nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒04‒27
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation, its Volatility and the Inflation-Growth Tradeoff in India By Raghbendra Jha; Varsha S. Kulkarni
  2. Euroization and cyclical stabilization in Montenegro: an empirical analysis By Sokic, Alexandre; FABRIS, Nikola
  3. Does Short-Time Work Save Jobs? A Business Cycle Analysis By Almut Balleer; Britta Gehrke; Wolfgang Lechthaler; Christian Merkl
  4. Propagation Mechanisms in Inflation: Governance as key By Goyal, Ashima
  5. Estimating India’s Fiscal Reaction Function By Truong Nguyen
  6. The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions By Nicholas Apergis; Stephen M. Miller; Effrosyni Alevizopoulou
  7. Sticky Price Models, Durable Goods, and Real Wage Rigidities By M. Alper Çenesiz; Luís Guimarães
  8. Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending By Jang-Ting Guo; Shu-Hua Chen
  9. Public debt and changing inflation targets By Krause, Michael U.; Moyen, Stéphane
  10. Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions By Azizi, Karim; Canry, Nicolas; Chatelain, Jean-Bernard; Tinel, Bruno
  11. Optimal fiscal policy By Jasper Lukkezen; Coen Teulings
  12. On the low-frequency relationship between public deficits and inflation By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  13. Optimal sovereign default By Adam, Klaus; Grill, Michael
  14. Credit frictions and the cleansing effect of recessions By Sophie Osotimehin; Francesco Pappada
  15. Financial Globalization and Monetary Transmission By Simone Meier
  16. Dynamic stochastic general equilibrium model with banks and endogenous defaults of firms By Sergei Ivashchenko
  17. Inflation Skewness and Price Indexation By Firouzi Naeim, Peyman; Rahimzadeh, golnoush
  18. Quantitative forward guidance and the predictability of monetary policy - A wavelet based jump detection approach - By Lars Winkelmann; ; ;
  19. The Case for Four Percent Inflation By Laurence Ball
  20. Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa? By Asongu, Simplice A
  21. Monitoring of Credit Risk through the Cycle: Risk Indicators By Yashkir, Olga; Yashkir, Yuriy
  22. Was the Recent Downturn in US GDP Predictable? By Mehmet Balcilar; Rangan Gupta; Anandamayee Majumdar; Stephen M. Miller
  23. Comment on Relative Price Variability and Inflation in Reinganum's Consumer Search Model By David Fielding; Chris Hajzler
  24. Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem By Elliot Anenberg; Patrick Bayer
  25. Essays in macro-finance. Essais de macro-finance . By Isore, Marlène
  26. The endless Eurozone crisis, where do we stand? A Classical-Kaleckian overview By Sergio Cesaratto
  28. "On the Franco-German Euro Contradiction and Ultimate Euro Battleground" By Jorg Bibow
  29. Over-indebted Youth: Unemployment and Deleveraging in the Euro Zone By Harald Sander
  30. Agricultural Policy Reforms and Structural Adjustments in Bangladesh By Hasan, Mohammad Monirul
  31. Are Government-Linked Corporations Crowding out Private Investment in Malaysia? By Jayant Menon; Thiam Hee Ng
  32. Financial development and manufactured exports: the african experience By Wamboye, Evelyn; Mookerjee, Rajen
  33. On financial risk and the safe haven characteristics of Swiss franc exchange rates By Christian Grisse; Thomas Nitschka
  34. Quantifying Productivity Gains from Foreign Investment By Christian Fons-Rosen; Sebnem Kalemli-Ozcan; Bent E. Sorensen; Carolina Villegas-Sanchez; Vadym Volosovych
  35. Regional Initiative in the Gulf Arab States: The Search for a Common Currency By Syed Abul, Basher
  36. "Currency Concerns under Uncertainty: The Case of China" By Sunanda Sen
  37. Tax evasion: Is this a government fight, or can anyone join? By Marcelo Arbex; Enlinson Mattos
  38. Working Paper 03-13 - Mesures prises en 2012 dans les branches chômage et pension : évaluation des effets selon le genre By Gijs Dekkers; Raphael Desmet; Nicole Fasquelle; Marie-Jeanne Festjens; Christophe Joyeux; Bertrand Scholtus; Saskia Weemaes
  39. Social Expenditure in New Zealand: Stochastic Projections By John Creedy; Kathleen Makale
  40. Purchasing Power Parity between the UK and the Euro Area By Giorgio Canarella; Stephen M. Miller; Stephen K. Pollard
  41. Forecasting with Mixed Frequency Samples: The Case of Common Trends By Peter Fuleky; Carl S. Bonham

  1. By: Raghbendra Jha; Varsha S. Kulkarni
    Abstract: This paper amends the New Keynesian Phillips curve model to include inflation volatility. It provides results on the determinants of inflation volatility and expected inflation volatility for OLS and ARDL(1,1) models and for change in inflation volatility and change in expected inflation volatility using ECM models. Output gap affects change in expected inflation volatility alone (in the ECM model) and not in the other models. Major determinants of inflation volatility and expected inflation volatility are identified. To the best of our knowledge this is the first paper to augment the New Keynesian Phillips Curve to include inflation volatility.
