nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒01‒26
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Individual Expectations and Aggregate Macro Behavior By Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenico Massaro
  2. A General Equilibrium Model with Banks and Default on Loans By Tamon Takamura
  3. Inflation, inflation uncertainty and output in Tunisia By Hachicha, Ahmed; Wen, Ming-Chang
  4. Investment-Specific News Shocks and U.S. Business Cycles By Nadav Ben Zeev; Hashmat U. Khan
  5. Fiscal Sustainability in a New Keynesian Model - Additional Appendix By Campbell Leith; Simon Wren-Lewis
  6. Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions By Apostolos Serletis; Periklis Gogas
  7. Monetary policy and macroprudential regulation : whither emerging markets By Canuto, Otaviano; Cavallari, Matheus
  8. Price Rigidity: Microeconomic Evidence and Macroeconomic Implications By Emi Nakamura; Jón Steinsson
  9. International Monetary Coordination and the Great Deviation By John B. Taylor
  10. Interaction of Formal and Informal Financial Markets in Quasi-Emerging Market Economies By Harold P.E. Ngalawa and Nicola Viegi
  11. The equity premium in a small open economy, and an application to Israel By Borenstein, Eliezer; Elkayam, David
  12. Behavioral Heterogeneity in U.S. Inflation Dynamics By Adriana Cornea; Cars Hommes; Domenico Massaro
  13. Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income By Andrea Colciago; Lorenza Rossi
  14. Behavioral Learning Equilibria By Cars Hommes; Mei Zhu
  15. Options for a Euro-area fiscal capacity By Jean Pisani-Ferry; Erkki Vihriälä; Guntram B. Wolff
  16. The Aggregate Effects of the Hartz Reforms in Germany By Matthias S. Hertweck; Oliver Sigrist
  17. Business cycle and entrepreneurial behavior using French regional data By Mathilde Aubry; Jean Bonnet; Patricia Renou-Maissant
  18. Short-Term Forecasting of Inflation in Bangladesh with Seasonal ARIMA Processes By Akhter, Tahsina
  19. Macroeconomic shocks and banking sector developments in Egypt By Herrera, Santiago; Youssef, Hoda
  20. Social networks and macroeconomic stability By Chen, Shu-Heng; Chang, Chia-Ling; Wen, Ming-Chang
  21. On the bottom-up foundations of the banking-macro nexus By Wäckerle, Manuel
  22. La répression financière est-elle la solution pour « liquider » la dette publique dans la zone euro ? By Bastien Drut
  23. Fiscal sentiment and the weak recovery from the Great Recession: a quantitative exploration By Finn E. Kydland; Carlos E. J. M. Zarazaga
  24. Remittances and Business Cycles: Comparison of South Asian Countries By Mazhar MUGHAL; Junaid AHMED
  25. The Golden Dilemma By Claude B. Erb; Campbell R. Harvey
  26. How to measure the unsecured money market? The Eurosystem’s implementation and validation using TARGET2 data By Luca Arciero; Ronald Heijmans; Richard Heuver; Marco Massarenti; Cristina Picillo; Francesco Vacirca
  27. Government spending and economic growth: evidence from Nigeria By Aladejare, Samson Adeniyi
  28. Offshoring and Occupational Specificity of Human Capital By Moritz Ritter
  29. The New Keynesian view of aggregate demand: some reflections from a Sraffian standpoint By White, Graham
  30. Emerging economies, trade policy, and macroeconomic shocks By Bown, Chad P.; Crowley, Meredith A.
  31. Strategic Capacity Investment Under uncertainty By Huisman, K.J.M.; Kort, P.M.
  32. Poor Numbers: explanation of Africa's statistical tragedy By Kodila-Tedika, Oasis
  33. Sovereign Contagion in Europe: Evidence from the CDS Market By P. Manasse; L. Zavalloni
  34. Optimal Waste Control with Abatement and Productive Capital Stocks. By Enrico Saltari; Giuseppe Travaglini

  1. By: Tiziana Assenza (Catholic University of Milan); Peter Heemeijer (University of Amsterdam, and ABN AMRO); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam)
    Abstract: The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. We fit a heterogeneous expectations model with a performance-based evolutionary selection among heterogeneous forecasting heuristics to the experimental data. A simple heterogeneous expectations switching model fits individual learning as well as aggregate macro behavior and outperforms homogeneous expectations benchmarks. Moreover, in accordance to theoretical results in the literature on monetary policy, we find that an interest rate rule that reacts more than point for point to inflation has some stabilizing effects on inflation in our experimental economies, although convergence can be slow in presence of evolutionary learning.
