nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒09‒29
sixty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. An Empirical Study on the New Keynesian Wage Phillips Curve: Japan and the US By Ichiro Muto; Kohei Shintani
  2. Effectiveness of the Australian Fiscal Stimulus Package: A DSGE Analysis By Shuyun May Li; Adam Spencer
  3. Financial Business Cycles By Iacoviello, Matteo
  4. Identifying Conventional and Unconventional Monetary Policy Shocks: A Latent Threshold Approach By Takeshi Kimura; Jouchi Nakajima
  5. Mismatch Shocks and Unemployment During the Great Recession By Francesco Furlanetto; Nicolas Groshenny
  6. The changing dynamics of US inflation persistence: a quantile regression approach By Peter Tillmann; Maik Wolters
  7. On the (De)Stabilizing Effect of Public Debt in a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  8. What Caused the Great Recession? By Homburg, Stefan
  9. Three Arrows of “Abenomics†and the Structural Reform of Japan : Inflation Targeting Policy of the Central Bank, Fiscal Consolidation, and Growth Strategy By Naoyuki Yoshino; Farhad Taghizadeh-Hesary
  10. Improving Income Stabilisation in EMU: An Analytical Exploration By Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
  11. Stabilization and expanded commitment: a theory of forward guidance for economies with rational expectations By Hughes Hallett Andrew; Nicola Acocella
  12. Risk shocks and divergence between the Euro area and the US By Thomas Brand; Fabien Tripier
  13. The credit counterparts of broad money By Gerald Steele
  14. Fiscal Policy Announcements of Italian Governments and Spread Reaction during the Sovereign Debt Crisis By M. Falagiarda; W. D. Gregori
  15. Arch and Structural Breaks in United States Inflation By Russell, Bill
  16. Occupational hazards and social disability insurance By Michaud, Amanda M.; Wiczer, David
  17. Strengthening Recovery in Central and Eastern Europe : EU11 Regular Economic Report By World Bank
  18. In Old Chicago: Simons, Friedman and the Development of Monetary-Policy Rules By George Tavlas
  19. On the Credibility of Inflation Targeting Regimes in Latin America By Rodrigo Mariscal; Andrew Powell; Pilar Tavella
  20. How Non-traded Goods May Generate Quasi-quadratic Costs for Capital Adjustment By Kerk L. Phillips
  21. Endogenous Growth with Addictive Habits By Emmanuelle Augeraud-Veron; Mauro Bambi
  22. Deep versus superficial habit: It’s all in the persistence By Cristiano Cantore; Paul Levine; Giovanni Melina
  24. A Decomposition of the Decline in Japanese Nominal Wages in the 1990s and 2000s By Kodama, Naomi; Inui, Tomohiko; Kwon, Hyeogug
  25. Comparing Solution Methods for DSGE Models with Labor Market Search By Hong Lan; ; ;
  26. The Growth-Inflation Nexus for the US over 1801-2013: A Semiparametric Approach By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  27. Philippine Economic Update : Pursuing Inclusive Growth through Sustainable Reconstruction and Job Creation By World Bank
  28. Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy By Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
  29. Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market By Aaron Hedlund
  30. Estimating Dynamic Equilibrium Models with Stochastic Volatility By Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Juan F. Rubio-Ramirez
  31. The Role of Public Sector Investment for Economic Development in Emerging Countries: The Case of Lao PDR By Osamu Nakamura
  32. Downward Rigidity in Households' Price Expectations: An Analysis Based on the Bank of Japan's 'Opinion Survey on the General Public's Views and Behavior' By Koichiro Kamada
  33. Africia's Pulse, April 2014 : An Analysis of Issues Shaping Africa's Economics Future By World Bank
  34. Rwanda Economic Update, No. 6 : Unearthing the Subsoil By World Bank Group
  35. Labor Supply and the Optimality of Social Security By Shantanu Bagchi
  36. Welfare Analysis of Policy Measures for Financial Stability By Ko Munakata; Koji Nakamura; Yuki Teranishi
  37. A Vision for Nepal : Policy Notes for the Government, Volume 1. Synthesis Report By World Bank Group
  38. Price and Nominal Wage Phillips Curves and the Dynamics of Distribution in Japan By Ryunosuke Sonoda
  39. Smoothing the adjustment to trade liberalization By Wolfgang Lechthaler; Mariya Mileva
  40. Financial Crisis, Taylor Rule and the Fed By Saten Kumar
  41. Asymmetric Loss in the Greenbook and the Survey of Professional Forecasters By Tae-Hwy Lee; Yiyao Wang
  42. Hong Kong's Growth Synchronisation with China and the U.S.: A Trend and Cycle Analysis By Dong He; Wei Liao; Tommy Wu
  43. Regional Economic Impact Analysis of High Speed Rail in China : Main Report By World Bank
  44. Exchange Rate Predictability in a Changing World By Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J.
  45. The Cyclical Behavior of Unemployment and Vacancies with Loss of Skills during Unemployment By Victor Ortego-Marti
  46. External Debt Origin, Capital Flight and Poverty Reduction in the Franc Zone: Does the Economic Consequences of Sino-African Relationship matter? By NGUENA Christian-Lambert
  47. Supervivencia de las empresas según indicadores empresariales. Modelo lineal mixto con datos de panel, período 2004 al 2008, caso de España By Luis Varona Castillo; Laura Gismera Tierno; Ricardo Gimeno Nogues
  48. Institutional investor portfolio allocation, quantitative easing and the global financial crisis By Joyce, Michael; Liu, Zhuoshi; Tonks, Ian
  49. Financial Reform in Australia and China By Alexander Ballantyne; Jonathan Hambur; Ivan Roberts; Michelle Wright
  50. Does nominal rigidity mislead our perception of the exchange rate passthrough? By Olivier de Bandt; Tovonony Razafindrabe
  51. Nigeria Economic Report, No. 2, July 2014 By World Bank
  52. More Jobs, Better Jobs : A Priority for Egypt By World Bank Group
  53. Fiscal Policy, Debt Constraint and Expectation-Driven Volatility By Kazuo Nishimura; Thomas Seegmuller; Alain Venditti
  54. Weak Concavity Properties of Indirect Utility Functions in Multisector Optimal Growth Models By Alain Venditti
  55. The rise or the fall of the wall? Determinants of low entrepreneurship in East Germany By Kuehn, Zoe
  56. Albert Aftalion and Business Cycle Theory: A Note By K.Vela Velupillai; Ragupathy Venkatachalam; Stefano Zambelli
  57. Interfacing a CGE Labour Market Model with the E3ME Multi-Sector Macroeconomic Model By G.A. Meagher; Felicity Pang; R.A. Wilson
  58. The New Trade Environment and Trade Performance in the Caribbean By World Bank
  59. A New Architecture for Public Investment in Europe By Natacha Valla; Thomas Brand; Sébastien Doisy
  60. The Cost of Greening Stimulus: A Dynamic Discrete Choice Analysis of Vehicle Scrappage Programs By Chao Wei; Shanjun Li
  61. The Impact of the Great Recession on Employment Polarization in Spain By Brindusa Anghel; Sara De la Rica; Aitor Lacuesta
  62. The Extent and Cyclicality of Career Changes: Evidence for the UK By Carlos Carillo-Tudela (University of Essex, CESifo and IZA ), Bart Hobijn (Federal Reserve Bank of San Francisco), Powen She (University of Essex) and Ludo Visschers (The University of Edinburgh, Universidad Carlos III and CESifo)
