nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒11‒02
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Business Cycle Implications of Mortgage Spreads By Walentin, Karl
  2. Unconventional government debt purchases as a supplement to conventional monetary policy By Martin Ellison
  3. Distortionary Fiscal Policy and Monetary Policy Goals By Adam, Klaus; Billi, Roberto M.
  4. The Output Effects of (Non-Separable) Government Consumption at the Zero Lower Bound By Valerio Ercolani; João Valle e Azevedo
  5. Can Monetary Policy Delay the Reallocation of Capital? By Schnell, Fabian
  6. The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium By Richard G. Lipsey
  7. Patterns of Convergence and Divergence in the Euro Area By Ángel Estrada; Jordi Galí; David López-Salido
  8. Gaps in the Institutional Structure of the Euro Area By Christopher A. Sims
  9. Sectoral Composition of Government Spending and Macroeconomic (In)stability By Juin-Jen Chang; Jang-Ting Guo; Jhy-Yuan Shieh; Wei-Neng Wang
  10. Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area By Dominic Quint; Pau Rabanal
  11. Identifying Fiscal Inflation By De Graeve, Ferre; Queijo von Heideken, Virginia
  12. Output effects of a measure of tax shocks based on changes in legislation for Portugal By Manuel Coutinho Pereira; Lara Wemans
  13. On the Redistributive Effects of Inflation: an International Perspective By Boel, Paola
  14. Inflation Dynamics: The Role of Public Debt and Policy Regimes By Woong Yong Park; Jae Won Lee; Saroj Bhattarai
  15. Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation By Nejat Anbarci; Richard Dutu; Nick Feltovich
  16. External Habit in a Production Economy By Andrew Y. Chen
  17. Financial Regulation in an Agent Based Macroeconomic Model By Riccetti, Luca; Russo, Alberto; Mauro, Gallegati
  18. Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate By Peter Skott; Soon Ryoo
  19. The Continental Dollar: How the American Revolution was Financed with Paper Money—Initial Design and Ideal Performance By Farley Grubb
  20. Entry and markup dynamics in an estimated business cycle model By Vivien LEWIS; Arnaud STEVENS
  21. Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective By Gary D. Hansen; Selahattin Imrohoroglu
  22. Financialisation and Crisis in an Agent Based Macroeconomomic Model By Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  23. Do You Mind if I Round?: Eliminating the Penny A Structural Analysis By Andrew Keinsley
  24. A sticky information Phillips curve for South Africa By Monique Reid; Gideon du Rand
  25. Monetary Policy with Heterogeneous Agents By Makoto Nakajima
  26. Bank procyclicality and output: Issues and policies By Athanasoglou, Panayiotis; Ioannis, Daniilidis; Manthos, Delis
  27. The Brazilian experience in managing interest-exchange rate nexus By Ricardo Carneiro; Pedro Rossi
  28. Fighting fit? Assessing New Zealand’s fiscal sustainability By Lees, Kirdan
  29. Macro Data with the FRED Excel Add-in By Humberto Barreto
  30. Redemption and Depression By Kakarot-Handtke, Egmont
  31. Fragmentation and Monetary Policy in the Euro Area By A. J. Al-Eyd; Pelin Berkmen
  32. An Evaluation of the Revenue side as a source of fiscal consolidation in high debt economies By Ritwik Banerjee
  33. Public Research Spending in an Endogenous Growth Model By Kunihiko Konishi
  34. Firms, Destinations, and Aggregate Fluctuations By Isabelle Mejean; Andrei Levchenko; Julian di Giovanni
  35. Estimating the structural budget balance of the Australian Government: An update By Nu Nu Win; Simon Duggan; Phil Garton; Spiro Premetis; Bonnie Li
  36. Uncovering the sources of sectoral employment fluctuations By Bryn Battersby; Michael Kouparitsas; Josiah Munro
  37. The Money Value of a Man By Mark Huggett; Greg Kaplan
  38. Global Factors in Capital Flows and Credit Growth By Valentina Bruno; Hyun Song Shin
  39. The Redistributive Effects of Financial Deregulation By Anton Korinek; Jonathan Kreamer
  40. A detrimental feedback loop: deleveraging and adverse selection By Bertsch, Christoph
  41. Implementing a Fiscal Transfer Mechanism in a Heterogeneous Monetary Union: A DSGE approach. By Thierry Betti
  42. Do Asset Price Drops Foreshadow Recessions? By John C Bluedorn; Jörg Decressin; Marco Terrones
  43. Catastrophic Job destruction By Anabela Carneiro; Pedro Portugal; José Varejão
  44. Prices over the Product Life Cycle: Implications for Quality-Adjustment and the Measurement of Inflation By Daniel Melser; Iqbal A. Syed
  45. Mr. Keynes, the Classics and the new Keynesians: A suggested formalization. By Rodolphe Dos Santos Ferreira
  46. Aggregation and Labor Supply Elasticities By Kneip, Alois; Merz, Monika; Storjohann, Lidia
  47. Consumption, Market Price of Risk, and Wealth Accumulation under Induced Uncertainty By Luo, Yulei; Young, Eric
  48. Globalization, Unemployment, and Product Cycles: Short- and Long-Run Effects By Finn Martensen
  49. Central Counterparty Links and Clearing System Exposures By Nathanael Cox; Nicholas Garvin; Gerard Kelly
  50. Relative Concerns on Visible Consumption: A Source of Economic Distortions By Climent Quintana-Domeque; Francesco Turino
  51. Multiple Market Imperfections, Firm Profitability and Investment. By Giorgio Calcagnini; Annalisa Ferrando; Germana Giombini
  52. Intézményi megoldások, fejlődési modellek By Bartha, Zoltán; Sáfrányné Gubik, Andrea; Tóthné Szita, Klára
  53. Constructing a PCE-Weighted Consumer Price Index By Caitlin Blair
  54. UK house prices: convergence clubs and spillovers By Alberto Montagnoli; Jun Nagayasu
  55. Working Capital, Trade and Macro Fluctuations By Se-Jik Kim; Hyun Song Shin
  56. Did Keynes in the General Theory significantly misrepresent J S Mill? By Roy H Grieve
  57. A Stochastic Dynamic Model of Trade and Growth: Convergence and Diversi?cation By Partha Chatterjee; Malik Shukayev
  58. Identifying Taylor Rules in Macro-finance Models By David Backus; Mikhail Chernov; Stanley Zin
  59. Infectious Diseases and Economic Growth By Aditya Goenkay; Lin Liu; Manh-Hung Nguyen
  60. Multivariate–Based Granger Causality between Financial Deepening and Poverty: The Case of Pakistan By Shahbaz, Muhammad; Ur Rehman, Ijaz
  61. Why has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)? By Charles Yuji Horioka; Takaaki Nomoto; Akiko Terada-Hagiwara
  62. Corporate Cash Holding in Asia By Charles Yuji Horioka; Akiko Terada-Hagiwara
  63. In the Kingdom of Solovia: The Rise of Growth Economics at MIT, 1956-1970 By Mauro Boianovsky; Kevin D. Hoover
  64. Firms’ financing constraints: Do perceptions match the actual situation? By A. FERRANDO; K. MULIER
  65. On Learning and Growth By Leonard J. Mirman; Kevin Reffett; Marc Santugini
  66. Taxing Carbon under Market Incompleteness By Valentina Bosetti; Marco Maffezzoli
  67. MIT's Openness to Jewish Economists By E. Roy Weintraub
  68. ICT-induced Technological Progress and Employment: A Literature Review By Anna Sabadash
  69. On the Relationship between Exchange Rates and External Imbalances: East and Southeast Asia By Juan Carlos Cuestas; Paulo José Regis

  1. By: Walentin, Karl (Monetary Policy Department, Central Bank of Sweden)
    Abstract: What are the business cycle effects of shocks to the interest rate spread between residential mortgages and government bonds of the corresponding maturity? We start by noting that the mortgage spread (i) has substantial volatility,(ii) is countercyclical and (iii) leads GDP by 2-3 quarters. Using a structural VAR, we find that innovations to the mortgage spread reduce house prices, residential investment, consumption and GDP by both economically and statistically significant magnitudes. Furthermore, the policy interest rate reacts strongly and in an offsetting direction to mortgage spread innovations. These findings highlight the relevance of financial frictions in residential mortgage markets as an unexplored source of business cycles. In addition, we show that unconventional monetary policy which affects the mortgage spread has sizable macroeconomic impact. Our results are robust to the inclusion of a corporate spread
    Keywords: Sources of business cycles; unconventional monetary policy; credit supply; housing demand; house prices; financial frictions
    JEL: E21 E32 E44 E52 R21
    Date: 2013–09–01
  2. By: Martin Ellison
    Abstract: In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments.� We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound.� To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model.� Asset quantities matter for interest rates through a preferred habitat channel.� If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
    Keywords: Quantitative Easing, Large-Scale Asset Purchases, Preferred Habitat, Optimal Monetary Policy
