nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒06‒04
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Central banks: Paradise lost By Issing, Otmar
  2. Disaster Risk in a New Keynesian Model By Marlène Isoré; Urszula Szczerbowicz
  3. Inflation targeting and product market deregulation By Moretti, Laura
  4. Restaurar a credibilidade das fundações jurídica e económica da estabilidade financeira: A necessidade de incorporação de teorias econômicas? By Ojo, Marianne
  5. Complexity and monetary policy By Orphanides, Athanasios; Wieland, Volker
  6. Monetary policy decisions by the world's central banks using real-time data By Klaus Schmidt-Hebbel; Francisco Muñoz
  7. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  8. Dissecting saving dynamics: Measuring wealth, precautionary, and credit effects By Carroll, Christopher D.; Slacalek, Jiri; Sommer, Martin
  9. Inflation in Poland under state-dependent pricing By Pawel Baranowski; Mariusz Gorajski; Maciej Malaczewski; Grzegorz Szafranski
  10. Fiscal consolidation strategy By Cogan, John F.; Taylor, John B.; Wieland, Volker; Wolters, Maik H.
  11. Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe By Khan, Muhammad; Kebewar, Mazen; Nenovsky, Nikolay
  12. Austerity versus Stimulus: A DSGE Political Economy Explanation By Richard McManus
  13. Política fiscal y demanda agregada: Keynes y Barro-Ricardo By Waldo Mendoza Bellido
  14. "The Problem of Excess Reserves, Then and Now" By Walker F. Todd
  15. Measuring U.S. Business Cycles: A Comparison of Two Methods and Two Indicators of Economic Activities By Francis W. Ahking
  16. Post-recession US employment through the lens of a non-linear Okun’s law By Menzie Chinn; Laurent Ferrara; Valérie Mignon
  17. A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Wich Policymakers Exploit the Risk Premium for Stabilization Purposes By Guillermo Escudé
  18. Debt, equity and income: the limits to the freedom of choice in an economy By DE KONING, Kees
  19. A new comparative approach to macroeconomic modeling and policy analysis By Wieland, Volker; Cwik, Tobias J.; Müller, Gernot J.; Schmidt, Sebastian; Wolters, Maik H.
  20. The Great Recession: A Self-Fulfilling Global Panic By Philippe Bacchetta; Eric van Wincoop
  21. Aggregate Demand, Instability, and Growth By Steven M. Fazzari; Pietro E. Ferri; Edward G. Greenberg; Anna Maria
  22. Belief shocks and the macroeconomy. By Suda, J.
  23. Towards a Stable Monetary Union: What Role for Eurobonds? By Niels Gilbert; Jeroen Hessel; Silvie Verkaart
  24. "We're all in this together"? A DSGE interpretation By Richard McManus
  25. A descriptive analysis of the balance sheet and monetary policy of De Nederlandsche Bank: 1900-1998 and beyond By Christiaan Pattipeilohy
  26. International Risk Sharing and Land Dynamics By Jean-François Rouillard
  27. Capital Controls, Global Liquidity Traps and the International Policy Trilemma By Michael B. Devereux; James Yetman
  28. Fiscal integration and growth stimulation in Europe By DREZE, Jacques; DURRE, Alain
  29. Endogenous Markups in the New Keynesian Model: Implications for Inflation-Output Trade-Off and Welfare By Ozan Eksi
  30. Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson By Jon D. Wisman
  31. A new paradigm for monetary policy? By Issing, Otmar
  32. The European Debt Crisis and Fiscal Reaction Functions in Europe 2000-2012 By Guido Baldi; Karsten Staehr
  33. Robust Stability of Monetary Policy Rules under Adaptive Learning By Eric Gaus
  34. Cyclical changes in the wage structure of the United Kingdom: a historical review of the GHS 1972-2002 By Peng, Fei; Kang, Lili
  35. Análisis del impacto social de las inversiones públicas en infraestructuras. La huella social By Pegnalver, Domingo
  36. How Low-Carbon Green Growth Can Reduce Inequalities By Anbumozhi, Venkatachalam; Bauer, Armin
  37. Export Dynamics in Large Devaluations By George Alessandria; Sangeeta Pratap; Vivian Yue
  38. 'Lucas' In The Laboratory By Elena Asparouhova; Peter Bossaerts; Nilanjan Roy; William Zame
  39. Assessing policy reforms for Italy using ITEM and QUESTIII By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici; Francesco Nucci
  40. Optimal Taxation and Life Cycle Labor Supply Profile By Michael Kuklik; Nikita Cespedes
  41. A life-cycle model of unemployment and disability insurance By Sagiri Kitao
  42. Analyzing the effects of insuring health risks: On the trade-off between short run insurance benefits vs. long run incentive costs By Cole, Harold L.; Kim, Soojin; Krueger, Dirk
  43. Global liquidity as an early warning indicator of asset price booms: G5 versus broader measures By Beata Bierut
  44. World, Country, and Sector Factors in International Business Cycles By Aikaterini Karadimitropoulou; Miguel León-Ledesma
  45. Macroeconomic Vulnerability in Developing Countries: Approaches and Issues By Anuradha Seth; Amr Ragab
  46. If Technology Has Arrived Everywhere, Why Has Income Diverged? By Comin, Diego; Mestieri, Marti
  47. An Economic Examination of Collateralization in Different Financial Markets By Xiao, Tim
  48. Analysis of external factors affecting the development of SMEs in Kosovo By Govori, Arbiana
  49. Flights to Safety By Lieven Baele; Geert Bekaert; Koen Inghelbrecht; Min Wei
  50. Money Talks: Emphasizing Wealth in Household Finances By Elena Simonova; Rock Lefebvre
  51. Assessing Indicators of Currency Crisis in Ethiopia: Signals Approach By Megersa, kelbesa; Cassimon, Danny
  52. The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence By Gal, Peter N.; Hijzen, Alexander; Wolf, Zoltan
  53. Immigration et croissance économique en France entre 1994 et 2008 By Hippolyte d’Albis; Ekrame Boubtane; Dramane Coulibaly
  54. Test of the German resilience By Bornhorst, Fabian; Mody, Ashoka
  55. Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues By Khiaonarong, Tanai
  56. An Accurate Solution for Credit Value Adjustment (CVA) and Wrong Way Risk By Xiao, Tim
  57. Future methods of political economy: from Hicks’ equation systems to evolutionary macroeconomic simulation By Hanappi, Hardy
  58. The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling By Xiao, Tim
  59. Immigration, unemployment and GDP in the host country: Bootstrap panel Granger causality analysis on OECD countries By Ekrame Boubtane; Dramane Coulibaly; Christophe Rault

  1. By: Issing, Otmar
    Abstract: --
    JEL: E44 E52 E58
    Date: 2012
  2. By: Marlène Isoré; Urszula Szczerbowicz
    Abstract: This paper incorporates a small and time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. A change in the probability of disaster may affect macroeconomic quantities and asset prices. In particular, a higher risk is sufficient to generate a recession without effective occurrence of the disaster. By accounting for monopolistic competition, price stickiness, and a Taylor-type rule, this paper provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and nominal rigidity, particularly suitable for further analysis of monetary policy. We also set up our next research agenda aimed at assessing the desirability of several policy measures in case of a variation in the probability of rare events.
