nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒01‒19
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Leverage, investment, and optimal monetary policy By Filippo Occhino; Andrea Pescatori
  2. Observed Expectations, News Shocks, and the Business Cycle By Fabio Milani; Ashish Rajrhandari
  3. Policy Regimes, Policy Shifts, and U.S. Business Cycles By Woong Yong Park; Jae Won Lee; Saroj Bhattarai
  4. Risk Shocks By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  5. Food Prices and Inflation Targeting in Emerging Economies By Marc Pourroy; Benjamin Carton; Dramane Coulibaly
  6. The Effects of Monetary Policy in a Small Open Economy: The Case of Portugal By Ricardo M. Sousa
  7. Rational Inattention to News: The Perils of Forward Guidance. By Gaballo, G.
  8. Default Risk and Economic Activity: A Small Open Economy Model with Sovereign Debt and Default By Jessica Roldán-Peña
  9. News and Financial Intermediation in Aggregate and Sectoral Fluctuations By Christoph Gortz; John D Tsoukalas
  10. Leverage Restrictions in a Business Cycle Model By Lawrence Christiano; Daisuke Ikeda
  11. The macroeconomic and financial effects of oil price shocks By Zhou, Song; Wang, Dong
  12. Interest Rates Determination and Crisis Puzzle (Empirical Evidence from the European Transition Economies) By Mirdala, Rajmund
  13. Anatomy of a fiscal débacle: the case of Portugal* By António Afonso
  14. Cyclically adjusted local government balances By Eugenia Panicara; Massimiliano Rigon; Gian Maria Tomat
  15. Eurozone: The Untold Economics By John Hatgioannides; Marika Karanassou; Hector Sala
  16. Evaluation of long-dated investments under uncertain growth trend, volatility and catastrophes By Gollier, Christian
  17. People's Power: The Power of Money By Kees, De KONING
  18. Consumption and Wealth in the US, the UK and the Euro Area:A Nonlinear Investigation By Fredj Jawadi; Ricardo M. Sousa
  19. The Inventory Growth Spread By Belo, Frederico; Lin, Xiaoji
  20. Adjusting the U.S. Fiscal Policy for Asset Prices: Evidence from a TVP-MS Framework By Luca Agnello; Gilles Dufrénot; Ricardo M. Sousa
  21. An early-detection index of fiscal stress for EU countries By Katia Berti; Matteo Salto; Matthieu Lequien
  22. Endogenous Technological Progress and the Cross Section of Stock Returns By Lin, Xiaoji
  23. Aggregate impacts of recent U.S. natural gas trends By Arora, Vipin
  24. Wealth Effects Revisited: 1975-2012 By Karl E. Case; John M. Quigley; Robert J. Shiller
  25. Labor Heterogeneity and Asset Prices: The Importance of Skilled Labor By Belo, Frederico; Lin, Xiaoji
  26. Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program By Agarwal, Sumit; Amromin, Gene; Ben-David, Itzhak; Chomsisengphet, Souphala; Piskorski, Tomasz; Seru, Amit
  27. The change of the value of the RMB and its influences on China By Wang, Di; Zhou, Ang; Wang, Dong
  28. Forecasting and nowcasting real GDP: Comparing statistical models and subjective forecasts By Jos Jansen; Xiaowen Jin; Jasper de Winter
  29. Economic Growth and Public Healthcare Expenditure in Kenya (1982 - 2012) By Nyamwange, Mathew
  30. On Bródy’s conjecture: facts and figures from the US economy By Mariolis, Theodore; Tsoulfidis, Lefteris
  31. House Prices, Consumption and the Role of Non-Mortgage Debt By Katya Kartashova; Ben Tomlin
  32. Does Automation Improve Stock Market Efficiency? Evidence from Ghana By Mensah, Justice T.; Pomaa-Berko, Maame; Adom, Philip Kofi
  33. Health, Education, and the Post-Retirement Evolution of Household Assets By James M. Poterba; Steven F. Venti; David A. Wise
  34. Labour Shares and Employment Protection in European Economies By Mirella Damiani; Fabrizio Pompei; Andrea Ricci

  1. By: Filippo Occhino; Andrea Pescatori
    Abstract: We study optimal monetary policy in an economy where firms’ debt overhangs lead to under-investment and under-production. The magnitude of this debt-induced distortion varies over the business cycle, rising significantly during recessions. When debt is contracted in nominal terms, this distortion gives rise to a balance sheet channel for monetary policy. In the presence of real and financial shocks, the monetary authority faces a trade-off between inflation and output gap stabilization. The optimal monetary policy rule prescribes that the anticipated component of inflation should be set equal to a target level, while the unanticipated component should rise in response to adverse shocks, smoothing the debt overhang distortion and the output gap.
