nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒06‒25
87 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting By Donald Coletti; René Lalonde; Paul Masson; Dirk Muir; Stephen Snudden
  2. Inflation Dynamics in the Presence of Informal Labour Markets By Paul Castillo; Carlos Montoro
  3. Divisia monetary aggregates for the GCC countries By Alkhareif, Ryadh; Barnett, William A.
  4. Divisia Monetary Aggregates for the GCC Countries By Ryadh M. Alkhareif; William Barnett
  5. When capital adequacy and interest rate policy are substitutes (and when they are not) By Stephen G Cecchetti; Marion Kohler
  6. Labour Market Frictions, Monetary Policy and Durable Goods By Federico Di Pace; Matthias S. Hertweck
  7. Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy By Caterina Mendicino
  8. Meta-Analysis of the New Keynesian Phillips Curve By Katarína Danišková; Jarko Fidrmuc
  9. Asset Prices, Credit and the Business Cycle By Chen, Xiaoshan; Kontonikas, Alexandros; Montagnoli, Alberto
  10. Fiscal Policy and Learning By Mitra, Kaushik; Evans, George W.; Honkapohja, Seppo
  11. Innocent Bystanders? Monetary Policy and Inequality in the U.S. By Coibion, Olivier; Gorodnichenko, Yuriy; Kueng, Lorenz; Silvia, John
  12. Les cycles économiques des pays de l'UEMOA: synchrones ou déconnectés? By Gammadigbé, Vigninou
  13. "Getting the Biggest Bang for the Buck in Fiscal Policy" By Miles S. Kimball
  14. The changing international transmission of US monetary policy shocks: is there evidence of contagion effect on OECD countries By Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
  15. Does Central Bank Financial Strength Matter for Inflation? An Empirical Analysis By Sona Benecka; Tomas Holub; Narcisa Liliana Kadlcakova; Ivana Kubicova
  16. A New Model Of Trend Inflation By Chan, Joshua; Koop, Gary; Potter, Simon
  17. Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation By Russell, Bill; Chowdhury, Rosen Azad
  18. A new model of trend inflation By Chan, Joshua; Koop, Gary; Potter, Simon
  19. Money Still Talks - Is Anyone Listening? By David Laidler
  20. Inferring monetary policy objectives with a partially observed state By Givens, Gregory; Salemi, Michael
  21. Uncertain Fiscal Consolidations By Bi, Huixin; Leeper, Eric M.; Leith, Campbell
  22. The Failure of Financial Macroeconomics and What to Do About it By Jean-Bernard Chatelain; Kirsten Ralf
  23. Monetary Conditions and Banks' Behaviour in the Czech Republic By Adam Gersl; Petr Jakubik; Dorota Kowalczyk; Steven Ongena; Jose-Luis Peydro Alcalde
  24. Spurious synchronization of business cycles: Dynamic correlation analysis of V4 countries By Svatopluk Kapounek; Jitka Pomenkova
  25. Euro area inflation as a predictor of national inflation rates By Antonella Cavallo; Antonio Ribba
  26. Skill-Biased Technological Change and the Business Cycle By Almut Balleer, Thijs van Rens
  27. Money, Financial Stability and Efficiency By ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
  28. Characterising the financial cycle: don't lose sight of the medium term! By Mathias Drehmann; Claudio Borio; Kostas Tsatsaronis
  29. Declining Labor Shares and the Global Rise of Corporate Savings By Loukas Karabarbounis; Brent Neiman
  30. Expectation Formation and Monetary DSGE Models: Beyond the Rational Expectations Paradigm By Fabio Milani; Ashish Rajbhandari
  31. What Determines Government Spending Multipliers? By Corsetti, Giancarlo; Meier, André; Müller, Gernot
  32. Systemic financial fragility and the monetary circuit: a stock-flow consistent Minskian approach By Marco Passarella
  33. Do Institutions and Culture Matter for Business Cycles? By Sumru Altug; Fabio Canova
  34. The Oil price-Macroeconomy Relationship since the Mid- 1980s: A global perspective By Claudio Morana
  35. Inflation Tracking Portfolios By Christopher T. Downing; Francis A. Longstaff; Michael A. Rierson
  36. Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence By Emi Nakamura; Dmitriy Sergeyev; Jón Steinsson
  37. Frictions and the Joint Behavior of Hiring and Investment By Yashiv, Eran
  38. The Role of Oscillatory Modes in U.S. Business Cycles By Andreas Groth; Michael Ghil; Stéphane Hallegatte; Patrice Dumas
  39. Optimal Fiscal Devaluation By Langot, François; Patureau, Lise; Sopraseuth, Thepthida
  40. The Bulgarian Foreign and Domestic Debt – A No-Arbitrage Macrofinancial View By Vilimir Yordanov
  41. Beyond Co-Integration: Modelling Co-Movements in Macro finance By Karim M. Abadir; Gabriel Talmain
  42. The Role of Institutional and Political Factors in the European Debt Crisis By Carlo Panico; Francesco Purificato
  43. The Role of Mining in an Australian Business Cycle Model By Veroude, Alexandra
  44. Riskiness Choice and Endogenous Productivity Dispersion over the Business Cycle By Can Tian
  45. Safety Traps By Kenza Benhima; Baptiste Massenot
  46. Evidence on the portfolio balance channel of quantitative easing By Daniel L. Thornton
  47. Bond pricing and the macroeconomy By Gregory R. Duffee
  48. Evaluating Macroeconomic Forecasts:A Concise Review of Some Recent Developments By Philip Hans Franses; Michael McAleer; Rianne Legerstee
  49. A Stock-Flow Analysis of a Schumpeterian Innovation Economy By Stefano Lucarelli
  50. Testing for Keynesian Labor Demand By Mark Bils; Peter J. Klenow; Benjamin A. Malin
  51. Bank leverage cycles By Galo Nuño; Carlos Thomas
  52. Modern Monetary Theory: A Debate By Brett Fiebiger; Scott Fullwiler; Stephanie Kelton; L. Randall Wray
  53. Assessing uncertainty in Europe and the US - Is there a common factor? By Sauter, Oliver
  54. Restoring Fiscal Equilibrium in the United States By William R. Cline
  55. A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan By Real Arai; Junji Ueda
  56. The Cost of Rigidity: The Case of the South African Labor Market By Johannes Fedderke
  57. The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe: with special reference to the Low Countries and England By John H. Munro
  58. Bank systemic risk and the business cycle: Canadian and U.S. evidence By Christian Calmès; Raymond Théoret
  59. Understanding bubbly episodes By Vasco Carvalho; Alberto Martin; Jaume Ventura
  60. The Effects of Public Spending Externalities By Valerio Ercolani; João Valle e Azevedo
  61. Boom-bust cycles, imbalances and discipline in Europe By Enrique Alberola; Luis Molina; Pedro del Río
  62. The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter By Christian Calmès; Raymond Théoret
  63. Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing By M. Hashem Pesaran; Ron P. Smith
  64. Universal banking, competition and risk in a macro model By Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
  65. Identifying the Shocks behind Business Cycle Asynchrony in Euroland By Trenkler, Carsten; Weber, Enzo
  66. The Myth of Financial Protectionism: The New (and old) Economics of Capital Controls By Kevin Gallagher
  67. Rising Inequality as a Root Cause of the Present Crisis By Engelbert Stockhammer
  68. eMPF Econometric Model of Public Finance By Sławomir Dudek; Tomasz Zając; Kamil Danielski; Magdalena Zachłod-Jelec; Paweł Kolski; Dawid Pachucki; Iwona Fudała-Poradzińska
  69. The great recession: Political trust, satisfaction with democracy and attitudes to welfare-state redistribution in europe By Javier G. Polavieja
  70. Conformism and Structural Change By Takeo Hori; Masako Ikefuji; Kazuo Mino
  71. Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities By Been-Lon Chen; Yu-Shan Hsu; Kazuo Mino
  72. Optimal Capital Income Taxation with Means-tested Benefits By Cagri Seda Kumru; John Piggott
  73. Measuring complementarity in financial systems. By Adeline Saillard; Thomas Url
  74. Gender Gaps in the Labor Market and Aggregate Productivity By David Cuberes; Marc Teignier
  75. Cyclical Adjustment of Capital Requirements: A Simple Framework By Repullo, Rafael
  76. Macroeconomic Shock Synchronization in the East African Community By Albert Mafusire; Zuzana Brixiova
  77. From the Stability Pact to ESM - What next? By Claudia M. Buch
  78. Public Capital in Resource Rich Economies: Is there a curse? By Sambit Bhattacharyya; Paul Collier
  79. Natural Resource Wealth: The challenge of managing a windfall By Frederick van der Ploeg; Anthony J Venables
  80. Price stickiness and exchange-rate pass-through: some evidence from Indian online retail By Bhattacharya, Jyotirmoy
  81. Bottlenecks in Ramping Up Public Investment By Frederick van der Ploeg
  82. The Demand of Liquid Assets with Uncertain Lumpy Expenditures By Fernando Alvarez; Francesco Lippi
  83. Rational equity bubbles By ZHOU, Ge
  84. Openness and Technology Diffusion in Payment Systems: The Case of NAFTA By Francisco Callado; Jana Hromcova; Natalia Utrero
  85. The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises By Paul Mizen; Serafeim Tsoukas
  86. Competitive Equilibrium in an Overlapping Generations Model with Production Loans By Dihai Wang; Gaowang Wang; Heng-fu Zou
  87. Financial Architectures and Development: Resilience, Policy Space, and Human Development in the Global South (revised June 2012) By Ilene Grabel

  1. By: Donald Coletti; René Lalonde; Paul Masson; Dirk Muir; Stephen Snudden
    Abstract: We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.
