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on Dynamic General Equilibrium |
| By: | Vincent Sterk (University College London); Silvana Tenreyro (London School of Economics) |
| Abstract: | This paper studies a redistribution channel for the transmission of monetary policy. Using a tractable OLG setting in which the government is a net debtor, we show that standard open market operations (OMO) conducted by Central Banks have significant revaluation effects that alter the level and distribution of wealth in the economy and the real interest rate. Specifically, expansionary OMO generate a negative wealth effect (the private sector as a whole is a net creditor to the government), increasing households’ incentives to save for retirement and pushing down the real interest rate. This, in turn, leads to a substitution towards durables, generating a temporary boom in the durable good sector. With search and matching frictions, a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand, raising aggregate employment. The mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions. The model shows that different monetary interventions (e.g., OMO versus helicopter drops) can have sharply different effects on activity. |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ceq:wpaper:1601&r=dge |
| By: | Nicolas Petrovsky-Nadeau (Tepper School of Business); Etienne Wasmer (Département d'économie) |
| Abstract: | Goods market frictions drastically change the dynamics of the labor market, both in terms of persistence and volatility. In a model with three imperfect markets – goods, labor, and credit – we find that credit and goods market imperfections are substitutable in raising volatility. Goods market frictions are unique in generating persistence. Two key mechanisms in the goods market generate large hump-shaped responses to productivity shocks: countercyclical goods market tightness and prices alter future profit flows and raise persistence; procyclical search effort of consumers and firms raises amplification. Goods market frictions are thus key in understanding labor market dynamics. |
| Keywords: | Goods market search; Labor market dynamics; Propagation; Credit market frictions |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b&r=dge |
| By: | Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas) |
| Abstract: | I develop a two-country New Keynesian model with capital accumulation and incomplete international asset markets that provides novel insights on the effect that imperfect international risk-sharing has on international business cycles and RER dynamics. I find that business cycles appear similar whether international asset markets are complete or not when driven by a combination of non-persistent monetary shocks and persistent productivity (TFP) shocks. In turn, international asset market incompleteness has sizeable effects if (persistent) investment-specific technology (IST) shocks are a main driver of business cycles. I also show that the model with incomplete international asset markets can approximate the RER volatility and persistence observed in the data, for instance, if IST shocks are near-unit-root. Hence, I conclude that the nature of shocks, the extent of financial integration across countries and the existing limitations on asset trading are central to understand the dynamics of the real exchange rate and the endogenous international transmission over the business cycles. |
| JEL: | F31 F37 F41 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:262&r=dge |
| By: | Dan Tortorice (Brandeis University); ; |
| Abstract: | I consider a real-business cycle, DSGE model where consumption is a function of the present discounted value of wage and capital income. The agent is uncertain if these income variables are stationary or non-stationary and puts positive probability on both representations. The agent uses Bayesian learning to update his probability weights on each model and these weights vary over time according to how well each model ts the data. The model exhibits an improved t to the data relative to the rational expectations benchmark. The model requires half the level of exogenous shocks to match the volatility of output and still matches the relative volatilities of key business cycle variables. The model lowers the contemporaneous correlation of consumption and wages with output and generates positive autocorrelation in model growth rates. Impulse responses exhibit persistent responses and consistent with survey evidence forecast errors are positively serially correlated. Finally, in contrast to the existing literature, the model endogenously generates observed time varying volatility and long run predictability of business cycle variables, especially for investment. |
| Keywords: | Business Cycles; Investment; Learning |
| JEL: | E32 E22 D83 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:100&r=dge |
| By: | Vincent Sterk (Department of Economics University College London (UCL); Centre for Macroeconomics (CFM)) |
