|
on Macroeconomics |
|
Issue of 2011‒01‒03
53 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Jagjit S. Chadha |
| Abstract: | Price-level determination requires co-ordination of monetary and fiscal policy to ensure a unique rational expectations equilibrium (REE). This paper derives a number of implications for simple interest rate rules resulting from various fiscal strategies. We show that fiscal choices under either the monetary theory of the price-level (MTPL) and the fiscal theory of the price-level (FTPL) can challenge widely accepted principles of monetary policy. Specifically, we show that a fiscal rule that responds aggressively to output and inflation may force the monetary authorities to adopt significantly more aggressive output and inflation stabilization policy than suggested by the the Taylor Principle. We also show how when monetary policy is severely constrained, the fiscal policy maker can act to stabilise the economy. Some policy conclusions in light of the lower zero bound for monetary policy and debt stabilization are drawn. |
| Keywords: | Monetary and Fiscal Policy Rules; Ricardian; Non-Ricardian Fiscal Policy |
| JEL: | E21 E32 E52 E63 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1013&r=mac |
| By: | Mimir, Yasin |
| Abstract: | I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the U.S. financial sector and those of credit spread. I find that (i) liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, (ii) financial variables are three to ten times more volatile than output, and (iii) financial variables lead the business cycle. I present a dynamic stochastic general equilibrium model with profit maximizing banks where bank equity mitigates a moral hazard problem between banks and their depositors. The driving sources of business cycles are shocks to bank equity as well as standard productivity shocks. The model generates real and financial fluctuations consistent with the U.S. data. The model also delivers some policy prescriptions about capital adequacy requirements of banks. |
| Keywords: | Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations |
| JEL: | E32 E44 E10 E20 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27643&r=mac |
| By: | Michał Brzoza-Brzezina (National Bank of Poland.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcin Kolasa (National Bank of Poland.) |
| Abstract: | Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. JEL Classification: E52, E58, E63. |
| Keywords: | boom-bust cycles, euro area accession, dynamic general equilibrium models |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101280&r=mac |
| By: | Jaromir Baxa; Roman Horvath; Borek Vasicek |
| Abstract: | We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment-based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting. |
| Keywords: | Endogenous regressors, inflation targeting, monetary policy, Taylor rule, time-varying parameter model. |
| JEL: | E43 E52 E58 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2010/02&r=mac |
| By: | Bennett T. McCallum; Edward Nelson |
| Abstract: | We consider what, if any, relationship there is between monetary aggregates and inflation, and whether there is any substantial reason for modifying the current mainstream mode of policy analysis, which frequently does not consider monetary aggregates at all. We begin by considering the body of thought known as the "quantity theory of money." The quantity theory centers on the prediction that there will be a long-run proportionate reaction of the price level to an exogenous increase in the nominal money stock. The nominal homogeneity conditions that deliver the quantity-theory result are the same as those that deliver monetary neutrality, an important principle behind policy formulation. The quantity theory implies a ceteris paribus unitary relationship between inflation and money growth. Simulations of a New Keynesian model suggest that we should expect this relationship to be apparent in time series data, with no heavy averaging or filtering required, but with allowance needed for the phase shift in the relationship between monetary growth rates and inflation. While financial innovation can obscure the relationship between monetary growth and inflation, evidence of a money growth/inflation relationship does emerge from U.S. time series and G7 panel data. Various considerations suggest that studies of inflation and monetary policy behavior can benefit from including both interest rates and money in the empirical analysis. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-57&r=mac |
| By: | Orjasniemi, Seppo (Bank of Finland Research) |
| Abstract: | In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union’s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries. |
| Keywords: | monetary union; monetary policy; fiscal policy; exchange rate |
| JEL: | E52 E62 F41 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2010_018&r=mac |
| By: | Hiroyuki Taguchi; Woong-Ki Sohn (Policy Research Institute) |
| Abstract: | This article sets out to assess the performance of inflation targeting (IT) frameworks from the perspective of the pass-through effect of external price shocks into consumer price inflation, focusing on the four East Asian economies which have adopted IT, during the period of 1990-2009. We first examine their monetary policy rules to identify the IT implementation, and then investigate the linkage between inflation-responsive rules and pass-through rates, as suggested by Gagnon and Ihrig (2004). Our main findings are as follows. First, under the IT adoption, Korea has taken an inflation responsive rule in a forward-looking manner, while Indonesia and Thailand have adopted the rule in a backward-looking manner. Second, only Korea has lost pass-through under IT adoption, thereby showing the clear linkage between inflation-responsive rules and the loss of pass-through. Third, the sensitivity test of inflation expectations to import price shocks in Korea also supports this linkage. These findings imply that IT adoption, if conducted in a forward-looking manner, can be a resisting power against external price shocks, even in small, open, emerging market economies, as tested under the latest global financial crisis in Korea. |
| Keywords: | inflation targeting, pass-through, East Asian emerging market economies, policy reaction function, inflation expectations |
| JEL: | E52 F31 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2458&r=mac |
| By: | Jaromir Benes; Marianne Johnson; Kevin Clinton; Troy Matheson; Petar Manchev; Roberto Garcia-Saltos; Douglas Laxton |
| Abstract: | This paper develops a simple model for measuring potential output that uses data on inflation, unemployment, and capacity utilization. We apply the model to 10 countries, in addition to the United States and the euro area. While there is a substantial amount of uncertainty around our estimates, we find that the financial crisis has resulted in a reduction in potential output. |