    Keywords: Economic models; Inflation and prices; International topics; Monetary policy framework
    JEL: E17 E31 E37 E52 F41 Q43
    Date: 2012
  2. By: Paul Castillo; Carlos Montoro
    Abstract: In this paper we analyse the effects of informal labour markets on the dynamics of inflation and on the transmission of aggregate demand and supply shocks. In doing so, we incorporate the informal sector in a modified New Keynesian model with labour market frictions as in the Diamond-Mortensen-Pissarides model. Our main results show that the informal economy generates a "buffer" effect that diminishes the pressure of demand shocks on inflation. This finding is consistent with the empirical literature on the effects of informal labour markets in business cycle fluctuations. This result implies that, in economies with large informal labour markets, changes in interest rates are more effective in stimulating real output and there is less impact on inflation. Furthermore, the model produces cyclical flows from informal to formal employment, consistent with the data.
    Keywords: Monetary Policy, New Keynesian Model, Informal Economy, Labour Market Frictions
    Date: 2012–02
  3. By: Alkhareif, Ryadh; Barnett, William A.
    Abstract: This paper builds monthly time-series of Divisia monetary aggregates for the Gulf area for the period of June 2004 to December 2011, using area-wide data. We also offer an "economic stability" indicator for the GCC area by analyzing the dynamics pertaining to certain variables such as the dual price aggregates, aggregate interest rates, and the Divisia aggregate user cost growth rates. Our findings unfold the superiority of the Divisia indexes over the officially published simple-sum monetary aggregates in monitoring the business cycles. There is also direct evidence on higher economic harmonization between GCC countries-- especially in terms of their financial markets and the monetary policy. Monetary policy often uses interest rate rules, when the economy is subject only to technology shocks. In that case, money is nevertheless relevant as an endogenous indicator (Woodford, 2003). Properly weighted monetary aggregates provide critical information to policy makers regarding inside liquidity created by financial intermediaries. In addition, policy rules should include money as well as interest rates, when the economy is subject to monetary shocks as well as technology shocks. The data show narrow aggregates growing while broad aggregates collapsed following the financial crises. This information clearly signals problems with the financial system's ability to create liquidity during the crises.
    Keywords: Divisia monetary aggregates; GCC countries; index number theory; monetary aggregation
    JEL: E51 E58 E52 E41
    Date: 2012–05–18
  4. By: Ryadh M. Alkhareif (Department of Economics, The University of Kansas); William Barnett (Department of Economics, The University of Kansas)
    Abstract: This paper builds monthly time-series of Divisia monetary aggregates for the Gulf area for the period of June 2004 to December 2011, using area-wide data. We also offer an "economic stability" indicator for the GCC area by analyzing the dynamics pertaining to certain variables such as the dual price aggregates, aggregate interest rates, and the Divisia aggregate user cost growth rates. Our findings unfold the superiority of the Divisia indexes over the officially published simple-sum monetary aggregates in monitoring the business cycles. There is also direct evidence on higher economic harmonization between GCC countries-- especially in terms of their financial markets and the monetary policy. Monetary policy often uses interest rate rules, when the economy is subject only to technology shocks. In that case, money is nevertheless relevant as an endogenous indicator (Woodford, 2003). Properly weighted monetary aggregates provide critical information to policy makers regarding inside liquidity created by financial intermediaries. In addition, policy rules should include money as well as interest rates, when the economy is subject to monetary shocks as well as technology shocks. The data show narrow aggregates growing while broad aggregates collapsed following the financial crises. This information clearly signals problems with the financial system's ability to create liquidity during the crises.
    Date: 2012–06
  5. By: Stephen G Cecchetti; Marion Kohler
    Abstract: Prudential instruments are commonly seen as the tools that can be used to deliver the macroprudential policy goals of reducing the frequency and severity of financial crises. And interest rates are traditionally viewed as the means to deliver the macroeconomic stabilisation goals of low, stable inflation and sustainable, stable growth. But, at the macroeconomic level, these two sets of policy tools have quite a bit in common. We use a simple macroeconomic model to study the extent to which capital adequacy requirements and interest rates might be substitutes in meeting the objective of stabilising the economy. We find that in our model both are substitutes for achieving conventional monetary policy objectives. In addition, we show that, in principle, they can both be used to meet financial stability objectives. This implies a need to coordinate the use of macroprudential and traditional monetary policy tools, a need that has clear implications for the construction of the policy framework designed to deliver the joint objectives of macroeconomic and financial stability.
    Keywords: Monetary policy, capital adequacy policy, financial stability policy
    Date: 2012–05
  6. By: Federico Di Pace (Department of Economics, University of Warwick, United Kingdom); Matthias S. Hertweck (Department of Economics, University of Konstanz, Germany)
    Abstract: The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our benchmark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the extensive margin.
    Keywords: durable production, labour markeet frictions, sectoral comovement, monetary policy
    JEL: E21 E23 E31 E52
    Date: 2012–06–06
  7. By: Caterina Mendicino
    Abstract: What are the macroeconomic implications of higher leveraged borrowing? To address this question, we develop a business cycle model with credit frictions in which firms reallocate capital among themselves through the credit market. We find that looser collateral requirements moderate the sensitivity of investment and output to changes in productivity but sharpen the response to shocks originated in the credit market. This result poses a challenge to the design of a macro-prudential policy framework that aims to mitigate pro-cyclicality in the financial market and improve macroeconomic stability. We document that, contrary to discretionary lower caps on loan-to-value ratios, time-varying caps that counter-cyclically respond to indicators of financial imbalances are successful in smoothing credit-cycles without increasing the sensitivity of the economy to real shocks. Further, countercyclical loan-to-value ratios also dampen macroeconomic volatility without reducing the size of the economy.  
    JEL: E21 E22 E44 G20
    Date: 2012
  8. By: Katarína Danišková (Comenius University, Bratislava); Jarko Fidrmuc
    Abstract: The New Keynesian Phillips Curve has become an inherent part of modern monetary policy models. It is derived from micro-founded models with rational expectations, sticky prices, and forward and backward-looking subjects on the market. Having reviewed about 200 studies, we analyze the weight of the forward-looking behavior in the hybrid New Keynesian Phillips Curve by means of meta regression. We show that selected data and method characteristics have significant impact on reported results. Moreover, we find a significant publication bias including publications in top journals, while we document no bias for the most cited studies and the most cited authors.
    Keywords: inflation, New Keynesian Phillips curve, meta-analysis, publication bias
    JEL: E31 E52 C32
    Date: 2012–04
  9. By: Chen, Xiaoshan; Kontonikas, Alexandros; Montagnoli, Alberto
    Abstract: This paper uses the multivariate unobserved components model with phase shifts to analyse the interaction of interest rates, output, asset prices and credit in the US. We find close linkages amongst cyclical fluctuations in the variables.
    Keywords: Asset Prices; Credit; Business Cycles; Multivariate Unobserved Components Models
    Date: 2012–04
  10. By: Mitra, Kaushik; Evans, George W.; Honkapohja, Seppo
    Abstract: Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of 'fiscal consolidations.'
    Keywords: Government Purchases, Expectations, Output Multiplier, Fiscal Consolidation, Taxation.,
    Date: 2012
  11. By: Coibion, Olivier (College of William and Mary); Gorodnichenko, Yuriy (University of California, Berkeley); Kueng, Lorenz (Northwestern University); Silvia, John (Wells Fargo)
    Abstract: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
    Keywords: monetary policy, income inequality, consumption inequality
    JEL: E3 E4 E5
    Date: 2012–06
  12. By: Gammadigbé, Vigninou
    Abstract: Using the annual data of real GDP from 1970 to 2010, this paper examines the synchronization of business cycles in the WAEMU. Two methods are used. First we calculate the cross correlations between cyclical components of real GDP of the different economies of the Union. The study then evaluate the concordance index proposed by Harding and Pagan [2002]. The results of the two approaches converge. They show that real cycles of the countries of WAEMU are weakly synchronous. Business cycles of the Ivory Coast, Mali and Niger are in phase with that of the WAEMU as a whole. The study also shows the asynchronous nature of the business cycle of Benin and that of the WAEMU. The results first demonstrate the high level of the risk that the common monetary policy will be countercyclical in some countries and procyclical in others, and secondly that the use of the common monetary policy in response to asymmetric shocks will cost for some countries. These results highlight the need to give a new impetus to the integration process to accelerate the cyclical convergence of WAEMU countries and facilitate the implementation of a common monetary policy that will be advantageous to all the countries the Union.
    Keywords: Synchronization, Business cycle, cross correlation, concordance index, WAEMU
    JEL: E32 C43 C41
    Date: 2012–04
  13. By: Miles S. Kimball
    Abstract: In ranking fiscal stimulus programs, it is useful to focus on the ratio of extra aggregate demand to extra national debt that results. This note argues that (because of repayment after the end of a recession) “national lines of credit”–that is, government-issued credit cards with countercyclical credit limits and favorable interest rates—would generate a higher ratio of extra aggregate demand to extra national debt than tax rebates. Because it involves government loans that are anticipated in advance to involve some losses and therefore involve a fiscal cost even after efforts to minimize losses, such a policy lies between traditional monetary policy and traditional fiscal policy.
