nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒12‒15
104 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal macroeconomic stabilization policy of food, metal, and energy price cycles in small open economies By Carlos Garcia; Jesisbé Mejía
  2. Convergence, cycles and complex dynamics of financing investment By Datta, Soumya
  3. Optimal Monetary Responses to Oil Discoveries By Samuel Wills
  4. Euro Area monetary policy transmission in Estonia By Gertrud Errit; Lenno Uusküla
  5. Capital Reallocation and Aggregate Productivity By Russell W. Cooper; Immo Schott
  6. Fiscal shocks and asymmetric effects: a comparative analysis By Pragidis, Ioannis; Gogas, Periklis; Plakandaras, Vasilios; Papadimitriou, Theophilos
  7. Financial Integration Challenges in ASEAN beyond 2015 By Maria Monica WIHARDJA
  8. Financial stability in open economies By Ippei Fujiwara, Yuki Teranishi
  9. The Effect of Fiscal Policy Shocks on the Flow of Funds By Andrew Bossie
  10. Large Scale Asset Purchases with segmented mortgage and corporate loan markets. By Meixing Dai; Frédéric Dufourt; Qiao Zhang
  11. Combining Monetary and Fiscal Policy in an SVAR for a Small Open Economy By Alfred A. Haug; Tomasz Jedrzejowicz; Anna Sznajderska
  12. The role of financial frictions during the crisis: An estimated DSGE model By Rossana Merola
  13. Modelo de equilibrio general dinámico y estocástico con rigideces nominales para el análisis de política y proyecciones en la República Dominicana. By Ramirez, Francisco A.; Torres, Francisco A.
  14. Imperfect Knowledge About Asset Prices and Credit Cycles By Pei Kuang
  15. Asymmetric Effects of Monetary Policy in the U.S. and Brazil By Pragidis, Ioannis; Gogas, Periklis; Tabak, Benjamin
  16. Fluctuations in Uncertainty By Nicholas Bloom
  17. External Debt and Taylor Rules In a Small Open Economy By Shigeto Kitano; Kenya Takaku
  18. Exchange Rate Volatility and Inflation Upturn in Nigeria: Testing for Vector Error Correction Model By Adeniji, Sesan
  19. How New Keynesian is the US Phillips curve? By Ragna Alstadheim
  20. The frontier of indeterminacy in a neo-Keynesian model with staggered prices and wages By Alexis Blasselle; Aurélien Poissonnier
  21. The Great Moderation: Inventories, Shocks or Monetary Policy? By Marcel Förster
  22. Demand for Liquidity and Welfare Cost of Inflation by Cohort and Age of Households By Yaz Terajima; Jose-Victor Rios-Rull; Césaire Meh; Shutao Cao
  23. The European debt crisis and fiscal reaction functions in Europe 2000–2012 By Guido Baldi; Karsten Staehr
  24. Why Does Monetary Policy Respond to the Real Exchange Rate in Small Open Economies? A Bayesian Perspective By Carlos Garcia
  25. Limited Asset Market Participation, Income Inequality and Macroeconomic Volatility By Giorgio Motta; Patrizio Tirelli
  26. Financial crises and time- varying risk premia in a small open economy: a Markov-Switching DSGE model for Estonia By Boris Blagov
  27. "Lost at Sea: The Euro Needs a Euro Treasury" By Jorg Bibow
  28. Interest Rate Fluctuations and Equilibrium in the Housing Market By Yavuz Arslan
  29. Assessing DSGE Model Nonlinearities By S. Borağan Aruoba; Luigi Bocola; Frank Schorfheide
  30. Do the CAP Subsidies Increase Employment in Sweden? Estimating the Open Economy Relative Multiplier Using an Exogenous Change in the CAP By Blomquist , Johan; Nordin, Martin
  31. Fiscal Policy, Sovereign Default, and Bailouts By Falko Juessen; Andreas Schabert
  32. Il confronto tra politiche di rigore fiscale e politiche di sviluppo economico in Italia e nell'UE By Aurelio Bruzzo; Massimiliano Di Pace
  33. An empirical study of factors affecting inflation in Republic of Tajikistan By Qurbanalieva, Nigina
  34. Deforestation and Seigniorage in Developing Countries: A Tradeoff? By Jean-Louis COMBES; Pascale COMBES MOTEL; Alexandru MINEA; Patrick VILLIEU
  35. Power Generation and the Business Cycle: The Impact of Delaying Investment By Renato Agurto; Fernando Fuentes; Carlos Garcia; Esteban Skoknic
  36. Identifying monetary policy shocks via heteroskedasticity: a Bayesian approach By Dmitry Kulikov; Aleksei Netšunajev
  37. Inflation and Economic Growth in Zambia: A Threshold Autoregressive (TAR) Econometric Approach By Phiri, Andrew
  38. Framing Finance: A Methodological Account By Sheila C Dow
  39. Unconventional Fiscal Policy at the Zero Bound By Emmanuel Farhi; Isabel Correia; Juan Pablo Nicolini; Pedro Teles
  40. Pro-cyclical mortality : Evidence from Norway By Venke Furre Haaland; Kjetil Telle
  41. Empirical evidence on inflation expectations in the new Keynesian Phillips curve By Sophocles Mavroeidis; Mikkel Plagborg-Møller; James H. Stock
  42. Inventory Investment in Australia and the Global Financial Crisis By Gianni La Cava
  43. Monetary Policy, Output and Prices- Peláezs Contributions and a Sequential Multiple-horizon Non-causation Test for the period 1861-1970 By Erik Alencar de Figueiredo; Claudio Shikida; Ari Francisco Araújo Jr
  44. Washington Meets Wall Street: A Closer Examination of the Presidential Cylce Puzzle By Roman Kraussl; Andre Lucas; David R. Rijsbergen; Pieter Jelle van der Sluis; Evert B. Vrugt
  45. Optimal Time-Consistent Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  46. Self-reinforcing effects between housing prices and credit: an extended version By André K. Anundsen; Eilev S. Jansen
  47. The Great Recession, tax policy, and the future of charity in America By Arthur C. Brooks
  48. Do Business Cycles Have Long-Term Impact for Particular Cohorts? By Torben M. Andersen; Jonas Maibom; Michael Svarer; Allan Sørensen
  49. Reserves of Natural Resources in a Small Open Economy By Isaac Gross; James Hansen
  50. Do Extended Unemployment Benets Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market By Henry S. Farber; Robert G. Valletta
  51. The BIS and the Latin American debt crisis of the 1980s By Piet Clement; Ivo Maes
  52. Tax Evasion, Human Capital, and Productivity Induced Tax Rate Reduction By Max Gillman; Michal Kejak
  53. When will the global economy return to rapid growth? By Marek Dabrowski
  54. Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform By Mazhar Waseem
  55. The Determinants of Greek Bond Yields: An Empirical Study Before and During the Crisis By Chionis, Dionisios; Pragidis, Ioannis; Schizas, Panagiotis
  56. Manufacturing Renaissance: Return of manufacturing to western countries By Tavassoli, Sam
  57. Income underreporting by households with business income. Evidence from Estonia. By Merike Kukk; Karsten Staehr
  58. Follow the Money: Methods for Identifying Consumption and Investment Responses to a Liquidity Shock By Dean Karlan; Adam Osman; Jonathan Zinman
  59. Interest Rate Policy and Financial Regulation: How to Control Excessive Risk Taking? By Malik Shukayev; Alexander Ueberfeldt; Simona Cociuba
  60. Two Sources of Bias in Estimating the Peak of the Laffer Curve By Dan Usher
  61. Marginal Tax Rates and Reported Incomes: New Time Series Evidence By Karel Mertens
  62. Reputational Constraints on Monetary Policy By K. Brunner; A. Meltzer
  63. Privatizzazioni e debito pubblico By Massimo Florio
  64. Public Debt and Economic Growth in Sri Lanka: Is There Any Threshold Level for Pubic Debt? By Hemantha Kumara; Nawalage S. Cooray
  65. Expanding Beyond Borders: The Yen and the Yuan By Subacchi, Paola
  66. Colonial New Jersey's Paper Money Regime, 1709-1775: A Forensic Accounting Reconstruction of the Data By Farley Grubb
  67. Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies By Kenneth N. Kuttner; Ilhyock Shim
  68. Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities By Mark Aguiar; Manuel Amador
  69. Bank performance and economic growth: evidence from Granger panel causality estimations By Cândida Ferreira
  70. The Cyclicality of the Opportunity Cost of Employment By Gabriel Chodorow-Reich; Loukas Karabarbounis
  71. The Six Major Puzzles in International Macroeconomics: Is there a Common Cause? By Maurice Obstfeld; Kenneth Rogoff; Ben Bernanke; Kenneth Rogoff
  72. Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows By Emmanuel Farhi; Ivan Werning
  73. Have Financial Markets Become More Informative? By Jennie Bai; Thomas Philippon; Alexi Savov
  74. Capital Flows to Emerging Markets: An alternative Theoretical Framework By Bruno Bonizzi
  75. Η κρυφή ανεργία στην Ελλάδα / Hidden Unemployment in Greece By Ioannidis, Yiorgos
  76. Relative Price Effects on Decompositions of Change in Aggregate Labor Productivity By Dumagan, Jesus C.
  77. DSGE models in the frequency domain By Luca Sala
  78. Was Harrod Right? By Kevin D. Hoover
  79. Redistributive effects and labour market dynamics. By Di Pace, Federico; Villa, Stefania
  80. Foreign capital, Non-Traded Goods and Welfare in a Developing Economy in the presence of Externalities By Chaudhuri, Sarbajit
  81. Monopoly price discrimination with constant elasticity demand By Aguirre Pérez, Ignacio; Cowan, Simon George
  82. The peculiar distributional character of the Greek taxation system (1995‐2008) and the reform that never took place By Ioannidis, Yiorgos
  83. Legge di stabilita' 2014-2016: le regole europee programmano la depressione By Paolo Pini
  84. Structural Change in Advanced Nations By Dale W. Jorgenson; Marcel P. Timmer
  85. La crise sur plateau : Perspectives 2013-2014 pour l’économie mondiale By Xavier Timbeau
  86. Locus of Control and Savings By Deborah A. Cobb-Clark; Sonja C. Kassenboehmer; Mathias G. Sinning
  87. RETURNS TO LOCATION IN RETAIL: Investigating the relevance of market size and regional hierarchy By Öner, Özge
  88. Revenue Tariff Reform By Peter Neary; James E. Anderson
  89. "The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone" By Philip Pilkington
  90. On the Size Distribution of Macroeconomic Disasters By Robert J. Barro; Tao Jin
  91. The ins and outs of top income mobility By Rolf Aaberge; Anthony B. Atkinson; Jørgen Modalsli
  92. Ο ιδιότυπός διανεμητικός χαρακτήρας του ελληνικού φορολογικού συστήματος (1995-2008) και η αναγκαία μεταρρύθμιση που ποτέ δεν έγινε By Ioannidis, Yiorgos
  93. Europe's Revolving Doors: Import Competition and Endogenous Firm Entry Institutions By Povilas Lastauskas
  94. The cost-of-living index with trade barriers By Thomas von Brasch
  95. Purchasing power parity and the Taylor rule By Hyeongwoo Kim, Ippei Fujiwara, Bruce E. Hansen, Masao Ogaki
  96. Hidden insurance in a moral hazard economy By Bertola, Giuseppe; Koeniger, Winfried
  97. Simultaneous auctions for complementary goods By Wiroy Shin
  98. Inequality, inequality of opportunity, and growth: what are we talking about? Theory and empirical investigation in Brazil By Geoffrey Teyssier
  99. Marginal abatement cost curves and the optimal timing of mitigation measures By Adrien Vogt-Schilb; Stéphane Hallegatte
  100. Eligibility thresholds for minimum living guarantee programs : international practices and implications for China By Umapathi, Nithin; Wang, Dewen; O'Keefe, Philip
  101. Bank Income Smoothing, Ownership Concentration and the Regulatory Environment By Vincent Bouvatier; Laetitia Lepetit; Frank Strobel
  102. Expectations of Returns and Expected Returns By Robin Greenwood; Andrei Shleifer
  103. Optimal Trading Strategies as Measures of Market Disequilibrium By Valerii Salov
  104. Values, beliefs and economic behaviors: a regional approach By João Carlos Graça,; João Carlos Lopes; Cláudia Niza

  1. By: Carlos Garcia (Facultad de Economía y Negocios, Universidad Alberto Hurtado); Jesisbé Mejía
    Abstract: This paper proposes an optimal strategy for stabilizing macroeconomic policy to address jointly the effects of changes in the prices of food, minerals and energy (oil). Our approach differs from the general literature, which analyzes the effects of a commodity boom and therefore the solutions in terms of economic policy separately, that is, by type of commodity. The stabilization strategy that we propose considers a key fact affecting many small open economies, namely, that they not only are affected by increases in commodity prices, but also benefit from them. Consequently, we use a DSGE model for a small open economy with restricted households to show that welfare could be improved with a fiscal rule incorporating transfers to stabilize household consumption. This strategy noticeably dominates an aggressive monetary policy focused only on stabilizing inflation and a fiscal policy that has an excessive bias toward saving income from exports.
