nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒12‒06
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Transparency, Expectations Anchoring and the Inflation Target By Guido Ascari; Anna Florio
  2. Price Stickiness Asymmetry and Real Shocks Macroeconomic Dynamics By Alessandro Flamini
  3. Establishing a Hawkish Reputation: Interest Rate Setting by Newly Appointed Central Bank Governors By Matthias Neuenkirch
  4. The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery By Stephanie Schmitt-Grohé; Martín Uribe
  5. Monetary Policy with Sectoral Linkages and Durable Goods By Ivan Petrella; Raffaele Rossi; Emiliano Santoro
  6. Designing Monetary Policy Committees By Volker Hahn
  7. The Credibility of Monetary Policy Announcements - Empirical Evidence for OECD Countries since the 1960s By Ansgar Belke; Andreas Freytag; Johannes Keil; Friedrich Schneider
  8. Policy Games with Distributional Conflicts By Alice Albonico; Lorenza Rossi
  9. Non-Linear Fiscal Regimes and Interest Rate Policy By Piergallini, Alessandro
  10. Loss Aversion and the Asymmetric Transmission of Monetary Policy By Edoardo Gaffeo; Ivan Petrella; Damjan Pfajfar; Emiliano Santoro
  11. Interest Rate Forecasts in Inflation Targeting Open-Economies By Alessandro Flamini
  12. Discretion vs. Timeless Perspective Policy-Making: the Role of Input-Output Interactions By Ivan Petrella; Raffaele Rossi; Emiliano Santoro
  13. Nominal Rigidities, Supply Shocks and Economic Stability By Guido Ascari; Alessandro Flamini; Lorenza Rossi
  14. Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation By Alessandro Flamini; Guido Ascari; Lorenza Rossi
  15. International monetary policy spillovers in an asymmetric world monetary system - The United States and China By Kristina Spantig
  16. Monetary Rules for Commodity Traders By Luis Catão; Roberto Chang
  17. Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs By Paolo Angelini; Sergio Nicoletti-Altimari; Ignazio Visco
  18. Die Rolle monetärer Variablen für die Geldpolitik vor, während und nach der Krise: Nicht nur für die EWU geltende Überlegungen By Seitz, Franz
  19. Co-mouvement d'activité dans l'UEMOA: une approche par les corrélations dynamiques By Gammadigbé, Vigninou
  20. Early warning indicator model of financial developments using an ordered logit By Reimers, Hans-Eggert
  21. The Labor Market Consequences of Financial Crises With or Without Inflation: Jobless and Wageless Recoveries By Calvo, Guillermo; Coricelli, Fabrizio; Ottonello, Pablo
  22. Исследование возможностей и диапазонов применения методологии экономико-математического моделирования на основе тензорного анализа денежного поля: теоретические и методологические вопросы взаимодействия финансового и реального сектора экономики By Maslov, Alexander
  23. Global excess liquidity and asset prices in emerging countries: a pvar approach By Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat
  24. The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate By Murat Tasci
  25. Appendix: Business Cycle Implications of Internal Consumption Habit for New Keynesian Models By Kano, Takashi; Nason, James M.
  26. Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector By Oscar Arce; Jose Manuel Campa; Angel Gavilan
  27. Managing Financial Crises: Lean or Clean? By Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
  28. Optimal Policy for Macro-Financial Stability By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R
  29. Market Discipline Under A Politicised Multilateral Fiscal Rule - Lessons from the Stability and Growth Pact Debate By Matthias Bauer; Martin Zenker
  30. On the Link Between the Volatility and Skewness of Growth By Geert Bekaert; Alexander Popov
  31. Coping with Macroeconomic Imbalances: Bulgaria’s Experience during the Global Turmoil By Rumen Dobrinsky
  32. Die japanischen Lehren für die europäische Krise By Gunther Schnabl
  33. Eine Analyse zur Einkommensteuerbelastung und Wirkung der kalten Progression der vergangenen 20 Jahre in Deutschland By Hechtner, Frank; Massarrat-Mashhadi, Nima; Sielaff, Christian
  34. Matching, Wage Rigidities and Efficient Severance Pay By Giulio Fella
  35. The Consumption-Investment-Unemployment Relationship in Spain: an Analysis with Regional Data By Bande, Roberto; Riveiro, Dolores
  36. TARGET2 and Central Bank Balance Sheets By Karl Whelan
  37. Monetäre Staatsfinanzierung und europäische Geld(un)ordnung By Christian Fahrholz
  38. Evaluation of long-dated investments under uncertain growth trend, volatility and catastrophes By Gollier, Christian
  39. Fiscal Policy and MPC Heterogeneity By Tullio Jappelli; Luigi Pistaferri
  40. Product Introductions, Currency Unions, and the Real Exchange Rate By Alberto Cavallo; Brent Neiman; Roberto Rigobon
  41. Speed, Algorithmic Trading, and Market Quality around Macroeconomic News Announcements By Martin L. Scholtus; Dick van Dijk; Bart Frijns
  42. Technology and the Changing Family: A Unified Model of Marriage, Divorce, Educational Attainment and Married Female Labor-Force Participation By Jeremy Greenwood; Nezih Guner; Georgi Kocharkov; Cezar Santos
  43. La demanda agregada y la distribución del ingreso: Un estudio a partir de los modelos de crecimiento kaleckianos By Loaiza Quintero, O.L.
