nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒12‒15
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Food Prices and Inflation Targeting in Emerging Economies By Marc Pourroy; Benjamin Carton; Dramane Coulibaly
  2. The Tragedy of the Commons and Inflation Bias in the Euro Area By Dinger, Valeriya; Steinkamp, Sven; Westermann, Frank
  3. The performance of simple fiscal policy rules in monetary union By Lukas Vogel; Werner Roeger; Bernhard Herz
  4. Macroprudential policy: its effects and relationship to monetary policy By Hyunduk Suh
  5. From Bretton Woods to inflation targeting: financial change and monetary policy evolution in Europe By David Cobham
  6. Business Cycle Implications of Internal Consumption Habit for New Keynesian Models By Kano, Takashi; Nason, James M.
  7. Is Inflation Targeting Still On Target? By Luis Felipe Céspedes; Roberto Chang; Andrés Velasco
  8. The Role of Credit in International Business Cycles By TengTeng Xu
  9. The past, present and future of central banking By David Cobham
  10. Macroeconomic Performance During Commodity Price Booms and Busts By Luis Felipe Céspedes; Andrés Velasco
  11. Understanding the distributional impact of long-run inflation By Gabriele Camera; YiLi Chien
  12. Forecasting Inflation and the Inflation Risk Premiums Using Nominal Yields By Bruno Feunou; Jean-Sébastien Fontaine
  13. Output Spillovers from Fiscal Policy By Alan J. Auerbach; Yuriy Gorodnichenko
  14. Time Horizons And Smoothing In the Bank of England's Reaction Function: The Contrast Between The Standard GMM And Ex Ante Forecast Approaches By David Cobham; Yue Kang
  15. Large excess reserves in the U.S.: a view from the cross-section of banks By Huberto M. Ennis; Alexander L. Wolman
  16. Optimal Fiscal Policy and the Banking Sector By Matthew Schurin
  17. The physics of business cycles and inflation By Hans G. Danielmeyer; Thomas Martinetz
  18. Policy Interest-Rate Expectations in Sweden: A Forecast Evaluation By Österholm, Pär; Beechey, Meredith
  19. Monetary policy strategies, financial institutions and financial markets in the Middle East and North Africa: an overview By David Cobham
  20. Efficient Bailouts? By Javier Bianchi
  21. A budget for Europe's monetary union By Guntram B. Wolff
  22. What inventories tell us about aggregate fluctuations -- a tractable approach to (S,s) policies By Yi Pengfei Wang; Wen; Zhiwei Xu
  24. Keynes’s employment function and the gratuitous Phillips curve disaster By Kakarot-Handtke, Egmont
  25. Central banks and house prices in the run-up to the crisis By David Cobham
  26. Was the Recent Downturn in US GDP Predictable? By Mehmet Balcilar; Rangan Gupta; Anandamayee Majumdar; Stephen M. Miller
  27. Fiscal Consolidations and Banking Stability By Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann
  28. Bank Ownership and Credit Cycle: the lower sensitivity of public bank lending to the business cycle. By Duprey, T.
  29. Fiscal Decentralisation and Fiscal Outcomes By Matteo Governatori; David Yim
  30. Gender-speci…c Differences in Labor Market Adjustment Patterns: Evidence from the United States By Dennis, Wesselbaum
  31. The ARRA: Some Unpleasant Welfare Arithmetic By Casey B. Mulligan
  32. Consolidamento fiscale e interventi sul pubblico impiego. L'esperienza di otto paesi europei By Mara Meacci; Cristina Quaglierini
  33. Causal Link between Central Government Revenue and Expenditure: Evidence for India By Yashobanta, Yashobanta Parida; smruti, Smruti Ranjan Behera
  34. Stochastic Volatility in the U.S. Labor Market By Dennis, Wesselbaum
  35. Momentum effect in individual stocks and heterogeneous beliefs among fundamentalists By Sandrine Jacob Leal; ; ;
  36. External Imbalances and Financial Crises By Alan M. Taylor
  37. The Euro Plus Pact: Competitiveness and external capital flows in the EU countries By Hubert Gabrisch; Karsten Staehr
  38. Accounting for unemployment: the long and short of it By Andreas Hornstein
  39. Development of the Banking Sector in Russia in 2011 By Mikhail Khromov; Alexey Vedev
  40. Can consumer confidence data predict real variables? Evidence from Croatia By Marija Kuzmanovic; Peter Sanfey
  41. Cyclical Variation in Labor Hours and Productivity Using the ATUS By Michael C. Burda; Daniel S. Hamermesh; Jay Stewart
  42. Active vs. Passive Decisions and Crowdout in Retirement Savings Accounts: Evidence from Denmark By Raj Chetty; John N. Friedman; Soren Leth-Petersen; Torben Nielsen; Tore Olsen
  43. From the horse’s mouth: how do investor expectations of risk and return vary with economic conditions? By Gene Amromin; Steven Sharpe
  44. Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs By Harold L. Cole; Soojin Kim; Dirk Krueger
  45. Reconciling the short and the long run: governance reforms to solve the crisis and beyond By Karl Aiginger; Olaf Cramme; Stefan Ederer; Roger Liddle; Renaud Thillaye

  1. By: Marc Pourroy; Benjamin Carton; Dramane Coulibaly
    Abstract: The two episodes of food price surges in 2007 and 2011 have raised the question of how monetary authorities should react to such external relative price shocks. These inflation shocks have been particularly challenging for developing and emerging economies’ central banks who have adopted inflation targeting strategies during the last decade. We develop a new-Keynesian small open-economy model that distinguishes three price indexes: an overall consumer prices index, the exact index of core inflation based on sticky prices, and a proxy for the core inflation index based on non-food prices. We show that nonfood inflation is a good proxy for core inflation in high-income countries, but not for middle-income and low-income countries. Although, in these countries we find that associating non-food inflation and core inflation may be promoting badly-designed policies, and consequently central banks should target headline inflation rather than non-food inflation. This result holds because non-tradable food goods represent a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food goods in consumption and the more detrimental lack of attention to the evolution in food prices.
