|
on Macroeconomics |
|
Issue of 2008‒10‒07
sixty-four papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Stefano Battilossi; James Foreman-Peck; Gerhard Kling |
| Abstract: | In the first age of rapid economic growth after 1945, fluctuations of western European output and employment were so mild that the very notion of a cycle was transformed or even seemed obsolete. A second period of much slower average economic growth was marked by large and frequent oscillations, associated with the oil shocks and the Great Inflation of the 1970s and early 1980s. The last phase, characterized by smooth and ampie swings in output and inflation, has been dubbed the Great Moderation , reflecting the gradual reduction of inflationary trends. Different reasons have been proposed for these changing patterns but a common factor is that the conduct of economic policy was critical. In this paper we survey the evolution of basic features of cycles in Europe, such as volatility and synchronization; explain why changes in economic policy-making were a fundamental driver of changing patterns; and provide analytical narratives of the responses of national governments and central bankers to cyclical fluctuations. Finally we briefly look at the historical and recent experience of Eastern Europe, assessing the área s reintegration from 1989 after the long economic decoupling from the rest of the continent in 1945. |
| Keywords: | Business cycle, Inflation, Great moderation, Fiscal and monetary policies |
| JEL: | E32 E63 N14 N36 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:wp08-13&r=mac |
| By: | Melecky, Ales; Melecky, Martin |
| Abstract: | This paper attempts to estimate possible losses in macroeconomic stabilization due to a move from inflation to exchange rate targeting on an example of the Czech Republic. The authors use an estimated New Keynesian policy model, general inflation and exchange rate targeting rules, and representative central bank loss functions to carry out such estimations. The authors find that for the Czech Republic moving from the historically applied inflation targeting to optimized exchange rate targeting should not involve any significant losses in macroeconomic stabilization. However, the Czech National Bank could improve its stabilization outcomes while remaining an inflation targeter. This requires the Czech National Bank to respond stronger to increasing expected future inflation and be less concerned about an opening output gap when adjusting its policy rate. Moving then from such optimized inflation targeting to optimized exchange rate targeting can result in significant losses in economic stabilization in the magnitude of 0.4 to 2 percentage points of GDP growth. |
| JEL: | E32 E58 E52 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10844&r=mac |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Marek Rusnák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | In this paper, we provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. We document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. Slovak central bank interest rate policy seems to follow the ECB’s interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms. |
| Keywords: | small open economy, foreign shocks, monetary policy, Slovakia, euro area |
| JEL: | E58 F41 F42 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_21&r=mac |
| By: | Mario J. Crucini; M. Ayhan Kose; Christopher Otrok |
| Abstract: | We examine the driving forces of G-7 business cycles. We decompose national business cycles into common and nation-specific components using a dynamic factor model. We also do this for driving variables found in business cycle models: productivity; measures of fiscal and monetary policy; the terms of trade and oil prices. We find a large common factor in oil prices, productivity, and the terms of trade. Productivity is the main driving force, with other drivers isolated to particular nations or sub-periods. Along these lines, we document shifts in the correlation of the G-7 component of each driver with the overall G-7 cycle. |
| JEL: | E3 E32 F4 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14380&r=mac |
| By: | Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank?s policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement over standard models, is considered just a starting point for their revision. |
| Keywords: | Asset pricing ; Risk ; Taylor's rule |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:412&r=mac |
| By: | Denise Côté; Carlos de Resende |
| Abstract: | In this paper, we develop a theoretical model which identifies four channels-import prices, competition with domestic suppliers and workers, and commodity prices-through which priceand wage-setting conditions in country j may affect inflation in country i. We estimate a dynamic inflation equation derived from the theoretical model using a quarterly dataset of eighteen OECD countries over the 1984-2006 period. Although our methodology can be applied to any pair of countries, we focus on the effect of China on the inflation rate of other countries. Our results suggest that while China's negative effect on global inflation has been quantitatively modest, it has increased in absolute terms since the early 2000s. We also find evidence that, for most countries examined, competition with domestic suppliers has been the most important channel. |
| Keywords: | International topics |
| JEL: | E22 E32 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-35&r=mac |
| By: | Césaire Meh; Kevin Moran |
| Abstract: | Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation. |
| Keywords: | Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models |
| JEL: | E44 E52 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-36&r=mac |
| By: | Gustavo Adler |
| Abstract: | The paper develops a simple model of sovereign debt where default both through direct repudiation and through inflation are possible and give rise to (endogenous) constraints on the currency composition and the level of public debt. This set up allows to show that procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin" and both can be explained by the presence of weak monetary institutions which cannot commit to price stability. The paper suggests that, as monetary institutions in EMEs strengthen, the "original sin" would fade away and the cyclical properties of fiscal policy would improve. |
| Keywords: | Sovereign debt , Fiscal policy , Inflation , Price stabilization , Public debt , Political economy , Emerging markets , Developing countries , Economic models , Working Paper , |
| Date: | 2008–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/209&r=mac |
| By: | Francesco, Guidi |
| Abstract: | What is the effect of either European Central Bank and Federal Reserve monetary policies on the Italian Index Mibtel? This paper aims to evaluate the impact of monetary policy announcements of the most important Central Banks on the volatility of returns which have been considered at both sectorial and sub-sectorial levels during the period 1999-2008. Using EGARCH models, this work shows that expansive monetary policies may influence stock market indexes much more than restrictive monetary policies. The difference among the two central bank monetary policies is that the ECB influences indexes much more than Fed monetary policy. |
| Keywords: | Monetary Policies; Stock Returns; Volatility; EGARCH; European Central Bank; Federal Reserve USA. |
| JEL: | E58 G10 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10759&r=mac |
| By: | David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | We analyse the impact of news on five financial markets in the Czech Republic, Hungary and Poland using a newly-constructed data set in a GARCH framework. Macroeconomic shocks (on GDP, inflation rate, current account and trade balance) are constructed as deviations from expected values. EMU-related political and fiscal news is captured as news dummies. Macroeconomic shocks significantly affect short-term interest rates and - to a lesser extent - other financial variables. Political and fiscal news has an impact on long-term bond yields and exchange rates. News displayed prominently in our media sources has a larger impact on financial markets than other news, in addition the sources of news themselves matter. We also discover asymmetric effects of news within markets. Finally, using a pooled GARCH model we find that macroeconomic shocks have the strongest impact on financial markets in Hungary, while political news has the largest influence in Poland. |
| Keywords: | Financial markets, Czech Republic, Hungary, Poland, political news, macroeconomic shocks, European Monetary Union |
| JEL: | G12 G15 F30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200815&r=mac |
| By: | Giuseppe Marotta |