| Keywords: | Cross country analysis , Economic growth , Economic models , Financial crisis , Fiscal policy , Global Financial Crisis 2008-2009 , Industrial production , Inflation , Monetary policy , Unemployment , |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/285&r=mac |
| By: | Paul Conway; Richard Herd; Thomas Chalaux |
| Abstract: | As a result of reforms and financial sector development, the People’s Bank of China (PBoC) now exerts significant control over money market interest rates. With money market conditions increasingly influencing effective commercial lending rates, the PBoC is also able to affect the cost of credit without recourse to its benchmark commercial bank rates. Furthermore, interest rates are an important determinant of investment spending in China, via the user cost of capital, and aggregate economic activity influences inflation. Hence, greater use of interest rates in implementing monetary policy would enhance macroeconomic stabilisation while avoiding a number of drawbacks of the current quantity-based approach. In addition, increased flexibility in the exchange rate would enhance its role in offsetting macroeconomic shocks and allow the PBoC more scope to tailor monetary policy to domestic macroeconomic conditions. Concurrently, changes in the PBoC’s policy stance should be predicated on informed judgments based on the monitoring of a set of indicators in conjunction with a flexible inflation objective as the nominal anchor. This paper relates to the 2010 OECD Economic Review of China (www.oecd.org/eco/surveys/china).<P>Poursuivre la réforme de la politique monétaire pour accomplir les objectifs domestiques<BR>Suite à diverses réformes et au développement du secteur financier, la Banque Populaire de Chine (BPdC) contrôle désormais de façon significative les taux d’intérêt du marché monétaire. Les conditions du marché monétaire influençant de plus en plus les taux effectifs des prêts commerciaux, la BPdC est également en mesure d’influencer le coût du crédit sans recourir à ses taux d’intérêt commerciaux de référence. De plus, les taux d’intérêt sont un déterminant important de l’investissement en Chine, via le coût du capital, et l’activité exerce une influence sur l’inflation. Par conséquent, une utilisation plus active des taux d’intérêt dans la conduite de la politique monétaire contribuerait à la stabilisation macroéconomique tout en évitant certains des inconvénients de l’approche actuelle par les quantités. En outre, une plus grande flexibilité du taux de change renforcerait son rôle dans l’amortissement des chocs macroéconomiques et donnerait une plus grande latitude à la BPdC pour ajuster la politique monétaire en fonction des conditions macroéconomiques internes. Dans le même temps, les changements de politique monétaire devraient résulter d’une évaluation empirique basée sur le suivi d’une série d’indicateurs dans le cadre d’un ancrage nominal sous la forme d’un objectif d’inflation flexible. Ce document se rapporte à l’Étude économique de la Chine de l’OCDE, 2009, (www.oecd.org/eco/etudes/chine). |
| Keywords: | regulation, macroeconomic policies, China, Money, réglementation, politique macro-économique, Chine, Monnaie |
| JEL: | E4 E5 E6 K2 L5 |
| Date: | 2010–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:822-en&r=mac |
| By: | Korobilis, Dimitris; Gilmartin, Michelle |
| Abstract: | This paper studies the transmission of monetary shocks to state unemployment rates, within a novel structural factor-augmented VAR framework with a time-varying propagation mechanism. We find evidence of large heterogeneity over time in the responses of state unemployment rates to monetary policy shocks, which do not necessarily comply with the response of the national unemployment rate. We also find evidence of heterogeneity over the spatial dimension, although geographical proximity seems to play an important role in the transmission of monetary shocks. |
| Keywords: | regional unemployment; structural VAR; factor model; monetary policy |
| JEL: | C32 E52 R11 C11 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27596&r=mac |
| By: | Clerc, L.; Dellas, H.; Loisel, O. |
| Abstract: | Monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks. But it also carries costs as some stabilization may be feasible even in the absence of credibility, and this may be more than what an individual country can hope for in a monetary union. In this paper, we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements. We produce examples where monetary union may be welfare improving even for low-modest levels of inflation bias (2-3%) as long as business cycles are not too a-synchronized across countries. |
| Keywords: | Currency union, credibility, stabilization, inflation bias. |
| JEL: | E4 E5 F4 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:308&r=mac |
| By: | Kimberly Beaton; René Lalonde; Stephen Snudden |
| Abstract: | This paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada's Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions. We find that U.S. financial shocks, as well as real shocks, have important effects on the Canadian economy. Moreover, financial frictions on both the demand and supply sides of credit amplify the first round impact of all types of U.S. shocks on the U.S. economy, as well as the second round impact on Canada. Real-financial linkages also increase the persistence of the Canadian response to U.S. shocks. We find that the interaction between the endogenous response of commodity prices and U.S. financial frictions plays an important role in the propagation of U.S. shocks to the Canadian economy. Finally, real-financial linkages also help to generate the positive cross correlation between domestic demand in the United States and Canada observed in the data, which is difficult to explain with a model where the transmission of shocks between countries is only based only on trade. |
| Keywords: | Business fluctuations and cycles; Economic models; International topics |
| JEL: | E21 E27 E32 F36 F40 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-40&r=mac |
| By: | Borraz, Fernando; Gianelli, Diego |
| Abstract: | Inflation expectations are key unobservable variables for decision-making, especially in managing monetary policy. Understand how to formulate them, if they are rational or adaptive is vital. This study answers these questions through a panel data analysis of the micro data from the inflation expectation survey of the Central Bank of Uruguay. The main findings indicate: i) a low predictive power of the analysts surveyed in the 12-month horizon; ii) a convergence of the individual forecasts to the released monthly median iii) an overweight of the inflation target ceiling and the dynamics of the inflation, and iv) a underweight of monetary policy instruments. With respect to the evidence of rationality, we find the partial use of available information and in some cases, there is a systematic bias. |
| Keywords: | inflation expectations; rationality; forecast errors |
| JEL: | E31 E58 D85 |
| Date: | 2010–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27713&r=mac |
