nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒09‒06
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Unemployment fluctuations, and optimal monetary policy in a small open economy By Hyuk Jae Rhee; Jeongseok Song
  2. The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking By Hylton Hollander and Guangling Liu
  3. Stabilisation Policy in a Model of Consumption, Housing Collateral and Bank Lending By Jagjit S. Chadha; Germana Corrado; Luisa Corrado
  4. Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan By Kitov, Ivan; KItov, Oleg
  5. How large are fiscal multipliers? A panel-data VAR approach for the Euro area By Ricardo Silva; Vitor Manuel Carvalho; Ana Paula Ribeiro
  6. A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments? By Christopher Reicher
  7. Monetary Policy and Balance Sheets By Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia Tamirisa
  8. "Keynes's Employment Function and the Gratuitous Phillips Curve Disaster" By Egmont Kakarot-Handtke
  9. The non-negative constraint on the nominal interest rate and the effects of monetary policy By Hasui, Kohei
  10. Household and firm leverage, capital flows and monetary policy in a small open economy By Pirovano, Mara
  11. The Central Bank and bank credits in the Philippines : a survey on effectiveness of monetary policy and its measures By Kashiwabara, Chie
  12. International Debt Deleveraging By Luca Fornaro
  13. "Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning" By Pavlina R. Tcherneva
  14. The Eu's Economic Policy Architecture after the Ratification of the Fiscal Treaty By Jorgen Mortensen
  15. Monetary Policy, Stock Prices and Central Banks - Cross-Country Comparisons of Cointegrated VAR Models By Ansgar Belke; Marcel Wiedmann
  16. Anticipation, Learning and Welfare: the Case of Distortionary Taxation By Emanuel Gasteiger; Shoujian Zhang
  17. Impact of a Low Interest Rate Environment - Global Liquidity Spillovers and the Search-for-yield By Ansgar Belke
  18. A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles By Zhiwei Xu; Pengfei Wang; Jianjun Miao
  19. Institutional Designs to Alleviate Liquidity Shortages in a Two- Country Model By Hiroshi Fujiki
  20. The implications of TARGET2 in the European balance of payment crisis and beyond By Sergio Cesaratto
  21. Reverse Kalman Filtering US Inflation with Sticky Professional Forecasts By James M. Nason; Gregor W. Smith
  22. Finance Access of SMEs: What Role for the ECB? By Ansgar Belke
  23. The incidence and persistence of cyclical job loss in New Zealand By Maré, David C; Fabling, Richard
  24. La END, el plan nacional plurianual del sector público y la sostenibilidad fiscal en la República Dominicana By Cruz-Rodriguez, Alexis
  25. Investment Frictions and the Aggregate Output Loss in China By Guiying (Laura) Wu
  26. Adaptive Learning and Survey Data By Agnieszka Markiewicz; Andreas Pick
  27. A Note on Commodity Taxation and Economic Growth By Kunihiko Konishi
  28. Job, Employment and Occupation Flows Over the Business Cycle By Lodewijk Visschers; Carlos Carrillo-Tudela
  29. Economic Growth and Inequality: Evidence from the Young Democracies of South America By Manoel Bittencourt
  30. Minimum Wage and Job Mobility By Céspedes, Nikita; Sánchez, Alan
  31. The Ease of Trade Imbalances Within the Euro Area After the 2008 Recession By Marcus Scheiblecker
  32. Estimation of Regulatory Credit Risk Models By Carlos Pérez Montes
  33. Water Resource Accounts for Uganda: Use and Policy Relevancy By Nicholas Kilimani
  34. Développement de l’Industrie Créative et Réduction du Chômage des Jeunes au Cameroun : une Approche par la Matrice de Comptabilité Sociale By NGUENA, Christian L.
  35. An investigation of housing affordability in the UK regions By Alberto Montagnoli; Jun Nagaysu
  36. Is the GDP growth rate in NIPA a welfare measure? By Jorge Duran; Omar Licandro
  37. The Economic Impact of Non-communicable Disease in China and India: Estimates, Projections, and Comparisons By Bloom, David E.; Cafiero, Elizabeth T.; McGovern, Mark E.; Prettner, Klaus; Stanciole, Anderson; Weiss, Jonathan; Bakkila, Samuel; Rosenberg, Larry

  1. By: Hyuk Jae Rhee (Department of Economics, University of Windsor); Jeongseok Song (Department of Economics,Chung-Ang University)
    Abstract: In this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate.
    Keywords: Unemployment; Monetary policy; Small open economy.