| Abstract: | We search for breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the euro. One break is detected in six national retail rates among EMU countries; two breaks are found in other six cases, and in the UK as well. The last break occurs much earlier for France while several quarters later for other countries, suggesting a loose link if ever with the event. Pass-throughs decrease (except for France), becoming even more incomplete (except for Netherlands); though the adjustment to equilibrium is faster, cross-country heterogeneity remains fairly large. With the new harmonized interest rates database, available since 2003, pass-throughs are much closer to one, especially for larger loans. |
| Keywords: | Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:depeco:549&r=mac |
| By: | M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad |
| Abstract: | This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups -- industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates -- output, consumption, and investment -- into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them. |
| JEL: | C11 C32 E32 F41 F42 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14292&r=mac |
| By: | Michael Funke; Sebastian Weber; Jörg Döpke; Sean Holly |
| Abstract: | In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith firm changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of output responses and the aggregate economy. Further analysis of sectoral data for the US suggests that there is a positive relationship between the skewness of inflation and aggregates, but the relation with output skewness is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustment. |
| JEL: | D12 E52 E43 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20809&r=mac |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Kamila Koprnická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Abstract: | In this paper, we examine the determinants of inflation differentials in a panel of the new European Union member states vis-à-vis the euro area in 1997-2007. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-à-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members, as compared to the euro area. |
| Keywords: | inflation differentials, price convergence, exchange rate, New EU members, panel data |
| JEL: | E31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_24&r=mac |
| By: | Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, Université de Lille 1, France); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan); Pierre-Guillaume Méon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling effect. However, members of a monetary union are better off under symmetric rules (voting, averaging, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union. |
| Keywords: | Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union |
| JEL: | D70 E43 E58 F33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-026&r=mac |
| By: | Davide Debortoli; Ricardo Nunes |
| Abstract: | Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt " more liberal" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even " more conservative" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt " more liberal" objectives may be aiming. We also discuss the opposite case, where objectives may become " more conservative" in the future, which may be the relevant case for countries considering the adoption of inflation targeting. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:944&r=mac |
| By: | Pierre-Richard Agénor; Karim El Aynaoui |
| Abstract: | This paper analyzes the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms’ net worth. The demand for excess reserves is determined by precautionary factors and opportunity cost variables. The basic framework is used to examine the impact of a change in the refinance rate and the required reserve ratio. The analysis is then extended to account for the impact of excess liquidity on bank pricing rules and macroeconomic equilibrium. Symmetric and asymmetric rules are shown to provide new explanations of the “price puzzle” or “stagflationary” effect associated with contractionary monetary policy. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:105&r=mac |
| By: | Sandeep Mazumder |
| Abstract: | Several authors have argued that if the labor share of income is used as the proxy for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas theory predicts marginal cost should be procyclical, and it employs a counterfactual assumption about the behavior of labor over the business cycle. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I conclude that the NKPC fails to give a sound explanation of inflation dynamics.. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:545&r=mac |
| By: | Luiz de Mello |
| Abstract: | Indonesia’s growth performance is improving, following a slow recovery from the 1997-98 financial crisis. Investment is picking up, despite considerable business-climate obstacles to entrepreneurship. Unemployment remains high, and labour informality is pervasive. Fiscal policy has been conducted responsibly and in an increasingly decentralised manner. Monetary policy is now carried out within a fully-fledged inflation-targeting framework. This paper argues that the main barriers to raising the economy’s growth potential are to be found on the supply side of the economy. Indonesia will need to improve the business environment and to make better use of labour inputs to put the economy on a higher growth trajectory. The country’s income gap relative to the OECD is sizeable, and several years of sustained growth will be needed to eliminate it. This Working Paper relates to the 2008 OECD Economic Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia). <P>Indonésie : Performances économiques et enjeux de l’action publique <BR>Les résultats de l’Indonésie sur le front de la croissance s’améliorent, amélioration qui s’inscrit dans le prolongement d’une phase de lente reprise après la crise financière de 1997-98. L’investissement suit une pente ascendante, malgré un climat des affaires très peu porteur. Le chômage demeure élevé et l’emploi dans le secteur informel très largement répandu. La politique budgétaire est conduite de façon responsable et aussi plus décentralisée. La politique monétaire s’articule désormais autour d’un dispositif de ciblage de l’inflation. D’après ce document, les principaux obstacles au relèvement du potentiel de croissance de l’économie indonésienne se situent du côté de l’offre. L’Indonésie va devoir s’efforcer d’offrir aux entrepreneurs des conditions d’ensemble plus propices au développement de leurs activités et de mieux utiliser le facteur travail pour mettre son économie sur une trajectoire de croissance plus prometteuse. L’écart de revenu par rapport aux pays de l’OCDE n’est pas négligeable et plusieurs années de croissance soutenue seront nécessaires pour le combler. Ce Document de travail se rapporte à l’Évaluation économique de l’OCDE de l’Indonésie, 2008 (www.oecd.org/eco/etudes/indonesie). |
| Keywords: | growth, croissance, réforme structurelle, macroeconomic policies, politique macro-économique, structural reforms, Indonesia, Indonésie |
| JEL: | E50 E60 O10 |
| Date: | 2008–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:637-en&r=mac |
| By: | Jonas Dovern; Johannes Weisser |
| Abstract: | In this paper, we use survey data to analyze the rationality of professional macroeconomic forecasts. We analyze both individual forecasts and average forecasts. We provide evidence on the properties of forecasts for all the G7-counties and four different macroeconomic variables. Furthermore, we present a modification to the structural model which is commonly used to model the forecast errors of fixed event forecasts in the literature. Our results confirm that average forecasts should be used with caution, since even if all individual forecasts are rational the hypothesis of rationality is often rejected by the aggregate forecasts. We find that there are not only large differences in the performance of forecasters across countries but also across different macroeconomic variables; in general, forecasts tend to be biased in situations where forecasters have to learn about large structural shocks or gradual changes in the trend of a variable |
| Keywords: | Evaluating forecasts,Macroeconomic Forecasting,Rationality,Survey Data,Fixed-Event Forecasts |
| JEL: | C25 E32 E37 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1447&r=mac |
| By: | Andrew Hodge (Reserve Bank of Australia); Tim Robinson (Reserve Bank of Australia); Robyn Stuart (Reserve Bank of Australia) |
