|
on Macroeconomics |
|
Issue of 2010‒06‒18
forty-four papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella |
| Abstract: | Recent developments in macroeconomics resurrect the view that wel- fare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we ?nd a disciplining e¤ect of a positive inflation target on the wage markup and identify a long-term trade-off between in?ation and output. |
| Keywords: | trend inflation, long-run Phillips curve, in?ation targeting, real money balances. |
| JEL: | E52 E58 J51 E24 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:186&r=mac |
| By: | Dennis Wesselbaum |
| Abstract: | In the recent New Keynesian literature a standard assumption is that the price for which an intermediate good is sold to the final good firm is equal to the marginal costs of the intermediate good firm. However, there is empirical evidence that this need not to hold. This paper introduces price bargaining into an otherwise standard New Keynesian DSGE model and show that this model performs reasonably well in replicating the observed persistence values. We further discuss the role of those product market imperfections for monetary policy and find a trade-off between stabilizing intermediate or final good inflation. In addition, the Ramsey optimal monetary policy can be approximated reasonably well with a Taylor-type interest rate rule with weights on both inflation rates and output |
| Keywords: | Inflation and Output Persistence, Monetary Policy, Price Bargaining |
| JEL: | E31 E52 L10 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1629&r=mac |
| By: | Zeno Enders (University of Bonn); Philip Jung (University of Mannheim); Gernot J. Mueller (University of Bonn) |
| Abstract: | In this paper we analyze European business cycles before and under EMU. Across the two periods we find 1) a significant decline in real exchange rate volatility, 2) significant changes in cross-country correlations, and 3) the volatility of macroeconomic fundamentals largely unchanged. We develop a two-country business cycle model and show that the calibrated model is able to replicate key features of the data prior to and under EMU. We find that the euro has a strong bearing on the transmission mechanism as cross-country spillovers increase substantially under EMU. As a result, foreign shocks become more and domestic shocks less important in accounting for the (unchanged) volatility of macroeconomic fundamentals. |
| Keywords: | European business cycles, Euro, Optimum Currency Area, EMU, Monetary Policy, Exchange rate regime, Cross-country spillovers |
| JEL: | F41 F42 E32 |
| Date: | 2010–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:162&r=mac |
| By: | L. Marattin; M. Marzo |
| Abstract: | Macroeconomic literature has traditionally regarded public expenditure as yielding no utility per se to any agent in the economy. In line with a few previous contributions (Linneman and Schabert 2004, Bouakez and Rebei 2007) we build a New Keynesian DSGE model with real and nominal rigidities and distortionary fiscal policy rules, calibrated on the Euro-area (1990:Q1-2008:Q4), where part of public spending is allowed to either Edgeworth complement or substitute private consumption by affecting its marginal utility. We show that the the interaction between the share of usefulness of public spending and the specification of fiscal and monetary policy rules is able to deliver private consumption multipliers which are in line with the empirical findings for the Euro-Area. |
| JEL: | E62 E63 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:704&r=mac |
| By: | Kalina Dimitrova |
| Abstract: | There are two aspects through which an economic policy can influence the economic situation – monetary and fiscal. Monetary and fiscal policies have different and sometimes controversial goals to achieve by means of specific instruments. While the mission of central banks is generally price stability, governments usually set their goals in the realm of economic growth and employment. Fiscal institutions , however, often use inflation in order to derive revenues (seigniorage) and finance budget deficits. Hence, inflation is viewed as a public finance phenomenon (Barro, 1979; Mankiw, 1987; Grilli, 1989). The purpose of this paper is to present a historical perspective on the behaviour of the monetary and fiscal policies pursued in Bulgaria from 1879, when the Bulgarian National Bank was established (soon after the liberation from the Ottoman Empire). Furthermore, historical time series of monetary and fiscal indicators give us the chance to study the link between government budget problems, fluctuations of monetary variables and inflation dynamics in different monetary episodes. |
| Keywords: | monetary and fiscal policy, inflation, exchange rate. |
| JEL: | E31 E63 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:13-2010&r=mac |
| By: | Gianni Amisano (European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gabriel Fagan (European Central Bank, DG Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We develop a time-varying transition probabilities Markov Switching model in which inflation is characterised by two regimes (high and low inflation). Using Bayesian techniques, we apply the model to the euro area, Germany, the US, the UK and Canada for data from the 1960s up to the present. Our estimates suggest that a smoothed measure of broad money growth, corrected for real-time estimates of trend velocity and potential output growth, has important leading indicator properties for switches between inflation regimes. Thus money growth provides an important early warning indicator for risks to price stability. JEL Classification: C11, C53, E31. |
| Keywords: | money growth, inflation regimes, early warning, time varying transition probabilities, Markov Switching model, Bayesian inference. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101207&r=mac |
| By: | Fuchun Li; Pierre St-Amant |
