nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒09‒03
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation dynamics: the role of public debt and policy regimes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  2. House prices and stock prices: Different roles in the U.S. monetary transmission mechanism By Hilde C. Bjørnland; Dag Henning Jacobsen
  3. Uncertainty shocks are aggregate demand shocks By Sylvain Leduc; Zheng Liu
  4. Monetary policy and commodity terms of trade shocks in emerging market economies By Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
  5. Taylor Rule Exchange Rate Forecasting During the Financial Crisis By Tanya Molodtsova; David Papell
  6. Sailing through the Global Financial Storm: Brazil's recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks. By Luiz Awazu Pereira da Silva; Ricardo Eyer Harris
  7. Macro-Prudential Policy and the Conduct of Monetary Policy. By Beau, D.; Clerc, L.; Mojon, B.
  8. House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy By Paolo Gelain; Kevin J. Lansing; Caterina Mendicino
  9. Monetary Rules and Sectoral Unemployment in Open Economies By William D. Craighead
  10. The Output Effect of Fiscal Consolidations By Alberto Alesina; Carlo Favero; Francesco Giavazzi
  11. The output effect of fiscal consolidations By Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco
  12. Complexity and Monetary Policy By Orphanides, Athanasios; Wieland, Volker
  13. The output effect of fiscal consolidations By Alberto Alesina; Carlo Ambrogio Favero; Francesco Giavazzi
  14. Politique monétaire et croissance économique en zone cemac [une évaluation empirique en données de panel] By Fouda Ekobena, Simon Yannick
  15. Is Monetary Policy in an Open Economy Fundamentally Different? By Tommaso Monacelli
  16. Public Debt and Redistribution with Borrowing Constraints By Florin Bilbiie; Tommaso Monacelli; Roberto Perotti
  17. Global slack as a determinant of U.S. inflation By Enrique Martínez-García; Mark A. Wynne
  18. The Comparison of the Recent Crises in Turkey in terms of Output Gap By Goksel , Turkmen; Ozturkler, Harun
  19. Register, issue, cap and trade: A proposal for ending current and future financial crises By Milne, Alistair
  20. State-Level Evidence on the Cyclicality of Real Wages By Bryan Perry; Kerk L. Phillips; David E. Spencer
  21. Good Skills in Bad Times: Cyclical Skill Mismatch and the Long-term Effects of Graduating in a Recession. By Liu, Kai; Salvanes, Kjell G.; Sørensen, Erik Ø.
  22. Are international food price spikes the source of Egypt's high inflation ? By Al-Shawarby, Sherine; Selim, Hoda
  23. Monetary Shocks in a Model with Inattentive Producers By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  24. Sunspots, unemployment, and recessions, or Can the solar activity cycle shape the business cycle? By Gorbanev, Mikhail
  25. The Trend is the Cycle: Job Polarization and Jobless Recoveries By Nir Jaimovich; Henry E. Siu
  26. Structural heterogeneity and partial budgetary cooperation in a monetary union By Menguy, Séverine
  27. Household consumption through recent recessions By Thomas Crossley; Hamish Low; Cormac O'Dea
  28. Labour market institutions and unemployment volatility: evidence from OECD countries By Faccini, Renato; Rosazza Bondibene, Chiara
  29. Universal banking, competition and risk in a macro model By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  30. A Role Model for the Conduct of Fiscal Policy? Experiences from Sweden By Flodén, Martin
  31. Mismatch Unemployment By Sahin, Aysegul; Song, Joseph; Topa, Giorgio; Violante, Giovanni L
  32. Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran? By Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi
  33. Emerging from recession? Future prospects for the Irish economy 2012-2020 By John Bradley; Gerhard Untiedt
  34. Influența deficitului bugetar asupra dezvoltării economice a României By Mesea, Oana Elena
  35. Finance-dominated capitalism, re-distribution and the financial and economic crises: A European perspective By Hein, Eckhard
  36. Nonlinear exchange rate pass-through in timber products: the case of oriented strand board in Canada and the United States By Goodwin, Barry K.; Holt, Matthew T.; Prestemon, Jeffrey P.
  37. Sectoral Employment Effects of Economic Downturns By Robert Stehrer; Terry Ward
  38. How to capture the full extent of price stickiness in credit card interest rates? By Abbas Valadkhani; Sajid Anwar; Amir Arjonandi
  39. Pre-1900 utopian visions of the ‘cashless society’ By Hollow, Matthew
  40. Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program By Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Tomasz Piskorski; Amit Seru
  41. The role of uncertainty in the euro crisis: A reconsideration of liquidity preference theory By Pusch, Toralf
  42. Are Migrants in Large Cities Underpaid? Evidence from Vietnam By Nguyen, Viet Cuong; Pham, Minh Thai
  43. Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources By Xiaoming Cai; Pieter A. Gautier; Makoto Watanabe
  44. Equilibrium Risk Shifting and Interest Rate in an Opaque Financial System. By Challe, E.; Mojon, B.; Ragot, X.

  1. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the equilibrium response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the equilibrium response of inflation to non-policy shocks. Moreover, a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy stances affect inflation dynamics, but because of a role for self-fulfilling beliefs due to equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a richer quantitative model.