    Keywords: Monetary Policy;Commodities;Food prices;DSGE models
    JEL: E32 E52 O23
    Date: 2012–11
  2. By: Dinger, Valeriya (Universitaet Osnabrueck); Steinkamp, Sven (Universitaet Osnabrueck); Westermann, Frank (Universitaet Osnabrueck)
    Abstract: Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view that national central banks in the euro area have indeed followed an independent monetary policy. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with inflation in the respective countries.
    Keywords: Tragedy of the Commons, Inflation Bias, Credit Channel, TARGET2, Euro Area
    JEL: E52 E58 H41
    Date: 2012–11–30
  3. By: Lukas Vogel; Werner Roeger; Bernhard Herz
    Abstract: The paper analyses the stabilising potential of simple fiscal policy rules for a small open economy in monetary union in a 2-region DSGE model with nominal and real rigidities. We consider simple fiscal instrument rules for government purchases, transfers, and consumption, labour and capital taxes in analogy to interest rate rules in monetary policy. The paper finds a dichotomy in the welfare effects of fiscal policy for liquidity-constrained and intertemporal optimising households, i.e. policies enhancing the welfare of one group tend to reduce the welfare of the other one. Moderate average welfare gains from optimal policy contrast with large losses from non-optimal policy. Fiscal rules that respond to employment fluctuations may be preferred to rules responding to indicators of price competitiveness, because optimal policy in the former corresponds more closely to the idea of countercyclical stabilisation. The paper also emphasises the strong impact of the budgetary closure rule on the welfare effects of business cycle stabilisation.
    JEL: E37 E62 F41
    Date: 2012–11
  4. By: Hyunduk Suh
    Abstract: This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers.
    Keywords: Ratio analysis
    Date: 2012
  5. By: David Cobham
    Abstract: Different ‘monetary architectures’ are distinguished, as a background to a discussion of the change in developed country monetary policy frameworks from fixed exchange rates under the Bretton Woods international monetary system to, ultimately, formal or informal inflation targeting. The introduction and experience of monetary targets in the 1970s is considered, followed by an analysis of the changes in countries’ monetary architectures, with particular reference to money and bond markets and to France and Italy, in the 1980s. Exchange rate targeting in Europe in the 1980s and 1990s is examined, followed by the changes in central bank independence in the 1990s. This leads to a discussion of the introduction of inflation targeting, and the issues raised for inflation targeting by the financial crisis of the late 2000s.
    Date: 2012
  6. By: Kano, Takashi; Nason, James M.
    Abstract: We study the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that internal consumption habit often improves the ability of NKDSGE models to match the spectra of output and consumption growth. Nonetheless, the fit of NKDSGE models with internal consumption habit is susceptible to the sources of nominal rigidity, to spectra identified by permanent productivity shocks, to the choice of monetary policy rule, and to the frequencies used for evaluation. These vulnerabilities indicate that the specification of NKDSGE models is fragile.
