|
on Macroeconomics |
|
Issue of 2012‒04‒10
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Guangling (Dave) Liu |
| Abstract: | The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey (2001) show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that, with a moderate level of cost-channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model. |
| Keywords: | Monetary policy, price puzzle, inflation targeting, New Keynesian model, Bayesian analysis |
| JEL: | E52 E31 E58 E12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:275&r=mac |
| By: | Singh, Aarti; Stone, Sophie |
| Abstract: | We study whether central banks should respond to asset prices in their policy rules. Using a modified version of Bernanke, Gertler and Gilchrist's (1999) model—a standard dynamic stochastic general equilibrium New Keynesian model with a financial accelerator effect—we explore how equilibrium determinacy is impacted when the central bank reacts to asset prices. Our results indicate that by reacting to asset price movements in its Taylor-type nominal interest rate feedback rule, a central bank makes determinacy of the rational expectations equilibrium more likely relative to a standard policy rule where the central bank does not react to asset prices. |
| Keywords: | financial accelerator; determinacy; monetary policy; Asset prices |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/8187&r=mac |
| By: | Nobuhiro Kiyotaki; John Moore |
| Abstract: | The paper presents a model of a monetary economy where there are differences in liquidity across assets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used, first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969). |
| JEL: | E10 E44 E50 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17934&r=mac |
| By: | Carvalho, Vasco M; Martin, Alberto; Ventura, Jaume |
| Abstract: | Over the last two decades U.S. aggregate wealth has fluctuated substantially. Against the backdrop of the Great Recession, the effects of these boom-and-bust cycles have come to dominate academic and policy discussions. How can we explain these fluctuations in wealth? Why are these fluctuations associated with changes in consumption, investment and output? In this note, we argue that answers to these questions entail the addition of two ingredients to existent macroeconomic models: rational bubbles and financial frictions. We explain why each of these building blocks is crucial to understand recent events and how they can be seamlessly integrated in standard models |
| Keywords: | bubbles; bubbly episodes; dynamic inefficiency; economic growth; financial frictions |
| JEL: | E32 E44 O40 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8924&r=mac |
| By: | Inoue, Takeshi; Toyoshima, Yuki; Hamori, Shigeyuki |
| Abstract: | This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature. |
| Keywords: | Southeast Asia, Indonesia, Thailand, Philippines, South Korea, Inflation, Business cycles, Asia, Business cycle synchronization, DCC, Inflation targeting |
| JEL: | E31 E32 E52 E58 F42 F44 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper328&r=mac |
| By: | Florin Bilbiie (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Fabio Ghironi (Department of Economics - Boston College); Marc Melitz (Department of Economics - Harvard university (Cambridge, USA)) |
| Abstract: | This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to sunk entry costs and a time-to-build lag) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The return to investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts procyclical product variety and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can simultaneously reproduce most of the variance of GDP, hours worked, and total investment found in the data. |
| Keywords: | Business cycle propagation; Entry; Markups; Product creation; Profits; Variety |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00680634&r=mac |
| By: | Giorgio Fagiolo; Andrea Roventini |
| Abstract: | The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework - the New Neoclassical Synthesis - grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects - known in the literature as agent-based computational economics (ACE) - and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises. |
| Keywords: | Economic Policy, Monetary and Fiscal Policies, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Great Recession, Crisis |
| JEL: | B41 B50 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-17&r=mac |
| By: | Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze) |
| Abstract: | We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system’s dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region. |
| Keywords: | inflation targeting, monetary policy, adaptive expectations, heterogeneous agents |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:flo:wpaper:2012-03&r=mac |
| By: | Rüdiger Bachmann; Tim O. Berg; Eric R. Sims |