    JEL: E40 E43 E52 E58
    Date: 2013–10–16
  3. By: Adam, Klaus (Mannheim University); Billi, Roberto M. (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.
    Keywords: optimal policy; lack of commitment; conservative monetary policy
    JEL: E52 E62 E63
    Date: 2013–10–01
  4. By: Valerio Ercolani; João Valle e Azevedo
    Abstract: We investigate the reaction of output to government spending shocks at the zero lower bound (ZLB) on the nominal interest rate when government and private consumption are non-separable in preferences. In particular, substitutability between private and government consumption significantly reduces the otherwise large output multipliers obtained at the ZLB. Additionally, the coupling of substitutability with a debt-stabilizing fiscal rule can generate negative output multipliers on impact.
    JEL: E32 E62
    Date: 2013
  5. By: Schnell, Fabian
    Abstract: This paper examines the medium-run effects of monetary policy and focuses its analyses on the consequences of distorted (in the sense of exogenously influenced) real interest rates that are currently observed in many industrialized countries. In our model, real interest rates that are too low hinder economic recovery because such rates allow relatively unproductive firms to remain in the market. Monetary policy should increase interest rates after a negative macroeconomic shock to force a reallocation of production factors to more productive firms. We show that there is a trade-off between the short-run and medium-run preferences of the central bank as a consequence. From a welfare perspective, the impact of monetary policy depends on the long-run interest rate relative to the welfare-maximizing interest rate because of the preference for variety in the model.
    Keywords: Monetary Policy Design, Reallocation of Capital, Structural Change, Heterogeneous Firms
    JEL: E32 E43 E50 E52
    Date: 2013–10
  6. By: Richard G. Lipsey (Simon Fraser University)
    Abstract: To make the argument that the behaviour of modern industrial economies since the 1990s is inconsistent with theories in which there is a unique ergodic macro equilibrium, the paper starts by reviewing both the early Keynesian theory in which there was no unique level of income to which the economy was inevitably drawn and the debate about the amount of demand pressure at which it was best of maintain the economy: high aggregate demand and some inflationary pressure or lower aggregate demand and a stable price level. It then covers the rise of the simple Phillips curve and its expectations-augmented version, which introduced into current macro theory a natural rate of unemployment (and its associated equilibrium level of national income). This rate was also a NAIRU, the only rate consistent with stable inflation. It is then argued that the current behaviour of many modern economies in which there is a credible policy to maintain a low and steady inflation rate is inconsistent with the existence of either a unique natural rate or a NAIRU but is consistent with evolutionary theory in which there is perpetual change driven by endogenous technological advance. Instead of a NAIRU evolutionary economies have a noninflationary band of unemployment (a NAIBU) indicating a range of unemployment and income over with the inflation rate is stable. The paper concludes with the observation that the great pre- Phillips curve debates of the 1950s that assumed that there was a range within which the economy could be run with varying pressures of demand, and varying amounts of unemployment and inflationary pressure, were not as silly as they were made to seem when both Keynesian and New Classical economists accepted the assumption of a perfectly
    Keywords: Natural rate of unemployment, NAIRU, NAIBU, inflation targeting, Phillips curve, evolutionary theory, equilibrium theory
    JEL: B22 E12 E31 E58 E61
    Date: 2013–10
  7. By: Ángel Estrada; Jordi Galí; David López-Salido
    Abstract: We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples
    JEL: E24 F31 O47
    Date: 2013–10
  8. By: Christopher A. Sims
    Abstract: The Euro was created at a time when the conventional view was that a central bank could control inflation by controlling the money supply and that fiscal policy’s interaction with monetary policy took the form of attempts to get the central bank to finance government debt. With a sufficiently firm and independent central bank, this view considered that financial markets would force discipline on fiscal policy. By creating a strong, independent central bank at the European level, facing multiple country-level fiscal authorities, the threat of political pressures for inflationary finance would be lower than with individual country central banks.
    Keywords: central banking, European union, monetary policy
    JEL: E02 E21 F33 F34 G21
    Date: 2013–05
  9. By: Juin-Jen Chang (Institute of Economics, Academia Sinica, Taipei, Taiwan); Jang-Ting Guo (University of California, Riverside, CA, USA); Jhy-Yuan Shieh (Department of Economics, Soochow University, Taipei, Taiwan); Wei-Neng Wang (Department of Economics, Soochow University, Taipei, Taiwan)
    Abstract: This paper examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two-sector real business cycle model with positive productive externalities in investment. When government purchases of con- sumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public-consumption share plays no role in the models local dynamics, and that a sufficiently high public-investment share can stabilize the economy against endogenous belief-driven cyclical uctuations. When each type of government spending is postulated as a constant proportion of the economys total output, we …find that there exists a trade-off between public consumption versus investment expenditures to yield saddle-path stability and equilibrium uniqueness.
    Keywords: Government Spending; Equilibrium (In)determinacy; Business Cycles
    JEL: E32 E62 O41
    Date: 2013–10
  10. By: Dominic Quint; Pau Rabanal
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.
    Keywords: Monetary policy;Euro Area;European Economic and Monetary Union;Macroprudential Policy;Credit expansion;Economic models;Monetary Policy, EMU, Basel III, Financial Frictions.
    Date: 2013–10–14
  11. By: De Graeve, Ferre (Monetary Policy Department, Central Bank of Sweden); Queijo von Heideken, Virginia (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Fiscal theorists warn about the risk of future inflation as a consequence of current fiscal imbalances in the US. Because actual inflation remains historically low and data on inflation expectations do not corroborate such risks, warnings for fiscal inflation are often ignored in policy and academic circles. This paper shows that a canonical NK- DSGE model enables identifying an anticipated component of inflation expectations that is closely related to fiscal policy. Estimation results suggest that fiscal inflation concerns have induced a 1.6%-points increase in long-run inflation since 2001. The model also rationalizes why data on inflation expectations do not reveal such concerns outright.