    Keywords: Price levels ; Monetary policy ; Macroeconomics
    Date: 2012
  2. By: Hilde C. Bjørnland; Dag Henning Jacobsen
    Abstract: We analyze the role of house and stock prices in the monetary policy transmission mechanism in the U.S. using a structural VAR model. The VAR is identifed using a combination of short-run and long-run (neutrality) restrictions, allowing for contemporaneous interaction between monetary policy and asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find different roles for house and stock prices in the monetary transmission mechanism. In particular, following a contractionary monetary policy shock, stock prices fall immediately, while the response in house prices is much more gradual. However, the fall in both house prices and stock prices enhances the negative response in output and inflation that has traditionally been found in the literature. Regarding the systematic response in monetary policy, stock prices play a more important role in the interest rate setting in the short run than house prices. As a consequence, shocks to house prices contribute more to GDP and inflation fluctuations than stock price shocks.
    Keywords: VAR, monetary policy, house prices, identification
    JEL: C32 E52 E44
    Date: 2012–08
  3. By: Sylvain Leduc; Zheng Liu
    Abstract: We study the macroeconomic effects of uncertainty shocks in a DSGE model with labor search frictions and sticky prices. In contrast to a real business cycle model, the model with search frictions implies that uncertainty shocks reduce potential output, because a job match represents a long-term employment relation and heightened uncertainty reduces the value of a match. In the sticky-price equilibrium, an uncertainty shock--regardless of its source--consistently acts like an aggregate demand shock because it raises unemployment and lowers inflation. We present empirical evidence--based on a vector autoregression model and using a few alternative measures of uncertainty--that supports the theory's prediction that uncertainty shocks are aggregate demand shocks.
    Keywords: Uncertainty ; Inflation (Finance) ; Unemployment
    Date: 2012
  4. By: Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
    Abstract: Commodity terms of trade shocks have continued to drive macroeconomic ‡uctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI in‡ation targeting performs relatively better than exchange rate targeting and non-traded in‡ation targeting both in terms of reducing macroeconomic volatility and enhancing welfare. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogeneous shocks is to target CPI inflation.
    Keywords: Commodity terms of trade, monetary policy; DSGE
    JEL: E52 G28
    Date: 2012
  5. By: Tanya Molodtsova; David Papell
    Abstract: This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.
    JEL: C22 F31
    Date: 2012–08
  6. By: Luiz Awazu Pereira da Silva; Ricardo Eyer Harris
    Abstract: Brazil sailed well through the global financial storm, using counter-cyclical policies to engineer its fast V-shaped recovery in 2010. In order to deal with inflationary pressures arising from its strong recovery, after the peak of the crisis, it used standard aggregate demand management instruments (tight fiscal and monetary policies). Brazil had also to deal with the post-QE global environment of excess liquidity in 2010-2011 where excessive capital inflows were exacerbating domestic credit growth with potentially destabilizing effects for price and financial stability. In that front, Brazil maintained and strengthened its strong financial sector regulation and supervision to continue to ensure financial stability, in particular, using a set of macroprudential instruments. While combining monetary and macroprudential instruments to lean against the financial cycle, the Central Bank of Brazil has always made clear that macroprudential measures are not a substitute for monetary policy action and are primarily geared at addressing financial stability risks. In fact, many policy makers after the global financial crisis seem to see now a complementarity between macroprudential measures and monetary policy. Accordingly, the (new) separation principle seems to evolve into using two instruments (the central bank’s base rate and a set of macroprudential tools) to address two objectives (the inflation target and a composite set of financial stability indicators). Brazil’s recent experience with monetary and macroprudential policies is a successful example of this new approach. More time and other countries’ experiences are needed to assess properly if this policy option can be generalized and replicated with similar results elsewhere.
    Date: 2012–08
  7. By: Beau, D.; Clerc, L.; Mojon, B.
    Abstract: In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macro-prudential policies that can “lean against credit” without affecting the short-term interest rate.
    Keywords: Monetary Policy; Financial Stability; Macro-prudential Policy; ESRB.
    JEL: E51 E58 E37 G13 G18
    Date: 2012
  8. By: Paolo Gelain; Kevin J. Lansing; Caterina Mendicino
    Abstract: Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.
    Keywords: Housing - Prices ; Housing - Econometric models
    Date: 2012
  9. By: William D. Craighead (Department of Economics, Wesleyan University)
    Abstract: This paper incorporates a search-and-matching model of the labor market into a “New Open Economy Macroeconomics” framework. This allows for an examination of the behavior of tradable and nontradable sector unemployment rates under alternative monetary rules. An examination of dynamics in response to shocks to productivity, world prices and interest rates, and foreign demand suggests that monetary rules that respond to prices of domestic output rather than consumer prices may be better able to stabilize unemployment.
    Keywords: search-and-matching model, monetary rules
    JEL: F4 E5
    Date: 2012–08
  10. By: Alberto Alesina; Carlo Favero; Francesco Giavazzi
    Abstract: This paper studies whether fiscal consolidations cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of fiscal adjustments, and is mainly due to the different response of private investment. Rather than studying the effects of individual shifts in taxes and spending, as the literature has so far typically done, we study the effects of the adoption of a fiscal consolidation plan, that is a combination of tax increases and spending cuts, some unanticipated, other anticipated, all announced at the same date. This allows us to obtain much more precise estimates of tax and spending multipliers and is important also because isolated shifts in taxes or spending occur very rarely—almost never in our sample. We find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogeneous across countries, suggesting that the degree of persistence of fiscal corrections varies.
