nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒02‒08
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Targeting nominal GDP or prices: Guidance and expectation dynamics By Mitra , Kaushik; Honkapohja, Seppo
  2. Monetary Policy, Bond Risk Premia, and the Economy By Peter N. Ireland
  3. Monetary part of Abenomics: a simplified model By Krouglov, Alexei
  4. The effect of the zero lower bound, forward guidance and unconventional monetary policy on interest rate sensitivity to economic news in Sweden By Richhild Moessner; Jakob de Haan; David-Jan Jansen
  5. A Behavioral Macroeconomic Model of Exchange Rate Fluctuations with Complex Market Expectations Formation By Peter Flaschel; Florian Hartmann; Chris Malikane; Christian R. Proaño
  6. The Price-Price Phillips Curve in Small Open Economies and Monetary Unions: Theory and Empirics By Andrea Vaona
  8. Growth Policies and Macroeconomic Stability By Douglas Sutherland; Peter Hoeller
  9. Exchange rate regimes and inflation: Evidence from India. By Mohanty, Biswajit; Bhanumurthy, N.R.
  10. Four Lectures on Central Banking By Arthur Grimes
  11. What We Know About Monetary Policy Transmission in the Czech Republic: Collection of Empirical Results By Oxana Babecka Kucharcukova; Michal Franta; Dana Hajkova; Petr Kral; Ivana Kubicova; Anca Podpiera; Branislav Saxa
  12. Information acquisition and learning from prices over the business cycle By Mäkinen, Taneli; Ohl , Björn
  13. Asymmetric Effects of Uncertainty over the Business Cycle: A Quantile Structural Vector Autoregressive Approach By Yves S. Schüler
  14. The Role of Foreign Banks in Monetary Policy Transmission: Evidence from Asia during the Crisis of 2008-9 By Bang Nam Jeon; Ji Wu
  15. Short‐Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis? By Oliver Landmann
  16. Еconomic theory and the New-Keynesian school By Josheski, Dushko; Magdinceva-Sopova, Marija
  17. Adaptive learning and survey data By Agnieszka Markiewicz; Andreas Pick
  18. What drives loan losses in Europe? By Jokivuolle, Esa; Pesola, Jarmo; Viren, Matti
  19. China and the World economy: Wavelet spectrum analysis of business cycles By Pomenková, Jitka; Fidrmuc, Jarko; Korhonen, Iikka
  20. Debt in the U.S. Economy By Kaiji Chenz; Ayse Imrohoroglu
  21. Noisy information and fundamental disagreement By Andrade, Philippe; Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel
  22. The impact of a comprehensive school reform policy for failing schools on educational achievement; Results of the first four years By Roel van Elk; Suzanne Kok
  23. Equilibrium Health Spending and Population Aging in a Model of Endogenous Growth: Will the GDP Share of Health Spending Keep Rising? By Ehrlich, Isaac; Yin, Yong
  25. The Macroeconomic Effects of Government Transfers: a Social Accounting Matrix Approach By Marcelo Neri; Fabio Monteiro Vaz; Pedro Herculano Guimarães Ferreira de Souza
  26. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data By Coibion, Olivier; Gorodnichenko, Yuriy; Kudlyak, Marianna; Mondragon, John
  27. Fear of Labor Rigidities – The Role of Expectations in Employment Growth in Peru By Pablo Lavado; Gustavo Yamada
  28. Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right By Kakarot-Handtke, Egmont
  29. Another view on U.S. Treasury term premiums By Durham, J. Benson
  30. R&D Behavior of German Manufacturing Companies during the 2008/09 Recession By Alexander Eickelpasch
  31. Dynamic Impacts on Growth and Intergenerational Effects of Energy Transition in a Time of Fiscal Consolidation By Gonand, Frédéric
  32. Heterogeneity and Biases in Inflation Expectations of Japanese Households By Ueno, Yuko; Namba, Ryoichi
  33. “Causality and Contagion in EMU Sovereign Debt Markets” By Marta Gómez-Puig; Simón Sosvilla-Rivero
  34. "What Remains of the Theory of Demand Management in a Globalizing World?" By Amit Bhaduri
  35. Revisiting the nexus between currency misalignments and growth in the CFA Zone By Carl Grekou
  36. Exchange-rate adjustment and macroeconomic interdependence between stagnant and fully employed countries By Yoshiyasu Ono
  37. Testing the Bhaduri-Marglin Model with OECD Panel Data By Jochen Hartwig
  38. Public Finances in Tuscany. 2012-2013 Report (Part 1) By Patrizia Lattarulo (ed.)
  39. Public Finances in Tuscany. 2012-2013 Report (Part 2) By Patrizia Lattarulo (ed.)
  40. The growth performance and prospects in the Euro area: a balance-of-payments approach By Carluccio Bianchi; Eleonora Lorenzini
  41. Os Efeitos Macroeconômicos das Transferências do Governo: uma Abordagem de Matriz de Contabilidade Social By Marcelo Neri; Fabio Monteiro Vaz; Pedro Herculano Guimarães Ferreira de Souza
  42. The Bright but Right View? New Evidence on Entrepreneurial Optimism By Bengtsson, Ola; Ekeblom, Daniel

  1. By: Mitra , Kaushik (University of Saint Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either pricelevel or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents’ learning.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2014–01–15
  2. By: Peter N. Ireland (Boston College)
    Abstract: This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.
