nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒06‒13
47 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Policy regimes, policy shifts, and U.S. business cycles By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  2. The Financial Crisis and the Changing Dynamics of the Yield Curve By Morten L. Bech; Yvan Lengwiler
  3. Do Good Institutions Promote Counter-Cyclical Macroeconomic Policies? By César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
  4. The response of interest rates to U.S. and U.K. quantitative easing By Jens H.E. Christensen; Glenn D. Rudebusch
  5. Macroeconomics with Financial Frictions: A Survey By Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov
  6. The Impact of Policy Shocks on Financial Structure: Empirical Results from Japan By Moayedi, Vafa; Aminfard, Matin
  7. Inflation-hedging Portfolios in Different Regimes. By Brière, Marie; Signori, Ombretta
  8. Monetary Policy Reform in a World of Central Banks By Gunther Schnabl
  9. Transparency: can central banks commit to truthful communication? By Julian A. Parra POlanía
  10. Macroeconomic forecasting during the Great Recession: The return of non-linearity? By Ferrara, L.; Marcellino, M.; Mogliani, M.
  11. Mythos TARGET2 - ein Zahlungsverkehrssystem in der Kritik By Peter Burgold; Sebastian Voll
  12. Non-linearities in exchange rate pass-through: Evidence from smooth transition models By Ben Cheikh, Nidhaleddine
  13. Transparency: can central banks commit to truthful communication? By Julian A. Parra-Polania
  14. Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus By Kayam, Saime S.
  15. Exchange rate pass-through to various price indices: empirical estimation using vector error correction models By Andreas Bachmann
  16. Are predictable improvements in TFP contractionary or expansionary? implications from sectoral TFP By Deokwoo Nam; Jian Wang
  17. Libéralisation commerciale et politique de change : possibilités et contraintes dans une petite économie ouverte – le cas de la Hongrie. By Kolozi, Pál Péter
  18. Why price inflation in developed countries is systematically underestimated By Ivan Kitov
  19. Bridging DSGE models and the raw data By Fabio Canova
  20. Optimal Fiscal Devaluation By Langot, François; Patureau, Lise; Sopraseuth, Thepthida
  21. Ecuador’s Economy Since 2007 By Rebecca Ray; Sara Kozameh
  22. Update on the Jamaican Economy By Juan Montecino; Jake Johnson
  23. Sovereign debt crises and financial bailouts: the anatomy and components of an everlasting relationship (I) By Ojo, Marianne
  24. Going Deeper Into the Link Between the Labour Market and Inflation By Tito Nícias Teixeira da Silva Filho
  25. The Shadow Banking System - Survey and Typological Framework By Jenny Poschmann
  26. Can Policy Improve Our Financial Decision-Making? By Lunn, Pete
  27. Stress test macroéconomique du système bancaire de l'UEMOA By Gammadigbé, Vigninou
  28. Hedging against the government: a solution to the home asset bias puzzle By Tiago C. Berriel; Saroj Bhattarai
  29. How do Laffer curves differ across countries? By Mathias Trabandt; Harald Uhlig
  30. Pricing deflation risk with U.S. Treasury yields By Jens H.E. Christensen; Jose A. Lopez; Glenn D. Rudebusch
  31. Marriage Stability, Taxation and Aggregate Labor Supply in the U.S. vs. Europe By Chakraborty, Indraneel; Stepanchuk, Serhiy; Holter, Hans A.
  32. Boom and Burst in Housing Market with Heterogeneous Agents By Alessandro Spelta; Guido Ascari; Nicolò Pecora
  33. Health Investment over the Life-Cycle By Timothy Halliday; Hui He; Hao Zhang
  34. When is debt sustainable? By Jasper Lukkezen; Hugo Rojas-Romagosa
  35. The world is not enough! Small open economies and regional dependence By Knut Are Aastveit; Hilde C. Bjørnland; Leif Anders Thorsrud
  36. Estimating term structure changes using principal component analysis in Indian sovereign bond market By Nath, Golaka
  37. Europe's Growth Emergency By Zsolt Darvas; Jean Pisani-Ferry
  38. La résolution d'un problème de multicolinéarité au sein des études portant sur les déterminants d'une publication volontaire d'informations : proposition d'un algorithme de décision simplifié basé sur les indicateurs de Belsley, Kuh et Welsch (1980) By Marc De Bourmont
  39. Ökonomische Entwicklungsperspektiven in der Kammerunion Elbe/Oder (KEO) By Bräuninger, Michael; Stiller, Silvia; Teuber, Mark; Wedemeier, Jan
  40. Explaining Changes in Earnings and Labour Costs During the Recession By Bergin, Adele; Kelly, Elish; McGuinness, Seamus
  41. The Causes of Slow Growth in Hungary during the Post-Communist Transformation Period By P‚ter Mih lyi
  42. The few leading the many: foreign affiliates and business cycle comovement By Jörn Kleinert; Julien Martin; Farid Toubal
  43. Nowcasting GDP in Real-Time: A Density Combination Approach By Knut Are Aastveit; Karsten R. Gerdrup; Anne Sofie Jore; Leif Anders Thorsrud
  44. WP 14 Revisions in official data and forecasting By Cecilia Frale; Valentina Raponi
  45. Empirical simultaneous prediction regions for path-forecasts By Òscar Jordá; Malte Knuppel; Massimiliano Marcellino
  46. Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities By Alexandru Minea; Antoine Parent
  47. Democracy and Reforms: Evidence from a New Dataset By Paola Giuliano; Prachi Mishra; Antonio Spilimbergo

  1. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy which resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post- Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred.