  63. Unemployment History and Frictional Wage Dispersion By Victor Ortego-Marti
  64. The Transmission of the Financial Crisis in 1907: An Empirical Investigation By Tallman, Ellis W.; Moen, Jon R.
  65. Identifying SIFI Determinants for Global Banks and Insurance Companies: Implications for D-SIFIs in Russia By Maiya Anokhina; Henry Penikas; Victor Petrov
  66. Science, Innovation and National Growth By Thomas Brenner

  1. By: Ichiro Muto (Bank of Japan); Kohei Shintani (Bank of Japan)
    Abstract: We present an empirical analysis on the New Keynesian Wage Phillips Curve (NKWPC), which is derived by Gali (2011) as a micro-founded structural relationship between wage inflation and the unemployment rate under a sticky wage framework using data for Japan and the US. We find that the empirical fit of the NKWPC is generally superior for Japan. We also find that the slope of the NKWPC is much steeper in Japan than in the US. These results suggest that wages are less sticky in Japan than in the US. Inflation indexation plays a key role in the US, but is less important in Japan. Rolling estimations indicate that the NKWPC has flattened over time in Japan. Analysis of recent data indicates that in both countries the role of inflation indexation is quantitatively smaller than before, although this result might be influenced by low and stable inflation rates over the past few decades.
    Keywords: Wage; Unemployment rate; New Keynesian model; Phillips curve
    JEL: E24 E31 E32
    Date: 2014–02–24
  2. By: Shuyun May Li; Adam Spencer
    Abstract: We develop and estimate a small open economy DSGE model to investigate the eectiveness of the Australian scal stimulus package introduced in the aftermath of the global nancial crisis (GFC). The timing and magnitudes of GFC shocks, scal shocks that mimic the stimulus transfers, and accommodative monetary policy shocks are carefully calibrated and fed into various simulation experiments. The results suggest that the stimulus transfers were eective in combating the economic downturn caused by the GFC, however, the scale of the transfer initiative seems to be excessive. K
    Keywords: Australian scal stimulus; DSGE; Global nancial crisis; Bayesian estimation
    JEL: E32 E62 E65 F41
    Date: 2014
  3. By: Iacoviello, Matteo (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.
    Keywords: Banks; DSGE models; collateral constraints; housing; Bayesian estimation
    JEL: E32 E44 E47
    Date: 2014–08–28
  4. By: Takeshi Kimura (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper proposes a new estimation framework for identifying monetary policy shocks in both conventional and unconventional policy regimes using a structural VAR model. Exploiting a latent threshold modeling strategy that induces time-varying shrinkage of the parameters, we explore a recursive identification switching with a time-varying overidentification for the interest rate zero lower bound. We empirically analyze Japan's monetary policy to illustrate the proposed approach for modeling regime-switching between conventional and unconventional monetary policy periods, and find that the proposed model is preferred over a nested standard time-varying parameter VAR model. The estimation results show that increasing bank reserves lowers long-term interest rates in the unconventional policy periods, and that the impulse responses of inflation and the output gap to a bank reserve shock appear to be positive but highly uncertain.
    Keywords: Identification; Latent threshold models; Monetary policy; Time-varying parameter VAR; Zero lower bound
    JEL: C32 E52
    Date: 2013–05–02
  5. By: Francesco Furlanetto; Nicolas Groshenny
    Abstract: We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve.
    Keywords: Search and matching frictions, unemployment, natural rates
    JEL: E32 C51 C52
    Date: 2014–08
  6. By: Peter Tillmann; Maik Wolters
    Abstract: We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution
    Keywords: inflation persistence, quantile regressions, structural breaks, unit root test, monetary policy, Federal Reserve
    JEL: E31 E37 E58 C22
    Date: 2014–08
  7. By: Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality affecting utility which is financed by income tax and public debt. We show that public debt considered as a fixed portion of GDP can have a stabilizing or destabilizing effect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic fluctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent fluctuations without debt.
    Keywords: endogenous cycles, heterogeneous agents, public spending, public debt, borrowing constraint
    JEL: C62 E32 H23
    Date: 2014–06
  8. By: Homburg, Stefan
    Abstract: This paper examines five possible explanations for the Great Recession of 2008 and 2009, using data for the United States and the eurozone. Of these five hypotheses, four are not supported by the data, while the fifth appears reasonable.
    Keywords: Financial crisis; Great Recession; wealth effect; credit crunch; money demand; central bank
    JEL: E3 E4 G1
    Date: 2014–09
  9. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary
    Abstract: “Abenomics†refers to the economic policies advocated by Prime Minister Shinzo Abe who became prime minister of Japan for a second time when his party, the Liberal Democratic Party, won an overwhelming majority at the general election in December 2012. Abenomics has “three arrows†: (i) aggressive monetary policy, (ii) fiscal consolidation, and (iii) growth strategy. The Japanese economy faces an aging population and expanding social welfare expenses. No other country has experienced Japan’s rapid growth of retired people. In this paper we will explain these three aspects of Abenomics and the current state of the Japanese economy, and examine what further remedies may be required if Japan is to recover from its long-term deflation. We look at such proposals as hometown investment trust funds and postponing of the retirement age through the introduction of a flexible wage rate system.
