|
on Macroeconomics |
|
Issue of 2005‒11‒12
forty-two papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Andreas Schabert (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam,The Netherlands.) |
| Abstract: | This paper examines monetary policy implementation in a ticky price model. The central bank’s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money injections. These equilibria are associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation is found to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank’s plan can uniquely be implemented in a history dependent way by money injections, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity. |
| Keywords: | Monetary policy implementation; optimal discretionary policy; history dependence; equilibrium indeterminacy; money growth policy. |
| JEL: | E52 E51 E32 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050533&r=mac |
| By: | Arnab Bhattacharjee; Christoph Thoenissen |
| Abstract: | We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric measures of the distance between model and data variance-covariance matrices to compare the different models. We find that the models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data. |
| Keywords: | Intertemporal macroeconomics, role of money, monetary policy, model selection, moment matching. |
| JEL: | C13 E32 E52 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0511&r=mac |
| By: | Matteo Ciccarelli (Corresponding author: European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Benoît Mojon (Université de la Méditerranée and European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper shows that inflation in industrialized countries is largely a global phenomenon. First, inflations of (22) OECD countries have a common factor that alone account for nearly 70% of their variance. This large variance share that is associated to Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, Global Inflation is, consistently with standard models of inflation, a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a very robust "error correction mechanism" that brings national inflation rates back to Global Inflation. This model consistently beats the previous benchmarks used to forecast inflation 1 to 8 quarters ahead across samples and countries. |
| Keywords: | Inflation; common factor; international business cycle; OECD countries. |
| JEL: | E31 E37 F42 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050537&r=mac |
| By: | Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman |
| Abstract: | This paper provides a quantitative assessment of the use of fiscal stimulus to achieve full recovery from a severe recession when the potency of monetary policy weakens after hitting its zero interest-rate bound. By contrast, most of the numerous recent zero interest-rate bound papers have ignored the use of fiscal stimulus, preferring to examine whether monetary policy alone can revive the economy despite the zero bound. We obtain our estimates by adapting and simulating a macro-econometric model that has been recently econometrically estimated, updated, and statistically tested using U.S. times series data. By contrast, most of the recent zero bound papers do not use an econometrically-estimated model. If the U.S. economy were hit with a large negative demand shock that drives the unemployment rate up to 7.9%, we estimate that even aggressive monetary policy that drives long-term interest rates to near zero would reduce the unemployment rate only to 6.7%. Full recovery would be achieved, however, if the aggressive monetary policy were complemented by sufficient fiscal stimulus in the form of cash transfers or income tax cuts to households. We estimate that a quarterly transfer to households that peaks at 2.7% of quarterly GDP and phases out gradually as it is repeated over seven quarters (so that the cumulative transfer is roughly 12% of quarterly GDP) would reduce the unemployment rate in such a recession by nearly an additional percentage pointC from 6.7% to 5.9%. |
| JEL: | E62 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-19&r=mac |
| By: | Matteo Iacoviello (Boston College) |
| Abstract: | I construct a heterogeneous agents economy that mimics the time-series behavior of the US earnings distribution from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks driving the model using data on income inequality, on aggregate income and on measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt, and the diverging patterns in consumption and wealth inequality over time. In particular, I show that, while short-run changes in household debt can be accounted for by aggregate fluctuations, the rise in household debt of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality. |
| Keywords: | Credit constraints, Incomplete Markets, Income Inequality, Household Debt |
| JEL: | E31 E32 E44 E52 R21 |
| Date: | 2005–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:629&r=mac |
| By: | William Barnett (University of Kansas); Apostolos Serletis (University of Calgary); W. Erwin Diewert (University of British Columbia) |
