nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒07‒28
thirty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How would monetary policy matter in the proposed African monetary unions? Evidence from output and prices By Asongu , Simplice A
  2. On Stabilization Policy in Sunspot-Driven Oligopolistic Economies By Rodolphe Dos Santos Ferreira; Frédéric Dufourt
  3. Should monetary policy lean against the wind? - an analysis based on a DSGE model with banking By Leonardo Gambacorta; Federico M Signoretti
  4. High Frequency Identification of Monetary Non-Neutrality By Emi Nakamura; Jón Steinsson
  5. Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets By Meixing Dai; Frédéric Dufourt; Qiao Zhang
  6. Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices By Asongu , Simplice A
  7. New Empirics of monetary policy dynamics: evidence from the CFA franc zones By Asongu , Simplice A
  8. Optimal Monetary Responses to Asset Price Levels and Fluctuations: The Ramsey Problem and A Primal Approach By Diogo Guillen; Wei Cui
  9. Central Bank Design By Ricardo Reis
  10. ‘Time Inconsistency’: The Phillips Curve Example (An Analysis for Intermediate Macroeconomics) By Fidelina B. Natividad-Carlos
  11. On firm-level, industry-level, and aggregate employment fluctuations By Miguel Casares
  12. Macroeconomic stabilisation and bank lending: A simple workhorse model By Spahn, Peter
  13. How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland By Bjarni G. Einarsson; Jósef Sigurdsson
  14. Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics By Kosuke Aoki; Nao Sudo
  15. (Taylor) Rules versus Discretion in U.S. Monetary Policy By Alex Nikolsko-Rzhevskyy; David Papell; Ruxandra Prodan
  16. Policies to support sustainable long-term growth in New Zealand By Calista Cheung
  17. Income Taxation of U.S. Households: Facts and Parametric Estimates By Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
  18. Waves in Ship Prices and Investment By Robin Greenwood; Samuel Hanson
  19. Tipping points in macroeconomic Agent-Based models By Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
  20. Environmental Protection, Rare Disasters, and Discount Rates By Robert J. Barro
  21. PRIVATE VERSUS PUBLIC OLD-AGE SECURITY By Barnett, Richard; Bhattacharya, Joydeep; Puhakka, Mikko
  22. Patience Cycles By Barnett, Richard; Bhattacharya, Joydeep; Puhakka, Mikko
  23. Is There a Quality Bias in the Canadian CPI? Evidence from Micro Data By Oleksiy Kryvtsov
  24. Profitability of the Banking Sector of Pakistan: Panel Evidence from Bank-Specific, Industry-Specific and Macroeconomic Determinants By Raza, Syed Ali; Jawaid, Syed Tehseen; Shafqat, Junaid
  25. Financial Integration and EMU's External Imbalances in a Two-Country OLG Model By Karl Farmer
  26. Transmissão da Política Monetária pelos Canais de Tomada de Risco e de Crédito: uma análise considerando os seguros contratados pelos bancos e o spread de crédito no Brasil By Debora Pereira Tavares; Gabriel Caldas Montes; Osmani Teixeira de Carvalho Guillén
  27. Okun's law - a meta analysis By Roger Perman; Stephan Gaetan; Christophe Tavera
  28. The hallmarks of crisis. A new center-periphery perspective on long cycles By Tausch, Arno
  29. Ireland’s Economic Crisis - The Good, the Bad and the Ugly By Karl Whelan
  30. An Asymmetric Model on Seigniorage and the Dynamics of Net Foreign Assets By Georg Dettmann
  31. Ефекти от политиките, финансирани от европейските фондове: оценяване на въздействието на инвестициите в образование и наука в България By Simeonova-Ganeva, Ralitsa; Ganev, Kaloyan

  1. By: Asongu , Simplice A
    Abstract: We analyze the effects of monetary policy on economic activity in the proposed African monetary unions. Findings broadly show that: (1) but for financial efficiency in the EAMZ, monetary policy variables affect output neither in the short-run nor in the long-term and; (2) with the exception of financial size that impacts inflation in the EAMZ in the short-term, monetary policy variables generally have no effect on prices in the short-run. The WAMZ may not use policy instruments to offset adverse shocks to output by pursuing either an expansionary or a contractionary policy, while the EAMZ can do with the ‘financial allocation efficiency’ instrument. Policy implications are discussed.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  2. By: Rodolphe Dos Santos Ferreira; Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)
    Abstract: Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. We show that a well designed taxation-subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single efficient equilibrium. At the macroeconomic level, implementing this stabilization policy leads to significant welfare gains, attributable to a quantitatively dominant "efficient stabilization effect". This effect, while important, is typically ignored in the traditional computations of the welfare costs of aggregate fluctuations (e.g., Lucas, 2003).
