|
on Macroeconomics |
|
Issue of 2006‒03‒18
fifty-four papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence) |
| Abstract: | This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While 'moderate' participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by ('Keynesian') conventional wisdom. The slope of the 'IS' curve changes sign, the 'Taylor principle' is inverted, optimal welfare-maximizing monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. The conditions for these results to hold are relatively mild compared to some existing empirical evidence. Our results may help explain the 'Great Inflation' and justify Fed behavior during that period. |
| Keywords: | limited asset markets participation, dynamic general equilibrium, aggregate demand, Taylor Principle, optimal monetary policy, real (in)determinacy |
| JEL: | E32 G11 E44 E31 E52 E58 |
| Date: | 2006–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0509&r=mac |
| By: | Sujit Kapadia |
| Abstract: | In countries with credible inflation targeting, it seems plausible to suggest that instead of forming a rational expectation, some firms ("inflation-targeters") might simply expect future inflation to always equal its target. This paper analyses the implications of this for optimal monetary policy in a standard new-Keynesian model. Under discretion, we show that if shocks have any persistence, inflation is more stable, loss is reduced, and the optimal policy frontier is improved as the proportion of inflation-targeters increases. Considering the commitment case, we show that the benefits of commitment are diminished (stabilisation bias is reduced) in the presence of inflation-targeters, but overall loss is still reduced relative to the rational expectations benchmark for plausible parameter values and mild persistence in the shock. Taken together, these results formally illustrate how policies which encourage expectations anchoring may be beneficial for the economy. |
| Keywords: | Inflation Targeting, Monetary Policy, Expectations, Stabilisation Bias |
| JEL: | E52 E58 E31 E32 D84 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:227&r=mac |
| By: | Sujit Kapadia |
| Abstract: | This paper analyses a new-Keynesian model incorporating hysteresis in output. Specifically, we assume that the natural rate of output sluggishly adjusts towards current output. We also assume that the natural rate has an upper bound and that, in addition to having standard objectives, the policymaker seeks to minimise deviations of actual output from this upper bound. We then solve for optimal monetary policy under a range of Phillips curve specifications. Our results suggest that despite increasing inflation temporarily, gradual demand expansions are usually desirable when the natural rate is low. Our model also offers a new explanation for inflation persistence. |
| Keywords: | Monetary Policy, Hysteresis, Unemployment, Inflation Persistence, Demand Expansions |
| JEL: | E52 E24 E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:250&r=mac |
| By: | Fourçans, André (ESSEC Business School); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | This paper analyses the European Central Bank (ECB) monetary policy over the period 1999-2005, both from a qualitative and a quantitative perspective, and compares it with the Federal Reserve Bank. The qualitative approach builds on information conveyed by various speeches of the central bank officers, mainly the President of the ECB, Jean-Claude Trichet. The quantitative analysis provides several estimates of what could have been the ECB and Fed interest rate rules. It also develops a VAR model of both the Euro zone and the US economy so as to analyze dynamic effects of an interest rate shock. Both the qualitative and quantitative analyses point to the difficult task of the ECB, which must build credibility while managing monetary policy under major uncertainty about the structure of the new Euro area. They also suggest that, apart from the ECB’s credibility building, differences between the observed behaviour of the ECB and the Fed over the time period under investigation should be accounted for by differences in the economic outlook of the two areas, rather than in the goals of the central bankers. |
| Keywords: | ECB and Fed; Euro area; Monetary policy; Taylor rule; VAR |
| JEL: | E52 E58 F01 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-06004&r=mac |
| By: | Peter N. Ireland |
| Abstract: | The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:06-1&r=mac |
| By: | Eric Swanson; Gary Anderson; Andrew Levin |
| Abstract: | We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a life-cycle consumption model, and discuss the quality and global properties of these solutions. |
| Keywords: | Macroeconomics - Econometric models ; Business cycles ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-01&r=mac |
| By: | Yongseung Jung; Tack Yun |
| Abstract: | In this paper, we estimate a VAR model to present an empirical finding that an unexpected rise in the federal funds rate decreases the ratio of sales to stocks available for sales, while it increases finished goods inventories. In addition, dynamic responses of these variables reach their peaks several quarters after a monetary shock. In order to understand the observed relationship between monetary policy and finished goods inventories, we allow for the accumulation of finished goods inventories in an optimizing sticky price model, where prices are set in a staggered fashion. In our model, holding finished inventories helps firms to generate more sales at given their prices. We then show that the model can generate the observed relationship between monetary shocks and finished goods inventories. Furthermore, we find that allowing for inventory holdings leads to a Phillips curve equation, which makes the inflation rate depend on the expected present-value of future marginal cost as well as the current periodicals marginal cost and the expected rate of future inflation. |
| Keywords: | Business cycles ; Monetary policy ; Phillips curve |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-02&r=mac |
| By: | Thomas R. Michl |
| Abstract: | This paper elaborates a simple model of growth with a Taylor-like monetary policy rule that includes inflation targeting as a special case. When the inflation process originates in the product market, inflation targeting locks in the unemployment rate prevailing at the time the policy matures. Even though there is an apparent NAIRU and Phillips curve, this long-run position depends on initial conditions; in the presence of stochastic shocks, it would be path dependent. Even with an employment target in the Taylor Rule, the monetary authority will generally achieve a steady state that misses both its targets since there are multiple equilibria. With only one policy instrument, Tinbergen's Rule dictates that policy can only achieve one goal, which can take the form of a linear combination of the two targets. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_444&r=mac |
