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on Macroeconomics |
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Issue of 2012‒07‒23
57 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Robert Amano; Tom Carter; Kevin Moran |
| Abstract: | The long-run relation between growth and inflation has not yet been studied in the context of nominal price and wage rigidities, despite the fact that these rigidities now figure prominently in workhorse macroeconomic models. We therefore integrate staggered price- and wage-setting into an endogenous growth framework. In this setting, growth and inflation are linked via the incentive to innovate. For standard calibrations, the linkage is strong: as trend inflation shifts from -5 to 5 percent, the range over which the economy’s steady-state growth rate varies spans 50 basis points, implying up to a 15 percent output differential after thirty years. Nominal wage rigidity plays a critical role in generating these results, and compounding of inflation’s growth effects implies large welfare losses. Endogenous growth thus proves a key channel via which inflation impacts New Keynesian economies. |
| Keywords: | Non-superneutrality, endogenous growth, welfare costs of inflation |
| JEL: | E31 E52 O31 O42 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1228&r=mac |
| By: | Meixing Dai |
| Abstract: | Using a New Keynesian framework, this paper shows that, under optimal discretion and optimal pre-commitment in a timeless perspective, imperfect transparency about the relative weight that the central bank assigns to output-gap stabilization generally reduces the average reaction of inflation to inflation shocks and the volatility of inflation, but increases these of the output gap in static and dynamic terms, and more so when inflation shocks are highly persistent. On balance, when inflation shocks are not excessively persistent, opacity could improve social welfare, more likely under pre-commitment than under discretion, if the weight assigned to output-gap stabilization is low. |
| Keywords: | Central bank transparency (opacity), macroeconomic volatility, inflation expectations dynamics, speed of convergence to the equilibrium. |
| JEL: | E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2012-08&r=mac |
| By: | Chen, Qianying (BOFIT); Funke, Michael (BOFIT); Paetz, Michael (BOFIT) |
| Abstract: | Monetary policy in mainland China differs from conventional central banking in several respects. The central bank regulates retail lending and deposit rates, influences the credit supply via window guidance, and, in recent years has even used the required reserve ratio as a tool for fine-tuning monetary policy. This paper develops a New Keynesian DSGE model to captures China’s unconventional monetary policy toolkit. We find that credit quotas are important as the interest-rate corridor distorts the efficient reactions of the economy. Moreover, for China’s central bankers the choice of a particular monetary policy tool or a the appropriate combination of instruments depends on the source of the shock. |
| Keywords: | DSGE models; monetary policy; China; macroprudential policy |
| JEL: | E42 E52 E58 |
| Date: | 2012–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_016&r=mac |
| By: | Oscar Pavlov (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | The standard one-sector real business cycle model is unable to generate expectations-driven fluctuations. The addition of countercyclical markups and modest investment adjustment costs offers an easy fix to this conundrum. The simulated model generates quantitatively realistic business cycles with news shocks accounting for over half of the variance of technology shocks. |
| Keywords: | expectations-driven business cycles, markups |
| JEL: | E32 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2012-02&r=mac |
| By: | Cristina Arellano; Yan Bai; Patrick J. Kehoe |
| Abstract: | During the recent U.S. financial crisis, the large decline in economic activity and credit was accompanied by a large increase in the dispersion of growth rates across firms. However, even though aggregate labor and output fell sharply during this period, labor productivity did not. These features motivate us to build a model in which increased volatility at the firm level generates a downturn but has little effect on labor productivity. In the model, hiring inputs is risky because financial frictions limit firms' ability to insure against shocks that occur between the time of production and the receipt of revenues. Hence, an increase in idiosyncratic volatility induces firms to reduce their inputs to reduce such risk. We find that our model can generate about 67% of the decline in output of the Great Recession of 2007–2009. |
| Keywords: | Recessions ; Credit |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:466&r=mac |
| By: | Kaszab, Lorant (Cardiff Business School) |
| Abstract: | This paper finds that labor tax cut can be an effective policy tool to mitigate the negative effects of a shock that made the zero lower bound on the nominal interest rate binding if the economy features rule-of-thumb households (besides Ricardian ones) and nominal rigidities in prices and wages. Our results are meant to contribute to the discussion initiated by Eggertsson (2010a) who found labor tax cut policy destabilising under zero nominal interest rate in a New Keynesian economy consisting only Ricardian consumers. |
| Keywords: | Fiscal policy; zero lower bound; labor tax cut; New Keynesian |
| JEL: | E52 E62 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2012/13&r=mac |
| By: | William T. Gavin; Benjamin D. Keen |
| Abstract: | We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap? The model answer to the first question is yes it can, but the effect is only temporary and probably not welfare enhancing. The answer to the second question is more complicated becasue it depends on policy. It also depends on whether it is the inflation rate or the real interest rate that will adjust over the longer run if the policy rate is held near zero for an extended period. We use the Fisher equation to analyze possible outcomes for situtations where the central bank has promised to keep the interest rate near zero for an extended period. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-019&r=mac |
| By: | Ansgar Belke; Andreas Freytag; Jonas Kei; Friedrich Schneider |
| Abstract: | Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between rules and inflation is relatively weak. In this paper, we first discuss likely causes for this weak link and present the argument that monetary commitment is not credible in itself. It can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment based on panel data covering five decades and 22 OECD countries confirms the crucial role of a credibly backed monetary commitment to price stability. |
| Keywords: | Credibility; central bank independence; price stability; monetary commitment |
| JEL: | E31 E50 E52 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0355&r=mac |
| By: | Ansgar Belke; Andreas Freytag; Jonas Keil; Friedrich Schneider |