| Abstract: | There have recently been suggestions for monetary policy to engineer higher inflation expectations so as to stimulate current spending. But what is the empirical relationship between inflation expectations and spending? We use the underlying micro data from the Michigan Survey of Consumers to test whether increased inflation expectations are indeed associated with greater reported readiness to spend. Cross-sectional data deliver the necessary variation to test whether the relationship between inflation expectations and spending changes in the recent zero lower bound regime compared to normal times, as suggested by many standard models. We find that the impact of inflation expectations on the reported readiness to spend on durable goods is statistically insignificant and small in absolute value when compared to other variables, such as household income or expected business conditions. Moreover, it appears that higher expected price changes have an adverse impact on the reported readiness to spend. A one percent increase in expected inflation reduces the probability that households have a positive attitude towards spending by about 0.1 percentage points. At the zero lower bound this small adverse effect remains, and is, if anything, slightly stronger. We also extend our analysis to the reported readiness to spend on cars and houses and obtain similar results. Altogether our results tell a cautionary tale for monetary (or fiscal) policy designed to engineer inflation expectations in order to generate greater current spending. |
| JEL: | D12 E21 E31 E52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17958&r=mac |
| By: | Artuc, Erhan; Pourpourides, Panayiotis M. |
| Abstract: | The research and development (R&D) sector is considered one of the main driving forces of sustainable growth in the long run. The sector, however, also shows excessive volatility and is one of the important sources of macroeconomic fluctuations. Using data from the United States Bureau of Economic Analysis and National Science Foundation, we show how significant technology innovations'contributions are to improve sector productivity and the efficiency of physical capital. After taking nominal innovations into consideration, such as shocks in monetary policy and inflation, capital innovations explain 70 percent of fluctuations of real investment in R&D, while productivity innovations in the R&D sector explain 30 percent of the variation in the output of the non-R&D sectors. Technology innovations explain most of the variation of output in the R&D sector and 78 percent of the variation of output in the rest of the economy. Although the R&D sector is relatively small, it has a significant impact on the fluctuations of aggregate output. |
| Keywords: | E-Business,Economic Theory&Research,Political Economy,Research and Development,Labor Policies |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6017&r=mac |
| By: | Bodenstein, Martin; Guerrieri, Luca; Kilian, Lutz |
| Abstract: | The recent volatility in global commodity prices and in the price of oil, in particular, has created renewed interest in the question of how monetary policy makers should respond to oil price fluctuations. In this paper, we discuss why this question is ill-posed and has no general answer. The central message of our analysis is that the best central bank policy response to oil price fluctuations depends on why the price of crude oil has changed. For example, an unexpected oil supply disruption in the Middle East calls for a different policy response than an unexpected increase in Chinese productivity or oil intensity. This means that policy makers need to disentangle the structural shocks that are jointly driving the price of oil and the macroeconomy and tailor their response to the observed mix of shocks. We use a multi-country DSGE model to quantify the appropriate policy responses and to analyze the optimal responses from a welfare point of view. We also reexamine the welfare gains from global monetary policy coordination in a world with trade in oil. |
| Keywords: | endogeneity; global economy; monetary policy; oil price; open economy; policy rule; welfare |
| JEL: | E32 E43 F32 Q43 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8928&r=mac |
| By: | Marcelo Ferman |
| Abstract: | In this paper I propose a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. I show that, once the possibility of regime switches in the short-rate process is incorporated into investors beliefs, the average slope of the yield curve generally will contain a new component called .level risk.. Level-risk estimates, based on a Markov-Switching VAR model of the U.S. economy, are then provided. I find that the level risk was large and negative during the Great Inflation, reflecting a possible switch to lower short-rate levels in the future. Since the mid-1980s the level risk has been moderate and positive, reflecting a small but still relevant possibility of a return to the regime of the 1970s. I replicate these results in a Markov- Switching dynamic general equilibrium model, where the monetary policy rule followed by the Fed shifts between an active and a passive regime. The model also explains why in recent decades the U.S. yield curve on average has been steeper than the yield curve in countries that adopted explicit inflation targeting frameworks. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp678&r=mac |
| By: | Coroneo, Laura (University of Manchester, Economics - School of Social Sciences); Corradi, Valentina (University of Warwick, Department of Economics); Santos Monteiro, Paulo (University of Warwick, Department of Economics) |
| Abstract: | The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy. Key words: Bootstrap ; GMM ; Moment Inequalities ; Optimal Monetary Policy. JEL Classification: C12 ; C52 ; E52 ; E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:985&r=mac |
| By: | Damill, Mario; Frenkel, Roberto |