    Keywords: Disaster risk;rare events;DSGE models;business cycles
    JEL: E17 E20 E32 G12
    Date: 2013–04
  3. By: Moretti, Laura
    Abstract: I evaluate the effect of inflation targeting on inflation and how it interacts with product market deregulation during the disinflationary process in the 1990s. Using a sample of 21 OECD countries, I show that, after controlling for product market deregulation, the effect of inflation targeting is quantitatively important and statistically significant. Moreover, product market deregulation also matters in particular in countries that adopted an inflation targeting regime. I propose a New Keynesian Phillips curve with an explicit role for market deregulation to rationalize the empirical evidence. --
    Keywords: Inflation Targeting,Product Market Deregulation,Difference in Difference
    JEL: E31 E58 E65 L51
    Date: 2012
  4. 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: Teoria do tempo Econômico (TET); hipótese dos mercados eficientes; a estabilidade financeira; a Teoria de moeda; crise do Euro; Austrian Keynesian or Quantitativist-monetarist; Teoria Random Walk
    JEL: E32 E52 E58 E6 K2 M4
    Date: 2013–05–13
  5. By: Orphanides, Athanasios; Wieland, Volker
    Abstract: The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables. --
    Keywords: Financial Crisis,Complexity,Monetary Policy,Model Uncertainty,Robust Simple Rules,ECB
    JEL: E50 E52 E58
    Date: 2012
  6. By: Klaus Schmidt-Hebbel; Francisco Muñoz
    Abstract: This paper contributes to the empirical understanding of monetary policy in five dimensions. First, specifiying a generalized Taylor equation that nests backward and forward-looking inflation and activity variables in setting policy rates. Second, using real-time data. Third, estimating the model on a world panel of monthly 1994-2011 data for 28 advanced and emerging economies. Fourth, using alternative panel data estimators to test for robustness. Fifth, testing for differences in monetary policy over time and across country groups. The findings are very supportive of the nested model and generally show that the Taylor principle is satisfied by the world's central banks.
    Keywords: monetary policy, Taylor rule, Taylor principle, heterogeneous panels
    JEL: E50 E52 E58
    Date: 2012
  7. 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 thatcannot 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 holdstrue 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
  8. By: Carroll, Christopher D.; Slacalek, Jiri; Sommer, Martin
    Abstract: We argue that the US personal saving rate's long stability (1960s-1980s), subsequent steady decline (1980s-2007), and recent substantial rise (2008-2011) can be interpreted using a parsimonious buffer stock model of consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between target and actual wealth, with the target determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the long-term saving decline, while fluctuations in wealth and uncertainty capture the bulk of the business-cycle variation. --
    Keywords: Consumption,Saving,Wealth,Credit,Uncertainty
    JEL: E21 E32
    Date: 2012
  9. By: Pawel Baranowski; Mariusz Gorajski; Maciej Malaczewski; Grzegorz Szafranski (Department of Econometrics, Institute of Econometrics, Faculty of Economics and Sociology, University of Lodz)
    Abstract: We analyse the short-term dynamics of Polish economy with a prominent state-dependent pricing mechanism of Dotsey, King and Wolman (1999). We compare macroeconomic evidence of price rigidity in a small-scale DSGE model with a state-dependent Phillips curve (SDPC) derived by Bakhshi, Khan and Rudolf (2007) to a benchmark model including hybrid New-Keynesian Phillips Curve (NHPC) of Gali and Gertler (1999). To analyse monetary policy transmission mechanism we estimate both models with Bayesian techniques and focus on the comparison of distribution of price vintages, a degree of price stickiness, values of parameters in Phillips curve equations, and impulse responses to macroeconomic shocks. The estimated state-dependent pricing model generates a median duration of prices about 4 quarters compared to 8 quarters in a time-dependent model. In the state-dependent pricing model it takes more time to dampen inflation dynamics after a monetary policy relative to a time-dependent counterpart. The menu cost model is also able to identify higher variance of technology shocks, and higher persistence in preference shocks, while the dynamics of the impulse responses in time- and state-dependent pricing models are hard to distinguish.
    Keywords: state-dependent pricing, inflation, menu costs, monetary policy, Polish economy
    JEL: E31
    Date: 2013–04
  10. By: Cogan, John F.; Taylor, John B.; Wieland, Volker; Wolters, Maik H.
    Abstract: In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization. --
    Keywords: Fiscal Policy,Fiscal Consolidation,Government Debt,Government Deficit,DSGE Model
    JEL: E27 E62 H62 H63 H68
    Date: 2012
  11. By: Khan, Muhammad; Kebewar, Mazen; Nenovsky, Nikolay
    Abstract: In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties. --
    Keywords: Inflation,Inflation uncertainty,Real uncertainty,Monetary regimes,Eastern Europe
    JEL: C22 C51 C52 E0
    Date: 2013–03
  12. By: Richard McManus
    Abstract: The 2008 financial crisis and subsequent global economic downturn has brought fiscal policy back onto the political and academic agenda. Despite the vast literature, the discussion is primarily focused upon the fiscal policy multiplier. This positive analysis omits normative consequences from policy and moreover, fails to consider political frictions to policy: something frequently observed in fiscal debates. By constructing a small scale New Keynesian DSGE model with a proportion of credit constrained (non-Ricardian) agents, this paper address these omissions. The results show that there is a normative justification of fiscal policy, in the presence of modest multipliers and the absence of progressive taxes, but on redistributive rather than aggregate grounds. Shocks impact the two agents differently and in polarising ways: countercyclical fiscal policy can be used to alleviate this divergence. However, aggregate improvements from policy are minimal as the gains of one agent are matched by the losses of another, thus giving rise to political frictions and moreover, predicting the current austerity versus stimulus debate.
    Keywords: Fiscal policy; heterogeneity; welfare; zero lower bound; liquidity rule-of-thumb; fiscal cyclicality
    JEL: E30 E62 H30
    Date: 2013–05
  13. By: Waldo Mendoza Bellido (Departamento de Economía - Pontificia Universidad Católica del Perú)
    Abstract: En este artículo se presenta un modelo teórico del tipo Barro-Ricardo (BR), que vincula la política fiscal, el consumo y la demanda agregada. En este marco, mostraremos cómo la teoría keynesiana puede ser presentada como un caso particular del modelo BR. Posteriormente, abordaremos la discusión acerca de los efectos de la política fiscal sobre el consumo y la demanda agregada, y mostraremos cómo, en ciertas condiciones, la política fiscal actúa en la dirección keynesiana y, en otras, en la dirección ricardiana.