| Abstract: | Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between rules and inflation is relatively weak. In this paper, we first discuss likely causes for this weak link and present the argument that monetary commitment is not credible in itself. It can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment based on panel data covering five decades and 22 OECD countries confirms the crucial role of a credibly backed monetary commitment to price stability. |
| Keywords: | credibility, central bank independence, price stability, monetary commitment |
| JEL: | E31 E50 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1225&r=mac |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | Milton Friedman's contributions to and influence on macroeconomics are discussed, beginning with his work on the consumption function and the demand for money, not to mention monetary history, which helped to undermine the post World War 2 "Keynesian" consensus in the area. His inter-related analyses of the dynamics of monetary policy's transmission mechanism, the case for a money growth rule, and the expectations augmented Phillips curve are then taken up, followed by a discussion of his influence not only directly on the monetarist policy experiments of the early 1980s, but also less directly on the regimes that underlay the "great moderation" that broke down in the crisis of 2007-2008. Friedman's seminal influence on the development of today's mainstream, stochastic, but essentially Walrasian, macroeconomic theory, rooted in his explicit deployment of econometric theory in the analysis of forward-looking maximising behaviour in 1957, and in his later work on the Phillips curve, is also assessed in the light of his own preference, which he shared with Keynes, for a pragmatic Marshallian approach to economic theorising. |
| Keywords: | Friedman; macroeconomics; Keynes; Keynesianism; monetarism; money; inflation; cycle; depression; monetary policy; consumption |
| JEL: | B22 E20 E30 E40 E50 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20122&r=mac |
| By: | Cogan, John F.; Taylor, John B.; Wieland, Volker; Wolters, Maik H |
| Abstract: | In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the initial model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. |
| Keywords: | budget deficit; fiscal consolidation strategy; fiscal policy; government debt; U.S. budget |
| JEL: | E27 E62 H30 H63 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9041&r=mac |
| By: | Jang-Ting Guo (Department of Economics, University of California-Riverside); Anca-Ioana Sirbu (Department of Economics, University of California-Riverside); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | We show that a one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale is able to generate qualitatively as well as quantitatively realistic aggregate fluctuations driven by news shocks to future consumption demand. In sharp contrast to many studies in the existing expectations-driven business cycle literature, our results do not rely on non-separable preferences or investment adjustment costs. |
| Keywords: | News Shocks; Aggregate Demand; Business Cycles |
| JEL: | E32 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2012-01&r=mac |
| By: | Makram El-Shagi; Sebastian Giesen; L. J. Kelly |
| Abstract: | While the long-run relation between money and inflation as predicted by the quantity theory is well established, empirical studies of the short-run adjustment process have been inconclusive at best. The literature regarding the validity of the quantity theory within a given economy is mixed. Previous research has found support for quantity theory within a given economy by combining the P-Star, the structural VAR and the monetary aggregation literature. However, these models lack precise modelling of the short-run dynamics by ignoring interest rates as the main policy instrument. Contrarily, most New Keynesian approaches, while excellently modeling the short-run dynamics transmitted through interest rates, ignore the role of money and thus the potential mid-and long-run effects of monetary policy. We propose a parsimonious and fairly unrestrictive econometric model that allows a detailed look into the dynamics of a monetary policy shock by accounting for changes in economic equilibria, such as potential output and money demand, in a framework that allows for both monetarist and New Keynesian transmission mechanisms, while also considering the Barnett critique. While we confirm most New Keynesian findings concerning the short-run dynamics, we also find strong evidence for a substantial role of the quantity of money for price movements. |
| Keywords: | monetary policy, P-Star, structural identification, Barnett critique |
| JEL: | E31 E52 C32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:6-12&r=mac |
| By: | Ekaterina Ponomareva (Gaidar Institute for Economic Policy) |
| Abstract: | The standard way to obtain the equation of New Keynesian Phillips curve is to linearize the equilibrium conditions of the Calvo model around a steady state with zero inflation. This approach is appropriate only in the low-inflation economics. This paper considers New Keynesian Phillips curve derived by linearizing the same equilibrium conditions around the time varying inflation trend. This model explains observed inflation persistence in different way and gives the different view on the ratio of agents with backward- and forward-looking expectations. In the paper estimated New Keynesian Phillips curve with time varying coefficients. This model shows that in Russia exist at least two sources of the inflation persistence. |
| Keywords: | : New Keynesian Phillips Curve, backward- and forward-looking expectations, inflation persistence, Bayesian VAR |
| JEL: | E12 E31 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gai:wpaper:0016&r=mac |
| By: | Lancastle, Neil |
| Abstract: | This paper asks why modern finance theory and the efficient market hypothesis have failed to explain long-term carry trades; persistent asset bubbles or zero lower bounds; and financial crises. It extends Keen (Solving the Paradox of Monetary Profits, 2010) and the Theory of the Monetary Circuit to give a mathematical representation of Minsky's Financial Instability Hypothesis. In the extended model, the central bank rate is not neutral and the path is non-ergodic. The extended circuit has survival constraints that include a living wage, a zero interest rate and an upper interest rate. Inflation is everywhere. The possibility of a high interest rate, hedge economy emerges, where powerful banks invest surplus loan interest. With speculation, banks lobby to enter investment markets and the system is precariously liquid/illiquid. The paradox of a Ponzi economy, where loans never get repaid, is that private banks must speculate to increase reserves and rely on systemic crises to rebuild their balance sheets. Estimating model parameters for the US gives a scissor-graph like the The Financial Crisis Inquiry Commission (The Financial Crisis Inquiry Report, 2011) with other nuances, namely i) a heart attack in 1973-1974 that corresponds to the collapse of Bretton Woods ii) an accelerated decoupling of household wages and loans after the repeal of Glass-Steagall. Simulating bank bailouts, household bailouts and a Keynesian boost suggests that bank bailouts are the least effective intervention, with downward pressure on wages and household spending. Bailing out hedge households is a form of monetary contraction, and boosting hedge business loans is a form of monetary expansion. The appropriate policy choice would seem to depend on the external balance and inflation concerns. The paper concludes that, with international Ponzi sectors, viable resolution mechanisms include reparations (dL < 0), turning Ponzi debt into equity or junk debt (dL → ∞), household bailouts and a Keynesian boost. -- |