| By: | Marco Airaudo; Luis-Felipe Zanna |
| Abstract: | In this paper we present an extensive analysis of the consequences for global equilibrium determinacy of implementing active interest rate rules (i.e. monetary rules where the nominal interest rate responds more than proportionally to changes in inflation) in flexible-price open economies. We show that conditions under which these rules generate aggregate instability by inducing cyclical and chaotic equilibrium dynamics depend on particular characteristics of open economies such as the degree of (trade) openness and the degree of exchange rate pass-through implied by the presence of non-traded distribution costs. For instance, we find that a forward-looking rule is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through. The existence of these dynamics and their dependence on the degree of openness are in general robust to different timings of the rule (forward-looking versus contemporaneous rules), to the use of alternative measures of inflation in the rule (CPI versus Core inflation), as well as to changes in the timing of real money balances in liquidity services ("cash-when-I-am-done" timing versus "cash-in-advance" timing). |
| Keywords: | Interest rates ; Equilibrium (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:849&r=mac |
| By: | James Yetman (Reserve Bank of New Zealand) |
| Abstract: | We compare inflation targeting, price level targeting, and speed limit policies when a central bank sets monetary policy under discretion, and must learn about the level of potential output over time. We show that if the central bank learns optimally over time, a speed limit policy dominates [is dominated by] a price level target if society places a high [low] weight on inflation stability. Inefficient learning on the part of the central bank can radically change this conclusion. A speed limit policy is favoured if the central bank places too much weight on recent data when estimating potential output, while a price level target is favoured if the central bank places too much weight on historical data. |
| JEL: | E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2005/07&r=mac |
| By: | Christophe Van Nieuwenhuyze (National Bank of Belgium, Research Department) |
| Abstract: | This paper aims to extract the common variation in a data set of 509 conjunctural series as an indication of the Belgian business cycle. The data set contains information on business and consumer surveys of Belgium and its neighbouring countries, macroeconomic variables and some worldwide watched indicators such as the ISM and the OECD confidence indicators. The statistical framework used is the One-sided Generalised Dynamic Factor Model developed by Forni, Hallin, Lippi and Reichlin (2005). The model splits the series in a common component, driven by the business cycle, and an idiosyncratic component. Well-known indicators such as the EC economic sentiment indicator for Belgium and the NBB overall synthetic curve contain a high amount of business cycle information. Furthermore, the richness of the model allows to determine the cyclical properties of the series and to forecast GDP growth all within the same unified setting. We classify the common component of the variables into leading, lagging and coincident with respect to the common component of quarter-on-quarter GDP growth. 22% of the variables are found to be leading. Amongst the most leading variables we find asset prices and international confidence indicators such as the ISM and some OECD indicators. In general, national business confidence surveys are found to coincide with Belgian GDP, while they lead euro area GDP and its confidence indicators. Consumer confidence seems to lag. Although the model captures the dynamic common variation contained in the data set, forecasts based on that information are insufficient to deliver a good proxy for GDP growth as a result of a nonnegligible idiosyncratic part in GDP's variance. Lastly, we explore the dependence of the model's results on the data set and show through a data reduction process that the idiosyncratic part of GDP's quarter-on-quarter growth can be dramatically reduced. However, this does not improve the forecasts. |
| Keywords: | Dynamic factor model, business cycle, leading indicators, forecasting, data reduction. |
| JEL: | C33 C43 E32 E37 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200603-2&r=mac |
| By: | N H Dimsdale (The Queen's College, Oxford); N Horsewood (Department of Economics, University of Birmingham); A van Riel (Social Policy, Netherlands Economic Institute, Rotterdam) |
| Abstract: | This paper contributes to the debate on the causes of unemployment in interwar Germany. It applies the Layard-Nickell model of the labour market to interwar Germany, using a new quarterly data set. The basic model is extended to capture the effects of the tariff wage under the Weimar Republic and the Nazis. The estimated equations suggest that demand shocks, combined with nominal inertia in the labour market, were important in explaining unemployment. In addition real wage pressures due the political processes of wage determination were a major influence on unemployment. Negative demand shocks appear to have been initially domestic and to have started before the impact of the World Depression. Both negative developments on the demand side of the economy and pressures coming from the supply side raised unemployment in the slump. In the recovery the wage policies of the Nazis and the revival of demand both contributed to the fall in unemployment. The mutual reinforcement of these factors may help to explain the severity of the interwar cycle in Germany. It also serves to emphasize the close connection between political and economic processes in this important episode in macroeconomic history. |
| Keywords: | Great Depression, Germany, real wages, unemployment |
| JEL: | N14 E24 E32 |
| Date: | 2006–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:esohwp:_056&r=mac |
| By: | Ivan O. Kitov (Russian Academy of Sciences) |