| Abstract: | This is the front matter from the book, William A. Barnett and Apostolos Serletis (eds.), The Theory of Monetary Aggregation, published in 2000 by Elsevier in its Contributions to Economic Anaysis mongraph series. The front matter includes the Table of Contents and the Introduction by Barnett and Serletis and the Preface by W. Erwin Diewert. The volume contains a unified collection and discussion of W. A. Barnett's most important published papers on financial aggregation theory and monetary economics. |
| Keywords: | monetary aggregation, money demand, Divisia, Divisia monetary aggregates, index number theory, aggregation theory |
| JEL: | E41 G12 C43 C22 |
| Date: | 2005–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511008&r=mac |
| By: | Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper analyses some fiscal aspects of mortgage debt in the EU. It first describes the main fiscal instruments that governments use to affect mortgage-financed home-ownership. In the empirical part, real mortgage debt growth is analysed for 15 EU countries using pooled regressions. Fiscal effects are included via after-tax interest rates. Other factors shown to be relevant for mortgage debt growth are house prices, financial deregulation, and stock markets while the effects of household income and inflation are less evident. Finally, the role of structural fiscal measures in reducing housing market volatility is highlighted. |
| Keywords: | Mortgage credit; loans; tax policy; income tax; interest deductibility. |
| JEL: | E51 E62 G21 H31 R21 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050526&r=mac |
| By: | Lars Svensson; Noah Williams |
| Abstract: | We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables. The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts---fan charts---of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting." |
| JEL: | E42 E52 E58 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11733&r=mac |
| By: | Lorenz Goette (University of Zurich); Rudolf Minsch (University of Applied Sciences, Chur, Switzerland); Jean-Robert Tyran (Department of Economics, University of Copenhagen) |
| Abstract: | We use a unique panel data set to analyze price setting in restaurants in Switzerland 1977-93, for items known to have sticky prices. The macroeconomic environment during this time period allows us to examine how firms adjust prices at low (0%) and fairly high (7%) inflation. Our results indicate that firms strongly react to inflation in the timing of their price adjustment: hazard of price changes is increasing with time and becomes steeper at higher inflation rates. However, we find little evidence that the amount by which they change the price responds to the inflation rate. |
| Keywords: | sticky prices; inflation; nominal inertia |
| JEL: | E30 E31 D21 B49 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0520&r=mac |
| By: | Joerg Bibow |
| Abstract: | This paper revisits KeynesÕs liquidity preference theory as it evolved from the Treatise on Money to The General Theory and after, with a view of assessing the theoryÕs ongoing relevance and applicability to issues of both monetary theory and policy. Contrary to the neoclassical Òspecial caseÓ interpretation, Keynes considered his liquidity preference theory of interest as a replacement for flawed saving or loanable funds theories of interest emphasizing the real forces of productivity and thrift. His point was that it is money, not saving, which is the necessary prerequisite for economic activity in monetary production economies. Accordingly, turning neoclassical wisdom on its head, it is the terms of finance as determined within the financial system that Òrule the roostÓ to which the real economy must adapt itself. The key practical matter is how deliberate monetary control can be applied to attain acceptable real performance. In this regard, it is argued that KeynesÕs analysis offers insights into practical issues, such as policy credibility and expectations management, that reach well beyond both heterodox endogenous money approaches and modern Wicksellian orthodoxy, which remains trapped in the illusion of money neutrality. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_427&r=mac |
| By: | G J Bratsiotis |
| Abstract: | Using a general equilibrium model this paper shows that when large monopolistic firms or unions perceive even a small influence on aggregate nominal variables, price targeting results in a higher equilibrium output than monetary accommodation. This is because price targeting increases, whereas monetary accommodation decreases, (i) the price elasticity of demand, (ii) the labour elasticity of demand and (iii) the elasticity of the wage with respect to households’ total real income (i.e. wage, money transfers and profits). Within this framework, price targeting is shown to reduce the macroeconomic inefficiencies associated with monopolistic competition. The paper also shows that the standard approximation, that no single price or wage setter can affect nominal aggregates, is a good approximation provided, (a) at least a few hundreds of such large firms exist and more significantly (b) labour markets are decentralized or wage centralization is very low. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:63&r=mac |
