|
on Macroeconomics |
|
Issue of 2009‒04‒13
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Martin Menner (Universidad de Alicante) |
| Abstract: | A search-theoretic monetary DSGE model with capital and in¬ventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrela¬tions of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technol¬ogy) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models. |
| Keywords: | Inflation and Output Dynamics, Business Cycle, Search-Theory of Money, Bayesian Estimation, Model Comparison. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-06&r=mac |
| By: | André Minella; Nelson F. Souza-Sobrinho |
| Abstract: | We develop and estimate a medium-size, semi-structural model for Brazil's economy during the inflation targeting period. The model captures key features of the economy, and allows us to investigate the transmission mechanisms of monetary policy. We decompose the monetary channels into household interest rate, firm interest rate, and exchange rate channels. We find that the household interest rate channel plays the most important role in explaining output dynamics after a monetary policy shock. In the case of inflation, however, both the household interest rate and the exchange rate channels are the main transmission mechanisms. Furthermore, using a proxy for an expectation channel, we also find that this channel is key in the transmission of monetary policy to inflation. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:181&r=mac |
| By: | Marvin Goodfriend; Robert G. King |
| Abstract: | A standard statistical perspective on the U.S. Great Inflation is that it involves an increase in the stochastic trend rate of inflation, defined as the long-term forecast of inflation at each point in time. That perspective receives support from two sources: the behavior of long-term interest rates which are generally supposed to contain private sector forecasts, and statistical studies of U.S. inflation dynamics. We show that a textbook macroeconomic model delivers such a stochastic inflation trend, when there are shifts in the growth rate of capacity output, under two behavioral hypotheses about the central bank: (i) that it seeks to maintain output at capacity; and (ii) that it seeks to maintain continuity of the short-term interest rate. The theory then identifies major upswings in trend inflation with unexpectedly slow growth of capacity output. We interpret the rise of inflation in the U.S. from the perspective of this simple macroeconomic framework. |
| JEL: | E3 E43 E52 E58 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14862&r=mac |
| By: | Lavan Mahadeva; Javier Gómez Pineda |
| Abstract: | The objective of this paper is to analyze how international cycles affect the real GDP cycle and so monetary policy decisions in Colombia. We estimate that cycles in world GDP, export prices and capital inflows are strongly associated with the Colombian business cycle both on impact and even during the first year. We find evidence that, because of inefficiencies in the domestic financial sector, external gains are channelled into nontradable spending through credit expansions. This creates large appreciations during booms. The reverse happens during world slowdowns. These swings in the Exchange rate restrict the scope for a countercyclical monetary policy. |
| Date: | 2009–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005406&r=mac |
| By: | Oleksiy Kryvtsov |
| Abstract: | Models with imperfect information that generate persistent monetary nonneutrality predominantly rely on assumptions leading to substantial heterogeneity of information across price-setters. This paper develops a quantitative general equilibrium model in which the degree of heterogeneity of information is determined endogenously. In the model, firms use two technologies to acquire information: costly updating to full information and costless learning from publicly observed market signals. Price changes of firms that update information infrequently are synchronized with market signals. This leads to an externality whereby less frequent updating increases the information conveyed by prices and quantities. When the model is calibrated to moments from a panel of BLS commodity sectors, it is found that the private value of costly updating to full information is close to zero, market signals are informative, and the real effects of monetary shocks are small. |
| Keywords: | Business fluctuations and cycles; Inflation and prices; Transmission of monetary policy |
| JEL: | D83 E31 E32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-11&r=mac |
| By: | Susana Salvado (FEUNL, GEE) |
| Abstract: | The issue of fiscal coordination in a Monetary Union is recurrent as monetary policy can no longer be used as a national stabilization policy instrument. We measure the increase in welfare due to the coordination of fiscal policies in the typical Neo-Keynesian environment, where monetary policy would have significantive and persistent real effects. We propose a decomposition of coordination gains into a deterministic and a stochastic parcel. We show that the deterministic fiscal coordination gain is high but that the stochastic gain, often called stabilization gain, is very small generating, for our calibration, an increase of 0.0161 percentage points, measured in consumption equivalents. |
| Keywords: | Coordination, Fiscal Policy, Gains, Nash. |
| JEL: | E61 E62 F41 F42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0013&r=mac |
