nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒05‒05
47 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Should Central Bank respond to the Changes in the Loan to Collateral Value Ratio and in the House Prices? By Tatiana Damjanovic; Sarunas Girdenas
  2. The Influence of Oil and Gas Revenues on Russia’s Monetary and Credit Policy By Alexei Kudrin
  3. The Role of Automatic Stabilizers in the U.S. Business Cycle By Alisdair McKay; Ricardo Reis
  4. (Un)anticipated monetary policy in a DSGE model with a shadow banking system By Verona , Fabio; Martins, Manuel M. F.; Drumond , Inês
  5. Disaster Risk in a New Keynesian Model By Maren Brede; ; ;
  6. Interaction entre politique monétaire et politique budgétaire:Cas de la Grèce By Daly, Hounaida; Smida, Mounir
  7. Banking and the Macroeconomy in China: A Banking Crisis Deferred? By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhigui
  8. Ecuador’s Economy Since 2007 By Mark Weisbrot; Jake Johnston; Stephan Lefebvre
  9. Central Banking in Making during the Post-crisis World and the Policy-Mix of the Central Bank of the Republic of Turkey By Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
  10. State-controlled Banks and the Effectiveness of Monetary Policy By Randall Morck; M. Deniz Yavuz; Bernard Yeung
  11. Monetary Policy Cooperation - Policy Prescriptions from New Open Economy Macroeconomics By Ippei Fujiwara
  12. The inflation-output trade-off revisited By Gauti Eggertsson; Marc P. Giannoni
  13. An Expectations-Driven Interpretation of the "Great Recession" By Christopher M. Gunn; Alok Johri
  14. Expected sovereign defaults and fiscal consolidations By Werner Roeger; Jan in 't Veld
  15. Monetary policy delegation and equilibrium coordination By Andrew P. Blake; Tatiana Kirsanova; Tony Yates
  16. Recovering from the Global Financial Crisis: achieving financial stability in times of uncertainty By Ojo, Marianne
  17. What Drives Aggregate Investment? By Rüdiger Bachmann; Peter Zorn
  18. Economic adjustment in the Baltic Countries By Ardo Hansson; Martti Randveer
  19. The cyclically-adjusted budget balance used in the EU fiscal framework: an update By Gilles Mourre; George-Marian Isbasoiu; Dario Paternoster; Matteo Salto
  20. Financial Fragility and Macroeconomic Instability in a Heterogeneous Interacting Agents Framework By Russo, Alberto
  21. Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment By Carlos Cuerpo; Inês Drumond; Julia Lendvai; Peter Pontuch; Rafal Raciborski
  22. An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt By Shaofeng Xu
  23. Robustness of Stability to cost of carrying money in a Matching Model of Money By Huang, Pidong
  24. Market-implied inflation and growth rates adversely affected by the Brent. By Cette, G.; de Jong, M.
  25. The long–run macroeconomic impacts of fuel subsidies By Michael Plante
  26. Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states By Huang, Pidong; Igarashi, Yoske
  27. Monetary Shocks with Observation and menu Costs By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  28. Why Ten $1's Are Not Treated as a $10 By Huang, Pidong; Igarashi, Yoske
  29. Pure or wake-up-call contagion? Another look at the EMU sovereign debt crisis By Raffaela Giordano; Marcello Pericoli; Pietro Tommasino
  30. Dutch Disease in the Post-Soviet Countries of Central and South-West Asia: How Contagious is it? By Balázs Égert
  31. Supply Restrictions, Subprime Lending and Regional US Housing Prices By Anundsen, André Kallåk; Heebøll, Christian
  32. Transmission Effects in the Presence of Structural Breaks: Evidence from South-Eastern European Countries By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  33. A comment on: 'Efficient propagation of shocks and the optimal return on money' By Huang, Pidong
  34. Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute By Joshua Aizenman; Brian Pinto; Vladyslav Sushko
  35. Capital humano, progreso tecnológico y crecimiento de la productividad en Andalucía By José Luis Torres; Jesús Rodríguez
  36. What we can learn about the behavior of firms from the average monthly frequency of price-changes: an application to the UK CPI data. By Dixon, Huw; Tian, Kun
  37. Balancing the European Monetary Union - an Impact Analysis on the Return of National Currencies By Anke Mönnig
  38. Innovation, Reallocation and Growth By Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William R. Kerr
  39. Saudi Financial Structure and Economic Growth: A Macroeconometric Approach By Ageli, Mohammed Moosa; Zaidan, Shatha Mousa
  40. Household aggregate wealth in the main OECD countries from 1980 to 2011: what do the data tell us? By Riccardo De Bonis; Daniele Fano; Teresa Sbano
  41. Growth and Structural Transformation By Berthold Herrendorf; Richard Rogerson; Ákos Valentinyi
  42. Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries By Katia Berti
  43. Optimal Taxation in Life-Cycle Economies in the Presence of Commitment and Temptation Problems By Cagri Seda Kumru; Saran Sarntisart
  44. Social Insurance and Retirement: A Cross-Country Perspective By Laun, Tobias; Wallenius, Johanna
  45. Linkages between the Eurozone and the South-Eastern European Countries: A Global VAR Analysis By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  46. A New Linear Estimator for Gaussian Dynamic Term Structure Models By Antonio Diez de los Rios
  47. Desenvolvimento do sistema financeiro e pobreza no Brasil: uma análise multivariada By Tânia Fialho; Frederico G. Jayme Jr; Ana Maria Hermeto Camilo de Oliveira

  1. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Sarunas Girdenas (Department of Economics, University of Exeter)
    Abstract: We study optimal policy in a New Keynesian model at zero bound interest rate where households use cash alongside with house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall we observe decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or in the loan to collateral value ratio. We also find that optimal monetary policy generates large and more persistent fall in the money multiplier in response to drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, money supply, money multiplier, loan to value ratio, collateral constraint, house prices, zero bound interest rate.
