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on Macroeconomics |
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Issue of 2010‒12‒18
forty-four papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule. |
| Keywords: | Endogenous sticky information, heterogeneous expectations, DSGE models |
| JEL: | E31 E52 E61 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:10-260&r=mac |
| By: | Basher, Syed Abul; Elsamadisy, Elsayed Mousa |
| Abstract: | Applying nonstationary panel data econometric methods, this paper analyzes the major sources and transmission of inflation in the Gulf Cooperation Council (GCC) countries over the 1980-2008 period. We argue that, in GCC countries, money is essentially demand determined, so that the high collinearity between money and aggregate demand indicators such as non-hydrocarbon output is expected and should be dealt with accordingly. Several important results emerge from the analysis. First, the money supply stands out as a significant determinant of inflation both in short- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaining inflation in the long-run than the short-run. The half-life of the speed of adjustment reveals that it takes about 2.9 years for 50% of a shock to the long-run equilibrium to dissipate. An implication of our results is the case it makes for more sovereign monetary policies in GCC countries. |
| Keywords: | Inflation; Monetary policy; Fiscal policy; Exchange rates; Oil price; Panel data. |
| JEL: | C32 E31 H30 E50 C33 |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27348&r=mac |
| By: | Giuseppe Ferrero (Bank of Italy, Economics and International Relations); Alessandro Secchi (Bank of Italy, Economics and International Relations) |
| Abstract: | We study the impact of the publication of central banks’ macroeconomic projections on the dynamic properties of an economy where (i) private agents have incomplete information and form their expectations using recursive learning algorithms; (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level; and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. The set of macroeconomic projections released by the central bank crucially affects the results in terms of stability of the equilibrium and speed of convergence of the learning process. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than when there is no announcement. |
| Keywords: | Monetary policy, Transparency, Interest rates, Learning, Speed of convergence |
| JEL: | E58 E52 E43 D83 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_782_10&r=mac |
| By: | Michael Hudson |
| Abstract: | The Federal Reserve's quantitative easing is presented as injecting $600 billion into "the economy." But instead of getting banks lending to Americans again—households and firms—the money is going abroad, through arbitrage interest-rate speculation, currency speculation, and capital flight. No wonder foreign economies are protesting, as their currencies are being pushed up. |
| Keywords: | Exchange Rates; Asset-price Inflation; Monetary Policy |
| JEL: | E50 E58 F34 F42 G12 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_639&r=mac |
| By: | Hiroyuki Taguchi; Chizuru Kato (Policy Research Institute) |
| Abstract: | This paper aims at assessing the performance of the inflation targeting framework from the quantitative perspective of the money and inflation relationship, focusing on the four East Asian economies, i.e. Korea, Indonesia, Thailand and the Philippines, who adopted the inflation targeting framework soon after the 1997-98 Asian currency crisis. Our estimation results told us that the inflation targeting framework in the sample economies, except for the Philippines, has functioned well as an anchor to curb inflation, in the sense that the framework speeds up price adjustment against money supply compared with their previous regime of pegged exchange rates. We interpret the speeding-up of price adjustment under inflation targeting framework in such a way that the framework may have been able to curb inflation through stabilizing inflationary expectations. We also found that the well-functioning inflation targeting framework was consistent with another estimation outcome: that of enhanced monetary autonomy under the post-crisis floating exchange rate regime. |
| Keywords: | inflation targeting framework, East Asian emerging market economy, money-inflation relationship, co-integration test, error correction estimation |
| JEL: | E52 F33 C23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2421&r=mac |
| By: | Dumitru, Ionut; Stanca, Razvan |
| Abstract: | The fiscal and budgetary policy should play a key role to alleviate the impact of the business cycle on the real economy. Procyclical fiscal policy is particularly undesirable in developing countries, as it not only exacerbates the business cycle, but also the high output volatility hurts the poorest people with low safety net. This paper assesses the structural budget deficit in Romania during 2000-2009 and evaluates the role of the fiscal policy during the business cycle. The paper concludes that the fiscal policy in Romania was highly procyclical, exacerbating the economic cycle. In order to escape from this procyclicality, Romania needs deep structural reforms in order to restore the sustainability of the public finances and put Romania on a sustainable growth path. |
| Keywords: | structural budget balance; procyclicality of fiscal policy; fiscal discipline |
| JEL: | E61 H3 H6 |
| Date: | 2010–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27300&r=mac |
| By: | Roman Horvath; Jakub Mateju |
