Alfonso Novales - Academia.edu (original) (raw)

Papers by Alfonso Novales

In an endogenous growth model with human capital accumulation, we discuss the possibility of welf... more In an endogenous growth model with human capital accumulation, we discuss the possibility of welfare improving changes on the 1scal policy stance in some actual economies. First, we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base, due to a dynamic La#er curve e#ect, showing that there is, in fact, a non-trivial margin for substituting debt for taxes on labor and capital income. Second, we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates. Two quali1cations: (a) feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption, and (b) the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure, relative to consumption, in the preferences of the re...

An overview of some statistical concepts using simple time series models: Stationarity, mean reve... more An overview of some statistical concepts using simple time series models: Stationarity, mean reversion, autocorrelation, impulse responses, autoregressive processes, stability. A section on simulating white noise, random walk, autoregressive processes comments on results in …le Simple_simul.xls. Lack of stationarity is illustrated, and impulse response functions are computed for processes with di¤erent characteristics.

The Quarterly Review of Economics and Finance, 2021

Abstract Hedging a credit portfolio using single-name credit default swap (CDS) is affected by lo... more Abstract Hedging a credit portfolio using single-name credit default swap (CDS) is affected by low liquidity and high spread volatility, which induces continuous changes in a portfolio mark-to-market. As an alternative, we consider hedging a derivative portfolio by taking a contrary position in a credit index, evaluating the empirical market risk that remains after such hedge. We perform three different hedging exercises: for single-names, for sectorial portfolios and for regional portfolios. We implement least squares hedging as a benchmark, and compare its efficiency with a hedge ratio estimated under the RiskMetrics exponentially moving average (EWMA) specification for time varying second order moments, as well as with the hedge ratio obtained from a bivariate GARCH model for the portfolio and the credit index used as a hedge. Over the 2007–2012 period, we find a high hedging efficiency for regional portfolios (Europe, North America and Japan), as well as for a global portfolio, which is back at pre-crisis levels. The EWMA hedge is slightly more efficient than the least-squares hedge, while the GARCH hedge does not improve hedging efficiency. Hedging efficiency is not as high for sectorial credit portfolios from Europe and North America, due to their more important idiosyncratic component. Taking into account the quality of the credit counterpart improves the effectiveness of the hedge, although it requires using less liquid credit indices, with higher transaction costs. This hedging strategy becomes much more complex if firms in the portfolio have a large idiosyncratic component. The efficiency of the hedge is higher when liquidity risk and systematic risk are high, or when the term structure is flat. We also provide evidence suggesting that credit indices can also offer a moderately efficient hedge for corporate bond portfolios, which we have examined with a reduced sample of firms over 2006–2018.

IFAC Proceedings Volumes, 1988

The paper describes a new. fully recursive method for identifying. estimating and forecasting mul... more The paper describes a new. fully recursive method for identifying. estimating and forecasting multivariate (vector) time-series. Any low frequency (trend) components associated with each of the elements of the vector time-series are first removed by recursive. fixed interval smoothing based on generalised random walk (GRW) models; while the vector of perturbational residuals obtained from this "detrending" step is then modelled as a vector AR or ARMA process. Finally the various structural models are combined to yield an overall multivariate. state-space model. which provides the basis for forecasting. using standard Kalman Filter methods. The practical utility of the approach is illustrated by a sales forecasting example.

Claves De La Economia Mundial Vol 10 2010 Isbn 978 84 7811 704 8 Pags 29 40, 2010

Documentos De Trabajo De La Facultad De Ciencias Economicas Y Empresariales, 1986

We propose a new approach to evaluating the usefulness of a set of forecasts, based on the use of... more We propose a new approach to evaluating the usefulness of a set of forecasts, based on the use of a discrete loss function de…ned on the space of data and forecasts. Existing procedures for such an evaluation either do not allow for formal testing, or use tests statistics based just on the frequency distribution of (data , forecasts)-pairs. They can easily lead to misleading conclusions in some reasonable situations, because of the way they formalize the underlying null hypothesis that 'the set of forecasts is not useful '. Even though the ambiguity of the underlying null hypothesis precludes us from performing a standard analysis of the size and power of the tests, we get results suggesting that the proposed DISC test performs better than its competitors.

