nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒08‒10
twenty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve? By Francisco Palomino; Alex Hsu
  2. Demand expectations and the timing of stimulus policies By Guimaraes, Bernardo; Machado, Caio
  3. Adapting the Hodrick-Prescott Filter for Very Small Open Economies By Grech, Aaron George
  4. The Gender Unemployment Gap By Stefania Albanesi; Aysegul Sahin
  5. Banking Crises and “Japanization†: Origins and Implications By Masahiro Kawai; Peter Morgan
  6. Recessions, Growth and Financial Crises By Dwyer, Gerald P; Devereux, John; Baier, Scott L.; Tamura, Robert
  7. The real financial crisis: an individual households' crisis The case for index-linked government bonds for the Netherlands, the U.S. and the U.K. By DE KONING, Kees
  8. Asset Bubbles in an Overlapping Generations Model with Endogenous Labor Supply By Shi, Lisi; Suen, Richard M. H.
  9. Woodford's Approach to Robust Policy Analysis in a Linear-Quadratic Framework By Jianjun Miao; Hyosung Kwon
  10. Statistical Modeling of Monetary Policy and its Effects By Sims, Christopher A.
  11. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  12. Sovereign bond market reactions to fiscal rules and no-bailout clauses – The Swiss experience By Lars P. Feld; Alexander Kalb; Marc-Daniel Moessinger; Steffen Osterloh
  13. The informal economy, innovation and intellectual property - Concepts, metrics and policy considerations By Jeremy de Beer; Kun Fu; Sacha Wunsch-Vincent
  14. Foreign Exchange Market Interventions and the $-¥ Exchange Rate in the Long-Run By Joscha Beckmann; Ansgar Belke; Michael Kühl
  15. A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints By Carlos Garriga; Mark P. Keightley
  16. "Foreign and Public Deficits in Greece: In Search of Causality" By Michalis Nikiforos; Laura Carvalho; Christian Schoder
  17. The Liquidity Coverage Ratio: the need for further complementary ratios? By Ojo, Marianne
  18. The HERMES-13 macroeconomic model of the Irish economy By Bergin, Adele; Conefrey, Thomas; FitzGerald, John; Kearney, Ide; Znuderl, Nusa
  19. Leverage ratios and Basel III: proposed Basel III leverage and supplementary leverage ratios By Ojo, Marianne
  20. The Basel capital adequacy and regulatory framework: balancing risk sensitivity, simplicity and comparability By Ojo, Marianne
  21. Exchange Rate Pass-through into German Import Prices – A Disaggregated Perspective By Joscha Beckmann; Ansgar Belke; Florian Verheyen
  22. Does Convergence Exist? By Jahan, Sumbul

  1. By: Francisco Palomino (University of Michigan); Alex Hsu (Georgia Tech)
    Abstract: We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.
    Date: 2013
  2. By: Guimaraes, Bernardo; Machado, Caio
    Abstract: This paper proposes a simple macroeconomic model with staggered investment decisions. The expected return from investing depends on demand expectations, which are pinned down by fundamentals and history. Owing to an aggregate demand externality, investment subsidies can improve welfare in this economy. The model can be used to address questions concerning the timing of stimulus policies: should the government spend more on preventing the economy from falling into a recession or on rescuing the economy when productivity picks up? Results show the government should strike a balance between both objectives.
    Keywords: Demand expectations, coordination, fiscal stimulus, timing frictions
    JEL: D84 E32 E62
    Date: 2013–07
  3. By: Grech, Aaron George
    Abstract: The Hodrick-Prescott (HP) filter is a commonly used method, particularly in potential output studies. However its suitability depends on a number of conditions. Very small open economies do not satisfy these as their macroeconomic series exhibit pronounced trends, large fluctuations and recurrent breaks. Consequently the use of the filter results in random changes in the output gap that are out of line with the concept of equilibrium. Two suggestions are put forward. The first involves defining the upper and lower bounds of a series and determining equilibrium as a weighted average of the filter applied separately on these bounds. The second involves an integration of structural features into the standard filter to allow researchers to set limits on the impact of structural/temporary shocks and allow for lengthy periods of disequilibria. This paper shows that these methods can result in a smoother output gap series for the smallest Euro Area economies.