| Abstract: | This paper aims to contribute to a better understanding on how inflation targets are set. For this reason, we first gather evidence from official central bank and government publications and from a questionnaire sent to central banks on how inflation targets are set; we then estimate the determinants of the level of inflation target in 19 inflation targeting countries using unbalanced panel interval regressions (to deal with the issue that targets are typically set as a range rather than as a point). Inflation targets are found to reflect macroeconomic fundamentals. Higher level as well as higher variability of inflation are associated with higher target. The setting of the inflation target is also found to have an important international dimension, as higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also suggest that the larger width of inflation target is set in a more volatile macroeconomic environment. We find that central bank credibility is negatively associated with the level of inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter even in less independent central banks. |
| Keywords: | inflation targeting; central bank; inflation; credibility; independence; |
| JEL: | E31 E42 E52 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp426&r=mac |
| By: | Sudipto Mundle; N.R. Bhanumurthy; Surajit Das (National Institute of Public Finance and Policy) |
| Abstract: | In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8% or so. The strategy is to gradually bring down the revenue deficit to zero by 2014-15, while allowing a combined fiscal deficit for centre plus states of about 6% of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case. |
| Keywords: | Macroeconomic Modelling, Policy Simulation, Fiscal Policy, India |
| JEL: | C32 E10 E17 E60 H60 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2413&r=mac |
| By: | Yusho Kagraoka (Musashi University - Musashi University); Zakaria Moussa (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | A key issue in current research about quantitative easing monetary policy (QEMP) is the ability of this strategy to impact the term structure of interest rates. Using a dynamic model for the yield curve with time-varying-parameters to the Japanese data, we provide three insights. First, the expectations hypothesis of the term structure of interest rates is generally supported even during the QEMP period. Second, the estimation results reveal that the contribution of macroeconomic variables on the variation of the yield curve is relatively small, especially during the QEMP period. As for the feed-back effect, the yield curve factors contribute only marginally to inflation variation. However, they account for more relevant part of output gap dynamics. Third, the monetary policy shock has a significant effect on yield curve level factor only during the high interest rates periods. However, the decline in the level factor during the QEMP period, while insignificant, indicates a strengthening credibility of the Bank of Japan and thus the effectiveness of its policy. |
| Keywords: | Quantitative Easing Policy; Macro-finance model; Time-varying-parameter VAR; Japan; Expectation channel |
| Date: | 2010–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00543010_v1&r=mac |
| By: | Lucotte, Yannick |
| Abstract: | Over the last decade, a growing number of emerging countries has adopted inflation targeting as monetary policy framework. In a recent paper, Freedman and Laxton (2009) ask the question “Why Inflation Targeting?”. This paper empirically investigates this question by analyzing a large set of institutional and political factors potentially associated with a country’s choice of adopting IT. Using panel data on a sample of thirty inflation targeting and non-inflation emerging countries, for the period 1980-2006, our results suggest that central bank independence, policy-makers’ incentives, and characteristics of political system play an important role in the choice of IT, while the level of financial development and political stability do not seem to matter. Empirical findings are confirmed by extensive robustness tests. |
| Keywords: | Inflation targeting; central bank independence; financial development; political institutions; emerging countries |
| JEL: | E58 E52 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27118&r=mac |
| By: | Durevall, Dick (Department of Economics, School of Business, Economics and Law, Göteborg University); Loening, Josef L. (World Bank); Birru, Yohannes A. (National Bank of Ethiopia) |
| Abstract: | During the global food crisis, Ethiopia experienced an unprecedented increase in inflation, among the highest in Africa. Using monthly data over the past decade, we estimate models of inflation to identify the importance of the factors contributing to CPI inflation and three of its major components: cereal prices, food prices, and non-food prices. Our main finding is that movements in international food and goods prices, measured in domestic currency, determined the long-run evolution of domestic prices. In the short run, agricultural supply shocks affected food inflation, causing large deviations from long-run price trends. Monetary policy seems to have accommodated price shocks, but money supply growth affected short-run non-food price inflation. Our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices, world food prices and domestic agricultural production should be considered. Omitting these factors can lead to biased results and misguide policy decisions.<p> |
| Keywords: | Ethiopia; Exchange rate; Food prices; Inflation; Money demand |
| JEL: | E31 E37 O55 Q17 |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0478&r=mac |
| By: | Wasim Shahid Malik; Ahsan ul HaqSatti; Ghulam Saghir (Pakistan Institute of Development Economics) |