    Date: 2012
  2. By: Morten L. Bech; Yvan Lengwiler (University of Basel)
    Keywords: term structure of interest rates, financial crisis, interest rate dynamics, LSAP, unconventional monetary policy
    JEL: E43 E52
    Date: 2012
  3. By: César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
    Abstract: The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countries’ ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected inextended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar.
    Keywords: Counter-cyclical macroeconomic policies, institutions, fiscal policy, monetary policy
    JEL: E43 E52 E62
    Date: 2012
  4. By: Jens H.E. Christensen; Glenn D. Rudebusch
    Abstract: We analyze the declines in government bond yields that followed the announcements of plans by the Federal Reserve and the Bank of England to buy longer-term government debt. Using empirical dynamic term structure models, we decompose these declines into changes in expectations about future monetary policy and changes in term premiums. We find that declines in U.S. Treasury yields mainly reflected lower policy expectations, while declines in U.K. yields appeared to reflect reduced term premiums. Thus, the relative importance of the signaling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communications policies.
    Keywords: Monetary policy
    Date: 2012
  5. By: Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov
    Abstract: This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.
    JEL: A23 E1 E3 E4 E5 G01 G1 G2
    Date: 2012–05
  6. By: Moayedi, Vafa; Aminfard, Matin
    Abstract: This study examines the relationship between Japan’s financial structure and the country’s fiscal/monetary policy. Vector Error Correction models are utilized to investigate the effect of policy shocks on financial structure development during a sample period of 48 years. Our findings reveal signs of an existing long-run relationship between policy variables and financial structure. Policymakers in Japan may have effectively influenced Japan’s financial structure development via fiscal and monetary actions. This result strengthens the assumption of a volatile financial structure due to policy interference. This study is the first of its kind and is intended to stimulate further research and debate.
    Keywords: Financial Structure; Fiscal Policy; Japan; Monetary Policy; VEC
    JEL: E62 E63
    Date: 2011–12–09
  7. By: Brière, Marie; Signori, Ombretta
    Abstract: The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.
    Keywords: portfolio optimisation; Inflation hedge; shortfall risk; pension finance;
    JEL: G23 E31 G11 G12
    Date: 2011–10
  8. By: Gunther Schnabl (Institute for Economic Policy, University of Leipzig)
    Abstract: The paper identifies based on the monetary overinvestment theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a neglect towards monetary policy reform in a world dominated by financial markets has led to the erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of the government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to have led to a hysteresis of the liquidity trap. In this context, monetary reform is discussed with respect to the exit from low interest rate and high debt policies, an adaption of monetary policy rules to financial market dominated economic development, and the displacement of the prevalent world monetary system. Enhanced competition between dollar and euro as international currencies moderated by East Asia is proposed to constitute a more stable international monetary system.
    Keywords: Economic Instability, Credit Cycles, Monetary Policy, Hayek, Mises, Monetary Policy Rules, Monetary Policy Reform, Currency Competition
    JEL: E42 E58 F33 F44
    Date: 2012–05–28
  9. By: Julian A. Parra POlanía
    Abstract: To evaluate whether transparency is beneficial, it is usual to assume that the central bank may choose one of two options, opacity versus truthful communication. However, the monetary policymaker may have incentives to misrepresent private information so as to reduce economic volatility by manipulating inflation expectations. Using a standard model, this paper points out the fact that if misrepresentation is included as a possible action there is no rational expectations equilibrium with inflation announcements. Therefore, even if transparency is preferred over secrecy the central bank cannot credibly commit to truth-telling, in contrast to what is commonly assumed in the literature on transparency.
    Keywords: Central Bank Announcements, Monetary Policy, Transparency. Classification JEL:E52, E58, D82
    Date: 2012–05
  10. By: Ferrara, L.; Marcellino, M.; Mogliani, M.
    Abstract: The debate on the forecasting ability in economics of non-linear models has a long history, and the Great Recession provides us with an opportunity for a re-assessment of the forecasting performance of several classes of non-linear models, widely used in applied macroeconomic research. In this paper, we carry out an extensive analysis over a large quarterly database consisting of major real, nominal and financial variables for a large panel of OECD member countries. It turns out that, on average, non-linear models do not outperform standard linear specifications, even during the Great Recession period. In spite of this result, non-linear models enable to improve forecast accuracy in almost 40% of cases. Especially some countries and/or variables appear to be more adapted to non-linear forecasting.