| By: | S. Boragan Aruoba; Frank Schorfheide |
| Abstract: | We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. Target rates of -1% or less maximize the social welfare function we consider, which contrasts with results derived from a cashless New Keynesian model. |
| JEL: | C5 E4 E5 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14870&r=mac |
| By: | De Walque, Gregory (National Bank of Belgium); Pierrard, Olivier (Catholic University of Louvain); Sneessens, Henri (Catholic University of Louvain); Wouters, Raf (National Bank of Belgium) |
| Abstract: | We consider a model with frictional unemployment and staggered wage bargaining where hours worked are negotiated every period. The workers' bargaining power in the hours negotiation affects both unemployment volatility and inflation persistence. The closer to zero this parameter, (i) the more firms adjust on the intensive margin, reducing employment volatility, (ii) the lower the effective workers' bargaining power for wages and (iii) the more important the hourly wage in the marginal cost determination. This set-up produces realistic labor market statistics together with inflation persistence. Distinguishing the probability to bargain the wage of the existing and the new jobs, we show that the intensive margin helps reduce the new entrants wage rigidity required to match observed unemployment volatility. |
| Keywords: | DSGE, search and matching, nominal wage rigidity, monetary policy |
| JEL: | E31 E32 E52 J64 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4059&r=mac |
| By: | Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerron-Quintana (Department of Economics, North Carolina State University); Juan F. Rubio-Ramírez (Department of Economics, Duke University); Martin Uribe (Department of Economics, Columbia University) |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| Keywords: | Small Open Economy, DSGE Models, Stochastic Volatility |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-013&r=mac |
| By: | Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana; Juan Rubio-RamÃrez; MartÃn Uribe |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14875&r=mac |
| By: | Congregado, Emilio (University of Huelva); Golpe, Antonio A. (University of Huelva); Parker, Simon C. (University of Western Ontario) |
| Abstract: | This paper estimates an unobserved components model to explore the macro dynamics of entrepreneurship in Spain and the US. We ask whether entrepreneurship exhibits hysteresis, defined as a macro dynamic structure in which cyclical fluctuations have persistent effects on the natural rate of entrepreneurship. We find evidence of hysteresis in Spain, but not the US, while in both countries business cycle output variations significantly affect future rates of entrepreneurship. The article discusses implications of the findings for the design of entrepreneurship policies. |
| Keywords: | hysteresis, unobserved components model, time series models, business cycles, self-employment, entrepreneurship |
| JEL: | C32 E32 J24 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4093&r=mac |
| By: | Mohitosh Kejriwal |
| Abstract: | Recent empirical studies find little evidence of a change in euro area inflation persistence over the post-1970 period. Their methodology is primarily based on standard unit root and structural break tests on the persistence parameter in an autoregressive specification for the inflation process. These procedures are, however, not designed to detect a change in persistence when a sub-sample of the data has a unit root, i.e., when the process shifts from stationarity to non-stationarity or vice-versa. In this paper, we use four classes of tests for a change in persistence that allow for such shifts to argue that euro area inflation shifted from a unit root process to a stationary one at some point in the sample. Statistical methods to select the break date identify the change in the second quarter of 1993, around the time of the Maastricht Treaty which established the groundwork for the European Monetary Union, with an explicit mandate for price stability as the primary objective of monetary policy. Bootstrap estimates of the persistence parameter, half-life estimates and confidence intervals for the largest autoregressive root all suggest a marked decline in persistence after the break. We also illustrate that the hypothesis of stationarity with a mean shift but a stable persistence parameter is not compatible with the data. The evidence presented is therefore consistent with the view that the degree of inflation persistence varies with the transparency and credibility of the monetary regime. |
| Keywords: | persistence, price stability, unit root, monetary policy |
| JEL: | C22 E3 E5 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1218&r=mac |
| By: | Susana Salvado (FEUNL, GEE) |
| Abstract: | In a Monetary Union where individual monetary instruments are lost, fiscal policy becomes more important as a national policy. The question addressed in this article is whether fiscal policy should be decided at the country level or by a central decision maker, being in any case the fiscal instruments specific to each country. To answer this question, the focus is on the quantitative effect, since there are costs of implementing a supranational decision maker. While discussing the methodologies used in literature, we hereby propose a different one for quantifying gains from cooperation. We conclude that gains from fiscal coordination are significative, but gains that result from policy changes as a reaction to shocks are, by nature, very small. We also show that, symmetric shocks lead to coordination gains of the same magnitude than asymmetric ones. |