| Abstract: | Since the introduction of rational expectations in the literature, most of the research focus in the area of macroeconomics has been investigating micro foundations of macroeconomic theory and transmission channels of policy. In 1990s, macroeconomists started working on macro models incorporating the assumption of nominal rigidity with explicit modeling of optimal behaviour of individuals and firms. More recently, these models gained empirical support by looking at both aggregate as well as at firm-level data. In this regard, limited studies are available that focus on developing countries. For Pakistan, there has been little focus on micro level studies in the field of macro or monetary economics, so our study attempts to fill this gap. Besides capturing price setting behaviour, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. It is important to note that this study is different from others throughout carried in different countries in the sense that instead of sending questionnaires by mail, data are collected by enumerators and field supervisors. It was found that Pakistani firms perceive to be in competitive environment they operate in. Most of the clients of the firms are regular and firms’ relationship with the customers is long-term. The large majority of firms use current information when reviewing prices. Around 70 percent of firms use either a state-dependent pricing rule or combination of both time-dependent and state-dependent rules. Pakistani firms revise and change their prices usually in the months of June and July. Moreover, costs of raw materials, cost of energy and inflation are the main determinants of price increase while the competitors’ price, raw materials costs and demand changes are responsible for price decrease. When it comes to the main causes of price stickiness, implicit contract with the customers is at the top, while explicit fixed term contract of prices on the second. Further it was observed that most of the firms change their wages once in a year. About half of the firms index their workers’ wages with inflation and past inflation rate is usually used for the purpose. Labour productivity and changes in inflation rate are found to be the main causes of wage change. |
| Keywords: | Price Setting Behaviour, Effectiveness of Monetary Policy, Wage and Price Contracts |
| JEL: | E24 E31 E52 E61 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2412&r=mac |
| By: | Anthony Garratt; James Mitchell; Shaun P. Vahey; Elizabeth C. Wakerly |
| Abstract: | We examine the effectiveness of recursive-weight and equal-weight combination strategies for forecasting using many time-varying models of the relationship be- tween inflation and the output gap. The forecast densities for inflation reflect the uncertainty across models using many statistical measures of the output gap, and allow for time-variation in the ensemble Phillips curves. Using real-time data for the US, Australia, New Zealand and Norway, we find that the recursive-weight strategy performs well, consistently giving well-calibrated forecast densities. The equal-weight strategy generates poorly-calibrated forecast densities for the US and Australian samples. There is little difference between the two strategies for our New Zealand and Norwegian data. We also find that the ensemble modelling approach performs more consistently with real-time data than with revised data in all four countries. |
| JEL: | C32 C53 E37 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-34&r=mac |
| By: | Larry E. Jones; Alice Schoonbroodt |
| Abstract: | Economic demographers have long analyzed fertility cycles. This paper builds a foundation for these cycles in a model of fertility choice with dynastic altruism and aggregate shocks. It is shown that under reasonable parameter values, fertility is pro-cyclical and that, following a shock, fertility continues to cycle endogenously as subsequent cohorts enter retirement. Quantitatively, in the model, the Great Depression generates a large baby bust -- between 38% and 63% of that seen in the U.S. in the 1930s -- which is subsequently followed by a baby boom -- between 53% and 92% of that seen in the U.S. in the 1950s. |
| JEL: | E13 J11 J13 O11 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16596&r=mac |
| By: | Gary Hansen |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:233&r=mac |
| By: | Peter Stella |
| Abstract: | The response of leading central banks to the current financial crisis has raised the magnitude of the financial and governance risks they face. An evaluation of the financial strength of a number of those banks suggests that they are in little danger of being forced by financial losses to alter their policies. Governance risks cannot be dismissed so lightly. In engaging extensively in unorthodox policies - bearing similarities to fiscal policy - a number of central banks have risked a critical examination of their governance structures and thereby potentially jeopardised their monetary policy independence. In order to forestall this risk to monetary policy, it is argued that unconventional policies be placed under a separate governance structure that would allow them to be brought under greater political control and accountability while preserving the operational independence of monetary policy. |
| Keywords: | monetary policy, central banking |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:330&r=mac |
| By: | Emanuel Kohlscheen |
| Abstract: | This note shows that the unbiasedness and the weak rationality hypotheses are not rejected for the inflation forecasts surveyed by the Central Bank when the forecast horizon is one month. However, as in other countries, a clear pattern of auto-correlation of forecast errors is found. Furthermore, increases (decreases) in inflation are systematically associated with underestimations (overestimations) of inflation in the following month. This is true for both, the full sample of forecasters and the sample that is restricted to the 5 institutions with best forecasting performance, suggesting that models in which past realizations of inflation have greater weight in the formation of average expectations are more accurate than the assumption of rational expectations. Models aimed at explaining how expectations are formed should be able to explain these stylized facts as well as the hysteresis of forecasts. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:227&r=mac |
| By: | Vasco Carvalho; Xavier Gabaix |
