nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒05‒19
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Market Deregulation and Optimal Monetary Policy in a Monetary Union By Matteo Cacciatore; Giuseppe Fiori; Fabio Ghironi
  2. Fiscal Deficits, Financial Fragility, and the Effectiveness of Government Policies By Markus Kirchner; Sweder van Wijnbergen
  3. Individual Expectations and Aggregate Macro Behavior By Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenico Massaro
  4. 'Excess Reserves, Monetary Policy and Financial Volatility By Keyra Primus
  5. Restaurer la crédibilité des fondements juridiques et économiques de la stabilité financière: la nécessité d'incorporation des théories économiques? By Ojo, Marianne
  6. Wiederherstellung der Glaubwürdigkeit der rechtlichen und wirtschaftlichen Grundlagen der finanziellen Stabilität: die Notwendigkeit für eine Gründung der Wirtschaftstheorien? By Ojo, Marianne
  7. The Fiscal Theory of the Price Level When All Income is Taxed By Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
  8. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  9. A Note on Money and the Conduct of Monetary Policy By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  10. Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis By Petreski, Marjan
  11. Recessions after Systemic Banking Crises: Does it matter how Governments intervene? By Sweder van Wijnbergen; Timotej Homar
  12. Business Cycle Fluctuations and Private Savings in OECD Countries: A Panel Data Analysis By Yvonne Adema; Lorenzo Pozzi
  13. Climate Change Skepticism in the Face of Catastrophe By Mark Kagan
  14. Efficiency of Central Bank Policy During the Crisis : Role of Expectations in Reinforcing Hoarding Behavior By Volha Audzei
  15. Long Term Government Debt, Financial Fragility and Sovereign Default Risk By Christiaan van der Kwaak; Sweder van Wijnbergen
  16. Restoring the credibility of the legal and economic foundations of financial stability: The need for incorporation of economic theories? By Ojo, Marianne
  17. Top Incomes, Rising Inequality, and Welfare By Kevin J. Lansing; Agnieszka Markiewicz
  18. Chinese monetary expansion and the U.S. economy: A note‎ By Vespignani, Joaquin L.; Ratti, Ronald A
  19. Behavioral Heterogeneity in U.S. Inflation Dynamics By Adriana Cornea; Cars Hommes; Domenico Massaro
  20. Financial globalization and monetary transmission By Simone Meier
  21. Behavioral Learning Equilibria By Cars Hommes; Mei Zhu
  22. Recuperar la credibilidad de los fundamentos jurídicos y económicos de estabilidad financiera: la necesidad de la incorporación de las teorías económicas? By Ojo, Marianne
  23. Putting the ‘System’ in the International Monetary System By Michael D. Bordo; Angela Redish
  24. The gender unemployment gap By Stefania Albanesi; Aysegül Sahin
  25. Improving GDP measurement: a measurement-error perspective By S. Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
  26. Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources By Xiaoming Cai; Pieter A. Gautier; Makoto Watanabe
  27. Quantifying Productivity Gains from Foreign Investment By Christian Fons-Rosen; Sebnem Kalemli-Ozcan; Bent E. Sorensen; Carolina Villegas-Sanchez; Vadym Volosovych
  28. Tax Rates as Strategic Substitutes By Ruud A. de Mooij; Hendrik Vrijburg
  29. Speed, Algorithmic Trading, and Market Quality around Macroeconomic News Announcements By Martin L. Scholtus; Dick van Dijk; Bart Frijns
  30. Assessing Debt Sustainability in a Stochastic Environment: 200 years of Dutch Debt and Deficit Management By Sweder van Wijnbergen; Alexander France
  31. World, Country, and Sector Factors in International Business Cycles By Aikaterini Karadimitropoulou; Miguel Leon-Ledesma
  32. Prediction Bias Correction for Dynamic Term Structure Models By Eran Raviv
  33. An Econophysics Model for Investments using the Law of the Electric Field Flow (Gauss’ Law) By Spanulescu, Ion; Popescu, Ion; Stoica, Victor; Gheorghiu, Anca
  34. A General Equilibrium Perspective of Aggregate Import Demand By Tuck Cheong Tang
  35. Export-Led Growth in Cambodia: An Empirical Study By Tuck Cheong Tang; Chea Ravin
  36. The 1991 Reforms, Indian Economic Growth, and Social Progress By Manmohan Agarwal; John Whalley
  37. Inventories and the Stockout Contstraint in General Equilibrium By Katsuyuki Shibayama; Jagjit S. Chadha
  38. Aggregation and The Estimated Effects of Local Economic Conditions on Health By Jason M. Lindo
  39. Total Factor Productivity and the Role of Entrepreneurship By Hugo Erken; Piet Donselaar; Roy Thurik
  40. New Evidence on Fungibility at the Aggregate Level By Lukasz Marc