    Keywords: Experiments; New Keynesian Macro Model; Monetary Policy; Expectations; Heterogeneity
    JEL: C91 C92 D84 E52
    Date: 2013–01–14
  2. By: Tamon Takamura
    Abstract: During the recent financial crisis in the U.S., banks reduced new business lending amidst concerns about borrowers’ ability to repay. At the same time, firms facing higher borrowing costs alongside a worsening economic outlook reduced investment. To explain these aggregate business cycle patterns, I develop a model with households, banks and firms. I assume that a bank’s ability to raise deposits is constrained by a limited commitment problem and that, furthermore, loans to firms involve default risk. In this environment, changes in loan rates affect the size of the business sector. I explore how banks influence the behavior of households and firms and find that both productivity and financial shocks lead to counter-cyclical default and interest rate spreads. I examine the implications of a government capital injection designed to mitigate the effect of negative productivity and financial shocks in the spirit of the Troubled Asset Relief Program (TARP). I find that the stabilizing effect of such policy interventions hinges on the source of the shock. In particular, a capital injection is less effective against aggregate productivity shocks because easing banks’ lending stance only weakly stimulates firms’ demand for loans when aggregate productivity falls. In contrast, a capital injection can counteract the adverse effect of financial shocks on the supply of loans. Finally, I measure aggregate productivity and financial shocks to evaluate the role of each in the business cycle. I find that the contribution of aggregate productivity shocks in aggregate output and investment is large until mid-2008. Financial shocks explain 65% of the fall in investment and 55% of the fall in output in the first quarter of 2009.
    Keywords: Business fluctuations and cycles; Economic models; Financial stability
    JEL: E32 E44 E69
    Date: 2013
  3. By: Hachicha, Ahmed; Wen, Ming-Chang
    Abstract: This study investigates the relationship between inflation, inflation uncertainty and output in Tunisia using real and nominal data. GARCH-in-mean model with lagged variance equation is employed for the analysis. The result shows that inflation uncertainty has a positive and significant effect on the level of inflation only in the real term. Moreover, inflation uncertainty Granger-causes inflation and economic growth respectively. These results have important implications for the monetary policy in Tunisia. --
    Keywords: GARCH-M model,inflation,inflation uncertainty,output
    JEL: C22 E31
    Date: 2013
  4. By: Nadav Ben Zeev (European University Institute); Hashmat U. Khan (Department of Economics, Carleton University)
    Abstract: This paper provides robust evidence that news shocks about future investment-specific technology (IST) constitute a signicant force behind U.S. business cycles. Extending a recent empirical approach to identifying news shocks, we find that positive IST news shocks induce comovement, i.e., raise output, consumption, investment,and hours. These shocks account for 70% of the business cycle variation in output, hours, and consumption, and 60% of the variation in investment, and have played an important role in 9 of the last 10 U.S recessions. IST news shocks also dominate unanticipated IST shocks in accounting for the forecast variance of aggregate variables. The findings have two important implications for research on news driven business cycles. First, they provide strong support for shifting focus to IST news shocks when investigating the role of news (or foresight) in driving business cycles. Second, an important avenue for further research is to consider structural mechanisms that can enhance the role of IST news shocks in estimated dynamic general equilibrium models.
    Keywords: Investment-specific technology, News shocks, Business cycles
    JEL: E32
    Date: 2012–09–19
  5. By: Campbell Leith; Simon Wren-Lewis
    Abstract: Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.
