nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒09‒30
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Elusive Promise of Independent Central Banking By Marvin Goodfriend
  2. Should Canadian Monetary Policy Respond to Asset Prices? Evidence from a Structural Model. By Daniel Komlan Fiodendji
  3. The Macroeconomic Effects of Interest on Reserves By Peter N. Ireland
  4. New Keynesian macroeconomics : Empirically tested in the case of Republic of Macedonia By Josheski, Dushko; Lazarov , Darko
  5. The Case For Temporary Inflation in the Eurozone By Schmitt-Grohé, Stephanie; Uribe, Martín
  6. Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multi-sector Approach By Pedro S. Amaral; James C. MacGee
  7. Deriving the Taylor Principle when the Central Bank Supplies Money By Davies, Ceri; Gillman, Max; Kejak, Michal
  8. The use of the Eurosystem's monetary policy instruments and operational framework since 2009 By Fabian Eser; Marta; Stefano Iacobelli; Marc Rubens
  9. Financial Constraints, Financial Shocks, and Business Cycle Accounting. By RIMARCHI, Massimiliano
  10. Monetary policy with heterogeneous agents By Nils Gornemann; Keith Kuester; Makoto Nakajima
  11. Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter? By Nidhaleddine Ben Cheikh
  12. Balance Sheet Channel of Monetary Policy and Economic Growth under Fiscal Dominance: Evidence from Pakistan By Shabbir, Safia
  13. The Bank of Amsterdam through the lens of monetary competition By Stephen Quinn; William Roberds
  14. Demographics, Redistribution, and Optimal Inflation By James Bullard; Carlos Garriga; Christopher J. Waller
  15. Long Run Productivity Risk and Aggregate Investment By Favilukis, Jack; Lin, Xiaoji
  16. 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.
  17. A Macroeconomic Model of Endogenous Systemic Risk Taking By Martinez-Miera, David; Suarez, Javier
  18. The interplay of economic reforms and monetary policy: the case of the Euro area By Francesco Drudi; Alain Durré; Francesco Paolo Mongelli
  19. Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects By Christopher Carroll; Jiri Slacalek; Martin Sommer
  20. Wage Rigidity: A Solution to Several Asset Pricing Puzzles By Favilukis, Jack; Lin, Xiaoji
  21. A Quantitative Study of Hong Kong's Fiscal Policy By Wong , Chi Shing
  22. Stochastic mortality, macroeconomic risks, and life insurer solvency By Hanewald, Katja; Post, Thomas; Gründl, Helmut
  23. Can emerging economies decouple from the US business cycle? By Eleonora Cutrini; Giorgio Galeazzi
  24. Comparing behavioural and rational expectations for the US post-war economy By Liu, Chunping; Minford, Patrick
  25. Loan supply shocks and the business cycle By Luca Gambetti; Alberto Musso
  26. How can we anticipate crises? By Vieru, Elena Bianca
  27. An approximate dual-self model and paradoxes of choice under risk By Drew Fudenberg; David K. Levine; Zacharias Maniadis
  28. Earnings Losses and Labor Mobility over the Lifecycle By Jung, Philip; Kuhn, Moritz
  29. Emissions Cap or Emissions Tax? A Multi-sector Business Cycle Analysis By Yazid Dissou; Lilia Karnizova
  30. Endogenous Liquidity and Defaultable Bonds By Zhiguo He; Konstantin Milbradt
  31. The effect of crude oil price change and volatility on Nigerian economy By Demachi, Kazue
  32. Anatomy of Cashless Banking in Nigeria: What Matters? By Atanda, Akinwande A.; Alimi, Olorunfemi Y.
  33. Las perspectivas de la economia espanola en 2012 By Rafael Domenech
  34. Explaining EU Citizens' Trust in the ECB in Normal and Crisis Times By Ehrmann, Michael; Soudan, Michel; Stracca, Livio
  35. Sharing high growth across generations:pensions and demographic transition in China By Zheng Song; Kjetil Storesletten; Yikai Wang; Fabrizio Zilibotti
  36. Access to credit for Italian firms: new evidence from the ISTAT confidence business surveys By Costa , Stefano; Malgarini, Marco; Margani , Patrizia
  37. Societal Aging: Implications for Fiscal Policy By Alan J. Auerbach
  38. The revelation of the Chinese national debt market (Chinese version) By Zhouying Gang; Chen Shiyuan
  39. Inclusive Growth Strategies for Pakistan: Myth or Reality for Policymakers! By Syed Muhammad, Atif; Sardar, Mohazzam
  40. Over-Optimistic Official Forecasts in the Eurozone and Fiscal Rules By Frankel, Jeffrey A.; Schreger, Jesse
  41. Happiness and the Persistence of Income Shocks By Bayer, Christian; Juessen, Falko
  42. Macroeconomic Implications of Demographic Changes: A Global Perspective By Ronald Lee
  43. A discussion on the development strategy of the Chinese debt market (Chinese version) By Zhouying Gang; Chen Shiyuan

  1. By: Marvin Goodfriend (Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail:
    Abstract: Independent central banking is reviewed as it emerged first under the gold standard and later with an inconvertible paper money. Monetary and credit policy are compared and contrasted as practiced by the 19th century Bank of England and the Federal Reserve. The lesson is that wide operational and financial independence given to monetary and credit policy in the public interest subjects the central bank to incentives detrimental for macroeconomic and financial stability. An independent central bank needs the double discipline of a priority for price stability and bounds on expansive credit initiatives to secure its promise for stabilization policy.