  1. By: Matteo Cacciatore; Giuseppe Fiori; Fabio Ghironi
    Abstract: The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2013–05
  2. By: Markus Kirchner (Central Bank of Chile); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-out mechanism that works through reduced private access to credit when banks accumulate sovereign debt under a leverage constraint. Our results show that, when banks invest a substantial fraction of their assets in sovereign debt, the effectiveness of fiscal stimulus policies may be impaired because deficit-financed fiscal expansions may tighten financial conditions to such an extent that private demand is crowded out. We also analyze the macroeconomic effectiveness of liquidity support to commercial banks through recapitalizations or loans by the government and the impact of different ways of financing those policies.
    Keywords: Financial intermediation; Fiscal policy; Sovereign debt
    JEL: E44 E62 H30
    Date: 2012–04–26
  3. By: Tiziana Assenza (Catholic University of Milan); Peter Heemeijer (University of Amsterdam, and ABN AMRO); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam)
    Abstract: The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. We fit a heterogeneous expectations model with a performance-based evolutionary selection among heterogeneous forecasting heuristics to the experimental data. A simple heterogeneous expectations switching model fits individual learning as well as aggregate macro behavior and outperforms homogeneous expectations benchmarks. Moreover, in accordance to theoretical results in the literature on monetary policy, we find that an interest rate rule that reacts more than point for point to inflation has some stabilizing effects on inflation in our experimental economies, although convergence can be slow in presence of evolutionary learning.
    Keywords: Experiments, New Keynesian Macro Model, Monetary Policy, Expectations, Heterogeneity
    JEL: C91 C92 D84 E52
    Date: 2013–01–14
  4. By: Keyra Primus
    Abstract: This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables.
    Date: 2013
  5. By: Ojo, Marianne
    Abstract: To what extent can monetary and financial crises and cycles be explained through economic theories? This paper is aimed at highlighting why a reliance on economic theories may be necessary given certain flaws which have been revealed from the recent Financial Crisis. Namely, that economic and legal foundations of financial stability cannot always be considered to be credible. Further, the paper aims to accentuate on why despite the valid argument (that a reference to economic theories may be required to explain causalities of financial and monetary crises), causalities could also be explained from other perspectives – even though these perspectives may sometimes, not be as accurate.
    Keywords: théorie du temps économique (TET); efficience des marchés hypothèse; la stabilité financière; Monnaie Theory; crise de l'euro; l'Autriche Keynésien ou quantitativiste-monétariste; théorie de la marche aléatoire
    JEL: E3 E32 E5 E52 E58 E6 K2 M4
    Date: 2013–05–13
  6. By: Ojo, Marianne
    Abstract: To what extent can monetary and financial crises and cycles be explained through economic theories? This paper is aimed at highlighting why a reliance on economic theories may be necessary given certain flaws which have been revealed from the recent Financial Crisis. Namely, that economic and legal foundations of financial stability cannot always be considered to be credible. Further, the paper aims to accentuate on why despite the valid argument (that a reference to economic theories may be required to explain causalities of financial and monetary crises), causalities could also be explained from other perspectives – even though these perspectives may sometimes, not be as accurate. (Inwieweit können Währungs-und Finanzkrisen durch ökonomischen Theorien erklärt werden? Dieses Papier ist auf die Hervorhebung warum ein Rückgriff auf ökonomische Theorien kann notwendig sein, aus Gründen von einigen Mängeln, die aus der jüngsten Finanzkrise enthüllt worden sind. Nämlich, dass die wirtschaftlichen und rechtlichen Grundlagen der finanziellen Stabilität nicht immer als glaubwürdig betrachtet werden können. Ferner zielt das Papier zu betonen, warum trotz der gültiges Argument (dass ein Verweis auf ökonomische Theorien erforderlich sein, um Kausalitäten von Finanz-und Währungskrisen zu erklären), Kausalitäten könnten auch aus anderen Perspektiven erklärt werden – auch wenn diese Perspektiven nicht immer so präzise oder genaue sind).