    Keywords: Abenomics, Japan, aging population, the Japanese economy, retired people, long-term deflation, a flexible wage rate system
    JEL: E52 E62 G21
    Date: 2014–08
  10. By: Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
    Abstract: This paper explores whether collective insurance schemes of various kinds could improve the degree of cyclical income stabilisation and the operation of fiscal stabilisers in the European Economic and Monetary Union (EMU). We review the potential issues, the underlying trade-offs and the necessary conditions for such schemes to be workable. The paper discusses "good" design features, which raise the potential efficiency and acceptability of these mechanisms. It argues that such schemes would preferably focus on large shocks, moderate the boom times as well as cushion adverse shocks, and include a degree of budgetary prudence to cater for real-time uncertainty in assessing business cycles. It carries out retrospective simulations using both "ex post" and "real-time" data. The results suggest that all the schemes considered would have provided non-negligible income stabilisation over the past 10-20 years, although somewhat less so when operating on the basis of data available in real time. The stabilisation schemes reviewed do not require particularly large or persistent payments into or out of them.
    Keywords: Risk-sharing; income smoothing; fiscal stabilisers; transfer scheme; output gap
    JEL: E61 E62 F36 F42 H77
    Date: 2014–09–03
  11. By: Hughes Hallett Andrew (Department of Public Policy – George Mason University Fairfax Drive, Arlington (USA)); Nicola Acocella (Department of Methods and Models for Economics, Territory and Finance, Sapienza University of Rome (Italy))
    Abstract: In this paper we construct a general theory of forward guidance in economic policy making, in order to provide a framework to explain the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role and then examine the consequences for performance when that guidance is withdrawn. Following results in Acocella et al (2013), who extend the theory of economic policy to a world with rational expectations, we show that forward guidance provides enhanced controllability and stabilizability – especially where such properties have not been available before. As a by-product we find that forward guidance severely limits the scope and incentives for time inconsistent behaviour in an economy whose policy goals are ultimately reachable. It can therefore add to the credibility of a set of policies.
    Keywords: Managing Expectations, Stabilizability, Dynamic Controllability, Time Consistency, Two point boundary solutions
    JEL: E42 E58 E61 E63
  12. By: Thomas Brand; Fabien Tripier
    Abstract: Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at vergence.
    Keywords: Great recession;Business cycles;Uncertainty;Divergence;Risk Shocks
    JEL: E3 E4 G3
    Date: 2014–07
  13. By: Gerald Steele
    Abstract: Tautological structures bring clarity to arguments in macroeconomics: familiar structures relate to the circulation of money, the circular flow of real income, and the balance of international payments. Less familiar is a structure incorporating all aspects of macroeconomic policy interventions. The origins and use of the credit counterparts of broad money are examined in the context of the application of UK monetary policy in the period since 1945.
    Date: 2014
  14. By: M. Falagiarda; W. D. Gregori
    Abstract: This paper attempts to evaluate the effects of fiscal policy announcements by the Italian government on the long-term sovereign bond spread of Italy relative to Germany. After collecting data on relevant fiscal policy announcements, we perform an econometric comparative analysis between the three cabinets that followed one another during the period 2009-2013. The results suggest that only fiscal policy announcements made by members of Monti's cabinet have been effective in influencing the Italian spread, revealing a remarkable credibility gap between Monti's technocratic administration and Berlusconi's and Letta's governments.
    JEL: E43 E62 G01 G12
    Date: 2014–09
  15. By: Russell, Bill
    Abstract: United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.
    Keywords: Philips curve, ARCH, structural breaks, inflation, markup,
    Date: 2013
  16. By: Michaud, Amanda M. (Indiana University); Wiczer, David (Federal Reserve Bank of St. Louis)
    Keywords: Disability Insurance; Occupational Choice; Optimal Policy
    JEL: E62 I13
    Date: 2014–08–26
  17. By: World Bank
    Keywords: Finance and Financial Sector Development - Access to Finance Banks and Banking Reform Economic Theory and Research Finance and Financial Sector Development - Debt Markets Finance and Financial Sector Development - Currencies and Exchange Rates Macroeconomics and Economic Growth
    Date: 2014–01
  18. By: George Tavlas (Bank of Greece)
    Abstract: This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid-1930s, advocated a price-level stabilization rule, and by Milton Friedman, who, beginning in the late-1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons' rule relates to modern rules which emphasize the pursuit of price stability as representing optimal monetary policy.    
    Keywords: Milton Friedman, Henry Simons, monetary-policy rules
    Date: 2014
  19. By: Rodrigo Mariscal; Andrew Powell; Pilar Tavella
    Abstract: Inflation targeting has been adopted in a set of emerging economies, including eight countries in Latin America. The success of this regime may depend critically on the credibility of the target and the expectation that the authorities will take appropriate actions if the target is breached. This paper exploits a database of inflation expectations and attempts to measure whether, for a set of inflation targeters in Latin America, expectations are well anchored. A tighter anchoring of expectations is interpreted as a gain in credibility. Also considered are the effects on the credibility of the regime if the inflation target is breached. The results indicate that while inflation expectations have not been fully anchored over the whole sample period, credibility has risen, but at the same time the cost of breaching the target has grown.
    Keywords: Monetary Policy, Economic Development & Growth, Latin America, Inflation targeting, Credibility, Expectations
    Date: 2014–08
  20. By: Kerk L. Phillips (Department of Ecobomics, Brigham Young University)
    Abstract: This paper shows that a two-tiered production structure with both traded and non-traded intermediate goods and non-traded final goods can generate a cost of capital adjustment that is very similar to the quadratic adjustment cost often assumed in single good macroeconomic models. This implies that while a quadratic loss function may seem like an ad hoc adjustment, it can be rationalized by sound theory from a more detailed model.
    Keywords: nontraded goods, adjustment costs, quadratic, capital accumulation
    JEL: E22 F10 F47
    Date: 2014–08
  21. By: Emmanuelle Augeraud-Veron; Mauro Bambi
    Abstract: In this paper, we investigate the global dynamics of an endogenous growth model with linear technology and addictive habits. We find feasible parameters’ conditions under which: a) the resulting equilibrium consumption path is steeper than in a standard AK model; b) endogenous fluctuations in the form of damping fluctuations around the balanced growth path emerge; c) the Easterlin’s paradox emerges. The relevance of these results is explained comparing our findings with the results already known in the existing literature.
    Keywords: Habit formation; consumption smoothing, endogenous fluctuations.