    Keywords: Fiscal policy; inflation; news
    JEL: E31 E62
    Date: 2013–09–01
  12. By: Manuel Coutinho Pereira; Lara Wemans
    Abstract: This paper develops a new measure of quarterly discretionary tax shocks for Portugal that result from changes in legislation, following the narrative approach. It covers the years from 1996 to 2012 and was based on a comprehensive analysis of tax policy measures taken in the course of this period. The …ndings point to strongly negative and persistent e¤ects of legislated tax increases on GDP and private consumption, matching the tendency of the narrative approach to yield comparatively high tax multipliers.
    JEL: E62 E43 E32
    Date: 2013
  13. By: Boel, Paola (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I calibrate the microfounded model in Boel and Camera (2009) to quantify the redistributive effects of inflation for a sample of OECD countries. In doing so, I address two important quantitative issues. First, using harmonized microdata from the Luxembourg Wealth Study, I provide an international comparison of the distribution of households' deposit accounts and financial assets. Second, I account for structural breaks when estimating money demand. I find that several results hold for the countries considered. First, the welfare cost of inflation changes over time, but the direction of the change varies across countries. Second, inflation acts as a regressive tax when a nominal asset other than money is held. Third, the magnitude of the redistributive effects differs across countries and it depends not only on wealth inequality, but also on the curvature and the level of the money demand curve. Last, I show that a subset of the population always prefers an inflationary policy when I extend the model to incorporate a political-economy equilibrium where agents can bargain over the inflation rate.
    Keywords: Money; Heterogeneity; Friedman Rule; Welfare Cost of Inflation; Calibration
    JEL: E40 E50
    Date: 2013–09–01
  14. By: Woong Yong Park (University of Hong Kong); Jae Won Lee (Rutgers University); Saroj Bhattarai (Pennsylvania State University)
    Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the equilibrium response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the equilibrium response of inflation to non-policy shocks. Moreover, a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy stances affect inflation dynamics, but because of a role for self-fulfilling beliefs due to equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a richer quantitative model.
    Date: 2013
  15. By: Nejat Anbarci; Richard Dutu; Nick Feltovich
    Abstract: How does the inflation tax impact on buyers’ and sellers’ behaviour? How strong is its effect on aggregate economic activity? To answer, we develop a model of directed search and monetary exchange with inflation. In the model, sellers post prices, which buyers observe before deciding on cash holdings that are costly due to inflation. We derive simple theoretical propositions regarding the effects of inflation in this environment. We then test the model’s predictions with a laboratory experiment that closely implements the theoretical framework. Our main finding confirms that not only is the inflation tax harmful to the economy – with cash holdings, GDP and welfare all falling as inflation rises – but also that its effect is relatively larger at low rates of inflation than at higher rates. For instance, when inflation rises from 0% to 5%, GDP falls by 2.8 percent, an effect 5 to 7 times stronger than when inflation rises from 5% to 30%. Our findings lead us to conclude that the inflation tax is a monetary policy channel of primary importance, even at low inflation rates.
    Keywords: money, inflation tax, directed search, posted prices, cash balances, welfare loss, frictions, experiment
    JEL: E31 E40 C90
    Date: 2013–10–18
  16. By: Andrew Y. Chen
    Abstract: A unified framework for understanding asset prices and aggregate fluctuations is critical for understanding both issues. I show that a real business cycle model with external habit preferences and capital adjustment costs provides one such framework. The estimated model matches the first two moments of the equity premium and risk-free rate, return and dividend predictability regressions, and the second moments of output, consumption, and investment. The model also endogenizes a key mechanism of consumption-based asset pricing models. In order to address the Shiller volatility puzzle, external habit, long-run risk, and disaster models require the assumption that the volatility of marginal utility is countercyclical. In the model, this countercyclical volatility arises endogenously. Production makes precautionary savings effects show up in consumption. These effects lead to countercyclical consumption volatility and countercyclical volatility of marginal utility. External habit amplifies this channel and makes it quantitatively significant.
    JEL: G12 E21 E30
    Date: 2013–10–22
  17. By: Riccetti, Luca; Russo, Alberto; Mauro, Gallegati
    Abstract: Starting from the agent-based decentralized matching macroeconomic model proposed in Riccetti et al. (2012), we explore the effects of banking regulation on macroeconomic dynamics. In particular, we study the overall credit exposure and the lending concentration towards a single counterparty, finding that the portfolio composition seems to be more relevant than the overall exposure for banking stability, even if both features are very important. We show that a too tight regulation is dangerous because it reduces credit availability. Instead, on one hand, too loose constraints could help banks to make money and to increase their net worth, thus making the constraints not binding. However, on the other hand, if bank profits are tied to higher payout ratio (as it really happened along the deregulation phase of the last 20 years), then the financial fragility increases causing a weaker economic environment (e.g., higher mean unemployment rate), a more volatile business cycle, and a higher probability of triggering financial crises. Accordingly, simulation results support the introduction of the Capital Conservation Buffer (Basel 3 reform).
    Keywords: financial regulation, agent-based macroeconomics, business cycle, crisis, unemployment, leverage
    JEL: C63 E32 G18
    Date: 2013–10
  18. By: Peter Skott (University of Massachusetts Amherst); Soon Ryoo (Adelphi University)
    Abstract: We show that (i) dynamic inefficiency may be empirically relevant in a modified Diamond model with imperfect competition, (ii) if fiscal policy is used to avoid inefficiency and maintain an optimal capital intensity, the required debt ratio will be inversely related to the growth rate, and (iii) austerity policies reductions in government consumption and entitlement programs for the old generation raise the required debt ratio.
    Keywords: Public debt, dynamic efficiency, growth effects, austerity
    JEL: E62 E22
    Date: 2013
  19. By: Farley Grubb
    Abstract: The purpose of this paper is to convince the reader that the Continental dollar was a zero-interest bearer bond and not a fiat currency—thereby overturning 230 years of scholarly interpretation; to show that the public and leading Americans knew and acted on this fact, and to illustrate the ideal performance of the Continental dollar as a zero-interest bearer bond. The purpose of establishing the ideal performance is to create a benchmark against which empirical measures of depreciation can be evaluated in future papers.
    JEL: E51 E52 E61 E63 H56 H63 N11 N21 N41
    Date: 2013–10
  20. By: Vivien LEWIS; Arnaud STEVENS
    Abstract: How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the extent to which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.17 percent. While markup fluctuations due to sticky prices or exogenous shocks account for a large proportion of US inflation variability, endogenous changes in desired markups also play a non-negligible role.
    Date: 2013–10
  21. By: Gary D. Hansen (University of California, Los Angeles (E-mail:; Selahattin Imrohoroglu (University of Southern California (E-mail: selo@
    Abstract: Past government spending in Japan is currently imposing a significant fiscal burden that is reflected in a net debt to output ratio near 150 percent. In addition, the aging of Japanese society implies that public expenditures and transfers payments relative to output are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure the size of this burden in the form of additional taxes required to finance these projected expenditures and to stabilize government debt. The fiscal adjustment needed is very large, in the range of 30-40% of total consumption expenditures. Using a distorting tax such as the consumption tax or the labor income tax requires either tax to rise to unprecedented highs, although the former is much less distorting than the latter. The extremely high tax rates we find highlight the importance of considering alternatives that attenuate the projected increases in public spending and/or enlarge the tax base.