    Keywords: Theory of Economic Time (TET); Hypothese Effizienter Märkte; finanzielle stabilität; Currency-Theorie; Euro-Krise; Austrian; Keynesian or Quantitativist-monetarist; Random Walk Theory
    JEL: E3 E32 E5 E52 E58 E6 K2 M4
    Date: 2013–05–12
  7. By: Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
    Abstract: In this paper we explore how the nature of the equilibria changes when the interest income from nominal bond holdings is also taxed in an fully flexible endowment economy. We find that the stability properties of this economy depend on the slope and the intercept of both monetary and fiscal policy rules. Thus, the parameter space consistent with locally determinate equilibria is much larger compared to that of Leeper (1991). For instance, deviations from the Taylor principle can still yield determinate equilibria even when fiscal policy does not aggressively respond to rises in debt levels. In addition, we show that if the government taxes all sources of income and the fiscal authority sets taxes taking into account the level of debt, then the economy exhibits a Laffer curve yielding multiple steady states. As we can see, ignoring the tax treatment of interest income generated by bond holdings is not as innocuous as it may seem.
    Keywords: Taxes, Bond Income, Laffer Curve, Monetary and Fiscal Policy Interactions.
    JEL: C11 E32 E62
    Date: 2013–05
  8. By: Jasper Lukkezen (Utrecht University, and CPB); Coen Teulings (University of Amsterdam, and CPB)
    Abstract: This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reducedform 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 reducedform 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.
    Keywords: optimal control; optimal policy; fiscal policy rules; fiscal consolidation; debt sustainability
    JEL: E6 H6
    Date: 2013–05–06
  9. By: Jagjit S. Chadha; Luisa Corrado; Sean Holly
    Abstract: Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum's (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.
    Keywords: money; DSGE; policy rules; external finance premium
    JEL: E31 E40 E51
    Date: 2013–04
  10. By: Petreski, Marjan
    Abstract: The objective of this paper is to assess if inflation targeting post-communist economies performed better, in terms of output growth, during the crisis than their non-inflation targeting counterparts. The paper also puts the issue in the context of the preconditions of inflation targeters to adopt this regime. 26 post-communist economies of Central and Eastern Europe and the Commonwealth of Independent States are analyzed during the ongoing economic crisis. Results suggest that inflation targeters of those countries performed worse than non-inflation targeters. The growth decline in inflation targeters post-communist economies has been estimated to be deeper by about four percentage points than that in non-inflation targeters. The study finds very limited role of the preconditions for growth decline. Only the lower amount of monetary financing of the budget may have contributed in inflation-targeting countries to have gone through the crisis better.
    Keywords: inflation targeting, pre-conditions for adoption, post-communist economies
    JEL: E42 E52
    Date: 2013
  11. By: Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam)
    Abstract: Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect.
    Keywords: Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization
    JEL: E44 E58 G21 G28
    Date: 2013–03–04
  12. By: Yvonne Adema (Erasmus University Rotterdam); Lorenzo Pozzi (Erasmus University Rotterdam)
    Abstract: We investigate the cyclicality of the private savings to GDP ratio for a panel of 19 OECD countries over the period 1971-2009. We find robust evidence that the private savings ratio is countercyclical. Three theories unambiguously predict a higher private savings ratio during recessions: a Ricardian offset effect, the presence of credit constraints, and precautionary savings. We find evidence only for the latter theory. Our estimations take into account a large number of econometric complications: persistence in the savings ratio, endogeneity of the regressors, cross-country parameter heterogeneity, cross-sectional dependence, stationarity issues, omitted variables, and instrument strength.