    Keywords: Business cycles ; Monetary policy
    Date: 2012
  2. By: Fabio Milani (Department of Economics, University of California-Irvine); Ashish Rajrhandari (Department of Economics, University of California-Irvine)
    Abstract: This paper exploits information from the term structure of survey expectations to identify news shocks in a a DSGE model with rational expectations. We estimate a structural business-cycle model with price and wage stickiness. We allow for both unanticipated and anticipated components (“newsâ€) in each structural disturbance: neutral and investment-specific technology shocks, government spending shocks, risk premium, price and wage markup shocks, and monetary policy shocks. We show that the estimation of a standard DSGE model with realized data obfuscates the identification of news shocks and yields weakly or non-identified parameters pertaining to such shocks. The identification of news shocks greatly improves when we re-estimate the model using data on observed expectations regarding future output, consumption, investment, government spending, inflation, and interest rates - at horizons ranging from one-period to five-periods ahead. The news series thus obtained largely differ from their counterparts that are estimated using only data on realized variables. Moreover, the results suggest that the identified news shocks explain a sizable portion of aggregate fluctuations. News about investment-specific technology and risk premium shocks play the largest role, followed by news about labor supply (wage markup) and monetary policy.
    Keywords: News Shocks; Estimation of DSGE Model with Survey Expectations; News in Business Cycles; Identification in DSGE Models; Rational Expectations
    JEL: E32 E50
    Date: 2012–12
  3. By: Woong Yong Park (University of Hong Kong); Jae Won Lee (Rutgers University); Saroj Bhattarai (Penn State University)
    Abstract: Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy that gave rise to self-fulfilling beliefs and resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post-Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred.
    Date: 2012
  4. By: Lawrence Christiano; Roberto Motto; Massimo Rostagno
    Abstract: We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as 'risk'. We find that fluctuations in risk are the most important shock driving the business cycle.
    JEL: E2 E3 E44
    Date: 2013–01
  5. By: Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Benjamin Carton (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Dramane Coulibaly (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: The two episodes of food price surges in 2007 and 2011 have been particularly challenging for developing and emerging economies' central banks and have raised the question of how monetary authorities should react to such external relative price shocks. We develop a new-keynesian small open-economy model and show that non-food 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 bably-designed policies, and consequently central banks should target headline inflation rather than non-food inflation. This result holds because non-tradable food represents a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food in consumption and the more detrimental lack of attention to the evolution in food prices.
    Keywords: Monetary policy; commodities; food prices; DSGE models
    Date: 2012–12
  6. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: In this paper, I analyze the macroeconomic effects of monetary policy on the Portuguese economy. I show that a positive interest rate shock leads to: (i) a contration of real GDP and a substantial increase of the unemployment rate; (ii) a quick fall in the commodity price and a gradual decrease of the price level; and (iii) a downward correction of the stock price index. It also produces a "short-lived liquidity effect" and helps explaining the negative comovement between bonds and stocks. In addition, I find evidence suggesting the existence of a money demand function characterized by small output and interest rate elasticities. By its turn, the central bank´s policy rule follows closely the dynamics of the money markets. Finally, both the real GDP and the price level in Portugal would have been higher during almost the entire sample period if there were no monetary policy surprises.
    Keywords: monetary policy, Portugal, euro area.
    JEL: E37 E52
    Date: 2012
  7. By: Gaballo, G.
    Abstract: This paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this information to rationally inattentive agents. At the unique REE, individual and aggregate risks can increase with the release when the monetary conduct is not "tight enough" and agents are "not attentive enough" to the news. In particular, the shorter the T, the more attentive the agents must be to avoid perverse welfare effects, whereas the notion of "tight enough" remains invariant. In this sense, efficient communication requires effective monetary policy.
    Keywords: Information Acquisition, Central Bank Communication, Monetary Policy, Social Value of Information.