    Keywords: Government debt, fiscal policy, aging, Japan
    JEL: E2 E62 H6
    Date: 2013–10
  22. By: Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: In the present paper we analyse the role of dividends distributed by firms and banks, highlighting the effects of their increase on financial instability and macroeconomic dynamics. During the last decades, the financialisation of nonfinancial corporations has been characterised by a shift from a "retain and reinvest" strategy to a "downsize and distribute" strategy. We will investigate such a phenomenon by varying some of the model parameters, so simulating firms’ and banks’ behaviours under alternative settings. On the one hand, more distributed dividends increases agents’ wealth and thus consumption may rise due to a wealth-effect. On the other hand, increasing dividends reduce firms’ net worth that may result in a strong dependence of firms’ production on bank credit; at the same time, if also banks distribute more dividends, then banks’ capital decreases and this may result in credit rationing. As we will see, financialisation through increasing dividends impacts financial (in)stability and income distribution, with relevant consequences on macroeconomic dynamics.
    Keywords: agent-based macroeconomics, business cycle, leverage, payout policy, financialisation, crisis
    JEL: C63 E32 G35
    Date: 2013–10
  23. By: Andrew Keinsley (Department of Economics, The University of Kansas)
    Abstract: For decades, economists have debated the price-rounding effect on the economy if the penny is eliminated. Deviating from the bulk of the literature, which typically considers case-studies with empirical simulations and data manipulation, I evaluate a multiple household, deterministic model with endogenous currency production. My findings suggest that the elimination of the smallest unit of currency has a “nickel-and-dime” effect on the economy, regardless of the rounding policy. This structural model is constructed and calibrated to emulate a “worst-case scenario”, but it is also robust to the empirical results in the literature.
    Keywords: Penny, Rounding Policy, Deterministic Model, Treasury Policy, Currency, Multiple Household Model
    JEL: E41 E42 E61 E62 E63 E64
    Date: 2013–10
  24. By: Monique Reid (Department of Economics, University of Stellenbosch); Gideon du Rand (Department of Economics, University of Stellenbosch)
    Abstract: Mankiw and Reis (2002) propose the Sticky Information Phillips Curve as an alternative to the standard New Keynesian Phillips Curve, to address empirical shortcomings in the latter. In this paper, a Sticky Information Phillips curve for South Africa is estimated, which requires data on expectations of current period variables conditional on sequences of earlier period information sets. In the literature the choice of proxies for the inflation expectations and output gap measures are usually not well motivated. In this paper, we test the sensitivity of model fit and parameter estimates to a variety of proxies. We find that parameter estimates for output gap proxies based either on a simple Hodrik-Prescott filter application or on a Kalman filter estimation of an aggregate production function are significant and reasonable, whereas methods employing direct calculation of marginal costs do not yield acceptable results. Estimates of information updating probability range between 0.69 and 0.81. This is somewhat higher than suggested by alternative methods using micro-evidence (0.65 – 0.70 (Reid, 2012)). Lastly, we find that neither parameter estimates nor model diagnostics are sensitive to the choice of expectation proxy, whether it be constructed from surveyed expectations or the ad hoc VAR based forecasting methods.
    Keywords: South Africa, sticky information, Phillips curve
    JEL: E31 E3 E52
    Date: 2013
  25. By: Makoto Nakajima (Federal Reserve Bank of Philadelphia)
    Abstract: We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.
    Date: 2013
  26. By: Athanasoglou, Panayiotis; Ioannis, Daniilidis; Manthos, Delis
    Abstract: The recent global financial crisis has highlighted the importance of the procyclicality of the financial sector. The procyclicality has transformed banks from mitigation mechanisms to amplifiers of changes in economic activity, potentially affecting financial stability and economic growth. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors including the Basel-type regulations, accounting standards and leverage have exacerbated it. Several suggestions have been forwarded to attenuate procyclicality, in the form of rules and discretion. They are presented here according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, which explicitly addresses the procyclicality issue.
    Keywords: Banking, procyclicality, demand and supply of loans, capital requirements, Basel II and III
    JEL: E3 E32 G2 G21 G28 G3
    Date: 2013–09–01
  27. By: Ricardo Carneiro; Pedro Rossi
    Abstract: This paper addresses four main questions: firstly, it discusses some theoretical background related to the interest-exchange rate nexus; secondly, it makes an attempt to explain why the interest rate in Brazil is so high, examining briefly the main explanations for it; thirdly, it describes Brazil’s foreign exchange markets, their size and hierarchy; and lastly, it explains the carry trade dynamics considering the institutionalism of the Brazilian foreign exchange market and also the government policies envisioned to curb it.
    Keywords: working paper, daadpartnership, finance-and-trade
    JEL: E44 E52 F4
    Date: 2013–05
  28. By: Lees, Kirdan (New Zealand Institute of Economic Research)
    Abstract: A new report from the New Zealand Institute of Economic Research (NZIER) highlights the unprecedented fiscal challenges that New Zealand politicians will face in coming decades. NZIER recommends that tough decisions around taxes and government spending need to be taken now, and stuck to, in order to avoid a US-like situation in the future when the economic and political costs of correcting debt levels become dangerously high. A bipartisan agreement on funding superannuation costs would be a good starting point.
    Keywords: fiscal sustainability; superannuation; pensions; New Zealand
    JEL: E61 E62 J26
    Date: 2013–10–24
  29. By: Humberto Barreto (Department of Economics and Management, DePauw University)
    Abstract: This working paper is intended to be a chapter in a forthcoming book, tentatively titled Macroeconomics with Excel. The printed book will be a manual for professors, while the Excel workbooks are freely available to students. See for more information on this project. This version was presented at the 9th annual Economics Teaching Conference on October 25, 2013.
    Keywords: data collection, Federal Reserve data, teaching, macroeconomics
    JEL: A2 E0 E2 E3 E4 E5
    Date: 2013–10
  30. By: Kakarot-Handtke, Egmont
    Abstract: According to prevailing methodological criteria, standard economics is definitively refuted. Joan Robinson’s wake-up call “Scrap the lot and start again” has therefore lost nothing of its original freshness and urgency. Yet, how can the restart succeed? This inquiry builds on structural axioms. First, conceptual consistency is assured and the confusion about profit and income is dissolved. The question of interest is then how a recession or depression develops as the result of the normal functioning of the monetary economy. This involves the identification of positive feedback. A very effective mechanism consists of the circular interaction of profit and distributed profit.
    Keywords: new framework of concepts; structure-centric; axiom set; randomness; market clearing; budget balancing; consumption economy; investment economy; credit expansion
    JEL: B59 E32 E50
    Date: 2013–10–24
  31. By: A. J. Al-Eyd; Pelin Berkmen
    Abstract: The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.
    Keywords: Monetary policy;Euro Area;Capital markets;Sovereign debt;Bond issues;Banks;Interest rates;Credit risk;Monetary transmission mechanism;European Central Bank;Interest rates, fragmentation, monetary policy
    Date: 2013–10–04
  32. By: Ritwik Banerjee (Department of Economics and Business, Aarhus University)
    Abstract: Unsustainable levels of debt in some European economies are causing considerable strain in the Euro area. Successful debt consolidation in high debt economies is one of the most important important objective for the European policy makers. I use a dynamic general equilibrium closed economy model to compute the dynamic Laffer Curves for Portugal, Ireland, Greece and Spain for different class of taxes. The general equilibrium effects of the interaction of labor tax, consumption tax and capital tax is demonstrated. Location of each economy on its Laffer curve suggests that there exists a scope for considerable revenue generation by raising consumption and labor tax rates but no such possibilities exist for capital tax rate. Thus revenue generation with certain tax rates as instruments, may hold a key to successful and sustained debt reduction.