    Keywords: Inflation, Inflation volatility, ARDL model, ECM model, Output gap, India
    JEL: E31 E32 E42 E44
    Date: 2013
  2. By: Sokic, Alexandre; FABRIS, Nikola
    Abstract: The aim of this paper is to evaluate the importance of the issue of the loss of an independent monetary policy in the case of officially euroized Montenegro. We examine the extent to which the monetary policy of the European Central Bank, which is set according to the economic conditions prevailing in the euro area, has contributed to the stabilisation of the business cycle of unilaterally euroized Montenegro. It is shown that under euroization the ECB monetary policy has been acyclical with respect to Montenegrin inflation and significantly countercyclical with respect to Montenegrin output growth. The comparative analysis with Serbia does not show that keeping an independent monetary policy would have improved the cyclical stabilisation in Montenegro. The pass-through from ECB policy rates to retail interest rates prevailing at commercial banks in Montenegro is shown to depend significantly on the macroeconomic and banking conditions prevailing in Montenegro.
    Keywords: euroisation, dollarization
    JEL: E3 E31 E5 E52
    Date: 2013–04–25
  3. By: Almut Balleer; Britta Gehrke; Wolfgang Lechthaler; Christian Merkl
    Abstract: This paper analyzes the effects of short-time work (i.e., government subsidized working time reductions) on unemployment and output fluctuations. The central question is whether the rule based component (i.e., the existence of the institution short-time work) and the discretionary component (i.e., rule changes) stabilize employment over the business cycle. In our baseline scenario the rule based component stabilizes unemployment fluctuations by 15% and output fluctuations by 7%. Given the small share of short-time work expenses in terms of GDP, the stabilization effects are large compared to other instruments such as the income tax system. By contrast, discretionary short-time work interventions do not have any statistically significant effect on unemployment. These effects are based on a structural VAR estimation which is identified using the output elasticity of short-time work estimated from German establishment paneldata. The model shows that non-effects of discretionary interventions may be due to their low persistence
    Keywords: Short-time work, fiscal policy, business cycles, search-and-matching, SVAR
    JEL: E24 E32 E62 J08 J63
    Date: 2013–02
  4. By: Goyal, Ashima
    Abstract: Resurgence in Indian inflation since 2007 was associated with sharp food and oil price inflation. Propagation mechanisms that allow these relative prices to affect aggregate prices include governance failures, the effect of food prices on wages, exchange rates on costs and the response to cost shocks in firm price-setting. The paper analyzes these mechanisms. Supply shocks took the form of upward shifts of an aggregate supply elastic in the sense costs did not rise with output. First round effects have to be allowed since of asymmetric price adjustment. Estimations show it was multiple supply shocks rather than persistent second round price effects that caused inflation. Output remained below potential. In such a structure, the best policies are those that reduce average production costs. Policy induced demand tightening to anchor inflationary expectations and prevent a wage-price spiral that could shift up costs imposed a large output sacrifice. Policy contraction generally exceeded the fall in output. A large negative demand impulse over 2010-12 constrained growth more than inflation. The analysis provides a new understanding of how supply constraints affect the economy
    Keywords: inflation, propagation, aggregate supply, relative price shocks, governance
    JEL: E31 E52 E62 O23
    Date: 2012–06–01
  5. By: Truong Nguyen
    Abstract: In the 1970s-1980s, monetary authorities were usually more active than their fiscal counterparts. After some crises, fiscal policy is currently regaining its role in implementing economic policies. As a sequel to estimating the Indian monetary reaction function, this paper models and estimates a fiscal reaction function for India as a part of a macro model for India. Unlike other papers about fiscal reaction func tions which are mainly empirical-based, this paper first establishes the theoretical foundations for the empirical estimation. In estimating India’s fiscal reaction function, data stationary problems are found and unbalanced regressions are employed. This paper finds that India’s fiscal policy depends on debt, output gap, and interest rate levels. Apart from debt and output gap which were mentioned in other papers, the interest rate is the new element in the function and should be important in any borrowing action. The estimated fiscal reaction function tracks the actual reaction function very closely.