| By: | Joerg Bibow |
| Abstract: | Challenging the conventional wisdom that structural problems are to blame for the euro areaÕs protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeterÑand a rather soft one, too -- it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECBÕs failure to internalize the euro areaÕs fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_425&r=mac |
| By: | Joerg Bibow |
| Abstract: | This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the ÒEurosystemÓ and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the Òtwo-pillar policy framework,Ó operating procedures, and actual performance since the euroÕs launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_428&r=mac |
| By: | Hilde C. Bjørnland (Department of Economics, University of Oslo and Norges Bank (Central Bank of Norway)) |
| Abstract: | Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP. |
| Keywords: | Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification |
| JEL: | C32 E52 F31 F41 |
| Date: | 2005–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_11&r=mac |
| By: | Silvia Fabiani (Corresponding author: Banca d'Italia, Rome, Italy); Claudia Kwapil (Corresponding author: Oesterreichische Nationalbank, Vienna, Austria); Martine Druant (Banque Nationale de Belgique, Brussels, Belgium); Ignacio Hernando (Banco de España, Madrid, Spain); Bettina Landau (European Central Bank, Kaiserstrasse 29, Frankfurt am Main, Germany.); Claire Loupias (Banque de France, Paris, France); Fernando Martins (Banco de Portugal, Lisbon, Portugal); Thomas Y. Mathä (Banque centrale du Luxembourg); Roberto Sabbatini (Banca d’Italia, Rome, Italy); Harald Stahl (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, Frankfurt am Main, Germany.); Ad C. J. Stokman (De Nederlandsche Bank, Amsterdam) |
| Abstract: | This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms. The results, robust across countries, show that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common. Around one-third of firms follow mainly time-dependent pricing rules while twothirds allow for elements of state-dependence. The majority of firms take into account past and expected economic developments in their pricing decisions. Price stickiness is mainly driven by customer relationships – explicit and implicit contracts – and coordination failure. Firms adjust prices asymmetrically in response to shocks: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand. |
| Keywords: | Price setting; nominal rigidity; real rigidity; inflation persistence; survey data. |
| JEL: | E30 D40 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050535&r=mac |
| By: | Lindbeck, Assar (The Research Institute of Industrial Economics) |
| Abstract: | The paper discusses a number of threats to the financial sustainability of social spending: increased internationalization of national economies, gradually higher relative costs of producing a number of human services, the “graying” of the population, slower productivity growth in the private sector, low employment rates, and various types of disincentive effects related to the welfare state itself, including moral hazard. I argue that threats from gradually rising costs of providing human services and disincentive effects of welfare-state arrangements, in particular moral hazard and benefit dependency, are more difficult to deal with than the other threats. I also discuss the choice between ad hoc policy reforms and automatic adjustment mechanisms, delegated to administrative bodies, for dealing with these threats. |
| Keywords: | Sustainable Fiscal Policy; Baumol’s Disease; Moral Hazard; Automatic Adjustment Mechanisms |
| JEL: | E62 H31 H53 |
| Date: | 2005–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0646&r=mac |
| By: | Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman |
| Abstract: | Is a tax rebate safe and effective? Simulations with an empirically-tested macro-econometric model are used to estimate the impact of the actual 2001 tax rebate in the U.S. and of a rebate twice as large repeated in three additional quarters, and the results of the simulations are interpreted in light of two important recent empirical studies of the spending of the 2001 rebate by households. Our simulations show that as long as a tax rebate is temporary and detriggered when the recession ends, its use during a recession does not pose a significant debt or inflation problem. We find that at the end of one year the larger repeated rebate would have reduced the unemployment rate from 5.9% to at least 5.2%. Thus, a triggered tax rebate is a safe and effective anti-recession policy. |
| Keywords: | Recession, Fiscal Policy, Tax Rebate |
| JEL: | E62 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-20&r=mac |
| By: | Olivier Blanchard |
| Abstract: | In the 1970s, European unemployment started increasing. It increased further in the 1980s, to reach a plateau in the 1990s. It is still high today, although the average unemployment rate hides a high degree of heterogeneity across countries. The focus of researchers and policy makers was initially on the role of shocks. As unemployment remained high, the focus has progressively shifted to institutions. This paper reviews the interaction of facts and theories, and gives a tentative assessment of what we know and what we still do not know. |