    JEL: E00 E21 O40
    Date: 2014–05
  22. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (City University London)
    Abstract: Bayesian estimation is employed to investigate whether deep as opposed to superficial habit improves the fit of a dynamic stochastic general equilibrium model. If the stock of superficial habit features the additional persistence typical of deep habit, the two specifications are virtually as good. Introducing deep habit in public consumption does not improve the model’s fit.
    JEL: E30 E62
    Date: 2014–09
  23. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia, Universidad de La Laguna and Universidad de Alcalá)
    Abstract: In this paper, we provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, emphasizing the role played by monetary and fiscaldominance in order to get fiscal solvency. Since the condition of fiscal solvency was satisfied, government deficit would have been sustainable along the sample period. In addition, the whole period can be characterized as one of fiscal dominance.
    Keywords: Fiscal policy, Sustainability, Fiscal Theory of the Price Level, Monetary dominance, Fiscal dominance.
    JEL: E62 H62
    Date: 2014–08
  24. By: Kodama, Naomi; Inui, Tomohiko; Kwon, Hyeogug
    Abstract: In the 1990s and the 2000s, the average nominal wage in Japan declined continuously. This is a sharp contrast to wage trends in other developed countries in the same period. This study seeks to provide new quantitative evidence on the possible factors contributing to the nominal wage decline in Japan’s so-called “two lost decades” employing the Blinder-Oaxaca decomposition method using data from the Basic Survey on Wage Structure for 1993-2008. We find that half of the decline of the average wage in the total economy is due to the growing employment share of low-wage industries. Further, we decompose changes in average wages at the industry level for three subperiods representing different phases of the business cycle in Japan. Controlling for worker characteristics, we find the wages of workers in the manufacturing, wholesale, and medical, health care, and welfare industries declined between 1998 and 2003. Further, our results show that 1997 was the turning point in terms of changes in the wage structure. In addition, we find that wages for workers with the same characteristics continued to decline in the 2000s, albeit at a slower pace, and the main factor responsible for the wage decline was changes in the composition of the workforce in the wholesale, retail, and medical, health care, and welfare industries.
    Keywords: nominal wage decline, deflation, changes in industrial structure, trade and labor market interactions
    JEL: J31 E24 E32 F16 L80
    Date: 2014–08
  25. By: Hong Lan; ; ;
    Abstract: I compare the performance of solution methods in solving a standard real business cycle model with labor market search frictions. Under the conventional calibration, the model is solved by the projection method using the Chebyshev polynomials as its basis, and the perturbation methods up to third order in both levels and logs. Evaluated by two accuracy tests, the projection approximation achieves the highest degree of accuracy, closely followed by the third order perturbation in levels. Although different in accuracy, all the approximated solutions produce simulated moments similar in value.
    Keywords: Computational methods; DSGE; Business cycles; Search and matching; Accuracy test
    JEL: C63 C68 E32
    Date: 2014–09
  26. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We try and detect whether there exists a threshold level of inflation for the US economy over 1801-2013, beyond which it has a negative effect on economic growth. We use a combination of nonparametric (NP) and instrumental variable semiparametric (SNP-IV) methods to obtain inflation thresholds for the United States. The results suggest that the relationship between growth and inflation is hump shaped—that higher levels of inflation reduce growth more. Our results consistently show that inflation above two per cent negatively affects growth.
    Keywords: Inflation, growth, nonparametric, semiparametric
    JEL: E31 O49 C14
    Date: 2014–09
  27. By: World Bank
    Keywords: Banks and Banking Reform Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth
    Date: 2014–03
  28. By: Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
    Abstract: This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of nancial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks'strategic reactions to changes in funding costs, in risk perception and in the regulatory environment.The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms.
    Keywords: Collateral, productivity, small open economy
    Date: 2014–09
  29. By: Aaron Hedlund (Department of Economics, University of Missouri-Columbia)
    Abstract: This paper investigates the macroeconomic effects of search risk in the housing market. To do so, I introduce a tractable directed search model of housing with mul- tidimensional buyer and seller heterogeneity. I incorporate this framework in an in- complete markets macroeconomic model with long-term mortgages and equilibrium default. I show that search risk spills over into higher foreclosure risk by creating a debt overhang problem. Heavily indebted sellers post high selling prices, take a long time to sell, and frequently end up in foreclosure. As a result, search risk increases mortgage default premia and tightens credit constraints, thus exacerbating the debt overhang problem by making refinancing more difficult. This mechanism establishes a novel link between housing and mortgage markets based on the illiquidity of housing.
    Keywords: housing, liquidity, search theory, credit constraints, household debt,foreclosure
    JEL: D31 D83 E21 E22 G11 G12 G21 R21 R31
    Date: 2014–09–12
  30. By: Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Juan F. Rubio-Ramirez
    Abstract: This paper develops a particle …ltering algorithm to estimate dynamic equilibrium models with stochastic volatility using a likelihood-based approach. The algorithm, which exploits the structure and profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data.
    Keywords: Dynamic equilibrium models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2014–09
  31. By: Osamu Nakamura (International University of University)
    Abstract: Recently, the Lao PDR has achieved high economic growth at around 7-8 percent annually which is very stable and robust growth in Asian economic dynamics, in particular in ASEAN. Vital public investments play an important role to develop social infrastructures and then strengthen the supply-side economy. This paper analyzes the macroeconomic structure and causes of high economic growth of Lao PDR by utilizing a macroeconometric model. According to the econometric analysis, vital public sector investment behaviors have caused to strengthen the supply-side economy and exports, which resulted in foreign capital and public investment increases through its virtuous circle.
    Keywords: public sector investment, take-off stage, macroeconometric model, scenario simulation, co-integrating relationships
    JEL: E17 E51 C01
    Date: 2014–09
  32. By: Koichiro Kamada (Bank of Japan)
    Abstract: This paper investigates the characteristics of households' inflation expectations using the micro-data of the Opinion Survey on the General Public's Views and Behavior conducted by the Bank of Japan. The results of the Kahn test indicate the existence of strong downward rigidity in households' price expectations. One consequence of this downward rigidity is that survey answers strongly react to shocks to inflation expectations in a high inflation environment, but only weakly in a low inflation environment. Furthermore, this downward rigidity may hide potential links between inflation expectations and other economic indicators and may produce spurious correlations between them. To overcome these problems, this paper adjusts the distribution of survey answers on inflation expectations for downward rigidity. Using this adjusted distribution, the paper examines the relationships between households' inflation expectations and their views on various economic issues. The main results are as follows. From the end of 2005 onward, a negative correlation between households' inflation expectations and their outlook for economic conditions can be observed. Regarding the activities of the Bank of Japan, the following relationships can be observed from 2006. First, the more strongly households are interested in the Bank's activities, the more stable are their inflation expectations. And second, the more confidence households have in the Bank, the more tightly are their inflation expectations anchored.