    Keywords: Consumption Habit, New Keynesian, Propagation, Monetary Transmission, Posterior Predictive Analysis, Bayesian Monte Carlo
    JEL: E10 E20 E32
    Date: 2012–11
  7. By: Luis Felipe Céspedes; Roberto Chang; Andrés Velasco
    Abstract: This paper reviews the recent experience of a half-dozen Latin American inflation-targeting (IT) nations. We document repeated and large deviations from the standard IT framework: exchange market interventions have been lasting and widespread; the real exchange rate has often become a target of policy, though this target is seldom made explicit; a range of other non-conventional policy tools, especially changes in reserve requirements but occasionally also taxes or restrictions on international capital movements, also came into common use. As in developed nations, during the 2008-2009 crisis issues of liquidity provision took center stage. We also attempt a first evaluation of the emerging modified framework of monetary policy. In general terms, the new approach seems to have been effective, at the very least since the region weathered the crisis reasonably well. But also, and perhaps more importantly, many questions remain about the desirability of non-conventional monetary policies in Latin America.
    JEL: E52 E58 F41
    Date: 2012–11
  8. By: TengTeng Xu
    Abstract: This paper examines the role of bank credit in modeling and forecasting business cycle fluctuations, and investigates the international transmission of US credit shocks, using a global vector autoregressive (GVAR) framework and associated country-specific error correction models. The paper constructs and compiles a dataset on bank credit for 33 advanced and emerging market economies from 1979Q1 to 2009Q4. The empirical results suggest that the incorporation of credit provides significant improvement in modeling and forecasting output growth, changes in inflation and long run interest rates, for countries with developed banking sector. Impulse response analysis provide strong evidence of the international spillover of US credit shocks to the UK, the Euro area, Japan and other industrialized economies, and the propagation to the real economy.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Econometric and statistical methods; International financial markets
    JEL: C32 G21 E44 E32
    Date: 2012
  9. By: David Cobham
    Abstract: The financial crisis, on the one hand, and the recourse to ‘unconventional’ monetary policy, on the other, have given a sharp jolt to perceptions of the role and status of central banks. In this paper we start with a brief ‘contrarian’ history of central banks since the second world war, which presents the Great Moderation and the restricted focus on inflation targeting as a temporary aberration from the norm. We then discuss how recent developments in fiscal and monetary policy have affected the role and status of central banks, notably their relationships with governments, before considering the environment central banks will face in the near and middle future and how they will have to change to address it.
    Date: 2012
  10. By: Luis Felipe Céspedes; Andrés Velasco
    Abstract: Fluctuations in commodity prices are often associated with macroeconomic volatility. But not all nations are created equal in this regard. The macro response to commodity booms and busts depends both on the structural characteristics of the economy and on the policy framework that is in place. In this paper we investigate the macro response of a group of commodity-producing nations in episodes of large commodity prices shocks. First we provide a theoretical framework to analyze how shocks to commodity prices affect the domestic economy. For this we use a simple open-economy model with nominal rigidities and financial frictions. Then we provide empirical evidence (using commodity price boom and bust episodes) that commodity price shocks have a significant impact on output and investment dynamics. Economies with more flexible exchange rate regimes exhibit less pronounced responses of output during these episodes. We also provide evidence that the impact of those shocks on investment tends to be larger for economies with less developed financial markets. Moreover, we find that international reserve accumulation, more stable political systems, and less open capital accounts tend to reduce the real exchange rate appreciation (depreciation) in episodes of commodity price booms (busts).
    JEL: E52 E58 F31 F32 F36 F41
    Date: 2012–11
  11. By: Gabriele Camera; YiLi Chien
    Abstract: The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self-insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare.
    Keywords: Inflation (Finance)
    Date: 2012
  12. By: Bruno Feunou; Jean-Sébastien Fontaine
    Abstract: We provide a decomposition of nominal yields into real yields, expectations of future inflation and inflation risk premiums when real bonds or inflation swaps are unavailable or unreliable due to their relative illiquidity. We combine nominal yields with surveys of inflation forecasts within a no-arbitrage model where conditional expectations are latent but spanned by the history of the observed data, analog to a GARCH model for the conditional variance. The filtering problem is numerically trivial and we conduct a battery of out-of-sample comparisons. Our favored model matches the quarterly inflation forecasts from surveys and uses the information in yields to produce the best monthly forecasts. Moreover, we restrict the distribution of the inflation Sharpe ratios to achieve economically reasonable estimates of the inflation risk premium and of the real rates. We find that the inflation risk premium (i) is positive on average, (ii) rises when the unemployment rate increases and (iii) when the level of interest rates decreases. Hence, real yields are more pro-cyclical than nominal yields due to variations of the inflation risk premiums.
    Keywords: Asset Pricing; Econometric and statistical methods; Inflation and prices; Interest rates
    JEL: E43 E47 G12
    Date: 2012
  13. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: In this paper, we estimate the cross-country spillover effects of government purchases on output for a large number of OECD countries. Following the methodology in Auerbach and Gorodnichenko (2012a, b), we allow these multipliers to vary smoothly according to the state of the economy and use real-time forecast data to purge policy innovations of their predictable components. We also consider the responses of other key macroeconomic variables. Our findings suggest that cross-country spillovers have an important impact, and also confirm those of our earlier papers that fiscal shocks have a larger impact when the affected country is in recession.
