nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒10‒27
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound? By Yuriy Gorodnichenko; Johannes Wieland; Olivier Coibion
  2. Rational Bubbles and Macroeconomic Fluctuations. The(De-)Stabilizing Role of Monetary Policy By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  3. On asymmetric effects in a monetary policy rule. The case of Poland By Anna Sznajderska
  4. Fiscal Policy, Banks and the Financial Crisis By In''t Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner
  5. Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity? By Benhabib, Jess; Evans, George W.; Honkapohja, Seppo
  6. The Role of Money in New-Keynesian Models By McCallum, Bennett T.
  7. Fiscal policy in contemporary DSGE models By Virginia Queijo von Heideken; Ferre De Graeve
  8. Land-Price Dynamics and Macroeconomic Fluctuations By pengfei Wang; Tao Zha; Zheng Liu
  9. Evaluating the Role of Firm-Specific Capital in New Keynesian models By Joao Madeira
  10. Stability Price Index, Core Inflation and Output Volatility By Wojciech Charemza; Imran Hussain Shah
  11. The Labor Market Consequences of Financial Crises With or Without Inflation: Jobless and Wageless Recoveries By Guillermo A. Calvo; Fabrizio Coricelli; Pablo Ottonello
  12. Macroeconomic determinants of inequality of opportunity and effort in the US: 1970-2009 By Gustavo A. Marrero; Juan G. Rodriguez
  13. MPC Voting, Forecasting and Inflation By Wojciech Charemza; Daniel Ladley
  14. "Innovation and Finance: An SFC Analysis of Great Surges of Development" By Alessandro Caiani; Antoine Godin; Stefano Lucarelli
  15. Aggregate Earnings and Macroeconomic Shocks: The Role of Labour Market Policies and Institutions By Bassanini, Andrea
  16. Business cycles and financial crises: the roles of credit supply and demand shocks By James M. Nason; Ellis W. Tallman
  18. Markets connectivity and financial contagion By Ruggero GRILLI; Gabriele TEDESCHI; Mauro GALLEGATI
  19. Central Bank Transparency and Financial Stability: Measurement, Determinants and Effects By Roman Horvath; Dan Vaško
  20. Optimal Sovereign Default By Adam, Klaus; Grill, Michael
  21. The interaction between the central bank and government in tail risk scenarios By Jan Willem van den End; Marco Hoeberichts
  22. Global Versus Local Shocks in Micro Price Dynamics By Marios Zachariadis
  23. Inflated Ordered Outcomes By Robert Brooks; Mark N. Harris; Christopher Spencer
  24. The Cyclicality of the Separation and Job Finding Rates in France By Hairault, Jean-Olivier; Le Barbanchon, Thomas; Sopraseuth, Thepthida
  25. "The Crisis of Finance-dominated Capitalism in the Euro Area: Deficiencies in the Economic Policy Architecture and Deflationary Stagnation Policies" By Eckhard Hein
  26. Unholy compromise in the Eurozone and how to mend it By Karl Aiginger; Stefano Micossi
  27. Consumption Inequality and Family Labor Supply By Blundell, Richard William; Pistaferri, Luigi; Saporta-Eksten, Itay
  28. How Do Oil Shocks A¤ect the Structural Stability of Hybrid New Keynesian Phillips Curve? By Somayeh Mardaneh
  29. Optimal Sovereign Default By Adam, Klaus; Grill, Michael
  30. LIBOR, EURIBOR and the regulation of capital markets: The impact of Eurocurrency markets on monetary setting policies By Ojo, Marianne
  31. Real Wages in the Manufacturing Industry in Macedonia: The Role of Macroeconomic Factors, with reference to recession times By Petreski, Marjan; Mojsoska-Blazevski, Nikica
  32. Efficiency in a Search and Matching Economy with a Competitive Informal Sector By Charlot, Olivier; Malherbet, Franck; Ulus, Mustafa
  33. Using real-time data to test for political budget cycles By Haan, Jakob de; Sturm, Jan-Egbert; Jong-A-Pin, Richard
  34. Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality? By Balázs Égert
  35. Energy-Saving Technical Change By Hassler, John; Krusell, Per; Olovsson, Conny
  36. Germs, Social Networks and Growth By Alessandra Fogli; Laura Veldkamp
  37. Difference or Ratio: Implication of Status Preference on Stagnation By Yoshiyasu Ono; Katsunori Yamada
  38. Central bank intervention and exchange rate behaviour : empirical evidence for India By Inoue, Takeshi

  1. By: Yuriy Gorodnichenko (UC Berkeley); Johannes Wieland (University of California, Berkeley); Olivier Coibion (College of William and Mary)
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state- dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes.
    Date: 2012
  2. By: Lise Clain-Chamosset-Yvrard (Aix-Marseille Université, Greqam); Thomas Seegmuller (CNRS, Greqam)
    Keywords: Rational bubble; Cash-in-advance constraint; Collaterals; Endogenous fluctuations; Monetary policy.
    JEL: D91 E32 E52
    Date: 2012–03–23
  3. By: Anna Sznajderska (National Bank of Poland)
    Abstract: Asymmetric effects in a monetary policy rule could appear due to asymmetric preferences of the central bank or/and due to nonlinearities in the economic system. It might be suspected that monetary authorities are more aggressive to the inflation rate when it is above its target level than when it is below. It also seems probable that monetary authorities have different preferences and react more strongly when the level of economic activity is low than when it is high. In this paper we investigate whether the reaction function of the National Bank of Poland (NBP) is asymmetric according to the level of inflation gap and the level of output gap. Moreover, we test whether these asymmetries might possibly stem from the nonlinearities in the Phillips curve. Threshold models are applied and two cases of unknown and known threshold value are investigated.