    Keywords: New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy; Credibility.
    JEL: E62 E63
    Date: 2012–09
  6. By: Apostolos Serletis (University of Calgary); Periklis Gogas
    Abstract: King, Plosser, Stock, and Watson (1991) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They fiÂ…nd a common stochastic trend in a three variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops signiÂ…ficantly when they add money balances and the nominal interest rate. In this paper we revisit the cointegration tests in the spirit of King et al. (1991), using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced-growth hypothesis and classical money demand functions can be attributed to mis-measurement of the monetary aggregate.
    Date: 2013–01–21
  7. By: Canuto, Otaviano; Cavallari, Matheus
    Abstract: Confidence in combining inflation-targeting-cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of asset price booms and busts that preceded the current global financial crisis. This paper has a two-fold purpose. On the one hand, it explores the implications and challenges of acknowledging the need for coordination between monetary policies and macroprudential regulation. On the other, it points out specific challenges currently faced by central bankers in emerging economies, as they cope with policy and regulatory coordination in a context of debt overhang and unconventional monetary policies in advanced economies.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Banks&Banking Reform
    Date: 2013–01–01
  8. By: Emi Nakamura; Jón Steinsson
    Abstract: We review recent evidence on price rigidity from the macroeconomics literature, and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists' understanding of individual price dynamics. However, the analysis of these new data raise a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price-setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting where temporary sales, product-churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy's response to demand shocks.
    JEL: E30
    Date: 2013–01
  9. By: John B. Taylor
    Abstract: Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination.
    JEL: E5 E58 F3
    Date: 2013–01
  10. By: Harold P.E. Ngalawa and Nicola Viegi
    Abstract: The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks.
    Keywords: Informal financial sector, formal financial sector, monetary policy, general equilibrium
    JEL: E44 E47 E52 E58
    Date: 2013
  11. By: Borenstein, Eliezer; Elkayam, David
    Abstract: In this paper we attempt to reproduce both the business cycle facts and the equity premium of the Israeli economy—an economy which is "typical" in the sense that investment is much more volatile than output (and consumption). We show that GHH preferences, which are quite common in RBC models of small open economies, are not suited for reproducing both the business cycle and the equity premium facts of a "typical" small open economy. We found that a way to progress is to "correct" the GHH preferences by adding some degree of wealth effect on labor supply. That is, by switching to the Jaimovich-Rebelo (2006) type of preferences. However, in this case we also need to add to the model some kind of limitations on labor supply (we used both real wage rigidity and habits in labor). Our main finding is that the use of Jaimovich-Rebelo preferences considerably improves the results relative to that achieved by GHH preferences. The reason for this is that the GHH preferences are characterized by a relatively high degree of substitutability between consumption and leisure and this moderates the volatility of the stochastic discount factor (SDF). By adding some degree of wealth effect we can achieve a significant increase in the volatility of the SDF, and hence an increase in the equity premium and in the volatility of investment. Following the relevant literature we used three shocks: to productivity, to government expenditure and to the world interest rate. Our analysis suggests that by adding one or more of two kinds of shocks: shocks to wealth and shocks to the real exchange rate – one can achieve a significant progress in reproducing both the business cycle facts and the equity premium.
    Keywords: Equity Premium; Asset Pricing; Business Cycle; Small Open Economy
    JEL: E32 G12 F41 E44
    Date: 2013–01–01
  12. By: Adriana Cornea (University of Exeter); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam)
    Abstract: In this paper we develop and estimate a behavioral model of inflation dynamics with monopolistic competition, staggered price setting and heterogeneous firms. In our stylized framework there are two groups of price setters, fundamentalists and naive. Fundamentalists are forward-looking in the sense that they believe in a present-value relationship between inflation and real marginal costs, while naive are backward-looking, using the simplest rule of thumb, naive expectations, to forecast future inflation. Agents are allowed to switch between these different forecasting strategies conditional on their recent relative forecasting performance. The estimation results support behavioral heterogeneity and the evolutionary switching mechanism. We show that there is substantial time variation in the weights of forward-looking and backward-looking behavior. Although on average the majority of firms use the simple backward-looking rule, the market has phases in which it is dominated by either the fundamentalists or the naive agents.