| Abstract: | We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks, and show that it has significant explanatory power for the evolution of macroeconomic volatility. We define “fundamental” volatility as the volatility that would arise from an economy made entirely of idiosyncratic microeconomic shocks, occurring primitively at the level of sectors or firms. In its empirical construction, motivated by a simple model, the sales share of different sectors vary over time (in a way we directly measure), while the volatility of those sectors remains constant. We find that fundamental volatility accounts for the swings in macroeconomic volatility in the US and the other major world economies in the past half century. It accounts for the “great moderation” and its undoing. Controlling for our measure of fundamental volatility, there is no break in output volatility. The initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is due to the increase of the size of the financial sector. We provide a model to think quantitatively about the large comovement generated by idiosyncratic shocks. As the origin of aggregate shocks can be traced to identifiable microeconomic shocks, we may better understand the origins of aggregate fluctuations. |
| JEL: | E32 E37 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1208&r=mac |
| By: | Etienne Farvaque (Faculty of Economic and Social Sciences, University of Lille I); Norimichi Matsueda (School of Economics, Kwansei Gakuin University) |
| Abstract: | External shocks, be they political or economic, can pose a significant threat to the sustainability of a monetary union. This paper focuses on the openness of a monetary union, and examines how the degrees and characteristics of the sensitivities of its member nations towards external shocks affect the sustainability of the commitment which each of its members made when joining the union. Furthermore, we discuss the sustainability of the prospective monetary union among the Gulf Cooperation Council countries in the light of obtained insights. |
| Keywords: | Monetary Union, Optimum Currency Areas, External Shocks, Gulf Cooperation Council |
| JEL: | E58 E61 F33 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:66&r=mac |
| By: | Nasir, Iqbal; Saima, Nawaz |
| Abstract: | The paper has twofold objectives. Firstly, the impact of the inflation rate on economic growth with the possibility of two threshold levels for Pakistan using annual data from 1961 to 2008 is examined and secondly, nonlinear relationship between inflation and investment has been investigated. Inflation and growth models support the existence of a nonlinear relationship with two thresholds (6 percent and 11 percent). Inflation below the first threshold affects economic growth positively but insignificantly; at moderate rates of inflation, between the two threshold levels, the effect of inflation is significant and strongly negative and at high rates of inflation, above the second threshold, the marginal impact of additional inflation on economic growth diminishes but is still significantly negative. Investment is one of the possible channels through which inflation influences economic growth and the analysis indicates the nonlinear relationship between these two variables with only one threshold at 7 percent. Rate of inflation below the threshold level has positive but insignificant impact, while above the threshold it has strong negative and significant impact on the investment. Therefore, it is desirable to keep the inflation below 6 percent because it may be helpful for the achievement of robust economic growth and investment. |
| Keywords: | Investment; Inflation; Nonlinear; Pakistan |
| JEL: | E31 O4 |
| Date: | 2010–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27163&r=mac |
| By: | Marcelo Delajara |
| Abstract: | We determine the extent of cyclical comovement in employment among the regions of Mexico by analyzing the covariance of the disturbances in regional cycles during the period July 1997 - October 2009. Employment refers to the number of workers with permanent contracts affiliated to the Instituto Mexicano del Seguro Social. Trend and cycle decomposition and the variance-covariance matrix of the cycle's disturbances are obtained from the estimation -using state space methods- of a structural multivariate model of the employment time series. We find, for most regions, that employment comovement is high and that the variance of the regional cycles' disturbances is largely associated with the fluctuations in national employment. We do not find evidence, however, of a common underlying cycle, which means that employment comovement would arise from the geographical propagation of regional specific shocks. |
| Keywords: | Employment, comovement, regions, Mexico. |
| JEL: | E32 R11 R23 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2010-15&r=mac |
| By: | Abdul Karim, Zulkefly; Abdul Karim, Bakri; Ahmad, Riayati |
| Abstract: | This paper examines the dynamic linkages between economic growth, fixed investment, and household consumption in Malaysia by using a structural vector error correction model (SVECM) approach. The empirical results revealed that household consumption and fixed investment are only significantly influenced output growth in the short run. This finding tends to support the alternative view of growth hypothesis, namely fixed investment-led growth, and household consumption-led growth in the short run. In the long run, there is no significant effect of fixed investment and household consumption on growth. However, in the long run, there is a permanent effect of economic growth on household consumption and investment. This empirical finding signals that a demand side policy (for example, fiscal and monetary policy) by affecting the household consumption and investment is ineffective to stimulate the economic growth in the long run. |
| Keywords: | Economic growth; fixed investment; consumption; SVECM |
| JEL: | E22 C22 E00 E21 |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27146&r=mac |
| By: | Iqbal, Nasir; Nawaz, Saima |