| Keywords: | Coordination, Fiscal Policy, Gains, Nash. |
| JEL: | E61 E62 F41 F42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0012&r=mac |
| By: | Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper examines an environment where money is essential and agents exchange in perfectly-competitive, Walrasian markets. Agents consume and produce a homogeneous good, but hold money to purchase consumption in the event of a relatively low productivity shock. A Walrasian market delivers a non-degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search-theoretic environments. The model is calibrated to long-run US velocity, and the welfare costs of inflation are assessed for variable buyer-seller ratios and persistent states of buying and selling. |
| Keywords: | Monetary Policy, Inflation, Welfare, Walrasian Markets |
| JEL: | E40 E50 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:2&r=mac |
| By: | Lukas Vogel; Elena Rusticelli; Pete Richardson; Stéphanie Guichard; Christian Gianella |
| Abstract: | This paper uses a variety of empirical methods to examine the apparent differences in monetary policy stances as between the United States and other G7 economies, notably those in the euro area, during the period of sharp increases in oil and other commodity prices in the first half of 2008. In particular it asks the question whether observed differences in policy stances could be attributed to differences in economic structures and the vulnerability of different regions to inflationary shocks coming from import prices as opposed to differences in monetary policy objectives. The main conclusion is that although there are a number of differences in the estimated impact and dynamics of commodities, import prices and exchange rates on domestic inflation, which may have contributed to differences in policy stances during the boom in commodity prices, they cannot explain them all.<P>Réponse de l’inflation aux chocs récents : Les pays du G7 diffèrent-ils les uns des autres ?<BR>Ce papier utilise plusieurs méthodes empiriques distinctes pour examiner les différences apparentes dans l’orientation des politiques monétaires aux États-Unis et d'autres économies du G7, notamment de la zone euro, pendant la période de fortes hausses des cours du pétrole et des matières premières au premier semestre de 2008. En particulier il pose la question de l’origine des différences observées dans l’orientation des politiques : peuvent-elles être attribuées aux différences de structures économiques et à la vulnérabilité de différentes régions aux chocs inflationnistes venant des prix à l'importation ou aux différences dans les objectifs de politique monétaire. La conclusion principale est que bien qu'il y ait un certain nombre de différences dans l'impact estimé des prix à l'importation des produits de base et des taux de change sur l'inflation domestique et dans leurs dynamiques, lesquels ont pu contribuer aux différences d’orientation des politiques monétaires durant la phase de boom des cours des matières premières, ces différences ne peuvent pas tout expliquer. |
| Keywords: | Phillips curve, courbe de Phillips, inflation, DSGE model, modèle DSGE, coût de transition, commodity prices, prix des matières premières, import prices, prix des importations, error-correction model, modèles à correction d’erreurs |
| JEL: | E31 E52 J30 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:689-en&r=mac |
| By: | Loic Batte; Agnes Benassy-Quere; Benjamin Carton; Gilles Dufrenot |
| Abstract: | We propose a two-country DSGE model of the Dutch disease in a monetary union, calibrated on Nigeria and WAEMU. Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy, and a fixed exchange rate regime. We find that, in the face of oil shocks, the most stabilizing regime for Nigeria is a fixed money supply whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil stabilization fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil and agricultural price shocks. |
| Keywords: | Dutch disease; DSGE; monetary union; optimal monetary policy |
| JEL: | E52 F41 Q33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-07&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). We 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, we apply our approach to generate and evaluate recursive forecasts for PCE inflation, core PCE inflation, the unemployment rate, and housing starts along with predictions for the seven variables that have been used to estimate the DSGE model. |
| JEL: | C11 C32 C53 E27 E47 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14872&r=mac |
| By: | Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España) |
