nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒05‒22
23 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Business Fluctuations and Monetary Policy Rules in the Philippines: with Lessons from the 1984-1985 Contraction By Dante B. Canlas
  2. Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting By Kevin D. Sheedy
  3. Fiscal Sustainability, Macroeconomic Stability, and Welfare under Fiscal Discipline in a Small Open Economy By Keiichi Morimoto; Takeo Hori; Noritaka Maebayashi; Koichi Futagami
  4. Monetary Policy Under Discretion Or Commitment? -An Empirical Study By Fromlet, Pia
  5. The output effect of fiscal consolidations By Alberto Alesina; Carlo Favero; Francesco Giavazzi
  6. A Note on Money and the Conduct of Monetary Policy By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  7. Generational Risk–Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks By Jasmina Hasanhodzic; Laurence J. Kotlikoff
  8. Business Cycle Synchronization in the European Union: The Effect of the Common Currency By Periklis Gogas
  9. Why Does Employment in All Major Sectors Move Together over the Business Cycle? By Yaniv Yedid-Levi
  10. Education Policy and Intergenerational Transfers in Equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Giovanni L. Violante
  11. Unemployment in the Great Recession By Christopher A. Pissarides
  12. Per un accesso sostenibile delle Pmi al credito (A sustainable access to credit for SMEs) By Giuseppe Marotta
  13. Stochastic Macro-equilibrium and Microfoundations for Keynesian Economics By YOSHIKAWA Hiroshi
  14. Linkages between the Eurozone and the South-Eastern European Countries: A VECMX* Analysis By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  15. Endogenous Market Structure, Occupational Choice, and Growth Cycles By Maria José Gil-Moltó; Dimitrios Varvarigos
  16. Obama and the Macroeconomy Estimating Social Preferences Between Unemployment and Inflation By Soeren Enkelmann
  17. Cluster governance in the framework of cluster social responsibility By Mikhaylov, Andrey Sergeevich
  18. Women, Medieval Commerce, and the Education Gender Gap By Graziella Bertocchi; Monica Bozzano
  19. INNOVATION, REALLOCATION AND GROWTH By Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William Kerr
  20. Gender Gaps and the Rise of the Service Economy By L. Rachel Ngai; Barbara Petrongolo
  21. Political Risk : The Missing Link in Understanding Investment Climate Reform? By Stephan Dreyhaupt; Ivan Nimac; Kusi Hornberger
  22. Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation By Dirk Krueger; Alexander Ludwig
  23. Republic of Lebanon--Good Jobs Needed : The Role of Macro, Investment, Education, Labor and Social Protection Policies By World Bank

  1. By: Dante B. Canlas (School of Economics, University of the Philippines Diliman)
    Abstract: The paper reviews recent research on macroeconomic theory of business fluctuations and its influence on monetary policy rules. It focuses on triggers to business fluctuations and the mechanisms that propagate the fluctuations once started. The Philippines is used as empirical setting. The theory’s predictions are examined using time-series data on aggregate output performance, money growth, and budget deficits of government. The paper casts a spotlight on the output contraction of 1984-1985, the longest downturn in the postwar economic history of the Philippines. The role of monetary policy and fiscal policy shocks in triggering that downturn is studied, followed by the role of subsequent macroeconomic policy adjustments that propagated the downturn. The paper points out that monetary policy rules evolved in the aftermath of the 1984-1985 downturn, culminating in the inflation-targeting rule that the monetary authority currently uses. The adoption of inflation targeting hinged on the introduction of legislation that enabled the creation of a central bank with policy and instrument independence from the fiscal authority.
    Date: 2012–06
  2. By: Kevin D. Sheedy
    Abstract: Financial markets are incomplete, thus for many agents borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating agents' nominal incomes from aggregate real shocks, this policy effectively completes the market by stabilizing the ratio of debt to income. The paper argues that the objective of nominal GDP should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.
    Keywords: incomplete markets, heterogeneous agents, risk sharing, nominal GDP targeting
    JEL: E21 E31 E44 E52
    Date: 2013–05
  3. By: Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Graduate School of Economics, Osaka University); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: We construct a small open economy model of endogenous growth with public capital accumulation and examine how a debt policy rule under which the government gradually reduces its debt-GDP ratio to a target level affects macroeconomic stability, fiscal sustainability, and welfare. We obtain the following implications for fiscal policy design in small countries. First, to ensure fiscal sustainability, the government should adjust public spending rather than the income tax rate to finance public debt. In addition, it has to set the target level of the debt-GDP ratio sufficiently low to avoid expectations-driven economic instabilities. Under sustainability and stability, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).