    Keywords: Inflation; Phillips Curve; Heterogeneous Expectations; Evolutionary Selection
    JEL: E31 E52 C22
    Date: 2013–01–14
  13. By: Andrea Colciago; Lorenza Rossi
    Abstract: Recent U.S. evidence suggests that the response of labor share to a productivity shock is characterized by countercyclicality and overshooting. These findings cannot be easily reconciled with existing business cycle models. We extend the Diamond-Mortensen-Pissarides model of search in the labor market by considering strategic interactions among an endogenous number of producers, which leads to countercyclical price markups. While Nash bargaining delivers a countercyclical labor share, we show that countercyclical markups are fundamental to address the overshooting. On the contrary, we find that real wage rigidity does not seem to play a crucial role for the dynamics of the labor share of income.
    Keywords: Labor Share Overshooting; Endogenous Market Structures; Search and Matching Frictions
    JEL: E24 E32 L11
    Date: 2013–01
  14. By: Cars Hommes (University of Amsterdam); Mei Zhu (Shanghai University of Finance and Economics)
    Abstract: We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dep endence and inflation may switch between low and high persistence regimes.
    Keywords: Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence
    JEL: E30 C62 D83 D84
    Date: 2013–01–14
  15. By: Jean Pisani-Ferry; Erkki Vihriälä; Guntram B. Wolff
    Abstract: Europe has responded to the crisis with strengthened budgetary and macroeconomic surveillance, the creation of the European Stability Mechanism, liquidity provisioning by resilient economies and the European Central Bank and a process towards a banking union. However, a monetary union requires some form of budget for fiscal stabilisation in case of shocks, and as a backstop to the banking union. This paper compares four quantitatively different schemes of fiscal stabilisation and proposes a new scheme based on GDP-indexed bonds. The options considered are: (i) A federal budget with unemployment and corporate taxes shifted to euro-area level; (ii) a support scheme based on deviations from potential output;(iii) an insurance scheme via which governments would issue bonds indexed to GDP, and (iv) a scheme in which access to jointly guaranteed borrowing is combined with gradual withdrawal of fiscal sovereignty. Our comparison is based on strong assumptions. We carry out a preliminary, limited simulation of how the debt-to-GDP ratio would have developed between 2008-14 under the four schemes for Greece, Ireland, Portugal, Spain and an â??averageâ?? country.The schemes have varying implications in each case for debt sustainability.
    Date: 2013–01
  16. By: Matthias S. Hertweck; Oliver Sigrist
    Abstract: This paper quantifies the impact of the Hartz reforms on matching efficiency, using monthly SOEP gross worker flows (1983-2009). We show that, until the early 2000s, close to 60% of changes in the unemployment rate are due to changes in the inflow rate (job separation). On the contrary, since the implementation of the reforms in the mid-2000s, the importance of the outflow rate (job finding) has been steadily increasing. This indicates that matching efficiency has improved substantially in recent years. Results from an estimated matching function — pointing to efficiency gains of more than 20% — corroborate this finding.
    Keywords: SOEP gross worker flows, Hartz reforms, matching efficiency, unemployment fluctuations
    JEL: E24 E32 J63 J64
    Date: 2013
  17. By: Mathilde Aubry (EM Normandie, Métis Research Department, France); Jean Bonnet (University of Caen Basse-Normandie - CREM UMR CNRS 6211, France); Patricia Renou-Maissant (University of Caen Basse-Normandie - CREM UMR CNRS 6211, France)
    Abstract: We study the influences of new firms startups on growth in regional and macroeconomic dimensions in France using a quarterly data basis over the 1993-2011 period. We find that fluctuations in GDP are an early indicator of new firm startups. Nevertheless the most important relationships are found between unemployment rate and new firms startups. Entrepreneurship is mainly driven by necessity motives that have consequences upon potential of growth of new firms startups in most of the French regions.