    Date: 2013–11–08
  33. By: World Bank
    Keywords: Macroeconomics and Economic Growth - Markets and Market Access Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets
    Date: 2014–04
  34. By: World Bank Group
    Keywords: Public Sector Expenditure Policy Banks and Banking Reform Economic Theory and Research Finance and Financial Sector Development - Debt Markets Finance and Financial Sector Development - Currencies and Exchange Rates Public Sector Development Macroeconomics and Economic Growth
    Date: 2014–08
  35. By: Shantanu Bagchi (Department of Economics, Towson University)
    Abstract: Traditional economic theory predicts that unfunded social security can be justified on the basis of its ability to efficiently finance retirement, and also for its ability to provide insurance against mortality risk and uninsurable shocks to labor income. In this paper, I demonstrate that the quantitative importance of the traditional roles of social security depends on how household labor supply responds to social security. I build a calibrated general-equilibrium model where social security has a large welfare-improving role, and I show that the distortionary effect on households' labor hours erases virtually all the welfare gains from social security. I also find that this result is robust within the range of labor supply elasticities usually encountered in the macroeconomic literature..
    Keywords: Labor supply, Social security, Mortality risk, Productivity shock, Insurance, Elasticity.
    JEL: E21 H55 J22
    Date: 2014–09
  36. By: Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability.
    Date: 2013–03–01
  37. By: World Bank Group
    Keywords: Poverty Reduction - Rural Poverty Reduction Finance and Financial Sector Development - Access to Finance Economic Theory and Research Finance and Financial Sector Development - Debt Markets Transport Economics Policy and Planning Transport Macroeconomics and Economic Growth
    Date: 2014
  38. By: Ryunosuke Sonoda
    Abstract: This study estimates two types of Phillips curves––the price Phillips curve and nominal wage Phillips curve––for the Japanese economy and analyses the institutional structure of the dynamics of effective demand and income distribution in each period from 1977 to 2007. The estimated results allow us to make the following four findings. First, the Japanese economy was a profit-led regime and a counter-cyclical wage share regime until the 1990s. Second, although the combination of regimes can make the dynamics of effective demand and income distribution unstable, such dynamics were actually stable until the 1980s because wage share was sufficiently regulated by labour–management cooperation. Third, however, during the 1990s, the dynamics became unstable, because this regulation mechanism was weakened by a proportional increase in non-regular workers who were not members of labour unions. Finally, after the 2000s, the dynamics restabilized because Japanese firms quickened their speeds of employment adjustment and the distributive regime in Japan switched from a counter-cyclical wage share one to a pro-cyclical wage share regime.
    Keywords: price Phillips curve, nominal wage Phillips curve, income distribution, demand regime, Kaleckian model
    JEL: E12 J53
    Date: 2014–09
  39. By: Wolfgang Lechthaler; Mariya Mileva
    Abstract: We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy meant to compensate the losers of trade liberalization and reduce the ensuing wage inequality. We consider several instruments of economic policy: a wage tax to redistribute income between skilled and unskilled workers; sector-specific consumption taxes and profit taxes to affect inter-sectoral wage inequality; sector-specific firm entry subsidies, worker sector-migration subsidies and training subsidies to speed up the adjustment process. We find that the re-distributional and efficiency effects of these instruments differ very much. Probably the most potent instrument to reduce the wage inequality after trade liberalization are training subsidies. They increase the supply of skilled workers and thereby reduce the skill premium. The policy also generates inefficiencies because too many workers are trained, but the costs of these inefficiencies are relatively low
    Keywords: trade liberalization; wage inequality; adjustment dynamics; redistribution
    JEL: E24 F11 F16 J62
    Date: 2014–08
  40. By: Saten Kumar (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation led them to hit the ZLB.
    Keywords: Ambiguity, Belief Function, Investment Bubble, Inference
    Date: 2014–02
  41. By: Tae-Hwy Lee (Department of Economics, University of California Riverside); Yiyao Wang (Booth School of Business, the University of Chicago)
    Abstract: This paper examines forecast rationality of the Greenbook and the Survey of Professional Forecasters (SPF) under asymmetric loss functions, using the method proposed by Elliott, Komunjer and Timmermann (2005) with a rolling window strategy. Over rolling periods, the degree and direction of asymmetry in forecast loss function are time-varying. While rationality under symmetric loss is often rejected, forecast rationality under asymmetric loss is not rejected over nearly all rolling periods. Besides, real output growth is consistently under-predicted in 1990s and inflation rate is consistently over-predicted in 1980s and 1990s. Generally, inflation forecast, especially for long horizon, exhibits greater level of loss asymmetry in magnitude and frequency. The loss asymmetry of real output growth forecast is more pronounced when the last revised vintage data is used rather than real-time vintage is used. All of these results similarly hold in Greenbook and SPF. The results are also similar with different sets of instrumental variables for estimation of the asymmetric loss and for forecast rationality test.
    Keywords: Greenbook, SPF, Asymmetric loss, Forecast rationality, Real output growth forecast, Inflation rate forecast, Real time data, Revised data.
    JEL: C53 E37
    Date: 2014–09
  42. By: Dong He (Hong Kong Monetary Authority); Wei Liao (International Monetary Fund); Tommy Wu (Hong Kong Monetary Authority)
    Abstract: This paper investigates the synchronisation of Hong Kong's economic growth with mainland China and the US. We identify trends of economic growth based on the permanent income hypothesis. Specifically, we first confirm whether real consumption in Hong Kong and mainland China satisfies the permanent income hypothesis, at least in a weak form. We then identify the permanent and transitory components of income of each economy using a simple state-space model. We use structural vector autoregression models to analyse how permanent and transitory shocks originating from mainland China and the US affect the Hong Kong economy, and how such influences evolve over time. Our main findings suggest that transitory shocks from the US remain a major driving force behind Hong Kong's business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong's trend growth.
    JEL: E21 F44
    Date: 2014–07
  43. By: World Bank
    Keywords: Banks and Banking Reform Transport Economics Policy and Planning Social Protections and Labor - Labor Policies Economic Theory and Research Roads and Highways Finance and Financial Sector Development Transport Macroeconomics and Economic Growth
    Date: 2014–06
  44. By: Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J.
    Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.