| Abstract: | of personal income distribution normalized to the total nominal GDP. Inflation is found to be a mechanism, which counters changes in the relative incomes induced by economic growth and population changes - both in number and age structure. A model is developed linking the measured inflation (consumer price index or GDP deflator), unemployment and change in labor force. During the last twenty-five years, unemployment in the USA has been a lagged linear function of inflation. In turn, inflation has also been a lagged linear function of relative change in labor force with time. The lag is currently three years. Only a small decrease in labor force participation rate is currently observed in contrast to a strong increase between 1965 and 1990. According to the indicated relationship, the well-known stagflation period clearly resulted from the lag: the sharp increase in inflation coincided in time with the high unemployment induced by the high inflation period two years before. One can predict the unemployment rate in the USA in the following two years within the accuracy of inflation measurements. For example, the end of 2005 is a pivot point from a period of decreasing unemployment to one of moderate growth from 5% in 2005 to 6% in the middle of 2008. Starting in 1960, cumulative values of the observed and the model predicted unemployment are in agreement with the lag between inflation and unemployment. Inflation is defined by a lagged linear function of rate of change in labor force. The observed and predicted inflation almost coincide for the last forty years of annual measurement values, smoothed by a five-year wide moving window curves and as cumulative curves as well. Deviation of the curves before 1960 can be explained by a degraded accuracy of the measurements. A severe decrease in the rate of change of labor force is expected after 2010. This drop can potentially induce a long-term deflationary period. The same effect has been observed for Japan starting in 1990. There are numerous implications of the results for monetary and social policy-makers. The most important is an absence of any means to control inflation and economic growth except though a reasonable labor policy. In addition, some urgent measures are necessary to prevent the start of a deflationary period in 2010-2012. |
| Keywords: | inflation, unemployment, labor force, USA, time series models |
| JEL: | E3 E6 J21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2006-28&r=mac |
| By: | Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank (ADB)); Geoffrey Ducanes (Asian Development Bank (ADB)); Xinhua He (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Rui Liu (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Shiguo Liu (Institute of World Economics & Politics (IWEP), Chinese Academy of Social Sciences (CASS)); Nedelyn Magtibay-Ramos (Asian Development Bank (ADB)); Pilipinas Quising (Asian Development Bank (ADB)) |
| Abstract: | This paper describes a quarterly macroeconometric model of the Chinese economy. The model comprises household consumption, investment, government, trade, production, prices, money, and employment blocks. The equilibrium-correction form is used for all the behavioral equations and the general→simple dynamic specification approach is adopted. Great efforts have been made to achieve the best possible blend of standard long-run theories, country-specific institutional features and short-run dynamics in data. The tracking performance of the model is evaluated. Forecasting and empirical investigation of a number of topical macroeconomic issues utilizing model simulations have shown the model to be immensely useful. |
| Keywords: | Macroeconometric model, Chinese economy, Forecasts, Simulations |
| JEL: | C51 E17 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp553&r=mac |
| By: | Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence) |
| Abstract: | This paper suggests that in a monetary union: (i) fiscal policies should be delegated with optimal contracts, perhaps written over the deficit; (ii) policymakers would have no incentives to deviate by forming coalitions from the resulting equilibrium when exchange of information is allowed for. In a model of a monetary union with decentralized fiscal authorities and both fiscal-fiscal and fiscal-monetary spillovers, individual policymaking is inefficient whereas binding agreements are unfeasible. A centralised equilibrium is optimal and time consistent if the policymaker shares the social preferences and uses non-distortionary fiscal instruments. When policy is decentralized with heterogenous preferences of authorities and fiscal policy is distortionary, the resulting equilibrium is always inefficient and stable to incentives to collude. The optimal policy mix can however be implemented in the decentralized game, via delegating all policies (by the same principal) where the resulting equilibrium is efficient and coalition-proof. |
| Date: | 2006–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0511&r=mac |
| By: | Tatsuma Wada (Department of Economics, Boston University); Pierre Perron (Department of Economics, Boston University) |
| Abstract: | This paper first generalizes the trend-cycle decomposition framework of Perron and Wada (2005) based on an unobserved components models with innovations having a mixtures of Normals distribution, which is able to handle sudden level and slope changes to the trend function as well as outliers. We investigate how important are the differences in the implied trend and cycle compared to the popular decomposition based on the Hodrick and Prescott (HP) (1997) filter. Our results show important qualitative and quantitative differences in the implied cycles for both real GDP and consumption series for the G7 countries. Most of the differences can be ascribed to the fact that the HP filter does not handle well slope changes, level shifts and outliers, while our method does so. Third, we assess how such different cycles affect some socalled “stylized facts” about the relative variability of consumption and output across countries. Our results show again important differences. In particular, the crosscountry consumption correlations are generally higher than the output correlations, except for the period from 1975 to 1985, provided Canada is excluded. Our results therefore provide a partial solution to this puzzle. The evidence is particularly strong for the most recent period. |
| Keywords: | Trend-Cycle Decomposition, Unobserved Components Model, International Business Cycle, Non Gaussian Filter. |
| JEL: | C22 E32 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-0&r=mac |
| By: | Refet S. Gürkaynak; Brian Sack; Eric Swanson |
| Abstract: | A number of recent papers have used different financial market instruments to measure near-term expectations of the federal funds rate and the high-frequency changes in these instruments around FOMC announcements to measure monetary policy shocks. This paper evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy. All of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered. Among financial market instruments, we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months. For longer horizons, the predictive power of many of the instruments we consider is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose an alternative shock measure that captures changes in market expectations of policy over slightly longer horizons. |
| Keywords: | Monetary policy ; Federal funds rate ; Financial markets |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-04&r=mac |
| By: | Pierre Perron† (Department of Economics, Boston University); Tatsuma Wada (Department of Economics, Boston University) |
