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

  1. Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9 By Tobias Adrian; Paolo Colla; Hyun Song Shin
  2. The Financial Market Impact of UK Quantitative Easing By Francis Breedon; Jagjit S. Chadha; Alex Water
  3. Business Cycle Dependent Unemployment Benefits with Wealth Heterogeneity and Precautionary Savings By Mark Strøm Kristoffersen
  4. Is Openness Inflationary? Policy Commitment and Imperfect Competition By Richard W. Evans
  5. Heterogeneous distribution of money supply across the euro area By Jitka Pomenkova; Svatopluk Kapounek
  6. Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications By Shaw, Ming-fu; Chang, Juin-jen; Chen, Hung-Ju
  7. Transmission of fiscal policy shocks into Romania's economy By Serbanoiu, Georgian Valentin
  8. Housing Dynamics over the Business Cycle By Kydland, Finn; Rupert, Peter; Sustek, Roman
  9. Taxation and Labor Supply of Married Women across Countries: A Macroeconomic Analysis By Bick, Alexander; Fuchs-Schündeln, Nicola
  10. Money Velocity with Interest Rate Stochastic Volatility and Exact Aggregation By William Barnett; Haiyang Xu
  11. Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment By Jean-Stéphane Mésonnier; Dalibor Stevanovic
  12. Fiscal and Financial Determinants of Eurozone Sovereign Spreads By Giovanni Caggiano; Luciano Greco
  13. Imperfect Credibility and Robust Monetary Policy By Richard Dennis
  14. The Evolution of Inflation Expectations in Mexico By Santiago García-Verdú
  15. Central Banking for Financial Stability: Some Lessons from the Recent Instability in the United States and Euro Area By Wall, Larry D.
  16. A model of the euro-area yield curve with discrete policy rates. By Renne, J-P.
  17. Deconstructing Growth - A Business Cycle Accounting Approach with application to BRICs By Suparna Chakraborty; Keisuke Otsu
  18. Three Essays on Robustness and Asymmetries in Central Bank Forecasting By Taro Ikeda
  19. Continuing Integration in Europe? Some empirical evidence on European industrial production cycle By Petr Rozmahel; Nikola Najman
  20. The endogenous money hypothesis and securitization: the Euro area case (1999-2010). By M. Lopreite
  21. The costs of rebalancing the Euro area By Engelbert Stockhammer; Dimitris P. Sotiropoulos
  22. Targeting the Poor: A Macroeconomic Analysis of Cash Transfer Programs By Eduardo Zilberman; Tiago Berriel
  23. Two Equations on the Pareto-Efficient Sharing of Real GDP Risk By Eagle, David M.; Christensen, Lars
  24. Cykle na rynku nieruchomości mieszkaniowych i komercyjnych, ryzyko dla inwestora oraz potrzeba adekwatnej i ostrożnej wyceny By Augustyniak, Hanna; Łaszek, Jacek; Olszewski, Krzysztof; Waszczuk, Joanna
  25. Price Stickiness in Customer Markets with Reference Prices By Nicolas Vincent
  26. Ein Nelson-Winter-Modell der deutschen Volkswirtschaft By Quaas, Georg
  27. Financial Globalization, Inequality, and the Raising of Public Debt By Azzimonti, Marina; de Francisco, Eva; Quadrini, Vincenzo
  28. From Living Well to Working Well: Raising Canada's Performance in Non-residential Investment By Benjamin Dachis; William B.P. Robson
  29. Central Banking for Financial Stability in Asia By Kawai, Masahiro; Morgan, Peter J.
  30. A Perspective on the Current State of Macroeconomic Theory By William Barnett
  31. Introduction to Recent Developments in Alternative Finance: Empirical Assessments and Economic Implications By Barnett, William A.; Jawadi, Fredj
  32. Time constraints, saving and old age By Davoine, Thomas
  33. Substitutability of Savings by Sectors: OECD Experiences By Yoichi Matsubayashi; Takao Fujii
  34. Приватизация и рациональная структура собственности (Privatizatsiya i ratsional’naya struktura sobstvennosti) By Polterovich, Victor
  35. 2008 Global Economic Crisis and Its Impact on India's Exports and Imports By sivakumar, marimuthu
  36. Проектирование реформ: как искать промежуточные институты (Proektirovanie reform: kak iskat' promezhutochnye instituty) By Polterovich, Victor

  1. By: Tobias Adrian; Paolo Colla; Hyun Song Shin
    Abstract: The financial crisis of 2007-9 has sparked keen interest in models of financial frictions and their impact on macro activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending to firms declines during the crisis, bond financing actually increases to make up much of the gap. This paper reviews both aggregate and micro level data and highlights the shift in the composition of credit between loans and bonds. Motivated by the evidence, we formulate a model of direct and intermediated credit that captures the key stylized facts. In our model, the impact on real activity comes from the spike in risk premiums, rather than contraction in the total quantity of credit.
