Evidence on the Effects of Inflation on Price Dispersion under Indexation
Juliane Scharff, S. Schreiber
Empirical Economics,
No. 1,
2012
Abstract
Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices, those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative price or inflation variability, RPV). Using US sectoral price data, we estimate such a relationship between inflation and RPV, also taking into account the endogeneity of inflation by using two- and three-stage least-squares and GMM techniques, which turns out to be relevant. We find an effect of (expected) inflation on RPV, and our results indicate that average (“trend”) inflation is important for the RPV-inflation relationship. Lagged inflation matters for indexation in the CPI data, but is not important empirically in the PPI data.
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Human Capital Mobility and Convergence. A Spatial Dynamic Panel Model of the German Regions
Alexander Kubis, Lutz Schneider
Abstract
Since the fall of the iron curtain in 1989, the migration deficit of the Eastern part of Germany has accumulated to 1.8 million people, which is over 10 percent of its ini-tial population. Depending on their human capital endowment, these migrants might either – in the case of low-skilled migration – accelerate or – in high-skilled case– impede convergence. Due to the availability of detailed data on regional human capital, migration and productivity growth, we are able to test how geographic mobil-ity affects convergence via the human capital selectivity of migration. With regard to the endogeneity of the migration flows and human capital, we apply a dynamic panel data model within the framework of β-convergence and account for spatial depend-ence. The regressions indicate a positive, robust, but modest effect of a migration surplus on regional productivity growth. After controlling for human capital, the effect of migration decreases; this decrease indicates that skill selectivity is one way that migration impacts growth.
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Technological Intensity of Government Demand and Innovation
Viktor Slavtchev, Simon Wiederhold
Abstract
Governments purchase everything from airplanes to zucchini. This paper investigates whether the technological intensity of government demand affects corporate R&D activities. In a quality-ladder model of endogenous growth, we show that an increase in the share of government purchases in high-tech industries increases the rewards for innovation, and stimulates private-sector R&D at the aggregate level. We test this prediction using administrative data on federal procurement performed in US states. Both panel fixed effects and instrumental variable estimations provide results in line with the model. Our findings bring public procurement within the realm of the innovation policy debate.
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Monetary Policy in a World Where Money (Also) Matters
Makram El-Shagi, Sebastian Giesen
IWH Discussion Papers,
No. 6,
2012
Abstract
While the long-run relation between money and inflation as predicted by the quantity theory is well established, empirical studies of the short-run adjustment process have been inconclusive at best. The literature regarding the validity of the quantity theory within a given economy is mixed. Previous research has found support for quantity theory within a given economy by combining the P-Star, the structural VAR and the monetary aggregation literature. However, these models lack precise modelling of the short-run dynamics by ignoring interest rates as the main policy instrument. Contrarily, most New Keynesian approaches, while excellently modeling the short-run dynamics transmitted through interest rates, ignore the role of money and thus the potential mid-and long-run effects of monetary policy. We propose a parsimonious and fairly unrestrictive econometric model that allows a detailed look into the dynamics of a monetary policy shock by accounting for changes in economic equilibria, such as potential output and money demand, in a framework that allows for both monetarist and New Keynesian transmission mechanisms, while also considering the Barnett critique. While we confirm most New Keynesian findings concerning the short-run dynamics, we also find strong evidence for a substantial role of the quantity of money for price movements.
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What Drives Banking Sector Fragility in the Eurozone? Evidence from Stock Market Data
Stefan Eichler, Karol Sobanski
Journal of Common Market Studies,
No. 4,
2012
Abstract
This article explores the determinants of banking sector fragility in the eurozone. For this purpose, a stock-market-based banking sector fragility indicator is calculated for eight member countries from 1999 to 2009 using the Merton model (1974). Using a panel framework, it is found that the macroeconomic environment, the structure of the banking sector and the intensity of banking regulation all have an effect on banking sector fragility in the eurozone.
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Protect and Survive? Did Capital Controls Help Shield Emerging Markets from the Crisis?
Makram El-Shagi
Economics Bulletin,
No. 1,
2012
Abstract
Using a new dataset on capital market regulation, we analyze whether capital controls helped protect emerging markets from the real economic consequences of the 2009 financial and economic crisis. The impact of the crisis is measured by the 2009 forecast error of a panel state space model, which analyzes the business cycle dynamics of 63 middle-income countries. We find that neither capital controls in general nor controls that were specifically targeted to derivatives (that played a crucial role during the crisis) helped shield economies. However, banking regulation that limits the exposure of banks to global risks has been highly successful.
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Introducing Financial Frictions and Unemployment into a Small Open Economy Model
Mathias Trabandt, Lawrence J. Christiano, Karl Walentin
Journal of Economic Dynamics & Control,
No. 12,
2011
Abstract
Which are the main frictions and the driving forces of business cycle dynamics in an open economy? To answer this question we extend the standard new Keynesian model in three dimensions: we incorporate financing frictions for capital, employment frictions for labor and extend the model into a small open economy setting. We estimate the model on Swedish data. Our main results are that (i) a financial shock is pivotal for explaining fluctuations in investment and GDP. (ii) The marginal efficiency of investment shock has negligible importance. (iii) The labor supply shock is unimportant in explaining GDP and no high frequency wage markup shock is needed.
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Labor Demand During the Crisis: What Happened in Germany?
Claudia M. Buch
IZA. Discussion Paper No. 6074,
2011
Abstract
In Germany, the employment response to the post-2007 crisis has been muted compared to other industrialized countries. Despite a large drop in output, employment has hardly changed. In this paper, we analyze the determinants of German firms’ labor demand during the crisis using a firm-level panel dataset. Our analysis proceeds in two steps. First, we estimate a dynamic labor demand function for the years 2000-2009 accounting for the degree of working time flexibility and the presence of works councils. Second, on the basis of these
estimates, we use the difference between predicted and actual employment as a measure of labor hoarding as the dependent variable in a cross-sectional regression for 2009. Apart from total labor hoarding, we also look at the determinants of subsidized labor hoarding through short-time work. The structural characteristics of firms using these channels of adjustment differ. Product market competition has a negative impact on total labor hoarding but a positive effect on the use of short-time work. Firm covered by collective agreements hoard less labor overall; firms without financial frictions use short-time work less intensively.
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Inflation Expectations: Does the Market Beat Professional Forecasts?
Makram El-Shagi
North American Journal of Economics and Finance,
No. 3,
2011
Abstract
The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation, we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect.
The extracted unexpected inflation is compared to the forecasting errors of ten
econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which
are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
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The Impact of Fixed Exchange Rates on Fiscal Discipline
Makram El-Shagi
Scottish Journal of Political Economy,
No. 5,
2011
Abstract
In this paper, it is shown that, contrary to standard arguments, fiscal discipline is not substantially enhanced by a fixed exchange rate regime. This study is based on data from 116 countries collected from 1975 to 2004 and uses various estimation techniques for dynamic panel data, in particular a GMM estimation in the tradition Arellano and Bover (1995) and Blundell and Bond (1998). Contrary to previous papers on this topic, the present paper takes into account that the consequences of a new exchange rate regime do not necessarily fully manifest immediately.
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