| By: | Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | Estimated Taylor rules became popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rule nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) a Generalized Method of Moments (GMM) estimation of models that allow discrimination between the sources of potential policy asymmetry but are conditioned by specific underlying relations (Dolado et al., 2004, 2005; Surico, 2007a,b); and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes (Hansen, 2000; Caner and Hansen, 2004). We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences and some interesting evidence on policy switches driven by the intensity of financial distress in the economy. |
| Keywords: | monetary policy, inflation targeting, nonlinear Taylor rules, threshold estimation |
| JEL: | C32 E52 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1010&r=mac |
| By: | Jagjit S. Chadha |
| Abstract: | I outline a simple roadmap for work in micro-founded models. Rather than abandoning the route to further micro-foundations and returning to ad hoc economics, the techniques we have used over the past two decades to develop micro-founded business cycle models will allow us to develop models with meaningful financial frictions and thus address once again the question of monetary and fiscal policies with active rather than passive financial sectors. Macroeconomics and finance are likely to remain bound together. |
| Keywords: | Future of Macroeconomics; DSGE Models; Crisis |
| JEL: | E42 E52 E58 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1012&r=mac |
| By: | Monica Værholm (Department of Economics. Norwegian School of Economics and Business Administration); Lars Fredrik Øksendal (Department of Economics. Norwegian School of Economics and Business Administration) |
| Abstract: | For later generations, August 1914 has become a watershed in monetary history. In a matter of days, the belligerent and neutral countries of Europe alike suspended the gold standard. The international monetary regime that had served the world economy for close to four decades was no more. Everywhere domestic fiat money became the order of the day. Even more importantly, the war brought a fundamental change in the priorities of monetary policy: National objectives triumphed over monetary stability. |
| Date: | 2010–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2010_28&r=mac |
| By: | Luc Laeven; Hui Tong |
| Abstract: | This paper studies how U.S. monetary policy affects global stock prices. We find that global stock prices respond strongly to changes in U.S. interest rate policy, with stock prices increasing (decreasing) following unexpected monetary loosening (tightening). This impact is more pronounced for sectors that depend on external financing, and for countries that are more integrated with the global financial market. These findings suggest that financial frictions play an important role in the transmission of monetary policy, and that U.S. monetary policy influences global capital allocation. |
| Keywords: | Corporate sector , Cross country analysis , Economic models , Interest rate policy , International capital markets , Monetary policy , Monetary transmission mechanism , Stock prices , United States , |
| Date: | 2010–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/278&r=mac |
| By: | Alessandro Barattieri; Susanto Basu; Peter Gottschalk |
| Abstract: | Nominal wage stickiness is an important component of recent medium-scale macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996–1999. The SIPP provides high-frequency information on wages, employment, and demographic characteristics for a large and representative sample of the U.S. population. The main results of the analysis are as follows: (1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. (2) The frequency of wage adjustment does not display significant seasonal patterns. (3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations. (4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. (5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate. |
| Keywords: | Wages |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-11&r=mac |
| By: | Keisuke Otsu |
| Abstract: | In this paper, I extend the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a two-country international business cycle model and quantify the effect of the disturbances in relevant markets on the business cycle correlation between Japan and the US over the 1980-2008 period. I find that disturbances in the labor market and production efficiency are important in accounting for the recent increase in the cross-country output correlation. Financial globalization can be the cause of the recent increase in cross-country output correlation if it operated through an increase in the cross- country correlation of disturbances in the labour market and production efficiency, not in the domestic or international capital markets. |
| Keywords: | Business Cycle Accounting; International Business Cycles; Financial Globalization |
| JEL: | E32 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1010&r=mac |
| By: | Martina Cecioni (Bank of Italy) |
| Abstract: | This paper studies the effect of competitive pressures on inflation dynamics. To this end it derives and estimates a New Keynesian Phillips curve in a model with endogenous firm entry. The number of active firms is inversely related to their market power. By taking into account the number of competitors, the pass-through of real marginal cost on inflation is separately identifiable from the effect of endogenous desired markup fluctuations. Estimates with US data suggest that the effect of real marginal cost on inflation is stronger than that found in the empirical test of the standard model. The estimated elasticity of the desired markup with respect to the number of firms implies that an increase of 10% in the number of active firms would lower annual inflation by 1.4% in the short run. |
| Keywords: | inflation dynamics, markups, firm entry |
| JEL: | E31 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_773_10&r=mac |
| By: | Ed Nosal; Christopher Waller; Randall Wright |
| Abstract: | We motivate and provide an overview to New Monetarist Economics. We then briefly describe the individual contributions to the Macroeconomics Dynamics special issues on money, credit and liquidity. |
| Keywords: | Macroeconomics - Econometric models |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-14&r=mac |
| By: | Claude Francis Naoussi (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | This article explores the role of trend shocks in explaining the specificities of business cycles in Sub-Saharan African (SSA) countries using the methodology introduced by Aguiar and Gopinath (2007) [Emerging Market Business Cycles: The Cycle Is the Trend Journal of Political Economy 115(1)]. We specify a small open economy model with transitory and trend shocks on productivity to replicate the differences in the business cycle behavior of output and consumption across countries, especially the excess volatility of consumption in SSA countries. Our results suggest a strong relationship between the weight of trend shocks in the source of fluctuations and economic development. The weight of trend shocks is (i) higher in SSA countries than in emerging and developed countries; (ii) negatively correlated with the level of income, the quality of institutions, and the size of the credit market; and (iii) uncorrelated with the aid received by countries, the ratio of trade-openness, the inflation rate, and government spending. |