    JEL: E2 E5 G01 G21
    Date: 2012–08
  2. By: Francis Breedon (Queen Mary, University of London); Jagjit S. Chadha (University of Kent and University of Cambridge); Alex Water (University of Kent)
    Abstract: After outlining some of the monetary developments associated with Quantitative Easing (QE), we measure the impact of the UK's initial 2009-10 QE Programme on bonds and other assets. First, we use a macro-finance yield curve both to create a counterfactual path for bond yields and to estimate the impact of QE directly. Second, we analyse the impact of individual QE operations on a range of asset prices. We find that QE significantly lowered government bond yields through the portfolio balance channel - by around 50 or so basis points. We also uncover significant effects of individual operations but limited pass through to other assets.
    Keywords: Term structure of interest rates, Monetary policy, Quantitative Easing
    JEL: E43 E44 E47 E58
    Date: 2012–08
  3. By: Mark Strøm Kristoffersen (Department of Economics and Business, Aarhus University, Denmark)
    Abstract: In the wake of the financial and economic crisis the discussion about social insurance and optimal stabilization policies has re-blossomed. This paper adds to the literature by studying the effects of a business cycle dependent level of unemployment benefits in a model with labor market matching, wealth heterogeneity, precautionary savings, and aggregate fluctuations in productivity. The results are ambiguous: both procyclical and countercyclical unemployment benefi?ts can increase welfare relative to business cy- cle invariant benefits. Procyclical benefits are beneficial due to countercyclicality of the distortionary effect (on job creation) from providing unemployment insurance, whereas countercyclical benefits facilitate consumption smoothing.
    Keywords: Unemployment insurance, business cycles, wealth heterogeneity, precautionary savings
    JEL: E32 H3 J65
    Date: 2012–08–30
  4. By: Richard W. Evans (Department of Economics, Brigham Young University)
    Abstract: This paper proposes a channel through which increased openness to international trade can increase a country's long-run incentive to create inflation. The theoretical justifcation for this channel is the well known "beggar thy neighbor" incentive, and its dominance relies on a monetary authority's ability to commit to policy as well as the asymmetric effects of the underlying frictions in the model across domestic and foreign households. Comparing data from the 1973-1987 period and the 1988-2002 period, I Find evidence that the effect of openness on inflation is positive among developed countries whose monetary policy can be approximated by commitment and that the inflationary bias of openness is dampened by the degree of imperfect competition and the inelasticity of labor supply within the country.
    Keywords: Optimal monetary policy; Imperfect competition; International monetary policy; Openness
    JEL: E52 E61 F41 F42
    Date: 2012–01
  5. By: Jitka Pomenkova (Department of National Economy, Faculty of Economics, VÅ B-Technical University of Ostrava); Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel university in Brno)
    Abstract: The recent economic crisis is regarded as symmetric shock which negatively affects all Eurozone member countries. Even if the whole euro area is in recession the probability of asymmetric shock arises on the monetary side of the economy. The issue is that money supply is unevenly distributed across the euro area. Different credit money creation increases inflationary pressures not only in long run but also in short-term, especially in house prices. The combination of credit money creation and increases in asset prices contributes to financial instability. The empirical part of the paper is based on the analysis in time-frequency domain. The authors apply wavelet analysis to identify increasing differences of co-movements in money supply between the selected old Eurozone member states and peripheral countries. The authors use the contribution of different member countries to the monetary aggregate M3 as the proxy of money supply distribution across the euro area.
    Keywords: wavelet analysis, financial stability, asset prices, monetary aggregates
    JEL: E51 F36
    Date: 2012–09
  6. By: Shaw, Ming-fu; Chang, Juin-jen; Chen, Hung-Ju
    Abstract: This paper develops an analytically tractable dynamic general-equilibrium model with a banking system to examine the macroeconomic implications of capital adequacy requirements. In contrast to the hypothesis of a credit crunch, we find that increasing the strength of bank capital requirements does not necessarily reduce the equilibrium quantity of loans, provided that banks have the option to respond to the capital requirements by accumulating more equity instead of cutting back on lending. Accordingly, we show that there is an inverted-U-shaped relationship between CAR and capital accumulation (and consumption). Furthermore, the optimal capital adequacy ratio for social-welfare maximization is lower than that for capital-accumulation maximization. In accordance with general empirical findings, the capital- accumulation maximizing capital adequacy ratio is procyclical with respect to economic conditions. We also find that monetary policy affects the real macroeconomic activities via the so-called bank lending channel, but the effectiveness of monetary policy is weakened by bank capital requirements.