    Keywords: commodity price boom, optimal fiscal and monetary policy, DSGE models
    JEL: E31 E32 E52 E62 E63 F1 F41
    Date: 2012–10
  2. By: Datta, Soumya
    Abstract: This paper demonstrates the diverse dynamical possibilities of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, growth cycles around it as well as various complex dynamics from codim 1 and codim 2 bifurcations. The effectiveness of monetary policy in the form of interest rate rules is examined under this context.
    Keywords: Growth cycles, Hopf bifurcation, complex dynamics, Taylor rule
    JEL: C62 C69 E12 E32
    Date: 2013–03–22
  3. By: Samuel Wills
    Abstract: Monetary policy can play an important role in managing oil discoveries. Ideally governments will use fiscal policy to smooth consumption of oil income. In practice this often does not happen, as governments delay spending until oil revenues are received. This induces changes in the economy, both at discovery and when spending begins. In this paper we consider how monetary policy should respond. The paper makes three contributions. The first is to show that an oil discovery causes the real exchange rate to appreciate twice: when forward-looking households and then the government increase their consumption. This can cause a recession under standard monetary regimes, as firms anticipate the second appreciation. The second contribution is to micro-found the objective of monetary policy. The central bank should stabilise inflation, the output gap and the fiscal gap. It will also try to appreciate the non-oil terms of trade, to exploit the asymmetry from owning oil wealth. The third is to derive a closed form for optimal monetary policy, which will respond in advance to expected changes in government demand. This will delay the second real appreciation until the government can take up the slack left by private demand. Optimal policy significantly improves welfare relative to standard monetary regimes, and is well approximated by a simple Taylor rule that responds to expected changes in the natural level of output.
    Keywords: Natural resources, oil, optimal monetary policy, small open economy, anticipated windfall
    JEL: E52 E62 F41 O13 Q30 Q33
    Date: 2013–08–30
  4. By: Gertrud Errit; Lenno Uusküla
    Abstract: This paper studies the effect of a monetary policy shock in the euro area on the main Estonian economic and financial variables between 2000 and 2012. Using a standard structural vector autoregression (SVAR) model we find strong and persistent effects on Estonian GDP, private consumption, corporate investment and imports. A monetary policy shock has also strong and sluggish effects on the housing loan and consumer credit interest rates. The estimated reaction of Estonian GDP and the GDP deflator-based inflation rate is about four times stronger than the reaction of euro area-wide aggregates. The Estonian money market interest rate (the 3-month Talibor) reacts about twice as strongly as the euro area money market interest rate (the 3-month Euribor). We also show that this finding is sensitive to the inclusion of the data from the years of the recent financial and economic crisis. We conjecture that household interest rates can play an important role in propagating monetary policy shocks in Estonia.
    Keywords: monetary policy, SVAR, Estonia, euro area
    JEL: E32 E52 C32
    Date: 2013–12–09
  5. By: Russell W. Cooper; Immo Schott
    Abstract: This paper studies the productivity implications of cyclical reallocation. Frictions in the reallocation process are a source of factor misallocation. Cyclical movements in these frictions lead to variations in the degree of reallocation and thus in productivity. These frictions also impact the capital accumulation decision. The effects are quantitatively important in the presence of fluctuations in adjustment frictions and/or the cross sectional variation of profitability shocks.
    JEL: D24 E2 E22 E32
    Date: 2013–12
  6. By: Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Plakandaras, Vasilios (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics)
    Abstract: We empirically test the effects of unanticipated fiscal policy shocks on the growth rate and the cyclical component of real private output and reveal different types of asymmetries in fiscal policy implementation. The data used are quarterly U.S. observations over the period 1967:1 to 2011:4. In doing so, we use both a vector autoregressive and the novel support vector machines systems in order to extract the fiscal policy shocks series. The latter has never been used before in a similar macroeconomic setting. Within our research framework, in order to test the robustness of our results to alternative aggregate money supply definitions we use two alternative moentary aggregates. These are the commonly reported by central banks and policy makers simple sum monetary aggregates at the MZM level of aggregation and the alternative CFS Divisia MZM aggregate. From each of these four systems we extracted four types of shocks: a negative and a positive government spending shock and a negative and a positive government revenue shock. These eight different types of unanticipated fiscal policy shocks are next used to empirically examine their effects on the growth rate and the cyclical component of real private GNP in two sets of regressions: one that assumes only contemporaneous effects of the shocks on output and one that is augmented with four lags of each fiscal shock.
    Keywords: Fiscal Policy; Asymmetric Effects; VAR
    JEL: E62
    Date: 2013–12–09
  7. By: Maria Monica WIHARDJA (Centre for Strategic and International Studies)
    Abstract: Financial integration challenges in ASEAN beyond 2015 can be grouped into two broad classes. The first classes of challenges are the regulatory and infrastructure challenges of financial market integration itself. The second pertains to monetary and fiscal policy regimes and how they are impacted by as well as how they impact on an integrated financial market in the region. The paper focuses on the integration in banking sector and the discussion in it considers the implications that the integration measures or strategies have on monetary policy of a country.
    Keywords: Economic integration, Monetary Policy, Fiscal Policy, Financial Aspects of Economic Integration, ASEAN
    JEL: F15 E52 E62 F36 N25
    Date: 2013–11
  8. By: Ippei Fujiwara, Yuki Teranishi
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.Length: 42 pages
    Keywords: Optimal monetary policy in open economy; financial market imperfectionsd estimator; Grid-t Confidence Interval
    JEL: E50 F41
    Date: 2013
  9. By: Andrew Bossie
    Abstract: Abstract: This paper uses a selection of fiscal vector autoregression models to identify the effect of fiscal policy shocks on the private sectorâs balance sheet using the Flow of Funds. As well, I examine the response of treasury interest rates, the Federal Funds rate and the assets of the Federal Reserve to gauge the response of monetary policy to fiscal policy shocks. I find that the Federal Reserve does not respond to fiscal policy shocks in any significant way. I also find that the business sector responds to fiscal policy shocks but not very strongly. The household sector responds more clearly. Fiscal policy shocks have an effect on householdâs holdings of both short term liquid assets and long term illiquid assets. Spending shocks also have a clear effect on mortgage lending.
    JEL: E5 E6 E4 H3 H5
    Date: 2013–11–15
  10. By: Meixing Dai; Frédéric Dufourt; Qiao Zhang
    Abstract: We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output.
    Keywords: Financial frictions, mortgage-backed securities (MBS), corporate bonds, unconventional monetary policy, large scale asset purchases (LSAPs), portfolio balance channel, credit spreads.
    JEL: E32 E44 E52 E58
    Date: 2013
  11. By: Alfred A. Haug (Department of Economics, University of Otago, New Zealand); Tomasz Jedrzejowicz (National Bank of Poland); Anna Sznajderska (National Bank of Poland)
    Abstract: This paper combines a monetary structural vector-autoregression (SVAR)with a fiscal SVAR for Poland. Fiscal foresight, in the form of implementation lags, is accounted for with respect to both discretionary government spending and tax changes. We demonstrate the importance of combining monetary and fiscal transmission mechanisms. However, ignoring fiscal foresight has no statistically significant effects. We calculate an initial government spending multiplier of 0.14, which later peaks at 0.48. The tax multiplier is close to zero. We also find that monetary policy in Poland transmits mainly through the real sector, that is through real GDP and the real exchange rate.
    Keywords: Structural vector autoregressions, monetary and fiscal policy, fiscal foresight, narrative approach
    JEL: E52 E62 C51
    Date: 2013–10
  12. By: Rossana Merola (ESRI, Economic Analysis Division; Trinity College Dublin)
    Abstract: After the recent banking crisis in 2008, financial market conditions have turned out to be a relevant factor for economic fluctuations. This paper provides a quantitative assessment of the impact of financial frictions on the U.S. business cycle. The analysis compares the original Smets and Wouters model (2003, 2007) with an alternative version augmented with the financial accelerator mechanism à la Bernanke, Gertler and Gilchrist (1996,1999). Both versions are estimated using Bayesian techniques over a sample extended to 2012. The analysis supports the role of financial channels, namely the financial accelerator mechanism, in transmitting dysfunctions from financial markets to the real economy. The Smets and Wouters model, augmented with the financial accelerator mechanism, is suitable to capture much of the historical developments in U.S. financial markets that led to the financial crisis. The model can account for the output contraction in 2008, as well as the widening in corporate spreads and supports the argument that financial conditions have amplified the U.S. business cycle and the intensity of the recession.
    Keywords: DSGE models, business cycle, financial frictions, Bayesian estimation
    JEL: C11 E32 E44
    Date: 2013–12
  13. By: Ramirez, Francisco A.; Torres, Francisco A.
    Abstract: This paper specifies and estimates a structural model of a small open economy to the Dominican Republic. The objective is to provide an analytical framework based on a rigorous theoretical component, but also including aspects that capture satisfactorily the dynamics of macroeconomic variables and being empirically plausible for its use for forecasting and policy analysis. The structure adopted in the model specification is standard in the literature of small open economies and is based on the work of Galí and Monacelli (2005 ) , Justiniano and Preston (2005), Ercerg , Henderson and Levin (2000) and Lubik and Schorfheide ( 2005 ) . The model is characterized by relationships between macroeconomic aggregates that reflect the behavior of economic agents and the technical and institutional constraints they face . The economy is populated by four types of agents: households , producers and importers of differentiated final goods consumption , and a government run monetary policy to influence economic conditions . Households choose each period how much to consume and work , while firms choose price and quantity of goods to offer to meet the demand . The external sector of the economy is characterized by the export of a fraction of domestic production and imports of goods consumed domestically, where the proportions are determined by the relative prices of domestically produced goods relative to foreign . Households have access to two vehicles for mobilizing resources intertemporally , a domestic bond and one external . Finally, the government is characterize by the behavior of the Central Bank who adjust it policy rate to offset inflation and output deviations from their equilibrium levels.
    Keywords: Modelos DSGE para Economías Pequeñas y Abiertas; Rigideces Nominales; Mecanismos de Transmisión de la Política Monetaria; Métodos Bayesianos
    JEL: E32 E52 F37
    Date: 2013–11–28
  14. By: Pei Kuang
    Abstract: This paper develops an equilibrium model with a housing collateral constraint in which rational agents are uncertain about the collateral price process. Bayesian learning by agents can endogenously generate booms and busts in collateral prices and significantly strengthen the role of the collateral constraint as an amplification mechanism through the interaction of agents' price beliefs, price realizations and credit limits. Over-optimism or pessimism is fueled when a surprise in price expectations is interpreted partially by the agents as a permanent change in the parameters governing the collateral price process and is validated by subsequently realized prices. The learning model can quantitatively account for the recent US boom-bust cycle in house prices, household debt and aggregate consumption dynamics during 2001-2008. The paper also demonstrates that the leveraged economy with a higher steady state leverage ratio is more prone to self-inforcing learning dynamics.
    Keywords: Boom-Bust, Collateral Constraints, Learning, Leverage, Housing
    JEL: D83 D84 E32 E44
    Date: 2013–11
  15. By: Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Tabak, Benjamin (Bank of Brazil)
    Abstract: We empirically test the effects of anticipated and unanticipated monetary policy shocks on the growth rate of real industrial production and explicitly test for different types of asymmetries in monetary policy implementation for two major international economies, the U.S. and Brazil. We depart from the conventional method of VAR analysis to estimate unanticipated monetary shocks and instead we use a combination of other methods. We first identify the Taylor rule that best describes the reaction of both central banks and then we test both forward looking linear and nonlinear models concluding that a Logistic Smooth Transition Autoregressive (LSTAR) forward looking model of the Taylor rule best describes the US FED Funds rate while a linear Taylor rule with the inclusion of a dummy variable best describes the reaction of the Central Bank of Brazil (BCB). We then use in-sample forecast errors in order to derive or identify the unexpected monetary shocks for both countries. In line with Cover (1992), we use these shocks to explore any asymmetries in the conduct of monetary policy on the growth rate of real industrial production. We also find asymmetries between anticipated and unanticipated monetary shocks as well as between effects of positive and negative shocks.
    Keywords: Taylor rule; monetary policy; nonlinear effects; LSTAR
    JEL: E40 E52 E58
    Date: 2013–12–07
  16. By: Nicholas Bloom
    Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
    JEL: E2 E3 O4
    Date: 2013–12
  17. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Graduate School of Economics, Nagoya University)
    Abstract: We develop a dynamic stochastic general equilibrium model of a small open economy in which both price rigidity and financial friction exist. We compare two cases featuring different interest rate rules. Both cases use the standard Taylor-type interest rate rules, but the second case also considers external debt levels. We find that when friction in foreign borrowing is large, adding an external debt level to Taylor rules improves welfare. The welfare curve, however, exhibits a hump shape since excessive reactions to changes in external debt reduce welfare.