    Keywords: nonlinear Taylor rule, nonlinear Phillips curve, asymmetries, threshold models
    JEL: E52 E58 E30
    Date: 2012
  4. By: In''t Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner
    Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
    Keywords: bank rescue measures; financial crisis; fiscal policy
    JEL: E32 E62 F41 G21 H63
    Date: 2012–10
  5. By: Benhabib, Jess; Evans, George W.; Honkapohja, Seppo
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
    Keywords: adaptive learning; fiscal policy; monetary policy; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2012–10
  6. By: McCallum, Bennett T. (Carnegie Mellon University; National Bureau of Economic Research)
    Abstract: In this paper Professor McCalllum reviews the different forms researchers have attempted to introduce a meaningful role of Money in New-keynesian models typically used in the monetary policy analysis at central banks. The paper concludes that, there is still no convincing argument toward the need of including monetary aggregates into the structure of New Keynesian models.
    Date: 2012–10
  7. By: Virginia Queijo von Heideken (Sveriges Riksbank); Ferre De Graeve (Sveriges Riksbank)
    Abstract: The role of fiscal policy in DSGE models has long been ignored. Recent evidence from reduced-form VARs (Sims (2011)), event-studies (Leeper et al. (2012)) and structural models (Fernández-Vilaverde et al. (2012)) shows that information about fiscal variables can add to macroeconomic models. To strongly convey the point that DSGE models should take fiscal policy seriously, we show that even without any information on fiscal variables standard contemporary DSGE models map historical fluctuations to fiscal policy. We estimate a version of the Smets-Wouters model and show that the model interprets changes in long-term interest rates, unrelated to current short rates, as news about fiscal policy through the effect it may have on future inflation. This interpretation is exactly the one Sims (2011) and Leeper and Walker (2012) argue for.
    Date: 2012
  8. By: pengfei Wang (Hong Kong University of Science and Technology); Tao Zha (Federal Reserve Bank of Atlanta); Zheng Liu (Federal Reserve Bank of San Francisco)
    Abstract: We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms' credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment.
    Date: 2012
  9. By: Joao Madeira (Department of Economics, University of Exeter)
    Abstract: In this paper I make use of Bayesian methods to estimate a firm-specific capital DSGE model with Calvo price and wage setting. This approach allows me to firmly conclude that firm-specific capital is highly relevant in improving the fit of New Keynesian models to the data as shown by a large increase in the value of the log marginal data density relative to the more conventional rental capital model. The introduction of firm-specific capital also has important implications for business cycle dynamics leading to increased persistence of aggregate variables and helps reduce the discrepancy between macro estimates of the NKPC and the observed frequent price adjustments in the micro data.
    Keywords: New Keynesian models, sticky prices, DSGE, business cycles, firm-specific capital, Bayesian estimation.
    JEL: E20 E22 E27 E30 E32 E37
    Date: 2012
  10. By: Wojciech Charemza; Imran Hussain Shah
    Abstract: This paper examines the relationship between the ‘exclusion’ type core inflation measures and the stability price index. Empirical results for Malaysia and Pakistan suggests that, if targeting core inflation index is to stabilize output, weights of the export-oriented sectors (energy for Malaysia and foodstuffs for Pakistan) should be reduces, in relation to the consumers’ price index weights, and for import-oriented sectors, increased. It also indicates that, in order to maintain real sector stability, central bankers should include the fundamental component of the stock market prices in the price index they target.
    Keywords: Price Index; Monetary Policy; Output Stability; Financial Markets
    JEL: E52 E58 G12
    Date: 2012–10
  11. By: Guillermo A. Calvo; Fabrizio Coricelli; Pablo Ottonello
    Abstract: This paper offers empirical evidence showing that, relative to "normal" recessions, financial crises hit the labor market by either enhancing the degree of joblessness and/or by further depressing the real wage – a situation that the paper labels "wageless recovery." This holds for a sample of both advanced and emerging-market economies recession episodes, using credit market data prior to the recession episode as instrumental variable for financial crises. Results also indicate that inflation determines the type of recovery: low inflation is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that these outcomes are consistent with a simple model in which collateral requirements are higher (lower), the larger is the share of labor costs (physical capital expenditure) involved in a loan contract. This is motivated by the conjecture that if a loan becomes delinquent, physical capital is easier to confiscate than human capital. Evidence from advanced economies supports the model. An implication of these findings is that a spike of inflation during financial crisis may help to reduce jobless recoveries, but at the expense of sharply lower real wages. Only relaxing credit constraint might help both unemployment and wages.