| Abstract: | This paper estimates a small structural model of the Australian economy, designed principally for forecasting the key macroeconomic variables of output growth, underlying inflation and the cash rate. In contrast to models with purely statistical foundations, which are often used for forecasting, the Bayesian Vector Autoregressive Dynamic Stochastic General Equilibrium (BVAR-DSGE) model uses the theoretical information of a DSGE model to offset in-sample over-fitting. We follow the method of Del Negro and Schorfheide (2004) and use a variant of the small open economy DSGE model of Lubik and Schorfheide (2007) to provide prior information for the VAR. The forecasting performance of the model is competitive with benchmark models such as a Minnesota VAR and an independently estimated DSGE model. |
| Keywords: | BVAR-DSGE; forecasting |
| JEL: | C11 C53 E37 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-04&r=mac |
| By: | Sahminan Sahminan |
| Abstract: | In this paper we investigate the effectiveness of Bank Indonesia's and Bank of Thailand's monetary policy communication. We focus on two channels of communication: monetary policy statements, and inter-meeting statements. Although the structure of Bank Indonesia's and Bank of Thailand's monetary policy statements have some differences, most of the statements contain policy inclination. In addition, during inter-meeting periods, members of their board of governors often convey statements that contain policy inclination. Our empirical results show that to some extent Bank Indonesia's and Bank of Thailand's monetary policy statements and inter-meeting statements move short-term interest rates effectively. We find that there is asymmetry in the effects of the statements, that is, the statements with loose policy inclination tend to be more effective relative to the statements with tight policy inclination. |
| Keywords: | communication, effectiveness, monetary policy, Bank Indonesia, Bank of Thailand |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:262&r=mac |
| By: | Munro, John H. |
| Abstract: | This article re-examines Earl Hamilton’s famous 1929 thesis on ‘Profit Inflation’ and the ‘birth of modern industrial capitalism’: namely, that the inflationary forces of the Price Revolution era produced a widening gap between prices and wages, thus providing industrial entrepreneurs with windfall profits, which they reinvested in larger-scale, more capital intensive forms of industry. Hamilton’s analyses of price and wage data for 16th- and 17th-century Spain, France, and England led him to conclude that: Spain had enjoyed virtually no ‘profit inflation’, since wages had generally kept pace with prices; and that early-modern England had experienced the greatest degree of such ‘profit inflation’. Such a contrast in their national economic experiences helps to explain, in Hamilton’s view, why Spain subsequently ‘declined’, while England became the homeland of the modern Industrial Revolution. A major reason for the significance and fame of the Hamilton thesis was its enthusiastic endorsement by John Maynard Keynes, in his Treatise of Money, published the following year, in 1930. Subsequently, the Hamilton ‘profit inflation’ thesis was subjected to severe attacks: by John Nef (1936-37) and David Felix (1956). But they had to rely on the same dubious and indeed often untrustworthy price and wage data for England and France (and of course on Hamilton’s data for Spain, which was of much higher quality). Both rightly noted that the proper comparison had to be made between industrial wages and industrial prices, not the price level in general. Since industrial prices generally rose less than did the overall price level (heavily weighted with foodstuffs), they found much less evidence for ‘profit inflation’ than had Hamilton. Nef developed a counter thesis to argue that sharply rising raw material costs, especially for wood and charcoal, forced industrialists to devise new furnace technologies to burn coal instead of wood or charcoal: changes that not inly reduced such costs but resulted in much larger-scale, more capital-intensive forms of industry. In this revised paper, I offer new data to demonstrate that neither the ‘energy’ nor the new furnace technologies took place until after the 1640s. This study is based on newer sets of price and wage indices that appeared after their publications: those by Phelps Brown and Hopkins for England (which I have modified, after using their data sheets in the LSE Archives), and for this version, additional price date for England. For the southern Netherlands, I have utilized Herman Van der Wee Consumer Price Index. My analyses of both industrial prices and industrial wages suggest that, for England, there is more evidence for potential ‘profit inflation’, in some industries, than Nef or Felix had been willing to concede. But the major discovery was that the Antwerp region continuously experienced, over the 16th and 17th centuries, the contrary phenomenon: what Keynes had called ‘Profit Deflation’ (for him, a truly negative force), in that industrial wages rose faster than industrial prices. And yet indisputably the southern Netherlands had a much more industrialized and more rapidly growing economy than did England, at least until the Revolt of the Netherlands (1568-1609). The concept of ‘profit inflation’ is not, therefore, a useful analytical tool, if based only on labour costs. This study concludes with a brief examination of the effects on inflation on two other factor costs: land, in terms of real rents, and capital, in terms of real interest rates, which did fall with inflation. In all likelihood both such costs did lag behind industrial prices in early-modern England and the Low Countries (and contrary to Eric Kerridge’s 1953 assertions on English rents), though real interest rates lagged more than did real rents. While disputing the Nef thesis, I do analyse the forms and nature of other new, larger-scale industries in this era (mining, metallurgy shipbuilding). I also provide a new appendix on the role of coinage debasements, as an another important monetary factor in determining regional differences in inflation rates; and this contradicts the almost universal assumption that debasements were irrelevant. |
| Keywords: | gold and silver bullion; money; coinage; Price Revolution; prices; consumer price indices; nominal and real wages; building craftsmen; masons; industrial products; profit-inflation; deflation; Spain; France; England; Netherlands |
| JEL: | O42 E31 J30 N14 O14 N33 B20 O52 E20 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10849&r=mac |
| By: | Bedri Kamil Onur Tas; Selahattin Togay |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:0813&r=mac |
| By: | Louis Be Duc (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Frank Mayerlen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Sola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This occasional paper describes the monetary presentation of the euro area balance of payments and its use. The monetary presentation is a tool for assessing the impact of balance of payments transactions involving non-bank residents on monetary developments. The paper explains in detail the principle underlying this approach, i.e. the link between the external counterpart of money, as reflected in the balance sheet of the banking sector, and the balance of payments. From a statistical perspective, it is shown that the monetary presentation of the balance of payments, which is based on international statistical standards, may be applied in any country or currency union. With regard to euro area statistics, the paper elaborates on the practical implementation of the monetary presentation, while also describing a few approximations and remaining statistical challenges. Finally, the paper assesses how the monetary presentation of the balance of payments has been used for analysing monetary developments in the euro area, and highlights the significant impact of balance of payments transactions on monetary dynamics in certain periods. JEL Classification: E51, F40 |
| Keywords: | Monetary analysis, capital flows, balance of payments |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080096&r=mac |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment. |
| JEL: | D40 E31 F31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14381&r=mac |
| By: | Erixon, Lennart (Dept. of Economics, Stockholm University) |
| Abstract: | A wage and economic policy programme for full employment, price stability, growth and equity was developed by two Swedish trade-union economists in the early post-war period. A restrictive macroeconomic policy, a wages policy of solidarity and an active labour market policy are the cornerstones of the Rehn-Meidner model. The model was influenced by Hans Singer’s analysis of the fallacies of incomes policy under full employment conditions. However it is difficult to find equivalences in contemporary economics to the model’s composition of means and goals, functional relationships or to its emphasis on the role of actual profits in wage formation. |