    Keywords: Business cycles; Stabilization policy; Indeterminacy; Sunspot equilibria; Oligopolistic competition
    JEL: E32 E62 D43 D61
    Date: 2013–06–30
  3. By: Leonardo Gambacorta; Federico M Signoretti
    Abstract: The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness.
    Keywords: DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind
    Date: 2013–07
  4. By: Emi Nakamura; Jón Steinsson
    Abstract: We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Real and nominal yields and forward rates at horizons out to 3 years move close to one-for-one at these times implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for "background noise" in interest rates is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We use structural macroeconomic models to show that the impact of changes in real interest rates on output is small or the impact of changes in output on prices is small or both. Furthermore, our evidence points towards substantial inflation inertia.
    JEL: E30 E40 E50
    Date: 2013–07
  5. By: Meixing Dai (BETA, University of Strasbourg); Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Qiao Zhang (BETA, University of Strasbourg)
    Abstract: We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are uniformly less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output.
    Keywords: Financial frictions, mortgage-backed securities (MBS), corporate bonds, unconventional monetary policy, large scale asset purchases (LSAPs), portfolio balance channel, credit spreads.
    JEL: E32 E44 E52 E58
    Date: 2013–03
  6. By: Asongu , Simplice A
    Abstract: Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  7. By: Asongu , Simplice A
    Abstract: Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  8. By: Diogo Guillen (Princeton University); Wei Cui (Princeton University)
    Abstract: Should monetary policy react to asset prices levels and changes? In answering this question, we provide a tractable monetary Ramsey approach for a heterogeneous agents model with conventional policy (interest rate or money growth target) and unconventional policy (purchase of private illiquid assets) as instruments, in which heterogeneous agents' interaction is summarized in one implementability condition. We show that entrepreneurs hold too much liquid asset in a model with equity issuance and resale (liquidity) constraints. In the steady state, optimal policy involves paying interest on liquid assets or reducing the money supply available, leading to an equivalent increase of .40% in permanent consumption compared to the economy with no policy. In responding to liquidity shocks, the paths of macroeconomic variables under no policy and optimal policy are sharply different and suggest the need for policy on changing the rate of return on liquid assets. Finally, we prove that the unconventional policy dominates the conventional counterpart, but, quantitatively, the welfare difference of them is negligible.
    Date: 2012
  9. By: Ricardo Reis
    Abstract: What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design.
    JEL: E5 E58
    Date: 2013–07
  10. By: Fidelina B. Natividad-Carlos (School of Economics, University of the Philippines Diliman)
    Abstract: This paper provides the algebra and a panel diagram to attempt to examine the so-called inflation- unemployment (or Phillips curve, or aggregate supply) example, the most popular example in the literature when introducing the concept of “time inconsistency” or “dynamic inconsistency”. The resulting panel diagram (along with the derivations presented in the appendices) is used to analyze the different possible outcomes, depending on the scenarios – rule or pre-commitment, cheating, and equilibrium – and find out whether there is indeed “time inconsistency” or “dynamic inconsistency” in the said example.
    Keywords: Philips curve, aggregate supply, time inconsistency, dynamic inconsistency, short-run optimal policy, long-run optimal policy, rational expectations, rules vs discretion
    JEL: E31 E52 E61
    Date: 2013–07
  11. By: Miguel Casares (Departamento de Economía-UPNA)
    Abstract: Employment fluctuations are examined, at different levels of aggregation, in a dynamic model that provides firm-specific hiring decisions due to search frictions and sticky pricing. The results indicate that firm-level employment dispersion rises with higher price stickiness and higher demand elasticity, whereas it falls with more convexity of search costs and with a higher labor supply elasticity. Industry-level employment is more volatile and less procyclical than aggregate employment, and a larger industry size reduces volatility and raises co-movement with output. The calibrated model is able to match the volatility, autocorrelation and cyclical correlation of US industry-level employment when incorporating firm-specific technology shocks.