| Abstract: | The research on the relationship between macroeconomic stability and fiscal decentralization has been rather inconclusive about the benefits of fiscal decentralization. The current paper is the first to investigate the effect of fiscal decentralization on macroeconomic stability by using Misery Index at country level especially for Pakistan. The evidence that has been presented reveals a significant positive impact of fiscal decentralization on macroeconomic stability of Pakistan, although the results are much weaker for expenditure decentralization. Effectiveness of expenditure decentralization in curtailing macroeconomic instability is depending upon the level of revenue decentralization. The current study clearly indicates that process of fiscal decentralization is beneficial for the economy of Pakistan. The present developments under taken by the government of Pakistan in term of 7th NFC award and 18th Constitutional Amendment will have clear implications for the Pakistan’s long term economic prosperity and macroeconomic stability. However, outcome of these reforms crucially depends upon the will of the political government. |
| Keywords: | Fiscal Decentralization; Macroeconomic Stability; Pakistan |
| JEL: | O11 E62 H77 E31 E24 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27184&r=mac |
| By: | Matheron, J. |
| Abstract: | This paper characterizes the short- and long-run effects of overtime de-taxation. A dynamic general equilibrium with overtime hours is first developed and calibrated to French data. A fiscal shock consisting of a complete de-taxation of overtime hours is then implemented in the model. Several fiscal scenarios are considered, depending on the pace of public debt and depending on whether consumption taxes or lump-sum taxes are adjusted. In each case, the welfare gains of the fiscal reform are computed. Overtime de-taxation is found to have very limited aggregate effects on output and the labor supply. It also generates a small welfare gain or even a welfare loss, depending on the on the fiscal scenario. |
| Keywords: | Overtime de-taxation, general equilibrium |
| JEL: | E13 E62 E65 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:304&r=mac |
| By: | Leonardo Morales-Arias; Guilherme V. Moura |
| Abstract: | This article proposes a multivariate model of inflation with conditionally heteroskedastic common and country-specific components. The model is estimated in one-step via Quasi-Maximum Likelihood for the G7 countries for the period Q1-1960 to Q4-2009. It is found that various model specifications considered fit well the first and second order dynamics of inflation in the G7. The estimated volatility of the common inflation component captures the international effects of the ‘Great Moderation’ and of the ‘Great Recession’. The model also shows promising capabilities for forecasting inflation in several countries |
| Keywords: | Global inflation, conditional heteroskedasticity, inflation forecasting |
| JEL: | E31 E37 F41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1666&r=mac |
| By: | Horny, G.; Sevestre, P. |
| Abstract: | This article provides evidence about the interrelationships between wages and prices at the microeconomic level. We rely on the right-to manage model to specify and estimate a multivariate model explaining the timing and magnitude of wage changes at the firm level. The modeling of price changes relies on a state-dependent model. The data we use is a quarterly panel of about 1800 firms from the French manufacturing industry, observed over the years 1998 to 2005. We find the occurrence of wage changes to be essentially time dependent, though weakly related to the state of the economy. However, the magnitude of wage changes strongly depends on macroeconomic variables, namely inflation and unemployment, and to a lesser extent on the evolution of the firm product price and on its productivity gains. Changes in the firm product price are mostly driven by the evolution of its costs and more specifically by that of its intermediate inputs. The wage cost, as well as the production and the industry level inflation, have a weaker influence. |
| Keywords: | wages, price stickiness, dynamic model, factor loadings. |
| JEL: | E31 C23 C25 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:305&r=mac |
| By: | Ellen R. McGrattan |
| Abstract: | Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends. |
| JEL: | E13 E32 H25 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16588&r=mac |
| By: | Beatrice Brunner; Andreas Kuhn |
| Abstract: | We estimate the effects of labor market entry conditions on wages for male individuals first entering the Austrian labor market between 1978 and 2000. We find a large negative effect of unfavorable entry conditions on starting wages as well as a sizeable negative long-run effect. Specifically, we estimate that a one percentage point increase in the initial local unemployment rate is associated with an approximate shortfall in lifetime earnings of 6.5%. We also show that bad entry conditions are associated with lower quality of a worker's first job and that initial wage shortfalls associated with bad entry conditions only partially evaporate upon involuntary job change. These and additional findings support the view that initial job assignment, in combination with accumulation of occupation or industry-specific human capital while on this first job, plays a key role in generating the observed wage persistencies. |
| Keywords: | Initial labor market conditions, endogenous labor market entry, initial job assignment, specific human capital |
| JEL: | E3 J2 J3 J6 M5 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:520&r=mac |
| By: | Charles-Henri Reuter (LSF, Statec, ESCP Europe, CEROS) |
