Working papers results
Abstract
This paper studies empirically the effects of and the interactions amongst economic and
political liberalizations. Economic liberalizations are measured by a widely used indicator
that captures the scope of the market in the economy, and in particular of policies
towards freer international trade (cf. Sachs and Werner 1995, Wacziarg and Welch 2003).
Political liberalizations correspond to the event of becoming a democracy. Using a
difference-in-difference estimation, we ask what are the effects of liberalizations on
economic performance, on macroeconomic policy and on structural policies. The main
results concern the quantitative relevance of the feedback and interaction effects
between the two kinds of reforms. First, we find positive feedback effects between
economic and political reforms. The timing of events indicates that causality is more
likely to run from political to economic liberalizations, rather than viceversa, but we
cannot rule out feedback effects in both directions. Second, the sequence of reforms
matters. Countries that first liberalize and then become democracies do much better
than countries that pursue the opposite sequence, in almost all dimensions.
We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. However, in order to account for the observed persistence in the real exchange rate and
the large deviations from UIP, we need a large and volatile premium on foreign exchange.
Firing frictions and renegotiation costs affect worker and firm preferences
for rigid wages versus individualized Nash bargaining in a standard
model of equilibrium unemployment, in which workers vary by
observable skill. Rigid wages permit savings on renegotiation costs and
prevent workers from exploiting the firing friction. For standard calibrations,
the model can account for political support for wage rigidity
by both workers and firms, especially in labor markets for intermediate
skills. The firing friction is necessary for this effect, and reinforces
the impact of both turbulence and other labor market institutions on
preferences for rigid wages.
We analyse the evolution of the business cycle in the accession countries, after a careful examination of the seasonal properties of the available series and the required modification of the cycle dating procedures. We then focus on the degree of cyclical concordance within the group of accession countries, which turns out to be in general lower than that between the existing EU countries (the Baltic countries constitute an exception). With respect to the Eurozone, the indications of synchronization are also generally low and lower relative to the position obtaining for countries taking part in previous enlargements (with the exceptions of Poland, Slovenia and Hungary). In the light of the optimal currency area literature, these results cast doubts on the usefulness of adopting the euro in the near future for most accession countries, though other criteria such as the extent of trade and the gains in credibility may point in a different direction.
The accession of ten countries into the European Union makes the
forecasting of their key macroeconomic indicators such as GDP
growth, inflation and interest rates an exercise of some importance.
Because of the transition period, only short spans of reliable time series
are available which suggests the adoption of simple time series models
as forecasting tools, because of their parsimonious specification and
good performance. Nevertheless, despite this constraint on the span of
data, a large number of macroeconomic variables (for a given time
span) are available which are of potential use in forecasting, making the
class of dynamic factor models a reasonable alternative forecasting tool.
We compare the relative performance of the two forecasting approaches,
first by means of simulation experiments and then by using data for five
Acceding countries. We also evaluate the role of Euro-area information for
forecasting, and the usefulness of robustifying techniques such as
intercept corrections and second differencing. We find that factor models
work well in general, even though there are marked differences across
countries. Robustifying techniques are useful in a few cases, while
Euro-area information is virtually irrelevant.
The hazard rate of investment is derived within a real option model, and its properties
are analyzed in order to directly study the relation between uncertainty and investment.
Maximum likelihood estimates of the hazard are calculated using a sample of MNEs that
have invested in Central and Eastern Europe over the period 1990-1998. Employing a
standard, non-parametric specification of the hazard, our measure of uncertainty has a
negative effect on investment, but the reduced-form model is unable to control for nonlinearities
in the relationship. The structural estimation of the option-based hazard is
instead able to account for the non-linearities and exhibits a significant value of waiting,
though the latter is independent from our measure of uncertainty. This finding supports
the existence of alternative channels through which uncertainty can affect investment.
Equilibrium business cycle models have typically less shocks than variables.
As pointed out by Altug, 1989 and Sargent, 1989, if variables are measured with
error, this characteristic implies that the model solution for measured variables has
a factor structure. This paper compares estimation performance for the impulse
response coefficients based on a VAR approximation to this class of models and
an estimation method that explicitly takes into account the restrictions implied
by the factor structure. Bias and mean squared error for both factor based and
VAR based estimates of impulse response functions are quantified using, as data
generating process, a calibrated standard equilibrium business cycle model. We
show that, at short horizons, VAR estimates of impulse response functions are less
accurate than factor estimates while the two methods perform similarly at medium
and long run horizons.
This paper aims to test some implications of the Fiscal theory of
the price level (FTPL). We develop a model similar to Leeper (1991)
and Woodford (1996), but extended so to generate real effects of fiscal
policy also in the "Ricardian" regime, via an OLG demographic
structure. We test on the data the predictions of the FTPL as incorporated
in the model. We find that the US fiscal policy in the period
1960-1979 can be classified as "Non-Ricardian", while it is "Ricardian"
since 1990. According to our analysis, the fiscal theory of the
price level characterizes one phase of the post-war US history.
We use a quantitative model of the U.S. economy to analyze the response
of long-term interest rates to monetary policy, and compare the model results
with empirical evidence. We find that the strong and time-varying yield curve
response to monetary policy innovations found in the data can be explained by
the model. A key ingredient in explaining the yield curve response is central
bank private information about the state of the economy or about its own
target for inflation.
In this paper a simple dynamic optimization problem is solved with the help of
the recursive saddle point method developed by Marcet and Marimon (1999). According
to Marcet and Marimon, their technique should yield a full characterization
of the set of solutions for this problem. We show though, that while their method
allows us to calculate the true value of the optimization program, not all solutions
which it admits are correct. Indeed, some of the policies which it generates as
solutions to our problem, are either suboptimal or do not even satisfy feasibility.
We identify the reasons underlying this failure and discuss its implications for the
numerous existing applications.