Journal of Macroeconomics, 2014

In an endogenous growth model with public consumption and public investment, we explore the time-... more In an endogenous growth model with public consumption and public investment, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We show that under the time-consistent, Markov policy, the economy lacks any transitional dynamics and also that there is local and global determinacy of equilibrium. We compare the Markovian optimal policy with the Ramsey policy as well as with the solution to the planner's problem under lump-sum taxation. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest.

Economic Modelling, 2014

We explore the implications of incorporating an elastic labor supply in an endogenous growth econ... more We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss.

Springer Texts in Business and Economics, 2014

ABSTRACT In spite of the importance of money in actual economies, explaining why consumers have a... more ABSTRACT In spite of the importance of money in actual economies, explaining why consumers have a demand for an asset which is dominated in return by other assets in the economy has been a traditional challenge for economic theory. Among many other monetary theorists, Keynes [49] proposed a detailed list of reasons why a typical consumer might demand money, including a precautionary reason or its role as facilitating transactions, which capture the role of money as a store of value and as a medium of exchange, respectively.

Economic Growth, 2009

ABSTRACT We present in this chapter the first growth model, introduced almost simultaneously by R... more ABSTRACT We present in this chapter the first growth model, introduced almost simultaneously by R.Solow and S.Swan in two different papers published in 1956. In fact, as we will see, the assumptions embedded in this model imply that, in the long run, and in the absence of technological growth, economies do not grow in per-capita terms. The possibility of aggregate growth arises only from either population growth or growth in factor productivity. Since neither factor is supposed to depend on the decisions of economic agents, this is known as an exogenous growth model. There are model economies for which there are steady-states with constant, non-zero growth rates determined by some decisions made by economic agents, like the level of education, or by some policy choices, like a given tax rate. These are known as endogenous growth models and will be studied in later chapters.

Economic Growth, 2009

ABSTRACT In the previous chapter we have characterized dynamic optimality conditions for monetary... more ABSTRACT In the previous chapter we have characterized dynamic optimality conditions for monetary economies, but we have only evaluated the steady-state effects of monetary policy. To complete the analysis, this chapter is devoted to characterizing the transitional dynamics of a monetary economy, as it moves from the initial condition to the steady-state. In particular, we examine the evolution of a given economy following a monetary policy intervention. We start by discussing the possible instability of the stock of debt, an issue that conditions the set of feasible policies which needs to be taken into consideration in the type of policy analysis which is undertaken in this chapter. As an example, we saw in the previous chapter how a policy of choosing the rate of money growth and the lump-sum transfer to consumers would lead to a well-defined steady-state, with stable inflation and a finite stock of debt. That is a not trivial result, since interest payments on outstanding debt have a feedback effect on the deficit and hence, on financing requirements, producing a tendency for the stock of debt to increase over time. Hence, when the government changes the inflation rate or the size of the lump-sum transfer, the service of outstanding debt could take the stock of debt to diverge from its steady-state level along an explosive path. This possibility can be avoided by linking the size of the lump-sum transfer to the level of outstanding debt each period t. The implication is then that the government can only freely choose monetary policy, fiscal policy being constrained to satisfy the government budget constraint.

Springer Texts in Business and Economics, 2014

To learn about the causes of aggregate fluctuations is one of the basic goals of Macroeconomics. ... more To learn about the causes of aggregate fluctuations is one of the basic goals of Macroeconomics. One of the main characteristics of aggregate fluctuations is that business cycles are neither regular nor predictable. Because of that, most economists consider that there are different shocks impinging on the economy, which are different in nature and intensity. These shocks do not follow a known pattern. Observed fluctuations in actual economies are the result of such shocks and the propagation mechanisms associated to them. There are different schools of thought in Macroeconomics whose main difference relates to the type of specific shocks which are accountable for economic fluctuations as well as in the description of their propagation mechanisms.