| Abstract: | Standard models predict that episodes of high unemployment are followed by recoveries. This paper shows, by contrast, that a large shock may set the economy on a path towards very high unemployment, with no recovery in sight. First, I estimate a reduced-form model of flows in the U.S. labor market, allowing for the possibility of multiple steady states. Next, I estimate a non-linear search and matching model, in which multiplicity of steady states may arise due to skill losses upon unemployment, following Pissarides (1992). In both cases, estimates imply a stable steady state with around 5 percent unemployment and an unstable one with around 10 percent unemployment. The search and matching model can explain observed job finding rates remarkably well, due to its strong endogenous persistence mechanism. |
| Keywords: | Unemployment, multiple steady states, non-linear estimation |
| JEL: | E24 E32 J23 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1603&r=dge |
| By: | Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester) |
| Abstract: | This paper constructs a dynamic model in which fiscal restrictions interact with government borrowing and default. The government faces fiscal constraints; it cannot adjust tax rates or impose lump-sum taxes on the private sector, but it can adjust public consumption and foreign debt. When foreign debt is sufficiently high, however, the government can choose to default to increase domestic public and private consumption by freeing up the resources used to pay the debt. Two types of defaults arise in this environment: fiscal defaults and aggregate defaults. Fiscal defaults occur because of the government's inability to raise tax revenues. Aggregate defaults occur even if the government could raise tax revenues; debt is simply too high to be sustainable. In a quantitative exercise calibrated to Greece, we find that our model can predict the recent default, but that increasing taxes would not have prevented it. In fact, increasing taxes would have made the recession deeper because of the distortionary effects of taxation. |
| Keywords: | Sovereign default; Tax reforms; Debt crisis |
| JEL: | F30 |
| Date: | 2016–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:525&r=dge |
| By: | Reiter, Michael (Institute for Advanced Studies, Vienna) |
| Abstract: | The paper presents a computationally efficient method to solve overlapping generations models with asset choice. The method is used to study an OLG economy with many cohorts, up to 3 different assets, stochastic volatility, short-sale constraints, and subject to rather large technology shocks. On the methodological side, the main findings are that global projection methods with polynomial approximations of degree 3 are sufficient to provide a very precise solution, even in the case of large shocks. Globally linear approximations, in contrast to local linear approximations, are sufficient to capture the most important financial statistics, including not only the average risk premium, but also the variation of the risk premium over the cycle. However, global linear approximations are not sufficient to reliably pin down asset choices. With a risk aversion parameter of only 4, the model generates a price of risk, measured as the Sharpe ratio, that is almost half of what it is for US stocks. However, the asset price fluctuations and the equity premium are much smaller than in US data. |
| Keywords: | OLG models, asset choice, projection methods |
| JEL: | C63 C68 E21 G11 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:320&r=dge |
| By: | Lena Dräger; Christian Proaño |
| Abstract: | Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a global banking sector along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank’s leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the dominating region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be partly mitigated if the central bank reacts to loan rate spreads, at least relative to the case with constant lending standards. |
| Keywords: | Cross-border banking, euro area, monetary unions,DSGE, monetary policy |
| JEL: | F41 F34 E52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:161-2016&r=dge |
| By: | Vega, Marco (Banco Central de Reserva del Perú) |
| Abstract: | This paper models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate depreciations are positively correlated with the probability of default by borrower firms and turn out to be a powerful mechanism to affect aggregate consumption. Throughout the monetary policy evaluation exercises performed, the sign of the unexpected depreciation is positively correlated to the real value of assets and negatively correlated to aggregate consumption. This result supports the idea that unexpected exchange rate depreciations are contractionary and not expansionary if dollarization and agency costs in the financial sector are considered. |
| Keywords: | Phillips Curve, Monetary Policy, Financial Dollarization, Financial Intermediation, Agency Costs, Small Open Economy |
| JEL: | E31 E44 F41 G21 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2015-019&r=dge |
