Working papers results
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.
We analyze welfare maximizing monetary policy in a dynamic general equilibrium two-country
model with price stickiness and imperfect competition. In this context, a typical terms
of trade externality affects policy interaction between independent monetary authorities. Unlike
the existing literature, we remain consistent to a public finance approach by an explicit
consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails
two main advantages. First, it allows an accurate characterization of optimal policy in an economy
that evolves around a steady state which is not necessarily efficient. Second, it allows to describe
a full range of alternative dynamic equilibria when price setters in both countries are completely
forward-looking and households' preferences are not restricted. We study optimal policy both in
the long-run and in response to shocks, and we compare commitment under Nash competition
and under cooperation. By deriving a second order accurate solution to the policy functions,
we also characterize the welfare gains from international policy cooperation.
Abstract
In this paper we concentrate on the hypothesis that the empirical
rejections of the Expectations Theory (ET) of the term structure of interest
rates can be caused by improper modelling of expectations. Our
starting point is an interesting anomaly found by Campbell-Shiller (1987),
when by taking a VAR approach they abandon limited information
approach to test the ET, in which realized returns are taken as a proxy for
expected returns. We use financial factors and macroeconomic information
to construct a test of the theory based on simulating investors'
effort to use the model in 'real time' to forecast future monetary policy
rates. Our findings suggest that the importance of fluctuations of risk
premia in explaining the deviation from the ET is reduced when some
forecasting model for short-term rates is adopted and a proper evaluation
of uncertainty associated to policy rates forecast is considered.
Employment protection legislations (EPL) are not enforced uniformly across the board. There are a number of exemptions to the coverage
of these provisions: firms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive rovisions. This within country variation in enforcement allows to make inferences on the impact of EPL which go beyond the usual cross-country approach. In this paper we develop a simple model which explains why these exemptions are in place to start with. Then we empirically assess the effects of EPL on dismissal probabilities, based on a double-difference approach. Our results are in line with the predictions of the theoretical model. Workers in firms exempted from EPL are more likely to be laid-off We do not observe this effect in the case of temporary workers. There is no effect of the exemption threshold on the growth of firms.