| Abstract: | In this paper we propose an affine model that uses as observed factors the Nelson and Siegel (NS) components summarising the term structure of interest rates. By doing so, we are able to reformulate the Diebold and Li (2006) approach to forecast the yield curve in a way that allows us to incorporate a non-arbitrage opportunities condition and risk aversion into the model. These conditions seem to improve the forecasting ability of the term structure components and provide us with an estimation of the risk premia. Our approach is somewhat equivalent to the recent contribution of Christiensen, Diebold and Rudebusch (2008). However, not only does it seem to be more intuitive and far easier to estimate, it also improves that model in terms of fitting and forecasting properties. Moreover, with this framework it is possible to incorporate directly the inflation rate as an additional factor without reducing the forecasting ability of the model. The augmented model produces an estimation of market expectations about inflation free of liquidity, counterparty and term premia. We provide a comparison of the properties of this indicator with others usually employed to proxy the inflation expectations, such as the break-even rate, inflation swaps and professional surveys. |
| Keywords: | Interest Rate Forecast, Inflation Expectations, Affine Model, Diebold and Li |
| JEL: | G12 E43 E44 C53 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0906&r=mac |
| By: | Christopher M. Gunn; Alok Johri |
| Abstract: | We explore the ability of a model with knowledge capital to generate expectations-driven business cycles. Knowledge capital is an input in production which is endogenously produced through a learning-by-doing process. We show that a standard real business cycle model augmented with only a learning-by-doing technology can exhibit an expectations-driven business cycle in response to news about a future change in total factor productivity. News about future productivity immediately increases the value of knowledge. This induces agents to accumulate knowledge now by working harder. The ensuing expansion of output is sufficient that both current consumption and investment can increase above steady state levels despite the absence of any contemporaneous productivity shock. Moreover, if knowledge capital is accumulated by firms the boom in real variables is accompanied by an appreciation in the price of equity shares, a feature that has empirical support. |
| Keywords: | Expectations-driven business cycle; Pigou cycle: News shock; Learning-by-doing; Asset pricing |
| JEL: | E3 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2009-02&r=mac |
| By: | Jim Malley; Ulrich Woitek |
| Abstract: | This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy. |
| Keywords: | Real Business Cycle, Bayesian estimation, VARMA errors |
| JEL: | C11 C52 E32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:408&r=mac |
| By: | Todd H. Kuethe (Department of Agricultural Economics, Purdue University); Valerien Pede (Department of Agricultural Economics, Purdue University) |
| Abstract: | We present a study of the effects of macroeconomic shocks on housing prices in the Western United States using quarterly state level data from 1988:1 – 2007:4. The study contributes to the existing literature by explicitly incorporating locational spillovers through a spatial econometric adaptation of vector autoregression (SpVAR). The results suggest these spillovers may Granger cause housing price movements in a large number of cases. SpVAR provides additional insights through impulse response functions that demonstrate the effects of macroeconomic events in different neighboring locations. In addition, we demonstrate that including spatial information leads to significantly lower mean square forecast errors. |
| Keywords: | Housing prices, VAR, spatial econometrics |
| JEL: | C31 C32 R21 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pae:wpaper:09-04&r=mac |
| By: | Kamil Yilmaz (Koc University) |
| Abstract: | We apply Diebold-Yilmaz spillover index methodology to monthly industrial production indices to study business cycle interdependence among G-6 industrialized countries since 1958. The business cycle spillover index fluctuates substantially over time, increasing especially after the 1973-75, 1981-82 and 2001 U.S. recessions. The band within which the spillover index fluctuates has widened since the start of the globalization process in the early 1990s. Our most important result, however, concerns the current state of the world economy: In a matter of four months from September to December 2008, the business cycle spillover index recorded the sharpest increase ever, reaching a record level as of December 2008 (See http://data.economicresearchforum.org/erf/bcspill.aspx?lang=en for updates of the spillover plot). Focusing on directional spillover measures, we show that in the current episode the shocks are mostly originating from the United States and spreading to other industrialized countries. We also show that, throughout the period of analysis, the U.S. (1980s and 2000s) and Japan (1970s and 2000s) have been the major transmitters of shocks among the industrialized countries. |
| Keywords: | Business Cycles, Spillovers, Industrial Production, Vector Autoregression, Variance Decomposition, Unit Roots, Cointegration |
| JEL: | E32 F41 C32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0903&r=mac |
| By: | Benedetto Molinari (Universidad Pablo de Olavide); Francesco Turino (Universidad de Alicante) |
| Abstract: | This paper provides new empirical evidence for quarterly U.S. aggregate advertisingexpenditures, showing that advertising has a well defined pattern over the BusinessCycle. To understand this pattern we develop a general equilibrium model wheretargeted advertising increases the marginal utility of the advertised good. Advertisingintensity is endogenously determined by profit maximizing firms. We embed thisassumption into an otherwise standard model of the business cycle withmonopolistic competition. We find that advertising affects the aggregate dynamics ina relevant way, and it exacerbates the welfare costs of fluctuations for the consumer.Finally, we provide estimates of our setup using Bayesian techniques. |
