Guntram B. Wolff
    Abstract: The European Central Bankâ??s monetary policy targets the euro-area average inflation rate. By setting conditions for the area as a whole it should ensure symmetric price adjustment. Indeed, consumer price inflation rates provide little evidence of asymmetricadjustment during 2009-11. Only Ireland, which is too small to trigger a symmetric reaction, had significantly lower inflation rates than the average. Some asymmetry is visible in total economy unit labour costs (ULC) during 2009- 11, whereas wages appear to develop more symmetrically. ULC adjustment has been largely disconnected from consumer price developments. This makes it difficult for the monetary transmission channel to operate fully and ensure consumer price adjustments. Structural reforms to remove price rigidities are key. The forecast is worrying. While the European Commission forecasts that Greek inflation rates will fall, German and Italian inflation rates will not adjust in the right direction during 2012-13. Less inflation in Italy and more inflation in Germany are urgently needed to achieve rebalancing in the euro area."
    Date: 2012–05
  3. By: Jess Benhabib; George W. Evans; Seppo Honkapohja
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
    JEL: E52 E58 E63
    Date: 2012–05
  4. By: Chen, Xiaoshan; MacDonald, Ronald
    Abstract: This paper investigates underlying changes in the UK economy over the past thirtyfive years using a small open economy DSGE model. Using Bayesian analysis, we find UK monetary policy, nominal price rigidity and exogenous shocks, are all subject to regime shifting. A model incorporating these changes is used to estimate the realised monetary policy and derive the optimal monetary policy for the UK. This allows us to assess the effectiveness of the realised policy in terms of stabilising economic fluctuations, and, in turn, provide an indication of whether there is room for monetary authorities to further improve their policies.
    Keywords: Markov-switching, Bayesian analysis, DSGE models,
    Date: 2011
  5. By: Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
    Abstract: The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.
    Keywords: Linear-quadratic approximation, unconditional expectations, optimal monetary policy, ranking simple policy rules,
    Date: 2011
  6. By: Pramod Kumar, Naik; Puja , Padhi
    Abstract: The study investigates the relationships between the Indian stock market index (BSE Sensex) and five macroeconomic variables, namely, industrial production index, wholesale price index, money supply, treasury bills rates and exchange rates over the period 1994:04–2011:06. Johansen’s co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between stock market index and macroeconomic variables. The analysis reveals that macroeconomic variables and the stock market index are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the stock prices positively relate to the money supply and industrial production but negatively relate to inflation. The exchange rate and the short-term interest rate are found to be insignificant in determining stock prices. In the Granger causality sense, macroeconomic variable causes the stock prices in the long-run but not in the short-run. There is bidirectional causality exists between industrial production and stock prices whereas, unidirectional causality from money supply to stock price, stock price to inflation and interest rates to stock prices are found.
    Keywords: Stock market index; macroeconomic variables; co-integration test; causality test
    JEL: E44 C22 G0
    Date: 2012–05–13
  7. 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.
    Keywords: jobless recoveries, U.S. business cycle, estimated DSGE models, Okun's law
    JEL: E32
    Date: 2012–05
  8. By: Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
    Abstract: The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear - quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of pol icy performance is a linear combinat ion of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.
    Keywords: Linear-quadratic approximation, unconditional expectations, optimal monetary policy, ranking simple policy rules,
    Date: 2011
  9. By: Christian Haefke; Marcus Sonntag; Thijs van Rens
    Abstract: Recent research in macroeconomics emphasizes the role of wage rigidity in ac- counting 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: wage rigidity, search and matching model, business cycle
    JEL: E24 E32 J31 J41 J64
    Date: 2012–05
  10. By: Briec, Walter; Gabillon, Emmanuelle; Lasselle, Laurence
    Abstract: Cecchetti et al. (2006) develop a method for allocating macroeconomic performance changes among the structure of the economy, variability of supply shocks and monetary policy. We propose a dual approach of their method by borrowing well-known tools from production theory, namely the Farrell measure and the Malmquist index. Following FÄare et al (1994) we propose a decomposition of the efficiency of monetary policy. It is shown that the global efficiency changes can be rewritten as the product of the changes in macroeconomic performance, minimum quadratic loss, and efficiency frontier.
    Keywords: e±ciency frontier, inflation variability, Farrell measure, Malmquist index,
    Date: 2011
  11. By: Blake, Andrew (Bank of England)
    Abstract: We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.
    Keywords: Fixed nominal interest rates; uniqueness; indeterminacy
    JEL: C63 E47 E61
    Date: 2012–05–18
  12. By: Pascal Michaillat
    Abstract: This article is based on a paper that models unemployment as the result of matching frictions and job rationing. Job rationing is a shortage of jobs arising naturally in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor. During recessions, job rationing is acute, driving the rise in unemployment, whereas matching frictions contribute little to unemployment. Intuitively, in recessions jobs are lacking, the labor market is slack, recruiting is easy and inexpensive, so matching frictions do not matter much. In a calibrated model, cyclical fluctuations in the composition of unemployment are quantitatively large.
    Keywords: Unemployment, matching frictions, job rationing
    JEL: E24 E32 J64
    Date: 2012–05
  13. By: Francisco, Ramirez
    Abstract: This document compares the proprieties of different empirical methodologies to estimate the output gap and the potential output (non-observable variables of interest to the design of monetary policy and macroeconomic analysis) using Dominican Republic as a case of study. The output gap and potential output are estimated with three different methods: univariated filters, non-observable variables methodology; and structural autorregresive vector (SVAR). Also, using all measures of output gap, a Phillip’s curve is estimated with each measure to evaluate the usability of these in macroeconometric models of policy analysis and forecast.