    Keywords: India’s fiscal reaction function, ARDL model, unbalanced regression
    JEL: E62 E63 H63
    Date: 2013
  6. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Effrosyni Alevizopoulou (Department of Banking and Financial Management, University of Piraeus)
    Abstract: The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
    Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
    Date: 2012–04
  7. By: M. Alper Çenesiz (cef.up, Faculdade de Economia, Universidade do Porto); Luís Guimarães (cef.up, Faculdade de Economia, Universidade do Porto)
    Abstract: The standard two-sector New Keynesian model with durable goods is at odds with conventional wisdom and VAR evidence: Following a monetary shock, it generates (i) either negative or no comovement across sectoral outputs, and (ii) aggregate neutrality of money when durable-goods' prices are flexible. We reconcile theory with evidence by incorporating real wage rigidities into the standard model: As long as durable-goods' prices are more flexible than nondurable-goods' prices, we obtain positive sectoral comovement and, thus, aggregate non-neutrality of money.
    Keywords: Durable goods; Real Wage Rigidities; Comovement; Money.
    JEL: E32 E51 E52
    Date: 2013–04
  8. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical áuctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.
    Keywords: Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating.
    JEL: E32 E62
    Date: 2013–04
  9. By: Krause, Michael U.; Moyen, Stéphane
    Abstract: What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. --
    Keywords: public debt,learning,inflation target,callable perpetuity,debt maturity
    JEL: E31 E52 H63
    Date: 2013
  10. By: Azizi, Karim; Canry, Nicolas; Chatelain, Jean-Bernard; Tinel, Bruno
    Abstract: This paper investigates the relevance of the No-Ponzi game condition for public debt (i.e. the public debt growth rate has to be lower than the real interest rate, a necessary assumption for Ricardian equivalence) and of the transversality condition for the GDP growth rate (i.e. the GDP growth rate has to be lower than the real interest rate). First, on the unbalanced panel of 21 countries from 1961 to 2010 available in OECD database, those two conditions were simultaneously validated only for 29% of the cases under examination. Second, those two conditions were more frequent in the 1980s and the 1990s when monetary policies were more restrictive. Third, in tune with the Keynesian view, when the real interest rate is higher than the GDP growth, it corresponds to 75% of the cases of the increases of the debt/GDP ratio but to only 43% of the cases of the decreases of the debt/GDP ratio (fiscal consolidations).
    Keywords: Government solvency, Austerity, Fiscal Consolidation, No-Ponzi Game condition, transversality condition, Keynesian countercyclical budgetary policy, monetary policy, economic growth.
    JEL: E43 E5 E6 H6 O4
    Date: 2013–04–24
  11. By: Jasper Lukkezen; Coen Teulings
    Abstract: This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reduced-form model of the economy from a linear VAR with a non-linear welfare function and obtain analytic solutions for optimal policy. The variables in our reduced-form model – growth, unemployment, primary surplus – have a natural rate that cannot be affected by policy. Policy can only reduce fluctuations around these natural rates. Our welfare function contains future GDP and unemployment, the relative weights of which determine the optimal response. The optimal policy rule demands an immediate and large policy response that is procyclical to growth shocks and countercyclical to unemployment shocks. This result holds true when the weight of unemployment in the welfare function is reduced to zero. The rule currently followed by policy makers responds procyclically to both growth and unemployment shocks, and does so much slower than the optimal rule, leading to significant welfare losses.