    JEL: E62 H60
    Date: 2012–08
  11. By: Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco
    Abstract: This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies..Estimating the effects of fiscal plans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers.
    Keywords: confidence; fiscal adjustment; investment; output
    JEL: E62 H60
    Date: 2012–08
  12. By: Orphanides, Athanasios; Wieland, Volker
    Abstract: The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
    Keywords: complexity; ECB; Financial crisis; model uncertainty; monetary policy; robust simple rules
    JEL: E50 E52 E58
    Date: 2012–08
  13. By: Alberto Alesina; Carlo Ambrogio Favero; Francesco Giavazzi
    Abstract: This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies..Estimating the effects of fiscal lans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers. Keywords: fiscal adjustment, output, confidence, investment JEL Classification: H60, E62
    Date: 2012
  14. By: Fouda Ekobena, Simon Yannick
    Abstract: The economic literature emphasizes the existence of a debate having milked with the impact of the monetary policy on the economic activity. At the beginning of the years 1990, the monetary policy of the countries of the CEMAC knew significant reforms which aimed at conferring to him of advantage of flexibility and effectiveness. This study attempts to determine the impact of the monetary policy on the economic growth in CEMAC region. In order to take account of individual and temporal specificities phenomena of growth, we use a panel model to estimate the equation of growth of the CEMAC region under the 1986-2006’s period. Generally, results show that the monetary policy centred on the role played by the nominal aggregates of money and credit negatively influences the economic growth in CEMAC region, which is against the assumption formulated at the beginning, one also notes that inflation has a negative effect on the economic growth. These results emphasize the need for maintaining a framework macroeconomic stable to profit from the positive externalities inherent in the impacts of the monetary policy as well as the concomitant installation of mechanisms of correction of the harmful effects coming from these policies.
    Keywords: monetary policy; economic growth; inflation; panel data; externality; CEMAC
    JEL: E58 C23 E52 C33
    Date: 2012–08–25
  15. By: Tommaso Monacelli
    Abstract: Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in ?nal consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors. Keywords: openness, trade, imported inputs, consumption imports, exchange rate, monetary policy. JEL Classi?cation Numbers: E52, F41.
    Date: 2012
  16. By: Florin Bilbiie; Tommaso Monacelli; Roberto Perotti
    Abstract: In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the presentvalue multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.
    Date: 2012
  17. By: Enrique Martínez-García; Mark A. Wynne
    Abstract: Resource utilization, or "slack," is widely held to be an important determinant of inflation dynamics. As the world has become more globalized in recent decades, some have argued that the concept of slack that is relevant is global rather than domestic (the "global slack hypothesis"). This line of argument is consistent with standard New Keynesian theory. However, the empirical evidence is fragile, at best, possibly because of a disconnect between empirical and theory-consistent measures of output gaps.
    Keywords: Macroeconomics ; Globalization
    Date: 2012
  18. By: Goksel , Turkmen; Ozturkler, Harun
    Abstract: The importance of output gap and its timely measure come from the fact that it can serve as a guide to macroeconomic policy design. The knowledge of the position of an economy in a cycle is invaluable information and it has an important role in formulation of monetary, fiscal, and income policies. In this paper, we measure potential GDP and output gap for the Turkish Economy for the period between 1998Q1 and 2011Q4, using production function approach. We analyze the crises and the boom periods in terms of output gap. We find that according to the length of downturn and recovery periods, the worst crisis is the 2001. However, when we compare the crises according to the magnitude, the biggest collapse occurs during 2008 crisis. After recovering from 2008 crisis, once again the actual real GDP remains higher than the potential GDP for 5 successive quarters. Moreover, in this period actual real GDP is back on its old trend suggesting that the recovery period is over for Turkey and the negative effects of 2008 global crisis are not permanent.
    Keywords: Crises; Output gap; Potential GDP; Production function approach; Turkey
    JEL: E32
    Date: 2012–06
  19. By: Milne, Alistair
    Abstract: A fundamental cause of the global financial crisis was excessive creation of short-term money-like liabilities (quasi-money), notably in shadow banking holdings of sub-prime MBS and other US dollar structured credit instruments and in cross-border flow of capital to the uncompetitive Euro area periphery. This paper proposes a registration system for: (i) controlling quasi-money and resulting economic externalities and systemic risks; and (ii) supporting public sector monetary issue to counter collapse of private sector credit in the aftermath of crises. This policy would trigger a profound but also economically beneficial change in the business models of both banks and long-term investors. --
    Keywords: Basel III,debt deflation,endogenous money,financial regulation,global financial crisis,limited purpose banking,maturity mismatch,narrow money,Pigouvian taxes,ring fencing,systemic financial risk,systemic financial externalities,Tobin tax
    JEL: E44 G21 G28
    Date: 2012
  20. By: Bryan Perry (Department of Economics, MIT); Kerk L. Phillips (Department of Economics, Brigham Young University); David E. Spencer (Department of Economics, Brigham Young University)
    Abstract: There is considerable evidence that real wages have become more procyclical over time in the U.S. A novel explanation for this phenomenon has been recently offered by Huang, Liu, and Phaneuf (2004), HLP. They develop a model to show that, as the input-output structure of an economy becomes more sophisticated, the response of real wages to an aggregate demand shock becomes more procyclical (less countercyclical) in an environment with both sticky wages and prices. We test the basic prediction of their model using state-level data in the U.S. We exploit the fact that the economies of individual states in the U.S. exhibit a range of input-output structures in the production process. This variation allows us to examine how the cyclical response of real wages to aggregate monetary policy varies with production structure in order to test the HLP hypothesis. We find strong support for the hypothesis. Our direct empirical test complements the evidence provided by HLP in their original paper.