    Keywords: Bank of England, central bank independence, credit turmoil of 2007-8, Federal Reserve, Great Inflation, lender of last resort, monetary policy
    JEL: E3 E4 E5 E6
    Date: 2012–09
  2. By: Daniel Komlan Fiodendji (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)
    Abstract: Although the Bank of Canada admits asset prices are considered in its policy deliberations because of their effects on inflation or output gap, the Bank of Canada denies trying to stabilize asset prices around fundamental values. However, since the start of the Bank of Canada we have seen a boom as well as a bust in the stock market. Are we to believe that the Bank of Canada did not react to these stock market fluctuations, apart from their impact consequences on economy? We investigate this issue by using a structural model based on the New Keynesian framework that is augmented by a stock market variable. We use an econometric method that allows us to distinguish the direct effect of stock prices on Bank of Canada policy rates from indirect effects via inflation or GDP. Our results suggest that stock market stabilization plays a larger role in Bank of Canada interest rate decisions than it is willing to admit. Furthermore, these results should give new relevant insights into the influence of stock market index prices on monetary policy in Canada and should provide relevant insights regarding the opportunities and limitations of incorporating financial indicators in monetary policy decision making. They should give financial market participants, such as analysts, bankers and traders, a better understanding of the impact of stock market index prices on the Bank of Canada policy. The results imply that the preferences of the monetary authority have changed between the different subperiods. In particular, the parameter associated with the implicit target of inflation has been reduced significantly. The findings suggest that the introduction of inflation targeting in Canada was accompanied by a fundamental change in the objectives of monetary policy, not only with respect to the average target, but also in terms of precautions taken to keep inflation in check in the face of uncertainty about the economy.
    Keywords: Asset Prices, Bank of Canada, Structural Model, Inflation Target, Preferences, Interest Rate,Monetary Policy
    JEL: E44 E52 E58 E61
    Date: 2012
  3. By: Peter N. Ireland
    Abstract: This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.
    JEL: E31 E32 E51 E52 E58
    Date: 2012–09
  4. By: Josheski, Dushko; Lazarov , Darko
    Abstract: In this paper we test New Keynesian propositions about inflation and unemployment trade off with the New Keynesian Phillips curve and the proposition of non-neutrality of money. The main conclusion is that there is limited evidence in line with the New-Keynesian theory. Money and growth are cointegrated series and that money growth influences the economics growth with one quarter lag. Cointegration means also that if the two series are cointegrated they have long run equilibrium. St.Louis model in the paper showed overall that increase in money growth leads to decrease in the economy growth. But the effect in the equation at three quarters lag is positive. The NAIRU rate in the unemployment inflation trade off model is almost similar as high to the actual unemployment. In the New Keynesian Phillips curve not surprisingly, there appears to be no statistically significant relationship between inflation and Unemployment –even in the classical Philips curve and in adaptive expectations Philips curve by Modigliani- Papademos (1975). Or the Friedman-Phelps- Lucas expectations-augmented one between the difference of actual and expected inflation rate and the gap between actual and the natural rate of unemployment presented in the next equation.
    Keywords: New-Keynesian Macroeconomics; NAIRU; Money and output trade off
    JEL: B23 B22
    Date: 2012–09–19
  5. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: Since the onset of the great recession in peripheral Europe, nominal hourly wages have not fallen much from the high levels they had reached during the boom years in spite of widespread increases in unemployment. This observation evokes a well-known narrative in which nominal downward wage rigidity is at the center of the current unemployment problem. We embed downward nominal wage rigidity into a small open economy with tradable and nontradable goods and a fixed exchange-rate regime. In this model, negative external shocks cause involuntary unemployment. We analyze a number of national and supranational policy options for alleviating the unemployment problem caused by the combination of downward nominal wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a battery of domestic policies that could be effective in solving the unemployment problem, it is unlikely that a solution will come from within national borders. This leaves supranational monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full employment in peripheral Europe could be restored by raising the Euro-area annual rate of inflation to about 4 percent for the next five years.
    Keywords: currency pegs; downward wage rigidity; inflation; monetary union
    JEL: E31 E62 F41
    Date: 2012–09
  6. By: Pedro S. Amaral (Federal Reserve Bank of Cleveland); James C. MacGee (University of Western Ontario)
    Abstract: We quantify the role of contractionary monetary shocks and wage rigidities in the U.S. Great Contraction. While the average economy-wide real wage varied little over 1929-33, real wages rose significantly in some industries. We calibrate a two-sector model with intermediates to the 1929 U.S. economy where wages in one sector adjust slowly. We find that nominal wage rigidities can account for less than a fifth of the fall in GDP over 1929-33. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in our two-sector model without intermediates.
    Keywords: Great Depression; Sectoral Models; Sticky Wages
    JEL: E20 E30 E50
    Date: 2012
  7. By: Davies, Ceri; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium “Taylor rule”. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a ‘Taylor principle’ sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy’s underlying structural parameters.