    Keywords: External debt; Taylor rules; small open economy; DSGE; welfare; emerging market economies
    JEL: E5 F4
    Date: 2013–11
  18. By: Adeniji, Sesan
    Abstract: Abstract This paper empirically examines the impact of exchange rate volatility on inflation in Nigeria using annual time series data from 1986 – 2012. The methodology employed includes: ADF, PP and KPSS test of unit root, Johansen Julius cointegration test, VECM, granger causality test, impulse response function and variance decomposition. The unit root test result shows that all variables are stationary at first difference, while Maxi-eigen value shows a long run relationship between the variables. VECM result established positive and significant relationship between inflation, exchange rate volatility, money supply and fiscal deficit, while gross domestic product show negative relationship. Granger causality outcome shows a bi-directional relationship between all the variables. Subsequently, exchange rate volatility is deduced to influence inflation in Nigeria. Therefore, it becomes imperative for the government to understand and control the various channels through which exchange rate transmits to affect inflation in Nigeria, check the growth of money supply, increase the level of productivity in the country and lastly cut down public sector expenditure and possibly make a shift from excessive consumption expenditure to capital expenditure believing this will reduce the burden of fiscal deficit and the rate of inflation.
    Keywords: Exchange rate volatility, inflation upturn, vecm, granger causality, impulse response and variance decomposition
    JEL: E31 E51 E62
    Date: 2013–12–08
  19. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway))
    Abstract: I provide a generalization of Calvo price setting, to include non-overlapping contracts as a special case and embed this in a small DSGE model. The resulting Generalized Phillips Curve (GPC) nests New-Keynesian and Neoclassical versions. I linearize the model around a potentially non-zero trend in.ation rate, and estimate it on US data using Bayesian methods, allowing for Markov switching in the variances of structural shocks. I find that the Phillips curve is 100% New Keynesian. There is no evidence of either forward or backward indexation. I illustrate that trend in.ation a¤ects the estimation of the Phillips curve.
    Keywords: Phillips curve, neoclassical, indexation, trend inflation, regime switch
    JEL: E13 E31
    Date: 2013–12–05
  20. By: Alexis Blasselle (LJLL - Laboratoire Jacques-Louis Lions - CNRS : UMR7598 - Université Pierre et Marie Curie (UPMC) - Paris VI); Aurélien Poissonnier (LMA - Laboratoire de macroéconomie - Centre de Recherche en Économie et STatistique (CREST), Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: We consider a neo-Keynesian model with staggered prices and wages. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables: output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly: the Central Banker can react to both inflations and the output gap. We generalize the Taylor principle in this case: it embeds the frontier of determinacy derived with staggered prices only, it is also symmetric in price and wage inflations. It follows that when staggered labour contracts are considered, wage inflation is also an illegible and efficient target for the Central Banker.
    Keywords: Dynamic Stochastic Général Equilibrium Model, Monetary Policy Rule, Sun Spot Equilibria, Taylor Principle.
    Date: 2013–12–09
  21. By: Marcel Förster (University of Giessen)
    Abstract: This paper presents a New Keynesian DSGE model with inventory holding firms. The model distinguishes between goods and materials, for both production as well as for inventories. The more detailed treatment of inventory holdings offers new insights into the determinants of business cycles before and during the Great Moderation. Via Bayesian estimation we determine the distributions of the parameters for U.S. data for two subsamples. Our results show that impulse responses change significantly in terms of magnitude and persistence over time. Shocks in the labor market have gained importance since the Great Moderation and they explain the volatility of many variables. We reject the hypothesis of better inventory management and improved monetary policy as explanations for the Great Moderation. Instead, labor supply developments and changes in cost associated with capital play a key role for the reduced fluctuations.
    Keywords: Inventories, Great Moderation, Bayesian Estimation, DSGE model, Business Cycles
    JEL: C13 E20 E30
    Date: 2013
  22. By: Yaz Terajima (Bank of Canada); Jose-Victor Rios-Rull (University of Minnesota); Césaire Meh (Bank of Canada); Shutao Cao (Bank of Canada)
    Abstract: Cross-sectional data show that money holding differs significantly over household consumption and age. Liquidity demand for money (i.e., money holding per dollar of consumption) decreases as household consumption increases. It also increases with household age conditional on the level of consumption. Observed age differences in money holdings contain not only age-specific information but also cohort-specific one. Using a life-cycle model, this paper disentangles these two effects on money demand and quantifies welfare gains of reducing the long-run inflation rate. We dynamically calibrate the model to micro data and macroeconomic conditions over time. We find that, although a large part of the observed cross-sectional age differences in money demand can be accounted for by some age effects, cohort effects play a non-negligible part, supporting a presence of financial innovation. In addition, changing inflation has significantly different impacts across household groups due to their heterogeneity in money holding. When inflation increases from the 2009 level to 10%, we find the aggregate welfare loss in consumption to be 1.34%. These losses are accrued mostly by generations that are currently alive and less by future cohorts. Finally, poorer households lose more than their rich peers.
    Date: 2013
  23. By: Guido Baldi; Karsten Staehr
    Abstract: After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001–2008 and for the post-crisis period 2009–2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems
    Keywords: fiscal reaction function, global financial crisis, debt crisis, structural break
    JEL: E61 E62 H62 H63
    Date: 2013–07–24
  24. By: Carlos Garcia (Facultad de Economía y Negocios, Universidad Alberto Hurtado)
    Abstract: To estimate how monetary policy works in small open economies, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru, and New Zealand) is rather similar to that observed in closed economies. Our results also indicate, however, that there are strong differences due to shocks from the international financial markets (mainly risk premium shocks). These differences explain most of the variability of the real exchange rate, which has important reallocation effects in the short run. Our results are consistent with an old idea from the Mundell-Fleming model: namely, a real depreciation to confront a risk premium shock is expansive or procyclical, in contradiction to the predictions of the balance sheet effect, the J curve effect, and the introduction of working capital into RBC models. In line with this last result, we have strong evidence that only in one of the five countries analyzed in this study does not intervene the real exchange rate, the case of New Zealand.
    Keywords: small open economy models; monetary policy rules; exchange rates; Bayesian econometrics
    JEL: F33 E52 F41
    Date: 2012–11
  25. By: Giorgio Motta; Patrizio Tirelli
    Abstract: By introducing external consumption habits and Limited Asset Market Participation in an otherwise standard New Keynesian DSGE model we uncover a causality link between limited asset market participation, consumption inequality and macroeconomic volatility. We also obtain that monetary contractions have redistributive effects in favor of asset holders, broadly con�rming the �findings in Coibion et al. (2012). Finally we analyze the impact of redistributive �scal policies that target consumption inequality between households groups. Such policies have bene�cial implications for macroeconomic stability, bringing the dynamic performance of the model close to the one generated by representative-agent DSGE models.
    Keywords: Limited Asset Market Participation, DSGE, Determinacy, Consumption Habits, Income Inequality, Redistribution
    JEL: E52 E63
    Date: 2013–12
  26. By: Boris Blagov
    Abstract: Under a currency board the central bank relinquishes control over its monetary policy and domestic interest rates converge toward the foreign rates. Nevertheless a spread between both usually remains. This spread can be persistently positive due to increased risk in the economy. This paper models that feature by building a DSGE model with a currency board, where the domestic interest rate is derived as a function of the foreign rate, the external debt position and an exogenous risk premium component. Applying Markov-Switching allows for time variation in the volatility of the risk premium component. The model shows that the size of risk premia shocks in an economy with a currency board is small in quiet times but the shocks are much larger during crises, which the standard model would understate. The model is applied with Bayesian methods to Estonian data and is able to match the banking and financial crises
    Keywords: Markov-Switching DSGE Models, currency board, stochastic risk premium
    JEL: E32 F41 C51 C52
    Date: 2013–12–09
  27. By: Jorg Bibow
    Abstract: The euro crisis remains unresolved even as financial markets may seem calm for now. The current euro regime is inherently flawed, and recent reforms have failed to turn this dysfunctional regime into a viable one. Our investigation is informed by the "cartalist" critique of traditional "optimum currency area" theory (Goodhart 1998). Various proposals to rescue the euro are assessed and found lacking. A "Euro Treasury" scheme operating on a strict rule and specifically designed not to be a transfer union is proposed here as a condition sine qua non for healing the euro’s potentially fatal birth defects. The Euro Treasury proposed here is the missing element that will mend the current fiscal regime, which is unworkable without it. The proposed scheme would end the currently unfolding euro calamity by switching policy from a public thrift campaign that can only impoverish Europe to a public investment campaign designed to secure Europe’s future. No mutualization of existing national public debts is involved. Instead, the Euro Treasury is established as a means to pool eurozone public investment spending and have it funded by proper eurozone treasury securities.
    Keywords: Euro Crisis; Currency Union; Fiscal Union; Transfer Union; Cartalism; Lender of Last Resort; European Integration
    JEL: E02 E42 E58 E61 E62 F36 G01
    Date: 2013–11
  28. By: Yavuz Arslan
    Abstract: I study the general equilibrium of the housing market in an economy populated by over-lapping generations of households. A contribution of the present paper is to solve for the housing market equilibrium in the presence of aggregate (interest rate) uncertainty with a realistic mortgage contract. In addition, households also face idiosyncratic uncertainty resulting from stochastic changes over the lifecycle in tastes (or need) for housing. In this environment, profit-maximizing banks offer fixed-rate mortgage (FRM) contracts to homebuyers. As seems plausible, each housing market transaction is subject to a fixed cost, which gives rise to S-s policy rules for housing transactions : existing homeowners change the size of their houses only if there is a sufficiently large change in the state of the economy (i.e., in interest rates, in their taste for housing, etc.). A plausibly calibrated version of the model is consistent with three empirically documented features of the housing market : (i) highly volatile housing prices and transaction volume, (ii) a strong positive correlation between transaction volume and housing prices, and (iii) a signi?cant negative relationship between interest rates and housing prices, which can rationalize a large part of the recent boom in housing prices in the U.S. and around the world.
    Keywords: House prices, Interest rates, Mortgage contracts
    JEL: D91 E21 G01 R21
    Date: 2013
  29. By: S. Borağan Aruoba; Luigi Bocola; Frank Schorfheide
    Abstract: We develop a new class of nonlinear time-series models to identify nonlinearities in the data and to evaluate nonlinear DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage/price adjustment costs and use predictive checks to assess its ability to account for nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage/price rigidities, these do not spill over to output growth or the interest rate.
    JEL: C11 C32 C52 E32
    Date: 2013–12
  30. By: Blomquist , Johan (AgriFood Economics Centre); Nordin, Martin (Department of Economics, Lund University)
    Abstract: This study evaluates the impact of agricultural subsidies (CAP) on unemployment and employment outside the agricultural sector. For the CAP subsidies to have an effect outside the agricultural sector, the subsidies must have a second-order effect. Thus, the Open Economy Relative Multiplier for Sweden is estimated with aggregate municipality data for the years 2001 to 2009. A side-effect of the decupling reform in 2005 was that Sweden was forced to introduce a grassland support which redistributed the payments among the regions. This exogenous redistribution of the CAP is the identifying assumption in this study. The subsidy creates private jobs at a cost of about $20,000 per job, which is consistent with earlier estimates based on US data.
    Keywords: Government Spending; Multiplier; Employment; Unemployment; CAP; Agricultural Subsidies
    JEL: E24 E62 Q18
    Date: 2013–12–02
  31. By: Falko Juessen; Andreas Schabert
    Abstract: This paper examines fiscal policy without commitment and the effects of conditional bailout loans. The government relies on distortionary taxation and decides between full debt repayment and costly default. It tends to overborrow due to myopia, which induces default to be a relevant policy option and provides a rationale to constrain sovereign borrowing. We consider a lump-sum financed fund that offers loans at a favorable price and conditional upon minimum primary surpluses. While the government prefers defaulting in the most adverse states, we find that it is willing to accept conditional loans in close-to-default states. These bailouts can lead to an increase in the mean debt price and a lower default probability that are associated with enhanced household welfare. Yet, these outcomes can be reversed when bailouts are too generous, while public debt never decreases in the long-run when bailout loans are available.
    Keywords: Discretionary fiscal policy, overborrowing, sovereign default, bailout loans, conditionality
    JEL: E32 H21 H63
    Date: 2013–12–10
  32. By: Aurelio Bruzzo; Massimiliano Di Pace
    Abstract: Austerity Fiscal policies versus Development policies in Italy and European Union The debate on economic policy issues underway in Italy and EU shows two different stances: on one hand a support to restrictive budgetary policy, aimed at achieving the balance of government finance, as required by European Union, and accepted by 25 EU countries, that is the ones signatories of the Fiscal Compact; on the other hand the priority assigned to the objective of economic development, shared by many representatives of the political and academic institutions of southern European countries, who claim to loosen the constraints stemming from public finance surveillance. In this framework the first paper, drafted by Aurelio Bruzzo, recalls this debate, highlighting the considerations mentioned by each group of economists, which you may find mixed in some studies worked out by supporters of intermediate positions. The second paper, written by Massimiliano Di Pace, after having pointed out the reasons and the content of the Fiscal Compact, as well as the changes to the Italian Constitution entailing the budget balance rule, quantifies the impact of these new guidelines of fiscal policy on Italian public finance. Both papers of this work are based on the belief that the two intended objectives of ongoing economic policy, that is financial stability and economic recovery, are not alternative, but complementary, and, under certain conditions, also compatible. In fact, together with the Fiscal Compact, it is still operational the Europe 2020 strategy, whose main objective is to create conditions for an intelligent, inclusive and sustainable economic growth.