  44. Market-based Eurobonds Without Cross-Subsidisation By Manasa Gopal; Markus Pasche
  45. Impact of Changes in the Global Financial Regulatory Landscape on Asian Emerging Markets By Tarisa Watanagase
  46. Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem By Buiter, Willem H.; Rahbari, Ebrahim
  47. Asset pricing with uncertain betas: A long-term perspective By Gollier, Christian
  48. Series enlazadas de empleo y VAB para Espana, 1955-2010 (RegDat_Nac_version 3.1) By Angel de la Fuente
  49. Labor Market Institutions and Informality in Transition and Latin American Countries By H. Lehmann; A. Muravyev
  50. Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate By Matthias Bauer; Martin Zenker
  51. The Frisch Elasticity in Labor Markets with High Job Turnover By Céspedes Reynaga, Nikita; Rendon, Silvio

  1. By: Guido Ascari (Department of Economics and Management, University of Pavia); Anna Florio (Polytechnic of Milan)
    Abstract: This paper proves that a higher inflation target unanchors expectations, as feared by Fed Chairman Bernanke. The higher the inflation target, the smaller the E-stability region when a central bank follows a Taylor rule in a New Keynesian model allowing for trend inflation and adaptive learning. Moreover, the higher the inflation target, the more the policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases the inflation target and increase the monetary policy response to output would be "reckless". Moreover, we show that transparency is an essential component of the inflation targeting framework and it helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target.
    Keywords: Trend Inflation, Learning, Monetary Policy, Trasparency
    JEL: E5
    Date: 2012–11
  2. By: Alessandro Flamini (Department of Economics and Management, University of Pavia)
    Abstract: In a two-sector New-Keynesian economy exposed to real shocks, this paper shows that the dispersion in the degree of sectoral price stickiness plays a key role in the determination of the dynamics of aggregate inflation and, consequently, of the whole economy. Increasing the dispersion in price stickiness reduces the persistence of inflation and, to a smaller extent, of the interest rate. It also reduces the volatility of inflation, the interest rate and the output-gap. Thus two economies with the same average degree of sectoral price stickiness but unlike variance may behave very differently. In particular, they can require monetary policies that differ in terms of tightness and/or easiness of a factor ranging between 50% and 150% over the first ten quarters. Generally, disregarding the dispersion in sectoral price stickiness leads policymakers to overvalue the volatility and persistence of inflation (output gap) with any (real) shocks, and to undervalue the volatility and persistence of the output gap with monetary shocks.
    Keywords: Sectoral asymmetries, price stickiness, New Keynesian model, persistence, volatility.
    JEL: E31 E32 E37 E52
    Date: 2012–11
  3. By: Matthias Neuenkirch (University of Aachen)
    Abstract: In this paper, we explore the interest rate setting behavior of newly appointed central bank governors. We use the sample of Kuttner and Posen (2010) which covers 15 OECD countries and estimate an augmented Taylor (1993) rule for the period 1974–2008. Our results are as follows: First, newly appointed governors fight inflation more aggressively during the first four to eight quarters of their tenure in an effort to establish the reputation of being inflation-averse. Second, we find a significantly stronger reaction to inflation for newly appointed governors in monetary policy frameworks with an at least partly independent central bank and an explicit nominal anchor.
    Keywords: Central bank governors, credibility, inflation, monetary policy, reputation, Taylor rules.
    JEL: E31 E43 E52 E58
    Date: 2012
  4. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
    JEL: E24 E31 E32 E52
    Date: 2012–11
  5. By: Ivan Petrella (Birkbeck, University of London); Raffaele Rossi (Lancaster University); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: We study the normative implications of a New Keynesian model featuring intersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production linkages fundamentally alters the intersectoral stabilization trade-off as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumental rules that adjust the policy rate in response to the output gap and alternative aggregate measures of final goods price inflation. Aggregating durable and non-durable inflation depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inflations to movements in the real marginal costs, so that the effective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core inflation.
    Keywords: Durable Goods, Input-Output Interactions, Monetary Policy, Interest Rate Rules
    JEL: E23 E32 E52
    Date: 2012–10–11
  6. By: Volker Hahn (Department of Economics, University of Konstanz, Germany)
    Abstract: We integrate a monetary policy committee into a New Keynesian model to assess the consequences of the committee's institutional characteristics for welfare. First, we prove that uncertainty about the committee's future composition may be desirable. Second, we show that longer terms of central bankers lead to more effective output stabilization at the expense of higher inflation variability. Third, larger committees allow for more efficient stabilization of both output and inflation, provided that the pool of candidates is sufficiently diverse. Finally, longer terms induce the government to appoint more conservative central bankers, which is conducive to welfare.
    Keywords: Monetary policy committees, term length, committee size, New Keynesian model
    JEL: E58 D71
    Date: 2012–11–19
  7. By: Ansgar Belke (University of Duisburg-Essen and IZA Bonn); Andreas Freytag (Friedrich-Schiller-University Jena); Johannes Keil (University of Duisburg-Essen); Friedrich Schneider (Johannes-Kepler-University Linz)
    Abstract: Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between rules and inflation is relatively weak. In this paper, we first discuss likely causes for this weak link and present the argument that monetary commitment is not credible in itself. It can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment based on panel data covering five decades and 22 OECD countries confirms the crucial role of a credibly backed monetary commitment to price stability.
    Keywords: credibility, central bank independence, price stability, monetary commitment
    JEL: E31 E50 E52
    Date: 2012
  8. By: Alice Albonico (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: This paper studies the effects generated by limited asset market participation under different fiscal and monetary policy games. We find that the distributional conflict due to limited asset market participation rises the inflation bias when the two authorities are independent and play strategically. A fully redistributive fiscal policy eliminates the extra inflation bias. However, the latter is cancelled at the cost of strongly reducing the Ricardian welfare in terms of consumption equivalents. A partial redistributive fiscal policy is able to reduce the inflation bias, but generates a strong Government bias. Finally, despite a fully conservative monetary policy is necessary to get price stability, it still implies a very strong reduction in liquidity constrained consumers welfare, in the absence of a redistributive fiscal policy. The model also implies some interesiting results when simulating a financial crisis scenario.