    Keywords: term structure, risk premia, monetary policy, macroeconomic performance
    JEL: E32 E43 E44 E52 G12
    Date: 2014–02–01
  3. By: Krouglov, Alexei
    Abstract: Presented is a simplified mathematical model that describes dynamics developing on financial market after the liquidity pumping. The model is used to examine theoretical and practical implications of the monetary component of Abenomics. Based on the theoretical considerations, proposed is a somewhat practical suggestion how to increase the efficiency of Abenomics’ monetary policy.
    Keywords: monetary policy; Abenomics; mathematical model
    JEL: C61 E32 E44
    Date: 2014–02–03
  4. By: Richhild Moessner; Jakob de Haan; David-Jan Jansen
    Abstract: We study whether the sensitivity of Swedish interest rates to economic news was affected by the zero lower bound and the Riksbank.s monetary policies. Our results suggest that the sensitivity of interest rate swaps to Swedish macroeconomic news was reduced at the effective zero lower bound at short maturities but not at longer maturities. We also find that the sensitivity of interest rate swaps to this news was not significantly affected at any maturity by forward guidance. Finally, we conclude that the sensitivity of interest rate swaps to news was not significantly affected at any maturity by unconventional monetary policy.
    Keywords: Unconventional monetary policy; central bank communication; forward guidance; zero lower bound; interest rate swaps
    JEL: E52 E58
    Date: 2014–01
  5. By: Peter Flaschel; Florian Hartmann; Chris Malikane; Christian R. Proaño
    Abstract: The paper investigates the emergence of complex market expectations (opinion dynamics) around nominal exchange rate adjustments using a macro-financial model of a small open economy featuring heterogeneous expectation formation (chartists and fundamentalists) and gradual adjustment processes in real and also to a certain degree in financial markets. The model shows among other things the mechanisms through which the first type of agents tends to destabilise the economy. Global stability can be ensured if opinions turn to fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the – due to chartist behavior – potentially explosive real-financial market interactions, but can enforce irregular behavior within these bounds. The size of output and exchange rate fluctuations can be dampened by adding suitable policy measures to the dynamics of the private sector.
    Keywords: Nonlinear Exchange Rate Dynamics, Opinion Dynamics, Viability, Persistent and Irregular Fluctuations, Macroeconomic Policy
    JEL: E12 E24 E31 E52
    Date: 2014–01–29
  6. By: Andrea Vaona
    Abstract: This paper extends the efficiency wages/partially adaptive expectations Phillips curve, otherwise known as the price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). The theoretical results are a priori ambiguous. However, in the first place, on resorting to plausible numerical simulations, economic openness increases the reactiveness of inflation to the unemployment rate. In regard to a monetary union, the national unemployment multiplier in the aggregate Phillips curve decreases with the weight of the member state in aggregate employment and increases with that in output. Secondly, we show in two empirical applications that our calibration can provide informative priors for models to be estimated thanks to the Kalman filter
    Keywords: efficiency wages, unemployment, Phillips curve, inflation, adaptive expectations, Kalman filter
    JEL: E3 E20 E40 E50 F15 F41 C22
    Date: 2014–01
  7. By: Wojciech Charemza; Carlos Diaz; Svetlana Makarova
    Abstract: Empirical evaluation of macroeconomic uncertainties and their use for probabilistic forecasting are investigated. A new weighted skew normal distribution which parameters are interpretable in relation to monetary policy outcomes and actions is proposed. This distribution is fitted to recursively obtained forecast errors of monthly and annual inflation for 38 countries. It is found that this distribution fits inflation forecasts errors better than the two-piece normal distribution, which is often used for inflation forecasting. The new type of ‘fan charts’ net of the epistemic (potentially predictable) element is proposed and applied for UK and Poland.
    Keywords: macroeconomic forecasting, inflation, uncertainty, monetary policy, non-normality, density forecasting
    JEL: C54 E37 E52
    Date: 2014–01
  8. By: Douglas Sutherland; Peter Hoeller
    Abstract: Policy reforms aimed at boosting long-run growth often have side effects – positive or negative – on an economy’s vulnerability to shocks and their propagation. Macroeconomic shocks as severe and protracted as those since 2007 warrant a reconsideration of the role growth-promoting policies play in shaping the vulnerability and resilience of an economy to macroeconomic shocks. Against this background, this paper looks at a vast array of policy recommendations by the OECD that promote longterm growth – contained in Going for Growth and the Economic Outlook – and attempts to establish whether they underpin macroeconomic stability or whether there is a trade-off. Les réformes visant à stimuler la croissance à long terme ont souvent des effets secondaires – positifs ou négatifs – sur la vulnérabilité d’une économie face à des chocs et à leur propagation. Des chocs macroéconomiques aussi graves et prolongés que ceux observés depuis 2007 justifient un réexamen de la contribution des politiques de promotion de la croissance à la vulnérabilité et à la résilience d’une économie face à de telles perturbations. Dans cette optique, le présent document passe en revue un large éventail de recommandations d’action formulées par l’OCDE pour encourager la croissance à long terme – qui figurent dans Objectif croissance et les Perspectives économiques – et cherche à déterminer si les actions recommandées favorisent la stabilité macroéconomique ou si des arbitrages s’imposent.