| Abstract: | We investigate the interactions between firms’ financial policies and expected business cycles, in listed firms, in Europe, and over 20 years. We show that these interactions are mediated by ownership structures. Firms with strongly concentrated ownership, or under control, lead contra-cyclical policies, while firms with dispersed ownership lead somewhat pro-cyclical policies, supporting the traditional expectation that business cycles are of little direct relevance for financial policies. Our theoretical considerations unfold from the idea that ownership dispersion implies a different mix in agency relations in the firm. It entails specificities in agency costs, opportunity benefits of managerial discretion, it fosters differing needs for disciplining through debt, different needs for signaling, and potentially different market timing behaviors by managers and incumbent shareholders. As a result different objectives and constraints foster different policies: firms with dispersed ownership conduct lean (i.e. procyclical) policies, while firms with concentrated ownership or under control favor some financial smoothing (i.e. contra-cyclical policies). We derive from these two propositions specific hypotheses about public debt issuance, private debt management, investment, dividend and cash-holding policies, as well as resulting changes in financial leverage. Evidence is mostly supportive of our hypothesizing and propositions. Our proceedings are largely exploratory and our potential contribution extends to a number adjacent research questions including, among others, the analysis of performance effects of ownership concentration, the relative assessment of governance mechanisms, or still the investigation, in capital structure studies, of specific managerial behaviors and managerspecific information. Overall our emphasis on the potential relevance of business cycles for firm’s financial policies comes timely following the recent financial turmoil. |
| Keywords: | Agency theory, International capital structure, Business cycles, Ownership dispersion. Entrenchment, Managerial discretion, Institutional context. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:10-10&r=mac |
| By: | Tiwari, Amaresh K. (Maastricht University) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:maastr:urn:nbn:nl:ui:27-24562&r=mac |
| By: | Amado, Raúl Oscar |
| Abstract: | In this paper we study the state's role in the modernization and urban transformation in Buenos Aires in the period 1850-1910. This transformation was connected with the economic movements of the second half of the nineteenth century. It was a modernizing movement, a radical alteration of the production-trade system, composition and population distribution and transport system. No "change" only the city of Buenos Aires. Transformed the campaign and its urban centers as the Atlantic orientation of the new state consolidated and eradicated and institutional instability and monetary policy. The "big village" became a big city, not only because the state wanted it that way. This modernization was not an imitation architecture. It was the economic growth in a time of global crisis which led to the break that caused the admiration of the witnesses of the Centennial, and consolidated national unity could be seen realized the dream of the generation of '37: Enabling Europe in South America. |
| Keywords: | economic history; economic growth; political consolidation of the Argentine government; transport; trade; agriculture |
| JEL: | E0 N16 F02 E23 |
| Date: | 2010–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26164&r=mac |
| By: | Hu, Xue; Whang, Yu-Jung; Zhang, Qiaoxi |
| Abstract: | In the classic Arrow-Debreu model, the existence of money is not accommodated. However, using trading post market segmentation and requiring budget balance in each pair-wise transaction the model can converge to monetary equilibrium. Uniqueness of the common medium of exchange (commodity money) follows from scale economy in transaction costs. Also, this paper shows that existence and convergence to monetary equilibrium are totally different concept. In Full Double Coincidence of Wants situation, where previous market information helps households judging which good has highest saleableness, convergence takes place more easily than in Absence of Double Coincidence of Wants situation. This paper investigates the emergence of commodity money as the result of a tatonnement adjustment in a trading post economy. The convergence process models Menger‟s concept of saleableness – the most liquid good becomes the common medium of exchange. A computational approach is adopted to illustrate the monetary convergence as a result of decentralized adjustment process by utility maximizing households in the economy. Starting from an arbitrary initial economy, the analysis constructs a mapping from a compact economy space to monetary equilibrium or non-monetary equilibrium. By varying the transaction costs parameters and the household endowments, the paper successfully identifies the regions of parameter space where convergence to monetary equilibrium occurs as a result of decentralized adjustment process. The reasons for non-convergence are also investigated. |
| Keywords: | trading post |
| Date: | 2010–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:1679757&r=mac |
| By: | Wang Yongzhong (Institute of World Economics and Politics) |
| Abstract: | In recent years, China has faced an increasing trilemma—how to maintain independent monetary policy and limit exchange rate flexibility simultaneously, while at the same time facing persistent and substantial international capital flows. This paper undertakes an empirical investigation to evaluate the effectiveness of China’s sterilizations and capital mobility regulations, measured by the sterilization and offset coefficients respectively, using monthly data between mid 1999 and March 2009. We find that the effectiveness of China’s sterilization is almost perfect in terms of the monetary base, while it is nearly half in light of M2, and the extent of China’s capital mobility regulations still works but not well binds. Recursive estimation finds evidence of increasing mobility of capital flows and decreasing extent of sterilizations that may undercut China’s ability to seek monetary autonomy and domestic currency stability simultaneously. |
