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on Macroeconomics |
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Issue of 2005‒12‒01
164 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Michael R. Pakko; William T. Gavin (Research Federal Reserve Bank of St. Louis); Finn E. Kydland |
| Keywords: | Inflation, Taxation, Business Cycle |
| JEL: | E31 E32 E42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:265&r=mac |
| By: | Matteo Iacoviello (Economics Boston College) |
| Keywords: | Debt, durables, volatility, borrowing constraints, housing |
| JEL: | E21 E32 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:186&r=mac |
| By: | Andrew T. Levin (Federal Reserve Board,Washington, DC 20551 USA); Richhild Moessner (Bank for International Settlements, Basel, Switzerland) |
| Abstract: | How monetary policy should be set optimally when the structure of the economy exhibits inflation persistence is an important question for policy makers. This paper provides an overview of the implications of inflation persistence for the design of monetary policy. |
| Keywords: | Inflation persistence; optimal monetary policy; uncertainty. |
| JEL: | E52 E58 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050539&r=mac |
| By: | Stephen D. Williamson |
| Keywords: | monetary policy, monetary theory, Friedman rule, money neutrality |
| JEL: | E4 E5 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:379&r=mac |
| By: | Julen Esteban-Pretel (Economics University of Tokyo); Elisa Faraglia |
| Keywords: | Search and Matching, Loss of Skill, Business Cycles, Monetary Policy |
| JEL: | J41 J31 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:328&r=mac |
| By: | V. Anton Muscatelli, Tiziano Ropele and Patrizio Tirelli |
| Abstract: | We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model allows a variety of channels for fiscal policy, and is estimated using Euro area data. We analyse the interaction of monetary and fiscal policies in EMU and demonstrate that, perhaps surprisingly, macroeconomic adjustment is not always facilitated by fiscal stabilisers in the case of certain types of shocks. The stabilising effects of fiscal policy at the national level are strictly dependent on the existence of home bias in consumption. |
| JEL: | E58 E62 E63 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_20&r=mac |
| By: | Christopher Waller; Guillaume Rocheteau (Department of Economics University of Notre Dame) |
| Keywords: | Money, Search, Bargaining, Inflation |
| JEL: | E40 E50 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:55&r=mac |
| By: | V. Anton Muscatelli, Patrizio Tirelli and Carmine Trescroci |
| Abstract: | This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between Fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targetingf orm. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers aspects output and inflation variability in the presence of such a monetary policy rule.. |
| JEL: | E58 E62 E63 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_19&r=mac |
| By: | Leena Rudanko |
| Keywords: | Search, Matching, Wage Contracts, Business Cycles |
| JEL: | E24 E32 J41 J63 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:876&r=mac |
| By: | S. Boragan Aruoba (Economics University of Maryland); Christopher J. Waller |
| Keywords: | money, capital, inflation, welfare |
| JEL: | E13 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:550&r=mac |
| By: | Juha Seppala; Federico Ravenna |
| Keywords: | Term Structure of Interest Rates, Monetary Policy, Sticky Prices, Habit Formation, Expectations Hypothesis |
| JEL: | E43 E5 G12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:804&r=mac |
| By: | Vincenzo Quadrini; Urban Jermann |
| Keywords: | Debt over-hang, financial flexibility, business cycle asymmetries |
| JEL: | E32 G1 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:692&r=mac |
| By: | Felipe F. Schwartzman |
| Abstract: | In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way. |
| JEL: | E42 E52 E61 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:038&r=mac |
| By: | Robert J. Gordon |
| Abstract: | This paper investigates the sources of the widely noticed reduction in the volatility of American business cycles since the mid 1980s. Our analysis of reduced volatility emphasizes the sharp decline in the standard deviation of changes in real GDP, of the output gap, and of the inflation rate. The primary results of the paper are based on a small three-equation macro model that includes equations for the inflation rate, the nominal Federal Funds rate, and the change in the output gap. The development and analysis of the model goes beyond the previous literature in two directions. First, instead of quantifying the role of shocks-in-general, it decomposes the effect of shocks between a specific set of supply shock variables in the model’s inflation equation, and the error term in the output gap equation that is interpreted as representing “IS” shifts or “demand shocks”. It concludes that the reduced variance of shocks was the dominant source of reduced business-cycle volatility. Supply shocks accounted for 80 percent of the volatility of inflation before 1984 and demand shocks the remainder. The high level of output volatility before 1984 is accounted for roughly two-thirds by the output errors (demand shocks) and the remainder by supply shocks. The output errors are tied to the paper’s initial decomposition of the demand side of the economy, which concludes that three sectors residential and inventory investment and Federal government spending, account for 50 percent in the reduction in the average standard deviation of real GDP when the 1950-83 and 1984-2004 intervals are compared. The second innovation in this paper is to reinterpret the role of changes in Fed monetary policy. Previous research on Taylor rule reaction functions identifies a shift after 1979 in the Volcker era toward inflation fighting with no concern about output, and then a shift in the Greenspan era to a combination of inflation fighting along with strong countercyclical responses to positive or negative output gaps. Our results accept this characterization of the Volcker era but find that previous estimates of Greenspan-era reaction functions are plagued by positive serial correlation. Once a correction for serial correlation is applied, the Greenspan-era reaction function looks almost identical to the pre-1979 “Burns” reaction function! |
| JEL: | E0 E21 E22 E31 E50 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11777&r=mac |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | This paper analyses the ECB communication, focusing in particular on its transparencydimension. We posit that if the ECB is transparent about its future policy decisions, then weshould be able to forecast fairly well its future interest rate setting behaviour. We find thatthe predicting ability of the European monetary authority's words, is similar to the oneimplied by market-based measures of monetary policy expectations. Moreover, the ECB'swording provides complementary, rather than substitute, information with respect toeconomic and monetary variables. |
| Keywords: | ECB communication, transparency, monetary policy forecast, empirical reactionfunction, Euribor rate curve |
| JEL: | E43 E52 E58 G14 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0694&r=mac |
| By: | Juan Pablo Medina; Ruy Lama |
| Keywords: | Optimal monetary policy; Asset market segmentation; Sticky prices. |
| JEL: | E44 E52 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:774&r=mac |
| By: | Alexandre Batista Ferreira; Frederico Gonzaga Jayme Júnior |
| Abstract: | The central purpose of this study is to assess the performance of the inflation targeting regime adopted in Brazil, in a context of high exchange rate volatility, as well as high public debt. In order to accomplish this, a Vector Autoregressive methodology was used. The results suggest that: i) the interest rate is an important instrument of monetary policy; ii) there is presence of inflationary inertia; iii) changes in interest rate to fight inflation can provoke more inflation; iv) the inflation rate is quite sensitive to the exchange rate volatility; v) the inflation rate answers, in way erratic and not significant, to the variations in the government's nominal result; vi) inflation rate response to the innovations in the output gap is not significant; vii) output gap responses to inflation rate shocks does not reveal to be significant; and viii) the monetary policy affects the output gap. The main conclusion is that inflation target in Brazil is limited by the no coordination between monetary and fiscal policies, as well as the external vulnerability. |
| JEL: | E40 E50 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:035&r=mac |
| By: | Ana Balcao Reis; Joao Ejarque (Economics University of Essex) |
| Keywords: | Endogenous Growth, Technology Shocks, Investment Shocks. |
| JEL: | E21 E32 O40 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:312&r=mac |
| By: | Eran Yashiv |
| Keywords: | aggregate labor market, aggregate fluctuations, labor market flows, search, matching, vacancies. |
| JEL: | E24 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:360&r=mac |
| By: | Xavier Gabaix |
| Keywords: | Business Cycle, Idiosyncratic shock, Aggregate shock, Aggregation, Heterogeneity, Power law, Zipf’s law |
| JEL: | E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:470&r=mac |
| By: | Vladimir Kühl Teles; Mauro Miranda |
| Abstract: | The main purpose of this paper is the empirical investigation of the business cycles responses of each of the five Brazilian regions to monetary policy innovations and other shocks. We applied a methodology integrating unobserved components and vector auto-regressions (VAR). We identified not only common and idiosyncratic sources of innovation, but also common and idiosyncratic responses to common shocks. We concluded that the Brazilian regions present asymmetric effects to common monetary shocks. |
| JEL: | R11 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:120&r=mac |
| By: | Breno Pascualote Lemos; Rodrigo Ayres Padilha; José Luís Oreiro |
| Abstract: | In this paper we perform an analysis of the stability conditions of a macrodynamic model with Walrasian adjustment under three different rules of monetary policy: the maintenance of a constant supply of real money balances, a fixed rule of monetary growth (or Friedman's rule) and the inflation targeting rule. The analysis of the model's stability conditions under study allows us to reach the conclusion that inflation targeting has the greater propensity towards stability than the other rules. This result shows that the wider flexibility in the use of instruments of monetary policy in comparison with the Friedman's rule, in parallels with the non-passivity of the inflation targeting regime in comparison with the constant supply rule, are important characteristics for the obtention of macroeconomic stability. |
| JEL: | E10 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:039&r=mac |
| By: | Wouter J. Denhaan (Economics Subject Area London School of Economics); Georg Kaltenbrunner |
| Keywords: | labor matching market; |
| JEL: | E32 J41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:29&r=mac |
| By: | Helder Ferreira de Mendonça |
| Abstract: | The main objective of this paper is to analyze if the adoption of inflation targeting implies changes in the behavior of several macroeconomic variables, especially in the unemployment rate. For this, empirical evidences based on a set of fourteen countries that adopted explicit inflation targeting are shown. Furthermore, a particular analysis for the Brazilian case through a VAR that considers the following variables: unemployment rate, Selic, inflation, industrial production, and inflation targeting credibility, is made. Among several findings taken from international experience, it is observed that there is the possibility of unemployment-inflation trade-off becoming relevant after the adoption of targets. In relation to theBrazilian case, the main point for the attainment of good results for the economy is the neces sity of the monetary regime having a high credibility. |
| JEL: | E52 E58 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:040&r=mac |
| By: | Christopher Waller; Aleksander Berentsen (Economics University of Basel) |
| Keywords: | Financial Intermediation, Aggregate Shocks, Monetary Policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:416&r=mac |
| By: | Rodrigo Sekkel; Denisard Alves |
| Abstract: | The purpose of the present study is to identify the effects of monetary policy and macroeconomic shocks on the dynamics of the Brazilian term structure of interest rates. We estimate a near-VAR under the identification scheme proposed by Christiano et al. (1996, 1999). The results resemble that of the US economy: monetary policy shocks flatten the term structure of interest rates. Nevertheless, we find that monetary policy shocks in Brazil appear to explain a significant larger share of the dynamics of the term structure than in the USA. Finally, we also study the importance of standard macroeconomic variables, as GDP, inflation and specially, a measure of country risk for the dynamics of the term structure in Brazil. The empirical evidence allows us to infer that as the Brazilian term structure of interest rates increase its maturities, the more important will macroeconomic shocks be to its determination. |