    Keywords: Budget policy; Fiscal Policy; Development Policy; European Union; Government Debt; Deficit; Fiscal Compact
    JEL: E02 E20 E30 E40 E50 E60 F40 F50 H50 H60 O20 R58
    Date: 2013–11–30
  33. By: Qurbanalieva, Nigina
    Abstract: This paper investigates the core factors affecting the price level in republic of Tajikistan by using ‘auto regressive distributed lags’ and Johansen-Juselius cointegration models. The empirical analysis is based on a dataset of demand pull and cost push inflation indicators. We used the monthly data for a period of 2005 to 2012. The findings of this study reveal that in the long run exchange rate, world wheat prices, world oil prices and labor supply Granger cause the price level. Nevertheless, in the short run only world wheat price and labor supply has significant impact. In case of demand pull inflation, in the long run, GDP gap, remittances inflow, and real wages are endogenously determined in the system as they significantly affect the price level. But in the short run, GDP gap, remittances inflow, broad money, government expenditure and real wages Granger causes the price level. Furthermore, there is a bi-directional Granger causality between GDP gap and remittances inflow. Also, real wage Granger causes the government expenditures. The GDP gap Granger causes the real wage, implying the scenario that a major cause of under production is the low level of employment. Finally the price level also Granger causes the real wage, is a reflection of a negative relationship between them.
    Keywords: Inflation, Tajikistan, Cost push, Demand Pull, ARDL, Cointegration
    JEL: E3 E31
    Date: 2013–12–03
  34. By: Jean-Louis COMBES; Pascale COMBES MOTEL; Alexandru MINEA; Patrick VILLIEU
    Abstract: Most of countries covered by natural forests are developing countries, with limited ability to levy taxes and restrained access to international credit markets; consequently, they are amenable to draw heavily on two sources of government financing, namely seigniorage and deforestation revenues. First, we develop a theoretical model emphasizing a substitution effect between seigniorage and deforestation revenues. Second, a panel-data econometric analysis over the 1990-2010 period confirms our findings. Consequently, a tighter monetary policy hastens deforestation. Third, we extend the theoretical model and show that international transfers dedicated to forest protection can upturn the positive link between tighter monetary policies and deforestation, and then discuss the relevance of this finding with respect to recent institutional arrangements.
    Keywords: deforestation, seigniorage, inflation, developing countries, Panel Data Analysis
    JEL: O13 Q23 E42 E52
    Date: 2013
  35. By: Renato Agurto; Fernando Fuentes (Facultad de Economía y Negocios, Universidad Alberto Hurtado); Carlos Garcia (Facultad de Economía y Negocios, Universidad Alberto Hurtado); Esteban Skoknic
    Abstract: This article presents the hypothesis that exogenous shocks in the electricity market can affect the business cycle of the Chilean economy in the short and medium terms. The shocks are identified as the delays in power-generation investment that have characterized the sector in recent years. The delays are due to political decisions and the process of attaining environmental approvals by state agencies. A comparison of different scenarios reveals that after eight years, the country would lose the equivalent of one year of GDP growth, with a consequent reduction in private investment, domestic consumption, and job creation. This result highlights the importance of environmental and energy policy in reducing business cycle fluctuations.
    Keywords: Business Cycle, Electric Energy, Bayesian Econometrics, DSGE models
    JEL: E17 E27 E37 L94
    Date: 2013–07
  36. By: Dmitry Kulikov; Aleksei Netšunajev
    Abstract: In this paper we contribute to the literature on the identification of macroeconomic shocks by proposing a Bayesian SVAR with timevarying volatility of innovations that depend on a hidden Markov process, referred to as an MS-SVAR. With sufficient statistical information in the data, the distinct volatility regimes of the errors allow all the structural SVAR matrices and impulse response functions to be identified without the need for conventional a priori parameter restrictions. We give mathematical identification conditions and propose a flexible Gibbs sampling approach for the posterior inference on MS-SVAR parameters. The new methodology is applied to the US, euro area and Estonian macroeconomic series, where the effects of monetary policy and other shocks are examined.
    Keywords: Markov switching model, volatility regimes, Bayesian inference, monetary policy shocks, SVAR analysis
    JEL: C11 C32 C54
    Date: 2013–12–09
  37. By: Phiri, Andrew
    Abstract: This study examines threshold effects of inflation on economic growth for the Zambian economy using quarterly data collected between 1998 and 2011. This objective is tackled through the use of a threshold autoregressive (TAR) model and the conditional least squares (CLS) estimation technique. As a by-product of utilizing this estimation technique, the paper is able to identify whether there could be an optimal inflation level at which the adverse effects of inflation on economic growth are subdued, or similarly, a level of inflation at which the positive effects of inflation on economic growth are maximized. In this respect, the paper estimates an inflation threshold level of 22.5% for the observed data. These results indicate that economic growth in Zambia can be stimulated even in a moderately high inflation environment. Particularly, the causality analysis identifies the credit sector and exchange rate developments as being crucial channels towards ensuring enhanced economic performance in the Zambian economy.
    Keywords: Inflation; Economic Growth; Granger Causality; TAR Models; Zambia
    JEL: C22 E31 E58
    Date: 2013–12–09
  38. By: Sheila C Dow (University of Stirling)
    Abstract: The way in which financial markets are framed depends on who is doing the framing, although there are reflexive interdependencies between these framings. Mainstream economics frames financial markets as archetypical competitive markets, focusing on prices as the key information on which to base analysis. This follows from traditional positivist methodology where computability is the key to theory appraisal. Central banks draw on this analysis for their own framing, but modify it significantly in the face of the requirement to take decisions under palpable uncertainty; some understanding is perceived to be necessary for prediction. Participants in financial markets in turn employ quantitative models for forming their expectations; in conditions of market turbulence the limits to these models become evident, and indeed material to prices themselves. Further, for these participants, markets are a social phenomenon. Finally the households and firms whose experience of financial markets enables or constrains spending frame financial markets in yet another way. The underlying argument of the paper is that the way in which financial markets are framed in theory should reflect the different framings in the economy, and that this would benefit from input from other disciplines.
    Keywords: framing, finance, monetary policy
    JEL: B0 E44 E58 G02
    Date: 2013–12
  39. By: Emmanuel Farhi; Isabel Correia; Juan Pablo Nicolini; Pedro Teles
    Abstract: When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.
  40. By: Venke Furre Haaland; Kjetil Telle (Statistics Norway)
    Abstract: Using variation across geographical regions, a number of studies from the U.S. and other developed countries have found more deaths in economic upturns and less deaths in economic downturns. We use data from regions in Norway for 1977-2008 and find the same procyclical patterns. Using individual-level register data for the same population, we then look at differences in pro-cyclicality across subsamples that are expected to be affected differently by the business cycle. Mortality is most pro-cyclical for young men (18-24), but there are also some indications of more pro-cyclical mortality for subgroups, such as the disabled, who are already dependent on the health-care system. Furthermore, the data allow us to look at pro-cyclicality in measures of morbidity, and we find procyclicality in disability, obesity and traffic accidents in densely populated areas. Finally, we investigate pro-cyclical mortality across socioeconomic groups and find that mortality is more procyclical for the well educated than the less educated, but it is less pro-cyclical for those with high earnings and more wealth than those with low earnings and less wealth. Overall, the observed associations between mortality and macroeconomic conditions seem to stem from a myriad of diverging mechanisms.
    Keywords: Mortality; Morbidity; Health; Recession; Unemployment; business cycle
    JEL: I10 E32 J6
    Date: 2013–11
  41. By: Sophocles Mavroeidis; Mikkel Plagborg-Møller; James H. Stock
    Abstract: We review the main identification strategies and empirical evidence on the role of expectations in the new Keynesian Phillips curve, paying particular attention to the issue of weak identification. Our goal is to provide a clear understanding of the role of expectations that integrates across the different papers and specifications in the literature. We discuss the properties of the various limited information econometric methods used in the literature and provide explanations of why they produce conflicting results. Using a common data set and a flexible empirical approach, we find that researchers are faced with substantial specification uncertainty, as different combinations of various a priori reasonable specification choices give rise to a vast set of point estimates. Moreover, given a specification, estimation is subject to considerable sampling uncertainty due to weak identification. We highlight the assumptions that seem to matter most for identification and the configuration of point estimates. We conclude that the literature has reached a limit on how much can be learned about the new Keynesian Phillips curve from aggregate macroeconomic time series. New identification approaches and new data sets are needed to reach an empirical consensus.
  42. By: Gianni La Cava (Reserve Bank of Australia)
    Abstract: A sharp decline in inventory investment was an important contributor to the economic slowdown in Australia in 2008/09. I identify the extent to which this was due to a tightening in short-term credit constraints. In an experimental design setting, I identify the causal effect of short-term credit constraints on inventory investment by exploiting variation in the debt maturity structure of Australian companies just prior to the global financial crisis. I show that the companies that were forced to refinance or repay a relatively large share of debt in 2008/09 reduced inventory investment by significantly more than companies that were due to refinance or repay their debt at some other time. A case study on the Australian motor vehicle industry supports the hypothesis that a decline in the availability of short-term credit significantly hampered corporate investment in inventories in 2008/09.
    Keywords: inventory investment; credit supply; financial crisis
    JEL: C31 C33 D92 E22 E32 E51 G32
    Date: 2013–11
  43. By: Erik Alencar de Figueiredo; Claudio Shikida; Ari Francisco Araújo Jr
    Abstract: This paper aims to examine if the use of modern protocol for time series data analysis corroborates the results found previously in the literature. Specically, we inspect the non structuralists arguments developed in the 1970s about monetary policy eects. The contributions of this paper are-(a) to review the non-structuralist arguments made by Carlos Manuel Pelaez and Wilson Suzigan and in Pelaez's later works and (b) to test the causality between money, output, and prices, as well as the authors central argument on the importance of monetary policy, using the sequential multiple-horizon non-causation test developed by Hill (2007). Pelaez and Suzigan's original results are corroborated, since monetary policy (measured by monetary base) has an effect on nominal rather than on real output.
    Date: 2013
  44. By: Roman Kraussl; Andre Lucas; David R. Rijsbergen; Pieter Jelle van der Sluis; Evert B. Vrugt (LSF)
    Abstract: We show that the annual excess return of the S&P 500 is almost 10 percent higher during the last two years of the presidential cycle than during the first two years. This pattern cannot be explained by business-cycle variables capturing timevarying risk premia, differences in risk levels, or by consumer and investor sentiment. We formally test the presidential election cycle (PEC) hypothesis as the alternative explanation found in the literature for explaining the presidential cycle anomaly. The PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight empirically-testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power, as is often believed.
    Keywords: political economy, market efficiency, anomalies, calendar effects
    JEL: E32 G14 P16
    Date: 2013
  45. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We show that agents in a competitive equilibrium borrow "too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we study the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.
    JEL: E0 F0 G0
    Date: 2013–12
  46. By: André K. Anundsen; Eilev S. Jansen (Statistics Norway)
    Abstract: The financial crisis has brought the interaction between housing prices and household borrowing into the limelight of economic policy debate. This paper examines the nexus of housing prices and credit in Norway within a structural vector equilibrium correcting model (SVECM) over the period 1986q2- 2008q4. The results establish a two-way interaction in the long-run, so that higher housing prices lead to a credit expansion, which in turn puts an upward pressure on housing prices. Interest rates influence housing prices indirectly through the credit channel. Furthermore, households’ expectations about future development in teir own income as well as in the Norwegian economy have a significant impact on housing price growth. Dynamic simulations show how shocks are propagated and amplified. When we augment the model to include the supply side, these effects are dampened. The paper is an extended version of Anundsen and Jansen (2013b) and it encompasses a previous Discussion Paper 651 (Anundsen and Jansen, 2011).
    Keywords: Housing prices; Household borrowing; Financial accelerator; Dynamic simulations
    JEL: C32 C52 E27 E44 G21 G28 R21 R31
    Date: 2013–10
  47. By: Arthur C. Brooks (American Enterprise Institute)
    Abstract: This paper estimates the price and income elasticities of charitable giving using the 2009 Panel Study of Income Dynamics. It then considers the likely effects of the 2013 personal income tax rate increases and possible tax deduction limits currently under consideration. �
    Keywords: taxation,philanthropy,charitable giving,America's culture of philanthropy
    JEL: A H
    Date: 2013–12
  48. By: Torben M. Andersen (Department of Economics and Business, Aarhus University); Jonas Maibom (Department of Economics and Business, Aarhus University); Michael Svarer; Allan Sørensen (Department of Economics and Business, Aarhus University)
    Abstract: Will the current employment crisis produce lost generations with permanently lower labour market attachment? Taking an explicit cohort perspective and based on Danish data we do not find strong persistence in employment rates at the cohort level. Younger workers tend to be more exposed to business cycle fluctuations than older workers, but importantly they recover more quickly from such set-backs than older workers for whom persistence is stronger. Moreover, no cohorts have been disproportionately affected by exposure to a sequence of adverse shocks. An explicit account of overlapping cohorts is shown to affect assessments of persistence in aggregate employment rates.