    Keywords: liquidity constrained consumers, optimal monetary and fiscal policy, strategic interaction, inflation bias.
    JEL: E3 E5
    Date: 2012–11
  9. By: Piergallini, Alessandro
    Abstract: Much empirical evidence finds that governments react to fiscal imbalances in a non-linear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that non-linear fiscal regimes alter equilibria under active and passive monetary-fiscal policies. The Fisher equation combined with non-linear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state at which fiscal policy is active is locally saddle-path stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state which converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high debt equilibrium along which inflation is uniquely determined.
    Keywords: Non-Linear Fiscal Rules; Interest Rate Policy; Multiple Equilibria; Global Dynamics
    JEL: E31 E52 E63
    Date: 2012–10–14
  10. By: Edoardo Gaffeo (University of Trento); Ivan Petrella (Birkbeck, University of London); Damjan Pfajfar (University of Tilburg); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households' utility depends on consumption deviations from a reference level below which loss aversion is displayed. In line with the prospect theory pioneered by Kahneman and Tversky (1979), losses in consumption loom larger than gains. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and infl?ation. The resulting state-dependent trade-off between output and infl?ation stabilization recommends stronger policy activism towards in?flation during expansions
    Keywords: Asymmetry, Monetary Policy, Business Cycle, Prospect Theory
    JEL: E32 E42 E52 D03 D11
    Date: 2012–07–16
  11. By: Alessandro Flamini (Department of Economics and Management, University of Pavia)
    Date: 2012–11
  12. By: Ivan Petrella (Birkbeck, University of London); Raffaele Rossi (Lancaster University); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretionary monetary policy-making may be superior to timeless perspective. To this end, we formulate an input-output economy in which firms' technology employs both labor and intermediate goods produced by all firms in the economy. Unlike price stickiness, input materials reduce the slope of the New Keynesian Phillips curve, while leaving the policy maker's preference for consumption stabilization unaffected. Strategic complementarities stemming from realistic degrees of input-output interactions greatly amplify the loss of social welfare under timeless perspective, even for small departures of the economy from its steady state. By contrast, price rigidity proves to be ineffective at improving the performance of discretion relative to timeless perspective.
    Keywords: Input-Output Economy, Monetary Policy, Discretion, Timeless Perspective
    JEL: E23 E32 E52
    Date: 2012–11–05
  13. By: Guido Ascari (Department of Economics and Management, University of Pavia); Alessandro Flamini (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: This paper shows that nominal rigidities in terms of price stickiness acts as a powerful supply-shock filter that reduces the overall economic instability. Considering a range of admissable values for price stickiness, the volatility of inflation, output and interest rate induced by technology or cost-push shocks can vary up to 50%. The paper suggests a word of caution for policies designed to increase price flexibility which would expose the economy to more economic instability in presence of supply shocks.
    Keywords: Price stickiness, economic stability, supply shock, technology shock, cost-push shock.
    JEL: E31 E32 E37 E52
    Date: 2012–11
  14. By: Alessandro Flamini (Department of Economics and Management, University of Pavia); Guido Ascari (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: Since the '80s the volatility of output growth and inflation experienced by several industrialized countries has remarkably declined, what has been dubbed the "Great Moderation". Various explanations have been proposed and likely all play some role. This paper shows that when an industrial transformation reduces the weight of the manufacturing sector relative to the services sector, the presence of sectoral heterogeneity in price stickiness leads to a significant decline in the volatility of inflation and output growth.
    Keywords: Great Moderation, sectoral asymmetries, price stickiness, New Keynesian model, persistence, volatility.
    JEL: E31 E32 E37 E52
    Date: 2012–11
  15. By: Kristina Spantig (Graduate Programme "Global Financial Markets")
    Abstract: The paper scrutinizes the spillover effects of expansionary monetary policies of a center economy to the macroeconomic policies of periphery countries, dependent on the exchange rate regime. In particular the impact of the US quantitative easing on the Chinese economy is analysed. The results suggest that the exchange rate regime plays a minor role in insulating the economies at the periphery of the world monetary system from monetary policy shocks in the center. The only exception is capital controls which enable the periphery countries, in particular China, to maintain a certain degree of monetary independence in the short run. In the long run a closer Chinese-European policy coordination is argued to create a counterbalance to the predominance of the US dollar in the currently asymmetric world monetary system. This would provide an incentive to the US to phase out undue monetary expansion.
    Keywords: monetary policy, excess liquidity, spillovers, US, China
    JEL: E31 E42 E52 E61
    Date: 2012
  16. By: Luis Catão; Roberto Chang
    Abstract: We develop a dynamic model of a small open economy that trades commodities whose world prices are subject to realistic random fluctuations, and study the implications of monetary policy alternatives. The model is much more flexible than those of previous studies, especially in allowing to compare perfect risk sharing against financial autarky. In each case we show how to derive analytically optimal Ramsey allocations and flexible price allocations, and hence to examine the crucial role of behavioral elasticities, production structure, and capital mobility in determining the welfare properties of different monetary choices. Applying these insights to a calibrated example, we find that the impulse responses associated with PPI targeting track flexible price allocations closely, but can diverge greatly from the Ramsey allocations, especially when risk sharing is perfect and the elasticity of demand for exports of a home aggregate is high. In those cases, policies that stabilize the real exchange rate more than PPI targeting, such as targeting expected inflation, deliver higher welfare. But PPI targeting is the clear winner under portfolio autarky.