    Keywords: Fiscal policy, Public debt, Welfare, Fiscal sustainability, Equiribrium indeterminacy
    JEL: E32 E62 H63
    Date: 2013–05
  4. By: Fromlet, Pia (Department of Economics)
    Abstract: In this paper, I investigate the monetary policy of five industrialized countries which have had explicit inflation targets for more than 15 years. Considering the case of discretionary policy as well as commitment, I estimate two first order conditions. The results support the theory of flexible in‡ation targeting under discretion for the United Kingdom. For New Zealand, the results under discretion suggests that monetary policymakers have been leaning with the wind rather than against the wind. The central banks of Canada, Sweden, and Australia have behaved in line with the theory of flexible in‡ation targeting under commitment.
    Keywords: Inflation targeting; optimal policy under discretion; optimal policy under commitment
    JEL: E31 E52 E58 E61
    Date: 2013–04–26
  5. By: Alberto Alesina; Carlo Favero; Francesco Giavazzi
    Abstract: Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private investment. We obtain these results by studying the effects of the adoption of fiscal consolidation plans (rather than isolated shocks), that is combinations of tax increases and spending cuts, some unanticipated, other anticipated, in a sample of 16 OECD economies..Keywords: fiscal adjustment, output, confidence, investment JEL Classification: H60, E62
    Date: 2013
  6. By: Jagjit S. Chadha (Department of Economics, University of Kent); Luisa Corrado (University of Rome "Tor Vergata", CIMF and CReMic); Sean Holly (University of Cambridge)
    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 ?nd 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 ?nance premium, which is in?ationary. We consider a number of alternative monetary policy rules, and ?nd 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: 2013–05–13
  7. By: Jasmina Hasanhodzic (Department of Economics, Boston University); Laurence J. Kotlikoff (Department of Economics, Boston University)
    Abstract: The theoretical literature on generational risk assumes that this risk is large and that the government can effectively share it. To assess these assumptions, this paper simulates a realistically calibrated 80-period overlapping generations life-cycle model with aggregate productivity shocks. Previous solution methods could not handle large-scale OLG models such as ours due to the well-known curse of dimensionality. The prior state of the art is Krueger and Kubler (2004, 2006), whose sparse-grid method handles 10 to 30 periods depending on the model’s realism. Other methods used to solve large-scale, multi-period life-cycle models are tenuous because they rely on either local approximations (Rios-Rull, 1994, 1996) or summary statistics of state variables (Krusell and Smith, 1997, 1998). We build on a new algorithm by Judd, Maliar, and Maliar (2009, 2011), which restricts the state space to the model’s ergodic set. This limits the required computation and effectively banishes the dimensionality curse in models like ours. We find that intrinsic generational risk is quite small, that government policies can produce generational risk, and that bond markets can help share generational risk. We also show that a bond market can mitigate risk-inducing government policy. Our simulations produce very small equity premia for three reasons. First, there is relatively little intrinsic generational risk. Second, intrinsic generational risk hits both the young and the old in similar ways. And third, artificially inducing risk between the young and the old via government policy elicits more net supply as well as more net demand for bonds, by the young and the old respectively, leaving the risk premium essentially unchanged. Our results hold even in the presence of rare disasters and very high risk aversion. They echo Lucas’ (1987) and Krusell and Smith’s (1999) point that macroeconomic fluctuations are too small to have major microeconomic consequences.
    Keywords: Intergenerational Risk Sharing; Government Transfer Policies; Aggregate Shocks; Incomplete Markets; Stochastic Simulation
    JEL: E21 E24 E62 H55 H31 D91 D58 C63 C68
    Date: 2013–05
  8. By: Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Center for Economic Analysis, Italy)
    Abstract: In this paper, I analyse the synchronization of business cycles within the E.U., as this is an important ingredient for the implementation of a successful monetary policy. The business cycles of twelve E.U. countries and two sub-groups of countries are extracted for the period 1989Q1-2010Q2. The cycle of G3, the group of the three largest European economies (Germany, France and Italy) is then used as a benchmark series for the comparisons. The sensitivity of the data to alternative cycle extraction methodologies is explored employing the Hodrick-Prescott and Baxter-King filters using alternative parameter specifications and leads/lags. The strength of cycle synchronization is measured using linear regressions, cross-correlation coefficients and the Cycle Synchronization Index (CSI). To assess whether synchronization is stronger after the introduction of the common currency, we also test two sub-samples pre- and post-EMU (1999Q1). The empirical results provide evidence that cycle synchronization within the Eurozone has become stronger in the common currency period.
