Level, Slope, Curvature of Sovereign Yield Curve and Fiscal Behaviour

We study fiscal behaviour and the sovereign yield curve in the U.S. and Germany in the period 1981:I-2009:IV. The latent factors, level, slope and curvature, obtained with the Kalman filter, are used in a VAR with macro and fiscal variables, controlling for financial stress conditions. In the U.S., fiscal shocks have generated (i) an immediate response of the short-end of the yield curve, associated with the monetary policy reaction, lasting between 6 and 8 quarters, and (ii) an immediate response of the longend of the yield curve, lasting 3 years, with an implied elasticity of about 80% for the government debt ratio shock and about 48% for the budget balance shock. In Germany, fiscal shocks entail no significant reactions of the latent factors and no response of the monetary policy interest rate. In particular, while (i) budget balance shocks created no response from the yield curve shape, (ii) surprise increases in the debt ratio caused some increase in the short-end and the long-end of the yield curve in the following 2nd and 3rd quarters.yield curve, fiscal policy, financial markets.

Macroeconomic Volatility Trade-off and Monetary Policy Regime in the Euro Area

This research uncovers a well-defined monetary policy regime starting in 1986 in the aggregate Euro Area. Both alternative solution-estimation methods employed - optimal control cum GMM, and dynamic programming cum FIML - identify a regime of strict inflation targeting with interest rate smoothing. The unemployment gap, properly estimated as quasi real-time information, is a relevant element in the information set of the monetary authority, despite not being included in its preferences. The emergence of the regime relates to the improvement of the volatility trade-off between inflation and unemployment gap since the mid-80s. Additional improving factors have been milder supply shocks and better ability of policymakers to set the interest rate closer to optimum.Monetary Policy Regime, Euro Area, Optimal Control, Dynamic Programming, GMM, FIML.

Growth Cycles in XXth Century European Industrial Productivity: Unbiased Variance Estimation in a Time-varying Parameter Model

This note applies the median unbiased estimation of coefficient variance, proposed by Stock and Watson (1998), to the extraction of the time-varying trend growth rate of industrial productivity in fifteen European countries, over most of the XXth Century, by means of an unobservable components univariate decomposition. In addition to the description of the procedure, this illustration is particularly useful in explaining why the method is especially appropriate for comparison of trends growth rates extracted from time series with diverse degrees of variability.unobservable components model; industrial productivity; growth cycles; Europe.

Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker

This paper tests for asymmetries in the preferences of the Euro-Area monetary policymaker with 1995:I-2004:III data from the last update of the ECB's Area-wide database. Following the relevant literature, we distinguish between three types of asymmetry: precautionary demand for expansions, precautionary demand for price stability and interest rate smoothing asymmetry. Based on the joint GMM estimation of the Euler equation of optimal policy and the AS-AD structure of the macroeconomy, we find evidence of precautionary demand for price stability in the preferences revealed by the monetary policymaker. This type of asymmetry is consistent with the ECB’s definition of price stability and with the priority of credibility-building by a recently created monetary authority.Central Bank Preferences, Asymmetry, Euro Area, Optimal Control, GMM.

Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?

We develop a new-Keynesian DSGE model with an extended fiscal policy block to assess the conditions for expansionary fiscal consolidations. In addition to several taxes, we consider public employment expenditures and government spending, which may have different degrees of productivity. We calibrate the model for the Euro Area and use it to simulate alternative fiscal consolidations with changes in the budget composition. Among the main conclusions we find that: (i) if conducted with a cut in weaklyproductive spending and a symmetric increase in highly-productive spending, fiscal consolidations have expansionary effects on investment and output; (ii) if consolidation is pursued through a pure reduction in weaklyproductive public employment, the effects on output decrease with the degree of labor market competition and turn out to be positive under perfect competition.fiscal policy, fiscal consolidation, new-Keynesian DSGE model

(Un)anticipated monetary policy in a DSGE model with a shadow banking system : [Version 21 Juni 2012]

Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) too low for too long interest rates, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favorable conditions

Monetary policy shocks in a DSGE model with a shadow banking system

This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.monetary policy; DSGE model; shadow banking system; boom-bust

