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on Central Banking |
| By: | Olivier Blanchard; Jordi Gali |
| Abstract: | We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation tradeoff and for the conduct of monetary policy.<br><br>We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment.<br><br>We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy. |
| JEL: | E3 E31 E32 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13897&r=cba |
| By: | Olivier Blanchard; Jordi Galí |
| Abstract: | We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation trade- off and for the conduct of monetary policy. We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in un- employment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy. |
| Keywords: | New-Keynesian model, labor market frictions, search model, unemployment, sticky prices, real wage rigidities |
| JEL: | E32 E50 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1076&r=cba |
| By: | Lars E.O. Svensson; Noah Williams |
| Abstract: | We study the design of optimal monetary policy under uncertainty in a dynamic stochastic general equilibrium models. We use a Markov jump-linear-quadratic (MJLQ) approach to study policy design, approximating the uncertainty by different discrete modes in a Markov chain, and by taking mode-dependent linear-quadratic approximations of the underlying model. This allows us to apply a powerful methodology with convenient solution algorithms that we have developed. We apply our methods to a benchmark New Keynesian model, analyzing how policy is affected by uncertainty, and how learning and active experimentation affect policy and losses. |
| JEL: | E42 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13892&r=cba |
| By: | Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi |
| Abstract: | This paper demonstrates that "commodity currency" exchange rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. |
| JEL: | C52 C53 F31 F47 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13901&r=cba |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | This paper offers a “panoramic†analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that "this time is different" among policymakers and investors. A recent example of the "this time is different" syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements. |
| JEL: | E6 F3 N0 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13882&r=cba |
| By: | Pär Österholm; Spencer Dale; Athanasios Orphanides |
| Abstract: | Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. There is a risk that the central bank can distract the public; this means that the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public's understanding to the extent that it "crowds out" a role for communicating imperfect information. |
| Keywords: | Central banks , Transparency , |
| Date: | 2008–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/60&r=cba |
| By: | Albert Marcet; Klaus Adam; Juan Pablo Nicolini |
| Abstract: | Introducing bounded rationality in a standard consumption-based asset pricing model with time separable preferences strongly improves empirical performance. Learning causes momentum and mean reversion of returns and thereby excess volatility, persistence of price-dividend ratios, long-horizon return predictability and a risk premium, as in the habit model of Campbell and Cochrane (1999), but for lower risk aversion. This is obtained, even though our learning scheme introduces just one free parameter and we only consider learning schemes that imply small deviations from full rationality. The findings are robust to the learning rule used and other model features. What is key is that agents forecast future stock prices using past information on prices. |
| JEL: | G12 D84 |
| Date: | 2008–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:732.08&r=cba |
| By: | Laurence Ball (Johns Hopkins University (E-mail: lball@jhu.edu)) |
| Abstract: | This paper examines the effects of a money-financed fiscal expansion -- a helicopter drop -- when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt. |
| Keywords: | Helicopter Drop, Liquidity Trap, Deflation |
| JEL: | E31 E52 E58 E63 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-04&r=cba |
| By: | Noah Williams |
| Abstract: | This paper studies the design of optimal contracts in dynamic environments where agents have private information that is persistent. In particular, I focus on a continuous time version of a benchmark insurance problem where a risk averse agent would like to borrow from a risk neutral lender to stabilize his income stream. The income stream is private information to the borrower and is persistent. I find that the optimal contract conditions on the agent's reported endowment as well as two additional state variables: the agent's utility and marginal utility under the contract. I show how persistence alters the nature of the contract, and consider an exponential utility example which can be solved in closed form. Unlike the previous discrete time models with i.i.d. private information, the agent's consumption under the contract may grow over time. Furthermore, in my setting the efficiency losses due to private information increase with the persistence of the endowment, and the distortions vanish as I approximate an i.i.d. endowment. |
| JEL: | D82 D86 E21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13894&r=cba |
| By: | Philippe D Karam; Adrian Pagan |
| Abstract: | We extend a small New Keynesian structural model used for monetary policy analysis to address a richer class of policy issues that arise in open economy analysis. We draw a distinction between absorption and domestic output, and as the difference between the two is effectively the current account, there is now an explicit accumulation or decumulation of foreign liabilities in response to various shocks affecting the system. Such stock equilibria can now have an impact back on to the flows in the domestic economy. We perform simulations using parameters calibrated to the Canadian economy and compare the differences in impulse responses from the original model. Advantages in a forecasting environment owing to the ability to impose explicit projections about imports and exports are also exposed. |
| Date: | 2008–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/64&r=cba |
| By: | Carlos Thomas (Banco de España) |
| Abstract: | I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile. |
| Keywords: | search and matching, real rigidities, New Keynesian Phillips curve |
| JEL: | E32 J40 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0806&r=cba |
| By: | Barbara Roffia (European Central Bank, DG Economics); Andrea Zaghini (Bank of Italy, Economic Research Department) |
| Abstract: | The paper analyzes the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialized economies. We find that when robust money growth is accompanied by large increases in stock and house prices and loose credit conditions, the probability of recording an inflationary outburst over a three-year horizon is significantly increased. In contrast, significant money stock expansions which are not associated with sustained credit increases and strong dynamics in other asset prices seem to be less likely to have inflationary consequences and thus, less worrying from a policy perspective. |