    JEL: E44 E51 E52 E58
    Date: 2013
  2. By: Alexei Kudrin (Gaidar Institute for Economic Policy)
    Abstract: This article examines the problems of implementing monetary and credit policy when there is significant flow of currency revenues from the export of raw materials. It argues that, given a strong balance of payments, the Central Bank has to accept either a strengthening of the rouble or inflation. Only the RF Government has the power to prevent an appreciation of the currency whilst at the same time controlling inflation. This dual task can be achieved by saving, when external economic conditions are favourable, a share of the revenues from oil and gas in reserve funds. Such a policy can create the foundations for macroeconomic stability and a favourable investment climate.
    Keywords: monetary and credit policy, oil and gas dependency “Dutch disease”, reserve fund, inflation
    JEL: E52 E58 E61
    Date: 2013
  3. By: Alisdair McKay; Ricardo Reis
    Abstract: Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures how effective they are. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data, as well as the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role on the effectiveness of the stabilizers, whereas tax-and-transfer programs that affect inequality and social insurance can have a large effect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the United States has barely had any effect on volatility. According to our model, expanding safety-net programs, like food stamps, has the largest potential to enhance the effectiveness of the stabilizers.
    JEL: E32 E62 H30
    Date: 2013–04
  4. By: Verona , Fabio (Bank of Finland Research); Martins, Manuel M. F. (University of Porto, Faculty of Economics and CEF:UP); Drumond , Inês (University of Porto, Faculty of Economics and CEF:UP, and DG-ECFIN, European Commission)
    Abstract: Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.
    Keywords: DSGE model; shadow banking system; too low for too long; boom-bust
    JEL: E32 E44 E52 G24
    Date: 2013–04–11
  5. By: Maren Brede; ; ;
    Abstract: This paper develops a simple New Keynesian model incorporating a small time-varying probability that the economy is struck by a disaster in the future. The model's main prediction is that a small increase in the disaster probability causes a recession in the economy, specically due to limited saving opportunities inasmuch as the model abstracts from capital accumulation. By contrasting its ndings to the ones of a comparable real business cycle model, this paper evaluates how the disaster hypothesis has been used and modelled in the existing literature.
    Keywords: time-varying risk, disasters, rare events, nominal rigidities
    JEL: E21 E31 E32
    Date: 2013–04
  6. By: Daly, Hounaida; Smida, Mounir
    Abstract: We attempt to draw together monetary and fiscal policy making theory and the cointegrated VAR econometric methodology. Kirsanova at al(2005) have provided theory on the design of optimal monetary and fiscal policies, but estimation of monetary policy arrangements has suffered from many salient criticisms, not least non-stationarity. A cointegrated vector-autoregressive model is used in this paper to estimate monetary and _fiscal policy rules and gain insight on policy interactions in Greece. Predictions found in the literature find partial support, and survey data is also used to help shed light on possible forms of expectations formation. The evidence does not suggest strong policy interactions, and supports the idea that monetary policy is more stabilising in its inuence on economic activity than is fiscal policy.
    Keywords: Politique monétaire, Politique budgétaire, Grèce, Interaction entre politique monétaire et budgétaire, Dettes publiques, Déficits Budgétaires.
    JEL: E52 E58 E61 E62
    Date: 2013–03–03
  7. By: Le, Vo Phuong Mai (Cardiff Business School); Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Xiao, Zhigui
    Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the ?tted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.
    Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference
    JEL: E3 E44 E52 C1
    Date: 2013–04
  8. By: Mark Weisbrot; Jake Johnston; Stephan Lefebvre
    Abstract: This paper looks at Ecuador’s financial and regulatory reforms during the past five years, perhaps the most comprehensive of any country in the 21st century: taking control over the central bank, regulating capital outflows, taxing the financial sector, encouraging domestic investment and co-operatives, and protecting consumers.