    Keywords: Potential output, output gap, Hodrick-Prescott filter, detrending, business cycles, small open economies
    JEL: B41 C1 E32 F41
    Date: 2013–08
  4. By: Stefania Albanesi (Federal Reserve Bank of New York and CEPR); Aysegul Sahin (Federal Reserve Bank of New York)
    Abstract: The unemployment gender gap, defined as the difference between female and male unemployment rates, was positive until 1980. This gap virtually disappeared after 1980, except during recessions when men's unemployment rate always exceeds women's. We study the evolution of these gender differences in unemployment from a long-run perspective and over the business cycle. Using a calibrated three-state search model of the labor market, we show that the rise in female labor force attachment and the decline in male attachment can mostly account for the closing of the gender unemployment gap. Evidence from nineteen OECD countries also supports the notion that convergence in attachment is associated with a decline in the gender unemployment gap. At the cyclical frequency, we find that gender differences in industry composition are important in recessions, especially the most recent, but they do not explain gender differences in employment growth during recoveries.
    Keywords: Gender unemployment gap, labor market attachment
    JEL: E24 J64
    Date: 2013–05
  5. By: Masahiro Kawai (Asian Development Bank Institute (ADBI)); Peter Morgan
    Abstract: Japan’s “two lost decades†perhaps represent an extreme example of a weak recovery from a financial crisis, and are now referred to as “Japanization.†More recently, widespread stagnation in advanced economies in the wake of the global financial crisis led to fears that Japanization might spread to other countries. This study examines the dimensions of Japanization—including low trend growth, debt deleveraging, deflation, and massive increases in government debt—and analyzes their possible causes—including inadequate macroeconomic policy responses, delayed banking sector restructuring, inadequate corporate investment, loss of industrial competitiveness, a slowdown in total factor productivity (TFP) growth due to excessive regulation and economic rigidities, and an aging society. The study compares Japan’s experience with three other groups that experienced banking crises in the 1990s—developed economies; emerging Asian economies and Latin American economies. Japan’s experience is found to parallel most closely that of other Asian economies that experienced unusually high growth rates of gross domestic product (GDP) and credit before their crises. The study also develops an econometric model of long-term growth rates that uses measures of net investment, the share of the aged in the population, and occurrence of banking crises in addition to traditional explanatory variables. It finds that very low rates of consumer price index (CPI) inflation (or deflation) and net investment, the lack of openness to foreign direct investment, and an aged population explain much of Japan’s slowdown.
    Keywords: Japan, lost decades, Japanization, global financial crisis, macroeconomic policy responses, banking crisis
    JEL: E20 E31 E51 F31 G01
    Date: 2013–07
  6. By: Dwyer, Gerald P; Devereux, John; Baier, Scott L.; Tamura, Robert
    Abstract: We examine the relationship of banking crises with economic growth and recessions. Our data cover 21 economies from around the world, most from 1870 to 2009 with the rest starting in 1901 or earlier. The data include capital investment and human capital formation. We have two major findings. First, there is very large heterogeneity in growth of Gross Domestic Product (GDP) and capital investment after banking crises. Most strikingly, twenty-five percent of counties experience no decrease in real GDP per capita in the year of the crisis or the following two years. Some countries see an increase in long run growth after a crisis while others see a fall, with no clear overall pattern. Second, we find clear evidence consistent with Zarnowitz’s Law. If there is a contraction in economic activity after a banking crisis, larger decreases in real GDP per capita are followed by faster subsequent growth.