    Keywords: employment fluctuations, search frictions, sticky prices, firm-specific shocks
    JEL: E3 J2 J3 J4
    Date: 2013
  12. By: Spahn, Peter
    Abstract: A hybrid standard macro model is supplemented by an explicit analysis of bank lending, based on a five-position aggregative balance sheet. In the model's two versions credit supply is based on a leverage targeting rule or on simple optimisation, taking into account lending risks and funding costs. Model simulations explore consequences of supply and demand disturbances, discretionary interest rate moves, asset valuation and credit risk shocks. Besides standard Taylor policies, the paper compares the relative efficiency of additional stabilisation tools like external-funding taxes and anti-cyclical leverage regulation. Quantitative restrictions for bank activities seem to be useful. --
    Keywords: Taylor rule,Leverage targeting,Financial market shocks,Funding costs,Endogenous money
    JEL: E1 E5 G2
    Date: 2013
  13. By: Bjarni G. Einarsson; Jósef Sigurdsson
    Abstract: This paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% depending on estimation methodology. We evaluate what factors influence changes in the NAIRU. In particular, we assess whether changes in the NAIRU have been influenced by structural changes or changes in actual unemployment and therefore aggregate demand; i.e., whether there is evidence of hysteresis in unemployment. We find that time variation in the NAIRU is to a large extent due to hysteresis effects but to a lesser extent due to structural factors. This implies that monetary policy can have long-run effects on unemployment and its conduct is thus more complicated. Prudence in the government’s conduct of fiscal policy and labor unions’ and their counterparties’ wage bargaining becomes more important in the presence of hysteresis in unemployment, as inflationary pressures must be countered with a rise in interest rates, which can cause an increase in the NAIRU. Keeping inflation low becomes more important for the real economy in the presence of hysteresis in unemployment.
    Date: 2013–07
  14. By: Kosuke Aoki (The University of Tokyo); Nao Sudo (Bank of Japan)
    Abstract: Since the middle of 1990s, the Japanese banks have continuously tilted their asset portfolio towards the government bonds, reducing their lending to …rms. In this paper, we investigate the causes and consequences of such changes in the banks behaviors, by introducing the bank’s asset portfolio decision into an otherwise standard New Keynesian model. The banks in our model construct their portfolio under the value at risk constraint, that requires banks repay their debt regardless of the realization of the asset returns. Under the constraint, an increase in down-side risks, tightening of capital requirement rules or deterioration of the banks net worth reduce the banks’ risk taking capacity, and incurs a shrinkage of the bank’s balance sheet and asset rebalancing towards government bond. The changes in banks’ investment decisions dampen output and inflation. Empirical studies suggest that our theoretical predictions are consistent with behavior of the Japanese banks.
    Date: 2013–07
  15. By: Alex Nikolsko-Rzhevskyy (Lehigh University); David Papell; Ruxandra Prodan
    Abstract: The Taylor rule has been the dominant metric for monetary policy evaluation over the past 20 years, and it has become common practice to identify periods where policy either adheres closely to or deviates from the Taylor rule benchmark. The purpose of this paper is to identify (Taylor) rules-based and discretionary eras solely from the data so that knowledge of subsequent economic outcomes cannot influence the choice of the dates. We define Taylor rules-based and discretionary eras by smaller and larger Taylor rule deviations, the absolute value of the difference between the actual federal funds rate and the federal funds rate prescribed by the original Taylor rule, and use tests for multiple structural changes and Markov switching models to identify the eras. Monetary policy in the U.S. is characterized by a Taylor rules-based (low deviations) era until 1974, a discretionary (high deviations) era from 1974 to about 1985, a rules-based era from about 1985 to 2000, and a discretionary era from 2001 to 2008. The Taylor rule deviations are about three times as large in the discretionary eras than in the rules-based eras and are almost four times larger in the most discretionary era (1974 to 1984) than in the least discretionary era (1985 to 2000). With the Markov switching models, which allow for regime changes at the beginning and end of the sample, we also identify a discretionary era from 1965 to 1968 and a rules-based era in 2006 and 2007. The discretionary and rules-based eras closely correspond to periods where the Taylor rule deviations are above and below two percent.