    JEL: E32 E62
    Date: 2012–11
  14. By: David Cobham; Yue Kang
    Abstract: The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach.
    Date: 2012
  15. By: Huberto M. Ennis; Alexander L. Wolman
    Abstract: Bank reserves in the United States increased dramatically at the end of 2008. Subsequent asset purchase programs in 2009 and 2011 more than doubled the quantity of reserves outstanding. These events required major adjustments in banks' balance sheets. We study the evolution of reserve holdings across banks from the fall of 2008 until the middle of 2011 and document how banks' balance sheets changed concurrently. Motivated by the potential implications for monetary policy of operating with a high level of reserves, we focus particular attention on those banks which accumulated large quantities of reserves.
    Keywords: Interest ; Financial markets ; Inflation (Finance) ; Monetary policy
    Date: 2012
  16. By: Matthew Schurin (University of Connecticut)
    Abstract: What should the government’s fiscal policy be when banks hold significant amounts of public debt and the government can default on its debt obligations? This question is addressed using a dynamic general equilibrium model where banks face constraints on their leverage ratios and adjust lending to satisfy regulatory requirements. In response to adverse real shocks, the government subsidizes banks and accelerates bond repayments to sustain private sector lending. When government consumption exogenously increases, however, the government optimally taxes banks and partially defaults on its debt. Debt issuance is procyclical to ensure equilibrium in the deposit market. With an opening of the economy, the government uses less aggressive tax and default policies. JEL Classification: E32, E62, F41, H21, H63 Key words: Business Fluctuations, Debt, Fiscal Policy, Government Bonds, Ramsey Equilibrium, Optimal Taxation
    Date: 2012–11
  17. By: Hans G. Danielmeyer; Thomas Martinetz
    Abstract: We analyse four consecutive cycles observed in the USA for employment and inflation. They are driven by three oil price shocks and an intended interest rate shock. Non-linear coupling between the rate equations for consumer products as prey and consumers as predators provides the required instability, but its natural damping is too high for spontaneous cycles. Extending the Lotka-Volterra equations with a small term for collective anticipation yields a second analytic solution without damping. It predicts the base period, phase shifts, and the sensitivity to shocks for all six cyclic variables correctly.
    Date: 2012–12
  18. By: Österholm, Pär (National Institute of Economic Research); Beechey, Meredith (Sveriges Riksbank)
    Abstract: In this paper, we evaluate two types of Swedish policy interest-rate ex-pectations: survey expectations and expectations inferred from market pricing. The data are drawn from the most prominent survey of finan-cial-market economists and from Swedish financial markets and the data are carefully matched by date to ensure comparability. Results show that both kinds of expectations suffer from bias and inefficiency and in terms of forecast precision there is no clear winner. We do find, though, evi-dence that the forecast accuracy of both kinds of policy-rate expectations has improved since the Riksbank started publishing its own policy-rate forecast, suggesting that this communication strategy has been beneficial from a policy perspective.
    Keywords: Survey data; Monetary policy; Sveriges Riksbank
    JEL: E47 E52
    Date: 2012–11–30
  19. By: David Cobham
    Date: 2012
  20. By: Javier Bianchi
    Abstract: This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. The optimal policy requires, in general, a mix of ex-post intervention and ex-ante prudential policy. We also analyze the effects of bailouts on financial stability and welfare in the absence of ex-ante prudential policy. Our results show that the moral hazard effects of bailouts are significantly mitigated by making bailouts contingent on the occurrence of a systemic financial crisis.
    JEL: E2 E20 E3 E32 E44 E6 F40
    Date: 2012–12
  21. By: Guntram B. Wolff
    Abstract: In a monetary union, national fiscal deficits are of limited help to counteract deep recessions; union-wide support is needed. A common euro-area budget (1) should provide a temporary but significant transfer of resources in case of large regional shocks, (2) would be an instrument to counteract severe recessions in the area as a whole, and (3) would ensure financial stability. The four main options for stabilisation of regional shocks to the euro area are: unemployment insurance, payments related to deviations of output from potential, the narrowing of large spreads, and discretionary spending. The common resource would need to be well-designed to be distributionally neutral, avoid free-riding behaviour and foster structural change while be of sufficient size to have an impact. Linking budget support to large deviations of output from potential appears to be the best option. A borrowing capacity equipped with a structural balanced budget rule could address area-wide shocks. It could serve as the fiscal backstop to the bank resolution authority. Resources amounting to 2 percent of euro-area GDP would be needed for stabilisation policy and financial stability.