    Keywords: Potential Output; Unobserved Component Model; Structural VAR
    JEL: C32 C53 E37
    Date: 2011
  14. By: Mumtaz, Haroon (Bank of England); Zanetti, Francesco (Bank of England)
    Abstract: This paper studies the dynamic response of labour input to neutral technology shocks. It uses a standard real business cycle model enriched with labour market search and matching frictions and investment-specific technological progress that enables a new, agnostic, identification scheme based on sign restrictions on an SVAR. The estimation supports an increase of labour input in response to neutral technology shocks. This finding is robust across different perturbations of the SVAR model. The model is extended to allow for time-varying volatility of shocks and the identification scheme is used to investigate the importance of neutral and investment-specific technology shocks to explain the reduced volatility of US macroeconomic variables over the past two decades. Neutral technology shocks are found to be more important than investment-specific technology shocks.
    Date: 2012–05–18
  15. By: Evans, George W.
    Abstract: In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.
    Keywords: Stagnation, fiscal and monetary policy, deflation trap,
    Date: 2011
  16. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper investigates the relationship between short term and long term inflation expectations in the US and the UK with a focus on inflation pass through (i.e. how changes in short term expectations affect long term expectations). An econometric methodology is used which allows us to uncover the relationship between inflation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored inflation expectations. For neither country do we fi nd anchored or unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our findings are not consistent with the specifi c model of contained inflation expectations presented here, but are consistent with a more broad view of expectations being constrained by the existence of an inflation target.
    Date: 2011
  17. By: Koop, Gary; Onorante, Luca
    Abstract: This paper uses forecasts from the European Central Bank's Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work. Given the relatively short data span of the Survey of Professional Forecasters and the need to control for many explanatory variables, we use dynamic model averaging in order to ensure a parsimonious econometric speci cation. We use both regression-based and VAR-based methods. We find no support for the backward looking behavior embedded in the Neo-classical Phillips curve. Much more support is found for the forward looking behavior of the New Keynesian Phillips curve, but most of this support is found after the beginning of the financial crisis.
    Keywords: inflation expectations, survey of professional forecasters, Phillips curve, Bayesian,
    Date: 2011
  18. By: Stravelakis, Nikos
    Abstract: This draft presents a model of internally generated growth and effective demand. It is constructed with the rationale of separating fast and slow variables. Slow variables appear as parameters. We show the reaction of profit growth to different rates of profit (slow variable) through the variation of the rate of interest and the price level (fast variables). The model is within the classical / Marxist tradition in the sense that profitability is the driving force of capital accumulation and the Marxist / post Keynesian tradition in the sense that the rate of interest is a purely monetary phenomenon depending on the competition between borrowers and lenders. Although we let prices and the rate of savings adjust to the rate of capital accumulation and the rate of interest respectively the prevailing rate of profit is the dominant force of accumulation giving insights on the characteristics of depressions and the effectiveness of various policies in that context. More specifically, the model shows the difference between fluctuations in profitability and production which characterize a recession to a standstill in profit growth which is the mark of a depression. As we will show savings adjustments are sufficient to bring an economy out of recession but are totally ineffective in depressions. Therefore, recession and depression policies should differ significantly not only quantitatively but also qualitatively. In a depression increasing, bank liquidity, trough governments and central banks, will not drive the system out of stagnation because profits are too low and outstanding debt is too high for banks to extend credit and corporations to invest. Furthermore, major restructuring involving real wage reductions, mergers and acquisitions of corporations and banks, includes the impairment of the weaker capital which will take a long undefined period of time with persistent high unemployment. Direct state investment, on the other hand, will reduce unemployment and create adequate demand to eventually drive the economy out of stagnation.
    Keywords: profitability; capital accumulation; profit of enterprise; depression
    JEL: B14 C02 B22
    Date: 2012–05–15
  19. By: Darby, Julia; Melitz, Jacques
    Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981-2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.
    Date: 2011
  20. By: Giovanni MELINA; Stefania VILLA
    Abstract: This paper studies how fiscal policy affects loan market conditions. First, it conducts a Structural Vector-Autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a Real Business Cycle model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock.
    Date: 2012–05
  21. By: Alessandro Caiani (Department of Economics and Business, University of Pavia); Antoine Godin (Department of Economics and Business, University of Pavia); Stefano Lucarelli (Department of Economics “Hyman P. Minsky”, University of Bergamo)
    Abstract: Schumpeter showed that the boom and bust cycles are intrinsically related to the functioning of the capitalist economy. These boom and bust cycles are inherent to the rise innovation. Our paper analyses innovation cycles in a stock flow consistent framework. It focuses on the essential role of internal and external finance in the emergence of a new technological paradigm. We present two models. The first one, as a tribute to Schumpeter’s work, follows strictly Schumpeter’s description of the business cycles induced by technological change, except for the financial side. The second model presents a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. The stock flow consistent approach allows us to track the flows of funds resulting from the rise of innovators in the system. The dynamics of prices, employment and wealth distribution among the different sectors is analysed. Above all, the role of financial-innovation nexus is underlined. The paper builds the grounds for a wider analysis of schumpeterian structural changes described in Schumpeter (1934/1912) and Schumpeter (1964/1939) We find this particularly relevant to understand the impact and potential sources of instability of an ever more financialized monetary economy of production.
    Keywords: Schumpeter, Innovation, Stock Flow Consistent Models, Monetary Circuit
    JEL: O30 O4 E32
    Date: 2012–05
  22. By: Abo-Zaid, Salem
    Abstract: This paper studies the optimality of labor tax smoothing in a simple model with credit frictions. Firms’ borrowing to pay their wage payments in advance is constrained by the value of their collateral at the beginning of the period. The labor tax and the shadow value on the credit constraint lead to a (static) wedge between the marginal product of labor and the marginal rate of substitution between labor and consumption. This paper suggests that while the notion of “wedge smoothing” is carried over to this environment, it is achieved only through a volatile labor-income tax rate. As the shadow value on the financing constraint varies over the business cycle, tax volatility is needed in order to counteract this variation and thus allow for “wedge smoothing”. In particular, the optimal labor-income tax rate is lower when the credit market is more tightened and higher when the credit market is less tightened. Therefore, when firms are more credit-constrained and the demand for labor is reduced, optimal fiscal policy calls for boosting labor supply by lowering the labor-income tax rate.