| Keywords: | Inflation, money growth, quantity theory of money |
| JEL: | E31 E40 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_657_08&r=cba |
| By: | Marika Karanassou (Queen Mary, University of London); Hector Sala (Universitat Autonoma de Barcelona) |
| Abstract: | In this paper we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e. the interplay of wage-staggering and money growth, generates a nonvertical NPC in the long-run, and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macrolabour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the US from 1970 to 2006. Since our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions (VARs). We find that the PC is downward-sloping with a slope of -3.58 in the long-run. Furthermore, during the stagflating 70s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, while the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 90s were both responsible for the significant lowering of the unemployment rate. |
| Keywords: | New Phillips curve; frictional growth; productivity growth; stagflating seventies; roaring nineties; impulse response functions |
| JEL: | E24 E31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2008-06&r=cba |
| By: | Claude Lopez |
| Abstract: | This study investigates the stationary behavior of the inflation rates for the Euro- zone members and some neighboring countries, for the 1957:2 to 2007:3 period. The analysis uses univariate unit root tests with enhanced small-sample performances that allow up to two breaks in the intercept, namely those of Elliott et al. (1996) and Lopez (2008). The results strongly reject the unit root null hypothesis for all the countries. Furthermore, they demonstrate that some of the Euro-zone inflation rates are stationary and others are regime-wise stationary. While such results may reconcile some of the literature findings and provide empirical evidence that the Maastricht criterion is respected, they also highlight the importance of accounting for breaks when studying these series. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2008-02&r=cba |
| By: | Roman Horvath |
| Abstract: | This paper examines the time-varying policy neutral interest rate in real time for the Czech Republic in 2001:1-2006:09, estimating various specifications of simple Taylor-type monetary policy rules. For this reason, we apply a structural time-varying parameter model with endogenous regressors. The results indicate that the policy neutral rate gradually decreased over the sample period to levels comparable to those in the euro area. Next, we propose a measure of the monetary policy stance based on the deviation of the actual interest rate from the estimated policy neutral rate and find it a useful predictor of the level as well as the change of the future inflation rate. |
| Keywords: | Policy neutral rate, Taylor rule, time-varying parameter model with endogenous regressors. |
| JEL: | E43 E52 E58 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/4&r=cba |
| By: | Javier Andrés (Universidad de Valencia); David López-Salido (Federal Reserve Board); Edward Nelson (Federal Reserve Bank of St. Louis) |
| Abstract: | We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate. |
| Keywords: | Money, natural rate, New Keynesian models |
| JEL: | E51 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0805&r=cba |
| By: | Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden) |
| Abstract: | This paper addresses two important questions that have, so far, been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data, which is hard to replicate using standard macro models. Building a small-scale macroeconomic model and estimating it on U.S. and U.K. data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes and that U.S. monetary policy is best understood as originating from a discretionary regime since 1960. |
| Keywords: | long-term interest rates; optimal monetary policy; discretion; commitment; Bayesian estimation |
| JEL: | C11 C13 C15 E32 E42 E43 E47 E50 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0220&r=cba |
| By: | George-Marios Angeletos; Alessandro Pavan; Christian Hellwig |
| Abstract: | This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenses by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns to defending the peg - its "type" - is intermediate. (ii) Devaluation occurs only for low types. (iii) the set of types who intervene shrinks with the precision of market information. (iv) A unique equilibrium policy survives in the limit as the noise in market information vanishes, whereas the devaluation outcome remains indeterminate. (v) The payoff of the central bank is monotonic in its type. (vi) The option to intervene can be harmful only for sufficiently strong types; and when this happens, weak types are necessarily better off. While these predictions seem reasonable, none of them would have been possible in the common-knowledge version of the model. Combined, these results illustrate the broader methodological point of the paper: global games can retain significant selection power and deliver useful predictions even when the endogeneity of information sustains multiple equilibria. |
| Keywords: | global games, robust predictions, signaling, currency crises, regime change, multiple equilibria. |
| JEL: | C7 D8 E5 E6 F3 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1459&r=cba |
| By: | Rudiger Ahrend; Boris Cournède; Robert Price |
| Abstract: | This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances -- the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether “macro-prudential” regulation could be useful. <P>Politique monétaire, excès des marchés et troubles financiers <BR>Dans quelle mesure la politique monétaire a-t-elle pu conduire à des excès dans les marchés d'actifs réels et financiers et in fine mener aux récentes perturbations financières ? Cette étude aborde cette question en fournissant des éléments qui laissent à penser que, lorsque les taux courts se trouvent de manière durable nettement au-dessous de ce que prescrirait une règle de Taylor, les prix des actifs, notamment immobiliers, ont tendance à s'élever (hormis ceux des actions). D'importantes augmentations des prix des actifs sont aussi observées lors des périodes de dérégulation ou d'innovation financières. Cette étude avance des arguments selon lesquels le relâchement monétaire observé en 2002-2005, se combinant à une rapide innovation financière, apparaît rétrospectivement comme l'un des facteurs ayant contribué à l'envolée des prix des actifs et au gonflement des déséquilibres financiers qui en a résulté, un processus dont la résorption a alimenté les troubles financiers de 2007. En outre, cette étude souligne que, dans certaines situations, les taux directeurs sont un instrument peu adapté pour répondre à la formation et au dégonflement de déséquilibres financiers, ce qui soulève la question de savoir si la réglementation « macro-prudentielle » ne serait pas alors plus utile. |