    Keywords: business cycles, volatility, economic policy, croissance, cycles d’activité, politique économique, volatilité
    JEL: E32 E52 E62 O40
    Date: 2014–02–06
  9. By: Mohanty, Biswajit (Department of Business Economics, Delhi University); Bhanumurthy, N.R. (National Institute of Public Finance and Policy)
    Abstract: Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a `policy discipline effect'- restricting money supply growth, and a `credibility effect'- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.
    Keywords: Exchange rate regime ; Inflation ; Money Supply ; ARDL Model ; India
    JEL: E52 F33 F41
    Date: 2014–01
  10. By: Arthur Grimes (Motu Economic and Public Policy Research and the University of Auckland)
    Abstract: These four lectures on central banking topics were presented in London between September and December 2013. The lectures were delivered as part of Arthur Grimes’ NZ-UK Link Foundation Visiting Professorship, based at the University of London’s School of Advanced Study. They followed his stepping down as Chair of the Reserve Bank of New Zealand in September 2013 after ten years in that role. The four lecture topics (and the institution at which they were delivered) are: Inflation Targeting: 25 Years’ Experience of the Pioneer (Bank of England); A Floating Exchange Rate is the Worst Exchange Rate Regime (except for all the others that have been tried) (University College London); How Prudent are Macroprudential Policies? (London School of Economics); Responsibility and Accountability in the Financial Sector (Institute of Advanced Legal Studies). A key theme across all four lectures is the importance of ensuring that central bank policies and actions are time consistent. Time consistency requires that a central bank can commit to implementing the policies that it says it will implement. For instance, if a central bank commits to delivering low inflation, it will not use its powers to deliver other goals at the expense of low inflation. Similarly, if it commits not to bail out banks in the event of failure, then it (and other official bodies) will not bail out a failed bank.
    Keywords: Central banking; inflation targeting; exchange rate systems; macroprudential policy; microprudential policy
    JEL: E52 E58 H81
    Date: 2014–02
  11. By: Oxana Babecka Kucharcukova; Michal Franta; Dana Hajkova; Petr Kral; Ivana Kubicova; Anca Podpiera; Branislav Saxa
    Abstract: This paper concentrates on describing the available empirical findings on monetary policy transmission in the Czech Republic. Besides the overall impact of monetary policy on inflation and output, it is useful to study its individual channels, in particular the interest rate channel, the exchange rate channel, and the wealth channel. The results confirm that the transmission of monetary impulses to the real economy works in an intuitive direction and to an intuitive extent. Our analyses show, however, that the global financial and economic crisis might have somewhat slowed and weakened the transmission. We found an indication of such a change in the functioning of the interest rate channel, where elevated risk premiums played a major role.
    Keywords: Bayesian, monetary policy transmission, time-varying parameters, VAR model.
    JEL: C11 C32 E44 E52 E58
    Date: 2013–10
  12. By: Mäkinen, Taneli (Banca d’Italia); Ohl , Björn (Narodowy Bank Polski)
    Abstract: We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a recession in the previous period, and firms enter the current period with a pessimistic belief, the incentive to acquire information is stronger than when the economy has been in a boom and firms share an optimistic belief. The cyclicality of the aggregate learning outcome is moderated by the price system, which transmits information from informed to uninformed firms, thus dampening information demand. Though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain.
    Keywords: information acquisition; rational expectations equilibrium; asymmetric information; strategic substitutability
    JEL: D51 D83 E32
    Date: 2014–02–04
  13. By: Yves S. Schüler (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper proposes to relate conditional quantiles of stationary macroeconomic time series to the different phases of the business cycle. Based on this idea, I introduce a Bayesian Quantile Structural Vector Autoregressive framework for the analysis of the effects of uncertainty on the US real economy. For this purpose, I define a novel representation of the multivariate Laplace distribution that allows for the joint treatment of multiple equation regression quantiles. I find significant evidence for asymmetric effects of uncertainty over the US business cycle. The strongest negative effects are revealed during recession periods. During boom phases uncertainty shocks improve the soundness of the economy. Moreover, the phase of the financial sector matters when the real economy is at recession but not if the economy is at boom. When the financial system is in a bad state, an uncertainty shock leads to a deeper recession than in times when the financial system is in a good state.