| Abstract: | This paper examines the macroeconomic policies and outcomes experienced by the Latin American economies during the period 1990-2010. Macroeconomic policies refer to exchange rates, monetary and aggregate fiscal policies, while macroeconomic outcomes, on the other hand, refer to the patterns of growth, inflation, employment, investment, balance of payments, and the evolution of external and public debts and international reserves. The analysis includes a discussion of the effects of macroeconomic outcomes on poverty rates. With regard to policy, the study examines the changes that took place in 1997-98, and then reviews the resulting new macroeconomic configuration that was established in 2002-03. This new configuration favoured the acceleration of output growth and employment creation, and contributed to reducing poverty rates. |
| Keywords: | Latin American economies, macroeconomic policies, economic growth, employment, poverty rates, inequality |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-23&r=mac |
| By: | Cristiano Cantore; Filippo Ferroni; Miguel A León-Ledesma |
| Abstract: | We investigate the time variation in the correlation between hours and technology shocks using a structural business cycle model. We propose an RBC model with a Constant Elasticity of Substitution (CES) production function that allows for capital- and labor-augmenting technology shocks. We estimate the model using US data with Bayesian techniques. In the full sample, we find (i) evidence in favor of a less than unitary elasticity of substitution (rejecting Cobb-Douglas) and (ii) a sizable role for capital augmenting shock for business cycles fluctuations. In rolling sub-samples, we document that the impact of technology shocks on hours worked varies over time and switches from negative to positive towards the end of the sample. We argue that this change is due to the increase in the elasticity of factor substitution. That is, labor and capital became less complementary throughout the sample inducing a change in the sign and size of the the response of hours. We conjecture that this change may have been induced by a change in the skill composition of the labor input. |
| Keywords: | Real Business Cycles models; Constant Elasticity of Substitution production function; Hours worked dynamics |
| JEL: | E32 E37 C53 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1201&r=mac |
| By: | Eo, Yunjong; Kim, Chang-Jin |
| Abstract: | In this paper, we relax the assumption of constant regime-specific mean growth rates in Hamilton's (1989) two-state Markov-switching model of the business cycle. We first present a benchmark model, in which each regime-specific mean growth rate evolves according to a random walk process over different episodes of booms or recessions. We then present a model with vector error correction dynamics for the regime-specific mean growth rates, by deriving and imposing a condition for the existence of a long-run equilibrium growth rate for real output. In the Bayesian Markov Chain Monte Carlo (MCMC) approach developed in this paper, the counterfactual priors, as well as the hierarchical priors for the regime-specific parameters, play critical roles. By applying the proposed model and approach to the postwar real GDP growth data (1947Q4-2011Q3), we uncover the evolving nature of the regime-specific mean growth rates of real output in the U.S. business cycle. An additional feature of the postwar U.S. business cycle that we uncover is a steady decline in the long-run equilibrium output growth. The decline started in the mid-1950s and ended in the mid-1980s, coinciding with the beginning of the Great Moderation. Our empirical results also provide partial, if not decisive, evidence that the central bank has been more successful in restoring the economy back to its long-run equilibrium growth path after unusually severe recessions than after unusually good booms. |
| Keywords: | State- Space Model; MCM; Hamilton Model; Markov Switching; Hierarchical Prior; Evolving Regime- Specific Parameters; Counterfactual Prior; Business Cycle; Bayesian Approach |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/8150&r=mac |
| By: | Stefano d'Addona (Department of International Studies, University of Rome 3); Ilaria Musumeci (Department of International Studies, University of Rome 3) |
| Abstract: | We analyze the current state of monetary integration in Europe, focusing on the United Kingdom’s position regarding the European Monetary Union (EMU). The interest rate decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor rule. Comparison of the monetary conduct of these two institutions provides useful guidance in identifying the differences that the British Government claims motivating its refusal to join the EMU. Testing for forward-looking behavior and possible asymmetries in policy responses, we show evidence supporting the opt-out decision taken by the British Government. |
| Keywords: | Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing |
| JEL: | E32 E52 |
| Date: | 2012–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:225&r=mac |
| By: | Ippei Fujiwara; Kozo Ueda |
| Abstract: | We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using a standard New Open Economy Macroeconomics (NOEM) model, an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies. |
| JEL: | E52 E62 E63 F41 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-17&r=mac |
| By: | Seitz, Franz; Rösl, Gerhard; Bartzsch, Nikolaus |