    JEL: E2 E31 E44 F3 F32
    Date: 2012–10
  12. By: Gustavo A. Marrero (Universidad de La Laguna); Juan G. Rodriguez (Universidad Complutense de Madrid)
    Abstract: Conventional wisdom predicts that changes in macroeconomic conditions significantly affect income inequality. In this paper we hypothesize that the way in which macroeconomic conditions affect inequality depends on how these conditions influence the constituents of total inequality: inequality of opportunity (IO) and inequality of effort (IE). Using the PSID database for the U.S. (1970-2009), we first decompose total inequality into these components. Then, we specify a dynamic model that relates each inequality component to a set of macroeconomic factors. Apart from real GDP and inflation rates, the most widely used factors in the literature, we also consider outstanding consumer credits and public welfare and health care expenditures. We find that real GDP and outstanding credits have a negative and significant effect upon IO and IE, while inflation has a positive and significant effect only on IE, and welfare expenditures have a negative and significant effect only on IO.
    Keywords: income inequality, inequality of opportunity, inequality of effort, growth cycle, outstanding consumer credit.
    JEL: D63 E32 O16 O51
    Date: 2012
  13. By: Wojciech Charemza; Daniel Ladley
    Abstract: This paper considers the effectiveness of monetary policy committee voting when the inflation forecast signals, upon which decisions are based, may be subject to manipulation. Using a discrete time intertemporal model, we examine the distortions resulting from such manipulation under a three-way voting system, similar to that used by the Bank of Sweden. We find that voting itself creates persistence in inflation. Whilst altering the forecast signal, even if well intentioned, results in a diminished probability of achieving the inflation target. However, if committee members ‘learn’ in a Bayesian manner, this problem is mitigated.
    Keywords: Voting Rules; Monetary Policy; Inflation Targeting
    JEL: E47 E52 E58
    Date: 2012–10
  14. By: Alessandro Caiani; Antoine Godin; Stefano Lucarelli
    Abstract: Schumpeter, a century ago, argued that boom-and-bust cycles are intrinsically related to the functioning of a capitalistic economy. These cycles, inherent to the rise of innovation, are an unavoidable consequence of the way in which markets evolve and assimilate successive technological revolutions. Furthermore, Schumpeter's analysis stressed the fundamental role played by finance in fostering innovation, in defining bank credit as the "monetary complement" of innovation. Nevertheless, we feel that the connection between innovation and firm financing has seldom been examined from a theoretical standpoint, not only by economists in general, but even within the Neo-Schumpeterian research line. Our paper aims at analyzing both the long-term structural change process triggered by innovation and the related financial dynamics inside the coherent framework provided by the stock-flow consistent (SFC) approach. The model presents a multisectoral economy composed of consumption and capital goods industries, a banking sector, and two household sectors: capitalists and wage earners. The SFC approach helps us to track the flows of funds resulting from the rise of innovators in the system. The dynamics of prices, employment, and wealth distribution among the different sectors and social groups is analyzed. Above all, the essential role of finance in fostering innovation and its interaction with the real economy is underlined.
    Keywords: Schumpeter; Innovation; Stock-flow Consistent Models; Monetary Circuit
    JEL: E11 E32 O31
    Date: 2012–10
  15. By: Bassanini, Andrea (OECD)
    Abstract: I examine the effect of labour market policies and institutions on the transmission of macroeconomic shocks to the labour market, using both aggregate and industry-level annual data for 23 OECD countries, 23 business-sector industries and up to 29 years. I find that high and progressive labour taxes and generous unemployment benefits amplify labour income fluctuations. By contrast, statutory minimum wages reduce the difference in the sensitivity of wages to aggregate shocks between low-wage and high-wage industries. Dismissal regulations are found to mitigate the impact of shocks on both earnings and employment. Moreover, this mitigation effect is greater in industries where firms have a greater propensity to make staffing changes through dismissals.
    Keywords: employment fluctuations, business-cycle, EPL, tax wedge, unemployment benefits
    JEL: J21 J31 J60
    Date: 2012–10
  16. By: James M. Nason; Ellis W. Tallman
    Abstract: This paper explores the hypothesis that the sources of economic and financial crises differ from non-crisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.
    Keywords: Markov processes
    Date: 2012
  17. By: Lilia Cavallari (Università degli Studi di Roma Tre)
    Abstract: This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results.
    Keywords: endogenous entry, firm dynamics, monopolistic competition, market power, markups
    JEL: E31 E32 E52
    Date: 2012
  18. By: Ruggero GRILLI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Gabriele TEDESCHI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Mauro GALLEGATI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: In this paper we investigate the sources of instability in credit and financial systems and the effect of credit linkages on the macroeconomic activity. By developing an agent-based model, we analyze the evolving dynamics of the economy as a complex, adaptive and interactive system, which allows us to explain some key elements occurred during the recent economic and financial crisis. In particular, we study the repercussions of inter-bank connectivity on agents' performances, bankruptcy waves and business cycle fluctuations. Interbank linkages, in fact, let participants share risk but also creates a potential for one bank's crisis to spread through the network. The purpose of the model is, therefore, to build up the dependence among agents at the micro-level and to estimate their impact on the macro stability.
    Keywords: Systemic risk, business cycle, giant component, network connectivity, volatility
    Date: 2012–10
  19. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Dan Vaško (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability.
    Keywords: financial stability, transparency, central banks
    JEL: E52 E58
    Date: 2012–09
  20. By: Adam, Klaus; Grill, Michael
    Abstract: When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which the government optimally fi…nances itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to signi…cant ‘default costs’. Optimal default improves the international diversi…cation of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - signi…cantly increase welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that default can be Ramsey optimal even if the net foreign asset position is positive.
