|
on Macroeconomics |
|
Issue of 2008‒02‒02
forty-nine papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-52&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-12&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-51&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-11&r=mac |
| By: | Allen Head (Queen's University); Junfeng Qiu (Central University of Finance and Economics, Beijing) |
| Abstract: | Optimal monetary policy is studied in an environment in which money plays an essential role in facilitating exchange and aggregate shocks affect individual agents asymmetrically. Exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central monetary authority both controls the stock of outside money and pursues an interest rate policy that affects the rate at which private banks create inside money. We find that the optimal monetary policy requires management of both interest rates and the quantity of outside money. By controlling interest rates the monetary authority can affect the price level in the short-run and adjust households' consumption, thus providing insurance against unfavorable aggregate shocks. The feasibility of the interest rate policy requires a minimum rate of trend inflation that may be positive and in principle quite large. The paper thus links two principal components of monetary policy: the optimal interest rate policy and the optimal long-run inflation rate. |
| Keywords: | banking, inside money, elastic money, monetary policy, inflation, zero bound |
| JEL: | E43 E51 E52 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1152&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-09&r=mac |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Under inflation targeting inflation exhibits negative serial correlation in the United Kingdom, and little or no persistence in Canada, Sweden and New Zealand, and estimates of the indexation parameter in hybrid New Keynesian Phillips curves are either equal to zero, or very low, in all countries. Analogous results hold for the Euro area–and for France, Germany, and Italy–under European Monetary Union; for Switzerland under the new monetary regime; and for the United States, the United Kingdom and Sweden under the Gold Standard: under stable monetary regimes with clearly defined nominal anchors, inflation appears to be (nearly) purely forward-looking, so that no mechanism introducing backward-looking components is necessary to fit the data. These results question the notion that the intrinsic inflation persistence found in post-WWII U.S. data–captured, in hybrid New Keynesian Phillips curves, by a significant extent of backward-looking indexation–is structural in the sense of Lucas (1976), and suggest that building inflation persistence into macroeconomic models as a structural feature is potentially misleading. JEL Classification: E31, E42, E47, E52, E58. |
| Keywords: | Inflation, European Monetary Union, inflation targeting, Gold Standard, Lucas critique, median-unbiased estimation, Markov Chain Monte Carlo. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070851&r=mac |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-13&r=mac |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-53&r=mac |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2007-47&r=mac |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:eargwp:earg-wp2007-10&r=mac |
| By: | Marcus Hagedorn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Iourii Manovskii (Department of Economics, University of Pennsylvania, 160 McNeil Building, 3718 Locust Walk, Philadelphia, PA, 19104-6297, USA.) |
| Abstract: | Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We use data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters of the model - the value of non-market activity and the bargaining weights. Our calibration implies that the model is, in fact, consistent with the data. JEL Classification: E24, E32, J41, J63, J64. |
| Keywords: | Search, matching, business cycles, labor markets. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070853&r=mac |
| By: | Evans , George W (University of Oregon and University of St. Andrews); Honkapohja, Seppo (Bank of Finland and University of Cambridge) |
| Abstract: | Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents’ learning. We use the standard New Keynesian model to illustrate this problem and survey the key results for interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications, including policy design under perpetual learning, estimated models with learning, recurrent hyperinflation, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | imperfect knowledge; learning; interest-rate setting; fluctuations; stability; determinacy |
| JEL: | D84 E31 E52 |
| Date: | 2007–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_032&r=mac |
| By: | Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España) |
| Abstract: | In this paper we decompose nominal interest rates into real risk-free rates, inflation expectations and risk premia using an affine model that takes as factors the observed inflation rate and the parameters generated in the zero yield curve estimation. We apply this model to the Spanish economy during the 90s, which is an especially challenging exercise given the nominal convergence towards the European Monetary Union (EMU) then under way. The methodology seems to be suitable for other countries currently involved in convergence towards EMU. The evidence indicates that inflation expectations and risk premia account for most of the observed variation in nominal rates, while real risk-free interest rates show a reduction during this period lower than that suggested by other approaches. |
