nep-ias New Economics Papers
on Insurance Economics
Issue of 2015‒01‒31
forty-one papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Improving Health Outcomes and Health Care in India By Isabelle Joumard ; Ankit Kumar
  2. Social health insurance improves women’s healthcare use: Evidence from Indonesia By Samarakoon, Shanika ; Parinduri, Rasyad
  3. Definition of catastrophic event when developing crop insurances for Finnish markets By Väre, Minna Katriina ; Liesivaara, Petri ; Myyrä, Sami
  4. Willingness to pay for agricultural yield insurance is affected by starting point bias By Myyrä, Sami ; Liesivaara, Petri
  5. To buy or not buy (insurance)? An experiment on public funds distribution under different rooted risks By Xu, Zhicheng ; Palma, Marco A.
  6. Evaluation of Crop Insurance Choices for Cotton Producers under the 2014 Farm Bill By Luitel, Kishor ; Knight, Thomas ; Hudson, Darren
  7. Simulating world trade in the decades ahead: Driving forces and policy implications By Fontagné, Lionel ; Fouré, Jean ; Keck, Alexander
  8. A new political economy approach for the economic crisis By Giuseppe Vitaletti
  9. Endogenous Search, Price Dispersion, and Welfare By Liang Wang
  10. Ireland’s economic crisis the good, the bad and the ugly By Karl Whelan
  11. The European Crisis and the role of the financial system By Vitor Constancio
  12. Credit policy in times of financial distress By Costas Azariadis
  13. Fundamentally wrong: market pricing of sovereigns and the Greek financial crisis By Heather D. Gibson ; Stephen G. Hall ; George S. Tavlas
  14. The unintended consequences and challenges of the Basel III Leverage Ratio: supplementary leverage ratios By Ojo, Marianne
  15. Local Government Investments and Ineffectiveness of Fiscal Stimulus during Japan's Lost Decades By Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
  16. Recurrent overdrafts: a deliberate decision by some prepaid cardholders? By Hayashi, Fumiko ; Cuddy, Emily
  17. Re-use of collateral in the repo market By Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
  18. Estimating Dual Deposit Insurance Premium Rates and Forecasting Non-performing Loans: Two New Models By Yoshino, Naoyuki ; Taghizadeh-Hesary, Farhad ; Nili, Farhad
  19. Real-time macro monitoring and fiscal policy By Ley, Eduardo ; Misch, Florian
  20. The time for austerity: Estimating the average treatment effect of fiscal policy By Jordà, Òscar ; Taylor, Alan M.
  21. Does austerity pay off? By Born, Benjamin ; Müller, Gernot J. ; Pfeifer, Johannes
  22. Efficient perturbation methods for solving regime-switching DSGE models By Junior Maih
  23. Inflation and Inflation Uncertainty in Turkey By dogru, bulent
  24. Traditional Inflation Dynamics By Malikane, Christopher
  25. Balance Sheet Recessions with Informational and Trading Frictions By Vladimir Asriyan
  26. The inflation targeting policy in Tunisia? Between perception and reality By Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
  27. Accounting for Changes in Between-Group Inequality By Ariel Burstein ; Eduardo Morales ; Jonathan Vogel
  28. News Shocks in Open Economies: Evidence from Giant Oil Discoveries By Rabah Arezki ; Valerie A. Ramey ; Liugang Sheng
  29. Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries By Ross Levine ; Chen Lin ; Wensi Xie
  30. Microeconomic Origins of Macroeconomic Tail Risks By Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
  31. Normalization of Banking By Volodymyr Vysochansky
  32. TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area By Gabriel Fagan ; Paul McNelis
  33. Betting on Exports: Trade and Endogenous Heterogeneity By Alessandra Bonfiglioli ; Gino Gancia
  34. Time-Varying Wage Risk, Incomplete Markets, and Business Cycles By Shuhei Takahashi
  35. Spillover effects in a monetary union: Why fiscal policy instruments matter By Amélie BARBIER-GAUCHARD ; Thierry BETTI ; Giuseppe DIANA
  36. Conservatism and Liquidity Traps By Nakata, Taisuke ; Schmidt, Sebastian
  37. Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia By Hills, Timothy S. ; Nakata, Taisuke
  38. Optimal taxation and debt with uninsurable risks to human capital accumulation By Gottardi, Piero ; Kajii, Atsushi ; Nakajima, Tomoyuki
  39. The inflation expectations of firms: what do they look like, are they accurate, and do they matter? By Bryan, Michael F. ; Meyer, Brent ; Parker, Nicholas B.