    Keywords: New firm formation, Business cycle, Schumpeter effect, «refugee» effect, panel data
    JEL: L26 E32 R11
    Date: 2013–01
  18. By: Akhter, Tahsina
    Abstract: The purpose of this study is to forecast the short-term inflation rate of Bangladesh using the monthly Consumer Price Index (CPI) from January 2000 to December 2012. To do so, the study employed the Seasonal Auto-regressive Integrated Moving Average (SARIMA) models proposed by Box, Jenkins, and Reinsel (1994). CUSUM, Quandt likelihood ratio (QLR) and Chow test have been utilized to identify the structural breaks over the sample periods and all three tests suggested that the structural breaks in CPI series of Bangladesh are in the month of February 2007 and September 2009. Hence, the study truncated the series and using CPI data from September 2009 to December 2012, the ARIMA(1,1,1)(1,0,1)12 models were estimated and forecasted. The forecasted result suggests an increasing pattern and high rates of inflation over the forecasted period 2013. Therefore, the study recommends that Bangladesh Bank should come forward with more appropriate economic and monetary policies in order to combat such increase inflation in 2013.
    Keywords: Inflation; Forecasting; SARIMA; Bangladesh
    JEL: E31 E17 C22
    Date: 2013–01–10
  19. By: Herrera, Santiago; Youssef, Hoda
    Abstract: From 2008 to 2011, Egypt was hit by significant shocks, both global and country-specific. This paper assesses the impact of the resulting macroeconomic instability on the banking sector, and examines its role as a shock absorber. The Central Bank of Egypt accommodated the shocks by supplying liquidity to the market. The paper verifies a change in the fiscal regime from one in which the primary fiscal balance was used an instrument to stabilize the public debt ratio to one in which the policy instrument stopped playing that role and affected investors'assessment of the risk of holding public debt. This pattern suggests that fiscal conditions influenced exchange rate and price expectations originating a fiscal dominance situation in which the Central Bank could not control inflation. Hence, the Central Bank lacked functional independence in spite of its de jure independence, which underscores the importance of strengthening institutions that facilitate policy coordination and allow policy to be more predictable. The government also funds itself through non-market mechanisms, in a typical financial repression scheme. The paper estimates the revenue from financial repression at about 2.5 percent of gross domestic product in 2011, which together with the revenues from seignoriage add up to close to 50 percent of the budgeted tax revenues, indicating the need for an in-depth review of the governance of the public banks and the funding of public sector activities. Finally, the paper estimates the impact of shocks to macroeconomic variables on loan portfolio quality and bank capital.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Economic Theory&Research,Currencies and Exchange Rates
    Date: 2013–01–01
  20. By: Chen, Shu-Heng; Chang, Chia-Ling; Wen, Ming-Chang
    Abstract: We construct an agent-based New Keynesian DSGE model with different social network structures to investigate the significance of network topologies to macroeconomic stability. According to our simulation results, we find that the more liquid the information flow, the higher the stability of the economy. Furthermore, the speed of information dissemination and the degree of clustering among agents may give rise to an adverse effect on economic stability. Finally, we find that the scale-free network will lead to the most dramatic economic fluctuations. The result is ascribed to the scale-free network's high centrality. It indicates that the opinion leaders may bring about a conglomerate effect that will cause fluctuations in the economy. --
    Keywords: New Keynesian DSGE models,macroeconomic stability,social networks,Information dissemination,herding effect,agent-based model
    JEL: D84 E12 C63 E3 E32
    Date: 2013
  21. By: Wäckerle, Manuel
    Abstract: The complexity of credit money is seen as the central issue in the banking-macro nexus, which the author considers as a structural as well as a process component of the evolving economy. This nexus is significant for the stability/fragility of the economic system because it links the monetary domain with the real domain of economic production and consumption. The evolution of credit rules shapes economic networks between households, firms, banks, governments and central banks in space and time. The author discusses the properties and characteristics of this process in three sections. First, he discusses the origins of the theory of money and its role in contemporary monetary economics. Second, he briefly discusses current theoretical foundations of top-down and bottom-up approaches to the banking-macro nexus, such as DSGE or ABM. Third, he suggests an evolutionary framework, building on the generic-rule based approach, to arrive at standards for bottom-up foundations in agent-based models of the banking-macro nexus. --
    Keywords: 20th century origins of the theory of money,Schumpeterian credit-driven innovation,Post-Keynesian endogenous money,top-down versus bottom-up,evolutionary institutional approach to bank lending,generic credit rules as bottom-up foundations
    JEL: E41 G21 B52 B25 C63 E51
    Date: 2013
  22. By: Bastien Drut
    Abstract: The recent rise of the public debt limits governments’ room for manoeuvre in terms of economic policy and it seems urgent to try to slow down its progression. This paper shows that even if financial repression appears as an appealing solution for the so called peripheral countries of the euro area, it is not without creating concerns from a macro-financial point of view.