| Keywords: | circuit theory,macroeconomic simulation,carry trade,banking regulation,interest rate policy |
| JEL: | E10 E27 E43 E58 E60 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201230&r=mac |
| By: | Esteban Perez Caldentey; Matias Vernengo |
| Abstract: | Conventional wisdom about the business cycle in Latin America assumes that monetary shocks cause deviations from the optimal path, and that the triggering factor in the cycle is excess credit and liquidity. Further, in this view the origin of the contraction is ultimately related to the excesses during the expansion. For that reason, it follows that avoiding the worst conditions during the bust entails applying restrictive economic policies during the expansion, including restrictive fiscal and monetary policies. In this paper we develop an alternative approach that suggests that fiscal restraint may not have a significant impact in reducing the risks of a crisis, and that excessive fiscal conservatism might actually exacerbate problems. In the case of Central America, the efforts to reduce fiscal imbalances, in conjunction with the persistent current account deficits, implied that financial inflows, with remittances being particularly important in some cases, allowed for an expansion of a private spending boom that proved unsustainable once the Great Recession led to a sharp fall in external funds. In the case of South America, the commodity boom created conditions for growth without hitting the external constraint. Fiscal restraint in the South American context has resulted, in some cases, in lower rates of growth than what otherwise would have been possible as a result of the absence of an external constraint. Yet the lower reliance on external funds made South American countries less vulnerable to the external shock waves of the Great Recession than Central American economies. |
| Keywords: | Business Fluctuations; Great Recession; Latin America |
| JEL: | E32 E65 O54 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_728&r=mac |
| By: | Fujisaki, Seiya |
| Abstract: | We analyze a relation between interest rate controls and equilibrium determinacy using a two-country model featuring traded and non-traded goods. In addition, parameters of preference and production may differ between the two countries. We find that macroeconomic stability strongly depends on such heterogeneity including monetary policy, and that it is easier to generate determinate equilibrium under liberalization of the economy. |
| Keywords: | heterogeneity; Taylor rule; open economy; non-traded goods; equilibrium determinacy |
| JEL: | E52 F41 |
| Date: | 2012–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40023&r=mac |
| By: | Michaillat, Pascal |
| Abstract: | This paper proposes a dynamic stochastic general equilibrium model in which the government-consumption multiplier doubles when unemployment rises from 5% to 8%. Theoretically, such countercyclicality arises because of a nonlinearity, namely, that labor supply is convex in a labor market tightness-employment diagram. In the model, as government consumption increases, public employment rises, stimulating labor demand. Equilibrium tightness increases, which reduces private employment and partially offsets the increase in public employment. Since labor supply is convex, the increase in tightness is small in recessions but large in expansions. Hence, government consumption reduces unemployment much more in recessions than in expansions. |
| Keywords: | business cycle; multiplier; unemployment |
| JEL: | E24 E32 E62 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9052&r=mac |
| By: | Tomasz Łyziak (National Bank of Poland, Economic Institute); Oksana Demchuk (National Bank of Poland, Economic Institute); Jan Przystupa (National Bank of Poland, Economic Institute); Anna Sznajderska (National Bank of Poland, Economic Institute); Ewa Wróbel (National Bank of Poland, Economic Institute) |
| Abstract: | In the light of the results of empirical studies presented in the Report and the literature available45 it may be concluded that the form of the monetary policy transmission mechanism in Poland is consistent with structural features of the Polish economy and coincides with those characteristic of more developed European economies, e.g. the euro area. Although the financial intermediation system is less developed than in the euro area, Poland, like the new EU Member States is characterised by a lower degree of rigidity and more frequent price adjustments (as a result of a relatively higher and more volatile inflation), due to which there exist no grounds for stating that the transmission mechanism is weaker in these countries than in the euro area countries. The characteristics of the monetary policy transmission mechanism in Poland, which changed considerably in the transition period along with the development of the financial system and changes in the monetary policy, displayed symptoms of stabilisation in 2004/2005-2007. Poland’s accession to the European Union, resulting in a major reduction of macroeconomic uncertainty, was one of the factors that contributed to this process. The monetary policy transmission mechanism was, however, disturbed by the financial crisis. Its impact on the transmission mechanism remains strong, which is demonstrated notably by the analysis of the effectiveness of transmission mechanism channels. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:116&r=mac |
| By: | Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Perri, Fabrizio |
| Abstract: | We study the effect of financial integration on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral financial linkages are associated with more divergent output cycles. This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the change in the relation between integration and synchronization can be driven by changes in the nature of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis. |
| Keywords: | co-movement; crisis; financial integration; international business cycles |
| JEL: | E32 F15 F36 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9044&r=mac |
| By: | Shouyong Shi |
| Abstract: | I construct a tractable model to evaluate the liquidity shock hypothesis that exogenous shocks to equity market liquidity are an important cause of the business cycle. After calibrating the model, I find that a large and persistent negative liquidity shock can generate large drops in investment, employment and output. Contrary to the hypothesis, however, a negative liquidity shock generates an equity price boom. This counterfactual response of equity price is robust, provided that a negative liquidity shock tightens firms' financing constraint on investment. Also, I demonstrate that the same counterfactual response of equity price arises when there is a financial shock to a firm's collateral constraint on borrowing. For equity price to fall as it typically does in a recession, the negative liquidity/financial shock must be accompanied or caused by other changes that relax firms' financing constraint on investment. I discuss some candidates of these concurrent changes. |