    Keywords: Banking capital regulation; bank lending channel; the loan-deposit rate
    JEL: E5 O4
    Date: 2012–09–05
  7. By: Serbanoiu, Georgian Valentin
    Abstract: In this paper I use a medium scale open economy DSGE model developed by Baksa, Benk and Jakab (2010) for the Hungarian economy. This model provides a notable degree of disaggregation both on the government revenue and expenditure side, being able to capture the shocks that come from fiscal policy decisions. My contributions can be summed up in the following three actions. First of all, I estimated the model for the Romanian economy, using Bayesian techniques. Secondly, I determined the parameters of fiscal feedback rules in order to establish if the automatic stabilizers work properly. And thirdly, I tried to analyze the impulse response functions in order to assess the effects of different fiscal policy measures on the most important macroeconomic variables.
    Keywords: DSGE model; Bayesian estimation; Fiscal policy; Procyclicality of fiscal policy; Impulse response functions; Fiscal feedback rules; Fiscal deficit; Government debt;
    JEL: E62 C68 H50 H30 C15 G28 E61 C11
    Date: 2012–06–28
  8. By: Kydland, Finn; Rupert, Peter; Sustek, Roman
    Abstract: Over the U.S. business cycle, fluctuations in residential investment are well known to systematically lead GDP. These dynamics are documented here to be specific to the U.S. and Canada. In other developed economies residential investment is broadly coincident with GDP. Nonresidential investment has the opposite dynamics, being coincident with or lagging GDP. These observations are in sharp contrast with the properties of nearly all business cycle models with disaggregated investment. Including mortgages and interest rate dynamics aligns the theory more closely with U.S. observations. Longer time to build in housing construction makes residential investment coincident with output.
    Keywords: Economics, General, Economics, Other, residential investment, nonresidential investment, business cycle, mortgages, time to build
    Date: 2012–08–01
  9. By: Bick, Alexander; Fuchs-Schündeln, Nicola
    Abstract: We document contemporaneous differences in the aggregate labor supply of married couples across 19 OECD countries. We quantify the contribution of international differences in non-linear labor income taxes and consumption taxes, as well as male and female wages, to the international differences in the data. Our model replicates the comparatively small differences of married men's hours worked very well. Moreover, taxes and wages account for a large part of the observed substantial differences in married women's labor supply between the US and Western, Eastern, and Northern Europe, but cannot explain the low labor supply of married women in Southern Europe.
    Keywords: Hours Worked; Taxation; Two-Earner Households
    JEL: E60 H20 H31 J12 J22
    Date: 2012–09
  10. By: William Barnett (Department of Economics, The University of Kansas); Haiyang Xu (Washington University in St.Louis)
    Abstract: The determinants of money velocity are theoretically explored under various assumptions of interest rate uncertainty in a monetary general equilibrium model. Money is introduced by putting monetary services in the utility function. Monetary assets pay interest. When interest rates are uncertain, it is found that the degree of risk aversion in consumers' preferences and the risk in the return rates of the benchmark asset affect both the intercept and slope of the money velocity function, while the risk in return rates of monetary assets only affects the intercept of the money velocity function. The traditional money velocity function would become unstable if covariances change over time between interest rates and consumption growth rate or between interest rates and real money growth rate. We simulate the model developed in this paper and find that the coefficients of the money velocity function are volatile. The Swamy and Tinsley (1980) random coefficient model is then estimated with money velocity data to compare the results with those from model simulation. It is found that the estimated stochastic slope coefficient of the velocity function behaves in a manner that is approximately consistent with the simulation results.