| Abstract: | This paper examines empirically the impact of financial stress on the transmission of monetary policy shocks in Canada. The model used is a threshold vector autoregression in which a regime change occurs if financial stress conditions cross a critical threshold. Using the financial stress index developed by Illing and Liu (2006) as a measure of the Canadian financial stress conditions, the authors examine questions such as: Do contractionary and expansionary monetary policy shocks have symmetric effects? Do financial stress conditions play a role as a nonlinear propagator of monetary policy shocks? Does monetary policy have the same effect on the real economy in the low financial stress regime and in the high financial stress regime? Suppose that the economy is currently in a given financial stress regime, do monetary policy shocks have a substantial effect on the transition probability of moving from the given regime to the other? The empirical findings reveal that (i) contractionary monetary shocks typically have a larger effect on output than expansionary monetary shocks; (ii) the effects of large and small shocks are approximately proportional; (iii) expansionary monetary shocks have larger effects on output in the high financial stress regime than in the low financial stress regime; (iv) large expansionary monetary shocks increase the likelihood of moving to, or remaining in, the low financial stress regime; (v) typically, high financial stress regime has been characterized by weaker output growth, higher inflation, and higher interest rates. |
| Keywords: | Financial stability; Monetary policy and uncertainty |
| JEL: | E50 C01 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-12&r=mac |
| By: | Jordi Galí |
| Abstract: | Since its inception, a most distinctive (and controversial) feature of the ECB monetary policy strategy has been its emphasis on money and monetary analysis, which constitute the basis of the so-called monetary pillar. The present paper examines the performance of the monetary pillar around the recent financial crisis episode, and discusses its prospects in light of the renewed emphasis on financial stability and the need for enhanced macro-prudential policies. |
| Keywords: | monetary policy strategy, two pillar strategy, monetarism, financial stability. |
| JEL: | E52 E58 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1223&r=mac |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexis Loublier |
| Abstract: | Epstein-Zin preferences have attracted significant attention within the macro-finance literature based on DSGE models as they allow to substantially increase risk aversion, and consequently generate non-trivial risk premia, without compromising the ability of standard models to achieve satisfactory macroeconomic data coherence. Such appealing features certainly hold for structural modelling frameworks where monetary policy is set according to Taylor-type rules or seeks to minimize an ad hoc loss function under commitment. However, Epstein-Zin preferences may have significant quantitative implications for both asset pricing and macroeconomic allocation under a welfare-based monetary policy conduct. Against this background, the paper focuses on the impact of such preferences on the Ramsey approach to monetary policy within a medium-scale model based on Smets and Wouters (2007) including a wide range of nominal and real frictions that have proven to be relevant for quantitative business cycle analysis. After setting an empirical benchmark that generates a mean value of 100 bp for the ten-year term premium, we show that Epstein-Zin preferences significantly affect the macroeconomic outcome when optimal policy is considered. The level and the dynamic pattern of risk premia are also markedly altered. We show that the effect of Epstein-Zin preferences is extremely sensitive to the presence of real rigidities in the form of quasi-kinked demands. We also analyse how this effect can be linked to a combined effect of capital accumulation and wage rigidities. JEL Classification: E44, E52, E61, G12. |
| Keywords: | Optimal monetary policy, macroeconometric equivalence, non time-separable preferences, term premium. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101209&r=mac |
| By: | Francesco Lippi (University of Sassary, EIEF); Andrea Nobili (Bank of Italy) |
| Abstract: | We model an economy where the cost of the oil input, industrial production, and other macroeconomic variables fluctuate in response to fundamental oil supply shocks, as well as aggregate demand and supply shocks generated domestically and in the world economy. We estimate the effects of these structural shocks on US monthly data over 1973.1-2007.12, using robust sign restrictions suggested by the model. It is shown that the interplay between the oil market and the US economy goes in both ways. First, US output falls below the baseline for a prolonged period of time after a negative oil supply shock. However, oil-supply shocks explain a relatively modest part of overall output fluctuations (about 10%). Second, most variations of (real) oil prices occur in response to shocks originated in the global economy and in the US. In particular, supply shocks in the rest of the world and in the US explain more than half of the variance of oil price fluctuations. Finally, the correlation between oil prices and the US business cycle depends on the nature of the fundamental shock: a negative correlation emerges in periods when oil-supply shocks or global demand shocks occur, while a positive correlation emerges in periods of supply shocks in the global economy or the US. The unconditional correlation between oil prices and US production over a long sample period is tenuous because it blends conditional correlations with different signs. |
| JEL: | C32 E3 F4 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1009&r=mac |
| By: | Ashima Goyal |
| Abstract: | Stylized facts for South Asia show the dominance of supply shocks, amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development are helping the region absorb shocks without reducing growth. Diverse sources of demand, flexible exchange rates, robust domestic savings, and changing political preferences are contributing. Countercyclical policy more suited to structure, and removal of distortions raising costs, would allow better coordination of monetary and fiscal polices to further support the process.[WP-2010-005] |