    Keywords: Labor tax smoothing; Credit frictions; Borrowing constraints
    JEL: E62 H21 E44
    Date: 2012–05–11
  23. By: Florackis, Chris; Kostakis, Alexandros; Kontonikas, Alexandros
    Abstract: This study examines the impact of macro-liquidity shocks on the returns of UK stock portfolios sorted on the basis of a series of micro-liquidity measures. The macro-liquidity shocks are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in futures contracts on the 3-month LIBOR during the period June 1999- December 2009. We report definitive evidence that these shocks are transmitted to the cross-section of liquidity-sorted portfolios, with most liquid stocks playing a very active role. Our results emphatically document that the shocks-returns relationship has reversed its sign during the recent financial crisis; the standard inverse relationship between interest rate surprises and portfolios’ returns before the crisis has turned into positive during the crisis. This finding confirms the inability of interest rate cuts to boost returns in the shortrun during the crisis, because these were perceived by market participants as a signal of a deteriorating economic outlook.
    Keywords: Liquidity Shocks, Monetary Policy, Market Micro-Structure, Stock Returns,
    Date: 2011
  24. By: Cosmin Ilut; Martin Schneider
    Abstract: This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of confidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confidence about productivity works like `unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.
    Date: 2012
  25. By: Harrison, Richard (Bank of England); Taylor, Tim (Bank of England)
    Abstract: In this paper, we compare two approaches to modelling behaviour under non-rational expectations in a benchmark New Keynesian model. The ‘Euler equation’ approach modifies the equations derived under the assumption of rational expectations by replacing the rational expectations operator with an alternative assumption about expectations formation. The ‘long-horizon’ expectations approach solves the decision rules of households and firms conditional on their expectations for future events that are outside of their control, so that spending and price-setting decisions depend on expectations extending into the distant future. Both approaches can be defended as descriptions of (distinct) forms of boundedly rational behaviour, but have different implications both for the form of the equations that govern the dynamics of the economy and the ease of deriving those equations. In this paper we construct two versions of a benchmark New Keynesian model in which non-rational expectations are modelled using the Euler equation and long-horizon approaches and show that both approaches have very similar implications for macroeconomic dynamics when departures from rational expectations are relatively small. But as expectations depart further from rationality, the two approaches can generate significantly different implications for the behaviour of key variables.
    Keywords: Expectations; monetary transmission mechanism
    JEL: D84 E17
    Date: 2012–05–18
  26. By: Harrison, Richard (Bank of England); Taylor, Tim (Bank of England)
    Abstract: We investigate the extent to which misperceptions about the economy can become self-reinforcing and thereby contribute to time-varying macroeconomic dynamics. To do so, we build a New Keynesian model with long-horizon expectations and dynamic predictor selection. Because agents solve multi-period optimisation problems (households maximise expected lifetime utility and firms maximise the discounted flow of future profits), their current decisions are influenced by expectations of the distant future and cannot in general be characterised by the familiar Euler equations that represent the rational expectations equilibrium of these models. We assume that agents have access to a set of alternative predictors that can be used to form expectations and choose among them based on noisy measures of their recent performance. This dynamic predictor selection generates endogenous fluctuations in the proportions of agents using each predictor, contributing to macroeconomic dynamics. We explore the behaviour of our model when agents have access to two simple predictors. One of the predictors is consistent with a mistaken belief that macroeconomic variables are more persistent than implied by the fundamental shocks hitting the economy. We show that the presence of a ‘persistent predictor’ can lead to changes in beliefs which are self-reinforcing, giving rise to endogenous fluctuations in the time-series properties of the economy. Moreover, we show that such fluctuations arise even if we replace the ‘persistent predictor’ with learning under constant gain.
    Keywords: Expectations; macroeconomic dynamics; heuristics
    JEL: D82 D84 E17
    Date: 2012–05–18
  27. By: Koop, Gary; Korobilis, Dimitris
    Abstract: We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.
    Keywords: Bayesian, State space model, Phillips curve,
    Date: 2011
  28. By: Nellie Zhang
    Abstract: This paper applies a static model of an interest rate corridor to the Canadian data, and estimates the aggregate demand for central-bank settlement balances in the Large Value Transfer System (LVTS). The empirical specification controls for various calendar effects that have been shown to cause fluctuations in LVTS payment flows. The analysis takes into account the downward divergence of the overnight interest rate from the target rate, which has been persistent since 2005. The results suggest that a target of $3 billion for LVTS settlement balances does not seem excessive during the time period when Canadian monetary policy was operating at the effective lower bound (ELB). Specifically, the model projects that, if the consistent downward divergence of overnight interest rate is taken into account, then on average $2.405 billion of LVTS settlement balances would probably have been sufficient to achieve the goal of keeping the overnight interest rate at or very close to the lower bound of the corridor. However, by targeting a slightly higher level, the Bank of Canada could be 95% certain that the overnight interest rate would on average not exceed its policy rate at the lower bound of the corridor. In addition, the estimation shows that the point elasticity of overnight interest rate is around 0.17 when the daily level of settlement balances is targeted at $3 billion under the ELB framework.