| Keywords: | Business cycle; Permanent shocks; Growth; Africa; Small open economy |
| Date: | 2010–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00546287_v1&r=mac |
| By: | Nguyen, Quoc Hung |
| Abstract: | It is well known that several quantitative properties of international real business cycle models with are at odds with the data. First, the cross-country correlations are much higher for consumption than for output, while in the data the opposite is true (the BKK puzzle). Second, cross-country correlations of employment and investment are negative, while in the data they are positive. This paper quantitatively shows that preferences with a zero income effect on labor supply help generate a correct cross-country correlation in employment even without any restrictions on financial markets. In a bond economy, a zero income effect in labor supply, combined with time-to-build investment, can generate a positive cross-country correlation in investment, and the BKK puzzle is also resolved when the inter-temporal elasticity of substitution in labor supply is low. |
| Keywords: | International real business cycles, Income effects, GHH preferences, Business cycles, International economic relations, Consumption, Investments, Employment |
| JEL: | E21 E22 E24 E32 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper269&r=mac |
| By: | Itai Agur; Maria Demertzis |
| Abstract: | This paper shows that a rate hike has countervailing effects on banks’ risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator cannot optimally neutralize the welfare effects that the interest rate has through bank incentives. The larger the correlation between banks’ projects, the more important the role for monetary policy. In a dynamic setting, not internalizing bank risk leads a monetary authority to keep rates low for too long after a negative shock. |
| Keywords: | Monetary policy; Financial stability; Maturity mismatch; Leverage; Regulation |
| JEL: | E43 E52 E61 G21 G28 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:271&r=mac |
| By: | António Afonso; Ana Sequeira |
| Abstract: | We assess the business cycle synchronization features of aggregate output in the 27 EU countries using annual data for the period 1970-2009. In particular, we compute measures of synchronisation for private consumption, government spending, gross fixed capital formation, exports and imports. Our results show a rise in synchronization over the full period, and although private consumption is the biggest component of GDP, external demand tends to be a more important determinant of business cycle synchronization. |
| Keywords: | EU, business cycle synchronization. |
| JEL: | E32 F15 F41 F42 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp222010&r=mac |
| By: | Rao, B. Bhaskara; Cao, Cung |
| Abstract: | This paper examines the validity of Rudd and Whelan’s (2006) critiques of Gali and Gertler’s (1999) hybrid Phillips curve (HYPC) by re-estimating the HYPC using full information maximum likelihood (FIML). We also estimate HYPC with the constraint that the weights for the sum of forward looking and backward looking expectations should be unity. Our results support Rudd and Whelan’s conclusion that the weight for forward looking expectations is insignificant. |
| Keywords: | New Keynesian Phillips Curve; Price Rigidities; FIML Estimation |
| JEL: | E32 E31 |
| Date: | 2010–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27528&r=mac |
| By: | Lars Winkelmann |
| Abstract: | This paper investigates the information content of the Norges Bank’s key rate projections. Wavelet spectrum estimates provide the basis for estimating jump probabilities of short- and long-term interest rates on monetary policy announcement days before and after the introduction of key rate projections. The behavior of short-term interest rates reveals that key rate projections have only little effects on market’s forecasting ability of current target rate changes. In contrast, longer-term interest rates indicate that the announcement of key rate projections has significantly reduced market participants’ revisions of the expected future policy path. Therefore, the announcement of key rate projections further improves central bank communication. |
| Keywords: | Central bank communication, interest rate projections, wavelets, jump probabilities |
| JEL: | E52 E58 C14 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-062&r=mac |
| By: | Subhendu, Das |
| Abstract: | In each country the central bank is a privately owned bank with no transparency and accountability to the government of that country. It is also the only bank that can print the money for that country and does it so out of thin air. At the same time this bank wants that the government returns the money with interest. We show that this structure creates deficit, introduces tax, and causes poverty around the globe. This paper shows how central banks control the economy by manipulating the financial system it has designed. The paper explains how easily the central banks can control the unemployment, create recessions, and transfer wealth from the lower economic group to higher economic group and perpetuate the poverty. The paper also proposes three methods of eliminating central banks. |
| Keywords: | central banks; Federal Funds Rate; Recessions |
| JEL: | E0 E4 E3 |
| Date: | 2010–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27719&r=mac |
| By: | Fabio Ghironi (Boston College); Viktors Stebunovs (Board of Governors of the Federal Reserve System) |
| Abstract: | This paper studies the domestic and international effects of the transition to an interstate banking system implemented by the U.S. since the late 1970s in a dynamic, stochastic, general equilibrium model with endogenous producer entry. Interstate banking reduces the degree of local monopoly power of financial intermediaries. We show that the an economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The rest of the world experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to a moderation of firm-level and aggregate output volatility. In turn, trade and financial ties between the two countries in our model allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. The results of the model are consistent with features of the U.S. and international business cycle after the U.S. began its transition to interstate banking. |
| Keywords: | Business cycle volatility; Current account; Deregulation; Interstate banking; Producer entry; Real exchange rate |
| JEL: | E32 F32 F41 G21 |
| Date: | 2010–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:765&r=mac |
| By: | Pikkarainen, Pentti (Financial Markets, Ministry of Finance) |