| JEL: | E24 J6 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11750&r=mac |
| By: | Karim Abadir (University of York, Heslington,York YO10 5DD, United Kingdom); Gabriel Talmain (University of York, Heslington,York YO10 5DD, United Kingdom) |
| Abstract: | We provide a methodology to disentangle the long-run relation between variables from their own dynamics. Macroeconomic and aggregate financial series have a high degree of inertia. If this persistence is not properly accounted for, spurious correlations will give rise to paradoxes. Our procedure shows that the Uncovered Interest Parity (UIP) puzzle evaporates when the dynamics are properly modelled: the forward premium loses all the predictive power that it seemed to have. We also show how the stock market grows in long cycles around a trend given by GDP, in a stable relation that does not break. |
| Keywords: | ACF-based GLS procedure; Autocorrelation Function; Long memory; Nonlinearities; Uncovered Interest Parity anomaly. |
| JEL: | E37 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050525&r=mac |
| By: | Tassos Anastasatos (Dept of Economics Univ. of Loughborough); Ian R. Davidson (Business School Univ. of Loughborough) |
| Abstract: | This paper presents formal evidence that currency episodes display heterogeneity in terms of their evolution, their impact on the inflicted economy and their links with financial, political and macroeconomic fundamentals. Limited-dependent variable models for ordered and unordered outcomes along with their heteroskedastic and random effects extensions are applied on a large panel of data comprising 40 years of monthly observations on 23 developed countries. Heterogeneity, complemented by indications of self-fulfilling expectations and noise, suggest that time and region specific predictive approaches and policy responses are more useful than trying to base analysis and policy decisions on more general patterns. Results are established with formal specification tests. |
| Keywords: | Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models. |
| JEL: | F31 C23 C25 E44 G15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_23&r=mac |
| By: | Harald Stahl (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, Frankfurt am Main, Germany.) |
| Abstract: | Price setting in German metal-working industries is analysed using a monthly panel of individual price data for more than 2,000 plants covering the period from 1980 to 2001. Motivated by several models in the literature, a duration model is estimated. Price changes can be explained by a combination of state-dependence and time-dependence. Time-dependence clearly dominates and is strongest if a price increase follows a price increase. This occurs most likely after 1, 4, 5, 8, 9, … quarters. This time-dependent effect is so strong and cost and price increases are so weak in the observed period that adjustment occurs before the sticky price sufficiently deviates from the flexible price, as traditional menu cost models assume. State-dependence seems to be most relevant in periods with decreasing demand. Then firms reduce prices and the time between two price cuts only rarely exceeds four months. |
| Keywords: | Price rigidity; duration analysis; business survey data. |
| JEL: | D43 E31 L11 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050534&r=mac |
| By: | L. POZZI |
| Abstract: | We investigate the relevance of aggregate and consumer-specific income uncertainty for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of income risk on consumption changes is decomposed into an aggregate and into a consumer-specific part. Empirically, aggregate risk is modelled through a GARCH process on aggregate income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting consumer-specific income risk is supported by the finding that it is negatively affected by received consumer transfers. |
| Keywords: | income uncertainty, consumption, precaution, state space models, GARCH errors, unobserved component, Bayesian |
| JEL: | E21 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:05/334&r=mac |
| By: | Fumio Hayashi; Koji Nomura |
| Abstract: | This paper constructs a multi-sector model to take explicit account of the very sharp change in the relative price between non-IT and IT goods. The model is calibrated to the Japanese economy, and its solution path from 1990 on is compared to Japan's macroeconomic performance in the 1990s. Compared to the one-sector analysis of Japan in the 1990s in Hayashi and Prescott (2002), our model does slightly better or just as well in accounting for Japan's output slump and does worse in accounting for the capital-output ratio. We also show that, to revive a 2% long-term growth in percapita GDP, Japan needs to direct 10% of private total hours to the IT sector. |
| JEL: | E2 O4 O5 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11749&r=mac |