    Keywords: Private Savings, Business Cycles, Ricardian offset, Credit Constraints, Precautionary Savings, Dynamic Panel, Cross-Sectional Dependence
    JEL: C23 E21 E32
    Date: 2012–12–17
  13. By: Mark Kagan (VU University Amsterdam)
    Abstract: This paper develops a general-equilibrium model of skill-biased technological change that approximates the observed shifts in the shares of wage and non-wage income going to the top decile of U.S. households since 1980. Under realistic assumptions, we find that all agents can benefi…t from the technology change, provided that the observed rise in redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.
    Keywords: Income Inequality, Skill-biased Technological Change, Capital-skill Complementarity, Redistribution, Welfare
    JEL: E32 E44 H23 O33
    Date: 2012–10–25
  14. By: Volha Audzei
    Abstract: Investor sentiment proved to be an important factor during the recent financial and current euro crises. At the same time many existing general equilibrium models do not account for agents' expectations, market volatility, or over-pessimism of investors' forecasts. In this paper we incorporate into the DSGE model a financial sector populated by a continuum of banks with heterogeneous forecasts. We simulate the model with expectational shocks calibrated by the values observed during the financial crisis. Our results suggest that expectational shocks alone could generate a recession of a magnitude comparable to the recent crisis. We then conduct a simple exercise to mimic the credit support policy of a central bank. The results indicate that without influencing agents' expectations, the liquidity provision alone reduces the magnitude of the recession, but neither stops it nor shortens its duration. One reason for low ec ciency of the policy in our model is that banks hoard the liquidity provided by a central bank.
    Keywords: financial intermediation; expectations; DSGE; liquidity provision;
    JEL: E22 E32 G01 G18
    Date: 2012–12
  15. By: Christiaan van der Kwaak (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We analyze the interaction between bank rescues, financial fragility and sovereign debt discounts. We construct a model that contains balance sheet constrained financial intermediaries financing both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. The introduction of the default possibility does not have any impact IF all government debt is short term. Interest rates on debt reflect higher default probabilities, but because all debt is short term, bank balance sheets are unaffected and no further negative effects arise through the endogenous sovereign debt channel. But once long term government debt is introduced, the possibility of capital losses on bank balance sheets arises. Then o utcomes significantly deteriorate compared to the short term debt only case. Higher interest rates on new debt lead to capital losses on banks' holding of existing long term government debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. This causes potentially conflicting macroeconomic effects of a debt financed recapitalization of banks. We investigate the case where the government announces a bankrecapitalization to occur 4 quarters after announcement. Under the parameter values chosen, the positive effects from an anticipated capital injection dominate the effects of the associated increase in sovereign default risk.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2013–04–02
  16. By: Ojo, Marianne
    Abstract: To what extent can monetary and financial crises and cycles be explained through economic theories? This paper is aimed at highlighting why a reliance on economic theories may be necessary given certain flaws which have been revealed from the recent Financial Crisis. Namely, that economic and legal foundations of financial stability cannot always be considered to be credible. Further, the paper aims to accentuate on why despite the valid argument (that a reference to economic theories may be required to explain causalities of financial and monetary crises), causalities could also be explained from other perspectives – even though these perspectives may sometimes, not be as accurate.
    Keywords: Theory of Economic Time (TET); Efficient Markets Hypothesis; financial stability; Currency Theory; Euro crisis; Austrian, Keynesian or Quantitativist-monetarist; Random Walk Theory
    JEL: E3 E5 E52 E58 K2 M4
    Date: 2013–05–11
  17. By: Kevin J. Lansing (Federal Reserve Bank of San Francisco, and Norges Bank); Agnieszka Markiewicz (Erasmus University Rotterdam)
    Abstract: This paper develops a general-equilibrium model of skill-biased technological change that approximates the observed shifts in the shares of wage and non-wage income going to the top decile of U.S. households since 1980. Under realistic assumptions, we find that all agents can benefit from the technology change, provided that the observed rise in redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.