    Keywords: Business Cycle, Synchronization, Eurozone
    Date: 2013–04
  9. By: Yaniv Yedid-Levi (The University of British Columbia)
    Abstract: In recessions, employment falls in all major sectors. Positive correlation of employment across sectors is a puzzle, because a standard two-sector business-cycle model driven by aggregate productivity shocks predicts negative correlation of total hours of work in the consumption-goods sector and the investment-goods sector. I start from the observation that most of the variability of total hours worked takes the form of variations in the number of workers. Hours per employed worker is only a secondary source of variation. The exten- sive margin is therefore critical in understanding the positive correlation of sectoral labor market variables, yet neglected by existing studies. This paper advances the literature on cross-sectoral correlation of employment by making unemployment an explicit feature of the model. I construct a two sector model with search and matching friction, capital ad- justment costs, and partial wage stickiness. The model explains the positive cross-sectoral correlation through movements of workers in both sectors into and out of unemployment.
    Date: 2012
  10. By: Brant Abbott (University of British Columbia, Canada); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Yale University and NBER, USA; IFS, UK); Giovanni L. Violante (New York University and NBER, USA; CEPR, UK)
    Abstract: This paper compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor supply during college, government grants and loans, as well as private loans, complement parental transfers as sources of funding for college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by two percentage points in the long-run. Any further relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants (especially their need-based component) are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers.
    Keywords: Education, Financial Aid, Inter vivos Transfers, Credit Constraints, Equilibrium
    JEL: E24 I22 J23 J24
    Date: 2013–02
  11. By: Christopher A. Pissarides
    Abstract: This paper studies the responses of unemployment in Germany, the United States and Britain to the Great Recession of 2008-09 by making use of Beveridge curve analysis, and in the entire OECD with other techniques. It is shown that Britain suffered from recession but no structural problems; the United States suffered from structural unemployment during the recovery; Germany exhibited a much better performance both during and after the recession. The rise in OECD unemployment is broken down into parts due to aggregate activity, the construction sector and a residual attributed to policies and institutions, which is used to reach conclusions about policy.
    Keywords: Unemployment, Great Recession, vacancies, Beveridge curve, construction sector, policies and institutions
    JEL: E24 J6
    Date: 2013–05
  12. By: Giuseppe Marotta
    Abstract: A widespread consensus for an easier access to bank credit for SMEs to quicken the recovery could lead to overlook risks, for banks as well as for economies, of financing projects that do not fit the structural adjustments in the world economy caused by the international crisis. Sustainable lending policies for both firms and banks require an investment in a more comprehensive soft information. Only firms can produce credible business plans; the assessment by banks’ experts in industrial organization as well as finance should integrate the regulatory quantitative risk measurement models. Policy makers’ initiatives to further credit access for SMEs, including central banks’ non conventional measures, should be evaluated within this framework.
    Keywords: growth, debt, financial crisis, macroprudential supervision, banking
    JEL: E58 G01 G21 G28 G32
    Date: 2013–05
  13. By: YOSHIKAWA Hiroshi
    Abstract: In place of the standard search equilibrium, this paper presents an alternative concept of stochastic macro-equilibrium based on the principle of statistical physics. This concept of equilibrium is motivated by unspecifiable differences in economic agents and the presence of all kinds of micro shocks in the macroeconomy. Our model mimics the empirically observed distribution of labor productivity. The distribution of productivity resulting from the matching of workers and firms depends crucially on aggregate demand. When aggregate demand rises, more workers are employed by firms with higher productivity while, at the same time, the unemployment rate declines. The model provides a micro-foundation for Keynes' principle of effective demand.
    Date: 2013–05
  14. 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 carried out our analysis using the VECMX* framework. Our results indicate that the transition economies in our sample react in a similar manner to changes in international macroeconomic policies. Cyprus and Greece react also in a similar way, but these responses are very small in magnitude. Finally, Turkey behaves in a different way, probably due to the inflationary pressures in its economy. In general, there is evidence of linkages and interdependence among the EU or Eurozone members of the region.