    Keywords: Laffer Curve, Public Debt, Portugal, Ireland, Greece, Spain
    JEL: E60 E62 H30
    Date: 2013–10–22
  33. By: Kunihiko Konishi (Graduate School of Economics, Osaka University)
    Abstract: This study constructs a variety expansion growth model with public research spending, in which public researchers raise the productivity of private R&D. We show that the rela- tionship between public research spending and the growth rate follows an inverted U-shape. This is because public research spending increases private R&D productivity, but crowds out labor input to private R&D. It is also shown that the welfare-maximizing level of pub- lic research spending is below the growth-maximizing level. With regards to tax policy, a zero-proffit tax maximizes both growth and welfare. Finally, the study analyzes the stability of the steady state, showing that the equilibrium is indeterminate when the governmentfs revenue source depends on asset income tax.
    Keywords: Public expenditure, Endogenous growth, Innovation, Indeterminacy
    JEL: E62 O41
    Date: 2013–10
  34. By: Isabelle Mejean (Ecole Polytechnique); Andrei Levchenko (University of Michigan); Julian di Giovanni (International Monetary Fund)
    Abstract: This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual ifrms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded set of estimating equations that decompose firms' annual sales growth rate into different components. We find that the firm-specic component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the rm size distribution is fat-tailed, idiosyncratic shocks to large rms contribute to aggregate fluctuations (the "granularity" hypothesis of Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.
    Date: 2013
  35. By: Nu Nu Win (Treasury, Government of Australia); Simon Duggan (Treasury, Government of Australia); Phil Garton (Treasury, Government of Australia); Spiro Premetis (Treasury, Government of Australia); Bonnie Li (Treasury, Government of Australia)
    Abstract: This Working Paper presents an overview of structural budget balance models and the adjustments most relevant for Australia. Three models (the OECD model, the IMF model and Treasury’s previously published model in the Australian Government’s 2009-10 Budget and McDonald et al (2010)) are discussed. Updated estimates of the Australian Government’s structural budget balance are presented alongside analysis showing the sensitivity of the results to plausible changes in key parameters. The updated structural budget balance estimates are based on the model used by McDonald et al (2010) and updated for the Australian Government’s 2013-14 Budget.
    Keywords: fiscal policy, cyclical adjustment, structural fiscal balance, commodity prices
    JEL: E62 H62 H69
    Date: 2013–05
  36. By: Bryn Battersby (Treasury, Government of Australia); Michael Kouparitsas (Treasury, Government of Australia); Josiah Munro (Treasury, Government of Australia)
    Abstract: This paper explores the sources of fluctuations in sectoral employment growth rates across the Australian economy over three different periods: the pre-terms of trade boom period; the pre-GFC phase of the terms of trade boom; and the GFC and post-GFC phase. We find that common cyclical fluctuations, not just sector specific shocks, can and do have an important effect on sectoral growth rate dispersion across the full sample. We also find that there is evidence of accelerated structural change in the latter phase of the terms of trade boom.
    Keywords: Kalman-filter, unobserved components, sectoral employment
    JEL: E24 E32 C51
    Date: 2013–09
  37. By: Mark Huggett (Georgetown University); Greg Kaplan (Princeton University)
    Abstract: This paper posits a notion of the value of an individual's human capital and the associated return on human capital. These concepts are examined using U.S. data on male earnings and financial asset returns. We find that (1) the value of human capital is far below the value implied by discounting earnings at the risk-free rate, (2) mean human capital returns exceed stock returns early in life and decline with age, (3) the stock component of the value of human capital is smaller than the bond component at all ages and (4) human capital returns and stock returns have a small positive correlation over the working lifetime.
    Keywords: Value of Human Capital, Return on Human Capital, Idiosyncratic and Aggregate Risk, Incomplete Markets, Heterogeneous Agents
    JEL: D91 E21 G12 J24
    Date: 2013–07
  38. By: Valentina Bruno (American University); Hyun Song Shin (Princeton University)
    Abstract: It is a cliché that the world has become more connected, but the financial crisis and the boom that preceded it have focused attention on the global factors behind credit growth and capital flows. Calvo, Leiderman and Reinhart (1993, 1996) famously distinguished the global "push" factors for capital flows from the country?specific "pull" factors, and the BIS report on global liquidity (the Landau report) has highlighted the role of cross?border banking in the transmission of financial conditions (BIS (2011)).
    Keywords: credit growth, boom, financial crisis, capital flows
    JEL: D02 D21 E32 E50 F30
    Date: 2013–06
  39. By: Anton Korinek; Jonathan Kreamer
    Abstract: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. Assuming incomplete risk markets between the financial sector and the real economy, we describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.
    JEL: E25 E44 G28 H23
    Date: 2013–10
  40. By: Bertsch, Christoph (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Market distress can be the catalyst of a deleveraging wave, as in the 2007/08 financial crisis. This paper demonstrates how market distress and deleveraging can fuel each other in the presence of adverse selection problems in asset markets. At the core of the detrimental feedback loop is agents' desire to reduce their reliance on distressed asset markets by decreasing their leverage which in turn amplifies the adverse selection problem in asset markets. In the extreme case, this leads to a market breakdown. I find that adverse selection creates both an "ex-ante" inefficiency because it distorts agents' long-term leverage choices and an "interim" inefficiency because it distorts agents' short-term liquidity management. I derive important implications for central bank policy.
    Keywords: Leverage; endogenous borrowing constraints; financial crisis; liquidity; asymmetric information; central bank policy
    JEL: D82 E58 G01 G20
    Date: 2013–09–01
  41. By: Thierry Betti
    Abstract: This paper deals with the implementation of a fiscal transfer mechanism among countries of a monetary union. I use a DSGE model of a monetary union close to Beetsma and Jensen (2005) and introduce both national fiscal policies and a transfer mechanism. I show the transfer has two effects: an obvious shift in demand but also a destabilizing effect due to a higher degradation of the term of trade for the recipient member. Then, I focus on two structural heterogeneities: the sensitivity to the transfer and the relative size of the two countries. I discuss in what extent these heterogeneities affect the effectiveness of the transfer.
    Keywords: fiscal federalism, transfer mechanism, new-Keynesian models, monetary union.
    JEL: E32
    Date: 2013
  42. By: John C Bluedorn; Jörg Decressin; Marco Terrones
    Abstract: This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.
    Keywords: Asset prices;Group of seven;Stock markets;Business cycles;Economic recession;Economic forecasting;Economic models;Business cycles; Macroeconomic forecasting; Financial markets; Uncertainty; Oil Prices; Binary dependent variable models.
    Date: 2013–10–02
  43. By: Anabela Carneiro; Pedro Portugal; José Varejão
    Abstract: In this article we study the resilience of the Portuguese labor market, in terms of job flows, employment and wage developments, in the context of the current recession. We single out the huge contribution of job destruction, especially due to the closing of existing firms, to the dramatic decline of total employment and increase of the unemployment rate. We also document the very large increase in the incidence of minimum wage earners and nominal wage freezes. We explore three different channels that may have amplified the employment response to the great recession: the credit channel, the wage rigidity channel, and the labor market segmentation channel. We uncover what we believe is convincing evidence that the severity of credit constraints played a significant role in the current job destruction process. Wage rigidity is seen to be associated with lower net job creation and higher failure rates of firms. Finally, labor market segmentation seems to have favored a stronger job destruction that was facilitated by an increasing number of temporary workers.