| Keywords: | financial markets, marchés financiers, housing, logement, house prices, regulation, monetary policy, politique monétaire, asset prices, prix des actifs, interest rate, taux d'intérêt |
| JEL: | E44 E5 F3 G15 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:597-en&r=cba |
| By: | Mario J. Crucini (Department of Economics, Vanderbilt University (E-mail: mario.crucini@vanderbilt.edu)); Mototsugu Shintani (Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mototsugu.shintani@vanderbilt.edu, mototsugu.shintani@boj.or.jp)); and Takayuki Tsuruga (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: takayuki.tsuruga@boj.or.jp)) |
| Abstract: | Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law- of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.- Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment. |
| Keywords: | Good-level Real Exchange Rates, Law of One Price, Sticky Information, Dynamic Panel |
| JEL: | E31 D40 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-05&r=cba |
| By: | Chengsi Zhang (School of finance, Renmin University of China, China); Denise R. Osborn (Center for Growth and Business Cycle Research, Economics,University of Manchester, UK); Dong Heon Kim (Department of Economics, Korea University, Seoul, South Korea) |
| Abstract: | Empirical estimations of the micro-founded New Keynesian Phillips Curve (NKPC) using rational inflation expectation proxies have often found that the output gap is an invalid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation when observed measures of inflation expectations are used in conjunction with the output gap. The paper also contributes to the literature by addressing the important problem of serial correlation in the stylized NKPC and developing an extended model to account for this serial correlation. Contrary to recent results indicating no role for the output gap, we find it to be a statistically significant driving variable for inflation, with this finding robust to whether the inflation expectations series used relates to individual consumers, professional forecasters or the US Fed. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models. |
| Keywords: | New Keynesian Phillips Curve, serial correlation, GMM, inflation forecasts |
| JEL: | E31 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0801&r=cba |
| By: | Paolo Del Giovane (Banca d'Italia); Silvia Fabiani (Banca d'Italia); Roberto Sabbatini (Banca d'Italia) |
| Abstract: | This study investigates inflation perceptions in both qualitative and quantitative terms and their relationship with factors likely to affect them. This has been done in a unified framework through a survey of a representative sample of Italian consumers carried out at the end of 2006. The results show that reported inflation is, on average, much higher than measured by official statistics. Inflation perceptions are higher for women, the unemployed and less educated individuals, as well as for consumers with some forms of financial distress. A very low knowledge of the inflation concept and related statistics and an inaccurate memory of past prices turn out to play a significant role in explaining the highest class of perceptions. In contrast, the characteristics of individual shopping activity do not result to be significant. All in all, these results suggest that when consumers express their opinions on what they report as “inflation”, they are incorporating a complex combination of forces that go well beyond the phenomena measured by official inflation statistics. |
| Keywords: | inflation, consumers, perceptions, euro |
| JEL: | D12 E31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_655_08&r=cba |
| By: | Jan J.J. Groen (Federal Reserve Bank of New York); George Kapetanios (Queen Mary, University of London) |
| Abstract: | This paper revisits a number of data-rich prediction methods, like factor models, Bayesian ridge regression and forecast combinations, which are widely used in macroeconomic forecasting, and compares these with a lesser known alternative method: partial least squares regression. Under the latter, linear, orthogonal combinations of a large number of predictor variables are constructed such that these linear combinations maximize the covariance between the target variable and each of the common components constructed from the predictor variables. We provide a theorem that shows that when the data comply with a factor structure, principal components and partial least squares regressions provide asymptotically similar results. We also argue that forecast combinations can be interpreted as a restricted form of partial least squares regression. Monte Carlo experiments confirm our theoretical result that principal components and partial least squares regressions are asymptotically similar when the data has a factor structure. These experiments also indicate that when there is no factor structure in the data, partial least squares regression outperforms both principal components and Bayesian ridge regressions. Finally, we apply partial least squares, principal components and Bayesian ridge regressions on a large panel of monthly U.S. macroeconomic and financial data to forecast, for the United States, CPI inflation, core CPI inflation, industrial production, unemployment and the federal funds rate across different sub-periods. The results indicate that partial least squares regression usually has the best out-of-sample performance relative to the two other data-rich prediction methods. |
| Keywords: | Macroeconomic forecasting, Factor models, Forecast combination, Principal components, Partial least squares, (Bayesian) ridge regression |
| JEL: | C22 C53 E37 E47 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp624&r=cba |
| By: | Knüppel, Malte |
| Abstract: | In this paper, we investigate the ability of a modified RBC model to reproduce asymmetries observed for macroeconomic variables over the business cycle. In order to replicate the empirical skewness of major U.S. macroeconomic variables, we introduce a capacity constraint into an otherwise prototypical RBC model. This constraint emerges due to the assumption of kinked marginal costs of utilization, where the kink is located at a utilization rate of 100 percent. We find that a model with a suitably calibrated cost function reproduces the empirical coecients of skewness remarkably well. |
| Keywords: | Capacity utilization, capacity constraints, asymmetry, RBC model |
| JEL: | E32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7036&r=cba |
| By: | Lenza, Michele |
| Abstract: | This paper studies optimal monetary policy responses in an economy featuring sectorial heterogeneity in the frequency of price adjustments. It shows that a central bank facing heterogeneous nominal rigidities is more likely to behave less aggressively than in a fully sticky economy. Hence, the supposedly excessive caution in the conduct of monetary policy shown by central banks could be partly explained by the existence of a relevant sectorial dispersion in the frequency of price adjustments. |
| Keywords: | core inflation, elasticity of intertemporal substitution, heterogeneity, nominal rigidity |