    Keywords: Taylor rule; velocity; forward-looking; misspecification bias
    JEL: E13 E31 E43 E52
    Date: 2012–08
  8. By: Fabian Eser (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marta (Banco de España, C/Alcalá, 48, 28014 Madrid, Spain.); Stefano Iacobelli (Banca d’Italia, Via Nazionale, 91, 00184 Roma, Italy.); Marc Rubens (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.)
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the first quarter of 2009 until the second quarter 2012. The paper discusses in detail, from a liquidity management perspective, the standard and non-standard monetary policy measures taken over this period. The paper reviews the evolution of the Eurosystem balance sheet, participation in tender operations, the outright purchase programmes, patterns of reserve fulfilment, recourse to standing facilities as well as the steering of money market interest rates. JEL Classification: D02, E43, E58, E65
    Keywords: Monetary policy implementation, central bank operational framework, central bank liquidity management, non-standard monetary policy measures
    Date: 2012–08
  9. By: RIMARCHI, Massimiliano
    Abstract: This thesis features three closely related chapters investigating the role of the investment wedge in affecting macroeconomic fluctuations. The first chapter shows that the Business Cycle Accounting (BCA) methodology is sensitive to the specification of households preferences in identifying the role of the investment wedge. A poor performance of the investment wedge and of the financial frictions it represents, such as the one BCA finds on 2007-2010 US data and other past events, is compatible with a simulated recession fully driven by financial factors and financial accelerator mechanisms when preferences are not correctly specified in the BCA tool. The second chapter investigates the conditions under which a shock to the risk premium paid by entrepreneurs on bank funds, i.e. a shock to the investment wedge, is able to generate a pro-cyclical response of aggregate consumption. The analysis shows that a minimum degree of nominal stickiness a-la-Calvo and non-separable households preferences of the GHH type, are sufficient conditions for solving the problem of counter cyclicality of consumption in the presence of financial shocks. The third chapter is an application of the BCA tool-kit to the Swedish boom-bust cycle of the late 1980s. The efficiency wedge plays an essential role in explaining the cycle while the investment wedge plays a minor role, adding to the persistence of the recession. Calibrating a BGG model to Sweden according to the findings of the BCA shows that financial deregulation reforms in Sweden did not affect the vulnerability of the economy to the recessionary shock.
    Date: 2012
  10. By: Nils Gornemann; Keith Kuester; Makoto Nakajima
    Abstract: We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.
    Keywords: Monetary policy ; Unemployment
    Date: 2012
  11. By: Nidhaleddine Ben Cheikh (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen Basse-Normandie)
    Abstract: This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.
    Keywords: Exchange Rate Pass-Through; Inflation; Smooth Transition Regression
    Date: 2012–09–10
  12. By: Shabbir, Safia
    Abstract: Using micro data on non-financial listed companies in Pakistan, over the period of 2000-2010, this paper emphasizes over the impact of monetary policy on economic growth through balance sheet channel. At first step, monetary tightening deteriorates the net worth of the firms and leads to cash flow squeeze; of which later affects the economic growth. We find this impact to last for three years over the balance sheets of the firms. Since, industrial sector drives the economic growth; we forecast corporate profitability at the second step. Empirical investigation shows that corporate profitability reverts to its mean at the rate of 25 percent. During Peak, mean reversion is 30 percent while it is 19 percent during trough implying that recession stays relatively longer and economic revival is slow during recessionary phase.
    Keywords: Monetary policy; monetary transmission; balance sheet channel; forecasting; profitability
    JEL: E52 E50 H32
    Date: 2012–09–14
  13. By: Stephen Quinn; William Roberds
    Abstract: In 1683 the Bank of Amsterdam introduced a form of fiat money that successfully competed with the coinage of the time. We argue that the principal motive for this monetary innovation was the uncertain value of coins circulating within the Dutch Republic. The Bank's fiat money regime persisted until the downfall of the Dutch Republic in 1795 and incorporated modern features such as gross settlement of financial obligations, open market operations, central bank repurchase agreements (the equivalent thereof), and emergency liquidity facilities.
    Date: 2012
  14. By: James Bullard (President and Chief Executive Officer, Federal Reserve Bank of St. Louis); Carlos Garriga (Research Officer, Federal Reserve Bank of St. Louis); Christopher J. Waller (Senior Vice President and Director of Research, Federal Reserve Bank of St. Louis (E-mail:
    Abstract: We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.
    Keywords: monetary policy, inflation bias, deflation, central bank design
    JEL: E4 E5 D7
    Date: 2012–09
  15. By: Favilukis, Jack (London School of Economics and Political Science); Lin, Xiaoji (OH State University)
    Abstract: We study the implications of long-run risk type shocks--shocks to the growth rate of productivity--for aggregate investment in a DSGE model. Our model offers an alternative to microfrictions explanation of aggregate investment non-linearities, in particular the heteroscedasticity of investment rate. Additionally, consistent with the data, these shocks imply that investment rate is history dependent (rising through an expansion), investment rate growth is positively autocorrelated, and is positively correlated with output growth at various leads and lags. A standard model with shocks to the level of productivity either predicts the opposite or fails to quantitatively capture these features in the data.