Cape Verde: The Case for Euroization

After 10 years of a fixed exchange rate against the euro and a deepening integration with the European Union (EU), the authorities of Cape Verde maintain a strong commitment to nominal stability and are now considering the official euroization of the country. Compared to the current pegging, euroization could be costly if the economic conditions of Cape Verde were to require control over the interest rates and the exchange rate. Given the strong economic and financial integration between Cape Verde and Europe, and the fact that Cape Verde records inflation rates at levels that are similar to those of the European Monetary Union (EMU), the relevant issue is whether the European Central Bank (ECB) monetary policy fits the needs of Cape Verde. In order to answer this question, we empirically assess the synchronization between the business cycle of Cape Verde and the business cycle of the EMU. For that purpose, we compute output gaps and then use conventional correlation measures as well as other indicators recently suggested in the literature. Replicating the methodology for each of the current 27 EU members, our results show that Cape Verde ranks better than several EU countries and even better than some EMU countries. We thus argue that there is a strong case for the euroization of Cape Verde. Euroization would secure the benefits already attained with the pegging to the euro and would warrant additional benefits, most likely with no relevant costs stemming from inappropriate ECB monetary policies.Africa, Cape Verde, European Monetary Union, Euroization, Business Cycles

Dilemas macroeconómicos e política monetária: o caso da Zona Euro

Descreve-se o essencial do essencial da tese Macroeconomic Trade-offs and Monetary Policy in the Euro Area (Martins, 2002), incorporando revisões, actualizações e extensões contidas nos artigos da respectiva disseminação internacional (Aguiar e Martins, 2005a, 2005b, 2005c). Tendo em vista a divulgação a cientistas de outras disciplinas, omite-se detalhes e complexidades técnicas e baseia-se a exposição em argumentos e gráficos intuitivos. Após uma breve revisão sobre dilemas macroeconómicos e política monetária, descreve-se três estudos neste âmbito relativos à Área do Euro. Primeiro, estuda-se as configurações do dilema de Phillips entre níveis de inflação e do desemprego e da Lei de Okun relacionando ciclos do emprego e do produto. Segundo, a partir de dados do dilema de Taylor entre variabilidades da inflação e do produto, estima-se a data de emergência de facto e os parâmetros do regime agregado de política monetária na Área. Finalmente, testa-se hipóteses de assimetrias nas preferências reveladas pela autoridade nesse regime agregado.Zona Euro; Curva de Phillips; Lei de Okun; Regime de Política Monetária; Assimetrias

Introducing programming to basic schools students using robotics

The present work reports on the development of programming activities with students from the 1st and 2nd cycles of schools in the town of Braga in the northwestern Portuguese region of Minho. These activities of promotion of computer programming were applied in order to promote the programming and innovative practices on science and technology education. The explored interdisciplinary methodologies in STEM teaching-learning processes, stimulate critical thinking and creativity while promoting the benefits of learning in collaborative environments. The active involvement of the students in these robot programming, “high tech” and trendy, activities is easy to achieve if the proposed challenges are set at an adequate level of difficulty and appealing enough to the age group and level of cognitive development of the student. Whenever possible to the students is given the possibility of choosing or even defining the problem/subject they will be exploring by programming a robot, which is seen as a mechanical artificial being the students will be able to understand, interact with and use and control. The teacher/educator should be available to provide to the students a proper empowering environment and to provide all support requested by the students giving, as much as possible, not straight answers but yes clues and small hints and examples leading the students to reach, themselves, to a solution to the problem the students face or to an answer to the students’ question that satisfy their own critical judgment. Through the programming testing process, it is possible to verify and see the level of perception and proficiency of the students assessing what students have learned and accomplished, creating immediate feedback for students and adjusting or re-orienting the students’ focus on a particular task or reasoning process. If well succeeded these activities can develop among the students a sound appreaciation towards Science Technology and Engineering while establishing relevant knowledge, creativity critical reasoning abilities and a large number of other competencies that will be valuable for the future development of the students in their studies and academic life but also in their future careers. The improvement of the self-esteem of the students when they realize they can actually “do it” is also a major benefit of this type of activities. As well in what concerns the boost of the self-esteem and selft-appreaciation of their teachers and educators, that often fear to explore this type of innovative approaches