| Abstract: | Recent work on trend-cycle decompositions for US real GDP yields the following puzzling features: methods based on Unobserved Components models, the Beveridge- Nelson decomposition, the Hodrick-Prescott filter and others yield very different cycles which bear little resemblance to the NBER chronology, ascribes much movements to the trend leaving little to the cycle, and some imply a negative correlation between the noise to the cycle and the trend. We argue that these features are artifacts created by the neglect of a change in the slope of the trend function in real GDP in 1973. Once this is properly accounted for, all methods yield the same cycle with a trend that is non-stochastic except for a few periods around 1973. This cycle is more important in magnitude than previously reported, it accords well with the NBER chronology and implies no correlation between the trend and cycle, since the former is non-stochastic. Our results are corroborated using an alternative trend-cycle decomposition based on a generalized Unobserved Components models with errors having a mixture of Normals distribution for both the slope of the trend function and the cyclical component. It can account endogenously for infrequent changes such as level shifts and change in slope, as well as different variances for expansions and recessions. It yields a decomposition that accords very well with common notions of the business cycle. |
| Keywords: | Trend-Cycle Decomposition, Structural Change, Non Gaussian Filtering, Unobserved Components Model, Beveridge-Nelson Decomposition. |
| JEL: | C22 E32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-030&r=mac |
| By: | Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence); David Stasavage (London School of Economics) |
| Abstract: | This paper analyses the effect of limits on fiscal deficits when fiscal policy outcomes depend on automatic stabilizers and when fiscal rules lack perfect credibility. The model developed, which includes interactions between monetary and fiscal policy, provides theoretical support for existing arguments that fiscal rules contracted on a structural deficit will be welfare-enhancing relative to rules written on the actual deficit. The latter rules would result in a procyclical bias in fiscal policy, as well as a contractionary bias in monetary policy. Contrary to existing arguments, the model also suggests that rules written on the structural deficit may ultimately be more credible than those written on the actual deficit. The reason for this is that rules written on the actual fiscal deficit risk running into a credibility trap; higher marginal penalties will be necessary when initial credibility of enforcement is imperfect, but announcing a higher penalty for violating a fiscal rule can actually reduce credibility if the penalty is disproportionately large relative to the violation. |
| Date: | 2006–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0512&r=mac |
| By: | Olan T. Henry; Nilss Olekalns; Sandy Suardi |
| Abstract: | The Friedman-Ball hypothesis implies a link between the inflation rate and inflation uncertainty. In this paper we employ a new test for the joint null hypothesis of no dependence effects and no asymmetry in the G7 inflation volatility. The results show that higher inflationrates operate additively via the conditional variance of inflation to induce greater inflation uncertainty in the U.S., U.K. and Canada. In addition, positive inflationary shocks are found to generate greater inflation uncertainty than negative shocks of a similar magnitude in the U.K. and Canada. |
| Keywords: | Friedman-Ball hypothesis, Asymmetry, Davies’ Problem |
| JEL: | E39 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:959&r=mac |
| By: | Luis-Felipe Zanna |
| Abstract: | In this paper we show that in the aftermath of a crisis, a government that changes the nominal interest rate in response to currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles. In particular if a government raises the interest rate proportionally more than an increase in currency depreciation then it induces self-fulfilling cyclical equilibria that are able to replicate some of the empirical regularities of emerging market crises. We construct an equilibrium characterized by the self-validation of people's expectations about currency depreciation and by the following stylized facts of the "Sudden Stop" phenomenon: a decline in domestic production and aggregate demand, a significantly larger currency depreciation, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods, and an improvement in the current account deficit. |
| Keywords: | Interest rates ; Equilibrium (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:848&r=mac |
| By: | Mark Gertler; John Leahy |
| Abstract: | We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order of magnitude suggested by a conventional time-dependent model. |
| Keywords: | Phillips curve |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-8&r=mac |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. We confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases with the duration of the peg before the crisis. We explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability, but multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well-known time inconsistency problem, but also to steer the economy away from the high inflation equilibria. These gains, however, come at a cost in the form of the monetary authority's lesser responsiveness to output shocks. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a "trap" whereby the regime initially confers gains in anti-inflation credibility, but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy. We also show that the more conservative is the regime in place and the larger is the cost of regime change, the longer will be the average spell of the fixed exchange rate regime, and the greater the output contraction at the time of a regime change. |
| Keywords: | Foreign exchange rates ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-07&r=mac |
| By: | Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence) |
| Abstract: | This paper argues that delegation (optimal institutional design) is not a solution to the dynamic inconcistency problem, and can even reinforce it. We show that 'optimal' delegation is not consistent with government's incentives. We solve for delegation schemes that are consistent with these incentives and find that they imply 'no delegation'. Introducing a cost of reappointing the central banker just postpones the problem, and can only solve it if the government is infinitely averse to changing central bank's contract. Our results hint to: (i) alternative explanations for good anti-inflationary performance; (ii) strengthening central bank independence and (iii) giving a more prominent role to Central Bank reputation building in fighting inflation. |