    Keywords: Forecasting, Non-linear models, Great Recession.
    JEL: C22 C53 E37
    Date: 2012
  11. By: Peter Burgold (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Sebastian Voll (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: TARGET2 ist seit gut einem Jahr Zielscheibe massiver akademischer Kritik. Wir legen dar, dass TARGET2 keiner Veränderungen bedarf. Die Salden sind keine echten Kredite und sollten nicht als solche betrachtet werden. Die zugrunde liegenden ökonomischen Probleme sind weder hinreichend noch notwendig mit dem Zahlungssystem verknüpft und können deswegen darüber nicht sinnvoll angegangen werden. Die geforderten Modifikationen stellen zudem keine überzeugenden Alternativen dar, insbesondere auch nicht für den Fall eines Auseinanderbrechens der Eurozone. Dann sind sie im Übrigen auch nur ein Teilproblem der zu regelnden Desintegration der Zentralbankbilanzen.
    Keywords: Eurokrise; Schuldenkrise, Währungsunion, Zentralbankkredit, grenzüberschreitender Zahlungsverkehr, Target2, Banknoten, Währungsdesintegration, euro crisis, debt crisis, monetary union, central bank credit, transnational payment system, Target2, banknotes, monetary disintegration
    JEL: E42 E59 F33
    Date: 2012–05–28
  12. By: Ben Cheikh, Nidhaleddine
    Abstract: This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher.
    Keywords: Exchange Rate Pass-Through; Inflation; Smooth transition regression models; Euro area
    JEL: E31 C22 F41 F31
    Date: 2012–04
  13. By: Julian A. Parra-Polania
    Abstract: To evaluate whether transparency is beneficial, it is usual to assume that the central bank may choose one of two options, opacity versus truthful communication. However, the monetary policymaker may have incentives to misrepresent private information so as to reduce economic volatility by manipulating inflation expectations. Using a standard model, this paper points out the fact that if misrepresentation is included as a possible action there is no rational expectations equilibrium with inflation announcements. Therefore, even if transparency is preferred over secrecy the central bank cannot credibly commit to truth-telling, in contrast to what is commonly assumed in the literature on transparency
    Date: 2012–05–28
  14. By: Kayam, Saime S.
    Abstract: In this paper, I consider two heterogeneous economies that engage in a currency union. The small economy adopts the currency of the large and is highly dependent on its wealthier partner for trade. The effects of a currency union, deficit financing and institutional restraints on inflation are analyzed in a dual economy with different wage-setting mechanisms. In the model, Northern Cyprus is the small economy and Turkey, being the only country that acknowledges it as an independent state is its larger partner. Features of the labour markets determine the wages. We make a conjecture that wage determination in Northern Cyprus (NC) is conducted with reference to centralized-bargaining and that decentralized bargaining sets the wages in Turkey (TR). Hence, the differences in wage-setting procedures cause a dual labour market. In order to incorporate monetary dependence into the analysis, we let the Turkish central bank to decide on the economic policy measures, in this case the inflation rate and unemployment. The institutional restraints such as economic sanctions increase the inflexibility in the NC and cause shocks to affect the economy more. In order to compensate for the losses that might be endured by the government in NC, TR finances the budget deficit of NC. Therefore, TR government needs to consider the burden of this financing issue.
    Keywords: currency union; monetary policy; labour market institutions; politics
    JEL: E62 F15 F16 L11
    Date: 2011
  15. By: Andreas Bachmann
    Abstract: The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard long-run equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Pass-through to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run for the consumer price index and some of its sub-indices. Producer prices react significantly to exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time.
    Keywords: Exchange rate pass-through; consumer prices; import prices; cointegration; vector error correction models; new open economy macroeconomic model
    JEL: E31 F31 F41
    Date: 2012–05
  16. By: Deokwoo Nam; Jian Wang
    Abstract: We document in the US data: (1) The dominant predictable component of investment-sector TFP is its long-run movements, and a favorable shock to predictable changes in investmentsector TFP induces a broad economic boom that leads actual increases in investment-sector TFP by almost two years, and (2) predictable changes in consumption-sector TFP occur mainly at short forecast horizons, and a favorable shock to such predictable changes leads to immediate reductions in hours worked, investment, and output as well as an immediate rise in consumption-sector TFP. We argue that these documented differences in the responses to shocks to predictable sectoral TFP changes can reconcile the seemingly contradictory findings in Beaudry and Portier (2006) and Barsky and Sims (2011), whose analyses are based on aggregate TFP measures. In addition, we find that shocks to predictable changes in investment-sector TFP account for 50% of business cycle fluctuations in consumption, hours, investment, and output, while shocks to predictable changes in consumption-sector TFP explain only a small fraction of business cycle fluctuations of these aggregate variables.