    JEL: E31 E58 F41
    Date: 2013–08–28
  2. By: Hylton Hollander and Guangling Liu
    Abstract: This paper studies the role of the equity price channel in business cycle fluctuations, and highlights its systemic risk across all sectors of the economy. We develop a canonical New-Keynesian dynamic stochastic general equilibrium model with a tractable role for the equity market in banking, entrepreneur and household economic interactions. The model is estimated with Bayesian techniques using U.S. data over the sample period 1982Q01 - 2012Q01. We show that a New-Keynesian DSGE model with an equity price channel well mimics the U.S. business cycle. Moreover, the equity price channel significantly exacerbates business cycle fluctuations through both the financial accelerator and bank funding channels. This study highlights the equity price channel as a different aspect to general equilibrium models with financial frictions, and emphasizes the consequences of the (in)stability of financial markets on the real economy.
    Keywords: Equity price channel, asset pricing, financial frictions, bank capital, New-Keynesian, Bayesian
    JEL: E32 E43 E44 E51 G12
    Date: 2013
  3. By: Jagjit S. Chadha; Germana Corrado; Luisa Corrado
    Abstract: We decompose aggregate consumption by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to effect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of assets, the demand for loans, the asset price and the quantity of housing collateral. We show that even though house price do not represent wealth, aggregate consumption is not independent of movements in house prices. We consider the case for employing macro-prudential policy jointly with monetary and fiscal policy in order to minimise losses for a representative household.
    Keywords: Credit constrained households; housing collateral; asset prices; bank lending; default risk; macro-prudential; fiscal and monetary policy
    JEL: E31 E40 E51
    Date: 2013–09
  4. By: Kitov, Ivan; KItov, Oleg
    Abstract: The evolution of the rate of price inflation, (t), and unemployment, u(t), in Japan has been modeled within the Phillips curve framework. As an extension to the Phillips curve, we represent both variables as linear functions of the change rate of labor force. All models were first estimated in 2005 for the period between 1980 and 2003. Here we update these original models with data through 2012. The revisited models accurately describe disinflation during the 1980s and 1990s as well as the whole deflationary period started in the late 1990s. The Phillips curve for Japan confirms the original concept that growing unemployment results in decreasing inflation. A linear and lagged generalized Phillips curve expressed as a link between inflation, unemployment, and labor force has been also re-estimated and validated by new data. Labor force projections allow a long-term inflation and unemployment forecast: the GDP deflator will be negative (between -0.5% and -2% per year) during the next 40 years. The rate fo unemployment will increase from ~4.3% in 2012 to ~5.5% in 2050.
    Keywords: inflation, unemployment, labor force, Phillips curve, forecasting, Japan
    JEL: E3 E37 E5 E52
    Date: 2013–08–30
  5. By: Ricardo Silva (Faculdade de Economia, University of Porto); Vitor Manuel Carvalho (Faculdade de Economia, University of Porto and CEF.UP); Ana Paula Ribeiro (Faculdade de Economia, University of Porto and CEF.UP)
    Abstract: In the current context where the limited role for monetary policy instruments apparently endows fiscal policy with higher effectiveness, European fiscal policy authorities are rather constrained by the fact of most countries being struggling against recessions together with the need to put public finances in a sustainable path. In this context, we assess how large are fiscal multipliers in Europe, for both aggregated and disaggregated spending and revenue variables. Moreover, we analyze how cycle phases and fiscal consolidation episodes shape the size of fiscal multipliers. We present evidence for the Euro area, relying on a VAR model with pooled annual data from 1998 to 2008. Estimation results show that, on average, transfers are the main driving force for the overall expenditure dynamics; moreover, wages exhibit negative impacts on output while positive effects are strongly driven by shocks in public investment and, to a lesser extent, by intermediate consumption. On the revenue side, all items impinge negatively on output growth. Additionally, our results show that public spending multiplier is positive in recessions while in expansions is smaller, inclusively, negative. Similarly, the effectiveness of the tax multiplier is, also, higher in recessions. Finally, we have found that consolidation phases affect negatively the size of multipliers.