    JEL: E6 H6
    Date: 2013–04
  12. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    Abstract: We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying VAR model for U.S. data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid-1960s up to 1980. Our results suggest that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II. --
    Keywords: Time-Varying VAR,Inflation,Public Deficits
    JEL: E42 E58 E61
    Date: 2013
  13. By: Adam, Klaus; Grill, Michael
    Abstract: When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which contracting frictions make it optimal for the government to finance itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to significant 'default costs'. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that following such shocks default can be Ramsey optimal even if the net foreign asset position is positive. --
    Keywords: Fiscal Policy,Sovereign Risk
    JEL: E62 F34
    Date: 2013
  14. By: Sophie Osotimehin; Francesco Pappada
    Abstract: Recessions are conventionally considered as times when the least productive rms are driven out of the market. Do credit frictions hamper this cleansing eect of recessions? We build and calibrate a model of rm dynamics with endogenous exit and credit frictions to investigate this question. We nd that, despite their distortionary eect on the selection of exiting rms, credit frictions do not reverse the cleansing eect of recession. Average idiosyncratic productivity rises following an adverse aggregate shock. Our results also suggest that recessions have a modest impact on average productivity whatever the level of credit frictions
    Keywords: cleansing, business cycles, rm dynamics, credit frictions
    JEL: E32 E44 D21
  15. By: Simone Meier
    Abstract: This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.
    Keywords: Monetary policy transmission, International financial integration
    JEL: E52 F41 F42 F47
    Date: 2013
  16. By: Sergei Ivashchenko (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences (RAS))
    Abstract: A dynamic stochastic general equilibrium (DSGE) model with endogenous defaults of firms is developed. Proposed mechanism of defaults is very flexible. It takes into account amount of assets owned by firms. It suggests that banks receive some payment from firm after default. The model is estimated for USA and for Russia.
    Keywords: DSGE, endogenous defaults of firms
    JEL: E32 E43 E44 E47 G21
    Date: 2013–01–25
  17. By: Firouzi Naeim, Peyman; Rahimzadeh, golnoush
    Abstract: One of the two price indexation schemes in the staggered price DSGE models is the indexation to the average inflation. In this essay we show that using average of inflation as index multiplier may lead to the deviation from the optimal price for intermediate good producer. Although there is no problem with this indexation method as far as the inflation distribution is symmetric, when we have a skewed inflation (as we have in the U.S. economy and most of the G7 countries) indexation to average inflation does not reflect the profit maximizer firm's decision making process. After showing the deficiencies of this method we introduce the Median of inflation distribution as a measure, explain it's advantage and support our claim by comparing the simulated inflation and the measure which is used for indexation purpose. Our results suggest that median of inflation distribution minimizes the forecast error in the Calvo price setting procedure of intermediate good producer
    Keywords: DSGE; Inflation Skewness; Non-Linearity; Calvo Pricing
    JEL: E30 E31 E37 E50 E52
    Date: 2013–04
  18. By: Lars Winkelmann; ; ;
    Abstract: The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. This paper suggests a new approach to evaluate the impact of the guidance strategy on the predictability of monetary policy. Using the example of Norway, the empirical investigation is based on jump probabilities of interest rates on central bank announcement days before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.
    Keywords: Central bank communication, interest rate projections, semimartingales, Locally Stationary Wavelet processes, jump detection
    JEL: E58 C14 C58
    Date: 2013–04
  19. By: Laurence Ball
    Abstract: Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
    Date: 2013–04
  20. By: Asongu, Simplice A
    Abstract: This paper assesses the adjustment of inflation with financial dynamic fundamentals of money (financial depth), credit (financial activity) and efficiency. Three main findings are established. (1) There are significant long-run relationships between inflation and the fundamentals. (2) The error correction mechanism is stable in all specifications but in case of any disequilibrium, only financial depth is significant in adjusting inflation to the long-run relationship. (3) In the long-run, short-term adjustments in the ability of banks to transform money into credit do not matter in correcting inflation. This is most probably due to surplus liquidity issues. Policy implications are discussed.
    Keywords: Excess money; inflation; credit; Africa
    JEL: E31 E5 O55
    Date: 2012–09–18
  21. By: Yashkir, Olga; Yashkir, Yuriy
    Abstract: The new Credit Risk Indicator (CRI) based on credit rating migration matrices is introduced. We demonstrate strong correlation between CRI and a number of defaults through several business cycles. The new model for the simulation of the annual number of defaults, based on the 1st quarter CRI data, is proposed.
    Keywords: Credit Risk, Risk Indicator, Correlation, Business Cycle, Default Rate
    JEL: E32 E37 G17
    Date: 2013–03–02
  22. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Anandamayee Majumdar (Department of Biostatistics, University of North Texas Health Science Center); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    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.