    Keywords: incomplete markets; optimal default; Ramsey optimal fiscal policy
    JEL: E62 F34
    Date: 2012–10
  21. By: Jan Willem van den End; Marco Hoeberichts
    Abstract: We analyse the relationship between tail risk and crisis measures by governments and the central bank. Using an adjusted Merton model in a game theoretical set-up, the analysis shows that the participation constraint for interventions by the central bank and the governments is less binding if the risk of contagion is high. The strategic interaction between governments and the central bank also influences the effectiveness of the interventions. A joint effort of both the governments and central bank leads to a better outcome. To prevent a bad equilibrium a sizable commitment by both players is required. Our stylized model sheds light on the strategic interaction between EMU governments and the Eurosystem in the context of the Outright Monetary Transactions program (OMT).
    Keywords: Financial crisis; Monetary policy; Central banks; Policy coordination
    JEL: E42 E52 E61 G01 G18
    Date: 2012–10
  22. By: Marios Zachariadis (University of Cyprus)
    Abstract: A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. We find that global shocks have more persistent effects on prices as compared to local ones e.g. prices respond faster to local macro shocks than to global micro ones, implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. Global macro shocks have the most persistent effect on prices, with the majority of goods and locations sharing a single source of trend over time stemming from these shocks. Finally, both local macro and local micro shocks are associated with relatively fast price convergence. How fast do prices adjust to changes in economic conditions? The answer is crucial in assessing the real effects of nominal shocks, for instance. The literature provides conflicting answers: whereas aggregate price indices have been found to be very persistent, more recent work starting with Bils and Klenow (2004) showed that individual prices adjust frequently. The implication that monetary policy might as a result be less effective than previously thought, has been challenged more recently. Boivin et al. (2009) attempt to resolve the micro-macro puzzle while retaining the importance of monetary policy by distinguishing between the (sluggish) response of individual prices to macroeconomic shocks common to every sector or product, and their (rapid) response to microeconomic shocks specific to a sector or product. Our paper emphasizes the distinction between global shocks common to every location worldwide, and local shocks specific to a location. We show that this distinction is much more striking and no less informative for price-setting models, than the macro-micro split considered in previous work. In fact, we find that the speed of price adjustment in response to local macro shocks or local micro shocks is relatively fast in both cases. At the same time, the price persistence associated with global versus local shocks of any type differs substantially. For both macro and micro shocks alike, local components are associated with much less persistence than global ones. Considering only one type of micro or macro shock would consequently hide the heterogeneity we observe in their effects and lead to misleading inferences about the relative persistence of local macro shocks (typically monetary ones) in micro prices. Based on our findings, price-setting theory models should not include as high a degree of price rigidity in response to local macro shocks as that implied in some of the earlier empirical work. At the same time, our work suggests the need for open economy price-setting theory models consistent with slow response of prices to global micro shocks and persistent price effects of international macro shocks. Our analysis relies on a panel of 276 micro price levels collected from 1990 to 2010 at a semi-annual frequency across 88 cities in 59 countries across the world. This dataset is non-standard and was especially compiled for us by the Economist Intelligence Unit (EIU) at a semiannual frequency for the complete untypically large sample of international locations. The March and September dates for gathering these semi-annual data are specifically designed to avoid standard sales seasons. In addition, EIU correspondents are specifically instructed to take regular retail prices and not to take sale prices. These sampling facts suggest that our price data are not as prone to include temporary price changes, shown by Nakamura and Steinsson (2008) to bias results towards finding more rapid price adjustment. This is important for the inferences we can draw about the speed of price adjustment in response to local shocks for instance. The three dimensions of our panel---time, location and individual product---allow us to decompose the dynamics of the common currency micro price-level for each product in a given location at a given date into four different components: (1) a global macro component common to every good in every location, capturing for example global oil shocks; (2) a global micro component specific to a good and common to every location, related for instance to technology shocks specific to a product but common across the globe; (3) a local macro component specific to a location and common to every good, related for example to monetary policy; and (4) a local micro or idiosyncratic component specific to a good and a location, capturing for instance the idiosyncrasy of weather conditions facing vineyards in a certain location. We obtain convergence rates specific to each component allowing for different speeds of price adjustment to these, our notion of price adjustment speed being the time it takes for prices to fully adjust to a shock. While ignoring the global-local distinction our data would imply that (similar to past research on the micro-macro gap) macro shocks are more persistent than micro ones with convergence rate estimates implying half-lives of 21 months versus 13 months respectively, decomposing macro and micro shocks into their global and local components reveals a different more precise picture. Local micro shocks are the most rapidly corrected ones, followed by local macro shocks, and global micro shocks. More precisely, local micro shocks have a half-life estimate of about 7 months. The reaction to local macro shocks is somewhat more persistent with a half-life of 10 months, while global micro shocks have a half-life that is about twice as long at 18 months. The latter three components of international prices are mean-reverting on average, but this does not apply to all relative prices for all goods or locations. The response of prices to global macro shocks is found to be permanent so that international prices share this single global stochastic trend which is the main factor behind the observed drift in price levels. Furthermore, we find that the global macro and micro components together account for half of the time-series volatility in prices in this sample. The above findings taken together suggest that global shocks cannot be ignored when analyzing the sources of persistence and volatility of prices. Our results confirm that prices react differently to different types of shocks, but stress that sorting shocks by geographic distance (global vs local) leads to more striking differences than sorting shocks by mere economic distance (macro vs micro). The observed differences in persistence of the different price components could stem from differences in the persistence of the shocks driving the processes associated with these components rather than from differences in the reaction of prices to these shocks. We thus investigate further by considering the link between persistence and volatility of the price components. If persistence of the shocks themselves was the main driver of the observed persistence in prices, then we would expect to see a positive relation between own persistence and volatility. The estimated link between these turns out to be either negative or statistically indistinguishable to zero. This leads us to infer that price adjustment to different types of conditions does not stem from the mere persistence of the shocks. The link between persistence and volatility provides us with a couple of additional new