  40. The Impacts of the Global Crisis on the Turkish Economy and Policy Responses By Hasan Comert ; Selman Colak
  41. Political uncertainty and household savings By Rolf Aaberge ; Kai Liu ; Yu Zhu

  1. By: Isabelle Joumard ; Ankit Kumar
    Abstract: With India’s low life expectancy largely reflecting deaths from preventable diseases, the most significant gains in health would come from population-wide preventive measures. Access to public health care services varies substantially, resulting in many people turning to private-sector providers who mainly serve those who can pay. While government has scaled up public health services, more health professionals and public health care spending will be needed to ensure broad and adequate health-care coverage. Priority should be given to high impact primary health care services. For more resources to translate into better services, the management of public health care services needs to improve. The private sector can be drawn upon more extensively, but should also be obliged to meet basic quality standards. Améliorer la santé et l'accès aux soins de tous en Inde. La faible espérance de vie en Inde s’expliquant largement par la mortalité liée à des maladies évitables, les gains les plus notables au plan sanitaire seront réalisés grâce à des mesures de prévention généralisées. L’accès aux services de santé publique est très variable et une part importante de la population se tourne vers les prestataires du secteur privé, qui servent essentiellement une population plus aisée. Si les autorités ont renforcé les services de santé publique, il faudra plus de professionnels de santé et plus de dépenses publiques de santé pour assurer une couverture sanitaire adéquate. Il conviendrait de donner la priorité aux services de soins primaires, à fort impact. Il conviendrait également d’améliorer la gestion des services publics de santé pour garantir une meilleure qualité de ces services par rapport aux ressources investies. Le secteur privé pourrait être davantage mis à contribution, mais devrait également être tenu de respecter des normes de qualité minimales.
    Keywords: health, health professionals, RSBY, India, public and private health insurance, RSBY, assurance santé privée, Inde, assurance santé publique, santé
    JEL: H51 I13 I15 I18
    Date: 2015–01–08
  2. By: Samarakoon, Shanika ; Parinduri, Rasyad
    Abstract: To improve the poor’s access to healthcare services, the Indonesian government introduced Askeskin, a subsidized social health insurance for the poor. We examine the effects of this social health insurance on women’s use of healthcare—maternal, preventive, and curative healthcare—services. Using propensity- score- and difference-in-differences matching strategies, we find the insurance increases the use of public facilities for maternal healthcare, discourages the use of midwives’ services, and increases the use of contraception; it does not seem to increase the use of preventive and curative care, however.
    Keywords: Social health Insurance; maternal healthcare; women’s preventive and curative healthcare; Indonesia; South East Asia
    JEL: I11 I12 I13 I15
    Date: 2015–01
  3. By: Väre, Minna Katriina ; Liesivaara, Petri ; Myyrä, Sami
    Abstract: In Finland, there is need for new crop insurance system as the Crop Damage Compensa-tion scheme (CDC) is abolished in 2015. Therefore, the responsibility of farmers, insurance companies and government in case of crop damages and catastrophic events need to be de-fined. We compared CDC data to the total value of crop production in Finland. Probability of catastrophic losses was simulated by Monte Carlo method and compared to farmers’ stated beliefs on catastrophic events. Results suggest that there occurs no such catastrophic risk that crop insurance system would not be able to cover. Thus, disaster relief program by the gov-ernment is not needed in Finland.
    Keywords: Catastrophe, crop, insurance, Monte Carlo, Risk and Uncertainty,
    Date: 2014–08
  4. By: Myyrä, Sami ; Liesivaara, Petri
    Abstract: Approach to agriculture risk management has extended in the EU and the possibilities of public support for yield risk management have increased. Crop insurance products are supported in EU’s Common Agricultural policy (CAP). The problem in policymaking is finding the balance between crop insurance supply and demand, because adequate data on farm-specific yield density functions are rarely available. We used a choice experiment (CE)to evaluate the willingness of farmers to buy crop insurance products. Demand for crop insurances was revealed, but we found that farmers anchor their willingness to pay for crop insurances to the price levels introduced.
    Keywords: Crop insurance, Choice experiment, split sample, Risk and Uncertainty,
    Date: 2014–08
  5. By: Xu, Zhicheng ; Palma, Marco A.
    Abstract: The distribution of income and wealth resulting from risk-taking behavior significantly affects cooperation and risk-sharing in many areas in many governmental programs, including health insurance and agricultural production. This paper studies redistributive decision making and fairness preferences under different rooted risks using a laboratory experiment, in the treatment of which the subjects can endogenously determine whether they want to buy insurance before they face one of three possible outcomes that will be realized with equal probability. If the first outcome is realized, a high payment will be delivered regardless of whether the subject buys insurance or not. The second risk is an avoidable loss contingent upon the subject buying insurance. The third outcome is an inevitable loss, i.e., minimum payment will be delivered no matter if the subject has or does not have insurance. Then we investigate fairness preferences of randomly paired subjects who are informed about the choices and outcomes for both parties and are asked to make redistributive tasks. The experimental design mimics the scenario of risk-sharing in health insurance and agricultural production. We find that how people make redistributive decisions depends on the insurance purchase decisions and income inequality. The results provide some policy implications for improving insurance efficiency.