    Keywords: Forecasting, Linear and non-linear models, Great Recession
    JEL: C32 E37
    Date: 2012–12
  23. By: David Fielding (Department of Economics, University of Otago, New Zealand); Chris Hajzler (Department of Economics, University of Otago, New Zealand)
    Abstract: There is now a large empirical literature on the effect of the aggregate inflation rate on (i) the dispersion of prices across goods or locations (relative price variability, or RPV) and (ii) the dispersion of inflation rates across goods or locations (relative inflation variability, or RIV). In the early part of this literature, empirical modelling is explicitly based on theoretical macroeconomic models incorporating signal extraction problems. However, more recent empirical research is less directly connected to theory, and several authors report results that are inconsistent with signal extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. In this paper, we show that such a result is predicted by consumer search models in the style of Reinganum (1979). A proper understanding of the dynamics of price dispersion in 21st century economies will require a renewed interest in the theoretical foundations of empirical models.
    Keywords: Relative Price Variability; Inflation; Search models
    Date: 2013–03
  24. By: Elliot Anenberg; Patrick Bayer
    Abstract: This paper presents new empirical evidence that internal movement - selling one home and buying another - by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.
    JEL: E32 R0 R21 R3 R31
    Date: 2013–04
  25. By: Isore, Marlène
    Abstract: This dissertation consists of three essays in financial macroeconomics. The methodological approach common to the first two articles is the application of the search and matching theory to financial markets. The third essay builds on the literature on rare events. In the first article, I develop a tractable two-country model in which financial contagion may arise despite a flexible exchange rate regime and substitutability between home and foreign financial assets, contrary to the open-economy standard results under these two conditions. While monetary contractions imply negative output co-movements, in line with the literature, non-walrasian shocks to banks’ funding costs do generate the contagion. The second essay analyzes the role of bankers’ behavior in bank default. The model accounts for heterogeneity in entrepreneurs’ productivity and information asymmetry at the expense of capital holders. Moral hazard arises following a productivity shock: bankers tend to choose investments that are more profitable in the short-run but whose risk is borne by the financiers. This mechanism magnifies credit rationing in the economy and contributes to bank default. The third article examines the macroeconomic impact of a change in the probability of rare events in a New Keynesian model. A rise in the probability of disaster is sufficient to generate a recession without effective occurrence of the disaster. After accounting for monopolistic competition and price stickiness, the responses of consumption and wages are also reminiscent of distressed times. The article thus provides a framework of the dynamic effects of rare events, particularly suitable for further policy analysis.
    Abstract: Cette thèse comprend trois articles en macroéconomie financière. L’approche méthodologique commune aux deux premiers est l’application des modèles d’appariement aux marchés financiers. Le troisième contribue à l’étude des événements rares. Le premier article démontre qu’une contagion financière internationale est susceptible d’émerger malgré un régime de taux de change flexible et une substituabilité entre les actifs financiers nationaux et étrangers, contrairement aux résultats standards sous ces deux conditions. A l’inverse des contractions monétaires traditionnelles, des chocs non-walrasiens de coûts de capitalisation bancaire génèrent une contagion internationale. Le deuxième article étudie le rôle du comportement des banquiers dans le défaut bancaire. Le modèle tient compte de l’hétérogénéité des emprunteurs et incorpore une asymétrie d’information au détriment des détenteurs de capitaux. Un aléa moral survient à la suite d’un choc de productivité : les banquiers tendent à choisir les investissements plus rentables à court terme mais dont le risque est supporté par les investisseurs. Ce mécanisme amplifie le rationnement du crédit dans l’économie et alimente le défaut bancaire. Le troisième article étudie l’impact macroéconomique d’une variation de la probabilité d’un événement rare dans un modèle néo-keynésien. Une hausse de la probabilité suffit notamment à générer une récession sans réelle occurrence du « désastre » et produit, en concurrence monopolistique, des réactions de la consommation et des salaires cohérentes. Nous proposons ainsi un cadre d’analyse des effets dynamiques des événements rares, préalable à l’investigation du rôle de la politique monétaire.