    Keywords: Persistence, lost generations, employment
    JEL: J6 E32
    Date: 2013–12–03
  49. By: Isaac Gross (Reserve Bank of Australia); James Hansen (Reserve Bank of Australia)
    Abstract: This paper studies the effect of a shock to resource prices in a small open economy where the stock of natural resources is responsive to exploration activity, and where extraction reduces the future availability of reserves. We show that the effects of a resource price shock on resource investment, labour utilisation and extraction are all amplified in the presence of endogenous reserves. We also find that spillovers to broader economic activity, including changes in domestic production, non-resource exports and consumption, are all greater in the presence of exploration activity. However, we find that incorporating endogenous reserves does not fundamentally change the effects of a resource price shock on key price measures including consumer prices, the real exchange rate and domestic interest rates.
    Keywords: natural resources; small open economy
    JEL: F41 Q33
    Date: 2013–12
  50. By: Henry S. Farber (Princeton University, NBER, IZA); Robert G. Valletta (Federal Reserve Bank of San Francisco, IZA)
    Abstract: In response to the Great Recession and sustained labor market downturn, the availability of unemployment insurance (UI) benefits was extended to new historical highs in the United States, up to 99 weeks as of late 2009 into 2012. We exploit variation in the timing and size of UI benet extensions across states to estimate the overall impact of these extensions on unemployment duration, comparing the experience with the prior extension of benets (up to 72 weeks) during the much milder downturn in the early 2000s. Using monthly matched individual data from the U.S. Current Population Survey (CPS) for the periods 2000-2005 and 2007-2012, we estimate the eects of UI extensions on unemployment transitions and duration. We rely on individual variation in benet availability based on the duration of unemployment spells and the length of UI benets available in the state and month, conditional on state economic conditions and individual characteristics. We nd a small but statistically signicant reduction in the unemployment exit rate and a small increase in the expected duration of unemployment arising from both sets of UI extensions. The eect on exits and duration is primarily due to a reduction in exits from the labor force rather than a decrease in exits to employment (the job nding rate). The magnitude of the overall eect on exits and duration is similar across the two episodes of benet extensions. Although the overall eect of UI extensions on exits from unemployment is small, it implies a substantial eect of extended benets on the steady-state share of unemployment in the cross-section that is long-term.
    Keywords: unemployment insurance benefits, extensions, duration of unemployment, unemployment exit rate
    JEL: D19 E24 H31 J21 J64
    Date: 2013–04
  51. By: Piet Clement (Bank for International Settlements); Ivo Maes (National Bank of Belgium, Research Department; Université catholique de Louvain, Robert Triffin Chair; ICHEC Brussels Management School)
    Abstract: The Latin American debt crisis, which broke out in August 1982, was the first global financial crisis in the postwar period. While the crisis started in the "periphery", it constituted a threat to the "core" of the world economy, as the banking system was under severe pressure. Alongside the IMF, the BIS played an important role in coordinating the international response to the crisis. Moreover, a lot of work at the BIS in the second half of the 1970s had aimed at restraining the debt build-up. Discussions on the rising debt levels were highly influential in shaping the BIS view of financial stability, with the "macroprudential" concept at its core. However, in the analysis of the debt buildup, the role of financial innovations was not really captured. In this paper, we focus on the Latin American debt crisis, discussing first the debt build-up, different initiatives to restrain lending and the BIS role in the management of the crisis. We then turn to the ensuing efforts to strengthen the financial system and the emerging BIS approach to financial stability.
    Keywords: Latin American debt crisis, BIS, macroprudential, financial fragility, Lamfalussy
    JEL: A11 B22 B32 E3 F02 G10 N10
    Date: 2013–12
  52. By: Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak
    Abstract: The paper shows a key role of human capital in explaining how US postwar growth and welfare could have increased while tax rates declined. As in evidence, we assume that the share of government revenue in output has remained stable and model tax evasion within an endogenous growth model with human capital. A trend upwards in the productivity of the goods or human capital sectors grad- ually decreases the degree of tax evasion, and causes a trend upwards in time spent in human capital accumulation. These productivity increases also increase the ratio of tax revenue to GDP at any given tax rate such that the tax rate must be reduced in order to be consistent with the stylized fact of a constant share of government revenue in output. Based on estimated US postwar goods and hu- man capital sectoral productivities, the model explains 30% of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The estimated joint sectoral productivity increases are asymmetric with a larger relative increase in the human capital investment sector, a result related to McGrattan and PrescottÂ’s (2010) relatively larger increase in the productivity of the sector producing intangible capital relative to the goods sector. We show that in a special case of exogenous growth without human capital investment, the explanatory power of the tax trend drops signiÂ…cantly.
    Keywords: Tax evasion, intermediation technology, endogenous growth, human capital productivity, dynamic general equilibrium.
    JEL: E13 E62 H26 O41
    Date: 2013–11
  53. By: Marek Dabrowski
    Abstract: More than six years have passed since the subprime mortgage crisis began in the US in the summer of 2007. In the following year, it spread to the entire world economy. Its consequences have not been fully overcome yet. Thus it’s not surprising that economists’ attention has been largely devoted to short-term, crisis-related issues like financial deleveraging and repairing the balance sheets of governments, corporations and households. For the macroeconomic policy debate, this means concentrating on demand management by using monetary and fiscal policy tools in order to return to a pre-crisis growth path. Rarely has the question been asked of whether or not this is a realistic goal, i.e., whether post-crisis growth can return to pre-crisis levels. An analysis of growth perspectives in the medium-to-long-term calls for using the neo-classical growth theory, according to which there are three factors at play: labor, capital and total factor productivity (TFP). In this brief we will try to figure out what their expected dynamics are and how much each of them can contribute to economic growth in the foreseeable future.
    Keywords: Macroeconomics and macroeconomic policy, Global/Multiregional, Crisis, Demographic Economics, growth
    Date: 2013–12
  54. By: Mazhar Waseem
    Abstract: This paper analyzes the effects of personal income taxation on earnings, formality and business organization choices of agents. I use a tax reform introduced in Pakistan in 2009, which increased taxation of partnership firms substantially relative to other unincorporated firms, as a natural policy experiment to identify behavioral responses to taxation that include movement into informality, under-reporting taxable earnings, and income shifting to tax-favored business forms. Relying on administrative tax records that comprise the universe of income tax returns filed in 2006â11, I find that the tax rate rise caused the exit of a large number of treated firms: the number of such firms reporting positive taxable earnings declined by 41% in 2009, by another 27% in 2010, and by an additional 15% in 2011. By tracking personal income tax returns of owners of the exited firms, I find that around 45% of the owners moved into informality, the rest switched their business organization. For the treated firms that did not exit, I document almost 50% reduction in reported earnings compared to untreated firms. Combining these estimates of behavioral responses with a simple conceptual framework, I compute that 133% of the projected increase in tax revenue was lost through the behavioral responses, implying that the new tax rate on partnership earnings was on the wrong side of the Laffer curve and would not have been optimal under any social preferences. The excess burden created by the reform increases by nearly 17% if negative spillovers on VAT base are also taken into account.
    JEL: H21 H24 H32 O17
    Date: 2013–12–09
  55. By: Chionis, Dionisios (Democritus University of Thrace, Department of Economics); Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Schizas, Panagiotis (Democritus University of Thrace, Department of Economics)
    Abstract: In this paper we try to uncover the determinants of the 10-year Greek bond yield in both pre and post crisis period that caused the unprecedented event, in the recent history, a country, member of the Euro area, not to able to tap the market. In doing so, we employ two major set of variables, market driven and macroeconomic variables, following the recent literature. We find two classes of results. First, debt to GDP ratio, deficit, inflation and unemployment among others, play a more significant role as determinants of the 10-year Greek bond yield during the crisis than had before and second, during the crisis 10years yield is above the price that fundamentals would imply. Moreover, we explicitly test for the impact of speculation on the yield. These results are in line with other empirical studies and shed line to the motion of bond yield in an unprecedented in terms of fiscal consolidation era as it is in Greece.
    Keywords: Sovereign bonds; Macroeconomic fundamentals; Greek Debt Crisis; Eurozone Debt crisis; Unrestricted VAR
    JEL: E43 G12 G14
    Date: 2013–12–05
  56. By: Tavassoli, Sam (CSIR, Blekinge Inst of Technology)
    Abstract: This paper argues that the location of manufacturing is gradually shifting to the west again, i.e. Manufacturing Renaissance. Such claim is based on the recent observed trend and the discussion is contextualized within the established theory that has been able to explain the location of manufacturing, i.e. Product Life Cycle Model (PLC). Then the paper identifies and discusses the four main drivers of this new phenomenon. Finally, it is noted that the rerun of manufacturing should be kept in portion and not all industries are coming back to the west in the same pace.
    Keywords: re-shoring; locational shift; manufacturing; Product Life Cycle model
    JEL: E02 E22 F21 O14
    Date: 2013–12–03
  57. By: Merike Kukk; Karsten Staehr
    Abstract: This paper estimates the extent of income underreporting by households with business income relative to households of wage earners in Estonia. The paper uses a modified version of the methodology pioneered by Pissarides and Weber (1989). The extent of income underreporting is estimated by comparing food Engel curves for households with and without business income. The baseline result is that the reported income of households with business income above 20% of total income must be multiplied by 2.6 in order to attain the same propensity of food consumption as households of wage earners. Households with business income above 0 but below 20% also underreport income, but to a lesser extent. The estimates are higher than those found for developed countries, but consistent with other studies of the shadow economy in transition countries. The analysis also shows that the presence of business income is a better indicator of income underreporting than a reported status of self-employment.
    Keywords: tax evasion, business income, income underreporting, Engel curve, transition country
    JEL: H26 E21 E26 H24
    Date: 2013–07–26
  58. By: Dean Karlan; Adam Osman; Jonathan Zinman
    Abstract: Identifying the impacts of liquidity shocks on spending decisions is difficult methodologically but important for theory, practice, and policy. Using seven different methods on microenterprise loan applicants, we find striking results. Borrowers report uses of loan proceeds strategically, and more generally their reporting depends on elicitation method. Borrowers also interpret loan use questions differently than the key counterfactual: spending that would not have occurred sans loan. We identify the counterfactual using random assignment of loan approvals and short-run follow-up elicitation of major household and business cash outflows, and estimate that about 100% of loan-financed spending is on business inventory.
    JEL: D12 D92 G21 O12 O16
    Date: 2013–12
  59. By: Malik Shukayev (Bank of Canada); Alexander Ueberfeldt (Bank of Canada); Simona Cociuba (University of Western Ontario)
    Abstract: This paper characterizes the optimal combination of monetary policy and financial regulation in a quantitative infinite horizon model with a risk taking channel of monetary policy. The model economy is rich enough to match main characteristics of the U.S. economy and its financial sector, yet tractable enough to deliver clear prescriptions regarding the optimal policy mix. The optimal policy mix has a simple state contingent leverage regulation and a small financial contribution tax on profits of financial intermediaries. Revenue derived from this tax helps to secure equity financing to solvent financial institutions during economic downturns. Leverage regulation and monetary policy act as complements when policy deviates from the optimum. Standard capital-adequacy regulation is welfare decreasing though effective at reducing risk taking.
    Date: 2013
  60. By: Dan Usher (Queen's University)
    Abstract: Important as it is for public policy, there is still no consensus about the size of the revenue-maximizing tax rate at the top of the Laffer curve. The purpose of this essay is not to supply a correct rate, but to identify difficulties in doing so. 1) Estimates of the revenue-maximizing tax rate are distorted by the discrepancy between the “elasticity of taxable income†at observed tax rates and as it would become at the revenue-maximizing tax rate, a discrepancy illustrated with reference to tax evasion as the source of the contraction in the tax base in response to increases in the tax rate. 2) When the response of tax revenue to tax rate is through the supply of labour, the Laffer curve may not be humped at all because the supply of labour may expand, rather than contract, in respond to an increase in the tax rate, causing tax revenue to rise more than proportionally to the tax rate all the way up to 100%.
    Keywords: Duty to Vote, Tax Evasion, Labour-leisure Choice
    JEL: H21 H26
    Date: 2013–11
  61. By: Karel Mertens (Cornell University)
    Abstract: This paper estimates the effects of changes in marginal tax rates on reported income for different income groups in the postwar US. A large public finance literature focuses on net-of-tax rate elasticities of reported income because it is indicative of the distortionary effects of taxation. Based on static regressions of income on average marginal tax rates, several recent studies find relatively small elasticities for the top 1% income groups and zero elasticities for other income groups. My estimates are dynamic and account explicitly for the endogeneity of average marginal tax rates. The main findings are (i) that reported incomes respond elastically in the year of a change in tax rates, (ii) that incomes respond also outside the top 1% group and (iii) that the response is larger in the years following the change in marginal rates. These results are based on structural vector autoregressions (SVAR) that allow for dynamic interactions with real GDP, the government budget (debt, spending and revenues), inflation and monetary policy. Unanticipated shocks to net-of-tax rates are identified using a narrative measure of federal tax policy changes using the methodology in Mertens and Ravn (AER forthcoming). Using the SVAR measure of exogenous changes in tax rates as an instrument has a large effect on the results of the static regressions previously considered in the literature: elasticities of reported income rise above 1 and are statistically significant across different income groups, including those below the top 1%. I verify the results for different measures for marginal tax rates and different income concepts: I use the 1960-2000 dataset of Saez (2004), a new dataset constructed from the Statistics of Income that spans 1950-2008, and a recent dataset made available by the CBO that starts in 1979. My empirical findings indicate that marginal tax rate changes have considerable effects on behavior, which has important implications for fiscal policy.
