The behavior of the nominal exchange rate at the beginning of disinflations

A standard rational expectations model would give strong predictions about the behavior of the nominal exchange rate at the beginning of a disinflation (a rise in interest rates): a substantial initial appreciation, followed by a steady depreciation. It largely conflicts actual observations, like the recent experience of Poland, Hungary, and Chile, where an initial appreciation was not followed by any systematic depreciation. The paper tries to explore whether rational expectations can be rescued by introducing noise and parameter learning. An optimistic learning case (worse than expected inflation data every period), or the combination of a pessimistic learning case (better than expected data every period) and a declining proportional risk content of the interest rate offers a potential explanation.uncovered interest parity, rational expectations, parameter learning, monetary contraction, small macromodel.

Changes in the Implicit Debt Burden of the Hungarian Social Security System

The paper studies the implicit debt burden of the Hungarian social security system, and especially its changes after certain real and hypothetical reform measures. It uses a computer simulation of a demographic model. The most important results are the following. The Hungarian implicit debt burden, prior to the 1998 reform, was quite substantial but not extraordinarily high in an international comparison. As the result of the implemented reforms, it has decreased from 100% of 1995 GDP to roughly 40% of it. This is equivalent to a permanent budget cut of approximately 1.5% of GDP per year. If we smooth the cyclicality of the late 90s less, then these measures are even better. Considering further reform scenarios, the only promising direction (let alone the unrealistic 5% improvement in revenue collection) was the decrease of the size of the first (PAYG) pillar of pensions. Cutting contribution rates (which is a current policy proposal) seems absolutely infeasible from a long-run perspective.

Economic Fluctuations in Central and Eastern Europe - the Facts

We carry out a detailed analysis of quarterly frequency dynamics in macroeconomic aggregates in twelve countries of Central and Eastern Europe. The facts we document include the variability and persistence in and the co-movement among output, and other major real and nominal variables. We find that consumption is highly volatile and government spending is procyclical. Gross fixed capital formation is highly volatile. Net exports are countercyclical. Imports are procyclical, much more than exports. Exports are most procyclical and persistent in open countries. Labor market variables are all highly volatile. Employment is lagging, and often procyclical. Real wages are dominantly procyclical. Productivity is dominantly procyclical and coincidental. Private credit is procyclical and dominantly lagging the cycle. The CPI is countercyclical, and is weakly leading or coincidental. The cyclicality of inflation is unclear, but its relative volatility is low. Net capital flows are mostly leading and procyclical and exhibit low persistence. Nominal interest rates are in general smooth and persistent. The nominal exchange rate is more persistent than the real one. Overall, we find that fluctuations in CEE countries are larger than in industrial countries, and are of similar size than in other emerging economies. This is particularly true about private consumption. The co-movement of variables, however, shows a large degree of similarity. A notable exception is government spending: unlike in industrial economies, it is rather procyclical in transition economies. The findings also indicate that Croatia and the accession group show broadly similar cyclical behavior to industrial countries. The most frequent country outliers are Bulgaria, Romania and Russia, especially in labor market, price and exchange rate variables. Excluding these countries from the sample makes many of the observed patterns in cyclical dynamics quite homogenous.Business Cycle Facts, Central and Eastern Europe

The Elasticity of Taxable Income: Estimates and Flat Tax Predictions Using the Hungarian Tax Changes in 2005

Many Central and Eastern European countries are adopting flat tax schemes in order to boost their economies and tax revenues. Though there are signs that some countries do manage to improve on both fronts, it is in general hard to distinguish the behavioral response to tax changes from the effect of increased tax enforcement. This paper addresses this gap by estimating the elasticity of taxable income in Hungary, one of the outliers in terms of not having a flat tax scheme. We analyze taxpayer behavior using a medium-scale tax reform episode in 2005, which changed marginal and average tax rates but kept enforcement constant. We employ a Tax and Financial Control Administration (APEH) panel dataset between 2004 and 2005 with roughly 215,000 taxpayers. Our results suggest a relatively small but highly significant tax price elasticity of about 0.06 for the population earning above the minimum wage (around 70% of all taxpayers). This number increases to around 0.3 when we focus on the upper 20% of the income distribution, with some income groups exhibiting even higher elasticities (0.45). We first demonstrate that such an elasticity substantially modifies the response of government revenues to the 2004-2005 tax changes, and then quantify the impact of a hypothetical flat income tax scheme. Our calculations indicate that though there is room for a parallel improvement of budget revenues and after-tax income, those gains are modest (2% and 1.4%, respectively). Moreover, such a reform involves important adverse changes in income inequality, and its burden falls mostly on lower-middle income taxpayers.elasticity of taxable income, tax reform, behavioral response, revenue estimation, flat tax.

Analyzing Fiscal Policy and Growth with a Calibrated Macro Model

CEE countries experience a catching up period in economic growth while preparing for accession to the European Union. In several countries we experience an expenditure boom arising either from exuberant expectations of consumers towards EU or EM or a fiscal deficit usually underpinned by an argument that a reallocation of total consumption at the expense of the future is a result of intertemporal optimization. The paper analyses whether this argument is justifiable. The key factors that influence the intertemporal trade-off are country risk and externalities from foreign direct investments. High indebtedness increases macroeconomic risk and discourages investments. If investment externalities exist the investment gap may cause high output loss. With careful calibration of the parameters determining the risk premium and the external effects of FDI the model predicts a 20% annual return of fiscal austerity at the macro level. This number is too high to be justifiable by any reasonable rate of time preference.Catching-up, Risk Premium, FDI, Consumption boom, Simulation.

Encoding databases satisfying a given set of dependencies

Consider a relation schema with a set of dependency constraints. A fundamental question is what is the minimum space where the possible instances of the schema can be "stored". We study the following model. Encode the instances by giving a function which maps the set of possible instances into the set of words of a given length over the binary alphabet in a decodable way. The problem is to find the minimum length needed. This minimum is called the information content of the database. We investigate several cases where the set of dependency constraints consist of relatively simple sets of functional or multivalued dependencies. We also consider the following natural extension. Is it possible to encode the instances such a way that small changes in the instance cause a small change in the code. © 2012 Springer-Verlag

Real Effects of Nominal shocks: a 2-sector Dynamic Model with Slow Capital Adjustment and Money-in-the-utility

This paper develops a two-sector model to study the e.ect and incidence of nominal shocks (fiscal or exchange rate policies) on sectors and factors of production. I adopt a classical twosector model of a small open economy and enrich its structure with gradual investment and a preference for real money holdings. An expansive nominal shock (fiscal expansion or a nominal appreciation) leads to increased spending (due to the role of money), which pushes nontraded prices up (with gradual capital adjustment, the short-term transformation curve is nonlinear). This translates into changes in factor rewards, capital labor ratios and sector-level employment of capital and labor. Higher nontraded prices lead to extra domestic income, validating some of the initial excess spending. This propagation mechanism leads to a persistent real e.ect (on relative prices, factor rewards, capital accumulation) of nominal shocks, which disappears gradually through money outflow (trade deficit). I also draw parallels with the NATREX approach of equilibrium real exchange rates and the literature on exchange rate based stabilizations.two-sector growth model, money-in-the-utility, q-theory, real effects of nominal shocks, endogenous pass-through.