facts. First, more volatility in micro conditions is associated with slower adjustment of prices, hence more persistent relative price distortions, in response to changes in macro conditions. Likewise, more volatility in local conditions is associated with slower price adjustment, hence more persistent relative price distortions, in response to changes in global conditions, with this link more than twice as large as the respective micro-macro link. We propose that decomposing macro and micro shocks into finer categories provides a new more precise tool for gauging models of price-setting. The persistence associated with each of these components and its relation with volatility of the different components, provide new facts that price-setting models should be able to rationalize. First, in light of the importance of the global or international dimension, it would be useful to have open economy price-setting models that can rationalize differences in the speed of adjustment to global versus local shocks in addition to macro versus micro shocks. These models should be able to explain why these differences are more striking when shocks are classified with respect to geographic distance (global vs local) rather than mere economic distance (macro vs micro). Second, models of price-setting should be able to cope with the estimated sign and size of the link between local volatility and the rate of price adjustment in response to global shocks. Again, they should also be able to explain why the volatility in local conditions seems to be more detrimental to the adjustment to global conditions, as compared to the effect of volatility in micro conditions for the adjustment to macro conditions. One possibility would be to resort to models of endogenous imperfect perception of shocks, in the spirit of the recent contributions of Reis (2006), MaÃÂkowiak and Wiederholt (2009), Woodford (2009) or Alvarez et al. (forthcoming), where the relative cost of observing global conditions would be greater than the one associated with monitoring local ones, and more so than the relative cost of observing macro conditions exceeds that for micro ones. Similarly, in the context of these models, the loss of processing capacities due to volatility in local conditions could be more detrimental to the monitoring of global conditions, as compared to the loss of processing capacities due to volatility in micro conditions for the monitoring of macro conditions. Rational inattention models are thus a natural candidate to consider for understanding our results. Yet another theoretical possibility would be to rely on labor market segmentation arguments, in the spirit of Carvalho and Lee (2010). Here, the segmentation would need to be greater between countries than within them in the same manner (but more so) that labor segmentation is greater across sectors than within them. However, this framework would also need to incorporate a link between volatility of shocks and persistence of price reactions. Our results on the differential response of prices to different types of shocks extend Clark (2006), Boivin et al. (2009), and MaÃÂkowiak et al. (2009), to a global environment. These papers bridge the gap between measured persistence of macro price indices and the frequent adjustment observed in micro prices. In their setup, a macro shock is common to every sector in the US, potentially encompassing a shock common to every country worldwide (our global macro shock) and a shock specific to the US (our local macro shock). Likewise, their sectoral shock can be made of a worldwide sectoral shock (our global micro shock) and a US sector-specific one (our local micro shock). Our work points to the importance of disentangling global and local components to understand price dynamics. No study of micro price levels has looked at this global/local decomposition of micro and macro shocks. We show that whereas global macro shocks are highly persistent, prices react to local macro shocks much faster than to global micro ones. By contrast, Boivin et al. (2009) find that sectoral prices adjust sluggishly to macro shocks but rapidly to micro ones, a result that has in turn spurred a debate on what theoretical model of price-setting could rationalize such different response of individual prices to different types of shocks. In their own words, their "main finding is that disaggregated prices appear sticky in response to macroeconomic and monetary disturbances, but flexible in response to sector-specific shocks" and that "many prices fluctuate considerably in response to sector-specific shocks, but they respond only sluggishly to aggregate macroeconomic shocks such as monetary policy shocks". To the extent that country-specific monetary policy is part of our local macro component, we find that it has much less persistent effects than in Boivin et al. (2009). Prices respond almost twice as fast to local macro shocks as they do to global micro ones. This also contrasts with the finding of a rapid adjustment to micro shocks in Boivin et al. (2009). The subset of our results that pertains to local micro and local macro shocks contributes to yet another line of research; the literature on international price comparisons. Until recently, international price differences were considered to be very persistent at the aggregate level. Deviations from PPP have a half-life of several years as documented in the surveys by Rogoff (1996) and Obstfeld and Rogoff (2000). The survey by Goldberg and Knetter (1997) stresses that the persistence is of comparable order when one considers deviations from the LOP using relatively aggregated sectoral price indices. Instead, the recent evidence relying on micro-data, such as Goldberg and Verboven (2005) using European car prices, Crucini and Shintani (2008) using annual EIU prices, and Broda and Weinstein (2008) or Burstein and Jaimovich (2009) using barcode prices, is that the persistence of LOP deviations is reduced sharply when based on micro prices with higher comparability across locations. Our estimated half-lives are even lower than in the recent micro-price literature on LOP deviations, in part due to the use of semiannual prices and a broader sample of locations across the world as compared to the previous studies. Although the scope of our paper is broader, to the extent that a subset of our results relates to the LOP literature discussed above they are also relevant for the Bergin et al. (2011) argument that the differential importance and persistence of (local) macro versus (local) micro shocks for LOP deviations can reconcile the macro with the micro evidence for international price convergence rates estimates. They show that macro shocks that dominate at the aggregate level are less volatile and have much greater persistence than idiosyncratic shocks at the individual good level that dominate micro prices. We estimate a more persistent response of individual prices to local macro shocks than to idiosyncratic ones in most cases. However, both responses are relatively fast and not always that different except for developed countries. Thus, our results suggest that the micro/macro gap between fast convergence in deviations from the LOP (micro) and the very persistent deviations from PPP (macro) cannot be entirely resolved by distinguishing between (local) macro and (local) micro shocks in the LOP as there is typically not that much more persistence in local macro shocks as compared to local micro ones. Apart from the much more general sample across (developed and developing) countries and goods (traded and non-traded), and the longer time span being considered in our paper, one factor driving differences in estimates for the local micro and local macro components in the two papers, is that Bergin et al. (2011) use the US as the comparison point relative to which to construct LOP deviations. Choosing a particular location as the comparison point introduces the statistical properties characterizing it into the deviations from the LOP for every other location. Instead, we choose to compare prices to the average across locations so that our findings do not depend on choosing a particular country as the comparison point. Finally, our findings do not depend on using the US dollar as the numeraire currency. Converting prices to the same currency is necessary for comparison.