    Date: 2012
  17. By: Kolozi, Pál Péter (Groupe d'économie mondiale (GEM))
    Abstract: La thèse s'articule autour de deux idées maitresses : les institutions sont des facteurs fondamentaux conditionnant le succès de la politique économique pendant toutes les phases de la libéralisation commerciale ; la politique monétaire peut être considérée comme un des facteurs-clés de ce point de vue. Il est possible de déterminer une politique monétaire optimale pour atteindre la libéralisation commerciale. Mais comme la politique monétaire doit prendre en considération d'autres objectifs, considérés en général comme plus importants, la politique monétaire est rarement optimale du point de vue du commerce. En même temps la politique monétaire ne prenant pas du tout en considérations les conséquences commerciales – donc par exemple une politique monétaire ne se focalisant que sur le niveau général des prix –n'est pas soutenable, soit à cause des conséquences macroéconomiques, soit à cause de déséquilibres politiques. Le chapitre 1 décrit le développement de l'institutionnalisme qui met au centre de l'analyse économique le rôle des institutions et des organisations. Il présente l'économie institutionnelle comme une nouvelle approche des sciences économiques, complétant la théorie néoclassique. Le chapitre 2 esquisse l'importance de la politique monétaire en tant qu'institution du point de vue de la libéralisation commerciale, démontre les caractéristiques de la politique monétaire optimale et explique pourquoi une telle politique est difficilement à mener. Le chapitre 3 présente la relation entre politique de change et commerce, les contraintes provenant des relations commerciales en mettant l'accent sur les risques de la politique de surévaluation. Le chapitre 4 esquisse le fonctionnement des politiques de manipulation du taux de change. Le chapitre 5 présente le modèle de déficit-inflation. Enfin, le chapitre 6 présente les expériences de la Hongrie soulignant que la politique monétaire ne s'occupant que de la désinflation ne peut que faire faillite, et que la théorie de l'indépendance de la banque centrale présente des risques pour les pays en transition.
    Abstract: The thesis is based on two main ideas: the institutions matter concerning the success of economic policy during the trade liberalization process and monetary policy can be seen as a key factor from that point of view. The line of argument of the thesis is based on a theoretical model of trade balance, inflation and exchange rate. The model is applied to the case of Hungary and the Hungarian experiences back the main conclusions of the model: monetary and exchange rate policy is unsustainable if it is determined without taking into consideration the trade effects. The economic history of Hungary between 1989 and 2009 gives several examples for that unsustainability. Chapter 1 describes the development of institutionalism; chapter 2 demonstrates the importance of monetary policy as an institution from the point of view of trade liberalization describes the optimal monetary policy and explains why it is difficult to follow that policy. Chapter 3 presents the relationship between exchange rate policy and trade. Chapter 4 outlines the functioning of manipulative exchange rate policies. Chapter 5 presents the model deficit-inflation. Chapter 6 presents the Hungarian experiences and underlines that monetary policy focused only on disinflation has to fail and the independence of the central bank can even represent risks to the economies in transition.
    Keywords: Commerce, taux de change, politique économique, politique commerciale, politique de change, Institutions;
    Date: 2011–05
  18. By: Ivan Kitov
    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.
    Date: 2012–06
  19. By: Fabio Canova
    Abstract: A method to estimate DSGE models using the raw data is proposed. The approach links the observables to the model counterparts via a flexible specification which does not require the model-based component to be solely located at business cycle frequencies, allows the non model-based component to take various time series patterns, and permits model misspecification. Applying standard data transformations induce biases in structural estimates and distortions in the policy conclusions. The proposed approach recovers important model-based features in selected experimental designs. Two widely discussed issues are used to illustrate its practical use.
    Keywords: DSGE models, Filters, Structural estimation, Business cycles
    JEL: E3 C3
    Date: 2012–05
  20. By: Langot, François; Patureau, Lise; Sopraseuth, Thepthida
    Abstract: We study fiscal devaluation in a small-open economy with labor market search frictions. Our analysis shows the key role of both dimensions in shaping the optimal tax scheme. By reducing labor market distortions, the tax reform is welfare-improving. Yet, as it makes imports more expensive, fiscal devaluation lowers the agents’ purchasing power, which is welfare-reducing. These contrasting effects give rise to an optimal tax scheme. Besides, transition matters. If the economy is better off in the long run, the required transitional saving effort increases the cost of the reform, thereby calling for a moderate magnitude of fiscal devaluation.