| Keywords: | Liquidity; Assets; Business cycles; Collateral |
| JEL: | E32 E5 G1 |
| Date: | 2012–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-459&r=mac |
| By: | Quamrul Ashraf; Boris Gershman; Peter Howitt |
| Abstract: | We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality. |
| JEL: | C63 E00 E31 E50 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18225&r=mac |
| By: | Christian Hott; Terhi Jokipii |
| Abstract: | In this paper we assess whether persistently too low interest rates can cause housing bubbles. For a sample of 14 OECD countries, we calculate the deviations of house prices from their (theoretically implied) fundamental value and define them as bubbles. We then estimate the impact that a deviation of short term interest rates from the Taylor-implied interest rates have on house price bubbles. We additionally assess whether interest rates that have remained low for a longer period of time have a greater impact on house price overvaluation. Our results indicate that there is a strong link between low interest rates and housing bubbles. This impact is especially strong when interest rates are "too low for too long". We argue that, by ensuring that rates do not deviate too far from Taylorimplied rates, central banks could lean against house price fluctuations without considering house price developments directly. If this is not possible, e.g. because a single monetary policy is confronted with a very heterogenous economic development within the currency area, alternative counter cyclical measures have to be considered. |
| Keywords: | House Prices, Bubbles, Interest Rates, Taylor Rule |
| JEL: | E52 G12 R21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2012-07&r=mac |
| By: | Sahoo, Ganeswar |
| Abstract: | This paper addresses the perspective of Hayek’s doctrine on monetary arrangements in the economy and his favorable argument for an international central bank over national central bank. I also discussed Hayek’s view on free banking (i.e. for the free issue of bank notes) that would enable the banks to provide more and cheaper credit. Furthermore, Hayek comes up with an intellectual debate on “rational choice” of monetary arrangements whether the commercial banks should have the right to issue bank notes (demand for free banking) which can be redeemable in the established national gold or silver currency or an international central bank. This paper focuses on Hayek’s overall philosophy on international money mechanism and his intellectual debate of rational choice between the two arrangements – free banking or an international central bank and his concerned over unstable arrangements in money mechanism,which, he believes, profoundly affects economic and social conditions of people and government. Therefore, to reach the conclusion, I outlined Hayek’s perspectives on central bank and government, then international gold standard, and finally, his choice between free banking and an international central banking which is central theme of this paper. |
| Keywords: | Money; Banking; Central Bank; Free Banking; Monetary Nationalism |
| JEL: | E31 E51 B22 E44 E42 E58 E52 E41 B53 |
| Date: | 2012–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39920&r=mac |
| By: | Ansgar Belke; Joscha Beckmann; Florian Verheyen |
| Abstract: | This study puts the monetary transmission process in the eurozone between 2003 and 2011 under closer scrutiny. For this purpose, we investigate the interest rate pass-through from money market to various loan rates for up to twelve countries of the European Monetary Union. Applying different cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). Based on these findings, we allow for different nonlinear patterns for shortrun dynamics of loan rates. Our investigation contributes to the literature in mainly two ways. On the one hand, we use fully harmonized data stemming from the ECB’s MFI interest rate statistics. In addition, we consider smooth transition models as an extension of conventional threshold models. Our results point to considerable differences in the size of the pass-through with respect to either different loan rates or countries. In the majority of cases, the pass-through is incomplete and the dynamics of loans adjustment are different for reductions and hikes of money market rates. |
| Keywords: | Interest rate pass-through; EMU; cointegration; ARDL bounds testing; smooth transition models |
| JEL: | E43 E52 F36 G21 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0350&r=mac |
| By: | Ansgar Belke; Joscha Beckmann; Florian Verheyen |
| Abstract: | This study puts the monetary transmission process in the eurozone between 2003 and 2011 under closer scrutiny. For this purpose, we investigate the interest rate pass-through from money market to various loan rates for up to twelve countries of the European Monetary Union. Applying different cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). Based on these findings, we allow for different nonlinear patterns for short-run dynamics of loan rates. Our investigation contributes to the literature in mainly two ways. On the one hand, we use fully harmonized data stemming from the ECB's MFI interest rate statistics. In addition, we consider smooth transition models as an extension of conventional threshold models. Our results point to considerable differences in the size of the pass-through with respect to either different loan rates or countries. In the majority of cases, the pass-through is incomplete and the dynamics of loans adjustment are different for reductions and hikes of money market rates. |
| Keywords: | interest rate pass-through, EMU, cointegration, ARDL bounds testing, smooth transition models |
| JEL: | E43 E52 F36 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1223&r=mac |
| By: | Quamrul Ashraf; Boris Gershman; Peter Howitt |
| Abstract: | We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2012-4&r=mac |
| By: | Zhiguo He; Péter Kondor |
| Abstract: | We develop a dynamic model of trading and investment with limited aggregate resources to study investment cycles. Unverifiable idiosyncratic investment opportunities imply market prices to play a role of rent distribution, distorting private investment incentives from a social point of view. This distortion is price-dependent, leading to two-sided inefficient investment cycles—too much investment in booms with high prices and too little in recessions with low prices. Interventions targeting only the underinvestment in recessions might make all agents worse off. We connect our results to both industry specific and aggregate boom-and-bust patterns. |
| JEL: | E22 E32 E61 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18217&r=mac |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | Although a number of economists have tried to revive the idea of nominal GDP targeting since the financial market collapse of 2008, relatively little has been offered in terms of a specific framework for how this objective might be achieved in practice. In this paper we adopt a strategy outlined by Holbrook Working (1923) and employed, with only minor modifications, by Hallman, et al. (1991) in the P-Star model. We then present a series of theoretical and empirical results to show that Divisia monetary aggregates can be controlled by the Federal Reserve and that the trend velocities of these aggregates, by virtue of the properties of superlative indexes, exhibit the stability required to make long-run targeting feasible. |