    Date: 2013
  62. By: K. Brunner; A. Meltzer
  63. By: Massimo Florio (DEAS, Universita' di Milano)
    Abstract: The proposal to use privatization proceeds in order to decrease public debt in Italy is criticized for several reasons. The Italian debt, now more than 133 per cent of the GDP is the outcome of fundamental fiscal unbalances, including large tax evasion. Without targeting such unbalances, the privatization proceeds will only contribute to delaying a fiscal crisis. Moreover, when a government sells its assets, it exchanges real or financial assets with cash, and the ratio Debt/Gdp is a poor indicator of the net wealth of the state. The possibility that selling government assets may create a demand side shock is unlikely. Eventually, given the difficulty to tax income in a country with large tax evasion, taxation of private wealth should be considered. Private wealth/Gdp per capita ratio in Italy is higher than in Germany and in several other developed countries, and is a symptom of the fiscal anomaly of the country, as this private wealth is the counterpart of public debt, tax evasion, tax elusion, corruption, and rent capture by some social groups.
    Keywords: Public debt, privatization, tax evasion, private wealth
    JEL: L33 H26 H63
    Date: 2013–11–11
  64. By: Hemantha Kumara (International University of University); Nawalage S. Cooray (International University of University)
    Abstract: The nexus between public debt and economic growth is multifaceted. Sri Lanka is not unique to this phenomenon, as there is growing concern about the implications of public debt on economic growth. By the end of 2012, public debt stood at Rs.6 trillion (79.14 percent of GDP). The shares of domestic and external debt to total debt stock were 42.6 and 36.5 per cent of GDP, respectively. In 2012, the total interest paid on public debt was Rs.408.5 billion, which was equal to 5.39 per cent of GDP and 41.35 per cent of the government's total revenue. In addition to large interest payments, there are growing concerns about the huge public debt accumulation and its impact on the economy in the long run. The debt increases economic growth through investment, and it also involves costs because of interest payments. The government aims to reduce the current debt]to]GDP ratio of 79.14 per cent down to 60 per cent by 2016. One can also argue that if the borrowings help increase the growth through high returns, debt accumulation may not be a burden to the economy. The relationship between debt and economic growth in Sri Lanka is inconclusive and has been based on ideological predilections and circumstantial evidence. Although there seems to be an obvious positive linear relationship between debt and growth in Sri Lanka, it is difficult to establish a clear long]run link between the two without a thorough investigation. This study aims to investigate several issues: What is the exact relationship (either positive or negative) between debt and economic growth? If the relationship is nonlinear, what is the optimum or threshold rate of debt that would minimise the economic cost of debt in terms of economic growth? That is, what is the sustainable level of debt for Sri Lanka? Is the Central Bank debt reduction target of 60 per cent by 2016 desirable? The paper develops an econometric model to address these issues based on a conditional convergence using time series data for the period 1960]2010. The study uses two]year non]overlapping averages to capture short]run fluctuations and instrumental variables to address the endogeneity problem. The study finds that there is a nonlinear relationship between the public debt and GDP per capita growth in Sri Lanka. The threshold level for public debt is 59.42 per cent of GDP. Above this level, public debt makes a negative impact on GDP per capita growth. Our finding of a threshold level strongly justify and support the debt reduction target of the government, which aims to reduce the current debt ratio of 79.14 per cent down to 60 per cent by 2016.
    Keywords: Public debt of Sri Lanka, debt and growth, threshold level of debt
    JEL: H63 O40
    Date: 2013–12
  65. By: Subacchi, Paola (Asian Development Bank Institute)
    Abstract: As all eyes are on the strategy and policy measures of the People’s Republic of China (PRC) to push the international use of the yuan, this paper turns to the internationalization of the Japanese yen and compares it with what the PRC is doing. There are some fundamental differences in the regional context and in the pattern of regional integration, and these distinguish the PRC’s current strategy from the Japanese experience in the 1980s. The yen’s development as an international currency, and the comparison with the PRC’s strategy, highlight the importance of regional integration as a way to overcome network externalities and market inertia. Using an analytical framework that assesses both the range of different roles (the scope) and geographical scale (the domain) of a currency in the global market, the paper suggests that economic fundamentals alone, albeit essential, are not sufficient to warrant a fully fledged scope and global domain of the currency. The paper concludes by suggesting that in the next decade the PRC yuan will become Asia’s leading currency due to the PRC’s deep economic integration in the region, and that the Japanese yen’s function as an international asset and store of value can be further enhanced if Tokyo’s competitiveness as a leading international financial center is improved.
    Keywords: yuan; japanese yen; internationalization; network externalities; regional integration
    JEL: E42 E44 F33
    Date: 2013–12–05
  66. By: Farley Grubb
    Abstract: Forensic accounting techniques are used to construct new data series on emissions, redemptions, and bills outstanding for colonial New Jersey paper money. These components are further separated into the amounts initially legislated and planned, and the amounts actually executed. Not only are these data improvements over the prior data in the literature, but they provide a more complete and nuanced accounting of colonial New Jersey’s paper money regime than what has been done previously for any British North American colony. Enough detail of the forensic accounting exercise is given for scholars to reproduce the data series from the original sources.
    JEL: E51 N11
    Date: 2013–12
  67. By: Kenneth N. Kuttner; Ilhyock Shim
    Abstract: Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilizing house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.
    JEL: G21 G28 R31
    Date: 2013–12
  68. By: Mark Aguiar; Manuel Amador
    Abstract: We address the question of whether and how a sovereign should reduce its external indebtedness when default is a significant possibility, with a particular focus on whether a sovereign should buy back or dilute existing long-term sovereign bonds. Our main finding is that when reduction of debt is optimal, the sovereign should remain passive in the long-term bond market during the deleveraging process, retiring long-term bonds as they mature but never actively issuing or buying back these bonds. The only active margin is the short-term bond market, which involves partial roll over of such debt. Any active maturity management, as will typically be required to address rollover crisis risk, will be delayed until the end of the deleveraging process. We also show that there exist a set of Pareto improving debt restructurings in which maturities are shortened; however, these cannot be implemented by trading in competitive secondary markets.
    JEL: E62 F34 F41
    Date: 2013–12
  69. By: Cândida Ferreira
    Abstract: This paper provides empirical evidence on the causality relations between bank performance and economic growth in a panel including 27 European Union member-states from 1996 through to the onset of the 2008 financial crisis. Bank performance is represented not only by the Return on Assets (ROA) and Return on Equity (ROE) ratios but also by bank cost efficiency, measured through Data Envelopment Analysis (DEA). For economic growth, we consider not only the GDP per capita but also the gross fixed capital formation growth. Deploying a panel Granger causality approach, we confirm positive causality running from bank performance to economic growth. However, as regards the opposite causality, running from growth to bank performance, we conclude that economic growth positively contributes to the bank ROA and ROE ratios but not so certainly in the case of the DEA bank cost efficiency.
    Keywords: Bank performance, Economic growth, DEA, Panel Granger causality, European Union.
    JEL: G21 G31 E44 F43 F36
    Date: 2013–12
  70. By: Gabriel Chodorow-Reich; Loukas Karabarbounis
    Abstract: The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. Using detailed microdata, administrative data, and the structure of the search and matching model with concave and non-separable preferences, we document that the opportunity cost of employment is as procyclical as, and more volatile than, the marginal product of employment. The empirically-observed cyclicality of the opportunity cost implies that unemployment volatility in search and matching models of the labor market is far smaller than that observed in the data. This result holds irrespective of the level of the opportunity cost or whether wages are set by Nash bargaining or by an alternating-offer bargaining process. We conclude that appealing to aspects of labor supply does not help search and matching models explain aggregate employment fluctuations.
    Date: 2013–01
  71. By: Maurice Obstfeld; Kenneth Rogoff; Ben Bernanke; Kenneth Rogoff
    Abstract: The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years. Our approach elucidates J. McCallum's home bias in trade puzzle, the Feldstein-Horioka saving-investment puzzle, the French-Poterba equity home bias puzzle, and the Backus-Kehoe- Kydland consumption correlations puzzle. That one simple alteration to an otherwise canonical international macroeconomic model can help substantially to explain such a broad arrange of empirical puzzles, including some that previously seemed intractable, suggests a rich area for future research. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term the exchange-rate disconnect puzzle.' The latter category of riddles includes both the Meese-Rogoff exchange rate forecasting puzzle and the Baxter-Stockman neutrality of exchange rate regime puzzle. Here although many elements need to be added to our extremely simple model, we can still show that trade costs play an essential role.
  72. By: Emmanuel Farhi; Ivan Werning
    Abstract: We consider a standard New Keynesian model of a small open economy with nominal rigidities and study optimal capital controls. Consistent with the Mundellian view, we find that the exchange rate regime is key. However, in contrast with the Mundellian view, we find that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.
    Date: 2013–01
  73. By: Jennie Bai; Thomas Philippon; Alexi Savov
    Abstract: The finance industry has grown, financial markets have become more liquid, and information technology allows arbitrageurs to trade faster than ever. But have market prices then become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not improved since 1960. We use a model with information acquisition and investment to link financial development, price informativeness, and allocational efficiency. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and welfare. We find that this component has remained stable over the past 50 years. When we decompose price informativeness into real price efficiency and forecasting price efficiency, we find that both have remained stable.
    JEL: E2 G1 N2
    Date: 2013–12
  74. By: Bruno Bonizzi (Department of Economics, SOAS, University of London, UK)
    Abstract: This paper represents a theoretical contribution to the analysis of international capital flows. It outlines an alternative theoretical framework based on Post-Keynesian monetary theory, and in particular on Hyman Minsky’s Wall Street paradigm and concept of Money-manager capitalism and Jan Toporowski’s theory of capital market inflation. The key aspects of such an approach are, firstly, that in a monetary analysis capital flows need to be understood as “flows of fundsâ€, as opposed to the traditional understanding of capital flows based on “real†decision, such as saving and investment. A consequence of this is the need of focusing on gross rather than net capital flows. Secondly, when considering emerging markets, the asymmetric nature of the international monetary system must be stressed. Thirdly, it is important to understand the specific forms that capital flows take: in today’s world, pension funds and other institutional investors — alongside banks — are key players in the financial markets, and their role in shaping capital flows to emerging markets must be explicitly recognised. This paper synthesises these elements by understanding capital flows as the result of institutional investors portfolio choice. Along the lines of Minsky and Toporowski, portfolio choice by institutional investors need to be assessed in relation to their balance sheet structure, beside risk/return trade-offs and general state of risk aversion
    Keywords: Capital flows, Emerging Markets, Flow of Funds, Institutional Investors
    Date: 2013–11
  75. By: Ioannidis, Yiorgos
    Abstract: Στόχος της παρούσας εργασίας είναι να δώσει μια εκτίμηση του μεγέθους της κρυφής ανεργίας καθώς και να αναλύσει τις ροές μεταξύ της απασχόλησης, της ανεργίας και του μη οικονομικά ενεργού πληθυσμού εργάσιμης ηλικίας. Με τον όρο κρυφή ανεργία αναφερόμαστε σε εκείνα τα άτομα που είτε είναι ακούσια άνεργοι είτε υποαπασχολούμενοι αλλά δεν καταγράφονται ως άνεργοι από την Έρευνα Εργατικού Δυναμικού. Για την εκτίμηση του πραγματικού ποσοστού ανεργίας χρησιμοποιήσαμε δύο μεθοδολογίες: εκείνη που προτείνεται από το ACOSS (Australian Council of Social Service) και εκείνη που διατυπώθηκε αρχικά από το Perry (1971) και αναπτύχθηκε περαιτέρω από τον Mitchell (2000). The aim of the paper is to estimate of the size of hidden unemployment in Greece. By hidden unemployment we refer to those people who are unemployed or involuntarily underemployed but they are not counted as unemployed by the Labour Force Survey. To estimate the actual unemployment rate we used two methodologies: one proposed by the ACOSS (Australian Council of Social Service) and one developed by Mitchell (2000)
    Keywords: hidden unemploymen
    JEL: E24
    Date: 2013–11
  76. By: Dumagan, Jesus C.
    Abstract: This paper shows that the decomposition of log-change in aggregate labor productivity (ALP) devised by Balk (2013) based on Sato-Vartia indexes is inexact when applied to gross domestic product (GDP) in chained or in constant prices so that sectoral contributions do not necessarily add up to "actual" log-change in ALP. However, this paper adjusts Balk`s decomposition by incorporating "relative prices"--from the "generalized exactly additive" (GEAD) decomposition of "arithmetic change" in ALP (Dumagan 2013)--and shows that the adjusted Balk decomposition is exact for GDP in chained or in constant prices like GEAD. An important finding is that relative prices could reverse the signs of sectoral contributions from Balk`s inexact decomposition. Hence, results from related decompositions of log-change in ALP, e.g., those based on the Tornqvist framework, that do not explicitly recognize relative prices could be misleading and, therefore, may need reconsideration.