| JEL: | E53 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:027&r=mac |
| By: | Federico Ravenna |
| Keywords: | Vector Autoreregression; Dynamic Stochastic General Equilibrium Model; Kalman Filter; Business Cycle Shocks |
| JEL: | C13 C22 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:841&r=mac |
| By: | Jinhui H. Bai (Department of Economics, Yale University); Ingolf Schwarz (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate. |
| Keywords: | Money, incomplete markets, fiscal policy, indeterminacy |
| JEL: | D52 E40 E50 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:jep:wpaper:05005&r=mac |
| By: | Qing Liu; Shouyong Shi |
| Keywords: | Currency Area; Monetary Coordination |
| JEL: | F31 C78 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:575&r=mac |
| By: | James Costain (Economics Universidad Carlos III de Madrid); Michael Reiter |
| JEL: | E32 E62 H21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:704&r=mac |
| By: | René Garcia; Richard Luger |
| Abstract: | The authors develop and estimate an equilibrium-based model of the Canadian term structure of interest rates. The proposed model incorporates a vector-autoregression description of key macroeconomic dynamics and links them to those of the term structure, where identifying restrictions are based on the first-order conditions that describe the representative investor's optimal consumption and portfolio plan. A remarkable result is that the in-sample average pricing errors obtained with the equilibrium-based model are only slightly larger than those obtained with a far more flexible no-arbitrage model. The gains associated with parsimony become obvious out-of-sample, where the equilibrium model delivers much more accurate predictions, especially for yields with longer-term maturities. The preferred equilibrium model has impulse responses that are consistent with long-term inflation expectations being anchored, so a surprise increase in inflation does not necessarily raise expectations of higher future inflation. |
| Keywords: | Interest rates |
| JEL: | E43 E44 E47 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-36&r=mac |
| By: | Thomas A. Lubik; Michael U. Krause (CentER and Department of Economics Tilburg University) |
| Keywords: | job-to-job mobility, propagation, business cycle, worker flows, seach and matching |
| JEL: | E24 E32 J64 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:792&r=mac |
| By: | VASILEIOS VLACHOS (UNIVERSITY OF MACEDONIA) |
| Abstract: | With the application of Ordinary Least Squares based on quarterly data of growth rates for inflation and unemployment for the period 2001 – 2003, the study concludes that a trade-off between inflation and unemployment does not exist in the Greek economy. Although the findings indicate that the EMU has no costs on the evolution of unemployment levels in Greece, the factors that generate the economic indicators on which the regression analysis is based point to the opposite direction. The utilization of the structural funds to date, the organization of the Olympic Games and the expansion of household debt are substitutes for the restrained government expenditure and have “temporary positive effects” on the level of aggregate demand. As long as Greece does not meet the expectations on competitiveness that were set as a standard for introducing the Euro, it will experience high levels of unemployment that it will probably not be able to cope with. |
| Keywords: | EMU, Greece, inflation, unemployment |
| JEL: | E24 E31 R11 R51 |
| Date: | 2005–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511020&r=mac |
| By: | Olivier Blanchard; Jordi Gali |
| Abstract: | Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the "divine coincidence", is due to a special feature of the model: the absence of non trivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation--unemployment relation found in the data. |
| JEL: | E32 E50 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11806&r=mac |
| By: | Maria Gabriella Briotti (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper reviews the theoretical and empirical literature that has investigated the conditions under which a contractionary fiscal policy is effective in reducing debt and deficit, but does not have a negative effect on growth. The issue is central to macroeconomics and policy making, given that many countries are currently facing increasing fiscal imbalances, with additional pressure coming in the medium term from population ageing. The paper concludes that the theoretical impact of fiscal policy on aggregate demand and economic activity depends largely on the conceptual framework considered and its assumptions about the world. Empirical studies based on macro-econometric model simulations find evidence that fiscal consolidations lead initially to production losses, while they can result in a higher output in the medium term. Empirical studies focusing on episodes of changes in fiscal policies provide in turn evidence that under certain circumstances austerity measures may have an expansionary impact on the economy. |
| Keywords: | fiscal multiplier, fiscal consolidation, non-Keynesian effects, government spending and taxing. |
| JEL: | E62 H30 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050038&r=mac |
| By: | Henry Siu |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:821&r=mac |
| By: | Linda S. Goldberg; Michael W. Klein |
| Abstract: | The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve. |
| JEL: | F3 E5 E6 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11792&r=mac |
| By: | Emanuel Mönch (Humboldt University, School of Business and Economics, Institute of Economic Policy, Spandauer Str. 1, 10178 Berlin, Germany) |
| Abstract: | This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model does not incorporate latent yield curve factors, but instead uses the common components of a large number of macroeconomic variables and the short rate as explanatory factors. Precisely, an affine term structure model with parameter restrictions implied by no-arbitrage is added to a Factor-Augmented Vector Autoregression (FAVAR). The model is found to strongly outperform different benchmark models in out-of-sample yield forecasts, reducing root mean squared forecast errors relative to the random walk up to 50% for short and around 20% for long maturities. |
| Keywords: | Affine term structure models, Yield curve, Dynamic factor models, FAVAR. |
| JEL: | C13 C32 E43 E44 E52 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050544&r=mac |
| By: | Márcio Holland |
| Abstract: | After strong currency crisis, in January 1999, Brazil implemented flexible exchange rate regime combined with inflation targeting. Some economists believe that emerging markets do not allow the exchange rate to float as much they had announced and therefore they suffer from the fear of floating. However, in this article there is evidence to believe that central banks in the emerging markets care about inflation ratter than exchange rate. The remarkable result found in this article is that the aggressiveness of the interest rate reaction to inflation explains far more the current monetary and exchange rate policy in Brazil than the idea of the fear of floating. |
| JEL: | E31 E37 E52 C22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:032&r=mac |
| By: | José Luís Oreiro; Breno Pascualote Lemos |
| Abstract: | The objective of this article is to present the structure and the first computational simulations of a one-sector macrodynamic model that imbed some elements of the post- keynesian theoretical framework. The theoretical elements embed in the model are: i) determination of the level of output by the principle of effective demand; (ii) differentiated savings propensities of capitalists and workers; iii) mark-up pricing; iv) investment decision based on Minsky´s two price theory; v) importance of firms´s capital structure over the level of aggregate investment; (vi) inflation based on distributive conflict between capitalists and workers; (vii) endogenous money and (ix) endogenous technical progress. The computational simulations of the model reproduce some important features of capitalist dynamics as "cyclical growth" - i. e.; irregular but bounded fluctuations of the growth rate of real GDP -; the occurrence of a single Great Depression over the entire simulation period, what resembles the "rare" nature of great crises in the history of capitalism. The computational simulation also shows that a big reduction in inflation rate in a short period spam will be accompanied by a great financial fragility of productive firms, which, sooner or latter, will generate a great depression. As a corollary of these results follows that the Central Bank should conduct monetary policy in a way to avoid very rapid reduction in inflation rate. |
| JEL: | O41 O11 E12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:056&r=mac |
| By: | Balazs Vilagi (Economics Department Central Bank of Hungary) |
| JEL: | E31 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:23&r=mac |
| By: | Jim Engle-Warnick (McGill University); Nurlan Turdaliev (McGill University) |
| Abstract: | We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics. |
| Keywords: | monetary policy, Taylor rule, experimental economics, repeated games |
| JEL: | C91 E42 |
| Date: | 2005–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511022&r=mac |
| By: | Robert J. Gordon |
| Abstract: | This paper develops a new analysis of the U. S. economy in the 1920s that is illuminated by contrasts with the 1990s, and it also re-examines the causes of the Great Depression. In both the 1920s and the 1990s the acceleration of productivity growth linked to the delayed effects of previously invented "general purpose technologies" stimulated an increase in fixed investment that became excessive and proved to be unsustainable, while the productivity acceleration helps to account for low inflation in both decades. The uncanny parallel of the stock market boom, bubble, and collapse in 1995-2001 as in 1924-1930, reminds us that business cycles emerge from the complex interplay of multiple factors, not just one. Common elements between the two decades are overshadowed by differences, including the much larger share of agricultural output in the 1920s, the weakness of farm prices throughout the decade, and the role of collapsing farm prices in the pervasive post-1929 downward shift in aggregate demand. Another partly related difference was a high volatility of inventory accumulation that reflected the larger share of agriculture and manufacturing in the economy of the 1920s. Failures of public policy in the 1920s included the absence of deposit insurance, the unit-banking regulations that prevented the diversification of financial risk across regions, and the low margin requirements that exacerbated swings in stock market prices. Further, the 1920s witnessed the advent of protectionism and the sharp curtailment of immigration. The stability of the American economy after the 2000-01 collapse of investment and the stock market proves that good public policy matters, going beyond the narrowly defined operations of monetary and fiscal policy. Such highly diverse policies as banking regulation, deposit insurance, margin rules, reduction of tariffs, and loose restrictions on immigration all combine to make today's American economy more stable and less fragile than in the 1920s. |
| JEL: | E0 E21 E22 E32 N00 N12 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11778&r=mac |
| By: | Huberto M. Ennis (Research Department Federal Reserve Bank of Richmond) |
| Keywords: | Random Matching, Private Information, Welfare |
| JEL: | D83 E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:135&r=mac |
| By: | Harald Uhlig; Fiorella De Fiore (Directorate General Research European Central Bank) |
| Keywords: | Financial structure, agency costs, heterogeneity |
| JEL: | E20 E44 C68 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:618&r=mac |
| By: | Alain Sand (GATE CNRS) |
| Abstract: | This paper presents a small macroeconomic model of Kazakhstan to study the impact of various economic policies. The simulations provide insight into the role of a tight monetary policy, higher foreign direct investment, rises in nominal wages and in crude oil prices. The results obtained are in line with the economic observations and give some support to the policies chosen as priority targets by the Kazakh authorities for the forthcoming years. |
| Keywords: | Central Asian CIS countries, Kazakhstan, Macroeconomic stabilization, Transition economies |
| JEL: | E17 F43 P47 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0411&r=mac |
| By: | Ricardo Reis |
| Keywords: | Inattentiveness, Production and Pricing under Uncertainty, Inflation, Sticky Information |
| JEL: | D92 E31 E20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:290&r=mac |
| By: | Vito Polito; Mike Wickens |