| Keywords: | nominal GDP targeting, Holbrook Working, P-Star |
| JEL: | E58 E52 E51 |
| Date: | 2012–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:802&r=mac |
| By: | Rodolfo G. Campos; Ilina Reggio; Dionisio García-Píriz |
| Abstract: | The Consumer Expenditure Survey (CEX) offers the most comprehensive consumption data at the consumer level for the United States. Several previous studies have shown a large gap between per-capita consumption from the CEX and the aggregate Personal Consumption Expenditure (PCE) series. While previous research has focused on consumption levels, we focus on the cyclical properties of consumption. We find that the cyclical properties of consumption expenditure data from the two sources are quantitatively very different. This result calls for caution when using CEX data for business cycle research. |
| Keywords: | Consumption, Business cycles, Consumer expenditure survey, Personal consumption expenditure |
| JEL: | E01 E21 E32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1220&r=mac |
| By: | Etienne Gagnon; David López-Salido; Nicolas Vincent |
| Abstract: | Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level. |
| JEL: | E31 E32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18213&r=mac |
| By: | Real Arai (Graduate School of Social Sciences, Hiroshima University); Junji Ueda (Policy Research Institute, the 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 |
| URL: | http://d.repec.org/n?u=RePEc:mof:wpaper:ron235&r=mac |
| By: | Simona E. Cociuba (University of Western Ontario); Malik Shukayev (Bank of Canada); Alexander Ueberfeldt (Bank of Canada) |
| Abstract: | A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model where interest rate policy affects risk taking by changing the amount of safe bonds available as collateral for repo transactions. Given properly priced collateral, lower than optimal interest rates reduce risk taking. However, if intermediaries can augment their collateral by issuing assets whose risk is underestimated by rating agencies, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions. |
| Keywords: | financial intermediation; risk taking; optimal interest rate policy; capital regulation |
| JEL: | E44 E52 G28 D53 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20121&r=mac |
| By: | Kazimierz Łaski (retired professor of University of Linz, research consultant of the Vienna Institute for International Economic Studies); Jerzy Osiatyński (Institute of Economics of the Polish Academy of Sciences); Jolanta Zięba (National Bank of Poland, Economic Institute) |
| Abstract: | First, the concept of public expenditure multiplier is redefined to allow for import intensity of exports, and its value is estimated for Poland and the Czech Republic in 2008–2009. Next, on the basis of effective demand model of economic dynamics, there follows a comparative analysis of GDP dynamics in the two countries in 2008-09 and of the factors that in 2009 made the rate of GDP growth positive in Poland and negative in Czech Republic. In 2009 both countries experienced the rate of exchange depreciation which, however, was significantly greater in Poland, as was the rise of rate of private savings, which negatively affects the GDP growth rate. On the other hand, fiscal expansion was slightly greater in Czech Republic than in Poland. What factors then helped to avoid the GDP growth to decline in 2009 in Poland but not in the Czech Republic? The key difference in the GDP generation was that in the latter country net exports were too small to offset the rate of growth of private savings, while in Poland improvement in the trade balance, heavily negative in earlier years, together with strong fiscal expansion outbalanced the effect of much greater than in the Czech Republic rise in the rate of private savings. The derived results are strongly sensitive to variations in such parameters of our model as sectoral import intensities and private propensity to save, which may well change with changes in growth of GDP and its components. This does not undermine theoretical foundations of our analysis, yet it limits validity of any conclusions with respect to hypothetical future impact of fiscal expansion or fiscal contraction. Nevertheless, it appears that maintaining a positive rate of GDP growth may require that the rate of private savings no longer continues to rise (i.e. that the average private propensity to consume no longer falls) at least until the dynamics of private investment and/or exports do not recover. |
| Keywords: | macroeconomics, effective demand principle, multiplier, stabilization policy |
| JEL: | E0 E12 E20 E63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:117&r=mac |
| By: | Per Krusell; Leena Rudanko |
| Abstract: | We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. We take a benevolent view of the union, assuming it to care equally about employed and unemployed workers, to treat identical workers in identical jobs the same, as well as to be fully rational, taking job creation into account when making its wage demands. Under these assumptions, if the union is able to fully commit to future wages, it achieves an efficient level of long-run unemployment. In the short run, however, the union raises current wages above the efficient level, in order to appropriate surpluses from firms with existing matches. The union wage policy is thus time-inconsistent. Without commitment, and in a Markov-perfect equilibrium, not only is unemployment well above its efficient level, but the union wage also exhibits endogenous real stickiness, which leads to increased volatility in the labor market. We consider extensions to partial unionization and collective bargaining between the union and an employers’ association. |
| JEL: | E02 E24 J51 J64 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18218&r=mac |
| By: | J.E. Bosca; Rafael Domenech; J. Ferri |
| Abstract: | We use a small open economy general equilibrium model to analyse the effects of a fiscal devaluation in EMU. The model has been calibrated for the Spanish economy, that is a good example of the advantages of a change in the tax mix, given that its tax system shows a positive bias in the ratio of social security contributions over consumption taxes. The preliminary empirical evidence for European countries shows that this bias was negatively correlated with the current account balance in the expansionary years previous to the 2009 crisis, where many EMU members accumulated large external imbalances. Our simulations results point to positive significant effects of a fiscal devaluation on GDP and employment similar to the ones that could be obtained with a exchange rate devaluation. However, although the effects in terms of GDP and employment are similar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there is an improvement in net exports, but the effects on domestic and external demand are quite different. |
| Keywords: | tax mix, fiscal devaluation, nominal devaluation |