| By: | Florian Oswald (University College of London [London] (UCL)) |
| Abstract: | This paper estimates a lifecycle model of consumption, housing choice and migration in the presence of aggregate and regional shocks, using the Survey of Income and Program Participation (SIPP). Using the model I estimate the value of the migration option and the welfare impact of policies that may restrict mobility. The option to move is equivalent to 4.4% of lifetime consumption. I also find that, were the mortgage interest-rate deduction to be eliminated, the aggregate migration rate would increase only marginally by 0.1%. Following a general equilibrium correction, house prices are reduced by 5%, which results in a 1% increase in home ownership. In a new steady state the elimination of the deduction is equivalent to an increase of 2.4% of lifecycle consumption. |
| Keywords: | Model of consumption; Housing choice; Migration |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/n1d9kd7k48keoo4brb07foqbd&r=dge |
| By: | CASTRO, Rui; KOUMTINGUÉ, Nelnan |
| Abstract: | Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries. |
| Keywords: | Incomplete markets; Endogenous borrowing constraints; Risk sharing; Economic integration |
| JEL: | F15 F34 F36 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2015-07&r=dge |
| By: | José E. Boscá; Javier Ferri |
| Abstract: | We introduce an update of REMS, the model used by the Spanish Ministries of Economy and Finance for ex-ante policy evaluation. We include two new features in the model: credit-constrained consumers, which are added to the existing optimizing consumers and liquidity-constrained (RoTs) consumers; and a market for housing. Credit-constrained consumers can borrow up to a limit defined by the expected value of their houses. Part of the real estate accumulated by patient households is offered to impatient and liquidity-contrained households as house to rent. Impatient households can decide between purchasing houses to occupy themselves or renting houses from patient households. Completely liquidity-constrained households only have access to rented houses. We illustrate how this housing market reacts to different shocks and we simulate the expected e¤ects of Spain's 2014 fiscal reform. |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaeee:eee2016-03&r=dge |
| By: | Jakob Palek (University of Kassel); Benjamin Schwanebeck (University of Kassel) |
| Abstract: | The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no inefficient labor allocation. Comparing different policy regimes, we get the following ranking in terms of welfare: discretion outperforms strict inflation targeting which outperforms a (euro-area based) Taylor Rule. |
| Keywords: | financial frictions, credit spreads, borrowing constraint, monetary policy, macroprudential policy, optimal policy mix, currency union |
| JEL: | E32 E44 E58 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201522&r=dge |
| By: | Nicolas Petrovsky-Nadeau (Tepper School of Business); Etienne Wasmer (Département d'économie); Shutian Zeng |
| Abstract: | There is a renewed interest in macroeconomic theories of search frictions in the goods market that help solve quantitative puzzles on amplification and persistence of GDP, sales, inventory and advertisement. This requires a deeper understanding of the cyclical properties of the intensive margins of search in this market. Using the American Time Use Survey we construct an indicator of shopping time. It includes both searching and purchasing goods and is based on 25 time use categories (out of more than 400 categories). We find that average time spent shopping declined in the aggregate over the period 2008-2010 compared to 2005-2007. The decline was largest for the unemployed who went from spending more time shopping for goods than the employed to roughly the same, or even less, time. Cross-state and individual regressions indicate procyclical consumer shopping time in the goods market. This evidence poses a challenge for models in which price comparisons are a driver of business cycles. |
| Keywords: | Goods market search; Time allocation; American Time Use Survey; Business cycles |
| JEL: | D12 E32 J22 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2lcqvok1m996m9pb3ctnmerhpq&r=dge |
| By: | Evangelos V. Dioikitopoulos (Department of Management, King's College London); Sugata Ghosh (Department of Economics amd Finanace, Brunel University London); Eugenia Vella (Department of Economics, University of Sheffield) |
| Abstract: | This paper explores the relationship among technological progress, environment and growth by combining endogenous efficiency of public abatement with endogenous discounting. Our model can feature two different balanced growth paths corresponding to different levels of environmental quality, which remains constant in the long-run although the economy grows. The multiple equilibria point to a non-monotonic relationship among technological progress, growth and the environment, as observed in the data. A Ramsey planner can implement the good equilibrium; however, under a positive technology shock, the economy achieves higher long-run growth at the cost of lower environmental quality (even if agents value the environment highly). This finding could help us explain why some advanced economies may not succeed in cleaning the environment effectively. |