| Abstract: | In this paper, we analyze the volume of euro banknotes issued by Germany within the euro area with several seasonal methods. We draw a distinction between movements within Germany, circulation outside Germany but within the euro area and demand from non-euroarea countries. Our approach suggests that only about 20% of euro notes issued by Germany are used for transactions in Germany. The rest is hoarded (10%), circulates in other euro area countries (25%) or is held outside the euro area (45%). -- In dem vorliegenden Papier analysieren wir die Emissionen von Euro-Banknoten durch die Deutsche Bundesbank anhand verschiedener saisonaler Ansätze. Wir unterscheiden zwischen der Nachfrage aus Deutschland, der Haltung in anderen Euro-Ländern und Umlauf außerhalb des Euro-Währungsgebiets. Es stellt sich heraus, dass nur ca. 20 % der emittierten Banknoten für Transaktionszwecke in Deutschland gebraucht werden. Der Rest wird aus unterschiedlichen Gründen gehortet (10 %), läuft in anderen EWU-Ländern um (25 %) oder wird außerhalb des Euro-Raums gehalten. |
| Keywords: | Banknotes,euro,foreign demand,hoarding,transaction balances |
| JEL: | E41 E42 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hawdps:30&r=mac |
| By: | Rafal Raciborski; Julia Lendvai; Lukas Vogel |
| Abstract: | The paper studies the impact of a securities transaction tax (STT) on financial trading, stock prices and real economic variables in a closed-economy dynamic stochastic general-equilibrium model featuring financial frictions. The model incorporates channels by which 'noise trading' affects real economic volatility. Firms' investment expenditure is related to the value of their outstanding shares. The model is calibrated to stylised facts of financial trading and firms' financing. The simulations suggest distortive effects of the STT on real variables similar to those of corporate income taxation. At the same time, the STT reduces economic volatility, but this stabilisation gain is quantitatively modest. |
| JEL: | E22 E44 E62 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0450&r=mac |
| By: | Hilary W. Hoynes; Douglas L. Miller; Jessamyn Schaller |
| Abstract: | In this paper we examine how business cycles affect labor market outcomes in the United States. We conduct a detailed analysis of how cycles affect outcomes differentially across persons of differing age, education, race, and gender, and we compare the cyclical sensitivity during the Great Recession to that in the early 1980s recession. We present raw tabulations and estimate a state panel data model that leverages variation across US states in the timing and severity of business cycles. We find that the impacts of the Great Recession are not uniform across demographic groups and have been felt most strongly for men, black and Hispanic workers, youth, and low education workers. These dramatic differences in the cyclicality across demographic groups are remarkably stable across three decades of time and throughout recessionary periods and expansionary periods. For the 2007 recession, these differences are largely explained by differences in exposure to cycles across industry-occupation employment. |
| JEL: | J11 J21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17951&r=mac |
| By: | Clemens J.M. Kool; Daniel L. Thornton |
| Abstract: | In this paper, we use survey forecasts to investigate the impact of forward guidance on the predictability of future short- and long-term interest rates in four countries: New Zealand, Norway, Sweden, and the United States. New Zealand began providing forward guidance in 1997, Norway in 2005, and Sweden in 2007. The United States had two periods of implicit forward guidance: 2003-2005 and 2008-2011. Overall, we find little or no convincing evidence that forward guidance actually improves markets' ability to forecast future rates or that any improvement in forecasting short-term rates is reflected in longer-term yields. The weak support we do find is at the short end of the yield curve and at relatively short forecast horizons and only for Norway and Sweden. There is no evidence that forward guidance has increased the efficacy of monetary for New Zealand, the country with the longest--15-year--forward guidance history. |
| Keywords: | monetary policy; central bank transparency; interest rates; term structure; forecasting |
| JEL: | E52 E43 E47 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1205&r=mac |
| By: | V. Ragupathy; K. Vela Velupillai |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpas:1210&r=mac |
| By: | Jesse Rothstein |
| Abstract: | Four years after the beginning of the Great Recession, the labor market remains historically weak. Many observers have concluded that "structural" impediments to recovery bear some of the blame. This paper reviews such structural explanations. I find that there is little evidence supporting these hypotheses, and that the bulk of the evidence is more consistent with the hypothesis that continued poor performance is primarily attributable to shortfalls in the aggregate demand for labor. |
| JEL: | E24 E32 E6 J21 J3 J63 J64 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17966&r=mac |
| By: | Jagjit S. Chadha |
| Abstract: | Global real interest rates were driven up in the 1980s, partly to encourage disinflation, while subsequently structural and conjunctural factors have driven rates to lower levels. The increase in the global pool of savings and the fiscal correction associated with the long economic expansion from 1992 to 2007 had put downward pressure on real rates and the extraordinary monetary policy responses since 2008 have sustained that trend into negative territory. The initial consequences of low real rates in the early part of this century had been to elevate asset prices, promote leverage in financial institutions and, as a counterparty, increase private sector indebtedness. The management of deleveraging by policymakers implies setting a low path for real rates along the yield curve by using a combination of traditional and non-traditional monetary