| Keywords: | Real interest rates, Risk Premium, Inflation expectations, Affine Model |
| JEL: | G12 E43 E44 C53 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0802&r=mac |
| By: | Özer Karagedikli; Pierre L. Siklos (Reserve Bank of New Zealand) |
| Abstract: | We conduct a high frequency event analysis to estimate the effects of monetary policy surprises, data surprises, and central bank verbal statements on the New Zealand-US dollar and the New Zealand-Australian dollar exchange rates. We find data surprises and monetary policy surprises have significant and large effects on exchange rate movements. More importantly, RBNZ interest rate decisions have a largely permanent impact on the exchange rate. Significantly, the impact of the published interest rate track seems to explain some 10 per cent additional variation in the exchange rate. |
| JEL: | E43 E44 E52 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/02&r=mac |
| By: | Tödter, Karl-Heinz; Manzke, Bernhard |
| Abstract: | This paper reviews theory and evidence of the welfare effects of inflation from a costbenefit perspective. Basic models and selected empirical results are discussed. Historically, in assessing the welfare effects of inflation, the distortion of money demand played a prominent role. More recently, interactions of inflation and taxation came into focus. Growth effects of inflation as well as welfare effects of unanticipated inflation and of inflation uncertainty are also addressed. To assess the policy question whether inflation should be reduced or eliminated, the costs of disinflation play a role. Finally, the trade-off between the benefits of reducing inflation and the costs of disinflation is discussed and an overall assessment of the net welfare effects of achieving price stability is provided. |
| Keywords: | Inflation, price stability, welfare costs and benefits, distortions, money demand, consumption allocation, tax-inflation interaction |
| JEL: | D61 E21 E31 E41 H21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6884&r=mac |
| By: | Aaron Drew; Özer Karagedikli (Reserve Bank of New Zealand) |
| Abstract: | The Reserve Bank of New Zealand (RBNZ) is regarded as one of the most transparent central banks in the world. Recent research suggests that one benefit of such transparency is that financial markets better anticipate a central bank's reaction to incoming data, and in relation, do not over-react to macroeconomic data surprises. In this paper, we provide some institutional details of how the RBNZ communicates its monetary policy decisions to financial markets and conduct an events analysis to test whether there are any transparency benefits in the pricing of New Zealand's yield curve. In line with the recent empirical literature, our results suggest that short-term interest rates tend to react appropriately to the data flow, while longer term interest rates are not unduly influenced. We also show that market reactions tend to be in line with the RBNZ's inflation target objective. |
| JEL: | E43 E44 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2008/01&r=mac |
| By: | Karel Mertens; Morten O. Ravn |
| Abstract: | We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between “surprise” and “anticipated” tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980’s recession. |
| Keywords: | Fiscal policy, tax liabilities, anticipation effects, structural estimation |
| JEL: | E20 E32 E62 H30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/05&r=mac |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | The purpose of this paper is to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. We also determine the optimal unrestricted and restricted policy responses to temporary as well as permanent shocks which both are anticipated by the public. In particular, our method is useful for the analysis of optimal monetary policy in New Keynesian dynamic general equilibrium models. |
| Keywords: | Anticipated Shocks, Optimal Monetary Policy, Rational Expectations, Generalized Schur Decomposition |
| JEL: | C32 C61 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:6877&r=mac |
| By: | Fitzenberger, Bernd; Franz, Wolfgang; Bode, Oliver |
| Abstract: | This paper provides new estimates of a time–varying NAIRU for Germany taking account of the structural break caused by German unification based on the Kalman Filter and on a partially linear model as two alternatives. Estimating a standard Phillips curve, the sum of coefficients associated with expected inflation is far beyond unity, whatever measure of expected inflation rates is employed. Therefore, either the NAIRU concept is not applicable to Germany or, as it is our suggestion, one estimates the unemployment rate that is compatible with a tolerable inflation rate of say 2 percent following roughly the inflation target put forward by the European Central Bank. The estimates presented in this paper suggest that the NAIRU compatible with 2 percent inflation in Germany is currently around 7 percent if the definition of unemployment follows the concept of the ILO. In contrast to the consensus in the literature, our estimates suggest furthermore that the NAIRU in Germany has not increased since the early 1990’s. |
| Keywords: | NAIRU, unemployment, inflation, Phillips curve, Okun’s Law, German unification, Kalman Filter, partially linear model |
| JEL: | C22 E24 E31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6890&r=mac |
| By: | Kilponen , Juha (Bank of Finland Research); Milne, Alistair (Cass Business School, City University, London and Bank of Finland Research) |
| Abstract: | Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact. |