    Keywords: fairness, insurance, Health Economics and Policy, Institutional and Behavioral Economics, Public Economics, Risk and Uncertainty, C91, D31, D63,
    Date: 2015
  6. By: Luitel, Kishor ; Knight, Thomas ; Hudson, Darren
    Abstract: New crop insurance coverage offered by the 2014 Farm Bill will be available to cotton farmers beginning in 2015. Stacked Income Protection Plan (STAX) and Supplemental Coverage Option (SCO) are new crop insurance options, which are designed to protect farmers from shallow losses. STAX is only available for upland cotton producers, while SCO is available for all major farm program crops. The objective of this project is to assess the benefits of the new crop insurance offerings for cotton producers in the Texas High Plains. Representative dry land and mixed, irrigated and dry land farms were developed using consensus evaluations of panels of producers in two distinct areas of the High Plains. Our simulation analysis examined producer welfare benefits of alternative combinations of underlying yield or revenue insurance coverage and STAX or SCO. The results suggest that Revenue Protection combined with STAX is the optimal insurance selection for both risk neutral and risk averse producers.
    Keywords: Farm Bill 2014, cotton representative farm simulation, crop insurance, STAX, SCO Endorsement., Agricultural and Food Policy, Production Economics, Risk and Uncertainty, Q18, D81, D78, D61,
    Date: 2016–12
  7. By: Fontagné, Lionel ; Fouré, Jean ; Keck, Alexander
    Abstract: Constructing fully traceable scenarios based on assumptions grounded in the literature, we are also able to isolate the relative impact of key economic drivers. We find that the stakes for developing countries are particularly high: The emergence of new players in the world economy, intensification of South-South trade and diversification into skill-intensive activities may continue only in a dynamic economic and open trade environment. Current trends towards increased regionalization may be reversed, with multilateral trade relationships gaining in importance. Hypothetical mega-regionals could slow down, but not frustrate the prevalence of multilateralism. Continuing technological progress is likely to have the biggest impact on future economic developments around the globe. Population dynamics are influential as well: For some countries, up-skilling will be crucial, for others labour shortages may be addressed through migration. Several developing countries would benefit from increased capital mobility; others will only diversify into dynamic sectors, when trade costs are further reduced.
    Keywords: international trade,macroeconomic projections,CGE simulations
    JEL: E27 F02 F17 F47
    Date: 2014
  8. By: Giuseppe Vitaletti (Tuscia University, Italy )
    Abstract: This paper formulates and discusses the hypothesis of a long run unbalance between Saving and Investment. Various remedies are proposed for such a problem, in the actual situation of economic crisis, depending on such unbalance. Among them there are: an agreement at G20 political level, for the structural equilibrium of single countries balances of trade; at the same political level, understandings aimed at making real interest tend to zero structurally; the option for a very high ratio between public debt and GDP; the conditional measures which reduces the growth of public debt, and allows, at a later time, the target of stabilisation of the ratio between Debt and GDP.
    Keywords: crisis, foreign commerce, public debt, public deficit, rents
    JEL: E E2 E6 F
  9. By: Liang Wang (University of Hawaii at Manoa )
    Abstract: This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous price dispersion, which is generated by sellers posting prices and buyers costly searching for low prices. We identify three channels through which inflation affects welfare. The interaction of real balance channel and price posting channel generates a welfare cost, at 10% annual inflation, equal to 3.23% of steady state consumption; if either channel is shut down, the welfare cost decreases to less than 0.15%. Search channel reduces welfare cost by more than 50%. The aggregate effect of inflation on welfare is nonmonotonic.
    Keywords: Nash Bargaining, Competitive Search, Indivisibility, Multiplicity, Uniqueness
    JEL: D51 E40
    Date: 2014–10
  10. By: Karl Whelan (University College Dublin )
    Abstract: This paper provides an overview of Ireland’s macroeconomic performance over the past decade. In addition, to presenting the underlying facts about the boom, bust and (currently limited) recovery, the paper also discusses some common fallacies and misrepresentations of economic events in Ireland. The paper concludes with some broader lessons from the Irish experience for Eurozone economic policy and some observations on the role that EMU and the ECB have played in Ireland’s crisis.
