nep-cba New Economics Papers
on Central Banking
Issue of 2016‒03‒10
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Effects of Monetary and Macroprudential Policies on Financial Conditions; Evidence from the United States By Aleksandra Zdzienicka; Sally Chen; Federico Diaz Kalan; Stefan Laseen; Katsiaryna Svirydzenka
  2. The effect of interest rate and communication shocks on private inflation expectations By Paul Hubert
  3. A Microfounded Design of Interconnectedness-Based Macroprudential Policy By Jose Fique
  4. Cost-Benefit Analysis of Leaning Against the Wind; Are Costs Larger Also with Less Effective Macroprudential Policy? By Lars E. O. Svensson
  5. Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability? By Itai Agur; Maria Demertzis
  6. Changing Imperatives for U.S. Monetary Policy Normalization By Bullard, James B.
  7. Interest Rate Pass-Through in the Dominican Republic By Francesco Grigoli; José M. Mota
  8. Macroprudential Policies in Southeastern Europe By Dilyana Dimova; Piyabha Kongsamut; Jérôme Vandenbussche
  9. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
  10. Asymmetric Exchange Rate Pass-through: Evidence from Nonlinear SVARs By Fernando J. Pérez Forero; Marco Vega
  11. Lending-of-last-resort is as lending-of-last-resort does: central bank liquidity provision and interbank market functioning in the euro area By Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
  12. Inflation and Activity – Two Explorations and their Monetary Policy Implications By Olivier J. Blanchard; Eugenio Cerutti; Lawrence Summers
  13. Current Account Determinats in Central Eastern European Countries By Jonida Bollano; Delina Ibrahimaj
  14. Inflation Targeting and Exchange Rate Regimes in Emerging Markets By Christian Ebeke; Armand Fouejieu
  15. The regulatory practice of the French financial regulator, 2006-2011. From substantive to procedural financial regulation? By Thierry Kirat; Frédéric Marty
  16. Les règles de Taylor à l’épreuve de la révolution : cas de l’Égypte. By baaziz, yosra
  17. Monetary Policy Transmission and Financial Stability in a LIC; The Case of Bangladesh By Sohrab Rafiq
  18. The Lender of Last Resort Function after the Global Financial Crisis By Marc Dobler; Simon Gray; Diarmuid Murphy; Bozena Radzewicz-Bak
  20. Causes and consequences of the financial crisis and the implications for a more resilient financial and economic system By Hein, Eckhard
  21. Wage Moderation in Crises; Policy Considerations and Applications to the Euro Area By Jörg Decressin; Raphael A. Espinoza; Ioannis Halikias; Michael Kumhof; Daniel Leigh; Prakash Loungani; Paulo A. Medas; Susanna Mursula; Antonio Spilimbergo; TengTeng Xu
  22. The Price Stability Under Inflation Targeting Regime : An Analysis With a New Intermediate Approach By Zied Ftiti; Walid Hichri
  23. Contingent Liabilities from Banks; How to Track Them? By Serkan Arslanalp; Yin Liao
  24. Where the Wild Things Are: Measuring Systemic Risk through Investor Sentiment By Ergungor, O. Emre
  25. Implementing the zero lower bound in an estimated regime-switching DSGE model By Andrew Binning; Junior Maih
  26. Effects of macroeconomic policy shock on the labour market dynamics in Australia By Mukti Nath Subedi

  1. By: Aleksandra Zdzienicka; Sally Chen; Federico Diaz Kalan; Stefan Laseen; Katsiaryna Svirydzenka
    Abstract: The Global Financial Crisis has reopened discussions on the role of the monetary policy in preserving financial stability. Determining whether monetary policy affects financial variables domestically—especially compared to the effects of macroprudential policies— and across borders, is crucial in this context. This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries—with the effects varying with country-specific characteristics—an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.
    Keywords: Financial stability;Monetary policy;Central banks and their policies;Financial crises;United States;Western Hemisphere;spillovers, international monetary fund, exchange rate, transmission mechanism, Monetary Policy (Targets, Instruments, and Effects), spillovers.,
    Date: 2015–12–31
  2. By: Paul Hubert (OFCE – Sciences Po)
    Abstract: The European Central Bank publishes inflation projections quarterly. This paper aims at establishing empirically whether they influence private inflation forecasts and whether they may be considered as an enhanced means of implementing policy decisions by facilitating private agents’ information processing. We compare the effect of an ECB inflation projection shock to an ECB interest rate shock.We provide original evidence that ECB inflation projections do influence private inflation expectations positively. We find that ECB projections convey signals about future ECB rate movements. This paper suggests that ECB projections enable private agents to correctly interpret and predict policy decisions.