    JEL: E6
    Date: 2012–06
  14. By: Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
    Abstract: We study the changing international transmission of US monetary policy shocks to 14 major OECD countries over the period 1981Q1-2010Q4. We use a time-varying parameter factor augmented VAR approach to study the effective federal funds rate shocks together with a large data set of 265, major financial, macroeconomic and trade variables. Our main findings are as follows. First, negative US monetary policy shocks have considerable negative impact on GDP growth in the US, Canada, Japan and Sweden whereas there is positive impact on GDP growth in the most of the other member countries. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. Third, the transmission of US monetary policy shocks to major economic and financial variables varies in magnitude during financial turmoil periods than normal periods such as the gross fixed capital formation residential, turned most negative over the second quarter after the initial shock in the US, Canada, Germany, Japan, Switzerland and New Zealand mainly during 2008Q4. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.
    Keywords: Monetary policy shocks, financial markets, international transmission channels, global integration, turmoil periods, time-varying parameter factor augmented VAR.
    JEL: F1 F4 F15 C3 C5
    Date: 2012
  15. By: Sona Benecka; Tomas Holub; Narcisa Liliana Kadlcakova; Ivana Kubicova
    Abstract: This paper analyses empirically the link between central bank financial strength and inflation. The issue has become very topical in recent years as many central banks have accumulated large financial exposures and the risk of losses has risen. We conclude that even though some estimates show a statistically significant and potentially non-linear negative relationship between several measures of central bank financial strength and inflation, this link appears rather weak and not as robust as suggested by the previous - very limited - literature. In general, other inflation determinants play a much more important and robust role.
    Keywords: Central bank financial strength, central bank independence, inflation, monetary policy, seigniorage.
    JEL: E31 E52 E58
    Date: 2012–05
  16. By: Chan, Joshua; Koop, Gary; Potter, Simon
    Abstract: This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.
    Keywords: Constrained inflation, non-linear state space model, underlying inflation, inflation targeting, inflation forecasting, Bayesian,
    Date: 2012
  17. By: Russell, Bill; Chowdhury, Rosen Azad
    Abstract: ‘Modern’ Phillips curve theories predict inflation is an integrated, or near integrated, process. However, inflation appears bounded above and below in developed economies and so cannot be ‘truly’ integrated and more likely stationary around a shifting mean. If agents believe inflation is integrated as in the ‘modern’ theories then they are making systematic errors concerning the statistical process of inflation. An alternative theory of the Phillips curve is developed that is consistent with the ‘true’ statistical process of inflation. It is demonstrated that United States inflation data is consistent with the alternative theory but not with the existing ‘modern’ theories.
    Keywords: Phillips curve, inflation, structural breaks, GARCH, nonstationary data,
    Date: 2012
  18. By: Chan, Joshua; Koop, Gary; Potter, Simon
    Abstract: This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.
    Keywords: Constrained inflation; non-linear state space model; underlying inflation; inflation targeting; inflation forecasting; Bayesian
    JEL: C51 E31 C15 E37 C11
    Date: 2012
  19. By: David Laidler (C.D. Howe Institute)
    Abstract: Monetary authorities should keep an eye on money growth in the economy to help stimulate and monitor the recovery. Money growth, meaning the pace of expansion in the quantity of money held by the public and readily accessible deposits at financial institutions, is proving prescient in the current situation. While skeptics of QE will be inclined to attribute the recent surge of US money growth and signs of recovery in its wake to coincidence, advocates will suggest that QE's first round in 2009 prevented a collapse of the money supply like the one that turned the initial downturn of 1929/30 into the Great Depression, and that its second round is now promoting recovery.
    Keywords: Monetary Policy, quantitative easing (QE), Bank of Canada, interest rates
    JEL: E52 E58 E42
    Date: 2012–05
  20. By: Givens, Gregory; Salemi, Michael
    Abstract: Accounting for the uncertainty inherent in real-time perceptions of the state of the economy is believed to be critical for the analysis of historical monetary policy. We investigate this claim through the lens of a small-scale new-Keynesian model with optimal discretionary policy and partial information about the state. The model is estimated using maximum likelihood on US data over the Volcker-Greenspan-Bernanke regime. A comparison of our estimates to those from a version of the model with complete information reveals that under partial information: (i) the Federal Reserve demonstrates a significant concern for stabilizing fluctuations in the output gap, and (ii) the discrepancy between optimal and observed policy behavior is smaller.
    Keywords: Partial Information; Optimal Monetary Policy; Central Bank Preferences
    JEL: E58 E52 E37
    Date: 2012–05–30
  21. By: Bi, Huixin; Leeper, Eric M.; Leith, Campbell
    Abstract: The paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain. Drawing on the evidence in Alesina and Ardagna (2010), we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts. We find that the composition of the fiscal consolidation, its duration, the monetary policy stance, the level of government debt and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and/or successful in stabilizing government debt.
    Keywords: government debt, budget reform, monetary-fiscal policy interactions,
    Date: 2012
  22. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE)
    Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight stylized facts of the ongoing crisis. We therefore suggest two complementary assumptions : (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.
    Keywords: Asset prices, liquidity trap, monetary policy, financial stability, business cycles, economic growth, dynamic stochastic, general equilibrium models.
    Date: 2012–05
  23. By: Adam Gersl; Petr Jakubik; Dorota Kowalczyk; Steven Ongena; Jose-Luis Peydro Alcalde
    Abstract: This paper examines the impact of monetary conditions on the risk-taking behaviour of banks in the Czech Republic by analysing the comprehensive credit register of the Czech National Bank. Our duration analysis indicates that expansionary monetary conditions promote risk-taking among banks. At the same time, a lower interest rate during the life of a loan reduces its riskiness. While seeking to assess the association between banks’ appetite for risk and the short-term interest rate we answer a set of questions related to the difference between higher liquidity versus credit risk and the effect of the policy rate conditioned on bank and borrower characteristics.
    Keywords: Business cycle, credit risk, financial stability, lending standards, liquidity risk, monetary policy, policy interest rate, risk-taking.
    JEL: E5 E44 G21
    Date: 2012–01
  24. By: Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Jitka Pomenkova (Department of Radio Electronics, Faculty of Electrical Engineering and Communication, Brno University of Technology)
    Abstract: The purpose of our paper is to define rules for decision of existence spurious synchronization of countries within the currency area. We devote this new methodological approach from an empirical research based on the variability of a dynamic correlation (correlation in frequency domain). We analyze the dynamic correlation in full range and in the business cycle frequencies as well. We also consider lags in economic activity co-movements. Contrary to the standard approach we show its insufficiency especially in case of time domain instruments. For this goal GDP values in quarters of the four Visegrad countries and the Eurozone in the period 1997/Q1–2011/Q1 are used
    Keywords: OCA theory, monetary policy efficiency, co-movements, Hamming window
    JEL: E3
    Date: 2012–06
  25. By: Antonella Cavallo; Antonio Ribba
    Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA.
    Keywords: Inflation differentials, euro area, structural Cointegrated VARs, permanent-transitory decompositions
    JEL: E31 C32
    Date: 2012–05
  26. By: Almut Balleer, Thijs van Rens
    Abstract: Over the past two decades, technological progress in the United States has been biased towards skilled labor. What does this imply for business cycles? We construct a quarterly skill premium from the CPS and use it to identify skill-biased technology shocks in a VAR with long-run restrictions. Hours fall in response to skill-biased technology shocks, indicating that at least part of the technology-induced fall in total hours is due to a compositional shift in labor demand. Investment-specific technology shocks reduce the skill premium, indicating that capital and skill are not complementary in aggregate production
    Keywords: skill-biased technology, skill premium, VAR, long-run restrictions, capital-skill, complementarity, business cycle
    JEL: E24 E32 J24 J31
    Date: 2012–06
  27. By: ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Date: 2012
  28. By: Mathias Drehmann; Claudio Borio; Kostas Tsatsaronis
    Abstract: We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the "unfinished recession" phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
    Keywords: financial cycle, business cycle, credit, asset prices, financial crises, medium-term
    Date: 2012–06
  29. By: Loukas Karabarbounis; Brent Neiman
    Abstract: We document a 5 percentage point decline in the share of global corporate income paid to labor from the mid-1970s to the late 2000s. Increased dividend payments did not absorb all of the resulting increase in profits, and therefore, the supply of corporate savings increased by over 20 percentage points as a share of total global savings. These trends were stronger in countries experiencing greater declines in the relative price of investment goods. We develop a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and the sectoral composition of savings affects macroeconomic allocations. We calibrate the shape of the production function and the capital market imperfections to match the cross-sectional variation in the two trends. In response to the observed global decline in investment prices, our model generates more than half of the observed changes in labor shares and corporate savings. The non-unitary elasticity of substitution between capital and labor interacts with imperfections in the capital market to jointly shape the economy’s dynamics.
    JEL: E21 E22 E25 G32 G35
    Date: 2012–06
  30. By: Fabio Milani (Department of Economics, University of California-Irvine); Ashish Rajbhandari (Department of Economics, University of California-Irvine)
    Abstract: Empirical work in macroeconomics almost universally relies on the hypothesis of rational expectations. This paper departs from the literature by considering a variety of alternative expectations formation models. We study the econometric properties of a popular New Keynesian monetary DSGE model under different expectational assumptions: the benchmark case of rational expectations, rational expectations extended to allow for `news' about future shocks, near-rational expectations and learning, and observed subjective expectations from surveys. The results show that the econometric evaluation of the model is extremely sensitive to how expectations are modeled. The posterior distributions for the structural parameters significantly shift when the assumption of rational expectations is modified. Estimates of the structural disturbances under different expectation processes are often dissimilar. The modeling of expectations has important effects on the ability of the model to fit macroeconomic time series. The model achieves its worse fit under rational expectations. The introduction of news improves fit. The best-fitting specifications, however, are those that assume learning. Expectations also have large effects on forecasting. Survey expectations, news, and learning all work to improve the model's one-step-ahead forecasting accuracy. Rational expectations, however, dominate over longer horizons, such as one-year ahead or beyond.