    Keywords: financial crises, banking crises, recessions, Zarnowitz's Law, Zarnowitz's rule
    JEL: E32 E44 G01
    Date: 2013–05
  7. By: DE KONING, Kees
    Abstract: The real financial crisis in the U.S. and in other countries did not take place in the banking or the wider financial sector -yes banks and others financial institutions were affected by their own induced excessive lending schemes- but no, it seriously affected the individual households. More than 40% of the 53 million home owners who had a mortgage in the U.S. were affected by foreclosure proceedings over the period 2004-2012. Out of those 21.4 million households 5.4 million had their homes repossessed. Between 2006 and 2010 an additional 7.8 million Americans lost their jobs. Mainly as a result of the economic slowdown, between 2006 and to-day the U.S. government doubled its debts from $8.5 trillion till just below $17 trillion to-day. On top of this individual households lost $12.6 trillion in net worth in 2008, more than the total debt level on home mortgages in that year which stood at $10.5 trillion. The focus of many economists is to find a general economic equilibrium and to study the relationship between money supply, inflation and economic growth levels. From above headline figures one can conclude that the U.S. economy was as far from a general equilibrium as one could possibly imagine. One may also conclude that it was not the money supply which changed dramatically (M2, seasonally adjusted, grew by 4.7% in 2003, 5.96% in 2004, 4.5% in 2005 and 5.76% in 2006), but rather the use of funds over the four years preceding 2008, which led to house price increases of over 30% in the three year period 2003-2005. It was the “abuse of funds” over the latter period which led to the subsequent losses in jobs, in incomes and net worth and in a reduction in economic growth rates which has lasted up till to-day. It was also one of the main causes of the growth in U.S. government debt over the last 7 years. In this paper a “use of funds” theory will be developed, which will be based on actual economic developments, rather than on hypothetical links between money supply, inflation, and economic growth. Emphasis will be placed on the two main long term borrowing levels which affect individual households: home mortgages and government debt levels. The borrowing behaviour of the company sector will not be a subject of discussion as a misallocation of funds to these companies will usually lead to bankruptcy, which means the company seizes to exist. Neither individual households nor a government disappear in the same manner. Emphasis will also be placed on the costs of debt and the accumulation of savings in pension funds in this use of funds theory. It will be demonstrated that issuing (part of) government debt in an index linked manner is an ideal tool to lower the costs of funding for the three countries under consideration: the Netherlands, the U.S. and the U.K. Such funding will also act as an anti-cyclical instrument in times of slow or negative economic growth. The negative interest rate effects on fixed rate bond portfolios as a consequence of discontinuing quantitative easing can be counteracted by temporarily increasing the volume of index linked bonds. The aim of this paper is to provide an insight into the links between lending activities, inflation, interest rates, economic growth and the ambition to provide for future incomes out of individual households own savings, rather than relying on a transfer system from those in work to those in retirement.
    Keywords: financial crisis; individual households' incomes and debts; home mortgages,government debt; pension funds; Bank of England pension fund; use of funds philosophy; quantitative easing; economic easing
    JEL: E2 E21 E24 E3 E32 E4 E43 E51
    Date: 2013–08–05
  8. By: Shi, Lisi; Suen, Richard M. H.
    Abstract: This paper examines the effects of asset bubbles in an overlapping generations model with endogenous labor supply. We derive a set of conditions under which asset bubbles will lead to an expansion in steady-state capital, investment, employment and output. We also provide a specific numerical example to illustrate these results.
    Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor.
    JEL: E22 E44
    Date: 2013–08–04
  9. By: Jianjun Miao (Boston University); Hyosung Kwon (Boston University)
    Abstract: This paper extends Woodford's (2010) approach to the robustly monetary policy to a general linear quadratic framwork. We provide algorithms to solve for a time-invariant linear robustly optimal policy from a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretation. We apply our methods to two New Keynesian models of monetary policy: (i) a model with persistent cost-push shocks and (ii) a model with inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation in the presence inflation inertia.
    Date: 2013
  10. By: Sims, Christopher A. (Princeton University)
    Abstract: Nobel Prize lecture, 8 December 2011
    Keywords: Causation; Macroeconomics
    JEL: C32 E60
    Date: 2013–08–08
  11. By: Keiichiro Kobayashi (Keio University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
    Keywords: Debt overhang, liquidity, working capital, systemic crisis.
    JEL: E30 G01 G21
    Date: 2013–08
  12. By: Lars P. Feld (Walter Eucken Institut & University of Freiburg); Alexander Kalb (Bayern LB); Marc-Daniel Moessinger (ZEW (Centre for European Economic Research)); Steffen Osterloh (German Council of Economic Experst)
    Abstract: We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on two different institutional factors. First, many of the Swiss cantons have adopted strong fiscal rules. We find evidence that both the presence and the strength of these fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in financial distress, thus leading to a fully credible no-bailout regime. Our results show that this break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the link between cantonal risk premia and the financial situation of the municipalities in its canton which existed before. This demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor.