    Abstract: This paper presents a Barro-Ricardo theoretical model (BR) that links fiscal policy, consumption and aggregate demand. In this framework, we show how the Keynesian approach can be presented as a special case of the BR model. Subsequently, we address the discussion about the effects of fiscal policy on consumption and aggregate demand and show how, under certain conditions, fiscal policy acts in the Keynesian direction and, in others, in the Ricardian direction.
    Keywords: Consumo, equivalencia ricardiana, política fiscal demanda agregada.
    JEL: E21 Y E62
    Date: 2013
  14. By: Walker F. Todd
    Abstract: This working paper looks at excess reserves in historical context and analyzes whether they constitute a monetary policy problem for the Federal Reserve System (the "Fed") or a potential-ly inflationary problem for the rest of us. Generally, this analysis shows that both absolute and relative sizes of excess reserves are a big problem for the Fed as well as the general public because of their inflationary potential. However, like all contingencies, the timing and extent of the damage that reserve-driven inflation might cause are uncertain. It is even possible today to find articles in both scholarly circles and the popular press arguing either that the inflationary blow-off might never happen or that an increasing tendency toward prolonged deflation is the more probable outcome.
    Keywords: Excess Reserves; Federal Reserve; Fed; European Central Bank; ECB; Quantitative Easing; Monetary Stimulus
    JEL: E51 E52 E58
    Date: 2013–05
  15. By: Francis W. Ahking (University of Connecticut)
    Abstract: In this paper, we examine two issues concerning business cycle research. First, a number of studies have demonstrated that more complicated non-linear models do not replicate business cycle features better than simpler linear models. In Harding and Pagan (2003), they showed that a random walk with drift model of real GDP for the U.S., U.K., and Australia can capture the main business cycle features of the respective countries quite well. Adding non-linear structure, such as Hamilton’s (1989) Markov-switching model produced cycles that are too extreme, especially with respect to the cumulative movements of the cycles, where cumulative movements are a measure of cumulated output losses from peak to trough of a business cycle. Furthermore, Harding and Pagan (2003a) argued that based on criteria, such as simplicity, transparency, robustness, and replicability, the non-parametric Bry and Boschan algorithm (1971) is in fact superior to the Markov-switching model in determining turning points in business cycles. Similarly, Hess and Iwata (1997) showed that a non-linear models such as the Markov-switching models are no better than a simple ARIMA(1,1,0) model in replicating business cycle features. <p> We start by comparing how well the Hamilton’s Markov-switching model and the Bry and Boschan algorithm can replicate the U.S. business cycle features. One interesting finding that has not been shown before is that we are unable to replicate Hamilton’s original result for the same sample period using real GDP rather than real GNP as Hamilton did. Furthermore, we also found that Hamilton’s Markov-switching model is not robust with respect to different sample periods. The Bry and Boschan algorithm, on the hand, replicated business cycle features consistently. <p> Second, Burns and Mitchell (1946) and NBER’s Business Cycle Dating Committee suggested that a variety of time series representing economic activities should be used for the purpose of dating business cycle. Nevertheless, real GDP is by far the most popular and frequently used single series to represent aggregate economic activities in business cycle research. We compared the ability of the U.S. real GDP and a coincident index published by the Federal Reserve Bank of Philadelphia in replicating features of the U.S. business cycle. We found that a constructed quarterly version of the coincident index is slightly preferred over the real GDP, suggesting that the coincident index may be a better indicator than the commonly used real GDP as an overall indicator of U.S. economic activities.
    JEL: E32 E37
    Date: 2013–05
  16. By: Menzie Chinn; Laurent Ferrara; Valérie Mignon
    Abstract: This paper aims at investigating the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear Okun’s law based on a smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Our findings based on out-of-sample conditional forecasts show that, since the exit of the 2008-09 recession, US employment is on average around 1% below the level implied by the long run output-employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.
    Keywords: Okun’s law, trend employment, non-linear modeling
    JEL: E24 E32 C22
    Date: 2013
  17. By: Guillermo Escudé (Central Bank of Argentina)
    Abstract: This paper builds a DSGE model for a SOE in which the central bank systematically intervenes both the domestic currency bond and the FX markets using two policy rules: a Taylor-type rule and a second rule in which the operational target is the rate of nominal currency depreciation. For this, the instruments used by the central bank (bonds and international reserves) must be included in the model, as well as the institutional arrangements that determine the total amount of resources the central bank can use. The "corner" regimes in which only one of the policy rules is used are particular cases of the model. The model is calibrated and implemented in Dynare for 1) simple policy rules, 2) optimal simple policy rules, and 3) optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences (styles). The results show that the losses are systematically lower when both policy rules are used simultaneously, and much lower for the usual preferences (in which only inflation and/or output stabilization matter). It is shown that this result is basically due to the central bank´s enhanced ability, when it uses the two policy rules, to influence capital flows through the effects of its actions on the endogenous risk premium in the (risk-adjusted) interest parity equation.
    Keywords: DSGE models, exchange rate policy, optimal policy, Small Open Economy
    JEL: E58 F41 O24
    Date: 2013–03
  18. By: DE KONING, Kees
    Abstract: Abstract Debt, equity and income: limits to the freedom of choice in an economy. Three concepts have been introduced in this paper, which help explain the economic developments in the U.S. and the U.K. over the last sixteen years; they are the “income gap”, the “equity gap” and the “productive assets versus non-productive assets”. The first concept is: “The income gap”. This gap can be defined as a shortfall in purchasing power to buy all goods and services which could have been produced if all available manpower would have been fully utilised. The second concept is: “The equity gap”. This gap can be defined as the loss in equity value and the loss in income out of equity for all individual households combined. The third concept is: “Productive assets versus non-productive assets”. Productive assets owned by individual households are savings which are used to create an income. All lending and other forms of savings’ transfers to the business sector create an income for the individual households, either through jobs or through profit levels. Mortgage debt incurred by individual households creates an income for others if it is used for expanding the volume of home building or for home improvements, but not if such debt is used to fund house prices to rise. The latter use of savings create non-productive assets, they do not create an income for other households. The same applies to government debt as the debt servicing costs have to come out of individual households’ incomes to pay other individual households: a zero-sum income game. In the U.S. over the period 2000-2006 average household incomes increased by 14.75% and mortgage debt by 105.1%. In the U.K. average annual earnings went up by 27.9% and household debt by more than 100% over the same period. In both countries house prices increased steeply leading to a rapid increase in non-productive assets and of course also to substantial mortgage default levels as income growth did not keep pace with the growth in mortgage debt. In 2008 the collapse occurred and in that year U.S. individual households lost $12.6 trillion in equity values and another $3.3 trillion in income lost over the equity invested: in total $15.9 trillion or 111.2% of GDP value in 2008. In the U.K. the loss was 90.3% of GDP. After 2008 both U.S. and U.K. individual households started to save more and reduce their borrowing levels. They were also confronted by income growth below inflation levels, increased unemployment which led to a slower combined income growth, lower labour force participation rates again leading to slower income growth and increased tax levels and higher government debt levels; the latter producing more non-productive assets. Also house prices dropped as did new housing starts. In this paper a series of possible measures have been spelled out which could redress the loss in purchasing power, reduce the chance of excessive mortgage lending reappearing, reduce the risks on interest only and variable rate mortgages, change the way in which banks foresee their risks patterns and finally keep a better balance between productive and non-productive assets in an economy. Individually individual households have very few economic options; collectively they can address all current economic problems and turn events to their benefit.