    Keywords: Ireland; Euro Area; Euro Crisis; Banking
    JEL: E52 E62 G01
    Date: 2013–07
  11. By: Vitor Constancio (European Central Bank )
    Abstract: The paper aims to provide a deep rationale for banking union in the Euro Area. It shows that the banking sectors of core and peripheral countries were responsible for financing the credit boom that created the imbalances and vulnerabilities that later were at the centre of the crisis. The increase of debt ratios in the periphery until 2007 was more significant for the private sector than for the public sector. The crisis has been as much a banking crisis as a sovereign debt crisis and to avoid similar future risks a European Supervisor and a Resolution Authority are essential.
    Keywords: European crisis; banking union; fiscal and macroeconomic imbalances
    JEL: H63 E52 F36 G01
    Date: 2013–07
  12. By: Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis )
    Abstract: This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit conditions which cause transitions from an optimal but fragile steady state to a suboptimal state with zero unsecured credit. The main findings are: (i) Countercyclical reserve policies protect the optimum equilibrium against modest shocks but are powerless against large shocks. (ii) If we ignore private information and central banks inefficiencies, this class of models bears out Bagehot’s 1873 claim in Lombard Street: panics are averted if central banks stand ready to lend at a rate somewhat above the one associated with the optimal state.
    Keywords: bank panics; last resort; capital requirements; credit conditions
    JEL: E52 E58 E44
    Date: 2013–07
  13. By: Heather D. Gibson (Bank of Greece ); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria ); George S. Tavlas (Bank of Greece )
    Abstract: We investigate the impact of the economic fundamentals, sovereign credit ratings, political uncertainty, and the ECB’s Securities Markets Program (SMP) on Greek sovereign spreads. Our findings show that sovereign downgrades and political uncertainty appear to have been drivers of the sharp rises in Greek sovereign spreads from 2008-9 onwards, over-and-above the impact of the economic fundamentals. Our findings also show that prior to 2008-2009, the markets failed to incorporate Greece’s deteriorating fundamentals into the price of Greek sovereigns. We demonstrate that, once markets reassessed their pricing of Greek credit risk, the change in the influence of the fundamentals came swiftly and abruptly, exhibiting overshooting characteristics. The SMP reduced spreads while it was in operation.
    Keywords: euro area financial crisis; sovereign spreads
    JEL: E63 G12
    Date: 2013–07
  14. By: Ojo, Marianne
    Abstract: The U.S standard leverage ratio, which is not as stringent as the U.S Supplementary Leverage Ratio, did not include Off Balance Sheet exposures - unlike the Basel leverage ratio. Hence the 3% Supplementary Leverage Ratio was established as part of measures to facilitate the inclusion of Off Balance Sheet exposures in July 2013 - even though many still consider the scope of such inclusion as not being extensive enough - since Secured Financing Transaction Exposures are still excluded. Furthermore, the Enhanced Supplementary Leverage Ratio increased the 3% leverage ratio to 5% (a 2% buffer) for globally systemic important banks (GSIBs) bank holding companies and 6 % for their banking subsidiaries. In respect of securities financing transaction exposures, however, U.S banks are considered to enjoy competitive advantage, since the exclusion of such exposures still persist - even though it is also argued that recent liquidity coverage and net stable funding ratio provisions should serve to address these exposures - this also being in line with the complementary functions of liquidity standards and leverage ratios within the risk-based capital adequacy framework. As well as contributing to the extant literature on supplementary leverage ratios, this paper will seek to illustrate why calibration between the risk capital adequacy framework, liquidity standards, and Basel leverage ratio is even more important than merely a focus on the relationship between the risk capital adequacy framework and the Basel leverage ratio. Meanwhile as regards Europe, there are also concerns relating to sovereign credit risks and the “inadequate pricing” of such risks which results in under capitalisation of banks, as well as potential consequences relating to serious distortions in financial stability whose effects could have repercussions extending beyond the Euro zone and globally. This paper considers two headings which have generated controversial discussions - particularly in respect of Basel III leverage ratio implementation, namely, under capitalisation of banks and the issue of calibration. It aims to illustrate why these constitute areas which are still in need of redress - even though tremendous efforts have been made to align the Basel III Leverage Ratio with the Supplementary Leverage Ratios. The paper will also demonstrate that whilst there are concerns related to the issue of calibration, certain jurisdictions such as the UK, have also introduced supplementary leverage ratios - as well as considered alternatives to the Basel leverage ratio.