    Keywords: Monetary Policy, ECB, Private Forecasts, Influence, Structural VAR
    JEL: E52 E58
    Date: 2015–09–01
  3. By: Jose Fique
    Abstract: To address the challenges posed by global systemically important banks (G-SIBs), the Basel Committee on Banking Supervision recommended an “additional loss absorbency requirement” for these institutions. Along these lines, I develop a microfounded design of capital surcharges that target the interconnectedness component of systemic risk. These surcharges increase the costs of establishing interbank connections, which leads to a non-monotonic welfare effect. While reduced interconnectedness decreases welfare by restricting the ability of banks to insure against liquidity shocks, it also increases it by reducing contagion when an interconnected bank fails. Thus, the regulator faces a trade-off between efficiency and financial stability. Furthermore, I show that capital requirements are more effective than default fund contributions when tail-risk exposure is the private information of banks. I conclude by analyzing how resolution regimes and stable funding requirements interact with these surcharges.
    Keywords: Financial Institutions, Financial system regulation and policies
    JEL: D82 D85 G21 G28
    Date: 2016
  4. By: Lars E. O. Svensson
    Abstract: “Leaning against the wind†(LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.
    Keywords: Financial stability;Monetary policy;Central banks and their policies;macroprudential policy, unemployment, unemployment rate, debt, marginal cost, benchmark, Monetary Policy (Targets, Instruments, and Effects), All Countries, macroprudential policy.,
    Date: 2016–01–11
  5. By: Itai Agur; Maria Demertzis
    Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.
    Keywords: Financial crises;Macroprudential, Supervision, Transmission, bank, risk, banks, financial stability, interest, Monetary Policy (Targets, Instruments, and Effects), Government Policy and Regulation, All Countries, Leverage,
    Date: 2015–12–29
  6. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During a presentation to the CFA Society St. Louis, President James Bullard said that recent data-based developments—namely, further declines in inflation expectations and a reduced risk of asset price bubbles—likely give the FOMC more leeway in its normalization program. He also discussed the need for monetary policy to be more clearly data dependent and suggested that the FOMC may wish to consider changes to the way it approaches the policy rate projections in the Summary of Economic Projections.
    Date: 2016–02–17
  7. By: Francesco Grigoli; José M. Mota
    Abstract: A well-functioning monetary transmission mechanism is critical for monetary policy. As the Dominican Republic recently adopted an inflation targeting regime, it is even more relevant to guarantee that changes in the monetary policy rates are quickly and fully reflected in retail rates, to eventually influence aggregate demand and inflation. This paper estimates the interest rate pass-through of the monetary policy rate to retail rates and explores asymmetries in the adjustment. We find evidence of complete pass-through to retail rates, confirming the effectiveness of the monetary policy transmission mechanism. However, our results also suggest a faster pass-through to lending rates than to deposit rates and asymmetric adjustments of short-term rates, as deposit rates respond faster to policy rate cuts and lending rates respond faster to policy rate hikes. Measures to enhance competition in the financial system could help to achieve a symmetric adjustment of retail rates.
    Keywords: Western Hemisphere;Dominican Republic;asymmetric, interest rate, pass-through, transmission mechanism, monetary policy, interest, lending, deposit, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–12–10
  8. By: Dilyana Dimova; Piyabha Kongsamut; Jérôme Vandenbussche
    Abstract: This paper presents a detailed account of the rich set of macroprudential measures taken in four Southeastern European countries—Bulgaria, Croatia, Romania, and Serbia—during their synchronized boom and bust cycles in 2003–12, and assesses their effectiveness. We find that only strong measures helped contain domestic credit growth, the share of foreigncurrency- denominated loans provided by the domestic banking sector, or the domestic banking sector’s reliance on foreign borrowing during the boom years. We also find that circumvention via direct external borrowing often fully offset the effectiveness of these strict measures, and thatmeasures taken during the bust had no discernible impact. We conclude that (i) proper calibration of macroprudential measures is of the essence; (ii) only strong, broad-based macroprudential measures can contain credit booms; (iii) econometric studies of macroprudential policy effectiveness should focus on measures rather than on instruments (i.e. classes of measures) and in so doing allow for possible non-linear and state-contingent effects.