| Abstract: | The paper concentrates on illustrating and assessing central banks’ liquidity operations during the crisis that started in August 2007. In addition to the ECB, the central banks of Sweden, Switzerland, the United Kingdom, Australia, Japan, Canada and the United States are analyzed. During the crisis the liquidity operations of central banks have converged. In many cases, central bank balance sheets have undergone extremely strong growth. The actions by central banks raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and their governance structure. |
| Keywords: | central banks; liquidity operations; balance sheets |
| JEL: | E32 E52 E58 |
| Date: | 2010–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2010_020&r=mac |
| By: | Hiroyuki Taguchi; Geethanjali Nataraj; Pravakar Sahoo (Policy Research Institute) |
| Abstract: | This paper examines the trends in monetary autonomy and its interaction with financial integration, currency regime and foreign reserves for the past two decades in select Asian countries viz., Thailand, Korea, Indonesia, Philippines, and India. Our main findings are as follows: First, Thailand, Korea and Indonesia, who experienced the change in currency regime towards a floating regime, have lowered the sensitivities of their interest rates (have raised monetary autonomy) after the regime change, while India without any change in currency regime has continued to raise the sensitivities of its interest rates (has lowered monetary autonomy) in line with increased financial integration. Second, in all sample economies, the accumulation of foreign reserves has contributed to retaining monetary autonomy in terms of preventing the sensitivities of interest rates from rising. We speculate that their accumulation might take a role as an anchor for monetary autonomy to the emerging market economies facing “fear of floating”. |
| Keywords: | monetary autonomy, financial integration, currency regime, foreign reserves, Asian emerging market economies, fear of floating |
| JEL: | E52 F33 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2459&r=mac |
| By: | Matros, Philipp; Weber, Enzo |
| Abstract: | The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques. |
| Keywords: | Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model |
| JEL: | E44 F31 C32 |
| Date: | 2010–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:18854&r=mac |
| By: | Tokuo Iwaisako; Keiko Okada (Policy Research Institute) |
| Abstract: | The decline in Japan's household saving rate accelerated sharply after 1998, but then decelerated again from 2003. Such nonlinear movement in the saving rate cannot be explained by the monotonic trend of population aging alone. According to the life cycle model of consumption and saving, population aging will increase short-run fluctuations in the saving rate, because the consumption of older households is less sensitive to income shocks. Analyzing income and spending data for different age groups, we argue that this is exactly what happened during the recession following the banking panic of 1997/98. Two important changes in income distribution are associated with this mechanism. First, the negative labor income shock, which in the initial stages of the lost decade was mostly borne by the younger generation, spread to older working households in the late 1990s and early 2000s. Second, there was a significant income shift from labor to shareholders associated with the corporate restructuring being undertaken during this time. This resulted in a decline in the wage share, so that the increase in corporate saving offset the decline in household saving. |
| Keywords: | Japan's saving rate, household saving, life cycle model, corporate saving, Lost Decade |
| JEL: | E2 E6 J4 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2456&r=mac |
| By: | Ernesto Sheriff (Universidad Privada Boliviana) |
| Abstract: | A new inflationary memory indicator was developed and applied here. A panel was built with the selected countries considering the economic growth as dependent variable in function of the convergence hypothesis, the inflation rate, the public expense and, the recursive variance of the inflation (VARINF) as inflationary memory indicator. The expected results of the panel were that the inflation and their variability affect the growth negatively neutralizing the possible effects that it could have the public expense on the same one. Five Latin American countries with experiences of high inflation were included (Argentina, Brazil, Bolivia, Peru and Nicaragua). |
| Keywords: | Inflationary memory, economic growth, Latin America |
| JEL: | E31 E65 D87 N16 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:adv:wpaper:201013&r=mac |
| By: | Young-Joon Park; Yonghyup Oh (Korea Institute for International Economic Policy) |
| Abstract: | This paper examines the ASEAN+3 cooperation of regional financial safety nets, and reviews the regional monetary issues of a single currency and currency competition in East Asia. We point out potential systemic risks in East Asia and the importance of regional surveillance. ASEAN+3 regional surveillance should move forward to the stronger measures of peer review and peer pressure, and make the AMRO a well-resourced professional surveillance secretariat to create capacity to apply independent conditionality. To this effective surveillance mechanism, we propose to establish the Board of Coordination to support the ASEAN+3 ERPD by confirming its decision or remitting the relevant case to the ASEAN+3 ERPD and providing possible legal consultation. The institution building of the CMIM secretariat will accelerate the establishment of a regional monetary institution, e.g. an Asian Monetary Fund. The current crisis provides sufficient incentives for East Asian economies to pursue internationalization of their currencies, and it would open the possibility towards a single currency in East Asia. |
| Keywords: | Regional financial safety nets, surveillance mechanism, CMIM, ABMI |
| JEL: | E61 F36 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2455&r=mac |
| By: | Xavier Raurich; Hector Sala; Valeri Sorolla (Universitat de Barcelona) |
| Keywords: | price markups, factor shares, elasticity of substitution |
| JEL: | E24 E25 E22 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2010250&r=mac |
| By: | Hannig, Alfred (Asian Development Bank Institute); Jansen, Stefan (Asian Development Bank Institute) |