| JEL: | E43 E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7035&r=cba |
| By: | Ari Aisen; David Hauner |
| Abstract: | We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system GMM. There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low. |
| Keywords: | Budget deficits , Interest rates , Fiscal policy , |
| Date: | 2008–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/42&r=cba |
| By: | Raffaela Giordano (Bank of Italy, Economic Research and International Relations); Sandro Momigliano (Bank of Italy, Economic Research and International Relations); Stefano Neri (Bank of Italy, Economic Research and International Relations); Roberto Perotti (IGIER- Bocconi University) |
| Abstract: | This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables. |
| Keywords: | Fiscal policy, Government spending, Fiscal multipliers, VAR |
| JEL: | E62 H30 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_656_08&r=cba |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper investigates the changing patterns and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net exports and various forms of capital flows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows. |
| JEL: | F15 F21 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13902&r=cba |
| By: | Isabelle Joumard; Christophe André |
| Abstract: | Tax receipts surged between 2005 and 2007 in many OECD countries, resulting in significant improvements in headline fiscal positions. As a consequence, pressures for tax cuts and for public spending increases have emerged. In the past, responding to such demands has permanently weakened budget positions as revenue windfalls ultimately proved to be temporary. Hence, the opportunity to address structural deficit problems and prepare for future demographic trends has been lost, and the ability to respond to subsequent cyclical downturns has been weakened. This paper provides an analysis of the factors behind recent revenue buoyancy and examines past responses to unexpected revenue gains. It also discusses whether improved information on fiscal positions and future fiscal challenges, combined with relevant fiscal rules, might help in avoiding a repetition of past errors in fiscal policy. <P>Dynamisme des recettes fiscales et implications de politique budgétaire <BR>Les recettes budgétaires ont fortement progressé entre 2005 et 2007 dans de nombreux pays de l'OCDE, provoquant une nette amélioration des soldes budgétaires. Cela a généré de nouvelles demandes de réductions d?impôts ou d?accroissement des dépenses publiques. Dans le passé, les gouvernements ont fréquemment cédé à ces demandes alors que les embellies de ressources n'étaient que temporaires, entrainant une détérioration durable des soldes budgétaires. En conséquence, des opportunités de réduire les déficits structurels et de préparer les sociétés aux évolutions démographiques ont été manquées. La capacité à répondre à un retournement ultérieur de la conjoncture s?en est aussi trouvée amoindrie. Ce document fournit une analyse des facteurs sous-tendant le dynamisme récent des recettes fiscales et examine comment les gouvernements y ont répondu dans le passé. Il discute également des moyens d'éviter la répétition des erreurs de politique budgétaire passées, et notamment du rôle de règles budgétaires appropriées ainsi que d'une meilleure information sur les situations budgétaires et les défis à venir. |
| Keywords: | fiscal policy, politique budgétaire, fiscal rules, règles budgétaires |
| JEL: | H2 H3 H6 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:598-en&r=cba |
| By: | Gabriel Di Bella |
| Abstract: | This paper proposes a framework for public debt sustainability analysis (DSA) that is complementary to that generally used by IFIs. The DSA in this paper has three components: (i) an integrated and consistent accounting framework for the Consolidated Public Sector (CPS); (ii) the estimation of an appropriate, and country-specific debt threshold, following the approach proposed by Reinhart, Rogoff and Savastano (2003); and (iii) a method for the calculation of the CPS primary balance to achieve the desired debt targets, without resorting to ad-hoc assumptions for the values of the macroeconomic variables during the planning horizon, in the spirit of Garcia and Rigobon (2004) and Celasun, Debrun and Ostry (2006). The paper uses this approach to analyze the sustainability of the Dominican Republic's Public Debt. |
| Keywords: | Debt sustainability , Dominican Republic , Public debt , |
| Date: | 2008–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/58&r=cba |
| By: | Frisell, Lars (Financial Stability Department, Central Bank of Sweden); Roszbach, Kasper (Research Department, Central Bank of Sweden); spagnolo, giancarlo (University of Rome) |
| Abstract: | We study the specific corporate governance problems of central banks in their complex role of inflation guardians, bankers’ banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review the current institutional arrangements of a number of central banks, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information. Research on central bank governance appears to have focused almost only on their monetary policy task. As shown by the sub-prime loan market turmoil, central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their stability. In this paper, we contrast the current governance practices at central banks with the structures suggested in the corporate governance literature. Our analysis highlights a number of specific issues that appear to have been unsatisfactorily addressed by existing research, such as the incentive structure for governors and board members, the balance between central banks’ multiple objectives and the need for term limits. |
| Keywords: | accountability; bank regulation; board structure; central banks; corporate governance; central bank independence; governor remuneration; term limits |
| JEL: | E58 G18 G34 G38 |
| Date: | 2008–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0221&r=cba |
| By: | Weber, Anke |
| Abstract: | This paper develops a theoretical model of dynamic decision-making of a monetary policy committee with heterogeneous members. It investigates the optimal transparency, and the optimal way of transmitting information of committees, by analysing the effects different communication strategies have on financial markets. It is shown that the communication strategy of the central bank committee has a significant effect on the predictability of monetary policy decisions when there is asymmetric information between the committee and market agents. Transparency about the diversity of views of the committee surrounding the economic outlook makes future monetary policy more predictable. However, communicating the diversity of views regarding monetary policy decisions may lead to less predictability of monetary policy in the short term. In addition, it is shown that communication in the form of voting records has the greatest effect on market participants' near term policy expectations. These results support findings of the empirical literature and have strong implications for the optimal communication strategies of committees including the question whether individual voting records should be published. |