    Keywords: Uncertainty, Economic Cycles, Quantile SVAR, Multivariate Laplace
    JEL: C32 E44 G01
    Date: 2014–01–27
  14. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Since the 1997-8 Asian financial crisis, the level of foreign bank penetration has increased steadily in Asian banking markets. This paper examines the impact of foreign banks on the monetary policy transmission mechanism in emerging Asian economies during the period from 2000 to 2009, with a specific focus on the global financial crisis of 2008-9. We present consistent evidence that, on the whole, an increase in foreign bank penetration weakened the effectiveness of the monetary policy transmission mechanism in the host emerging Asian countries during crisis periods. We also investigate various conditions and environments, including the type of monetary policy shocks, the severity of shocks upon parent banks in global crisis, the dependence of parent banks on the wholesale funding market, the country of origin of foreign banks, and entry modes, under which the effectiveness of monetary policy transmission is reduced more severely due to the increasing presence of foreign banks in the emerging Asian banking markets.
    Keywords: Foreign Bank Penetration, Monetary Policy Transmission, Asian Banking
    JEL: E44 F43 G21
    Date: 2014–01
  15. By: Oliver Landmann (Institut für allgemeine Wirtschaftsforschung, Universität Freiburg)
    Abstract: The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.
    Keywords: Financial Crisis, Great Recession, Macroeconomics, New Neoclassical Synthesis, Keynesian Economics, New Classical Economics, Great Moderation
    JEL: B22 B40 E10 E12 E13
    Date: 2014–01
  16. By: Josheski, Dushko; Magdinceva-Sopova, Marija
    Abstract: In this paper it is described the school of neo-Keynesians (Akerlof and Stiglitz are in the group of ”Hard” New-Keynesians, that don’t accept New neo-classical synthesis, i.e. Dynamic Stochastic General equilibrium models-DSGE),that as a basic source of instability in the economies view the demand аnd supply side shocks, short run is important for them, wages and prices are rigid, expectations of the economic agents are rational, but also historical data are of great importance, and they introduced microeconomic foundations for their macroeconomic models.
    Keywords: New-Keynesians, nominal rigidities, microeconomic foundations
    JEL: E00 E12
    Date: 2014–01–30
  17. By: Agnieszka Markiewicz; Andreas Pick
    Abstract: This paper investigates the ability of the adaptive learning approach to replicate the expectations of professional forecasters. For a range of macroeconomic and financial variables, we compare constant and decreasing gain learning models to simple, yet powerful benchmark models. We find that constant gain models provide a better fit for the expectations of professional forecasters. For macroeconomic series they usually perform significantly better than a naïve random walk forecast. In contrast, we find it difficult to beat the no-change benchmark using the adaptive learning models to forecast financial variables.
    Keywords: expectations; survey of professional forecasters; adaptive learning; bounded rationality
    JEL: E37 E44 G14 G15
    Date: 2014–01
  18. By: Jokivuolle, Esa (Bank of Finland Research); Pesola, Jarmo (Bank of Finland); Viren, Matti (University of Turku and Bank of Finland)
    Abstract: We model banks’ loan losses with a panel of European countries for the period 1982–2012 using three country-specific macro variables: output growth shocks, real interest rates, and a measure of excessive private sector indebtedness. We find that a drop in output has an intensified impact on rising loan losses if the economy is excessively indebted. This may explain differences in loan losses in different recessions across time and across countries. For instance, the dramatic output drop in Finland in 2009 did not cause large loan losses compared with the Finnish crisis of the early 1990s because of the more moderate level of indebtedness. Low interest rates during the recent recession may have been another, perhaps the most important, factor mitigating loan losses.
    Keywords: loan losses; banking crises; indebtedness
    JEL: E44 G28
    Date: 2013–12–30
  19. By: Pomenková, Jitka (BOFIT); Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT)
    Abstract: We employ a wavelet spectrum analysis to study globalization and business cycles in China and G7 countries. The co-movement synchronization between G7 countries and China is shown to have undergone frequent and large changes during our sample period. The co-movements for business cycle frequencies are generally different from those for other frequencies, and synchronization with China’s business cycle differs as between G7 countries. In recent years Japan, Germany and Italy seem to have the closest synchronization at business-cycle frequency. We find a significant relationship between the time-varying wavelet measure of synchronization and trade only for business-cycle frequencies. The co-movements at longer frequencies are negatively related to trade, so that the overall co-movements and trade tend not to be significantly related.
    Keywords: globalization; business cycles; synchronization; trade; wavelet analysis
    JEL: E32 F15 F41
    Date: 2014–01–27
  20. By: Kaiji Chenz (Department of Economics, Emory University, Atlanta); Ayse Imrohoroglu (Department of Finance and Business Economics, Marshall School of Business, University of Southern California)
    Abstract: In 2011, the publicly held debt-to-GDP ratio in the United States reached 68% and is expected to continue rising. Many proposals to curb the government deficit and the resulting debt are being discussed. In this paper, we use the standard neoclassical growth model to examine the future path of output, budget deficits, and debt in the U.S. economy under different tax policies. While this framework is relatively simple, it incorporates the general equilibrium effects of tax policy, which are often missing from the Congressional Budget Office projections. Our results show that debt-to-GNP ratios above 100% are likely to continue into the future and that even small labor supply elasticities have a significant impact on these projections. We also find that labor income tax rates higher than 40% are needed for the deficit-to-GNP ratio to return to its historical level in the long run. Such high tax rates, however, result in about 10% lower per capita GNP and large welfare costs at the steady state compared to the historical tax rates.