    Keywords: relative prices, productivity change decomposition, index number theory
    Date: 2013
  77. By: Luca Sala
    Abstract: We use frequency domain techniques to estimate a medium-scale DSGE model on different frequency bands. We show that goodness of t, forecasting performance and parameter estimates vary substantially with the frequency bands over which the model is estimated. Estimates obtained using subsets of frequencies are characterized by signicantly different parameters, an indication that the model cannot match all frequencies with one set of parameters. In particular, we find that: i) the low frequency properties of the data strongly affect parameter estimates obtained in the time domain; ii) the importance of economic frictions in the model changes when different subsets of frequencies are used in estimation. This is particularly true for the investment cost friction and habit persistence: when low frequencies are present in the estimation, the investment cost friction and habit persistence are estimated to be higher than when low frequencies are absent. JEL Classication: C11, C32, E32 Keywords: DSGE models, frequency domain, band maximum likelihood.
    Date: 2013
  78. By: Kevin D. Hoover
    Abstract: Modern growth theory derives mostly from Robert Solow’s “A Contribution to the Theory of Economic Growth” (1956). Solow’s own interpretation locates the origins of his “Contribution” in his view that the growth model of Roy Harrod implied a tendency toward progressive collapse of the economy. He formulates his view in terms of Harrod invoking a fixed-coefficients production function. This paper, first, challenges Solow’s reading of Harrod, arguing that Harrod’s object in providing a “dynamic” theory had little to do with the problem of long-run growth as Solow understood it, but instead addressed the medium run fluctuations. It was an attempt to isolate conditions under which the economy might tend to run below potential. In making this argument, Harrod does not appeal to a fixed-coefficients production function – or to any production function at all, as that term is understood by Solow. The paper next traces the history of the dominance of Solow’s interpretation among growth economists. These tasks belong to the history of economics. The paper’s final task belongs to economic history. It offers an informal reexamination of economic history through the lens of Harrod’s dynamic model, asking whether there is a prima facie case in favor of Harrod’s model properly understood.
    Keywords: economic growth, Roy Harrod, Robert Solow, dynamics, dynamic instability, knife-edge, warranted rate of growth, natural rate of growth
    JEL: B22 O4 E12 E13 N1 B31
    Date: 2012
  79. By: Di Pace, Federico; Villa, Stefania
    Abstract: We propose and estimate, using Bayesian techniques, a Dynamic Stochastic General Equilibrium model featuring search and matching frictions with redistributive productivity shocks – which account for fluctuations in the distribution of income across factors of production. We first find supporting evidence that the model is able to replicate cyclical properties of labour market variables. We then disentangle two endogenous sources of labour market amplification: (i) deep habits and (ii) the replacement ratio. The latter appears to be a powerful endogenous amplification mechanism given the shock structure of the model. As far as the exogenous amplification is concerned, labour market variability can be largely explained by redistributive innovations. Finally, contrary to Total Factor Productivity shocks, redistributive shocks increase total hours.
    Date: 2013–11
  80. By: Chaudhuri, Sarbajit
    Abstract: A three-sector, three-factor general equilibrium model is developed for a small open developing economy where an inflow of foreign capital generates externalities in the presence of a non-traded final commodity. There are two types of capital and the efficiency of labour depends positively on the consumption of the non-traded commodity. Effects of inflows of foreign capital on social welfare and human capital formation are examined. The analysis finds that while capital that is used in all the sectors may improve welfare; capital used specifically in the non-traded sector is likely to affect social welfare adversely. These results can at least question the desirability of allowing entry of foreign capital in the non-traded final good sector that emanates externalities.
    Keywords: Foreign capital, externality, non-traded good, social welfare, human capital formation, general equilibrium.
    JEL: F21 H2 H23 H5 H53 J4 O1 O17
    Date: 2013–12–11
  81. By: Aguirre Pérez, Ignacio; Cowan, Simon George
    Abstract: This paper presents new results on the welfare e¤ects of third-degree price discrimination under constant elasticity demand. We show that when both the share of the strong market under uniform pricing and the elasticity di¤erence between markets are high enough,then price discrimination not only can increase social welfare but also consumer surplus.
    JEL: L12 L13 D42
    Date: 2013–11
  82. By: Ioannidis, Yiorgos
    Abstract: The period 1995‐2008 is a period of fundamental transformation for the Greek economy. The dominance of services in the GDP and the decline of manufacturing and agriculture, the expansion of wage earners and the decline of self‐employment, the strengthening of large companies versus the smaller ones, the massive influx of immigrants and women in the labour market, the economic expansion to the Balkans and Turkey, the liberalization of the financial system, the euro, are all aspects of a transformation that occurred during that period. So, at a first glance it seems to be a paradox that the structure of the taxation system and its results only changed marginally. The explanation of this paradox lies in the peculiar distributive (as opposed to redistributive)character of the taxation system. Namely, the fact that the government interventions during the period 1995‐2008 resulted in the distribution of the surplus generated from the robust growth to business elites and specific social groups, instead of using this surplus to fund a reform of the taxation system aiming at a fairer distribution of the tax burden. Unfortunately, the combination of the tax agenda of the conservative party in government (Nea Dimocratia) along with a populist rhetoric of the opposition did not allow the promotion of the so needed tax reform.
    Keywords: taxation, political economy, tax-evation
    JEL: E20 E60 E64
    Date: 2013
  83. By: Paolo Pini
    Abstract: La Legge di Stabilita' 2014-2016 elaborata dal governo italiano e' volta al rispetto dei vincoli previsti dai Trattati europei, e non alla crescita del reddito e dell'occupazione. Cio' nonostante, la Commissione Europea non ha ritenuto di dare "semaforo verde", in quanto il rientro dal debito non è garantito nel breve e medio periodo. Cosi' la proposta governativa non viene giudicata soddisfacente dai tecnocrati europei perche' non coerente con le politiche di rigore e di austerita' espansiva, ma neppure soddisfa le parti sociali che chiedono interventi non simbolici per la riduzione del cuneo fiscale, e quindi per la crescita e l'occupazione. Ma siamo certi che impegnare tutte le risorse disponibili per la riduzione del cuneo sia la politica piu' adatta per far uscire il paese dalla crisi in presenza di una trappola della produttivita' che caratterizza il nostro paese da venti anni? [English version] Italian Budgetary Plan 2014-2016: The European Rules Plan the Depression The Italian Budgetary Plan 2014-2016 prepared by the Italian government is finalized to fulfil the constraints of the European Treaties, rather than income and employment growth goals. The European Commission, however, decided not to give the “green lightâ€, because fiscal consolidation is not guaranteed both in short and medium term. Thus the Italian government proposal is considered unsatisfactory by European technocrats, as inconsistent with the budgetary rigour and “expansive austerity†policy. The proposal does not even satisfy the social partners, employer associations and trade unions, who ask for not symbolic actions for reducing the tax wedge, thus for supporting growth and employment. Are we sure though that the commitment of all available resources in the direction of tax wedge reduction is the best policy for driving Italy out of the crisis, as the country has been trapped in productivity stagnation for twenty years?
    Keywords: Italian Budgetary Plan 2014-2016; European Economic Policy; Productivity
    JEL: E61 H6 O47
    Date: 2013–11–28
  84. By: Dale W. Jorgenson; Marcel P. Timmer
    Abstract: We provide new evidence on patterns of structural change in advanced economies, reconsidering the stylised facts put forward by Kaldor (1963), Kuznets (1971), and Maddison (1980). Since 1980, the services sector has overwhelmingly predominated in the economic activity of the European Union, Japan, and the US, but there is substantial heterogeneity among services. Personal, finance, and business services have low productivity growth and increasing shares in employment and GDP. By contrast, shares of distribution services are constant, and productivity growth is rapid. We find that the labour share in value-added is declining, while the use of ICT capital and skilled labour is increasing in all sectors and regions.
  85. By: Xavier Timbeau (OFCE)
    Abstract: L'accélération attendue de la croissance mondiale en 2014 pourrait enfin laisser espérer la fin du marasme après six années de crise. Le terme possible de la crise dans la zone euro porte l'espoir d'une normalisation du fonctionnement de l'économie mondiale. Mais, au-delà de quelques chiffres positifs publiés depuis le début de l'année et de l'anticipation d'une fin de récession dans la zone euro, rien aujourd'hui n'indique que les difficultés sont surmontées. Les mécanismes de la crise des dettes souveraines peuvent se réactiver, les péripéties politico-budgétaires américaines, qui ont trouvé une issue temporaire, peuvent resurgir début 2014 et les tensions autour de la fiscalité et la hausse du chômage nourrissent les inquiétudes sociales. Selon les tenants de la rigueur à marche forcée, l'amélioration du climat conjoncturel dans la zone euro illustrerait les premiers bénéfices de la stratégie de consolidation budgétaire telle qu'elle a été conduite depuis 2010. C'est négliger l'effet multiplicateur très négatif de la rigueur sur l'activité, l'absence de coordination des ajustements qui a accentué l'effet récessif de ces choix de politique économique, et le mauvais calibrage de l'effort imposé aux pays qui a étouffé la reprise naissante en 2010 et empêché la résorption de la partie conjoncturelle des déficits. On peut plutôt voir dans l'embellie de la conjoncture en zone euro la conséquence des arrangements institutionnels qui ont permis de contenir la crise des dettes souveraines et qui ont consisté à faire endosser le risque de détention de dette souveraine par des tiers via une forme de mutualisation. La zone euro sera enlisée dans la faible croissance d'ici à 2015 et ne pourra guère compter sur le dynamisme vacillant de ses partenaires extérieurs, les États-Unis et les pays émergents.
    Date: 2013–10
  86. By: Deborah A. Cobb-Clark (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and IZA, Bonn); Sonja C. Kassenboehmer (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and IZA, Bonn); Mathias G. Sinning (Research School of Economics, College of Business and Economics, The Australian National University; RWI, Essen; and IZA, Bonn)
    Abstract: This paper analyzes the relationship between individuals’ locus of control and their savings behavior, i.e. wealth accumulation, savings rates, and portfolio choices. Locus of control is a psychological concept that captures individuals’ beliefs about the controllability of life events and is a key component of self-control. We find that households with an internal reference person save more both in terms of levels and as a percentage of their permanent incomes. Although the locus-of-control gap in savings rates is largest among rich households, the gap in wealth accumulation is particularly large for poor households. Finally, households with an internal reference person and average net worth hold significantly less financial wealth, but significantly more pension wealth, than otherwise similar households with an external reference person.
    Keywords: Non-cognitive skills, locus of control, wealth accumulation, asset portfolios, savings
    JEL: G02 G11 I31 R21
    Date: 2013–12
  87. By: Öner, Özge (Jönköping International Business School, & Centre for Entrepreneurship and Spatial Economics)
    Abstract: This paper investigates returns to location in the retail sector and further analyzes the systematic variations across central and peripheral retail markets, as well as across different types of retailing activities. The empirical design utilizes individual level data, where the earnings of individuals working in the retail sector are used as a proxy for retail performance, which allows for a comparison across different types of retailing activities, although the sector as a whole is highly heterogeneous. In order to capture the urban-periphery interaction in retail markets, an accessible market potential measure is used, which allows for capturing the impact from potential demand in close proximity, in the region and from outside of the region separately. In the analysis, the impacts of spatial, store, and individual characteristics are analyzed for four types of retailing activities: food retailing, clothing, household retailing and specialized stores. The results are in line with previous theoretical arguments that rely on traditional location theories. There is a distinct variation between urban and peripheral retail markets, as well as between different types of retailing activities. Market size in close proximity is found to play an important role for stores selling goods for frequent purchase, whereas the relevant market extends beyond municipal borders for retailers selling goods for less frequent purchase. The competition effect is evident for non-central markets, driven from close proximity to large central markets.
    Keywords: Urban hierarchy; market accessibility; retail sector; location premium
    JEL: D31 E24 L81 P25
    Date: 2013–12–09
  88. By: Peter Neary; James E. Anderson
    Abstract: What kind of tariff reform is likely to raise welfare in situations where tariff revenue is important?� Uncertainty about specification and risk from imprecise parameter estimates of any particular specification reduce the credibility of simulation estimates.� A promising alternative is to develop rules which are robust with respect to such uncertainty.� We present sufficient conditions for a class of linear rule that guarantee welfare-improving tariff reform.� The rules span cones of welfare-improving tariff reforms consisting of convex combinations of (i) trade-weighted-average-tariff-preserving dispersion cuts; and (ii) uniform tariff cuts that preserve domestic relative prices among tariff-ridden goods.
    Keywords: Trade policy reform, Generalized mean and variance of tariffs, Tariff revenue, Piecemeal policy reform
    JEL: F13 H21
    Date: 2013–12–13
  89. By: Philip Pilkington
    Abstract: In a policy note published last year by the Levy Institute, Philip Pilkington and Warren Mosler argued that the eurozone sovereign debt crisis could be solved by national governments without the assistance of the European Central Bank (ECB) and without their leaving the currency union, through the issuance of a proposed financial innovation called "tax-backed bonds." These bonds would be similar to standard government bonds except that, should the country issuing the bonds not make its payments, the tax-backed bonds would be acceptable to make tax payments within the country in question, and would continue to earn interest. In the current policy note, Pilkington examines the continued relevance of the bond proposal in light of changes that have taken place with respect to ECB policy since the original proposal was made, as well as the case made by Ireland's finance minister that tax-backed bonds would violate current Irish law (and, by implication, the law in other eurozone countries). He also outlines some changes made to the initial proposal in response to constructive criticisms received since its publication, and briefly notes another area in which the proposal might be utilized—outside the eurozone. His conclusion? That tax-backed bonds remain a valid policy tool, one that can be implemented at the national rather than at the federal level, and a stepping stone to solving the eurozone’s economic problems.