    Keywords: supplementary leverage ratios; short term funding; financial stability; OBS exposures; Standardised Approach to Counterparty Credit Risk (SA-CCR); credit conversion factors (CCF)
    JEL: E6 G14 G2 G28 K2
    Date: 2015–01–15
  15. By: Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
    Abstract: This paper provides an explanation of the reason why previous works suggest that the effect of fiscal stimulus measure is, if any, small during the lost decades in Japan. To show this, it focuses on public investment by local governments which occupies a substantial portion of the total investment. Specifically, we divide it into subsidized and non-subsidized expense, and empirically study the differences between their decision-making processes from the perspective of fiscal stimulus measures. The results of this analysis reveal that subsidized expense is countercyclical to the economic situation of the nation as a whole, but on the other hand, no connection with business cycles is seen at prefectural level. Contrastingly, non-subsidized expense shows no reaction to the state of the macro economy. In the 2000s, in particular, it is shown to be procyclical in relation to economic fluctuation at prefectural level, due to the fiscal rigidity of local governments. Based on the fact that the majority of Japan's public investment is carried out by local governments, it becomes clear that, as a problem prior to the evaluation of its policy effects, public investment is not implemented with adequate timing to offset business cycles in the first place.
    Keywords: Local governments, Public investment, Subsidized expense, Non-subsidized expense, Lost decades
    JEL: E62 H72
    Date: 2015–01
  16. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City ); Cuddy, Emily
    Abstract: Overdrafts have been an ongoing concern of policymakers, and they are one of the main issues being considered for prepaid card rules that the Consumer Financial Protection Bureau (CFPB) is currently drafting. Despite regulatory interventions and heated debate between proponents and opponents of further intervention, little research has been conducted to understand the overdraft behavior of prepaid cardholders. This paper attempts to fill that gap by analyzing a large micro-level dataset of general purpose reloadable (GPR) prepaid cardholders. We find that a small percentage of GPR prepaid cardholders regularly make overdraft transactions and incur overdraft fees, but they tend to spend and load more funds on their card as well as use their card for a longer period of time than do cardholders who do not make overdraft transactions. Our results suggest that some cardholders may be making a deliberate decision to overdraw their account and pay overdraft fees.
    Keywords: Overdrafts; General purpose reloadable prepaid cards; Unbanked and underbanked
    JEL: D12 E42 G21
    Date: 2014–10–01
  17. By: Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
    Abstract: This paper introduces a methodology to estimate the re-use of collateral based on actual transaction data. With a comprehensive dataset from the Swiss franc repo market we are able to provide the first systematic empirical study on the re-use of collateral. We find that re-use was most popular prior to the financial crisis, when roughly 10% of the outstanding interbank volume was based on re-used collateral. Furthermore, we show that re-use increases with the scarcity of collateral. By giving an estimate of collateral re-use and explaining its drivers, the paper contributes to the ongoing debate on collateral availability.
    Keywords: Re-use of collateral, repo, money market, financial stability, Switzerland
    JEL: E58 G01 G18 G21 G32
    Date: 2015
  18. By: Yoshino, Naoyuki (Asian Development Bank Institute ); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute ); Nili, Farhad (Asian Development Bank Institute )
    Abstract: Risky banks that endanger the stability of the financial system should pay higher deposit insurance premiums than healthy banks and other financial institutions that have shown good financial performance. It is necessary, therefore, to have at least a dual fair premium rate system. In this paper, we develop a model for calculating dual fair premium rates. Our definition of a fair premium rate in this paper is a rate that could cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting non-performing loans (NPLs), we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction setting. The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions some banks show negative performance or vice versa. Our final results show that stable banks should pay lower deposit insurance premium rates.
    Keywords: dual deposit insurance premium rates; non-performing loans; idiosyncratic shocks; fair premium rates
    JEL: E44 G21 G28
    Date: 2015–01–15
  19. By: Ley, Eduardo ; Misch, Florian
    Abstract: This paper considers the effects of inaccurate real-time output data on fiscal policy, both with respect to budgetary planning and fiscal surveillance. As newer and better information becomes available, output data available in real time get revised and are likely to conflict with final figures that are only released some years later. By contrast, fiscal policy is inevitably based on real-time figures. The paper develops a simple but comprehensive modeling framework to formalize the linkages between output data revisions and fiscal policy and combines it with a newly compiled dataset from the International Monetary Fund's World Economic Outlook, comprising final and real-time output data for 175 countries, over a period of 17 years. Based on a simulation exercise, it finds that output data revisions alone may significantly undermine the reliability of real-time estimates of the overall and structural fiscal balances, and that output data revisions may result in unplanned and substantial debt accumulation. The paper also shows that there are significant differences across country income groups.
    Keywords: Real-time Output Data,Fiscal Policy,Data Revisions,Public Debt
    JEL: E01 E62 H68
    Date: 2014
  20. By: Jordà, Òscar ; Taylor, Alan M.
    Abstract: After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government's shift to austerity policies in 2010 on subsequent growth.