    Keywords: income gap, equity gap, productive and non-productive financial assets, individual households debt, equity and income levels, mortgage growth compared to income growth
    JEL: E0 E21 E24 E4 E44 E5
    Date: 2013–05–16
  19. By: Wieland, Volker; Cwik, Tobias J.; Müller, Gernot J.; Schmidt, Sebastian; Wolters, Maik H.
    Abstract: In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models' implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development. --
    Keywords: Macroeconomic Models,Model Uncertainty,Policy Rules,Robustness,Monetary Policy,Fiscal Policy,Model Comparison
    JEL: E52 E58 E62 F41
    Date: 2012
  20. By: Philippe Bacchetta; Eric van Wincoop
    Abstract: While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration.
    JEL: E32 F40 F41 F44
    Date: 2013–05
  21. By: Steven M. Fazzari; Pietro E. Ferri; Edward G. Greenberg; Anna Maria
    Abstract: This paper considers a puzzle in growth theory from a Keynesian perspective. If neither wage and price adjustment nor monetary policy are effective at stimulating demand, there is no endogenous dynamic process to assure that demand grows fast enough to absorb the production of a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrods’s instability results. Demand grows because it follows an explosive upward path that is ultimately constrained by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.
    Keywords: economic growth, instability, aggregate demand, floors and ceilings
    JEL: E32 E12 O40
    Date: 2012–05
  22. By: Suda, J.
    Abstract: I study the role of shocks to beliefs combined with Bayesian learning in a standard equilibrium business cycle framework. By adapting ideas from Cogley and Sargent (2008b) to the general equilibrium setting, I am able to study how a prior belief arising from the Great Depression may have influenced the macroeconomy during the last 75 years. In the model, households hold twisted beliefs concerning the likelihood and persistence of recession and boom states, beliefs which are only gradually unwound during subsequent years. Even though the driving stochastic process for technology is unchanged over the entire period, the nature of macroeconomic performance is altered considerably for many decades before eventually converging to the rational expectations equilibrium. This provides some evidence of the lingering effects of beliefs-twisting events on the behavior of macroeconomic variables.
    Keywords: Bayesian learning, business cycles, Great Depression.
    JEL: E32 E37 D83 D84
    Date: 2013
  23. By: Niels Gilbert; Jeroen Hessel; Silvie Verkaart
    Abstract: This paper investigates the role that Eurobonds could play in making EMU stable in the long run. We establish that EMU’s budgetary problems are not only caused by lack of budgetary discipline, but also by the large and sudden fiscal deterioration during the financial crisis. This type of shock can never be fully ruled out. EMU member states appear more vulnerable in this situation than countries with their own currency, and risk getting caught in a self-fulfilling spiral of increasing interest rates. This presents a strong case for some type of rescue mechanism. We establish that neither the EFSF/ ESM nor the ECB form the ideal backstop, and that Eurobonds potentially offer a more stable solution, but at the price of important moral hazard problems. All existing Eurobond proposals therefore seek a balance between stabilisation and moral hazard, typically through retaining some degree of market discipline. Our Eurobond proposal improves the trade-off between stabilisation and moral hazard by using Eurobonds themselves to further enforce budgetary discipline. Even then, however, EMU governance has to be strengthened substantially and debt levels have to converge before Eurobonds can be introduced. Therefore, our Eurobond proposal could only serve as the capstone of EMU.
    Keywords: Eurobonds; sovereign bond spreads; fiscal risk-sharing; Economic and Monetary Union
    JEL: E44 E61 H63 H77 F33 F36
    Date: 2013–05
  24. By: Richard McManus
    Abstract: The recent global economic downturn has resulted in hardship for many individuals and the unequal distribution of this hardship across agents is frequently debated. This paper constructs a small scale New Keynesian DSGE model to test whether individuals suffer to similar degrees during recessions: in effect testing the common political mantra `we're all in this together'. It does this by including heterogeneity in the actions of households through their access to capital markets distinguishing those with full access (Ricardian agents) from those with no access (rule-of-thumb agents). In aggregate welfare movements as a result of recessionary shocks are small but this hides a big divergence with the credit constrained signi cantly losing. There is a redistribution of welfare from non-Ricardian to Ricardian households from the shock, and under reasonable calibrations, the latter are seen to gain at the expense of the former.
    Keywords: Cost of business cycles; rule-of-thumb consumers; welfare; heterogeneity
    JEL: E32 I30 D63
    Date: 2013–05
  25. By: Christiaan Pattipeilohy
    Abstract: This paper investigates developments in the balance sheet and monetary policy of De Nederlandsche Bank in the period 1900-1998. We find that – given the institutional framework which is applicable - the composition of DNB’s balance sheet is to a large extent endogenous to monetary and financial-economic conditions. Historically, the Bank’s implementation of monetary policy was geared primarily towards the market for foreign exchange and the Dutch banking sector. However, it has not been uncommon for the Bank to also hold a portfolio of government bonds for monetary policy purposes. Our analysis suggests that monetary policy, its instruments and intermediate targets should not be viewed as fixed and unalterable concepts. Changing conditions and relations within the economy may warrant or even require innovations in the monetary policymakers’ toolbox. Clear communication is important to manage expectations on what can and cannot be expected from conventional and (previously) less conventional monetary policy measures.
    Date: 2013–05
  26. By: Jean-François Rouillard (Département d'économique and GREDI, Université de Sherbrooke)
    Abstract: While business cycles of industrialized countries have become more synchronized in the past decade, the gap between cross-country correlations in output and in consumption, known as the quantity anomaly, has widened on average. A two-country real business cycle model with national endogenous borrowing constraints and frictionless international financial markets can account for these stylized facts that are related to international risk sharing. When preferences are non-separable between consumption and leisure, the borrowing mechanism brings about an internal labor wedge that interacts with the efficient international allocation. This labor wedge is also fundamental to explain the Backus-Smith puzzle or consumption—real-exchange-rate anomaly. Technology shocks contribute to explain international co-movements, whereas country-specific financial shocks to borrowing capacity allow the model to replicate the lack of international risk sharing. When the model is augmented with an additional sector, real estate, international co-movements are matched more closely.