    Keywords: Tax distortion; Dynamic Laffer Curve; Debt-to-GNP Ratio.
    JEL: E27 E62 H68
    Date: 2014–02
  21. By: Andrade, Philippe; Crump, Richard K. (Federal Reserve Bank of New York); Eusepi, Stefano (Federal Reserve Bank of New York); Moench, Emanuel (Federal Reserve Bank of New York)
    Abstract: We study the term structure of disagreement of professional forecasters for key macroeconomic variables. We document a novel set of facts: 1) forecasters disagree at all horizons, including the very long run; 2) the shape of the term structure of disagreement differs markedly across variables: the term structure is downward-sloping for real output growth, relatively flat for CPI inflation, and upward-sloping for the federal funds rate; 3) disagreement is time varying at all horizons, including the very long run. We suggest a model with noisy information and shifting long-run beliefs that is consistent with these stylized facts. Notably, our model does not rely on the heterogeneity of prior beliefs, bounded rationality, or differences in the precision of signals across agents.
    Keywords: expectations; survey forecasts; imperfect information; term structure of disagreement
    JEL: D83 D84 E37
    Date: 2013–12–01
  22. By: Roel van Elk; Suzanne Kok
    Abstract: This CPB Discussion Paper estimates the effects of a comprehensive school reform program on high-stakes test scores in Amsterdam. The program implements a systematic and performance-based way of working within weakly performing primary schools and integrates measures such as staff coaching, teacher evaluations and teacher schooling, and the use of new instruction methods. Difference-in-differences estimates show substantial negative effects on test scores for pupils in their final year of primary school. The program decreased test scores with 0.17 standard deviations in the first four years after its introduction. A potential explanation for this finding is the intensive and rigorous approach that caused an unstable work climate with increased teacher replacement.
    JEL: E32 E52 E62
    Date: 2014–01
  23. By: Ehrlich, Isaac (University at Buffalo, SUNY); Yin, Yong (University at Buffalo, SUNY)
    Abstract: The apparently unrelenting growth in the GDP-share of health spending (SHS) has been a perennial issue of policy concern. Does an equilibrium limit exist? The issue has been left open in recent dynamic models which take income growth and population aging as given. We view these variables as endogenously determined within an overlapping-generations, human-capital-based endogenous-growth model, where a representative parent makes all life-cycle consumption and investment decisions, and life and health protection are subject to diminishing returns. Our prototype model, allowing for both quantity and quality of life as desired goods, yields equilibrium upper bounds for SHS. Our calibrated simulations also account for observed trends in reproductive choices, population aging, life expectancy, and economic growth. The analysis offers new insights about factors that drive long-term trends in aging and health spending and establishes a direct relation between health investments at young age and the equilibrium, steady-state rate of economic growth.
    Keywords: endogenous growth, population aging, human capital, health spending, life protection, life expectancy
    JEL: I1 I15 O4 E24
    Date: 2014–01
  24. By: Jonas Dovern (University of Heidelberg); Ulrich Fritsche (Hamburg University); Prakash Loungani (International Monetary Fund); Natalia Tamirisa (International Monetary Fund)
    Abstract: We study forecasts for real GDP growth using a large panel of individual forecasts from 36 advanced and emerging economies during 1989–2010. We show that the degree of information rigidity in average forecasts is substantially higher than that in individual forecasts. Individual level forecasts are updated quite frequently, a behavior more in line “noisy” information models (Woodford, 2002; Sims, 2003) than with the assumptions of the sticky information model (Mankiw and Reis, 2002). While there are cross-country variations in information rigidity, there is no systematic difference between advanced and emerging economies.
    Keywords: Rational Inattention, Aggregation Bias, Growth Forecasts, Information Rigidity, Forecast Behavior
    JEL: E27 E37
    Date: 2014–01
  25. By: Marcelo Neri (FGV, Centre for Social Policies - IBRE and EPGE); Fabio Monteiro Vaz (IPEA); Pedro Herculano Guimarães Ferreira de Souza (IPEA)
    Abstract: Government transfers to individuals and families play a central role in the Brazilian social protection system, accounting for almost 14 per cent of Gross Domestic Product (GDP) in 2009. While their fiscal and redistributive impacts have been widely studied, the macroeconomic effects of transfers are harder to ascertain.
    Keywords: The Macroeconomic Effects of Government Transfers: a Social Accounting Matrix Approach
    Date: 2013–12
  26. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Kudlyak, Marianna (Federal Reserve Bank of Richmond); Mondragon, John (University of California, Berkeley)
    Abstract: One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higherincome households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants' incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.