| By: | Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain) |
| Abstract: | This paper reports the results of a survey carried out by the Banco de España on a sample of around 2000 Spanish firms to deepen the understanding of firms’ price setting behaviour. The main findings may be summarised as follows. Most Spanish firms are price setters that use predominantly state-dependent rules or a combination of time- and statedependent rules when reviewing their prices. Changes in costs are the main factor underlying price increases, whereas changes in market conditions (demand and competitors’ prices) are the main driving forces of price decreases. The degree of price flexibility is directly related to the share of energy inputs over total costs and to the intensity of competition, whereas it is inversely linked to the labour share. The three theories of price stickiness that receive the highest empirical support are implicit contracts, coordination failure and explicit contracts. |
| Keywords: | Price setting; price stickiness; survey data. |
| JEL: | D40 E31 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050538&r=mac |
| By: | Korkut A. ErtŸrk |
| Abstract: | Despite his emphasis on the speculative character of investment decisions, Minsky paid little attention to asset price speculation per se, ignoring asset price bubbles and their macroeconomic effects. That is perhaps because his views were formed during the era of financial regulation, when speculation Òcould do no harm as bubbles on a steady stream of enterprise.Ó Clearly, times have since changed. KeynesÕs old warning that the situation ÒÉ is serious when enterprise becomes the bubble on a whirlpool of speculationÓ has begun to ring true again. To deepen our understanding of financial fragility under present-day conditions, the paper builds on KeynesÕs insights in his General Theory on the stock exchange by going back to his Treatise, where asset price expectations and speculation play an integral part in his analysis of the business cycle. More specifically, it develops the macroeconomic implications of some of his arguments that have mainly been eclipsed by his GT. These can be summarized in three related propositions: (1) asset price expectations systematically exhibit self-sustained biases in one direction or another over the business cycle; (2) once an asset price bubble emerges no automatic mechanism exists to check the deviation of prices from their true values; and, (3) mean reversion in asset prices over time plays itself out through a rise in inactive money balances in the banking system, which Keynes called the bear position, as more and more people begin to think that asset prices have reached levels that are unreasonable. This early picture of how financial variables interact with output determination over the business cycle is contrasted with KeynesÕs better known analysis in the GT, which, it is argued, does not lend itself as readily to analyzing asset price misalignments. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_424&r=mac |
| By: | Marcel Fratzscher (European Central Bank, DG-Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The paper analyses whether communication and actual interventions in FX markets are successful in moving exchange rates over the medium- to long-run. It compares empirical evidence based on time-series analysis with that obtained from an eventstudy approach. Both the time-series approach based on option contracts and the event-study methodology yield compelling evidence that communication and actual interventions tend to be successful in moving exchange rates in the desired direction contemporaneously as well as over the medium- to long-term. This finding is consistent with recent work on microstructure models that emphasises the importance of dynamic effects of news and fundamentals on exchange rates. |
| Keywords: | Communication; exchange rate; intervention; policy; time-series analysis; event-study methodology; United States; euro area; Japan. |
| JEL: | E61 E58 F31 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050528&r=mac |
| By: | K C Neanidis |
| Abstract: | This paper examines the macroeconomic effects of foreign aid transfers in a small open recipient economy. The focus, however, is not on the impact of foreign aid per se but rather on aid’s influence conditional upon the different budgetary financing policies under the discretion of the recipient government. We compare the effects of an aid transfer tied to investment in a public good from a pure aid transfer, under income-tax and/or inflation-tax financing of government expenditures. The effects of each form of aid under each type of public financing are examined with respect to the economic growth rate, the rate of inflation, and the percentage change in welfare of the recipient economy. The economy is analyzed numerically and specific policy recommendations are provided for individual recipient countries. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:58&r=mac |
| By: | Denis Fougère (CNRS, CREST-INSEE (Paris), CEPR (London) and IZA (Bonn)); Hervé Le Bihan (Banque de France (Paris)); Patrick Sevestre (Université Paris XII-Val de Marne and Banque de France (Paris)) |