    JEL: E40 E50 E60 G10 H60
    Date: 2013–01–14
  23. By: Finn E. Kydland; Carlos E. J. M. Zarazaga
    Abstract: The U.S. economy isn' t recovering from the deep Great Recession of 2008–2009 with the strength predicted by models that incorporate a variety of shocks and frictions in the basic analytical framework of the neoclassical growth model. It has been argued that the counterfactual predictions shouldn 't be attributed to inherent features of that framework, but to the omission from the analysis of the prospects of an imminent switch to a higher taxes regime prompted by the unprecedented fiscal challenges faced by the U.S. economy in peacetime. The paper explores quantitatively this fiscal sentiment hypothesis. The main finding is that the hypothesis can account for a substantial fraction of the decline in investment and labor input in the aftermath of the Great Recession, relative to their pre-recession trends. These results require, however, a quali cation: The perceived higher taxes must fall almost exclusively on capital income.
    Date: 2013
  24. By: Mazhar MUGHAL; Junaid AHMED
    Abstract: Remittances and Business Cycles: Comparison of South Asian Countries
    Date: 2012–08
  25. By: Claude B. Erb; Campbell R. Harvey
    Abstract: While gold objects have existed for thousands of years, gold’s role in diversified portfolios is not well understood. We critically examine popular stories such as ‘gold is an inflation hedge’. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. We also explore valuation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average consistent with mean reversion. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. In the end, investors face a golden dilemma: 1) embrace a view that ‘those who cannot remember the past are condemned to repeat it’ and the purchasing power of gold is likely to revert to its mean or 2) embrace a view that the emergence of new markets represent a structural change and ‘this time is different’.
    JEL: E58 G10 G11 G15 G28 N20
    Date: 2013–01
  26. By: Luca Arciero; Ronald Heijmans; Richard Heuver; Marco Massarenti; Cristina Picillo; Francesco Vacirca
    Abstract: This paper develops a methodology, based on Furfine (1999), to identify unsecured interbank money market loans from transaction data of the most important euro processing payment system, TARGET2, for maturity ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the Italian trading platform e-MID and (ii) aggregated reporting by the EONIA panel banks. The Type 2 (false negative) error for the best performing algorithm setup is equal to 0.92%. The results focus on three levels: Eurosystem, core versus (geographical) periphery and countries (Italy and the Netherlands). The different stages of the global financial crisis and of the sovereign debt crises are clearly visible in the interbank money market, characterised by significant drops in the turnover. We find aggregated interest rates very close to the EONIA but we observe high heterogeneity across countries and market participants.
    Keywords: euro interbank money market; Furfine; TARGET2; financial stability; EONIA
    JEL: E42 E44 E58 G01
    Date: 2013–01
  27. By: Aladejare, Samson Adeniyi
    Abstract: This study examines the relationships and dynamic interactions between government capital and recurrent expenditures and economic growth in Nigeria over the period 1961 to 2010. Real Gross Domestic Product (RGDP) was used as a proxy for economic growth in the study.The analytical technique of Vector Error Correction Model and Granger Causality were exploited. Based on the result findings, it is evident that the Wagnerian and Rostow-Musgrave hypothesis were applicable to the relationship between the fiscal variables used in this study in Nigeria. The study therefore recommended among others that: there should be effective channeling of public funds to productive activities, which will have a significant impact on economic growth; there should be joint partnership between the government and the private sector in providing essential infrastructural services that will promote economic growth and development, etc.