    JEL: E50 E58 E60 D83
    Date: 2013
  8. By: Jessica Roldán-Peña
    Abstract: Empirical evidence shows that sovereign defaults are associated with significant downturns in economic activity in defaulting countries. However, the existing literature on sovereign debt and default mainly analyzes endowment economies and, therefore, does not address the relationship between default risk and macroeconomic dynamics. This paper develops a general equilibrium small open economy model with financial frictions that allows to simultaneously examine the behavior of output, investment and borrowing dynamics and its interaction with sovereign default. When calibrated to match the business cycles properties of an average emerging market economy, the model is able to reproduce the countercyclicality of net exports and sovereign spreads and the negative correlation between investment and net exports observed in the data. Furthermore, when analyzing its behavior around sovereign default, the model successfully captures the declines in output, consumption and investment that are actually associated with these episodes.
    Keywords: Sovereign debt, sovereign default, business cycles, small open economy.
    JEL: E32 E44 F32 F34
    Date: 2012–12
  9. By: Christoph Gortz; John D Tsoukalas
    Abstract: We estimate a two-sector DSGE model with financial intermediaries - a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010) - and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bonds spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for importance and propagation of asset value news shocks.
    Keywords: News, Financial intermediation, Business Cycles, DSGE, Bayesian estimation
    JEL: E2 E3
    Date: 2012–07
  10. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries ('bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.
    JEL: E44 E5 E52
    Date: 2013–01
  11. By: Zhou, Song; Wang, Dong
    Abstract: The oil price shock is considered as a major contributor to economic fluctuation. In this paper, we investigate whether the impulse responses of different macroeconomic variables and financial variables to the oil price shock and the effect of interest rates change. And we also use Granger Causality Test to evaluate the correlation between oil prices, stock markets and gold prices. Estimation results based on the U.S. data suggest that: (i) The oil price shock has a significant impact on inflation, stock markets and gold prices and it also has a short-term impact on interest rates. (ii) Co-movement of oil prices, stock markets and gold prices exist. (iii) Changing interest rates as monetary policy can induce price puzzle in order to reduce the inflation caused by the oil price shock.
    Keywords: VAR; Granger Causality; oil prices
    JEL: E32 Q43
    Date: 2012–11–02
  12. By: Mirdala, Rajmund
    Abstract: Economic theory provides clear suggestions in fixed versus flexible exchange rates dilemma in fighting high inflation pressures. However, relative diversity in exchange rate regimes in the European transition economies revealed uncertain and spurious conclusions about the exchange rate regime choice during last two decades. Moreover, eurozone membership perspective (de jure pegging to euro) realizes uncertain consequences of exchange rate regime switching especially in the group of large floaters. Successful anti-inflationary policy associated with stabilization of inflation expectations in the European transition economies at the end of 1990s significantly increased the role of short-term interest rates in the monetary policy strategies. At the same time, so called qualitative approach to the monetary policy decision-making performed in the low inflation environment, gradually enhanced the role of real interest rates expectations in the process of nominal interest rates determination. However, economic crisis increased uncertainty on the markets and thus worsen expectations of agents. In the paper we analyze sources of nominal interest rates volatility in ten European transition by estimating the structural vector autoregression (SVAR) model. Variance decomposition and impulse-response functions are computed to estimate the relative contribution of inflation expectations and expected real exchange rates to the conditional variability of short-term money market interest rates as well as responses of nominal interest rates to one standard deviation inflation expectations and expected real interest rates shocks. Effects of economic crisis are considered by estimation of two models for every single economy from the group of the European transition economies using data for time periods 2000-2007 and 2000-2011.
    Keywords: interest rates; inflation expectations; expected real interest rates; SVAR; variance decomposition; impulse-response function
    JEL: E43 C32 E31 E52
    Date: 2012–12
  13. By: António Afonso
    Abstract: After entering the EU in 1986, Portugal benefited from low interest rates and some growth momentum. However, the difficulty in taming fiscal imbalances, the pro-cyclicality of fiscal policy, the use of extraordinary fiscal measures, coupled with the 2008-2009 economic and financial crisis led to a fiscal débacle and to an international financial rescue in 2011.We briefly review here those developments.