    Date: 2012–12
  22. By: Yi Pengfei Wang; Wen; Zhiwei Xu
    Abstract: We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technol- ogy shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general-equilibrium models with het- erogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model’s deep structural para- meters.
    Keywords: Inventories
    Date: 2012
  23. By: Pamphile Mezui-Mbeng; (CEREFIGE - Université Omar Bongo); ;
    Abstract: Cet article analyse les interactions potentielles entre les fluctuations cycliques du crédit et celles de l’activité des pays de la CEMAC. Les cycles sont estimés à l’aide d’un filtre passe-bande, puis caractérisés, sur la période 1960-2008, selon l’algorithme de Bry et Boshan. L’analyse des co-mouvements et de la concordance établit la procyclicité du crédit dans les pays de la CEMAC. Les tests économétriques de la cointégration et de la causalité précisent la nature des interactions entre les cycles au sein des pays. En effet, au Tchad le cycle du crédit cause celui de l’activité. Au Gabon et au Congo, un effet feedback est observé. Enfin, au Cameroun et en RCA, la causalité semble moins évidente. Finalement, les résultats révèlent des spécificités sur le comportement des banques vis-à-vis du financement de l’activité au sein de la CEMAC.
    Keywords: cycle du crédit, cycle des affaires, filtre passe-bande, co-mouvements, indice de concordance
    JEL: E30 E32 E44 E47 F47
    Date: 2012
  24. By: Kakarot-Handtke, Egmont
    Abstract: Keynes had a lot of plausible things to say about unemployment and its causes. His ‘mercurial mind’, though, relied on intuition which means that he could not prove his diverse opinions convincingly. This explains why Keynes’s ideas immediately invited bastardizations. One of them, the Phillips curve synthesis, proved to be fatal. This paper identifies Keynes’s undifferentiated employment function as weak spot. The structural employment function, on the other hand, works in inflationary and deflationary environments and supersedes the bastard Phillips curve. It will be rigorously demonstrated why there is no trade-off between price inflation and unemployment.
    Keywords: new framework of concepts; structure-centric; axiom set; Say’s regime; Keynes’s regime; market clearing; full employment; product price flexibility; intertemporal budget balancing; multiplier; trade-off; price inflation; wage inflation
    JEL: E12 E24
    Date: 2012–12–06
  25. By: David Cobham
    Abstract: The financial crisis and the role played within it by fluctuations in house prices has reopened the debate about whether monetary policy should respond to asset prices. This paper investigates how the central banks of the euro area, the UK and the US considered, understood and responded to the trends in house prices in the six or seven years preceding the crisis, and how they have analysed those developments since the crisis. It suggests that these central banks, particularly the Anglo-Saxon ones, might have been able to take some useful action if they had devoted more intellectual resources to analysing the possible misalignments of house prices and been willing to act on them.
    Date: 2012
  26. By: Mehmet Balcilar (Eastern Mediterranean University); Rangan Gupta (University of Pretoria); Anandamayee Majumdar (University of North Texas Health Science Center); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper uses small set of variables-- real GDP, the inflation rate, and the short-term interest rate -- and a rich set of models -- athoeretical and theoretical, linear and nonlinear, as well as classical and Bayesian models -- to consider whether we could have predicted the recent downturn of the US real GDP. Comparing the performance by root mean squared errors of the models to the benchmark random-walk model, the two theoretical models, especially the nonlinear model, perform well on the average across all forecast horizons in out-of-sample forecasts, although at specific forecast horizons certain nonlinear athoeretical models perform the best. The nonlinear theoretical model also dominates in our ex ante forecast of the Great Recession, suggesting that developing forward-looking, microfounded, nonlinear, dynamic-stochastic-general-equilibrium models of the economy, may prove crucial in forecasting turning points. JEL Classification: C32, E37 Key words: Forecasting, Linear and non-linear models, Great Recession
    Date: 2012–11
  27. By: Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann
    Abstract: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks’ balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks’ demand for government securities increases relative to other assets.
    Keywords: Fiscal consolidations;bank balance sheets;portfolio re-balancing;banking stability
    JEL: E62 G11 G21 H30
    Date: 2012–11
  28. By: Duprey, T.
    Abstract: Overall lending cyclicality increased in the years 2000s, but public bank lending remains significantly less cyclical than their private counterparts. This stylized fact is showed to hold empirically on a dataset of 140 countries over 1989-2009 covering 464 public banks and 72 privatizations while accounting for the unbalanced feature of the panel. Using a dataset on banking crisis and records about bank privatizations, I can control for nationalizations during crisis as well as the evolution of ownership status overtime. Nevertheless the cyclical properties remain heterogeneous depending (i) on the area considered --still procyclical in OECD countries, acyclical in Europe, while countercyclical for developing countries, or on (ii) the phase of the business cycle itself --with lower reactions to economic fluctuations in periods of recession, even in Europe, where credit expansion by public banks is then acyclical. As a robustness check, I indeed observe that newly privatized banks engage in more procyclical lending. In addition, most liability item, like short/long term liabilities or customer deposits, pattern the same reduced cyclicality, especially during economic downturns. Last, I do not find evidences that this cyclical pattern is encompassed by forced loans to the government nor institutional features.