    Keywords: Ecuador,economy,financial reform, macroeconomics
    JEL: F F1 F2 F3 F33 F34 I I1 I12 I18 O O4 O47 O5 O54 O57 E E6 E5 E52 E58 E52
    Date: 2013–02
  9. By: Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
    Abstract: After the global crisis, one of the most important lessons learned for the Central Banks has appeared to be the vital importance of financial stability along with the price stability. Hence, finding solutions to how to incorporate the financial stability objective in the implementation of the monetary policy without diluting the price-stability objective has started to be heavily discussed by the academics and policy makers. Accordingly, it has started to be debated that using only short-term interest rates as the main policy tool may not be enough to maintain the price stability and the financial stability at the same time. Interest rates that provide price stability and financial stability can be different and this necessitates the central banks to use multiple policy tools. In view of this, the Central Bank of the Republic of Turkey adopted a new monetary policy framework called the new policy mix in which multiple tools are employed to achieve multiple objectives. In this framework, required reserves ratios, weekly repo rates, interest rate corridor, funding strategy and other macro prudential tools are jointly used as complementary tools for the credit, interest rate and liquidity policies to achieve the price and the financial stability objectives concurrently. This new monetary policy adopted in Turkey also provides an interesting case study to assess how a country came up with novel policies to account for its country specific characteristics.
    Keywords: Central banking, Policy-mix, Global financial crisis, Financial Stability
    JEL: E44 E52 E58
    Date: 2013–04
  10. By: Randall Morck; M. Deniz Yavuz; Bernard Yeung
    Abstract: We find lending by state controlled banks to be significantly more associated with monetary policy than is lending by private sector banks. At the country-level, we further find monetary policy to be significantly closely linked to aggregate loan growth and aggregate fixed capital investment growth in countries whose large banks are more predominantly state controlled. These differences are more pronounced during monetary expansions amid slow GDP growth periods. Other factors, such as small bank size and the presence of a controlling shareholder in a private sector bank also correlate with more lending sensitivity to monetary policy.
    JEL: E5 G1 G21 G28 G3 O16 P5
    Date: 2013–04
  11. By: Ippei Fujiwara
    Date: 2013–04
  12. By: Gauti Eggertsson; Marc P. Giannoni
    Abstract: A rich literature from the 1970s shows that as inflation expectations become more and more ingrained, monetary policy loses its stimulative effect. In the extreme, with perfectly anticipated inflation, there is no trade-off between inflation and output. A recent literature on the interest-rate zero lower bound, however, suggests there may be some benefits from anticipated inflation when the economy is in a liquidity trap. In this paper, we reconcile these two views by showing that while it is true that, at positive interest rates, the greater the anticipated inflation the less stimulative are the effects, the opposite holds true at the zero bound. Indeed, at the zero bound, the more the public anticipates inflation, the greater is the expansionary effect of inflation on output. This leads us to revisit the trade-off between inflation and output and to show how radically it changes in the face of demand shocks large enough to bring the economy into a liquidity trap. Instead of vanishing once inflation becomes anticipated, the trade-off between inflation and output increases substantially and may become arbitrarily large. In such cases, raising the inflation target in a liquidity trap can be very stimulative.
    Keywords: Inflation (Finance) ; Interest rates ; Liquidity (Economics) ; Supply and demand
    Date: 2013
  13. By: Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University)
    Abstract: The boom-years preceding the "Great Recession" were a time of rapid innovation in the financial industry. We explore the idea that both the boom and eventual bust emerged from overoptimistic ex-pectations of efficiency-gains in the financial sector. We treat the bankruptcy costs facing intermediaries in a costly state verification problem as a stochastic process, and model the boom-bust in terms of an unfulfilled news-shock where the expected fall in costs are eventually not realized. In response to a change in expectations only, the model generates a boom-bust cycle in aggregate activity, asset pricesand leverage, and a countercyclical credit spread.
    Keywords: expectations-driven business cycles, intermediation shocks, news shocks, great recession, financial accelerator
    JEL: E3 E44
    Date: 2013–04–25
  14. By: Werner Roeger; Jan in 't Veld
    Abstract: This paper uses a two region DSGE model for the Euro area (periphery vs. core), to analyse the costs of higher sovereign risk premia, the so called 'sovereign risk channel'. We highlight the importance of valuation effects of sovereign bonds in bank balance sheets for the transmission of sovereign default expectations to the private sector. While at the current juncture the fiscal multiplier is larger in the EA periphery, we show that for highly indebted countries in the EA no fiscal consolidation could have more detrimental effects if it leads to expectations of sovereign default. In our view these results provide useful additional information for the debate on fiscal austerity which focusses mainly on the size of the multiplier.
    JEL: E62 E32 E62 G21 H63 F41
    Date: 2013–04
  15. By: Andrew P. Blake; Tatiana Kirsanova; Tony Yates
    Abstract: This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.