    JEL: E24 J23 J63
    Date: 2013
  44. By: Daniel Melser (Moody's; Iqbal A. Syed (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large US scanner data set on supermarket products and applying exible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance and at sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias underestimates the measurement of inflation by around 0.30 percentage points each year.
    Keywords: Consumer price index (CPI); cost of living; matched-model index; quality change bias; sample rotation; scanner data
    JEL: C43 D22 E31
    Date: 2013–10
  45. By: Rodolphe Dos Santos Ferreira
    Abstract: The paper suggests a new Keynesian model of the General Theory. A reduced form entails a diagram with three curves relating employment and the real wage, which represent the two fundamental classical postulates and the principle of effective demand. This diagram illustrates better than IS-LM the generality of Keynes’s theory, clarifying the distinction of voluntary and involuntary unemployment. Other significant features are the role of the distribution of expected interest rates among heterogeneous agents, whether dispersed or concentrated, in shaping the LM curve, as well as the role of wage competitiveness constraints as a foundation of Keynes’s relative wage hypothesis.
    Keywords: Keynes’s model, involuntary unemployment, coordination failures, liquidity trap, relative wages.
    JEL: B22 E12
    Date: 2013
  46. By: Kneip, Alois (University of Bonn); Merz, Monika (University of Vienna); Storjohann, Lidia (University of Bonn)
    Abstract: The aggregate Frisch elasticity of labor supply has played a key role in business cycle analysis. This paper develops a statistical aggregation procedure which allows for worker heterogeneity in observables and unobservables and is applicable to an individual labor supply function with non-employment as a possible outcome. Performing a thought experiment in which all offered or paid wages are subject to an unanticipated temporary change, we can derive an analytical expression for the aggregate Frisch elasticity and illustrate its main components: (i) the intensive and extensive adjustment of hours worked, (ii) the extensive adjustment of wages, and (iii) the aggregate employment rate. We use individual-specific data from the German Socio-Economic Panel (SOEP) for males at working-age in order to quantify each component. This data base provides indirect evidence on non-employed workers' reservation wages. We use this variable in conjunction with a two-step conditional density estimator to retrieve the extensive adjustment of hours worked and wages paid. The intensive hours' adjustment follows from estimating a conventional panel data model of individual hours worked. Our estimated aggregate Frisch elasticity varies between .63 and .70. These results are sensitive to the assumed nature of wage changes.
    Keywords: aggregation, reservation wage distribution, labor supply, extensive and intensive margin of adjustment, time-varying Frisch elasticities
    JEL: C51 E10 J22
    Date: 2013–10
  47. By: Luo, Yulei; Young, Eric
    Abstract: In this paper we examine implications of model uncertainty due to robustness (RB) for consumption-saving, market price of uncertainty, and aggregate wealth accumulation under limited information-processing capacity (rational inattention or RI) in an otherwise standard permanent income model. We first solve the robust permanent income models with inattentive consumers and show that RI by itself creats an additional demand for robustness that leads to higher ¡°induced uncertainty¡± facing consumers. Second, we explore how the induced uncertainty composed by (i) model uncertainty due to RB and (ii) state uncertainty due to RI, affects consumption-saving decisions and the market price of uncertainty. Particurly, we find that induced uncertainty can better explain the observed market price of uncertainty. Furthermore, we explore the observational equivalence between RB and risk-sensitivity (RS) in this filtering problem. Finally, we evaluate the importance of induced uncertainty and fundamental uncertainty in determining equilibrium aggregate wealth.
    Keywords: Robust Filtering, Rational Inattention, Observational Equivalence, Induced Uncertainty, Market Prices of Uncertainty, Wealth Accumulation
    JEL: D8 D83 E2 E21
    Date: 2013–10–10
  48. By: Finn Martensen (Department of Economics, University of Konstanz, Germany)
    Abstract: In a North-South product-cycle model, I study the short- and long-run effects on Northern unemployment of (i) trade liberalization, (ii) tighter international patent protection, and (iii) Southern market expansion. Besides production workers, I also consider R&D workers, which is new to the literature on short-run effects. In the short run, R&D workers are affected before production workers in case of trade liberalization and tighter international patent protection. Unilateral Northern trade liberalization increases unemployment in the short and long run, while Southern trade liberalization has stronger opposite effects. Surprisingly, tighter international patent protection yields a short-run unemployment increase, although it decreases unemployment in the long run. An expansion of the Southern market yields a short- and long-run decrease in unemployment.
    Keywords: Product Cycles, Globalization, Trade Liberalization, International Patent Protection, Unemployment
    JEL: E24 F16 F43
    Date: 2013–10–23
  49. By: Nathanael Cox (Reserve Bank of Australia); Nicholas Garvin (Reserve Bank of Australia); Gerard Kelly (Reserve Bank of Australia)
    Abstract: Links between central counterparties (CCPs) enable participants to clear positions in any linked CCP without needing to maintain multiple CCP memberships. While links enable exposure to be reduced by allowing netting across CCPs, CCPs become exposed to one another through the possibility of a CCP default. The change in system exposure resulting from these two effects has recently been of great interest to policymakers, and we assess this quantitatively using a straightforward extension of Duffie and Zhu (2011). Our model shows that CCP links can reduce overall system exposure in most plausible scenarios. This conclusion is robust to changes in assumptions about the nature of participants and their exposures, as well as to the existence of more than two linked CCPs.
    Keywords: clearing; netting; financial stability; central counterparty
    JEL: E42 G14
    Date: 2013–10
  50. By: Climent Quintana-Domeque; Francesco Turino
    Abstract: Do relative concerns on visible consumption give rise to economic distortions?� We re-examine the question posited by Arrow and Dasgupta (2009) building upon their theoretical framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods.� Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium marginal rate of substitution between the visible and non-visible goods will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does.� If one is willing to invoke separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one, consistent with expenditure patterns both in developed and developing countries.
    Keywords: visible goods, non-visible goods, conspicuous consumption, inconspicuous consumption, conspicuous leisure, inconspicuous leisure, labor supply, market distortions
    JEL: D6 E2
    Date: 2013–10–10
  51. By: Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Annalisa Ferrando (European Central Bank Frankfurt); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: This paper investigates the impact of the interaction between product, labor and financial market imperfections on firms’ investment by using a panel data of European firms over the period 1994-2008. It studies the impact of product and labor market regulations on firm investment and how it changes with the degree of financial market imperfections. Findings show that product and labor market regulations negatively affect firm investment by lowering firm profitability. The presence of more efficient financial markets increases firm investment and lowers the negative effects of market regulations.
    Keywords: Investment, Regulation Impact, EPL, Financial Market Development.
    JEL: D21 D43 E22 E60
    Date: 2013
  52. By: Bartha, Zoltán; Sáfrányné Gubik, Andrea; Tóthné Szita, Klára
    Abstract: The book presents a FOI model analysis of the OECD countries, and highlights some of their possible development paths.
    Keywords: FOI model, development models, institutional factors
    JEL: E61 O11 O57
    Date: 2013–06–30
  53. By: Caitlin Blair
    Abstract: This study investigates the effects of simulating the Consumer Price Index (CPI) with alternately sourced weights on the inflation experience for an average US consumer. The Bureau of Labor Statistics currently uses household spending data from the Consumer Expenditure Survey (CE) to construct expenditure category weights, or “item” weights, in the CPI. The Bureau of Economic Analysis also estimates consumer expenditures, but does so at a national level for publication of Personal Consumption Expenditures (PCE) in the National Income and Product Accounts. In this paper, 2005-2010 price indexes that utilize PCE weights instead of CE expenditure weights are compared with the CPI-Urban in order to evaluate current CPI weighting methods. These comparisons show that the annualized growth rate over five years of an adjusted PCE-weighted CPI is slightly lower than that of the CPI-U, while a reweighted index that uses PCE expenditure definitions grows much more quickly than the CPI.