    JEL: E22 E23 E44
    Date: 2012–07
  16. By: Liu, Kai (Norwegian School of Economics (NHH)); Salvanes, Kjell G. (Norwegian School of Economics (NHH)); Sørensen, Erik Ø. (Norwegian School of Economics (NHH))
    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: mismatch, business cycle, graduation
    JEL: E32 J31 J62
    Date: 2012–08
  17. By: Martinez-Miera, David; Suarez, Javier
    Abstract: We analyze banks' systemic risk taking in a simple dynamic general equilibrium model. Banks collect funds from savers and make loans to firms. Banks are owned by risk-neutral bankers who provide the equity needed to comply with capital requirements. Bankers decide their (unobservable) exposure to systemic shocks by trading off risk-shifting gains with the value of preserving their capital after a systemic shock. Capital requirements reduce credit and output in
    Keywords: Capital requirements; Credit cycles; Financial crises; Macroprudential policies; Risk shifting; Systemic risk
    JEL: E44 G21 G28
    Date: 2012–09
  18. By: Francesco Drudi (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alain Durré (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany; IESEG-School of Management (Lille Catholic University) and LEM-CNRS (UMR 8179).); Francesco Paolo Mongelli (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany; Goethe University Frankfurt.)
    Abstract: The world has been struck by a mutating systemic financial crisis that is unprecedented in terms of financial losses and fiscal costs, geographic reach, and speed and synchronisation. The crisis from August 2007 to date can be divided into three main phases: the financial turmoil from August 2007 to the collapse of Lehman Brothers; the global financial crisis from September 2008 until spring 2010; and the euro area sovereign debt crisis from spring 2010 to the current period. While each phase has brought significant challenges, the current sovereign debt crisis has been the most critical stage for the euro area. It has brought unprecedented challenges for the monetary union and triggered extraordinary adjustments in both monetary policy and institutional arrangements at the euro area level. The purpose of this article is to outline the features of each crisis phase, to describe the actions taken by the European Central Bank (ECB) during each phase and to explain the rationale for such measures. It also discusses the need to strengthen further the economic union in order to guarantee the sustainability of the monetary union of the euro area. In this respect, it is argued that the recent institutional adjustments made at the EU level would have been necessary independently of the financial crisis. JEL Classification: D78, E52, E58, G01, H12
    Keywords: Monetary policy decision-making, Eurosystem, financial crisis, financial and institutional reforms
    Date: 2012–09
  19. By: Christopher Carroll; Jiri Slacalek; Martin Sommer
    Abstract: We argue that the U.S. personal saving rate’s long stability (1960s–1980s), subsequent steady decline (1980s–2007), and recent substantial rise (2008–2011) can be interpreted using a parsimonious 'buffer stock' model of consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between 'target' and actual wealth, with the target determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the long-term saving decline, while fluctuations in wealth and uncertainty capture the bulk of the business-cycle variation.
    Date: 2012–09
  20. By: Favilukis, Jack (London School of Economics and Political Science); Lin, Xiaoji (OH State University)
    Abstract: In standard models wages are too volatile and returns too smooth. We make wages sticky through infrequent resetting, resulting in both (i) smoother wages and (ii) volatile returns. Furthermore, the model produces other puzzling features of financial data: (iii) high Sharpe Ratios, (iv) low and smooth interest rates, (v) time-varying equity volatility and premium, and (vi) a value premium. In standard models, highly pro-cyclical and volatile wages are a hedge. The residual profit becomes unrealistically smooth, as do returns. Smoother wages act like operating leverage, making profits more risky. Bad times and unproductive firms are especially risky because committed wage payments are high relative to output.
    JEL: E21 E23 E32 E44 G12
    Date: 2012–09
  21. By: Wong , Chi Shing
    Abstract: Given the adoption of the linked exchange rate since October 1983, fiscal policy becomes the only measurement for stabilizing the Hong Kong economy. This paper attempts to establish a framework for evaluating the fiscal effect to prevent the abuse of fiscal measures. The empirical study of Jha et al. (2010) revealed the significant negative impact of fiscal effect in Hong Kong, which violates the classical view of fiscal policy. A similar result has been found by adopting another structural vector autoregression (SVAR) model proposed by Ravn et al. (2007). An omission of control variables in the quantitative model is possible. The MSCI AC (All countries) Pacific Index has been introduced as an international block in the SVAR model proposed by Ravn et al. (2007). The fiscal effect becomes positive and standardizes with the previous fiscal studies. The replacement of investment variable in the modified model suggests that positive fiscal innovation does not encounter with the crowding out effect on investment. The estimations for the decomposition policy expenditures indicate that compositional effect exists, and it undermines the fiscal multiplier. The estimations also reveal that the innovation in recurrent expenditure contributes mainly to the fiscal effect. With the persistence and significant impact on output, concentrating on infrastructure expenditure is the recommendation on Hong Kong fiscal policy to maximize the expansionary effect in the short run.