    Keywords: Exchange Rate Forecasting, Taylor Rules, Time-Varying Parameters, Bayesian Methods,
    Date: 2014
  45. By: Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: This paper studies the cyclical fluctuations in unemployment and vacancies in a search and matching model in which workers lose skills during periods of unemployment. Firms' profits fluctuate more because aggregate productivity affects the economy's human capital level. Moreover, wages for workers with lower levels of human capital are closer to the value of non-market time, leading to more rigid wages. Fluctuations in the vacancy-unemployment ratio are larger than is the case in the baseline search and matching model. For mid-range values of non-market time the improvement is substantial, and the model accounts for most observed labor market fluctuations.
    Keywords: Search and Matching; Unemployment Fluctuations; Unemployment History; Human Capital Depreciation
    JEL: E2
    Date: 2014–09
  46. By: NGUENA Christian-Lambert (Yaoundé/Cameroun)
    Abstract: Is China-Africa economic relation instrumental for capital flight and poverty reduction in FZ? Does it matter in the improvement of external debt’s impact on GDP per capita and capital flight reduction in particular? This paper extends and assesses the Asongu and Aminkeng (2013) conclusions about Sino-African economic relations in the FZ context.Thus, practically, the intuition is to use a TSLS-IV econometric estimation technique on 14 African countries specific data over the period 1983-2013 to empirically assess if African external debt exclusively from China can be instrumental in the way toward capital flight and poverty reduction in FZ. The construction of a theoretical framework highlighting stylized fact and the review of a recent literature on this issue has been firstly undertaken. The main result allowed the following interpretations: (a) an important part of the traditional external debt contracted with constraint is going back out of the continent as capital flight and; (b) The capital flight contributes to improving the level of poverty in Africa. Overall, we can conclude that the contribution to economic development depends on the origin of loans received and, fostering the economic relations with China could be an excellent alternative for FZ countries. This paper is original since it has tested the Asongu and Aminkeng (2013) assumption in the continent where concerns of low economic development, higher poverty and capital flight are most acute.
    Keywords: Sino-African economic relation; Capital flight; External debt origin; pro poor economic growth; Poverty reduction
    JEL: E61 E62 H11 I32 O10 O19
    Date: 2014–09
  47. By: Luis Varona Castillo (R&B Proptraders, SL); Laura Gismera Tierno (Universidad Pontificia Comillas de Madrid. ICADE); Ricardo Gimeno Nogues (Banco de España)
    Abstract: La supervivencia empresarial es un tema relevante en la literatura de Economía de la Empresa. Se ha logrado explicar este concepto para el caso de España en el período comprendido entre los años 2004 a 2008 en un 65 por ciento (se han estimado catorce modelos alternativos lineales mixtos con datos de panel). Este fenómeno económico estaría explicado fundamentalmente porque existe una relación positiva y significante entre el capital humano de las empresas, algunas características financieras de las compañías y el entorno con la supervivencia empresarial. El presente artículo apoya la hipótesis de que existen una serie de factores que influyen en la supervivencia de las empresas y confirma que los cluster explican la supervivencia (incluyendo a su vez la idea de que son espacios no sólo de colaboración sino de rivalidad). En un contexto en el que el Perú interesa direccionar sus políticas hacia la diversificación industrial para potenciación los cluster, cadenas productivas, facilitando los eslabonamientos del universo empresarial.
    Keywords: supervivencia empresarial, capital humano, cluster, gestión empresarial, economía de la empresa
    JEL: C33 C58 D22 E24 J24 L25 M21
    Date: 2014–08
  48. By: Joyce, Michael (Bank of England); Liu, Zhuoshi (Bank of England); Tonks, Ian (University of Bath)
    Abstract: We examine how the Bank of England’s quantitative easing (QE) policy during the global financial crisis affected the investment behaviour of insurance companies and pension funds and whether their behaviour was consistent with the operation of the so-called 'portfolio balance channel' that has been emphasised by UK and US monetary policy makers as a key channel through which QE works. To assess the incremental impact of QE, we need some counterfactual of how the investment behaviour of institutional investors would have changed in the absence of the policy. We construct this by conditioning on variables that explain portfolio allocation but are invariant to the QE policy itself, which allows us to construct both ex-ante and ex-post counterfactuals. Our analysis of a range of data sources, including national accounts net investment data and micro-data on life insurance companies and pension funds, suggests QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds relative to the counterfactual. Although analysis of the micro-data does suggest some heterogeneity in the response to QE across different institutions, the shift into corporate bonds was quite widespread. However, portfolio rebalancing by institutional investors into riskier assets seems to have been limited to corporate bonds and did not extend to equities.
    Keywords: Institutional investors; asset allocation; quantitative easing; portfolio balance channel; financial crisis
    JEL: C22 C23 E61 E65 G11
    Date: 2014–09–12
  49. By: Alexander Ballantyne (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Ivan Roberts (Reserve Bank of Australia); Michelle Wright (Reserve Bank of Australia)
    Abstract: This paper describes the Australian experience of domestic financial deregulation, capital account liberalisation and the float of the exchange rate, and provides a comparison to China's current efforts to reform its own financial system. In doing so, it considers similarities and differences in the circumstances facing the two economies. Australia's financial reforms were essential, in the longer term, for building a stronger economy and more robust financial system, but the paper does not interpret the Australian experience as a prescription for financial reform in China. Indeed, the specific sequencing of deregulation that occurred in Australia might not be optimal in a Chinese context, although it is likely that the reforms themselves, pursued with appropriate caution, would have long-run benefits for the Chinese economy.
    Keywords: financial deregulation; financial development; China; Australia
    JEL: E44 G18 O53 O56
    Date: 2014–09
  50. By: Olivier de Bandt; Tovonony Razafindrabe
    Abstract: Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we …nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that …rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.
    Keywords: Exchange rate pass-through, nominal rigidity, import price
    JEL: F31 E31 C23
    Date: 2014–09–01
  51. By: World Bank
    Keywords: Poverty Reduction - Rural Poverty Reduction Poverty Reduction - Achieving Shared Growth Economic Theory and Research Macroeconomics and Economic Growth - Regional Economic Development Finance and Financial Sector Development - Debt Markets
    Date: 2014–07
  52. By: World Bank Group
    Keywords: Finance and Financial Sector Development - Access to Finance Health, Nutrition and Population - Population Policies Economic Theory and Research Social Protections and Labor - Labor Policies Social Protections and Labor - Labor Markets Macroeconomics and Economic Growth
    Date: 2014–06
  53. By: Kazuo Nishimura (RIEB, Kobe University - Kobe University, KIER, Kyoto University - Kyoto University); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Venditti (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie)
    Abstract: Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.