| Abstract: | This paper examines heterogeneity in price stickiness using a large, original, set of individual price data collected at the retail level for the computation of the French CPI. To that end, we estimate, at a very high level of disaggregation, competing-risks duration models that distinguish between price increases, price decreases and product replacements. The main findings are the following: i ) cross-product and cross-outlet-type heterogeneity in both the shape of the hazard function and the impact of covariates is pervasive ii) at the product-outlet type level, the baseline hazard function of a price spell is non-decreasing iii ) there is strong evidence of state dependence, especially for price increases. |
| Keywords: | Sticky prices; heterogeneity; hazard function; duration models. |
| JEL: | E31 C41 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050536&r=mac |
| By: | N Bose; J A Holman; K C Neanidis |
| Abstract: | This paper explores how the optimal mode of public finance depends on the stage of economic development. The theoretical analysis is based on an overlapping generations growth model with an imperfect capital market. Random shocks create a demand for liquidity and establish a role for financial intermediaries. In this model, inflation matters because it affects the relative rates of return on assets in such a way that money becomes the preferred asset in the portfolio holdings of banks, causing a detrimental effect on economic growth. Such an effect is stronger (weaker) at lower (higher) levels of economic development due to the higher (lower) default risks associated with lending. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our model’s predictions using a panel of 21 OECD and 40 developing countries observed over the period 1972-1999. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:57&r=mac |
| By: | David K. Musto; Nicholas S. Souleles |
| Abstract: | To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans' returns with aggregate returns. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the 'covariance risk' of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude. |
| JEL: | E21 E51 G21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11735&r=mac |
| By: | Mauricio A. Hernández; Munir A. Jalil; Carlos Esteban Posada |
| Abstract: | Los ciclos económicos colombianos de la segunda mitad del siglo XX implicaron considerables variaciones en los agregados reales de la economía. A partir de un modelo con tecnología de producción AK y una función de producción de bienes de capital que presenta retornos decrecientes para la inversión, se calculó el costo de las fluctuaciones económicas en términos de consumo y bienestar de las familias. Según nuestros resultados, bajo estabilidad económica la tasa de crecimiento de largo plazo del consumo per cápita se habría incrementado entre 0,13 y 0,47 puntos porcentuales, pasando de 1,4% por año, en el escenario fluctuante, a una tasa en el intervalo 1,53% -1,87% anual. De acuerdo con diferentes niveles de la elasticidad intertemporal de sustitución del consumo, la compensación necesaria para hacer que las familias obtuvieran un mismo bienestar bajo los dos escenarios (fluctuante y estable) equivaldría, en promedio, a 4,7% del consumo inicial. |
| Keywords: | D61;E32. |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:353&r=mac |
| By: | Rebelein, Robert (Vassar College Department of Economics) |
| Abstract: | The return of large government budget deficits should encourage us to resume analysis of their effects. Two topics deserving further attention are the importance of correctly modeling the form of intergenerational relationships and clarification of the extent to which deficits crowd out private investment. This paper presents an overlapping generations model in which children seek to manipulate the size of the end-of-life bequest they receive from the parent – similar to the manipulation observed in the Samaritan’s dilemma. I first use numerical simulations to show this intergenerational strategic behavior does not negate the debt neutrality assertions of Ricardian equivalence. Then, by introducing capital gains and inheritance taxes, I show the crowding out effect of government debt is notably smaller in models with strategic behavior; manipulation by children increases the importance of bequests, which forces parents to save (and bequeath) a larger portion of a debt-financed tax cut. In spite of the neutrality of debt under lump sum taxes, including intergenerational strategic behavior can significantly influence the outcome of government tax policies. Given the restrictive nature of the conditions required for Ricardian equivalence to hold, it may be more useful to measure how near to or far from Ricardian equivalence a particular policy or economy comes rather than simply determining whether or not it holds in that environment. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:vas:papers:74&r=mac |
| By: | Ricardo Reis |
