Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0701 Title: Uninsurable Risk and Financial Market Puzzles Author-Name: Parantap Basu Author-Name: Andrei Semenovz Author-Name: Kenji Wadax Abstract: This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0701.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0702 Title: Modelling multilateral trade resistance in a gravity model with exchange rate regimes Author-Name: Christopher Adam Author-Name: David Cobham Author-Person: pco208 Abstract: In estimating a gravity model it is essential to analyse not just bilateral trade resistance, the barriers to trade between a pair of countries, but also multilateral trade resistance (MTR), the barriers to trade that each country faces with all its trading partners. Without correctly modelling MTR, it is impossible either to obtain accurate estimates of the effects on trade of exchange rate regimes and other variables or to perform accurate counterfactual simulations of trade patterns under other assumptions about exchange rate regimes or other variables. In this paper we implement a number of different ways of modelling MTR ?both for a standard gravity model and for an extended model which includes a full range of bilateral exchange rate regimes ?notably several variants of the technique developed by Baier and Bergstrand (2006), which turn out to produce broadly similar results. We then illustrate our preferred approach by carrying out simulations of the effects of the creation of an East African currency union and the effects of a withdrawal from EMU by Italy. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0702.pdf File-Format: Application/pdf Classification-JEL: F10, F33, F49. Keywords: gravity, geography, trade, exchange rate regime, currency union, transactions costs, multilateral trade resistance. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0703 Title: Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings Author-Name: Max Gillman Author-Email: gillmanm@cf.ac.uk Author-Name: Michal Kejak Abstract: The paper presents a general equilibrium that can explain ten related sets of empirical results, providing a unified approach to understand usually disparate effects typically treated separately. These are grouped into two sets, one on financial development, investment and inflation, and one on inflations effect on other economy-wide variables such as growth, real interest rates, employment, and money demand. The unified approach also contributes a systematic explanation of certain nonlinearities that are found across these results, as based on the production function for financial intermediary services and the resultant money demand function. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0703.pdf File-Format: Application/pdf Classification-JEL: C23, E44, O16, O42. Keywords: Inflation, financial development, growth, exchange credit production Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0704 Title: Information, heterogeneity and market incompleteness in the stochastic growth model Author-Name: Liam Graham Author-Name: Stephen Wright Abstract: We provide a microfounded account of imperfect information in the stochastic growth model which dramatically changes the properties of the model. We describe heterogenous households that acquire information about aggregates through their participation in markets. If markets are incomplete, household information will be imperfect. We solve the model taking account of the infinite regress of expectations that this lack of information implies. We derive analytical and numerical results to show that imperfect information can significantly change the properties of the model: under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0704.pdf File-Format: Application/pdf Classification-JEL: D52; D84; E32. Keywords: imperfect information; higher order expectations; Kalman filter; dynamic general equilibrium Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0705 Title: Winners and Losers in Housing Markets Author-Name: Nobuhiro Kiyotaki Author-Name: Alexander Michaelides Author-Name: Kalin Nikolov Abstract: This paper is a quantitatively-oriented theoretical study into the interaction between housing prices, aggregate production, and household behaviour over a lifetime. We develop a life-cycle model of a production economy in which land and capital are used to build residential and commercial structures. We find that, in an economy where the share of land in the value of structures is large, housing prices react more to an exogenous change in expected productivity or the world interest rate, causing large redistribution effects between net buyers and net sellers of houses. Changing the financing constraint, however, has limited effects on housing prices. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0705.pdf File-Format: Application/pdf Classification-JEL: E21. Keywords: Real estates, Land, Housing Prices, Life cycle, Collateral constraints. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0706 Title: Country Portfolio Dynamics Author-Name: Michael B Devereux Author-Name: Alan Sutherland Abstract: This paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0706.pdf File-Format: Application/pdf Classification-JEL: E52, E58, F41. Keywords: Country portfolios, solution methods. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0707 Title: Taylor Rules Cause Fiscal Policy Ineffectiveness Author-Name: Guido Ascari Author-Name: Neil Rankin Abstract: With the aim of constructing a dynamic general equilibrium model where fiscal policy can operate as a demand management tool, we develop a framework which combines staggered prices and overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make tax cuts, financed by increasing government debt, effective in raising short-run output. Surprisingly, in our baseline model this fails to occur. We trace the cause to the assumption that monetary policy is governed by a Taylor Rule. If monetary policy is instead governed by a money supply rule, fiscal policy effectiveness is restored. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0707.pdf File-Format: Application/pdf Classification-JEL: E62, E63. Keywords: staggered prices, overlapping generations, fiscal policy effectiveness, Taylor Rules. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0708 Title: Real and Nominal Wage Rigidity in a Model of Equal-Treatment Contracting Author-Name: Jonathan Thomas Author-Name: Andy Snell Abstract: This paper analyses a model with downward rigidities in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wages and unemployment. We solve for the dynamics of wages and unemployment under conditions of downward wage rigidity, where forward looking firms take into account these constraints. Using simulated productivity data based on the post-war US economy, we analyse the ability of the model to match certain stylised labour market facts. Creation-Date: 2007-11 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0708.pdf File-Format: Application/pdf Classification-JEL: E32, J41. Keywords: Labour contracts, business cycle, unemployment, equal treatment, downward rigidity, cross-contract restrictions. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0709 Title: Testing a DSGE model of the EU using indirect inference Author-Name: David Meenagh Author-Name: Patrick Minford Author-Name: Michael Wickensy Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. If the errors are scaled down, then the original model marginally passes the Wald test. We compare a New Classical version of the model which passes the test but generates a combination of excessive inflation variance and inadequate output variance. If the large consumption and investment errors are removed as possibly due to low frequency events, then the New Classical version passes easily while the original version is strongly rejected. Creation-Date: 2007-11 Revision-Date: 2008-03 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0709.pdf File-Format: Application/pdf Classification-JEL: C12, C32. Keywords: Bootstrap, DSGE Model, VAR model, Model of EU, indirect inference, Wald statistic. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0710 Title: Saddlepath Learning Author-Name: Martin Ellison Author-Name: Joseph Pearlman Abstract: Saddlepath learning occurs when agents know the form but not the coefficients of the sad?dlepath relationship defining rational expectations equilibrium. Under saddlepath learning, we obtain a completely general relationship between determinacy and e-stability, and generalise Min?imum State Variable results previously derived only under full information. When the system is determinate, we show that a learning process based on the saddlepath is always e-stable. When the system is indeterminate, we find there is a unique MSV solution that is iteratively e-stable. However, in this case there is a sunspot solution that is learnable as well. We conclude by demon?strating that our results hold for any information set. Creation-Date: 2010-02 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0710.pdf File-Format: Application/pdf Classification-JEL: C60, E00. Keywords: e-stability, determinacy, learning, saddlepath stability.