    Keywords: Time Consistency, Discretion, Multiple Equilibria, Policy Delegation
    JEL: E31 E52 E58 E61 C61
    Date: 2013–04
  16. By: Ojo, Marianne
    Abstract: Why are some global financial crises more difficult to recover from and overcome than others? What steps are necessary in ensuring that financial stability and recovery is facilitated? What kind of environment has the previous financial environment evolved to and what kind of financial products have also contributed to greater vulnerability in the triggering of systemic risks? These are amongst some of the questions which this book attempts to address. In highlighting the role and importance of various actors in post crises reforms and the huge impacts certain factors and products have contributed in exacerbating the magnitude and speed of transmission of financial contagion, it also provides an insight into why global financial crises have become more complicated to address than was previously the case. As well as considering and highlighting why matters related to pro cyclicality and capital measures should not constitute the sole focus of attention of the G20's initiatives, the book is aimed at identifying other important issues such as liquidity risks and requirements which have constituted, to a large extent, the focus of international standard setters and regulators. It also aims to direct regulators, central bank officials and supervisors, academics, business and legal professionals and other relevant interested parties in the field to current and previously ignored issues such as the "cartelisation" of capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over-the-Counter) derivatives markets is evidenced by Basel III's focus. "Cartelisation" and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences. The aims and objectives of the book would not be complete by merely identifying and highlighting the general root causes of global financial crises, and current issues to be focussed on. Hence each chapter will also recommend (as well as highlight) measures which should be (and have been) put forward in order to address the issues and factors which contribute to the magnitude and severity of global financial crises.
    Keywords: Financial stability; pro cyclicality; supervisors; systemic risks; counter party risks
    JEL: E51 E52 E58 K2 M4 M41
    Date: 2013–04–29
  17. By: Rüdiger Bachmann; Peter Zorn
    Abstract: Using firm-level survey data for the West German manufacturing sector, this paper revisits the technology-driven business cycle hypothesis for the case of aggregate investment. We construct a survey-based measure of technology shocks to gauge their contribution to short-run investment fluctuations. We estimate an upper bound for the contribution of technology shocks to the variance of the aggregate investment growth rate of 19 percent. The larger part of fluctuations in aggregate investment can be attributed to finance and demand shocks, which we also extract from the survey data.
    JEL: E20 E22 E30 E32 O47
    Date: 2013–04
  18. By: Ardo Hansson; Martti Randveer
    Abstract: Estonia, Latvia and Lithuania stand out for their rapid economic adjustment after the outbreak of the global financial crisis. The reduction of imbalances and vulnerabilities in the Baltic countries has been much faster than that in the euro area countries most affected by the debt crisis. Our analysis seeks to explain these developments by addressing the following questions. First, what explains the recent cyclical pattern of the Baltic economies? Second, what are the similarities and differences between the economic adjustment in the Baltics and that in the euro area countries most affected by the recent debt crisis? And, finally, how successful has the strategy of adjustment been in the Baltic countries? We argue that the primary driving force of the cyclical developments in the Baltic economies has been the change in capital flows. A comparison of the economic adjustment in the Baltic countries with that in the three euro area countries strongly affected by the debt crisis – Ireland, Greece and Portugal – suggests that the main determinant of the speed of adjustment has been the ability of the countries to mitigate the impact of the sudden stop in private sector capital flows. Looking at the pros and cons of rapid and gradual adjustment, we conclude that in the case of the Baltic countries, the strategy of rapid adjustment has overall been a successful response to a very difficult situation
    Keywords: business cycles, economic adjustment, financial crisis, Baltic economies
    JEL: E32 G01 P52
    Date: 2013–04–23
  19. By: Gilles Mourre; George-Marian Isbasoiu; Dario Paternoster; Matteo Salto
    Abstract: The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance, both in its preventive and corrective arms. The concept corresponds to the budget balance prevailing if the economy was running at potential. After correcting for the one-off and temporary measures, it is called structural budget balance and used to assess the fiscal policy stance. The importance of the CAB has been restated forcefully with the recent reform of the European economic governance. This paper aims at methodologically improving the CAB to better measure the reaction of the balance-to-GDP ratio to cyclical conditions. This was achieved by using a more precise concept of the cyclical-adjustment parameter and by updating the decade-old fiscal elasticities underlying the computation of the CAB. This paper reviews and explains in detail these recent improvements and describes the impact thereof on the CAB results.
    JEL: E32 E61 H3 H6
    Date: 2013–03
  20. By: Russo, Alberto
    Abstract: A financial crisis can have important effects on the real economy. The more financially fragile are agents the more likely is the occurrence of a financial crisis. Moreover, financial contagion may have more or less severe consequences on the real economy, depending on the degree distribution of credit interlinkagess. However, financial instability may be due to real causes. For instance, the deregulation of markets may create the conditions for an increase of inequality. If rich people save a larger part of their income, while the poor are forced to reduce consumption, a lack of aggregate demand may follow, which can eventually lead to a large crisis.