| Keywords: | South Asia, supply shocks, flexible exchange rates, diversity, distortions |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2545&r=mac |
| By: | Tobias S. Blattner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Emil Margaritov (Goethe University, Department of Money and Macroeconomics, House of Finance, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany.) |
| Abstract: | Estimations of simple monetary policy rules are often very rigid. Standard practice requires that a decision is made as to which indicators the central bank is assumed to respond to, ignoring the data-rich environment in which policy-makers typically form their decisions. However, the choice of the feedback variables in the estimations of simple rules bears non-trivial implications for the prescriptions borne from these rules. This paper addresses this issue for the euro area using a new comprehensive real-time database for the euro area and examines the ECB’s past interest-rate setting behaviour in two complementary ways that are designed to deal with both model and data uncertainty. In a first step we follow the “thick-modelling” approach suggested byGranger and Jeon (2004) and estimate a series of 3,330 policy rules. In a second step we employ a factor-model approach similar to Bernanke and Boivin (2003) for the US Fed, but with structurally interpretable factors à la Belviso and Milani (2006). Taken together, we find a strong justification for the need of adopting robust approaches to describe the historical evolution of euro area monetary policy. We also find that the ECB is neither purely backward nor forward-looking, but reacts to a synthesis of the available information on the current and future state of the economy. JEL Classification: C50, E52, E58. |
| Keywords: | Taylor rules, Monetary policy, Real-time data. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101210&r=mac |
| By: | Jean-Olivier Hairault (Paris School of Economics - Centre d'Economie de la Sorbonne et IZA); François Langot (GAINS-TEPP - Université du Mans, CEPREMAP et IZA) |
| Abstract: | Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state. |
| Keywords: | Business cycle costs, inefficiency gap, new-Keynesian macroeconomics. |
| JEL: | E32 E12 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10043&r=mac |
| By: | Matteo Barigozzi; Antonio Conti |
| Abstract: | We adopt a time-varying cointegration test to discriminate among different empirical studies claiming to find a stable Euro Area money demand equation. A time invariant relation explaining real balances is rejected by data, even when accounting for housing, financial and labour markets. Conversely, an international portfolio allocation approach provides stabilization. In particular, international financial markets, rather than monetary policy, are the key determinant of the observed diverging path of money growth. In terms of policy, we provide empirical support for a New Two Pillars Strategy aimed to achieve financial stability through money and credit and price stability through interest rates. |
| Keywords: | Euro Area Money Demand; Time-Varying Vector Error Correction Model; International Portfolio Allocation; Financial Stability |
| JEL: | E41 E44 C32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/57649&r=mac |
| By: | Ryu-ichiro Murota; Yoshiyasu Ono |
| Abstract: | We propose a microeconomic foundation of the multiplier effect and that of the consumption function using a dynamic optimization model that explains a shortage of aggregate demand and unemployment. We show that government purchases boost aggregate demand through a multiplier-like process but that the implication is quite different. It works through not an increase in disposable income but moderation of deflation, which makes money holding costly and stimulates consumption. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0779&r=mac |
| By: | Bill Adams (The Conference Board); Pieter Bottelier (The Conference Board); Ataman Ozyildirim (The Conference Board); Jing Sima-Friedman (The Conference Board) |
| Abstract: | Leading indicators represent variables that tend to precede and predict coincident indicators of general economic activity, which as a multivariate concept, can be measured with the help of metrics on employment, production, total income and sales in real (inflation adjusted) terms. In many countries, composite indexes of leading economic indicators (LEI) are used to help predict short-term cyclical fluctuations of the economy in conjunction with composite indexes of coincident economic indicators (CEI). They also serve to analyze short-term macroeconomic dynamics of the business cycle. This paper reviews the available monthly and quarterly leading indicators for China, and develops a composite index following the indicators approach of The Conference Board, which publishes the U.S. LEI. Predicting turning points in the business cycle is extremely difficult, but the long history of research on leading indicators provides empirical evidence that LEIs can help in this task. This paper discusses our selection of leading indicators of the Chinese economy over 1986-2009. We evaluate our selection of leading indicators against the chronology of business and growth cycles. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnf:wpaper:1002&r=mac |
| By: | Adrian Masters |
| Abstract: | This paper considers the effect of monetary policy and inflation on retail markets. It analyzes a model in which: goods are dated and produced prior to being retailed, buyers direct their search on the basis of price and general quality and, buyers' match specific tastes are their private information. Sellers set the same price for all buyers but some do not value the good highly enough to purchase it. The market economy is typically inefficient as a social planner would have the good consumed. The Friedman rule represents optimal policy as long as there is free-entry of sellers. When the upper bound on the number of participating sellers binds sufficiently, moderate levels of inflation can be welfare improving. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-11&r=mac |