    Keywords: Portugal, public finances, fiscal imbalances
    JEL: E62 E65 H6
    Date: 2013–01
  14. By: Eugenia Panicara (Banca d'Italia); Massimiliano Rigon (Banca d'Italia); Gian Maria Tomat (Banca d'Italia)
    Abstract: The paper provides an analysis of cyclically-adjusted budget balances of local governments in Italy for the period 2002-07. We find that local government balances appear to be relatively sensitive to the business cycle. In particular, a shock of 1 per cent in GDP changes their resources by approximately 0.6 billion. Within the sample period, both central and local policies concerning local government budgets had a sizeable impact on local government balances in cyclically-adjusted terms.
    Keywords: local public finance, budget sensitivity, business cycle, tax elasticity
    JEL: E32 E62 H71
    Date: 2012–12
  15. By: John Hatgioannides (City University); Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: This paper dwells on the Eurozone woes and addresses the origins of the transition from a fictitious boom to a painful bust by unravelling (i) the supply-side structural imbalances that formed the core-periphery economic divide, and (ii) the necessity of the periphery’s sovereign debt to finance imports from the export-led core. Within our macroeconomic setup, we challenge the cliché that countries of the core have funded the sovereign debts of the periphery and demonstrate that the commonly held view that the periphery countries have lived beyond their means (due to wages growing beyond what is justified by productivity gains) is in stark contrast to the trajectories followed by the wage shares. We argue against the tyrannical neoliberal policies of austerianism and we propose the rebooting of central and private banking. We present a fresh vision for the future of the Eurozone that will halt the tearing of the social fabric of its member states.
    Keywords: Eurozone crisis, Structural imbalances, Sovereign debt, Austerity, Neoliberal policies, Banking/credit system
    JEL: E50 E62 E65 G01
    Date: 2013–01
  16. By: Gollier, Christian (TSE(LERNA, University of Toulouse))
    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
  17. By: Kees, De KONING
    Abstract: Money can create jobs and thereby incomes for individual households, but money can equally destroy jobs and income. Added values can be created with the assets which are based on the savings levels -the net worth of individual households- but the "money managers": a government, a central bank, banks and (international) bureaucrats can also create losses to the savings level. This dilemma should be at the heart of economic thinking. For instance in the U.S in 2006 a dollar saved and used for a home mortgage loan only returned 69 cents in home value increase. In 2007 a dollar saved and used in the same way lost 2.5 dollars. Banks moved the goalposts from relying on the income of individual households to wanting their money back out of the assets -the homes-. Individual households were never asked. The effects were that all 132 million home owners were affected rather than the 5.3 million doubtful debtors. This paper sets out the causes of such money destruction. It also explains that money can act in a positive manner to repair the damage done. Banking reforms, quantitative strenghthening as opposed to QE, economic easing and changing the focus of national accounting away from economic growth to Country Profit -the increase/decrease in the net worth of individual households are discussed.
    Keywords: Balance sheet of households; money power; money crisis; jobs and savings; ownership of savings; income lending and asset based lending; securitisation; savings behaviour; Quantitative easing and strengthening; bank reforms; economic easing; country profit
    JEL: E0 E58 E24 E44 E21 E61
    Date: 2013–01–10
  18. By: Fredj Jawadi (University of Evry Val d’Essone & Amiens School of Management); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper assesses the importance of nonlinearity in estimating the wealth effects on consumption for the US, the UK and the Euro area. We look at the impact of both (i) aggregate wealth and (ii) disaggregate wealth, namely, by comparing financial wealth effects with housing wealth effects. We also assess the magnitude of the response of consumption using both a linear model and two nonlinear approaches (a quantile regression and a smooth transition regression). We find that the elasticity of consumption with respect to aggregate wealth is largest for the UK and housing wealth effects do not seem to be relevant in the Euro area. As for the quantile regression, it shows that the sensitivity of consumption with respect to wealth and income variation is larger when consumption growth is abnormally high, i.e. during periods of economic booms. The smooth transition regression model is able to track reasonably well the consumption patterns during periods of economic downturn, financial instability and housing market corrections. Our approaches uncover a more complex dynamics of the relationship between consumption and wealth than previous results in the literature, whilst being in accordance with the theoretical background underlying the wealth effects on consumption.
    Keywords: consumption, wealth, dynamic OLS, quantile regression, smooth transition.