    Keywords: inequality, household debt, Great Recession
    JEL: E21 E51 D14 G21
    Date: 2014–01
  27. By: Pablo Lavado (Departamento de Economía, Universidad del Pacífico); Gustavo Yamada (Departamento de Economía, Universidad del Pacífico)
    Abstract: Many studies have been conducted to analyze the effect of stricter Employment Protection Legislation (EPL). However, almost all of them has focused on an ex-post impact; leaving aside a second but equally important channel: expectations. This paper aims to analyze the role of expectations on peruvian formal and informal labor market; using news as our identification variable. We use the monthly number of news related to the approval of the General Labor Law (GLL), a proposal entailing future stronger labor rigidities, from January 2001 to May 2012. Using the Permanent Employment Survey (EPE), we find a negative relation between expectations towards a stricter labor market and both employment and average income. News mainly affect formal occupied EAP, arousing a substitution effect from formal to informal employment. We also discover that the effect of expectations differs in periods with higher versus lower GDP growth. Finally, we find some evidence supporting news having a cumulative effect: the larger the previous stock of news, the weaker the effect.
    Keywords: Fear, Labor, Rigidities, Role, Expectations, Employment, Growth, Peru , Perú, News, EAP
    JEL: D22 D24 D81 D82 D84 D92 E24 E26 J0 J20 J22 J23 J28 J38 J64 J68 J80 J81 J83 J88
    Date: 2013–12
  28. By: Kakarot-Handtke, Egmont
    Abstract: In a recent article, Keen resumes the debate with Krugman about the effects of debt upon the economy. It is hard to see how the question can be settled as long as all participants apply their idiosyncratic models. Hence the issue boils down, as Krugman rightly put it, to the deeper question: “how should one do economics.” Sketched with a broad brush, the consensus is that Orthodoxy has failed and that Heterodoxy has no convincing alternative to offer. The conceptual consequence of the present paper is to restart from a firm common formal ground. This relocation makes the debate solvable.
    Keywords: new framework of concepts; structure-centric; axiom set; consumption economy; debt; Profit Law; simulation; market clearing; budget balancing
    JEL: B59 E21 G00
    Date: 2014–02–03
  29. By: Durham, J. Benson (Federal Reserve Bank of New York)
    Abstract: The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk.
    Keywords: Treasury term premium; monetary policy
    JEL: E52 G10
    Date: 2013–12–01
  30. By: Alexander Eickelpasch
    Abstract: This paper investigates to what extent the R&D behavior of manufacturing companies was influenced by the 2008/09 crisis. Based on a broad official data set for German manufacturing companies, only a few companies that engaged in R&D during 2008 gave it up in the following year. Some companies even started R&D during crisis. R&D expenditures declined in 2009 compared to 2008, but expanded in 2010. The development of R&D expenditures was less volatile than sales. Probit analyses show that the occurrence of R&D in 2009 is very much determined by engagement in R&D in 2008 and that changes in demand are not relevant. However, fluctuation in demand proved to be relevant in the regressions computed where the intensity of R&D expenditures was the dependent variable. This result suggests that companies reacted counter cyclically in 2008/09, i.e. the reduction in R&D was smaller than the decline in demand, or the expansion of R&D expenditures was greater than the change in demand. Similar regressions for using R&D staff as the dependent variable did not find any influence of changes in demand. The results suggest that companies see R&D as a longer term task necessary to retain competitiveness.
    Keywords: Research and development, Business cycle, Manufacturing
    JEL: E32 L60 O31
    Date: 2014
  31. By: Gonand, Frédéric
    Abstract: Social planners in most western countries will be facing two long-lasting challenges in the next years: energy transition and fiscal consolidation. One problem is that governments might consider that implementing an energy transition could get i n the way of achieving a fiscal consolidation. If so, interrupting the energy transition in a time of fiscal consolidation would involve significant aggregate impacts on activity and inter generational redistributive effects. This article tries to assess them empirically. It relies on an overlapping-generations framework in a general equilibrium setting, with a detailed energy module. The model is parameterized on data provided by OECD/IEA for France. Different results emerge. Renouncing to the energy transition would slightly foster the level of GDP during the next 10 to 15 years - depending on the dynamics of the prices of fossil fuels on world markets - but weigh on it more significantly afterwards (up to -1% in 2050). If the pric es of fossil fuels keep increasing in the future, implementing an energy transition could have br oadly the same favourable effects on the GDP level in the long run as those of a fiscal consolidation diminishing significantly public spending instead of raising taxes. In the long-run, the GDP would be maximized by implementing an energy transition and simultaneously lessening the public deficit by lowering some public expenditure, a policy that would entail an overall gain of around 1,6% of GDP in 2050. Stopping the energy transition would also bring about intergenerational issues. It would be detrimental to the intertemporal wellbeing of almost all cohorts alive in 2010. A fiscal policy with lower public expenditures and frozen tax rates may be still more favourable to young and future generations than implementing an energy transition. However, renouncing to an energy transition would annihilate most of these pro-youth effects.