    Keywords: Expectation formation; Rational expectations; News shocks; Adaptive learning; Survey expectations; Econometric evaluation of DSGE models; Forecasting
    JEL: C52 D84 E32 E37 E50
    Date: 2012–06
  31. By: Corsetti, Giancarlo; Meier, André; Müller, Gernot
    Abstract: This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.
    Keywords: exchange rate regime; financial crisis; fiscal policy; fiscal rules; government spending; Multiplier; public finances
    JEL: E62 E63 F41
    Date: 2012–03
  32. By: Marco Passarella
    Abstract: In the last few years, a number of scholars has referred to the crop of contributions of Hyman P. Minsky as „required reading? for understanding the tendency of capitalist economies to fall into recurring crises. However, the so-called „financial instability hypothesis? of Minsky relies on muchdisputed assumptions. Moreover, Minsky?s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to overcome these theoretical difficulties, the paper supplies a simplified, but consistent, re-formulation of some of the most disputed aspects of Minsky?s theory by cross-breeding it with inputs from the current Post-Keynesian literature. This allows us to analyze (within a simplified stock-flow consistent monetary circuit-model) the impact of both „capital-asset inflation? and consumer credit on the financial „soundness? of a monetary economy of production.
    Keywords: Financial Instability; Stock-Flow Consistency; Monetary Theory of Production
    JEL: B50 E12 E32 E44
    Date: 2012
  33. By: Sumru Altug (Koc University and CEPR); Fabio Canova (EUI, ICREA-UPF, CREMED, CREI, and CEPR)
    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: 2012–06
  34. By: Claudio Morana (Università di Milano Bicocca, CeRP-Collegio Carlo Alberto, Italy, Fondazione Eni Enrico Mattei, Italy and International Centre for Economic Research, ICER)
    Abstract: In this paper the oil price-macroeconomy relationship is investigated from a global perspective, by means of a large scale macro-financial-econometric model. In addition to real activity, fiscal and monetary policy responses and labor and financial markets are considered as well. We find that oil market shocks would have contributed to slowing down economic growth since the first Persian Gulf War episode. Among oil market shocks, supply side disturbances were the largest contributor to macro-financial fluctuations, accounting for up to 12% of real activity variance. The latter shocks would have exercised recessionary effects during the first and second Persian Gulf War and 2008 oil price episodes; preferences, speculative and volatility shocks would have also contributed to exacerbate the recessionary episodes. As long as oil supply will keep expanding at a lower pace than required by demand conditions, a recessionary bias, determined by higher and more uncertain real oil prices, may then be expected to persist also in the near future.
    Keywords: Oil Price, Oil Price-Macroeconomy Relationship, Macro-finance Interface, International Business Cycle, Factor Vector Autoregressive Models
    JEL: C22 E32 G12
    Date: 2012–05
  35. By: Christopher T. Downing; Francis A. Longstaff; Michael A. Rierson
    Abstract: We propose a new approach to constructing inflation tracking portfolios. The key to this approach is the insight that asset returns track expected inflation far better than they track current realized inflation. Thus, we can construct portfolios that track next month's inflation much more closely than they track this month's inflation. We show this staggered hedging approach can eliminate nearly 90 percent of the tracking error of more conventional inflation hedging strategies. We also find that long-short positions in equities play a dominant role in the effective hedging of inflation risk over extended horizons. These results suggest that the goal of protecting portfolios against inflation may be more feasible that is commonly believed.
    JEL: G11
    Date: 2012–06
  36. By: Emi Nakamura; Dmitriy Sergeyev; Jón Steinsson
    Abstract: We quantify the importance of long-run risks – persistent shocks to growth rates and uncertainty – in a panel of long-term aggregate consumption data for developed countries. We identify sizable and highly persistent world growth-rate shocks as well as less persistent country-specific growth rate shocks. The world growth-rate shocks capture the productivity speed-up and slow-down many countries experienced in the second half of the 20th century. We also identify large and persistent common shocks to uncertainty. Our world uncertainty process captures the large but uneven rise and fall of volatility that occurred over the course of the 20th century. We find that negative shocks to growth rates are correlated with shocks that increase uncertainty. Our estimates based on macroeconomic data alone line up well with earlier calibrations of the long-run risks model designed to match asset pricing data. We document how these dynamics, combined with Epstein-Zin-Weil preferences, help explain a number of asset pricing puzzles.
    JEL: E21 G12
    Date: 2012–06
  37. By: Yashiv, Eran (Tel Aviv University)
    Abstract: The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamic behavior in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring and investment costs. It is significant and negatively signed, implying complementarity between investment and hiring. There is a substantial role for aggregate labor market conditions in hiring costs, whereby the latter are lower in "good times." The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is counter-cyclical. This is so as they follow the cyclical behavior of their respective present values. The relevant intertemporal considerations are highlighted. An asset-pricing type empirical analysis of the estimation results indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.
    Keywords: gross investment, gross hiring, frictions, business cycles, present values of hiring and investment, forward-looking behavior, production-based asset pricing, complementarities, labor market conditions
    JEL: E24 J23 J63 J64
    Date: 2012–06
  38. By: Andreas Groth (Geosciences Department, Ecole Normale Supérieure, Paris, France, Environmental Research & Teaching Institute, Ecole Normale Supérieure); Michael Ghil (Geosciences Department, Ecole Normale Supérieure, Paris, France, Environmental Research & Teaching Institute, Ecole Normale Supérieure, Paris, France Department of Atmospheric & Oceanic Sciences and Institute of Geophysics & Planetary Physics, University of California); Stéphane Hallegatte (Centre International de Recherche sur l'Environnement et le Développement, Nogent-sur-Marne, France, Ecole Nationale de la Météorologie, Météo France); Patrice Dumas (Centre International de Recherche sur l'Environnement et le Développement, Nogent-sur-Marne)
    Abstract: We apply the advanced time-and-frequency-domain method of singular spectrum analysis to study business cycle dynamics in a set of nine U.S. macroeconomic indicators. This method provides a robust way to identify and reconstruct shared oscillations, whether intermittent or modulated. We address the problem of spurious cycles generated by the use of detrending filters and present a Monte Carlo test to extract significant oscillations. Finally, we demonstrate that the behavior of the U.S. economy changes significantly between episodes of growth and recession; these variations cannot be generated by random shocks alone, in the absence of endogenous variability.
    Keywords: Advanced Spectral Methods, Comovements, Frequency Domain, Monte Carlo testing, Time Domain
    JEL: C15 C60 E32
    Date: 2012–05
  39. By: Langot, François (University of Le Mans); Patureau, Lise (University of Lille 1); Sopraseuth, Thepthida (GAINS, Université du Maine)
    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: 2012–06
  40. By: Vilimir Yordanov
    Abstract: Bulgaria started the transition in the early 90’s with a sovereign default and debt restructuring. Later on, under a strict fiscal discipline, the country succeeded to reduce significantly its debt burden and is currently among the top EU performers in that respect. The current debt outstanding is composed mainly of local currency treasuries issued on the domestic market as well as Eurobonds and Global bonds on the international one. These instruments give rise to two risky spreads - credit and currency. The Currency Board Arrangement and the fixed exchange rate regime the country follows prevent from a discretionary monetary policy and this gives relative stability to the bonds’ yields and the risky spreads. Their financial role starts dominating over any macroeconomic one making them a natural object for investigation with financial engineering tools. The main focus of the paper is an analysis of the informational content of the risky spreads in a multifaceted way from noarbitrage,financial, and macroeconomic points of view.
    Keywords: arbitrage; term structure; credit risk; credit spread; currency spread; HJM
    JEL: F31 G12 E43 C58
    Date: 2012–03–01
  41. By: Karim M. Abadir (Tanaka Business School, Imperial College London, UK); Gabriel Talmain (Department of Economics, University of Glasgow, UK)
    Abstract: Macroeconomic and aggregate financial series share an unconventional type of nonlinear dynamics. Existing techniques (like co-integration) model these dynamics incompletely, hence generating seemingly paradoxical results. To avoid this, we provide a methodology to disentangle the long-run relation between variables from their own dynamics, and illustrate with two applications. First, in the forward-premium puzzle, adding a component quantifying the persistent nonlinear dynamics of exchange rates yields substantial predictability and makes the forward-premium term insignificant. Second, S&P 500 grows in a pattern of momentum followed by reversal, forming long cycles around a trend given by GDP, a stable non-breaking relation since WWII.
    Date: 2012–06
  42. By: Carlo Panico; Francesco Purificato
    Abstract: Panico and Purificato argue that before 2007, flaws in the European institutional organization affected the cyclical and growth performance of the euro countries. After that date they contributed to an intensification of the conflicts among national political bodies and between them and the European authorities. These conflicts have favored the speculative attacks against some Government debts and exposed the peculiar conditions under which central banking is carried out in the euro area. <p></p>They conclude that the institutional organization of the euro area must be reformed in such a way as to allow it to effectively pursue the objectives for which it was created, i.e. to protect the economies and the citizens from the instability of the international financial markets. The reforms must remove, as has been done in monetary policy, the cause of the “moral hazard” problem, i.e. the uncertainty as to the actual conduct of fiscal policy, and transform the current defensive attitudes of the different actors of the coordination process (i.e. the national political authorities and the central bank) into a cooperative and positive search for the most convenient mix of monetary and fiscal policy for the whole area.