    Keywords: indeterminacy; endogenous cycles; public debt; income taxation
    Date: 2014–06
  54. By: Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: Studies of optimal growth in a multisector framework are generally addressed in reduced form models. These are defined by an indirect utility function which summarizes the consumers’ preferences and the technologies. Weak concavity assumptions of the indirect utility function allow one to prove differentiability of optimal solutions and stability of steady state. This paper shows that if the consumption good production function is concave-gamma, and the instantaneous utility function is concave-rho, then the indirect utility function is weakly concave, and its curvature coefficients are bounded from above by a function of gamma and rho.
    Keywords: indirect utility function, social production function, multisector optimal growth model, weak concavity
    JEL: C62 E32 O41
    Date: 2014–09
  55. By: Kuehn, Zoe (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: Between 1949 and 1989, communism restricted private entrepreneurship in East Germany, but even after reunification in 1990 entrepreneurship remained low compared to other transition economies. To quantify the determinants of low entrepreneurship in East Germany and its impact on economic outcomes, I set up a two-region model economy with occupational and migration choices. Individuals can become workers or entrepreneurs in East or West Germany. In line with German policy after reunification, in East Germany wages are fixed above labor productivity and there are capital subsidies. Managerial knowhow is a combination of innate talent and entrepreneurial parental background which only West Germans possess. Technological growth increases with the innate talent of entrepreneurs. Counter-factual experiments show that the missing tradition of entrepreneurship, while contributing to technological growth, accounts for almost 10 percentage points of the gap between East and West German GDP per capita. On the other hand, reunification (wage setting policy, migration possibilities, and subsidies) slowed down technological growth and increased the output gap by 7 percentage points.
    Keywords: Entrepreneurship; Growth; Allocation of Talent; Social Mobility; Transition
    JEL: E24 F15 J22
    Date: 2014–07
  56. By: K.Vela Velupillai; Ragupathy Venkatachalam; Stefano Zambelli
    Date: 2014
  57. By: G.A. Meagher; Felicity Pang; R.A. Wilson
    Abstract: In recent years, a series of European labour market forecasts have been produced on behalf of, and have been published by, the European Centre for the Development of Vocational Training (CEDEFOP). These forecasts were generated using a modular modelling approach containing two major components: * a multi-sector macroeconomic model (E3ME) for 29 European countries, primarily developed and operated by Cambridge Econometrics, and * a labour market extension (WLME), primarily developed and operated by the Institute for Employment Research at the University of Warwick. The countries are treated as an integrated system in E3ME but the extension is applied to each country separately. Forecasts of employment by industry are determined by E3ME; forecasts of employment by occupation and qualification are determined by the extension. The two components rely mainly on time series econometric techniques to generate their forecasts. This paper describes how WLME can be replaced with an alternative extension (MLME) which incorporates a computable general equilibrium model. The CGE model has been developed primarily at the Centre of Policy Studies at Monash University. Compared to WLME, MLME relies less on time series extrapolation and more on explicitly modelled economic behaviour. This approach introduces a range of behavioural and technical parameters which offer more scope for modelling developments in the labour market which impact on occupations and skills rather industries. Forecasts produced using the new E3ME-MLME system are reported for the United Kingdom, Greece and the Netherlands, and compared with the corresponding forecasts produced using the existing E3ME-WLME system. The focus of the comparison is on qualitative differences in the way the two sets of forecasts are to be interpreted. In particular, the sense in which explicit specification of technical change and economic behaviour (in the new system) can be substituted for time series extrapolation techniques (in the existing system) is carefully considered. The primary objective of the paper, therefore, is to demonstrate the empirical feasibility of the alternative methodology rather than to produce robust alternative forecasts.
    Keywords: Forecasting, CGE models, hybrid models, labour markets
    JEL: C53 C58 D58 E27 J23 O41
    Date: 2014–09
  58. By: World Bank
    Keywords: Environmental Economics and Policies International Economics and Trade - Free Trade Economic Theory and Research Private Sector Development - Emerging Markets International Economics and Trade - Trade Policy Macroeconomics and Economic Growth Environment
    Date: 2014–06
  59. By: Natacha Valla; Thomas Brand; Sébastien Doisy
    Abstract: Some five years after the severe recession of 2009, private sector investment in Europe is still dangerously sluggish. And public sector investment has been cut, reinforcing the downward trend seen over the past thirty years. In this paper, we discuss the complementarity between private and public sector investment. Evidence suggests that in the medium term, public investment does not hinder, but fosters, the quantity and efficiency of private investment. Moreover, our fiscal multiplier for public investment (at 1.4, considerably above ‘breakeven’) is significantly stronger than those for other fiscal instruments. Taken together, these two findings suggest that the public sphere would be well advised to tilt spending towards investment in areas such as infrastructure and human capital, which represent an investment for future generations. A new European initiative might be needed to get investment back on track and thus protect future growth. To this end we propose establishing, by treaty, a Eurosystem of Investment Banks (ESIB), around a pan-European financial capacity that would coordinate the actions of the national public investment banks of Euro area member states and add to their funding capacity. The ESIB would channel the Euro area’s excess savings towards investment in the right places throughout the continent. To do so in an economically sustainable and financially profitable way, funding would be conditional on firm commitments to growth-enhancing structural reforms and economic policies. Our proposed Eurosystem of Investment Banks (ESIB) would be structured around a federal centre and national entities. The central node, the Fede Fund, would be created by restructuring the European Investment Bank into a truly federal entity. The Fede Fund would orchestrate the joint work of national investment and development banks with a clear European map in mind. The mandate of the ESIB, enshrined in the Treaty, would be to promote long-term growth, well-being and employment in Europe. The mandate would, by definition, reflect a political consensus emanating democratically from the people of the Euro area member states. The ownership and governance of the Fede Fund would be key in ring-fencing the investment process from national political agendas not linked to the promotion of long-term growth. We propose a structure with both public and private Fede shareholders, who would collectively elect the ESIB Board of Directors. The Fede Fund would also issue debt to finance investment at an economically relevant scale (10% of Euro area GDP, so around €1tn).