    Date: 2016–02–15
  9. By: de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
    Abstract: We provide empirical evidence on banks’ responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks’ adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. The results also suggest that central bank liquidity has mitigated this effect most clearly on lending volumes. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks. JEL Classification: G21, G32
    Keywords: banking/financial intermediation, financial crisis
    Date: 2016–02
  10. By: Fernando J. Pérez Forero (Central Reserve Bank of Peru); Marco Vega (Central Reserve Bank of Peru)
    Abstract: We study the response of headline inflation to exchange rate innovations in a nonlinear context, where we distinguish between positive (depreciation) and negative (appreciation) exchange rate shocks. For that purpose, we specify a nonlinear Structural Vector Autoregressive (SVAR) model and we compute asymmetric impulse response functions for headline inflation after exchange rate innovations. We introduce a bootstrap Monte Carlo routine that allows to compute the error bands for these nonlinear impulse responses. Results for the Peruvian economy exhibit a remarkable statistically significant asymmetry in the response of headline inflation, both on impact and on propagation. In absolute values, the effect of a depreciation shock after one year is about twice the size of that corresponding to an appreciation shock. Roughly speaking, the one-year exchange rate pass-through to prices is 20 percent under a depreciation and only 10 percent under an appreciation.
    Keywords: Exchange rate pass-through, asymmetric impulse responses, non-linear SVARs, Bootstrap, Monte Carlo
    JEL: C32 E31 F31
    Date: 2016–02
  11. By: Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
    Abstract: This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013). JEL Classification: E58, F36, G01, G21
    Keywords: central bank policy, financial crisis, interbank markets, lender-of-last-resort, sovereign debt crisis
    Date: 2016–02
  12. By: Olivier J. Blanchard; Eugenio Cerutti; Lawrence Summers
    Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    Date: 2015–11–06
  13. By: Jonida Bollano (Bank of Albania); Delina Ibrahimaj (Bank of Albania)
    Abstract: This paper empirically investigates the determinants of current accounts for a sample of 11 Central and East European Countries outside the Euro area. To this end we rely on the estimation of a panel VAR model with fixed effects over the period Q1 2005 to Q42014. Consistent with existing literature, we show that domestic GDP, the fiscal deficit, and the real effective exchange rate are key determinants of the current accounts of these countries. The dynamic relationships revealed in the paper complement the empirical literature on several fronts by providing new evidence from these emerging market economies.
    Keywords: Current account determinants, Central East Europe, P-VAR, GMM estimation
    JEL: F31 F32 F41 F42
    Date: 2015–10–01
  14. By: Christian Ebeke; Armand Fouejieu
    Abstract: This paper investigates the effects of the adoption of inflation targeting (IT) on the choice of exchange rate regime in emerging markets (EMs), conditional on certain macroeconomic conditions. Using a large sample of EMs and after controlling for the selection bias associated with the adoption of IT, we find that IT countries on average have a relatively more flexible exchange rate regime than other EMs. However, the flexibility of the exchange rate regime shows strong heterogeneity among IT countries depending on their degree of openness and exposure to FX risks. Moreover, we find that the marginal effect of IT adoption on the exchange rate flexibility increases with the duration of the IT regime in place, and with the propensity scores to adopt it.
    Date: 2015–10–28
  15. By: Thierry Kirat (IRISSO-UMR 7170 - Institut de Recherche Interdisciplinaire en Sciences Sociales - Université Paris IX - Paris Dauphine); Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Fraud and misconduct in financial markets have recently become a key regulatory issue against the backdrop of the financial crisis. This paper investigates the sanctions policy and practices of the French financial regulator, Autorité des Marchés Financiers (AMF). It argues that, over time, the AMF has shifted from substantive to procedural regulation of finance. This shift consists in departing from sanctions based on observed outcomes in the market and, instead, assessing how the internal organizational schemes of financial firms actually perform. The AMF's new policy and practice involves a process of legalization of organizations; it also evidences a tendency to delegate regulation to financial firms themselves
    Keywords: legalization of organization,substantive regulation,procedural deterrence,Financial market
    Date: 2015
  16. By: baaziz, yosra
    Abstract: This paper challenges the suitability of a nonlinear Taylor rule in characterizing the monetary policy behavior of Egyptian central bank), especially in turbulent times. More specifically, we investigate the possibility that the Taylor rule should be formulated as a threshold process and examine the validity of such nonlinear Taylor rule as a robust rule for conducting monetary policy in Egypt. Analytical results show that nonlinear Taylor rule holds and that adopting a nonlinear specification instead of the linear leads to a costs reduction in terms of fit: 90 basis point in 2008-Q4 and 20 basis point in post-revolution.