| By: | Adam S. Posen (Peterson Institute for International Economics) |
| Abstract: | Japan’s Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan’s recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery. |
| Keywords: | Japan, deflation, fiscal stimulus, quantitative easing |
| JEL: | E31 E62 E63 O53 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp10-7&r=mac |
| By: | Deng, Binbin |
| Abstract: | In the past few decades, real business cycle theory has developed rapidly after the initiation of Kydland and Prescott in 1982. It has grown substantially as an independent literature and served as a widely recognized framework for studies of the economy at business cycle frequencies. It has enjoyed great success for its ability to replicate most of the observed characteristics of U.S. aggregate economic activity after WWII. Over the years, different extensions to and modifications of the real business cycle model have been proposed by many researchers. In the mean time, various criticisms and challenges have been exposed to the theory from different perspectives. Recently, new developments have been undergoing a constructive process and emerging questions are being considered to improve the empirical performance of the theory. To celebrate the theory, several works have been devoted to a comprehensive survey of the literature, represented by King and Rebelo (1999). Efforts have been also made to discuss open questions in the literature in an attempt to suggest future studies, such as Rebelo (2005). However, a systematic review of the real business cycle theory involving different perspectives to compact the literature into a narrative representation seems currently unavailable. This paper tries to fill the gap. |
| Keywords: | real business cycles; dynamic stochastic general equilibrium; aggregate shocks |
| JEL: | E10 |
| Date: | 2009–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17932&r=mac |
| By: | Hart, Robert A. (University of Stirling); Roberts, J. Elizabeth (University of Stirling) |
| Abstract: | Based largely on industry-level aggregate statistics, the prevailing view, and one that has strongly influenced macroeconomic thought, is that real wages during the cycle containing the Great Depression are either acyclical or countercyclical. Does this finding hold-up when more micro data are employed? We examine this question based on detailed blue-collar workers’ company payroll data for a large section of the British engineering and metal working industries. We distinguish between pieceworkers and timeworkers, with pieceworkers accounting for over half the workforce. For the period 1927 to 1937, the two pay groups are broken down into 14 occupations, and 48 travel-to-work geographical districts. We estimate wage and hours cyclicality in respect of the national unemployment rate as well as the district rates. Weekly hours and real weekly earnings are found to be strongly procyclical. Real hourly earnings of pieceworkers are also significantly procyclical. The roles of standard and overtime hours are crucial to these findings. |
| Keywords: | timework, piecework, working time, real wage cyclicality, the Great Depression |
| JEL: | E32 J31 J33 N64 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4977&r=mac |
| By: | Vera Glassner; Toralf Pusch |
| Abstract: | In the European Monetary Union the transnational coordination of collective wage bargaining has acquired increased importance on the trade union agenda. The metal sector has been at the forefront of these developments. This paper addresses the issue of crossborder coordination of wage setting in the metal sector in the central western European region, that is, in Germany, the Netherlands and Belgium, where coordination practices have become firmly established in comparison to other sectors. When testing the interaction of wage developments in the metal sector of these three countries, relevant macroeconomic (inflation and labour productivity) and sector-related variables (employment, export-dependence) are considered with reference to the wage policy guidelines of the European Commission and the European Metalworkers’ Federation. Empirical evidence can be found for a wage coordination effect in the form of increasing compliance with the wage policy guidelines of the European Metalworkers’ Federation. The evidence for compliance with the stability-oriented wage guideline of the European Commission is weaker. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:13-10&r=mac |
| By: | Meixing Dai |
| Abstract: | Dans une économie de marchés financiers, soumis au risque de disfonctionnement, où les actifs financiers sont des substituts imparfaits, on ne peut pas négliger les marchés financiers et monétaires dans les décisions de politique monétaire comme le suppose actuellement la littérature de ciblage d’inflation et des règles du taux d’intérêt. Le disfonctionnement des marchés financiers et monétaires, débouchant sur une crise financière majeure caractérisée par l’éclatement des bulles spéculatives importantes sur les prix des actifs réels et financiers, pourrait obliger la banque centrale à mener une politique du taux d’intérêt zéro associée avec des politiques d’assouplissement quantitatif et/ou de crédit pour sortir de (ou éviter) la trappe à liquidité. Après la sortie de crise, il est indispensable de réviser la stratégie et la conduite de la politique monétaire en prenant en compte le fonctionnement imparfait des marchés financiers et monétaires. |
| Keywords: | Assouplissement quantitatif, assouplissement de crédit, politique du taux d’intérêt zéro, ciblage d’inflation, trappe à liquidité, disfonctionnement des marchés financiers, stratégie à deux piliers. |
| JEL: | E44 E51 E52 E58 E61 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-15&r=mac |