    Keywords: Income Inequality, Skill-biased Technological Change, Capital-skill
    JEL: E32 E44 H23 O33
    Date: 2012–10–26
  18. By: Vespignani, Joaquin L.; Ratti, Ronald A
    Abstract: This paper examines the influence of monetary shocks in China on the U.S. economy over ‎‎1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through ‎effects in demand for imports, particularly that of commodities. China’s growth influences ‎world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. ‎China’s monetary expansion is also associated with significant decreases in the trade ‎weighted value of the U.S. dollar that is due to the operation of a pegged currency. China ‎manages the exchange rate and has extensive capital controls in place. In terms of the ‎Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a ‎managed exchange rate permit China to pursue an independent monetary policy with ‎consequences for the U.S.‎
    Keywords: International monetary transmission, China’s monetary aggregates
    JEL: E0 E4 E41 F4 F41
    Date: 2013–05–01
  19. By: Adriana Cornea (University of Exeter); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam)
    Abstract: In this paper we develop and estimate a behavioral model of inflation dynamics with monopolistic competition, staggered price setting and heterogeneous firms. In our stylized framework there are two groups of price setters, fundamentalists and naive. Fundamentalists are forward-looking in the sense that they believe in a present-value relationship between inflation and real marginal costs, while naive are backward-looking, using the simplest rule of thumb, naive expectations, to forecast future inflation. Agents are allowed to switch between these different forecasting strategies conditional on their recent relative forecasting performance. The estimation results support behavioral heterogeneity and the evolutionary switching mechanism. We show that there is substantial time variation in the weights of forward-looking and backward-looking behavior. Although on average the majority of firms use the simple backward-looking rule, the market has phases in which it is dominated by either the fundamentalists or the naive agents.
    Keywords: Inflation, Phillips Curve, Heterogeneous Expectations, Evolutionary Selection
    JEL: E31 E52 C22
    Date: 2013–01–14
  20. 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
    Date: 2013
  21. By: Cars Hommes (University of Amsterdam); Mei Zhu (Shanghai University of Finance and Economics)
    Abstract: We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dep endence and inflation may switch between low and high persistence regimes.
    Keywords: Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence
    JEL: E30 C62 D83 D84
    Date: 2013–01–14
  22. By: Ojo, Marianne
    Abstract: To what extent can monetary and financial crises and cycles be explained through economic theories? This paper is aimed at highlighting why a reliance on economic theories may be necessary given certain flaws which have been revealed from the recent Financial Crisis. Namely, that economic and legal foundations of financial stability cannot always be considered to be credible. Further, the paper aims to accentuate on why despite the valid argument (that a reference to economic theories may be required to explain causalities of financial and monetary crises), causalities could also be explained from other perspectives – even though these perspectives may sometimes, not be as accurate. (¿En qué medida pueden las crisis y los ciclos monetarios y financieros se explica a través de las teorías económicas? Este trabajo tiene como objetivo poner de relieve por qué puede ser necesario un mayor recurso a las teorías económicas dadas ciertas fallas que se han revelado desde la crisis financiera reciente. Es decir, lo hicieron fundamentos económicos y jurídicos de la estabilidad financiera no siempre pueden ser considerados como creíbles. Además, el trabajo tiene como objetivo acentuar el por qué a pesar del argumento válido (una referencia a las teorías económicas puede ser necesario para explicar causalidades de las crisis financieras y monetarias), causalidades también podrían ser explicadas desde otras perspectivas - a pesar de estas perspectivas pueden, a veces, no ser lo más preciso).
    Keywords: Teoría del Tiempo Económico (TET); mercados eficientes de hipótesis; la estabilidad financiera; la Teoría de moneda; crisis del euro; Austrian, Keynesian or Quantitativist-monetarist; Teoría Random Walk
    JEL: E32 E5 E6 K2 M4
    Date: 2013–05–12
  23. By: Michael D. Bordo; Angela Redish
    Abstract: The international gold standard of the late nineteenth century has been described as a system of ‘spontaneous order’, capturing the idea that its architects at the time were fashioning domestic monetary systems which created a system of fixed exchange rates almost as a by-product. In contrast the framers of the Bretton Woods System were intentional in building an international monetary system and so it is by advocates of designing an international monetary order. In this paper we examine the transition from spontaneous order circa 1850 to designed system and then back towards spontaneous order in the late twentieth century, arguing that it is an evolution with multiple stops and starts, and that the threads that underlie the general tendency through these hesitations are the interplay between monetary and fiscal factors and the evolution of the financial system. This transformation is embedded within deep evolving political fundamentals including the rise of democracy, nationalism, fascism and communism and two world wars.