| Abstract: | If a consumer wishes to protect her retirement account from the risk of price changes in order to sustain a stable standard of living, then what price index should the account be indexed to? This paper constructs a dynamic price index (DPI) that answers this question. Unlike the existing theory on price indices (which is static and certain), the DPI measures the cost of living for a consumer who lives for many periods and faces uncertainty. The first contribution of this research is to define this price index and study its theoretical properties. The DPI: is homogeneous of degree 1 with respect to all prices, is forward-looking with respect to price shocks, responds more to permanent vis-à-vis transitory price changes, includes asset prices with a potentially large weight, and distinguishes between durable and non-durable goods prices. The second contribution of the paper is to construct a DPI for the United States from 1970 to 2004. It gives an account of the cost of living in the U.S. that is strikingly different from the one provided by the CPI. The DPI is less persistent, more volatile, and a large part of its movements are driven by changes in the prices of houses and bonds. |
| JEL: | E31 C43 J26 D91 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11746&r=mac |
| By: | Erik Hurst; Arthur Kennickell; Annamaria Lusardi; Francisco Torralba |
| Abstract: | In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income. |
| JEL: | E2 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11731&r=mac |
| By: | Dean Karlan (Economic Growth Center, Yale University); Jonathan Zinman (Dartmouth College) |
| Abstract: | The price elasticity of demand for credit has major implications for macroeconomics, finance, and development. We present estimates of this parameter derived from a randomized trial. The experiment was implemented by a consumer microfinance lender in South Africa and identifies demand curves that, while downward-sloping with respect to price, are flatter than recent estimates in both developing and developed countries throughout most of a wide price range. However, demand becomes highly price sensitive at higher-than-normal rates. We discuss several interpretations of this kink and present some related evidence. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rate. This pattern is more pronounced among lower income individuals, a comparative static that has been observed in the United States as well and is consistent with liquidity constraints that decrease with income. |
| Keywords: | Credit Markets, Microfinance, Demand Elasticity, Development Finance, Maturity Elasticity, Consumer Credit |
| JEL: | D1 D9 E2 G2 O1 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:926&r=mac |
| By: | Michele SALVATI |
| Abstract: | In this comment I will only tackle the growth problem – the big t arget that (up to now) the EU has missed – fully sharing the view of the Report that, without a more sustained growth, both cohesi on and stability are at stake. In particular, I will concentrate on the US-EU comparison, which is the way in which the Report fra mes the problem, as most of the applied literature does. Such a c omparison, in the last 10 years, and even more so since the begin ning of this century, conveys a rather gloomy picture of European growth: is such a picture justified? Is the comparison well taken? On the whole I share the view that that Europe has a “growth problem”, and particularly so the three big countries of the Eurozone: Germany, France, and Italy. And I basically share the analysis of such problem that the Report develops. In order t o put the European growth problem in a wider and longer perspecti ve, however, I argue that there are exceptional circumstances tha t contribute to explain the very strong growth that the US has en joyed in the last few years and the disappointing one that has ch aracterized Europe in the same period. Such circumstances are imp ortant per se and, above all, because they raise some radical que ries on the whole institutional fabric of the European Union |
| Keywords: | United States, Economic Growth, European Economic Policy |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2005-18&r=mac |
| By: | Claudio H. Dos Santos; Gennaro Zezza |
| Abstract: | Despite being arguably the most rigorous form of structuralist/post-Keynesian macroeconomics, stock-flow consistent models are quite often complex and difficult to deal with. This paper presents a model that, despite retaining the methodological advantages of the stock-flow consistent method, is intuitive enough to be taught at an undergraduate level. Moreover, the model can easily be made more complex to shed light on a wealth of specific issues. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_421&r=mac |
| By: | Evelin Ahermaa (Estonian Institute of Economic Research) |