| Abstract: | We propose an index of the fiscal stance that is convenient for practical use. It is based on a finite time horizon, not on an infinite time horizon like most tests. As it employs VAR analysis it is simple to compute and easily automated. We also show how it is possible to analyse a change of policy within a VAR framework. We use this methodology to examine the effect on fiscal sustainability of a change in policy. We then conduct an empirical examination of the fiscal stances of the US, the UK and Germany over the last 25 or more years, and we carry out a counter-factual analysis of the likely consequences for fiscal sustainability of using a Taylor rule to set monetary policy over this period. Among our findings are that the recent fiscal stances of all three countries are not sustainable, and that using a Taylor rule in the past would have improved the fiscal stances of the US and UK, but not that of Germany. |
| Keywords: | Budget deficits; government debt; fiscal sustainability; VAR analysis; economic policy. |
| JEL: | C22 C53 E62 E63 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0503&r=mac |
| By: | Silvia Ardagna; Francesco Caselli; Timothy Lane |
| Abstract: | We use a panel of 16 OECD countries over several decades to investigate the effects ofgovernment debts and deficits on long-term interest rates. In simple static specifications, aone-percentage-point increase in the primary deficit relative to GDP increasescontemporaneous long-term interest rates by about 10 basis points. In a vector autoregression(VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10years. The effect of debt on interest rates is non-linear: only for countries with above-averagelevels of debt does an increase in debt affect the interest rate. World fiscal policy is alsoimportant: an increase in total OECD-government borrowing increases each country'sinterest rates. However, domestic fiscal policy continues to affect domestic interest rates evenafter controlling for worldwide debts and deficits. |
| Keywords: | Government deficit, public debt, long-term interest rates |
| JEL: | E62 E44 H62 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0670&r=mac |
| By: | Arnildo da Silva Correa; André Minella |
| Abstract: | This paper investigates the presence of non-linear mechanisms of the pass- through from exchange rate to inflation in Brazil. In particular, it estimates a Phillips curve with a threshold for the passthrough. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle, direction and magnitude of the exchange rate change and volatility of the exchange rate. For that purpose, three variables are tested as thresholds: i) output gap, ii) exchange rate change, and iii) exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is booming, when the exchange rate depreciates above some threshold and when the exchange rate volatility is lower. These results have important implications for monetary policy and are possibly related to pricing-to-market behavior, menu costs of price adjustment and uncertainty about the degree of persistence in exchange rate movements. |
| JEL: | E31 E50 E58 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:033&r=mac |
| By: | Michael F. Gallmeyer; Burton Hollifield |
| Keywords: | term structure, monetary policy, Taylor rule |
| JEL: | G0 G1 E4 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:676&r=mac |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of US monetary policy and in the implied central bank target for inflation. Empirical results and FOMC transcripts support a neglected interpretation of policy during the Great Inflation of the 1970’s. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-04&r=mac |
| By: | Reinout De Bock (Economics Northwestern University) |
| Keywords: | Embodied Technical Change, Search and Matching, Persistence |
| JEL: | E24 E32 J64 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:572&r=mac |
| By: | Bart Hobijn; Andrea Tanbalotti (Research and Statistics Group Federal Reserve Bank of New York); Federico Ravenna |
| Keywords: | Monopolistic Competition, Sticky Prices, Inflation, Euro. |
| JEL: | E31 E63 L89 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:659&r=mac |
| By: | Christopher Phelan; Marco Bassetto (Department of Economics University of Minnesota) |
| JEL: | E52 E42 E43 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:433&r=mac |
| By: | Stefano Eusepi; Jess Benhabib |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:926&r=mac |
| By: | Filippo Occhino; John Landon-Lane (Economics Rutgers University) |
| Keywords: | limited participation, segmented markets, Bayesian model comparison, monetary policy shocks. |
| JEL: | C11 C52 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:116&r=mac |
| By: | M. DOSSCHE; G. EVERAERT |
| Abstract: | Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved time-varying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the half life of a shock, can range from 1 quarter in case of a cost-push shock to several years for a shock to long-run inflation expectations or the output gap. |
| Keywords: | Inflation Target, State Space Model, Kalman Filter, Bayesian Analysis |
| JEL: | C11 C22 C32 E31 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:05/340&r=mac |
| By: | Martin Ellison; Neil Rankin |
| Abstract: | We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we show that the economy will not necessarily tend to the Friedman Rule, as Obstfeld found. Instead it may tend to the critical debt level at which there is no cheating incentive under commitment, and inflation and could well be positive here. |
| Keywords: | Time consistency; optimal inflation-tax smoothing; discretion; commitment; Friedman Rule. |
| JEL: | E52 E61 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0501&r=mac |
| By: | Zsolt Darvas (Corvinus University, Budapest); Gabor Vadas (Magyar Nemzeti Bank) |
| Abstract: | Decomposing output into trend and cyclical components is an uncertain exercise and depends on the method applied. It is an especially dubious task for countries undergoing large structural changes, such as transition countries. Despite their deficiencies, however, univariate detrending methods are frequently adopted for both policy oriented and academic research. This paper proposes a new procedure for combining univariate detrending techniques which is based on revisions of the estimated output gaps adjusted by the variance of and the correlation among output gaps. The procedure is applied to the study of the similarity of business cycles between the euro area and new EU Member States. |
| Keywords: | combination, detrending, new EU members, OCA, output gap, revision |
| JEL: | C22 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2005/05&r=mac |
| By: | Giovanna Vallanti |
| Abstract: | We use a panel of 20 OECD countries over a 30-year period to estimate the implications ofinternational capital mobility for unemployment. We find that the increase in capital flowssince the mid1980s has contributed to an amplification of the impulse response ofunemployment to country-specific shocks and to a fall in the persistence of unemployment inresponse to the same shocks. |
| Keywords: | unemployment persistence, unemployment volatility, international capital flows,OECD countries |
| JEL: | E24 E32 F15 F21 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0684&r=mac |
| By: | Andrew Ang; Sen Dong |
| Keywords: | affine term structure model, monetary policy, interest rate risk |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:22&r=mac |
| By: | Jordi Gali; Mark Gertler; David Lopez-Salido |
| Abstract: | Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust. |
| JEL: | E31 E32 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11788&r=mac |
| By: | Hortlund, Per (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII. |
| Keywords: | Bank leverage; Capital-asset ratio; Inflation; Corporate taxes. |
| JEL: | E44 E52 G28 G32 H25 N23 N24 |
| Date: | 2005–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0612&r=mac |
| By: | Alan G. Ahearne; John Ammer; Brian M. Doyle; Linda S. Kole; Robert F. Martin |
| Abstract: | This paper examines periods of pronounced rises and falls of real house prices since 1970 in eighteen major industrial countries, with particular focus on the lessons for monetary policy. We find that real house prices are pro-cyclical—co-moving with real GDP, consumption, investment, CPI inflation, budget and current account balances, and output gaps. House price booms are typically preceded by a period of easing monetary policy, but then diminishing slack and rising inflation lead monetary authorities to begin tightening policy before house prices peak. In a careful reading of official reports, speeches, and minutes, we find little evidence that foreign central banks have reacted to past episodes of rising real house prices beyond taking into account their implications for inflation and output growth. However, central bankers have expressed a range of opinions in the more recent policy debate with some willing in certain cases to raise policy rates to try to stem current and future surges in asset prices while others favor moral suasion or a hands-off approach. Finally, we characterize the risks associated with house-price reversals. Although mortgage lenders in some countries have significant exposure to house prices, the balance of evidence suggests that this exposure does not, in and of itself, pose a significant risk to financial stability. Nevertheless, the co-movement of both property prices and default rates with the business cycle means that losses on mortgage lending are likely to be higher when banks’ other lines of business are also performing poorly. |
| Keywords: | Monetary policy ; Housing - Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:841&r=mac |
| By: | Selo Imrohoroglu; Kaiji Chen; Ayse Imrohoroglu (finance and business economics usc) |
| Keywords: | Growth Model, Total Factor Productivity, Saving Behavior |
| JEL: | E13 E22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:747&r=mac |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | In its Monthly Bulletin of November 2002, the European Central Bank (ECB) stated that themonthly press conference held by its President represents one of its most importantcommunication channels and that it provides a comprehensive summary of the policyrelevant assessment of economic developments. After providing a glossary to translate thequalitative information of the press conferences into an ordered scale, we verify empiricallywhether and to what extent market expectations react to the information released by the ECB.We found that the public not only understand but also believe the signals sent by theEuropean monetary authority. |
| Keywords: | communication, credibility, ECB, glossary, Repo, Euribor, news approach |
| JEL: | E50 E52 E58 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0682&r=mac |
| By: | Alessandro Secchi; Francesco Lippi |
| Keywords: | currency, search theory, inflation |
| JEL: | E5 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:393&r=mac |
| By: | Manuel Toledo (Economics University of Rochester); Jose I. Silva |
| Keywords: | Labor Markets, Search, Matching, Insider-Outsider, Turnover Costs, Business Cycles |
| JEL: | J63 J64 J41 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:775&r=mac |
| By: | Belen Jerez; Miquel Faig |
| Keywords: | inflation, prices, private information, competitive search |
| JEL: | D83 E41 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:462&r=mac |
| By: | Nicola Fuchs-Schuendeln (Department of Economics Harvard University) |
| Keywords: | life cycle consumption, natural experiment |
| JEL: | D12 E21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:517&r=mac |
| By: | Bullard,James; Schaling,Eric (Tilburg University, Center for Economic Research) |
| Abstract: | We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. Keywords: Indeterminacy, learning, monetary policy rules, new open economy macroeconomics, exchange rate regimes, second generation policy coordination. |
| Keywords: | indeterminacy;second generation policy coordination; learning;monetairy policy;open economy;macroeconomics;exchange rate |
| JEL: | E58 E61 F31 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2005116&r=mac |
| By: | Márcio Antônio Salvato; João Victor Issler; Angelo Mont'alverne Duarte |
| Abstract: | We investigate whether business cycles are all alike computing the welfare costs of business cycles for European-Union (EU) as the solution of the problem proposed by Lucas (1987). Because these countries have a long tradition of integration and trade, it is a "natural experiment" to investigate how similar their welfare costs of business cycles are. Using standard assumptions on preferences and a reasonable reduced form for consumption, we computed welfare costs using three alternative trend-cycle decomposition methods, but focusing on the multivariate Beveridge-Nelson decomposition. Our results show that welfare costs are very different across EU countries and between US and EU countries, and thus it is a strong evidence that business cycles are not alike in Europe. |
