nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒07‒05
23 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Signaling Effects of Monetary Policy By Leonardo Melosi
  2. An analytical framework for the Post-Keynesian macroeconomic paradigm By Herr, Hansjörg
  3. Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy By Ruediger Bachmann; Benjamin Born; Steffen Elstner; Christian Grimme
  4. Future fiscal and debt policies: Germany in the Context of the European Monetary Union By Hein, Eckhard; Truger, Achim
  5. Optimal Fiscal and Monetary Rules in Normal and Abnormal Times By Cristiano Cantore; Paul Levine; Giovanni Melina; Joseph Pearlman
  6. Mismatch shocks and unemployment during the Great Recession By Francesco Furlanetto; Nicolas Groshenny
  7. Crise da União Europeia (why pigs can’t fly) By Cláudio Gontijo
  8. Money Market Rates and Retail Interest Regulation in China: The Disconnect between Interbank and Retail Credit Conditions By Nathan Porter; TengTeng Xu
  9. Liquidity and Inefficient Investment By Oliver D. Hart; Luigi Zingales
  10. International Business Cycles with Complete Markets By Alexandre Dmitriev; Ivan Roberts
  11. The Role of Fiscal Policy Components in Private Consumption: a Re-examination of the Effects of Military and Civilian Spending By Pieroni, Luca; Lorusso, Marco
  12. The Effects of Central Bank Independence and Inflation Targeting on Macroeconomic Performance: Evidence from Natural Experiments By Michael Parkin
  13. Maastricht e o Gerenciamento da União Monetária Europeia By Cláudio Gontijo
  14. Seigniorage Revenue and Inflation Tax: Testing Optimal Seigniorage Theory for Turkish Economy By dogru, bulent
  15. Austerity in the Euro area: The sad state of economic policy in Germany and the EU By Truger, Achim
  16. Bailouts, Time Inconsistency, and Optimal Regulation By V.V. Chari; Patrick J. Kehoe
  17. Generational Risk – Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks By Jasmina Hasanhodzic; Laurence J. Kotlikoff
  18. Food Inflation in EU: Distribution Analysis and Spatial Effects By Angelos Liontakis; Dimitris Kremmydas
  19. The fungibility of health aid reconsidered By Nicolas Van de Sijpe
  20. Achieving Amicable Settlements and Possible Reconciliations : The Role of Forensic Accountants in Equitable Distributions By Ojo, Marianne; DiGabriele, Jim
  21. Marginal Tax Rates and Income: New Time Series Evidence By Karel Mertens
  22. Government Fiscal Efforts vs. Labour Union Strikes: An Estimated Cournot-Nash Policy Game By Massimiliano Castellani; Luca Fanelli; Marco Savioli
  23. Aid, disbursement delays, and the real exchange rate By Jarotschkin, Alexandra; Kraay, Aart

  1. By: Leonardo Melosi (Federal Reserve Bank of Chicago)
    Abstract: We develop a DSGE model in which the policy rate signals to price setters the central bank’s view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. We find that the model fits the data better than a prototypical New Keynesian DSGE model because the signaling effects of monetary policy help the model account for the run-up in inflation expectations in the 1970s. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. The signaling effects of monetary policy have contributed (i ) to heightening inflation expectations in the 1970s, (ii ) to raising inflation and to exacerbating the recession during the first years of Volcker’s monetary tightening, and (iii ) to subduing inflation and to stimulating economic activity from 1991 through 2007.