| JEL: | E62 E47 F31 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1211&r=mac |
| By: | Capuano, Carlo; Purificato, Francesco |
| Abstract: | The paper analyzes how organized crime affects the economy through its impact on the effective demand, following the Neo-Kaleckian approach. From this perspective, the presence of organized crime, on the one hand, tends to reduce the effective demand draining resources through extortion, bribery of public officials and encouraging consumption of criminal goods (illegal goods and goods produced in the underground economy), on the other hand, tends to increase the effective demand using the proceeds of criminal activity in the purchase of legal consumption and investment goods. The model highlights the opposing action of these two forces and identifies the conditions for a negative impact on the degree of capacity utilization and the growth rate. For the latter, these conditions tend to be more stringent, due to the direct impact of organized crime on investment decisions. Overall, the operation of organized crime tends to negatively influence the economic activity to the extent that the income drained from the legal sector is not reused into the same sector. |
| Keywords: | Neo-Kaleckian; macroeconomics; organized crime; illegal or illicit markets |
| JEL: | E12 E2 O17 K4 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40077&r=mac |
| By: | Jaime Luque; Abderrahim Taamouti |
| Abstract: | The message in this note is that the adoption of the Euro has changed the effect of Eurozone countries’ economic fundamentals on per capital Gross Domestic Product (GDPpc) growth rate volatility (economic uncertainty). Increments in government debt significantly decreased GDPpc growth rate volatility before the Euro, but increased it after. The other fundamentals exhibit less structural change on economic uncertainty. These stylized facts are robust to different measures of GDPpc growth rate volatility and to the exclusion of the recent financial crisis period, and are specific to the Eurozone countries in Europe. |
| Keywords: | GDPpc growth rate volatility, Euro, Eurozone countries, Economic uncertainty, Government debt, Economic fundamentals |
| JEL: | E02 E52 F00 F02 F15 F33 F34 F36 F42 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1221&r=mac |
| By: | Marianna Riggi (Bank of Italy) |
| Abstract: | I consider an economy growing along the balanced growth path that is hit by an adverse shock to its capital accumulation process. The model integrates efficiency wages due to imperfect monitoring of the quality of labour in a search and matching framework with methods of dynamic general equilibrium analysis. I show that, depending on the firms' abilities to assess workers' performance, the discipline device role of unemployment may account for sharp declines in employment and jobless recoveries driven by exceptional increases in the work effort of employees. The model also explains why rigid real wages may prevail in equilibrium: the large movements in unemployment are indeed associated with real wage rigidity, which is generated endogenously by efficiency wages. |
| Keywords: | jobless recoveries, efficiency wages, productivity, capital depreciation, real wage rigidities. |
| JEL: | E24 E32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_871_12&r=mac |
| By: | Wong, Shirly Siew-Ling; Puah, Chin-Hong; Abu Mansor, Shazali; Liew , Venus Khim-Sen |
| Abstract: | The initiative to capture the information content behind the rise and fall of the business cycle has popularized the study of leading indicators. Many of the foreign experiences shared by economically advanced countries reveal that the leading indicator approach works well as a short-term forecasting tool. Thus, exploring an indicator-based forecasting tool for business cycle analysis and economic risk monitoring would provide insight into the Malaysian economy as well as that of other emerging countries. By extending the ideology of indicator construction from the US National Bureau of Economic Research (NBER), the present study demonstrated the strong potential of the leading indicator approach to be a good gauge of the business cycle movement in addition to being a practical and functional early warning indicator for economic vulnerability prediction. |
| Keywords: | Business Cycle; Composite Leading Indicator; Early Warning Indicator |
| JEL: | E32 C82 E37 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39944&r=mac |
| By: | Rodríguez González, Guillermo |
| Abstract: | The purpose of this paper is to review the phenomenon has been called Dutch disease in the light of Austrian business cycle theory. To this end we will see the history of Austrian business cycle theory from its roots in Wicksell ([1898] 2000) to the extension of the theory in open economies with fiat currencies in Cachanosky (2012). We will review the concept of Dutch disease and the positions of its nature negative, neutral or positive in terms of growth, along with the problem of real exchange rate and its possible relationship with the long term growth, and taking into account the relevant differences between the economies that emit fiat currencies used as reserves and economies that import those currencies as reserves to issue their money, finally we postulate that the Dutch disease, as the economic malaise, it´s simply a variant specific and peripheral, of the distortions in the inter-temporary structure of capital by bad investments, extensively studied in the Austrian business cycle theory. |
| Keywords: | Enfermedad holandesa; macroeconomía del capital; teoría austriaca del ciclo; dinero fiduciario |
| JEL: | E50 F31 B53 |
| Date: | 2012–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39986&r=mac |
| By: | Paolo Angelini (Bank of Italy); Andrea Gerali (Bank of Italy) |
| Abstract: | We use a dynamic general equilibrium model of the euro area to study banks’ possible responses to the stricter capital requirements called for by the Basel III reform package. We show that the effects on output depend, inter alia, on the strategy banks adopt in response to the reform, and that banks tend to prefer some strategies over others. Specifically, an increase in loan spreads minimizes banks’ costs and induces the sharpest contraction in real activity and investment, in the immediate as well as long term. A recapitalization, or restrictions on dividends, have more modest effects on output, but are less likely to be preferred by banks. We also find that the undesired macroeconomic effects of the reform during the transition phase are significantly mitigated if the reform is announced well ahead of its actual implementation – as was done for the Basel III package. |
| Keywords: | Basel III, capital requirements, macroprudential policy, banks. |
| JEL: | E44 E58 E61 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_876_12&r=mac |
| By: | Osmani Teixeira de Carvalho Guillény; João Victor Isslerz; Afonso Arinos de Mello Franco-Neto |
| Abstract: | Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle fluctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major differences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values -- ß=0.985, and f=5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% -- the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle fluctuations are respectively 0.63% and 1.17% of per-capita consumption. The same figures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:284&r=mac |
