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Growth and Business Cycle Research Group

Discussion papers 2014

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Agénor, P-R., (2014). 'Optimal Fiscal Management of Commodity Price Shocks', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 197.

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A dynamic stochastic general equilibrium model is used to study the optimal fiscal response to commodity price shocks in a small open low-income country. The model accounts for imperfect access to world capital markets and a variety of externalities associated with public infrastructure, including utility benefits, a direct complementarity effect with private investment, and reduced distribution costs. However, public capital is also subject to congestion and absorption constraints, with the latter affecting the efficiency of infrastructure investment. The model is parameterized and used to examine the transmission process of a temporary resource price shock under a benchmark case (cash transfers) and alternative fiscal rules, involving either higher public spending or accumulation in a sovereign fund. The optimal allocation rule between spending today and asset accumulation is determined so as to minimize a social loss function defined in terms of the volatility, relative to the benchmark case, of private consumption and either the nonresource primary fiscal balance or a more general index of macroeconomic stability, which accounts for the volatility of the real exchange rate. Sensitivity analysis is conducted with respect to various structural parameters and model specification.


Bratsiotis, G. J., Tayler, W.J., Zilberman, R., (2014). 'Financial Regulation, Credit and Liquidity Policy and the Business Cycle', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 196.

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The global financial crisis in 2007 prompted policy makers to introduce a combination of bank regulation and macroprudential policies, including non-conventional monetary policies, such as interest on reserves and changes in required reserves. This paper examines how the combination of such policies can help stabilize the effects of real and financial shocks in economies where financial frictions are important. Although there is an extensive literature on financial regulation and macro-prudential policy, and more recently some literature on the effects of interest on reserves, these policies are usually examined independently. The results point to the importance of coordination between financial regulation and monetary policy in minimizing welfare losses following such shocks. Interest on reserves is shown to be more effective in reducing welfare losses than changes in required reserves and to play a significant role in making stabilization policy more effective. The results also suggest an easing of bank capital requirements during recessions, when output and loans are falling and the risk of default is high.


Agénor, P-R., Alpaslan, B., (2014). 'Infrastructure and Industrial Development with Endogenous Skill Acquisition', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 195.

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The link between infrastructure and industrial development is studied in an OLG model with endogenous skill acquisition. Industrial development is defined as a shift from an imitation-based, low-skill economy to an innovation-based, high-skill economy, where ideas are produced domestically. Imitation generates knowledge spillovers, which enhance productivity in innovation. Changes in industrial structure are measured by the ratio of the variety of imitation- to innovation-based intermediate goods. The model also distinguishes between basic infrastructure, which helps to promote learning by doing and productivity in imitation activities, and advanced infrastructure, which promotes knowledge networks and innovation. Numerical experiments, based on a calibrated version for a low-income country, show that changes in the level and composition of public investment in infrastructure may have significant effects on the structure of the labour force and the speed of industrial development.


Macnamara, P., (2014). 'Limited Re-Entry and Business Cycles', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 194.

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This paper builds a model of firm dynamics to study the consequences of "limited re-entry" for macroeconomic dynamics. Matched individual-level data from the Current Population Survey indicate that only 8% of unemployed chief executives, on average, find employment again as a chief executive after 12 months. Given the close link between entrepreneurs and chief executives, this suggests that it is very difficult for exiting entrepreneurs to "re-enter" in the future. The model, calibrated to match this observation, indicates that "limited re-entry" has made business cycles more volatile and persistent.


Macnamara, P., (2014). 'Entry and Exit with Financial Frictions', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 193.

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This paper considers a model of firm dynamics to study how well aggregate shocks account for fluctuations in the entry and exit of establishments. To do this, I construct measures of aggregate financial and technology shocks. Under reasonable parameters, the model indicates that financial shocks (and not technology shocks) have contributed to the majority of cyclical fluctuations in entry and exit rates. In particular, the reduction in entry and the increase in exit during the 2007-09 recession have contributed to the slow recovery of output and hours that followed.


Bratsiotis, G. J., Robinson, W.A., (2014). 'Unit Total Costs: An Alternative Marginal Cost Proxy for Inflation Dynamics', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 192.

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The conventional New Keynesian Phillips Curve (NKPC), driven by unit labour costs has been criticized for failing to match inflation dynamics and for explaining the duration of fixed price contracts. This paper extends recent attempts in the literature to find an alternative marginal cost proxy for the NKPC, by introducing a fuller marginal cost proxy, ''unit total costs'' that is derived from both labour and non-labour unit costs, where the latter includes, capital related costs and production taxes. Borrowing costs are also examined separately, as in the cost channel literature. Unit total costs are shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. The cost channel becomes relatively less important when unit total costs, rather than unit labour costs, are used as a marginal cost proxy.


Agénor, P-R., Alper, K., Pereira da Silva, L.,(2014). 'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 191.

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A dynamic stochastic model of a small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility is developed. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to a premium. A sudden flood in capital flows generates an expansion in credit and activity, as well as asset price pressures. Countercyclical capital regulation, in the form of a Basel III-type rule based on credit gaps, is effective at promoting macro stability (defined in terms of the volatility of a weighted average of inflation and output deviations) and financial stability (defined in terms of three measures based on asset prices, the credit-to-GDP ratio, and the ratio of bank foreign borrowing to GDP). However, because the gain in terms of reduced economic volatility exhibits diminishing returns, in practice a countercyclical regulatory capital rule may need to be supplemented by other, more targeted macroprudential instruments when shocks are large and persistent.


Neanidis, K.C., Rana, M.P.,(2014). 'Crime versus Organized Crime in Italy: Do their Drivers Differ?', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 190.

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This paper empirically examines the determinants of organized crime and of common crime in a panel of Italian regions over the period 1983-2003. In line with the literature, these factors include economic, socio-demographic, and crime-deterrence indicators. The analysis shows that both organized and common crimes respond symmetrically to some drivers, such as crime-deterrence variables and the share of a region’s economically active population, reducing both categories of crime. At the same time, there are drivers that influence only one of these types of crime, with higher education and population density both raising organized crime. Overall, this study points to the importance of disentangling the examination of the factors that drive organized crime from those of common crime, useful for the development of strategies specific to addressing each type of crime.