and fiscal policies for as long as the economic dislocation persists. Facing a public and private debt overhang, low real rates help the adjustment of global balance sheets but cannot be driven low permanently by policymakers. My analysis suggests that there are two regimes for real rates; those for normal times are positive and vary with the global economic cycle, while those that deal with economic dislocation are negative. Once growth is secured, real rates will rise quickly to more normal levels, not least because, in order to limit any increase in funding costs that may result from capital inadequacy (apparent or real), banks themselves have a considerable appetite for capital, and that will also start to crank up real rates given a fixed pool of savings. It therefore seems likely that, over the medium term, real yields are likely to be in the range of 2-4%, rather than their current levels. |
| Keywords: | Real rates; trends; globalisation |
| JEL: | E31 E40 E51 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1205&r=mac |
| By: | Pierpaolo Benigno; Federica Romei |
| Abstract: | Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances. |
| JEL: | E52 F32 F41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17944&r=mac |
| By: | Christian Buelens |
| Abstract: | This paper analyses how euro area inflation forecasts have been affected by the financial and economic crisis. Its first objective is to evaluate the accuracy of three representative groups of inflation forecasting models (rules of thumb and benchmark models; autoregressive moving average models; autoregressive distributed lag models) under a direct and an indirect approach, respectively. The second objective of the paper is to study how the absolute and relative forecasting performances of the models and approaches have been impacted by the economic and financial crisis. The paper finds that direct forecasting models selected on the basis of a penalty function generally dominate simple benchmark models. The analysis furthermore suggests that when an appropriate specification for the component-specific models is found, indirect forecasts outperform the corresponding direct forecasts. Nonetheless, in line with the findings from earlier studies, there are insufficient elements to assert a systematic superiority of one of the two approaches. Concerning the second objective, the across-the-board rise in the forecast errors of all models considered, confirms that inflation forecasting has become substantially more difficult after the onset of the crisis. However, the deterioration of the different models has been uneven: indeed, direct autoregressive distributed lag models and indirect models improved in relative terms during the crisis. |
| JEL: | C32 C52 C53 E31 E37 E58 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0451&r=mac |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| Abstract: | Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output. |
| Keywords: | E44, F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:22-2011&r=mac |
| By: | Balázs Égert |
| Abstract: | This paper addresses difficulties in modelling exchange rates in South Africa. Real exchange rate models of earlier research seem to be sensitive to the sample period considered, alternative variable definition, data frequency and estimation methods. Alternative exchange rate models proposed in this paper including the stock-flow approach and variants of the monetary model are not fully robust to data frequency and alternative estimation periods, either. Nevertheless, adding openness to the stock-flow approach and augmenting the monetary model with share prices and the country risk premium improves significantly the fit of the models around the large (nominal and real) depreciation episodes of 2002 and 2008. Interestingly, real commodity prices do not help explain the large depreciations. While these models do a reasonably good job in-sample, their out-of-sample forecasting properties remain poor. |
| Keywords: | exchange rate, real exchange rate, nominal exchange rate, commodity, Balassa-Samuelson, productivity, monetary model, stock-flow approach, openness, country risk |
| JEL: | E31 F31 O11 P17 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-18&r=mac |
| By: | R. Anton Braun; Lena Mareen Körber; Yuichiro Waki |
| Abstract: | A growing body of recent research examines the nonlinearity created by a zero lower bound on the nominal interest rate. It is common practice in the literature to log-linearize the other equilibrium restrictions around a deterministic steady state with a stable price level. This paper shows that the resulting log-linearized equilibria can have some very unpleasant properties. We make this point using a tractable stochastic New Keynesian model that admits an exact solution. We characterize the log-linearized equilibrium. This characterization is highly misleading. Using the log-linearized equilibrium conditions gives incorrect results about existence and uniqueness of equilibrium and provides an incorrect classification of the types of zero-bound equilibria that can arise in the true economy. These problems are severe. For instance, using empirically relevant parameterizations of the model labor falls in response to a tax cut in the log-linearized economy but rises in the true nonlinear economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2012-05&r=mac |
| By: | Lukas Vogel |