    Keywords: Rubin Causal Model,allocation bias,average treatment effect,booms,fiscal multipliers,identification,inverse probability weighting,local projection,matching,output fluctuations,propensity score,regression adjustment,slumps
    JEL: C54 C99 E32 E62 H20 H5 N10
    Date: 2014
  21. By: Born, Benjamin ; Müller, Gernot J. ; Pfeifer, Johannes
    Abstract: Policy makers often implement austerity measures when the sustainability of public finances is in doubt and, hence, sovereign yield spreads are high. Is austerity successful in bringing about a reduction in yield spreads? We employ a new panel data set which contains sovereign yield spreads for 31 emerging and advanced economies and estimate the effects of cuts of government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in response to the spending cuts, at least in the short-run. In contrast, austerity pays off, if conditions are more benign.
    Keywords: austerity,confidence,fiscal policy,fiscal stress,local projections,panel VAR,sovereign risk,yield spreads
    JEL: C32 E43 E62
    Date: 2014
  22. By: Junior Maih (Norges Bank (Central Bank of Norway)and Centre for Applied Macro and Petroleum economics, BI Norwegian Business School )
    Abstract: In an environment where economic structures break, variances change, distributions shift, conventional policies weaken and past events tend to reoccur, economic agents have to form expectations over different regimes. This makes the regime-switching dynamic stochastic general equilibrium (RS-DSGE) model the natural framework for analyzing the dynamics of macroeconomic variables. We present effcient solution methods for solving this class of models, allowing for the transition probabilities to be endogenous and for agents to react to anticipated events. The solution algorithms derived use a perturbation strategy which, unlike what has been proposed in the literature, does not rely on the partitioning of the switching parameters. These algorithms are all implemented in RISE, a exible object-oriented toolbox that can easily integrate alternative solution methods. We show that our algorithms replicate various examples found in the literature. Among those is a switching RBC model for which we present a third-order perturbation solution.
    Keywords: DSGE, Markov switching, Sylvester equation, Newton algorithm, Pertubation, Matrix polynominal
    JEL: C6 E3 G1
    Date: 2015–01–16
  23. By: dogru, bulent
    Abstract: Abstract: In this study, the relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analyses for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed.
    Keywords: Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model
    JEL: C4 C40 E40
    Date: 2014
  24. By: Malikane, Christopher
    Abstract: We derive a traditional Phillips curve under the assumption that firms optimize their prices in the context where a fraction of their output is contracted on previous prices, and where they face potential losses and gains from such contracts. Our derivation delivers an augmented exact specification that is of an accelerationist type. Specifically, our baseline TPC features one lag of inflation and the labour share, two lags of the output gap and one lag of supply shocks. With rule-of-thumb behaviour considered, our traditional Phillips curve admits higher lags of these variables. We estimate these traditional Phillips curves for six developed and five emerging market economies and find that the degree of price rigidity is significant and has the correct sign. We conclude that this optimization-based traditional Phillips curve is a credible rival to its forward-looking new Keynesian counterpart.
    Keywords: Traditional price Phillips curves, backward-looking behaviour
    JEL: E31
    Date: 2014–08–30
  25. By: Vladimir Asriyan
    Abstract: Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro contingent contracts and the illiquidity premia they need to pay creditors for holding such contracts. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the policy implications of the theory and I find that subsidizing contingencies in private contracts is welfare improving; in particular, policies that solely target borrowers' leverage are sub-optimal.
    Keywords: balance sheet recessions, contingent contracts, liquidity, informational frictions, trading frictions, financial regulation
    JEL: E32 E44 G01
    Date: 2015–01
  26. By: Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
    Abstract: In this paper, we tried to examine and provide a clear answer on the possibility of the Central Bank of Tunisia to adopt the inflation targeting (IT) monetary policy. But the transition to the new optimum monetary framework remains a challenge in itself and requires the filling of certain pre-conditions. To do this, we first started by clarifying the conduct of monetary policy in Tunisia and the institutional and structural pre-requisites progress to make in adoption view of this new strategy, which allows more inflation mastering in a context of crisis and post-revolution. Regarding the transmission mechanisms, we conducted an empirical study of dynamic structural VAR models to conclude whether there is a stable and predictable relationship between monetary policy instruments and inflation, which is considered as a strong technical condition in favor of IT.
    Keywords: Inflation targeting, transmission mechanisms, structural VAR, Tunisia.
    JEL: C3 E5
    Date: 2014
  27. By: Ariel Burstein ; Eduardo Morales ; Jonathan Vogel
    Abstract: We provide an assignment model to decompose changes in between-group wage inequality into changes in the composition of the workforce, the productivity/demand for tasks, computerization, and labor productivity. The model incorporates comparative advantage between many groups of workers, many types of equipment, and many tasks and yet may be parameterized and estimated in a transparent manner. Our identification of parameters, measurement of shocks, and the equilibrium equation determining wages are all very similar to what have been used in previous reduced-form analyses. We use U.S. data on the allocation of workers to occupations and computer usage as well as changes in average wages across worker groups between 1984 and 2003 to parameterize our model. We find that computerization and changes in task productivity/demand, which are both measured without directly using data on changes in wages, jointly explain the majority of the rise in the skill premium and more disaggregated measures of between-eduation group inequality as well as roughly half of the rise in the relative wage of women over this time period. We show how to link the strength of these two forces to changes in the extent of international trade.