    Keywords: fiscal devaluation; consumption tax; payroll tax; labor market search; small open economy; Dynamic General Equilibrium model
    JEL: E27 E62 H21 J38
    Date: 2012–04
  21. By: Rebecca Ray; Sara Kozameh
    Abstract: Outside observers could be forgiven for expecting Ecuador to suffer terribly during and after the recent global crisis. Two of the country’s largest sources of foreign earnings, petroleum exports and remittances from abroad, crashed during the global recession. Furthermore, lacking its own currency, the government’s options for responding were limited. But instead of a deep, protracted recession, Ecuador lost only 1.3 percent of GDP during three quarters of contraction. After four additional quarters the economy returned to the pre-recession level of output, and two years after the recession started, it reached its 20-year growth trend. This paper takes a detailed look at the fiscal, monetary, and other economic and social policies implemented during the last five years, as well as the role of the external sector in the economy. It also examines economic and social outcomes including levels of poverty, inequality, and unemployment as well as education and health outcomes for children.
    Keywords: Ecuador,economy,growth,macroeconomics
    JEL: F F1 F2 F3 F33 F34 I I1 I12 I18 O O4 O47 O5 O54 O57 E E6 E5 E52 E58 E52
    Date: 2012–05
  22. By: Juan Montecino; Jake Johnson
    Abstract: This paper looks at Jamaica’s stalled agreement with the International Monetary Fund (IMF), its economic performance over the past year and examines its persistently high debt burden. It finds that an unsustainable debt burden continues to displace needed investments, preventing long-term growth. The stalling of the IMF agreement has prevented disbursements of necessary multilateral financing, slowing the economy’s recovery. Together with pro-cyclical macroeconomic policies supported by the IMF, the recovery of the Jamaican economy remains muted.
    Keywords: jamaica, imf, debt, JDX,
    Date: 2012–05
  23. By: Ojo, Marianne
    Abstract: This paper highlights why financial bailouts are an inevitable and necessary element in global efforts aimed at ensuring that financial stability is sustained. How could such bailouts be conducted in such a way that moral hazard does not become a too frequent, ever recurring issue? Systemic risks constitute a crucial reason for the need to avoid global instability. Adequately and promptly responding to “too big to fail” institutions and nations also constitutes a crucial component of the need to avoid and contain the spread of systemic risks.
    Keywords: systemic risks; financial regulation; sovereign debts; bailouts; moral hazard; supervision; monetary; fiscal policies; IMF; monetary unions; regional unions; ECB
    JEL: K2 E5 E6 D00 G01
    Date: 2012–06–02
  24. By: Tito Nícias Teixeira da Silva Filho
    Abstract: The unemployment rate is one of the most closely watched economic indicators. However, it has important limitations and shortcomings as a measure of the state of the labour market. This could help to explain the fact that in traditional Phillips curves unemployment explains but a small part of inflation. This paper tries to mitigate such problems going deeper into labour market indicators. With that aim alternative unemployment rates are built and assessed, along with disaggregated unemployment rates and other labour market indicators. The evidence shows that some of those indicators have considerably greater explanatory power over inflation than the traditional unemployment rate and, therefore, should be followed closely by policymakers.
    Date: 2012–05
  25. By: Jenny Poschmann (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: Even though the sector of Non-bank financial intermediaries (NBFI) or shadow banks represent a large part of the contemporary financial system, these institutions received almost no attention in macroeconomic studies so far. Their presence has significant influence on the conduct of monetary policy and systemic risk within the financial system. Therefore, it is important to understand the nexus within the shadow banking sector and connections with the traditional banking sector. This work will examine specific institutions involved in the shadow banking system and their development. A stylized banking sector including NBFI will be introduced and provides the starting point for subsequent research on monetary transmission.
    Keywords: shadow banking, financial intermediation, financial architecture, monetary policy
    JEL: G10 E44
    Date: 2012–05–28
  26. By: Lunn, Pete
    Keywords: Policy
    Date: 2012–02
  27. By: Gammadigbé, Vigninou
    Abstract: In this paper we evaluate the resilience of the banking system of WAEMU to macroeconomic shocks. From banks data, aggregated by country from 1990 to 2010, we identify the microeconomic and macroeconomic determinants of banks profitability of the Union using the generalized method of moments (GMM) in a dynamic panel data model. We then perform the exercises of stress by evaluating the sensitivity of the banks coefficient of profitability to various adverse scenarios.The results show that banks of the Union are more vulnerable to monetary shocks than real activity. They support especially soundness of the banking sector as a whole in respond to changes in its macroeconomic environment, so that the risk of degradation of profitability related to impact of the real economy are contained.
    Keywords: Stress testing; dynamic panel data models; Generalized method of moments; coefficient of profitability; WAEMU
    JEL: C23 G21
    Date: 2012–03
  28. By: Tiago C. Berriel; Saroj Bhattarai
    Abstract: This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. These conclusions are robust to a wide range of preference parameter values and the incompleteness of financial markets. A calibrated version of the model predicts asset holdings that quantitatively match the data.