| Keywords: | Effectiveness, Capital Mobility, International Reserves, Sterilization |
| JEL: | E50 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:2381&r=mac |
| By: | Gabriel Jiménez; Atif R. Mian; José-Luis Peydró; Jesús Saurina |
| Abstract: | While banks may change their supply of credit due to bank balance sheet shocks (the local lending channel), firms can react by adjusting their sources of financing in equilibrium (the aggregate lending channel). We formalize a methodology for separately estimating these effects. We estimate the local and aggregate lending channel effects of the banks' ability to securitize real estate assets on non-real estate firms in Spain. We show that equilibrium dynamics nullify the strong local lending channel effect on credit quantity for firms with multiple banking relationships. However, credit terms for these firms become significantly more favorable due to securitization. Securitization also leads to an expansion in credit on the extensive margin towards first-time bank clients, and these borrowers are significantly more likely to end up in default. Finally, the 2008 collapse in securitization leads to a reversal in local lending channel. |
| JEL: | E44 G21 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16595&r=mac |
| By: | D. Fudenberg; C. Harris |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:496&r=mac |
| By: | Sokolov, Yuri |
| Abstract: | The recent economic crisis on the demand side of the economy affects the trends and volatilities of the exchange rates as well as the operating conditions of borrowers in emerging market economies. But the exchange rate depreciation creates both winners and losers. With a weaker exchange rate, exporters and net holders of foreign assets will benefit, and vice verse, those relying on import and net debtors in foreign currency will be hurt. This paper presents a simple FX adjustment framework within Factor Endogenous Behaviour Aggregation (FEBA) approach* based on the decomposition of the competitiveness factor into components with meaningful behaviour content and subsequent collapsing into the Adjustment Index. The setup, while being simple, nicely captures non-linear and non-symmetric nature of the FX risk impact on bank’s credit portfolio and could be very useful for modeling credit risk. *The approach was set up in “Interaction between market and credit risk: Focus on the endogeneity of aggregate risk” and mentioned in Roubini Global Economic Digest as “Advance in Credit Risk Management”. |
| Keywords: | exchange rate, factor modeling, competitiveness, credit risk, market risk |
| JEL: | E30 G32 D01 E37 A10 |
| Date: | 2010–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27222&r=mac |
| By: | Strachman, Eduardo; Fucidji, José Ricardo |
| Abstract: | In this paper we describe the main causes of recent financial crisis as a result of many theoretical, methodological, and practical shortcomings mostly according to heterodox, but also including some important orthodox economists. At the theoretical level, there are problems concerning teaching and using economic models with overly unrealistic assumptions. In the methodological front, we find the unsuspected shadow of Milton Friedman’s ‘unrealisticism of assumptions’ thesis lurking behind the construction of this kind of models and the widespread neglect of methodological issues. Of course, the most evident shortcomings are at the practical level: (i) huge interests of the participants in the financial markets (banks, central bankers, regulators, rating agencies mortgage brokers, politicians, governments, executives, economists, etc. mainly in the US, Canada and Europe, but also in Japan and the rest of the world), (ii) in an almost completely free financial and economic market, that is, one (almost) without any regulation or supervision, (iii) decision-taking upon some not well regarded qualities, like irresponsibility, ignorance, and inertia; and (iv) difficulties to understand the current crisis as well as some biases directing economic rescues by governments. Following many others, we propose that we take this episode as an opportunity to reflect on, and hopefully redirect, economic theory and practice. |
| Keywords: | Economic Crisis; Financial Crisis; Post-Keynesian; Methodology; Macroeconomics; Economic Theory; Current Monetary; Banking and Financial Issues |
| JEL: | E44 A11 B41 |
| Date: | 2010–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27130&r=mac |
| By: | Michael D. Bordo; John S. Landon-Lane |
| Abstract: | This paper compares the recent global crisis and recession to earlier international financial crises and recessions. Based on existing chronologies of banking, currency and debt crises we identify clusters of crises. We use an identification of extreme events and a weighting scheme based on real GDP relative to the U.S. to identify global financial crises since 1880. For banking crises we identify five global ones since 1880: 1890-91, 1907-08, 1913-14, 1931-32, 2007-2008. In terms of global incidence the recent crisis is fourth in ranking and comparable to 1907-08. We also calculate output losses during the recessions associated with global financial crises and again the recent crisis is similar in severity to 1907-08 and is fourth in ranking. On both dimensions the recent crisis is a pale shadow of the Great depression. The relatively mild experience of the recent crisis may reflect institutional and policy learning. |
| JEL: | E30 N20 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16589&r=mac |