| Keywords: | Rehn-Meidner model; Swedish model; Stockholm school of economics; labour market policy; wages policy of solidarity |
| JEL: | B22 B29 E24 E62 E64 J31 J51 |
| Date: | 2008–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2008_0008&r=mac |
| By: | Stéphanie Guichard; David Turner |
| Abstract: | This paper constructs a broad measure of financial conditions for the United States which suggests that since the onset of the credit crisis there has been a marked tightening in financial conditions, despite a substantial easing of policy rates and a depreciation of the dollar. This measure of overall financial conditions includes interest rate spreads for riskier borrowers and a survey measure of the tightness of bank lending standards, which have been the main drivers behind the tightening in financial conditions. Indeed, recent data suggest that the trend deterioration in overall financial conditions has continued into the second half of 2008. The effect of the tightening in overall financial conditions already experienced may subtract 1¾ per cent from GDP over the next four to six quarters. Not only have financial conditions continued to worsen, but much of the impact on the real economy has yet to be felt. <P>Une mesure de l’impact des conditions financières sur l’activité aux États-Unis <BR>Ce papier propose une mesure des conditions financières au sens large pour les États-Unis suggérant que depuis le début de la crise du crédit, les conditions financières se sont fortement resserrées malgré la baisse substantielle des taux directeurs et la dépréciation du dollar. Cette mesure des conditions financières au sens large inclut les primes de risques supportées par les emprunteurs les plus risqué et les résultats d’une enquête sur le caractère plus ou moins restrictif de l’accès au crédit bancaire. Ces derniers ont été les principaux facteurs conduisant á un durcissement des conditions financières. Les informations les plus récentes suggèrent que les conditions financières au sens large ont continué á se durcir au cours de la seconde moitié de 2008. L’effet du durcissement qui a eu lieu jusqu'à présent pourrait retirer jusqu’á 1¾ pour cent de PIB au cours des quatre à six prochains trimestres. Ainsi, non seulement les conditions financières continuent á se durcir mais une large part de l’impact sur l’économie réelle reste á venir. |
| Keywords: | financial conditions index, interest rate spreads, credit crunch, credit channel, macro-financial linkages, indice des conditions financières, écarts de taux d’intérêt, contraction du crédit, canal du crédit, relations macro-financières |
| JEL: | E32 E44 E47 E51 |
| Date: | 2008–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:635-en&r=mac |
| By: | Mario Forni; Filippo Altissimo; Riccardo Cristadoro; Marco Lippi; Giovanni Veronese. |
| Abstract: | Removal of short-run dynamics from a stationary time series to isolate the medium to long-run component, can be obtained by a band-pass filter. However, band pass filters are infinite moving averages and can therefore deteriorate at the end of the sample. This is a well-known result in the literature isolating the business cycle in integrated series. We show that the same problem arises with our application to stationary time series. In this paper we develop a method to obtain smoothing of a stationary time series by using only contemporaneous values of a large dataset, so that no end-of-sample deterioration occurs. Our construction is based on a special version of Generalized Principal Components, which is designed to use leading variables in the dataset as proxies for missing future values in the variable of interest. Our method is applied to the construction of New Eurocoin, an indicator of economic activity for the euro area. New Eurocoin is an estimate, in real time, of the medium to long-run component of the euro area GDP growth, which performs equally well within and at the end of the sample. As our dataset is monthly and most of the series are updated with a short delay, we are able to produce a monthly, real-time indicator. An assessment of its performance as an approximation of the medium to long-run GDP growth, both in terms of fitting and turning-point signaling, is provided. |
| Keywords: | Coincident Indicator, Band-pass Filter, Large-dataset Factor Models, Generalized Principal Components |
| JEL: | C51 E32 O30 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:020&r=mac |
| By: | Angana Banerji; Haiyan Shi; Paul Louis Ceriel Hilbers; Alexander W. Hoffmaister |
| Abstract: | House prices in Europe have shown diverging trends, and this paper seeks to explain these differences by analyzing three groups of countries: the "fast lane", the average performers, and the slow movers. Price movements in the first two groups are found to be driven mostly by income and trends in user costs, and housing markets in these countries seem relatively more susceptible to adverse developments in fundamentals. Real house price declines among the slow movers are harder to explain, although ample supply, low home ownership, and less complete mortgage markets are likely factors. The impact of macroeconomic, prudential and structural policies on housing markets can be large and should be a factor in policy decisions. |
| Keywords: | Housing prices , Europe , Economic indicators , Taxation , Interest rates , Monetary policy , Fiscal policy , Population , Demand , Supply , Economic models , Working Paper , |
| Date: | 2008–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/211&r=mac |
| By: | Andrew T. Foerster; Pierre-Daniel G. Sarte; Mark W. Watson |
| Abstract: | This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long and Plosser (1983), produce an approximate factor model as a reduced form. A structural factor analysis then indicates that aggregate shocks continue to be the dominant source of variation in IP, but the importance of sectoral shocks more than doubles after the Great Moderation (to 30%). The increase in the relative importance of these shocks follows from a fall in the contribution of aggregate shocks to IP movements after 1984. |
| JEL: | C32 E23 E32 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14389&r=mac |
| By: | Gaetano Bloise; Pietro Reichlin |
| Abstract: | In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from ev- ery contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained ine±ciency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare im- provement, subject to participation, coincides with the introduced notion of constrained ine±ciency. |
| Keywords: | Private debt; solvency constraints; default; Cass Criterion; asset |
| JEL: | D50 D52 D61 E44 G13 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0089&r=mac |
| By: | Rocco Huang |
| Abstract: | This study shows that during Paul Volcker’s drastic monetary tightening in the early 1980s, local banks operating in only one county reduced loan supply much more sharply than local subsidiaries of multi-county bank holding companies in similar markets, after controlling for bank (and holding company) size, liquidity, capital conditions, and, most important, local credit demand. The study allows cleaner identification by examining 18 U.S. “county-banking states” where a bank’s local lending volume at the county level was observable because no one was allowed to branch across county borders. The local nature of lending allows us to approximate and control for the exogenous component of local loan demand using the prediction that counties with a higher share of manufacturing employment exhibit weaker loan demand during tightening (which is consistent with the interest rate channel and the balance-sheet channel of monetary policy transmission).The study sheds light on the working of the bank lending channel of monetary policy transmission. |
| Keywords: | Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-20&r=mac |
| By: | Fabricio Coricelli (University of Siena; University of Paris I; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Abstract: | Most empirical studies on price setting that use micro data focus on advanced industrial countries. In this paper we analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations). We find that market structure is an important determinant of pricing behavior. The effect of market structure on persistence of inflation results from two conflicting forces. Increased competition may reduce persistence by increasing the frequency of price changes. In contrast, higher competition may increase persistence through inertial behaviour induced by the strategic complementarity among price setters. In our case study, we find that the latter effects dominate. Indeed, the dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition is not conducive to lower persistence. Furthermore, we find that the frequency of price changes depends negatively on the price dispersion and positively on the product-specific inflation. These results seem consistent with predictions of Calvo’s staggered price model. |