    Date: 2012
  29. By: Mathias Trabandt; Harald Uhlig
    Abstract: We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
    Date: 2012
  30. By: Jens H.E. Christensen; Jose A. Lopez; Glenn D. Rudebusch
    Abstract: We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation-protected securities (TIPS). The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the five-year maturity was 41 basis points on a par-yield basis.
    Keywords: Deflation (Finance) ; Inflation-indexed bonds - United States
    Date: 2012
  31. By: Chakraborty, Indraneel (Department of Economics); Stepanchuk, Serhiy (Magyar Nemzeti Bank); Holter, Hans A. (Department of Economics)
    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
  32. By: Alessandro Spelta (Department of Economics and Business, University of Pavia); Guido Ascari (Department of Economics and Business, University of Pavia); Nicolò Pecora (Catholic university of Piacenza)
    Abstract: We study the housing market using a partial “dis”-equilibrium model in which the rational expectations hypothesis is relaxed in favor of an agent-based approach. The chartist-fundamentalist mechanism allows for the behavioral foundation of the expectations, the endogenous development of bubbles and contributes to replicate the recent house price dynamics. We also analyze the role of the interest rate during the boom and, anchoring the interest rate to the change in house price, we investigate the possibility to reduce the volatility and the distortion in the price dynamics.
    Date: 2012–05
  33. By: Timothy Halliday (Department of Economics, University of Hawaii at Manoa); Hui He (Department of Economics, University of Hawaii at Manoa); Hao Zhang (Department of Economics, University of Hawaii at Manoa)
    Abstract: We quantify what drives the rise in medical expenditures over the life- cycle. Three motives are considered. First, health delivers a flow of utility each period (the consumption motive). Second, better health enables people to allocate more time to productive or pleasurable activities (the investment motive). Third, better health improves survival prospects (the survival mo- tive). We calibrate an overlapping generations model with endogenous health accumulation to match key economic targets and then we gauge its perfor- mance by comparing key age-pro?les from the model to their counterparts in the data. We ?nd that the investment motive is more important than the consumption motive until about age 50. After that, the rise in medical ex- penditures is primarily driven by the value of health as a consumption good. The survival motive is quantitatively less important when compared to the other two motives. Finally, with our calibrated model, we conduct a series of counter-factual experiments to investigate how modi?cations to social security, government-run health insurance, and longevity impact the life-cycle behavior of medical expenditures as well as the aggregate medical expenditures-GDP ratio.
    Keywords: Health Investment Motive, Medical Expenditure, life Cycle
    JEL: E21 I12
    Date: 2012–06–01
  34. By: Jasper Lukkezen; Hugo Rojas-Romagosa
    Abstract: <p>This CPB Discussion Paper proposes indicators to assess government debt sustainability. Sustainable government finances can be achieved via three main channels: fiscal responses, economic growth and financial repression.</p><p>The fiscal response provides information on the long-term country specific attitude towards fiscal sustainability and is estimated using Bohn (2008)’s approach. We combine the estimated fiscal response with a stochastic debt simulation and calculate the probability of debt-to-GDP ratios rising above some threshold. This is applied on historical data for seven OECD countries. In particular, the probability of debt-to-GDP ratios rising by more than 20% in the next decade clearly identifies countries that have sustainability concerns: Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands and Belgium.</p>
    JEL: E4 E6 H0 H6
    Date: 2012–06
  35. By: Knut Are Aastveit; Hilde C. Bjørnland; Leif Anders Thorsrud
    Abstract: This paper bridges the new open economy factor augmented VAR (FAVAR) studies with the recent findings in the business cycle synchronization literature emphasizing the importance of regional factors. That is, we estimate and identify a three block FAVAR model with separate world, regional and domestic blocks and study the transmission of both global and regional shocks to four small open economies (Canada, New Zealand, Norway and UK). The results show that foreign shocks explain a major share of the variance in all countries, most so shocks that are common to the world. However, regional shocks also play an important role, explaining more than 20 percent of the variance in the variables. Hence in small open economies, the world is not enough. The regional factors impact the four countries differently, though, some through trade and some through consumer sentiment. Our findings of a strong transmission of both global and regional shocks to open economies are in sharp contrast to the evidence from recently developed open economy DSGE models.
    Keywords: International transmission, world and region, small open economy, FAVAR, Business cycles
    JEL: C32 E32 F41
    Date: 2011–11
  36. By: Nath, Golaka
    Abstract: This paper analyses the India sovereign yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of zero coupon interest rates derived from government bond trading using Nelson-Siegel functional form. This decomposition of the yield curve highlights important relationship between identified factors and metrics of the term structure shape. The empirical findings support statistical similarities between the Indian yield curve and term structure studies of major countries.