| Keywords: | bank capital; bank lending; capital buffers; pro-cyclicality; capital regulation; cost channel; credit channel; loan margins; monetary trade-offs |
| JEL: | E51 E52 G21 |
| Date: | 2007–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_033&r=mac |
| By: | Proietti, Tommaso |
| Abstract: | The chapter deals with parametric models for the measurement of the business cycle in economic time series. It presents univariate methods based on parametric trend{cycle decom- positions and multivariate models featuring a Phillips type relationship between the output gap and inflation and the estimation of the gap using mixed frequency data. We finally address the issue of assessing the accuracy of the output gap estimates. |
| Keywords: | State Space Models. Kalman Filter and Smoother. Bayesian Estimation. |
| JEL: | C32 E32 C22 |
| Date: | 2008–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6854&r=mac |
| By: | Guido Menzio; Shouyong Shi |
| Abstract: | In this paper, we develop a tractable model of the labor market where workers search for jobs both while unemployed and while on the job. Search is directed in the sense that each worker chooses to search for the offer that provides the optimal tradeoff between the probability of obtaining the offer and the increase in the value relative to the worker's current employment. There are both aggregate and match-specific shocks, on which the wage path in an offer can be contingent. We characterize the equilibrium analytically and show that the equilibrium is unique and socially efficient. On the quantitative side, we calibrate the model to the US data to measure the effect of aggregate productivity fluctuations on the labor market. We find that productivity fluctuations account for approximately 64% of the cyclical volatility in US unemployment. Moreover, productivity fluctuations generate the same matrix of correlations between unemployment and other labor market variables as in the US. In particular, the Beveridge curve is negatively sloped over business cycles, and the magnitude of the slope is the same as in the data. In light of these findings, we conclude that productivity shocks are one of the main forces driving labor market fluctuations over business cycles. Furthermore, we find that recessions have a cleansing effect on the economy. |
| Keywords: | Directed Search; On the Job Search; Unemployment Fluctuations |
| JEL: | E24 E32 J64 |
| Date: | 2008–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-308&r=mac |
| By: | Evans , George W (University of Oregon and University of St. Andrews); Honkapohja, Seppo (Bank of Finland and University of Cambridge) |
| Abstract: | We consider the robust stability of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, ie rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter. |
| Keywords: | commitment; interest-rate setting; adaptive learning; stability; determinacy |
| JEL: | D84 E31 E52 |
| Date: | 2007–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_031&r=mac |
| By: | Åsberg Sommar, Per (Financial Stability Department, Central Bank of Sweden); Shahnazarian, Hovick (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | We use a vector error correction model to study the long-term relationship between aggregate expected default frequency and the macroeconomic development, i.e. CPI, industry production and short-term interest rate. The model is used to forecast the median expected default frequency of the corporate sector by conditioning on external forecasts of macroeconomic developments. Evaluations of the model show that it yields low forecast errors in terms of RMSE. The estimation results indicate that the interest rate has the strongest impact on expected default frequency among the included macroeconomic variables. The forecasts indicate that EDF will rise gradually over the forecast period. |
| Keywords: | Expected Default Frequency; Macroeconomic Impact; Business cycle; vector error correction model; Financial stability; Financial and real economy interaction |
| JEL: | C32 C52 C53 G21 G33 |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0219&r=mac |
| By: | Candelon Bertrand; Muysken Joan; Vermeulen Robert (METEOR) |
| Abstract: | By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy remains procyclical after 1992. This result contradicts the previous findings of Galí and Perotti (2003). It also appears that fiscal rules differ between large and small countries: especially large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy does exhibit different behaviour facing supply or demand constraints. The procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline. |
| Keywords: | macroeconomics ; |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2007050&r=mac |
| By: | Pietro ALESSANDRINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Michele FRATIANNI (Indiana University, Graduate School of Business Bloomington) |
| Abstract: | There is a broad consensus that the current, large US current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem. |
| Keywords: | Keynes Plan, exchange rates, external imbalances, international monetary system, key currency, supranational bank money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:310&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Davide Furceri (University of Illinois at Chicago, Department of Economics (M/C 144), 601 S. Morgan Street, Chicago, 60607, Illinois, USA.) |