| Keywords: | price setting, market structure, emerging markets |
| JEL: | D40 E31 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_23&r=mac |
| By: | David Jamieson Bolder; Yuliya Romanyuk |
| Abstract: | Model risk is a constant danger for financial economists using interest-rate forecasts for the purposes of monetary policy analysis, portfolio allocations, or risk-management decisions. Use of multiple models does not necessarily solve the problem as it greatly increases the work required and still leaves the question "which model forecast should one use?" Simply put, structural shifts or regime changes (not to mention possible model misspecifications) make it difficult for any single model to capture all trends in the data and to dominate all alternative approaches. To address this issue, we examine various techniques for combining or averaging alternative models in the context of forecasting the Canadian term structure of interest rates using both yield and macroeconomic data. Following Bolder and Liu (2007), we study alternative implementations of four empirical term structure models: this includes the Diebold and Li (2003) approach and three associated generalizations. The analysis is performed using more than 400 months of data ranging from January 1973 to July 2007. We examine a number of model-averaging schemes in both frequentist and Bayesian settings, both following the literature in this field (such as de Pooter, Ravazzolo and van Dijk (2007)) in addition to introducing some new combination approaches. The forecasts from individual models and combination schemes are evaluated in a number of ways; preliminary results show that model averaging generally assists in mitigating model risk, and that simple combination schemes tend to outperform their more complex counterparts. Such findings carry significant implications for central-banking analysis: a unified approach towards accounting for model uncertainty can lead to improved forecasts and, consequently, better decisions. |
| Keywords: | Interest rates; Econometric and statistical methods |
| JEL: | C11 E43 E47 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-34&r=mac |
| By: | James Feigenbaum; Frank Caliendo; Emin Gahramanov |
| Abstract: | . . . |
| JEL: | C61 E21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:368&r=mac |
| By: | Anastasia Guscina |
| Abstract: | Debt crises that have shaken Latin America, Asia, and Russia have brought an increasing attention to the structure of debt in emerging market countries. Using the newly released Jeanne-Guscina EM Government Debt Database 2006 this paper empirically explores the role of macroeconomic, political, and institutional factors in determining the structure of government debt. Results show that unstable macroeconomic environment, poor quality institutions, and uncertain political climate hinder the development of domestic debt market. Moreover, such instability shifts the debt structure away from long-term local currency fixed rate debt towards short-term debt or to debt indexed to foreign currency, short-term interest rates or inflation. Original sin seems to be on the way out, as more and more countries are issuing local currency debt at longer maturities-which can be explained by successful macroeconomic stabilization policies and lessons learned from the debt crises. |
| Keywords: | Emerging markets , Domestic debt , Financial crisis , Political economy , Financial institutions , Financial stability , Interest rates , Inflation , Working Paper , |
| Date: | 2008–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/205&r=mac |
| By: | Holden, Tom |
| Abstract: | Abstract: The partial information rational expectations solution to a general linear multivariate expectational macro-model is found when agents are uncertain about the true values of the model’s parameters. Necessary and sufficient conditions for convergence to the full information rational expectations solution are given, and the core of an algorithm for the Bayesian updating of beliefs is provided. In the course of this a new class of full information rational expectations equilibria is described and some of its desirable properties proven. |
| Keywords: | Rational Expectations; Partial information; Bayesian learning; Generalized Schur decomposition; Sunspots; Indeterminacy; Feasible Rational Expectations Equilibria |
| JEL: | E00 C60 C11 |
| Date: | 2008–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10872&r=mac |
| By: | Frank Schorfheide; Keith Sill; Maxym Kryshko |
| Abstract: | This paper develops and illustrates a simple method to generate a DSGE model-based forecast for variables that do not explicitly appear in the model (non-core variables). The authors use auxiliary regressions that resemble measurement equations in a dynamic factor model to link the non-core variables to the state variables of the DSGE model. Predictions for the non-core variables are obtained by applying their measurement equations to DSGE model- generated forecasts of the state variables. Using a medium-scale New Keynesian DSGE model, the authors apply their approach to generate and evaluate recursive forecasts for PCE inflation, core PCE inflation, and the unemployment rate along with predictions for the seven variables that have been used to estimate the DSGE model. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-17&r=mac |
| By: | Colignatus, Thomas |
| Abstract: | The financial crisis that erupted in 2007, continues in 2008 and likely continues longer, is in need for explanation by economic theory. The monetary authorities and financial regulators provide us with piecemeal engineering on the fly but there is a lack of overview. The lack of convincing theory and strategy becomes especially worrying when we see the crisis affecting the real economy. People and economic activities that already suffer are not well-represented in national statistics, which provides newspapers with a rosy picture as if the current crisis only affects the financial sector and not the real economy. When the crisis starts to bite those who are in the statistics then the financial crisis will become recognized for the economic crisis that it is, but apparently with little guidance from economic theory on how to solve it. The time honoured solution is to have the poor and powerless work harder and earn less to solve the problems of the rich and powerful. But economic theory can do better. The paper compares various competing economic theories and suggests that economists study a particular theory that apparently hasn’t had sufficient attention yet. The current financial crisis finds a fundamental cause in stagflation. This stagflation originally was open but was later hidden by financial deregulation and innovation. By tackling stagflation the financial crisis would become manageable. A suggestion on how to tackle stagflation is provided by Colignatus (2005), "Definition & Reality in the General Theory of Political Economy", Dutch University Press |
| Keywords: | financial crisis; economic crisis; stagflation; inflation; unemployment; Phillipscurve; taxes |
| JEL: | E0 A1 P16 |
| Date: | 2008–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10831&r=mac |
| By: | Roumen Avramov (Centre for Liberal Strategies, Sofia); Dragana Gnjatovic (Megatrend University, Belgrade) |
| Abstract: | We adopt a comparative view of the stabilization policies designed and implemented in Bulgaria and Yugoslavia during the fatal economic crises of their regimes in late 1980s. The role of the IMF can be better highlighted by comparing “with (Yugoslavia)-without (Bulgaria)” scenarios in a communist context. The authorities' views are discussed and newly accessible archival evidence is presented in the case of Bulgaria. The ruling elites’ vision is confronted by that of critical professionals thus permitting a retrospective assessment of the conceptual readiness of the society for the forthcoming transition to a market economy in the early 1990s. |
| Keywords: | macroeconomic stabilization; inflation; communist economy; Bulgaria; Yugoslavia. |
| JEL: | E63 N10 P24 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:81&r=mac |
| By: | Proietti, Tommaso |