    JEL: E31
    Date: 2013–10
  54. By: Alberto Montagnoli (Division of Economics, University of Stirling); Jun Nagayasu (Graduate School of Systems and Information Engineering,)
    Abstract: This paper uses the log t test to analyse the convergence of house prices across UK regions and the presence of spillovers effects. We find that UK house prices can be grouped into four clusters. Moreover we document the dynamics of the house price spillovers across regions.
    Keywords: Regional house prices, heterogeneity, convergence, spillovers
    JEL: E31 E52
    Date: 2013–10
  55. By: Se-Jik Kim (Seoul National University); Hyun Song Shin (Princeton University)
    Abstract: In addressing the precipitous drop in trade volumes in the recent crisis, the real and financial explanations have sometimes been juxtaposed as competing explanations. However, they can be reconciled by appeal to the time dimension of production and the working capital demands associated with offshoring and vertical specialization of production. We explore a model of manufacturing production chains with offshoring where firms choose their time profile of production and where inventories, accounts receivable, and productivity are procyclical and track financial conditions.
    Keywords: offshoring, manufacturing, production
    JEL: D24 D21 D51 E23 F20
    Date: 2013–06
  56. By: Roy H Grieve (Department of Econimics, University of Strathclyde)
    Abstract: It has been alleged that J M Keynes, quoting in the General Theory a passage from J S Mill’s Principles, misunderstood the passage in question and was therefore wrong to cite Mill as an upholder of the ‘classical’ proposition that ‘supply creates its own demand’. We believe that, although Keynes was admittedly in error with respect to, so-to-say, the ‘letter’ of Mill’s exposition, he did not mislead readers as to the ‘substance’ of Mill’s conception. The purpose of this paper is to demonstrate that J S Mill did indeed stand for a ‘classical’ position, vulnerable to Keynes’s critique as developed in the General Theory. [This is a revised version of an earlier working paper: ‘Keynes, Mill and Say’s Law’, Strathclyde Papers in Economics, 2000/11]
    Keywords: Keynes and the 'classics'; John Stuart Mill; Say's Law
    JEL: B12 B22 B31 E32
    Date: 2013–10
  57. By: Partha Chatterjee (FMS, University of Delhi, Delhi 110007); Malik Shukayev (Bank of Canada)
    Abstract: There is a growing literature that studies the properties of models that combine international trade and neoclassical growth theory, but mostly in a de- terministic setting. In this paper we introduce uncertainty in a dynamic Heckscher-Ohlin model and characterize the equilibrium of a small open economy in such an environment. We show that, when trade is balanced period-by-period, the per capita output and consumption of a small open economy converge to an invariant distribution that is independent of the initial wealth. Further, at the invariant distribution, there are periods in which the small economy diversi?es. Numerical simulations show that the speed of convergence increases with the size of the shocks. In the limit, when there is no uncertainty, there is no convergence and countries may specialize permanently. The paper highlights the role of market incompleteness, as a result of the period-by-period trade balance, in this setup. Through an analytical example we also illustrate the importance of country speci?c risk in delivering our results.
    Keywords: Economic Growth; International Trade; Heckscher-Ohlin; Convergence; Stochastic Growth Theory; Diversi?cation; Incomplete markets; Risk.
    JEL: F1 F4 O4 E2
    Date: 2013
  58. By: David Backus; Mikhail Chernov; Stanley Zin
    Date: 2013
  59. By: Aditya Goenkay (Department of Economics, National University of Singapore, AS2, Level 6, 1 Arts Link, Singapore 117570); Lin Liu (Department of Economics, Harkness Hall, University of Rochester, Rochester, NY 14627, USA); Manh-Hung Nguyen (LERNA-INRA, Toulouse School of Economics, Manufacture des Tabacs, 21 All¶ee de Brienne, 31000 Toulouse, France)
    Abstract: This paper develops a framework to study the economic impact of infectious diseases by integrating epidemiological dynamics into a continuous time neo-classical growth model. There is a two way interaction between the economy and the disease: the incidence of the disease affects labor supply and investment in health capital can affect the incidence and recuperation from the disease. Thus, both the disease incidence and the income levels are endogenous. It is a general framework to study the effect and control of infectious diseases where there is an interaction with physical capital and health expenditures. The dynamics of the disease make the control problem non-convex and thus, a new existence theorem is given. We fully characterize the local dynamics of the model. There can be multiple steady states, and as the underlying parameters change there can be bifurcations. There can also be steady states where the disease is endemic but the optimal response is not to spend any resources on controlling it. We also see how the endogenous variables change as some underlying economic parameters are varied.
    Keywords: Epidemiology; Infectious Disease; Bifurcation; Existence of equilibrium
    JEL: C61 D51 E13 O41 E32
    Date: 2013
  60. By: Shahbaz, Muhammad; Ur Rehman, Ijaz
    Abstract: This paper deals with the empirical investigation of causal relationship between financial deepening, economic growth and poverty reduction using quarter frequency data in case of Pakistan over the period of 1972-2011. We applied the ARDL bounds testing approach by incorporating structural breaks stemming in the series. The order of integration of the variables is examined by applying structural break unit root test. Our empirical exercise indicated that long run relationship between financial deepening, economic growth and poverty reduction exists in case of Pakistan. The causality analysis implied that causality results are sensitive with the use of proxy for poverty reduction as well as methodology to be applied.
    Keywords: Financial deepening, economic growth, poverty
    JEL: E0 E00
    Date: 2013–10–14
  61. By: Charles Yuji Horioka (School of Economics, University of the Philippines; National Bureau of Economic Research; and Institute of Social and Economic Research, Osaka University); Takaaki Nomoto (Office of Regional and Economic Integration, Asian Development Bank); Akiko Terada-Hagiwara (Economic and Research Department, Asian Development Bank)
    Abstract: In this paper, we present data on trends over time in government debt financing in Japan since 2010 with emphasis on the importance of foreign holders and speculate about the determinants of those trends. We find that Japanese government securities were held primarily by domestic holders until recently because robust domestic saving (combined with strong home bias) made it possible for domestic investors to absorb most of the government debt but that foreign holdings of Japanese government securities have increased sharply in recent years, especially in the case of short-term government securities. We show that trends in foreign holdings of Japanese government securities can be explained by conventional economic factors such returns and risks and that the recent surge in foreign holdings of short-term Japanese government securities is attributable to foreign investors in search of a safe haven for their funds in the face of the Global Financial Crisis of 2008-09 precipitated by the Lehman crisis. Our analysis suggests that the surge in foreign holdings of Japanese government securities will subside (in fact, it already has), and this, combined with the projected decline in domestic saving (especially household saving) caused by population aging, will make it necessary for Japan to get its fiscal house in order. Thus, Japan’s massive government debt has not wreaked havoc in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may wreak havoc in the future as both of these factors become less applicable unless the government debt can be brought under control.