| Keywords: | Monetary Policy Committees, Uncertainty, Communication, Transparency |
| JEL: | E50 E52 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7037&r=cba |
| By: | Peter Stella |
| Abstract: | Central bank financial strength is positively associated with good policy performance. Financially weak central banks generate losses which undermine macroeconomic stability and call into question the credibility of their policies. In assessing central bank financial strength a careful examination of the policy regime and the volatility of the economic environment is necessary. Conventional measures of private enterprise financial strength- profitability and capital-can be very misleading when applied to central banks. The way in which a central bank balance sheet is strengthened matters. Providing the central bank with marketable government debt that can be used to develop a money market that in turn may become the locus of central bank monetary operations serves both to directly strengthen the institution and improve the quality of the environment in which it operates, thereby facilitating the attainment of its ultimate performance objectives. |
| Keywords: | Central banks , Transparency , Fiscal policy , Fiscal stability , Inflation , |
| Date: | 2008–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/49&r=cba |
| By: | Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Department for Structural Economic Analysis) |
| Abstract: | Whether discretionary fiscal policies in industrialized countries act counter- or pro-cyclically and whether their reaction is symmetric or asymmetric over the cycle are still largely unsettled questions. This uncertainty remains even when attention is restricted to euro-area countries, where these questions have important implications for the debate on European fiscal rules. We review the recent empirical literature to explain why the results of the various studies differ so greatly. We find that differences are driven partly by the choices made in modelling fiscal behaviour and in the related notions of fiscal policy cyclicality. Results are also affected by data source and vintage (ex post or real-time). The time period chosen is relatively less important. We conclude that the notion of pro-cyclical fiscal policies often upheld in the debate is not justified by the data. Ex post data suggest either a-cyclicality or weak counter-cyclicality. Real-time information gives clearer indications of counter-cyclical behaviour, especially when we progress from a very simple “core” model to a more complex one, including at least the impact of fiscal rules. As for symmetry or asymmetry, the answer varies with sources of data and time periods. With the more complex model the indications of asymmetric behaviour are more robust. Whenever asymmetry is present, it entails shifts in all the parameters of the fiscal rule and not necessarily in the output gap parameter. |
| Keywords: | fiscal policy, euro-area countries, fiscal rules, pro and counter-cyclical policies, policy symmetry over the cycle, ex post and real-time data, dynamic panel models. |
| JEL: | E61 D72 E62 H60 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_654_08&r=cba |
| By: | Paolo Epifani; Gino Gancia |
| Abstract: | This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the first mechanism is inefficient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our findings raise warnings that globalization may have led to inefficiently large governments. |
| Keywords: | Openness, Government Size, Terms of Trade Externality, Elasticity of Substitution between Imports and Exports |
| JEL: | F1 H1 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:359&r=cba |
| By: | Peter Blair Henry; Diego Sasson |
| Abstract: | For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 752 US dollars -- an increase equal to more than a quarter of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers' incomes actually coincides with a rise in manufacturing sector profitability. |
| JEL: | E2 F3 F4 F41 J3 O4 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13880&r=cba |
| By: | Helge Berger; Pär Österholm |
| Abstract: | We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice. |
| Keywords: | Inflation , Euro Area , Demand for money , Monetary policy , Monetary aggregates , |
| Date: | 2008–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/53&r=cba |
| By: | Bottazzi, L.; Da Rin, M.; Hellmann, T. (Tilburg University, Center for Economic Research) |
| Abstract: | We develop a theory and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor?s legal system is more important than that of the company in determining investor behavior. |
| Keywords: | Financial Intermediation;Law and Finance;Corporate Governance;Venture Capital |
| JEL: | G20 G30 G24 K22 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200830&r=cba |
| By: | Christopher D. Carroll; Jiri Slacalek; Martin Sommer |
| Abstract: | We estimate the degree of 'stickiness' in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well. |
| JEL: | E21 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13876&r=cba |
| By: | Matteo Iacoviello (Boston College); Stefano Neri (Bank of Italy, Economics and International Relations) |
| Abstract: | The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles. |
| Keywords: | House prices, Collateral Constraints, Bayesian methods, Two-sector Models |
| JEL: | E32 E44 E47 R21 R31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_659_08&r=cba |
| By: | Trevon D. Logan |
| Abstract: | A recent literature has advanced the use of Engel curves to estimate overall CPI bias. In this paper, I show that the methodology is sensitive to the modeling of household demography. Existing estimates of CPI bias do not account for the changing effect of household size on budget shares, and this can lead to omitted variable bias. Since the effect of household size on demand changes over time the drift in Engel curves attributed to CPI bias is partially explained by this effect. My estimates of the annual rate of CPI bias from 1888 to 1935 are changed by at least 25%, and usually more than 50%, once the changing effect of household size is accounted for. |
| JEL: | D1 E3 J1 N3 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13870&r=cba |
| By: | Joshua Aizenman; Jaewoo Lee |
| Abstract: | This paper examines the degree to which the learning by doing externality [LBD] calls for an undervalued exchange rate, a policy suggested by recent empirical studies which concluded that mildly undervalued real exchange rate may enhance growth. We obtain mixed results. For an economy where LBD externality operates in the traded sector, real exchange rate undervaluation may be used in order to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. Yet, we also find that these results are not robust to changes in the nature of the LBD externality. If the LBD externality is embodied in aggregate investment, the optimal policy calls for subsidizing the cost of capital in the traded sector, and there is no room for undervalued exchange rate policy. In addition, a deliberate undervaluation by means of hoarding reserves may backfire if the needed sterilization would increase the cost of investment in the traded sector. |