| Keywords: | Advertising, DSGE model, Business Cycle fluctuations, Bayesian |
| JEL: | D11 E32 J22 M37 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-09&r=mac |
| By: | Ronald Schettkat (Department of Economics University of Wuppertal); Rongrong Sun (Department of Economics University of Wuppertal) |
| Abstract: | Almost all institutions - employment protection legislation, unions, wages, wage structure, unemployment insurance, etc. - have been alleged and found guilty to have caused this tragic development at some point in the long history of rising and persistent unemployment in Europe. US labor market institutions, assumed to leave markets unfettered, became the benchmark for Europe. Based on the assertion of neutrality of monetary policy in the medium and long run, the search for causes of European unemployment has shielded away from the policy of central banks. Actually, however, the institutional setup regarding monetary policy is very different between the FED and the Bundesbank (ECB). We argue that the interaction of negative external shocks and tight monetary policies may have been the major - although probably not the only - cause of unemployment in Europe remaining at ever higher levels each recession. We identify the monetary policy of the Bundesbank as asymmetrical in the sense that the Bank did not actively fight recessions, but that it dampened recovery periods. |
| Keywords: | Production; Employment; Unemployment; Monetary Policy; Central Banks and Their Policies |
| JEL: | E23 E24 E42 E43 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:schdps:sdp09003&r=mac |
| By: | Ferroni, Filippo |
| Abstract: | DSGE models are currently estimated with a two step approach: data is first filtered and then DSGE structural parameters are estimated. Two step procedures have problems, ranging from trend misspecification to wrong assumption about the correlation between trend and cycles. In this paper, I present a one step method, where DSGE structural parameters are jointly estimated with filtering parameters. I show that different data transformations imply different structural estimates; the two step approach lacks a statistical-based criterion to select among them. The one step approach allows to test hypothesis about the most likely trend specification for individual series and/or use the resulting information to construct robust estimates by Bayesian averaging. The role of investment shock as source of GDP volatility is reconsidered. |
| Keywords: | DSGE models; Filters; Structural estimation; Business Cycles |
| JEL: | C32 E32 C11 |
| Date: | 2009–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14550&r=mac |
| By: | Michael Reiter (Institute for Advanced Studies, Vienna); Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University and Institute for Advanced Studies, Vienna) |
| Abstract: | The lumpy nature of plant-level investment is generally not taken into account in the context of monetary theory (see, e.g., Christiano et al. 2005 and Woodford 2005). We formulate a generalized (S,s) pricing and investment model which is empirically more plausible along that dimension. Surprisingly, our main result shows that the presence of lumpy investment casts doubt on the ability of sticky prices to imply a quantitatively relevant monetary transmission mechanism. |
| Keywords: | Lumpy Investment, Sticky Prices |
| JEL: | E22 E31 E32 |
| Date: | 2009–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_05&r=mac |
| By: | K. Azim Ozdemir; Serkan Yigit |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0901&r=mac |
| By: | Fougère, Denis (CREST-INSEE); Gautier, Erwan (Bank of France); Le Bihan, Hervé (Bank of France) |
| Abstract: | We examine the effect of the minimum wage on restaurant prices. We contribute to both the study of economic impact of the minimum wage and to the micro patterns of price stickiness. For that purpose, we use a unique dataset of individual price quotes collected to calculate the Consumer Price Index in France and we estimate a price rigidity model based on a flexible (S; s) rule. We find a positive and significant impact of the minimum wage on prices. The effect of the minimum wage on prices is however very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices. |
| Keywords: | price stickiness, minimum wage, inflation, restaurant prices |
| JEL: | E31 D43 L11 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4070&r=mac |
| By: | Bigio, Saki (Department of Economics, New York University) |
| Abstract: | Cross-country evidence suggests that during recent years a large fraction of developing countries seem to began to overcome fear of oating, i.e., a lower relative volatility of exchange rates to monetary policy instruments. To explain this trend, we build a model that describes the behavior of Central Banks in developing countries under uncertainty and fear of misspecication about the eects of exchange rate depreciations. The Central Bank is uncertain about two sub-models which dier in that exchange rate depreciations can cause output either to expand (textbook eect) or contract (balance sheet eect). Optimal policy within the second sub-model is consistent with fear of floating. A feature of fear of oating is that, by preventing sizeable exchange rate swings, Central Banks could loose valuable information useful to distinguish among models. We describe how the Central Bank's the evolution of the prior depends on the optimal policy and viceversa. We conclude that the trend towards less fear of floating may not be explained by Bayesian or robust policies because it would have been too quick to explain the data. However, if there was a parameter change affecting many countries during the early 2000's, the model generates the observed pattern. |