    Keywords: Fiscal policy; Fiscal multipliers; Fiscal shocks; Business-cycle fluctuations; Public debt; Euro area; VAR analysis
    JEL: E32 E62 E65 H60
    Date: 2013–08
  6. By: Christopher Reicher
    Abstract: This paper provides a set of detailed estimated fiscal reaction functions for a panel of twenty industrialized countries, and it discusses commonalities and differences with regard to systematic fiscal policies across countries. In general, the countries in the panel adjust tax revenues strongly in response to the public debt, and they adjust tax revenues and transfer payments, but, interestingly, not tax rates, strongly in response to output fluctuations. Some countries such as Germany appear to adjust government consumption and investment relatively strongly in response to the public debt, while the United States adjusts capital tax rates relatively strongly. In general, an increased emphasis in the theoretical literature on the effects of procyclical tax revenues and countercyclical transfer payments as automatic stabilizers may be warranted
    Keywords: Fiscal policy, fiscal rule, deficits, taxes, government purchases, transfer payments
    JEL: E62 E63 H20 H62
    Date: 2013–08
  7. By: Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia Tamirisa
    Abstract: This paper evaluates the strength of the balance sheet channel in the U.S. monetary policy transmission mechanism over the past three decades. Using a Factor-Augmented Vector Autoregression model on an expanded data set, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while money market fund assets grow. The balance sheet effects are comparable in magnitude to the traditional interest rate channel. However, their economic significance in the run-up to the recent financial crisis was small. Large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable expansion of mortgage credit, suggesting an important role for macroprudential policies.
    Keywords: monetary policy transmission, balance sheets, FAVAR, generalized dynamic factor models
    JEL: E44 E52 G20
    Date: 2013
  8. By: Egmont Kakarot-Handtke
    Abstract: Keynes had many plausible things to say about unemployment and its causes. His "mercurial mind," though, relied on intuition, which means that he could not strictly prove his hypotheses. This explains why Keynes's ideas immediately invited bastardizations. One of them, the Phillips curve synthesis, turned out to be fatal. This paper identifies Keynes's undifferentiated employment function as a sore spot. It is replaced by the structural employment function, which also supersedes the bastard Phillips curve. The paper demonstrates in a formal and rigorous manner why there is no trade-off between price inflation and unemployment.
    Keywords: New Framework of Concepts; Structure-centric; Axiom Set; Say's Regime; Keynes's Regime; Market Clearing; Full Employment; Product Price Flexibility; Intertemporal Budget Balancing; Multiplier; Trade-Off; Price Inflation; Wage Inflation
    JEL: E12 E24
    Date: 2013–08
  9. By: Hasui, Kohei
    Abstract: This paper analyzes the effects of monetary policy shock when there is a non-negative constraint on the nominal interest rate. I employ two algorithms: the piecewise linear solution and Holden and Paetz's (2012) algolithm (the HP algorithm). I apply these methods to a dynamic stochastic general equilibrium (DSGE) model which has sticky prices, sticky wages, and adjustment costs of investment. The main findings are as follows. First, the impulse responses obtained with the HP algorithm do not differ much from those obtained with the piecewise linear solution. Second, the non-negative constraint influences the effects of monetary policy shocks under the Taylor rule under some parameters. In contrast, the constraint has little effects on the response to money growth shocks. Third, wage stickiness contributes to the effects of the non-negative constraint through the marginal cost of the product. The result of money growth shock suggests that it is important to analyze the effects of the zero lower bound (ZLB) in a model which generates a significant liquidity effect.
    Keywords: Zero lower bound; Monetary policy shock; Wage stickiness; Liquidity effect
    JEL: E47 E49 E52
    Date: 2013–08–30
  10. By: Pirovano, Mara
    Abstract: This paper presents a framework to analyze the interplay between ?financial frictions at the household and fi?rm level, liability dollarization and monetary policy in a small open economy subject to productivity and capital infl?ow shocks. Optimized monetary policy rules are calculated under several speci?cations (infl?ation targeting, exchange rate targeting, fi?xed exchange rate, credit growth targeting) and for two central bank?s objectives (macreconomic stability and macroeconomic plus fi?nancial stability). I ?find that, fi?rst, adding ?financial stability to the central bank?s objectives results in more inertial monetary policy rules. Second, the optimized Taylor rules under the ?financial stability objective achieve a lower volatility of infl?ation and of credit growth at the same time. However, this comes at the expense of a higher standard deviation of production. Third, when ?financial stability is included among the central bank?s objectives, engaging in exchange rate smoothing delivers the smallest value of the central bank?s loss function, mainly arising through a much reduced volatility of the credit aggregate. In the considered economy, credit growth targeting is suboptimal because of the effect of stronger interest rate increase on currency ?uctuations, which reinforce the ?financial accelerator. Finally, for the considered shocks, the extent of co-movement of fi?nancial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate fl?exibility.