    Keywords: South-Eastern Europe, Monetary Transmission, VECMX* Model, Generalised Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–15
  15. By: Maria José Gil-Moltó; Dimitrios Varvarigos
    Abstract: We model an industry that supplies intermediate goods in a growing economy. Agents can choose whether to provide labour or to become firm owners and compete in the industry. The idea that entry is determined through occupational choice has major implications for the economy’s intrinsic dynamics. Particularly, the results show that economic dynamics are governed by endogenous volatility in the determination of both the number of industry entrants and in the growth rate of output. Consequently, we argue that occupational choice and the structural characteristics of the endogenous market structure can act as both the impulse source and the propagation mechanism of economic fluctuations.
    Keywords: Overlapping generations; Endogenous cycles; Firms’ entry; Industry Dynamics
    JEL: E32 L16
    Date: 2013–02
  16. By: Soeren Enkelmann (Department of Economics, Leuphana University Lueneburg, Germany)
    Abstract: This paper investigates social preferences towards unemployment and ination in the United States. Estimating a popularity function with monthly data for the recent Obama administration, we find that U.S. voters react strongly to both unemployment and inflation. However, reducing unemployment is more important to society as voters would trade off 1 point of unemployment against 2.5 points of ination. One point of unemployment costs the president about 4 points, one point inflation costs him 1.5 point. Moreover, we provide evidence that macroeconomic preferences are not stable over time. Finally, we show that public preferences towards unemployment and inflation are not homogeneous across different groups in society. The poor and low-eduated, for example, react more strongly to changes in the unemployment rate than other groups.
    Keywords: social preference function, popularity function, unemployment, inflation, Obama
    JEL: D72 H11
    Date: 2013–05
  17. By: Mikhaylov, Andrey Sergeevich
    Abstract: --
    Keywords: international cluster,cluster governance,cluster social responsibility,Cyprus financial cluster,cluster crisis,regional economy
    JEL: E02 E61 F23 F43 G01 G38 H12
    Date: 2013–03–30
  18. By: Graziella Bertocchi; Monica Bozzano
    Abstract: We investigate the historical determinants of the education gender gap in Italy in the late nineteenth century, immediately following the country’s Unification. We use a comprehensive newly-assembled database including 69 provinces over twenty-year sub-samples covering the 1861- 1901 period. We find robust evidence that female primary school attainment, relative to that of males, is positively associated with the medieval pattern of commerce, along the routes that connected Italian cities among themselves and with the rest of the world. The effect of medieval commerce is particularly strong at the non-compulsory upperprimary level and persists even after controlling for alternative long-term determinants reflecting the geographic, economic, political, and cultural differentiation of medieval Italy. The long-term influence of medieval commerce quickly dissipates after national compulsory primary schooling is imposed at Unification, suggesting that the channel of transmission was the larger provision of education for girls in commercial centers.
    Keywords: Education gender gap, medieval commerce, Italian Unification, political institutions, family types.
    JEL: E02 H75 I25 J16 N33 O15
    Date: 2012
  19. By: Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William 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 53 of GDP reduces welfare by about 1.53 because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 53 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.
    Keywords: entry, growth, industrial policy, innovation, R&D, reallocation, selection.
    JEL: E2
    Date: 2013–04
  20. By: L. Rachel Ngai; Barbara Petrongolo
    Abstract: This paper explains the narrowing of gender gaps in wages and market hours in recent decades by the growth of the service economy. We propose a model with three sectors: goods, services and home production. Women have a comparative advantage in the production of services in the market and at home. The growth of the services sector, in turn driven by structural transformation and marketization of home services, acts as a gender-biased demand shift and leads to a rise in women's wages and market hours relative to men. Quantitatively, the model accounts for an important share of the observed rise in women's relative wage and market hours and the fall in men's market hours.
    Keywords: gender gaps, structural transformation, marketization
    JEL: E24 J22 J16
    Date: 2013–04
  21. By: Stephan Dreyhaupt; Ivan Nimac; Kusi Hornberger
    Keywords: Macroeconomics and Economic Growth - Investment and Investment Climate Finance and Financial Sector Development - Debt Markets Private Sector Development - Emerging Markets Finance and Financial Sector Development - Non Bank Financial Institutions Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress
    Date: 2012–03
  22. By: Dirk Krueger; Alexander Ludwig
    Abstract: In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogeneous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generating a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2013–03–27
  23. By: World Bank
    Keywords: Social Protections and Labor - Labor Markets Social Protections and Labor - Labor Policies Health, Nutrition and Population - Population Policies Banks and Banking Reform Finance and Financial Sector Development - Access to Finance Health Nutrition and Population
    Date: 2012–12

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