    Keywords: international risk sharing, real estate dynamics, borrowing constraints, labor wedge, financial shocks
    JEL: E44 F34 F44
    Date: 2013–05
  27. By: Michael B. Devereux; James Yetman
    Abstract: The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial markets, the problem of the zero bound introduces a new dimension to the international policy trilemma. International financial market openness may render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a 'liquidity trap' in one country are propagated through financial markets to other countries. But monetary policy effectiveness may be restored by the imposition of capital controls, which inhibit the transmission of these shocks across countries. We derive an optimal monetary policy response to a global liquidity trap in the presence of capital controls. We further show that, even though capital controls may facilitate effective monetary policy, except in the case where monetary policy is further constrained (beyond the zero lower bound constraint), capital controls are not desirable in welfare terms.
    JEL: F3 F32 F33
    Date: 2013–05
  28. By: DREZE, Jacques (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); DURRE, Alain (IESEG-School of Management (Lille Catholic University) and LEM-CNRS)
    Abstract: With the current sovereign debt crisis, the incompleteness of economic integration in the Economic and Monetary Union (EMU) has become patent leading to an intense debate among academics and policy makers. Most of the debate focuses on the needs to strengthen fiscal rules and to restore fiscal imbalances through austerity measures which weigh on growth prospects. In this paper we analyse current economic developments within the euro area through the lens of general equilibrium theory. We address two issues (international sharing of macroeconomics risks and coordinated growth stimulation) which are essential to guarantee the sustainability of the EMU. More specifically, we propose mechanisms to cope with intergenerational and interregional risks while focusing on (fiscally neutral) investments meeting social needs and apt to break the vicious circle between fiscal imbalances and stagnation.
    Keywords: pgeneral equilibrium model, risk sharing, growth stimulation, fiscal integration, EMU, indexed bonds
    JEL: E24 E63 H63
    Date: 2013–05–06
  29. By: Ozan Eksi
    Date: 2013–05
  30. By: Jon D. Wisman
    Abstract: Although the Great Depression and the financial crisis of 1929 that triggered it have been endlessly studied, there is little consensus and even much puzzlement as to why they occurred. This article claims that beneath the many causal factors that have been advanced lie deeper underlying determining forces that have received less notice: wage stagnation and the dramatic increase in inequality following World War I. Wage stagnation and rising inequality fueled three dynamics that set the stage for a financial crisis – the focus of this study -- and contributed to the duration of the depression that followed. The first is that consumption was constrained by the smaller share of total income accruing to workers, thereby restricting investment opportunities in the real economy. Flush with greater income and wealth, the elite flooded financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments, some of which recycled the rich's surplus assets as debt to those less well off. The second dynamic is that greater inequality pressured households to find ways to consume more to maintain their relative social status. As a result, household saving rates declined, households took on greater debt, and may have worked longer hours. The third dynamic is that, as the rich took larger shares of income and wealth, they gained relatively more command over everything, including ideology. Reducing taxes on the rich, favoring business over labor, and failing to regulate newly evolving credit instruments flowed out of this ideology.
    Keywords: inadequate demand, consumer externalities, social respectability, speculation, financial innovation, ideology
    JEL: E21 E44 G01
    Date: 2013
  31. By: Issing, Otmar
    Abstract: --
    Date: 2013
  32. By: Guido Baldi; Karsten Staehr
    Abstract: After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001-2008 and for the post-crisis period 2009-2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems.
    Keywords: Fiscal reaction function, global financial crisis, debt crisis, structural break
    JEL: E61 E62 H62 H63
    Date: 2013
  33. By: Eric Gaus (Ursinus College)
    Abstract: Recent research has explored how minor changes in expectation formation can change the stability properties of a model (Duffy and Xiao 2007, Evans and Honkapoja 2009). This paper builds on this research by examining an economy subject to a variety of monetary policy rules under an endogenous learning algorithm proposed by Marcet and Nicolini (2003). The results indicate that operational versions of optimal discretionary rules are not ``robustly stable'' as in Evans and Honkapoja (2009). In addition commitment rules are not robust to minor changes in expectational structure and parameter values.
    Keywords: Learning, Rational Expectations, Monetary Policy Rules
    JEL: E52 D83
    Date: 2012–07–12
  34. By: Peng, Fei; Kang, Lili
    Abstract: This paper aims to investigate the cyclical changes in the wage structure of the United Kingdom over the period 1972-2002 using the General Household Survey (GHS). Wage structure of the UK shows a cyclical pattern, which may be from the different wage cyclicality of the top, middle and bottom percentile groups. Higher educated male workers have experienced a faster growth of the education premiums so that the wages of males have become more dispersed after the 1970s. However, female workers with only primary education have faster wage growth than higher educated ones. Moreover, the experience premiums of females have grown faster than males and become similar to males in recent years. Changes in the skill endowments and market valuation can account for the cyclical changes in female earnings structure over the entire period. The residual earnings inequality accounts for more than half changes in overall earnings inequality of males, which cannot be explained by changes in skill endowments and market returns. The evolution of the wage structure, including changes in gender gap, overall wage inequality, skill premiums as well as residual wage inequality are affected by business cycle.
    Keywords: wage inequality, skill premiums, business cycle
    JEL: E32 J24 J31
    Date: 2013–05–01
  35. By: Pegnalver, Domingo
    Abstract: The welfare and social peace are the most important concepts when making policy decisions and investment spending of public resources. Currently both welfare and social peace are compromised by the lack of productive capital and excess of speculative capital, the imbalance between suffering cutbacks labor incomes and speculative capital gains. This autor paper proposes and develops a new way for social impact assessment of public investment in infrastructures, the Social Trace, related to the concept of sustainable development as it was defined by Brundtland report. The creation and operation of public infrastructure and its relation to the right to decent work, GDP, inflation and the unemployment rate is the pillar on which this theory rests.
    Keywords: public investment, infrastructure, social cost benefit analysis, social CBA, social NPV, inflation, NAIRU, unemployment, social trace.
    JEL: E24 E27 R11 R13 R42 R58
    Date: 2013–04–24
  36. By: Anbumozhi, Venkatachalam (Asian Development Bank Institute); Bauer, Armin (Asian Development Bank Institute)
    Abstract: Half of the world’s population—3 billion people—lives below the poverty line, and Asia has the largest share. In pursuit of sustainable economic development and poverty alleviation, there is great potential among low-income households for green consumption, production, innovation, and entrepreneurial activity. This paper shows how an inclusive green growth model can uplift the poor through entrepreneurship and fiscal policy reforms.