| JEL: | E32 C32 C53 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:031&r=mac |
| By: | Fang Yang (Department of Economics University of Minnesota) |
| Keywords: | Consumption, Housing, Portfolio |
| JEL: | H31 E21 E27 R21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:718&r=mac |
| By: | Marco Flávio da Cunha Resende |
| Abstract: | A consensus has not yet emerged about the relationship between budget deficit, external deficit and national saving. In general, the mechanisms through which budget deficits could cause current account deficits are not highlighted in the works about this theme. Basing on the Post Keynesian literature one can find a result concerning the relationship between the budget deficit and the national saving distinct from the one observed in the mainstream literature, since Post keynesians invert the causal link between saving and investment. According to mainstream economic literature the budget deficit can cause an insufficiency of national saving while according to Post Keynesians the budget deficit can transfer to abroad the investment stimulus on the saving formation. We arrive at the conclusion that there is not a systematic relationship between budget deficit, current account deficit and national saving and that when it happens it can be processed only through changes in the real exchange rate. |
| JEL: | E21 E22 E62 F30 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:068&r=mac |
| By: | Bruno Silva Martins; Marco Bonomo |
| Abstract: | The objective of this paper is to investigate the potential role of credit market imperfections in transmission mechanism of monetary policy in Brazil. The paper uses the.nancial accelerator model, developed by Bernanke, Gertler and Gilchrist (1999), where the credit channel arises via balance sheet effects. The simulations indicate that the financial accelerator effect. seems to exist in Brazilian economy, and that the microeconomics reforms, recently implemented in Brazil, may change the dynamics of Brazilian economy in the future. |
| JEL: | E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:043&r=mac |
| By: | Roger E. A. Farmer |
| Keywords: | Unemployment Real Business Cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:26&r=mac |
| By: | Eijffinger,Sylvester C.W.; Goderis,Benedikt (Tilburg University, Center for Economic Research) |
| Abstract: | This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effects on the probability of crisis is ambiguous. |
| Keywords: | short term debt; currency;financial crisis;monetary policy;foreign debt;balance sheets |
| JEL: | E52 E58 F34 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2005113&r=mac |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo) |
| 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: | 2005–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_026&r=mac |
| By: | Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Thomas Westermann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | For monetary policy purposes it is useful to apply a concept of potential output growth that looks through the fluctuations inherent in most model based estimates. Growth accounting can be a useful tool in this respect, given its focus on average developments in real GDP growth and supply side factors over medium to longer-term horizons. This paper describes the assumptions and measurement issues underlying the growth accounting framework and applies it to euro area data for the period 1980 to 2003. It shows that growth in measured total factor productivity has been the single most important contributor to real GDP growth over this period. However, the contribution to growth from this factor declined between the 1980s and the 1990s, while that from labour increased. Looking forward, the projected demographic developments imply a reduction in average real GDP growth in the coming decades unless compensation is achieved from other supply-side factors. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050022&r=mac |
| By: | Eran Yashiv |
| Abstract: | Does the search and matching model fit aggregate U.S. labor market data? While the modelhas become an important tool of macroeconomic analysis, recent literature pointed to somefailures in accounting for the data. This paper aims to answer two questions: (i) Does themodel fit the data, and, if so, on what dimensions? (ii) Does the data "fit" the model, i.e. whatare the data which are relevant to be explained by the model? The analysis shows that themodel does fit certain specifications of the data on many dimensions, though not on all. Thisincludes capturing the high persistence and high volatility of most of the key variables, aswell as the negative co-variation of unemployment and vacancies. It offers a workable,empirically-grounded version of the model for the analysis of aggregate U.S. labor marketdynamics. The paper provides macroeconomists guidance concerning the relevant "buildingblock" for modelling the labor market, both in terms of the model and in terms of the data. |
| Keywords: | search, matching, U.S. labor market, vacancies, labor market flows, business cycles. |
| JEL: | E24 E32 J32 J63 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0677&r=mac |
| By: | Albrecht Ritschl; Martin Uebele |
| Abstract: | This paper examines the comovement of the stock market and of real activity in Germany before World War I under the effcient market hypothesis. We employ multivariate spectral analysis to compare rivaling national product estimates to stock market behavior in the frequency domain. Close comovement of one series with the stock market enables us to decide between various rivaling business cycle chronologies. We find that business cycle dates obtained from deflated national product series are severely distorted by interference with the implicit price deflator. Among the nominal series, the income estimate of Hoffmann (1965) correlates best with the stock market, while the tax based estimate of Hoffmann and Müller (1959) is too smooth especially before 1890. We find impressive comovement between the stock market and nominal wages, a sub-series of Hoffmann's income estimate. We can show that a substantial part of this nominal wage series is driven by data on real investment activity. Our findings confirm the traditional business cycle chronology for Germany of Burns and Mitchell (1946) and Spiethoff (1955), and lead us to discard later, rivaling business cycle chronologies. |
| Keywords: | Business Cycle Chronology, Imperial Germany, Spectral Analysis, Effcient Market Hypothesis |
| JEL: | E32 E44 N13 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-056&r=mac |
| By: | R. Anton Braun (Faculty of Economics University of Tokyo); Daisuke Ikeda |
| Keywords: | Saving, Heterogeneity, general equilibrium |
| JEL: | E21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:625&r=mac |
| By: | Skander Van den Heuvel (Finance Department University of Pennsylvania) |
| Keywords: | Bank capital requirements, Welfare, Sidrauski model |
| JEL: | E44 G28 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:880&r=mac |
| By: | Lawrence Christiano; Martin Eichenbaum |
| JEL: | E32 C15 C52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:902&r=mac |
| By: | Jesper Berg (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen K, Denmark.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This occasional paper explains why the bank lending survey was developed by the ECB and describes its main features. It discusses the importance of credit developments for both the economy and the functioning of monetary policy, and further clarifies why the survey was introduced. Furthermore, the paper demonstrates that the value added of implementing a bank lending survey for the euro area lies in particular in the way it provides greater insight into developments in credit standards, non-interest rate credit conditions and terms, the risk perception of banks and the willingness of banks to lend. Credit standards are the internal guidelines or criteria of a bank which reflect the bank’s loan policy. The terms and conditions of a loan refer to the specific obligations agreed upon by the lender and the borrower. This occasional paper also considers similar surveys conducted by the Federal Reserve System in the US and by the Bank of Japan. |
| Keywords: | Survey; Banks; Credit Standards; Credit Markets; European Central Bank; Federal Reserve; Bank of Japan |
| JEL: | E43 E51 G21 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050023&r=mac |
| By: | Emilie Laffiteau (CATT / UPPA); Jean-Marc Montaud (CATT / UPPA; CED / IFReDE-GRES, Université Montesquieu Bordeaux IV) |
| Abstract: | L’objectif de cette étude est d’évaluer, à travers l’expérience récente de l’Argentine, le lien entre les mécanismes du Currency Board et les ajustements macroéconomiques, notamment sur le marché du travail. Dans un premier temps, nous présentons les principales spécificités du système monétaire argentin. Dans un deuxième temps nous construisons un modèle d’Equilibre Général Financier qui incorpore les mécanismes du Currency Board et les principales caractéristiques de l’économie argentine. Enfin, dans un troisième temps, nous simulons trois situations économiques qu’à connu l’Argentine à la fin des années quatre-vingt-dix : un renforcement des politiques d’austérité, les chocs des crises financières et une accélération des efforts d’intégration régionale. Chaque simulation montre alors comment l’économie argentine et son marché du travail réagissent dans un contexte où les mécanismes monétaires sont contraints par le régime du Currency Board. The aim of this study is to address, through the recent argentine experience, the link between Currency Board’s mechanisms and macroeconomic adjustments, especially in the labour market. First, we present how the argentine monetary system was set up; secondly we build a financial general equilibrium model which includes a Currency Board mechanism and the main features of the argentine economy. Thirdly, three types of simulations illustrate the argentine economic situation at the end of nineties: austerity politics strengthening, financial crisis and regional integration strengthening scenarii. Each simulation explains how the argentine economy react in a framework where monetary mechanisms are constraint by the Currency Board. (Full text in french) |
| JEL: | E42 E58 E24 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:mon:ceddtr:120&r=mac |
| By: | William Roberds (Research Department Federal Reserve Bank of Atlanta); Stephen Quinn |
| Keywords: | Central banking, commodity money, debasement |
| JEL: | E42 N13 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:318&r=mac |
| By: | Michael Sturm (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nikolaus Siegfried (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050031&r=mac |
| By: | Patrick Francois (University of British Columbia); Huw Lloyd- Ellis (Queen's University) |
| Abstract: | We develop a model of 'intrinsic' business cycles, driven by the decentralized behaviour of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show how equilibrium cycles, associated with strategic delays in implementation and endogenous innovation, arise even in the presence of reversible investment. We derive the implications for the cyclical evolution of both tangible (physical) and intangible (knowledge) capital. In particular, our framework is consistent with key aspects of the somewhat puzzling relationship between fixed capital formation and the stockmarket at business cycle frequencies. |
| Keywords: | Tobin's Q, fixed capital formation, intangible investment, cycles and growth |
| JEL: | E |
| Date: | 2005–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511023&r=mac |
| By: | Guay C. Lim; Paul D. McNelis |
| Abstract: | This paper examines the interaction of real exchange rates and current account movements in open economies subject to monopolistic competition with sticky price-setting behavior and distortionary taxes. We find that the correlations between fiscal balances and the current account depend on the elasticity of net exports with respect to the real exchange rate. Under highly elastic export demand, the welfare e¤ects may be greater or lower than under export demand with a low elasticity. |
| Keywords: | sticky price setting; current account; real exchange rate |
| JEL: | E52 E62 F41 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:056&r=mac |
| By: | V. Sanchez-Marcos; J.V.Rios-Rull (Economics Universidad de Cantabria) |
| Keywords: | housing prices, frictions,aggregate shocks |
| JEL: | E3 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:648&r=mac |
| By: | Norbert Fiess |
| Abstract: | In early January 2003, the United States and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua launched official negotiations for the Central American Free Trade Agreement (CAFTA), a treaty that would expand NAFTA-style trade barrier reductions to Central America. With deeper trade integration between Central America and the US, it is expected that there will be closer links in business cycles among Central America and the US. The aim of this paper is to assess the degree of business cycle synchronization between Central America and the US. This is not only relevant for a better understanding of the influence of important trading partners on the business cycle fluctuations in the domestic economy. It has also an important implication in terms of evaluating the costs and benefits of macroeconomic coordination. |