| Abstract: | This paper analyses the effects in terms of size and volatility of government revenue and spending on growth in OECD and EU countries. The results of the paper suggest that both variables are detrimental to growth. In particular, looking more closely at the effect of each component of government revenue and spending, the results point out that i) indirect taxes (size and volatility); ii) social contributions (size and volatility); iii) government consumption (size and volatility); iv) subsidies (size); and v) government investment (volatility) have a sizeable, negative and statistically significant effect on growth. JEL Classification: E62, H50, O40. |
| Keywords: | Fiscal policy, government size, fiscal volatility, economic growth. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070849&r=mac |
| By: | Marcus Miller (University of Warwick and Centre for Economic Policy Research); Lei Zhang (University of Warwick) |
| Abstract: | This paper proposes an integrated framework to analyze jointly two key issues: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in emerging markets, their precautionary savings can generate substantial “global imbalances,” especially if there is an inefficient supply of global “insurance.” In principle, lower real interest rates will ensure that aggregate demand equals supply at a global level (though the required real interest may be negative). While a precautionary savings glut appears to be a temporary phenomenon, a process of correction triggered by a “Sudden Stop” in capital flows to the United States might lead to a “hard landing.” |
| Keywords: | stochastic dynamic general equilibrium, loss aversion, liquidity trap |
| JEL: | D51 D52 E12 E13 E21 E44 F32 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:1076&r=mac |
| By: | Linzert, Tobias; Schmidt, Sandra |
| Abstract: | In this paper we employ a time series econometric framework to explore the structural determinants of the spread between the euro overnight rate and the ECB’s policy rate (EONIA spread) aiming to explain the widening of the EONIA spread in the period from mid-2004 to mid-2006. We mainly estimate a model of the EONIA spread from March 2004 until August 2006. The analysis identifies possible driving forces underlying the evolution of the spread over time and aims to quantify the impact of specific factors on the observed upward shift. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ uncertainty about the liquidity conditions lead to a significant upward pressure on the spread. ECB’s liquidity policy only has a significant impact on the reduction of the spread if a loose policy is conducted during the last week of an MRO. Interestingly, interest rate expectations have not been found to have an important influence. |
| Keywords: | Overnight Market Rate (EONIA), Interest Rate Determination, Monetary Policy Implementation, Operational Framework |
| JEL: | C22 E43 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6896&r=mac |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Jacques Anas (Coe Rexecode, Paris); Laurent Ferrara (Banque de Frances); Marco Lo Duca (European Central Bank) |
| Abstract: | We propose a dating process for the business and growth Euro-zone cycles. This process is a result of a non parametric algorithm and diverse criteria assessment (duration, deepness, diffusion, synchronisation), as well as of “expert judgments” based on a combination of the following principles: a comparison of direct and indirect dating; an objective of coherence between growth cycle and business cycle turning points (ABCD approach); an objective of coherence between industrial and GDP cycles. As a complement to the traditional direct approach based on the study of Euro-zone aggregates, the main contribution of this paper is to measure the degree of diffusion and synchronisation of the cycles among the countries. |
| Keywords: | Economic cycles, Turning point, Chronology, Non parametric approach, Euro-zone |
| JEL: | C50 C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:33_07&r=mac |
| By: | Luiz de Mello; Diego Moccero; Jean-Yves Gnabo |
| Abstract: | The bulk of recent literature on foreign-exchange interventions has overlooked the potential interdependencies that may exist between these operations and the conduct of monetary policy. This is the case even under inflation targeting and especially in emerging-market economies, because central banks often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign reserves, and when the exchange rate is perceived as out of step with fundamentals. This paper uses a friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and the Czech Republic since adoption of inflation targeting in these countries in 1999 and 1998, respectively. The main findings are that: i) in both countries interventions occur predominantly to reduce exchange-rate volatility, while in Brazil the central bank also reacts to exchange-rate deviations from medium-term trends; ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the domestic currency; and iii) interventions seem to take place independently of contemporaneous monetary policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated. <P>Interdépendance entre politique monétaire et interventions sur le marché du change dans des régimes de ciblage d’inflation : le cas du Brésil et de la République tchèque <BR>La littérature récente sur les interventions de banques centrales sur le marché des changes a négligé l’interdépendance potentielle qui peut exister entre ces opérations et la politique monétaire. Pourtant, la question de l’interdépendance se pose même lorsque les économies adoptent un ciblage inflation, en particulier pour les pays émergeants, car les banques centrales se réservent, en général, ouvertement le droit d’intervenir pour calmer les désordres de marché, accumuler des réserves, ou réajuster le niveau du