    Date: 2012
  23. By: Robert Brooks (Department of Econometrics and Business Statistics, Monash University, Melbourne, Australia); Mark N. Harris (Department of Econometrics and Quantitative Modelling, School of Economics and Finance, Curtin Business School, Curtin University, Perth, Australia, WA 6845); Christopher Spencer (School of Business and Economics, Loughborough University, UK)
    Abstract: We extend Harris and Zhao (2007) by proposing a (Panel) Inflated Ordered Probit model, and demonstrate its usefulness by applying it to Bank of England Monetary Policy Committee voting data.
    Keywords: Panel Inflated Ordered Probit, random effects, inflated outcomes, voting, Monetary Policy Committee
    JEL: E5 C3
    Date: 2012–10
  24. By: Hairault, Jean-Olivier (University of Paris 1 Panthéon-Sorbonne); Le Barbanchon, Thomas (CREST); Sopraseuth, Thepthida (GAINS, Université du Maine)
    Abstract: In this paper, we aim to shed light on the relative contribution of the separation and job finding rates to French unemployment at business cycle frequencies by using administrative data on registered unemployment and labor force surveys. We first investigate the fluctuations in steady state unemployment, and then in current unemployment in order to take into account the unemployment deviations from equilibrium. Our results show the dominant role of the job finding rate in accounting for French unemployment fluctuations. The contribution of the job finding rate amounts to about two-thirds of the unemployment dynamics. With the two data sets, we find that both rates contributed to unemployment fluctuations during the nineties, while the job finding rate has been more significant in the last decade. In particular, the last business cycle episodes, including the last recession, exacerbate the role of the job finding rate.
    Keywords: unemployment variability, job separation, job finding, worker flows
    JEL: E24 J6
    Date: 2012–10
  25. By: Eckhard Hein
    Abstract: In this paper the euro crisis is interpreted as the latest episode in the crisis of finance-dominated capitalism. For 11 initial Euro area countries, the major features of finance-dominated capitalism are analyzed; specifically, the increasing inequality of income distribution and the rising imbalances of current accounts. Against this background, the euro crisis and the economic policy reactions of European governments and institutions are examined. It is shown that deflationary stagnation policies have prevailed since 2010, resulting in massive real GDP losses; some improvement in the price competitiveness of the crisis countries but considerable and persistent current account imbalances; reductions in government deficit-to-GDP ratios but continuously rising trends in gross government debt-to-GDP ratios; a risk of further recession for the euro area as a whole—and the increasing threat of the euro's ultimate collapse. Therefore, an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and strategies—in particular, the lack of (1) an institution convincingly guaranteeing public debt and (2) a stable and sustainable financing mechanism for acceptable current account imbalances-is outlined.
    Keywords: Finance-dominated Capitalism; Distribution; Financial and Economic Crisis; European Economic Policies
    JEL: E25 E58 E61 E63 E64 E65
    Date: 2012–10
  26. By: Karl Aiginger; Stefano Micossi
    Abstract: This paper reviews the causes of the ongoing crisis in the eurozone and the policies needed to restore stability in financial markets and reassure a bewildered public. Its main message is that the EU will not overcome the crisis until it has a comprehensive and convincing set of policies in place; able to address simultaneously budgetary discipline and the sovereign debt crisis, the banking crisis, adequate liquidity provision by the ECB and dismal growth.
    Keywords: Euro crisis, monetary union, policy coordination
    JEL: E61 E63 F33 F36 F42
    Date: 2012–08
  27. By: Blundell, Richard William; Pistaferri, Luigi; Saporta-Eksten, Itay
    Abstract: In this paper we examine the link between wage inequality and consumption inequality using a life cycle model that incorporates household consumption and family labor supply decisions. We derive analytical expressions based on approximations for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, non-separability and asset accumulation decisions. We show how the model can be estimated and identifi…ed using panel data for hours, earnings, assets and consumption. We focus on the importance of family labor supply as an insurance mechanism to wage shocks and fi…nd strong evidence of smoothing of male’s and female’s permanent shocks to wages. Once family labor supply, assets and taxes are properly accounted for their is little evidence of additional insurance.