    Date: 2013–08
  11. By: Kashiwabara, Chie
    Abstract: In the post-Asian crisis period, bank loans to the manufacturing sector have shown a slow recovery in the affected countries, unexceptionally in the Philippines. This paper provides a literacy survey on the effectiveness of the Central Bank’s monetary policy and the responsiveness of the financial market, and discusses on the future works necessary to better understand the monetary policy effectiveness in the Philippines. As the survey shows, most previous works focus on the correlation between the short-term policy rates and during the period of monetary tightening and relatively less interest in quantitative effectiveness. Future tasks would shed lights on (1) the asset side – other than loan outstanding – of banks to analyze their behavior/preference in structuring portfolios, and (2) the quantitative impacts during the monetary easing period.
    Keywords: Philippines, Monetary policy, Loans, Credit, Monetary policy measure, Credit channel, Bank loan
    JEL: E42 E52 G38
    Date: 2013–03
  12. By: Luca Fornaro
    Abstract: I provide a framework for understanding debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging world consumption demand is depressed and the world interest rate is low, reecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can depreciate their nominal exchange rate to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut off, and therefore the falls in consumption demand and in the world interest rate are amplified. Hence, monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging. In a liquidity trap deleveraging gives rise to a union-wide recession, which is particularly severe in high-debt countries. The model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions. JEL classification: E31, E44, E52, F32, F34, F41, G01, G15
    Keywords: Global Debt Deleveraging, Liquidity Trap, Monetary Union, Precautionary Savings, Debt Deflation
    Date: 2013–06–10
  13. By: Pavlina R. Tcherneva
    Abstract: The present paper offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the New Consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment but also contributes to the increasing postwar labor market precariousness and the erosion of income inequality. The two conventional demand-side measures are then contrasted with the proposed alternative--a bottom-up approach to fiscal policy based on a reinterpretation of Keynes's original policy prescriptions for full employment. The paper offers a theoretical, methodological, and policy rationale for government intervention that includes specific direct-employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.
    Keywords: Full Employment; Fiscal Policy; Aggregate Demand; Business Cycles; Income Distribution; New Consensus
    JEL: E24 E25 E62 E63 J68
    Date: 2013–08
  14. By: Jorgen Mortensen
    Abstract: The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, adopted in March 2012 and entering into force in January 2013, was presented as a reinforcement of the Stability and Growth Pact. The present Brief argues that this new Treaty does not seem to offer a definitive solution to the problem of finding the appropriate budgetary-monetary policy mix in the EMU and that it may complicate some aspects of the economic policy governance in the Eurozone.
    Keywords: Macroeconomics and macroeconomic policy, Europe, Euro area, eurozone
  15. By: Ansgar Belke; Marcel Wiedmann
    Abstract: In this paper, we analyze the long-run behavior and short-run dynamics of stock markets across some selected developed and emerging economies – namely the United States, the Euro Area, Japan, the United Kingdom, Australia, South Korea, Thailand and Brazil – in the Cointegrated Vector-Autoregressive (CVAR) framework. The main purpose is to assess empirically if liquidity conditions play a significant role for stock market developments. As an innovation, liquidity conditions enter the analysis from three angles: in the form of a broad monetary aggregate, the interbank overnight rate and net capital flows which in our case stands for the share of global liquidity that arrives in the recipient economy. A second aim is to check empirically whether central banks are able to serve as a driver of the stock market as it, for instance, seems to be the case in late 2012 and 2013 in the wake of the forward guidance conveyed by central banks worldwide.
    Keywords: Asset prices; CVAR; central banks; monetary policy; VECM
    JEL: E43 E58
    Date: 2013–08
  16. By: Emanuel Gasteiger (Instituto Universitario de Lisboa); Shoujian Zhang (University of St Andrews)
    Abstract: We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We ex- tend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-fullling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.
    Keywords: Fiscal Policy, Adaptive Learning, Oscillations
    JEL: E32 E62 D84
    Date: 2013–08–26
  17. By: Ansgar Belke
    Abstract: On 10 January 2013 the ECB Governing Council decided “to keep the key ECB interest rates unchanged” based on an assessment of a ‚contained‘ inflationary pressure and a weak economic activity, a contraction of real GDP in second and third quarter of 2012. Similar decisions have been taken by other leading central banks around the globe. This paper assesses and comments on several aspects of the implied low interest rate environment. It contains some general considerations with respect to the current low interest rate environment in advanced economies. It then deals with potential conflicts between monetary policy and financial stability in a low interest rate environment. Moreover, more practical implications for the necessity of supervision of pension funds and the insurance sector are derived. The paper also assesses the investment opportunities for retail investors in such an environment. Finally, we single out examples of main beneficiaries and losers from a low interest rate environment.