| By: | Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Ciampoli, Nicola (Associazione Italiana per la Cultura della Cooperazione e del Non Profit) |
| Abstract: | We investigate the finance-growth nexus before and around the global financial crisis using for the first time OTC derivative data in growth estimates. Beyond the most recent Wacthel and Rousseau (2010) evidence which documents the interruption of the positive finance-growth relationship after 1989, we show that bank assets contribute indeed negatively, while OTC derivative positively or insignificantly with a much smaller effect in magnitude. At the same time the impact of the crisis is captured by a very strong negative effect of year dummies around the event. Our findings and their discussion aim to provide insights for policy measures aimed at tackling the crisis, disentangling positive from negative effects of derivatives and bank activity on the real economy and restoring the traditional positive link between finance and growth. |
| Keywords: | finance and growth; OTC derivatives; banking; global financial crisis |
| JEL: | E44 G10 O40 |
| Date: | 2012–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:aiccon:2012_110&r=mac |
| By: | Korte, Niko (BOFIT) |
| Abstract: | This study examines the forecasting power of confidence indicators for the Russian economy. ARX models are fitted to the six confidence or composite indicators, which were then compared to a simple benchmark AR-model. The study used the output of the five main branches as the reference series. Empirical evidence suggests that confidence indicators do have forecasting power. The power is strongly influenced by the way which the indicator is constructed from the component series. The HSBC Purchasing Managers' Index (PMI), the OECD Composite Leading Indicator (CLI) and the OECD Business Confidence Indicator (BCI) were the best performers in terms of both the information criterion and forecasting accuracy. |
| Keywords: | confidence indicators; forecasting; Russia |
| JEL: | E37 P27 |
| Date: | 2012–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_015&r=mac |
| By: | Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel |
| Abstract: | We investigate how "news" affected domestic interest spreads vis-à-vis Germany and how it propagated to other countries during the recent crisis period, thereby distinguishing between the so-called GIIPS countries and other European countries. We make original use of the Eurointelligence newsflash to construct news variables based on the amount of news that is released on a country on a given date. We find that more news on average raises the domestic interest spread of GIIPS countries since September 2009. In addition, we find that it leads to an increase in the interest spreads of other GIIPS countries. The magnitude of the news effects is related to cross-border bank holdings. A split of news into bad and good news shows that the upward pressure on domestic and foreign interest spreads is driven by bad news. We also find spill-overs of bad news from GIIPS countries onto non-GIIPS countries. However, the magnitude of these spill-overs is substantially smaller than that to other GIIPS countries. |
| Keywords: | co-movement; Euro-intelligence; GIIPS; interest rate spreads; new variables; non-GIIPS; spill-overs |
| JEL: | E62 G01 G12 G15 H61 H62 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9043&r=mac |
| By: | Nestor Gandelman; Alejandro Rasteletti |
| Abstract: | This paper examines the effect of bank credit on employment formalization in Uruguay. Using a difference-in-differences methodology proposed by Cata~o, Page´s and Rosales (2011), the paper finds that financial deepening decreases informality, especially in more financially dependent sectors. The effect is additionally found to be greater for women and younger workers. Despite the severe economic crisis and a sharp contraction of bank credit experienced by the economy in the period of analysis, no evidence is found that the effect of bank credit on employment formality has changed over time. |
| JEL: | E26 G21 O16 O4 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4778&r=mac |
| By: | Diego Restuccia; Guillaume Vandenbroucke |
| Abstract: | An average person born in the United States in the second half of the nineteenth century completed 7 years of schooling and spent 58 hours a week working in the market. By contrast, an average person born at the end of the twentieth century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30 percent. What explains these trends? We consider a model of human capital and labor supply to quantitatively assess the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work. We find that the observed increase in wages and life expectancy account for 80 percent of the increase in years of schooling and 88 percent of the reduction in hours of work. Rising wages alone account for 75 percent of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25 percent of the increase in schooling and almost none of the decrease in hours of work. In addition, we show that the mechanism emphasized in the model is consistent with other trends at a more disaggregate level such as the reduction in the racial gap in schooling and the decrease in the cross-sectional dispersion in hours. |
| Keywords: | Schooling, hours of work, productivity, life expectancy, trends, United States |
| JEL: | E1 I25 J11 O4 |
| Date: | 2012–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-460&r=mac |
| By: | Olaf Posch (Aarhus University and CREATES); Andreas Schrimpf (Bank for International Settlements and CREATES) |
| Abstract: | This paper shows that the consumption-based asset pricing model (C-CAPM) with low-probability disaster risk rationalizes large pricing errors, i.e. Euler equation errors. This result is remarkable, since Lettau and Ludvigson (2009) show that leading asset pricing models cannot explain sizeable pricing errors in the C-CAPM. We also show (analytically and in a Monte Carlo study) that implausible estimates of risk aversion and time preference are not puzzling in this framework and emerge as a result of rational pricing errors. While this bias essentially removes the pricing error in the traditional endowment economy, a production economy with stochastically changing investment opportunities generates large and persistent empirical pricing errors. |
| Keywords: | Euler equation errors, Rare disasters, C-CAPM |
| JEL: | E21 G12 O41 |
| Date: | 2012–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-32&r=mac |
| By: | Giorgio Albareto (Bank of Italy); Paolo Finaldi Russo (Bank of Italy) |
| Abstract: | This paper analyzes firms’ difficulties in accessing credit before and during the crisis, by focusing on two of their characteristics: financial fragility and growth prospects. Our econometric analysis indicates that fragile financial conditions were associated with a much higher than average probability of rationing, both before and during the crisis. High rates of growth in sales and investments, in value added per employee and in the propensity to export – indicators presumably linked to growth prospects – favoured access to credit in the period leading up to the financial crisis; during the crisis, instead, credit rationing was more widespread and less related to firms’ potential growth. Lending relationships facilitated access to the credit market, especially for firms with better growth prospects; this result is consistent with the hypothesis that the banks which are more involved in firms’ financing have better information and stronger incentives to use it. |