    Keywords: Energy transition; intergenerational redistribution; overlapping generations; fiscal consolidation; general equilibrium;
    JEL: D58 D63 E62 L7 Q28 Q43
    Date: 2014–01
  32. By: Ueno, Yuko; Namba, Ryoichi
    Abstract: This study examines the formation of the inflation expectations of Japanese households using a micro-level dataset of forecast errors of expected inflation rates. The Japanese have recently come to be interested in policies that intend to positively influence the inflation expectations of households and firms. The effectiveness of these policies depends on the mechanism of expectation formation. Thus, whether expectations are formed adaptively or rationally, or whether expectations are homogeneous or heterogeneous, are important factors influencing policy effectiveness. In this study, we carefully examine the formation of inflation expectations of Japanese households by using a micro-level dataset of the “Consumer Confidence Survey” of the Japanese government. We observe that inflation expectations are stably biased upwards and are distributed in a dispersed way. We find that the “asymmetric loss function model,” in which households incur asymmetric loss from either over estimation or underestimation of the future inflation rate, can explain the observed bias to a certain extent. Further, the relationships between expectations and age show a stable asymmetric inverted-U shape notwithstanding the survey period. The a symmetric loss function can also explain this shape, indicating that mid-aged consumers tend to show strong asymmetries in error aversion.
    Date: 2014–01
  33. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper contributes to the literature by applying the Grangercausality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis.
    Keywords: Sovereign bond yields, Granger-Causality, Contagion, Euro area. JEL classification: E44, F36, G15, C52
    Date: 2014–02
  34. By: Amit Bhaduri
    Abstract: In our era of global finance, the theory of aggregate demand management is alive and unwell, says Amit Bhaduri. In this policy brief, Bhaduri describes what he regards as a prevalent contemporary approach to demand management. Detached from its Keynesian roots, this "vulgar" version of demand management theory is being used to justify policies that stand in stark contrast to those prescribed by the original Keynesian model. Rising asset prices and private-debt-fueled consumption play the starring roles, while fiscal policy retreats into the background. Returning to foundations laid down by Keynes and Kalecki, Bhaduri sets out to clarify whether there is any place for traditional demand management policies—featuring an active role for deficit spending and public investment—in the context of financial globalization. His conclusion: such policies are ultimately unavoidable if we are to revitalize the real economy and achieve stability.
    Date: 2014–01
  35. By: Carl Grekou
    Abstract: In this paper, we revisit the link between currency misalignments and economic growth by taking into account the foreign currency-denominated debt dynamics (except French Franc and euro) for the CFA zone countries over the period 1985-2011. Relying on a BEER approach and using panel cointegration techniques, we first derive currency misalignments. We then estimate a panel smooth transition growth equation that allows us to observe nonlinear impacts of misalignments on both economic growth and foreign currency-denominated debt dynamics. We find that the nonlinear impact of currency misalignments on growth through the competitiveness channel is mitigated by the foreign currency-denominated debt dynamics through a valuation effect.
    Keywords: Currency misalignments, CFA zone, debt, economic growth, panel smooth transition regression
    JEL: C33 E42 F3 F43
    Date: 2014
  36. By: Yoshiyasu Ono
    Abstract: This paper presents a two-country two-commodity dynamic model with free international asset trade in which one country achieves full employment and the other suffers long-run unemployment. Own and spill-over effects of changes in policy, technological and preference parameters that emerge through exchange-rate adjustment are examined. Parameter changes that worsen the stagnant countryfs current account depreciate the home currency, expand home employment and improve the foreign terms of trade, making both countries better off. The stagnant countryfs foreign aid to the fully employed country also yields the same beneficial effects.
    Date: 2014–01
  37. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The Bhaduri-Marglin model is a post-Kaleckian model that allows for studying the impact of functional income distribution on the growth in demand. Over recent years, a number of empirical studies based on this model have aimed at determining whether a redistribution towards profits harms or fosters demand growth. The focus so far has been on a very limited number of countries. This paper is the first to test the Bhaduri-Marglin model with panel data. It finds that demand growth is reduced by a redistribution towards profits in the average OECD country. Productivity growth is also impaired.
    Keywords: Distribution, demand growth, productivity growth, Bhaduri-Marglin model, OECD panel data
    JEL: C23 E12 E20 O30 O40
    Date: 2014–01
  38. By: Patrizia Lattarulo (ed.) (Istituto Regionale per la Programmazione Economica della Toscana)
    Abstract: The way the supply of public services and social insurance – thus, the traditional Italian welfare system – are organized is today strongly debated. The pressure for fiscal consolidation, coming from the international community – first from finance, then from politics – and the need of trustworthiness arising in the Italian political system are among the factors that sped up the start of a reorganization in the public sector, which many political programs have suggested for a long time. New principles are emerging pointing to a different, less diffuse and more selective welfare model, a more regulatory rather than economic role of the State, a more widespread standard in the restitution of the services rendered and for fiscal responsibility at local level. In the meantime, citizens and firms, which are already burdened by the crisis, are faced with the imposition of tax overpressure and the reduction of social guarantees from public administration. This work analyses the impacts of government action on public expenditure in Tuscany and the reactions of local authorities, aimed at preserving the customary supply capacity of public services provided to citizens. It also examines the onset of the process of municipal federalism through the introduction of the Unique Municipal Tax and other instruments for local fiscal autonomy. Finally, it deals extensively with public investments, in particular with the effects on payments of the Stability Pact, the real opportunities of public-private partnerships financing, and the want for more efficiency by means of a better functioning in the awarding procedure.