    Keywords: lending cycle, procyclicality, public banking, privatizations.
    JEL: G21 G28 G32 H44
    Date: 2012
  29. By: Matteo Governatori; David Yim
    Abstract: In recent years, the concern that the behaviour of subnational governments may hinder the achievement of national budgetary targets has been increasingly raised across the EU. In this paper the relationship between fiscal decentralisation and budgetary outcomes of the general government is analysed. Results suggest that fiscal decentralisation is not harmful per se for budgetary discipline, although it is likely to have an adverse effect if predominantly financed by transfers from the central government rather than by subnational taxes and fees. Moreover, borrowing rules applying to subnational governments appear to partly counteract the adverse effect of transfers on fiscal balances. Therefore, policy concerns should not focus on decentralisation as such but rather on a 'bad' design of decentralisation, i.e. one which is not accompanied by subnational financial responsibility.
    JEL: E62 H62 H71 H72
    Date: 2012–11
  30. By: Dennis, Wesselbaum
    Abstract: Do men and women behave differently while adjusting labor supply over the business cycle? Using data for the United States we show that women are signifi…cantly more likely to adjust along the intensive margin (number of hours), while men adjust more often along the extensive margin (employment). Older, single, and divorced/widowed adjust predominantly along the extensive margin. Our …findings have crucial implications for the design of policy reforms, especially as governments desire to increase female labor force participation while facing demographic challenges.
    Keywords: Extensive Margin; Intensive Margin; Male and Female Labor Supply
    JEL: E32 J10 J20
    Date: 2012–10–29
  31. By: Casey B. Mulligan
    Abstract: Distributions of marginal labor income tax rates for unemployed household heads and spouses are estimated for three benefit and tax rule scenarios: actual rules under the American Reinvestment and Recovery Act, rules as they would have been if they had not been changed since 2007, and rules as they might have been with a bigger fiscal stimulus. About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus. Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one.
    JEL: E24 H31 I38
    Date: 2012–12
  32. By: Mara Meacci; Cristina Quaglierini
    Abstract: Per effetto della crisi economica che si è realizzata con particolare intensità nel corso del 2009, molte economie avanzate hanno intrapreso percorsi di risanamento fiscale. Nell'ambito di tali misure un ruolo non trascurabile è rappresentato dagli interventi di riduzione della spesa per il pubblico impiego. Il lavoro esamina le misure di aggiustamento fiscale intraprese fino a luglio 2011 in otto paesi europei - Francia, Germania, Grecia, Irlanda, Italia, Portogallo, Regno Unito e Spagna - e le specifiche iniziative assunte riguardo alla spesa per il pubblico impiego. Più in dettaglio, il primo paragrafo tratta degli sviluppi macroeconomici connessi alla crisi economico-finanziaria. Il secondo paragrafo illustra la dimensione della spesa per il pubblico impiego nei paesi esaminati e la sua evoluzione negli ultimi anni, delineando sinteticamente le principali tendenze nel decennio precedente la crisi. Nel terzo paragrafo si descrivono le manovre di aggiustamento dei conti adottate nei vari paesi e le misure specifiche previste per il pubblico impiego, esaminando analogie e differenze. Il quarto paragrafo analizza le misure sul pubblico impiego in relazione alle raccomandazioni di policy dei principali organismi internazionali. Il quinto paragrafo espone le principali conclusioni. Nel complesso i paesi esaminati hanno adottato tipologie di interventi riduttivi della spesa per i dipendenti pubblici simili e in accordo con le raccomandazioni espresse dai principali organismi internazionali. Le misure attuate hanno in gran parte risposto all’esigenza di un contenimento della spesa pubblica nel breve periodo, in alcuni casi possono però essere suscettibili di creare effetti di recupero una volta esaurito il momento di urgenza di contenimento fiscale. Più in generale, si evidenzia la necessità di un’attenta gestione e valutazione della fase post-crisi in relazione al ripristino delle dinamiche retributive, alla definizione degli assetti ordinamentali e all’invecchiamento e alla riduzione del numero di dipendenti pubblici.