| Abstract: | <p>The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion. <p>In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights: <p> - Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid financial behavior throughout financial crises, keeping deposits in a safe place and paying back their loans. <p> - Institutional risk profiles at the bottom end of the financial market are characterized by large numbers of vulnerable clients who own limited balances and transact small volumes. Although this profile may raise some concerns regarding reputational risks for the central bank and consumer protection, in terms of financial instability, the risk posed by inclusive policies is negligible. <p> - In addition, risks prevalent at the institutional level are manageable with known prudential tools and more effective customer protection. <p> - The potential costs of financial inclusion are compensated for by important dynamic benefits that enhance financial stability over time through a deeper and more diversified financial system. <p>In the following pages, we present the current state of financial inclusion globally. We also explore some trends in financial inclusion and what the most effective policies are to favor it. In doing so, we suggest that innovations aimed at countering financial exclusion may help strengthen financial systems rather than weakening them. |
| Keywords: | financial inclusion; financial stability; costs and benefits; current policy issues |
| JEL: | E44 G15 G18 G20 G21 G28 |
| Date: | 2010–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0259&r=mac |
| By: | Alfred Hannig; Stefan Jansen (Asian Development Bank Institute) |
| Abstract: | The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion. In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights: Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid financial behavior throughout financial crises, keeping deposits in a safe place and paying back their loans. Institutional risk profiles at the bottom end of the financial market are characterized by large numbers of vulnerable clients who own limited balances and transact small volumes. Although this profile may raise some concerns regarding reputational risks for the central bank and consumer protection, in terms of financial instability, the risk posed by inclusive policies is negligible. In addition, risks prevalent at the institutional level are manageable with known prudential tools and more effective customer protection. The potential costs of financial inclusion are compensated for by important dynamic benefits that enhance financial stability over time through a deeper and more diversified financial system. In the following pages, we present the current state of financial inclusion globally. We also explore some trends in financial inclusion and what the most effective policies are to favor it. In doing so, we suggest that innovations aimed at countering financial exclusion may help strengthen financial systems rather than weakening them. |
| Keywords: | finance, financial inclusion, financial systems |
| JEL: | E44 G15 G18 G20 G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2467&r=mac |
| By: | Andreas Irmen (University of Luxembourg and CESifo, Munich) |
| Abstract: | In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor. This confirms the assessment of Klump and de La Grandville (2000) that a greater elasticity of substitution allows for faster economic growth. However, unlike their findings my result applies to the steady-state growth rate. Moreover, it does not hinge on particular assumptions on how aggregate savings come about. It holds for any household sector allowing savings to grow at the same rate as aggregate output. |
| Keywords: | Capital Accumulation, Elasticity of Substitution, Direction of Technical Change, Neoclassical Growth Model. |
| JEL: | E22 O11 O33 O41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:10-21&r=mac |
| By: | Paulina Etxeberria-Garaigort (Department of Foundations of Economic Analysis II, University of the Basque Country); Amaia Iza (Department of Foundations of Economic Analysis II, University of the Basque Country) |
| Abstract: | This paper seeks to quantify to the extent to which price dynamics in Hong Kong are due to the Balassa-Samuelson hypothesis. From 1985 to 1998, the CPI in Hong Kong increased spectacularly, yet there was dramatic deflation from 1998 to 2006. This dynamics was mainly driven by the price pattern of the nontradable goods and services. We find that, the Balassa-Samuelson hypothesis seems to be a good explanation for the inflation differentials between Hong Kong and the US from 1985 to 1998. However, in the 1998-2006 period, we find that the Balassa-Samuelson hypothesis cannot explain the inflation di¤erentials between Hong Kong and the US. On the one hand, there is a significant deviation from the PPP in the price of tradable goods between both countries. On the other hand, the internal transmission of the Balassa-Samuelson hypothesis does not hold for either country. |
| Keywords: | Real Exchange Rate (RER), Balassa-Samuelson hypothesis, Ination |
| JEL: | E13 E32 F41 |
| Date: | 2010–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:201014&r=mac |
| By: | L. Randall Wray |
| Abstract: | This paper advances three fundamental propositions regarding money: (1) As R. W. Clower (1965) famously put it, money buys goods and goods buy money, but goods do not buy goods. (2) Money is always debt; it cannot be a commodity from the first proposition because, if it were, that would mean that a particular good is buying goods. (3) Default on debt is possible. These three propositions are used to build a theory of money that is linked to common themes in the heterodox literature on money. The approach taken here is integrated with Hyman Minsky’s (1986) work (which relies heavily on the work of his dissertation adviser, Joseph Schumpeter [1934]); the endogenous money approach of Basil Moore; the French-Italian circuit approach; Paul Davidson’s (1978) interpretation of John Maynard Keynes, which relies on uncertainty; Wynne Godley’s approach, which relies on accounting identities; the “K” distribution theory of Keynes, Michal Kalecki, Nicholas Kaldor, and Kenneth Boulding; the sociological approach of Ingham; and the chartalist, or state money, approach (A. M. Innes, G. F. Knapp, and Charles Goodhart). Hence, this paper takes a somewhat different route to develop the more typical heterodox conclusions about money. |
| Keywords: | Money; Credit; Debt; Uncertainty; Default; Unit of Account; Heterodox; Circuit Approach; Godley; Minsky; Knapp; Schumpeter; Endogenous Money |
| JEL: | E4 E5 E6 E11 E12 B5 B15 B22 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_647&r=mac |
| By: | Clements, Michael P. (University of Warwick) |
| Abstract: | We investigate two characteristics of survey forecasts that are shown to contribute to their superiority over purely model-based forecasts. These are that the consensus forecasts incorporate the effects of perceived changes in the long-run outlook, as well as embodying departures from the path toward the long-run expectation. Both characteristics on average tend to enhance forecast accuracy. At the level of the individual forecasts, there is scant evidence that the second characteristic enhances forecast accuracy, and the average accuracy of the individualforecasts can be improved by applying a mechanical correction. Keywords: consensus forecast, model-based forecasts, long-run expectations. |
| Keywords: | consensus forecast ; model-based forecasts ; long-run expectations JEL Classification: C53 ; E37 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:954&r=mac |
| By: | Richard Reid (Asian Development Bank Institute) |