| JEL: | F13 F15 F31 F43 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13853&r=cba |
| By: | Tiziana Assenzay; Michele Berardi |
| Abstract: | In this work we analyze a credit economy à la Kiyotaki and Moore (JPE, 1997) enriched with learning dynamics. Both borrowers and lenders need to make expectations about the future price of the collateral, and under heterogeneous learning this can have interesting consequences for the economy when the possibility of bankruptcy is taken into consideration. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:100&r=cba |
| By: | H. Peyton Young |
| Abstract: | A person learns by trial and error if he occasionally tries out new strategies, rejecting choices that are erroneous in the sense that they do not lead to higher payoffs. In a game, however, strategies can become erroneous due to a change of behavior by someone else. We introduce a learning rule in which behavior is condition on whether a player experiences an error of the first or second type. This rule, called interactive trial and error learning, implements Nash equilibrium behavior in any game with generic payoffs and at least one pure Nash equilibrium. |
| Keywords: | Learning, Adaptive Dynamics, Nash Equilibrium, Bounded Rationality |
| JEL: | C72 D83 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:384&r=cba |
| By: | Orsetta Causa |
| Abstract: | This working paper investigates the policy determinants of hours worked among employed individuals in OECD countries, focussing on the impact of taxation, working-time regulations, and other labour and product market policies. It explores the factors underlying cross-country differences in hours worked — in line with previous aggregate approaches — while at the same time it looks more closely at labour force heterogeneity — in the vein of microeconomic labour supply models. The paper shows that policies and institutions have a different impact on working hours of men and women. Firstly, while high marginal taxes create a disincentive to work longer hours for women, their impact on hours worked by men is almost insignificant. Secondly, working-time regulations have a significant impact on hours worked by men, and this impact differs across education categories. Thirdly, other labour and product market policies, in particular stringent employment protection of workers on regular contracts and competition-restraining product market policies, have a negative impact on hours worked by men, over and beyond their impact on employment levels. <P>Expliquer les différences d’heures travaillées dans les pays de l’OCDE : une analyse empirique <BR>Résumé: Cet article analyse les déterminants politiques des heures travaillées par la population employée dans les pays de l‘OCDE. Ce travail porte sur l‘impact des taxes, des réglementations du temps de travail, et des politiques du marché du travail et du marché des produits sur la marge intensive de l‘utilisation du travail. Il s‘interroge sur les facteurs sous-jacents les différences d‘heures travaillées — en ligne avec les approches agrégées — mais analyse également l‘hétérogénéité de la force de travail-dans la veine des analyses microéconomiques de l‘offre de travail. Cet article montre que les politiques et les institutions ont un impact sur les heures travaillées par différentes sous-populations composant la force de travail. Pour résumer, tandis que les heures travaillées par les femmes sont sensibles à la fiscalité du travail, les heures travaillées par les hommes répondent davantage aux réglementations sur la durée du temps de travail ainsi qu‘aux politiques du marché du travail et du marché des produits. Premièrement, alors qu‘un niveau élevé de taxation marginale implique une désincitation à augmenter le nombre d‘heures travaillées chez les femmes, l‘impact de la fiscalité sur les heures travaillées par les hommes est nul. Deuxièmement, la réglementation sur la durée du temps de travail a un impact significatif sur les heures travaillées par les hommes, et cet impact varie en fonction du niveau d‘éducation. Troisièmement, d‘autres politiques structurelles, et en particulier la rigueur de la protection de l‘emploi sur les contrats permanents, ainsi qu‘une réglementation anti compétitive du marché des produits, ont un impact négatif sur les heures travaillées par les hommes, par-delà leur impact sur leur niveau d‘emploi. |
| Keywords: | taxation, labour market policies, politique du marché du travail, offre de travail, labour supply |
| JEL: | H31 J22 J58 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:596-en&r=cba |
| By: | Amendola, Nicola |
| Abstract: | According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share. |
| Keywords: | Money; Search; Double Coincidence; Bargaining |
| JEL: | C78 E40 |
| Date: | 2008–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7839&r=cba |
| By: | Fatih Ozatay (Department of Economics, ETU); Erdal Ozmen (Department of Economics, METU); Gülbin Sahinbeyoglu (CBRT) |
| Abstract: | This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we employ not only the conventional panel data estimation procedures but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals proxied by sovereign country ratings are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to US macroeconomic news and changes in the Federal Reserve’s target interest rates. The magnitude and the sign of the effect of US macroeconomic news, however, crucially depend on the state of the US economy, such as the presence of an inflation dominance. |
| Keywords: | Bond spreads, Emerging markets, Macroeconomic news |
| JEL: | E43 E58 F36 G14 G15 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:0707&r=cba |
| By: | Adriana Moreira Amado (UnB); Marco Flávio da Cunha Resende (Cedeplar-UFMG); Frederico G. Jayme Jr. (Cedeplar-UFMG) |
| Abstract: | The Minskyan approach to financial instability and its effects on the real economy have recently been revived in order to explain the exchange rate crises undergone by the so-called emergent economies. Economies of this type are characterized by repeated scarcity of foreign currency, which can be explained by using Neo-Schumpeterian theory. Based on the Minskyan approach and on the Neo-Schumpeterian literature, this study seeks to demonstrate that there is a cyclic recurrence of exchange rate crises in Latin-American (peripheral) economies. By using data on international liquidity, the balance of payments and the increase in production in the G7 economies and in thirteen Latin-American economies, it was found that the Latin-American economies mirror the cycles of international liquidity. |
| Keywords: | financial instability, national innovation system, cycles |
| JEL: | F32 F33 F43 O30 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdp:texdis:td327&r=cba |
| By: | Melolinna, Marko (Bank of Finland Research) |