    Keywords: real wages, monetary policy, U.S. states
    JEL: E32 E52 E10
    Date: 2012–08
  21. By: Liu, Kai (Dept. of Economics, Norwegian School of Economics and Business Administration); Salvanes, Kjell G. (Dept. of Economics, Norwegian School of Economics and Business Administration); Sørensen, Erik Ø. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: We show that cyclical skill mismatch, defined as mismatch between the skills supplied by college graduates and skills demanded by hiring industries, is an important mechanism behind persistent career loss from graduating in recessions. Using Norwegian data, we find a strong countercyclical pattern of skill mismatch among college graduates. Initial labor market conditions have a declining but persistent effect on the probability of mismatch early in their careers. We provide a simple model of industry mobility that is consistent with our empirical findings. The initially mismatched graduates are also more vulnerable to business cycle variations at the time of graduation.
    Keywords: Skill mismatch; business cycles
    JEL: E32 J31 J62
    Date: 2012–08–17
  22. By: Al-Shawarby, Sherine; Selim, Hoda
    Abstract: This paper examines whether domestic inflation spikes in Egypt during 2001-2011 were primarily the result of external food price shocks. To estimate the pass-through of international food price inflation to domestic price inflation, two different methodologies are used: a two-step regression model estimates the pass-through in the long run, and a vector autoregression model provides the short-run estimates. The empirical evidence confirms that pass-through is high in the short term, but not in the long run. More precisely, the results show that (i) long-run pass-through to domestic food inflation is relatively low, lying between 13 and 16 percent, while the long-term spill-over from domestic food inflation to core inflation is moderate, lying around 60 percent; (ii) in the short term, pass-through is relatively high, estimated around 29 percent after 6 months and around two-thirds after a year, but the spill-over effect to core inflation is limited; (iii) international food price shocks explain only a small portion of domestic inflation shocks in both the short and long terms; and (iv) international price inflation has asymmetric effects on domestic prices.
    Keywords: Food&Beverage Industry,Markets and Market Access,Currencies and Exchange Rates,Emerging Markets,Access to Markets
    Date: 2012–08–01
  23. By: Fernando Alvarez (University of Chicago and NBER); Francesco Lippi (University of Sassari and EIEF); Luigi Paciello (EIEF)
    Abstract: We study a sticky price model in which prices respond sluggishly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). In these set-ups firms change prices only when they gather the relevant information. We extend their analysis to the case of random transitory variation in the firm’s observation cost. We characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive observations of a firm. We show how to aggregate a continuum of those distributions to characterize the cross-sectional distribution of the times until the next adjustment, an object that is key to characterize the response of the economy to aggregate shocks. While deriving this result, we comment on some incorrect interpretation that appear in the literature about this aggregation results. Finally, we show analytically how the real effect of a monetary shock depends on the mean and the variance of the times between consecutive observations. We conclude that variation in observation cost has a modest effect on the aggregate response of the economy to a monetary shock.
    Date: 2012
  24. By: Gorbanev, Mikhail
    Abstract: Over the last 77 years (from 1935), all 7 cyclical maximums of the solar activity overlapped closely with the US recessions, thus predicting (or triggering?) 8 out of 13 recessions officially identified by NBER (including one “double-deep” recession). Over the last 64 years (from 1948), all 6 maximums of the solar activity were preceded by minimums of the US unemployment rate, and the spikes in the unemployment rate followed with lags of 2-3 years. On the world scale, over the last 44 years (for which the data is available), all 4 maximums of the solar activity overlapped with minimums of the unemployment rate in the G7 countries, followed by its spikes within 2-3 years. From 1965, when consistent recession dating is available for all G7 countries, nearly 3/5 of the recessions started in the 3 years around and after the sunspot maximums. Was it a mere coincidence or a part of a broader pattern? This paper explores the correlation between the solar activity cycles (as measured by the number of sunspots on the sun surface) and the timing of recessions in the US and other economies. It finds out that the probability of recessions in G7 countries greatly increased around and after the solar maximums, suggesting that they can cause deterioration in business conditions and trigger recessions. This opens new approach for projecting recessions, which can be applied and tested with regard to the next solar maximum in 2013. Caution: This research is not in the “mainstream” of the economic thought. Read at your own risk!
    Keywords: unemployment; recession; business cycle; sunspot; solar cycle
    JEL: E32 Q51 Q54
    Date: 2012–07–26
  25. By: Nir Jaimovich; Henry E. Siu
    Abstract: Job polarization refers to the recent disappearance of employment in occupations in the middle of the skill distribution. Jobless recoveries refers to the slow rebound in aggregate employment following recent recessions, despite recoveries in aggregate output. We show how these two phenomena are related. First, job polarization is not a gradual process; essentially all of the job loss in middle-skill occupations occurs in economic downturns. Second, jobless recoveries in the aggregate are accounted for by jobless recoveries in the middle-skill occupations that are disappearing.