    Keywords: Hong Kong; Fiscal Policy; Structural VAR
    JEL: E62 E17 E6 E1
    Date: 2012–08–30
  22. By: Hanewald, Katja; Post, Thomas; Gründl, Helmut
    Abstract: Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index kt in the Lee-Carter model, we develop a dynamic asset-liability model to assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in this stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices react to changes in GDP, which itself is modelled as a stochastic process. Our simulation results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated. --
    Date: 2011
  23. By: Eleonora Cutrini (University of Macerata); Giorgio Galeazzi (University of Macerata)
    Abstract: <p align="justify">In this paper we focus on the decoupling hypothesis between emerging countries and United States, as the more influent economy for the business cycle movements of advanced countries. Despite the theoretical and empirical analyses to date, it seems fair to say that there is no consensus on the main determinants of differences or similarities in the business fluctuations among countries or groups. We contribute to the debate using quarterly seasonally adjusted data over the period 1995–2010 and find that after a period of substantial increase in business cycles synchronization, different groups of emerging economies decoupled from the United States before the outbreak of the financial crisis (between 2003 and 2007). During the peak of the crisis the change in business cycle was so huge to determine the “decoupling reversal” (or recoupling) that results from our analysis. Furthermore, we investigate the conditions under which emerging economies can actually avoid being involved into the United States recession or at least minimize the consequences. Our results suggest as key variables domestic demand, intraregional linkages and quality of institutions. The higher the level of these variables, the most likely is to reduce their dependence from the US business cycle.</p>
    Keywords: emerging economies,panel probit,synchronicity,decoupling
    JEL: E32 F15 F44
    Date: 2012–05
  24. By: Liu, Chunping; Minford, Patrick
    Abstract: The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full reestimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.
    Keywords: bank crisis; behavioural expectations; indirect inference; rational expectations
    JEL: E17 E37 E47
    Date: 2012–09
  25. By: Luca Gambetti (Universitat Autonoma de Barcelona, B3.1130 Departament d’Economia i Historia Economica, Edifici B, Bellaterra 08193, Barcelona, Spain.); Alberto Musso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides empirical evidence on the role played by loan supply shocks over the business cycle in the Euro Area, the United Kingdom and the United States from 1980 to 2010 by applying a time-varying parameters VAR model with stochastic volatility and identifying these shocks with sign restrictions. The evidence suggests that loan supply shocks appear to have a significant effect on economic activity and credit market variables, but to some extent also inflation, in all three economic areas. Moreover, we report evidence that the short-term impact of these shocks on real GDP and loan volumes appears to have increased in all three economic areas over the past few years. The results of the analysis also suggest that the impact of loan supply shocks seems to be particularly important during slowdowns in economic activity. As regards to the most recent recession, we find that the contribution of these shocks can explain about one half of the decline in annual real GDP growth during 2008 and 2009 in the Euro Area and the United States and possibly about three fourths of that observed in the United Kingdom. Finally, the contribution of loan supply shocks to the decline in the annual growth rate of loans observed from the peaks of 2007 to the troughs of 2009/2010 was slightly less than half of the total decline in the Euro Area and the United States and somewhat more than half of that in the United Kingdom. JEL Classification: C32, E32, E51
    Keywords: Loan supply, business cycle, Euro area, UK, US, time-varying VAR, sign restrictions
    Date: 2012–09
  26. By: Vieru, Elena Bianca
    Abstract: Every crisis should teach us a valuable lesson. However, it seems that we learn almost nothing since they still occur from time to time strongly affecting the world economies. The basic question from where we started our research and to which we tried to answer as clearly as possible is the following: How can we anticipate future crises before they begin to make their presence felt on the global economic scene? The answer is both simple and handy, as the most consistent and relevant explanations in this regard come from the Austrian School of economics. We refer, in particular, to the theory of business cycle. Analyzing this problem, we discovered multiple causes, or better said clues that might help us anticipate and recognize the onset time of economic recessions. We will focus on two of them, considered to be the most important ones. The first clue is closely linked to an expansionary monetary policy that led to a deterioration of credit and to inflation. The second sign that we will be argued in this paper, a sign in close connection with the first clue, is due to the application of protectionist measures or, in other words, the second cause was actually the state’s interventionism.
    Keywords: Austrian School; business cycle; crisis; expansion; interventionism
    JEL: E32 E51 E40 B25 B53 G21
    Date: 2011–11
  27. By: Drew Fudenberg; David K. Levine; Zacharias Maniadis
    Abstract: We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.
    Keywords: Macroeconomics - Econometric models
    Date: 2012
  28. By: Jung, Philip (University of Bonn); Kuhn, Moritz (University of Bonn)
    Abstract: Extensive literature demonstrates that workers with high tenure suffer large and persistent earnings losses when they are displaced. We study the reasons behind these losses in a tractable search model that includes a lifecycle dimension, endogenous job mobility, and worker- and match-heterogeneity. The model jointly explains key characteristics of the U.S. labor market such as large average transition rates, a large share of stable jobs, and earnings losses after displacement. We decompose earnings losses and find that only 50% result from wage loss, and endogenous reactions and selection account for the remainder. These findings have important implications for welfare costs of displacement and labor market policies.