| Keywords: | Balance Sheet Effect, Fear of Floating, Model Uncertainty, Learning, Monetary Policy, Policy Experimentation, Robustness |
| JEL: | C11 E44 E58 F31 F33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2009-004&r=mac |
| By: | Herbert Buscher; Hubert Gabrisch |
| Abstract: | Our study tries to find out whether wage dynamics between Euro member countries became more synchronized through the adoption of the common currency. We calculate bivarate correlation coefficients of wage and wage cost dynamics and run a model of endogenously induced changes of coefficients, which are explained by other variables being also endogenous: trade intensity, sectoral specialization, financial integration. We used a panel data structure to allow for cross-section weights for country-pair observations. We use instrumental variable regressions in order to disentangle exogenous from endogenous influences. We applied these techniques to real and nominal wage dynamics and to dynamics of unit labor costs. We found evidence for persistent asymmetries in nominal wage formation despite a single currency and monetary policy, responsible for diverging unit labor costs and for emerging trade imbalances among the EMU member countries. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:7-09&r=mac |
| By: | Jambu, Marc-Antoine |
| Abstract: | The current financial and economic crisis is not du to the Dollar paradox. That's why the growing "Global Imbalances" remains an interesting issue. By mixing theories from the litterature of Foreign Direct Investment in China and the Collateral theory developped in [Dooley, Folkerts-Landau, Garber, (2004)], webuild a model which give an explanation of the American Tresory Bonds reserve held by the Chinese Central Bank. We show that the Chinese governement doesn't really need to worry about the solvability of the American economy. Moreover Chinese governement has rational intensives for american overindebtness. The main limit of this strategy consist in less human capital accumulation expectations from the FDI positive externalities. Besides we show how inflation pressures, du to incomplete sterilisation of the chinese monetary policy, can be moderate by positive productivity and quality shocks. To finish we conclude that Chinese governement has no insentive to protect intellectual property rights, whereas WTO commitments have to be assumed. |
| Keywords: | FDI; Global imbalances; Collateral Theory |
| JEL: | E58 E2 E31 F32 F21 |
| Date: | 2009–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14460&r=mac |
| By: | Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Anna Iara (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The main question addressed in this study is the performance of the labour markets in the Western Balkans. The aim is to find out whether they can deliver growth of employment and decline of unemployment in the medium run and whether they can withstand short-term shocks due to changes in demand or supply. These questions are particularly pressing in view of the monetary policy based on fixed exchange rates which is followed by the majority of the countries in this region. In terms of the theory of optimal currency areas, if the exchange rate is fixed, labour markets have to be flexible if there are adverse shocks. Otherwise, adjustment would work through a fall in employment levels and an increase in unemployment. The alternative of flexible exchange rates has been abandoned by most monetary authorities in the region for fears of risk of an exchange rate crisis. |
| Keywords: | Western Balkans, optimum currency area, labour market flexibility, external disequilibria, wage-setting |
| JEL: | E24 F15 F16 F41 F42 J3 J4 D57 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wii:rpaper:rr:352&r=mac |
| By: | Pieter A. Gautier (VU University Amsterdam) |
| Abstract: | In this note I argue that the desirability of fiscal policy in response to the current crisis depends on whether one views the current crisis as a temporary deviation from a unique equilibrium or as a bad equilibrium out of multiple equilibria. The paper presents a simple Diamond (1982) type of model where firms must find an (investment) bank to finance their projects and the investment banks sell risky assets to get capital from investors. Due to coordination frictions, the economy can get stuck in an inefficient low-trade equilibrium. Finally, I briefly discuss some of the policies that have recently been put forward to stimulate the economy in the context of this model. |
| Keywords: | financial crisis; coordination frictions; macroeconomic complementarities; search frictions |
| JEL: | E44 E62 J64 |
| Date: | 2009–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090028&r=mac |
| By: | Sebastián Nieto Parra |