    JEL: E24 F16 J2
    Date: 2015–01
  28. By: Rabah Arezki ; Valerie A. Ramey ; Liugang Sheng
    Abstract: This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output–the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.
    JEL: E00 F32 F41
    Date: 2015–01
  29. By: Ross Levine ; Chen Lin ; Wensi Xie
    Abstract: Do stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on firm profitability, employment, equity issuances, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy.
    JEL: D22 E02 G21 G3 G38 K22
    Date: 2015–01
  30. By: Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
    Abstract: We document that even though the normal distribution is a good approximation to the nature of aggregate fluctuations, it severely underpredicts the frequency of large economic downturns. We then provide a model that can explain these facts simultaneously. Our model show that the propagation of microeconomic shocks through input-output linkages can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns (macroeconomic tail risks) from infinitesimal to substantial. For example, an economy subject to thin-tailed micro shocks but with “unbalanced” input-output linkages (where some sectors or firms play a much more important role than others as inputs suppliers to the rest of the economy) may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. This is despite the fact that a central limit theorem-type result would imply that aggregate output is normally distributed. We characterize what types of input-output linkages and distributions of microeconomic shocks lead to sizable macroeconomic tail risks, and also show how the same economic forces cause the output of many sectors to simultaneously fall by large amounts.
    JEL: C67 E32
    Date: 2015–01
  31. By: Volodymyr Vysochansky (Uzhhorod University )
    Abstract: The article considers free banking formation approach in self-regulated monetary system and its benefits for economic agents and society in general.
    Keywords: banking, money, commodity units, deposit, reserve, monetary system
    JEL: E42 G1 G21
    Date: 2014–12–30
  32. By: Gabriel Fagan (Institute for International Integration Studies, Trinity College Dublin ); Paul McNelis (Graduate School of Business Administration, Fordham University, New York )
    Abstract: This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops.We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common centralbank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bankfinancing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates thecollapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However,a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates thetendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.Length: 68 pages
    Keywords: Sudden stops, Target Balances, European Monetary Union
    JEL: E52 E62 F41
    Date: 2014–12
  33. By: Alessandra Bonfiglioli ; Gino Gancia
    Abstract: We study the equilibrium determinants of firm-level heterogeneity in a model in which firms can choose between different probability distributions when drawing productivity at the entry stage and explore the implications in closed and open economy. One novel result is that export opportunities, by increasing payoffs in the tail, induce firms to draw technology from riskier distributions. When more productive firms also pay higher wages, trade amplifies wage dispersion by inducing firms to take more risk ex-ante and hence making them more unequal ex-post. Our model is consistent with new evidence on how firm-level heterogeneity varies across U.S. industries.
    Keywords: firm heterogeneity, productivity dispersion, wage inequality, international trade
    JEL: F12 F16 E24
    Date: 2014–12
  34. By: Shuhei Takahashi (Institute of Economic Research, Kyoto University )
    Abstract: Idiosyncratic earnings risk shows cyclical variation. In order to analyze its implication with respect to labor market dynamics, this paper develops an incomplete asset markets model in which individuals make consumption-saving and employment choices each period in the presence of time-varying person-specific wage risk. I measure the model's risk variation using wage data in the Panel Study of Income Dynamics. When including variation in both idiosyncratic wage risk and aggregate total factor productivity, the model produces a weakly negative correlation between total hours worked and average labor productivity close to the U.S. data. In contrast, in the absence of wage risk fluctuations, the model generates a counterfactually strong positive correlation.
    Keywords: Idiosyncratic wage risk, uncertainty shocks, hours-productivity correlation
    JEL: D31 E31
    Date: 2015–01
  35. By: Amélie BARBIER-GAUCHARD ; Thierry BETTI ; Giuseppe DIANA (LaRGE Research Center, Université de Strasbourg )
    Abstract: Using a two-country DSGE model, we analyze the spillover effects of fiscal policy in a monetary union. Based on a non-Walrasian labor market and a detailed fiscal sector, our analysis focuses on the relative cross-border effects of different kinds of fiscal instruments (expenditure side and revenue side). We show that different fiscal instruments produce quite different qualitative effects on the foreign economy. For instance, a public consumption expansion or a cut in social protection tax triggers a decrease in foreign GDP and an increase in foreign unemployment. On the contrary, an increase in transfers to households or a decrease in VAT leads to an increase in foreign GDP and a decrease in foreign unemployment. Moreover, we demonstrate that the choice of the fiscal instrument strongly affects the size of the spillover effects, meaning that different fiscal instruments also produce different quantitative effects on the foreign economy.