taux de change lorsque celui-ci ne semble pas en phase avec les fondamentaux. Cet article utilise un modèle de friction afin d’estimer une fonction de réaction sur le marché du change et les effets marginaux qui y sont associés pour le Brésil et la République Tchèque, à partir du moment où ces deux pays ont adopté un ciblage d’inflation (i.e., respectivement 1999 et 1998). Les principaux résultats sont que : i) les interventions visent principalement à réduire la volatilité du taux de change dans les deux pays, toutefois, la Banque centrale brésilienne réagit également aux déviations du taux de change par rapport à la tendance de moyen terme ; ii) il y a une forte asymétrie dans le comportement des banques centrales : les interventions sont plus importantes et plus probables lorsque la banque centrale doit déprécier plutôt qu’apprécier sa monnaie ; enfin iii) la politique d’interventions semble être indépendante de la politique monétaire pour le Brésil, alors qu’elles sont liées dans le cas de la République tchèque. |
| Keywords: | intervention, intervention, monetary policy, politique monétaire, Brazil, Brésil, Czech Republic, République tchèque |
| JEL: | C24 E52 F31 |
| Date: | 2008–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:593-en&r=mac |
| By: | Filippo Taddei |
| Abstract: | I analyze the equilibrium level of liquidity and its relevance for the allocation of credit, when the notion of liquidity is related to private information. The general equilibrium analysis yields the following main implications: firstly, it provides an explanation of procyclical liquidity even in the presence of security endogeneity; secondly, it illustrates how government debt, by providing liquidity to an otherwise illiquid private market, encourages rather than “crowds out” private investment; thirdly, it offers a well defined notion of securities’ value, the liquidity of which is endogenously enhanced by the arrangements within financial markets. The approach jointly analyzes the three factors crucial to liquidity: (1) its level is endogenously determined through equilibrium pricing while entrepreneurs choose which security to issue; (2) the introduction of government debt has the two-fold effect of directly providing liquidity to entrepreneurs and indirectly influencing the type of securities they issue in equilibrium; (3) financial markets develop arrangements to allow the beneficial employment of securities, not only physical assets, as collateral (financial pyramiding). |
| Keywords: | Liquidity, Collateral, Business Cycle, Government Debt, Financial Arrangements, Tranching, Financial Pyramiding. |
| JEL: | E22 E44 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:65&r=mac |
| By: | Marattin, Luigi; Marzo, Massimiliano |
| Abstract: | Using the simple arithmetic of government budget constraint, we perform an analysis on the Italian case, investigating the consequences on the main public finance aggregates of the adoption of a fiscal policy rule responding to past real debt/GDP ratio. Such a rule, firmly grounded in the economic analysis, would allow the reduction of Italy's outstanding stock of debt without requiring the strict adherence to the 3% criterion for deficit/GDP ratio, as prescribed by SGP. We perform a forecasting exercise under five alternative scenarios, analyze the details of a structural debt reduction strategy with alternative yearly step, and finally carry out a counterfactual exercise by applying our proposed rule to the period 1994-2006. |
| Keywords: | fiscal consolidation; public debt reduction; fiscal policy. |
| JEL: | E63 E61 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6880&r=mac |
| By: | Michael Artis; Toshihiro Okubo |
| Abstract: | This paper studies the intranational business cycle -that is the set of regional (prefecture) business cycles- in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures. Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a "synthetic Euro Area". The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher's z-transform), in a panel data GMM estimation framework. An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base also allows for additional models to be represented. |
| Keywords: | Intranational business cycle, Hodrick-prescott filter, Optimal Currency Area, Gravity Model, Market potential, Heckscher Ohlin theorem |
| JEL: | E32 F41 R11 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d07-234&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan González Alegre (European University Institute, Via della Piazzuola, 43, I-50133, Firenze, Italy.) |
| Abstract: | In this paper we test whether a reallocation of government budget items can enhance long-term GDP growth in a set of European countries. We apply modern panel data techniques to the period 1970-2006, and we use three alternative dependent variables in a growth regression: economic growth, total factor productivity and labour productivity. Our results are able to identify also the distortions induced by public expenditure in the private factors allocation. In particular, we detect a strong crowding-in effect associated to public investment, which have enhanced economic growth by boosting private investment. We also associate a significant dependence of productivity on public expenditure on education as well as the role of social security and health issues in growth and the labour market. JEL Classification: C23, E62, H50, O40. |
| Keywords: | Economic growth, panel models, fiscal policy. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070848&r=mac |
| By: | Bernal, Humberrto |