| Date: | 2006–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0510&r=mac |
| By: | Marta Gómez-Puig (Universitat de Barcelona) |
| Abstract: | With European Monetary Union (EMU), there was an increase in the adjusted spreads (corrected from the foreign exchange risk) of euro participating countries' sovereign securities over Germany and a decrease in those of non-euro countries. The objective of this paper is to study the reasons for this result, and in particular, whether the change in the price assigned by markets was due to domestic factors such as credit risk and/or market liquidity, or to international risk factors. The empirical evidence suggests that market size scale economies have increased since EMU for all European markets, so the effect of the various risk factors, even though it differs between euro and non-euro countries, is always dependent on the size of the market. |
| Keywords: | Monetary integration, sovereign securities markets, international and domestic credit risk, and market liquidity. |
| JEL: | E44 F36 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2006147&r=mac |
| By: | Keith Sill |
| Abstract: | Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium. |
| Keywords: | Equity ; Macroeconomics |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-1&r=mac |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:369&r=mac |
| By: | Yongsung Chang; Taeyoung Doh; Frank Schorfheide |
| Abstract: | The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification. |
| Keywords: | Labor supply ; Hours of labor |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-3&r=mac |
| By: | Duo Qin (Queen Mary, University of London); Marie Anne Cagas (Asian Development Bank (ADB), and University of the Philippines); Geoffrey Ducanes (Asian Development Bank (ADB), and University of the Philippines); Nedelyn Magtibay-Ramos (Asian Development Bank (ADB)); Pilipinas Quising (Asian Development Bank (ADB)) |
| Abstract: | This paper compares forecast performance of the ALI method and the MESMs and seeks ways of improving the ALI method. Inflation and GDP growth form the forecast objects for comparison, using data from China, Indonesia and the Philippines. The ALI method is found to produce better forecasts than those by MESMs in general, but the method is found to involve greater uncertainty in choosing indicators, mixing data frequencies and utilizing unrestricted VARs. Two possible improvements are found helpful to reduce the uncertainty: (i) give theory priority in choosing indicators and include theory-based disequilibrium shocks in the indicator sets; and (ii) reduce the VARs by means of the general→specific model reduction procedure. |
| Keywords: | Dynamic factor models, Model reduction, VAR |
| JEL: | E31 C53 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp554&r=mac |
| By: | Ai Deng (Department of Economics, Boston University); Pierre Perron (Department of Economics, Boston University) |
| Abstract: | We consider the CUSUM of squares test in a linear regression model with general mixing assumptions on the regressors and the errors. We derive its limit distribution and show how it depends on the nature of the error process. We suggest a corrected version that has a limit distribution free of nuisance parameters. We also discuss how it provides an improvement over the standard approach to testing for a change in the variance in a univariate times series. Simulation evidence is presented to support this. We illustrate the usefulness of our method by analyzing changes in the variance of stock returns and a variety of macroeconomic time series, as well as by testing for change in the variance of the residuals in a typical four-variable VAR model. Our results show the widespread prevalence of changes in the variance of such series and the fact that the variability of shocks affecting the U.S. economy has decreased. |
| Keywords: | Change-point, Variance shift, Recursive residuals, Dynamic models, Conditional heteroskedasticity. |
| JEL: | D80 D91 G11 E21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-043&r=mac |
| By: | M. Hashem Pesaran; Ron Smith |
| Abstract: | This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann andWeiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, xit, and then consistently combined to form a Global VAR (GVAR). It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where xit variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. This approach has been used in a wide variety of contexts and for a wide variety of purposes. The paper also provides some new results. |
| Keywords: | Global VAR (GVAR), DSGE models, VARX |
| JEL: | C32 E17 F42 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:06-43&r=mac |
| By: | Theodore M. Crone; Leonard I. Nakamura; Richard Voith |
| Abstract: | Until the end of 1977, the U.S. consumer price index for rents tended to omit rent increases when units had a change of tenants or were vacant, biasing inflation estimates downward. Beginning in 1978, the Bureau of Labor Statistics (BLS) implemented a series of methodological changes that reduced this nonresponse bias, but substantial bias remained until 1985. The authors set up a model of nonresponse bias, parameterize it, and test it using a BLS microdata set for rents. From 1940 to 1985, the official BLS CPI-W price index for tenant rents rose 3.6 percent annually; the authors argue that it should have risen 5.0 percent annually. Rents in 1940 should be only half as much as their official relative price; this has important consequences for historical measures of rent-house-price ratios and for the growth of real consumption. |
| Keywords: | Consumer price indexes ; Rent ; Inflation (Finance) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-7&r=mac |
| By: | Keiichiro Kobayashi; Masaru Inaba |
| Abstract: | This paper shows that some of the puzzling observations in the protracted recessions of the 1990s in Japan and the 1930s in the United States can be accounted for by a simple variant of the neoclassical growth model with borrowing constraints. There are three puzzles: First, a large wedge emerged between the marginal rate of substitution between consumption and leisure and the marginal product of labor. This labor wedge is associated with declines in labor inputs. Second, although shrinkage of investment was observed in both episodes, a wedge that represents investment frictions did not emerge. Third, in spite of unprecedented monetary easing in Japan since the late 1990s, deflation has continued. A key ingredient is the emergence of a huge accumulation of nonperforming debts, which must have been a consequence of the large fluctuations in asset prices. The debts tighten the borrowing constraints and can cause the puzzling features of the recessions, which may be protracted if the bad debt problem persists for years. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06011&r=mac |
| By: | Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence) |
