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Table of ContentsAssessing Competitiveness and Real Exchange Rate Misalignment in Low-Income Countries Social Security Coverage and the Labor Market in Developing Countries Three Minimal Market Institutions: Theory and Experimental Evidence Soaring Minds: The Flight of Israel's Economists The Growth Effect of Democracy: Is it Heterogeneous and How Can it be Estimated? Inflation Dynamics and Trade Openness Liquidity Traps, Learning and Stagnation Testing the Sticky Information Phillips Curve Gordian Knots of the 21st Century Do Federal Funds Futures Need Adjustment for Excess Returns? A State-Dependent Approach A Quarterly Post-World War II Real GDP Series for New Zealand On the Suboptimality of Path-Dependent Pay-Offs in Lévy Markets | |||||||||
MACROECONOMICS ABSTRACTS"Assessing Competitiveness and Real Exchange Rate Misalignment in Low-Income Countries"
C. GABRIEL DI BELLA, International Monetary Fund (IMF)
Assessing a country's competitiveness routinely starts with an analysis of the real exchange rate. However, in low-income countries, empirical analysis of the real exchange rate is often subject to important limitations that seriously weaken the results. This paper summarizes the methodologies used to assess real exchange rate misalignments and discusses the range of obstacles common to low-income countries. Recognizing the importance of using a wide range of indicators for assessing competitiveness in low-income countries, the paper discusses alternative competitive measures and then proposes a template of indicators to allow for a systematic assessment of competitiveness in low-income countries. The template is then used to rank countries according to their competitiveness performance in 2006.
"Social Security Coverage and the Labor Market in Developing Countries"
PAULA AUERBACH, Inter-American Development Bank (IADB) This paper examines the reasons behind the low rates of participation in old age pension programs in developing countries. Using a large set of harmonized household surveys from Latin America we assess how much of the low participation can be explained by involuntary rationing out of jobs with benefits versus how much can be instead explained by workers' low willingness/ability to contribute towards such programs. We compare contribution patterns among wage employees, for whom participation is compulsory, with contribution patterns among self-employed workers, for whom participation is often voluntary. For both types of workers the probability of contributing to old age pension programs is similarly correlated with education, earnings, size of the employer, household characteristics and age. Our results indicate that on average at least 20-30 percent of the explained within-country variance in participation patterns can be accounted for by individuals' low willingness to participate in old-age pension programs. Nonetheless, we also find evidence suggesting that some workers are rationed out of social security against their will. "Three Minimal Market Institutions: Theory and Experimental Evidence"
JUERGEN HUBER, University of Innsbruck, University of Vienna - Department of Finance We define and examine the performance of three minimal strategic market games in laboratory relative to their theoretical predictions. These closed exchange economies have limited amounts of cash to facilitate transactions, and include feedback unlike open or partial equilibrium settings of most experiments. Without a role for money or credit, and abstracting away from market mechanisms, general equilibrium theory makes no predictions about how paths of convergence to the CE may differ across alternative markets. Our laboratory data reveal different paths of convergence to CE, and different levels of allocative efficiency in the three settings. The results suggest that abstraction from institutional details may have been taken too far, and, for example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may help us understand markets better. "Soaring Minds: The Flight of Israel's Economists"
DAN BEN-DAVID, Tel Aviv University - Eitan Berglas School of Economics, Centre for Economic Policy Research (CEPR), NBER
Despite their small number, Israeli economists have become an important fixture in the international academic scene. In recent years, this phenomenon has been characterized by an additional attribute: the number of Israelis who have chosen to leave the country's universities - or not to return to them - a process that has brought Israel's top economics departments to the brink.
"The Growth Effect of Democracy: Is it Heterogeneous and How Can it be Estimated?"