    JEL: E52 F41
    Date: 2012–11
  17. By: Paolo Angelini (Banca d'Italia); Sergio Nicoletti-Altimari (Banca d'Italia); Ignazio Visco (Banca d'Italia)
    Abstract: We review the recent literature on macroprudential policy and its interaction with other policies, extracting several points. First, there are externalities in the financial sector, often in the form of excessive credit growth. Second, monetary policy needs to take financial stability into account. Third, macroprudential instruments can moderate the financial cycle. Finally, there are complementarities between monetary and macroprudential policies, but also potential conflict. We then relate these points to recent events in the euro area where, following the sovereign debt crisis, a retrenchment of finance within national borders is taking place, amplifying the divergences across economies. We argue that in principle national authorities would like to adjust macroprudential instruments to compensate for the highly heterogeneous financial conditions, but at present they have little leeway to do so, since in the run-up to the crisis insufficient capital buffers had been accumulated. Various factors may explain low bank capitalization levels worldwide. We discuss the role of risk-weighted assets, which may have inadequately captured actual risks in many jurisdictions; we also document that European and US banks’ capital ratios decline monotonically with bank size. This confirms that key features of the microprudential apparatus are crucial for preventing financial instability.
    Keywords: macroprudential policy, monetary policy, capital requirements
    JEL: E44 E58 E61
    Date: 2012–11
  18. By: Seitz, Franz
    Abstract: Nach der jüngsten Finanz- und Wirtschaftskrise kamen verstärkt Forderungen auf, die Geldpolitik solle zur frühzeitigen Erkennung von Finanzmarktungleichgewichten verstärkt auf monetäre Variablen ihr Augenmerk richten. Der vorliegende Beitrag zeigt, dass diese Überlegung wohl begründet ist, allerdings nicht erst seit der Finanzkrise. Zudem leistet ein derartiges Vorgehen auch den besten Beitrag zur dauerhaften Gewährleistung von Preisstabilität. -- During and after the recent financial and economic crises more and more economists argued in favour of a monetary policy which should pay more attention to monetary variables as early warning indicators of financial market imbalances. The present paper shows that these considerations are well justified, but not only since the latest crisis. Such an approach is also the best contribution for the permanent safeguarding of price stability.
    Keywords: Geldmenge,Geldpolitik,Inflation,Finanzkrise
    JEL: E42 E52 E58
    Date: 2012
  19. By: Gammadigbé, Vigninou
    Abstract: This paper brings a new lighting on the synchronization of the business cycles in the WAEMU countries. The study applies the concept of dynamic correlation to the analysis of the activity co-movement of the union. The results show the low level of synchronization of the business cycles, which makes difficult the implementation of a common monetary policy that will be advantageous to all the countries. These results lead to policy recommendations.
    Keywords: Co-mouvement d'activité, Cycle économique, Analyse spectrale, Corrélation dynamique, UEMOA
    JEL: E32 C22
    Date: 2012–11
  20. By: Reimers, Hans-Eggert
    Abstract: The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 - 2011 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price developments. --
    JEL: E37 E44 E51 G01
    Date: 2012
  21. By: Calvo, Guillermo; Coricelli, Fabrizio; Ottonello, Pablo
    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.
    Keywords: Financial crises; Jobless recovery; Wageless recovery
    JEL: E24 E44 G01
    Date: 2012–11
  22. By: Maslov, Alexander
    Abstract: The paper analyzes practical application of money field theory, which was published before. Using econometric and linear modeling of time-series as a basis for the analysis of Canada’s financial indicators, inferences are made towards the country’s stability and actions monetary authorities have to take in order to increase the efficiency of interaction between financial and real sectors of an economy.
    Keywords: monetary policy; money supply; tensor analysis; linear operators
    JEL: E51 C02 E10 E60
    Date: 2012–03–24
  23. By: Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat (Larefi, Université Bordeaux IV)
    Abstract: The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear.
    Keywords: Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis
    JEL: E44 E52 F3 G01
    Date: 2012–04
  24. By: Murat Tasci (Research Department, Federal Reserve Bank of Cleveland)
    Abstract: This paper proposes an empirical method for estimating a long-run trend for the unemployment rate that is grounded in the modern theory of unemployment. I write down an unobserved components model and identify the cyclical and trend components of the underlying unemployment flows, which in turn imply a time varying estimate of the unemployment trend, the natural rate. I identify a sharp decline in the outflow rate - job …finding rate- since 2000, which was partly offset by the secular decline in the inflow rate separation rate since 1980s, implying a relatively stable natural rate, currently at 6 percent. Numerical examples show that slower labor reallocation along with the weak output growth explains most of the persistence in unemployment since the Great Recession. Contrary to the business-cycle movements of the unemployment rate, a signi…cant fraction of the low-frequency variation can be accounted for by changes in the trend of the inflows, especially prior to 1985. Finally, I highlight several desirable features of this natural rate concept that makes it a better measure than traditional counterparts. These include statistical precision, the signi…cance of required revisions to past estimates with subsequent data additions, policy relevance and its tight link with the theory.
    Keywords: Unemployment; Natural Rate; Unemployment Flows; Labor Market Search
    JEL: E24 E32 J64
    Date: 2012–11
  25. By: Kano, Takashi; Nason, James M.
    Abstract: The appendix discusses computational aspects of the paper “Business Cycle Implications of Internal Consumption Habit for New Keynesian Models.” These topics range from solving the baseline new Keynesian dynamic stochastic general equilibrium (NKDSGE) model, estimating the structural infinite-order vector moving averages, checking whether these models recover the fundamental shocks, to computing the permanent and transitory output and consumption growth spectral densities. More evidence about the fit of the NKDSGE models is also reviewed. The NKDSGE models are evaluated using alternative priors, and modification of the VARs generating the posterior distributions, and a different goodness of fit statistic. These evaluations reflect the robustness of the evidence about NKDSGE model fit reported in “Business Cycle Implications of Internal Consumption Habit for New Keynesian Models.”