    Keywords: Crise financière, frictions, appariement, contagion, banques, aléa moral, événement rare, désastre économique;
    Date: 2012–09
  26. By: Sergio Cesaratto
    Abstract: It is not easy to untangle the logic that in the past led to creation of the European Monetary Union (EMU) and that is currently guiding the prevailing Eurozone (EZ) policies. Although lacking the right institutions, which can be seen as the ultimate root of its crisis, the ten years of the EMU could be celebrated in 2008 with some fanfare. The EMU even seemed a success, judged from the point of view of imbalanced growth of some peripheral countries that masked its deflationary stance. This imbalanced growth was the proximate cause of the EZ financial crisis. In the paper we shall review the main causes of the EZ financial crisis, interpreted as a balance of payments crisis; the role of the European payment system TARGET 2 in buffering its violent blast; the Classical-Kaleckian rationale of the German malevolent mercantilism; the inadequate EZ policy measures to respond to the crisis; possible alternative solutions. Unfortunately, rather than pushing towards the creation of a different set of European institutions, the prevailing crisis resolution philosophy resembles a late vindication of the original deflationary Euro-bias.
    Keywords: European Monetary Union, financial crisis, Germany, neo-mercantilism, balance of payment,capital flows, sudden stops, TARGET 2, OMT
    JEL: E11 E12 E42 E58 F32 F33 F34 F36 N24
    Date: 2013–02
  27. By: Olivier Cardi; Romain Restout
    Abstract: This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa- Samuelson model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving unchanged the non traded wage-traded wage ratio. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970-2007, our estimates show that the relative price rises by only 0.78% while the relative wage falls by 0.27%. Hence, our first set of empirical ¯ndings cast doubt on the quantitative predictions of the Balassa-Samuelson model. A second set of empirical findings highlights the role of imperfect labor mobility: interacting the ratio of sectoral labor share-adjusted total factor productivities with an index of labor mobility across sectors, we find that the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted as the degree of labor mobility increases. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results are robust to the introduction of i) non-separability in preferences between consumption and labor, and ii) traded investment.
    Keywords: Relative price of non tradables, Sectoral wages, Productivity growth, Sectoral labor reallocation, Investmen.
    JEL: E22 F11 F41 F43
    Date: 2013
  28. By: Jorg Bibow
    Abstract: Highlighting that France and Germany held largely contradicting hopes and aspirations for Europe's common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro "transfer union," but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation-a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.
    Keywords: Currency Union; Euro Policy Regime; Euro Crisis; Franco-German Partnership; Competitiveness; ECB Policies
    JEL: E02 E42 E58 E61 E65
    Date: 2013–04
  29. By: Harald Sander (Maastricht School of Management & Institute of Global Business & Society, Cologne University of Applied Sciences)
    Abstract: This paper looks at the Euro-zone crisis from the point of view of the Euro-zone youth. Young people in many Euro-zone countries are today confronted with high and persistent unemployment with potentially long-lasting “scarring effects” compromising their present and future well-being. While lower and sustainable public debts are desirable from the point of view of inter-generational justice, it is argued that this objective cannot be achieved by means of front-loaded austerity policies. With long-term negative consequences of short-term austerity it is shown that not only social consideration but also the underlying public debt dynamics in the presence of scarring and other hysteresis effects make a strong case for a gradual growth-oriented approach to deleveraging that carefully aims at balancing short- and long-term costs and benefits while protecting vulnerable young people.
    Keywords: Youth unemployment, scarring effects, hysteresis, debt deleveraging, European Monetary Union, financial crisis
    JEL: E6 F4 H63 J4
    Date: 2012–09
  30. By: Hasan, Mohammad Monirul
    Abstract: This paper depicts the agricultural policy reforms and structural changes in Bangladesh from independence to the present times. Bangladesh agriculture has experienced major structural changes and achieved major successes over the last three and a half decades. Reforms began in the late 1970s and early 1980s by liberalizing the input markets. Both domestic and trade policy got a vibration of liberalization in the early 1990s. After the independence, Bangladesh followed a highly restrictive trade and exchange rate policy characterized by import regulations, high import tariffs, export taxes, persistent quantitative restrictions and an overvalued exchange rate. With a decade long half-hearted attempt towards trade liberalization, the democratic government in 1991 took courageous steps towards reforming the trade regime. Reforms instigated during this period included reducing and compressing tariffs, implementing and publishing a less complicated import tax structure, gradually eliminating non-tariff import restrictions, and promoting exports through income tax exemptions, bonded warehousing, and flexible exchange rate management. The recent Import-Export Policy 2009-2012 is a major step to the continuation of the liberalization of international trade.