    Keywords: Indian Sovereign Yield Curve; principal component; interest rates; bond; yield curve; macroeconomics; term structure of interest rates
    JEL: E43 G12 E31 E44
    Date: 2012–06–04
  37. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences and Bruegel); Jean Pisani-Ferry (Director of Bruegel)
    Abstract: Highlights: The European Union growth agenda has become even more pressing because growth is needed to support public and private sector deleveraging, reduce the fragility of the banking sector, counter the falling behind of southern European countries and prove that Europe is still a worthwhile place to invest. The crisis has had a similar impact on most European countries and the US: a persistent drop in output level and a growth slowdown. This contrasts sharply with the experience of the emerging countries of Asia and Latin America. Productivity improvement was immediate in the US, but Europe hoarded labour and productivity improvements were in general delayed. Southern European countries have hardly adjusted so far. There is a negative feedback loop between the crisis and growth, and without effective solutions to deal with the crisis, growth is unlikely to resume. National and EU-level policies should aim to foster reforms and adjustment and should not risk medium-term objectives under the pressure of events. A more hands-on approach, including industrial policies, should be considered.
    Keywords: economic growth, deleveraging, productivity, convergence, economic adjustment, structural reform scoreboard, composition of fiscal adjustments, growth policy under constraints
    JEL: E60 F43 O40
    Date: 2011–12
  38. By: Marc De Bourmont (Rouen Business School - Rouen Business School)
    Abstract: De nombreuses études ont été réalisées sur le thème des déterminants d'une publication volontaire d'informations et la plupart des auteurs de ces études recourent à l'estimation d'un modèle de régression linéaire classique (RLC). Cette technique aboutit en effet, lorsque les contraintes nécessaires à son application sont respectées, à l'utilisation des meilleurs estimateurs linéaires sans biais. Une absence de multicolinéarité constituant l'une de ces contraintes, l'objet de cet article est 1/de montrer l'insuffisance relative des outils de diagnostic généralement utilisés 2/ de démontrer les avantages et la supériorité des indicateurs de Belsley, Kuh et Welsch (1980). A partir de ces indicateurs, cet article propose un algorithme de décision simplifié qui est appliqué d'une façon illustrative au sein d'une étude empirique portant sur les déterminants d'une publication volontaire d'informations sur les activités de recherche et développement.
    Keywords: linéaire, Multicolinéarité, Variance Inflation Factor, VIF, Matrice des Corrélations.
    Date: 2012
  39. By: Bräuninger, Michael; Stiller, Silvia; Teuber, Mark; Wedemeier, Jan
    Abstract: Die Kammerunion Elbe/Oder (KEO) ist ein Zusammenschluss von 15 deutschen, 6 polnischen und 9 tschechischen Industrie- und Handelskammern, die sich zum Ziel gesetzt hat, gemeinsam die Interessen der Unternehmen der Region auf nationaler und europäischer Ebene zu vertreten. Im Jahr 2010 lebten in den zugehörigen Kammerbezirken 37,6 Mio. Menschen, was einem Anteil von 7,5 % an der EU-Bevölkerung entspricht. Das Bruttoinlandsprodukt der KEO-Region betrug im Jahr 2008 716,6 Mrd. Euro und damit 5,7 % des Bruttoinlandsprodukts der EU. --
    Date: 2012
  40. By: Bergin, Adele; Kelly, Elish; McGuinness, Seamus
    Abstract: This paper utilises data from the National Employment Surveys to analyse movements in both earnings and labour costs during the period 2006 through to 2009. It finds that, despite an unprecedented fall in output and rise in unemployment, both average earnings and average labour costs increased marginally over the period. Although some factors, such as a rise in the incidence of part-time working and falls in construction employment, served to depress wages, these influences were more than outweighed by increases in both the share of and returns to graduate employment and a rising return to large firm employment. This analysis suggests that a good deal of the downward wage rigidity observed within Irish private sector employment since the onset of the recession has largely been driven by factors consistent with continued productivity growth. Nevertheless, particularly within the male labour market, a substantial proportion of the movements in wages cannot be explained by changes in either labour market composition or the returns to individual/job characteristics. The large unexplained component in the data is attributed to a general reluctance of firms to cut wages in order to avoid productivity losses associated with worker dissatisfaction or higher rates of labour turnover. In support of this view, the study demonstrates that firms will adopt strategies such as reducing staff numbers, hours worked and bonus payments, in preference to reducing wages.