    Keywords: low-carbon growth; green growth. inequalities; sustainable economic development; poverty alleviation; green consumption; entrepreneurship; fiscal policy reforms
    JEL: E62 H61 Q20 Q30 Q40
    Date: 2013–05–15
  37. By: George Alessandria (Federal Reserve Bank of Philadelphia); Sangeeta Pratap (City University of New York); Vivian Yue (Federal Reserve Board of Governors and Hong Kong Institute for Monetary Research)
    Abstract: This paper studies export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, interest rates, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish export dynamics leading to more gradual net export dynamics, sharper contractions in output, and endogenous declines in labor productivity
    Keywords: Export Dynamics, Devaluation, Net Exports
    JEL: E31 F12
    Date: 2013–05
  38. By: Elena Asparouhova; Peter Bossaerts; Nilanjan Roy; William Zame
    Abstract: This paper reports on experimental tests of an instantiation of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. Central features of the model (infinite horizon, perishability of consumption, stationarity) present difficult challenges and require a novel experimental design. The experimental evidence provides broad support for the qualitative pricing and consumption predictions of the model (prices move with fundamentals, agents smooth consumption) but sharp differences from the quantitative predictions emerge (asset prices display excess volatility, agents do not hedge price risk). Generalized Method of Moments (GMM) tests of the stochastic Euler equations yield very different conclusions depending on the instruments chosen. It is suggested that the qualitative agreement with and quantitative deviation from theoretical predictions arise from agents' expectations about future prices, which are almost self-fulfilling and yet very different from what they would need to be if they were exactly self-fulfilling (as the Lucas model requires).
    JEL: C92 E21 E32 G12
    Date: 2013–05
  39. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Fabio Di Dio (Consip SpA); Francesco Felici (Italian Ministry of Economy and Finance); Francesco Nucci (Università di Roma “La Sapienza)
    Abstract: In this paper we assess the implications of policy reforms for the Italian economy by jointly using the Italian Treasury Econometric Model (ITEM) and QUEST III, the endogenous growth dynamic general equilibrium (DGE) model of the European Commission (DG ECFIN) in the version calibrated for Italy. We point out some of the key differences between the two models, highlighting some policy insights that DGE models can provide compared to those of traditional macro-econometric models. Their structural characteristics and the results of simulations are analyzed by using an array of shocks commonly examined in the evaluation of possible reforms. We show that two elements incorporated into the QUEST model play a key role in explaining the qualitative and quantitative differences among the two models in the dynamic responses to structural shifts, namely: the role of expectations in the transmission of reforms and the endogenous growth mechanism. We conclude that the joint consideration of the two models can improve our understanding of how the assessment of policy interventions is likely to be affected by the uncertainty surrounding model-based evaluation.
    Keywords: Economic Modelling, DGE, Structural Reforms, Italy
    JEL: E10 C50 E60
    Date: 2013–05–17
  40. By: Michael Kuklik; Nikita Cespedes
    Abstract: La tasa óptima de impuesto a los ingresos de capital en Estados Unidos es 36% según Conesa y otros (2009). Este resultado se deriva de un modelo de ciclo de vida y se debe a la existencia de mercado incompletos y a la oferta laboral endógena. Se muestra que este modelo tiene problemas en explicar algunos aspectos básicos de la oferta de trabajo a lo largo de ciclo de vida de los trabajadores. En este trabajo, introducimos no linealidad en los salarios y transferencias entre personas y logramos reproducir las características de ciclo de vida de la oferta de trabajo. El primer supuesto induce a que las horas de trabajo sean altamente persistentes y ayuda a considerar las decisiones de trabajo en el margen extensivo a lo largo del ciclo de vida. El segundo supuesto permite modelar las decisiones de trabajo a temprana edad. El modelo propuesto sugiere que la tasa de impuesto optima a los ingresos de capital es de 7,4%.
    Abstract: The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model nonlinear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choicesearly in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.
    Keywords: Labor supply, optimal taxation, capital taxation, non-linear wage, inter-vivos transfer.
    JEL: E13 H21 H24 H25
    Date: 2013
  41. By: Sagiri Kitao (Hunter College; Hunter College)
    Abstract: The paper builds a life-cycle model of heterogeneous agents with search frictions, in which individuals choose a sequence of saving and labor supply faced with uncertainty in longevity, employment, health status and medical expenditures. Unemployed individuals decide search intensity and whether to apply for disability insurance (DI) benefits if eligible. We investigate, first, the effects of cash and Medicare benefits of the DI system on the life-cycle pattern of employment. Without in-kind benefits through Medicare, the DI coverage could fall by 30%. Second, the impact of a change in labor market conditions and roles of the DI are studied. A rise in exogenous job separation rates or a fall in job finding rates by 20% each can lead to a drop in employment rate by 1.7 and 2.1 percentage points, respectively. A model without the DI could underestimate the effect on employment by more than 30%.
    Keywords: Disability insurance, labor force participation, life-cycle, Medicare, unemployment insurance.
    JEL: E2 E6 J2 J6
    Date: 2013
  42. By: Cole, Harold L.; Kim, Soojin; Krueger, Dirk
    Abstract: This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation. --
    Keywords: Health,Insurance,Incentive
    JEL: E61 H31 I18
    Date: 2012
  43. By: Beata Bierut
    Abstract: We test the performance of various measures of global liquidity as early warning indicators of booms in house and equity prices in 20 OECD countries between 1970 and 2010. We use a panel probit approach to test the relative performance of global liquidity measures based on two aggregation schemes: the traditional measures, based on G5 data, and broader measures, based on data for up to 26 countries/currency areas. Our results show that, in the last decade, global liquidity measures outperformed domestic measures as early warning indicators. Between the two global liquidity measures, G5 aggregates often outperformed broader global liquidity measures. The search for the best early warning indicator showed that the G5 real narrow money gap performed best for booms in house prices, while the global real private credit growth gap performed best for booms in equity prices, either when aggregated over G5 or over a broader sample of countries. Nevertheless, given the rising importance of the emerging market economies and a declining share of G5 in global liquidity, the current superior performance of G5 measures may not warrant their superior performance in the future. Therefore, given the importance of global liquidity measures in warning about asset price booms, the need for constructing broader global liquidity measures is warranted.
    Keywords: Early Warning Indicators; Asset Price Booms; Global Liquidity
    JEL: E44 E51 C53
    Date: 2013–05
  44. By: Aikaterini Karadimitropoulou (University of East Anglia); Miguel León-Ledesma (University of Kent)
    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.