    Keywords: Interest rates; Monetary policy implementation; Payment, clearing, and settlement systems
    JEL: G01 E40 E50 C36
    Date: 2012
  29. By: Nath, Golaka; Raja N, Aparna
    Abstract: The short term market is an important source for banks and institutions to secure funds to align their short term asset liability mismatches. Central Banks use the market to signal policy stance changes. In India, Reserve Bank of India uses monetary policy not only to signal the policy stances but also uses the same to map growth dynamics of the economy. The short term rates generally synchronize with policy rates in a manner that helps smooth transmission of monetary policy. In India, the short term market heavily revolves around daily LAF of RBI as well as overnight inter-bank Call Money, Repo and CBLO markets. Effort to develop a term money market has not been very successful. The article looked at creating an indexed rate taking into account all three segments into consideration rather than picking up only one rate. The liquidity was estimated as ratio of LAF and Net Demand and Time Liability (NDTL). The relationship between indexed rate and liquidity was tested and found to be rational. The article also found rational relationship between the spread of Inter-bank Call and Repo and ratio of LAF and NDTL along with money market transaction volume.
    Keywords: Indian Money market; Repo Market; CBLO; LAF; Liquidity adjustment Facility; Open Market Operations; NDTL
    JEL: E51 E58 E52 E50 E61
    Date: 2012–02–28
  30. By: Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
    Abstract: We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical ‘‘dynamic’’ provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy.
    Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
    JEL: E51 E58 E60 G21 G28
    Date: 2012–05
  31. By: Sumru Altug; Fabio Canova
    Abstract: We examine the relationship between institutions, culture and cyclical fluctuations for a sample of 45 European, Middle Eastern and North African countries. Better governance is associated with shorter and less severe contractions and milder expansions. Certain cultural traits, such as lack of acceptance of power distance and individualism, are also linked business cycle features. Business cycle synchronization is tightly related to similarities in the institutional environment. Mediterranean countries conform to these general tendencies.
    Keywords: business cycles, institutions, culture, Mediterranean countries, synchronization
    JEL: C32 E32
    Date: 2012–04
  32. By: Paul Maarek (THEMA, Universite de Cergy-Pontoise)
    Abstract: This paper aims to understand the pattern of the labor share of income during the devel- opment process. We highlight a U-shapped relationship between development and the labor share. Our theory emphasizes the interplay between rms'monopsony power and the size of the informal sector when the formal labor market has frictions. The size of the informal sector parameterizes workers'outside opportunities in wage setting. In the rst stage of development, productivity gains are not compensated by wage increases, as most of workers'outside opportunities depend on the in- formal sector whose productivity remains unchanged. The labor share decreases as a result. In the second stage of development, outside opportunities rely more on productivity in formal rms as the formal sector expands. Consequently, the labor share increases. We then use a policy experiment, namely capital account liberalization episodes, in order to determine the causal impact of economic development on the labor share.
    Keywords: Development ; Informal sector ; Labor share ; Matching frictions
    JEL: E25 J42 O17
    Date: 2012
  33. By: Kitov, Ivan
    Abstract: There is an extensive historical dataset on real GDP per capita prepared by Angus Maddison. This dataset covers the period since 1870 with continuous annual estimates in developed countries. All time series for individual economies have a clear structural break between 1940 and 1950. The behavior before 1940 and after 1950 can be accurately (R2 from 0.7 to 0.99) approximated by linear time trends. The corresponding slopes of regressions lines before and after the break differ by a factor of 4 (Switzerland) to 19 (Spain). We have extrapolated the early trends into the second interval and obtained much lower estimates of real GDP per capita in 2011: from 2.4 (Switzerland) to 5.0 (Japan) times smaller than the current levels. When the current linear trends are extrapolated into the past, they intercept the zero line between 1908 (Switzerland) and 1944 (Japan). There is likely an internal conflict between the estimating procedures before 1940 and after 1950. A reasonable explanation of the discrepancy is that the GDP deflator in developed countries has been highly underestimated since 1950. In the USA, the GDP deflator is underestimated by a factor of 1.4. This is exactly the ratio of the interest rate controlled by the Federal Reserve and the rate of inflation. Hence, the Federal Reserve actually retains its interest rate at the level of true price inflation when corrected for the bias in the GDP deflator.
    Keywords: real GDP; price inflation; interest rate; central bank; developed countries
    JEL: E43 O47 E31 E01
    Date: 2012–05–27
  34. By: Andrzej Torój (Ministry of Finance, Poland)
    Abstract: It is commonly argued that Poland avoided a massive drop in output during the 2008/2009 economic crisis in part thanks to substantial nominal zloty's depreciation against the euro. The Polish case is often contrasted with Slovakia that adopted the euro in January 2009 and, since the Ecofin Council decision in summer 2008, exhibited virtually no nominal exchange rate volatility while facing deep losses in output. In this paper we attempt to validate this contrast by reversing the roles, i.e. checking if Poland really would have faced the same drop -- and Slovakia the same boost -- if it had been Poland, not Slovakia, that adopted the euro at that point. Our counterfactual simulations based on a New Keynesian DSGE model indicate that, indeed, the Polish tradable output could have been 10-15 percent lower than actually observed in 2009, while the Slovak one -- approximately 20 percent higher. This asymmetry results mainly from structural differences between the two economies, such as size, openness, share of nontradable sector and foreign trade elasticities. The difference of this size would have been short-lived (3-4 quarters), and the difference of the nontradable output would have been of much lower magnitude.
    Keywords: euro adoption, Poland, Slovakia, DSGE, counterfactual simulations
    JEL: C54 E42
    Date: 2012–05–23
  35. By: Koop, Gary; Korobilis, Dimitris
    Abstract: Block factor methods offer an attractive approach to forecasting with many predictors. These extract the information in these predictors into factors reflecting different blocks of variables (e.g. a price block, a housing block, a financial block, etc.). However, a forecasting model which simply includes all blocks as predictors risks being over-parameterized. Thus, it is desirable to use a methodology which allows for different parsimonious forecasting models to hold at different points in time. In this paper, we use dynamic model averaging and dynamic model selection to achieve this goal. These methods automatically alter the weights attached to different forecasting model as evidence comes in about which has forecast well in the recent past. In an empirical study involving forecasting output and inflation using 139 UK monthly time series variables, we find that the set of predictors changes substantially over time. Furthermore, our results show that dynamic model averaging and model selection can greatly improve forecast performance relative to traditional forecasting methods.