    Date: 2012
  43. By: Veroude, Alexandra
    Abstract: The purpose of this paper is to evaluate a business cycle model that includes a mining sector, with the cyclical variations of the Australian Economy. Large quantities of mineral deposits are found in Australia and there exists high demand for these minerals from developing nations. This results in the mining sector contributing to a high proportion of GDP. Sur- prisingly, the inclusion of a mining sector has not previously been studied in a business cycle model. Australia is a small open economy however, due to a lack of prior literature then, as a rst attempt, we assume an economy without a foreign sector. The model built upon a neoclassical growth model, and results were simulated from solving this model via the Blanchard-Kahn method. The statistics generated show that some vari- ables are capable to closely model some of the elements of the Australian economy. However, other variables display standard deviations and con- temporaneous correlations, which are substantially dierent to the actual data. This is implying that the inclusion of the basic mining mechanism alone does not provide the perfect representation of the Australian econ- omy. As the importance of mining is growing in Australia, research should be undertaken to evaluate the impact of the mining sector in economic models.
    Keywords: Resource /Energy Economics and Policy,
    Date: 2012–02–05
  44. By: Can Tian (Department of Economics, University of Pennsylvania)
    Abstract: Cross-sectional productivity dispersion is countercyclical, at the plant level and at the firm level. I incorporate a firm’s project choice decision into a firm dynamics model with business cycle features to explain this empirical .finding both qualitatively and quantitatively. In particular, all projects available have the same expected flow return and differ from one another only in the riskiness level. The endogenous option of exiting the market and limited funding for new investment jointly play an important role in motivating firms’ risk-taking behavior. The model predicts that relatively small firms are more likely to take risk and that the cross-sectional productivity dispersion, measured as the variance/standard deviation of firm-level profitability, is larger in recessions.
    Keywords: Countercyclical Productivity Dispersion, Business Cycles, Firm Dynamics
    JEL: E32 L11 L25
    Date: 2012–06–09
  45. By: Kenza Benhima; Baptiste Massenot
    Abstract: Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a "safe" one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.
    Keywords: decreasing relative risk aversion; reference consumption; business cycles; Japan's lost decade
    JEL: E22 E32
    Date: 2012–05
  46. By: Daniel L. Thornton
    Abstract: With its interest rate instrument at the zero lower bound, the Federal Open Market Committee has turned to unconventional methods to stimulate economic growth and increase employment. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt. Policymakers and analysts have argued that QE works through the so-called portfolio balance channel: it reduces long-term yields by reducing the term premium investors require to hold long-dated securities. I present several reasons to be skeptical of the theoretical foundations of this portfolio balance channel and offer several arguments for why the effect of QE might be relatively small even if it is theoretically valid. Consistent with these arguments, an empirical analysis using a variety of interest rate variables and public debt supply measures used in the literature finds essentially no support for the portfolio balance channel.>
    Keywords: Monetary policy - United States ; Economic conditions
    Date: 2012
  47. By: Gregory R. Duffee
    Abstract: This chapter reviews some of the academic literature that links nominal and real term structures with the macroeconomy. The main conclusion is that none of our models is consistent with basic properties of nominal yields. It is difficult to explain the average shape of the nominal yield curve, the variation of yields over time, and the predictability of excess bond returns. There are two overarching problems. First, much of the variation over time in economic activity is orthogonal to variation in nominal yields, and vice versa. Second, although mean excess returns to nominal Treasury bonds are positive, these returns do not appear to positively covary with risks that require compensation, at least according to standard asset-pricing models.
    Date: 2012–06
  48. By: Philip Hans Franses (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam); Michael McAleer (Erasmus University Rotterdam,Tinbergen Institute,Kyoto University,Complutense University of Madrid); Rianne Legerstee (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, Tinbergen Institute The Netherlands)
    Abstract: Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC.
    Keywords: Macroeconomic forecasts, econometric models, human intuition, biased forecasts, forecast performance, forecast evaluation, forecast comparison.
    JEL: C22 C51 C52 C53 E27 E37
    Date: 2012–06
  49. By: Stefano Lucarelli
    Abstract: Credit money plays a crucial role in Schumpeterian theoretical analysis of economic development. Nevertheless, it is not simple to propose an analytical framework which is able to clarify the meaning of credit creation considered as the monetary complement of innovation. This contribution aims to describe Schumpeterian economic development in a “monetary theory of production” framework. According to the Schumpeterian perspective, we propose to emphasize within the monetary circuit both the monetary nature and the qualitative change of the capitalist system (i.e. the innovative process). We will describe the different phases of Schumpeterian economic development by employing a set of accounting matrixes, which allows us to respect the condition of stock-flow consistency.
    JEL: B50 E51 O33
    Date: 2012
  50. By: Mark Bils; Peter J. Klenow; Benjamin A. Malin
    Abstract: According to the textbook Keynesian model, short-run demand for labor is sensitive to the demand for goods. In this view, sellers deviate from setting the marginal product of labor proportional to the real wage, instead enduring or choosing lower price markups when demand for goods is high. We test this prediction across U.S. industries in the two decades up through the Great Recession. To identify movements in goods demand, we exploit how durability varies across 70 categories of consumption and investment. We also take into account the flexibility of prices and capital-intensity of production across goods. We find evidence in support of Keynesian Labor Demand.
    JEL: E12 E2 E3 E6
    Date: 2012–06
  51. By: Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: We study the cyclical fl uctuations of leverage and assets of fi nancial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fl uctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated fi nancial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We fi nd that volatility shocks are key to generating fl uctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.
    Keywords: fi nancial intermediaries, short-term collateralized debt, limited liability, call option, put option, moral hazard, leverage
    JEL: E20 G10 G21
    Date: 2012–06
  52. By: Brett Fiebiger; Scott Fullwiler; Stephanie Kelton; L. Randall Wray
    Abstract: This working paper presents a debate, which begins with Bret Fiebiger arguing that the approach to monetary and financial macroeconomics which terms itself "modern monetary theory” does not have sound analytic foundations and is of little relevance empirically. Scott Fullwiler, Stephanie Kelton and L. Randall Wray, three leading contributors to modern monetary theory, respond with a new statement of their overall approach, which they believe shows clearly its links with post-Keynesianism. Fiebiger provides a final rejoinder to the Fullwiler-Kelton-Wray response.
    Date: 2012
  53. By: Sauter, Oliver
    Abstract: This paper aims an empirical investigation of uncertainty in the Euro Zone as well as the US. For this purpose I conduct a factor analysis of uncertainty measures starting in 2001 until the end of 2011. I use survey-based data provided by the ECB and the Federal Reserve Bank of Philadelphia as well as the stock market indices VSTOXX and VIX, both measures of implied volatility of stock market movements. Each measure shows an increase in uncertainty during the last years marked by the financial turmoil. Given the rise in uncertainty, the question arises whether this uncertainty is driven by the same underlying factors. For the Euro Zone, I show that uncertainty can be separated into factors of short and long-term uncertainty. In the US there is a sharp distinction between uncertainty that drives stock market and real variables on the one hand and inflation (short and long-term) on the other hand. Combining both data sets, factor analysis delivers (1) an international stock market factor, (2) a common European uncertainty factor and (3) an US-inflation uncertainty factor. --
    Keywords: monetary policy,uncertainty,survey forecast,forecast disagreement,factor analysis
    JEL: C1 E3 E5 E6
    Date: 2012
  54. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The United States faces a “fiscal cliff” at the end of calendar year 2012, when the two major tax cuts from the Bush era and some other tax provisions will expire and in the absence of action scheduled reductions in spending will begin. The subsequent increase in taxes and reduction in spending would dramatically tighten the federal budget deficit at a time when unemployment remains high. On an annual basis the total impact of the fiscal cliff amounts to a reduction in the federal budget deficit of about $800 billion on a direct basis (about 5 percent of GDP). After taking account of revenue losses and extra social spending resulting from induced slowdown in the economy, the Congressional Budget Office places the net fiscal impact at $560 billion for the first nine months of 2013, implying $745 billion or 4.5 percent of GDP for calendar year 2013. An aging population and rising health care costs continue to boost federal spending under current policies, and it is critical that the United States put the budget on a sustainable path, which will require significant changes in spending and tax policies. It is therefore difficult to escape the conclusion that it is a good thing that the United States faces a fiscal cliff. The expiration of the Bush era tax cuts at the end of 2012 provides a unique opportunity to raise tax rates and/or eliminate tax deductions so that the United States can restore federal revenue to at least 18 percent of GDP and probably more in order to meet growing fiscal needs associated with an aging population. The political pain of higher tax rates should concentrate political minds on the associated task of finding more ways of cutting spending and limiting increases in entitlement spending. It will nonetheless be important to phase in the fiscal adjustment gradually, for example, over the four years of the next presidential term, in order to moderate the output loss that would otherwise occur under current conditions of high unemployment combined with interest rates near zero. Moreover, Cline says the needed structural fiscal adjustment amounts to 3 percent of GDP and the component of overkill included in the fiscal cliff’s 5 percent of GDP adjustment should be avoided.
    Date: 2012–06
  55. By: Real Arai (Graduate School of Social Sciences, Hiroshima University); Junji Ueda (Policy Research Institute, Ministry of Finance Japan)
    Abstract: We investigate how large a size of primary deficit to GDP ratio the Japan’s government can sustain. For this investigation, we construct an overlapping generations model, in which multi-generational households live and the government maintains a constant ratio of primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long-run in order to avoid the divergence of the public debt to GDP ratio.