    Date: 2013–05
  45. By: Anuradha Seth (BDP); Amr Ragab (The New School for Social Research)
    Abstract: Economic vulnerability is approached from micro- and macroeconomic perspectives. While the microeconomic perspective is concerned with the impact of shocks on the well-being of individual households, the macroeconomic perspective focuses on the impact of these shocks on economic growth. This paper reviews the literature on macroeconomic vulnerability and finds that there is no single approach to understanding macroeconomic vulnerability in the context of financial and economic crises in developing countries. It identifies the critical contributions of different studies on macroeconomic vulnerability and appraises their main differences. The paper then proposes elements for a more comprehensive framework of macroeconomic vulnerability for developing countries. In a world where shocks and crises are becoming more frequent, the imperative for countries to build resilience and protect themselves from development reversals has become all the more urgent. Not surprisingly, addressing macroeconomic vulnerability has become an important aspect of the international development agenda. (?)
    Keywords: Macroeconomic Vulnerability in Developing Countries: Approaches and Issues
    Date: 2012–05
  46. By: Comin, Diego; Mestieri, Marti
    Abstract: If Technology Has Arrived Everywhere, Why Has Income Diverged? We study the lags with which new technologies are adopted across countries, and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820.
    Keywords: Technology Diffusion, Transitional Dynamics, Great Divergence
    JEL: E13 O14 O33 O41
    Date: 2013–05
  47. By: Xiao, Tim
    Abstract: This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.
    Keywords: unilateral/bilateral collateralization, partial/full/over collateralization, asset pricing, plumbing of the financial system, swap premium spread, OTC/cleared/listed financial markets.
    JEL: E44 G12 G18 G24 G28 G32 G33
    Date: 2012–05–01
  48. By: Govori, Arbiana
    Abstract: Small and medium enterprises are becoming increasingly important for the creation and development of a modern, dynamic and knowledge-based economy. This is because of their capacity to promote entrepreneurship and entrepreneurial skills, and because of their ability to be flexible and adapt quickly to a changing market, and to generate new jobs. SME sector is the backbone of the economy in countries with higher income, while it is less developed in the countries with the low incomes. Organization for Economic Cooperation and Development (OECD) reports that more than 95% of enterprises in the OECD area are SMEs. These enterprises employ about 60% of private sector workers, make a major contribution in the field of innovation and support regional development and social cohesion. Also, SMEs in most low income countries give significant contribution to GDP growth and the creation of new jobs. In Kosovo SMEs represent more than 99% of the total number of enterprises and their share in GDP amounts to more than 50% (CBK, 2011). For this reason, the identification of external factors affecting the development of SMEs in Kosovo is very important, in order to take all the necessary steps to reduce or remove barriers and create new opportunities for these enterprises. This research focuses primarily on the impact of external factors, with special emphasis on access to finance for Small and Medium Enterprises (SMEs) in Kosovo. External factors such as access to finance, competition, corruption, and government policies have very important impact in the development of SMEs in Kosovo. Facilitating access to finance is essential to set up a favorable environment to develop SMEs. However, in general, SMEs in developing countries face numerous barriers to funding, although this problem is not unknown even in developed countries. Barriers that face SMEs usually relate to high administrative costs, high collateral requirements and the lack of willingness of banks to lend to SMEs. Raising the level of awareness of their role and availability of access to finance for SMEs can improve economic conditions in developing countries by promoting innovation, growth of GDP and reduce unemployment.
    Keywords: Small and medium enterprises, the SME sector, SME financing, development factors, bank loans, GDP
    JEL: E2 E22 E6 E64 G2 G21 G23 G3 G32
    Date: 2013–04–03
  49. By: Lieven Baele; Geert Bekaert; Koen Inghelbrecht; Min Wei
    Abstract: Despite a large and growing theoretical literature on flights to safety, there does not appear to exist an empirical characterization of flight-to-safety (FTS) episodes. Using only data on bond and stock returns, we identify and characterize flight to safety episodes for 23 countries. On average, FTS days comprise less than 5% of the sample, and bond returns exceed equity returns by 2 to 3%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money market instruments, corporate bonds, and commodity prices (with the exception of metals, including gold) face abnormal negative returns in FTS episodes. Liquidity deteriorates on FTS days both in the bond and equity markets. Both economic growth and inflation decline right after and up to a year following a FTS spell.
    JEL: E43 E44 G11 G12 G14
    Date: 2013–05
  50. By: Elena Simonova (Certified General Accountants Association of Canada); Rock Lefebvre (Certified General Accountants Association of Canada)
    Abstract: Recognizing the importance of household wealth in the overall financial wellbeing of Canadians and the relative scarcity of the public policy dialogue that is centered unequivocally on wealth, this paper aims to critically examine households’ wealth position, their attitudes to the accumulation of wealth and practices utilized for that purpose. Measured as the difference between the value of household assets and liabilities as it transpires at a given point in time, an examination of the outcomes of household wealth accumulation is performed through assessing the aggregate levels of wealth, the quality of the household wealth position, and exploration of households’ views on the importance and purpose of wealth accumulation, and strategies utilized for that. Results of the analysis show that households’ determination towards wealth accumulation does not appear to be strong as only few engage in developing wealth accumulation strategies, and monitoring the dollar value of their wealth and economic factors that may affect it. Reluctance of households to engage in active savings is also evident. Moreover, high levels of household debt elevate household exposure to risks whereas the high reliance on the appreciation of assets for wealth accumulation increases households’ vulnerabilities.
    Keywords: wealth, wealth accumulation, household finances, household savings, household debt, household assets
    JEL: E21 D14 D12 R21 I31
    Date: 2013–05
  51. By: Megersa, kelbesa; Cassimon, Danny
    Abstract: Currency crises, generally defined as rapid depreciation of a local currency or loss of foreign exchange reserves, are common incidents in modern monetary systems. Due to their repeated occurrence and severity, they have earned wide coverage by both theoretical and empirical literature. However, unlike advanced and emerging economies, currency crises in low-income countries have not received due attention. This paper uses the signals approach developed by Kaminsky et al. (1998) and assesses currency crisis in Ethiopia over the time frame January 1970 to December 2008. Using the Exchange Market Pressure Index (EMPI), we identify three currency crisis episodes, Oct. 1992 - Sep. 1993; Mar. – Jul. 1999 and Oct. – Dec. 2008. This timing shows the importance of both local and international dynamics in determining currency crises. The crisis periods coincide with the liberalization following the fall of Ethiopian socialism, the Ethio-Eritrean border conflict, and the zenith of the global financial crisis, respectively. More macro-economic indicators picked up the first crisis in a 24 month signalling window, compared to the latter two. Three categories of indicators were used: current account, capital account and domestic financial sector. None of the capital account indicators were significant based on the noise-to-signal ratio rule. One possible explanation for this might be the weak integration of the Ethiopian economy with global capital markets.