    JEL: E0 J0
    Date: 2012–08
  26. By: Menguy, Séverine
    Abstract: The paper analyzes the usefulness of budgetary cooperation in a monetary union, even if it is limited to a subgroup of countries with close structural characteristics. The author finds that its advantages depend on the nature of the shocks and on the width of the heterogeneities within the monetary union. Budgetary cooperation between countries where the sensitivities of economic activity to public expenditures and to foreign economic activity are sufficiently high, is beneficial to stabilize symmetric demand shocks. It is beneficial to stabilize symmetric supply shocks if it concerns a sufficiently large number of countries. On the contrary, budgetary cooperation is generally detrimental to stabilize asymmetric demand or supply shocks. --
    Keywords: economic stabilization,monetary union,budgetary cooperation,demand shocks,supply shocks,structural heterogeneity
    JEL: E61 E63 F41 F42
    Date: 2012
  27. By: Thomas Crossley (Institute for Fiscal Studies and University of Cambridge); Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge); Cormac O'Dea (Institute for Fiscal Studies)
    Abstract: This paper examines trends in household consumption and saving behaviour in each of the last three recessions in the UK. The 'Great Recession' has been different from those that occurred in the 1980s and 1990s. It has been both deeper and longer, but also the composition of the cutbacks in consumption expenditures differs, with a greater reliance on cuts to non durable expenditure than was seen in previous recessions, and the distributional pattern across individuals differs. The young have cut back expenditure more than the old, as have mortgage holders compared to renters. By contrast, the impact of the recession has been similar across education groups. We present evidence that suggests that two aspects of fiscal policy in the UK in 2008 and 2009- the temporary reduction in the rate of VAT and a car scrappage scheme- had some success in encouraging households to increase durable purchases.
    Keywords: Consumption, Spending, Recessions
    JEL: E21 D12
    Date: 2012–08
  28. By: Faccini, Renato (Queen Mary, University of London); Rosazza Bondibene, Chiara (NIESR and Royal Holloway, University of London)
    Abstract: Using publicly available data for a group of 20 OECD countries, we find that the cyclical volatility of the unemployment rate exhibits substantial cross-country and time variation. We then investigate empirically whether labour market institutions can account for this observed heterogeneity and find that the impact of various institutions on cyclical unemployment dynamics is quantitatively strong and statistically significant. The hypothesis that labour market institutions could increase the volatility of unemployment by reducing match surplus is not supported by the data. In fact, unemployment benefits, taxation and employment protection appear to reduce the volatility of unemployment rates. In addition, we find that the precise nature of union bargaining has important implications for cyclical unemployment dynamics, with union coverage and density having large and offsetting effects. Finally, we provide evidence suggesting that interactions between shocks and institutions matter for cyclical unemployment fluctuations. However, institutions only account for about one quarter of the explained variation, which implies that they are important but they are not the entire story.
    Keywords: Labour market institutions; labour market fluctuations
    JEL: E32 E60 J01 J08
    Date: 2012–08–21
  29. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Vladislav Damjanovic (Department of Economics, University of Exeter); Charles Nolan (University of Glasgow)
    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 find that the financial sector can move very sharply from safe to risky investment strategies and that the degree of competitiveness is important for risk premia. We also 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 benefits of universal banking are positive but decreasing in the value and volatility of shocks to the quality of financial capital. When shock is moderate, competition improves the welfare. However, banks with some market power have a cushion of profits against adverse shocks which is beneficial since there is an excess burden associated with government bailouts. Hence, when a worse shock hits the economy, the optimal degree of competitiveness of separate banking firms is higher than for universal firms. So, 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.
    JEL: E13 E44 G11 G24 G28
    Date: 2012
  30. By: Flodén, Martin
    Abstract: Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991-1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was around four percent in 1994-1995, and budget deficits had been eliminated by 1998. Growth remained high in the subsequent decade, and the government debt ratio was reduced by almost 50 percent of GDP. This paper describes and analyzes the Swedish crisis and the policy measures implemented in response to the crisis. Policy measures include abandoning the fixed exchange rate, fiscal austerity, a new stricter fiscal framework, and several structural reforms in the 1990s. These policies were appropriate for handling the Swedish crisis, but the Swedish experiences have limited applicability for the current debt crisis, in particular because currency depreciation in combination with strong growth on export markets was a key ingredient in the Swedish recovery. Implementing fiscal austerity would have been more complicated absent this export-led growth. Moreover, the new fiscal framework has most likely contributed to strengthening public finances, but I demonstrate that budget surpluses and high GDP growth only explain around a third of the reduction in the public debt ratio after 1997.
    Keywords: Banking crisis; Fiscal consolidation; Fiscal rules; Macroeconomic crisis
    JEL: E02 E32 E62 E65 G01
    Date: 2012–08
  31. By: Sahin, Aysegul; Song, Joseph; Topa, Giorgio; Violante, Giovanni L
    Abstract: We develop a framework where mismatch between vacancies and job seekers across sectors translates into higher unemployment by lowering the aggregate job-finding rate. We use this framework to measure the contribution of mismatch to the recent rise in U.S. unemployment by exploiting two sources of cross-sectional data on vacancies, JOLTS and HWOL, a new database covering the universe of onlineU.S. job advertisements. Mismatch across industries and occupations explains at most 1/3 of the total observed increase in the unemployment rate, whereas geographical mismatch plays no apparent role. The share of the rise in unemployment explained by occupational mismatch is increasing in the education level.