    JEL: E00 N1
    Date: 2013–05
  24. By: Stefania Albanesi; Aysegül Sahin
    Abstract: The unemployment gender gap, defined as the difference between female and male unemployment rates, was positive until 1980. This gap virtually disappeared after 1980--except during recessions, when men's unemployment rates always exceed women's. We study the evolution of these gender differences in unemployment from a long-run perspective and over the business cycle. Using a calibrated three-state search model of the labor market, we show that the rise in female labor force attachment and the decline in male attachment can mostly account for the closing of the gender unemployment gap. Evidence from nineteen OECD (Organisation for Economic Co-operation and Development) countries also supports the notion that convergence in attachment is associated with a decline in the gender unemployment gap. At the cyclical frequency, we find that gender differences in industry composition are important in recessions, especially the most recent, but they do not explain gender differences in employment growth during recoveries.
    Keywords: Unemployment ; Women - Employment ; Business cycles ; Recessions
    Date: 2013
  25. By: S. Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
    Abstract: We provide a new and superior measure of U.S. GDP, obtained by applying optimal signal-extraction techniques to the (noisy) expenditure-side and income-side estimates. Its properties -- particularly as regards serial correlation -- differ markedly from those of the standard expenditure-side measure and lead to substantially-revised views regarding the properties of GDP.
    Keywords: Income ; Expenditures, Public ; Business cycles ; Recessions
    Date: 2013
  26. By: Xiaoming Cai (VU University Amsterdam); Pieter A. Gautier (VU University Amsterdam); Makoto Watanabe (VU University Amsterdam)
    Abstract: An advantage of collective wage agreement is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached because more productive firms (for a particular worker type) can no longer signal this by posting higher wages. Specifically, we consider a search model with two sided heterogeneity and on-the-job search. We compare the most favorable case of a collective wage agreement (i.e. the wage that a planner would choose under the constraint that all firms in a sector-ocupation cell must offer the same wage) with the case without collective wage agreement. We find that collective wage agreements are never desirable if firms can commit ex ante to a wage and only desirable if firms cannot commit and the relative efficiency of on the job search to off- the job search is less than 20%. This result is hardly sensitive to the bargaining power of workers. Empirically we find both for the Netherlands and the US that this value is closer to 50%.
    Keywords: Collective wage agreements, on-the-job search, efficiency
    JEL: E24 J62 J63 J64
    Date: 2012–08–28
  27. 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
  28. By: Ruud A. de Mooij (IMF); Hendrik Vrijburg (Erasmus University Rotterdam)
    Abstract: This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability.
    Keywords: Strategic Substitutes, Asymmetry, Strategic Tax Response, Tax Coordination
    JEL: E62 F21 H25 H77
    Date: 2012–10–02
  29. By: Martin L. Scholtus (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Bart Frijns (Auckland University of Technology)
    Abstract: This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook).
    Keywords: Macroeconomic News, High Frequency Trading, Latency Costs, Market Activity, Event-Based Trading
    JEL: E44 G10 G14
    Date: 2012–11–13
  30. By: Sweder van Wijnbergen (University of Amsterdam); Alexander France (University of Amsterdam)
    Abstract: When debt levels approach critical levels, tax payers may revolt against the associated debtservice burden. Funding problems may arise in capital markets when lenders anticipate such revolts and refuse to participate in debt auctions. We provide a stochastic framework to assess whether such problems may arise and argue that the key to fiscal sustainability in a stochastic environment is a feedback rule from debt level shocks back to corresponding adjustments in the primary surplus. We show that such feedback rules narrow future distributions of debt-output ratios and so reduce crisis probabilities. We apply the methodology to Dutch debt and deficit data spanning two centuries. Our results strongly argue for the incorporation of rules stipulating tightening fiscal policy whenever debt stocks exceed previously agreed upon targets (like in the original Eurozone Stability pact).