    JEL: E21 E44 D12
    Date: 2012
  19. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University)
    Abstract: Previous studies show that firms with low inventory growth outperform firms with high inventory growth in the cross-section of publicly traded firms. In addition, inventory investment is volatile and procyclical, and inventory-to-sales is persistent and countercyclical. We embed an inventory holding motive into the investment-based asset pricing framework by modeling inventory as a factor of production with convex and nonconvex adjustment costs. The augmented model simultaneously matches the large inventory growth spread in the data, as well as the time-series properties of the firm level capital investment, inventory investment, and inventory-to-sales. Our conditional single-factor model also implies that traditional unconditional factor models such as the CAPM should fail to explain the inventory growth spread, although not with the same large pricing errors observed in the data.
    JEL: E22 E23 E44 G12
    Date: 2012–11
  20. By: Luca Agnello (University of Palermo, Department of Economics, Business and Finance); Gilles Dufrénot (University of Aix-Marseille II, Research Center of Economic Development and International Finance); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending and taxes as time-varying transition probability (TVTP) Markovian processes, we find that taxes significantly adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller extent) to stock prices changes during normal times. However, at periods characterized by high financial volatility, government taxation only counteracts stock market developments (and not the dynamics of the housing sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that, correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides a more accurate assessment of the fiscal stance and its sustainability.
    Keywords: Fiscal policy, asset prices, time-varying transition probability Markov process.
    JEL: E37 E52
    Date: 2012
  21. By: Katia Berti; Matteo Salto; Matthieu Lequien
    Abstract: The financial and economic crisis has generated renewed interest, especially among policy-makers, in early-warning systems that could help identifying fiscal and macro-financial vulnerabilities potentially triggering risks. Against this background, this paper presents an early-warning index of fiscal stress, incorporating fiscal, financial and competitiveness variables, some of which are common to the scoreboard used in the EU for the surveillance of macroeconomic imbalances. Thresholds of fiscal risk are determined, based on the non-parametric signals approach, for the overall index, the two sub-indexes grouping fiscal and financial-competitiveness variables and each individual variable used in the analysis. Values of the overall index beyond its critical threshold pinpoint to potential risks of fiscal stress in the short run, while the analysis at individual variable level allows identifying possible sources of vulnerabilities, which is key to design appropriate risk-mitigating policies. The results obtained highlight the importance of incorporating financial-competitiveness variables in an early-warning system for fiscal stress, as such variables appear to be better "leading indicators" of fiscal stress than fiscal variables are. The results also speak in favour of using an early-warning composite indicator of fiscal stress, rather than looking at the individual variables taken in isolation. Results obtained by applying the proposed methodology to EU countries are presented in the last part of the paper.
    JEL: E62 E65 E66 H62 H63 E21 F32 F34
    Date: 2012–12
  22. By: Lin, Xiaoji (OH State University)
    Abstract: I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is endogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between intangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.
    JEL: E23 E44 G12
    Date: 2012–11
  23. By: Arora, Vipin
    Abstract: Predictions about the macroeconomic impacts of recent U.S. natural gas trends vary widely. I re-evaluate the possible effects on U.S. economic activity using a standard general equilibrium model. Within this framework I show that increases in natural gas supply result in small-to-moderate economic gains, even with unemployment or under-utilized capital. Subsequent rises in economy-wide productivity are the key to magnifying the economic impacts of greater natural gas supply and resources. The 1995-2000 period, where U.S. productivity growth was driven by information technology, is a good starting point for comparing how American productivity may evolve because of natural gas.
    Keywords: Natural gas; general equilibrium; unemployment; variable capacity; shale; productivity
    JEL: E27 E17 D24 Q43
    Date: 2013–01–11
  24. By: Karl E. Case; John M. Quigley; Robert J. Shiller
    Abstract: We re-examine the links between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption. In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending. The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%
    JEL: E02 G1 R31
    Date: 2013–01
  25. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University)
    Abstract: We show that heterogeneity in the composition of the labor force affects asset prices in financial markets in important ways. Theoretically, we combine a standard model of labor heterogeneity (Acemoglu, 2002) with a standard neoclassical q-theory model with labor adjustment costs. We then show that the negative expected return-hiring rate relation documented in previous studies is steeper in industries with higher labor adjustment costs. Using the overall industry level of labor skill as a proxy for the industry specific size of labor adjustment costs, we provide empirical support for this prediction. The negative expected return-hiring rate relation is twice as large among industries with higher labor skills than in industries with lower labor skills. In addition, we uncover a novel unconditional labor skill return spread. Firms in industries with more skilled labor have on average higher stock returns than firms in industries with low skilled labor, but this difference is only large across small firms. According to this result, firms with higher labor skills labor tend to be more risky because skilled labor is more costly to adjust, which in turn affects the firm's sensitivity to aggregate shocks in the economy.