| Abstract: | In a wide variety of international macro models monetary policy cooperation is optimal, non-cooperative policies are inefficient, but optimal policies can be attained noncooperatively by optimal design of domestic institutions. We show that given endogenous instititional design, inefficiencies of noncooperation cannot and will not be eliminated. Credible contracts are introduced as the contracts that would be chosen by the governments based on their individual rationality. These will be inefficient when compared to the optimal ones. Implementation of the latter implicity embeds an assumption about cooperation at the delegation stage, which is inconsistent with the advocated non-cooperative nature of the solution. A general solution method for credible contracts and an example from international monetary policy cooperation are considered. Our results could explain some inefficiencies of existing delegation schemes and hint to a stronger coordinating role for supranational authorities in international policy coordination. |
| Date: | 2006–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0513&r=mac |
| By: | Mikael Carlsson (Sveriges Riksbank, Stockholm); Stefan Eriksson (Uppsala University); Nils Gottfries (Uppsala University, CESifo and IZA Bonn) |
| Abstract: | How well do alternative labor market theories explain variations in net job creation? According to search-matching theory, job creation in a firm should depend on the availability of workers (unemployment) and on the number of job openings in other firms (congestion). According to efficiency wage and bargaining theory, wages are set above the market clearing level and employment is determined by labor demand. To compare models, we estimate an encompassing equation for net job creation on firm-level data. The results support demandoriented theories of job creation, whereas we find no evidence in favor of the searchmatching theory. |
| Keywords: | job creation, involuntary unemployment, search-matching, labor demand |
| JEL: | E24 J23 J64 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2024&r=mac |
| By: | Juan de Dios Tena; Miguel Jerez; Sonia Sotoca; Nicole Carvallo |
| Abstract: | An important limitation in order to specify and estimate a macroeconomic model that describes the Chilean economy resides in using variables with sufficient number of observations that allow for a reliable econometric estimation. Among these variables, the GDP constitutes a fundamental magnitude. Nevertheless, for this variable there is not quarterly information before 1980. This paper computes quarterly GDP series for the period 1966-1979 using the approach by Casals et al (2000). As result, the new series incorporates the cyclical dynamic in the quarterly series later to 1979 respecting, in addition, all the annual existing information before the above mentioned period. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws061706&r=mac |
| By: | Sungbae An; Frank Schorfheide |
| Abstract: | This paper reviews Bayesian methods that have been developed in recent years to estimate and evaluate dynamic stochastic general equilibrium (DSGE) models. We consider the estimation of linearized DSGE models, the evaluation of models based on Bayesian model checking, posterior odds comparisons, and comparisons to vector autoregressions, as well as the nonlinear estimation based on a second-order accurate model solution. These methods are applied to data generated from correctly specified and misspecified linearized DSGE models, and a DSGE model that was solved with a second-order perturbation method. |
| Keywords: | Macroeconomics ; Vector autoregression |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-5&r=mac |
| By: | James Bergin (Queen's University); Dan Bernhardt (University of Illinois) |
| Abstract: | We study the dynamics of an industry subject to aggregate demand shocks where the productivity of a firm's technology evolves stochastically over time. Each period, each firm, given the aggregate demand shock, the productivity of its technology, and the distribution of technology productivities in the economy, (i) chooses whether to remain in the industry or to exit to sell its resources to an entrant; and (ii) an active firm chooses how much capital and labor to employ, and hence output to produce. To characterize the intertemporal evolution of the distribution of firms, we discuss in particular how exit decisions, aggregate output, profits and distributions of firm productivities vary, (a) across different demand realization paths; (b) along a demand history path, detailing the effects of continued good or bad market conditions; and (c) for different anticipated future market conditions. Sufficient conditions are provide for worse demand realizations to lead to increased exit of low-productivity firms and then to improved distributions of firms at all future dates and states. Finally, it is shown that a downturn in demand can raise welfare due to the impact on exit decisions. |
| Keywords: | stochastic heterogeneity, aggregate shocks, exit, thin markets, demand uncertainty |
| JEL: | E32 L16 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1043&r=mac |
| By: | Guillaume Chevillon |
| Abstract: | To forecast at several, say h, periods into the future, a modeller faces two techniques: iterating one-step ahead forecasts (the IMS technique) or directly modelling the relation between observations separated by an h-period interval and using it for forecasting (DMS forecasting). It is known that unit-root non-stationarity and residual autocorrelation benefit DMS accuracy in finite samples. We analyze here the effect of structural breaks as observed in unstable economies, and show that the benefits of DMS stem from its better appraisal of the dynamic relationships of interest for forecasting. It thus acts in between congruent modelling and intercept correction. We apply our results to forecasting the South African GDP over the last thirty years as this economy exhibits significant unstability. We analyze the forecasting properties of 31 competing models. We find that the GDP of South Africa is best forecast, 4 quarters ahead, using direct multi-step techniques, as with our theoretical results. |
| Keywords: | Multi-step Forecasting, Structural Breaks, South Africa |
| JEL: | C32 C53 E3 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:257&r=mac |
| By: | Dennis J. Snower; Christian Merkl |
| Abstract: | The East German labor market has hardly made any progress since German reunification, despite massive migration flows and support from the West. We argue that East Germany is in trouble precisely because of the support it has received. This paper explores the phenomenon of "the caring hand that cripples," arising from bargaining by proxy, the adoption of the West German welfare system and the associated employment persistence. Even the steady decrease of labor cost (normalized by productivity) since the beginning of the nineties did not help to kick start the East. We suggest that labor force participants fell into "traps," concerning low skills, ageing of the workforce, labor-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector. |