| Abstract: | Tobacco products belong to a group of excise goods and an excise duty is levied on them. The latter increases the price, but there are no changes in the quality of the goods and it leads to tax frauds. There has been regular increase in the excise duties on tobacco products in Estonia; changes in tax rates have influenced legal sales, mostly of cigarettes. Consumption of cigarettes is the largest in the group of tobacco products in Estonia; therefore, the paper is especially focused on cigarettes. The purpose of the paper is to evaluate illegal market of cigarettes in Estonia, using comparison of the net of estimations. The paper introduces the method of analysis where the essential role is given to inhabitants (concerning their expert and individual opinions). Empirical evidence concerning illegal market of cigarettes in Estonia is presented by size on the example of fieldwork carried out in 2003. |
| Keywords: | cigarettes, excise duty, illegal market, taxation |
| JEL: | E62 K42 |
| URL: | http://d.repec.org/n?u=RePEc:ttu:wpaper:tutwpe05/122&r=mac |
| By: | William A. Barnett (University of Kansas); Jane Binner (Nottingham Business School); W. Erwin Diewert (University of British Columbia) |
| Abstract: | This is the front matter from the book, William A. Barnett and Jane Binner (eds.), Functional Structure and Approximation in Econometrics, published in 2004 by Elsevier in its Contributions to Economic Analysis monograph series. The front matter includes the Table of Contents, Volume Introduction, and Section Introductions by Barnett and Binner and the Preface by W. Erwin Diewert. The volume contains a unified collection and discussion of W. A. Barnett's most important published papers on applied and theoretical econometric modelling. |
| Keywords: | consumer demand, production, flexible functional form, functional structure, asymptotics, nonlinearity, systemwide models |
| JEL: | C3 E41 G12 C43 C22 |
| Date: | 2005–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0511006&r=mac |
| By: | Wynne Godley |
| Abstract: | The latest batch of numbers from the United States makes for a disturbing read. The growth rate of GDP has been adequate, but the current account deficit was 6.3 percent of GDP in the fourth quarter of 2004, and the terrible trade figures for January and February promise an even bigger deficit in the first quarter of 2005 (BEA 2005). Let no one suppose that this deterioration is a temporary effect that will automatically turn around soon. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:05-4&r=mac |
| By: | Jérôme Héricourt (TEAM); Mathilde Maurel (ROSES) |
| Abstract: | The purpose of this paper consists in assessing the extent of financial integration in the European Union using the Feldstein-Horioka criterion. More precisely, we test the cross-correlation of savings and investment rates across the regions of the European Union, using regional data from Regio and national statistical offices, over the period 1995-2000. Several important outcomes are reported by our article. First, we find that the financial integration seems to be realized inside each country, and we are able to rationalize the few puzzles we face. Second, we find that overall financial integration between EU regions is almost complete. After performing additional investigations on consistent sub-groups of regions, however, our analysis discards the illusion that the sole suppression of institutional barriers to capital mobility would be sufficient to achieve a perfect financial integration. In that spirit, our main finding is that History, language, borders and distance as a proxy for transaction and information costs, still matter. |
| Keywords: | Feldstein-Horioka puzzle, regional savings, investment, capital market, capital flows. |
| JEL: | E22 F21 G15 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:j05070&r=mac |
| By: | Roberto Patuelli (Vrije Universiteit); Simonetta Longhi (University of Essex); Aura Reggiani (University of Bologna); Peter Nijkamp (Vrije Universiteit); Uwe Blien (Institut fuer Arbeitsmarkt und Berufsforschung) |
| Abstract: | Using a panel of 439 German regions we evaluate and compare the performance of various Neural Network (NN) models as forecasting tools for regional employment growth. Because of relevant differences in data availability between the former East and West Germany, NN models are computed separately for the two parts of the country. The comparisons of the models and their ex-post forecasts have been carried out by means of a non-parametric test: viz. the Friedman statistic. The Friedman statistic tests the consistency of model results obtained in terms of their rank order. Since there is no normal distribution assumption, this methodology is an interesting substitute for a standard analysis of variance. Furthermore, the Friedman statistic is indifferent to the scale on which the data are measured. The evaluation of the ex-post forecasts suggests that NN models are generally able to correctly identify the fastest-growing and the slowest-growing regions, and hence predict rather well the correct ranking of regions in terms of their employment growth. The comparison among NN models – on the basis of several criteria – suggests that the choice of the variables used in the model may influence the model’s performance and the reliability of its forecasts. |
| Keywords: | forecasts, regional employment, learning algorithms, rank order test |
| JEL: | C23 E27 R12 |
| Date: | 2005–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpur:0511004&r=mac |