    Keywords: earnings losses, lifecycle, labor-market transitions, turbulence
    JEL: E24 J63 J64
    Date: 2012–09
  29. By: Yazid Dissou (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario); Lilia Karnizova (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)
    Abstract: In contrast to previous studies, this paper uses a multi-sector setting to assess aggregate and sectoral impacts of reducing carbon dioxide emissions in the presence of stochastic productivity shocks. We develop a multi-sector dynamic stochastic general equilibrium model, calibrated to the U.S. economy, to compare the economic implications of reducing carbon emissions with an emissions cap and with an emission tax. As in previous studies, we find that an emission cap predicts lower volatility of aggregate variables than an emission tax. Still, our results point to the importance of going beyond a single-sector analysis in evaluating the relative merits of the cap and the tax policies. The ranking of the welfare costs under the two regimes depends on the sources of productivity shocks. While there is no difference in the welfare costs of the two regimes for productivity shocks originating from non-energy sectors, we find that an emissions cap policy is more costly than an emission tax policy for shocks that originate from the energy sectors. Moreover, we find that non-energy shocks have distinct sectoral impacts under the two regimes even though there are no significant differences between the two regimes for the aggregate variables.
    Keywords: cap-and-trade; carbon tax; emissions; business cycle; multiple sectors
    JEL: E32 Q43 Q54 Q58
    Date: 2012
  30. By: Zhiguo He; Konstantin Milbradt
    Abstract: This paper studies the interaction between fundamental and liquidity for defaultable corporate bonds that are traded in an over-the-counter secondary market with search frictions. Bargaining with dealers determines a bond's endogenous liquidity, which depends on both the firm fundamental and the time-to-maturity of the bond. Corporate default decisions interact with the endogenous secondary market liquidity via the rollover channel. A default-liquidity loop arises: Earlier endogenous default worsens a bond's secondary market liquidity, which amplifies equity holders' rollover losses, which in turn leads to earlier endogenous default. Besides characterizing in closed form the full inter-dependence between liquidity premium and default premium for credit spreads, we also study the optimal maturity implied by the model based on the tradeoff between liquidity provision and inefficient default.
    JEL: E44 G01 G12
    Date: 2012–09
  31. By: Demachi, Kazue
    Abstract: This study analyses the effects of changes in the international oil price and price volatility on the macro-economy of an African oil exporter, Nigeria. Applying the five-variable Structural Vector Auto Regression (SVAR) model to monthly data series from January 1970 to May 2011, impulse response functions are calculated to see the influences among the crude oil price, Nigeria’s exchange rate, money supply (M2), domestic price levels (CPI) and the policy interest rate (Discount Rate). The estimation results suggest that Nigeria’s exchange rate is affected not only by the changes in the international oil price but also by its price volatility. M2 increases as a response to an oil price increase, which suggests that as the international oil price rises there is a huge increase in the money supply into the domestic market from the national oil company and international oil companies, which are the largest suppliers of dollars next to the monetary authority itself.
    Keywords: African oil exporter; Crude oil price; Volatility
    JEL: E5
    Date: 2012–07–31
  32. By: Atanda, Akinwande A.; Alimi, Olorunfemi Y.
    Abstract: This study discussed in details the structure, importance, challenges and consequences of the newly adopted cashless policy programme in the Nigerian banking sector. The cashless policy is mainly instituted to enhance the effectiveness of flow of financial resources among economic agents in the economy at least cost possible as well as ensuring prompt cash transfers within the system. The Central of Bank of Nigeria (CBN) cashless initiative is geared towards eliminating the continuous use of physical cash in most daily transactions at the business unit of the economy, as well as regulating, controlling, and securing the financial system. A critical analysis at the policy as contained in this report as identified major constraints that can hinder the effectiveness of the cashless banking without prompt attention by the concerned authority.
    Keywords: Cashless Banking; Cashless Economy; Financial System; Electronic payment; Nigeria
    JEL: E0 E02 E42 E58
    Date: 2012–08
  33. By: Rafael Domenech
    Abstract: Tras el intento de recuperacion economica de 2010 y principios de 2011, la economia espanola ha vuelto a la recesion. La crisis de deuda soberana en Europa, la perdida de confianza y las elevadas tensiones financieras situan a la economía espanola al borde de una severa restriccion crediticia y amenazan con posponer el inicio de la recuperacion economica y reducir significativamente su crecimiento potencial. Para evitar ese escenario, Espana necesita que la eurozona utilice los mecanismos e instituciones existentes con la maxima efectividad y flexibilidad, para anclar cuanto antes las expectativas de los agentes economicos sobre el futuro del euro y recuperar el atractivo de los mercados de deuda y la demanda de los inversores internacionales. Al mismo tiempo, Espana debe llevar a cabo una estrategia creible y bien coordinada con las instituciones europeas, con la que realizar una consolidacion fiscal que sea a la vez rigurosa y gradual de todas sus administraciones publicas, completar la reestructuracion bancaria y efectuar un amplio conjunto de reformas estructurales que faciliten la reasignacion de los factores productivos a las empresas y sectores mas dinamicos, incentivar la inversion y la creacion de empleo, y generar expectativas de un mayor crecimiento potencial.