    Keywords: Fiscal policy, spillover effects, new-Keynesian model, labor market, unemployment
    JEL: E62 F41 F42 J20
    Date: 2015
  36. By: Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) ); Schmidt, Sebastian (European Central Bank )
    Abstract: Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.
    Keywords: Discretion; inflation conservatism; inflation targeting; liquidity traps; zero lower bound
    JEL: E52 E62
    Date: 2014–11–12
  37. By: Hills, Timothy S. (Board of Governors of the Federal Reserve System (U.S.) ); Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9.
    Keywords: Fiscal policy; government spending multipliers; interest rate smoothing; liquidity trap; zero lower bound
    JEL: E32 E52 E61 E62 E63
    Date: 2014–11–20
  38. By: Gottardi, Piero (European University Institute ); Kajii, Atsushi (Kyoto University ); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta )
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–11–01
  39. By: Bryan, Michael F. (Federal Reserve Bank of Atlanta ); Meyer, Brent (Federal Reserve Bank of Atlanta ); Parker, Nicholas B. (Federal Reserve Bank of Atlanta )
    Abstract: The purpose of this paper is to answer the three questions in the title. Using a large monthly survey of businesses, we investigate the inflation expectations and uncertainties of firms. We document that, in the aggregate, firm inflation expectations are very similar to the predictions of professional forecasters for national inflation statistics, despite a somewhat greater heterogeneity of expectations that we attribute to the idiosyncratic cost structure firms face. We also show that firm inflation expectations bear little in common with the “prices in general” expectations reported by households. Next we show that, during our three-year sample, firm inflation expectations appear to be unbiased predictors of their year-ahead observed (perceived) inflation. We also show that firms know what they don’t know—that the accuracy of firm inflation expectations is significantly and negatively related to their uncertainty about future inflation. And lastly, we demonstrate, by way of a cross-sectional Phillips curve, that firm inflation expectations are a useful addition to a policymaker’s information set. We show that firms’ inflation perceptions depend (importantly) on their expectations for inflation and their perception of firm-level slack.
    Keywords: inflation; survey inflation expectations; price formation
    JEL: C81 C90 E31 E37 E60
    Date: 2014–12–01
  40. By: Hasan Comert (Department of Economics, METU ); Selman Colak
    Abstract: This paper focuses on the impacts of the recent global crisis on the Turkish economy and the policy measures taken in response to the crisis. Turkish economy was adversely affected by the crisis through mainly three channels, namely expectations channel, trade channel and financial channel. The distinctive characteristic of the crisis was a severe export shock which can account for an important part of the decline in production in Turkey. Beside this, a significant sudden stop in financial flows worsened the credit conditions in the economy. As a result, the Turkish economy witnessed one of its worst economic down-turns after the Second World War. In fact, the Turkish growth performance was one of the worsts among developing countries. However, as opposed to previous crises, the financial markets in Turkey and many other developing countries did not experience a collapse. We argue that this is mainly related to the small magnitude and short duration of the financial shocks hitting Turkey and other developing countries relative to the ones in the previous decades. In this sense, the Turkish economy might not have been fully tested during the last global crisis. How the economy will behave in case of a larger financial shock is still unknown.
    Keywords: Turkish Economy, Developing Countries, Recent Global Crises, Financial Flows, Monetary and Fiscal Policies.
    JEL: F32 E63 E66 G01
    Date: 2014–12
  41. By: Rolf Aaberge ; Kai Liu ; Yu Zhu (Statistics Norway )
    Abstract: Despite macroeconomic evidence pointing to a negative aggregate consumption response due to political uncertainty, few papers have used microeconomic panel data to analyze how households adjust their consumption after an uncertainty shock. We study household savings and expenditure adjustment from an unexpected, large-scale and rapidly evolving political shock that occurred largely in May 1989 in Beijing, China. Using monthly micro panel data from a sample of the Urban Household Survey, we present evidence that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China. Our estimates also suggest the channel through which increase in savings is achieved: the increase in savings is driven by reductions in semi-durable expenditure and frequency of major durable adjustment. The uncertainty effect is more pronounced among older, wealthier, and more socially advantaged households. We interpret our findings using existing models of precautionary behavior. By focusing on time variation in uncertainty, our identification strategy avoids many of the potential problems in empirical studies of precautionary savings such as self-selection and life-cycle effects. Our findings on the channel of adjustment also coincide with the predictions from models on consumer durables adjustment combined with income uncertainty.
    Keywords: China; household savings; uncertainty
    JEL: D91 J3 E21
    Date: 2014–12

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