| By: | John Sondey (Deparment of Economics, South Dakota State University); Matthew Diersen (Deparment of Economics, South Dakota State University) |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:sda:ibrief:2010514&r=mac |
| By: | Dolls M; Fuest C; Peichl A |
| Abstract: | This paper analyzes the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis. We find that automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 per cent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 31 per cent in the EU and up to 28 per cent in the US. There is large heterogeneity within the EU. Automatic stabilizers in Eastern and Southern Europe are much lower than in Central and Northern European countries. We also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs. We find no evidence supporting this view. |
| JEL: | E32 E63 H2 H31 |
| Date: | 2010–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:ese:emodwp:em2/10&r=mac |
| By: | Jan Kregel |
| Abstract: | The use of government fiscal stimulus to support the economy in the recent economic crisis has brought increases in government deficits and increased government debt. This has produced an interest in sustainable government debt and the role of deficits in the economy. This paper argues in favor of a concept of "responsible" government policy, referring to positions held by Franklin and Marshall Professor Will Lyons. The idea is that government should be responsible to the needs and desires of its citizens, but that this should go beyond physical security and education, to economic security. Building on the fallacy of composition and misplaced concreteness, it suggests that in an integrated macro system an increased desire to save on the part of the private sector will be self-defeating unless the government acts in a responsible manner to support those desires. This can only be done by government dissaving via an expenditure deficit. The outstanding government debt simply represents the desires of the public to hold safe financial assets, and can only be unsustainable if the public’s desires change. The government should always be responsive to these desires, and adjust its expenditure policy. |
| Keywords: | Deficit Spending; Sustainable Deficits; Responsible Fiscal Policy; Will Lyons |
| JEL: | E61 E62 H31 H62 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_602&r=mac |
| By: | Özlem Onaran |
| Abstract: | <p>We are in a new episode of the global crisis: the struggle to distribute the costs of the crisis. The financial speculators and corporations are relabeling the crisis as a “sovereign debt crisis” and pressurizing the governments in diverse countries ranging from Greece to Britain to cut spending to avoid taxes on their profits and wealth. In Europe the crisis laid bare the historical divergences. At the root of the problem is the neoliberal model which turned the periphery of Europe into markets for the core. The restrained policy framework, which is based on strict inflation targeting, and which lacks fiscal transfers targeting productive investments in the periphery is the main cause of the divergences. </p><p>The EU’s current policies are still assuming that the problem is a lack of fiscal discipline and do not question the structural reasons behind the deficits and the “beggar my neighbor” policies of Germany. The deflationary consequences of wage cuts may turn the problem of debt to insolvency for private as well as the public sector.</p><p>The crisis calls for a major change in policy framework within Europe that places regional and social cohesion at the core of policy making. This is a crisis of distribution and a reversal of inequality at the expense of labor is the only real solution. </p> |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp226&r=mac |
| By: | Jacques Kibambe (Department of Economics, University of Pretoria); Arnold Zellner (Booth School of Business, University of Chicago) |
| Abstract: | Using a disaggregated Marshallian Macroeconomic Model (MMM-DA), this paper investigates how the adoption of a set of 'free market reforms' may affect the economic growth rate of South Africa. Accounting for possible side effects mainly on the budget deficit, our findings suggest that the institution of the proposed policy reforms would yield a substantial growth in the aggregate annual real GDP. The resulting GDP growth rate could range from 5.3 percent to 9.8 percent depending on which variant of the reform policies is implemented. |
| Keywords: | Marshallian Macroeconometric Model, Disaggregation, Transfer functions |
| JEL: | E27 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201013&r=mac |
| By: | Min Zhang |
| Abstract: | This paper shows that the Mortensen-Pissarides search and matching model can be successfully parameterized to generate observed large cyclical fluctuations in unemployment and modest responses of unemployment to changes in unemployment insurance (UI) benefits. The key features behind this success are the consideration of the eligibility for UI benefits and the heterogeneity of workers. With the linear utilities commonly assumed in the Mortensen-Pissarides model, a fully rated UI system designed to prevent moral hazard has no effect on unemployment. However, the UI system in the United States is neither fully rated nor able to prevent workers with low productivity from quitting their jobs or rejecting employment offers to collect benefits. As a result, an increase in UI generosity has a positive, but realistically small, effect on unemployment. This paper answers the Costain and Reiter (2008) criticism to the Hagedorn and Manovskii (2008) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model. |
| Keywords: | Search, Matching, Moral Hazard, UI Entitlement, Equilibrium Unemployment, Labor Markets |
| JEL: | E24 E32 J64 |
| Date: | 2010–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-405&r=mac |
| By: | Andrey LAUNOV (University of Mainz, Mainz School of Management and Economics, UniversitŽ catholique de Louvain and CESifo); Klaus WALDE (University of Mainz, Mainz School of Management and Economics, UniversitŽ catholique de Louvain and CESifo) |