    Keywords: public investment;private investment;Europe;European Investment Bank
    JEL: E6 H54
    Date: 2014–07
  60. By: Chao Wei (Department of Economics/Institute for International Economic Policy, George Washington University); Shanjun Li (Dyson School of Applied Economics and Management, Cornell University)
    Abstract: During the recent economic crisis, many countries have adopted stimulus programs designed to achieve two goals: to stimulate economic activity in lagging durable goods sectors and to protect or even enhance environmental quality. The environmental benefits are often viewed and much advocated as co-benefits of economic stimulus. This paper investigates the potential tradeoff between the stimulus and environmental objectives in the context of the popular U.S. Cash-for-Clunkers (CFC) program by developing and estimating a dynamic discrete choice model of vehicle ownership. Results from counterfactual analysis based on several specifcations all show that the design elements to achieve environmental benets significantly limit the program impact on demand stimulus: the cost of vehicle demand stimulus after netting out environmental benets can be up to 77 percent higher under the program than that from an alternative policy design without the design elements aimed at the environmental objective.
    Keywords: Stimulus, Dynamic Discrete Choice Model, Vehicle Scrappage
    JEL: E62 H23 H31
    Date: 2014–12
  61. By: Brindusa Anghel; Sara De la Rica; Aitor Lacuesta
    Abstract: This article analyzes changes in the occupational employment share in Spain for the period 1997-2012 and the way particular sociodemographic groups adapt to those changes. There seems to be clear evidence of employment polarization between 1997 and 2012 that accelerates over the recession. Changes in the composition of the labour supply cannot explain the increase in the share of occupations at the low end of the wage distribution. Sector reallocation may have partially contributed to explain the polarization process in Spain during the years of expansion (1997-2007) but it is a minor factor during the recession. The polarization of occupations within sectors observed, especially during the recession, appears to be related to a decline in routine tasks which is compensated by an increase in occupations with non-routine service contents, which are found both in the low and high end of the wage distribution. Instead, jobs with a higher degree of abstract contents do not appear to increase their share in total employment during these 15 years. The paper finds that this process has affected males more strongly than females because of their higher concentration in occupations more focused on routine tasks. Among males, for workers under 30 years old, we find a decrease in the share of occupations with more routine tasks which turns into increases in those with more abstract content and particularly with more non-routine service content. Instead, male workers over 30 years old seem to remain in declining occupations to a greater extent. Females of different ages are not affected by the abovementioned changes.
    Date: 2014–09
  62. By: Carlos Carillo-Tudela (University of Essex, CESifo and IZA ), Bart Hobijn (Federal Reserve Bank of San Francisco), Powen She (University of Essex) and Ludo Visschers (The University of Edinburgh, Universidad Carlos III and CESifo)
    Abstract: Using quarterly data for the U.K. from 1993 through 2012, we document that in economic downturns a smaller fraction of unemployed workers change their career when starting a new job. Moreover, the proportion of total hires that involves a career change for the worker also drops in recessions. Together with a simultaneous drop in overall turnover, this implies that the number of career changes declines during recessions. These results indicate that recessions are times of subdued reallocation rather than of accelerated and involuntary structural transformation. We back this interpretation up with evidence on who changes careers, which industries and occupations they come from and go to, and at which wage gains.
    Keywords: Labour market turnover, occupational and industry mobility, wage growth.
    JEL: J63 J64 G10
    Date: 2014–09–02
  63. By: Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: This paper studies wage dispersion among identical workers in a random matching search model in which workers lose human capital during unemployment. Wage dispersion increases, as workers accept lower wages to avoid long unemployment spells. The model is an important improvement over baseline search models. It explains between a third and half of the observed residual wage dispersion. When adding on-the-job search, the model accounts for all of the residual wage dispersion and generates substantial dispersion even for high values of non-market time. The paper thus addresses the trade-off between explaining frictional wage dispersion and the cyclical behavior of unemployment.
    Keywords: Job search; search and matching; wage dispersion; unemployment history
    JEL: E2
    Date: 2014–09
  64. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Moen, Jon R. (Federal Reserve Bank of Cleveland)
    Abstract: Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). We trace the transmission of the crisis from New York City trust companies to the New York City national banks through direct and indirect interconnections. Trust companies held cash balances at national banks, and these balances were liquidated as trust companies suffered depositor runs. Secondly, trust companies and national banks were notable creditors to the New York Stock Exchange; when trusts were suffering runs, the call loan market on the stock exchange seized. The crisis spread to the interior banks after the New York Clearing House banks restricted the convertibility of deposits into cash. Bond returns were sharply negative in the two weeks following the suspension. We highlight commonalities between the Panic of 1907 and the fi nancial crisis of 2007-2009.
    Keywords: Banking panic; asset price; asset volatility; correlation risk; correspondent banking
    JEL: E44 G01 N11 N21
    Date: 2014–09–03
  65. By: Maiya Anokhina (National Research University Higher School of Economics, Moscow); Henry Penikas (National Research University Higher School of Economics, Moscow); Victor Petrov (National Research University Higher School of Economics, Moscow)
    Abstract: The increased role of financial institutions in the economy leads to a need to determine those that are systemically important. The bankruptcy of such institutions creates negative effects for the economy on the global scale. The aim of this article is to identify important financial coefficients that can be used in the methodology of identification of G-SIB and G-SII. Models of binary choice and models of ordered choice are used in this article, several models are highly predictive. Besides this paper has revealed several financial coefficients, that helped to find the probabilities of G-SIF for Russian banks and insurance companies.
    Keywords: Systemic importance; Basel committee, probability of default, financial coefficients; models of ordered choice, models of binary choice, global systemically important banks (G-SIB), insurance company.
    JEL: C70 E58 G21
    Date: 2014–09
  66. By: Thomas Brenner (Economic Geography and Location Research, Philipps-University, Marburg)
    Abstract: This paper studies the effects of public research (publications) and innovation output (patents) on national economic growth with the help of a GMM panel regression including 114 countries. Effects on productivity growth and capital and labor inputs are distinguished. Furthermore, different time lags are examined for the various analyzed effects and two time periods as well as less and more developed countries are studied separately. The results confirm the effect of innovation output on productivity for more developed countries. Simultaneously, innovation output is found to have negative impacts on capital and labor inputs, while public research is found to have positive impacts on labor inputs.
    Keywords: national growth, innovation, public research, growth
    JEL: O11 O31 E10 C23
    Date: 2014–09–14

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