| Abstract: | During the 1990s and the 2000s a variety of crises affected the stability of international capital markets: from the European Monetary System crisis in 1992-93 and the emerging market crises to today’s financial crisis have been present in the arenas of capital markets. These crises stimulated the theoretical and empirical literature on the economics of the crises in several ways, among other things on the determinants of a crisis, its impact on domestic output, and policy implications. In most of the recent crises public sector financing difficulties combined with currency problems dominated the collapse of these countries. Both unsustainable fiscal and monetary policies were important factors behind these crises (...) |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:devaac:89-en&r=mac |
| By: | Zeps, Dainis |
| Abstract: | We suggest new approach to what should be considered money. We argue that not money itself should be measurable quantity but change of it, thus, entering gauge freedom action in economics in analogy with what we perceive in nature how it is described by theoretical physics. |
| Keywords: | world’s economy; money; gauge freedom; physics; commonwealth |
| JEL: | C0 |
| Date: | 2009–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14453&r=mac |
| By: | Simon Gilchrist; Vladimir Yankov; Egon Zakrajsek |
| Abstract: | To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30~percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S.\ economic fluctuations during the 1990--2008 period. |
| JEL: | E32 E44 G12 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14863&r=mac |
| By: | Zeps, Dainis |
| Abstract: | We run economy not knowing rules of what we are running. Commonwealth maybe should be allowed to functionate under its own rules that should be discovered, similar to these in physics or biology. By the way, quantity value of what money measures should be discovered too. Greed in whatever appearance, direct or hidden, should be excluded completely. |
| Keywords: | world’s economy; crisis; money; bubble of value; greed; noosphere; psychology; religion; physics; commonwealth; common benefit. |
| JEL: | C0 |
| Date: | 2009–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14416&r=mac |
| By: | Ang, James |
| Abstract: | This paper attempts to shed some light on the role of financial sector policies in generating new knowledge, drawing on the experience of one of the fastest growing and largest developing countries. Using relatively long time series data, the results in this paper indicate that interest rate restraints help generate knowledge in India’s economy. Other financial repressionist policies, in the form of high reserve and liquidity requirements as well as significant directed credit controls, appear to have a dampening effect on ideas production. The results lend some support to the argument that some form of financial sector reforms may help stimulate economic growth via increasing innovative activity. |
| Keywords: | financial sector policies; innovative activity; endogenous growth; India. |
| JEL: | E58 O53 O16 E44 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14495&r=mac |
| By: | Elias Karakitsos |
| Abstract: | All of the various schemes that have been put forward to resolve the current credit crisis follow either the "business as usual" or the "good bank" model. The "business as usual" model takes different forms--insurance or guarantee of the assets or liabilities of the financial institutions, creation of a "bad bank" to buy toxic assets, temporary nationalization--and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s. The "good bank" solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression. In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified "good bank" approach, with the government either guaranteeing a large proportion of the personal sector's assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:09-3&r=mac |
| By: | Löschel, Andr; Oberndorfer, Ulrich |
| Abstract: | In this paper, we analyze oil price impacts on unemployment for Germany. Firstly, we survey theoretical and empirical literature on the oil-unemployment relationship and relate them to the German case. Secondly, we illustrate this issue within the framework of a vector autoregression (VAR) approach for Germany. For this purpose, we use three different specifications in order to adequately address the uncertainty related to the construction of an adequate oil variable. Using monthly data from 1973 to 2008, we show that oil price increases induce a rise in unemployment in the German labor market. Moreover, for a restricted sample period for post-unification Germany, we oppose claims that the oil to macroeconomy relationship has weakened since the 1980s. However, our results suggest that it has become more important to construct adequate measures of oil price variables. |
| Keywords: | oil price, unemployment, Germany |
| JEL: | E24 Q43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:7526&r=mac |
| By: | Yuriy Gorodnichenko; Enrique G. Mendoza; Linda L. Tesar |
| Abstract: | During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland’s Great Depression. We also show that Finland’s Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade. |
| JEL: | E32 F41 P2 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14874&r=mac |
| By: | Schich, Sebastian T. |