    Keywords: previsiones, crecimiento potencial, equilibrios múltiples
    JEL: E17 E32 O40
    Date: 2012–07
  34. By: Ehrmann, Michael (European Central Bank, Frankfurt/Main, Germany); Soudan, Michel (European Central Bank, Frankfurt/Main, Germany); Stracca, Livio (European Central Bank, Frankfurt/Main, Germany)
    Abstract: We study the determinants of trust in the ECB as measured by the European Commission’s Eurobarometer survey in particular during the global financial crisis and the European sovereign debt crisis. We find that the fall in trust in the ECB in crisis times can be rather well explained based on the pre-crisis determinants, and show that the fall in trust reflected the macroeconomic deterioration, a more generalised fall in the trust in European institutions in the wake of the crisis as well as the severity of the banking sector’s problems, to which the ECB was associated in the public opinion.
    Keywords: Trust, Eurobarometer, Global financial crisis, Public opinion, European Central Bank
    JEL: E58 G21 Z13
    Date: 2012–08
  35. By: Zheng Song (Department of Economics, University of Chicago Booth, Chicago, Illinois, United States); Kjetil Storesletten (Federal Reserve Bank of Minneapolis, Minnesota, United States); Yikai Wang (Department of Economics, University of Zurich, Switzerland); Fabrizio Zilibotti (CEPRA, Institute of Economics, Universita' della Svizzera Italiana)
    Abstract: Intergenerational inequality and old-age poverty are salient isuues in contemporary China. China's aging population threatens the fiscal sustainability of its pension system, a key vehicle for intergenerational redistribution. We analyze the positive and normative effects of alternative pension reforms, using a dynamic general equilibrium model that incorporates population dynamics and productivity growth. Although a reform is necessary, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations. High wage growth is key for these results.
    Keywords: China, credit market imperfections, demographic transition, economic growth, fully funded system, inequality, intergenerational redistribution, labor supply, migration, pensions, poverty, rural-urban reallocation, total fertility rate, wage growth
    JEL: E21 E24 G23 H55 J11 J13 O43 R23
    Date: 2012–07
  36. By: Costa , Stefano; Malgarini, Marco; Margani , Patrizia
    Abstract: The paper aims at investigating on the credit conditions experienced by Italian firms during the recent business cycle. In doing so, we use a novel dataset on firms’ opinions derived from the ISTAT Business Confidence surveys. The dataset allows us to add to existing literature in three different ways: first of all, the availability of a very rich set of information on firms' perceptions enables us to study a number of factors possibly influencing credit conditions at the firm level; secondly, the analysis may be extended beyond the Manufacturing sector, considering also the Construction, Retail and Services sectors; thirdly, the high frequency of the data helps in shedding light into the most recent period following the sovereign debt crisis, for which available evidence is still scarce. Starting from these considerations, three different panel data model are estimated, relating the probability of being credit constrained to various individual characteristics of the firms and of the sector in which they operate. Obtaining credit for Italian firms results to be easier in the North and being a Medium-Large firm. Moreover, access to credit is also found to crucially depend on individual credit worthiness; in Manufacturing, productive internationalization is found to have a negative effect on access to credit. Over time, credit conditions are particularly negative during the financial crisis, progressively recovering in 2009-2010. A new deterioration has been perceived by Italian firms since mid-2011, with the emerging of the sovereign debt crisis; this assessment is progressively translating into an effective credit rationing towards the end of last year and in the first months of 2012.
    Keywords: panel data; business surveys; credit crunch
    JEL: E51 C23 E44 G21
    Date: 2012–09
  37. By: Alan J. Auerbach (Professor of Economics and Law, University of California, Berkeley (E-mail:
    Abstract: This paper considers implications of population aging for the conduct of fiscal policy, grouping the issues into four areas, focusing on the impact of aging on: (1) the size of government budget imbalances; (2) the composition of government spending and government budget flexibility; (3) the composition of tax collections and the desirability of alternative tax systems; and (4) the effectiveness of fiscal policy as a tool for stabilization. Societal aging puts considerable stress put on public sector finances because of large, unfunded and age-based entitlement programs. Even if existing programs can be modified, a growing share of government budgets will be devoted to old-age entitlement programs, and both economics and politics suggest that this will reduce the flexibility of budget determinations. An aging population makes certain tax bases - in particular, consumption taxes, and wealth transfer taxes as well - more productive and efficient. The consequences of aging are less clear as to stabilization policy, both with respect to the effectiveness of automatic stabilizers and the ability of government to take effective discretionary actions.
    Keywords: deficits, fiscal imbalances, tax reform, political economy, stabilization policy
    JEL: E62 H21 H62
    Date: 2012–09
  38. By: Zhouying Gang; Chen Shiyuan
    Abstract: From the perspective of the subprime mortgage crisis and the European debt crisis expounded the importance of a developed government bond market to cushion the financial crisis,And comparative analysis of the United States, the United Kingdom, Japan, Germany, the euro zone and offshore government bonds market, to the development of the National Debt market And enlightenment
    Keywords: government bonds, the bond market, the financial crisis, international Comparison
    JEL: E G O
    Date: 2012–08
  39. By: Syed Muhammad, Atif; Sardar, Mohazzam
    Abstract: The mantra of inclusive growth is taking over the public policy debates addressing poverty alleviation and sustained development in the developing world. In order to reduce poverty substantially, rapid pace of growth is not only necessary, but it should be sustainable in the long run and broad-based across sectors, nonetheless, inclusive of country’s labour force at large. Poverty and growth were much discussed and analysed in separation by policymakers in the previous decades. Inclusive growth strategy is an integration of these two strands of analyses implying relationship between the macro and micro determinants of growth. This paper examines the nature of relationship between the macroeconomic and social-development indicators by using a Multiple Regression Framework and Vector Auto Regression Model, as proposed by Toda-Yamamoto, is used to determine the direction of causality between the key macroeconomic variables of Pakistan over the period of 1997-98s to 2009-10. The paper critically examines Inclusive growth paradigm ─ for market led growth, and suggests its weaknesses which can be addressed through review of the pro-poor goals of economic policy of Post Washington Consensus (PWC). Finally, the paper urges to explore the myths and realities of inclusive growth strategies for policymakers in Pakistan to identify and prioritize the Pakistan specific constraints i.e. Low spending on health and education, promote growth in agriculture and rural development for sustained and inclusive growth.