    Date: 2012–11
  26. By: Oscar Arce; Jose Manuel Campa; Angel Gavilan
    Abstract: We provide a model with sector-specific debt-collateral constraints to analyse how asymmetric financing conditions across sectors affect the aggregate investment, credit and output composition. In our model, investments in the construction sector allow for higher leverage than investments in the non-durable consumption goods sector. When borrowing constraints bind in both sectors, unit returns in the construction sector are lower due to a positive pledgeability premium, and changes in interest rates have a non-monotonic effect in the sectoral composition of investment. Specifically, a fall in interest rates triggers a relative rise in investment in the consumption goods sector when rates are relatively high, whereas the opposite effect obtains when rates are sufficiently low. We argue that this prediction of the model, which depends critically on the asymmetries of financing conditions across sectors, is consistent with the evidence for a number of OECD countries during the decade before the 2007/08 crisis.
    Keywords: investment and credit, pledgeability premium, collateral constraints, sectoral allocation, housing
    JEL: E22 E32 E44
    Date: 2012–11
  27. By: Mitsuru Katagiri (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ryo Kato (Director, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail:; Takayuki Tsuruga (Associate Professor, Graduate School of Economics, Kyoto University, (E-mail:
    Abstract: This paper discusses the lean vs. clean policy debate in managing financial crises based on dynamic general equilibrium models with an occasionally binding collateral constraint. We show that a full state-contingent subsidy for debtors can restore the first-best allocations by forestalling disorderly deleveraging in a crisis. While this result appears to favor the clean policy against a lean policy that achieves the second-best allocation, further assessment points to various risks associated with the clean policy from a practical viewpoint. First, the optimal clean policy is likely to call for an unrealistically large amount of fiscal resources. Second, if the clean policy is activated with an empirically realistic intervention, the less-than-optimal clean policy incentivizes debtors to take on undue risks, exposing the economy to higher crisis probabilities. Finally, the less-than-optimal clean policy may give rise to huge welfare losses due to the policy maker's misrecognition of the state of the economy.
    Keywords: Financial Crisis, Credit Externalities, Bailout, Macroprudential Policy
    JEL: E32 G01 G18
    Date: 2012–11
  28. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R
    Abstract: In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy maker has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.
    Keywords: Bailouts; Capital Controls; Exchange Rate Policy; Financial Crises; Financial Frictions; Macro-Financial Stability; Macro-Prudential Policies
    JEL: E52 F37 F41
    Date: 2012–11
  29. By: Matthias Bauer (Graduate Programme "Global Financial Markets"); Martin Zenker (Graduate Programme "Soziale Marktwirtschaft")
    Abstract: Does a multilateral fiscal rule improve market discipline in a monetary union? This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on EMU sovereign default risk for the period 2001 to 2005. For various EMU member countries our findings suggest that credit risk did not increase in the SGP's early years in response to the political undermining of the Pact. Due to the existence of systematic volatility effects we conclude that from its beginning the Pact was not perceived as a credible institution by financial markets. Bond markets have not been the watchdogs the proponents of transparency enhancing fiscal rules frequently claim them to be. Investors did not anticipate any serious consequences arriving from political non-ownership of the Pact and corresponding fiscal leeway on national public finances in the euro zone back then. In this context, policymakers working on a reform of Europe's fiscal framework should abstain from enhancing multilateral fiscal rules lacking political ownership, including the reformed SGP and the new "European Fiscal Compact".
    Keywords: fiscal rules, market discipline, sovereign credit risk, GARCH
    JEL: E62 F55 C22 C58
    Date: 2012
  30. By: Geert Bekaert; Alexander Popov
    Abstract: In a sample of 110 countries, we document a positive relation between the volatility and skewness of growth in the cross-section, but a negative relation in panel data with country fixed effects. The negative relation between volatility and skewness in panel data is driven by business cycle variation in rich countries. The long-run cross-sectional relation is related to two distinct phenomena: sudden and short-lived growth spurts in mostly developing countries, and sharp crises in mostly developed countries, following the build-up of leverage during low-volatility periods. The former phenomenon is driven by one of the following events in mostly developing countries: industrialization, macroeconomic stabilisation, and the discovery and exploitation of natural resources. The latter phenomenon is consistent with recent theories of financial frictions.
    JEL: E32 G10 O10
    Date: 2012–11
  31. By: Rumen Dobrinsky
    Abstract: It is textbook knowledge that economic crises are in most cases associated with the accumulation of macroeconomic imbalances. In turn, macroeconomic imbalances emerge as the result of imbalanced growth. In the ideal world of equilibrium, all macroeconomic variables change at the same, equilibrium growth rate. The real world is one of disharmony and disequilibria, when there are significant divergences in the rates of growth of economic variables. When speed differentials are within certain limits, the resulting macroeconomic imbalances are manageable through the instruments of macroeconomic policy and are not a matter of concern. Crises emerge when disequilibria get out of control and the economy is incapable of coping with significant speed differentials among key economic variables. ...