TORSTEN PERSSON, Stockholm University - Institute for International Economic Studies (IIES), London School of Economics & Political Science (LSE), National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR) We estimate the effect of political regime transitions on growth with semi-parametric methods, combining difference in differences with matching, that have not been used in macroeconomic settings. Our semi-parametric estimates suggest that previous parametric estimates may have seriously underestimated the growth effects of democracy. In particular, we find an average negative effect on growth of leaving democracy on the order of -2 percentage points implying effects on income per capita as large as 45 percent over the 1960-2000 panel. Heterogenous characteristics of reforming and non-reforming countries appear to play an important role in driving these results. "Inflation Dynamics and Trade Openness"
JANINE ARON, University of Oxford - Department of Economics It is difficult to obtain reliable measures of evolving openness to trade, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices. "Liquidity Traps, Learning and Stagnation"
GEORGE W. EVANS, University of Oregon - Department of Economics We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals. "Testing the Sticky Information Phillips Curve"
OLIVIER COIBION, College of William and Mary, University of Michigan at Ann Arbor - Department of Economics I consider the empirical evidence for the sticky information model of Mankiw and Reis (2002) relative to the basic sticky price model, conditional on historical measures of inflation forecasts. Overall, the evidence is unfavorable to the sticky information model of price-setting: the estimated structural parameters are inconsistent with an underlying sticky information model and the sticky-information Phillips Curve is statistically dominated by the New Keynesian Phillips Curve. I find that the poor performance of the sticky information approach is driven by two key elements. First, predicted inflation in the sticky information model places substantial weight on old forecasts of inflation. Because these consistently underestimate inflation in the 1970s and overestimate inflation since the 1980s, particularly at long forecast horizons, predicted inflation from the sticky information model inherits these patterns. Second, predicted inflation from the sticky information model is excessively smooth. "Gordian Knots of the 21st Century"
PAWEL OPALA, National Bank of Poland
In this paper we identify four Gordian Knots of the global economy in the 21st century, that is 1) limits to growth: scarce energy and natural disasters, 2) aging of the developed world and the 21st century as the age of migration, 3) the rise of China and the failure of democracy, and 4) rising significance of global financial markets and emergence of new global players.
"Do Federal Funds Futures Need Adjustment for Excess Returns? A State-Dependent Approach"
BRENT BUNDICK, Federal Reserve Bank of Kansas City This paper utilizes a Markov-switching framework to model excess returns in federal funds futures contracts. This framework identifies a high-volatility state where excess returns are large, positive, and volatile and a low-volatility state where excess returns have a lower volatility and are small in absolute value. Federal funds futures rates require adjustment for excess returns only in the high-volatility state. Intermeeting rate cuts of the federal funds rate target always correspond with the high-volatility regime and can explain much of the variation in excess returns. This paper also examines previous return models and helps clarify the relationship between excess returns, business cycles, and intermeeting rate cuts. In real-time forecasting, however, the unadjusted futures rates outperform three different forecasting models. This result strengthens the case for unadjusted futures rates as a measure of monetary policy expectations. "A Quarterly Post-World War II Real GDP Series for New Zealand"
VIV HALL, Victoria University of Wellington - School of Economics & Finance There are no official quarterly real GDP estimates for New Zealand for the period prior to 1977. We develop a seasonally adjusted series for 1947q2 to 2006q2, by linking quarterly observations from two recent official series to temporally disaggregated observations for an earlier time period. Annual real GDP series are disaggregated, using the information from two quarterly diffusion indexes, developed by Haywood and Campbell (1976). Three econometric models are used: the Chow and Lin (1971) model that disaggregates the level of GDP; and the Fernández (1981) and Litterman (1983) models that disaggregate changes in GDP. Statistical properties of the series are evaluated, and movements in the new series are benchmarked against qualitative research findings from New Zealand's post-WWII economic history. Our preferred quarterly series is based on results generated from the Chow-Lin model. "On the Suboptimality of Path-Dependent Pay-Offs in Lévy Markets"
STEVEN VANDUFFEL, Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE) Cox & Leland (2000) use techniques from the field of stochastic control theory to show that in the particular case of a Brownian motion for the asset returns all risk averse decisionmakers with a fixed investment horizon prefer path-independent payoffs over path-dependent ones. We will provide a novel and simple proof for the Cox & Leland result and we will extend it to general, not necessarily complete, Lévymarkets. It is also shown that in these markets optimal path-independent pay-offs have final values increasing with the underlying asset value. Our results imply that path-dependent investment payoffs, the use of which is widespread in financial markets, do not appear to offer good value for risk averse decisionmakers with a fixed investment horizon. | |||||||||
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Solicitation of Abstracts
Macroeconomics publishes working and accepted paper abstracts of empirical and theoretical papers in macroeconomics. This includes business cycles and economic growth, inflation, unemployment, the behavior of various components of aggregate demand (consumption, residential and nonresidential investment and net exports) and studies of savings, budget deficits and technical progress. The topics in this journal include E1, E2, E3 and E6 from Section E of the classification system of the JEL.
Distribution ServicesIf your Institution is interested in learning more about increasing readership for its research by becoming a Partner in Publishing or starting a Research Paper Series, please email: Management@SSRN.com. Distributed by:Advisory BoardMacroeconomics, Archives of Vols. 1-13, 1996-2008 OLIVIER J. BLANCHARD JOHN Y. CAMPBELL STEPHEN G. CECCHETTI BENJAMIN M. FRIEDMAN ROBERT E. HALL ROBERT E. LUCAS BENNETT T. MCCALLUM ALLAN H. MELTZER FREDERIC S. MISHKIN PAUL M. ROMER JULIO J. ROTEMBERG MATTHEW D. SHAPIRO ROBERT J. SHILLER CHRISTOPHER A. SIMS JOHN B. TAYLOR
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