| Keywords: | German unification; labor markets; labor market traps |
| JEL: | E24 J3 P2 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1263&r=mac |
| By: | Marie Musard-Gies (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | Dans ce papier, nous cherchons à évaluer si il est possible pour une banque centrale de dévoiler ses préférences, et plus précisément le poids qu'elle accorde à la stabilisation de l'inflation et de l'output gap dans sa fonction objectif. Nous considérons que la banque centrale peut dévoiler de l'information sur ses préférences de deux manières : tout d'abord, explicitement, via sa politique de communication, mais aussi, implicitement, via ses décisions de politique monétaire. Nous étudions alors, dans un jeu dynamique, le cas de la transparence sur les prévisions de la banque centrale comme substitut de la transparence sur les préférences lorsque le secteur privé est capable de réviser son estimation initiale des préférences de la banque centrale (apprentissage du secteur privé). |
| Keywords: | Transparence ; préférences de la banque centrale |
| Date: | 2006–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009596_v1&r=mac |
| By: | Samuel Malone |
| Abstract: | Macroeconomic volatility, in particular from exposure to volatile terms of trade in the form of volatile commodity prices, is an important source of risk for emerging market countries. As a consequence of this exposure, it has been argued, their probability of facing solvency problems on payments of their foreign currency debt is high, as are the country risk premia they must pay in order to borrow from international capital markets. While the availability of derivative contracts on many major commodity prices makes it possible to hedge commodity price exposure, many emerging market sovereigns either do not hedge a significant amount of their fiscal exposure to their major exports and import commodities or do not clearly report their hedging activities. In light of this phenomenon, and with the goal of crisis prevention in mind, we illustrate how a country exposed to shocks can execute its own insurance strategy against fluctuations in the prices of its major export commodities using futures and options markets. In the context of a model of sovereign default with endogeous sovereign spread and debt choice (Catao and Kapure (2004)), we demonstrate the resulting benefits of this insurance in terms of increased welfare for the country, a reduced soverign spread, and a higher debt ceiling. Additionally, we highlight some political economy problems leaders might face that hinder them from hedging in practice, and describe a hedging strategy to overcome these problems. |
| Keywords: | Sovereign Default, Hedging, Macroeconomic Volatility |
| JEL: | E44 F34 H63 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:246&r=mac |
| By: | Adrien Verdelhan (Department of Economics, Boston University); Hanno Lustig (UCLA/ NBER) |
| Abstract: | Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate di®erential and why high interest rate currencies do not depreciate as much as the interest rate di®erential. We sort foreign currency returns into portfolios based on foreign interest rates, and we test the Euler equation of a domestic investor who invests in these currency portfolios. We ¯nd that domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies do not under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk. |
| Keywords: | Exchange Rates, Asset Pricing. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-019&r=mac |
| By: | Jonathan Treussard (Department of Economics, Boston University); |
| Abstract: | This paper applies the methods of Detemple, Garcia, and Rindisbacher (2003, 2005) to derive optimal lifetime consumption-portfolio plans in an economy characterized by a N- factor Heath-Jarrow-Morton (1992) bond sector that is Markovian with respect to 3N state variables. The Detemple-Garcia-Rindisbacher methodology is reviewed and its .exibility is further demonstrated. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-032&r=mac |
| By: | O.T. Henry; S. Suardi |
| Abstract: | Empirical evidence documents a level effect in the volatility of short term rates of interest. That is, volatility is positively correlated with the level of the short term interest rate. Using Monte-Carlo simulations this paper examines the performance of the commonly used Engle-Ng (1993) tests which differentiate the effect of good and bad news on the predictability of future short rate volatility. Our results show that the tests exhibit serious size distortions and loss of power in the face of a neglected level effect. |
| Keywords: | Level Effects; Asymmetry; Engle-Ng Tests |
| JEL: | C12 G12 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:945&r=mac |
| By: | Vanhuele, Marc; Damay, Coralie |
| Abstract: | At a very early age, the child becomes a real consumer and the prices becomes part of his daily basis. This exploratory study shows that the child acquires a knowledge of prices through a non linear and non cumulative training, marked out by formative incidents. He uses measures and strategies of price evaluation. This procedure is influenced by interest, expertise and experience of children product. |
| Keywords: | child-consumer; price konwoledge; memorization and estimation of prices |
| JEL: | D11 E31 |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0820&r=mac |
| By: | Eddie eckel (Economics Dept., Northwestern University, and School of Economics, Tel Aviv University); Barton L Lipman (Department of Economics, Boston University); Aldo Rustichini (University of Minnesota.) |
| Abstract: | “My own behavior baffles me. For I find myself not doing what I really want to do but doing what I really loathe.” Saint Paul What behavior can be explained using the hypothesis that the agent faces temptation but is otherwise a “standard rational agent”? In earlier work, Gul–Pesendorfer [2001] use a set betweenness axiom to restrict the set of preferences considered by Dekel, Lipman, and Rustichini [2001] to those explainable via temptation. We argue that set betweenness rules out plausible and interesting forms of temptation. We propose a pair of alternative axioms called DFC, desire for commitment, and AIC, approximate improvements are chosen. DFC characterizes temptation as situations where given any set of alternatives, the agent prefers committing herself to some particular item from the set rather than leaving herself the flexibility of choosing later. AIC says that if adding an option to a menu improves the menu, it is because that option is chosen under some circumstances. We show that these axioms characterize a natural generalization of the Gul–Pesendorfer representation. . |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-041&r=mac |