    Keywords: fiscal sustainability, public debt, primary deficit, economic growth
    JEL: E62 H62 H63 H68
    Date: 2012–06
  56. By: Johannes Fedderke
    Abstract: The South African labor market has been characterized by high and persistent levels of unemployment, and a poor capacity to create jobs. This paper examines existing evidence on what rigidities have generated this outcome. Pricing power in output markets, as well as labor supply and demand side rigidities are all found to have contributed, resulting in excessive increases in real wage costs which under conditions of relatively low economic growth, has produced a stagnant labor market. Policy requirements are the pursuit of stonger economic growth and reductions in real labor costs.
    Date: 2012
  57. By: John H. Munro
    Abstract: Coinage debasement in medieval and early modern Europe remains an ill-understood topic; and indeed an often cited article ("The Debasement Puzzle": Velde and Weber, 1996) sought to demonstrate that coinage debasements were both impractical and economically futile. The purpose of this study is to demonstrate that aggressive debasements were generally very practical and effective, so long as they were properly devised to profit both the merchants who brought bullion to the mints and the princes who earned seigniorage revenues from those mints. To be sure, the general public often suffered the consequences of this seigniorage tax from the consequent inflation. But another goal of this study is to demonstrate that inflation was almost never proportionate to the extent of the debasement, even during Henry VIII's Great Debasement (1542-53); and to demonstrate that both merchants and the prince benefitted from debasements in real terms, provided that they spent the increased quantity of now debased coins (of the same face value) quickly enough, before the full force of inflation was felt. Central to the economic success of such debasements was the pre-modern mint technology: the very crudity of the techniques of "hammered" coinages whose mint outputs did not produce fully identical coins in each issue. For this and many other reasons explored in this study, domestic merchants and the general public almost always accepted coins by tale (number), at face value, and did not discount them for deficiencies in weight and fineness, except for those merchants dealing with gold coins in international trade. The second part of this study is an examination of the European princes' motives for conducting such coinage debasements. As the previous argument and so many previous studies have indicated, an obvious motive was profit-seeking, so that such debasements may be regarded more as fiscal than truly monetary policies. But an equally powerful and perhaps even more widespread monetary motive was defence of the realm's coinages and mints: i.e., necessary defences and retaliations against aggressive, profit-seeking debasements undertaken by neighboring prices (or city states). In essence, that meant a defence against the operations of Gresham's Law, whose frequency and effectiveness in international monetary flows are also examined in this study. The operation of Gresham's Law also involved, however, the deterioration of the general standard of domestic coins through counterfeiting, fraudulent clipping and sweating of the coins, and especially by normal wear and tear in domestic circulation. Such deterioration, for all these reasons, thus meant that freshly minted, full-bodied good coins were soon driven out of circulation (exported abroad, melted down, or just hoarded) by the prevailing circulation of 'bad' coins, thus necessitating a defensive debasement to reduce the mint standard, in weight and fineness, to that of the prevailing circulation. The problem of Gresham's Law, related to both aggressive and defensive debasements, was resolved, to obviate debasements, only by the advent of modern steam-powered machinery to produce perfectly round, milled, and exact replicas of coins struck. The final but brief aspect of this study is to answer the question raised by Sargent and Velde in their recent monograph: The Big Problem of Small Change (2002). Were such coinage debasement ever undertaken as a deliberate policy to expand the money supply (especially during the late-medieval "bullion famines") and in particular to remedy any chronic shortage of petty coins or "small change": other than as a defensive reaction to Gresham's Law? The answer advanced in this study, briefly, is simply NO (for the reasons explored in the conclusion).
    Keywords: coinage debasements; ‘Great Debasement’; gold; silver; billon; bullion; bullionist policies; mints; mint outputs; seigniorage; brassage; token coinages; ‘small change’; Gresham’s Law; inflation; deflation; ‘bullion famines’ and monetary scarcities; warfare; taxation; France; Flanders; dukes of Burgundy; England; Henry VIII.
    JEL: E E41 E42 E51 E52 E62 F33 H11 H27 N13 N23 N43
    Date: 2012–06–06
  58. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty, and more specifically the way banks systemic risk evolves over the business cycle. Adopting the methodology of Beaudry et al. (2001), our results clearly suggest that the dispersion across banks traditional portfolios has increased through time. We introduce an estimation procedure based on EGARCH and refine Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009) framework to analyze the question in the new industry context, i.e. shadow banking. Consistent with finance theory, we first confirm that banks tend to behave homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that the cross-sectional dispersions of loans to assets and non-traditional activities shrink essentially during downturns, when the resilience of the banking system is at its lowest. More importantly, our results also suggest that the cross-sectional dispersion of market-oriented activities is both more volatile and sensitive to the business cycle than the dispersion of the traditional activities.
    Keywords: Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty; Markov switching regime; EGARCH.
    JEL: C32 G20 G21
    Date: 2012–04–27
  59. By: Vasco Carvalho; Alberto Martin; Jaume Ventura
    Keywords: bubbles, dynamic inefficiency, economic growth, financial frictions, pyramid schemes
    JEL: E32 E44 O40
    Date: 2012–01
  60. By: Valerio Ercolani; João Valle e Azevedo
    Abstract: We take to the data an RBC model with two salient features. First, we allow government consumption to directly affect the marginal utility of consumption. Second, we allow public capital to affect the productivity of private factors. On the one hand, private and government consumption are estimated to be substitute goods. As a consequence, the estimated response of private consumption to a government consumption shock is negative, as in models with separable government consumption, but such response is much stronger. Further, substitutability makes labor supply to react less, so the estimated output multiplier is lower than in models with separabilities, peaking - on impact - at 0.39. On the other hand, non-defense public investment enhances mildly or negligibly, depending on the specification, the productivity of private factors. In those specifications where non-defense public investment is found to be productive, a non-defense investment shock generates the following estimated responses (after several quarters): a positive reaction for private consumption, Tobin’s q, private investment and real wages. Unlike models with unproductive government investment, the estimated output multiplier builds up over time, starting well below one on impact, then reaching 0.93 after three years and 1.44 after six.
    JEL: E32 E62
    Date: 2012
  61. By: Enrique Alberola (Banco de España); Luis Molina (Banco de España); Pedro del Río (Banco de España)
    Abstract: The fallout from the 2008 financial crisis has been particularly acute in the euro area Member States of the south-western rim and in the new EU Member States, due to their previously accumulated macroeconomic and financial imbalances. The perception that the euro environment provided a solid shield against economic instability shaped the incentives, expectations and actions of agents, markets and policymakers. This, in turn, eroded discipline at all levels: EU-wide surveillance, domestic policies and markets. The empirical analysis of this paper, focused on market discipline, shows that before the crisis credit risk premia neglected fiscal imbalances and hardly reflected external or financial imbalances, in particular in advanced economies. This result is partly explained by the masking effect of the expansionary phase on underlying imbalances. The crisis has shattered the perception of the euro as a safe haven for economic stability, where imbalances do not matter. Moreover, the severity of the crisis has uncovered the fragilities of the institutional framework underpinning the euro and is leading to its reinforcement by means of stronger economic governance and surveillance. Going forward, however, a further two factors may exert a greater impact on the future discipline and stability of the European economies: i) more stringent financing conditions by markets, contingent on fundamentals, although there are doubts on the persistence of this discipline in future expansionary phases; and, above all ii) domestic policymaking conduct that is consistent with the constraints that EMU entails. These three forces could settle the European integration process and EMU on a more solid footing, although the jury is still out.
    Keywords: Financial crisis, fiscal discipline, credit risk, euro area, CDS
    JEL: G01 G15
    Date: 2012–06
  62. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.
    Keywords: Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty.
    JEL: C32 G20 G21
    Date: 2012–01–27
  63. By: M. Hashem Pesaran (University of Cambridge, UK; University of Southern California, USA); Ron P. Smith (Birkbeck, University of London, UK)
    Abstract: This paper is concerned with ex ante and ex post counterfactual analyses in the case of macroeconometric applications where a single unit is observed before and after a given policy intervention. It distinguishes between cases where the policy change affects the model’s parameters and where it does not. It is argued that for ex post policy evaluation it is important that outcomes are conditioned on ex post realized variables that are invariant to the policy change but nevertheless influence the outcomes. The effects of the control variables that are determined endogenously with the policy outcomes can be solved out for the policy evaluation exercise. An ex post policy ineffectiveness test statistic is proposed. The analysis is applied to the evaluation of the effects of the quantitative easing (QE) in the UK after March 2009. It is estimated that a 100 basis points reduction in the spread due to QE has an impact effect on output growth of about one percentage point, but the policy impact is very quickly reversed with no statistically significant effects remaining within 9–12 months of the policy intervention.
    Keywords: Counterfactuals, policy evaluation, macroeconomics, quantitative easing (QE), UK economic policy
    JEL: C18 C54 E65
    Date: 2012–06
  64. By: Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
    Abstract: A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.
    Keywords: Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks.,
    Date: 2012
  65. By: Trenkler, Carsten; Weber, Enzo
    Abstract: This paper investigates which shocks drive asynchrony of business cycles in the euro area. Thereby, it unites two strands of literature, those on common features and on structural VAR analysis. In particular, we show that the presence of a common cycle implies collinearity of structural impulse responses. Several Wald tests are applied to the latter hypothesis. Results reveal that differences in the GDP dynamics in several peripheral countries compared to a euro zone core are triggered by idiosyncratic, and to a lesser extent also world, shocks. Additionally, real shocks prove relevant rather than nominal ones.