    Keywords: Global liquidity; central banks and their policies; financial repression; low interest rates; insurance companies; pension funds
    JEL: E58 F33 G22 G23
    Date: 2013–07
  18. By: Zhiwei Xu (Hong Kong University of Science and Technology); Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University)
    Abstract: We present an estimated DSGE model of stock market bubbles and business cycles using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. We identify a sentiment shock which drives the movements of bubbles and is transmitted to the real economy through endogenous credit constraints. This shock explains more than 96 percent of the stock market volatility and about 25 to 45 percent of the variations in investment and output. It generates the comovements between stock prices and macroeconomic quantities and is the dominant force in driving the internet bubbles and the Great Recession.
    Date: 2013
  19. By: Hiroshi Fujiki (Associate Director-General and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Fujiki (2003, 2006) extended the Freeman (1996) model to a two- country model, demonstrating that elastic money supplies in foreign exchange markets and the domestic credit market yield efficiency gains in monetary equilibrium, and that several institutional designs equally achieve the desired elastic money supplies. The present paper considers four institutional designs using a model similar to Fujiki (2003): a combination of central bank discount window policy and the CLS Bank; a central bank intervention both in the domestic credit market and the foreign exchange market; cross-border collateral arrangements; and foreign currency liquidity swap lines. These institutional designs yield the same efficiency gains in our model.
    Keywords: Foreign exchange market, CLS, Cross-border collateral arrangements, Liquidity swap lines
    JEL: E58 F31 F33
    Date: 2013–08
  20. By: Sergio Cesaratto
    Abstract: The paper provides an account of the meaning and implications of TARGET 2 in the Eurozone (EZ) balance of payments crisis. In this context, it discusses Hans-Werner Sinn’s thesis about a stealth bail-out of the EZ periphery by the ECB from a heterodox perspective. Financial liberalisation, a relatively loose monetary policy and the provisional fading of devaluation risks generated ephemeral growth in some peripheral EZ countries sustained by capital flows from corecountries. This has been followed by real exchange rate revaluation and deterioration of foreign accounts. As a result, external financing flows dried up and the previous stock of loans began to be repatriated. TARGET 2 has played a fundamental role in avoiding a precipitous crisis. This distinguishes the European crisis from more traditional balance of payments crises. However, the presence of TARGET 2 does not offset the absence of the financial crisis prevention and resolution mechanisms that are characteristic of fully-fledged political and currency unions
    JEL: E11 E12 E42 E58 F32 F33 F34 F36 N24
    Date: 2013–08
  21. By: James M. Nason (Federal Reserve Bank of Philadelphia); Gregor W. Smith (Queen's University)
    Abstract: We provide a new way to filter US inflation into trend and cycle components, based on extracting long-run forecasts from the Survey of Professional Forecasters. We operate the Kalman filter in reverse, beginning with observed forecasts, then estimating parameters, and then extracting the stochastic trend in inflation. The trend-cycle model with unobserved components is consistent with numerous studies of US inflation history and is of interest partly because the trend may be viewed as the Fed’s evolving inflation target or long-horizon expected inflation. The sluggish reporting attributed to forecasters is consistent with evidence on mean forecast errors. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation forecasts, the unobserved-components model and the sticky-information model.
    Keywords: US inflation, professional forecasts, sticky information, Beveridge-Nelson
    JEL: E31 E37
    Date: 2013–09
  22. By: Ansgar Belke
    Abstract: Small and medium size enterprises (SMEs) of southern euro area economies (e.g. Italy, Spain) pay significantly higher borrowing rates than their peers of the core (e.g. Germany, France) and this divergence is widening. It is argued that severe market failures prevent SMEs in southern euro area countries from access to key inputs, in particular access to finance. This paper makes an assessment of feasible options to improve finance access of SMEs, available to EU institutions as well as to the ECB in the context of its price stability mandate. Because of nonnegligible moral hazard issues, the paper is sceptical about a stronger involvement of the ECB in the (indirect) financing of SMEs through the securitisation of banks`loans or their use as collateral for monetary policy operations. The paper concludes with some proposals for extending finance access of SMEs, including through mutual guarantee institutions along the lines recently pursued by the European Investment Bank.