    Date: 2012–09
  11. By: Jean-Stéphane Mésonnier; Dalibor Stevanovic
    Abstract: The recent crisis has revealed the potentially dramatic consequences of allowing the build-up of an overstretched leverage of the financial system, and prompted proposals by bank supervisors to significantly tighten bank capital requirements as part of the new Basel 3 regulations. Although these proposals have been fiercely debated ever since, the empirical question of the macroeconomic consequences of shocks to banks’ leverage, be they policy induced or not, remains still largely unsettled. In this paper, we aim to overcome some longstanding identification issues hampering such assessments and propose a new approach based on a data-rich environment at both the micro (bank) level and the macro level, using a combination of bank panel regressions and macroeconomic factor models. We first identify bank leverage shocks at the micro level and aggregate them to an economy-wide measure. We then compute impulse responses of a large array of macroeconomic indicators to our aggregate bank leverage shock, using the new methodology developed by Ng and Stevanovic (2012). We find significant and robust evidence of a contractionary impact of an unexpected shock reducing the leverage of large banks. <P>
    Keywords: bank capital ratios, macroeconomic fluctuations, panel, dynamic factor models,
    JEL: C23 C38 E32 E51 G21 G32
    Date: 2012–09–01
  12. By: Giovanni Caggiano (University of Padova); Luciano Greco (University of Padova)
    Abstract: The relationship between fiscal and financial euro area indicators and sovereign yield spreads has changed after the start of the financial crisis. Increased financial volatility has magnified the impact of fiscal conditions as drivers of sovereign risk, has widened the set of macroeconomic determinants, and has caused substantial interactions between fiscal and financial variables.
    Keywords: Fiscal policy, Financial Crisis, Refinancing risk, Regime switch, Cross-country Panel.
    JEL: E43 E62 F32 H60
    Date: 2012–07
  13. By: Richard Dennis
    Abstract: This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank.s approximating model, the paper's main findings are as follows. First, a central bank's credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness
    JEL: E58 E61 C63
    Date: 2012–08
  14. By: Santiago García-Verdú
    Abstract: This paper presents an analysis of the expected inflation distribution based on the surveys made to economic analysts in the private sector, by Banco de México. Conceptually, the analysis can be divided into three aspects: level, dispersion, and skewness, of expected inflation. It is anticipated that the behavior of these aspects will be consistent with the process of inflation convergence to its target, in the sense that the expected inflation level and dispersion, and the probability of observing a sizable realization of inflation have been diminishing, as the cited process has taken place. Additionally, first, a model is presented in which agents face a cost when they update their inflation expectation. This model explains some of the facts seen in inflation expectation dispersion. In the model, the decrease in the dispersion is consistent with an increase in the frequency with which the agents update their inflation expectation, as observed in the data. Second, under an event-study framework the respond of upside risks of inflation expectations to the approval of the Income Law is analyzed. The results suggest that once the cited law is approved, on average there is a decrease in such risks.
    Keywords: Inflation, Expectations, Expected Inflation.
    JEL: E31 D84
    Date: 2012–08
  15. By: Wall, Larry D. (Asian Development Bank Institute)
    Abstract: Central banks have had an important role in maintaining financial stability through their lender of last resort role. As lender of last resort, the central bank is given enormous power which is normally tempered by a variety of limits. In the most recent crises in both the United States and euro area, the Federal Reserve and European Central Bank (ECB) have come under enormous pressure to take lender of last resort actions that exceed these normal bounds. This paper reviews the experience of these two central banks and draws some implications for future policy.
    Keywords: central banking; financial stability; united states; euro area; federal reserve; european central bank
    JEL: E50 E58 G28
    Date: 2012–09–04
  16. By: Renne, J-P.
    Abstract: This paper presents a no-arbitrage model of the yield curve that explicitly incorporates the central-bank policy rate. After having estimated the model using daily euro-area data, I explore the behaviour of risk premia at the short end of the yield curve. These risk premia are neglected by the widely-used practice that consists in backing out market forecasts of future policy-rate moves from money-market forward rates. The results suggest that this practice is valid in terms of sign of the expected target moves, but that it tends to overestimate their size. As an additional contribution, the model is exploited to simulate forward-guidance measures. A credible commitment of the central bank to keep its policy rate unchanged for a given period of time can result in substantial declines in yields. For instance, a central-bank commitment to keep the policy rate at 1% over the next 2 years would imply a decline in the 5-year rate of about 25 basis points.
    Keywords: affine term-structure models; zero lower bound; regime switching; forward policy guidance.
    JEL: E43 E44 E47 E52 G12
    Date: 2012
  17. By: Suparna Chakraborty; Keisuke Otsu
    Abstract: What are the economic mechanisms that account for sudden growth spurts? Are these mechanisms similar across episodes? Focusing on the economic resurgence of the BRICs over the last decade, we employ the Business Cycle Accounting methodology developed by Chari, Kehoe and McGrattan (2007) to address these questions. Our results highlight that while efficiency wedges do contribute in a large part to growth, especially in Brazil and Russia, there is an increasing importance of investment wedge especially in the late 2000s, noted in China and India. The results are typically related to the stages of development with Brazil and Russia coming off a crisis to grow in the 2000s, while India and China were already on a stable growth path. Our conclusions are robust to alternative methodological extensions where we allow shocks to the trend component of efficiency as opposed to traditional shocks to the cyclical component, as well as to standard modifications where we allow for investment adjustment costs. Relating improvements in wedges to institutional and financial reforms, we find that financial development and improvements in effective governance in BRICs are consistent with improvements in investment and efficiency wedges that led to growth.