    Keywords: Bayesian, state space model, factor model, dynamic model averaging,
    Date: 2011
  36. By: Angelopoulos, Konstantinos; Malley, James; Philippopoulos, Apostolis
    Abstract: This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main fi ndings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidise labour; (ii) a Pareto improving means to reduce ine¢ ciently high capital taxation under discretion is for the government to place greater weight on the welfare of capitalists; (iii) capitalists and workers preferences, regarding the optimal amount of "capitalist bias", are not aligned implying a conflict of interests.
    Keywords: Optimal fi scal policy, Markov-perfect equilibrium, heterogeneous agents,
    Date: 2011
  37. By: Pablo Hernández de Cos (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This study illustrates the effects of different fiscal consolidation measures on economic activity through simulations performed with a general equilibrium model calibrated to the Spanish economy. Overall, our results show that fiscal consolidation has short-run costs but sizable long-run benefits in terms of growth. Regarding the short-run costs, their magnitude depends crucially on the presence of confidence effects due to the consolidation process, which tend to reduce the value of fiscal multipliers
    Keywords: Fiscal consolidation, general equilibrium, fiscal multipliers, confidence effects
    JEL: E62 C68
    Date: 2012–05
  38. By: Dizaji, S.F.
    Abstract: The main purpose of this study is to investigate the dynamic relationship between government revenues and government expenditures in Iran as a developing oil export based economy. Moreover, I want to know how government expenditures and revenues respond to oil price (revenue) shocks. I use two different groups of the variables with two different time periods (quarterly and annually) to investigate the robustness and reliability of the results and to provide a more comprehensive base for comparison against different methodologies. For the first group of the variables (including oil price, oil revenues to GDP ratio, government total expenditures to GDP ratio and a dummy variable for capturing the effects of war with Iraq) I apply an SVAR model using annual data for the period 1970-2008. The results of the impulse response functions and variance decomposition analysis indicate that the causality is running from oil revenues to GDP ratio to government total expenditures to GDP ratio. Moreover the contribution of oil revenue shocks in explaining the government expenditures to GDP ratio is stronger than the contribution of oil price shocks. For the second group of the variables (oil revenues, government total revenues, government current expenditures, government capital expenditures, money supply and CPI) unrestricted VAR and VEC models have been applied using quarterly data for the period 1990:2-2009:1. The results of the impulse response functions and variance decompositions analysis for both VAR and VEC models indicate that the strong causality is running from government revenues to government expenditures (both current and capital) in Iranian economy while the evidence for the reverse causality is very weak. The results show that in the VEC model which the long-run behavior of endogenous variables is restricted to converge to their co-integration relationships, oil revenue shocks can affect the other macroeconomic variables more directly while in the VAR model this changes and works through the total revenues channel. Moreover the findings indicate that government revenues, government expenditures and money supply are important determinants of domestic price level in Iranian economy. Overall my results support the revenue-spending hypothesis for Iran. In this context Iran should enhance the effectiveness of fiscal policy by making budget expenditure less driven by revenue availability. This policy can help to avoid the costs and instability that variations in public spending generate mostly due to the fluctuations in oil revenues.
    Keywords: government expenditures;sanctions;Iran;government revenues;oil shocks;vector autoregression (VAR)
    Date: 2012–05–10
  39. By: C. J. Polychroniou
    Abstract: Conventional wisdom has calcified around the belief that the countries in the eurozone periphery are in trouble primarily because of their governments' allegedly profligate ways. For most of these nations, however, the facts suggest otherwise. Apart from the case of Greece, the outbreak of the eurozone crisis largely preceded dramatic increases in public debt ratios, and as has been emphasized in previous Levy Institute publications, the roots of the crisis lie far more in the flawed design of the European Monetary Union and the imbalances it has generated. But as Research Associate and Policy Fellow C. J. Polychroniou demonstrates in this policy brief, domestic political developments should not be written out of the recent history of the eurozone's stumbles toward crisis and possible dissolution. However, the part in this tale played by southern European political regimes is quite the opposite of that which is commonly claimed or implied in the press. Instead of out-of-control, overly generous progressive agendas, the countries at the core of the crisis in southern Europe-Greece, Spain, and Portugal-have seen their macroeconomic environments shaped by the dominance of regressive political regimes and an embrace of neoliberal policies; an embrace, says Polychroniou, that helped contribute to the unenviable position their economies find themselves in today.
    Date: 2012–05
  40. By: José I. Silva (Universitat de Girona); Javier Vázquez-Grenno (Universitat de Barcelona & IEB)
    Abstract: This paper aims to shed some light on the dynamics of the Spanish labor market, using data from the Spanish Labor Force Survey for the period 1987 to 2010. We examine transition rates in a three-state model and compare our results with those reported for the UK and the US. Explicitly introducing the employment duality present in the Spanish labor market, we study labor market dynamics in a four-state model set-up. We also analyze the behavior of these rates within two sub-periods of recession and a further two sub-periods of boom. We provide evidence of the cyclicality of the transition rates using unconditional and conditional correlations. Finally, we compute the contribution of the different transitions to unemployment rate volatility. Our over-all conclusion points out that the employment duality is the key to understand the unemployment volatility and the functioning of the Spanish labor market.
    Keywords: Job finding rate, job separation rate, unemployment
    JEL: E24 E32 J6
    Date: 2012
  41. By: Barnett, Alina (Bank of England); Mumtaz, Haroon (Bank of England); Theodoridis, Konstantinos (Bank of England)
    Abstract: Evidence from a large and growing empirical literature strongly suggests that there have been changes in inflation and output dynamics in the United Kingdom. This is largely based on a class of econometric models that allow for time-variation in coefficients and volatilities of shocks. While these have been used extensively to study evolving dynamics and for structural analysis, there is little evidence on their usefulness in forecasting UK output growth, inflation and the short-term interest rate. This paper attempts to fill this gap by comparing the performance of a wide variety of time-varying parameter models in forecasting output growth, inflation and a short rate. We find that allowing for time-varying parameters can lead to large and statistically significant gains in forecast accuracy.