    Keywords: ECB; financial crisis; bank-firm relationships; credit guarantee schemes; monetary policy transmission; small business finance
    JEL: E23 E51 G21 O16
    Date: 2013–07
  23. By: Maré, David C (Motu Economic and Public Policy Research); Fabling, Richard (Motu Economic and Public Policy Research)
    Abstract: In New Zealand, the impact of the 2007–2008 Global Financial Crisis (GFC) was milder than in most other developed countries, though still substantial, with employment declining by 2.5 percent between the fourth quarter of 2008 and the fourth quarter of 2009. There were pronounced declines in job and worker turnover rates, signalling a decline in labour market liquidity and difficulties for new entrants and high-turnover groups of workers (Fabling and Maré, 2012). The current paper documents the extent and composition of employment change between 2000 and 2011, focusing particularly on the 2008–2010 period, when the labour market impacts of the GFC were strongest. As in previous downturns, the incidence of cyclical job loss and unemployment has fallen disproportionately on young and unskilled workers. The paper identifies, for subgroups of workers identified by age, gender and earnings level, the sensitivity of employment growth and labour market flows to aggregate employment fluctuations and also to relative fluctuations across industries and local labour market areas. The rate of job accessions (hiring) is particularly sensitive to the economic cycle and most strongly for young workers. Most of the differences across groups in the size of cyclical employment fluctuations are due to differing responsiveness to common shocks and not to exposure to different industry and local shocks. Finally, the paper traces outcomes for workers whose jobs end, summarising their duration out of work and the wage increases or reductions they experience when they secure employment. Workers who left or lost jobs spent longer out of work after the GFC and settled for lower earnings growth when they did find a job. Both of these effects had partly but not fully abated within 3 years of the onset of the GFC.
    Keywords: global financial crisis; cyclical job loss; unemployment; earnings growth
    JEL: E24 E32 J21
    Date: 2013–08
  24. By: Cruz-Rodriguez, Alexis
    Abstract: In this paper we evaluate the fiscal sustainability of the Dominican Republic using the recursive algorithm proposed by Croce and Juan-Ramón (2003). The results indicate that the Dominican economy shows an unsustainable fiscal position in much of the period, but for the years 2014-2016 would be conducting a fiscal policy that is consistent with the convergence of the debt-to-GDP ratio to sustainable levels as required by PNPSP and END.
    Keywords: Fiscal sustainability, public debt, primary surplus
    JEL: E62 H62 H68
    Date: 2013–08–28
  25. By: Guiying (Laura) Wu (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)
    Abstract: Investment frictions reduce, delay or protract investment expenditure that is necessary for ?rms to capture growth opportunities. Using a capital adjust- ment costs framework, this paper estimates the gap between China?s actual and frictionless aggregate output. It applies the method of simulated moments to a fully structural investment model on a panel of Chinese ?rms; and takes into ac- count potential unobserved heterogeneities and measurement errors in the data. The estimated capital adjustment costs are substantial and vary across ?rms of di¤erent sizes, and across regions with di¤erent investment environments. If Chinese ?rms had faced a lower level of adjustment costs such as in the U.S., China?s aggregate output would be 25% higher.
    Keywords: Investment, Capital Adjustment Costs, Method of Simulated Moments
    JEL: E22 D92 C15
    Date: 2013–07
  26. By: Agnieszka Markiewicz (Erasmus University Rotterdam); Andreas Pick (Erasmus University Rotterdam and De Nederlandsche Bank)
    Abstract: This paper investigates the ability of the adaptive learning approach to replicate the expectations of professional forecasters. For a range of macroeconomic and financial variables, we compare constant and decreasing gain learning models to simple, yet powerful benchmark models. We find that both, constant and decreasing gain models, provide a good fit for the expectations of professional forecasters for a range of variables. These results suggest that, instead of relying only on the the most recent observation, agents use more complex models to form their expectations even for financial variables where random walk forecasts are often difficult to beat.
    Keywords: expectations, survey of professional forecasters, adaptive learning, bounded rationality
    JEL: E37 E44 G14 G15
    Date: 2013–02–28
  27. By: Kunihiko Konishi (Graduate School of Economics, Osaka University)
    Abstract: This note reexamines the growth effects of commodity taxation and a manufacturing subsidy. By incorporating endogenous labor supply into a variety expansion model following Grossman and Helpman (1991), we derive new results. First, if households consider leisure to be important, an increase in the commodity tax rate can decrease the growth rate in the short run. Second, a small elasticity of substitution and a small manufacturing subsidy halt economic growth. Third, when the elasticity of substitution is small and sustained growth is possible, a decrease in the subsidy raises the short-run growth rate and decreases the long-run growth rate.