    JEL: E22 E23 E44 G12
    Date: 2012–11
  26. By: Agarwal, Sumit (National University of Singapore); Amromin, Gene (Federal Reserve Bank of Chicago); Ben-David, Itzhak (OH State University); Chomsisengphet, Souphala (US Office of the Comptroller of the Currency); Piskorski, Tomasz (Columbia University); Seru, Amit (University of Chicago)
    Abstract: The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity--which is also observed before the program--reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.
    JEL: E60 E65 G18 G21 H30
    Date: 2012–11
  27. By: Wang, Di; Zhou, Ang; Wang, Dong
    Abstract: The issue of the change of the value of the Chinese currency has been focused by the world for several years. Its influences on not only China but also the rest of the world could not be neglected. Briefly historical background of the change of the Chinese currency as well as the influences it caused will be discussed in this essay by using the Mundell-Fleming Model as the basic concept to research and explain the particular situation in China. The result is that China should do the steady appreciation in terms of its currency rather than revalue it rapidly to improve the Chinese economy and several recommendations will be listed as well.
    Keywords: exchange rate; FDI; monetary policy
    JEL: E43 F0 E5
    Date: 2012–07–08
  28. By: Jos Jansen; Xiaowen Jin; Jasper de Winter
    Abstract: We conduct a systematic comparison of the short-term forecasting abilities of eleven statistical models and professional analysts in a pseudo-real time setting, using a large set of monthly indicators. Our analysis covers the euro area and its five largest countries over the years 1996-2011. We find that summarizing the available monthly information in a few factors is a more promising forecasting strategy than averaging a large number of indicator-based forecasts. The dynamic and static factor model outperform other models, especially during the crisis period. Judgmental forecasts by professional analysts often embody valuable information that could be used to enhance forecasts derived from purely mechanical procedures.
    Keywords: nowcasting; professional forecasters; factor model; judgment; forecasting
    JEL: E52 C53 C33
    Date: 2012–12
  29. By: Nyamwange, Mathew
    Abstract: This study advices on a suitable strategy for financing healthcare in Kenya as the sector faces challenges of underfunding with an increased demand of quality and availability of health care services that are equitable and affordable for a growing population.The study examines the effect of per capita gross domestic product (GDP per capita) on public healthcare expenditure (PHCE) in Kenya, and uses estimates of public recurrent & development expenditures, (1982 - 2012), as well as the economic survey and statistical abstracts for the same years. The analysis is a time series estimation of the effect of per capita gross domestic product on public healthcare expenditure, so as to explain the minimum amount of funding that the government should direct to public healthcare expense given future predictions of GDP per capita by institutions like World Bank. The study employs OLS regression and checks for co-integration on the long-run relationship between PHCE and GDP per capita, as well as other tests of granger causality, unit root presence and stationarity and study attempts to determine the properties of healthcare in Kenya. Results reveal that healthcare in Kenya is a necessary good and has an elasticity of 0.024% to GDP per capita. This is to mean that for every 1% increase in GDP per capita, PHCE should increase by 0.024%.
    Keywords: Public Healthcare Expenditure; Economic Growth; Kenya Healthcare Financing;
    JEL: E0 H0 A1 C0 D9 B4 H5 E6 H6 C2 I1
    Date: 2012–11–06
  30. By: Mariolis, Theodore; Tsoulfidis, Lefteris
    Abstract: Bródy’s conjecture is submitted to an empirical test using input-output flow data of varying size for the US economy for the benchmark years 1997 and 2002, as well as for the period 1998-2010. The results suggest that the ratio of the modulus of the subdominant eigenvalue to the dominant one increases both with the size of the matrix and, for the same matrix size, over the years lending support to the view of increasing instability (in the sense of Bródy) for the US economy over the period 1997-2010.