| Abstract: | This paper seeks to add to the current debate about financial development and growth in the emerging world by looking at how different financial systems evolve: how and why financial structures change during various stages of development, how best to measure them, and seeing what practical policy lessons can be drawn from historical experience. Some financial structures may be better suited to growth at certain stages of development but they may be less well suited in other circumstances. In the search for optimal financial structure, rather than attempt to adopt another country’s particular structure it may be more fruitful for today’s emerging world to concentrate more on addressing the needs of savers and borrowers in each individual system. A major lesson for the emerging world from past financial development is that there are risks involved in transitioning from one framework to another. Too fast a change increases the danger that all the necessary regulatory, supervisory and educational changes may not keep pace with the financial changes. This can increase the susceptibility to instability and reduce resilience to shocks. |
| Keywords: | financial development, financial growth, regulatory changes |
| JEL: | E44 F00 F01 F02 G00 G15 G18 G20 G38 N00 N01 N20 N30 N40 O10 O16 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2470&r=mac |
| By: | Lars Boerner; Albrecht Ritschl |
| Abstract: | Communal responsibility, a medieval institution studied by Greif (2006), supported the use of credit among European merchants in the absence of modern enforcement technologies. This paper shows how this mechanism helps to overcome enforcement problems in anonymous buyer/seller transactions. In a village economy version of the Lagos and Wright (2005) model, agents trading anonymously in decentralized markets can be identified by their citizenship and thus be held liable for each other. Enforceability within each village's centralized afternoon market ensures collateralization of credit in decentralized markets. In the resulting equilibrium, money and credit coexist in decentralized markets if the use of credit is costly. Our analysis easily extends itself to other payment systems like credit cards that provide a group identity to otherwise anonymous agents. |
| Keywords: | Communal responsibility, anonymous matching, money demand, credit, bills of exchange |
| JEL: | E41 D51 N2 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-060&r=mac |
| By: | Martine AUDIBERT (Centre d'Etudes et de Recherches sur le Développement International); Pascale COMBES MOTEL (Centre d'Etudes et de Recherches sur le Développement International); Alassane DRABO |
| Abstract: | Relationships between health and economic prosperity or economic growth are difficult to assess. The direction of the causality is often questioned and the subject of a vigorous debate. For some authors, diseases or poor health had contributed to poor growth performances especially in low-income countries. For other authors, the effect of health on growth is relatively small, even if one considers that investments which could improve health should be done. It is argued in this paper that commonly used health indicators in macroeconomic studies (e. g. life expectancy, infant mortality or prevalence rates for specific diseases such as malaria or HIV/AIDS) imperfectly represent the global health status of population. Health is rather a complex notion and includes several dimensions which concern fatal (deaths) and non-fatal issues (prevalence and severity of cases) of illness. The reported effects of health on economic growth vary accordingly with health indicators and countries included in the analyses. The purpose of the paper is to assess the effect of a global health indicator on growth, the so-called disability-adjusted life year (DALY) that was proposed by the World Bank and the WHO in 1993. Growth convergence equations are run on 159 countries over the 1999-2004's period, where the potential endogeneity of the health indicator is dealt for. The negative effect of poor health on economic growth is not rejected thus reinforcing the importance of achieving MDGs. |
| Keywords: | Disease Global Burden, DALYs, economic growth, macroeconomic health impact, cross-country analysis |
| JEL: | E22 E24 I10 I18 O47 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1223&r=mac |
| By: | Dimitris K. Christopoulos; Karine Gente; Miguel A. Leon-Ledesma |
| Abstract: | Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high demestic savings, the RER only depends on productivity spread between two sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, the RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, the RER is mainly driven by productivity and net foreign assets in constrained countries and by productivity in unconstrained countries. |
| Keywords: | Real Exchange Rate; Capital Inflows Constraint; Overlapping Generations |
| JEL: | E39 F32 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1011&r=mac |
| By: | Nagayasu, Jun |
| Abstract: | This paper analyzes capital mobility within Japan based on the consumption-based correlation method developed by Obstfeld (1994). This thoery suggests that consumption in one region is closely related to that in other regions if the capital market is open. We test this theoretical implication in the panel data context using the dynamic factor model which enables us to estimate unobservable common factors. Then we provide evidence of perfect capital mobility and capital integration having advanced rapidly between 1965 and 1975. Furthermore, the common factor is found to affect regional consumption heterogeneously and to be closely associated with stock returns. |
| Keywords: | Capital mobility; Dynamic factor model |
| JEL: | E21 C33 F36 |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27720&r=mac |
| By: | Borissov, Kirill; Surkov, Alexander |
| Abstract: | We consider a Barro-type endogenous growth model in which the government’s purchases of goods and services enter into the production function. The provision of government services is financed by flat-rate (linear) income or lump-sum taxes. It is assumed that individuals differing in their discount factors vote on the tax rates. We propose a concept of voting equilibrium leading to some versions of the median voter theorem for steady-state equilibria, fully characterize steady-state equilibria and show that if the median voter discount factor is sufficiently low, the long-run rate of growth in the case of flat-rate income taxation is higher than that in the case of lump-sum taxation. |
| Keywords: | economic growth; voting; proportional; flat-rate; linear tax; lump-sum tax; heterogeneous agents; endogenous growth |
| JEL: | E62 H21 H31 H41 D91 D72 O4 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27517&r=mac |
| By: | Kontek, Krzysztof |