    Date: 2012–09
  32. By: Gunther Schnabl (University of Leipzig)
    Abstract: Japan hat nicht nur 15 Jahre vor Europa einen Boom-und-Krisen-Zyklus durchschritten, sondern auch wichtige Erfahrungen mit Krisentherapien in Form von monetärer Lockerung, expansiver Finanzpolitik und Rekapitalisierung von Finanzinstituten gemacht. Japan hat die Nullzinsgrenze bereits 1999 erreicht und eine Staatsverschuldung in Rekordhöhe angehäuft. Das Papier vergleicht die Boom-und- Krisen-Zyklen in Japan und Europa hinsichtlich der Ursachen, des Krisenverlaufs, der Krisentherapien und der Wirkung der Krisentherapien. Als Folgen einer auf expansiver Geld- und Finanzpolitik basierenden Krisentherapie werden die Hysterese der Niedrigzins- und Hochverschuldungsfalle, das Aussetzen der Allokations- und Signalfunktion des Zinses, die graduelle Verstaatlichung des Finanzsektors und der gesamtwirtschaftlichen Nachfrage sowie graduelle reale Einkommensverluste abgeleitet. Die wirtschaftspolitische Implikation für Europa und Japan ist der konsequente Ausstieg aus der expansiven Geld- und Finanzpolitik trotz hoher Anpassungskosten.
    Keywords: Japan, Europa, Bubble Economy, Europäische Schuldenkrise, Niedrigzinspolitik, Stagnation
    JEL: E32 E42 E58
    Date: 2012
  33. By: Hechtner, Frank; Massarrat-Mashhadi, Nima; Sielaff, Christian
    Abstract: Der vorliegende Beitrag widmet sich der Einkommensteuerbelastung und den Effekten aus der (kalten) Progression der letzten 20 Jahre in Deutschland. Die aktuelle Diskussion zu Steuersenkungsplänen der Regierung trägt den Auswirkungen der kalten Progression Rechnung. Einführend erfolgt ein kurzer Überblick themenverwandter Analysen der vergangenen Jahrzehnte. Hierbei zeigt sich, dass die kalte Progression und die damit verbundene Forderung nach Steuersenkungen immer wieder aufgekommen ist. Aufbauend auf empirischen Einkommensverteilungen werden in dem vorliegenden Beitrag die theoretischen und empirischen Belastungsverschiebungen seit dem Jahr 1992 analysiert. Hierbei zeigt sich, dass auch unter Beachtung eines gestiegenen Arbeitnehmerentgeltes insgesamt seit 1992 für die überwiegende Zahl der Steuerpflichtigen die Steuerbelastung gesunken ist. Gleichwohl kann ein leichter Trend zu einer Mehrbelastung seit dem Jahr 2005 beobachtet werden. Weiterhin zeigt sich ein stärkerer Progressionsgrad insbesondere für untere Einkommensbereiche, wobei dieser Effekt gerade in der jüngsten Vergangenheit zu beobachten ist. Darüber hinaus lässt sich ableiten, dass die Bedeutung der kalten Progression insgesamt seit 1992 zugenommen hat. --
    Keywords: Kalte Progression,Steuertarif,Inflation,Steuerentlastung,Einkommensteuerbelastung
    JEL: E31 H20 K34 P24
    Date: 2012
  34. By: Giulio Fella (Queen Mary, University of London)
    Abstract: This paper studies the effect of mandated severance pay in a matching model featuring wage rigidity for ongoing, but not new, matches. Mandated severance pay matters only if binding real wage rigidities imply inefficient separation under employment at will. In such a case, large enough severance payments reduce job destruction, and increase job creation and social efficiency, under very mild conditions. Furthermore, mandated severance pay never results in inefficient labor hoarding. Whenever separation is jointly optimal, the parties agree to end the match with a spot severance payment below the statutory one. The marginal effect of mandated severance pay is zero when its size exceeds that which induces the same allocation that would prevail in the absence of wage rigidity. The results hold under alternative micro-foundations for wage rigidity.
    Keywords: Severance pay, Renegotiation, Wage rigidity
    JEL: E24 J64 J65
    Date: 2012–11
  35. By: Bande, Roberto; Riveiro, Dolores
    Abstract: In this paper we analyse the consequences of changes in the consumption patterns on unemployment through an intermediate channel via investment. Specifically, after presenting our theoretical framework, we build a dynamic econometric multiequational model, in which we estimate a consumption function, an investment function and an unemployment rate equation, using a panel of 17 Spanish regions. This model is characterised by its dynamics and the cross equation relationships. After estimating the model, we run a number of dynamic simulations in order to verify our starting hypothesis, namely that temporary and persistent shocks to consumption have long lasting effects on unemployment, both directly and indirectly, through investment. Our results are especially relevant in the current recessive context of the Spanish economy, which is characterised by severe falls in consumption and unprecedented increases in unemployment
    Keywords: Consumption; investment; unemployment; panel data
    JEL: E24 E22 E21
    Date: 2012–10
  36. By: Karl Whelan (University College Dublin)
    Abstract: The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency.
    Keywords: TARGET2, ECB, Euro Crisis
    JEL: E51 E52 E58
    Date: 2012–11–21
  37. By: Christian Fahrholz (Graduate Programme "Global Financial Markets")
    Keywords: Eurokrise, Finanzkrise, EZB, Geldpolitik
    JEL: E2 E4 E6 G1 H6
    Date: 2012
  38. By: Gollier, Christian
    Abstract: Because of the uncertainty about how to model the growth process of our economy, there is still much confusion about which discount rates should be used to evaluate actions having long-lasting impacts, as in the contexts of climate change, social security reforms or large public infrastructures for example. We characterize efficient discount rates when the growth of log consumption follows a random walk with uncertain parameters. We examine different models in which the parametric uncertainty affects the trend and the volatility of growth, or the frequency of catastrophes. This uncertainty implies that the term structures of the risk free discount rate and of the aggregate risk premium are respectively decreasing and increasing. It also implies that the discount rate is increasing with maturity if the beta of the investment is larger than half of relative risk aversion. Another important consequence of parametric uncertainty is that the risk premium is not proportional to the beta of the investment. Finally, we apply our findings to the evaluation of climate change policy. We argue in particular that the beta of actions to mitigate climate change is relatively large, so that the term structure of the associated discount rates should be increasing.