    Keywords: financial instability, inequality, crisis
    JEL: C63 E32 P17
    Date: 2013–03
  21. By: Carlos Cuerpo; Inês Drumond; Julia Lendvai; Peter Pontuch; Rafal Raciborski
    Abstract: The current crisis revealed the unsustainability of private sector indebtedness levels, fuelled, in the recent past, by a prolonged period of rapid credit expansion in some EU Member States. The deleveraging process that is now taking place, although necessary, stands as a source of concern in terms of its implications for economic activity. Against this background, this paper aims to (i) identify the EU Member States that are currently facing deleveraging pressures in the non-financial private sector, making use of the informational content of various indebtedness indicators; (ii) assess quantitatively those pressures, using both a threshold approach, which compares the current level of households and non-financial corporations' debt with a static benchmark, and a stationarity approach, which goes a step further by taking into account valuation effects and the possibility of a time-varying "sustainable" level of indebtedness; (iii) refine the link between the identified deleveraging pressures and the actual adjustment of indebtedness through an analysis of the credit supply and demand conditions in each Member State; (iv) simulate the impact of a households' sector deleveraging shock using a dynamic stochastic general equilibrium model and assess the transmission mechanism through which such a shock influences the economic activity. Some policy implications are also discussed in the concluding section.
    JEL: E21 E44 H C54
    Date: 2013–04
  22. By: Shaofeng Xu
    Abstract: This paper examines the contributions of population aging, mortgage innovation and historically low interest rates to the sharp rise in U.S. house prices and mortgage debt between 1994 and 2005. I construct an overlapping generations general equilibrium housing model and find that these three factors together account for over half of the increase in house prices and most of the increase in mortgage debt during this period. Population aging contributes to rising house prices and mortgage debt, but it accounts for only a small portion of their observed changes. Meanwhile, mortgage innovation significantly increases the mortgage borrowing of various age cohorts, but it has a trivial effect on house prices because interest rates rise due to higher demand for mortgage loans. This increases households’ savings in financial assets and leaves their housing assets nearly unchanged. The observed run-up in house prices can, however, be justified in an open-economy setting where interest rates fall due to a global saving glut. Declining interest rates force households at prime saving ages to reallocate their wealth from financial assets to housing assets, which dramatically drives up house prices.
    Keywords: Asset Pricing; Credit and credit aggregates; Economic models
    JEL: E21 E44 G11 R21
    Date: 2013
  23. By: Huang, Pidong
    Abstract: This paper studies stability of monetary steady states in a Trejos-Wright random matching model of money with money holding set {0,1,2} and cost of carrying money. There kinds of steady states exist generically: pure-strategy full-support steady states, mixed-strategy full-support steady state, and non-full-support steady state. Stability analysis shows that full-support steady states are stable and determinate generically and that non-full-support steady state is stable and indeterminate if there is a small positive carrying cost.
    Keywords: random matching model; monetary steady state; instability; determinacy; Zhu (2003).
    JEL: E00
    Date: 2013–04–18
  24. By: Cette, G.; de Jong, M.
    Abstract: The inflation and the real yield component deduced from inflation-linked and nominal bond prices are adversely affected by two market effects: price distortions due to certain market-related events and oil price movements. Their underlying time-correlation without those effects is stable and positive. Market data analysis carried out on the world’s major bond markets gives valuable new insight into the long-debated relationship between inflation and growth prospects.
    Keywords: inflation-linked bonds, breakeven inflation, Fisher hypothesis, Brent.
    JEL: E43 G15
    Date: 2013
  25. By: Michael Plante
    Abstract: Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.
    Keywords: Fiscal policy
    Date: 2013
  26. By: Huang, Pidong; Igarashi, Yoske
    Abstract: We investigate in details a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and the individual money holding set {0,1,2}. First we show generic existence of three kinds of steady states: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states, and then we show relations between them. Finally we provide stability analyses. It is shown that (1) and (2) are locally stable, (1) being also determinate. (3) is shown to be unstable.
    Keywords: random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003).
    JEL: E00
    Date: 2013–04–16
  27. By: Fernando Alvarez (University of Chicago and NBER); Francesco Lippi (University of Sassari and EIEF); Luigi Paciello (EIEF)
    Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.
    Date: 2013
  28. By: Huang, Pidong; Igarashi, Yoske
    Abstract: We study the stability of monetary steady states in a random matching model of money where money is indivisible, the bound on individual money holding is finite, and the trading protocol is buyer take-it-or-leave-it offers. The class of steady states we study have a non-full-support money-holding distribution and are constructed from the steady states of Zhu (2003). We show that no equilibrium path converges to such steady states if the initial distribution has a different support.