| JEL: | F15 F42 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_14&r=mac |
| By: | Neville Francis; Valerie A. Ramey (Economics University of California, San Diego) |
| Keywords: | hours, long-run trends, schooling |
| JEL: | E24 O40 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:250&r=mac |
| By: | Osmani Teixeira de Carvalho de Guillén; Carlos Hamilton Vasconcelos Araújo |
| Abstract: | This article uses a Vector Error Correction Model (VECM) framework to study exchange rate pass-through to producer and consumer prices in Brasil. We identify two long-run and one short-run relations in data. We calculate the impulse-response function of domestic prices to exchange rate shock. Exchange rate pass-through is shown to be incomplete. We verify that passthrough is modest for producer prices and very small for consumer prices. An exchange rate shock does, therefore, have a limited impact on consumer price inflation. |
| JEL: | E31 E32 E58 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:034&r=mac |
| By: | Nicolas Ponty (INSEE, PNUD) |
| Abstract: | La programmation financière et monétaire tient une place centrale dans les négociations entre les autorités nationales des pays en développement et les institutions de Bretton Woods. Elle répond notamment à la nécessité d’établir une cohérence prospective entre l’évolution des principaux agrégats macroéconomiques : comptes nationaux, soldes budgétaires, situation monétaire, balance des paiements extérieurs et endettement extérieur. Sur la période récente, le suivi macroéconomique des pays en développement a connu différentes évolutions. D’abord, une surveillance multilatérale, notamment en matière budgétaire, s’est mise en place sous l’égide des organisations régionales. Ensuite, les appuis financiers extérieurs sont de plus en plus fréquemment décidés sous la forme d’une aide budgétaire et sur la base d’une conditionnalité de performance. Enfin, la programmation budgétaire sur un horizon de moyen terme s’est renforcée avec la mise en place récente de Cadre des Dépenses à Moyen Terme (CDMT). Pour répondre à ces évolutions, les outils macroéconomiques d’analyse et de prévision actuellement disponibles doivent être renforcés. Cette étude, menée dans le cadre spécifique des pays membres de l’UEMOA, propose un modèle pays MAcro structurel DYNamique, MADYN. La modélisation retenue repose bien entendu sur le cadre comptable minimal de la programmation financière et monétaire (cf. partie I). Il le complète en amont par une prise en compte systématique des variables d’environnement et de politique économique. Les différents blocs du modèle sont présentés (cf. partie II). Un panorama des principaux déterminants théoriques des comportements modélisés est alors présenté. La dernière et troisième partie précise la cohérence d’ensemble du modèle et ses conditions, en analyse variantielle et aussi en prévision. Financial and monetary programming holds a central place in negotiations between national authorities of developing countries and Breton Woods institutions. It answers in particular the need for establishing a prospective coherence between the evolution of the main macroeconomic aggregates : national accounts, fiscal balances, monetary situation, external payments and external debt. Over the recent period, the macroeconomic follow-up of developing countries has gone through various evolutions. Initially, a multilateral monitoring, notably in fiscal area, was launched under the guidance of regional organisations. Then, Official Development Assistance is more and more frequently delivered in the form of budgetary aid and on conditionality based performance. Finally, budgetary programming on a medium term horizon was reinforced with the recent launching of a Medium Term Expenditure Framework (MTEF). To answer these evolutions, currently available macroeconomic tools for analysis and forecast must be strengthened. This study, undertaken within the specific framework of WAEMU member States, sets up a MAcro DYNamic structural model, MADYN. The modelling approach is based of course on the minimal accounting framework of the financial and monetary programming (See part I). It is characterised upstream by taking into account of environmental and economic policy variables. The various blocks of the model are presented (See part II). A survey of the overriding theoretical determinants of the behaviours is then presented. The last and third part specifies the overall consistency of the model and its conditions of use, both in counterfactual analysis and also in forecasting. (Full text in french) |
| JEL: | C1 E17 E60 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:mon:ceddtr:118&r=mac |
| By: | Julia Darby, V. Anton Muscatelli and Graeme Roy |
| Abstract: | Fiscal consolidations, episodes where governments make large discretionary improvements in their fiscal positions, have received considerable attention, especially in EMU. The existing literature demonstrates that the composition of consolidations is a crucial determinant of their success. We show that sub-central governments also play a key role in consolidations through sustained cuts in expenditures, as their intergovernmental grants are cut. In contrast to existing studies we find that cuts in capital spending at sub-central levels are a feature of successful consolidations. We also show that the government type and the nature of fiscal arrangements in a country impact on these results. |
| JEL: | E62 E63 H62 H77 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_21&r=mac |
| By: | Louis Bê Duc (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); David Marqués Ibáñez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Adrian van Rixtel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | For central banks, the monitoring of financing conditions plays a pivotal role in assessing the actual transmission of monetary policy impulses to borrowers. This paper presents in detail some of the indicators and data used by the ECB to assess financing conditions in the euro area. It also shows how these indicators have been used to provide a broad assessment of developments in financing conditions in the euro area in recent years. The ECB’s analysis of financing conditions is dynamic and seeks to reflect underlying changes in the euro area’s financial structure. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050037&r=mac |
| By: | Ignazio Angeloni (Italian Ministry of Economy and Finance, Rome, Italy.); Michael Flad (Johann Wolfgang Goethe University, 60054 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines diverse aspects of the monetary integration of the ten new Member States (NMS) which joined the EU on 1 May 2004 into the euro area. Most NMS have undergone a rapid and deep transformation in all areas with considerable progress in their processes of reform and convergence, and more is underway. While trade integration with the other 15 EU Member States (EU15) has progressed quickly, convergence in output specialisation to EU standards has been slow, especially if measured in real terms. This may influence negatively the pace of real convergence. Most NMS lag significantly behind in building up and deepening their financial systems. There is also evidence that exchange rate flexibility may still be serving as a useful shock absorber for some NMS, and so far the evidence indicates that real exchange rates have moved, broadly speaking, in line with long term fundamental equilibria. On the positive side, many NMS are quite advanced relative to the euro area in the process of labour market and institutional reform (their labour market structures are more flexible than those of the euro area countries). There is also some evidence that a few NMS have a significant degree of business-cycle synchronisation with the euro area: hence, they may become less likely to be affected by different economic shocks. This, however, is not true for all NMS. The monetary policy institutions of the NMS have also converged to some degree - goals and institutional settings of central banks are now much more similar than before. A case-by-case approach to adopting the euro, based on country-specific conditions, seems natural due to the differences between the countries. |
| Keywords: | Optimum Currency Area, Economic and Monetary Integration, EMU. |
| JEL: | E42 F13 F33 F42 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050036&r=mac |
| By: | Lavan Mahadeva; Alex Muscatelli |
| Abstract: | This paper looks at some implications of data uncertainty for monetary policy. We combine national accounts data revisions with optimal control and filtering experiments on a calibrated model to discuss policy implications of price-versus-volume data uncertainty in GDP data for the United Kingdom. We find some degree of negative correlation between revisions to real GDP and GDP deflator data. We develop a methodology for estimating the output gap which takes account of the benefit of hindsight and decreasing measurement errors through time. Our optimal control experiments reveal that monetary policy makers would be led to place greater weight on nominal GDP data and correspondingly less weight on separate, uncertain estimates of prices and volume growth. However, estimates of real growth and also the output gap matter even when there is much uncertainty of this type. Our results also suggest that estimates of the level of inflationary pressure and nominal GDP data become more important when the economy is prone to inflationary overreactions to shifts in technological progress |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:14&r=mac |
| By: | Richard G. Anderson; Kevin L. Kliesen |
| Abstract: | The acceleration of productivity growth during the latter half of the 1990s was both the defining economic event of the decade and a major topic of debate among Federal Reserve policymakers. A key aspect of the debate was the conflict between incoming aggregate data, which initially suggested little productivity gain, and anecdotal firm-level evidence which hinted at an acceleration. Some FOMC members feared an overheating economy and higher inflation; others, including the Chairman, argued that revolutionary increases in productivity were occurring and the Committee should not prematurely forgo significant future gains in real income by tightening policy. We review the difficulty of measuring productivity during periods of rapid quality change, the large magnitude of subsequent data revisions during the 1990s, and, from FOMC transcripts, the contemporary monetary policy debate within the FOMC as the decade*s data evolved. |
| Keywords: | Monetary policy ; Production (Economic theory) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-067&r=mac |
| By: | Domenico Giannone; Lucrezia Reichlin; David Small |
| Abstract: | This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing "news" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables, and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation, while GDP is affected only by real variables and interest rates. |
| Keywords: | Economic forecasting ; Gross domestic product ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-42&r=mac |
| By: | Arup Daripa (School of Economics, Mathematics & Statistics, Birkbeck College) |
| Abstract: | A repo auction is a multi-unit common value auction in which bidders submit demand functions. Such auctions are used by the Bundesbank as well as the European Central Bank as the principal instrument for implementing monetary policy. In this paper, we analyze a repo auction with a uniform pricing rule. We show that under a uniform pricing rule, the usual intuition about the value of exclusive information can be violated, and implies free riding by uninformed bidders on the information of the informed bidders, lowering payoff of the latter. Further, free riding can distort the information content of auction prices, in turn distorting the policy signals, hindering the conduct of monetary policy. The results agree with evidence from repo auctions, and clarifies the reason behind the Bundesbank’s decision to switch away from the uniform price format. Our results also shed some light on the rationale behind the contrasting switch to the uniform price format in US Treasury auctions. |
| Keywords: | Repo auction, Informational Free Riding, Monetary Policy Signals. |
| JEL: | D44 E50 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0520&r=mac |
| By: | Marco Del Negro; Christopher Otrok |
| Abstract: | The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon. The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-24&r=mac |
| By: | Michael W. L. Elsby |