Economic Growth, 2009

ABSTRACT

Economic Growth, 2009

The AK model, introduced by Rebelo [74], is characterized by a constant returns to scale technolo... more The AK model, introduced by Rebelo [74], is characterized by a constant returns to scale technology, linear in physical capital Yt = AKt,Y_{t} = AK_{t}, with A representing the constant average and marginal productivity of capital, and Kt the aggregate stock of capital. As we saw in Chap. 2, aggregate constant returns to scale in the cumulative inputs is a

Economic Growth, 2009

ABSTRACT

Economic Growth, 2009

In this chapter we present the discrete time version of some of the issues discussed in the previ... more In this chapter we present the discrete time version of some of the issues discussed in the previous chapter. We introduce a government in the economy, and define and characterize the competitive equilibrium. The intertemporal government budget constraint, the relationship between the competitive equilibrium allocation and that of the benevolent planner mechanism, and the Ricardian doctrine, can be all analyzed in discrete-time in a similar fashion as we have done in the continuous time version of the model. Dealing with all the details of the discrete time version of the Cass–Koopmans economy is very instructive in order to be able to formulate alternative, more complex growth models, as well as to perform policy analysis, as we do towards the end of the chapter. It is particularly important to get familiar with the formulation and use of the transversality condition and with the characterization of stability conditions. As we will see below, stability conditions are crucial to generate a numerical solution for this model in the form of a set of time series for the endogenous variables.

Springer Texts in Business and Economics, 2014

The use of general descriptive names, registered names, trademarks, service marks, etc. in this p... more The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein.

Excel files and MATLAB programs for Chapters 3 and 4 of "Economic Growth: Theory and Numeric... more Excel files and MATLAB programs for Chapters 3 and 4 of "Economic Growth: Theory and Numerical Solution Methods" published by Springer Verlag.

In an endogenous growth model with human capital accumulation, we discuss the possibility of welf... more In an endogenous growth model with human capital accumulation, we discuss the possibility of welfare improving changes on the 1scal policy stance in some actual economies. First, we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base, due to a dynamic La#er curve e#ect, showing that there is, in fact, a non-trivial margin for substituting debt for taxes on labor and capital income. Second, we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates. Two quali1cations: (a) feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption, and (b) the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure, relative to consumption, in the preferences of the re...

An overview of some statistical concepts using simple time series models: Stationarity, mean reve... more An overview of some statistical concepts using simple time series models: Stationarity, mean reversion, autocorrelation, impulse responses, autoregressive processes, stability. A section on simulating white noise, random walk, autoregressive processes comments on results in …le Simple_simul.xls. Lack of stationarity is illustrated, and impulse response functions are computed for processes with di¤erent characteristics.

The Quarterly Review of Economics and Finance, 2021

Abstract Hedging a credit portfolio using single-name credit default swap (CDS) is affected by lo... more Abstract Hedging a credit portfolio using single-name credit default swap (CDS) is affected by low liquidity and high spread volatility, which induces continuous changes in a portfolio mark-to-market. As an alternative, we consider hedging a derivative portfolio by taking a contrary position in a credit index, evaluating the empirical market risk that remains after such hedge. We perform three different hedging exercises: for single-names, for sectorial portfolios and for regional portfolios. We implement least squares hedging as a benchmark, and compare its efficiency with a hedge ratio estimated under the RiskMetrics exponentially moving average (EWMA) specification for time varying second order moments, as well as with the hedge ratio obtained from a bivariate GARCH model for the portfolio and the credit index used as a hedge. Over the 2007–2012 period, we find a high hedging efficiency for regional portfolios (Europe, North America and Japan), as well as for a global portfolio, which is back at pre-crisis levels. The EWMA hedge is slightly more efficient than the least-squares hedge, while the GARCH hedge does not improve hedging efficiency. Hedging efficiency is not as high for sectorial credit portfolios from Europe and North America, due to their more important idiosyncratic component. Taking into account the quality of the credit counterpart improves the effectiveness of the hedge, although it requires using less liquid credit indices, with higher transaction costs. This hedging strategy becomes much more complex if firms in the portfolio have a large idiosyncratic component. The efficiency of the hedge is higher when liquidity risk and systematic risk are high, or when the term structure is flat. We also provide evidence suggesting that credit indices can also offer a moderately efficient hedge for corporate bond portfolios, which we have examined with a reduced sample of firms over 2006–2018.