    Keywords: Economic growth; Capital expenditure; Recurrent expenditure; Vector Error Correction; Causality
    JEL: E62
    Date: 2013–01–18
  28. By: Moritz Ritter (Department of Economics, Temple University)
    Abstract: I document that workers in newly tradable service occupations possess more occupation-specific human capital and are more highly educated than workers in previously tradable occupations. Motivated by this observation, I develop a dynamic equilibrium model with labor market frictions and specific human capital to study the labor adjustment process after a trade shock. When calibrated to match the increase in U.S. trade between 1990 and 2010, the model suggests that (1) output increases immediately after a trade shock and converges quickly to the steady state; (2) labor market institutions play a larger role in the adjustment process than specific human capital; (3) the short run distributional effects are small if the labor market is flexible, even in the presence of specific human capital.
    Keywords: Offshoring, Sectoral Labor Reallocation, Human Capital
    JEL: E24 F16 J24 J62
    Date: 2012–12
  29. By: White, Graham
    Abstract: The paper contends that the derivation of the aggregate demand curve in the new Keynesian literature is insufficient to provide the theoretical ground for the use to which it is usually put; namely, as a theoretical basis for the claim that long-run wage and price flexibility would push a capitalist economy to the full-employment or "natural" level of output. It is argued that the derivation solely on the basis of the propositions about optimising household consumption expenditures is insufficient to guarantee a decreasing aggregate demand function without circular reasoning. This point is clarified by use of a very simple two-commodity production model of long-run steady states due to Spaventa and Nell. To guarantee a decreasing aggregate demand function, the new Keynesian approach must invoke the kinds of propositions used in more traditional derivations; propositions which themselves are in question on capital-theoretic gr ounds.
    Date: 2012–11
  30. By: Bown, Chad P.; Crowley, Meredith A.
    Abstract: This paper estimates the impact of aggregate fluctuations on the time-varying trade policies of 13 major emerging economies over 1989-2010. By 2010, these World Trade Organization member countries collectively accounted for 21 percent of world merchandise imports and 22 percent of world gross domestic product. The paper examines determinants of carefully constructed, bilateral measures of new import restrictions on products arising through the temporary trade barrier (TTB) policies of antidumping, safeguards, and countervailing duties. The approach explicitly addresses changes to the institutional environment facing these emerging economies as they joined the WTO and adopted disciplines to restrain their application of other trade policies, such as applied import tariffs. The paper presents evidence of a counter-cyclical relationship between macroeconomic shocks and new TTB import restrictions in addition to an important role for fluctuations in bilateral real exchange rates. Furthermore, for the subset of major Group of 20 emerging economies, the trade policy responsiveness coinciding with WTO establishment in 1995 suggests a significant change relative to the pre-WTO period; i.e., new import restrictions became more counter-cyclical over time. Finally, the paper documents evidence on changes to some of these empirical relationships coinciding with the Great Recession.
    Keywords: Currencies and Exchange Rates,Economic Theory&Research,Free Trade,Emerging Markets,Debt Markets
    Date: 2013–01–01
  31. By: Huisman, K.J.M.; Kort, P.M. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper considers investment decisions within an uncertain dynamic and competitive framework. Each investment decision involves to determine the timing and the capacity level. In this way we extend the main bulk of the real options theory where the capacity level is given. We consider a monopoly setting as well as a duopoly setting. Our main results are the following. In the duopoly setting we provide a fully dynamic analysis of entry deterrence/accommodation strategies. We find that the first investor overinvests in capacity in order to delay entry of the second investor. In very uncertain economic environments the first investor always ends up being the largest firm in the market. If uncertainty is moderately present, a reduced value of waiting implies that the preemption mechanism forces the first investor to invest so soon that a large capacity cannot be afforded. Then it will eventually end up with a capacity level being lower than the second investor.