    Keywords: Bayesian econometrics; price puzzle; persistent real effects of nominal shocks; imperfect common knowledge; public signal; heterogeneous beliefs
    JEL: E52 C11 C52 D83
    Date: 2013–03–01
  2. By: Herr, Hansjörg
    Abstract: The original Keynesian paradigm differs from the Neoclassical Synthesis and even more so from the New-Keynesian approach. In this paper, a modern framework for the original Keynesian paradigm is presented. It will highlight the key elements of the paradigm. A model is developed to determine output, unemployment and price level changes. Finally, the paper draws policy conclusions based on Keynesian original thinking. The purpose of the paper is not only to give a framework of Keynesian thought, but also to stimulate debate and discussion within the Post-Keynesian camp. The paper is written in a way which allows nonexperts in the field to follow the argumentation. However, not all ramifications of the Post- Keynesian paradigm can be covered. --
    Keywords: economic paradigm,Keynesian economics,output and employment,inflation,economic policy
    JEL: E12 E20 E31 E50 E58
    Date: 2013
  3. By: Ruediger Bachmann; Benjamin Born; Steffen Elstner; Christian Grimme
    Abstract: Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.
    JEL: E30 E31 E32 E5
    Date: 2013–06
  4. By: Hein, Eckhard; Truger, Achim
    Abstract: Currently fiscal policies in Germany seem to be in a very comfortable position and the German Debt Brake is regarded as an institutional precondition for this success and has been exported to the Euro area in the guise of the Fiscal Compact. In this paper we scrutinize German fiscal policies and its new national and European institutional constraints from a macroeconomic perspective. We start by reiterating the requirements for fiscal policies of member countries in a currency union like the Euro area from a Post-Keynesian perspective and examine German fiscal policies in the period from 1999 until 2007 against this theoretical background. We then turn to German fiscal policies during the Great Recession, the German Debt Brake, the Fiscal Compact and future perspectives, and analyse the associated problems and risks. Finally, we discuss alternative scenarios which could avoid the deflationary pressures of the German Debt Brake and the Fiscal Compact on domestic demand and contribute to internally rebalancing the Euro area. --
    Keywords: fiscal policy,government deficits and debt,debt brake,fiscal compact,Germany,Euro area
    JEL: E61 E62 E64 E65 H62 H63
    Date: 2013
  5. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (International Monetary Fund); Joseph Pearlman (City University, London)
    JEL: E62 E30
    Date: 2013–06
  6. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Nicolas Groshenny (University of Adelaide, School of Economics)
    Abstract: We investigate the macroeconomic consequences of .uctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is almost irrelevant for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by 1.25 percentage points and the natural rate by 2 percentage points. Moreover, it is the only shock that generates a positive conditional correlation between unemployment and vacancies.
    Keywords: Search and marketing frictions, Unemployment, Natural rates
    JEL: E32 C51 C52
    Date: 2013–06–28
  7. By: Cláudio Gontijo (FACE-UFMG)
    Abstract: This article analyses the roots of the European debt crisis, which started at the end of 2009 and embraced the so called PIGS, causing a global turbulence. It studies the historical genesis of the European Monetary Union since the decade of 1970, in connection with the dynamics of the international economy, the theoretical foundations of the Maastricht Treaty and the economic policies of the Union, as well as the evolution of the traditional macroeconomic indicators of the block and the PIGS up to 2010. It shows that the conservative thesis that populist policies are at the origins of the crisis does not fit the data.
    Keywords: European debt crisis; financial crises; European Monetary Union; Euro.
    JEL: E3 E44
    Date: 2013–06
  8. By: Nathan Porter; TengTeng Xu
    Abstract: Interest rates in China are composed of a mix of both market-determined interest rates (interbank rates and bond yields), and regulated interest rates (retail lending and deposit rates), reflecting China’s gradual process of interest rate liberalization. This paper investigates the main drivers of China’s interbank rates by developing a stylized theoretical model of China’s interbank market and estimating an EGARCH model for 7-day interbank repo rates. Our empirical findings suggest that movements in administered interest rates (part of the People’s Bank of China’s monetary policy toolkit) are important determinants of market-determined interbank rates, in both levels and volatility. The announcement effects of reserve requirement changes also influence interbank rates, as well as liquidity injections from open market operations in recent years. Our results indicate that the regulation of key retail interest rates influences the behaviour of marketdetermined interbank rates, which may have limited their independence as price signals. Further deposit rate liberalization should allow short-term interbank rates to play a more effective role as the primary indirect monetary policy tool.