| Abstract: | The distribution of unemployment duration in our equilibrium matching model with spell-dependent unemployment benefits displays a time-varying exit rate. Building on Semi-Markov processes, we translate these exit rates into an expression for the aggregate unemployment rate. Structural estimation using a German micro-data set (SOEP) allows us to discuss the effects of a recent unemployment benefit reform (Hartz IV). The reform reduced unemployment by only 0.3%. Contrary to general beliefs, we find that both employed and unemployed workers gain (the latter from an intertemporal perspective). The reason is the rise in the net wage caused by more vacancies per unemployed worker. |
| Keywords: | Non-stationary unemployment benefits, endogenous effort, matching model,structural estimation, Semi-Markov process |
| JEL: | E24 J64 J68 C13 |
| Date: | 2010–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2010020&r=mac |
| By: | Carlo Mazzaferro; Marcello Morciano; Elena Pisano; Simone Tedeschi |
| Abstract: | Household saving rate in Italy declined over the last two decades.This trend still persists despite three pension reforms have been enacted since the beginning of the nineties. In this paper we search further evidence of general macroeconomic effects through the analysis of households behaviour. In the first part of the paper we use data from five surveys of the Bank of Italy Surveys of Household Income and Wealth (SHIW) to estimate the lifetime profiles of saving and wealth accumulation. Estimates show that the age profile of the propensity to save has been influenced more by cohort effects than by general trend effects; whereas the age profile of the ratios of financial assets to disposable income has been subject to relevant trend effects. In the second part of the paper we analyse the effects of pension reforms on saving behaviour of Italian Households. Firstly we use a difference-in-difference estimator in order to test whether the groups more severely hit by the reforms actually increased their saving rate relative to the other groups. Then we estimate the Social Security Net Wealth (SSWN) for each individual in the SHIW in the analysed period (1989-2000). Finally we estimate the substitution coefficient between SSWN and private wealth taking into account that the reaction of saving to a change in SSWN depends also on age of the individual. Our results show that the reduction of SSWN is unequally distributed across individuals. The cut is stronger for self employed, young workers and women. Most of the groups more severely hit by the reforms did not increase their saving rate relative to the control group: younger households, in particular, did not increase the saving rate. On the whole a reduction of one Euro in SSWN seems to induce, on the average, a compensating increase in private wealth by about fifty cents. The substitution coefficient between private and social security wealth is higher for the richest and oldest part of the sample. Finally when we split the sample observations by year we find that the more dramatised is the impact of the reform, the higher is the substitution coefficient. |
| Keywords: | Pension reform; household saving; social security wealth; difference-in-difference |
| JEL: | E21 H55 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:mod:cappmo:0073&r=mac |
| By: | Launov, Andrey (University of Mainz); Wälde, Klaus (University of Mainz) |
| Abstract: | The distribution of unemployment duration in our equilibrium matching model with spell-dependent unemployment benefits displays a time-varying exit rate. Building on Semi-Markov processes, we translate these exit rates into an expression for the aggregate unemployment rate. Structural estimation using a German micro-data set (SOEP) allows us to discuss the effects of a recent unemployment benefit reform (Hartz IV). The reform reduced unemployment by only 0.3%. Contrary to general beliefs, we find that both employed and unemployed workers gain (the latter from an intertemporal perspective). The reason is the rise in the net wage caused by more vacancies per unemployed worker. |
| Keywords: | non-stationary unemployment benefits, endogenous effort, matching model, structural estimation, semi-Markov process |
| JEL: | E24 J64 J68 C13 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4958&r=mac |
| By: | Kajal Lahiri; Gultekin Isiklar |
| Abstract: | Using a Factor Structural Vector Autoregressive (FSVAR) model and monthly GDP growth forecasts during 1995-2003, we find that Indian economy responds largely to domestic and Asian common shocks, and much less to shocks the from the West. However, when we exclude the Asian crisis period from our sample, the Western factor comes out as strong as the Asian factor contributing 16% each to the Indian real GDP growth, suggesting that the dynamics of transmission mechanism is time-varying. Our methodology on the use of forecast data can help policy makers of especially developing countries with frequent economic crises and data limitations to adjust their policy targets in real time. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-06&r=mac |
| By: | Marco Del Negro (Federal Reserve Bank of New York); Fabrizio Perri (University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR and NBER); Fabiano Schivardi (Universit`a di Cagliari, EIEF and CEPR) |
| Abstract: | The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions,it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption. |
| JEL: | E62 H21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1007&r=mac |
| By: | Jean Pisani-Ferry |
| Abstract: | Bruegel Director Jean Pisani-Ferry focuses on the institutional response to the euro area crisis with the Van Rompuy Task Force being set up to reform economic governance. The task force is due to present its progress report shortly and the author examines two basic questions in this context? what went wrong in the euro area (and the lessons learnt from this) and consequently what are the three choices for reforming governance. He explains why implementation of existing rules need to be strengthened and why the Van Rompuy Task Force should revisit the fundamental principles on which the EMU is founded and resist the temptation to solely address divergences. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:esslec:427&r=mac |