| Abstract: | The paper focuses on the comparison of the direct and iterated AR predictors when Xt is a difference stationary process. In particular, it provides some useful results for comparing the efficiency of the two predictors and for extracting the trend from macroeconomic time series using the two methods. The main results are based on an encompassing representation for the two predictors which enables to derive their properties quite easily under a maintained model. The paper provides an analytic expression for the mean square forecast error of the two predictors and derives useful recursive formulae for computing the direct and iterated coefficients. From the empirical standpoint, we propose estimators of the AR coefficients based on the tapered Yule-Walker estimates; we also provide a test of equal forecast accuracy which is very simple to implement and whose critical values can be obtained with the bootstrap method. Since multistep prediction is tightly bound up with the estimation of the long run component in a time series, we turn to the role of the direct method for trend estimation and derive the corresponding multistep Beveridge-Nelson decomposition. |
| Keywords: | Beveridge-Nelson decomposition; Multistep estimation; Tapered Yule-Walker estimates; Forecast combination. |
| JEL: | C51 E32 C53 E31 C22 |
| Date: | 2008–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10859&r=mac |
| By: | Peter Claeys (Faculty of Economics, University of Barcelona); Rosina Moreno (Faculty of Economics, University of Barcelona); Jordi Suriñach (Faculty of Economics, University of Barcelona) |
| Abstract: | It is commonly believed that a fiscal expansion raises interest rates. However, these crowding out effects of deficits have been found to be small or non-existent. One explanation is that financial integration offsets interest rate differentials on globalised bond markets. This paper measures the degree of integration of government bond markets, using spatial modelling techniques to take this spillover on financial markets into account. Our main finding is that the crowding out effect on domestic interest rates is significant, but is reduced by spillover across borders. This spillover is important in major crises or in periods of coordinated policy actions. This result is generally robust to various measures of cross-country linkages. We find spillover to be much stronger among EU countries. |
| Keywords: | fiscal policy, spillover, interest rates, crowding out, spatial models. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:200810&r=mac |
| By: | Neil R. Ericsson; Steven B. Kamin |
| Abstract: | This paper assesses the empirical merits of PcGets and Autometrics--two recent algorithms for computer-automated model selection--using them to improve upon Kamin and Ericsson's (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correction model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a "ratchet" variable that captures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:943&r=mac |
| By: | David Hauner |
| Abstract: | Putting the pension system on a sustainable footing arguably remains the biggest challenge in Russia's economic policies. The debate about the policy options was hitherto constrained by the absence of general equilibrium analysis. This paper fills this gap by simulating their macroeconomic effects in a DSGE model calibrated to Russia's economy-the first of its kind to the best of our knowledge. The results suggest that a minimum benefit level in the public system should optimally be financed through lower government consumption, while higher taxation of labor and capital should be avoided. Reducing public investment spending is superior to increasing consumption taxes unless investment generates high rates of return. |
| Keywords: | Russian Federation , Pensions , Economic reforms , Private savings , Tax policy , Public investment , Consumption taxes , Aging , Population , Value added tax , Working Paper , |
| Date: | 2008–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/201&r=mac |
| By: | Nathan S. Balke; Stephen P. A. Brown; Mine K. Yücel |
| Abstract: | The effect of oil price shocks on U.S. economic activity seems to have changed since the mid-1990s. A variety of explanations have been offered for the seeming change?including better luck, the reduced energy intensity of the U.S. economy, a more flexible economy, more experience with oil price shocks and better monetary policy. These explanations point to a weakening of the relationship between oil prices shocks and economic activity rather than the fundamentally different response that may be evident since the mid-1990s. Using a dynamic stochastic general equilibrium model of world economic activity, we employ Bayesian methods to assess how economic activity responds to oil price shocks arising from supply shocks and demand shocks originating in the United States or elsewhere in the world. We find that both oil supply and oil demand shocks have contributed significantly to oil price fluctuations and that U.S. output fluctuations are derived largely from domestic shocks. |
| Keywords: | Petroleum industry and trade ; Petroleum products - Prices ; International trade ; Economic conditions - United States |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:20&r=mac |
| By: | Gaetano Gaballo |
| Abstract: | This paper shows how to extend the adaptive learning approach to a truly behavioral uncertainty problem. It investigates the simplest case of a first order self-referential model where two agents have a non-negligible impact on aggregate expectations. Unlike the standard setting, agents are not boundedly rational in that they acknowledge their own influence on output and they are perfectly informed about the exogenous determinants of the economy. Nevertheless no common knowledge is assumed; agents are epistemically isolated and they can only have noisy perceptions of the other agent's simultaneous expectation. In order to have consistent forecasts, each agent has to learn how the other agent's expectations will affect the economy. I prove there exist two types of learnable equilibria: (a) a unique rational expectation equilibrium (REE) and (b) at least one behavioral sunspot equilibrium (BSE). The latter may arise because the learning dynamics can generate the self-fulfilling reciprocal belief that the other agent is irrationally exuberant. Finally, numerical simulations illustrate how an unpredictable switch from the REE to a BSE may occur endogenously when both coexist and are learnable. |
| Keywords: | excess volatility, behavioral uncertainty, intrinsic heterogeneity, statistical learning, structural change. |
| JEL: | E52 E61 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:usi:depfid:1008&r=mac |
| By: | M. Eslava, J. Haltwanger, A. Kugler, M. Kugler (Wilfrid Laurier University) |
| Abstract: | We analyze employment and capital adjustments using plant data from the Colombian Annual Manufacturing Survey. We estimate adjustment functions for capital and labor as a non-linear function of the gaps between desired and actual factor levels, allowing for interdependence in adjustments of the two factors. In addition to non-linear employment and capital adjustments in response to market fundamentals, we find that capital shortages reduce hiring and labor surpluses reduce capital shedding. We also find that after factor market deregulation in Colombia in 1991, factor adjustment hazards increased on the job destruction and capital formation margins. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency. Yet, the actual impact of the Colombian deregulation on aggregate productivity through factor adjustment was modest. |
| Keywords: | Reallocation, joint factor adjustment, irreversibility, deregulation |
| JEL: | E22 E24 O11 C14 J63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:wpaper:eg0059&r=mac |
| By: | Emre Ozsoz (Fordham University, Department of Economics); Erick W. Rengifo (Fordham University, Department of Economics); Dominick Salvatore (Fordham University, Department of Economics) |
| Abstract: | In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results. |
| Keywords: | Central Bank Intervention, Foreign Exchange Rates, Dollarization, Ordered Probit |
| JEL: | F31 E58 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-16&r=mac |
| By: | Marc D. Weidenmier; Joseph H. Davis; Roger Aliaga-Diaz |
| Abstract: | The recent world energy crisis raises serious questions about the extent to which the United States should increase domestic oil production and develop alternative sources of energy. We examine the energy developments in Brazil as an important experiment. Brazil has reduced its share of imported oil more than any other major economy in the world in the last 30 years, from 70 percent in the 1970s to only 10 percent today. Brazil has largely achieved this goal by: (1) increasing domestic oil production and (2) developing one of the world’s largest and most competitive sources of renewable energy -- sugarcane ethanol -- that now accounts for 50 percent of Brazil's total gasoline consumption. A counterfactual analysis of economic growth in Brazil from 1980-2008 suggests that GDP is almost 35 percent higher today because of increased domestic oil production and the development of sugarcane ethanol. We also find a notable reduction in business-cycle volatility as a result of Brazil's progression to a more diversified energy program. Nearly three-fourths of the welfare benefits have come from domestic oil drilling, however, as rents have been paid to domestic factors of production during a time of rising oil prices. We discuss the potential implications of Brazil's energy program for the U.S. economy by conducting historical counterfactual exercises on U.S. real GDP growth since the 1970s. |