    Keywords: Time-varying parameters; stochastic volatility; VAR; FAVAR; forecasting; Bayesian estimation
    JEL: C32 E37 E47
    Date: 2012–05–18
  42. By: Abo-Zaid, Salem
    Abstract: In this paper, I study the monthly net job creation (NJC) at the aggregate level in the U.S. over the period 1950-2011. The paper has few important findings. First, NJC did not show a significant trend over the last 6 decades, which resulted in a fall in the NJC rate. Second, NJC is very volatile and it may change course even in the span of one month. Third, there is no clear pattern about the co-movement between NJC and the change in the unemployment rate in the U.S. Fourth, the average of total NJC and private NJC since late 2010 are significantly higher than their respective historical averages and the volatility in NJC since the end of the Great Recession is not unusual by historical standards. Fifth, the size of NJC in the first decade of the 21st century has been the lowest along the entire sample. Finally, the most frequent drop in the unemployment rate is by 0.1 percent, and drops of more than 0.2 percent should not be highly expected.
    Keywords: U.S. Net Job Creation; U.S. Unemployment Rate; U.S. Labor Force; The Great Recession
    JEL: E24 J60 J21
    Date: 2012–05–25
  43. By: Ravi Bansal; Dana Kiku; Ivan Shaliastovich; Amir Yaron
    Abstract: We show that volatility movements have first-order implications for consumption dynamics and asset prices. Volatility news affects the stochastic discount factor and carries a separate risk premium. In the data, volatility risks are persistent and are strongly correlated with discount-rate news. This evidence has important implications for the return on aggregate wealth and the cross-sectional differences in risk premia. Estimation of our volatility risks based model yields an economically plausible positive correlation between the return to human capital and equity, while this correlation is implausibly negative when volatility risk is ignored. Our model setup implies a dynamics capital asset pricing model (DCAPM) which underscores the importance of volatility risk in addition to cash-flow and discount-rate risks. We show that our DCAPM accounts for the level and dispersion of risk premia across book-to-market and size sorted portfolios, and that equity portfolios carry positive volatility-risk premia.
    JEL: E0 G0 G01 G12
    Date: 2012–05
  44. By: Max Gillman
    Abstract: The paper shows how a dynamic neoclassical AS-AD can be derived and used to describe business cycles and growth trends to undergraduates. Derived within the Ramsey-Cass-Koopmans (RCK) model, the AS-AD is the stationary equilibrium of the deterministic dynamic general equilibrium framework. Allowing Solow exogenous growth, the AS-AD is derived along the balanced growth path equilibrium. The derivation first builds consumption demand, aggregate demand, and then aggregate supply through the equilibrium conditions and a closed form solution for the capital stock. Through a comparative static change in goods sector productivity, the paper shows the basic failing of the standard RBC model. Allowing a second comparative static change in the consumer's time endowment, this captures a change in the "external margin" of labor supply. These comparative statics enable explanation of the business cycle, and "Solow-plus" growth trends including education time and working time. In extension of RCK, the paper shows beyond the undergraduate level, how to derive AS-AD when including human capital and endogenous growth. This allows an endogenous change in the time endowment for work and leisure through a change in human capital productivity, with a similar but more fundamental AS-AD story of business cycles and growth trends.
    Date: 2012–05–15
  45. By: Leena Rudanko (Department of Economics, Boston University, and NBER); Per Krusell (Stockholm University, CEPR, and NBER)
    Abstract: We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. We take a benevolent view of the union in assuming it to care equally about employed and unemployed workers and we assume, moreover, that it is fully rational, thus taking job creation into account when making its wage demands. Under these assumptions, if the union is also able to fully commit to future wages it generates an efficient level of long-run unemployment. However, in the short run, it uses its market power to collect surpluses from firms with existing matches by raising current wages above the efficient level. These elements give rise to a time inconsistency. Without commitment, and in a Markov-perfect equilibrium, not only is unemployment well above its efficient level, but the union wage also exhibits endogenous real stickiness which amplifies the responses of vacancy creation and unemployment to shocks. We consider extensions to partial unionization and collective bargaining between a labor union and an employers’ association.
    Keywords: Labor unions, frictional labor markets, time-inconsistency
    JEL: E02 E24 J51 J64
    Date: 2012–01
  46. By: Hugo Bänziger
    Abstract: None
    Date: 2012–05
  47. By: Fernando Aragon (Simon Fraser University)
    Abstract: This paper studies the effect of costly taxation on the fiscal response of local governments to intergovernmental transfers. Using a panel dataset of Peruvian municipalities, I find robust evidence that central government's grants have a greater stimulatory effect in municipalities facing higher tax collection costs. The results are consistent with costly taxation partially explaining the flypaper effect.
    Keywords: Flypaper effect; Intergovernmental transfers; Fiscal decentralization
    JEL: H71 H77
    Date: 2012–05
  48. By: Alexandru MINEA (Centre d'Etudes et de Recherches sur le Développement International); Antoine PARENT
    Abstract: In their already-famous 2010 article "Growth-in-a-Time-of-Debt" (AER-100(2)-pp.-573-78), Carmen Reinhart and Kenneth Rogoff show that average post-WW2 economic growth is dramatically declining in advanced economies, once the debt-to-GDP ratio is above a 90% threshold. We explore the relevance of this exogenous threshold using up-to-date econometric techniques, and reveal an endogenously-estimated threshold around a debt-to-GDP ratio of 115%, above which the negative debt-growth link changes sign. Consequently, additional evidence is needed before suggesting policy recommendations regarding growth effects of fiscal policy in such high debt regimes, which may be subject to complex nonlinearities.
