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Growth and Business Cycle Research Group

Discussion papers 2011

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Berardi, M., (2011). 'Heterogeneous sunspots solutions under learning and replicator dynamics', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 160.

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In a linear stochastic forward-looking univariate model with predetermined variables, we consider the possibility of heterogeneous equilibria with sunspots emerging endogenously through adaptive learning and replicator dynamics. In particular, we investigate equilibria where only a fraction of agents in the economy condition their forecasts on a sunspot, and equilibria where different groups of agents use different sunspots. We conclude that, although such heterogeneous equilibria exist and can be stable under adaptive learning, they do no survive under endogenous replicator dynamics. Moreover, we show that even homogeneous sunspot equilibria require some degree of coordination among agents for them to emerge in an economy. We conclude that heterogeneous equilibria with sunspots are fragile under endogenous selection of predictors by agents, and that even the relevance of homogeneous sunspot equilibria is questioned once agents are allowed to doubt about the importance of sunspots in their forecasts.


Galimberti, J.K., Moura, M.L., (2011). "Improving the reliability of real-time Hodrick-Prescott filtering using survey forecasts" , Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 159.

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Incorporating survey forecasts to a forecast-augmented Hodrick-Prescott filter, we evidence a considerable improvement to the reliability of US output-gap estimation in real time. Odds of extracting wrong signals of output-gap estimates are found to reduce by almost a half, and the magnitude of revisions to these estimates accounts to only three fifths of the output-gap average size, usually an one-by-one ratio. We further analyse how this end-of-sample uncertainty evolves as time goes on and observations accumulate, showing that a 90% rate of correct assessments of the output-gap sign can be attained with five quarters of delay using survey forecasts.


Blackburn, K., Forgues-Puccio, G.F., (2011). "Foreign aid - a fillip for development or a fuel for corruption?" , Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 158.

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We present an analysis of the effects of foreign aid on economic development when the quality of governance may be compromised by corruption. The analysis is based on a dynamic general equilibrium model in which growth is driven by capital accumulation and public policy is administered by government-appointed bureaucrats. Corruption may arise due to the opportunity for bureaucrats to embezzle public funds which are otherwise used to provide productive public goods and services. Our main results may be summarised as follows: (1) corruption impedes economic development and compromises the effectiveness of aid programmes; (2) the incidence of corruption may, itself, be affected by both the development process and the donation of aid; (3) foreign aid is good for development when governance is good, but may be bad (perhaps very bad) for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, …fixtures of an economy.


Berardi, M., (2011). 'Strategic interactions, incomplete information and learning', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 157.

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In a model of incomplete, heterogeneous information, with externalities and strategic interactions, we analyse the possibility of adaptive learning to act as coordination device. We build on the framework introduced by Angeletos and Pavan (2007) and extend it to a setting where agents need to learn to coordinate. We analyse conditions under which learning obtains, and show that adaptive learning can solve the problem of socially inefficient coordination.


Berardi, M., (2011). 'On the stability properties of optimal interest rules under learning', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 155.

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In recent literature on monetary policy, it has been argued that a sensible policy rule should be able to induce learnability of the fundamental equilibrium: if private agents update their beliefs over time using adaptive learning techniques, they should be able to converge towards rationality. Evans and Honkapohja (2003) showed that in a New Keynesian model an expectations based rule has such a desirable property, while a fundamentals based one does not. In order to implement an expectations based rule, though, the policymaker needs to observe private sector expectations. We show that there exists an alternative rule, based only on fundamentals, that can achieve the same positive results in terms of stability of private sector’s learning dynamics. Moreover, such a rule is learnable by the policymaker, and the combined learning dynamics of the private sector and the central bank make the economy converge to the fundamental equilibrium.


Agénor, P-R., Alper, K., Pereira da Silva, L., (2011). 'Capital Regulation, Monetary Policy and Financial Stability', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 154.

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This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker's concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.


Artis, M., Chouliarakis, G., Harischandra, P.K.G., (2011). 'Business Cycle Synchronization Since 1880', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 153.

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This paper studies the international business cycle behaviour across 25 advanced and emerging market economies for which 125 years of annual GDP data are available. The picture that emerges is more fragmented than the one drawn by studies that focused on a narrower set of advanced market economies. The paper offers evidence in favour of a secular increase in international business cycle synchronization within a group of European and a group of English-speaking economies that started during 1950-1973 and accelerated since 1973. Yet, in other regions of the world, country-specific shocks are still the dominant forces of business cycle dynamics.