| Abstract: | This paper seeks to contribute to the literature on downward nominal wage rigidity (DNWR)along two dimensions. First, we formulate and solve an explicit model of wage-setting in thepresence of worker resistance to nominal wage cuts - something that has previously beenconsidered intractable. In particular, we show that this resistance renders wage increases(partially) irreversible. Second, using this model, we can explain why previous estimates ofthe macroeconomic effects of DNWR have been so weak despite remarkably robustmicroeconomic evidence. In particular, we show that previous studies have neglected thepossibility that DNWR can lead to a compression of wage increases as well as decreases.Thus, the literature may have been overstating the costs of DNWR to firms. Using micro-datafor the US and Great Britain, we find robust evidence in support of the predictions of themodel. In the light of this evidence, we conclude that increased wage pressure due to DNWRmay not be as large as previously envisaged, but that the data is nevertheless consistent with amodel in which workers resist nominal wage cuts. |
| Keywords: | Nominal Wage Rigidity, Loss Aversion, Irreversibility |
| JEL: | J30 J41 E24 E31 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0704&r=mac |
| By: | Thomas Philippon; Francesco Franco (Economics Universidade Nova de Lisboa) |
| JEL: | E2 E3 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:246&r=mac |
| By: | Roberto Tatiwa Ferreira; Luiz Ivan de Melo Castelar |
| Abstract: | The present study uses linear and non-linear diffusion index models to produce one-stepahead forecast of quarterly Brazilian GDP growth rate. Diffusion index models are like dynamic factors models. The non-linear diffusion index models used in this work are not only parsimonious ones, but also they try to capture economic cycles using for this goal a Threshold diffusion index model and a Markov-Switching diffusion index model. |
| JEL: | E32 E37 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:029&r=mac |
| By: | Eurilton Araújo; Luciane Carpena; Alexandre Cunha |
| Abstract: | We studied the cyclical and growth properties of Brazilian per capita output from 1850 to 2000. Contrary to the experience of some developed countries, we did not find large changes in the volatility of per capita output. However, we obtained evidence that the oscillations in economic activity became more persistent after World War II. |
| JEL: | C22 E32 N40 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:030&r=mac |
| By: | Pedro Gomes; Pedro Bom; Pedro Leão |
| Abstract: | Standard estimations of Taylor.s (1993) monetary policy rule assume that the natural real rate of interest can be regarded as constant. By contrast, based on Mankiew (2000) theory of Savers and Spenders, we argue that the natural rate is related to the distribution of income between the two types of agents. We show evidence from the U.S., based on a respecication of the Taylor rule proposed by Clarida et al. (2000), that the natural rate of is positively in.uenced by the long-run movements of the labour share in the national income. As the labour share has been falling since 1980s, our results indicate that the natural real interest rate fell from around 6% to around 2% in the beginnings of our decade. |
| JEL: | E43 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:026&r=mac |
| By: | Burcu Duygan |
| Keywords: | uncertainty, durable goods spending, unemployment, financial crisis |
| JEL: | D1 D8 D9 E2 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:594&r=mac |
| By: | Enrique G. Mendoza |
| Keywords: | Sudden Stops, Fisherian Deflation, Tobin’s q, Collateral Constraints |
| JEL: | F41 F32 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:307&r=mac |
| By: | Miklos Koren; Silvana Tenreyro |
| Abstract: | Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possiblereasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii)poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy);and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectorsthey specialize in. We show how to decompose volatility into these four sources, quantify their contribution toaggregate volatility, and study how they relate to the stage of development. We document the followingregularities. First, as countries develop, their productive structure moves from more volatile to less volatilesectors. Second, the level of specialization declines with development at early stages, and slowly increases atlater stages of development. Third, the volatility of country-specific macroeconomic shocks falls withdevelopment. Fourth, the covariance between sector-specific and country-specific shocks does not varysystematically with the level of development. We argue that many theories linking volatility and developmentare not consistent with these findings and suggest new directions for future theoretical work. |
| Keywords: | volatility, specialization, diversification, development, economic fluctuations. |
| JEL: | O11 O14 E32 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0706&r=mac |
| By: | Julia K. Thomas; Aubhik Khan (Research Federal Reserve Bank of Philadelphia) |
| Keywords: | Inventories, Business Cycles, (S,s), Stockout-avoidance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:182&r=mac |
| By: | Dirk Krueger; Karsten Jeske |
| Keywords: | Housing, Mortgage Market, Default Risk |
| JEL: | E21 G11 R21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:242&r=mac |
| By: | Fernando M. Gonçalves; Márcio Holland; Andrei D. Spacov |
| Abstract: | The phenomenon of high and persistent short-term real interest rates in Brazil has stimulated an extensive literature attempting to explain its causes. Among the various contributions on the topic, one that has received considerable attention is the article by Arida, Bacha, and Lara-Resende (2004) (henceforth, ABL), which argues that risks associated with the jurisdiction and currency inconvertibility are relevant determinants of the level of short-term real interest rates. In the present paper, we formulate a methodology based on ABL's definition of jurisdiction uncertainty, use a set of institutional variables that proxy the degree of jurisdictional uncertainty, build an index of currency inconvertibility based on capital controls and use them to test ABL's conjecture and variants of it. The results are by and large unfavorable not only to ABL's conjecture, but also to variants of their argument. The results further indicate that traditional monetary and fiscal factors are far more relevant to explain the level of short-term real interest rates than the binomial jurisdictional uncertainty/ currency inconvertibility is. |
| JEL: | E43 E50 K41 K40 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:028&r=mac |
| By: | Stijn van Nieuwerburgh; Michael Kumhof |
| Keywords: | Portfolio balance, sterilized foreign exchange intervention |
| JEL: | E42 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:851&r=mac |
| By: | Ulisses Ruiz de Gamboa |
| Abstract: | This paper tests the sustainability of the Brazilian public debt throughout its history as an independent nation (1823-2004) by the use of cointegration tests. Since the sample period covers a historical period highlighted by a great deal of political, economic and institutional shifts, recursive tests have also been carried out in order to evaluate the constancy of the cointegrating rank. Initially, the traditional intertemporal budget model (Ricardian Equivalence model) has been suposed, and thus testing the cointegration of government expenditures and revenues. However, the presence of consecutive default or debt restructuring situations concerning the Brazilian public debt, throughout its republican period, suggests an alternative model, in which the sustainability of public debt is achieved by "debt repudiation" ("New Ricardian Equivalence" model). The cointegration tests based on such an alternative model have included dummies for each default or renegotiation period of the public debt ("default dummies"). As a conclusion, one might postulate that the fiscal policy implemented in Brazil during almost all its history as an independent nation, oscillated between authentic sustainability periods (Imperial period) and moments when fiscal sustainability was achieved through debt default or renegotiation (republican period from 1889 to 1943 and from 1983 to 1993) or seigniorage revenues (republican period from 1944 to 1982). |
| JEL: | E62 H60 C32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:050&r=mac |
| By: | Paulo de Andrade Jacinto; César Augusto Oviedo Tejada; Tanara Rosângela Vieira Sousa |
| Abstract: | The paper investigates de relationship between employment rate and mortality rate in Brazil during the period 1981-2002. It briefly reviews the literature on macroeconomic conditions and health, emphasizing the existence of two controversial hypothesis. The Ruhm's Hypothesis suggest that high unemployment rates associated with lower mortality and vice versa stands in stark contrast to Brenner's earlier work, who found the opposite effect. The paper follows the methodology put forward Ruhm (2000) to estimate the impact of employment on mortality rate. Controlling for a state-specific effects using a static and dynamic panel data model, we find evidence that total mortality rate is higher in recessions, i.e. when improved the condition macroeconomics occur a fall in mortality rate. This result suggests that we accept the Brenner's hypothesis in opposite to Ruhm's hypothesis. |
| JEL: | J60 I12 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:168&r=mac |
| By: | Ad van Riet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ekkehard Ernst; Christophe Madaschi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Fabrice Orlandi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alvaro Santos Rivera (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Benoît Robert (Banque Nationale de Belgique, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Jörg Döpke (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 10250 Frankfurt am Main, Germany.); Constantina Backinezos (Bank of Greece, 21, E. Venizelos Avenue, 60431 Athens, Greece.); Ioanna Bardakas (Bank of Greece, 21, E. Venizelos Avenue, 60431 Athens, Greece.); Esther Gordo Mora (Banco de España, Alcalá, 28014 Madrid, Spain.); Christian Barontini (Banque de France, 39, rue Croix-des Petits-Champs, 75049 Paris Cedex 01, France.); Mark Cassidy (Central Bank of Ireland, Dame Street, Dublin 2, Ireland.); Sandro Trento (Banca d’Italia, Via Nazionale 91, 00184 Rome, Italy.); Erik Walch (Banque centrale du Luxembourg, 2 boulevard Royal, 2983 Luxembourg.); Bouke Buitenkamp (De Nederlandsche Bank, Westeinde 1, 1017 Amsterdam, The Netherlands.); Karin Wagner (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1011 Vienna, Austria.); Hugo Reis (Banco de Portugal, 148, Rua do Commercio, 1101 Lisbon Codex, Portugal.); Risto Herrala (Bank of Finland, P.O. Box 160, 00101 Helsinki, Finland.); Faisel Sethi (Danmarks Nationalbank, Havengade 5, 1093 Copenhagen K, Denmark.); Kurt Gustavsson (Sveriges Riksbank, Brunkebergstorg 11, 103 37 Stockholm, Sweden.); Vincent Labhard (Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom.) |
| Abstract: | This paper analyses trends in sectoral specialisation in the EU and concludes the following: 1) The European production structure appears more homogenous than that of the US. 2) While sectoral specialisation has shown a slight increase in some smaller euro area countries towards the end-1990s, it is too early to detect any potential impact of EMU. 3) Despite some changes in sectoral composition, the business cycles of euro area countries became more synchronised over the 1990s, which may be seen as reassuring from the point of view of the single monetary policy. 4) Sectoral re-allocation accounts for as much as 50% of the increase in labour productivity growth in business sector services in the euro area. 5) The slowdown of European labour productivity growth relative to the US since the mid-1990s is explained by a stronger performance in the US wholesale and retail trade, financial intermediation and high-tech manufacturing sectors. |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20040019&r=mac |
| By: | Juan Carlos Cordoba (Economics Rice University) |
| Keywords: | Idiosyncratic Risk, Incomplete Markets, Borrowing Constraints, Wealth |
| JEL: | E2 E44 G22 D |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:235&r=mac |
| By: | Amartya Lahiri; Carlos A. Vegh |
| Abstract: | Central banks typically raise short-term interest rates to defend currency pegs. Higher interest rates, however, often lead to a credit crunch and an output contraction. We model this trade-off in an optimizing, first-generation model in which the crisis may be delayed but is ultimately inevitable. We show that higher interest rates may delay the crisis, but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect. The optimal interest rate defense involves setting high interest rates (relative to the no defense case) both before and at the moment of the crisis. Furthermore, while the crisis could be delayed even further, it is not optimal to do so. |
| JEL: | F41 E52 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11791&r=mac |
| By: | Zvi Hercowitz; Jeffrey C. Campbell (E. Berglass School of Economics Tel Aviv University) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:120&r=mac |
| By: | Farley Grubb |