    Date: 2013–12
  90. By: Robert J. Barro; Tao Jin
    Abstract: The coefficient of relative risk aversion is a key parameter for analyses of behavior toward risk, but good estimates of this parameter do not exist. A promising place for reliable estimation is rare macroeconomic disasters, which have a major influence on the equity premium. The premium depends on the probability and size distribution of disasters, gauged by proportionate declines in per capita consumption or GDP. Long-term national-accounts data for 36 countries provide a large sample of disasters of magnitude 10% or more. A power-law density provides a good fit to the size distribution, and the upper-tail exponent, α, is estimated to be around 4. A higher α signifies a thinner tail and, therefore, a lower equity premium, whereas a higher coefficient of relative risk aversion, γ, implies a higher premium. The premium is finite if α > γ. The observed premium of 5% generates an estimated γ close to 3, with a 95% confidence interval of 2 to 4. The results are robust to uncertainty about the values of the disaster probability and the equity premium and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite.
  91. By: Rolf Aaberge; Anthony B. Atkinson; Jørgen Modalsli (Statistics Norway)
    Abstract: This paper is concerned with the question of whether top income earners are permanently there or only temporarily receive the highest incomes. How much mobility is there at the top of the income distribution, and how has mobility changed over time? The paper makes both a methodological and an empirical contribution to answering these questions. The first part of the paper introduces a family of top income mobility measures based on differences in average annual incomes of top income earners in short-term and long-term distributions of income. Norwegian income tax records are then employed to study top income mobility in Norway since 1967. The results reveal low levels of top income mobility, but a relatively large increase in mobility starting at the same time as the income shares of the top income receivers started to increase around 1990.
    Keywords: Top income shares; Income mobility; Inequality
    JEL: J31 E24 D63 N34
    Date: 2013–10
  92. By: Ioannidis, Yiorgos
    Abstract: Η περίοδος 1995-2008 συνιστά μια περίοδο θεμελιακών μετασχηματισμών για την ελληνική οικονομία. Η κυριαρχία των υπηρεσιών ως προς την παραγωγή του ΑΕΠ και η υποχώρηση της μεταποίησης, η τεράστια επέκταση της μισθωτής εργασίας και η αντίστοιχη μείωση της αυτοαπασχόλησης, η ενίσχυση των μεγάλων επιχειρήσεων έναντι των μικρών, η μαζική είσοδος των μεταναστών, το άνοιγμα της οικονομίας στον διεθνή ανταγωνισμό και η επέκτασή της στα Βαλκάνια και την Τουρκία, η απελευθέρωση του χρηματοπιστωτικού συστήματος, όλα αυτά [και άλλα τόσα] αποτελούν όψεις ενός μετασχηματισμού που συντελέστηκε κατά τη διάρκεια αυτής της περιόδου. Με αυτό δεδομένο, εμφανίζεται κατ’ αρχήν ως παράδοξο το γεγονός ότι η δομή του φορολογικού συστήματος και τα οικονομικά αποτελέσματά του μεταβληθήκαν οριακά. Η ερμηνεία αυτού του παραδόξου βρίσκεται στον ιδιότυπα διανεμητικό χαρακτήρα της εξέλιξης του φορολογικού συστήματος. Δηλαδή στο γεγονός, ότι οι κυβερνητικές παρεμβάσεις της περιόδου 1995-2008 είχαν ως τελικό αποτέλεσμα το πλεόνασμα που προέκυψε από τις ευνοϊκές οικονομικές συνθήκες να διανεμηθεί σε επιχειρηματικές ελίτ και συγκεκριμένες κοινωνικές ομάδες, αντί να χρηματοδοτήσει τη δικαιότερη κατανομή του φορολογικού βάρους. Έτσι, η ανισοβαρής επιβάρυνση μισθωτών και συνταξιούχων όχι μόνο διατηρήθηκε αλλά ενισχύθηκε περαιτέρω. Συνεπώς η μεταρρύθμιση του φορολογικού συστήματος αποτελεί αδήριτη ανάγκη, ωστόσο, όπως θα υποστηριχθεί κατά το δεύτερο μέρος του άρθρου, ο συνδυασμός της φορολογικής ατζέντας της Νέας Δημοκρατίας με τον αντιπολιτευτικό λαϊκισμό δεν επέτρεψε την προώθηση της τόσο αναγκαίας φορολογικής μεταρρύθμισης
    Keywords: φορολογική πολιτική
    JEL: E60 E64
    Date: 2013
  93. By: Povilas Lastauskas
    Abstract: The close relationship between politics and enterprises made the revolving door wide open and reinforced business influence on political decisions. The paper analyses relationship between firm entry institutions and import competition inside the EU. Though there is a clear tendency for entry and startup costs to decrease over time and particularly in space, I challenge the view that greater openness to trade automatically leads to improved firm entry institutions. My model enables calculating business entry impediments whereas lobbying game produces structural estimates of the counterfactual levels of trade, prices and earnings had no business obstacles existed. Conditions for active entry barriers are laid down in terms of extensive margin and asymmetries in technology and trade costs. Importantly, the model demonstrates that startling differences in firm regulation can be explained resorting to relative gains and losses accruing in a fully trading network as is the EU. More generally, understanding factors which affect imports is crucial for any model seeking to uncover ex ante welfare effects of trade
    Keywords: trade, entry institutions, firm heterogeneity, foreign competition
    JEL: C31 E02 F12 F14 F15 F55
    Date: 2013–09
  94. By: Thomas von Brasch (Statistics Norway)
    Abstract: The standard cost-of-living index hinges on the assumption that there is free trade. Applying it to situations where trade barriers are present yields biased results with respect to a true cost-of-living index. Import price indices are particularly vulnerable to this bias since many of the goods included in these indices are characterised by either explicit or implicit trade barriers. In this article I generalise the cost-of-living index to also allow for barriers to trade in the form of quantity constraints. Further, I develop an upper bound index to the true cost-of-living index when trade barriers are present. The upper bound index has an intuitive interpretation and it is easy to calculate. In the case of clothing imports to Norway the mean annual upper bound cost-of-living bias due to trade barriers is between 0.9 - 1.5 percentage points. It is also shown that average prices, which is often used in the literature, is not a measure of cost-of-living and the annual underestimation of how trade liberalisation has impacted inflation from using average prices was at least 0.8 percentage points.
    Keywords: Index numbers; Cost-of-living; Price level; Trade barriers
    JEL: C43 E31 F14
    Date: 2013–09
  95. By: Hyeongwoo Kim, Ippei Fujiwara, Bruce E. Hansen, Masao Ogaki
    Abstract: It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods.
    Keywords: purchasing power parity; Taylor Rule; half-life of PPP deviations;median unbiased estimator; Grid-t Confidence Interval
    JEL: C32 E52 F31
    Date: 2013
  96. By: Bertola, Giuseppe; Koeniger, Winfried
    Abstract: We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional formrestrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of nonexclusive financial contracts. --
    Keywords: Hidden action,Principal agent,First-order approach,Constrained efficiency
    JEL: E21 D81 D82
    Date: 2013
  97. By: Wiroy Shin
    Abstract: This paper studies an environment of simultaneous, separate, first-price auctions for complementary goods. Agents observe private values of each good before making bids, and the complementarity between goods is explicitly incorporated in their utility. For simplicity, a model is presented with two first-price auctions and two bidders. We show that a monotone pure-strategy Bayesian Nash Equilibrium exists in the environment.
    Date: 2013–12
  98. By: Geoffrey Teyssier (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne - PRES HESAM)
    Abstract: Building on the existing literature, a synthetic approach intended to ease the understanding of the notion of inequality of opportunity is developed. In turn, this paper tests a convincing hypothesis explaining the mixed evidence found by empirical studies regarding the instrumental effect of inequality on growth: income inequality would in fact be a composite measure of inequality of opportunity, which is expected to be detrimental to growth, and of inequality effort, which is expected to be beneficial; the effect of total income inequality would then depend on which sort of inequality dominates. This hypothesis, already confirmed by Marrero and Rodríguez (2012) in the US, needs to be validated in other countries and on different samples in order to gain legitimacy. This paper consequently replicates the benchmark regressions from Marrero and Rodríguez (2012) in an emerging economy, namely Brazil. The results are in complete contradiction with those found in the US: neither inequality of opportunity nor inequality of effort have a significant impact on growth,whatever the econometric specification used.
    Keywords: income inequality, inequality of opportunity, economic growth
    Date: 2013–06
  99. By: Adrien Vogt-Schilb (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Stéphane Hallegatte (SDN - Sustainable Development Network - The World Bank)
    Abstract: Decision makers facing abatement targets need to decide which abatement measures to implement, and in which order. Measure-explicit marginal abatement cost curves depict the cost and abating potential of available mitigation options. Using a simple intertemporal optimization model, we demonstrate why this information is not sufficient to design emission reduction strategies. Because the measures required to achieve ambitious emission reductions cannot be implemented overnight, the optimal strategy to reach a short-term target depends on longer-term targets. For instance, the best strategy to achieve European's -20% by 2020 target may be to implement some expensive, high-potential, and long-to-implement options required to meet the -75% by 2050 target. Using just the cheapest abatement options to reach the 2020 target can create a carbon-intensive lock-in and make the 2050 target too expensive to reach. Designing mitigation policies requires information on the speed at which various measures to curb greenhouse gas emissions can be implemented, in addition to the information on the costs and potential of such measures provided by marginal abatement cost curves.
    Keywords: climate change mitigation; dynamic efficiency; sectoral policies
    Date: 2013–12–10
  100. By: Umapathi, Nithin; Wang, Dewen; O'Keefe, Philip
    Abstract: Using a simple framework, this paper discusses the underlying reason of the variation of threshold level in developed countries, from the least generous 20 percent to around 60 percent of median wage, with an average of 35 percent. The generosity of minimum guarantee social assistance programs is deeply rooted in social values and principles that further underpin the policy objectives. Many Organizations for Economic Cooperation and Development (OECD) countries set their policy targets for minimum living standard programs beyond basic needs and aim to guarantee a minimum socially acceptable level for a decent living. Thresholds are also refined to reflect the differences in family size and demographic structure, difference in regional cost of living and changes in prices and local wages. In some countries the thresholds show some regional variation due to local discretionary powers of sub-national authorities to set the threshold depending on the co-financing mechanisms. These lessons are valuable for China as the Chinese government has made efforts to standardize the implementation and management of its own minimum income guarantee (Di Bao) programs. The policy recommendations for China include accelerating the convergence of localized approaches, raising the administrative level for setting thresholds to higher level, defining the roles of central and local governments in financing and management, and establishing a transparent budgetary management system to transfer and allocate social assistance funds.
    Keywords: Safety Nets and Transfers,Rural Poverty Reduction,Poverty Impact Evaluation,Regional Economic Development,Services&Transfers to Poor
    Date: 2013–11–01
  101. By: Vincent Bouvatier (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Frank Strobel (university of birmingham - Department of Economics)
    Abstract: Abstract We empirically examine whether the way a bank might use loan loss provisions to smooth its income is in‡uenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.
    Date: 2013
  102. By: Robin Greenwood; Andrei Shleifer
  103. By: Valerii Salov
    Abstract: For classification of the high frequency trading quantities, waiting times, price increments within and between sessions are referred to as the a-, b-, and c-increments. Statistics of the a-b-c-increments are computed for the Time & Sales records posted by the Chicago Mercantile Exchange Group for the futures traded on Globex. The Weibull, Kumaraswamy, Riemann and Hurwitz Zeta, parabolic, Zipf-Mandelbrot distributions are tested for the a- and b-increments. A discrete version of the Fisher-Tippett distribution is suggested for approximating the extreme b-increments. Kolmogorov and Uspenskii classification of stochastic, typical, and chaotic random sequences is reviewed with regard to the futures price limits. Non-parametric L1 and log-likelihood tests are applied to check dependencies between the a- and b-increments. The maximum profit strategies and optimal trading elements are suggested as measures of frequency and magnitude of the market offers and disequilibrium. Empirical cumulative distribution functions of optimal profits are reported. A few classical papers are reviewed with more details in order to trace the origin and foundation of modern finance.
    Date: 2013–12
  104. By: João Carlos Graça,; João Carlos Lopes; Cláudia Niza
    Abstract: The purpose of this paper is to identify relationships between value orientations, beliefs and economic behaviors of agents, on one side, and differences between levels of economic development, on the other. Empirical analysis is based on a sample of Portuguese municipalities and correspondent parishes, organized in groups set by an urban-versus-rural typology and according to levels of development as measured by GDP per capita. Different value orientations, beliefs and behaviors were identified. Four clusters were thereby considered, generically correspondent to “stabilization”, “economic nationalism”, “entrepreneurship” and “consumerism”. These clusters are related to the spatial dimensions considered.
    Keywords: Values, beliefs, economic behaviors, Portuguese regions
    Date: 2013–12

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