    Keywords: Currency crisis, financial crisis, early warning systems, signals approach, Ethiopia
    JEL: E5 E6 G2 O1 O11
    Date: 2013–05–22
  52. By: Gal, Peter N. (Tinbergen Institute); Hijzen, Alexander (OECD); Wolf, Zoltan (U.S. Census Bureau)
    Abstract: This paper investigates the role of policies and institutions for aggregate labour market dynamics during the recent financial crisis using firm-level data. First, it provides comparable estimates on firm-level labor adjustment by country, industry and firm size. Second, using variance decomposition methods, it shows that differences in firm-level labor adjustment accounts for about 40% of the cross-country variation in aggregate employment growth at the outset of the crisis. We interpret this as evidence that differences in institutional settings accounted for a substantial part of the variation in aggregate employment growth. Third, we find that stronger protection for regular workers is associated with lower (higher) employment (earnings-per-worker) response in the wake of output shocks. This suggests employment protection shifts the burden of adjustment from the extensive to the intensive margin. However, in explaining the diverse cross-country patterns in employment adjustment during the crisis, the impact of employment protection alone seems to be small.
    Keywords: global financial crisis, employment protection, labour market adjustment, firm-level data
    JEL: E24 J23
    Date: 2013–05
  53. By: Hippolyte d’Albis; Ekrame Boubtane; Dramane Coulibaly
    Abstract: Cet article propose une évaluation quantitative des interactions entre d’une part, le Produit Intérieur Brut (PIB) par habitant et le taux de chômage, et d’autre part, l’immigration permanente en France métropolitaine sur la période 1994-2008. L’immigration est mesurée par les titres de séjour de plus d’un an accordés aux étrangers en provenance des pays tiers et est décomposée par motifs d’admission. L’estimation de modèles vectoriels autorégressifs (VAR) donne les résultats suivants. Le taux d’immigration, et en particulier d’immigration familiale, a un effet positif et significatif sur le PIB par habitant, tandis que les effets de l’immigration sur le chômage ne sont pas significatifs. Par ailleurs, le PIB par habitant a un effet positif et significatif sur le taux d’immigration et le taux de chômage à un effet négatif et significatif sur le taux d’immigration de travail.
    Keywords: Immigration, Croissance, Modèles VAR
    JEL: E20 F22 J61
    Date: 2013
  54. By: Bornhorst, Fabian; Mody, Ashoka
    Abstract: From its early post-war catch-up phase, Germany's formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries' standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany's ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere. --
    Keywords: Economic Performance,Economic Reforms,Economic Recovery,Current Account,Productivity,Labor Market,Spillovers,Germany
    JEL: E20 E65 N14 O52 P52
    Date: 2012
  55. By: Khiaonarong, Tanai (Asian Development Bank Institute)
    Abstract: The Association of Southeast Asian Nations (ASEAN) is expected to benefit from the significant growth in the Asia-Pacific payments market. Growth in economic activity would increase the size, scale, and scope of payment transactions. Enabling the scale and scope of payments would in turn increase economic activity. This would also require national payment systems to be regionalized and operate with cross-border and multi-currency capabilities. As existing regional payment arrangements have illustrated how they can be successfully established, ASEAN can itself leverage on its current cooperative forums in creating a more regionalized payment system. This paper assesses the challenges ASEAN faces in doing so.
    Keywords: asean; payment system; asia-pacific payments market; national payment systems
    JEL: E42 E58 G28
    Date: 2013–05–20
  56. By: Xiao, Tim
    Abstract: This paper presents a new framework for credit value adjustment (CVA) that is a relatively new area of financial derivative modeling and trading. In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the prices of risky contracts are normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.
    Keywords: credit value adjustment (CVA), wrong way risk, right way risk, credit risk modeling, risky valuation, default time approach (DTA), default probability approach (DPA), collateralization, margin and netting.
    JEL: E44 G12 G32 G33
    Date: 2013–05–01
  57. By: Hanappi, Hardy
    Abstract: Traditional macroeconomics and agent-based simulation (ABS) seem to be two disjunctive worlds, two different sprachspiele in the sense of Wittgenstein. It is not just the fact that macroeconomics has a long and distinguished history that on top of more than 200 years of discourse has recently adopted a sophisticated dynamic mathematical framework, while ABS is still in its infancy and for outsiders looks more like an intellectual toy than a serious research tool. Both languages are tools and eventually both are aiming at the same object of investigation: political economy. Why they let their object appear differently certainly is due to the intrinsic properties of the two languages. As is the case with every tool, the properties of the tool are to some extent transferred to the results that can be achieved with the respective tool. What aggravates this split of work styles is the fact that two different large research communities are linked to the use of the two languages; and each member of such a community has built already a considerable human capital stock, which consists mainly of elements that belong to exactly one of the two languages. Any expedition into the use of the foreign language runs into danger to make a part of the own toolset look obsolete, and thus to lose hard earned human capital. The incentives for cooperation disappear. To ease the pains of disaggregated research, the aim of this paper is to improve mutual understanding, and to show how far evolutionary macroeconomic simulation can advance political economy by explaining traditional macroeconomics as a (sometimes implausible) special case of its own more general approach. On the other hand ABS researchers often are unaware of the rich interpretative and empirically oriented treasures that classical macroeconomics has in store. What at first sight looks to be easily transferred into an algorithm turns out to be a highly refined argument, which in turn challenges the skills of ABS modelers. The most promising route to follow in the future certainly will be to be versatile in both languages, to walk on both feet. This short paper should provide a modest first step towards this goal.
    Keywords: Macroeconomics, simulation, evolutionary economics
    JEL: E10 E11 E12
    Date: 2013–03–31
  58. By: Xiao, Tim
    Abstract: This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some well-known risky valuation models in the markets can be viewed as special cases of this framework. We introduce the concept of comvariance (or comrelation) into the area of credit risk modeling to capture the default relationship among three or more parties. Accounting for default correlations and comrelations becomes important, especially during the credit crisis. Moreover, we find that collateralization works well for financial instruments subject to bilateral credit risk, but fails for ones subject to multilateral credit risk.
    Keywords: asset pricing; credit risk modeling; unilateral, bilateral, multilateral credit risk; collateralization; comvariance; comrelation; correlation.
    JEL: E44 G12 G21 G33
    Date: 2013–05–01
  59. By: Ekrame Boubtane; Dramane Coulibaly; Christophe Rault
    Abstract: This paper examines the causality relationship between immigration, unemployment and economic growth of the host country. We employ the panel Granger causality testing approach of K´onya (2006) that is based on SUR systems and Wald tests with country specific bootstrap critical values. This approach allows to test for Granger causality on each individual panel member separately by taking into account the contemporaneous correlation across countries. Using annual data over the 1980-2005 period for 22 OECD countries, we find that, only in Portugal, unemployment negatively causes immigration, while in any country, immigration does not cause unemployment. On the other hand, our results show that, in four countries (France, Iceland, Norway and the United Kingdom), growth positively causes immigration, whereas in any country, immigration does not cause growth.
    Keywords: Immigration, growth, unemployment, causality
    JEL: E20 F22 J61
    Date: 2013

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