| JEL: | E3 N1 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14362&r=mac |
| By: | Kinnunen, Helvi (Bank of Finland Research) |
| Abstract: | This paper investigates public pension funding using a dynamic general equilibrium macroeconomic model (DSGE) that facilitates investigation of distortionary effects of fiscal and pension policy responses to ageing. The model is calibrated to the Finnish economy, which will encounter substantial ageing pressures in the near future. During the transition to an older population structure ageing costs can be substantially lowered by allowing public funds to smooth out the tax responses. Cutting down on pension prefunding at a time when the pace of ageing is at its peak reduces the necessary tax hikes and stimulates labour supply growth at the moment when the labour market is tightest. With smaller funding needs, ageing leads to a slower growth in labour costs, a better employment conditions and faster production growth. |
| Keywords: | ageing; general equilibrium; public finance; government funds |
| JEL: | E13 H55 J11 J26 |
| Date: | 2008–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_021&r=mac |
| By: | Pablo Druck; Mario Dehesa |
| Abstract: | The paper analyzes the challenges for the Eastern Caribbean Central Bank (ECCB) to be an effective lender of last resort (LOLR) as part of a modern banking crisis resolution framework. The main results from the theoretical model of the ECCB's institutional arrangement are that the majority of currency union members may veto emergency lending in the case of a member-specific shock, as such lending may endanger the stability of the currency board (by lowering the central bank's international reserves, thus raising devaluation risk). However, in the presence of contagion across countries, all currency union members have a vested interest in liquidity supply from the central bank. A key policy recommendation is that currency union members need a stronger fiscal position to continue to access international financial markets and sustain the exchange rate peg. |
| Date: | 2008–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/214&r=mac |
| By: | Marcos Chamon; Irineu E. Carvalho Filho |
| Abstract: | Economic policies are often judged by a handful of statistics, some of which may be biased during periods of change. We estimate the income growth implied by the evolution of food demand and durable good ownership in post-reform Brazil and Mexico, and find that changes in consumption patterns are inconsistent with official estimates of near stagnant incomes. That is attributed to biases in the price deflator. The estimated unmeasured income gains are higher for poorer households, implying marked reductions in "real" inequality. These findings challenge the conventional wisdom that post-reform income growth was low and did not benefit the poor. |
| Keywords: | Brazil , Mexico , Data analysis , Economic reforms , Income , Private consumption , Consumer prices , Deflation , Economic models , Economic policy , Working Paper , |
| Date: | 2008–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/197&r=mac |
| By: | J. David Brown; John S. Earle |
| Keywords: | productivity, reallocation, industry dynamics, creative destruction, reform, transition, Georgia, Hungary, Lithuania, Romania, Russia, Ukraine |
| JEL: | E32 O47 P23 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwesc:diwesc9&r=mac |
| By: | S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti |
| Abstract: | We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example. |
| Keywords: | Business conditions |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-19&r=mac |
| By: | Dracea, Raluca; Cristea, Mirela; Ionascu, Costel; Irtes, Meltem |
| Abstract: | The academic literature analyzes the fiscality concern from all points of view, and the question which pressed upon the theoreticians and also the practitioners of the last decades remains: which is the adequate level of the fiscality? The difficulty in answering the question consists in opposite interests: on one hand, the government is willing to acquire the highest level due to the ascendant tendency of public expenses; on the other hand, the tax payers long for a much reduced level in order to dispose of more financial funds. Considering the theory of Arthur Laffer as well as the premise that the taxation structure (flat or progressive tax) is less important than the general level of taxation (tax burden), the purpose of this paper consists in the empirical analysis of the correlation between the tax pressure rate, GDP and the tax incomes flux within two States which adopt different tax systems: Romania and Turkey. For this purpose, we have described the methodology of creating the Laffer curve for Romania and Turkey and we have applied the methods concerning the analysis between the GDP and real tax systems, as well as those methods which estimate the empirical tendency of the fiscality rate within the two States, mentioned above, taking into account the parameters which determine it. The conclusion indicates the existence of a correlation between the real GDP and the real tax incomes, strongly manifested in Turkey (progressive tax system) as compared to Romania (flat tax system). Romania provides an optimistic position, based on standard tendencies which confirm the theory of Arthur Laffer within other countries in Eastern Europe. |
| Keywords: | Laffer curve fiscality rate tax incomes static statistical analysis correlations |
| JEL: | E62 H21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10469&r=mac |
| By: | Gabriel Jiménez (Banco de España); José A. López (Federal Reseve Bank of San Francisco); Jesús Saurina (Banco de España) |
| Abstract: | Since bank credit lines are a major source of corporate funding, we examine the determinants of credit line usage with a comprehensive database of Spanish corporate credit lines. A line’s default status is a key factor driving its usage, which increases as a firm’s financial condition worsens. Line usage decreases by roughly 10% for each year of its life. Lender characteristics, such as the number and length of a firm’s banking relationships, are found to affect a firm’s usage decisions, and credit line usage is found to be inversely related to macroeconomic conditions. |
| Keywords: | credit lines, firm default, bank lending, exposure at default |
| JEL: | E32 G18 M21 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0821&r=mac |
| By: | William A. Brock; Charles F. Manski |
| Abstract: | We study a competitive credit market in which lenders, having partial knowledge of loan repayment, use a Bayesian, maximin, or minimax-regret criterion to make lending decisions. Lenders allocate endowments between loans and a safe investment, while borrowers demand loans to undertake investments. Borrowers may incompletely repay their loans when investment productivity turns out to be low ex post. We characterize market equilibrium, the contracted repayment rate being the price variable that equilibrates loan supply and demand. We explore market dynamics when a credit market that is initially in steady state experiences an unanticipated shock that temporarily lowers the productivity of borrower investments. The shock reduces loan repayment and lenders, not knowing whether the shock is temporary, then reduce loan supply. We study two forms of government intervention to restore the steady state. One policy manipulates the return on the safe investment and the other guarantee a minimum loan return to lenders. We conclude that the minimum-return guarantee is preferable. This policy directly reduces lender ambiguity in a transparent manner. |
| JEL: | E43 G11 G18 H81 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14378&r=mac |
| By: | Libertad González Luna; Berkay Özcan |
| Abstract: | We analyze the impact of an increase in the risk of divorce on the saving behaviour of married couples. From a theoretical perspective, the expected sign of the effect is ambiguous. We take advantage of the legalization of divorce in Ireland in 1996 as an exogenous increase in the likelihood of marital dissolution. We analyze the saving behaviour over time of couples who were married before the law was passed. We propose a difference-in-differences approach where we use as comparison groups either married couples in other European countries (not affected by the law change), or Irish families who did not experience a significant increase in the expected risk of divorce (such as very religious families, or single individuals). Our results suggest that the increase in the risk of divorce brought about by the law was followed by an increase in the propensity to save of married couples, consistent with a rise in precautionary savings interpretation. An increase in the risk of marital dissolution of about 40 percent led to a 7 to 13 percent rise in the proportion of married couples reporting positive savings. |