| Keywords: | credit rationing, relationship lending, financial fragility, growth prospects |
| JEL: | E51 G21 G32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_127_12&r=mac |
| By: | Guillermo A. Calvo; Alejandro Izquierdo; Rudy Loo-Kung |
| Abstract: | This paper addresses the issue of the optimal stock of international reserves in terms of a statistical model in which reserves affect both the probability of a Sudden Stop–as well as associated output costs–by reducing the balance-sheet effects of liability dollarization. Optimal reserves are derived under the assumption that central bankers conservatively choose reserves by balancing the expected cost of a Sudden Stop against the opportunity cost of holding reserves. Results are obtained without using calibration to match observed reserves levels, providing no a priori reason for our concept of optimal reserves to be in line with observed holdings. Remarkably, however, observed reserves on the eve of the global financial crisis were–on average–not distant from optimal reserves as derived in this model, indicating that reserve over-accumulation in Emerging Markets was not obvious. However, heterogeneity prevailed across regions: from a precautionary standpoint, Latin America was closest to model-based optimal levels, while reserves in Eastern Europe lay below optimal levels, and those in Asia lay above. Nonetheless, there are other motives for reserve accumulation: we find that differences between observed reserves and precautionary-motive optimal reserves are partly explained by the perceived presence of a lender of last resort, or characteristics such as being a large oil producer. However, to a first approximation, there is no clear evidence supporting the so-called neo-mercantilist motive for reserve accumulation. |
| JEL: | E42 E58 F15 F31 F32 F33 F41 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18219&r=mac |
| By: | Julian Caballero |
| Abstract: | This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one standard deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Thus, a bonanza raises the likelihood of a crisis from an unconditional probability of 4. 4 percent to 12 percent. Larger windfalls of capital (two-s. d. bonanzas) increase the odds of a crisis by eight times. The joint occurrence of a bonanza and a lending boom raises these odds even more. Decomposing flows into FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom. Thus, windfalls in all types of flows exacerbate the deleterious effects of credit. However, surges in portfolio-equity flows seem to have an independent effect, even in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital. |
| JEL: | E44 E51 F21 F32 F34 G01 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4775&r=mac |
| By: | Collignon, Stefan (Asian Development Bank Institute) |
| Abstract: | This paper gives an overview of the causes of the European debt crisis and the consequences for the external relations. It finds that political mishandling has increased uncertainty, which has contributed to a tendency for the euro to become weaker. |
| Keywords: | europe debt crisis; euro; euro area |
| JEL: | E42 F33 F36 G01 |
| Date: | 2012–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0370&r=mac |
| By: | Todd Moss and Stephanie Majerowicz |
| Abstract: | Ghana’s largest and most important creditor for the past three decades has been the International Development Association (IDA), the soft loan window of the World Bank. That will soon come to an end. The combination of Ghana’s rapid economic growth and the recent GDP rebasing exercise means that Ghana suddenly finds itself above the income limit for IDA eligibility. Formal graduation is imminent and comes with significant implications for access to concessional finance, debt, and relations with other creditors. This paper considers the specific questions related to Ghana’s relationship with the World Bank, as well as the broader questions about the country’s new middle-income status. |
| JEL: | E01 E65 H50 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:300&r=mac |
| By: | Pierdzioch, Christian; Rülke, Jan Christoph; Stadtmann, Georg |
| Abstract: | Recent price trends in housing markets may reflect herding of market participants. A natural question is whether such herding, to the extent that it occurred, reflects herding in forecasts of professional forecasters. Using survey data for Canada, Japan, and the United States, we did not find evidence of forecaster herding. On the contrary, forecasters anti-herd and, thereby, tend to intentionally scatter their forecasts around the consensus forecast. The extent of anti-herding seems to vary over time. For Canada and the United States, we found that more pronounced anti-herding leads to lower forecast accuracy. -- |
| Keywords: | Housing starts,Forecasting,Herding |
| JEL: | E37 D84 C33 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:euvwdp:320&r=mac |
| By: | Eduardo Morón; Edgar Salgado; Cristhian Seminario |
| Abstract: | This paper examines the link between financial deepening and formalization in Peru. Using data from the National Household Survey, Bloomberg and the Central Bank of Peru Central Bank, the Cata~o, Page´s, and Rosales (2009) model is implemented at activity level (2-digits ISIC), and the Rajan and Zingales (1998) approach of sectors’ dependence on external funds is followed. The sample is divided into three firm size categories, and two formality measures are assessed. Using the accounting books specification, robust results are obtained, supporting a significant and positive effect of credit growth on formalization only for the self-employment firms category. Alternatively, using the pension enrollment specification, the channel is found positively significant only for firms with more than 10 workers; there is a smaller effect for firms with 2-10 workers. There is also a significant between effect, explaining the transition from small firms to larger firms due to greater credit availability. |
| JEL: | E26 G21 O16 O4 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4776&r=mac |
| By: | Liutang Gong (Guanghua School of Management, Peking University); Ruquan Zhong (Institute of Applied Mathematics, AMSS, CAS); Heng-fu Zou (Institute for Advanced Study, Wuhan University; CEMA, Central University of Finance and Economics) |
| Abstract: | In this paper, we consider a finite-horizon model with the time-additive utility and the time varying discount rate. With the assumption of the concavity of absolute risk tolerance, the concavity of the consumption function has been proved. This result significantly broadens the conclusion of Carroll and Kimball (1996) for the case of the HARA utility function. |
| Keywords: | Consumption function, Concavity, Risk tolerance |
| JEL: | E21 C6 D91 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:559&r=mac |