    Keywords: random matching model; monetary steady state;
    JEL: E00
    Date: 2013–04–30
  29. By: Raffaela Giordano (Bank of Italy); Marcello Pericoli (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: We test whether the sharp increase in sovereign spreads of euro area countries with respect to Germany after the explosion of the Greek crisis was due to deteriorating macroeconomic and fiscal fundamentals or to some form of financial contagion. Our analysis includes indicators of domestic and external imbalances which were mostly disregarded by previous studies, and distinguishes between investors' increased attention to the variables which ultimately determine the creditworthiness of a sovereign borrower (wake-up-call contagion) and behaviour not linked to fundamentals (pure contagion). We find evidence of wake-up-call contagion but not of pure contagion.
    Keywords: sovereign bond spread, contagion, non-stationary panels.
    JEL: E62 G01 H62
    Date: 2013–04
  30. By: Balázs Égert
    Abstract: This study seeks to determine the extent to which the former communist states of Central and South-West Asia are “infected” by the Dutch Disease. We take a detailed look at the functioning of the transmission mechanism of the Dutch Disease, i.e. the chains that run from commodity prices to real output in manufacturing. We complement this with two econometric exercises. First, we estimate nominal and real exchange rate models to see whether commodity prices are correlated with the exchange rate. Second, we run growth equations to analyse the possible effects of commodity prices and the dependency of economic growth on natural resources.
    Keywords: Oil price Dutch Disease; Real exchange rate Natural resource; Economic growth
    JEL: E31 F31 O11 P17
    Date: 2013
  31. By: Anundsen, André Kallåk (Dept. of Economics, University of Oslo); Heebøll, Christian (Department of Economics, University of Copenhagen)
    Abstract: This paper analyzes the recent boom-bust cycle in the US housing market from a regional perspective. Particular attention is paid to supply side restrictions and financial accelerator effects related to subprime lending. Considering 248 Metropolitan Statistical Areas across the entire US, we estimate a simultaneous boom-bust system for housing prices and supply. The model includes non-linear regional specific supply elasticities, determined by geographical and regulatory supply restrictions. In contrast to the predictions of a supply-demand framework, our results suggest that tighter supply restrictions lead to both a larger housing price boom and bust following a temporary increase in subprime lending. Extending the model to include a financial accelerator, our results indicate that supply restricted areas are significantly more exposed to this mechanism, which explains the greater housing price volatility in these areas over the course of a boom-bust cycle.
    Keywords: Regional Boom-Bust Cycles; Housing Supply Restrictions; Subprime Lending; Financial Accelerator
    JEL: E32 E44 G21
    Date: 2013–01–25
  32. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Andreas Yannopoulos (Department of Economics, University of Crete)
    Abstract: In this paper, we investigate the monetary transmission mechanism through interest rate and real effective exchange rate channels, for five South-Eastern European countries, namely Bulgaria, Croatia, Greece, Romania and Turkey. Recent unit root and cointegration techniques in the presence of structural breaks in the data have been used in the analysis. The empirical results validate the existence of a valid long-run relationship, with parameter constancy, for each of the five sample countries. Additionally, the estimated impulse response functions regarding the monetary variables and the real effective exchange rate converge and follow a reasonable pattern in all cases.
    Keywords: Monetary Transmission Mechanism, Structural Breaks, LM Unit Root Tests, Cointegration Tests, Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–01
  33. By: Huang, Pidong
    Abstract: Lotteries are introduced into Cavalcanti and Erosa (2008) [2], a version of Trejos and Wright (1995) [4] with aggregate shocks. Lotteries improve welfare and eliminate the two notable features of the optimum with deterministic trades: over-production and history-dependence. Moreover, the optimum can be supported by buyer take-it-or-leave-it offers.
    Keywords: Random matching model of money; Aggregate shock; Optimal allocation; History-dependence; Lottery
    JEL: E30
    Date: 2012–01–04
  34. By: Joshua Aizenman; Brian Pinto; Vladyslav Sushko
    Abstract: We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.
    Keywords: financial cycles, financial and trade openness, real transmission of financial shocks, foreign exchange reserves
    Date: 2013–04
  35. By: José Luis Torres (Universidad de Málaga); Jesús Rodríguez (Universidad Pablo de Olavide)
    Abstract: Un estudio que analiza los factores determinantes del crecimiento de la producción y de la productividad del trabajo para la economía andaluza durante el periodo 1980-2008.
    Keywords: Progreso tecnológico, capital humano, progreso tecnológico específico a la inversión, Productividad total de los factores
    JEL: E24 J24
    Date: 2012
  36. By: Dixon, Huw (Cardiff Business School); Tian, Kun (Cardiff Business School)
    Abstract: The monthly frequency of price-changes is a prominent feature of many studies of the CPI micro-data. In this paper, we see how much this ties down the behavior of price-setters ("firms") in steady-state in terms of the average length of price-spells across firms. We are able to divide an upper and lower bound for the mean duration of price-spells averaged across firms. We use the UK CPI data at the aggregate and sectoral level and find that the actual mean is about twice the theoretical minimum consistent with the observed frequency. We estimate the distribution using the hazard function and find that although the estimated hazard differs significantly from the Calvo distribution, the means and medians are similar. However, despite the micro differences, we find that the artificial Calvo distributions generated using the sectoral frequencies result in very similar impulse responses to the estimated hazards when used in the Smets-Wouters (2003) model.