| Keywords: | Time preference; growth; environmental quality; Fiscal policy; technological progress |
| JEL: | D90 E21 E62 H31 O44 Q28 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2016002&r=dge |
| By: | Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin |
| Abstract: | We extend the search-matching model of the marriage market of Shimer and Smith (2000) to allow for labor supply, home production, match-specific shocks and endogenous divorce. We study nonparametric identification using panel data on marital status, education, family values, wages, and market and non market hours, and we develop a semiparametric estimator. We estimate how much sorting results from time use specialization or homophilic preferences. We estimate how equilibrium marriage formation affects the wage elasticities of market and non market hours. We estimate individuals’ willingness to pay for marriage and quantify the redistributive effect of intra-household resource sharing. |
| Keywords: | Search-matching, sorting, assortative matching, collective labor supply, structural estimation. |
| JEL: | C78 D83 J12 J22 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1601&r=dge |
| By: | Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski |
| Abstract: | This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a twocountry macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, we find that foreign ownership of banks amplifies spillovers from foreign shocks. It also strenghtens the international transmission of monetary and macroprudential policies. We next replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also show that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks. |
| Keywords: | foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking |
| JEL: | E32 E44 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:231&r=dge |
| By: | Ozge Senay (University of St. Andrews); Alan Sutherland (University of St Andrews and CEPR) |
| Abstract: | Recent literature on monetary policy in open economies shows that, when international financial trade is restricted to a single non-contingent bond, there are significant internal and external trade-offs that prevent optimal policy from simultaneously closing all welfare gaps. This implies an optimal policy which deviates from inflation targeting in order to offset real exchange rate misalignments. These simple models are, however, not good representations of modern financial markets. This paper therefore develops a more general and realistic two-country model of incomplete markets, where, in the presence of a wide range of stochastic shocks, there is international trade in nominal bonds denominated in the currencies of the two countries and equity claims on profit streams in the two countries. The analysis shows that, as in the recent literature, optimal policy deviates from inflation targeting in order to offset exchange rate misalignments, but the welfare benefits of optimal policy relative to inflation targeting are quantitatively smaller than found in simpler models of financial incompleteness. It is nevertheless found that optimal policy implies quantitatively significant stabilisation of the real exchange rate gap and trade balance gap compared to inflation targeting. |
| Keywords: | Optimal monetary policy, Financial market structure, Country Portfolios |
| JEL: | E52 E58 F41 |
| Date: | 2016–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1603&r=dge |
| By: | Kollmann, Robert (European Centre for Advanced Research in Economics and Statistics (ECARES)) |
| Abstract: | This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate. |
| JEL: | F31 F32 F36 F41 F43 |
| Date: | 2015–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:258&r=dge |
| By: | Bhattarai, Saroj (University of Texas at Austin); Egorov, Konstantin (Pennsylvania State University) |
| Abstract: | We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher. |
| JEL: | E31 E52 E58 E61 E62 E63 F41 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:260&r=dge |
| By: | Zhang Haiping (Singapore Management University) |