    Keywords: great recession; mismatch; unemployment; vacancies
    JEL: E3 J2 J6
    Date: 2012–08
  32. By: Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi
    Abstract: This deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break stemming in the series. The unit root properties have been tested by applying Zivot-Andrews (1992) and Clemente et al. (1998) structural break tests. The VECM Granger causality approach is used to detect the direction of causal relationship between financial development and income distribution. Moreover, Greenwood-Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.
    Keywords: Financial Development; Income Inequality; ARDL Bound Testing
    JEL: E44
    Date: 2012–08–20
  33. By: John Bradley (EMDS - Economic Modelling and Development Strategies); Gerhard Untiedt (GEFRA - Gesellschaft fuer Finanz- und Regionalanalysen)
    Abstract: How will Ireland emerge from recession and what path will the development take? In our recently published paper about the future prospects of the Irish economy we analyse and forecast using the HERMIN model of the Irish economy. The key message is that it will be a painful and slow recovery and that mainly the production side of the economy matters.
    Date: 2012–08–20
  34. By: Mesea, Oana Elena
    Abstract: This paper empirically analyzes the impact of budget deficit on the economic development of Romania. Using the OLS estimates for quarterly series for the period from 2001 to 2011, the results of the estimates prove that there is an indirect relationship between budget deficit and economic growth of Romania. According to the best statistically significant model from the three different model tested, we reached the result that one percent rise of budget deficit gives a 1.36 percent fall in real GDP. This result sustains the neoclassical hypothesis and is against the Keynesist hypothesis or the Ricardian equivalence.
    Keywords: budget deficit; economic growth; fiscal policy; Romania
    JEL: E62 H62 H61
    Date: 2012–08–04
  35. By: Hein, Eckhard
    Abstract: In this paper the euro crisis is viewed as the most recent episode of the crisis of financedominated capitalism. Therefore, two major features of finance-dominated capitalism, the increasing inequality of income distribution and the rising imbalances of current accounts, are analysed for a set of major Euro area countries. Against this background the euro crisis is examined, and it is shown that the economic policy reactions of European governments and institutions, narrowly interpreting the crisis as a sovereign debt crisis caused by irresponsible behaviour of some member country governments, are misguided and will lead to deflationary stagnation and an increasing risk of disintegration of the Euro area. For this reason, an alternative macroeconomic policy approach tackling the basic contradictions of financedominated capitalism and the deficiencies of European economic policy institutions and economic policy strategies is outlined. It is argued that, on the one hand, an institution which convincingly guarantees the public debt of Euro area member countries and, on the other hand, an expansionary macroeconomic policy approach, in particular in the current account surplus countries of the Euro area, need to be introduced. --
    Keywords: Finance-dominated capitalism,distribution,financial and economic crisis,European economic policies
    JEL: E25 E58 E61 E63 E64 E65
    Date: 2012
  36. By: Goodwin, Barry K.; Holt, Matthew T.; Prestemon, Jeffrey P.
    Abstract: We assess exchange rate pass–through (ERPT) for U.S. and Canadian prices for oriented strand board (OSB), a wood panel product used extensively in U.S. residential construction. Because of its prominence in construction and international trade, OSB markets are likely sensitive to general economic conditions. In keeping with recent research (e.g., Al-Abri and Goodwin, 2009; Larue et al., 2010), we examine regime–specific ERPT effects; we use a smooth transition vector error correction model. We also build on work by Nogueira, Jr. and Leon-Ledesma (2011) and Chew et al. (2011) in considering ERPT asymmetries associated with a measure of general macroeconomic activity. Our results indicate that during expansionary periods ERPT is modest, at least initially, but during the recent financial crises ERPT effects were quite large.
    Keywords: Exchange rate pass–through; oriented strand board; smooth transition model; unemployment
    JEL: E32 F10 F30
    Date: 2012–08–22
  37. By: Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Terry Ward
    Abstract: The recent economic downturnThe decline in GDP during the recession has been concentrated in manufacturing and construction and triggered significant (though smaller) declines in basic services (distribution, hotels and restaurants, and transport). The decline in manufacturing production was particularly strong in Germany, while in Spain and Ireland as well as the Baltic states there was a pronounced decline in construction, which had expanded markedly in these countries over the years preceding the recession. Just as in previous economic downturns in the EU, the recent recession has hit investment goods industries (including construction) much harder than consumer goods industries, essentially because investment can be postponed in a way that consumption cannot; nevertheless, within the latter, the production of durable goods – which are similar to investment goods in this respect – was hit hard as well.The effect on employment of the downturn differed markedly among sectors and countries according to the strength of the measures adopted both by employers and governments to preserve jobs, but also according to expectations about the pace and scale of recovery and the sustainability of the previous pattern of growth. Although average hours worked declined significantly in manufacturing during the worst period of the recession in 2009, supported by measures to preserve jobs in many countries, since then there has been a widespread increase, reflecting the reluctance of employers to take on workers in the context of a hesitant recovery and the uncertainty of longer-term prospects. Just as the recession disproportionately affected industry, so too the recovery was in its initial stages stimulated by an upturn in manufacturing as demand for investment and durable goods picked up. This was especially the case for chemicals and motor vehicles where output began to recover strongly in the latter part of 2009 and during 2010. Value-added in industry grew by 6% between 2009 and 2010 in the EU as a whole, considerably more than in other parts of the economy (in construction, value-added continued to