    Keywords: Financial crisis, Macroeconomics, Fiscal Policy, Public Expenditure, Government wage bill, Public employment
    JEL: E6 F3 H5 H6 G0 J45
    Date: 2012–08
  33. By: Yashobanta, Yashobanta Parida; smruti, Smruti Ranjan Behera
    Abstract: This paper attempts to analyze the causal relationship between central government revenue and expenditure for India using annual data over the period 1970-2008. The Johansen cointegration test suggests that there is a long-run relationship between central government revenue and expenditure. The result from Granger causality test based on Vector Error Correction Models (VECM) suggests bidirectional causality between central government revenues and expenditures in the long-run supporting Fiscal Synchronization hypothesis. Under this hypothesis, our finding indicates that the fiscal authority of India should try to raise revenue and cut expenditure simultaneously in order to control the respective fiscal deficit. The short-run Granger causality test based on WALD test restriction suggests unidirectional causality from expenditure to revenue supporting “Spend-and-Tax” hypothesis. This hypothesis suggests that the unsustainable fiscal imbalances can be mitigated by policies that adjusted government expenditure.
    Keywords: Revenue; Expenditure; Deficit; Causality; Cointegration
    JEL: E62 O23 P35 H53 H68
    Date: 2012–10–30
  34. By: Dennis, Wesselbaum
    Abstract: In state-of-the-art macroeconomic and labor market models shocks are assumed to be homoscedastic. However, we show that this assumption is much too restrictive. We …find signifi…cant evidence for strong time-varying volatility in all considered labor market time series. First, we estimate the unconditional variance-covariance matrix and …find signi…cant evidence for time variability. Second, we estimate the conditional variance-covariance matrix and discuss the time-varying risk contained in labor market variables. The implications are relevant for modelling purposes, welfare analysis, and the understanding of sources of fluctuations.
    Keywords: Dynamic Correlation; Multivariate GARCH; Stochastic Volatility
    JEL: E30 J60 C30
    Date: 2012–11–29
  35. By: Sandrine Jacob Leal; (CEREFIGE - ICN Business School Nancy-Metz (France)); ;
    Abstract: This paper investigates whether the observed “momentum effect” in individual stocks, caused by positive serial correlations in returns over short horizons, can be explained by fundamentalists’ heterogeneous beliefs when chartists are present in the market. For this purpose, we propose a heterogeneous agent model wherein agents follow different strategies and where information about asset fundamentals diffuses slowly. Computer-based simulations reveal that the interplay of fundamentalists and chartists can robustly generate positive serial correlations in returns over short horizons. Especially, short-term momentum is explained by trend-following strategies and slow diffusion of information. Furthermore, our model is able to simultaneously generate the momentum effect in individual stock returns, asset price overreaction and misalignments often observed in real financial time series.
    Keywords: momentum effect, return predictability, bounded rationality, trading strategies, computer-based simulations
    JEL: E30 E32 E44 E47 F47
    Date: 2012
  36. By: Alan M. Taylor
    Abstract: In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself.
    JEL: E3 E4 E5 F3 F4 N1
    Date: 2012–12
  37. By: Hubert Gabrisch; Karsten Staehr
    Keywords: European integration , policy coordination , unit labor costs , current account imbalances, economic crises
    JEL: E61 F36 F41
    Date: 2012–12–10
  38. By: Andreas Hornstein
    Abstract: Shimer (2012) accounts for the volatility of unemployment based on a model of homogeneous unemployment. Using data on short-term unemployment he finds that most of unemployment volatility is accounted for by variations in the exit rate from unemployment. The assumption of homogeneous exit rates is inconsistent with the observed negative duration dependence of unemployment exit rates for the U.S. labor market. We construct a simple model of heterogeneous unemployment with short-term and long-term unemployed, and use data on the duration distribution of unemployment to account for entry to and exit from the unemployment pool. This alternative account continues to attribute most of unemployment volatility to variations in exit rates from unemployment, but it also suggests that most of unemployment volatility is due to the volatility of long-term unemployment rather than short-term unemployment. We also show that once one allows for heterogeneous unemployment, the expected value of income losses from unemployment increases substantially, and unemployment volatility implied by a simple matching model increases.
    Keywords: Business cycles ; Labor market ; Unemployment ; Economic growth
    Date: 2012
  39. By: Mikhail Khromov (Gaidar Institute for Economic Policy); Alexey Vedev (Gaidar Institute for Economic Policy)
    Abstract: The financial sphere of Russia was the first sector of the national economy which was affected by the global economic crisis of 2008. Financial markets were hit first and then the banking sector experienced the liquidity problem to be followed by a full-scale economic crisis in Russia. Early in 2011, all the factors pointed to the fact that the banking sector overcame the crisis, and it seemed the upward development began. The banking sector had at its disposal huge available resources for expansion of lending to the non-financial sector.