| Abstract: | The purported failure of the classical quantity theory of money in the colonial economy is shown to be a failure of data and not a failure of theory. When new data on the quantity of specie in circulation is added to the current data on paper money and prices, and econometrically estimated in both short- and long-run monetary models, the long-debated anomaly regarding the performance of the classical quantity theory of money in the colonial economy disappears. How paper money was backed and could be exchanged for specie was important, but not in the way theorists assert. |
| JEL: | N11 E42 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11784&r=mac |
| By: | Adam Szeidl; Raj Chetty |
| Keywords: | Portfolio choice, Housing, Risk Aversion, Microfoundations |
| JEL: | D81 E21 G11 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:122&r=mac |
| By: | Leena Mörttinen; Paolo Poloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Patrick Sandars (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jukka Vesala |
| Abstract: | This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-à-vis these different sources of risk and vulnerability. Analysing the impact of the identified risks on banks’ financial condition is the ultimate objective of the ESCB banking sector stability analysis. |
| Keywords: | Financial stability, Banking sector, Macro-prudential analysis and indicators, Financial sector statistics. |
| JEL: | C82 E44 E58 G21 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20050026&r=mac |
| By: | Linda Tesar; Ariel Burstein (Economics University of Michigan); Chris Kurz |
| Keywords: | business cycle sychronization, production sharing, |
| JEL: | F23 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:304&r=mac |
| By: | Farley Grubb |
| Abstract: | The monetary powers embedded in the U.S. Constitution were revolutionary and led to a watershed transformation in the nation's monetary structure. They included determining what monies could be legal tender, who could emit fiat paper money, and who could incorporate banks. How the debate at the 1787 Constitutional Convention over these powers evolved and led the Founding Fathers to the specific powers adopted is presented and deconstructed. Why they took this path rather than replicate the successful colonial system and why they codified such powers into supreme law rather than leaving them to legislative debate and enactment are addressed. |
| JEL: | K10 G20 E50 N21 H10 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11783&r=mac |
| By: | Julia Darby, V. Anton Muscatelli and Graeme Roy |
| Abstract: | Cross-country evidence on sub-central governments’ responses to cuts in grants received from central government shows the typical response is to adjust expenditure rather than offset cuts by raising ‘own’ revenues. Spending cuts are focused on the wage bill and, disproportionately, on capital expenditure. Even where countries have greater flexibility to offset the centrally imposed cuts, through a high degree of expenditure decentralisation, tax and borrowing autonomy, they tend not to exercise these powers. So, centrally imposed cuts result in expenditure restraint at the sub-central level, but the adjustment appears to suffer from short-termism, given the disproportionate focus on capital spending. |
| JEL: | E62 E63 H62 H77 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_18&r=mac |
| By: | Saadet Kýrbaþ Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Adnan Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Evrim Turgutlu (Department of Economics, Faculty of Business, Dokuz Eylül University) |
| Abstract: | This paper investigates the validity of the Fisher hypothesis using data from 33 developed and developing countries. Conventional cointegration tests do not provide strong evidence on the relationship between nominal interest rates and inflation. Therefore, we use fractional cointegration analysis to test the long-run relationship between the two variables. The results indicate that the long-run relationship between nominal interest rates and inflation do not exist for most countries in the sample when conventional cointegration test is employed. However, fractional cointegration between the two variables is found for a large majority of countries, implying the validity of the Fisher hypothesis. The results also indicate that the equilibrium errors display long memory. |
| Keywords: | Fisher hypothesis, interest rates, fractional cointegration, long memory |
| JEL: | E43 C22 |
| URL: | http://d.repec.org/n?u=RePEc:deu:dpaper:0405&r=mac |
| By: | Lawrence J. Christiano; Martin Eichenbaum; Robert J. Vigfusson |
| Abstract: | We show that the standard procedure for estimating long-run identified vector autoregressions uses a particular estimator of the zero-frequency spectral density matrix of the data. We develop alternatives to the standard procedure and evaluate the properties of these alternative procedures using Monte Carlo experiments in which data are generated from estimated real business cycle models. We focus on the properties of estimated impulse response functions. In our examples, the alternative procedures have better small sample properties than the standard procedure, with smaller bias, smaller mean square error and better coverage rates for estimated confidence intervals. |
| Keywords: | Vector analysis ; Vector autoregression ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:842&r=mac |
| By: | Jorge Soares; Marina Azzimonti (Economics University of Iowa); Pierre-Daniel Sarte |
| Keywords: | Time-consistency, Markov Equilibrium, Public Debt |
| JEL: | H2 H6 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:481&r=mac |
| By: | Paul Beaudry; Franck Portier (Economics Universite de Toulouse) |
| Keywords: | Stock Prices - Total Factor Productivity |
| JEL: | E3 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:515&r=mac |
| By: | Istvan Konya; Peter Benczur (Economics Magyar Nemzeti Bank) |
| Keywords: | real effects of nominal shocks, endogenous pass-through, two-sector growth model, q-theory, money-in-the-utility |
| JEL: | F32 F41 F43 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:51&r=mac |
| By: | Ellen McGrattan; V. V. Chari; Patrick Kehoe |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:664&r=mac |
| By: | Gianluca Violante; Giovanni Gallipoli (Economics University College London); Costas Meghir |
| Keywords: | Education, Inequality, Equilibrium, Policy |
| JEL: | J20 J24 E20 E60 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:522&r=mac |
| By: | Jean-Claude Maswana (Kyoto University) |
| Abstract: | The determination of the causal pattern among inflation, money growth, and exchange rate has important implications for policymakers regarding appropriate stabilization policies in developing economies. Using Congolese data where the pace of broad money growth and hyperinflation (23,760% annual change) reached record levels in early 1990s, we use single−equation multivariate autoregressive models with the optimal lag selected using Hsiaofs approach to Granger causality. Results indicate feedback causality between inflation and money growth on one side, and unidirectional Granger causality from money growth to the exchange rate and from the exchange rate to inflation on the other. These results suggest that the over−riding goal of disinflation needs to be accomplished initially by exchange rate stabilization, followed by a direct inflation targeting. |
| Keywords: | Congo Inflation Hsiao's version of Granger Causality |
| JEL: | O P |
| Date: | 2005–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0511023&r=mac |
| By: | Juan Carlos Cordoba (Rice University); Genevieve Verdier (Texas A&M) |
| Abstract: | Lucas (2004) asserts that 'Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing [Italics in the original] compared to the apparently limitless potential of increasing production.' In this article we evaluate this claim using an extended version of Lucas' (1987) welfare evaluation framework. We construct a social welfare function following Lucas' (2004) own suggestion of weighing everyone's welfare equally, and compute welfare measures in the same way as Lucas (1987). The result is surprising and robust. The potential welfare gains of redistribution are substantial and likely exceed the welfare gains of economic growth. Moreover, our calculations suggest that US inequality is above its optimal level. |
| Keywords: | Welfare costs, business cycles, economic growth, inequality |
| JEL: | E1 E2 D3 |
| Date: | 2005–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511021&r=mac |
| By: | Takashi Kano; Hafedh Bouakez (Economics HEC Montreal) |
| Keywords: | Learning-by-doing, Habit formation, Bayesian analysis |
| JEL: | C52 E32 J22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:513&r=mac |
| By: | Sagiri Kitao (Economics NYU) |
| Keywords: | Income Taxation, Entrepreneurs, Dynamic General Equilibrium, Heterogeneous Agents |
| JEL: | E1 E6 H2 H3 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:514&r=mac |
| By: | Gilberto Tadeu Lima |
| Abstract: | It is developed a macrodynamic model of distribution, capital accumulation and growth in which investment is non-linear in distribution: at low (high) levels of wage share, the impact of a higher profit share on investment is negative (positive). This specification conforms with some of the empirical evidence for the rise and fall of the Golden Age in several advanced economies. As it turns out, whether the economy follows a wage-led growth regime or a profit-led one depends on the prevailing distribution. Indeed, a similar dependence applies, alongside with the relative bargaining power of capitalists and workers and the cyclical behavior of markups, to the dynamic stability properties of the economy. |
| JEL: | O41 O11 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:057&r=mac |
| By: | K. Balla; G. Kertesi |
| Keywords: | transition, privatization, unemployment |
| JEL: | E62 H23 P30 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:75&r=mac |
| By: | Roel Beetsma; Alex Cukierman; Massimo Giuliodori |
| Abstract: | We provide empirical evidence on two, major war-related, regularities of U.S. fiscal policy. First, while during and around World War I there is a positive correlation between defense spending and civil non-defense spending, this correlation becomes negative during World War II. This may be explained by a combination of complementarities between defense and civilian spending that decrease with the size of government in conjunction with marginal tax distortions that increase with government's size. Second, during and around World War II there are, war-related, ratchets in transfers, veteran spending, taxes and revenues in the following sense. Invariably, the share of taxes and revenues in GDP goes up, and the share of transfers goes down, when the share of defense expenditures goes up. But taxes go down less and transfers go up more per unit change in defense expenditures when those expenditures go down at the war's conclusion than the amounts by which taxes go up and transfers go down during the buildup in defense expenditures at the beginning of the war effort. There is no evidence of such ratchets during and around World War I. Two, not necessarily mutually exclusive, explanations for these findings are: 1. The substantially higher franchise during World War II interacted with the crisis induced by the war to cause a permanent expansion of the welfare state. 2. The Great Depression permanently changed the norms of social justice and the interaction of this change with the experience of the War led to a more generous welfare state. |
| Keywords: | World War I and II; ratchet; defense spending; civilian spending transfers; taxes; revenues; franchise. |
| JEL: | E62 E65 N11 N12 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:057&r=mac |
| By: | Johannes Kaiser (Laboratory for Experimental Economics, University of Bonn, Germany); Sebastian Kube (Department of Economics, University of Karlsruhe, Germany) |
| Abstract: | We analyse the behavioural components of a firm's speculation decisions. Specifically, we conducted laboratory experiments to study how firms speculate in a deterministic two-country model with two currencies. The data is used to investigate how exchange rate variations and interest rates can influence a firm's behaviour. The subjects made only small use of technical trade. We show the existence of exchange rate uncertainty and show how the subjects try to cope with it by hedging and pessimistic expectations. One can observe that central banks can curb the influence of speculation on exchange rate volatility if they are powerful enough and collude. |
| Keywords: | currency speculation, exchange rate uncertainty, behavioural finance, laboratory experiment |
| JEL: | C91 D84 E44 E52 F31 |
| Date: | 2005–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpex:0511005&r=mac |
| By: | Kevin X.D. Huang (Research Federal Reserve Bank of Philadelphia); Zheng Liu |
| Keywords: | Temptation, Self-Control, Gul-Pesendorfer Preferences, Asset Pricing |
| JEL: | E44 C11 C15 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:770&r=mac |