    Keywords: BRIC; business cycle accounting; efficiency; market frictions; trend shocks; investment adjustment costs
    JEL: E32
    Date: 2012–08
  18. By: Taro Ikeda (Kurume University, Faculty of Economics)
    Abstract: This paper introduces asymmetric central bank forecasting into the standard New Keynesian model within the context of robust control theory. Asymmetric forecasting expresses policymakersf reservations about economic forecasts, and the degree of their reservations is reflected as an asymmetric preference whose existence warrants laying aside the assumption that policymakersf base decisions primarily on rational expectations. This study concludes that monetary policy becomes more aggressive because of policymakersf reservations about forecasts stemming from asymmetry, and preference for policies robust enough to overcome unanticipated situations. In addition, adopted policies will likely amplify economic fluctuations and significantly reduce social welfare.
    Keywords: robust control, asymmetric forecasting, bounded rationality
    JEL: E50 E52 E58
    Date: 2012–08
  19. By: Petr Rozmahel (Department of Economics, Faculty of Business and Economics, Mendel University in Brno); Nikola Najman (Department of Economics, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: The paper deals with assessing the common trends in business cycle similarity and convergence in Europe. The main goal of the paper is to identify common cyclical co-movements and trends in convergence among the European countries so that the emerging European business cycle could be identified. Concerning the factors of business cycle, the research question of the paper is based on assumption that the integration effects are so dominant to bring the European cycle into existence. Also a potential influence of a global crisis on European and world business cycles is examined in the paper. The industrial production index is used to approximate business cycles. Hodrick-Prescott filter, Christiano-Fitzgerald filter and first differencing were used to dissect the cyclical components and identified the cycles in the data. The common co-movements, trends of convergence and divergence are identified using correlation analysis. Particularly, actual cross correlation and historical correlation in separated subsequent periods is applied in the analysis. The results do not provide an evidence of emerging European business cycle contrary to US cycle. The global economic crises was identified as a kind of negative symmetric shock pushing all major economies towards the recession phase of the cycle und thus increasing similarity. The results also shed some light on an influence of different detrending techniques when dissecting the cycles from the input macroeconomic time series.
    Keywords: business cycle, correlation, convergence, Eurozone, industrial production
    JEL: E32 F15 F44
    Date: 2012–09
  20. By: M. Lopreite
    JEL: E12 E51 E52
    Date: 2012
  21. By: Engelbert Stockhammer (Kingston University); Dimitris P. Sotiropoulos (Kingston University)
    Abstract: This paper investigates the economic costs of Euro area rebalancing. Based on an old Keynesian model we estimate a current account equation, a wage-Phillips curve and an Okun’s Law equation. All estimations are carried out for a panel of eleven Euro area members (excluding Luxembourg). From the estimation results we calculate the output costs of reducing current account deficits. Greece, Ireland, Italy, Portugal and Spain (GIIPS) had, on average, current account deficits of 8.4% of GDP in 2007. To eliminate these current account deficits, it would necessitate a reduction of GPD by some 47%. These are staggering amounts and, indeed we think that such a reduction of GDP should not be imposed in the GIIPS group. Moreover, we doubt whether it would be politically feasible. In principle there are two ways that trade imbalances could be resolved: deflationary adjustment in the deficit countries or inflationary adjustment in the surplus countries. Presently, the burden of adjustment is exclusively on the deficit countries. Our results indicate that the economic costs of this adjustment to those countries are equivalent to the output loss of the Great Depression. An adjustment of the surplus countries would increase growth and it would come with higher inflation, but it would allow rebalancing without a Great Depression in parts of Europe.
    Keywords: Rebalancing, Euro area, current account, Phillips curve, Okun’s law
    JEL: E12 E6 F4
    Date: 2012–06
  22. By: Eduardo Zilberman (Department of Economics PUC-Rio); Tiago Berriel (EPGe/FGV)
    Abstract: This paper introduces cash transfers targeting the poor in an incomplete marketsmodel with heterogeneous agents facing idiosyncratic risk. These transfers change the degree of insurance in the economy and affect precautionary motives asymmetrically,leading the poorest households to decrease savings proportionally more than their richer counterparts. In a model economy calibrated to Brazil, once the cash transfer program is adopted, wealth inequality and social welfare increase, poverty decreases,while employment and income inequality remain about the same. Imperfect access to financial markets is important for these results, whereas whether the program is funded with lump sum or distortive taxes is not.