| Abstract: | The paper extends the QUEST III model by home production to discuss fiscal limits in an economy with tax avoidance. It finds that revenue-maximising labour and corporate tax rates in the benchmark model are relatively high (54% and 72%) compared to current EU-average implicit tax rates. No such limit is found for the consumption tax. Higher substitutability between market and home production flattens the Laffer curves for labour and corporate taxation and introduces one for the consumption tax. Although higher tax rates raise additional tax revenue, the economic costs of higher distortionary taxation in terms of output contraction are substantial. |
| JEL: | E62 H20 H30 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0448&r=mac |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| Abstract: | We show in a tractable, multi-country OLG model that cross-country differences in financial development explain three recent empirical patterns of international capital fl ows. International capital mobility affects output in each country directly through the size of domestic investment as well as indirectly through the composition of domestic investment and the level of domestic savings. In contrast to earlier literature, our model admits the possibility that the indirect effects dominate the direct effects and international capital mobility raises output in the poor country and globally, although net capital flows are in the direction of the rich country. Our model adds to the understanding of the benefits of international capital mobility in the presence of financial frictions. |
| Keywords: | financial frictions, financial development, foreign direct investment |
| JEL: | E44 F41 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:20-2011&r=mac |
| By: | Russell Cooper; Guan Gong; Ping Yan |
| Abstract: | This paper studies the employment and productivity implications of new labor regulations in China. These new restrictions are intended to protect workers' employment conditions by, among other things, increasing firing costs and increasing compensation. We estimate a model of costly labor adjustment from data prior to the policy. We use the estimated model to simulate the effects of the policy. We find that increases in severance payments lead to sizable job creation, a significant reduction in labor reallocation and an increase in the exit rate. A policy of credit market liberalization will reduce employment, slightly increase labor reallocation and reduce exit. The estimated elasticity of labor demand is about unity so that an increase in the base wage leads to sizable job losses. |
| JEL: | E24 J08 J23 O38 O53 P2 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17948&r=mac |
| By: | Florin Bilbiie (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Roland Straub (Research Department - European Central Bank) |
| Abstract: | Recent estimates of the output Euler equation for the United States indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero. We first argue that this result may hide a structural break: the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965-1979 and 1982-2003. The sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition. We outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high, and provide institutional evidence for such a change in the United States in the late 70s and early 80s. |
| Keywords: | IS curve; Euler equation for output; limited asset markets participation; aggregate demand; rule-of-thumb consumers |
| Date: | 2012–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00680647&r=mac |
| By: | Clements, Michael P. (University of Warwick, Department of Economics) |
| Abstract: | The recent literature has suggested that macroeconomic forecasters may have asymmetric loss functions, and that there may be heterogeneity across forecasters in the degree to which they weigh under and over-predictions. Using an individual-level analysis that exploits the SPF respondents’ histogram forecasts, we find little evidence of asymmetric loss for the in‡ation forecasters. Key words: Disagreement ; forecast uncertainty ; asymmetric loss ; Survey of Professional Forecasters JEL Classification: C53 ; E31 ; E37 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:986&r=mac |
| By: | Martin S. Eichenbaum; Nir Jaimovich; Sergio Rebelo; Josephine Smith |
| Abstract: | Recent empirical work suggests that small price changes are relatively common. These findings have been used to evaluate competing theories of nominal price rigidities. In this paper we use micro data from the consumer price index and a scanner data set from a national supermarket chain to reassess the importance of small price changes. We argue that the vast majority of these changes are due to measurement error. We conclude that small price changes are too small a phenomenon for macro modelers to be concerned with. |
| JEL: | E3 E4 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17956&r=mac |
| By: | Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Fabio Di Dio (Consip S.p.A., Macroeconomic Modelling Unit); Francesco Felici (Italian Ministry of Economy and Finance,) |
| Abstract: | Since the second half of 2011, after a period of prolonged low growth, Italy has found itself at the center of a severe economic crisis. Concerns about the sustainability of its debt burden, along with gloomy growth prospects, have pushed up the cost of government borrowing, exacerbating current economic conditions. At the moment Italy is facing two mounting economic challenges: (i) achieve a rapid fiscal consolidation to restore financial market confidence; (ii) implement structural reforms to strengthen medium-term growth prospects. Using the European Commission's model QUEST III with R&D, adapted to Italy, we quantify the potential effects of a set of interventions inspired to the reform packages currently being undertaken or under discussion and consider different levels of policy effort. Results show that reforms are likely to bring about sizable gains in output, consumption, employment and net foreign assets position and that most of these gains derive from labor market reforms. However, the fiscal austerity plan is likely to severely mitigate the positive effects of the interventions, especially during the earlier phases of the reform process. Most of these losses accrue to liquidity-constraint households who would experience a drop in consumption. |