    Keywords: public debt, economic growth, nonlinear effects, cliometrics
    JEL: N10 E62 H63
    Date: 2012
  49. By: FUKAO Kyoji; Tangjun YUAN
    Abstract: In a country such as China, which maintains strict controls on foreign exchange and frequently intervenes in the currency market, it is not surprising that the local currency is persistently undervalued in nominal terms. Normally, one would expect such a policy of deliberate currency undervaluation to result in a sharp rise in domestic prices, with abnormally low prices reversed not through an appreciation of the nominal exchange rate but through a rise in domestic prices. Why is this not occurring in China? A possible explanation is that, due to certain structural reasons, the equilibrium real exchange rate for China is considerably lower than that of other developing countries.<br />Taking this hypothesis as our point of departure, we examine how undervalued the Chinese yuan is in terms of purchasing power parity by comparing China's experience with other developing countries and the development process of developed countries in the past. In addition, we construct an open economy growth model with three sectors, where - similar to the Lewis growth model - there is surplus labor in the primary industry. Using this model, we analyze the relationship between the economic growth process and the level of absolute prices (real exchange rate). We show that the absolute price level will not increase until the economy reaches the Lewisian turning point. In addition, we show that in an economy like China, where there are strong barriers to the migration of labor to the manufacturing sector and where the ratio of net exports of goods and services to GDP is high, the economy will not reach the turning point until GDP per worker reaches a sufficiently high level.
    Date: 2012–05
  50. By: Paul Maarek; Philippe Askenazy; Gilbert Cette (THEMA, Universite de Cergy-Pontoise; Paris School of Economic-CNRS, Cepremap, IZA and Banque de France; Banque de France and Université de la Méditerranée (DEFI))
    Abstract: This paper aims to clarify the role of market regulations in rent creation and rent sharing. For each country-industry-year observation, the rent size (RS), measured by the value added price relative to the GDP price, is assumed to depend solely on direct anti-competitive regulations (ACR) on services and goods. The second step explains the rent sharing process by using the impact of our RS measure on the capital share. ACR on the good market increases rent size. RS increases the capital share but the magnitude highly depends on the bargaining power of the two alternative beneficiaries: workers and upstream industries.
    Keywords: Rents, capital share, prices, market regulations, output gap, unemployment
    JEL: E25 J20
    Date: 2012
  51. By: Holter, Hans A (Uppsala Center for Fiscal Studies); Chakraborty, Indraneel (Southern Methodist University); Stepanchuk, Serhiy (Magyar Nemzeti Bank)
    Abstract: Americans work more than Europeans. Using micro data from the U.S. and 17 European countries, we study the contributions from demographic subgroups to these aggregate level dierences. We document that women are typically the largest contributors to the discrepancy in work hours. We also document a negative empirical correlation between hours worked and dierent measures of taxation, driven by men, and a positive correlation between hours worked and divorce rates, driven by women. Motivated by these observations, we develop a life-cycle model with heterogeneous agents, marriage and divorce and use it to study the impact of two mechanisms on labor supply: (i) dierences in marriage stability and (ii) dierences in tax systems. We calibrate the model to U.S. data and study how labor supply in the U.S. changes as we introduce European tax systems, and as we replace the U.S. divorce and marriage rates with their European equivalents. We nd that the divorce and tax mechanisms combined explain 58% of the variation in labor supply between the U.S. and the European countries in our sample.
    Keywords: Aggregate Labor Supply; Taxation; Marriage; Divorce; Heterogeneous Households
    JEL: E24 E62 H24 H31 J21 J22
    Date: 2012–05–27
  52. By: Kitov, Ivan; Kitov, Oleg
    Abstract: The growth rate of real GDP per capita in the biggest OECD countries is represented as a sum of two components – a steadily decreasing trend and fluctuations related to the change in some specific age population. The long term trend in the growth rate is modelled by an inverse function of real GDP per capita with a constant numerator. This numerator is equivalent to a constant annual increment of real GDP per capita. For the most advanced economies, the GDP estimates between 1950 and 2007 have shown very weak and statistically insignificant linear trends (both positive and negative) in the annual increment. The fluctuations around relevant mean increments are characterized by practically normal distribution. For many countries, there exist historical estimates of real GDP since 1870. These estimates extend the time span of our analysis together with a few new estimates from 2008 to 2011. There are severe structural breaks in the corresponding time series between 1940 and 1950, with the slope of linear regression increasing by a factor of 4.0 (Switzerland) to 22.1 (Spain). Therefore, the GDP estimates before 1940 and after 1950 have been analysed separately. All findings of the original study are validated by the newly available data. The most important is that all slopes (except that for Australia after 1950) of the regression lines obtained for the annual increments of real GDP per capita are small and statistically insignificant, i.e. one cannot reject the null hypothesis of a zero slope and thus constant increment. Hence the growth in real GDP per capita is a linear one since 1870 with a break in slope between 1940 and 1950.
    Keywords: GDP; model; economic growth; inertia; trend; OECD
    JEL: O11 E32 O57
    Date: 2012–05–25
  53. By: Syed tehseen, jawaid; Raza, Syed Ali
    Abstract: This study investigates the determinants of current account deficit in Pakistan by using the annual time series data for the period 1976 to 2010. The cointegration results suggest the positive and significant long run relationship of current account deficit with exchange rate, trade deficit and fiscal deficit, while significant negative relationship is found with external debt and private saving. The error correction model also confirms the significant positive relationship of current account deficit with exchange rate, trade deficit and fiscal deficit in short run. The Granger-causality test shows the bidirectional causality run from exchange rate and external debt to current account deficit. However, unidirectional causality is found from current account deficit to external debt and fiscal deficit. It is recommended that government needs to be cautious in financing its fiscal deficit. Savings habits should be increase to narrow the investment gap in economy.