    Keywords: Taylor rules, rules versus discretion, monetary policy
    JEL: E52
    Date: 2013–07–17
  16. By: Calista Cheung
    Abstract: As its workforce ages and major economies shift towards producing higher value-added goods and services, New Zealand will face increasing challenges to remain globally competitive and maintain high living standards. Future growth will need to come increasingly from productivity gains, and resources will have to shift towards activities that rely more on skills, technology and intangible assets. Strengthening international linkages will be crucial to overcoming geographic disadvantages and will require improvements in the information and communications technology infrastructure, together with innovation leveraged off the country’s strong primary industry knowledge base. Continuing to raise skill levels and the pensionable age will also help counter the effects of ageing. Lifting national saving, partly by targeting a higher public saving rate, will reduce the persistently high relative real interest rates and the sustained overvaluation of the real exchange rate, which potentially harm economic activity. To improve the sustainability of growth, revenues from non-renewable resource extraction need to be invested for the benefit of future generations and greater efforts devoted to mitigate the damage to natural capital from economic activity, particularly with respect to water quality. This Working Paper relates to the 2013 OECD Economic Review of New Zealand ( Zealand).<P>Des politiques en faveur d'une croissance viable à long terme en Nouvelle-Zélande<BR>Tandis que sa population active vieillit et que les grandes économies s’orientent vers la production de biens et services apportant une plus grande valeur ajoutée, il va devenir de plus en plus difficile pour la Nouvelle-Zélande de rester compétitive sur la scène mondiale et de maintenir un niveau de vie élevé. À l’avenir, la croissance devra s’appuyer de plus en plus sur les gains de productivité, et les ressources devront être consacrées à des activités qui font davantage appel aux qualifications, aux technologies et aux actifs incorporels. Le renforcement des liaisons internationales, déterminant pour surmonter l’éloignement géographique, nécessitera une amélioration de l’infrastructure des technologies de l’information et de la communication, ainsi qu’une innovation tirant parti de la solide base de connaissances du pays dans le secteur primaire de l’économie. S’il continue à relever les niveaux de qualification ainsi que l’âge du départ à la retraite, le pays pourra compenser les effets du vieillissement de la population et, en visant un taux d’épargne publique plus élevée, il réduira les effets potentiellement néfastes de la lourde dette extérieure pour l’activité économique. Pour rendre la croissance plus durable, il devra investir les recettes de l’extraction des ressources non renouvelables au bénéfice des générations futures, et consacrer davantage d’efforts à l’atténuation des dommages qu’entraîne l’activité économique pour le capital naturel, et notamment la qualité de l’eau. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Nouvelle-Zélande 2013 (éland e).
    Keywords: growth, human capital, globalisation, product market regulation, trade, migration, ageing, innovation, climate change, labour force participation, distance, comparative advantage, emissions trading scheme, green growth, macroeconomic imbalances, royalties, sustainable growth, net foreign assets, natural capital, croissance, capital humain, innovation, vieillissement, réglementation des marchés de produits, commerce, changement climatique, mondialisation, distance, avantage comparatif, migration, croissance verte, système d’échange de quotas d’émissions, déséquilibres macroéconomiques, croissance durable, capital naturel, redevances;
    JEL: E24 E27 E61 E62 F10 J11 J18 J24 J26 O43 O47 Q38 Q51 Q54 Q58
    Date: 2013–07–08
  17. By: Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
    Abstract: We use micro data from the U.S. Internal Revenue Service to document how Federal Income tax liabilities vary with income, marital status and the number of dependents. We report facts on the distributions of average taxes, properties of the joint distributions of taxes paid and income, and discuss how taxes are affected by marital status and the number of children. We also provide multiple parametric estimates of tax functions for use in applied work in macroeconomics and public finance.