decline). In those sectors where most efforts have been made to preserve jobs – in the engineering industries and motor vehicles in particular – labour productivity at the beginning of 2011 was below the level before the onset of recession in a number of countries. This could dampen the rate of job creation as and when recovery takes place since it implies that output could be increased without any immediate need to expand employment.Employment trends in selected sectors results from analysis of long-term developmentsEmployment is strongly related to changes in value-added, though an increase in value-added tends to be partly met by productivity growth as well as by employing more people. Similarly, a fall in value-added tends to be associated with a decline in productivity growth as well as a decline in employment, though lags in adjustment may delay the latter.The relationship between employment and real wages tends to be significant in manufacturing, where increases in real wages tend to reduce the growth of employment; this is not the case in services. In the UK, as in the US, real wages tend to adjust more quickly to changes in labour demand than in Germany and France, suggesting that labour markets are more flexible in the former countries.There is an inverse relationship between average hours worked and the number employed, indicating in general that the more hours people work, the smaller the number employed and vice versa, so that adjustments in working time has an important effect on jobs.Investment in ICT has positive and significant effects on employment in manufacturing, probably working through improvements in productivity. The opposite is the case in services, suggesting that the increasing use of ICT tends to reduce employment. After a shock, it takes up to three years for employment to return to trend levels in France, Spain, Belgium and the Netherlands. In the other countries, the pace of adjustment is faster, at only one-and-a-half to two years on average. Changes in the composition of employmentOver the recession period from 2007 to 2010, the share of jobs filled by women continued to increase across the EU. This, however, reflects the large job losses in manufacturing and construction where few women are employed. In most sectors, even in services, the share of jobs filled by women declined.The share of jobs filled by workers aged 55 and over has increased in most parts of the EU over the past ten years, reflecting a tendency for older people to remain longer in work. This continued to be the case over the recession period, unlike during previous periods of economic downturn when early retirement has been a major means of reducing work forces. The main group hit by the present crisis are the young below the age of 25.The proportion of the work force with tertiary education increased in all sectors over the years leading up to the recession; the same is true for the share of employment accounted for by managers and professionals. Both trends have continued over the recession period.There has been a shift from full-time to part-time jobs over the recession period, which may reflect uncertainty among employers over future prospects as well as the pursuit of more flexible organization of work.Employment experience in previous economic downturns There are some differences between previous periods of downturn in those sectors in which employment was most affected. In all periods, however, employment continued to expand in business services and hotels and restaurants. Economic crises were predominantly weathered by adjustments in hours worked to preserve jobs and the know-how of the work force, thus limiting the costs of re-employment and training. This tendency was strongest in the 1970s, moderate in the 1980s and mixed in the 1990s. Value-added was generally more volatile than the number employed and hours worked. During the three periods of economic downturn, value-added grew only in business services. The largest losses were observed in machinery and equipment, basic metals and construction in all three periods.Sectoral interdependenciesFor each job created by an increase in final demand in a particular sector, there are between 1.4 and 2.3 additional jobs created in the economy as a whole. Employment multipliers are highest in manufacturing (especially in chemicals, electrical equipment and transport equipment) and are lowest in services, which need fewer inputs from other sectors. Domestic employment multipliers tend to have remained broadly unchanged over the past 15 years or so whereas international employment multipliers (the effect of growth in one country on employment in others) have increased markedly, reflecting the growing importance of production networks and international integration.Employment creation in services is mainly a domestic process, whereas within manufacturing, job creation takes place internationally (particularly in textiles, chemicals and electrical equipment and transport equipment).Growth of demand in the EU tends to lead to significant employment creation in other countries, reflecting the increase in imports that it results in. This is particularly so with respect to electrical equipment, textiles and chemicals, though it is also the case for each of those that growth of demand increases employment not only in the Member State in which it occurs but also in other parts of the EU.Measures taken to support employment during the crisisMeasures to counter the effect of the recession on employment were implemented in all Member States. However, those were mainly general; relatively few responses were sector-specific, such as car scrapping schemes, which were introduced in a number of countries, and cuts in value-added tax on hotels and restaurants (in Ireland and France). But there has been a decentralization of pay bargaining to company level in some sectors in some countries (such as in basic metals or chemicals in Germany). Many countries introduced expansionary fiscal policies to stimulate demand as well as short-time working arrangements (mainly concentrated in manufacturing). In a number of countries, there has been an expansion of training and work experience programmes, recruitment incentive schemes for employers hiring new workers, support to business start-ups, measures to increase access to credit, pay freezes and more flexible working arrangements, all designed to increase employment. Young people, who have been severely affected by the recession and the lack of job creation, have been a particular target for government support, in the form of subsidized employment schemes, work placement programmes, work experience or training guarantees and intensified job search assistance.