| Abstract: | Resumen El objetivo de este documento es entender, clasificar y proporcionar un importante resumen de los rasgos fundamentales de la macroeconomía con fundamentos microeconómicos y la macroeconomía como soporte de la microeconomía. Este documento puede ser interesante para aquellos que desean entender como estas dos escuelas macroeconómicas se han desarrollado. Macroeconomía con fundamento microeconómicos presenta cuatro ramas: la Síntesis Neoclásica, Monetaristas, Nuevos Clásicos y Real Business, mientras la macroeconomía como soporte de la microeconomía solo presenta la rama de los Nuevos Keynesianos. Aunque estas escuelas tienen sus ideas particulares, cada rama las usa con diferentes propósitos. Aunque el desarrollo del pensamiento macroeconómico ha mostrado diferentes puntos de vista que han generado debate dentro del campo, los economistas, con el tiempo, han tomado en cuenta estas diferencias para generar nuevas ideas. Por ejemplo, actualmente la mayoría de los economistas han escrito economía aplicada y teórica teniendo en cuenta la noción de equilibrio y fallas del mercado. Abstract The aim of this paper is to understand, classify and thus provide an important summary of fundamental features of Macroeconomics with microeconomics backgrounds and Macroeconomics as a background of microeconomics. It could be particularly interesting for those who wish to understand how these two macroeconomics schools of thought have developed. Macroeconomics with microeconomics backgrounds has four branches: Neoclassical Synthesis, Monetarist, New Classical and Real Business, whereas Macroeconomics as a background of microeconomics just has the New Keynesians branch. Even though these schools have their own particular ideas, each branch uses them for a different purpose. Although the development of macroeconomic thought has shown different views what have arisen interesting debates in economic field, economists have taken into account these different views to come up with new ideas throughout time. For instance, now days most economists have written applied and theory work bearing in mind equilibriums and fails of the market. JEL- Classification: B22 , B23, N1 |
| Keywords: | Macroeconomics; Macroeconomics schools of thought; Microeconomics; Expectations. |
| JEL: | N1 B23 B22 |
| Date: | 2007–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6883&r=mac |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. |
| JEL: | E44 F30 N20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13761&r=mac |
| By: | Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India) |
| Abstract: | Since the early 1990s the Indian economy has seen a considerable relaxation of controls, as a consequence of which it has witnessed unprecedented growth. This is especially remarkable in the external sector. In this paper I evaluate the progress made on the macroeconomic front and address the possibility of opening up the capital account of the balance of payments. I show that given the weakness in the financial sector and the government finances, it may be dangerous to speed up the process of opening up the capital account further. |
| Keywords: | Economic liberalization, financial repression, capital account convertibility |
| JEL: | E58 F21 F32 F43 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:157&r=mac |
| By: | Proietti, Tommaso |
| Abstract: | The paper estimates a large-scale mixed-frequency dynamic factor model for the euro area, using monthly series along with Gross Domestic Product (GDP) and its main components, obtained from the quarterly national accounts. The latter define broad measures of real economic activity (such as GDP and its decomposition by expenditure type and by branch of activity) that we are willing to include in the factor model, in order to improve its coverage of the economy and thus the representativeness of the factors. The main problem with their inclusion is not one of model consistency, but rather of data availability and timeliness, as the national accounts series are quarterly and are available with a large publication lag. Our model is a traditional dynamic factor model formulated at the monthly frequency in terms of the stationary representation of the variables, which however becomes nonlinear when the observational constraints are taken into account. These are of two kinds: nonlinear temporal aggregation constraints, due to the fact that the model is formulated in terms of the unobserved monthly logarithmic changes, but we observe only the sum of the monthly levels within a quarter, and nonlinear cross-sectional constraints, since GDP and its main components are linked by the national accounts identities, but the series are expressed in chained volumes. The paper provides an exact treatment of the observational constraints and proposes iterative algorithms for estimating the parameters of the factor model and for signal extraction, thereby producing nowcasts of monthly gross domestic product and its main components, as well as measures of their reliability. |
| Keywords: | Dynamic Factor Models; EM algorithm; Non Linear State Space Models; Temporal Disaggregation; Nonlinear Smoothing; Monthly GDP; Chain-linking. |
| JEL: | C32 E32 |
| Date: | 2008–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6860&r=mac |
| By: | Filippo Taddei |
| Abstract: | The existence of collateral requirements to guarantee repayment on issued securities reduces in general the efficiency of competitive equilibria. The general equilibrium analysis is presented in a world where reputation plays no role, and the lender always expects a future payment equal to the future market value of provided collateral. In this context I show that collateral requirements result in two distinct problems for efficiency. I argue that two financial arrangements, tranching and financial pyramiding, arise in developed capital markets in response to the challenges posed by collateral requirements. If these arrangements are sufficiently developed, then the pareto efficiency of competitive equilibria is restored, even in the presence of collateral requirements. |