    Keywords: Price-spell; steady state; duration
    JEL: E50
    Date: 2013–01
  37. By: Anke Mönnig (GWS - Institute of Economic Structures Research)
    Abstract: The current state budget crisis in the EU and the numerous futile efforts to solve the problem has brought back the fraction of people that argument in favour of an exit strategy of Germany from the European monetary union (EMU) or even the break-up of the EMU in total. This paper investigates for the case of Germany, whether or not a return to a new deutsche mark would be beneficial. It applies the macro-econometric input-output model INFORGE for this analysis, as it is able to quantify direct and indirect effects on inter-industrial level as well as on the demand and supply sides of the economy. Above that, INFORGE considers sectoral effects which are extremely important for the evaluation of this impact analysis. The quantitative results of the computed projection shows, that a return to a national currency would lower Germany's growth path mainly due to the expected appreciation of the new currency. A second scenario, which assumes a worsening of the crisis within the remaining EMU would intensify the negative implications for Germany. Although the results should be considered with respect to their strong assumptions, consensuses among economists exist that these assumptions might be initiated in case of an EMU break-up. Hence, in the case of Germany, the effort of doing everything to foster the future existing of the monetary union is of utmost importance.
    Keywords: European Monetary Union, projection, impact analysis
    JEL: E2 E5 F4
    Date: 2012
  38. By: Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William R. Kerr
    Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
    JEL: E02 L1 O31 O32 O33
    Date: 2013–04
  39. By: Ageli, Mohammed Moosa; Zaidan, Shatha Mousa
    Abstract: This paper investigates the nexus between financial sector development and economic growth in the Saudi economy over the period 1970-2012 by using four alternative proxies for financial development and several techniques including unit root tests, the co-integration test, the Granger Causality Test, and the Vector Error Correction Model (VECM). We used time series econometrics techniques to examine the causal relationship between financial sector development and economic growth in the Saudi economy. The results obtained from the analyses show that there is a positive relationship between financial sector development and economic growth in Saudi Arabia. The development of the financial system will thus have a positive impact on the growth of the Saudi economy.
    Keywords: Financial Sector Development, Unit Root test, co-integration test, Vector Error Correction Model (VECM), Augmented Dickey Fuller (ADF), Economic Growth, Saudi Arabia
    JEL: E44 O11 O53
    Date: 2013–01–29
  40. By: Riccardo De Bonis (Bank of Italy); Daniele Fano (University of Rome, Tor Vergata); Teresa Sbano (Pioneer Investments)
    Abstract: This paper analyses aggregate household wealth in Canada, France, Germany, Italy, Japan, Spain, the UK and the US. Building on a new data set for the time span 1980-2011, we discuss the trends in household financial assets in the last thirty years, the reasons for differences across countries, the tendency towards convergence, the economic interpretation of breaks in time series and the effects of the recent financial crisis. We also comment on the evolution of household debt and real assets. In discussing the empirical evidence, the paper summarises some of the recent literature on household wealth.
    Keywords: household wealth and debt; financial systems
    JEL: E01 E21 G20
    Date: 2013–04
  41. By: Berthold Herrendorf; Richard Rogerson; Ákos Valentinyi
    Abstract: Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi–sector extension of the one–sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi–sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi–sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality. We conclude by suggesting several directions for future research on structural transformation.
    JEL: E20 O40
    Date: 2013–04
  42. By: Katia Berti
    Abstract: Stochastic projections are a powerful tool to feature uncertainty in macroeconomic conditions into the analysis of public debt dynamics. They allow simulating a very large number of debt paths, corresponding to as many shock constellations to the non-fiscal determinants of debt evolution (short- and long-term interest rates, growth rate and exchange rate). Furthermore, random shocks are simulated in a way to reflect the size and the correlation of historical shocks. The specific approach for stochastic projections used here, based on the variance-covariance matrix of historical shocks, further allows defining a "central scenario" (for which we use ECFIN's Autumn 2012 forecasts), around which shocks apply. The paper applies this methodology to 24 EU countries over 2013-17. Cross-country differences in the variance of the debt-to-GDP ratio distributions (reflecting differences in historical volatility of macroeconomic conditions) emerge clearly from the simulations. This shows the importance of allowing for a more comprehensive and country-tailored assessment of downward and upward risks to debt dynamics. This stochastic framework also has the distinctive advantage of allowing for an explicit probabilistic assessment of debt projection results. A closer scrutiny of three EU countries in the case with temporary shocks reveals, for instance, that the most likely outcome for IT over 2013-17 is a decreasing path for the debt ratio (though this is projected to be still higher than 116% with a 50% probability in 2017). For ES, simulations show an increasing path over the projection horizon for all shock constellations, with an 80% probability of a debt ratio greater than 100% in 2017. Finally, for HU, we obtain a 60% probability that the debt ratio stabilises or reaches higher values from 2013 onwards, with a 40% probability of a debt ratio greater than 80% in 2017.