    Keywords: Investment under Uncertainty;Entry Deterrence/Accomodation;Duopoly;Capacity Choice
    JEL: E22 C73 L13
    Date: 2013
  32. By: Kodila-Tedika, Oasis
    Abstract: Why does sub-Saharan Africa have statistics of low quality? We try to provide an answer by empirically testing a plethora of hypotheses. Results show that with the exception of English, French and Portuguese colonies, other colonies have a weak statistical capacity. Ethnic fragmentation, openness and revolutions lead to the same conclusion. Government effectiveness positively associated statistical capacity. The level of development has a nonlinear relationship with statistical capacity, while the effect of human capital remains complex. Pourquoi l’Afrique sub-saharienne a des statistiques de faible qualité ? Nous testons à partir d’un échantillon africain plusieurs hypothèses explicatives, de manière empirique. Les résultats suggèrent que les colonies autres qu’anglaises, portugaises et françaises ont des faibles capacités statistiques. La fragmentation ethnique, l’ouverture et les révolutions conduisent aussi à la même conclusion. L’efficacité du gouvernement explique positivement la capacité statistique. Le niveau de développement est associé de manière non linéaire à la capacité statistique. L’effet du capital humain reste complexe.
    Keywords: Afrique sub-saharienne; capacité statistique; qualité des données
    JEL: E01 N17
    Date: 2013–01–12
  33. By: P. Manasse; L. Zavalloni
    Abstract: This paper addresses the following questions. Is there evidence of contagion in the Eurozone? To what extent do sovereign risk and the vulnerability to contagion depend on fundamentals as opposed to a country's "credibility"? We look at the empirical evidence on EU sovereigns CDS spreads and estimate an econometric model where the crucial role is played by time varying parameters. We model CDS spread changes at country level as reflecting three different factors: a Global sovereign risk factor, a European sovereign risk factor and a Financial intermediaries risk factor. Our main findings are as follows. First, while the US subprime crisis affects all European sovereign risks, the Greek crisis is largely a matter concerning the Euro Zone. Second, differences in vulnerability to contagion in the Eurozone are remarkable: after the Greek crisis the core Eurozone members become less vulnerable to EUZ contagion, possibly due to a safe-heaven effect, while peripheric countries become more vulnerable. Third, market fundamentals go a long way in explaining these differences: they jointly explain between 54 and 80% of the cross-country variation in idiosyncratic risks and in the vulnerability to contagion, largely supporting the "wake-up calls" hypothesis suggesting that market participats bocome more wary of market fundamentals during finacial crises.
    JEL: E44 F34 G01 G12 G15 H63
    Date: 2013–01
  34. By: Enrico Saltari (Department of Economics and Law, Università "La Sapienza" Roma); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: In this paper we address the control problem of a social optimum in presence of waste and capital stocks. We address this problem in two stages. In the first, we suppose that output is fixed; next, we endogenize output allowing for growth. The analytical framework is simple. Consumption is assumed to generate an undesirable residue. Society can control waste accumulation using abatement capital, and rise output using productive capital which accumulates over time. We have three main results. (1) On the analytical ground we are able to find a closed form solution to the optimal consumption with waste, abatement and productive capital stocks. (2) For the case of fixed output, we get a solution where stocks and flows affect the dynamics of the system. Environmental policies may have permanent effects on the level of variables. Then, (3) when waste and abatement capital are embedded in a classical growth model, we obtain an Environmental Keynes-Ramsey rule which states that the growth rate of the productive capital is positive if and only if its net marginal productivity is greater than the net social cost it generates, given by the marginal disutility of waste weighted by its shadow cost.
    Keywords: Abatement capital, waste accumulation, optimal control, Pigouvian taxes and subsidies, output growth
    JEL: E22 L51 H23 Q28
    Date: 2013

This nep-mac issue is ©2013 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.