| By: | Junjian Miao (Department of Economics, Boston University); Manuel Santos (Department of Economics, W. P. Carey School of Business) |
| Abstract: | This paper presents a recursive method for the computation of sequential competitive equilibria in dynamic models with heterogeneous agents and market frictions. This computational method builds on a convergent operator defined over an expanded set of state variables for which a Markovian equilibrium solution is shown to exist. We apply this method to a stochastic growth economy and two financial economies. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-003&r=mac |
| By: | François Gourio (Department of Economics, Boston University) |
| Abstract: | I use a putty-clay technology to explain several asset market facts. The key mechanism is as follows: a one percent increase in revenues leads to a more-than-one percent increase in profits, since labor costs don’t move one-for-one. This amplification is greater for plants with low productivity for which the average profit margin (revenue minus costs) is small. This “operating leverage” effect implies that low productivity plants benefit disproportionately from business cycle booms. These plants have thus higher systematic risk and higher average returns. This model can help explain the empirical findings of Fama and French (1992), and more generally the sources of differences in market betas across firms. I obtain supporting evidence for the mechanism using firm- and industry-level data. The aggregate effect follows from trend growth: low-productivity plants outnumber high-productivity plants, making the aggregate stock market procyclical. I examine these aggregate implications and find that this model generates a volatile stock market return that predicts the business cycle. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-002&r=mac |
| By: | Dirk Schoenmaker; Charles Goodhart |
| Abstract: | No abstract availableDownload Paper |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp164&r=mac |
| By: | Fernando Espinosa, Klender Cortez and Romà J. Adillon (Universitat de Barcelona) |
| Abstract: | Evidence exists that many natural facts are described better as a fractal. Although fractals are very useful for describing nature, it is also appropiate to review the concept of random fractal in finance. Due to the extraordinary importance of Brownian motion in physics, chemistry or biology, we will consider the generalization that supposes fractional Brownian motion introduced by Mandelbrot. The main goal of this work is to analyse the existence of long range dependence in instantaneous forward rates of different financial markets. Concretelly, we perform an empirical analysis on the Spanish, Mexican and U.S. interbanking interest rate. We work with three time series of daily data corresponding to 1 day operations from 28th March 1996 to 21st May 2002. From among all the existing tests on this matter we apply the methodology proposed in Taqqu, Teverovsky and Willinger (1995). |
| Keywords: | Long-memory processes, interest rate analysis, Fractional Brownian Motion. |
| JEL: | C13 C82 E43 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2006149&r=mac |
| By: | David P. Myatt |
| Abstract: | In an asymmetric war of attrition the players` prize valuations are drawn from different distributions. A "stochastic strength" ordering, based upon relative hazard rates, is used to rank these distributions. The stochastically stronger player is perceived to be strong ex ante, even though her realized valuation may be lower ex post. Since the classic war of attrition exhibits multiple equilibria, the game is perturbed; for instance, by imposing an arbitrarily large time limit, or allowing for the arbitrarily small probability of players that are restricted to fighting forever. In the unique equilibrium of the perturbed game, a stochastically weaker player almost always "instantly exits" at the beginning, even though her valuation may be higher. |
| Keywords: | war of attrition, exit, rent seeking, auctions, stochastic dominance, games of timing, bargaining, voluntary provision of public goods, macroeconomics stabilization, adoption of technological standards |
| JEL: | D44 D72 D74 D81 E63 L11 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:160&r=mac |
| By: | Henk Kranendonk; Johan Verbruggen |
| Abstract: | There are two methods in use to determine the contributions of expenditure categories to economic growth. In the conventional 'international method', total imports are deducted from exports, whereas in what is known as the 'Dutch method', final and intermediary imports are allocated to all expenditure categories. Although the Dutch method is a little more complex than the international method, it has the considerable advantage that the contributions of the expenditure categories to GDP growth can be better compared, producing a better understanding of the composition of GDP growth. This memorandum discloses the Dutch method and illustrates the differences in perception which the two methods produced for the years 1999 to 2004. The findings are that the international method underestimates the importance of exports for GDP growth and overestimates the importance of domestic expenditure categories, like private consumption and investments. |
| Keywords: | economic growth; input ouput models; production structure |
| JEL: | C6 E37 L16 O4 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:memodm:129&r=mac |
| By: | Donghoon Lee (Department of Economics, New York University); Kenneth I. Wolpin (Department of Economics, University of Pennsylvania) |
| Abstract: | In this paper, we present a unified treatment of and explanation for the evolution of wages and employment in the U.S. over the last 30 years. Specifically, we account for the pattern of changes in wage inequality, for the increased relative wage and employment of women, for the emergence of the college wage premium and for the shift in employment from the goods to the service-producing sector. The underlying theory we adopt is neoclassical, a two-sector competitive labor market economy in which the supply of and demand for labor of heterogeneous skill determines spot market skill-rental prices. The empirical approach is structural. The model embeds many of the features that have been posited in the literature to have contributed to the changing U.S. wage and employment structure including skill-biased technical change, capital-skill complementarity, changes in relative product-market prices, changes in the productivity of labor in home production and demographics such as changing cohort size and fertility. |
| Keywords: | Male-Female Wage Differential, Wage Inequality, College Wage Premium |
| JEL: | E24 J2 J3 |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:06-005&r=mac |