| Keywords: | Collateral, Pareto Optimality, Financial Arrangements, Tranching, Financial Pyramiding. |
| JEL: | D5 E44 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:64&r=mac |
| By: | Baas, Timo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Brücker, Herbert (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]) |
| Abstract: | "This paper examines the macroeconomic consequences of the diversion of migration flows away from Germany towards the UK in the course of the EU Eastern Enlargement. The EU has agreed with the new member states from Central and Eastern Europe transitional periods for the free movement of workers. The selective application of migration restrictions during the transitional periods has resulted in a reversal of the pre-enlargement allocation of migration flows from the new member states across the EU: Germany as the main destination before enlargement attracts only modest immigration flows since 2004, while the UK and Ireland which have been only marginally affected by immigration prior to enlargement absorb about 60% of the inflows in the post-enlargement period. The macroeconomic effects of this diversion process is analysed in this paper on the basis of a CGE model which considers wage rigidities. We find that higher migration is associated with larger GDP and employment gains, but also with a smaller wage increase and a smaller decline of the unemployment rate. The diversion of migration flows away from Germany towards the UK yields thus a higher GDP and employment growth in the UK. The joint GDP of Germany and the UK declines by 0.1 per cent as a consequence of the migration restrictions." (author's abstract, IAB-Doku) ((en)) |
| JEL: | F15 F22 C68 J61 J30 |
| Date: | 2008–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:200803&r=mac |
| By: | Don Webber (School of Economics, University of the West of England, Bristol); Paul White (Department of Mathematics and Statistics, University of the West of England, Bristol, UK); Angela Helvin (Department of Mathematics and Statistics, University of the West of England, Bristol, UK) |
| Abstract: | This paper presents a “broken stick” method to test for structural breaks in a regression model. The method is illustrated using output data across the EU and the results are bootstrapped to identify statistical significance. |
| Keywords: | Chow test; Broken stick regression |
| JEL: | C12 C22 E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:0801&r=mac |
| By: | BECCHETTI LEONARDO; DELLE CHIAIE SIMONA |
| Abstract: | The link between education and in?ation is relatively unexplored in the economic literature. In our paper we provide four potential rationales for a positive effect of education on in?ation. First, education increases productivity of consumer search which, in turn, reduces in?ationary pressures. Second, in?ationary surprises with real effects are more likely to be realised against less educated economic agents. Third, consensus around severe antin?ationary policies may depend as well from the level of education. Fourth, more educated individuals are more likely to become net creditors and lobby for lower in?ation rates. Our GMM estimates of a panel VAR system on a sample of 92 countries do not reject this hypothesis showing that education Granger causes in?ation especially in low education, less developed countries. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceiswp:265&r=mac |
| By: | Campbell, R.A.J.; Koedijk, C.G.; Lothian, J.R.; Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago. |
| Keywords: | Irving Fisher;UIP;PPP;inflation;interest rates;exchange rates |
| Date: | 2007–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765010774&r=mac |
| By: | Robert J. Hill (School of Economics, The University of New South Wales); Daniel Melser (Moody’s Economy.Com) |
| Abstract: | Panel hedonic comparisons can be made using the region-time-dummy method. This method is a natural extension of the well known time-dummy and region-dummy methods which have been used extensively in the hedonic literature. We show that these methods are all affected by substitution bias, which can seriously distort their results. We propose an alternative approach that is free of substitution bias which builds up panel comparisons from bilateral building blocks using the hedonic imputation method. This approach is very flexible. We consider a number of variants on this method, all of which are likely to be improvements on the unconstrained region-time-dummy method. We illustrate our findings using data for 14 regions in Sydney over a six year period. We find clear evidence of bias in the region-time-dummy results as well as in simple average measures such as the median that fail to adjust for quality change. For these reasons we favor the hedonic imputations approach. |
| Keywords: | Hedonic regression; Quality adjustment; Housing; Price index; Substitution bias; Multilateral indexes |
| JEL: | C43 E31 O47 R31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2007-33&r=mac |
| By: | Julio J. Rotemberg |