    Keywords: Development economics; Econometric and statistical methods; Financial markets; Monetary policy framework; Transmission of monetary policy
    JEL: E43 E52 E58 C22
    Date: 2013
  9. By: Oliver D. Hart; Luigi Zingales
    Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the nonpledgeability of human capital. We show that the competitive equilibrium is constrained inefficient, leading to too little risky investment. We also show that fiscal policy following a large negative shock can increase ex ante welfare. Finally, we show that if the government cannot commit to the promised level of fiscal intervention, the ex post optimal fiscal policy will be too small from an ex ante perspective.
    JEL: E41 E51 G21
    Date: 2013–06
  10. By: Alexandre Dmitriev (University of Tasmania); Ivan Roberts (Reserve Bank of Australia)
    Abstract: Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the 'international co-movement puzzle' (Baxter 1995) and the 'quantity anomaly' (Backus, Kehoe and Kydland 1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alone can account for the 'international co-movement puzzle'. Our model features time non-separable preferences that allow arbitrarily small changes in wealth to affect the supply of labour. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; and (ii) realistic cross-country correlations of consumption. It reduces the gap between international correlations of output and consumption, but fails to change their order. Unlike models with restricted international markets, ours shows little sensitivity to the parameterisation of the forcing process.
    Keywords: time non-separable preferences; wealth effects; international business cycles
    JEL: E32 F41 G15
    Date: 2013–06
  11. By: Pieroni, Luca; Lorusso, Marco
    Abstract: In this paper, we re-examine the magnitude of the impact of government spending on private consumption by a new Keynesian approach, focusing on the role of military spending. For this reason, we separate civilian and military spending in the U.S. economy and analyse their respective effects. Our VAR estimates show, as expected, that civilian expenditure induces a positive and significant response on private consumption whereas military spending has a negative impact. We then develop a simple DSGE new Keynesian model to simulate the empirical evidence under a larger persistence of shocks and a different financing mechanism in military spending, the latter reproducing the propensity of policy-makers to use budget deficits to finance wars. Lastly, simulated impulse response functions of alternative specification models prove the robustness of our analysis.
    Keywords: Military and Civilian Spending, SVAR, DSGE Model.
    JEL: E2 E62 H1 H10
    Date: 2013–05–13
  12. By: Michael Parkin (University of Western Ontario)
    Abstract: not available
    Keywords: none available
    Date: 2013
  13. By: Cláudio Gontijo (FACE-UFMG)
    Abstract: This article shows that, to a large extent, the European sovereign debt crisis resulted from the institutional arrangement of Maastricht, as well as the policies pursued by the European leadership, formatted from the "new macroeconomic consensus" and the theory of optimal economic area. In particular, it argues that, largely, the crisis and its deepening resulted from the fact that the European Central Bank did not play the role of lender of last resort, as well as the implementation of policies and adjustment focused on cutting public spending and increasing taxation.
    Keywords: European Monetary Union; Euro, Maastricht Agreement.