IFAC Proceedings Volumes, 1988

The paper describes a new. fully recursive method for identifying. estimating and forecasting mul... more The paper describes a new. fully recursive method for identifying. estimating and forecasting multivariate (vector) time-series. Any low frequency (trend) components associated with each of the elements of the vector time-series are first removed by recursive. fixed interval smoothing based on generalised random walk (GRW) models; while the vector of perturbational residuals obtained from this "detrending" step is then modelled as a vector AR or ARMA process. Finally the various structural models are combined to yield an overall multivariate. state-space model. which provides the basis for forecasting. using standard Kalman Filter methods. The practical utility of the approach is illustrated by a sales forecasting example.

Claves De La Economia Mundial Vol 10 2010 Isbn 978 84 7811 704 8 Pags 29 40, 2010

Documentos De Trabajo De La Facultad De Ciencias Economicas Y Empresariales, 1986

We propose a new approach to evaluating the usefulness of a set of forecasts, based on the use of... more We propose a new approach to evaluating the usefulness of a set of forecasts, based on the use of a discrete loss function de…ned on the space of data and forecasts. Existing procedures for such an evaluation either do not allow for formal testing, or use tests statistics based just on the frequency distribution of (data , forecasts)-pairs. They can easily lead to misleading conclusions in some reasonable situations, because of the way they formalize the underlying null hypothesis that 'the set of forecasts is not useful '. Even though the ambiguity of the underlying null hypothesis precludes us from performing a standard analysis of the size and power of the tests, we get results suggesting that the proposed DISC test performs better than its competitors.

Journal of Macroeconomics, 2014

In an endogenous growth model with public consumption and public investment, we explore the time-... more In an endogenous growth model with public consumption and public investment, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We show that under the time-consistent, Markov policy, the economy lacks any transitional dynamics and also that there is local and global determinacy of equilibrium. We compare the Markovian optimal policy with the Ramsey policy as well as with the solution to the planner's problem under lump-sum taxation. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest.

Economic Modelling, 2014

We explore the implications of incorporating an elastic labor supply in an endogenous growth econ... more We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss.

Springer Texts in Business and Economics, 2014

ABSTRACT In spite of the importance of money in actual economies, explaining why consumers have a... more ABSTRACT In spite of the importance of money in actual economies, explaining why consumers have a demand for an asset which is dominated in return by other assets in the economy has been a traditional challenge for economic theory. Among many other monetary theorists, Keynes [49] proposed a detailed list of reasons why a typical consumer might demand money, including a precautionary reason or its role as facilitating transactions, which capture the role of money as a store of value and as a medium of exchange, respectively.

Economic Growth, 2009

ABSTRACT We present in this chapter the first growth model, introduced almost simultaneously by R... more ABSTRACT We present in this chapter the first growth model, introduced almost simultaneously by R.Solow and S.Swan in two different papers published in 1956. In fact, as we will see, the assumptions embedded in this model imply that, in the long run, and in the absence of technological growth, economies do not grow in per-capita terms. The possibility of aggregate growth arises only from either population growth or growth in factor productivity. Since neither factor is supposed to depend on the decisions of economic agents, this is known as an exogenous growth model. There are model economies for which there are steady-states with constant, non-zero growth rates determined by some decisions made by economic agents, like the level of education, or by some policy choices, like a given tax rate. These are known as endogenous growth models and will be studied in later chapters.