    JEL: E62 H63 C15
    Date: 2013–04
  43. By: Cagri Seda Kumru; Saran Sarntisart
    Abstract: Self-control problem is an important determinant of individuals. economic decisions. The decision maker’s future utility is affected by unwanted temptation. This implies that implications of various government policies would differ if one incorporates these behavioural aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. The purpose of this paper is to examine the question of optimal taxation when individuals have self-control problems. In order to capture our agents’ temptation towards current consumption, our model make use of the preference structure pioneered by Gul and Pesendorfer and further elaborated by Krusell et al. in the context of optimal taxation. We extend by adding labor choice and besides savings tax, we also analyze capital income tax, consumption tax and labor income tax. Results show that when the analysis is restricted to logarithmic preferences separable in consumption and labor supply, the government should subsidize either capital income or investment as it maximizes both an individual’s commitment utility for consumption and labor supply at the same time. Because individuals consume and supply labor more than their commitment utility, subsidizing improves welfare as it makes temptation less attractive.
    Keywords: Temptation; self-control; consumption-savings; optimal taxation
    JEL: E21 E62 H21
    Date: 2013–04
  44. By: Laun, Tobias (Department of Economics, Uppsala University); Wallenius, Johanna (Dept. of Economics, Stockholm School of Economics)
    Abstract: In this paper we study the role of social insurance, namely old-age pensions, disability insurance and healthcare, in accounting for the differing labor supply patterns of older individuals across OECD countries. To this end, we develop a life cycle model of labor supply and health with heterogeneous agents. The key features of the framework are: (1) people choose when to stop working, and when/if to apply for disability and pension benefits, (2) the awarding of disability insurance benefits is imperfectly correlated with health, and (3) people can partially insure against health shocks by investing in health, the cost of which is dependent on health insurance coverage. We find that the incentives faced by older workers differ hugely across countries. In fact, based solely on differences in social insurance programs, the model predicts even more cross-country variation in the employment rates of people aged 55-64 than we observe in the data.
    Keywords: Life cycle; Retirement; Disability insurance; Health
    JEL: E24 J22 J26
    Date: 2013–04–25
  45. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Andreas Yannopoulos (Department of Economics, University of Crete)
    Abstract: In the present paper we assess the impact of the Eurozone�s economic policies on specific South-Eastern European countries, namely Bulgaria, Croatia, Cyprus, Greece, Romania, Slovenia and Turkey. Since these countries are connected to the EU or the Eurozone and the economic interdependence among them is evolving, we implemented the Global VAR model. Our results indicate that all sample countries, except Turkey, react in a similar manner to changes (a) in the macroeconomic policies of the Eurozone, and (b) in the nominal exchange rate of the euro against the US dollar. There is evidence of linkages among the EU or Eurozone members of the region, and between each of them and the Eurozone.
    Keywords: Monetary Transmission, Global VAR Model, Weak Exogeneity, Impact Elasticities, Generalised Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–08
  46. By: Antonio Diez de los Rios
    Abstract: This paper proposes a novel regression-based approach to the estimation of Gaussian dynamic term structure models that avoids numerical optimization. This new estimator is an asymptotic least squares estimator defined by the no-arbitrage conditions upon which these models are built. We discuss some efficiency considerations of this estimator, and show that it is asymptotically equivalent to maximum likelihood estimation. Further, we note that our estimator remains easy-to-compute and asymptotically efficient in a variety of situations in which other recently proposed approaches lose their tractability. We provide an empirical application in the context of the Canadian bond market.
    Keywords: Asset Pricing; Econometric and statistical methods; Interest rates
    JEL: E43 C13 G12
    Date: 2013
  47. By: Tânia Fialho (UNIMONTES); Frederico G. Jayme Jr (Cedeplar-UFMG); Ana Maria Hermeto Camilo de Oliveira (Cedeplar-UFMG)
    Abstract: In recent decades, several studies have emphasized the relationship between the development of the financial system and economic growth. Theoretical and empirical analyzes suggest that the development of the financial system has a positive effect on the rate of economic growth, generating impacts on income growth and reducing poverty rates. This study investigated the effectiveness of the development of the financial system as a tool for promoting economic growth, increase income and reduce poverty, using data from the Brazilian states from 1995 to 2008. We employ canonical correlation in order to confront the theoretical predictions with the empirical behavior of the variables of interest over time. The results show that the development of the financial system has demonstrated a good predictive power of the variance of the compounds of variables related to income and poverty.
    Keywords: Financial Development, poverty, income.
    JEL: E00 E20 E44
    Date: 2013–04

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