    Keywords: nonlinear Taylor rule; Logistic Smooth Transition Regression (LSTR); special events; costs in terms of fit
    JEL: E52 E58
    Date: 2016–02–27
  17. By: Sohrab Rafiq
    Abstract: This paper explores how monetary policy affects the real economy and its efficacy in promoting financial stability in a large low income country. This paper shows that monetary policy modestly impacts real economic activity and inflation via the bank lending and financial accelerator channels. Second, money market and treasury rates signal changes in the policy stance, while altering banks’ intermediation cost curves due to shifting risk premia. At the same time, evidence points to monetary policy inducing an overshooting in asset prices. These findings suggest that financial stability could be undermined if the calibration of monetary policy is based solely on output and inflation without accounting for the stage of the financial cycle. Finally, the paper discusses policy measures that would enhance the transmission of monetary policy and promote financial stability in Bangladesh.
    Keywords: Liquidity;Credit;Development;Asia and Pacific;Bangladesh;Monetary policy;Prices;inflation, financial stability, reserve, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics,
    Date: 2015–11–09
  18. By: Marc Dobler; Simon Gray; Diarmuid Murphy; Bozena Radzewicz-Bak
    Abstract: The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as “Lender of Last Resort†) provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.
    Keywords: Lender of last resort;Central banks and their policies;collateral, risk control measures, market, lender, liquidity, central bank, Government Policy and Regulation, All Countries,
    Date: 2016–01–22
  19. By: Chia-Chien Chang (Department of finance); Yung -Jen Chung (Department of finance)
    Abstract: In December 2010, the BCBS (2010a) strengthened its liquidity framework by proposing two quantitative indicators for liquidity risk in Basel III: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Whether the new liquidity risk indicators are effective to measure the liquidity risk of bank thereby reducing bank failures is an issue of concern. Thus, this study uses a quarterly data of Taiwan banks from 2006 to 2013 and uses the panel multiple regression model to investigate the effectiveness of LCR and NSFR in Taiwan banks. We also study the effectiveness of spread and several liquidity risk indictors used in Taiwan based on Principles for Sound Liquidity Risk Management and Supervision (PSLRMS). Moreover, we test the liquidity risk majored from systematic or non-systematic risk, and consider the size effect and time effect to compare the result. The result shows that all liquidity risk indicators can explain empirical default point (EDD) significantly, for big banks, LCR is more important than NSFR, but for small banks, NSFR is more important. In crisis period, spread and LCR are significant in big banks, but no indicators are significant in small banks. After crisis, both big and small banks are affected by spread, and NSFR and LCR is significant in small bank and in big bank, respectively.
    Keywords: Subprime mortgage crisis, Basel III, The Liquidity Coverage Ratio, The Net Stable Funding Ratio, Size effect
  20. By: Hein, Eckhard
    Abstract: The increasing dominance of finance starting in the late 1970s/early 1980s in the US and the UK, and somewhat later in other countries, was associated with two fundamental and structural processes generating the contradictions of this phase of development and finally the financial and economic crises starting in 2007: the deregulation of the financial (and economic) system and the massive redistribution of income at the expense of labour and low income households. These fundamental processes provided the conditions for the generation of major imbalances within some of the national economies, on the one hand, and at the international level, on the other hand. These imbalances and contradictions led eventually to the deep financial and economic crisis, starting in 2007. Therefore, a more resilient financial and economic system requires the re-regulation and downsizing of the financial sector, the re-distribution of income (and wealth) from top to bottom and from capital to labour, the re-orientation of macroeconomic policies towards stabilizing domestic demand at non-inflationary full employment levels, and the re-creation of international monetary and economic policy coordination.