    Keywords: Actual Economies; Bródy’s Conjecture; Eigenvalue Distribution; Speed of Convergence
    JEL: E32 D57 C67 C62
    Date: 2012–05
  31. By: Katya Kartashova; Ben Tomlin
    Abstract: This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt. Using quantile regression, we find a positive and significant relationship between regional house prices and total household debt all along the conditional debt distribution. This suggests that the household-level relationship between house prices and debt goes beyond the purchase of real estate. We then find a positive relationship between house prices and non-mortgage debt (the sum of secured lines of credit, unsecured lines of credit, leases and other consumer loans, except for credit cards) for homeowners. Combining these results with the reported uses of non-mortgage debt allows us to connect house prices and nonhousing consumption - this connection is new to the literature on house prices and consumption. We conclude that the increases in house prices over the 1999-2007 period were, indeed, associated with an increase in non-mortgage debt and non-housing consumption. Our results can be thought of as the establishment of a conservative lower bound for the overall relationship between house prices and aggregate consumption.
    Keywords: Credit and credit aggregates; Domestic demand and components
    JEL: E21 D10 D14 D31
    Date: 2013
  32. By: Mensah, Justice T.; Pomaa-Berko, Maame; Adom, Philip Kofi
    Abstract: As a burgeoning capital market in an emerging economy, automation of the stock market is regarded as a major step towards integrating the financial market as a conduit for economic growth. The automation of the Ghana Stock Exchange (GSE) in 2008 is expected among other things to improve the efficiency of the market. This paper therefore investigates the impact of the automation on the efficiency of the GSE within the framework of the weak-form Efficient Market Hypothesis (EMH) using daily market returns from the Ghana Stock Exchange All-Share index from 2006 to 2011. The Unit Root Random Walk and the GARCH models were used to analyze the efficiency of the GSE in the pre and post automation sample periods. Results show that the GSE was weakly inefficient in both pre and post automation periods, suggesting that the automation of the GSE have not yielded the needed impact towards improving the efficiency of the exchange.
    Keywords: Stock; efficiency; automation; Ghana;
    JEL: E0 A1 G0
    Date: 2012–08–19
  33. By: James M. Poterba; Steven F. Venti; David A. Wise
    Abstract: This paper explores the relationship between education and the evolution of wealth after retirement. Asset growth following retirement depends in part on health capital and financial capital accumulated prior to retirement, which in turn are strongly related to educational attainment. These “initial conditions” for retirement can have a lingering effect on subsequent asset evolution. Our aim is to disentangle the effects of education on post-retirement asset evolution that operate through health and financial capital accumulated prior to retirement from the effects of education that impinge directly on asset evolution after retirement. We consider the indirect effect of education through financial resources—in particular Social Security benefits and defined benefit pension benefits—and through health capital that was accumulated before retirement. We also consider the direct effect of education on asset growth following retirement, emphasizing the correlation between education and the returns households earn on their post-retirement investments. Households with different levels of education invest, on average, in different assets, and they may consequently earn different rates of return. Finally, we consider the additional effects of education that are not captured through these pathways. Our empirical findings suggest a substantial association between education and the evolution of assets. For example, for two person households the growth of assets between 1998 and 2008 is on average much greater for college graduates than for those with less than a high school degree. This difference ranges from about $82,000 in the lowest asset quintile to over $600,000 in the highest.
    JEL: E21 I14 I24
    Date: 2013–01
  34. By: Mirella Damiani; Fabrizio Pompei; Andrea Ricci
    Abstract: Liberalisation of temporary contracts has become an important component of recent labour reforms but up to now available research has not paid attention to the impacts of these institutional changes on functional income distribution. The present paper intends to fill this gap by focussing on the reduction in strictness of employment protection of temporary jobs and analysing its effects on factor shares. We have estimated labour share, as well as its components, worker pays and employment, by considering country-sector evidence for 14 EU economies and the sample period 1995-2007. We have found that these legislative changes, that have favoured the extensive use of temporary contracts, have contributed to instability of working conditions and caused negative effects on workers’ pays. These impacts have more than counterbalanced the scanty positive effects on employment (due to greater access to the labour market of additional workers, likely young and women), thus leading to a decrease in income share accruing to workers.
    Keywords: factor income distribution, labour regulation.
    JEL: E25 J50
    Date: 2012–11–05

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