    Keywords: E62, H62, H63, H68
    Date: 2012–02–12
  31. By: Aikaterini Karadimitropoulou; Miguel Leon-Ledesma
    Abstract: Do sector-specific factors common to all countries play an important role in explaining business cycle co-movement? We address this question by analyzing international co-movements of value added (VA) growth in a multi-sector dynamic factor model. The model contains a world factor, country-specific factors, sector-specific factors, and idiosyncratic components. We estimate the model using Bayesian methods for 30 disaggregated sectors in the G7 economies for the 1974-2004 period. Our findings show that, although there is a substantial role for sector-specific factors, fluctuations are dominated by country-factors. The world factor appears to play a minimal role because, when using aggregate data, the world factor captures both the factor common to all countries and industries and the factor common to the same industry across countries. We then examine how these factors evolved as globalization deepened over the past two decades. Our results suggest that business cycles at a disaggregate level have not become more synchronized internationally. This is mainly driven by a substantial fall in the volatility of world shocks during the globalization period, rather than a lower sensitivity of sectoral growth to world factors. Our results also reveal that world factors appear to be more important for industries with a higher level of international vertical integration.
    Keywords: dynamic factors; disaggregated business cycles; international co-movement
    JEL: E32 F44
    Date: 2013–04
  32. By: Eran Raviv (Erasmus University Rotterdam)
    Abstract: When the yield curve is modelled using an affine factor model, residuals may still contain relevant information and do not adhere to the familiar white noise assumption. This paper proposes a pragmatic way to improve out of sample performance for yield curve forecasting. The proposed adjustment is illustrated via a pseudo out-of-sample forecasting exercise implementing the widely used Dynamic Nelson Siegel model. Large improvement in forecasting performance is achieved throughout the curve for different forecasting horizons. Results are robust to different time periods, as well as to different model specifications.
    Keywords: Yield curve; Nelson Siegel; Time varying loadings; Factor models
    JEL: E43 E47 G17
    Date: 2013–03–07
  33. By: Spanulescu, Ion; Popescu, Ion; Stoica, Victor; Gheorghiu, Anca
    Abstract: In this paper a new econophysics model of investment processes is proposed and discussed. For this purpose an analogy between the electric field flow and the investment supplying flow with credits for the considered investment is used.
    Keywords: econophysics, electrical field, Gauss’ Law, investment process, investment field.
    JEL: A12 E22
    Date: 2012–05–25
  34. By: Tuck Cheong Tang
    Abstract: This study extends the analytical framework for the specification of import demand behaviour from the conventional partial equilibrium to a general equilibrium perspective. This perspective emphasises the macro dimension of import demand and the potential influence of financial factors. Two new structural import demand equations are developed: (1) one specification utilises the macroeconomic income-expenditure relationships in the goods market; and (2) the second specification utilises the portfolio balance approach to capture financial market developments.
    Keywords: Aggregate import demand; General equilibrium perspective; Income-expenditure equilibrium; Portfolio balance
    JEL: E1 F4
    Date: 2013–05
  35. By: Tuck Cheong Tang; Chea Ravin
    Abstract: The study examines the export-led growth (ELG) hypothesis for Cambodia. The sample covers annual observations between 1972 and 2008. The Granger's non-causality tests support ELG as well as the growth-led exports. Also, there is causality from imports growth to exports growth. The study also presents the results of impulse response functions and variance decomposition. Some policy implications are viewed in the study.
    Keywords: Cambodia; Exports; Imports; Growth
    JEL: E2 F4
    Date: 2013–05
  36. By: Manmohan Agarwal; John Whalley
    Abstract: This paper analyzes the effects of the reforms initiated in India following the balance of payments (BOP) crisis of 1991 on economic performance. We do not find persuasive the contention of many analysts that growth accelerated after the mid-1980s when reforms were initiated. Nor does statistical analysis support the contention that reforms in the mid-1980s resulted in a growth acceleration. We show that there is an accelerating rate of growth of GDP after the mid 1970s and it is difficult to relate this gradual acceleration to specific policy changes. The changed policies in the 1980s did not mean a basic change in the policy framework. Furthermore, since corporate investment as a share of GDP did not increase in the 1980s it is difficult to identify the mechanism by which the more pro-business policies of the government were translated to higher growth. We also find that the differences with East Asia and particularly China depend on the basis of the comparison. We compare changes in performance since the reforms, which started in China in 1979 and in India in 1991. Such a comparison shows more similarities than differences. We finally examine social progress. We find that South Asia lags behind other regions in making progress towards the Millennium Development Goals (MDGs) and India lags behind other South Asian countries. The responsiveness of the improvement in the MDGs to increases in per capita income is usually low in Asia and particularly in India.