    Keywords: territorial finances, public expenditure, services to citizens, municipal federalism, public investments, Tuscany
    JEL: E62 D6 H7 R51
  39. By: Patrizia Lattarulo (ed.) (Istituto Regionale per la Programmazione Economica della Toscana)
    Abstract: The way the supply of public services and social insurance – thus, the traditional Italian welfare system – are organized is today strongly debated. The pressure for fiscal consolidation, coming from the international community – first from finance, then from politics – and the need of trustworthiness arising in the Italian political system are among the factors that sped up the start of a reorganization in the public sector, which many political programs have suggested for a long time. New principles are emerging pointing to a different, less diffuse and more selective welfare model, a more regulatory rather than economic role of the State, a more widespread standard in the restitution of the services rendered and for fiscal responsibility at local level. In the meantime, citizens and firms, which are already burdened by the crisis, are faced with the imposition of tax overpressure and the reduction of social guarantees from public administration. This work analyses the impacts of government action on public expenditure in Tuscany and the reactions of local authorities, aimed at preserving the customary supply capacity of public services provided to citizens. It also examines the onset of the process of municipal federalism through the introduction of the Unique Municipal Tax and other instruments for local fiscal autonomy. Finally, it deals extensively with public investments, in particular with the effects on payments of the Stability Pact, the real opportunities of public-private partnerships financing, and the want for more efficiency by means of a better functioning in the awarding procedure.
    Keywords: territorial finances, public expenditure, services to citizens, municipal federalism, public investments, Tuscany
    JEL: E62 D6 H7 R51
  40. By: Carluccio Bianchi (Department of Economics and Management, University of Pavia); Eleonora Lorenzini (Department of Economics and Management, University of Pavia)
    Abstract: This paper aims to apply the balance of payments constrained-growth model to explain Euro area growth performance in the last forty years and to discuss likely prospects for the future. After a formal reconsideration of the long-run and short-run arguments supporting the validity of the Post-Keynesian approach to economic growth, a simplified and an extended version of the basic model are outlined. The application of these models to the Euro area experience shows that Thirlwall’s Law performs quite well in explaining growth in all decades under consideration. The fundamental reasons behind the recent unsatisfactory EMU growth experience, therefore, appear to be a decreasing export dynamics and a rising dependence on imports. Given current trends, the prospects for the future appear to be gloomy, unless structural reforms of the productive system are promoted in order to improve overall EMU competitiveness.
    Keywords: Growth, Euro area, Thirlwall’s Law, balance-of-payments constraint, import and export functions
    JEL: E12 F14 O40 O52
    Date: 2014–02
  41. By: Marcelo Neri (FGV, Centre for Social Policies - IBRE and EPGE); Fabio Monteiro Vaz (IPEA); Pedro Herculano Guimarães Ferreira de Souza (IPEA)
    Abstract: As transferências do governo para indivíduos e famílias desempenham um papel central no sistema de proteção social brasileiro, representando quase 14 por cento do Produto Interno Bruto (PIB) em 2009. Embora seus impactos fiscais e redistributivos já tenham sido amplamente estudados, os efeitos macroeconômicos das transferências são mais difíceis de determinar.
    Keywords: Os Efeitos Macroeconômicos das Transferências do Governo: uma Abordagem de Matriz de Contabilidade Social
    Date: 2013–12
  42. By: Bengtsson, Ola (Department of Economics, Lund University); Ekeblom, Daniel (Department of Economics, Lund University)
    Abstract: Existing empirical evidence suggest that entrepreneurs are optimists, a finding researchers often interpret as evidence of a behavioral bias in entrepreneurial decision-making. We revisit this claim by analyzing an unusually large survey dataset (180,814 responses) that allows us to create a good measure of entrepreneurial optimism. Our measure is based on the individual’s beliefs about nationwide future economic conditions. These beliefs form a good measure of optimism because they, unlike an individual’s beliefs about her own future economic conditions, are completely uncorrelated with the individual’s own life or work situation (which is not optimism). Our data highlight the importance of measuring optimism correctly. About half of the survey respondents differ in their beliefs about nationwide and own conditions. In addition to its conceptual and empirical relevance, our measure of optimism makes it possible to relate an individual’s beliefs to actual outcomes. We can thereby test, in a novel way, whether entrepreneurial optimism is a behavioral bias or not. We first show that entrepreneurs have more favorable beliefs about nationwide conditions. We then show that these entrepreneurs’ beliefs are relatively good predictors of the future. We conclude from these two findings that entrepreneurs are less biased towards optimism than non-entrepreneurs are biased towards pessimism. Additional evidence pertaining to education, which arguably correlates positively with rational decision-making, supports this conclusion. We show that entrepreneurs are more educated and their beliefs about the future are more similar to educated peoples’ beliefs. In summary, our paper documents that entrepreneurial optimism is an important real-world phenomenon, yet, it may not be a behavioral bias that gives rise to irrational decision-making.
    Keywords: Entrepreneurship; forecast; optimism; survey data
    JEL: C83 D84 E27 L26
    Date: 2014–01–08

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