| Keywords: | Divorce, saving, marriage, divorce law |
| JEL: | J12 D10 K36 E21 D91 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1111&r=mac |
| By: | Ivan O. Kitov (Russian Academy of Sciences) |
| Abstract: | This study validates the microeconomic model defining the evolution of personal incomes in the U.S. Because of a large portion of population not reporting any income, any comprehensive modeling of the overall personal income distribution (PID) is complicated. Age-dependent PIDs allow overcoming this shortcoming since the portion of population without income is very low (<4 %) for ages over 45 years. It is demonstrated that the evolution of Gini coefficient, for the years with a good PID resolution, can be accurately (<0.005) predicted. As the overall PIDs, the empirical age-dependent (density) PIDs collapse to practically one curve when normalized to cumulative growth in personal income and total population in given age groups for the period between 1967 and 2005. This allows exact prediction of Gini coefficient and other measures of inequality, which are defined by PID. Therefore, these measures of income inequality are only of secondary importance. In all age groups, the model predicts slightly decreasing Gini coefficients between 1977 and 2005. The overall G is approximately constant, however. The Pareto law index, k, undergoes significant changes over age: increases from the youngest age to approximately 67 years of age, and then drops. This index defines the roll-off at the highest incomes. |
| Keywords: | personal income distribution, age, mean income, microeconomic modelling, USA, real GDP, macroeconomics |
| JEL: | D01 D31 E17 J1 O12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2008-95&r=mac |
| By: | Matteo Bassi (Università di Salerno, CSEF Toulouse School of Economics (GREMAQ)) |
| Abstract: | Strotz (1956) first suggested that individuals are more impatient when making short-run tradeoffs than long-run ones. Many experimental studies supports his conjecture. Motivated by recent evidence from the British Department of Work and Pension (2006), this paper applies this behavioral framework to retirement decisions. We propose a three-periods OLG model with quasi-hyperbolic consumers whosave for post retirement consumption in the first period and choose their retirement age in the second. We show that this behavioral assumption explains the observed drop in post retirement consumptiondue to lack of saving and the high level of voluntary (i.e. not due to disability or dismission from the firm) early exit from the labor force. When deciding about their retirement age, workers weight too much the costs of remaining at work (i.e. disutility of working, implicit tax on continued activity) and too little the benefits of postponed retirement (i.e. increase of the Bismarckian component of the pension formula), perceived as too far in the future. We investigate the implications of time inconsistent preferences for a political economy model in which voters determine simultaneously thesize and the degree of redistribution of the pension system. We show that, when voting over thepayroll tax, time inconsistent young workers, who look for a commitment device that increases boththeir saving and retirement age, form a coalition with rich in order to decrease the size of the system. When voting over the degree of redistribution, they form a coalition with poor individuals as to in-crease the at part of the pension formula. Our political model provides a political justification for the negative relationship between size and redistribution observed in most OECD countries (Disney 2004). |
| Keywords: | Hyperbolic Discounting, Majority Voting, Redistribution, Retirement Age, Saving Behaviour |
| JEL: | A12 D91 E21 H55 J64 |
| Date: | 2008–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:205&r=mac |
| By: | Andrea Cipollini; Giuseppe Missaglia |
| Abstract: | In this paper, using industry sector stock returns as proxies of firm asset values, we obtain bank capital requirements (through the cycle). This is achieved by Montecarlo simulation of a bank loan portfolio loss density. We depart from the Basel 2 analytical formula developed by Gordy (2003) for the computation of the economic capital by, first, allowing dynamic heterogeneity in the factor loadings, and, also, by accounting for stochastic dependent recoveries. Dynamic heterogeneity in the factor loadings is introduced by using dynamic forecast of a Dynamic Factor model fitted to a large dataset of macroeconomic credit drivers. The empirical findings show that there is a decrease in the degree of Portfolio Credit Risk, once we move from the Basel 2 analytic formula to the Dynamic Factor model specification. |
| Keywords: | Dynamic Factor Model, Forecasting, Stochastic Simulation, Risk Management, Banking |
| JEL: | C32 C53 E17 G21 G33 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:010&r=mac |
| By: | Ross Starr (University of California, San Diego) |
| Abstract: | General equilibrium is investigated with N commodities deliverable at T dates traded spot and futures at ½ N 2T 3 dated commodity-pairwise trading posts. Trade is a resource-using activity recovering transaction costs through the spread between (bid) wholesale) and ask (retail) prices (pairwise rates of exchange). Budget constraints are enforced at each trading post separately implying demand for a carrier of value between trading posts and over time, commodity money (spot or futures). Trade in media of exchange and stores of value is the difference between gross and net inter-post trades. "Demand for 'money'" is stocks held for retrade. |
| Keywords: | Equilibrium, Money and Interest Rates, |
| Date: | 2008–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2008-09&r=mac |
| By: | Diego Moccero |
| Abstract: | Indonesia’s business environment is discouraging entrepreneurship and holding back private-sector growth and development. Weaknesses in the regulatory framework, infrastructure bottlenecks and poor governance continue to weigh down on investment. Policies have been put in place to address these problems, but much remains to be done. An important recent initiative is the enactment of the Investment Law in 2007, which strengthened the foreign investment regime. This paper argues that options for reform could focus on making regulations more pro-business, including by removing red tape and onerous provisions at the local level of government, improving governance and relaxing remaining restrictions on foreign investment. Further financial deepening would facilitate access by enterprises to more abundant, cheaper sources of finance. This Working Paper relates to the 2008 OECD Economic Assessment of Indonesia (www.oecd.org/eco/surveys/indonesia). <P>Améliorer le cadre des affaires et des investissements en Indonésie <BR>En Indonésie, le cadre des affaires décourage la création d’entreprises et freine la croissance du secteur privé. Les faiblesses de la réglementation, les goulets d’étranglement dans les infrastructures et la médiocrité de la gouvernance continuent à entraver les investissements. Des mesures ont été prises pour remédier à ces problèmes, mais beaucoup reste à faire. L’une des importantes initiatives prises récemment a été l’adoption, en 2007, d’une loi sur les investissements qui a amélioré le régime des investissements étrangers. On soutient dans ce papier que la réforme pourrait viser surtout à rendre la réglementation plus favorable à l’activité privée, notamment en supprimant les tracasseries et les lourdeurs administratives aux échelons locaux des pouvoirs publics, en améliorant la gouvernance et en assouplissant les restrictions qui subsistent à l’égard des investissements étrangers. En outre, la poursuite de l’approfondissement des marchés financiers permettrait aux entreprises de se procurer davantage de fonds à moindre coût. Ce Document de travail se rapporte à l’Évaluation économique de l’OCDE de l’Indonesie, 2008 (www.oecd.org/eco/etudes/indonesie). |
| Keywords: | financial sector, secteur financier, foreign direct investment, investissement direct étranger, infrastructure, infrastructure, Indonesia, investment climate, Indonésie, climat des affaires |
| JEL: | E22 F21 G20 |
| Date: | 2008–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:638-en&r=mac |