    Keywords: taxation, tax progressivity, households
    JEL: E62 H24 H31
    Date: 2013–07
  18. By: Robin Greenwood; Samuel Hanson
    Abstract: We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants’ competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity, but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.
    JEL: E44 G12 L9
    Date: 2013–07
  19. By: Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
    Abstract: The aim of this work is to explore the possible types of phenomena that simple macroeconomic Agent-Based models (ABM) can reproduce. Our motivation is to understand the large macro-economic fluctuations observed in the "Mark I" ABM devised by D. Delli Gatti and collaborators. Our major finding is the existence of a first order (discontinuous) phase transition between a "good economy" where unemployment is low, and a "bad economy" where unemployment is high. We show that this transition is robust against many modifications of the model, and is induced by an asymmetry between the rate of hiring and the rate of firing of the firms. This asymmetry is induced, in Mark I, by the interest rate. As the interest rate increases, the firms become more and more reluctant to take further loans. The unemployment level remains small until a tipping point beyond which the economy suddenly collapses. If the parameters are such that the system is close to this transition, any small fluctuation is amplified as the system jumps between the two equilibria. We have also explored several natural extensions. One is to allow this hiring/firing propensity to depend on the financial fragility of firms. Quite interestingly, we find that in this case, the above transition survives but becomes second order. We also studied simple wage policies and confidence feedback effects, whereby higher unemployment increases the saving propensity of households. We observe several interesting effects, such as the appearance of acute endogenous crises, during which the unemployment rate shoots up before the economy recovers. We end the paper with general comments on the usefulness of ABMs to model macroeconomic phenomena, in particular in view of the time needed to reach a steady state.
    Date: 2013–07
  20. By: Robert J. Barro
    Abstract: Extremely low discount rates play a central role in the Stern Review’s evaluation of environmental protection, and this assumption has been criticized by many economists. The Review also stresses that great uncertainty is a critical element for optimal environmental policies. An appropriate model for this policy analysis requires sufficient risk aversion and fattailed uncertainty to get into the ballpark of explaining the observed equity premium. A satisfactory framework, based on Epstein-Zin/Weil preferences, also separates the coefficient of relative risk aversion (important for results on environmental investment) from the intertemporal elasticity of substitution for consumption (which matters little). Calibrations based on existing models of rare macroeconomic disasters suggest that optimal environmental investment can be a significant share of GDP even with reasonable values for the rate of time preference and the expected rate of return on private capital. The key parameters, yet to be pinned down, are the proportionate effect of environmental investment on the probability of environmental disaster and the baseline probability of environmental disaster.
    JEL: E1 G12 Q5
    Date: 2013–07
  21. By: Barnett, Richard (Department of Economics & International Business LeBow College of Business Drexel University); Bhattacharya, Joydeep (Department of Economics Iowa State University); Puhakka, Mikko (Department of Economics University of Oulu)
    Abstract: We compare two institutions head on, a family compact – a parent makes a transfer to her parent in anticipation of a possible future gift from her children – with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist; indeed, the former may be preferred. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system – as the experience of Europe, circa 1880s, would suggest – this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system.
    Keywords: fertility; family compacts; social security; intergenerational cooperation; pensions; self-enforcing constitutions
    JEL: E21 E32
    Date: 2012–09–02
  22. By: Barnett, Richard (Department of Economics & International Business LeBow College of Business Drexel University); Bhattacharya, Joydeep (Department of Economics Iowa State University); Puhakka, Mikko (Department of Economics University of Oulu)
    Abstract: Evidence supports the notion that those who grow up to be patient do better than those who do not. Parents can inculcate the virtue of delayed gratification in their children by taking the right actions. We study a model in which parents, for selfish reasons, invest resources to raise patient children. In the model, patience raises the marginal return to human capital acquisition giving the patient young an incentive to spend more on their own education at the expense of investment in their own progeny’s patience. This dynamic generates intergenerational patience cycles.