    Keywords: Agricultural policy, Structural Policy, Trade reform, Bangladesh, Policy reforms in Bangladesh, Bangladesh Economic reforms, policy changes, structural adjustment policy, Five year plans in Bangladesh, Fiscal reforms
    JEL: E6 E61 E62 F13 N10 O11 O13 Q10 Q17 Q18
    Date: 2012–12
  31. By: Jayant Menon; Thiam Hee Ng
    Abstract: Private investment in Malaysia has been sluggish since the Asian financial crisis. One explanation is that the growing presence of government-linked corporations(GLCs) has been crowding out private investment. For the first time, we provide empirical evidence on the relationship between GLC presence and private investment. We find that when GLCs are dominant in an industry, investment by private firms is significantly negatively impacted. Conversely, when GLCs do not dominate an industry, the impact on private investment is not seen. Sensitivity tests associated with varying the level of the threshold used to determine dominance confirm the robustness of the results. To revive private investment in Malaysia, government must not only redress its growing fiscal deficit, but also expedite its program of divestment.
    Keywords: Malaysia, private investment, government-linked corporations(GLCs), crowding-out
    JEL: E22 F20 F21 J78 O53
    Date: 2013
  32. By: Wamboye, Evelyn; Mookerjee, Rajen
    Abstract: Using a sample of twenty nine African countries for which adequate time series data are available this paper explores the nexus between financial development and manufactured exports. This particular relationship is especially important in the context of Africa since export diversification away from resources and agriculture is an important part of Africa’s growth strategy. Our results show that in eleven countries financial development causes manufactured exports and manufactured exports causes financial development in seven countries. We then explore reasons for these findings and find that a rich and surprising set of factors explain our findings.
    Keywords: Financial Development, Granger Causality, Manufactured Exports, Africa
    JEL: E44 E50 F13 G20 O16 O55
    Date: 2013–04–22
  33. By: Christian Grisse; Thomas Nitschka
    Abstract: We analyse bilateral Swiss franc exchange rate returns in an asset pricing framework to evaluate the Swiss franc's safe haven characteristics. A "safe haven" currency is a currency that offers hedging value against global risk, both on average and in particular in crisis episodes. To explore these issues we estimate the relationship between exchange rate returns and risk factors in augmented UIP regressions, using recently developed econometric methods to account for the possibility that the regression coefficients may be changing over time. Our results highlight that in response to increases in global risk the Swiss franc appreciates against the euro as well as against typical carry trade investment currencies such as the Australian dollar, but depreciates against the US dollar, the Yen and the British pound. Thus, the Swiss franc exhibits safe-haven characteristics against many, but not all other currencies. We find statistically significant time variation in the relationship between Swiss franc returns and risk factors, with this link becoming stronger in times of stress.
    Keywords: Exchange rate, monetary policy, risk factors, safe haven, Swiss franc, uncovered interest rate parity
    JEL: E32 F44 G15
    Date: 2013
  34. By: Christian Fons-Rosen (Universitat Pompeu Fabra and Barcelona Graduate School of Economics); Sebnem Kalemli-Ozcan (University of Maryland, CEPR, and NBER); Bent E. Sorensen (University of Houston and CEPR); Carolina Villegas-Sanchez (ESADE - Universitat Ramon Llull); Vadym Volosovych (Erasmus University Rotterdam and ERIM Research Institute of Management)
    Abstract: We quantify the causal effect of foreign investment on total factor productivity (TFP) using a new global firm-level database. Our identification strategy relies on exploiting the difference in the amount of foreign investment by financial and industrial investors and simultaneously controlling for unobservable firm and country-sector-year factors. Using our well identified firm level estimates for the direct effect of foreign ownership on acquired firms and for the spillover effects on domestic firms, we calculate the aggregate impact of foreign investment on country-level productivity growth and find it to be very small.
    Keywords: Multinationals; FDI; Knowledge Spillovers; Selection; Productivity
    JEL: E32 F15 F36 O16
    Date: 2013–04–11
  35. By: Syed Abul, Basher
    Abstract: While many commentators have been openly critical of China's currency policy on the basis of an undervalued renminbi, despite a similar surge in GCC's (Gulf Cooperation Council) balance of payment surpluses in the first decade of this century, the vast majority of the commentators have maintained a stony silence on the undervalued Gulf currencies. This underscores the geopolitics of currencies as a form of asymmetric warfare and the consequences of dollar, euro or renminbi diplomacy. This paper makes two main additions to the literature on Gulf monetary union. First, it emphasizes that the creation of a fiscal union is necessary for the Gulf monetary union to succeed. Second, it proposes some alternatives to pegging to the dollar, which would allow the GCC to absorb large swings in global commodity prices (oil, food) in the short to medium run. The proposed exchange rate regimes are not conditional on the formation of the Gulf monetary union, and can be implemented individually or collectively.