    Keywords: Commodity taxation, Subsidy, Labor supply, Endogenous growth
    JEL: E62 O41
    Date: 2013–09
  28. By: Lodewijk Visschers (Universidad Carlos III); Carlos Carrillo-Tudela (Essex)
    Abstract: We study, empirically and theoretically, the flows from and to unemployment, and from job to job, and relate these to occupational mobility. We are also particularly interested in the cyclical patterns of these flows. Using the Survey of Income and Program Participation, we document patterns of job mobility with and without occupational change, and in particular, focus on these workers’ subsequent labor market outcomes. We then model these flows in an adaptation of Carrillo-Tudela and Visschers (2011, 2013) that incorporates on-the-job search. Due to its block-recursive structure, the model stays tractable, even when the agents are subject to aggregate productivity shocks. We investigate whether the observed patterns of occupational mobility are consistent with an attachment to occupations growing with occupational tenure, also when incorporating job-to-job transitions; whether this attachment is in line with estimated returns to occupational human capital; and how this attachment varies over the business cycle, and over the life cycle. We then plan to relate our outcomes to the overall strength of reallocative forces for workers, and what role the business cycle plays in this.
    Date: 2013
  29. By: Manoel Bittencourt
    Abstract: We investigate in this paper whether income growth has played any role on inequality in all nine young South American democracies during 1970-2007. The results, based on dynamic panel time-series analysis, suggest that income growth has played a progressive role in reducing inequality during the period. Moreover, the results suggest that this negative relationship is stronger in the 1990s and early 2000s, a period in which the continent achieved macroeconomic stabilisation, political consolidation and much improved economic performance. On the contrary, during the 1980s (the so-called "lost decade"), the negative income growth experienced by the continent at the time has hit the poor the hardest, which has consequently lead to an increase in inequality. All in all, we suggest that consistent growth, and all that it encompasses, is an important equaliser which should not be discarded as a plausible option by policy makers interested in a more equal income distribution.
    Keywords: Growth, inequality, South America
    JEL: E20 O11 O15 O54
    Date: 2013
  30. By: Céspedes, Nikita (Banco Central de Reserva del Perú; PUCP); Sánchez, Alan (GRADE)
    Abstract: We study the effects of the minimum wage in over employment and income by considering a monthly database that captures seven minimum wage changes registered between 2002 and 2011. We estimate that about 1 million workers have an income by main occupation in the neighbourhood of the minimum wage. We found that the minimum wage-income elasticity is statistically significant; the evidence also suggests that those who receive low incomes and those working in small businesses are the most affected by increases in the minimum wage. Employment effects are monotonically decreasing in absolute terms by firm size: moderate in big firms and higher in small firms. Results are robust when assessing the job-to-job transitions. Finally, we present evidence that supports the hypothesis that the minimum wage in Peru is correlated with income. The movement of income distribution in the context of changes in the minimum wage as well as the results provided by a model that captures the drivers of income justify this result.
    Keywords: Minimum wage, Labor mobility, Income dynamics, Informality
    JEL: E24 E26 J20 J21 J61
    Date: 2013–08
  31. By: Marcus Scheiblecker (WIFO)
    Abstract: Right from the start of the European currency union, trade imbalances could be observed in the current accounts and trade balances of the euro countries. The business cycle upswing reaching into 2008 and the strong inflow of cheap money led to a strong economic expansion especially in the periphery of the euro area. Traditionally abundant wage increases in these countries persisted. In the more export oriented economies in the core of the euro area, however, hardly any wage increases could be observed due to the lacklustre internal demand. As a consequence, those countries gained further in competitiveness in comparison to the periphery. This led to an increase in foreign trade imbalances. With the sharp drop of economic activity in 2008 and the swift dry-up of cheap financial means this process was interrupted. Since, labour unit costs of Spain, Portugal and Greece evolved much more muted than the average of the euro area. As a result, imports of those countries stagnated while exports increased at the same time which led to a nearly balanced external trade in 2012.
    Keywords: External imbalances Euro area Current account
    Date: 2013–08–29
  32. By: Carlos Pérez Montes (Banco de España)
    Abstract: This article estimates a general credit risk model with both macroeconomic and latent credit factors for Spanish banks during the period 2004-2010. The proposed framework allows to estimate with bank level data both the standard credit risk model of Basel II and generalized models. I fi nd evidence of persistence in the credit latent factor and of a signifi cant effect of GDP growth and interbank rates on loan default rates. The estimated default correlation is low across specifications. The model is also used to calculate the impact on the probabilities of default of stressed economic scenarios.