    Date: 2012–08
  23. By: Eagle, David M.; Christensen, Lars
    Abstract: For a pure-exchange, closed economy without storage, Eagle and Domian (2005) and Koenig (2011) derive similar but different equations of Pareto-efficient risk sharing. We confirm that both equations are correct. We also generalize and reinterpret Koenig’s equation. We find that Koenig’s equation as the superior one when we use the harmonic mean to compute average relative risk aversion. Our reinterpretation of Koenig’s generalized equation is that Pareto efficiency requires that the consumption of an individual with average relative risk should be proportional to the real GDP.
    Keywords: risk sharing; Pareto efficiency; nominal GDP targeting; quasi-real indexing; inflation indexing
    JEL: E31 E52 D60
    Date: 2012–01–31
  24. By: Augustyniak, Hanna; Łaszek, Jacek; Olszewski, Krzysztof; Waszczuk, Joanna
    Abstract: This article explains why the housing and commercial real estate market are in a permanent disequilibrium. The real estate market converges towards the equilibrium, but it changes due to credit constraints, expectations and the long investment process. The cycles on this market are much more volatile than those of the whole economy. Moreover, the market is very local. Often, one can observe the accumulation of different factors, which lead to herding and speculations and finally result in a crisis. Because the market is strongly financed by banks, problems on the market affect the whole financial system. Thus, an appropriate and prudent valuation of the property is needed, which helps to smooth the demand and also reduces the risk for the investor and the bank.
    Keywords: Housing market cycles; commercial real estate cycles; disequilibrium; banking sector; regulation;
    JEL: E32 E44 R21 R31
    Date: 2012–08–23
  25. By: Nicolas Vincent
    Abstract: Price rigidity is often modeled by assuming that firms face a fixed cost of price change. However, in surveys, firms report that the main reason they wish to keep prices stable is for fear of antagonizing customers. Moreover, marketing studies show that most consumers engage in very little product comparison on a typical shopping trip. In this paper, we explore the implications of these observations for price rigidity. In our model, comparing prices and characteristics of alternative brands is time-consuming. While some consumers behave as bargain hunters with zero opportunity cost form shopping, most are loyal to firms as long as posted prices are not raised. A price increase is interpreted as a signal that a better alternative may be available and triggers consumer search. Firms do not face menu costs and are free to change nominal prices, but understand that their pricing decisions will affect their customer base and hence future profits. We show that this micro-founded mechanism is akin to a nominal rigidity and naturally generates price stickiness. It is also compatible with the observation of frequent sales at the retail level and can rationalize the decreasing or flat hazard functions observed empirically.
    Keywords: Price stickiness, customer relations, nominal rigidities, consumer inattention
    JEL: E30 L16
    Date: 2012
  26. By: Quaas, Georg
    Abstract: Die von Nelson und Winter (1982) vorgeschlagene evolutorische Theorie hat hunderte Studien angeregt, die sich auf das Modell beziehen, das in ihrem Buch vorgestellt wird. Dieses Modell demonstrierte die empirische Gültigkeit eines neuen theoretischen und methodologischen Ansatzes auf dem Hintergrund der U.S.-amerikanischen Ökonomie und entsprechender Daten. Allerdings wurde nur in wenigen Studien versucht, das Modell durch Anwendung auf eine andere Volkswirtschaft zu replizieren. Das vorliegende Pepier stellt eine spezielle Implementation der umfangreichen, aber sehr speziellen Klasse von Nelson-Winter-Modellen dar, die die Evolution der deutschen Volkswirtschaft von 1970 bis 2004 nachvollzieht. Im Großen und Ganzen zeigt das Modell dasselbe Verhalten wie von Nelson und Winter berichtet. Vergleicht man es mit den üblichen ökonometrischen Modellen, so ist seine Leistungsfähigkeit fernab von zufriedenstellend. Aber das ist insofern nicht überraschend, als im Modell so wichtige Strukturen wie ein Markt für Güter und Dienstleistungen noch nicht implementiert worden sind. -- The evolutionary theory proposed by Nelson and Winter (1982) has inspired hundreds of studies related to the model presented in their book. This model has demonstrated the empirical validity of a new theoretical and methodological approach to the background of the U.S. economy and the corresponding data. However, only a few of those related studies aimed at replicating the model and applying it to another economy. This study presents a special implementation of the large, but very special class of Nelson-Winter models that mimics the evolution of the German economy from 1970 to 2004. By and large, the model shows the same behavior reported by Nelson and Winter. Compared to standard econometric models, its performance is far from satisfactory. This is not surprising because important structures such as a market for goods and services are still not implemented in the model.