    Keywords: patience; delayed gratification; preference transmission; human capital
    JEL: E20 J24
    Date: 2012–08–24
  23. By: Oleksiy Kryvtsov
    Abstract: Rising consumer prices may reflect shifts by consumers to new higher-priced products, mostly for durable and semi-durable goods. I apply Bils’ (2009) methodology to newly available Canadian consumer price data for non-shelter goods and services to estimate how price increases can be divided between quality growth and price inflation. I find that less than one-third of observed price increases during model changeovers should be attributed to quality growth. This implies overall price inflation close to inflation measured by the official index. I conclude that, according to Bils’ methodology, the quality bias is not an important source of potential mismeasurement of CPI inflation in Canada.
    Keywords: Inflation and prices; Potential output
    JEL: E31 M11 O47
    Date: 2013
  24. By: Raza, Syed Ali; Jawaid, Syed Tehseen; Shafqat, Junaid
    Abstract: This study investigates determinants of banks’ profitability in Pakistan by using the panel data of 18 banks from the period of 2001 to 2010. Pedroni panel cointegration results confirm that there exists valid long run relationship between considered variables. Results of random effects model suggest negative and significant effect of bank size, credit risk, liquidity, taxation, and nontraditional activity with profitability. Conversely, positive and significant effects of capitalization, banking sector development and inflation have been found with profitability. However, the stock market development has negative but insignificant relationship with profitability. Sensitivity analyses confirm that the results are robust.
    Keywords: Profitability, Banks, Panel Data, Credit Risk
    JEL: E44 G21 L8
    Date: 2013–07–05
  25. By: Karl Farmer (Karl-Franzens University of Graz)
    Abstract: The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge.
    Date: 2013–07
  26. By: Debora Pereira Tavares; Gabriel Caldas Montes; Osmani Teixeira de Carvalho Guillén
    Abstract: This research presents a pioneering contribution to the literature on the transmission mechanism of monetary policy through the credit channel and the risk-taking channel, since it analyzes the influence of monetary policies on the insurance hiring process by banks in order to protect them against losses in lending transactions to individuals and, also, investigates the impact of contracting this type of insurance on credit spread in Brazil. The results indicate that: i) monetary policies influence the credit insurance premium; and ii) there exists a positive relationship between the insurance premium and the spread, suggesting that the credit spread is sensitive to the amount of insurance paid by financial institutions.
    Date: 2013–07
  27. By: Roger Perman (Department of Economics, University of Strathclyde); Stephan Gaetan (CREM< CNRS - Universite de Rennes 1); Christophe Tavera (CREM< CNRS - Universite de Rennes 1)
    Abstract: This paper seeks to identify whether there is a representative empirical Okun’s Law coefficient (OLC) and to measure its size. We carry out a meta regression analysis on a sample of 269 estimates of the OLC to uncover reasons for differences in empirical results and to estimate the ‘true’ OLC. On statistical (and other) grounds, we find it appropriate to investigate two separate subsamples, using respectively (some measure of) unemployment or output as dependent variable. Our results can be summarized as follows. First, there is evidence of type II publication bias in both sub-samples, but a type I bias is present only among the papers using some measure of unemployment as the dependent variable. Second, after correction for publication bias, authentic and statistically significant OLC effects are present in both sub-samples. Third, bias-corrected estimated true OLCs are significantly lower (in absolute value) with models using some measure of unemployment as the dependent variable. Using a bivariate MRA approach, the estimated true effects are -0.25 for the unemployment sub-sample and -0.61 for the output-sub sample; with a multivariate MRA methodology, the estimated true effects are -0.40 and -1.02 for the unemployment and the output-sub samples respectively.