| Abstract: | Government provision of a financial safety net for financial institutions has been a key element of the policy response to the current crisis, with governments extending existing guarantees and introducing new ones. These measures have been helpful in avoiding a further accelerated loss of confidence. But they are not costless. Like any guarantee, deposit insurance gives rise to moral hazard, especially if the coverage is unlimited. Clearly, in the midst of a crisis, one should not be overly concerned with moral hazard, as the immediate task is to restore confidence, and guarantees can be helpful in that respect. Nonetheless, to keep market discipline operational, it is important to specify when the extra insurance will end, and this timeline needs to be credible. To be able to establish such a timeline the root causes of the lack of confidence – that is the effects of troubled assets on financial firms’ health – need to be addressed effectively. On a more fundamental level, once a government has ventured down the road of guarantee expansion, there may be a general perception that a government guarantee will always be available during crisis situations. As a consequence, other elements of the financial safety net may need to be strengthened, including the prudential and supervisory framework. |
| Keywords: | Policy responses to financial crisis, safety net, deposit insurance, moral hazard |
| JEL: | E61 G22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7540&r=mac |
| By: | Stefania Albanesi; Claudia Olivetti |
| Abstract: | The entry of married women into the labor force is one of the most notable economic phenomena of the twentieth century. We argue that medical progress played a critical role in this process. Improved maternal health alleviated the adverse effects of pregnancy and childbirth on women's ability to work, while the introduction of infant formula reduced mothers' comparative advantage in infant feeding. We construct economic measures of these two dimensions of medical progress and develop a quantitative model that aims to capture their impact. Our results suggests that these advances, by enabling women to reconcile work and motherhood, were essential for the rise in married women's participation and the evolution of their economic role. |
| JEL: | E24 J16 J21 J22 N3 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14873&r=mac |
| By: | Deborah A. Cobb-Clark; Andrew Leigh |
| Abstract: | In the late 1970s and early 1980s, the overall unemployment rate in the ACT was virtually indistinguishable from that in the country as a whole. However, for the past twenty-five years, unemployment in the ACT has been lower – often substantially lower – than in the nation as a whole. The ACT also has a lower rate of long-term unemployment (defined as unemployment durations of 12 months or more). Given the unique nature of the ACT labour market, it is useful to focus on long-term unemployment in the ACT specifically. We do this by analysing administrative data on benefits payments. Looking only at unemployed persons in the ACT, and analysing the propensity to be long-term unemployed, we find that men, Indigenous people, older people, and less educated people are more likely to be long-term unemployed. Finally we find that unemployment and long-term unemployment in the ACT is geographically concentrated in certain neighbourhoods. |
| Keywords: | unemployment duration, local labour markets |
| JEL: | E24 J64 J68 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:auu:dpaper:603&r=mac |
| By: | Carol S. Lehr (Department of Economics, VCU School of Business) |
| Abstract: | During the 1940s wages compressed dramatically and the dispersion of returns to education and experience declined. This paper shows that the change in the 1940s wage structure arises from a compression in the distribution of mean wages between occupations. The compression results from labor market shortages caused both by economic mobilization and the selective nature of the draft. The war increased demand for relatively low skilled labor and induction policies protected many highly skilled occupations while inducting most heavily from lower-skilled occupations. These factors help to explain compression in both the upper and the lower portions of the male wage distribution and provide the mechanism linking war-time labor market shocks to the decline in the return to education. |
| Keywords: | wage inequality, war mobilization, occupation skill |
| JEL: | E24 J21 J31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:vcu:wpaper:0901&r=mac |
| By: | Ang, James |
| Abstract: | While financial liberalization has always been advocated in developing countries, experiences with it do not always produce desirable outcomes. In order to evaluate the costs and benefits associated with financial liberalization and repression, this study highlights that the overall effectiveness of the reform programs depends on the relative strength of each financial sector policy implemented. Using India as a case study, the results indicate that interest rate controls, statutory liquidity requirements and directed credit programs positively affect the level of financial development. A rise in cash reserve requirements appears to have an adverse effect on development of the financial system. The results lend some support to the argument that some form of financial restraints may help promote financial development. |
| Keywords: | Financial development; financial liberalization |
| JEL: | E58 O53 O16 E44 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14497&r=mac |