| By: | Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper proposes a general equilibrium model with heterogeneous households and a financial market where each financial instrument provides liquidity services in addition to enabling a transfer of purchasing power over time. Importantly, liquidity services may be asymmetric according to whether the financial instrument is held as an asset or as a liability, and are also agentspecific. The main purpose of the study is to develop an analytical framework and a language for evaluating the effect of (broadly defined) liquidity factors on equilibrium rates of return and intertemporal allocation. |
| Keywords: | Real interest rates; liquidity services; financial market; heterogeneity. |
| JEL: | E40 E43 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050542&r=mac |
| By: | Alexandre Rands Barros |
| Abstract: | This paper develops the hypothesis that the co-existence of state owned banks with privately owned banks together tends to raise interest rates spreads and profitability of privately owned banks. This hypothesis can help explain the relationship between the share of state owned banks on total banking assets and economic growth, as reported in the literature. Three empirical tests of the two parts of the main hypothesis are presented. Two of them rely on Brazilian monthly time series data and the other one uses a cross section regression with data for a sample of countries. One of them builds on an estimation of an expanded version of the composition of a rate of return of an asset under the market efficient hypothesis. Another one estimates a factor augmented vector autoregression (FAVAR) model. All of these tests give support to the hypotheses tested. |
| JEL: | G21 G28 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:041&r=mac |
| By: | Micha? Brzoza-Brzezina (National Bank of Poland and Warsaw School of Economics, Warsaw, Poland.) |
| Abstract: | The paper analyses the potential for lending booms in the three biggest new EU Member States (the Czech Republic, Hungary and Poland) during the process of euro adoption. Experiences of some old members (Greece, Ireland and Portugal) and the econometric evidence speak in favour of strong loan increases in Hungary and Poland even though their magnitude may be smaller than in the case of those recently recorded in Ireland and Portugal. Due to estimation problems, the situation in the Czech Republic was more difficult to foresee, but given almost complete interest rate convergence with the euro area only modest increases in lending should be expected there. In conclusion, it may be stated that, given the currently available information, no substantial risk to the banking sectors of the new Member States should be expected. |
| Keywords: | lending booms, euro area, banking sector stability, new Member States. |
| JEL: | E51 E58 G21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050543&r=mac |
| By: | Jon Wongswan |
| Abstract: | This paper documents the impact of U.S. monetary policy announcement surprises on equity indexes in sixteen countries, covering both developed and emerging economies. Using high-frequency intraday data, I find a large and significant response of Asian, European, and Latin American equity indexes to U.S. monetary policy announcement surprises at short time horizons. In this paper, I use two proxies for monetary policy surprises: a surprise change to the current target federal funds rate, and a revision to the path of future monetary policy (Gürkaynak, Sack, and Swanson (2004)). Consistent with results for the U.S. equity market, this paper finds that in most cases foreign equity indexes react only to a surprise change in the current target rate. On average, a hypothetical unanticipated 25-basis-point cut in the federal funds target rate is associated with a 1/2 to 21/2 percent increase in foreign equity indexes. The variation of the response across countries appears to be more related to the degree of financial integration with the United States than it is to trade linkages with the United States or the degree of exchange rate flexibility. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:844&r=mac |
| By: | Onur Ozgur (Economics New York University) |
| Keywords: | Credit Rationing, Investment Cycles, Limited Enforceability, Liquidity Provision, Resource Constraints |
| JEL: | C6 C7 D9 G2 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:251&r=mac |
| By: | Monika Merz; Eran Yashiv |
| Abstract: | What role does labor play in a firm's market value? We explore this question using a production-based assetpricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin toinvestment in capital and that the two interact, with the interaction being a crucial determinant of the time seriesbehavior of market value. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring andinvestment decisions and the consequences for firms' value. The model generates a good fit of the data. Wedecompose the estimated market value, thereby quantifying the link between firms' value and gross hiring flows,employment, gross investment flows, and physical capital. We find that a conventional specification -- quadraticadjustment costs for capital and no hiring costs -- performs poorly. Hiring and investment flows, unlikeemployment and capital stocks, are volatile and both are essential to account for market value volatility. A keyresult is that firms' value embodies the value of hiring and investment over and above the capital stock. |
| Keywords: | production-based asset pricing, labor market frictions, gross flows, Q-model, GMM |
| JEL: | E22 E23 E24 G12 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0690&r=mac |
| By: | Francis E. Warnock; Veronica C. Warnock |
| Abstract: | Foreign flows have an economically large and statistically significant impact on long-term interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications. |
| Keywords: | Capital movements ; Interest rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:840&r=mac |
| By: | Yulei Luo (Economics Princeton University) |
| Keywords: | Rational Inattention, Optimal Control under Imperfect Observations, Consumption Dynamics, Risk Premium |
| JEL: | C61 D81 E21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:345&r=mac |
| By: | Florin Bilbiie; Fabio Ghironi |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:842&r=mac |
| By: | Giovanni Lombardo; Alan Sutherland |
| Abstract: | This paper shows how to compute a second-order accurate solution of a non-linear rational expectation model using algorithms developed for the solution of linear rational expectation models. This result is a state-space representation for the realized values of the variables of the model. This state-space representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts. |
| Keywords: | Second-order approximation; solution method for rational expectation models. |
| JEL: | E63 E0 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0504&r=mac |
| By: | Roberto Chang; Linda Kaltani; Norman Loayza |
| Abstract: | This paper studies how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where output gains after trade liberalization depend on the degree of labor market flexibility. In that model, trade protection may ameliorate the problem of underemployment (and underproduction) in sectors affected by labor market distortions; hence trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. We then present some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. For this purpose, we use a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. We find that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken. |
| JEL: | E61 F13 F43 O40 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11787&r=mac |
| By: | Hyeon-Seung Huh; Raghbendra Jha; Chung Mo Koo |
| Abstract: | For the East Asian countries, the total amount of government debt has risen sharply over the following several years in the wake of the Asian financial crisis. The purpose of this paper is to assess whether the current levels of government debt are sustainable for those severely attacked countries, namely Korea, Malaysia, Indonesia, the Philippines, and Thailand. Under the intertemporal budget constraint model, we test for fiscal sustainability and examine whether there was any discernible change in the behaviour of government debt following the East Asian crisis. Empirical analysis indicates that the levels of government debts are not sustainable in all counties under study. It also shows that the crisis contributes significantly to push the government debt in excess of its sustainable level. This urges policy attention for fiscal consolidation. |
| JEL: | E6 H5 H6 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2005-23&r=mac |
| By: | Richard Day |
| Abstract: | The models used in economic theory, though necessarily abstract, should be consistent with the nature of decision making behavior. A formal metaphor of individual behavior as a continuous flow indicates certain requirements that theories of consumer, producer, and economywide behavior should exhibit. A family of discrete time, recursive optimizing models is suggested as the appropriate building block for further developing dynamic economic theory. |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:evopap:2005-14&r=mac |
| By: | Antonella Trigari; Mark Gertler (Economics IGIER, Università Bocconi) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:921&r=mac |
| By: | Mark Aguiar; Erik Hurst |
| Keywords: | Consumption, Home Production |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:303&r=mac |
| By: | Ivan Werning; George-Marios Angeletos (Department of Economics Massachusetts Institute of Technology) |
| Keywords: | multiple equilibria, coordination, global games, speculative attacks |
| JEL: | D8 E5 F3 G1 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:284&r=mac |
| By: | Tom Krebs (Dept of Economics Brown University) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:188&r=mac |
| By: | Miroslav Verbic (Institute for Economic Research Ljubljana) |
| Abstract: | The article represents a construction of a quarterly econometric model of the Slovenian economy and an analysis of fundamental relationships of the Slovenian economy. For this purpose we formed a system of identities, consistent with the national accounts, and of stochastic equations, consistent with economic theory as well as institutional and constitutional characteristics of the Slovenian economy. The present econometric model of the Slovenian economy SIQM 2.1 consists of 97 equations and covers the period of 1997:1 – 2003:4. Adequacy of the model, i.e. its ability to reproduce the actual economic developments in the period under investigation, was verified by performing dynamic simulations. It was established that the results are econometrically satisfactory and in part even quite favourable. |
| Keywords: | economic transformation, model construction and estimation, model evaluation and testing, simultaneous equation models, Slovenia |
| JEL: | C3 C51 C52 |
| Date: | 2005–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0511015&r=mac |
| By: | Anderson Cavalcante; Marco Crocco; Matheus Alves de Brito |
| Abstract: | This article is part of a research agenda in the financial aspects of regional development. Although this is not a new agenda, it is possible to say that it is not consolidate yet. The paper aims to analyze how distinct macroeconomic environment could affect the variation of credit among regions. Two very distinct periods of the brazilain economy are analyzed: the year of 1994, which could characterized by the monetary stabilization and by the economic growth based on the internal market performance; and the year of 2004, which is characterized by the economic growth based on the performance of external market. Thought the shif-share analyzes of the regional distribution of the variation of credit, it is showed that the economic growth based on the internal market is more favorable to the redistribution of the regional credit if it is compared with the economic growth based on the external market. This outcome shad lights on the debate over what is the best type of economic growth to tackle the regional imbalances. |
| JEL: | R11 R12 R51 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2005:121&r=mac |
| By: | Derek Bond (University of Ulster); Michael J. Harrison (Department of Economics, Trinity College); Edward J. O'Brien (Department of Economics, Trinity College and Central Bank of Ireland) |
| Abstract: | This paper draws attention to the limitations of the standard unit root/cointegration approach to economic and financial modelling, and to some of the alternatives based on the idea of fractional integration, long memory models, and the random field regression approach to nonlinearity. Following brief explanations of fractional integration and random field regression, and the methods of applying them, selected techniques are applied to a demand for money dataset. Comparisons of the results from this illustrative case study are presented, and conclusions are drawn that should aid practitioners in applied time-series econometrics. |
| JEL: | C22 C52 E41 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep20021&r=mac |