    Keywords: Common cycles , euro area , impulse responses , structural VAR , Wald tes
    JEL: C32 E32
    Date: 2012
  66. By: Kevin Gallagher
    Abstract: <p>Unstable global capital flows to developing countries have been characteristic of the world economy in the wake of the global financial crisis. The nations that have deployed capital controls to mitigate the negative effects of such flows have been branded as “protectionist” by some. This paper argues that such claims are unfounded. There is a longstanding strand of modern economic theory that dates back to Keynes and Prebisch and continues to this day that sees the use of capital controls as essential for macroeconomic stability and in order to deploy an independent monetary policy. In a most recent development, a “new welfare economics” of capital controls has arisen within the mainstream that sees controls as measures to correct for market failures due to imperfect information, contagion, uncertainty and beyond. Taken as a whole then, rather than the “new protectionism,” capital controls could be seen as the “new correctionism” that re-justifies a tool that has long been recognized to promote stability and growth in developing countries. </p><p></p>
    JEL: E44 E5 F3 F30 F32 F34 F41
    Date: 2012
  67. By: Engelbert Stockhammer
    Abstract: <p><span lang="EN-GB">The paper argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense rising inequality should be regarded as a root cause of the present crisis. We identify four channels by which it has contributed to the crisis. First, rising inequality creates a downward pressure on aggregate demand since it is poorer income groups that have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand two growth models have emerged: a debt-led model and an export-led model. Third, (in the debt-led growth models) higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend hold riskier financial assets than other groups. The rise of hedge funds and of subprime derivatives in particular has been linked to rise of the superrich.</span></p><p><span lang="EN-GB"> </span></p>
    Keywords: crisis, distribution, inequality, effective demand, growth regimes, post-Keynesian economics
    JEL: E12 E25 E60
    Date: 2012
  68. By: Sławomir Dudek (Ministry of Finance, Poland); Tomasz Zając (Ministry of Finance, Poland); Kamil Danielski; Magdalena Zachłod-Jelec (Ministry of Finance, Poland); Paweł Kolski (Ministry of Finance, Poland); Dawid Pachucki (Ministry of Finance, Poland); Iwona Fudała-Poradzińska (Ministry of Finance, Poland)
    Abstract: This paper presents the Econometric Model of Public Finance, eMPF. The model has been developed and maintained at the Polish Ministry of Finance to facilitate forecasting process, especially for the budget and convergence programme purposes, and to deliver scenario analyses. We present the particular blocks of the model and responses to some standard shocks. The eMPF model is a medium size quarterly macroeconometric model of the Polish economy. It was estimated on the seasonally adjusted data on the 1995-2010 sample. The model consists of 352 variables, of which 279 are endogenous and about 40 are explained by stochastic ECM type equations. The long run of the model is theory based and is derived from optimization conditions of the market participants. Microeconomic foundations of the long-run equilibrium impose constraints for dynamics of the model to force it to converge to the steady state. In the short run the model is demand driven with elasticities estimated to reflect historical path of the variables and rigidities in the economy. Taking into account the mix of economic theory and the willingness to fit the equations to the data, the eMPF model belongs to the so-called hybrid models family. There are two sectors identified in the model: the market sector and the general government sector, both summing up to the total economy according to the ESA95 methodology. Within the market sector two additional subsectors are recognised: households and companies, but only part of the institutional accounts is incorporated for these two subsectors. To fulfill the needs of the Ministry of Finance to prepare fiscal policy analyses, the model has quite detailed public finance block.
    Keywords: structural macroeconometric model, macroeconomic model, Polish economy
    JEL: E10 E17 E20 E50 E60
    Date: 2012–06–12
  69. By: Javier G. Polavieja (IMDEA Social Sciences Institute)
    Abstract: This paper investigates the impact of economic vulnerability and economic recession on political trust, satisfaction with democracy and attitudes towards welfare-state redistribution across different EU countries. I argue that these set of attitudes are crucial in defining public support for the European model of social capitalism, historically characterized by the combination of national democratic institutions and extensive welfare provision. I further content that the impact of recession on citizens’ support for national political institutions could have been particularly severe in Euro-zone countries since national governments inside the European Monetary Union lack standard policy instruments to combat recession. Following the economic voting literature, I distinguish between recession effects that are triggered by the individual experience of economic hardship (egocentric effects) and those triggered by citizens’ dissatisfaction with the economic situation of the country as a whole (sociotropic effects). Applying two-step regression techniques to a pool of the 2004 and the 2010 rounds of the European Social Survey, I investigate individual-level egocentric and sociotropic effects on political trust, democratic satisfaction and attitudes to redistribution, as well as direct macro-level recession effects on the typical citizen for both countries inside and outside the Euro zone. I find significant recession effects for political trust and satisfaction with democracy in Euro-zone countries. The erosion of political trust and satisfaction with democracy is sizeable in Ireland, Slovenia and Spain and reaches truly alarming proportions in the case of Greece. The evidence on recession effects on attitudes to redistribution is, however, inconclusive. Implications are discussed.
    Keywords: economic recession, political trust, satisfaction with democracy, attitudes towards redistribution; europe; welfare states; monetary union; legitimacy; european social survey
    Date: 2012–06–18
  70. By: Takeo Hori (Aoyamagakuin University); Masako Ikefuji (University of Southern Denmark); Kazuo Mino (Kyoto University)
    Abstract: We study structural change in a simple, two-sector endogenous growth model and show that the presence of commodity-specific consumption externalities can be a source of structural change. When the degrees of consumption externalities are different between different goods, the two sectors grow at different rates, whereas the aggregate economy exhibits balanced growth in the sense that capital stock and expenditure grow at the same constant rate. Under the more restrictive condition such that the degrees of consumption externalities are the same, structural change does not occur. We also show that the dependence of the benchmark consumption levels on the past consumption is crucial for the divergent patterns of structural change across countries.
    Keywords: Structural change, Consumption externalities, Two-sector growth model, Kaldor facts
    JEL: E21 E30 O10 O41
    Date: 2012–06
  71. By: Been-Lon Chen (Academia Sinica); Yu-Shan Hsu (National Chung Cheng University); Kazuo Mino (Kyoto University)
    Abstract: One-sector neoclassical growth models reveal that consumption externalities lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state only if there is a labor-leisure tradeoff. This paper shows that in a two-sector neoclassical growth model, even without a labor-leisure tradeoff, consumption spillovers easily lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state. Consumption spillovers that yield over-accumulation of capital in an otherwise identical one-sector model may lead to under-accumulation of capital in two-sector models depending on relative capital intensities and relative degrees of externalities. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy with consumption externalities.
    Keywords: two-sector model; consumption externalities; efficiency; indeterminacy
    JEL: E21 E32 O41
    Date: 2012–06
  72. By: Cagri Seda Kumru (Research School of Economics, The Australian National University and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales); John Piggott (ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)
    Abstract: This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to capital income taxation in a life-cycle context.
    Keywords: Dynamic general equilibrium, taxation, welfare
    JEL: E21 E62 H55
    Date: 2012–05
  73. By: Adeline Saillard (Centre d'Economie de la Sorbonne - Paris School of Economics); Thomas Url (WIFO - Austrian Institute of Economic Research)
    Abstract: The distinction between bank and market based economies has a long tradition in applied macroeconomics. The two types differ not only in the level of financial activity channeled through the stock market and private banking, but also in their institutional frameworks. We challenge this traditional distinction between the two types of financial architecture. We develop an index that accounts for complementarity between financial markets and banking systems that has been hypothesized by Sylla (1998) and Song and Thakor (2010). The theoretical foundation of our empirical approach is the general equilibrium framework by Freixas and Rochet (1997). We validate the proposed index and the underlying theory of complementary using a random coefficient and a Generalized estimating equations (GEE).
    Keywords: Bank-based, market-based, complementarity, efficiency, financial structure.
    JEL: E42 G20
    Date: 2012–06
  74. By: David Cuberes (Department of Economics, The University of Sheffield); Marc Teignier (Department of Economics, University of Alicante)
    Abstract: The gaps between male and female outcomes and opportunities are present in several different dimensions and many countries, especially in developing ones. These gaps are likely to result in lower aggregate productivity because of an inefficient use of women potential. In this paper we examine the quantitative effects of gender gaps in entrepreneurship and labor force participation on aggregate income. To do the analysis, we first present a simple theoretical framework illustrating the negative impact of gender gaps on resource allocation and aggregate labor productivity. We then calibrate and simulate the model to study the quantitative effects of gender inequality. We show that gender gaps in entrepreneurship have important effects on aggregate productivity and labor force gender gaps on income per capita. Specifically, our model predicts that if all women are excluded from entrepreneurship, average output per worker drops by more than 10% and wages fall by even more, while if all women are excluded from the labor force, income per capita falls by almost 40%. Our cross-country analysis shows that gender gaps and income losses are quite similar across income groups but differ importantly across geographical regions, with a total income loss of 27% in Middle East and North Africa, a 23% loss in South Asia, and a loss of around 15% in the rest of the world.
    Keywords: gender inequality; entrepreneurial talent; factor allocation; aggregate productivity
    JEL: E2 O40
    Date: 2012
  75. By: Repullo, Rafael
    Abstract: We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements.