    JEL: E20 F10 F30 O40
    Date: 2013–05
  37. By: Katsuyuki Shibayama; Jagjit S. Chadha
    Abstract: We study the implications of a stockout constraint in a dynamic general equilibrium model, which can explain both RBC and inventory facts well. Under the stockout constraint, inventories and demand are complements in generating sales, and hence the optimal level of inventories increases in expected demand. We also show that the inventory to sales ratio is both persistent and countercyclical because the cost of carrying inventories is mainly determined by the interest rate. We use this model to disentangle output and sales, by matching the key inventory moments, and find that preference and productivity shocks are equally important in data. Finally, we assess whether improvements in inventory management can explain the Great Moderation. We find that, although improvements in inventory management can reduce the need for inventory holdings, which decreases output volatility relative to sales volatility, lower levels of inventories actually increases sales volatility. Because these two effects offset each other, a change in inventory management does not change output volatility to any great extent.
    Keywords: Inventory investment; Inventory cycles; Stockout constraint; Great Moderation
    JEL: E12 E20 E32
    Date: 2013–05
  38. By: Jason M. Lindo
    Abstract: This paper considers the relationship between local economic conditions and health with a focus on different approaches to geographic aggregation. After reviewing the tradeoffs associated with more- and less-disaggregated analyses–including an investigation of the migratory response to changing economic conditions–I update earlier state-level analyses of mortality and infant health and then consider how the estimated effects vary when the analysis is conducted at differing levels of geographic aggregation. This analysis reveals that more-disaggregated analyses severely understate the extent to which downturns are associated with improved health. Further investigation reveals that county economic conditions have an independent effect on mortality but that state and regional economic conditions are stronger predictors. I also leverage county-level data to explore heterogeneity in the link between county economic conditions and health across states, demonstrating that local downturns lead to the greatest improvements in health in low-income states.
    JEL: E32 I10 J20
    Date: 2013–05
  39. By: Hugo Erken (Ministry of Economic Affairs, The Hague); Piet Donselaar (Ministry of Economic Affairs, The Hague); Roy Thurik (Erasmus School of Economics, Erasmus Universiteit Rotterdam, EIM Business and Policy Research, Zoetermeer)
    Abstract: Total factor productivity of twenty OECD countries for a recent period (1971-2002) is explained using six different models based on the established literature. Traditionally, entrepreneurship is not dealt with in these models. In the present paper it is shown that – when this variable is added - in all models there is a significant influence of entrepreneurship while the remaining effects mainly stay the same. Entrepreneurship is measured as the business ownership rate (number of business owners per workforce) corrected for the level of economic development (GDP per capita).
    Keywords: Total factor productivity, research and development, entrepreneurship, OECD
    JEL: E20 L26 M13 O10 O30 O40 O50
  40. By: Lukasz Marc (VU University Amsterdam)
    Abstract: This study examines the fungibility of foreign aid and makes three contributions to the existing literature. Firstly, fungibility of aid at the aggregate level is reexamined on a richer panel dataset of 91 developing countries for 1980-2009, taking into account endogeneity of aid and autocorrelation in residuals. Results indicate that aid is strongly fungible: around 80 % is substituting rather than increasing government spending in the short run. There is also substantial heterogeneity in the sample, with aid being more fungible for countries with a low share of aid in GDP. Secondly, aid is disaggregated into bilateral and multilateral components. Despite substantial differences between both components, there are only very small indications that multilateral aid is less fungible than bilateral aid and estimates are volatile when aid is instrumented. Thirdly, this study attempts to distinguish between off- and on-budget aid at the aggregate level using the value of technical cooperation as a proxy for off-budget aid. While on-budget aid is strongly fungible, off-budget aid is non-fungible. In the long run, around 50 % of aid increases government expenditures, although results are not stable. High levels of fungibility (except for off-budget aid) suggest that resources spent on earmarking may be wasted and donors should rethink the way aid is distributed.
    Keywords: foreign aid, fungibility, government expenditures
    JEL: E62 F35 H50 O23
    Date: 2012–08–14

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