    Keywords: Okuns law, meta analysis, Okun's law coefficient, OLC
    JEL: E3 E31 E32 E6
    Date: 2013–07
  28. By: Tausch, Arno
    Abstract: Our analysis, based on a variety of standard econometric techniques, aims to be a fairly comprehensive test of the hypotheses about long cycles, associated with the name of Kondratiev/Kondratieff. Our work tries to link the issue of long cycles with the issue of economic convergence and divergence in the world system, because there are very strong cyclical ups and downs of relative convergence in the world system, observable not just in the “national” growth rates and “national” economic cycles. Already the Japanese economist Kaname Akamatsu, who lived from August 7, 1896 to December 20, 1974, and who was a great admirer of Kondratiev/Kondratieff, hinted at this connection. His most well-known tribute to Kondratiev/Kondratieff (Akamatsu, 1961) specifically links the rise and decline of the global peripheries to the larger Kondratiev/Kondratieff cycle. His contribution, which is hardly ever mentioned nowadays in the framework of K-cycle research, is the starting point of our analysis. In fact, these “Akamatsu cycles”, analyzed in this work, are even stronger and seem to be more devastating than the “national Kondratiev/Kondratieff waves” and world systemic waves themselves, leading to the discovery of what might be even termed a “double-Tsunami wave structure”. Both our re-analysis of world industrial production growth data since 1741 as well as the global conflict data since 1495, presented in this article, cautiously support the earlier contentions of world system research with evidence, tested by spectral analysis and auto-correlation analysis. Using the well-known and now updated Maddison data base at, Kondratiev/Kondratieff cycles of around 60 years duration at a nation state level are most clearly visible in Argentina, Canada, and Russia, with evidence on the existence of longer cycles of more than 35 years also in Belgium; Chile; Greece; Netherlands; India; New Zealand; Spain; and USA; while for the other countries of the Maddison data set, earlier negative spectral density analysis results reported in the ample literature surveyed in this article could not be falsified. By contrast, the evidence about strong long term cycles of convergence seems to be very convincing. Future research is recommended to realize that convergence processes in most nations of the world are discontinuous and of a cyclical nature, thus supporting the pessimism inherent in the writings by the world systems scholar Giovanni Arrighi on the subject.
    Keywords: Kondratieff; Long waves: Business cycles
    JEL: C65 E32 E37
    Date: 2013–07–16
  29. By: Karl Whelan (University College Dublin)
    Abstract: This paper provides an overview of Ireland’s macroeconomic performance over the past decade. In addition, to presenting the underlying facts about the boom, bust and (currently limited) recovery, the paper also discusses some common fallacies and misrepresentations of economic events in Ireland. The paper concludes with some broader lessons from the Irish experience for Eurozone economic policy and some observations on the role that EMU and the ECB have played in Ireland’s crisis.
    Keywords: Irish Economy, Banking Crises, Euro Crisis
    Date: 2013–07–24
  30. By: Georg Dettmann (Department of Economics (University of Verona))
    Abstract: The emergence of international current account imbalances has dominated the economic debate for several years and has been considered one of the main reasons for the turbulences in the world economy since 2007. Economic theory suggests that an economy cannot run persistent current account deficits without depleting its net foreign assets. Nevertheless, for most of the 2000s the US net foreign liabilities grew at a rate below the one of the cumulative current account deficit. To investigate on the mechanisms that allow the US to do so, this paper sets up a two country DGE model with asymmetric liquidity constraints. The model will show that there is a permanent wealth transfer from the world to the US. The unique position of the US not only allows them to run persistent current account deficits, but also imposes a permanent decay on the American current account. As the issuer of the world key currency in an asymmetric world monetary system, the US can make use of Seigniorage and valuation effects to be able to run a continuous current account deficit. These mechanisms work in favour of their net foreign bond holdings, but let their CA further deteriorate. The corresponding one-way capital flows were part of the distortions that laid the ground for the world financial crisis 2007-2009. Future will show if a multi polar world with several (regional) reserve currencies emerges.
    Keywords: Seigniorage, NFA Positions, Current Account, DGE, Two Country Model, Borrowing Constraints, International Monetary Theory
    JEL: E41 E42 E47 E51 F31 F32
    Date: 2013–06
  31. By: Simeonova-Ganeva, Ralitsa; Ganev, Kaloyan
    Abstract: The main objective of the paper is to provide an estimation of the impact of the investments in education and science in Bulgaria, financed by the European structural instruments. It provides net impact assessment as of end of 2012 as well as projections of potential effect until 2020. The methodology used is based on application of SIBILA model (Vasilev, Ganev, Simeonova-Ganeva, Chobanov & Tsvetkov, 2011).
    Keywords: economic policies, impact assessment, european funds, human capital, technological capital
    JEL: E6 H5 I2
    Date: 2013

This nep-mac issue is ©2013 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.