| By: | Nicoletta Batini (University of Surrey and IMF); Young-Bae Kim (University of Surrey); Paul Levine (University of Surrey); Emanuela Lotti (University of Surrey) |
| Abstract: | This paper reviews the literature on the informal economy, focusing first on empirical findings and then on existing approaches to modelling informality within both partial and general equilibrium environments. We concentrate on labour and credit markets, since these tend to be most affected by informality. The phenomenon is particularly important in emerging and other developing economies, given their high degrees of informal labour and financial services and the implications these have for the effectiveness of macroeconomic policy. We emphasize the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models for a full understanding of the costs, benefits and policy implications of informality. The survey shows that the literature on informality is quite patchy, and that there are several unexplored areas left for research. JEL Classification: J65, E24, E26, E32 |
| Keywords: | Informal economy, labour market, search-matching models |
| JEL: | E52 E37 E58 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0609&r=mac |
| By: | Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari, EIEF); Luigi Paciello (EIEF) |
| Abstract: | We study the price setting problem of a firm in the presence of both observation and menu costs. In this problem the firm optimally decides when to collect costly information on the adequacy of its price, an activity which we refer to as a price “review”. Upon each review, the firm chooses whether to adjust its price, subject to a menu cost, and when to conduct the next price review. This behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment. The goal of the paper is to study how the firm’s choices map into several observable statistics, depending on the level and relative magnitude of the observation vs the menu cost. The observable statistics are: the frequency of price reviews, the frequency of price adjustments, the size-distribution of price adjustments, and the shape of the hazard rate of price adjustments. We provide an analytical characterization of the firm’s decisions and a mapping from the structural parameters to the observable statistics. We compare these statistics with the ones obtained for the models with only one type of cost. The predictions of the model can, with suitable data, be used to quantify the importance of the menu cost vs. the information cost. We also consider a version of the model where several price adjustment are allowed between observations, a form of price plans or indexation. We find that no indexation is optimal for small inflation rates.. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1010&r=mac |
| By: | Fernando Tenjo; Martha López |
| Abstract: | We explore the performance of a set of early warning indicators for a group of Latin American economies under the endogenous cycle perspective. For this group of countries, the paper confirms the results of work on industrialized countries that a combination of asset prices and credit provides valuable information of probable future financial crises. However, we go a step further in the analysis of emerging economies and find that a combination of capital flows from abroad and credit is an even superior leading indicator of such events. |
| Date: | 2010–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007073&r=mac |
| By: | Österholm, Pär (National Institute of Economic Research); Mossfeldt, Marcus (National Institute of Economic Research) |
| Abstract: | This paper estimates the effects of the financial crisis on the Swedish labour market. Using an unobserved components model and an external forecast, we estimate a future path for the NAIRU. Judging by this analysis, the labour market will be in equilibrium again in 2013. Linking the NAIRU to other labour-market variables through an estimated vector error correction model and population projections, it is found that this new equilibrium is associated with a smaller equilibrium labour force and lower equilibrium employment. |
| Keywords: | Discouraged worker; Unobserved components; Cointegration |
| JEL: | E24 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nierwp:0117&r=mac |
| By: | Olaf Posch (Aarhus University, Denmark); Timo Trimborn (University of Hannover) |
| Abstract: | We propose a simple and powerful method for determining the transition process in continuous-time DSGE models under Poisson uncertainty numerically. The idea is to transform the system of stochastic differential equations into a system of functional differential equations of the retarded type. We then use the Waveform Relaxation algorithm to provide a guess of the policy function and solve the resulting system of ordinary differential equations by standard methods and fix-point iteration. Analytical solutions are provided as a benchmark from which our numerical method can be used to explore broader classes of models. We illustrate the algorithm simulating both the stochastic neoclassical growth model and the Lucas model under Poisson uncertainty which is motivated by the Barro-Rietz rare disaster hypothesis. We find that, even for non-linear policy functions, the maximum (absolute) error is very small. |
| Keywords: | Continuous-time DSGE, Optimal stochastic control, Waveform Relaxation |
| JEL: | E21 G11 O41 |
| Date: | 2010–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2010-08&r=mac |
| By: | Posch, Olaf; Trimborn, Timo |