    Keywords: Banking sector, Russian economy
    JEL: E43 E44 E51 E58 G15 G21 G24
    Date: 2012
  40. By: Marija Kuzmanovic (EBRD); Peter Sanfey (EBRD)
    Abstract: This paper uses monthly data to examine the links between consumer confidence and real economic variables in Croatia, and it tests whether movements in the former contain predictive power for the latter. The results suggest that changes in consumer confidence help to explain retail turnover and imports, while expectations about forthcoming major purchases have particularly strong predictive power for retail turnover. We also find that the inclusion of confidence on the right-hand side improves the fit of simple models of retail turnover, a variable that is highly correlated with quarterly GDP. The results therefore highlight the usefulness of these survey data in helping to explain and forecast the real economy.
    Keywords: consumer confidence; Croatia
    JEL: E2 P3
    Date: 2012–10
  41. By: Michael C. Burda; Daniel S. Hamermesh; Jay Stewart
    Abstract: We examine monthly variation in weekly work hours using data for 2003-10 from the Current Population Survey (CPS) on hours/worker, from the Current Employment Survey (CES) on hours/job, and from the American Time Use Survey (ATUS) on both. The ATUS data minimize recall difficulties and constrain hours of work to accord with total available time. The ATUS hours/worker are less cyclical than the CPS series, but the hours/job are more cyclical than the CES series. We present alternative estimates of productivity based on ATUS data and find that it is more pro-cyclical than other productivity measures.
    JEL: E23 J22
    Date: 2012–12
  42. By: Raj Chetty; John N. Friedman; Soren Leth-Petersen; Torben Nielsen; Tore Olsen
    Abstract: Do retirement savings policies – such as tax subsidies or employer-provided pension plans – increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on savings for the population of Denmark. We find that a policy's impact on total savings depends critically on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action – such as employer-provided pensions or automatic contributions to retirement accounts – increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not reoptimize. We estimate that 85% of individuals are passive savers. The 15% of active savers who respond to price subsidies do so primarily by shifting assets across accounts rather than reducing consumption. These individuals also oset changes in automatic contributions and have higher wealth-income ratios. We conclude that automatic contributions are more effective at increasing total retirement savings than price subsidies for three reasons: (1) subsidies induce relatively few individuals to respond, (2) they generate substantial crowdout conditional on response, and (3) they do not influence the savings behavior of passive individuals, who are least prepared for retirement.
    JEL: E21 H3
    Date: 2012–11
  43. By: Gene Amromin; Steven Sharpe
    Abstract: Data obtained from monthly Gallup/UBS surveys from 1998-2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes, run in 22 monthly surveys between 2000-2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor’s reported expected returns, but with the opposite sign. Moreover, analysis of the micro data indicates that expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. ; In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors’ reported expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty.
    Keywords: Stocks ; Macroeconomics - Econometric models ; Risk - Mathematical models
    Date: 2012
  44. By: Harold L. Cole; Soojin Kim; Dirk Krueger
    Abstract: This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
    JEL: E61 H31 I18
    Date: 2012–11
  45. By: Karl Aiginger; Olaf Cramme; Stefan Ederer; Roger Liddle; Renaud Thillaye
    Abstract: The policy brief is the first outcome of the four-year project 'Welfare, Wealth and Work for Europe' which started in April 2012 and aims at providing the analytical basis for a new European growth path towards a socio-ecological transition. It identifies the blind spots of the institutional changes embarked on by the EU in the aftermath of the sovereign debt crisis, and puts forward a combination of short-term and long-term measures in order to make an exit strategy compatible with the requirements of an economically dynamic, socially inclusive and ecologically sustainable Europe. The first section analyses the main features of the reformed governance framework and shows that the recent push towards integration does not fundamentally correct the flawed and self-contradictory features of Maastricht's institutions. A second section weighs different exit strategies and shows that the short-term logic of insurance and adjustment needs to be completed by the long-term vision of a sustainable economic union. The option of a smaller Eurozone is not considered as a viable road for all the economic and political costs it represents. The final section formulates recommandations to EU policy-makers with the view both to overcome the debt crisis and to lay the ground for a socio-ecological transition in Europe. In doing so, it pays particular attention to three kinds of trade-offs and tensions that have emerged throughout the crisis: the potential clash between adjustment and social cohesion ; the uncertainty on how to combine a more integrated Eurozone with a Community-based EU-27; the conflicting demands for more sovereignty and more democracy against a backgroung of deeper integration.
    Keywords: good governance, competitiveness, ecological excellence, institutional reforms, economic strategy, EU integration, European economic policy, European governance, multi-level governance
    JEL: E02
    Date: 2012–09

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