    Keywords: Fixed exchange rate; Currency basket; Fiscal union; Monetary union; Gulf Cooperation Council.
    JEL: E52 F36 F4
    Date: 2013–04–23
  36. By: Sunanda Sen
    Abstract: The recent declines in China's financial account balance ended the "twin surplus" era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China's financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a "two-way floating" RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China's economic relations vis-a-vis trading and financial partners, which include the United States. The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes's observation, in 1937, regarding uncertainty in markets: "About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."
    Keywords: China; Financial Balances; Official Reserves; Twin Surpluses; Rebalancing; Expectations; Internationalization; Managed Exchange Rate
    JEL: E31 E52 F42 O16 O53
    Date: 2013–03
  37. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation)
    Abstract: In the traditional optimal taxation literature, taxpayers and consumers are viewed and treated as potential tax evaders. We consider an optimal commodity taxation model where consumers have an important role as tax enforcers. Requesting purchase receipts (individual auditing) is time consuming and the government offers a fraction of the taxes collected to provide incentive for buyers to participate in the auditing activity. We show that tax rebates have a non-trivial income effect, which modifies the traditional (dual approach) "Ramsey equation". Tax-enforcement policies affect buyers' allocations directly, in addition to standard changes in the good's price. Comparing numerical results across three tax-enforcement regimes, we observe that welfare is higher if individual auditing is the only tax enforcement policy.
    Keywords: Optimal Taxation, Indirect Tax Evasion, Tax Enforcement and Auditing.
    JEL: E62 H21 H26 K42
    Date: 2013–04
  38. By: Gijs Dekkers; Raphael Desmet; Nicole Fasquelle; Marie-Jeanne Festjens; Christophe Joyeux; Bertrand Scholtus; Saskia Weemaes
    JEL: E6 H53 H55 J1 J2
    Date: 2013–02–28
  39. By: John Creedy; Kathleen Makale (The Treasury)
    Abstract: This paper presents stochastic projections for 13 categories of social spending in New Zealand over the period 2011-2061. These projections are based on detailed demographic estimates covering fertility, migration and mortality disaggregated by single year of age and gender. Distributional parameters are incorporated for all of the major variables, and are used to build up probabilistic projections for social expenditure as a share of GDP using simulation methods, following Creedy and Scobie (2005). Emphasis is placed on the considerable uncertainty involved in projecting future expenditure levels.
    Keywords: Population, projections, stochastic simulation, social expenditure, fiscal costs, New Zealand
    JEL: E61 H50 J11
    Date: 2013–03
  40. By: Giorgio Canarella (Department of Finance, University of Nevada, Las Vegas); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, California State University, Los Angeles)
    Abstract: We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and the Euro Area, which we represent by Germany, the largest of its members. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of the PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate, the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles.
    Keywords: Purchasing Power Parity, Euro Area, Cointegrated VAR.
    JEL: E31 E43 F31 F32
    Date: 2012–08
  41. By: Peter Fuleky (UHERO and Department of Economics, University of Hawaii at Manoa); Carl S. Bonham (Department of Economics, University of Hawaii at Manoa)
    Abstract: We analyze the forecasting performance of small mixed frequency factor models when the observed variables share stochastic trends. The indicators are observed at various frequencies and are tied together by cointegration so that valuable high fre- quency information is passed to low frequency series through the common factors. Dierencing the data breaks the cointegrating link among the series and some of the signal leaks out to the idiosyncratic components, which do not contribute to the trans- fer of information among indicators. We nd that allowing for common trends improves forecasting performance over a stationary factor model based on dierenced data. The \common-trends factor model" outperforms the stationary factor model at all analyzed forecast horizons. Our results demonstrate that when mixed frequency variables are cointegrated, modeling common stochastic trends improves forecasts.
    Keywords: Dynamic Factor Model, Mixed Frequency Samples, Common Trends, Forecasting
    JEL: E37 C32 C53 L83
    Date: 2013–04

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