    Keywords: employment effects of crisis, sectoral employment, economic downturns and sectoral labour demand, policy reactions
    JEL: E24 J08 J21 J23
    Date: 2012–08
  38. By: Abbas Valadkhani (University of Wollongong); Sajid Anwar (The University of the Sunshine Coast); Amir Arjonandi (University of Wollongong)
    Abstract: We present a new approach to evaluate the full extent of price stickiness in credit card interest rates by modifying the existing asymmetric models so that they can be adopted for testing both the amount and adjustment asymmetries as well as the lagged dynamic inertia. Consistent with similar studies, banks behave asymmetrically in response to changes in the Reserve Bank of Australia’s (RBA) target interest rate. Rate rises are passed onto the consumer faster than rate cuts and the credit card interest rate showed a very significant degree of downward rigidity. Based on the magnitude of the pass-through parameters obtained from short-run dynamic models, rate rises had a full one-to-one and instantaneous impact on credit card interest rates. However, in absolute terms the short-run effects of rate cuts were not only less than half of the rate rises but also were delayed on average by three months.
    Keywords: Interest rates; Asymmetric behaviour; Credit cards; Australia
    JEL: E43 E58 G21
    Date: 2012
  39. By: Hollow, Matthew
    Abstract: This article looks in more depth at the different ways in which ideas about cashless societies were articulated and explored in pre-1900 utopian literature. Taking examples from the works of key writers such as Thomas More, Robert Owen, William Morris and Edward Bellamy, it discusses the different ways in which the problems associated with conventional notes-and-coins monetary systems were tackled as well as looking at the proposals for alternative payment systems to take their place. Ultimately, what it shows is that although the desire to dispense with cash and find a more efficient and less-exploitable payment system is certainly nothing new, the practical problems associated with actually implementing such a system remain hugely challenging. This paper was written for the Cashless Society Project, an interdisciplinary and international effort to add some historical and analytical perspectives to discussions about the future of money, banking and payments. For more information, see
    Keywords: utopian; cashless; money; pre-1900
    JEL: E42
    Date: 2012
  40. By: Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Tomasz Piskorski; Amit Seru
    Abstract: The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity—which is also observed before the program—reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.
    JEL: E60 E65 G18 G21 H3
    Date: 2012–08
  41. By: Pusch, Toralf
    Abstract: An active role of fiscal policy has been rediscovered as a crisis remedy at the beginning of the financial crisis all over Europe. More recently, the Euro Crisis with its mounting governments' funding costs for a number of Southern EU member states and Ireland has called this strategy into question. As opposed to this view, the main point of this contribution is to elaborate a link between rising sovereign risk premia in the Eurozone and a major feature of the financial crisis - which culminated in elevated uncertainty after the Lehman collapse. Theoretically, this link is developed with a reference to Keynes' liquidity preference theory. Empirically, a high explanatory power of rising uncertainty in financial markets and detrimental effects of fiscal austerity for the evolution of sovereign risk spreads are demonstrated by means of panel regressions and supplementary correlation analyses. --
    JEL: E12 E62 G12
    Date: 2012
  42. By: Nguyen, Viet Cuong; Pham, Minh Thai
    Abstract: This paper examine the difference in wages between migrants and non-migrants (native workers) in large cities in Vietnam. It is found that migrants receive substantially lower wages than non-migrants. The wage gap tends to be larger for older migrants. However, once observed demographic characteristics of workers are controlled, there is no difference in wages between migrants and non-migrants. The main difference in observed wages between migrants and non-migrants is explained by differences in age and education between migrants and non-migrants.
    Keywords: Migration; underpaid; decomposition; household survey; Vietnam
    JEL: E24 O15
    Date: 2012–05–16
  43. By: Xiaoming Cai (VU University Amsterdam); Pieter A. Gautier (VU University Amsterdam); Makoto Watanabe (VU University Amsterdam)
    Abstract: An advantage of collective wage agreement is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached because more productive firms (for a particular worker type) can no longer signal this by posting higher wages. Specifically, we consider a search model with two sided heterogeneity and on-the-job search. We compare the most favorable case of a collective wage agreement (i.e. the wage that a planner would choose under the constraint that all firms in a sector-ocupation cell must offer the same wage) with the case without collective wage agreement. We find that collective wage agreements are never desirable if firms can commit ex ante to a wage and only desirable if firms cannot commit and the relative efficiency of on the job search to off- the job search is less than 20%. This result is hardly sensitive to the bargaining power of workers. Empirically we find both for the Netherlands and the US that this value is closer to 50%.
    Keywords: Collective wage agreements; on-the-job search; efficiency
    JEL: E24 J62 J63 J64
    Date: 2012–08–28
  44. By: Challe, E.; Mojon, B.; Ragot, X.
    Abstract: We analyze the risk-taking behavior of heterogenous intermediaries that are protected by limited liability and choose both their amount of leverage and the risk exposure of their portfolio. Due to the opacity of the financial sector, outside providers of funds cannot distinguish “prudent” intermediaries from “imprudent” ones that voluntarily hold high-risk portfolios and expose themselves to the risk of bankrupcy. We show how the number of imprudent intermediaries is determined in equilibrium jointly with the interest rate, and how both ultimately depend on the cross-sectional distribution of intermediaries’ capital. One implication of our analysis is that an exogenous increase in the supply of funds to the intermediary sector (following, e.g., capital inflows) lowers interest rates and raises the number of imprudent intermediaries (the risk-taking channel of low interest rates). Another one is that easy financing may lead an increasing number of intermediaries to gamble for resurrection following a bad shock to the sector’s capital, again raising economy wide systemic risk (the gambling-for-resurrection channel of falling equity).
    Keywords: Risk shifting; Portfolio correlation; Systemic risk; Financial opacity.
    JEL: E44 G01 G20
    Date: 2012

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