    Keywords: asset prices, term structure, risk premium, decreasing discount rates, parametric uncertainty, CO2 beta, rare events, macroeconomic catastrophes.
    JEL: E43 G11 G12 Q54
    Date: 2012–11
  39. By: Tullio Jappelli (University of Napoli "Federico II", CSEF and CEPR); Luigi Pistaferri (Stanford University, CEPR and SIEPR)
    Abstract: We use responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume. We find that the marginal propensity to consume (MPC) is 48 percent on average, and that there is substantial heterogeneity in the distribution. We find that households with low cash-on-hand exhibit a much lower MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that redistributing income from the top 10% to the bottom 10% of the income distribution would boost aggregate consumption by about 0.25% of total revenues raised.
    Keywords: Marginal Propensity to Consume, Fiscal Policy, Consumption Heterogeneity
    JEL: E21 D91
    Date: 2012–11–15
  40. By: Alberto Cavallo; Brent Neiman; Roberto Rigobon
    Abstract: We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregate implications. First, in contrast to the prior literature, we demonstrate that the law of one price holds perfectly within the euro zone for thousands of goods sold by each of the retailers. Second, we find large deviations from the law of one price for these same goods outside of currency unions, even when the nominal exchange rate is pegged. For example, the Danish krone is pegged to the euro but Danish prices differ markedly from those in the euro zone countries. The reason is that about three-quarters of the magnitude of law of one price deviations reflects differences in prices at the time goods are first introduced, as opposed to the component emerging from incomplete passthrough or from nominal rigidities. Third, we show that good-level real exchange rates measured at the time goods are first introduced move with the nominal exchange rate. This implies that aggregate real exchange rate volatility and persistence is due neither to the omission of introduction prices nor to price stickiness.
    JEL: E3 F3 F4
    Date: 2012–11
  41. By: Martin L. Scholtus (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Bart Frijns (Auckland University of Technology)
    Abstract: This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook).
    Keywords: Macroeconomic News; High Frequency Trading; Latency Costs; Market Activity; Event-Based Trading
    JEL: E44 G10 G14
    Date: 2012–11–13
  42. By: Jeremy Greenwood (Department of Economics, University of Pennsylvania, USA); Nezih Guner (Universitat Autonoma de Barcelona and Barcelona GSE, Spain); Georgi Kocharkov (Department of Economics, University of Konstanz, Germany); Cezar Santos (Department of Economics, University of Mannheim, Germany)
    Abstract: Marriage has declined since 1960, with the drop being bigger for non-college educated individuals versus college educated ones. Divorce has increased, more so for the non-college educated vis-à-vis the college educated. Additionally, assortative mating has risen; i.e., people are more likely to marry someone of the same educational level today than in the past. A unified model of marriage, divorce, educational attainment and married female labor force participation is developed and estimated to fit the postwar U.S. data. The role of technological progress in the household sector and shifts in the wage structure for explaining these facts is gauged.
    Keywords: Assortative mating, education, married female labor supply, household production, marriage and divorce, minimum distance estimation
    JEL: E24 D31 J13 J17 J62
    Date: 2012–06–30
  43. By: Loaiza Quintero, O.L.
    Abstract: The aim of this paper is to study the mechanisms through which aggregate demand and income distribution affect the rate of growth, in a post-keynesian framework rooted in the works of Michal Kalecki. Thus, this paper addresses some issues that are put aside by neoclassical theory, which focuses on supply side phenomena to explain growth. The Say’s law refusal implied by the framework employed allows to determine the influence that demand exerts on economic growth, which also depends upon the sensibility of saving and investment decisions to changes in the income shares of workers and capitalists.
    Keywords: Economic Growth; demand; neoclassical theory; post-keynesian theory; Say’s law; income distribution
    JEL: E12 E25 E20
    Date: 2011–05–03
  44. By: Manasa Gopal (Birla Institute of Technology & Science, Pilani); Markus Pasche (Friedrich Schiller University Jena, School of Economics and Business Admistration)
    Abstract: Most current Eurobond proposals imply substantial cross-subsidisation since some countries partially pay the risk premia for others, thus creating moral hazard and disincentives for fiscal discipline. We suggest, instead, to use standard technologies of financial intermediation like pooling and collateralizing risks. The proposed Eurobond system decreases the costs for all participating nations which is Pareto improving. Since collateral requirements are calculated on individual risk, we eliminate cross-subsidisation. It is essential for the model that a significant fraction of governmental bonds is still issued individually since the model utilizes the risk perception abilities and disciplinating functions of the private capital market. We also discuss institutional issues of possible implementations.
    Keywords: sovereign debt, Eurobond, collateral, pooling, cross-subsidisation
    JEL: E62 E63 H63
    Date: 2012
  45. By: Tarisa Watanagase (Asian Development Bank Institute (ADBI))
    Abstract: This paper discusses the relevance of Basel III to Asian emerging markets. It reviews some of the proposed regulations of Basel III in order to evaluate their likely implications for, and their ability to enhance, the stability of the banking and financial system. This is followed by a discussion on the challenges faced by the regulators of Asian emerging markets in effectively managing their financial regulations, given their capacity and institutional constraints. The paper concludes with policy recommendations for Asian emerging markets to strengthen and enhance the stability of their banking and financial systems.