    JEL: E5 E6
    Date: 2013–06
  14. By: dogru, bulent
    Abstract: The goal of this study is to test the implication of Mankiv’s (1987) optimal seigniorage theory suggesting that in the long run higher tax rates are associated with higher inflation rates and higher nominal interest rates for Turkish Economy using time series dataset for the time period 1980-2011.We examine the long run relationship between nominal interest rates, inflation and tax revenue. For this purpose, we estimate the Mankiw’soptimal seigniorage model for Turkish Economy with the cointegration and vector error correction methods (VECM) techniques. According to econometric result, in long run there is a causality relationship from inflation and tax revenue to nominal interest rates. However, in short run we could not find any evidence that support the causality from inflation and tax revenue to nominal interest rates
    Keywords: seigniorage and inflation tax, optimal seigniorage theory, Turkish economy, error correction model, cointegration analysis
    JEL: E6 E62
    Date: 2013–06
  15. By: Truger, Achim
    Abstract: The Euro area is currently going through its worst period of recession and economic stagnation since the Great Depression and World War II. The article tries to give an impression of the extraordinary degree of fiscal austerity and the devastating economic effects it has already had and must be expected to have in the near future. In addition it is argued that both the lack of economic justification and the devastating consequences of the fiscal policies currently executed should have been absolutely obvious even from a mainstream perspective. Therefore the sad state of economic policies in the Euro area is that it did not even follow moderate mainstream proposals but instead seemed to rely on radical and outdated theoretical or purely ideological foundations. Germany as the most economically and politically influential member state of the Euro area seems to be most infected by such radical ideas. --
    Keywords: fiscal policy,Hamburg appeal,austerity,debt brake,fiscal compact,Germany,Euro area
    JEL: E61 E62 E64 E65 H62 H63
    Date: 2013
  16. By: V.V. Chari; Patrick J. Kehoe
    Abstract: We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in aggregate states in which resources lost to bankruptcy in the equilibrium without a government are largest.
    JEL: E0 E44 E6 E61
    Date: 2013–06
  17. By: Jasmina Hasanhodzic; Laurence J. Kotlikoff
    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 calibrates and simulates 80-period, 40-period, and 20-period overlapping generations (OLG) life-cycle models 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 uses sparse-grid methods to handle 10 to 30 periods depending on the model's realism. Other methods used to solve large-scale, multi- period life-cycle models rely on either local approximations or summary statistics of state variables. We employ and extend a recent 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, aggregate shocks hit 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, very high risk aversion, persistent productivity shocks, and stochastic depreciation. They echo other findings in the literature suggesting that macroeconomic fluctuations are too small to have major microeconomic consequences.
    JEL: E0
    Date: 2013–06
  18. By: Angelos Liontakis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens, Greece); Dimitris Kremmydas (Department of Agricultural Economics & Rural Development, Agricultural University of Athens, Greece)
    Abstract: In the European Union homogenous inflation forces are expected to prevail due to the increased economic integration, especially after the creation of the single currency area. This expectation is directly related to the issue of inflation convergence which has gained increasing attention by both academia and policy makers in Europe. While the examination of the core inflation is of great importance for macroeconomic policy, the prominent role of disaggregate inflation indices and especially food inflation has been also frequently emphasized in the literature. However, the issue of food inflation convergence has been largely ignored in empirical studies. This study explores the evolving distribution of the food inflation rates in the EU-25 member states, using the distribution dynamics analysis and covering the period from January 1997 to March 2011. This analysis rests on the assumption that each country represents an independent observation which provides unique information that can be used to estimate the transition dynamics of inflation. However, we show that inside EU-25, spatial autocorrelation prevails and therefore, the independency assumption is violated. To insure spatial independence, the Getis spatial filter is implemented prior to the distribution dynamics analysis. The results of the analysis confirm the existence of convergence trends which are even more clear after the spatial filtering procedure, indicating, on the one hand, the influence of spatial effects on food inflation and, on the other hand, the effectiveness of Getis spatial filtering.
    Keywords: European Union, inflation, convergence, spatial filtering
    JEL: E31 C21 R12
    Date: 2013
  19. By: Nicolas Van de Sijpe
    Abstract: This paper draws further attention to the importance of taking into account off-budget aid when estimating the degree of foreign aid fungibility. It does so by re-evaluating the results of a recent, influential paper which concluded that health aid is fully fungible in the long run. Allowing for the presence of off-budget aid indicates that the degree of fungibility of health aid is much more uncertain than at first blush appears. Under plausible assumptions about the role of off-budget aid, the conclusion of full fungibility is overturned and at most only a limited degree of fungibility is found.