| Abstract: | In an overlapping generations model with financial frictions and the fixed investment size requirement, Matsuyama (2004, Econometrica) shows that, in the absence of integrated financial markets, the world economy has a unique steady state, which is symmetric and stable in the sense that inherently identical countries converge to the same income level in the long run, regardless of their initial income level; financial globalization may \break" this symmetric steady state and lead to cross-country income polarization. He calls this phenomenon \symmetry breaking" and points out that financial underdevelopment is one of the necessary conditions. We revisit this result by introducing wealth inequality and the minimum in- vestment requirement into his framework. Increasing wealth inequality strictly reduces the possibility of symmetry breaking; if wealth inequality exceeds a threshold value, symmetry breaking does not arise at all, regardless of the level of financial development. Thus, wealth inequality is an equally important factor as financial development in determining the possibility of symmetry breaking. We also address some practical issues in this framework, e.g., the conditions of financial integration, the domestic financial crisis and capital controls, and the world interest rate shocks and income volatility |
| Keywords: | Financial Frictions, Financial Globalization, Minimum Investment Requirements, Symmetry Breaking, Wealth Inequality |
| JEL: | E44 F41 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:05-2015&r=dge |
| By: | Ozge Senay (University of St. Andrews); Alan Sutherland (University of St Andrews and CEPR) |
| Abstract: | Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks. |
| Keywords: | Optimal monetary policy, Financial market structure, Country Portfolios, Collateral constraints |
| JEL: | E52 E58 F41 |
| Date: | 2016–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1603&r=dge |
| By: | Zhang Haiping (Singapore Management University) |
| Abstract: | We embed financial frictions and sector-specific minimum investment requirements (MIR) in a two-factor, two-sector, overlapping-generation model and show that whether trade integration leads to convergence of the income levels among member states depends on their level of financial development. It helps reconcile the mixed empirical evidence on trade integration and income dynamics in different groups of countries from the institutional perspective. In the recent decades, trade globalization has allowed developed countries to specialize towards the high-MIR, high-return production stages and tasks through international fragmentation of production and global sourcing. In our model, the "sectors" can be interpreted broadly as production stages and tasks. Free trade may induce the more financially developed countries to specialize fully in the high-MIR, high-return "sector", which fundamentally changes the credit market condition and the way the interest rate is determined. In this case, free trade may amplify rather than eliminate the global imbalances (a phenomenon of the large capital ows from developing to developed countries observed in the recent years), opposite to the findings of Antras and Caballero (2009, Journal of Political Economy). This way, we argue that trade and financial integration should be analyzed jointly and trade driven structural changes may reshape our understanding of capital fl ows. |
| Keywords: | Financial development, financial integration, minimum investment requirements, symmetry breaking, trade integration, wealth inequality |
| JEL: | F11 F41 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:15-2015&r=dge |
| By: | Carneiro,Francisco Galrao; Hnatkovska,Viktoria |
| Abstract: | This paper analyzes the business cycle characteristics of the economies of the Organization of Eastern Caribbean States using a model of a small open economy subject to interest rate and fiscal expenditure shocks and financial frictions. The paper shows that macroeconomic aggregates in this region are quite volatile, with consumption exhibiting higher volatility than gross domestic product. The analysis also finds that in these economies real interest rates are highly volatile and strongly countercyclical with gross domestic product and other macroeconomic aggregates. Similarly, fiscal expenditures show significant volatility, but are pro-cyclical with gross domestic product. The results suggest two major directions for designing policies to help reduce the volatility experienced by the Organization of Eastern Caribbean States economies. First, Organization of Eastern Caribbean States countries should seek a greater openness to international financial markets, which could help them smooth out the effects of fundamental shocks, such as shocks to technology and terms of trade, and shocks associated with natural hazards. However, this removal of international financial barriers needs to be accompanied by improvements in domestic financial conditions, as this would reduce the vulnerability of these economies to country risk premium shocks. Second, the Organization of Eastern Caribbean States region should try harder to move toward a countercyclical fiscal policy stance, as this could help to stabilize the domestic risk premium and cushion the negative effects of interest rate shocks on economic activity, hence reducing volatility. |
| Keywords: | Debt Markets,Economic Conditions and Volatility,Economic Theory&Research,Access to Finance,Emerging Markets |
| Date: | 2016–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7545&r=dge |
| By: | Xavier Ragot |