    Keywords: Inclusive growth; development economics; Pakistan
    JEL: E62 C32 I28
    Date: 2012–07–07
  40. By: Frankel, Jeffrey A. (Harvard University); Schreger, Jesse (Harvard University)
    Abstract: Why do countries find it so hard to get their budget deficits under control? Systematic patterns in the errors that official budget agencies make in their forecasts may play an important role. Although many observers have suggested that fiscal discipline can be restored via fiscal rules such as a legal cap on the budget deficit, forecasting bias can defeat such rules. The members of the eurozone are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro in 1999, members have postponed painful adjustment by making overly optimistic forecasts of future growth and budget positions and arguing that the deficits will fall below the cap within a year or two. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But what is the record with such national rules? Our econometric findings are summarized as follows: -Governments' budget forecasts are biased in the optimistic direction, especially among the Eurozone countries, especially when they have large contemporaneous budget deficits, and especially during booms. -Governments' real GDP forecasts are similarly over-optimistic during booms. -Despite the well-known tendency of eurozone members to exceed the 3% cap on budget deficits, often in consecutive years, they almost never forecast that they will violate the cap in the coming years. This is the source of the extra bias among eurozone forecasts. If euro area governments are not in violation of the 3% cap at the time forecasts are made, forecasts are no more biased than other countries. -Although euro members without national budget balance rules have a larger over-optimism bias than non-member countries, national fiscal rules help counteract the wishful thinking that seems to come with euro membership. The reason is that when governments are in violation of the 3% cap the national rules apparently constrain them from making such unrealistic forecasts. -Similarly, the existence of an independent fiscal institution producing budget forecasts at the national level reduces the over-optimism bias of forecasts made when the countries are in violation of the 3% cap.
    JEL: E62 H20
    Date: 2012–09
  41. By: Bayer, Christian (University of Bonn); Juessen, Falko (TU Dortmund)
    Abstract: We reassess the empirical effect of income and employment on self-reported well-being. Our analysis makes use of a novel two-step estimation procedure that allows applying instrumental variable regressions with ordinal observable data. As suggested by the theory of incomplete markets, we differentiate between the effects of persistent and transitory income shocks. In line with this theory, we find that persistent shocks have a significant impact on happiness while transitory shocks do not. This has consequences also for inference about the happiness effect of employment. We find that employment per se is rather associated with a decline in happiness.
    Keywords: incomplete markets, happiness, income persistence
    JEL: E21 D12 D60
    Date: 2012–07
  42. By: Ronald Lee (Professor of Demography and Economics, University of California, Berkeley (E-mail:
    Abstract: The populations of the World are aging, in both rich and poor countries. Older people work much less than younger adults, and earn far less than their consumption costs. The difference is made up in part by public or private transfers from working age adults, and in part from asset income. As countries grow richer, labor supply at older ages drops while consumption at older ages rises relative to younger, due mainly to the rising costs of publicly provided health care. For these reasons, population aging becomes more costly with economic development. As populations age in the coming decades, support ratios will drop, slowing the growth of per capita consumption by .3% to .8% per year. However, the same processes that lead to population aging also may lead to increased investment in both human capital and in physical and financial assets, raising the capital intensity of the economy and raising labor productivity. The rising labor productivity should offset the declining support ratio, and increased asset income will further offset these declines. However, the extent to which these offsetting processes unfold depends on the institutional structures and public policies that are in place. While population aging will place severe strains on particular public programs, overall, the economic challenges of population aging need not be overwhelming, and need not pose a major threat to economic well-being.
    Keywords: population aging, macroeconomic, demographic transition, human capital, economic growth, support ratio, demand for wealth
    JEL: E2 E6 I2 J11 J14 O11
    Date: 2012–09
  43. By: Zhouying Gang; Chen Shiyuan
    Abstract: This paper will review the development process of China's government bond market, analyze the current situation and problems as well as the status of economic reform in China and for And make policy recommendations on the development of the government bond market in China from a strategic height, including the issuance of special treasury bonds to the implementation of the national economy Third of debt restructuring, further play the role of the government bond market in the interest rate market, to form a unified government bond market System, and based on the development of the internationalization of RMB treasury bonds offshore market.
    Keywords: Government bonds, bond market, internationalization of the RMB offshore market economic reforms
    JEL: E G O
    Date: 2012–08

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