| By: | Gianluca Cubadda (Faculty of Economics, University of Rome "Tor Vergata"); Barbara Guardabascio (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | This paper considers methods for forecasting macroeconomic time series in a framework where the number of predictors, N, is too large to apply traditional regression models but not su¢ciently large to resort to statistical inference based on double asymptotics. Our interest is motivated by a body of empirical research suggesting that popular data-rich prediction methods perform best when N ranges from 20 to 50. In order to accomplish our goal, we examine the conditions under which partial least squares and principal component regression provide consistent estimates of a stable autoregressive distributed lag model as only the number of observations, T, diverges. We show both by simulations and empirical applications that the proposed methods compare well to models that are widely used in macroeconomic forecasting. |
| Keywords: | Partial least squares; principal component regression; dynamic factor models; data-rich forecasting methods; dimension-reduction techniques. |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:176&r=mac |
| By: | James Zuccollo; John Ballingall (NZ Institute of Economic Research) |
| Keywords: | New Zealand, savings rate, computable general equilibrium |
| JEL: | E21 C68 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2427&r=mac |
| By: | Agnes Benassy-Quere; Lionel Fontagne; Jean Foure |
| Abstract: | We present growth scenarios for 128 countries to 2050, based on a three-factor production function that includes capital, labour and energy. We improve on the literature by accounting for the energy constraint through dynamic modelling of energy productivity, and departing from the assumptions of either a closed economy or full capital mobility by applying a Feldstein-Horioka-type relationship between savings and investment rates. Our results suggest that, accounting for relative price variations, China could account for 28% of the world economy in 2050, which would be much more than the United States (14%), India (12%), the European Union (11%) and Japan (3%). They suggest also that China would overtake the United States around 2025 (2035 at constant relative prices). However, in terms of standards of living, measured through GDP per capita in purchasing power parity, only China would be close to achieving convergence to the US level, and only at the end of the simulation period. |
| Keywords: | GDP projections; long run; global economy |
| JEL: | E23 E27 F02 F47 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2010-27&r=mac |
| By: | Gaetano Lisi (University of Cassino); Maurizio Pugno (University of Cassino) |
| Abstract: | A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. The key assumptions adopted are that entrepreneurial ability is heterogeneous across individuals; skill accumulation determines productivity growth in the regular sector and a positive externality on the underground sector; job-seekers choose whether or not to invest in education and skill depending on the expected wages in the two sectors. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. Policies for entrepreneurship and monitoring would help both economic growth and employment. |
| Keywords: | entrepreneurship, underground economy, shadow economy, unemployment, human capital, endogenous growth, search and matching models |
| JEL: | E26 J23 J24 J63 J64 L26 O40 |
| Date: | 2010–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:css:wpaper:2010-07&r=mac |
| By: | Børsum, Øystein (Dept. of Economics, University of Oslo) |
| Abstract: | This paper analyses the default option typical to American mortgages. House-holds borrow to buy durable housing, but future house prices are uncertain, and households find it advantageous to default on their debt if house prices fall suffi- ciently. A key assumption of the model is that households are relegated to the rental market upon default, and that there is a small pecuniary inefficiency (“iceberg cost”) in renting. This leads defaulters to substitute consumption of other goods for housing; that is, the demand for housing falls upon default. Consequently, when some households default, aggregate demand for housing is reduced, hence house prices fall more, possibly inciting other households to default. This complementarity is a source of multiple equilibria, and a price externality. Using a specific case for which an analytical solution can be derived, I show that contagion is possible: it may be that the default of a minority (interpretable as sub-prime borrowers) spreads to a majority (interpretable as prime borrowers). |
| Keywords: | Housing demand; Mortgage market; Default risk; Multiple equilibria Contagion |
| JEL: | E21 G11 R21 |
| Date: | 2010–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2010_010&r=mac |
| By: | Kalbe Abbas; Manzoor Hussain Malik (Pakistan Institute of Development Economics) |
| Abstract: | The study analyses market perception about the performance of Pakistani commercial banks due to financial liberalisation and deregulation measures taken by the central bank over the last two decades. For this purpose, it uses Survey approach. To augment the results of Survey Based Approach, it employs Distribution Free Approach to measure relative cost inefficiencies of commercial banks. Out of 35 commercial banks, 15 banks have been chosen for analysis purpose. Key banking reforms remain helpful in correcting flaws in the banking sector of Pakistan. In particular, privatisation of banks, the deregulation and institutional strengthening measures and switching towards market-based monetary and credit management remain helpful in correcting the prevailing flaws. The cost inefficiency scores of banks also indicate that the efficiency of Pakistani banks have improved during 1990 to 2006. As regards group-wise efficiency estimates, foreign banks are found to be more efficient, followed by private banks, nationalised commercial banks, and privatised banks. The relative high cost inefficiency of privatised banks is most probably due to having remained under state owned structure during most of the period of the study. The financial liberalisation and the resultant competitive environment might be the key factors behind improvements in efficacy of banks. |
| Keywords: | Banking, Efficiency, Regulations, Financial Reforms |
| JEL: | E51 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2411&r=mac |