| Abstract: | This paper introduces a methodology for identifying oil supply shocks in a restricted VAR system for a small open economy. Financial market information is used to construct an identification scheme that forces the response of the restricted VAR model to an oil shock to be the same as that implied by futures markets. Impulse responses are then calculated by using a bootstrapping procedure for partial identification. The methodology is applied to Finland and Sweden in illustrative examples in a simple 5-variable model. While oil supply shocks have an inflationary effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is more ambiguous. |
| Keywords: | oil futures; partial identification; macroeconomic shocks |
| JEL: | C01 E32 E44 |
| Date: | 2008–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_009&r=cba |
| By: | Ting Qin; Walter Enders (Department of Economics, St. Cloud State University) |
| Abstract: | A key feature of Gallant’s Flexible Fourier Form is that the essential characteristics of one or more structural breaks can be captured using a small number of low frequency components from a Fourier approximation. We introduce a variant of the Flexible Fourier Form into the trend function of U.S. real GDP in order to allow for gradual effects of unknown numbers of structural breaks occurring at unknown dates. We find that the Fourier components are significant and that there are multiple breaks in the trend. In addition to the productivity slowdown in the 1970s, our trend also captures a productivity resumption in the late 1990s and a slowdown in the late 1950s. Our cycle corresponds very closely to the NBER chronology. We compare the decomposition from our model with those from a standard unobserved components model, the HP filter, and the Perron and Wada (2005) model. We find that our decomposition has several favorable characteristics over the other models and has very different implications about the recovery from the recent recession. |
| Keywords: | Flexible Fourier Form, Smooth Trend Breaks, Fourier Approximation |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:scs:wpaper:0809&r=cba |
| By: | Daniel Cohen; Pierre Jacquet; Helmut Reisen |
| Abstract: | Cancelling of poor-country debt does not mean that the best way to give aid is through grants only. Aid through loans may often prove superior, provided that it maintains debt sustainability. A new scheme for soft loans is suggested, with higher interest rates and cancellation provisions if bad shocks occur, to minimise moral hazard and strengthen debt sustainability |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:devaac:44-en&r=cba |
| By: | Arellano, Cristina |
| Abstract: | Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina. |
| JEL: | F34 F32 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7867&r=cba |
| By: | Eva Carceles-Poveda (SUNY Stony Brook); Chryssi Giannitsarou (University of Cambridge) |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:carceles08&r=cba |
| By: | Liem Hoang-Ngoc (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Bruno Tinel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Cette contribution discute les théories de la crise de l'Etat social. Par un examen des transformations des normes de contrôle social de la production et la répartition des revenus en France au cours des trente dernières années, elle soutient que nous sommes déjà sortis de l’Etat social. L’inefficacité du modèle actuel n’est dès lors pas attribuable aux « rigidités » de l’Etat social, mais aux effets pervers des politiques néo-libérales dont l’impact sur les formes de contrôle de l’investissement et de la répartition des revenus est d’ores et déjà avéré. |
| Keywords: | Etat social ; crise du fordisme ; politique économique ; politique salariale ; politique fiscale ; politique industrielle ; politique de l'emploi |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00264786_v1&r=cba |
| By: | Erik Schokkaert |
| Abstract: | Capabilities and functionings are new and attractive concepts for assessing the well-being and advantage of individuals. Functionings refer to a person’s achievements, i.e. what she manages to do or to be. Capabilities refer to her real opportunities and incorporate the idea of freedom. We discuss how recent theoretical and empirical work has improved our insights in some of the key questions of the approach. How to measure opportunities and how to balance freedom and responsibility? How to formulate a list of capabilities which can be used to analyse changes over time and differences between different societies without being open to manipulation? How to construct an overall index of well-being and what should be the relative role of a priori ethical evaluations and of the opinions of the individuals themselves? What is the relationship between measures of well-being and advantage at the individual and at the aggregate level? To make further progress it is crucial, first, to estimate structural models with individual data, analysing the link between individual achievements, the socioeconomic and environmental background of the persons concerned and the specific features of the individual processes of choice and decision-making; and, second, to integrate the insights from these models in a coherent ethical framework specifying the role of individual preferences and the limits of personal responsibility. |
| Keywords: | capabilities, opportunities |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0734&r=cba |
| By: | Ariel Rubinstein |
| Date: | 2008–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001984&r=cba |
| By: | Yuri Maksimenko |
| Abstract: | A hypothesis has been suggested for economics to become a natural science. The object of the science would be the system of reproduction of the life of people. The source of data would be the vague perceptions of experts. The instrument would be a language of generalized terms. The criterion of truth would be the consensus of opinions. The sphere of application would be the global economy. The method of application would be the proliferation of knowledge through the World Wide Web to produce social synergy forces within the economy. |
| JEL: | A10 A12 A13 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mce:nonmon:0010&r=cba |
| By: | Peter Jarrett; Céline Letremy |