| Abstract: | This paper presents the functional relationship between two areas of interest in contemporary behavioral economics: one concerning choices under conditions of risk, the other concerning choices in time. The paper first presents the general formula of the relationship between decision utility, the survival function, and the discounting function, where decision utility is an alternative to Cumulative Prospect Theory in describing choices under risk (Kontek, 2010). The stretched exponential function appears to be a simple functional form of the resulting discounting function. Solutions obtained using more complex forms of decision utility and survival functions are also considered. These likewise lead to the stretched exponential discounting function. The paper shows that the relationship may also have other forms, including the hyperbolic functions typically used to describe the intertemporal experimental results. This solution has however several descriptive disadvantages, which restricts its common use in the description of lottery and intertemporal choices, and in financial asset valuations. |
| Keywords: | Discounted Utility; Hyperbolic Discounting; Decision Utility; Prospect Theory; Asset Valuation |
| JEL: | E43 G12 D81 D90 C91 |
| Date: | 2010–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27541&r=mac |
| By: | Felix Chan; Michael McAleer (University of Canterbury); Marcelo C. Medeiros |
| Abstract: | Nonlinear time series models, especially those with regime-switching and conditionally heteroskedastic errors, have become increasingly popular in the economics and finance literature. However, much of the research has concentrated on the empirical applications of various models, with little theoretical or statistical analysis associated with the structure of the processes or the associated asymptotic theory. In this paper, we first derive necessary conditions for strict stationarity and ergodicity of three different specifications of the first-order smooth transition autoregressions with heteroskedastic errors. This is important, among other reasons, to establish the conditions under which the traditional LMlinearity tests based on Taylor expansions are valid. Second, we provide sufficient conditions for consistency and asymptotic normality of the Quasi- Maximum Likelihood Estimator for a general nonlinear conditional mean model with first-order GARCH errors. |
| Keywords: | Nonlinear time series; regime-switching; smooth transition; STAR; GARCH; log-moment; moment conditions; asymptotic theory |
| JEL: | E43 Q11 Q13 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/79&r=mac |
| By: | Das, Rituparna |
| Abstract: | This paper demonstrates how, without mechanically applying any formula like Nelson-Siegel or Nelson-Siegel-Svensson straight cut, a short term yield curve can intuitively be constructed with traded securities and then plugging the gaps with regression and cubic splines on case by case basis, which contains market information and gives enough room to scenario analysis for designing portfolio strategies. Opportunity of short run arbitrage is found non-existent. In terms of further research there is scope of running time series regression of short rates on 3 month MIBOR and one dummy variable for the news of RBI’s auction of dated securities. The patterns of spot rates, forward rates and par rates are similarly flat because the market participants seem not take any trade decisions on the eve of RBI auction and inflationary information content. |
| Keywords: | yield curve; term structure; treasury bill; dated security; short rate; spot rate; par yield; forward rate |
| JEL: | E43 |
| Date: | 2010–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27553&r=mac |
| By: | Chia-Lin Chang (National Chung Hsing University); Li-Hsueh Chen (California State University-Los Angeles); Shawkat Hammoudeh (Drexel University); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University) |
| Abstract: | This paper examines the long- and short-run asymmetric adjustments for nine pairs of spot and futures prices, itemized as three own pairs for three different bio-fuel ethanol types, three own pairs for three related agricultural products, namely corn, soybeans and sugar, and three cross pairs that included hybrids of the spot price of each of the agricultural products and an ethanol futures price. Most of the spreads' asymmetric adjustments generally happen during narrowing. The three ethanol pairs that contain the eCBOT futures with each of Chicago spot, New York Harbor spot and Western European (Rotterdam) spot show different long- run adjustments, arbitrage profitable opportunities and price risk hedging capabilities. The asymmetric spread adjustments for the three grains are also different, with corn spread showing the strongest long-run widening adjustment, and sugar showing the weakest narrowing adjustment. Among others, the empirical analysis indicates the importance of potentially hedging the spot prices of agricultural commodities with ethanol futures contracts, which sends an important message that the ethanol futures market is capable of hedging price risk in agricultural commodity markets. The short-run asymmetric adjustments for individual prices in the nine pairs (with exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures. |
| Keywords: | Long-run and short-run asymmetric adjustments, ethanol, agricultural products, arbitrage opportunities, hedging, widening and narrowing adjustment. |
| JEL: | E43 Q11 Q13 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:752&r=mac |
| By: | Chia-Lin Chang; Li-Hsueh Chen; Shawkat Hammoudeh; Michael McAleer (University of Canterbury) |
| Abstract: | This paper examines the long- and short-run asymmetric adjustments for nine pairs of spot and futures prices, itemized as three own pairs for three different bio-fuel ethanol types, three own pairs for three related agricultural products, namely corn, soybeans and sugar, and three cross pairs that included hybrids of the spot price of each of the agricultural products and an ethanol futures price. Most of the spreads’ asymmetric adjustments generally happen during narrowing. The three ethanol pairs that contain the eCBOT futures with each of Chicago spot, New York Harbor spot and Western European (Rotterdam) spot show different long-run adjustments, arbitrage profitable opportunities and price risk hedging capabilities. The asymmetric spread adjustments for the three grains are also different, with corn spread showing the strongest long-run widening adjustment, and sugar showing the weakest narrowing adjustment. Among others, the empirical analysis indicates the importance of potentially hedging the spot prices of agricultural commodities with ethanol futures contracts, which sends an important message that the ethanol futures market is capable of hedging price risk in agricultural commodity markets. The short-run asymmetric adjustments for individual prices in the nine pairs (with exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures. |
| Keywords: | Long-run and short-run asymmetric adjustments; ethanol; agricultural products; arbitrage opportunities; hedging; widening and narrowing adjustment |
| JEL: | E43 Q11 Q13 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/78&r=mac |