    Keywords: financialisation,distribution,growth,financial and economic crisis,resilient financial and economic system
    JEL: D30 E02 E11 E12 E21 E22 E25 E44 E61 E65 G01
    Date: 2016
  21. By: Jörg Decressin; Raphael A. Espinoza; Ioannis Halikias; Michael Kumhof; Daniel Leigh; Prakash Loungani; Paulo A. Medas; Susanna Mursula; Antonio Spilimbergo; TengTeng Xu
    Abstract: The paper studies the impacts of wage moderation in the euro area. Simulation results show that if a single euro area crisis-hit economy undertakes wage moderation, the impact on output is positive for that economy and for the entire euro area. If all crisis-hit economies undertake wage moderation together, their output still expands, albeit to a lesser degree. If the wage moderation is accompanied by cuts in policy interest rates by the central bank—and by quantitative easing once interest rates hit the zero lower bound—then output for the entire euro area expands as well.
    Keywords: Wage bargaining;Euro Area;Wage adjustments;Negative spillovers;Monetary policy;Euro area, Crisis, Current account, Internal devaluation, Unemployment, Wage moderation, economies, devaluation, monetary policy, economy, General, Open Economy Macroeconomics, International Policy Coordination and Transmission, International Business Cycles, All Countries,
    Date: 2015–11–17
  22. By: Zied Ftiti; Walid Hichri
    Date: 2016–02–18
  23. By: Serkan Arslanalp; Yin Liao
    Abstract: In this paper, we develop a methodology to assess potential losses to the government that could arise from bank failures. The approach is intended to be simple, parsimonious, and used in real time. It generates an index that we call the banking sector contingent liability index (BCLI), based on the banking sector’s size, concentration, diversification, leverage, and riskiness of assets. The index is illustrated for 32 advanced and emerging market economies from 2006 to 2013, as well as a group of banks including global systemically important banks (G-SIBs).
    Keywords: Contingent liabilities;Sovereign risk;Banking sector;bank, banks, banking, risk, Government Policy and Regulation, All Countries,
    Date: 2015–12–09
  24. By: Ergungor, O. Emre (Federal Reserve Bank of Cleveland)
    Abstract: In this paper, I develop a systemic risk measure derived from investor sentiment that has predictive power over future economic activity and market returns. Unlike existing measures, it is not focused on flagging investors’ heightened awareness of risk at the end of a boom episode but rather on capturing shifts in their trading behavior at the beginning of the episode. The method allows investors and regulators to observe industries in which risks could be building and provides regulators some lead time in deploying their macroprudential tools.
    Keywords: Financial stability; Systemic risk; Investor sentiment; Risk management;
    JEL: G01 G11 G12 G18 G28
    Date: 2016–02–19
  25. By: Andrew Binning (Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway) and BI Norwegian Business School)
    Abstract: The Zero Lower Bound (ZLB) on policy rates is one of the key monetary policy issues du jour. In this paper we investigate the problem of modelling and estimating the ZLB in a simple New Keynesian model with regime switches. The key features of the model include switches in the time preference shock, productivity growth rate and the steady state rate of inflation leading to two steady states: a normal steady state and a ZLB steady state. The model is tted to US data using Bayesian methods and is found to match the US experience over the great moderation and the ZLB periods very well. The key features of the model allow us to test competing theories about the determinants of the ZLB steady state. Our results suggest that the ZLB steady state is driven by precautionary savings behavior. It is also found that expectations over different regimes crucially matter for the dynamics of the system.
    Keywords: Zero Lower Bound, Regime-switching, DSGE, Bayesian Estimation
    Date: 2016–02–11
  26. By: Mukti Nath Subedi (Australian National University)
    Abstract: Fiscal and monetary policy have played an important role in defending the economy from the ravages of global financial crisis (GFC) of 2007-08. Inspired by Australian fiscal and monetary policy performance during GFC, this study investigates the effects of macroeconomic policy shocks on the labour market dynamics in Australia using a vector auto-regression (VAR) method. It examines the dynamic response of output, unit labour cost, total hours worked and employment to changes in government spending and cash rate for 1985:3-2015:1. The results suggest that in response to positive cash rate shock total hours worked and employment react negatively, whereas unit labour cost reacts positively. On the other hand, in response to positive government spending shock, total hours worked and employment response positively, whereas, unit labour cost responds negatively.
    Keywords: Labour market, Vector Autoregression, Macroeconomic policy
    JEL: C32 E24 E69

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