    Keywords: Consumption; Inequality; Labor Supply
    JEL: E21 J22
    Date: 2012–10
  28. By: Somayeh Mardaneh
    Abstract: In this paper, the structural stability of the hybrid New Keynesian Phillips Curve (NKPC) and possible changes in pricing behaviour of firms are investigated in the context of oil price shocks. Using quarterly US aggregate data, this curve is estimated in subsamples formed with oil price shock dates by generalized method of moments (GMM) and continuously updated GMM (CU-GMM). The results for the structural break test confirm 1974:I, 1979:II and 1990:III as identified oil price shock dates and do not reject the structural stability of the over-identifying restrictions implied by the Gali and Gertler’s (1999) hybrid NKPC. However, there is evidence for parameter instability for this hybrid NKPC in terms of backward-looking rule-of-thumb behaviour in both set of estimations. The standard GMM estimates suggest that although the forward-looking behaviour is predominant in the period before the 1974 Oil Crisis, it loses ground against backward-looking behaviour after every oil shock. In contrast, the CU-GMM estimates suggest the opposite: forward-looking behaviour becomes more important after oil price shocks, and inflation persistence decreases as a result. The difference between the two sets of results may be due to weak instruments. Alternatively, given that the CU-GMM seems to suffer smaller bias in the finite sample than the 2-step GMM in the presence of weak instruments, it is more likely that the structural instability of the hybrid NKPC is captured by the CU-GMM estimates.
    Keywords: Hybrid New Keynesian Phillips Curve; Oil Price Shock; Structural Stability; Infl‡ation; Forward-looking Behaviour; Backward-looking Behaviour; GMM; Continuously Updated GMM.
    JEL: E31 E52
    Date: 2012–10
  29. By: Adam, Klaus; Grill, Michael
    Abstract: When is it optimal for a government to default on its legal repayment oblig- ations? We answer this question for a small open economy with domestic production risk in which the government optimally finances itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally devi- ate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to significant default costs. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to do- mestic output, and that default can be Ramsey optimal even if the net foreign asset position is positive.
    JEL: E62 F34
    Date: 2012
  30. By: Ojo, Marianne
    Abstract: What factors and developments have fuelled the „cartelisation“ of capital markets? - to the extent of the rigging of EURIBOR and LIBOR rates? In what ways can EURIBOR and LIBOR rate rigging practices be addressed? How and why have offshore markets expanded to the degree and extent to which they exist today – this partly being explained through the multiplier effect, as well as the fact that onshore (national) regulations have boosted and facilitated the growth of offshore financial centers? This paper is not only aimed at addressing these issues and developments, but also highlights why (even though) the need for de regulation of national capital markets is justified, the converse appears to apply to the liberalisation of external capital markets. Furthermore, the liberalisation of global and external capital markets has provided the impetus and justification for the need to de regulate national capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over- the-Counter) derivatives markets is evidenced by Basel III's focus. „Cartelisation“ and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences.
    Keywords: EURIBOR (Euro Inter-Bank Offered Rate); LIBOR (London Inter-Bank Offered Rate); de regulation; monetary policies; rate rigging; equity; bond markets; derivatives; capital markets; liberalisation
    JEL: E02 D0 K2 E5 G01
    Date: 2012–10–20
  31. By: Petreski, Marjan; Mojsoska-Blazevski, Nikica
    Abstract: In this paper we analyze the determinants of real wages in Macedonia’s manufacturing sector. We emphasize the macroeconomic aspects involved, and use econometric panel data techniques to model the behaviour of real wages for the period 2005:1-2010:12, using monthly data. In the study we found non-negligible persistence of real wages, which reduces in the recession period. We further find a role for prices, real exchange rate and the tariff index in determining real wages.
    Keywords: real wages; Macedonia; panel data; Generalized Method of Moments
    JEL: E24 J31
    Date: 2011
  32. By: Charlot, Olivier (University of Cergy-Pontoise); Malherbet, Franck (University of Rouen); Ulus, Mustafa (Galatasaray University)
    Abstract: We consider a dual labor market with a frictional formal sector and a competitive informal sector. We show that the size of the informal sector is generally too large compared to the optimal allocation of the workers. It follows that our results give a rationale to informality-reducing policies.
    Keywords: search and matching models, informality, efficiency
    JEL: E24 E26 J60 L16 O1
    Date: 2012–10
  33. By: Haan, Jakob de; Sturm, Jan-Egbert; Jong-A-Pin, Richard (Groningen University)
    Abstract: We use real-time annual data on the fiscal balance, government current spending, current revenues and net capital outlays as published at a half yearly frequency in the OECD Economic Outlook for 25 OECD countries. For each fiscal year t we have a number of forecasts, a first release, and subsequent revisions. It turns out that revisions in the fiscal balance data are not affected by elections. However, we do find that governments spend more than reported before an election which provides support for moralhazard type of political budget cycle (PBC) models: through hidden efforts the incumbent tries to enhance his perceived competence. We also find that governments had higher current receipts than reported before an election, which is in line with adverse-selection type of PBC models in which incumbents signal competence through expansionary fiscal policy before the elections.