    Keywords: Sub-national government bonds, fiscal rules, no-bailout clause, sovereign risk premium
    JEL: E62 G12 H63 H74
    Date: 2013
  13. By: Jeremy de Beer (U. Ottawa); Kun Fu (Imperial College); Sacha Wunsch-Vincent (World Intellectual Property Organization, Economics and Statistics Division, Geneva, Switzerland)
    JEL: E26 O12 O17 O3
    Date: 2013–07
  14. By: Joscha Beckmann; Ansgar Belke; Michael Kühl
    Abstract: This paper tries to clarify the question of whether foreign exchange market interventions conducted by the Bank of Japan are important for the Dollar-Yen exchange rate in the long-run. Our strategy relies on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we put our focus on two new questions. Firstly, does the consideration of periods of massive interventions in the foreign exchange market help to uncover a potential long-run relationship between the exchange rate and its fundamentals? Secondly, do Forex interventions support the adjustment towards a long-run equilibrium value? Our overall results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated Forex interventions. Our results indicate that only coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a long-run perspective. This is a novel contribution to the literature.
    Keywords: Structural exchange rate models; cointegration; intervention analysis
    JEL: E44 F31 G12
    Date: 2013–07
  15. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Mark P. Keightley (Florida State University)
    Abstract: This paper analyzes the effectiveness of three different types of education policies: tuition subsidies (broad based, merit based, and flat tuition), grant subsidies (broad based and merit based), and loan limit restrictions. We develop a quantitative theory of college within the context of general equilibrium overlapping generations economy. College is modeled as a multi-period risky investment with endogenous enrollment, time-to-degree, and dropout behavior. Tuition costs can be financed using federal grants, student loans, and working while at college. We show that our model accounts for the main statistics regarding education (enrollment rate, dropout rate, and time to degree) while matching the observed aggregate wage premiums. Our model predicts that broad based tuition subsidies and grants increase college enrollment. However, due to the correlation between ability and financial resources most of these new students are from the lower end of the ability distribution and eventually dropout or take longer than average to complete college. Merit based education policies counteract this adverse selection problem but at the cost of a muted enrollment response. Our last policy experiment highlights an important interaction between the labor-supply margin and borrowing. A significant decrease in enrollment is found to occur only when borrowing constraints are severely tightened and the option to work while in school is removed. This result suggests that previous models that have ignored the student's labor supply when analyzing borrowing constraints may be insufficient.
    Keywords: Student Loans, Education Subsidies, Higher Education
    JEL: E0 H52 H75 I22 J24
    Date: 2013–05
  16. By: Michalis Nikiforos; Laura Carvalho; Christian Schoder
    Abstract: The paper discusses the trajectories of the Greek public deficit and sovereign debt over the last three decades and its connection to the political and economic environment of the same period. We pay special attention to the causality between the public and the foreign deficit. We argue that from 1980 to 1995 causality ran from the public deficit to the foreign deficit, but that due to the European monetary unification process and the adoption of the common currency, causality has reversed since. This hypothesis is tested and verified econometrically using both Granger Causality and Cointegration analyses.
    Keywords: Greece, crisis, public debt, twin deficits, imbalances
    JEL: E62 F21 F34 F41
    Date: 2013–08
  17. By: Ojo, Marianne
    Abstract: This paper considers components of the Liquidity Coverage Ratio – as well as certain prevailing gaps which may necessitate the introduction of a complementary liquidity ratio. The definitions and objectives accorded to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) highlight the focus which is accorded to time horizons for funding bank operations. A ratio which would focus on the rate of liquidity transformations and which could also serve as a complementary metric given certain gaps which currently prevail with the Liquidity Coverage Ratio, as well as existing gaps with other complementary liquidity monitoring tools, is proposed.
    Keywords: Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); High Quality Liquid Assets (HQLA); liquidity monitoring tools; objectivity; comparability; transparency; disclosure
    JEL: E0 E02 G2 G3 K2
    Date: 2013–08–04
  18. By: Bergin, Adele; Conefrey, Thomas; FitzGerald, John; Kearney, Ide; Znuderl, Nusa
    Abstract: The HERMES macroeconomic model has been used extensively for over 25 years to carry out medium-term forecasting and scenario analysis of the Irish economy. Most recently the model has been used to generate the scenarios underpinning the 2013 edition of the ESRI's Medium-Term Review. In the long period over which the model has been used for policy analysis, the Irish economy has undergone substantial change and new approaches to modelling important economic relationships have been developed. This paper outlines the structure and behaviour of the most recent version of the HERMES model (HERMES-13). We describe the key mechanisms and the modelling innovations which have been introduced to deal with major changes in the economy. As the model draws on a range of research on the Irish economy, we describe how this work has been incorporated into the model to better capture key economic relationships. Finally, we examine the results of a series of shocks to key variables carried out using the model. This provides a benchmark against which to evaluate the long-run properties of the model as well as illustrating how the model can shed light on the key transmission channels in the economy. This paper, and the accompanying detailed model listing and estimation output, provides a basic reference manual that practitioners and interested parties can use to interpret model output and, it is hoped, make suggestions for further model development and improvement.