    Keywords: Nelson-Winter-Modell,Evolutorische Ökonomik,Modell der deutschen Volkswirtschaft,Nelson-Winter model,evolutionary theory,modeling the German economy
    JEL: E11 D21 O32
    Date: 2012
  27. By: Azzimonti, Marina; de Francisco, Eva; Quadrini, Vincenzo
    Abstract: During the last three decades, the stock of government debt has increased in most developed countries. During the same period, we also observe a significant liberalization of international financial markets and an increase in income inequality in several industrialized countries. In this paper we propose a multicountry political economy model with incomplete markets and endogenous government borrowing and show that governments choose higher levels of public debt when financial markets become internationally integrated and inequality increases. We also conduct an empirical analysis using OECD data and find that the predictions of the theoretical model are supported by the empirical results.
    Keywords: Financial integration; Government debt; Income inequality
    JEL: E60 F59
    Date: 2012–09
  28. By: Benjamin Dachis (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: Investment in plant and equipment per worker by Canadian businesses is picking up relative to counterparts elsewhere after years of underperformance. Canada’s relative improvement owes much to outperformance by resource-rich provinces, Newfoundland and Labrador being the most recent star, while Ontario continues to slip. Policies that increase competitive pressures to invest and remove biases against non-residential investment could boost capital spending by businesses and improve Canadian workers’ prospects for higher incomes in the future.
    Keywords: Tools for Workers, Canada, non-residential investment, business investment
    JEL: E22 E23
    Date: 2012–08
  29. By: Kawai, Masahiro (Asian Development Bank Institute); Morgan, Peter J. (Asian Development Bank Institute)
    Abstract: A key lesson of the 2007–2009 global financial crisis was the importance of containing systemic financial risk and the need for a “macroprudential” approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. By virtue of their overview of the economy and the financial system and their responsibility for payments and settlement systems, there is a broad consensus that central banks should play a key role in monitoring and regulating financial stability. Emerging economies face additional challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops” or reversals of capital inflows. This paper reviews the recent literature on this topic and identifies relevant lessons for central banks, especially those in Asia’s emerging economies.
    Keywords: central banking; central banks; financial stability; asia; surveillance and regulation; global financial crisis
    JEL: E52 F31 G28
    Date: 2012–08–31
  30. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: Historically, microeconomics was the domain of scientific methodology in economics, while macroeconomics attracted less mathematically oriented economists. In recent years, the level of sophistication of macroeconomics has grown dramatically, and that field now attracts many of the most mathematically oriented economists. Nevertheless, the field's set of shared views (i.e., maintained hypothesis) has not grown. The purpose of the scientific method is to permit the maintained hypothesis within a field to grow by establishing a rigorous methodology for deductively deriving and empirically testing hypotheses. The field of macroeconomics has failed that test of scientific success during precisely the decades of most rapid growth in the use of scientific methodology. It is argued that the source of the paradox lies in the fact that the inroads of science in macroeconomics have been asymmetric. Central to the definition and objectives of macroeconomics is dimension reduction and dynamics. Rigorous dimension reduction is impossible without formal aggregation, and complex dynamics is impossible without nonlinearity. Yet applications of formal aggregation theory and nonlinear dynamics to macroeconomics have progressed very slowly, at the time that scientific methodology in other areas of macroeconomics have advanced rapidly. This asymmetry explains the paradox.
    Date: 2012–09
  31. By: Barnett, William A.; Jawadi, Fredj
    Abstract: This paper is the introduction to the forthcoming book, Recent Developments in Alternative Finance: Empirical Assessments and Economic Implications, Proceedings of Second International Symposium in Computational Economics and Finance. The conference was held in Tunis, Tunisia, March 15-17, 2012. The volume will appear as volume 22 of the Emerald Press monograph series, International Symposia in Economic Theory and Econometrics. The topic of the conference was alternative approaches to finance.