    Date: 2012
  34. By: Balázs Égert
    Abstract: The economics profession seems to increasingly endorse the existence of a strongly negative nonlinear effect of public debt on economic growth. Reinhart and Rogoff (2010) were the first to point out that a public debt-to-GDP ratio higher than 90% of GDP is associated with considerably lower economic performance in advanced and emerging economies alike. A string of recent empirical papers broadly validates this threshold value. This paper seeks to contribute to this literature by putting a variant of the Reinhart-Rogoff dataset to a formal econometric testing. Using nonlinear threshold models, there is some evidence in favour of a negative nonlinear relationship between debt and growth. But these results are very sensitive to the time dimension and country coverage considered, data frequency (annual data vs. multi-year averages) and assumptions on the minimum number of observations required in each nonlinear regime. We show that when non-linearity is detected, the negative nonlinear effect kicks in at much lower levels of public debt (between 20% and 60% of GDP). These results, based on bivariate regressions on secular time series, are largely confirmed on a shorter dataset (1960-2010) when using a multivariate growth framework that accounts for traditional drivers of long-term economic growth and model uncertainty. Nonlinear effects might be more complex and difficult to model than previously thought. Instability might be a result of nonlinear effects changing over time, across countries and economic conditions. Further research is certainly needed to fully understand the link between public debt and growth.<P>Dette publique, croissance économique et effets non-linéaires : mythe ou réalité ?<BR>Les économistes semblent de plus en plus approuver l'existence d'un effet fortement négatif non linéaire de la dette publique sur la croissance économique. Reinhart et Rogoff (2010) furent les premiers à souligner que la dette publique par rapport au PIB supérieur à 90% du PIB est associée à une performance économique nettement plus faible dans les économies avancées et émergentes. Une série de récentes études empiriques confirme largement cette valeur seuil. Ce papier vise à contribuer à cette littérature en mettant une variante du jeu de données de Reinhart et Rogoff à un test économétrique formelle. En utilisant des modèles non linéaires à seuils, nous confirmons l’existence d'une relation non linéaire négative entre la dette et la croissance. Mais ces résultats sont très sensibles à la dimension temporelle et la couverture des pays considérés, la fréquence des données (données annuelles par rapport aux données pluriannuels) et des hypothèses sur le nombre minimum d'observations requises dans chaque régime non linéaire. Nous montrons que lorsque la non-linéarité est détectée, les effets négatifs non linéaires entrent en action à des niveaux beaucoup plus faibles de la dette publique (entre 20% et 60% du PIB). Ces résultats, basés sur des régressions bivariées sur des séries très longues sont largement confirmés sur une période plus courte (1960 2010) lors de l'utilisation d'un cadre de croissance multivarié qui considère des facteurs traditionnels de la croissance économique à long terme et l'incertitude du modèle. Les effets non linéaires peuvent être plus complexes et plus difficiles à modéliser qu'on ne le pensait. L'instabilité peut être le résultat de l'évolution des effets non linéaires dans le temps, entre les pays et les conditions économiques. Des recherches complémentaires sont certainement nécessaires pour mieux comprendre le lien entre la dette publique et de la croissance.
    Keywords: public debt, economic growth, nonlinearity, threshold effects, dette publique, croissance économique, effet de seuil, effet non linéaire
    JEL: E6 F3 F4 N4
    Date: 2012–10–17
  35. By: Hassler, John; Krusell, Per; Olovsson, Conny
    Abstract: We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energy-saving technical change appears to respond strongly to the oil-price shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.
    Keywords: directed technical change; energy saving
    JEL: E0 O3 Q32
    Date: 2012–10
  36. By: Alessandra Fogli; Laura Veldkamp
    Abstract: Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, how does this effect operate and how big is it? Using network analysis tools, we explore how different social structures affect technology diffusion and thereby a country's rate of technological progress. The network model also explains why societies with a high prevalence of contagious disease might evolve toward growth-inhibiting social institutions and how small initial differences can produce large divergence in incomes. Empirical work uses differences in the prevalence of diseases spread by human contact and the prevalence of other diseases as an instrument to identify an effect of social structure on technology diffusion.
    JEL: E02 O1 O33
    Date: 2012–10
  37. By: Yoshiyasu Ono; Katsunori Yamada
    Abstract: We consider a dynamic macroeconomic model with households that regard relative affluence as social status. The measure of relative affluence can be the ratio to, or the difference from, the social average. The two specifications lead to quite different results: with the ratio specification full employment is necessarily realized, whereas with the difference specification persistent shortages of aggregate demand and employment can arise. Furthermore, using the data of an experiment of affluence comparison we empirically find that the difference specification is far more persuasive than the ratio specification. Thus, the present model provides an analytical framework for persistent stagnation.
    Date: 2012–10
  38. By: Inoue, Takeshi
    Abstract: This paper examines the causal relationship between central bank intervention and exchange returns in India. Using monthly data from December 1997 to December 2011, the empirical results derived from the CCF approach of Cheung and Ng (1996) suggest that there is causality-in-variance from exchange rate returns to central bank intervention, but not vice versa. These findings are robust in the sense that they hold in cases where the returns were measured from either the spot rate or the forward rate. Therefore, the results of this paper suggest that the Indian central bank has intervened in the foreign exchange market to respond to exchange rate volatility, although the volatility has not been influenced by central bank intervention in the form of net purchases of foreign currency in the market.
    Keywords: India, Foreign exchange, Exchange control, Central bank, Causality-in-variance, Exchange rate, Intervention
    JEL: E58 F31
    Date: 2012–06

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