    Keywords: Current Account; Saving; Fiscal Deficit; Trade Deficit; External Debt; Exchange Rate
    JEL: E62 F32 E21
    Date: 2012–02–10
  54. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 fi nancial crisis were largely driven by liquidity risk. However, credit risk played a more signifi cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
    Date: 2011
  55. By: Mas, Ignacio; Klein, Michael
    Abstract: Across the world mobile money schemes are being launched. In such schemes financial service providers interact with clients via mobile phones or other mobile devices such as tablets. Service offerings include payments and saving as well as basic insurance products and sometimes credit based on scoring methods that use information about the client’s payment history. The world of mobile money is still in the experimental stage. Some schemes like M-PESA in Kenya have, at least initially, been run-away successes. Some three quarters of all adults in Kenya signed up within little over four years after M-PESA was launched. Other schemes in Kenya and elsewhere have produced more modest results. Yet the promise of mobile financial services is sufficiently strong for currently over 200 mobile deployments counting just the cellphone based ones. Much experimentation is still needed to find the best business models. Hence room for such experimentation is desirable. At the same time policymakers and regulators need to be clear about possible ramifications of the mobile revolution for the design of financial regulation and its implementation. This note discusses several systemic issues that arise from mobile payment schemes: The impact of “e-money” on money supply, problems posed by financial distress of mobile money schemes, and the impact of mobile money schemes on money-laundering and illicit finance --
    JEL: G21 G28
    Date: 2012
  56. By: Ivan Kitov; Oleg Kitov
    Abstract: The growth rate of real GDP per capita in the biggest OECD countries is represented as a sum of two components - a steadily decreasing trend and fluctuations related to the change in some specific age population. The long term trend in the growth rate is modelled by an inverse function of real GDP per capita with a constant numerator. This numerator is equivalent to a constant annual increment of real GDP per capita. For the most advanced economies, the GDP estimates between 1950 and 2007 have shown very weak and statistically insignificant linear trends (both positive and negative) in the annual increment. The fluctuations around relevant mean increments are characterized by practically normal distribution. For many countries, there exist historical estimates of real GDP since 1870. These estimates extend the time span of our analysis together with a few new estimates from 2008 to 2011. There are severe structural breaks in the corresponding time series between 1940 and 1950, with the slope of linear regression increasing by a factor of 4.0 (Switzerland) to 22.1 (Spain). Therefore, the GDP estimates before 1940 and after 1950 have been analysed separately. All findings of the original study are validated by the newly available data. The most important is that all slopes (except that for Australia after 1950) of the regression lines obtained for the annual increments of real GDP per capita are small and statistically insignificant, i.e. one cannot reject the null hypothesis of a zero slope and thus constant increment. Hence the growth in real GDP per capita is a linear one since 1870 with a break in slope between 1940 and 1950.
    Date: 2012–05
  57. By: Koop, Gary; Pesaran, M. Hashem; Smith, Ron P.
    Abstract: In recent years there has been increasing concern about the identification of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can even be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such cases the marginal posterior of an unidentified parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (T) is increased. For identified parameters the posterior precision rises with T, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than T. This result assumes that the identified parameters are pT-consistent, but similar differential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models.
    Keywords: Bayesian identifi cation, DSGE models, posterior updating, New Keynesian Phillips Curve,
    Date: 2011
    Abstract: This paper compares the forecasting performance of different models which have been proposed for forecasting in the presence of structural breaks. These models differ in their treatment of the break process, the parameters defining the model which applies in each regime and the out-of-sample probability of a break occurring. In an extensive empirical evaluation involving many important macroeconomic time series, we demonstrate the presence of structural breaks and their importance for forecasting in the vast majority of cases. However, we find no single forecasting model consistently works best in the presence of structural breaks. In many cases, the formal modeling of the break process is important in achieving good forecast performance. However, there are also many cases where simple, rolling OLS forecasts perform well.
    Keywords: Forecasting, change-points, Markov switching, Bayesian inference,
    Date: 2011
  59. By: Jerger, Jürgen; Röhe, Oke
    Keywords: Zentralbankunabhängigkeit; Europäische Zentralbank; Zeitinkonsistenz; Schuldenkrise
    JEL: E58 E62
    Date: 2012–05–24
  60. By: Modibo Sidibé (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: This paper proposes a unified framework for the analysis of inequalities. In contrast to the former literature on inequalities, housing is included as a major determinant of individual saving behavior. Disparities across locations affect individual outcomes in both labor and education markets. In a Bewley-Huggett-Aiyagari type model where several frictions are represented, the model allows for segmentation between homeowners and renters in the housing market, imperfection in the capital market and residential mobility over the life-cycle. Moreover, individual location is assumed to affect labor productivity, wealth accumulation via the dynamics of housing prices and the human capital acquisition process of the next generation. The dynamics of prices combined to bequest motive provide the perfect framework to understand the tenure choice of individuals. Furthermore, the fixity of housing supply in each neighborhood combined with borrowing constraints prevent some households from living in their preferred area, which leads to segregation. Using this general framework, the paper contributes to the understanding of the complex relationships between labor, housing and education markets. Finally, several experiments aimed at decreasing the level of inequalities at the individual and location level are provided.
    Keywords: Heterogeneous Agents, Inequalities, Wealth distribution, Housing
    JEL: E24 I30 R23
    Date: 2012
  61. By: Chan, Joshua C.C.; Koop, Gary
    Abstract: Macroeconomists working with multivariate models typically face uncertainty over which (if any) of their variables have long run steady states which are subject to breaks. Furthermore, the nature of the break process is often unknown. In this paper, we draw on methods from the Bayesian clustering literature to develop an econometric methodology which: i) finds groups of variables which have the same number of breaks; and ii) determines the nature of the break process within each group. We present an application involving a five-variate steady-state VAR.
    Date: 2011

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