    Keywords: credit risk, default correlation, stress test, state space model, bootstrap, MLE
    JEL: E0 G21
    Date: 2013–03
  33. By: Nicholas Kilimani (Department of Economics, University of Pretoria)
    Abstract: The increasing variability in the climatic pattern and its adverse effects on the Ugandan economy has become a major development challenge. For example, a key but climate sensitive sector like agriculture is increasingly experiencing severe disruptions as a result of its reliance on rainfall which has increasingly become unpredictable. Recent studies indicate a seemingly decreasing trend in the number of rainy days during the months which are crucial for crop growth. This trend is severely disrupting agricultural activity across the country. Since water is a vital input in many economic activities, we need to clearly understand the available supply of water resources and the level of utilization by the different sectors of the economy. This is with the view to establishing whether or not, there is room for increased utilization; within the framework of Integrated Water Resources Management. It is the objective to the study to provide this understanding through a water resource accounting framework. However, no developed water resource accounts exist for the Ugandan economy. Hence the task of the study was to develop the water resource accounts for Uganda. The results show evidence of under utilization of the available water resources. The under utilization is prevalent across all productive sectors of the economy and is likely to constrain the scope for productivity improvements, economic growth and other development outcomes.
    Keywords: Water Accounts, Water utilization, Economic performance
    JEL: E01 Q56
    Date: 2013–08
  34. By: NGUENA, Christian L.
    Abstract: The aim of this article is to examine and measure the importance of the development of the creative industry in the fight against youth unemployment in Cameroon. To achieve this assignment we conducted a quantitative and qualitative analysis of youth labor market and an analysis of the social accounting matrix of Cameroon that we constructed supplemented by a small survey. This analysis allowed us to highlight the fact that youth are most affected by unemployment and to present policy recommendations for the development of the creative industry of Cameroon which, with its multidimensional aspect, could contribute more to absorb much of youth unemployment than now.
    Keywords: Youth unemployment; Creative industry; Social Accounting Matrix (SAM); Labor market.
    JEL: E69 J21 J23 Z19
    Date: 2013–02–03
  35. By: Alberto Montagnoli (Department of Economics, University of Stirling); Jun Nagaysu (Graduate School of Systems & Information engineering, University of Tsukuba, Japan)
    Abstract: The housing market has been extensively investigated in the literature; however, there is a lack of understanding of the fundamentals affecting housing affordability across UK regions as measured by the price to income ratio. The aim of this paper is twofold; firstly we calculate the affordability ratio based on individuals' incomes. Second we set off to ask which socio-economic factors could affect this ratio. The analysis finds a strong influence coming from the mortgage rate, the residents' age and academic qualifications. We also report a positive and significant effect from foreign capital coming to the UK. Finally, we record a non-negligible degree of heterogeneity across the twelve regions.
    Keywords: House market, affordability index, heterogeneity, panel data
    JEL: E31 E52
    Date: 2013–08
  36. By: Jorge Duran (Université Libre de Bruxelles); Omar Licandro (IAE-CSIC and Barcelona GSE)
    Abstract: The permanent decline of equipment prices relative to nondurable consumption prices rendered fixed-base quantity indexes obsolete, because of the well-known substitution bias. National Income and Product Accounts (NIPA) responded by switching to a flexible-base quantity index to measure GDP growth. We argue this is a welfare measure of output growth. In a two-sector endogenous growth model, we use the Bellman equation to explicitly represent preferences on consumption and investment, we apply a Fisher-Shell true quantity index to the this utility representation and show it is equal to the Divisia index, well approximated by the flexible-base quantity index used by NIPA.
    Date: 2013
  37. By: Bloom, David E. (Harvard University); Cafiero, Elizabeth T. (Harvard School of Public Health); McGovern, Mark E. (Harvard School of Public Health); Prettner, Klaus (University of Göttingen); Stanciole, Anderson (The Bill and Melinda Gates Foundation); Weiss, Jonathan (London School of Hygiene & Tropical Medicine); Bakkila, Samuel (Harvard School of Public Health); Rosenberg, Larry (Harvard School of Public Health)
    Abstract: This paper provides estimates of the economic impact of non-communicable diseases (NCDs) in China and India for the period 2012-2030. Our estimates are derived using WHO's EPIC model of economic growth, which focuses on the negative effects of NCDs on labor supply and capital accumulation. We present results for the five main NCDs (cardiovascular disease, cancer, chronic respiratory disease, diabetes, and mental health). Our undiscounted estimates indicate that the cost of the five main NCDs will total USD 27.8 trillion for China and USD 6.2 trillion for India (in 2010 USD). For both countries, the most costly domains are cardiovascular disease and mental health, followed by respiratory disease. Our analyses also reveal that the costs are much larger in China than in India mainly because of China's higher income and older population. Rough calculations also indicate that WHO's Best Buys for addressing the challenge of NCDs are highly cost-beneficial.
    Keywords: health and economic development, non-communicable disease, growth models, cost-effectiveness
    JEL: E13 I15 O40
    Date: 2013–08

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