    Keywords: Government debt, government securities, government bonds, government bills, government notes, sovereign debt, debt securities, debt financing, government debt financing, debt holdings, government debt holdings, foreign debt, foreign debt holdings, foreign debt investments, foreign investors, capital flows, international capital flows, short-term capital movements, cross-border portfolio investments, safe haven, capital flight, flight to safety, debt rollover, home bias, sovereign debt crisis, eurozone crisis, eurozone, Japan
    JEL: E21 F32 F34 G15 H63 O53
    Date: 2013–10
  62. By: Charles Yuji Horioka (School of Economics, University of the Philippines; National Bureau of Economic Research; and Institute of Social and Economic Research, Osaka University); Akiko Terada-Hagiwara (Economic and Research Department, Asian Development Bank)
    Abstract: In this paper, we analyze the determinants of corporate saving in the form of changes in the stock of cash for 11 Asian economies using firm-level data from the Oriana Database for the 2002–2011 period. We find some evidence that cash flow has a positive impact on the change in the stock of cash, which suggests that Asian firms are borrowing constrained and that they save more when their cash flow increases so that they will be able to finance future investments. Moreover, we find in the developed economy sample that, as expected, cash flow has a positive impact on the change in the stock of cash only in the case of the smallest firms, which are more likely to be borrowing constrained, and find in the developing economy sample that, as expected, the positive impact of cash flow on the change in the stock of cash declines with firm size. In addition, we find that the cash flow sensitivity of cash declined after the global financial crisis. Finally, we find some evidence that Tobin’s q has a positive impact on the change in the stock of cash.
    Keywords: corporate saving, corporate investment, borrowing constraints, liquidity constraints, cash flow, cash holdings, cash flow sensitivity of cash, Tobin’s q, firm size, productivity shocks, Asia, Oriana Database, financial sector development, global financial crisis
    JEL: D92 E21 E22 G11 O53
    Date: 2013–10
  63. By: Mauro Boianovsky; Kevin D. Hoover
    Abstract: From its flow tide, fueled by the Cold War, to its ebbing with the anti-growth movement and the economic crises of the early 1970s, the “growthmen” of MIT stood at the center of the dominant field in macroeconomics. The history of MIT growth economics is traced from Solow’s seminal neoclassical growth model of 1956 through the stabilization of growth theory in the first graduate textbooks.
    Keywords: growth theory, development economics, MIT, Robert Solow, endogenous growth models, technical progress
    JEL: B2 B22 O4 O11 E12 E13
    Abstract: This paper uses a non parametric matching procedure to match survey replies to balance sheet information. It draws on the SAFE survey on access to finance for a sample of 11886 firms in the euro area which are matched with their nearest neighbour in an extended dataset with balance sheet information on 2.3 million firms. We investigate the role of firm characteristics with respect to the experience of facing financing obstacles in the period 2009-2011. We distinguish between firms' perceived financing constraints and actual financing constraints. We find that more profitable firms are less likely to face actual financing constraints. Also firms with more working capital and lower leverage ratios are less likely to be actually financially constrained, however profitability measures seem to be more robust. Firms are more likely to perceive access to finance problematic when they have more debt with short term maturity. Finally, firm age, but not size, is important in explaining both the perceived and the actual financial constraints.
    Keywords: SMEs, financial constraints, survey data, statistical matching of data
    JEL: E22 G30 G10 O16 K40
    Date: 2013–07
  65. By: Leonard J. Mirman; Kevin Reffett; Marc Santugini
    Abstract: We study the effect of learning on optimal growth. We first derive the Euler equation in a general learning environment without experimentation. We then consider the case of iso-elastic utility and linear production, for general distributions of the random shocks and beliefs (i.e., no conjugate priors) and for any horizon. We characterize the unique optimal policy function for this learning model. We show how learning alters the maximization problem of the social planner. We also compare the learning model with the deterministic and stochastic models. This work builds on the work on learning and growth in a Brock-Mirman environment initiated by Koulovatianos, Mirman, and Santugini (2009) (KMS) for the Mirman-Zilcha model (with log utility and Cobb-Douglas production). While the Mirman-Zilcha model provides some insights about the effect of learning on growth, it also hides many important features of learning that the model in this paper takes account of. In other words, compared to the Mirman-Zilcha model, we show that the case of iso-elastic utility and linear production yields a more profound effect of learning on dynamic programming and thus optimal behavior.
    Keywords: Brock-Mirman environment, Dynamic programming, Learning, Optimal growth
    JEL: D8 D9 E2
    Date: 2013
  66. By: Valentina Bosetti (Università Commerciale “L. Bocconi”, IGIER and FEEM); Marco Maffezzoli (Università Commerciale “L. Bocconi” and IGIER)
    Abstract: This paper is the first attempt, to the best of our knowledge, to study the impact of a carbon tax by means of a heterogeneous agents model. The objectives of the paper are two: i) To assess how the results of a representative agent model compare to those coming from a model accounting for heterogeneity across agents when evaluating aggregate economic and environmental impacts of a carbon tax; ii) To assess the distributional implications of a carbon tax (and equivalent cap) and how they can be mitigated through different recycling schemes or allocations.
    Keywords: Carbon Tax, Double Dividend, Heterogeneous Agents Model
    JEL: Q58 Q54 E2
    Date: 2013–09
  67. By: E. Roy Weintraub
    Abstract: MIT emerged from “nowhere” in the 1930s to its place as one of the three or four most important sites for economic research by the mid-1950s. A conference held at Duke University in April 2013 examined how this occurred. In this paper the author argues that the immediate postwar period saw a collapse – in some places slower, in some places faster – of the barriers to the hiring of Jewish faculty in American colleges and universities. And more than any other elite private or public university, particularly Ivy League universities, MIT welcomed Jewish economists.
    Keywords: MIT, Jewish faculty, anti-Semitism, Samuelson
    JEL: B2 B22 O4 O11 E12 E13
  68. By: Anna Sabadash (European Commission – JRC - IPTS)
    Abstract: This report surveys the literature on the employment impact of ICT. Two competing views - compensation and substitution theory - dominate the current economic debate. The first assumes that the labour-saving impact of technological progress is counterbalanced by various compensation mechanisms. The second asserts that technology cause job displacement, leading to polarization, de-skilling and possibly a jobless economy. Recent employment trends are often seen as indicative of mismatches between rapidly changing demand for skills and slow adjustment in the supply. Despite a wealth of theoretical models and empirical evidence, a consensus regarding the employment effect of ICT remains elusive. While there are many empirical studies on technological progress in general, few are based on specific ICT indicators. Our review devotes equal space to each mainstream economic theory on the complex connection between technology and employment, while giving greater emphasis to those studies which specifically look at ICT and that provide empirical support to sound theoretical grounds. This report recommends further empirical research on the specific employment impact of ICT.
    Keywords: ICT, technological progress, innovation, employment, skills, occupations
    JEL: E24 J21 J23 O33
    Date: 2013–10
  69. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Paulo José Regis (Department of Economics, Xi'an Jiaotong-Liverpool University)
    Abstract: The role the real exchange rate plays in determining current account balances has gathered momentum as East and Southeast Asian countries have seen increasingly positive current account balances. This paper analyses the evolution of current accounts in the region. A cointegrating relationship between the real effective exchange rate and the ratio of the current account balance to the GDP is tested, based on both linear and nonlinear models. The half-life of current account imbalances is relatively short, implying high capital mobility. Results point to the existence of a long-run relationship, and in most cases the causality runs from the exchange rate to the current account.
    Keywords: emerging markets, current account, half-life, East and Southeast Asia.
    JEL: C22 E32 F15
    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.