    Keywords: finance; alternative finance; monetary economics
    JEL: E51 E52 G30 G10 G00 G20 E41
    Date: 2012–08–30
  32. By: Davoine, Thomas
    Abstract: Abstract I take seriously the hypothesis that the wealthy lack time to consume to explain empirical evidence on old age asset decumulation and rich savings rates. Basic life-cycle theory predicts that households run down their assets toward the end of their life but evidence shows they do it at a very low rate. Under homothetic preferences, this theory also predicts that rich and poor save at the same rate, inconsistent with empirical evidence. Other existing models are also inconsistent with both evidence at the same time. Integrating a Becker home production model in Ramsey growth theory, I show that time constraints can explain the evidence on savings rate and asset decumulation, as well as some other evidence difficult to rationalize.
    Keywords: Time constraints, home production, neoclassical growth theory, savings rate, old age asset decumulation
    JEL: E21 D9 J14 J22
    Date: 2012–08
  33. By: Yoichi Matsubayashi (Graduate School of Economics, Kobe University); Takao Fujii (Graduate School of Economics, Kobe University)
    Abstract: This paper investigates empirically the substitutability of savings among the household, corporate and government sectors in OECD countries. First, theoretical micro-foundations are constructed, wherein, each sector behaves under intertemporal optimization. Second, empirical investigations are conducted based on this theoretical formation. Optimal consumptions is then derived based on the theoretical relationship between household consumption and corporate and government savings. Empirical results indicate that changes in corporate savings marginally offset household savings in OECD countries. This empirical evidence somewhat supports the assertion that households partly pierce the corporate veil and that other factors, such as fluctuations in disposable income and precautionary motives, contribute to the relation between household and corporate savings. However, substitutability of savings between the households and the government is not clearly evident.
    Keywords: Savings by Sectors, Pierce Corporate Veil, Ricardian Equivalence Theorem
    JEL: E21 E62 F01
    Date: 2012–08
  34. By: Polterovich, Victor
    Abstract: The costs and benefits of privatization are considered, focusing on the current Russian conditions. The experience of many countries, as well as econometric and theoretical studies, a review of which is given in the paper, show that relative efficiency of privatized enterprises in comparison with the state depends on the stage of economic development and quality of institutions. State-owned enterprises may have a number of special functions which are particularly important for developing or resource abundant economies. In particular, they can play the role of agents of modernization to initiate large-scale projects as public-private partnerships. It is shown that the decision on privatization should be considered in the context of a more general problem of finding a rational ownership structure in an economy. Factors affecting the comparative efficiency of public and private enterprises are analyzed. A number of hypotheses are proposed about the shape of dependence of the rational ownership structure on the level of development, the quality of government, and the quality of markets. Recommendations on improvement of the public sector management are formulated.
    Keywords: Sappington–Stiglitz theorem; transformation cost; NP- cycles; stationary ownership structure; ownership diversification; industrial policy
    JEL: E02 O1 P5 H11 D02 H82
    Date: 2012
  35. By: sivakumar, marimuthu
    Abstract: After the introduction of Liberalization, Privatization and Globalization by the name of economic reforms Indian economy has been integrated with the global economy. This integration enabled India to move on high growth path but that integration exposed Indian economy to adverse impacts from the world economy. India’s share in the world trade is less than 2 per cent. India’s vision in the world trade is not only earning foreign exchange but also to induce the economic growth and development. To achieve this vision India is trying to increase its exports. But the 2008 global economic crisis has hindered this effort. Since the globalization, it is explicit that the shocks in the world economy may affect the Indian economy also. There is a need to assess those effects on our economy is the need of the hour.
    Keywords: Global Economic Crisis; India; Exports; Imports
    JEL: E0 F0 A1 F14
    Date: 2012–08–30
  36. By: Polterovich, Victor
    Abstract: It is a typical case in the practice of reforms, when a reformer, who seeks to introduce an institution with desired properties, discovers that its immediate implementation is impossible because of resource, technological, cultural, political or institutional constraints. In this case, one has to construct a sequence of alternating interim institutions that, for each moment of time, satisfy the existing constraints, and, in the end, provide the implementation of the desired institution. The paper describes some methods and constructions that can be used to create sequences of interim institutions. Two approaches to their design are considered: the method of "mixing" and the method of institutional competition. I explore the possibilities of finding interim institutions through institutional experimentation and by means of using a theory of the evolving institutions in more developed countries. The suggested methodologies are used to analyze a number of reforms, such as privatization in China and Slovenia, the mass introduction of funded pension systems in the 1990s, changes of the voting rules in the Council of Ministers of the EU, the introduction of the unified state examination for admission to Russian universities, etc.
    Keywords: institutional reform design; interim institution; pension system; mortgage institution; building and loan association; dual price system; privatization
    JEL: E02 O1 P5 H75 D02 L85
    Date: 2012

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