    Keywords: foreign health aid; fungibility; public health expenditure
    JEL: E62 F35 H51 I18 O23
    Date: 2013
  20. By: Ojo, Marianne; DiGabriele, Jim
    Abstract: This book is focussed on investigating how a proper implementation of forensic accounting tools could serve as a means and channel whereby such techniques as valuations, equitable distribution and evidence could be employed in avoiding unnecessary break ups and emotional breakdowns. Through the exploration of options which are available to marital couples considering separation or divorce during periods of crises, the book aims to emphasise the theme that a break from the relationship may be the step required to avert a break-up. The role of forensic accounting in facilitating an amicable process during such a break - which could result in the possible restoration of relationships involved during such crucial stage also constitutes a recurring theme of the book. It is a well known fact that financial problems constitute the source of break-downs in many relationships. Whilst other factors may contribute to failures in relationships and whilst some couples may have finalised their intentions and require very little assistance in getting through such painstaking processes, others may have their decisions influenced by court procedures, counselling sessions and the proper application of equitable distribution procedures – such equitable distribution procedure being considered a preferred technique in resolving marital asset distributions than the community property concept. Further this book highlights factors which need to be taken into consideration – not only in averting unnecessary break-ups, but also in facilitating harmonious and amicable settlements which may eventually pave the way for reconciliation, as well as restoration of broken down relationships. Whilst planning of marital asset distribution should not constitute the focus of any marriage, planning when the need arises may serve not only as a channel whereby a relationship can be restored eventually, but as a temporary means of weathering the storms during the difficult times in the relationship.
    Keywords: equitable distribution; marital reconciliation; forensic accounting; valuations
    JEL: E3 E32 K2 M4
    Date: 2013–06–29
  21. By: Karel Mertens
    Abstract: This paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the United States over the 1950-2010 period. After isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach, I find large positive effects in the top 1% of the income distribution. In contrast to earlier findings based on tax return data, I also find large effects in other income percentile brackets. A hypothetical tax reform cutting marginal rates only for the top 1% leads to sizeable increases in top 1\% incomes and has a positive effect on real GDP. There are also spillover effects to incomes outside of the top 1%, but top marginal rate cuts lead to greater inequality in pre-tax incomes.
    JEL: E6 E62 H2 H24
    Date: 2013–06
  22. By: Massimiliano Castellani (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Luca Fanelli (Department of Statistical Sciences, University of Bologna, Italy); Marco Savioli (Department of Economics, University of Siena, Italy; The Rimini Centre for Economic Analysis, Italy; School of Economics, Management, and Statistics, Rimini campus, University of Bologna, Italy)
    Abstract: In this paper, we propose a novel policy-game model with perfect information to analyze the simultaneous interaction between the government and the labour union in a unionized economy. Our model explains how the strategic interaction between the labour union, mainly concerned with wages and strikes, and the government, mainly concerned with unemployment and fiscal policy, gives rise to a long run Cournot-Nash equilibrium. Our policy-game model is estimated by a cointegrated Vector Autoregressive system using Italian quarterly data on government budget surplus (fiscal efforts) and on hours not worked (strikes) on the period 1960-2009. Since the government budget surplus is the variable which adjusts faster to equilibrium, our estimated speeds of long run adjustment point out that the government is more effective than the labour union. A phase diagram interpretation of the estimated model is provided.
    Keywords: Fiscal efforts, strikes, policy game, VEqC, speed of adjustment
    JEL: E62 J51 C72 C54 C32
    Date: 2013–06
  23. By: Jarotschkin, Alexandra; Kraay, Aart
    Abstract: Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploits the long delays between the approval of aid projects and the subsequent disbursements on them. These disbursement delays enable the isolation of a source of variation in aid inflows that is uncorrelated with contemporaneous macroeconomic shocks that may drive both aid and the real exchange rate. Using this predetermined component of aid as an instrument, there is little evidence that aid inflows lead to significant real exchange rate appreciations.
    Keywords: Macroeconomic Management,Debt Markets,Economic Stabilization,Emerging Markets,Economic Theory&Research
    Date: 2013–06–01

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