| Abstract: | Switzerland has had a long-standing surplus on its current account. But over the past 15 years that surplus has surged to levels unmatched by nearly any other OECD country at any point. This paper looks at the surplus from a balance of payments vantage point as well as from the optic of the excess of national saving over domestic investment. It then seeks possible explanations for the uptrend and assesses whether it results to any extent from market, institutional or policy failures that could call for reforms. A number of important measurement issues are raised. But the key recommendation is that the authorities should prepare for a possible sharp increase in the value of the Swiss franc if and when investors engaged in the “carry trade” unwind their positions. To that end they should examine labour, capital and product markets with a view to ensuring they are as flexible as possible and that factors are as mobile as possible, both geographically and sectorally. This will allow any necessary adjustment to a higher exchange rate to be smoothly accommodated. This Working Paper is largely extracted from the 2007 OECD Economic Survey of Switzerland (www.oecd.org/eco/survey/switzerland). <P>La signification du colossal excédent des paiements courants de la Suisse <BR>La Suisse affiche depuis fort longtemps un excédent des paiements courants. Toutefois, au cours des 15 dernières années, cet excédent a atteint des niveaux quasiment sans précédent pour la zone OCDE. Dans le présent document, nous examinons cet excédent tant sous l’angle de la balance des paiements que dans l’optique de l’excédent de l’épargne nationale sur l’investissement intérieur. Nous recherchons ensuite les explications possibles de cette hausse, et tentons de déterminer si elle résulte dans quelque mesure que ce soit de défaillances des marchés, des institutions ou de l’action publique pouvant exiger la mise en oeuvre de réformes. Nous soulevons divers problèmes de mesure importants, mais notre principale recommandation est que les autorités devraient se préparer à la forte appréciation du franc suisse qui pourrait se produire dès lors que les investisseurs engagés dans des opérations de portage (« carry trade ») dénoueraient leurs positions. Dans cette optique, elles devraient examiner la situation des marchés du travail, des capitaux et des produits afin de veiller à ce qu’ils soient aussi flexibles que possible et à ce que la mobilité des facteurs de production soit maximale, tant en termes géographiques que sectoriels. Cela permettra un ajustement en douceur de l’économie en cas de hausse du taux de change. Ce Document de travail est largement extrait de l’Étude économique de l’OCDE de la Suisse 2007 (www.oecd.org/eco/etudes/suisse). |
| Keywords: | Switzerland, Suisse, current account, compte courant |
| JEL: | E01 E21 E22 E44 E58 E65 F31 F32 O52 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:594-en&r=cba |
| By: | Stephen G Hall; Qian Guo |
| Abstract: | In this paper we investigate the relevance of the Balassa-Samuelson effect to the determination of regional inflation in China, for the period 1985 – 2000. To do this, we first construct annual measures of Chinese inflation and industry input on regional and sectoral basis. Then we generalize the Asea and Mendoza (1994) settings to consider asymmetric productivity shocks across sectors. Testing this model on Chinese Regional Data aid of non-stationary panel data techniques, it shows that our extended theoretical model is a good empirical representation of the Chinese data which supports the Balassa- Samuelson effect. Moreover, we are able to test the Asea and Mendoza (1994) version of our general model and find that the restrictions are rejected. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:08/8&r=cba |
| By: | Thomas Harjes; Luca Antonio Ricci |
| Abstract: | This paper estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation. |
| Keywords: | Inflation targeting , South Africa , Inflation , Energy prices , Exchange rate instability , Demand , |
| Date: | 2008–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/48&r=cba |
| By: | Carrera, Jorge Eduardo/J.E. |
| Abstract: | Currency board (CB) was a corner solution for Argentine hyperinflation, however its balance is controversial. How does a CB work as a long run regime? After evaluating the result of ten years CB regime, we obtain important lessons for a monetary union and for dollarization proposals. We discuss: 1) the capacity of such a regime to deal with real and nominal volatility, 2) fiscal problems and debt dynamics, 3) financial problems under currency substitution, 4) CB regime compared with dollarization and 5) the feasibility of a single–peg CB in a flexible exchange rate world. |
| Keywords: | Currency board; Dollarization; Monetary union; Fiscal policy and Monetary policy |
| JEL: | F34 F32 F41 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7843&r=cba |
| By: | Holger Floerkemeier; Mariusz A. Sumlinski |
| Abstract: | In recent years, the South Caucasus and Central Asia countries (CCA-6) have received significant foreign exchange inflows. While a healthy reserve buffer is desirable to selfinsure against external crises, holding international reserves also involves costs. We analyze the adequacy of CCA-6 reserves using widely recognized rules of thumb, and simulate optimal reserve levels applying the Jeanne (2007) model. Both the adequacy measures and the model-based simulations indicate that, with the exception of Tajikistan, CCA-6 reserves had increased to broadly comfortable levels by 2006. More recently, reserve adequacy has been tested in Kazakhstan, which has been affected by the 2007 global liquidity crunch. |
| Date: | 2008–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/41&r=cba |
| By: | Osmani T. Guillen; Benjamin M. Tabak |
| Abstract: | This paper studies the Brazilian term structure of interest rates and characterizes how the term premia has changed over time. We employ a Kalman filter approach, which is extended to take into account regime switches and overlapping forecasts errors. Empirical evidence suggests that term premia depends on international global liquidity and domestic factors such as the composition of public debt and inflation volatility. These results provide guidance for the formulation of fiscal and monetary policies. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:158&r=cba |
| By: | Fabia A. de Carvalho; Cyntia F. Azevedo |
| Abstract: | There is consensus in the economic literature that the reserve requirements are a tax levied upon financial intermediation, yet the incidence of the tax remains controversial. In this paper, we test whether changes in reserve requirements in Brazil impact the stock returns of the financial system distinctly from the rest of the economy. We find evidence that Brazilian bank stock returns were affected by changes in reserve requirements on both time deposits and transaction accounts, which implies that the tax burden of required reserves was not fully passed through to banks' borrowers or clients. Stock returns of non-financial firms were also affected by these changes, suggesting that in some cases, reserve requirements on time deposits and transaction accounts served as a non-neutral instrument of monetary or fiscal policy in Brazil. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:160&r=cba |
| By: | Raj Arunachalam; Trevon Logan |
| Abstract: | This paper is the first systematic attempt to measure the existence and degree of dowry inflation in South Asia. The popular press and scholarly literature have assumed dowry inflation in South Asia for some time, and there are now a number of theoretical papers that have attempted to explain the rise of dowries in South Asia. Despite these advances, there has been no systematic study of dowry inflation. Using large-sample retrospective survey data from India, Bangladesh, Pakistan, and Nepal, we assess the empirical evidence for dowry infllation. We find no evidence that real dowry amounts have systematically increased over time in South Asia. |
| JEL: | C1 D1 J1 O10 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13905&r=cba |