| Keywords: | Structural Reforms, Fiscal Consolidation, Simulation Analysis, Italy |
| JEL: | E10 E60 E47 |
| Date: | 2012–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:227&r=mac |
| By: | Dufresne, Daniel; Vázquez-Abad, Felisa |
| Abstract: | The classical cobweb theorem is extended to include production lags and price forecasts. Price forecasting based on a longer period has a stabilizing effect on prices. Longer production lags do not necessarily lead to unstable prices; very long lags lead to cycles of constant amplitude. The classical cobweb requires elasticity of demand to be greater than that of supply; this is not necessarily the case in a more general setting, price forecasting has a stabilizing effect. Random shocks are also considered. -- |
| Keywords: | Cobweb theorem,production lags,stable markets,price fluctuations |
| JEL: | C02 C62 C65 D58 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201217&r=mac |
| By: | Alvaro Hernando Chaves Castro |
| Abstract: | Este documento analiza la dinámica de la inflación colombiana para el periodo 1984 - II a 2008 – IV, a partir de una Curva de Phillips Neokeynesiana Híbrida (HNKPC por sus siglas en inglés). El modelo teórico que describe el proceso inflacionario se caracteriza por incorporar fundamentos de tipo microeconómico e incorpora por un lado, cierto tipo de imperfecciones reales (rigidez del salario real) y por otro, shocks por el lado de la oferta, como lo es la variación del precio de las materias primas, que pueden constituirse en una fuente importante de fluctuaciones económicas en el corto plazo. Mediante el método de Variables Instrumentales (IV) se estima econométricamente la curva NKPC, introduciendo algunos quiebres estructurales de forma exógena con el fin de analizar las variaciones de la tasa de inflación con respecto a su valor de estado estable o de largo plazo. Los resultados muestran un muy buen ajuste de la inflación colombiana a la especificación NKPC y por otro lado, se encuentra que al incorporar un término de inflación futura en la ecuación, el signo negativo del componente rezagado de la inflación se corrige plenamente. Al introducir en la ecuación datos sobre pronósticos inflacionarios que se derivan de la Encuesta de Expectativas Inflacionarias (EEI), como proxy de la inflación futura, se encuentra que la ponderación que recibe la inflación futura en la NKPC es estadísticamente significativa y diferente de cero, al tiempo que se corrigen los problemas de especificación del modelo. Dicho resultado es más evidente después de un proceso desinflacionista suscitado a partir de febrero de 2009, que coincide con un quiebre estructural para la inflación que resulta ser en magnitud y dirección estadísticamente significativo. Las implicaciones de política que se desprenden a partir de la evidencia empírica sugieren que en el diseño de la política monetaria se debería enfrentar no solo el objetivo de estabilizar la brecha entre el producto observado y potencial, sino ponderar de igual manera el objetivo atinente al bienestar económico. |
| Date: | 2011–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000418:009405&r=mac |
| By: | Carmen M. Reinhart |
| Abstract: | We document that the global scope and depth of the crisis the began with the collapse of the subprime mortgage market in the summer of 2007 is unprecedented in the post World War II era and, as such, the most relevant comparison benchmark is the Great Depression (or the Great Contraction, as dubbed by Friedman and Schwartz, 1963) of the 1930s. Some of the similarities between these two global episodes are examined but the analysis of the aftermath of severe financial crises is extended to also include the most severe post-WWII crises as well. As to the causes of these great crises, we focus on those factors that are common across time and geography. We discriminate between root causes of the crises, recurring crises symptoms, and common features (such as misguided financial regulation or inadequate supervision) which serve as amplifiers of the boom-bust cycle. There are recurring temporal patterns in the boom-bust cycle and their broad sequencing is analyzed. |
| JEL: | E32 E44 E50 F30 F33 G01 N20 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17941&r=mac |
| By: | Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA) |
| Abstract: | The view is widespread that there are just two options for the future of the Eurozone – either it is complemented by a fiscal union, or it will fall apart. In this paper, we discuss five possible elements of a fiscal union, of which three are in the centre of the current debate on fiscal union in the Eurozone. Second, we argue that the fiscal union will only work if political integration in Europe goes significantly beyond the current state of affairs. Third, we suggest an alternative approach, which places less emphasis on centralised fiscal policy coordination and focuses on financial sector reform, decentralised responsibility for government debt and sovereign debt restructurings in the case of fiscal crises. |