    Keywords: Global Financial Regulatory Landscape, Asian Emerging Markets, Basel, banking and financial systems
    JEL: E52 G21 G28
    Date: 2012–10
  46. By: Buiter, Willem H.; Rahbari, Ebrahim
    Abstract: This study shows that Target2 net claims are a poor measure of Bundesbank loss exposure, and even more so of German loss exposure to the rest of the Eurozone. This is true even under plausible assumptions about a comprehensive break-up scenario that leaves Germany as the only member of the euro area and the Bundesbank as the sole owner of the ECB. In this implausible scenario, the discrepancy between the Bundesbank’s Target2 net credit balance and its likely loss exposure has two principal sources. First, the 16 national central banks (NCBs) that exit the Eurosystem (which will on balance be net Target2 debtors) and their sovereigns will not automatically walk away completely from their Target2 debts - defaulting on their debts with a zero recovery rate for the Bundesbank. Legally, the Target2 claims are not extinguished by exit from the Eurosystem by the debtor NCBs. Politically and realistically, many of the exiting NCBs would be able and willing to honour their obligations to Target2 in part or even in full. Second, in the comprehensive break-up scenario, future seigniorage revenues of the Bundesbank would likely go up, as it would be left with a larger share (in our example 100 percent) of the ownership of the ECB. Changes in German exposure to the rest of the euro area (or to the periphery) can differ in magnitude and in sign from Bundesbank exposure.
    Keywords: Bundesbank; capital flight; ECB; eurosystem; imbalances; TARGET2
    JEL: E01 E42 E63 F32 F33 F36
    Date: 2012–11
  47. By: Gollier, Christian
    Abstract: How should one evaluate investment projects whose CCAPM betas are uncertain? This question is particularly crucial for projects yielding long-lasting impacts on the economy, as is the case for example for many green investment projects. We defined the notion of a certainty equivalent beta. We characterize it as a function of the characteristics of the uncertainties affecting the asset’s beta and the economy as a whole. We show that its term structure is not constant and that, for short maturities, it equals the expected beta. If the expected beta is larger than a threshold (which is negative and large in absolute value in all realistic calibrations), the term structure of the certainty equivalent beta is increasing and tends to its largest plausible value. In the benchmark case in which the asset’s beta is normally distributed, the certainty equivalent beta becomes infinite for finite maturities.
    Keywords: asset prices, term structure, risk premium, certainty equivalent beta.
    JEL: E43 G11 G12 Q54
    Date: 2012–11
  48. By: Angel de la Fuente
    Abstract: En este trabajo se elaboran series homogeneas de distintos agregados de empleo y de VAB a precios corrientes y constantes para el conjunto de Espana durante el periodo 1955-2010. Las series se construyen mediante el enlace de diversas bases de la CNE y de la Contabilidad Trimestral, introduciendose tambien una correccion tentativa para reconciliar las series de empleo de la CNE con las de la EPA
    Keywords: Contabilidad Nacional de Espana, series homogeneas
    JEL: E01
    Date: 2012–11
  49. By: H. Lehmann; A. Muravyev
    Abstract: This paper analyzes, using country-level panel data from transition economies and Latin America, the impact of labor market institutions on informal economic activity. The measure of informal economic activity is taken from Schneider et al. (2010), the most comprehensive study to date. The data on institutions, which cover employment protection legislation (EPL), the tax wedge, the unemployment benefit level, unemployment benefit duration and union density, are assembled at the IZA (transition countries) and the World Bank (LAC countries). We find that a more regulated labor market (higher EPL) increases the size of the informal economy. There is also evidence that a larger tax wedge increases informality. The tax wedge elasticity of informal economy, when evaluated at the sample mean, is rather modest, around 0.1%. Our results are broadly in line with the literature, which identifies labor market regulation and the tax wedge as important drivers of informality.
    JEL: E24 J21 J42 O17 P20
    Date: 2012–11
  50. By: Matthias Bauer (Graduate Programme "Global Financial Markets"); Martin Zenker (Graduate Programme "Soziale Marktwirtschaft")
    Abstract: This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on the euro's foreign exchange expectation bias for the period 2001 to 2005. Our findings suggest that euro foreign exchange markets were attentive to the political dispute over the enforcement of the SGP's rules. The results indicate that foreign exchange markets anticipated the gradual demise of the SGP. 1) For the expectation bias in euro foreign exchange markets we do not find systematic level effects. 2) Since volatility decreases following "destabilising" political events, we conclude that already in the early years of the SGP regime the demise of the original Pact was anticipated by foreign exchange market participants. The conclusion is that a politicised multilateral fiscal rule does not improve market discipline, which could be a crucial argument against the new "European Fiscal Compact".
    Keywords: fiscal rules, market discipline, FX markets, GARCH
    JEL: E62 F31 F33 C22 C58
    Date: 2012
  51. By: Céspedes Reynaga, Nikita (Central Bank of Peru); Rendon, Silvio (Stony Brook University)
    Abstract: We estimate Frisch elasticity in a labor market with high job turnover. In a context where only around 18% of the employed labor force has formal and stable jobs, we perform a fixed effects estimation as proposed by MaCurdy (1981) with a Heckman correction for selection into unemployment. We identify the positive slope of the labor supply using firms' size as an instrumental variable for wages. We use Peruvian data from the Permanent Employment Survey of Lima. We find that neglecting wage endogeneity implies a downward sloping labor supply, while the job turnover bias, not accounting for job turnover, overestimates Frisch elasticity. We estimate Frisch elasticity at around 0.38, which indicates fairly adjustable wages and little reaction of hours of work to wage variations. Moreover, we find that the Frisch elasticity is decreasing in income and tended to increase in the last decade.
    Keywords: labor supply, Frisch elasticity, hours of work, job turnover
    JEL: E24 J22 J24 J41 J60 J63
    Date: 2012–11

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