    Keywords: Banking regulation; Basel II; Capital requirements; Procyclicality
    JEL: E44 G21 G28
    Date: 2012–06
  76. By: Albert Mafusire; Zuzana Brixiova
    Abstract: The East African Community (EAC) economic integration has gained momentum recently, with the EAC countries officially aiming to adopt a single currency in the summer of 2012. This paper assesses empirically the readiness of the EAC countries for monetary union. First, structural similarity of the EAC countries is measured in terms of intra-industry trade and similarity of production. Second, the symmetry of shocks among the EAC members is examined with structural VAR. Both methods show that the shock synchronization in the EAC is low, albeit increasing, suggesting that the move to EAMU should not be rushed. The paper concludes with policies that would facilitate the EAC regional economic integration, including the eventual establishment of monetary union.
    Keywords: shock synchronization; structural VAR; regional integration; East Africa
    JEL: E32 F42 C53
    Date: 2012–03–01
  77. By: Claudia M. Buch
    Abstract: Europe is struggling with the resolution of the severe debt crisis and is in the process of overhauling its institutional set up. One element of the reform agenda is the European Stability Mechanism (ESM) which is intended to provide liquidity assistance to countries in case financial stability in the Euro Area is at stake. The ESM shall enter into force in July 2012, following ratification of the member states. It will have five instruments at its disposal: direct loans to countries, purchases of assets on the primary or secondary market, contingent credit lines, and funds for bank recapitalization. In this contribution, it is argued that establishing an explicit crisis resolution mechanism is in principle useful. However, the ESM is defined too broadly, and its scope should be limited to the provision of emergency liquidity assistance only under narrowly defined circumstances. Using the option to recapitalize banks might help addressing a potential debt overhang problem. Yet, the current framework has deficiencies in this regard and lacks the necessary backing by complementary institutional reforms, notably a regime for cross-border bank resolution.
    Keywords: Euro Area, ESM
    JEL: E61 E63 F55
    Date: 2012–06
  78. By: Sambit Bhattacharyya; Paul Collier
    Abstract: As poor countries deplete their natural resources, for increased consumption to be sustainable some of the revenues should be invested in other public assets. Further, since such countries typically have acute shortages of public capital, the finance from resource depletion is an opportunity for needed public investment. Using a new global panel dataset on public capital and resource rents covering the period 1970 to 2005 we find that, contrary to these expectations, resource rents significantly and substantially reduce the public capital stock. This is more direct evidence for a policy-based ‘resource curse’ than the conventional, indirect evidence from the relationships between resource endowments, growth and income. The adverse effect on public capital is mitigated by good economic and political institutions and worsened by GDP volatility and ethnic fractionalization. Rents from depleting resources have more adverse effects than those that are sustainable. Our main results are robust to a variety of controls, and to instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, as well as across different samples and data frequencies.
    Keywords: Natural resources, public capital
    JEL: E0 O1
    Date: 2012
  79. By: Frederick van der Ploeg; Anthony J Venables
    Abstract: Many countries have failed to use natural resource wealth to promote growth and development. They have been damaged by volatility of revenues, have failed to save a sufficiently high proportion of their resource revenues and failed to make high return investments to support diversification of their economies. This paper explores the reasons for these failures and discusses policies to improve performance.
    Keywords: resource curse, managing windfalls, fiscal rules, volatility, absorptive capacity, Dutch disease, public investment
    JEL: E60 F34 F35 F43 H21 H63 O11 Q33
    Date: 2012
  80. By: Bhattacharya, Jyotirmoy
    Abstract: We use daily data for a period of 219 days on the price of imported books from an online retailer based in India in order to study price stickiness and exchange-rate pass-through. The price changes in our sample are a mixture of idiosyncratic and synchronized price changes. Exchange rate pass-through is found to exist but is imperfect.
    Keywords: price stickiness; exchange rate pass-through; online retail
    JEL: E31
    Date: 2012–06–08
  81. By: Frederick van der Ploeg
    Abstract: A windfall in a developing economy with capital scarcity and investment adjustment costs facing a temporary windfall should be used to give more consumption to poorer present generations and to speed up development by ramping up public investment and paying off debt taking due account of the increasing inefficiency as investment gets ramped up. The optimal strategy requires negative genuine saving; the permanent income requires zero genuine saving. The optimal real consumption increments are smaller once one allows for absorption constraints resulting from Dutch disease and sluggish adjustment of -grown’ public capital.
    Keywords: optimal management of windfalls, economic development, capital scarcity, public capital, PIMI, investment adjustment costs, absorption constraints, genuine saving, Dutch disease
    JEL: E60 F34 F35 F43 H21 H63 O11 Q33
    Date: 2012
  82. By: Fernando Alvarez; Francesco Lippi
    Abstract: We consider an inventory model for a liquid asset where the per-period net expenditures have two components: one that is frequent and small and another that is infrequent and large. We give a theoretical characterization of the optimal management of liquid asset as well as of the implied observable statistics. We use our characterization to interpret some aspects of households’ currency management in Austria, as well as the management of demand deposits by a large sample of Italian investors.
    JEL: E41
    Date: 2012–06
  83. By: ZHOU, Ge
    Abstract: This paper discusses the existence of a bubble in the pricing of an asset that pays positive dividends. I show that rational bubbles can exist in a growing economy. The existence of bubbles depends on the relative magnitudes of risk aversion to consumption and to wealth. Furthermore, I examine how an exogenous shock in technology might trigger bubbles.
    Keywords: bubbles; the spirit of capitalism; growth
    JEL: E44 E20
    Date: 2012–06–11
  84. By: Francisco Callado (Departament d'Economia i Empresa, Universitat de Girona); Jana Hromcova (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Natalia Utrero (Departament d'Economia i Empresa, Universitat de Girona)
    Abstract: We study the relationship between openness and payment system development. In particular, we analyze how the existence of technology diffusion from a more developed country fosters a transformation of payment choice in a less developed country. We apply our analysis to Mexico. Economic growth in Mexico was not high enough to cause a transformation of payment choice observed in the data after 2001. We argue that the switch towards electronic payments can be attributed to openness and related payment technology spillovers from the US in the context of NAFTA.
    Keywords: cash, payments, openness, NAFTA
    JEL: E42 F43 O33 O54
    Date: 2012–06
  85. By: Paul Mizen; Serafeim Tsoukas
    Abstract: Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995-2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997-98 Asian crisis and the 2007-09 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times.
    Keywords: Financial constraints, External finance premium, Asian markets, Financial crises
    JEL: E22 F32 G32
    Date: 2012–05
  86. By: Dihai Wang (Fudan University); Gaowang Wang (Central University of Finance and Economics); Heng-fu Zou (Central University of Finance and Economics)
    Abstract: The paper shows that there do exist two kinds of steady state equilibria in the overlapping generations models with consumption and production loans, similar to the pure exchagne economies examined by Gale (1973). Furthermore, the local stability properties of these two (kinds of) steady states are also investigated.
    Keywords: Multiple steady state paths, Overlapping generations, Production loans
    JEL: E21 O41
    Date: 2012
  87. By: Ilene Grabel
    Abstract: <p> The current crisis is proving to be productive of institutional experimentation in the realm of financial architecture(s) in the developing world. The drive toward experimentation arose out of the East Asian financial crisis of 1997‐98, which provoked some developing countries to take steps to insulate themselves from future turbulence, IMF sanctions, and intrusions into policy space. I argue that there are diverse, unambiguous indications that the global financial architecture is now evolving in ways that contribute to a new institutional heterogeneity. In some policy and institutional innovations we see the emergence of financial architecture that is far less US- and IMF‐centric than has been the norm over the past several decades. Moreover, the growing economic might, self‐ confidence and assertiveness on the part of policymakers in some developing countries (and, at the same time, the attendant uncertainties surrounding the economies of the USA and Europe) is disrupting the traditional modes of financial governance and dispersing power across the global financial system. </p><p>In making these arguments it is important not to overstate the case. It is far too early to be certain that lasting, radical changes in the global financial architecture are afoot, or that the developments now underway are secure. Nor am I arguing that all regions of the developing world either enjoy the opportunity and/or have the means to participate in the process of reshaping the global financial architecture. Rather, my goal is more modest. I show here that today there are numerous opportunities for policy and institutional experimentation, and there are clear signs that these opportunities are being exploited in a variety of distinct ways. As compared to any other moment over the last several decades, we see clear signs of fissures, realignments and institutional changes in the structures of financial governance across the global South. I have elsewhere characterized this current state of affairs as one of “productive incoherence.” I use this term to capture the proliferation of institutional innovations and policy responses that have been given impetus by the crisis, and the ways in which the current crisis has started to erode the stifling neo‐liberal consensus that has secured and deepened neo‐liberalism across the developing world over the past several decades. </p><p>The productive incoherence of the current crisis is apparent in the emergence of a denser, multi-layered and more heterogeneous Southern financial architecture. The current crisis has induced a broadening of the mission and reach of some existing regional, sub‐regional, bilateral, and national financial institutions and arrangements, and has stimulated discussions of entirely new arrangements. In some limited cases these institutions and arrangements substitute for the Bretton Woods institutions. This substitution is most pronounced in cases when the Bretton Woods institutions have failed or have been slow to respond to calls for support, or when they have responded to such requests with conditionality that has been overly constraining of national policy space. But in most cases, the institutions and arrangements that I discuss here complement the global financial architecture. I will argue in what follows that recent changes in the Southern financial landscape increase its potential to promote financial stability and resilience, support the development of long-run productive capacities, advance aims consistent with human development, and expand national policy space. Moreover, the emergence of a vibrant Southern financial architecture is not simply additive. Rather it may prove transformative, insofar as the Bretton Woods institutions are pushed to respond to long‐standing concerns regarding their legitimacy, governance, and conditionalities.</p>
    JEL: E65 F53 O23
    Date: 2012

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