| Keywords: | Fiscal Union, EU, EMU, Euro, ESM |
| JEL: | E62 H77 H87 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp39&r=mac |
| By: | Jeremy Greenwood (University of Pennsylvania); Juan M. Sanchez (Federal Reserve Bank of St. Louis); Cheng Wang (Iowa State University) |
| Abstract: | How important is financial development for economic development? A costly state veriÂ…cation model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the worldÂ’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between UgandaÂ’s potential and actual output. |
| Keywords: | costly state veriÂ…cation, economic development, Â…financial intermediation, fiÂ…rm-size distribution, interest-rate spreads, cross-country output differences, cross-country differences in Â…financial sector productivity, cross-country TFP differences |
| JEL: | E13 O11 O16 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:572&r=mac |
| By: | Eric Ruscher; Guntram Wolff |
| Abstract: | Using national account data, we define corporate balance sheet adjustment episodes as periods during which major increases in non-financial corporations' net lending/borrowing are experienced. An analysis of such episodes in Germany and Japan, and a more systematic exploration of a sample of 30 countries, show that corporate balance sheet adjustment tends to be long lasting and associated with significant effects on current accounts, wages and investment. The adjustment is generally achieved by reducing investment and increasing savings on the back of a falling wage share. A panel econometric exercise shows that balance sheet adjustment periods are triggered by macroeconomic downturns as well as balance sheet stress due to high debt, low liquidity and negative equity price shocks. |
| JEL: | E62 H20 H30 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0449&r=mac |
| By: | Gorecki, Paul K. |
| Abstract: | This paper analyses the conduct of competition policy in Ireland between 2000 and 2011. Attention is paid to the policies and actions of those persons and institutions responsible for competition policy: the Minister for Jobs, Enterprise and Innovation; the Competition Authority; the Courts; and, since 2010, the European Union and the International Monetary Fund. Competition policy after some initial setbacks at the beginning of the recession, has enjoyed strong support since 2010. |
| Keywords: | competition/COMPETITION POLICY/Ireland/Policy/recession/European Union |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp427&r=mac |
| By: | Claudia FORONI; Massimiliano MARCELLINO |
| Abstract: | Forecast models that take into account unbalanced datasets have recently attracted substantial attention. In this paper, we focus on different methods pro- posed so far in the literature to deal with mixed-frequency and ragged-edge datasets: bridge equations, mixed-data sampling (MIDAS), and mixed-frequency (MF) models. We discuss their performance on now- and forecasting the quarterly growth rate of Euro area GDP and its components, using a very large set of monthly indicators taken from Eurostat dataset of Principal European Economic Indicators (PEEI). We both investigate the behavior of single indicator models and combine first the forecasts within each class of models and then the information in the dataset by means of factor models, in a pseudo real-time framework. Anticipating some of the results, MIDAS without an AR component performs worse than the corresponding approach which incorporates it, and MF-VAR seems to outperform the MIDAS approach only at longer horizons. Bridge equations have overall a good performance. Pooling many indicators within each class of models is overall superior to most of the single indicator models. Pooling information with the use of factor models gives even better results, at least at short horizons. A battery of robustness checks high- lights the importance of monthly information during the crisis more than in stable periods. Extending the analysis to a real-time context highlights that revisions do not influence substantially the results. |
| Keywords: | mixed-frequency data; mixed-frequency VAR; MIDAS; factor models; nowcasting; forecasting |
| JEL: | E37 C53 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2012/07&r=mac |
| By: | Benjamin Eden (Department of Economics, Vanderbilt University) |
| Abstract: | I examine the implementation of the Friedman rule under the assumption that age dependent lump sum transfers are possible and private intermediation is costly. This is done both in an infinitely lived agents model and in an overlapping generations model. I argue that in addition to a zero nominal-interest-rate policy (the so called Friedman rule) a transfer to young agents, or a government loan program is required for satiating agents with real balances. The paper also contributes to the understanding of Friedman's original article and discusses related questions about the size of the financial sector. It is shown that the adoption of the (modified) Friedman rule will crowd out private lending and borrowing. I also look at the social value of a market for contingent claims and argue that resources spent on operating a market for accidental nominal bequests are a waste from the social point of view in spite of the fact that individuals have an incentive to trade in such markets. |
| Keywords: | The Friedman Rule, Accidental bequests, The optimal size of the financial sector, Government loans |
| JEL: | E40 E52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1202&r=mac |