    Keywords: modelling/Policy/scenarios
    Date: 2013–07
  19. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. It will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood, indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.
    Keywords: global systemically important banks (G-SIBs); risk weighted assets; leverage ratios; harmonisation; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: E3 E5 G2 G3 K2
    Date: 2013–07–31
  20. By: Ojo, Marianne
    Abstract: As well as highlighting the importance of cost benefit analyses in decision- making processes where (expected) outcomes are very difficult to predict – given the degree of prevailing and potential risks and uncertainties, as well as the unquantifiable nature of such risks and uncertainties, this paper also illustrates the importance of complementary measures in the current Basel risk based capital adequacy framework. As technological advances and societal changes contribute towards the generation of certain levels of risks – some of which were previously not in existence, it is increasingly becoming evident that risks certainly have a dual nature. Institutional risks comprise of risks which are not only attributable to the firm or organisation where models (such as internal controls) or techniques are operated, namely internal control risks, but also the risks involved in managing those risks. In view of such uncertainties, and the continual evolution of risks, it becomes immediately apparent that certain outcomes cannot be predicted with high accuracy and certainty – hence the need to weigh the investment of high expenditure in such unpredictable outcomes. Is the desire to achieve comparability, as well as simplicity, greater than the need to attain accurate, reliable and more relevant results through investment in more complex techniques? Such techniques involving not only initially high outlays but also costs (as well as risks) involved in managing such techniques? These constitute some of the questions which this paper attempts to address.
    Keywords: comparability; simplicity; risk based capital adequacy framework; bank stress testing; risks; risk theories; Basel leverage ratios; liquidity standards
    JEL: E6 G2 G28 G3 K2
    Date: 2013–08–01
  21. By: Joscha Beckmann; Ansgar Belke; Florian Verheyen
    Abstract: This study analyzes the exchange rate pass-through into German import prices based on disaggregated data taken on a monthly basis between 1995 and 2012. Our main contribution is twofold: firstly, we employ various time-series techniques to analyze data for different product categories, and also cointegration techniques to carefully distinguish between shortrun and long-run pass-through coefficients. Secondly, in a panel data approach we estimate time-varying pass-through coefficients and explain their development with regard to various macroeconomic factors. Our results show that long-run pass-through is only partly observable and incomplete, while short-run passthrough shows a more unique character, although heterogeneity across product groups does exist. We are also able to identify several macroeconomic factors which determine changes in the degree of pass-through, which is especially relevant for policymakers.
    Keywords: Exchange rate pass-through; Germany; cointegration; time-varying coefficient model
    JEL: E31 F10 F14
    Date: 2013–07
  22. By: Jahan, Sumbul
    Abstract: DOES CONVERGENCE EXIST? Sumbul Jahan Institute of Business Administration (IBA), 2013 Research Project Supervisor: Dr. Farooq Pasha & Dr. Heman D. Lohano The idea of convergence in economics is the hypothesis that poorer economies income will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge; Developing countries have the potential to grow at a faster rate than the developed countries because of availability of better health facilities and technological advancements adopted from developed countries. Convergence can have two meanings: firstly, absolute (σ) convergence refers to a reduction in the dispersion of levels of income across economies; beta (β) convergence occurs when poor economies grow faster than rich ones. This research estimates absolute and beta convergence using natural log of GDP per capita and natural log of GDP per person employed, highlighting the differences in results achieved using two income parameters. This research estimates absolute and beta convergence firstly for all countries of the world; then for all developed countries and all developing countries, which have been classified as per income groups; and lastly, all developing countries have been subdivided into three regional groups and absolute and beta convergence in those three groups namely: Europe & Asia, North & Sub Saharan Africa, and Latin America & the Caribbean for a time period of 31 years from 1980 – 2011. A pattern in results can be observed in this research, especially in three regional groups of developing countries. The differences in results in natural log of GDP per capita and natural log of GDP per person employed can be due to difference in literacy rate, standard of living, technological advancements, attitude towards work and many other structural variables.
    Keywords: Convergence, absolute, beta
    JEL: E13
    Date: 2013–06

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