| Abstract: | This paper presents a model in which firms recruit both unemployed and employed workers by posting vacancies. Firms act monopsonistically and set wages to retain their existing workers as well as to attract new ones. The model differs from Burdett and Mortensen (1998) in that its assumptions ensure that there is an equilibrium where all firms pay the same wage. The paper analyzes the response of this wage to exogenous changes in the marginal revenue product of labor. The paper finds parameters for which the response of wages is modest relative to the response of employment, as appears to be the case in U.S. data and shows that the insistence by workers that firms act with a minimal level of altruism can be a source of dampened wage responses. The paper also considers a setting where this minimal level of altruism is subject to fluctuations and shows that, for certain parameters, the model can explain both the standard deviations of employment and wages and the correlation between these two series over time. |
| JEL: | D64 E24 J30 J64 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13755&r=mac |
| By: | Musgrave, Ralph S. |
| Abstract: | Since 2002, the British Government department responsible for immigration, the Home Office, has claimed immigrants pay £2-5bn more in tax than they withdraw from the public purse. The workings behind this figure omit the cost of the additional infrastructure investments that immigrants necessitate (no small omission). The conventional wisdom is that funding government owned assets is a burden on the community at large, whereas funding private sector business assets is not. However the distinction between public and private sectors is artificial. Thus funding the private sector investments is just as much a burden on the community as funding the public sector. Thus it is the community at large funds the additional private sector business assets that immigrants necessitate. The important distinction is not between public and private sector assets, but between what might be called “communally used” assets (public and private) and assets which only one person or family benefits from, of which housing is much the most important. That is, the community at large does not pay for immigrants’ housing: immigrants themselves do. Assets other than housing in the UK amount to about £30,000 per head. The investment burden on the community is around double this because the typical immigrant has one child shortly after arriving. Immigrants do eventually pay this back – after about a generation. But by that time interest on the debt (which is not paid back) resembles the debt itself. Having arrived at a figure for the investment burden that immigrants impose, there is then the question as to what effect this has on the overall contribution that immigrants make, or burden that they impose. Answering this question involves answering a number of subsidiary questions about what can and cannot be debited to immigration. The four main subsidiary questions are thus. 1. Should the cost of educating immigrants’ children (£7.6bn a year) be attributed to immigration? The Home Office, Migrationwatch and others have disagreed on this for some time. It is shown that Migrationwatch is right: these educational costs should be attributed to immigration. 2. In past years, some Government current spending (as opposed to capital spending) was financed by increasing the national debt. Are immigrants (who have not benefited from this spending) effectively paying interest on this part of the national debt? If so, this would be unfair. It is shown that immigrants are not in fact paying for this past current spending. 3. Several studies have recently claimed that immigrants reduce interest rates. These studies all make the same mistake: they assume that interest rate reductions are the only weapon that governments have to raise demand with a view to employing extra workers (immigrants). In fact it is an expansion of the monetary base over the decades and centuries which has created the extra demand that immigrants necessitate. Moreover, interest rates have to rise a finite amount in reaction to immigration because someone somewhere has to forgo consumption to fund the additional investments that immigrants necessitate. 4. Do remittances reduce real incomes for natives? It is concluded that they do. The final figure for the cost imposed on UK natives by immigrants (about £12bn a year) is tentative, first because quantifying the variables that produce the £12bn is more informed guesswork than accurate measurement. Second, some of the official figures on which the estimate is based could be inaccurate. For example, there is evidence that the official figure for the total value of all assets in the UK could have been underestimated by 100% or more; and the real figure for remittances could conceivably be ten times the official figure. In short the cost imposed on UK natives by immigrants could easily be half or double the above £12bn. |
| Keywords: | Immigration; infrastructure; cost; Musgrave; Migrationwatch; IPPR; Home Office; immigrants; migration; education; children; interest rates; remittances. |
| JEL: | F22 J61 E4 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6869&r=mac |
| By: | M. FRÖMMEL |
| Abstract: | The choice of an exchange rate arrangement affects exchange rate volatility: higher flexibility goes ahead with increasing volatility and vice versa (Flood and Rose 1995, 1999). We investigate five Central and Eastern European countries between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching- Model (Hamilton 1989). We discover switches between high and low volatility regimes consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. |
| Keywords: | CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies |
| JEL: | E42 F31 F36 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/487&r=mac |