| Abstract: | The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in a heterogeneous-agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol–Tobin literature, are introduced. Studying each friction in turn, one finds that the financial friction explains more than 78% of total money demand. |
| Keywords: | Money Demand; Money Distribution; Heterogenous Agents |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/4vm8e5vhjr99cb1ekr86bivlk0&r=dge |
| By: | Barañano Mentxaka, Ilaski; San Martín Lizarralde, Marta |
| Keywords: | endogenous, growth, externalities, optimal, policy, indeterminacy |
| JEL: | H21 E62 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:16781&r=dge |
| By: | Elisa Guglielminetti (Département d'économie (ECON)); Rafael Lalive (University of Lausanne); Philippe Ruh (University of Zürich); Etienne Wasmer (Département d'économie) |
| Abstract: | Job search is a spatially oriented activity. Searching farther is costly, and working far away from home entails high costs, affecting job acceptance decisions. We build a simple theoretical framework where job seekers choose how much to search, how far to search, and what lowest wage they accept for a given commute distance. In this setup, unemployment insurance discourages broader job search through reducing the net gain from getting a job. Opposite forces encourage broader search, either through the re-entitlement effect or, under liquidity constraints, to finance costly spatial job search. We use a unique dataset on all workers entering unemployment in Austria between 1995 to 2004 to investigate these forces. We find that newly unemployed workers initially find relatively more frequently jobs in the same workplace as they used to be employed. As the unemployment spell gets longer, they both accept lower wages and progressively enlarge their radius of search, ending up with a job farther away from their previous workplace (but not necessarily farther away from their residence). Unemployment insurance reduces reservation wages at a given accepted commute distance, and encourages search outside the municipality of the previous job. Reducing potential benefit duration affects wages and commuting distance more strongly than changes in the benefit level. |
| Keywords: | Job search; Job seekers; Unemployment insurance |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/4n249fe9fu9n7qnntf71h06q6n&r=dge |
| By: | Dabusinskas, Aurelijus (Lietuvos Bankas); Konya, Istvan (Centre for Economic and Regional Studies of the Hungarian Economy of Sciences and Central European University); Millard, Stephen (Bank of England) |
| Abstract: | The recent crisis in the Eurozone has led to much discussion about the structure of labour markets in different Eurozone economies. In particular, there has been much talk of the need for structural labour market reform in the Eurozone periphery. But, there are many aspects of labour market structure – eg, wage flexibility, flexibility in hiring and firing, generosity of welfare schemes, etc — and it is not clear a priori which aspects really matter. In this paper, we analyse how cross-country differences in labour market characteristics — in particular, wage and employment rigidities — shape the response of different countries to a variety of macroeconomic shocks. To address this question, we use a calibrated small open economy model in which we set the parameters governing the structural characteristics of the labour market based on three European countries: Estonia, Finland and Spain. We find that, given our labour market calibrations, we would expect output and unemployment to be much more adversely affected by the shocks associated with the financial crisis in countries with high job turnover rates. |
| Keywords: | Labour market structure; labour market flexibility |
| JEL: | E24 |
| Date: | 2016–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0582&r=dge |
| By: | Frantisek Brazdik; Zuzana Humplova; Frantisek Kopriva |
| Abstract: | When presenting the results of macroeconomic forecasting, forecasters often have to explain the contribution of data revisions, conditioning information, and expert judgment updates to the forecast update. We present a framework for decomposing the differences between two forecasts generated by a linear structural model into the contributions of the elements of the information set when anticipated and unanticipated conditioning is applied. The presented framework is based on a set of supporting forecasts that simplify the decomposition of the forecast update. The features of the framework are demonstrated by examining two forecast scenarios with the same initial prediction period but different forecast assumptions. The full capabilities of the decomposition framework are documented by an example forecast evaluation where the forecast from the Czech National Bank’s Inflation Report III/2012 is assessed with respect to the updated forecast from Inflation Report III/2013. |
| Keywords: | Data revisions, DSGE models, forecasting, forecast revisions |
| JEL: | C53 E01 E47 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2015/12&r=dge |