| Abstract: | We propose a simple and powerful method for determining the transition process in continuous-time DSGE models under Poisson uncertainty numerically. The idea is to transform the system of stochastic differential equations into a system of functional differential equations of the retarded type. We then use the Waveform Relaxation algorithm to provide a guess of the policy function and solve the resulting system of ordinary differential equations by standard methods and fix-point iteration. Analytical solutions are provided as a benchmark from which our numerical method can be used to explore broader classes of models. We illustrate the algorithm simulating both the stochastic neoclassical growth model and the Lucas model under Poisson uncertainty which is motivated by the Barro-Rietz rare disaster hypothesis. We find that, even for non-linear policy functions, the maximum (absolute) error is very small. |
| Keywords: | Continuous-time DSGE, Optimal stochastic control, Waveform Relaxation |
| JEL: | E21 G11 O41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-450&r=mac |
| By: | Joanne Lindley (University of Surrey); Steven McIntosh (University of Sheffield) |
| Abstract: | Much has been written about the impact of over-education on wages using cross-sectional data, although there have been few studies that analyse the returns to over-education in a dynamic setting. This paper adds to the existing literature by using panel data to investigate the impact and permanence of over-education wage penalties, whilst controlling for unobserved individual heterogeneity. Our fixed effects estimates suggest that the over-education wage penalty cannot solely be explained by unobserved heterogeneity. Over-education is permanent for many workers since around 50 percent of workers over-educated in 1991 are still over-educated in 2005. However, we also show that these workers are of lower quality compared to around 25 percent who find a match within five years of being over-educated. Finally, there is a significant scarring effect for workers over-educated in 1991 since they never fully reach parity compared to those who were matched in 1991, although this is not the case for graduates who manage to find a match within 5 years. |
| Keywords: | structured uncertainty, DSGE models, robustness, Bayesian estimation, interest-rate rules |
| JEL: | E52 E37 E58 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0110&r=mac |
| By: | John Schmitt; Kris Warner; Sarika Gupta |
| Abstract: | The United States currently incarcerates a higher share of its population than any other country in the world. We calculate that a reduction in incarceration rates just to the level we had in 1993 (which was already high by historical standards) would lower correctional expenditures by $16.9 billion per year, with the large majority of these savings accruing to financially squeezed state and local governments. As a group, state governments could save $7.6 billion, while local governments could save $7.2 billion. These cost savings could be realized through a reduction by one-half in the incarceration rate of exclusively non-violent offenders, who now make up over 60 percent of the prison and jail population. A review of the extensive research on incarceration and crime suggests that these savings could be achieved without any appreciable deterioration in public safety. |
| Keywords: | incarceration, prison, jail, incarceration rates, budget deficit |
| JEL: | E E6 E62 H H7 H72 H6 H61 K K4 K42 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2010-14&r=mac |
| By: | Bachmann, Ronald (RWI Essen); Bauer, Thomas (RWI Essen); David, Peggy (RWI Essen) |
| Abstract: | Economic conditions at the time of labour market entry can induce wage differentials between workers entering the labour market at different points in time. While the existence and persistence of these entry wage differentials are well documented, little is known about their interaction with employees' mobility behaviour. This paper contributes to this research area by analyzing the interaction between job mobility and entry wage differentials using German administrative data. The results suggest that labour market entrants earning less than the average starting wage are more likely to change jobs, directly from employer to employer as well as indirectly via an unemployment spell. In addition they are more likely to change occupation. Moreover, job mobility tends to reduce the effects of labour market entry conditions, implying that job mobility operates as an adjustment mechanism that mitigates entry wage differentials. These results hold not only for high-skilled, but also for medium-skilled and unskilled workers. |
| Keywords: | mobility, job-to-job, wages, labour market entry, initial conditions |
| JEL: | E24 J31 J62 J64 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4965&r=mac |
| By: | Lagadec, Gael; Ris, Catherine |
| Abstract: | This article offers elements to assess the effects of the world economic crisis in the Asia-Pacific region. The mechanisms and development of the subprime crisis are briefly recalled in order to examine how far they reach in the area. Examining the situation of the area’s economies, with a distinction between developed economies, emerging countries and developing economies highlights how the transmission of the crisis grows with the level of development. Being vulnerable due to their important dependency on revenues from outside (tourism, raw materials export, private transfers, aid…) the Pacific small developing economies have been indirectly affected by the crisis. Indeed the world economic crisis has increased the economic difficulties which the governments and populations of the Pacific already had to face when the oil and food prices rose, which seriously undermined them. Focus is laid on the three French Pacific territories. As they have hardly integrated international exchanges and rely mainly on transfers from the metropolis, their characteristics have somehow protected them from the crisis. The macroeconomic indicators of the Pacific industrialising countries are rather favourably-oriented yet the slowdown of economic growth has further weakened the most vulnerable populations. |
| Keywords: | Economic tendency; Subprime crisis; Asia-Pacific |
| JEL: | E32 O56 O53 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23123&r=mac |