Economic Growth, 2009

ABSTRACT In the previous chapter we have characterized dynamic optimality conditions for monetary... more ABSTRACT In the previous chapter we have characterized dynamic optimality conditions for monetary economies, but we have only evaluated the steady-state effects of monetary policy. To complete the analysis, this chapter is devoted to characterizing the transitional dynamics of a monetary economy, as it moves from the initial condition to the steady-state. In particular, we examine the evolution of a given economy following a monetary policy intervention. We start by discussing the possible instability of the stock of debt, an issue that conditions the set of feasible policies which needs to be taken into consideration in the type of policy analysis which is undertaken in this chapter. As an example, we saw in the previous chapter how a policy of choosing the rate of money growth and the lump-sum transfer to consumers would lead to a well-defined steady-state, with stable inflation and a finite stock of debt. That is a not trivial result, since interest payments on outstanding debt have a feedback effect on the deficit and hence, on financing requirements, producing a tendency for the stock of debt to increase over time. Hence, when the government changes the inflation rate or the size of the lump-sum transfer, the service of outstanding debt could take the stock of debt to diverge from its steady-state level along an explosive path. This possibility can be avoided by linking the size of the lump-sum transfer to the level of outstanding debt each period t. The implication is then that the government can only freely choose monetary policy, fiscal policy being constrained to satisfy the government budget constraint.

Springer Texts in Business and Economics, 2014

To learn about the causes of aggregate fluctuations is one of the basic goals of Macroeconomics. ... more To learn about the causes of aggregate fluctuations is one of the basic goals of Macroeconomics. One of the main characteristics of aggregate fluctuations is that business cycles are neither regular nor predictable. Because of that, most economists consider that there are different shocks impinging on the economy, which are different in nature and intensity. These shocks do not follow a known pattern. Observed fluctuations in actual economies are the result of such shocks and the propagation mechanisms associated to them. There are different schools of thought in Macroeconomics whose main difference relates to the type of specific shocks which are accountable for economic fluctuations as well as in the description of their propagation mechanisms.

Economic Growth, 2009

ABSTRACT

Economic Growth, 2009

The AK model, introduced by Rebelo [74], is characterized by a constant returns to scale technolo... more The AK model, introduced by Rebelo [74], is characterized by a constant returns to scale technology, linear in physical capital Yt = AKt,Y_{t} = AK_{t}, with A representing the constant average and marginal productivity of capital, and Kt the aggregate stock of capital. As we saw in Chap. 2, aggregate constant returns to scale in the cumulative inputs is a

Economic Growth, 2009

ABSTRACT

Economic Growth, 2009

In this chapter we present the discrete time version of some of the issues discussed in the previ... more In this chapter we present the discrete time version of some of the issues discussed in the previous chapter. We introduce a government in the economy, and define and characterize the competitive equilibrium. The intertemporal government budget constraint, the relationship between the competitive equilibrium allocation and that of the benevolent planner mechanism, and the Ricardian doctrine, can be all analyzed in discrete-time in a similar fashion as we have done in the continuous time version of the model. Dealing with all the details of the discrete time version of the Cass–Koopmans economy is very instructive in order to be able to formulate alternative, more complex growth models, as well as to perform policy analysis, as we do towards the end of the chapter. It is particularly important to get familiar with the formulation and use of the transversality condition and with the characterization of stability conditions. As we will see below, stability conditions are crucial to generate a numerical solution for this model in the form of a set of time series for the endogenous variables.

Springer Texts in Business and Economics, 2014

The use of general descriptive names, registered names, trademarks, service marks, etc. in this p... more The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein.

Excel files and MATLAB programs for Chapters 3 and 4 of "Economic Growth: Theory and Numeric... more Excel files and MATLAB programs for Chapters 3 and 4 of "Economic Growth: Theory and Numerical Solution Methods" published by Springer Verlag.