    Keywords: cost/recession/data/employment/unemployment/wages/Productivity/growth/labour market
    Date: 2012–04
  41. By: P‚ter Mih lyi (Institute of Economics, Research Center for Economic and Regional Studies, Hungarian Academy of Sciences, Head of Department of Finance at University of Pannonia Visiting Professor of Economics at Economics Department, Central European University)
    Abstract: In his 1966 Inaugural Lecture at Cambridge, entitled On the Causes of the Slow Rate of Economic Growth in the UK, the Hungarian-born British economist, Nicholas Kaldor presented a series of "laws" to account for the growth rate differences between Britain on the one hand, and the more successful economies like the US, Germany or France on the other. He called his method circular cumulative causation, a multi-causal approach where the interdependencies between the explanatory factors were strong, and where variables interlinked in the determination of the outcome. In Kaldor's interpretation, the UK's main problem was the slow growth of productivity, caused by the slow growth of the manufacturing sector. And why did that matter? Because he found that productivity of the manufacturing sector was positively related the growth of the manufacturing sector itself - i.e. the law of increasing returns to scale manifested itself in a strong way. The objective, the methodology and central analytical concepts of the present paper are similar. Now we look for the causes of the slow growth of the Hungarian economy. As it will turn out, increasing returns to scale, which Kaldor took from Young (1928) seminal study, occupies a central position in this paper, too.
    Keywords: Hungary, catching-up, productivity, small and medium size firms, Kaldor's law, increasing returns to scale
    JEL: E12 E22 E66 O47 O50 O52
    Date: 2012–03
  42. By: Jörn Kleinert; Julien Martin; Farid Toubal
    Abstract: This paper uses microdata on balance sheets, trade, and the nationality of ownership of firms in France to investigate the effect of foreign multinationals on business cycle comovement. We first show that foreign affiliates, which represent a tiny fraction of all firms, are responsible for a high share of employment, value added, and trade both at the national and at the regional levels. We also show that the distribution of foreign affiliates across regions differs with the nationality of the parent. We then show that foreign affiliates increase the comovement of activities between their region of location and their country of ownership. Moreover, we find greater comovement among French regions that have a more similar composition in terms of the nationality of foreign affiliates. These findings suggest that a non-negligible part of business cycle comovement is driven by a few multinational companies, and that the international transmission of shocks is partly due to linkages between affiliates and their foreign parents.
    Date: 2012
  43. By: Knut Are Aastveit; Karsten R. Gerdrup; Anne Sofie Jore; Leif Anders Thorsrud
    Abstract: In this paper we use U.S. real-time vintage data and produce combined density nowcasts for quarterly GDP growth from a system of three commonly used model classes. The density nowcasts are combined in two steps. First, a wide selection of individual models within each model class are combined separately. Then, the nowcasts from the three model classes are combined into a single predictive density. We update the density now-cast for every new data release throughout the quarter, and highlight the importance of new information for the evaluation period 1990Q2-2010Q3. Our results show that the logarithmic score of the predictive densities for U.S. GDP increase almost monotonically as new information arrives during the quarter. While the best performing model class is changing during the quarter, the density nowcasts from our combination framework is always performing well both in terms of logarithmic scores and calibration tests. The density combination approach is superior to a simple model selection strategy and also performs better in terms of point forecast evaluation than standard point forecast combinations.
    Keywords: Density combination; Forecast densities; Forecast evaluation; Monetary policy; Nowcasting; Real-time data
    JEL: C32 C52 C53 E37 E52
    Date: 2011–09
  44. By: Cecilia Frale; Valentina Raponi
    Abstract: This paper deals with the topic of revision of data with the aim of investigating whether consecutive releases of macroeconomic series published by statistical agencies contain useful information for economic analysis and forecasting. The rationality of the re-visions process is tested considering the complete history of data and an empirical application to show the usefulness of revisions for improving the precision of forecasting model is proposed. The results for Italian GDP growth show that embedding the revision process in a dynamic factor model helps to reduce the forecast error.
    Keywords: Data revisions, real-time dataset, mixed frequency, Dynamic factor Model
    JEL: E32 E37 C53
    Date: 2012–03
  45. By: Òscar Jordá; Malte Knuppel; Massimiliano Marcellino
    Abstract: This paper investigates the problem of constructing prediction regions for forecast trajectories 1 to H periods into the future - a path forecast. We take the more general view that the null model is only approximative and in some cases it may be altogether unavailable. As a consequence, one cannot derive the usual analytic expressions nor resample from the null model as is usually done when bootstrap methods are used. The paper derives methods to construct approximate rectangular regions for simultaneous probability coverage which correct for serial correlation. The techniques appear to work well in simulations and in an application to the Greenbook path-forecasts of growth and inflation.
    Keywords: Forecasting
    Date: 2012
  46. By: Alexandru Minea (CERDI (University of Auvergne), 65 Boulevard François Mitterrand, BP 320, 63009 Clermont-Ferrand Cedex 1, France.); Antoine Parent (BETA-REGLES (University of Nancy 2), 13 Place Carnot, CO 26, 54035 Nancy Cedex.)
    Date: 2012
  47. By: Paola Giuliano; Prachi Mishra; Antonio Spilimbergo
    Abstract: Empirical evidence on the relationship between democracy and economic reforms is limited to few reforms, countries, and periods. This paper studies the effect of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital and banking sectors, product markets, agriculture, and trade for 150 countries over the period 1960–2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is scarce evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.
    JEL: E6 O57
    Date: 2012–06

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