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on Macroeconomics |
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Issue of 2010‒04‒11
48 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Dellas, H.; Diba, B.; Loisel, O. |
| Abstract: | This paper incorporates banks as well as frictions in the market for bank capital into a standard New Keynesian model and considers the positive and normative implications of various financial shocks. It shows that the frictions matter significantly for the effects of the shocks and the properties of optimal monetary and fiscal policy. For instance, for shocks that increase banks' demand for liquidity, optimal monetary policy accepts an output contraction while it would not in the absence of the frictions (or under suitably conducted fiscal policy). We find that optimal monetary policy can be approximated by a simple interest-rate rule targeting inflation; and it also allows large adjustments in the money supply, a property reminiscent of Poole's analysis. |
| Keywords: | Financial frictions, banking, optimal policy |
| JEL: | E2 E4 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:277&r=mac |
| By: | Klaus Adam; Roberto M. Billi |
| Abstract: | We study interactions between monetary policy, which sets nominal interest rates, and fiscal policy, which levies distortionary income taxes to finance public goods, in a standard, sticky-price economy with monopolistic competition. Policymakers? inability to commit in advance to future policies gives rise to excessive inflation and excessive public spending, resulting in welfare losses equivalent to several percent of consumption each period. We show how appointing a conservative monetary authority, which dislikes inflation more than society does, can considerably reduce these welfare losses and that optimally the monetary authority is predominantly concerned about inflation. Full conservatism, i.e., exclusive concern about inflation, entirely eliminates the welfare losses from discretionary monetary and fiscal policymaking, provided monetary policy is determined after fiscal policy each period. Full conservatism, however, is severely suboptimal when monetary policy is determined simultaneously with fiscal policy or before fiscal policy each period. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-10&r=mac |
| By: | Sylvain Leduc; Keith Sill |
| Abstract: | Using survey-based measures of future U.S. economic activity from the Livingston Survey and the Survey of Professional Forecasters, the authors study how changes in expectations, and their interaction with monetary policy, contribute to fluctuations in macroeconomic aggregates. They find that changes in expected future economic activity are a quantitatively important driver of economic fluctuations: a perception that good times are ahead typically leads to a significant rise in current measures of economic activity and inflation. The authors also find that the short-term interest rate rises in response to expectations of good times as monetary policy tightens. Their results provide quantitative evidence on the importance of expectations-driven business cycles and on the role that monetary policy plays in shaping them. |
| Keywords: | Economic forecasting ; Monetary policy ; Business cycles |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-6&r=mac |
| By: | Vlieghe, Gertjan (Brevan Howard) |
| Abstract: | I develop a model for monetary policy analysis that features significant feedback from asset prices to macroeconomic quantities. The feedback is caused by credit market imperfections, which dynamically affect how efficiently labour and capital are being used in aggregate. I then analyse what implications this mechanism has for monetary policy. The paper offers three insights. First, the monetary transmission mechanism works not only via nominal rigidities but also via a reallocation of productive resources away from the most productive agents. Second, following an adverse productivity shock there is a dynamic trade-off between the immediate fall in output, which is an efficient response to the productivity fall, and the fall in output thereafter, which is caused by a reallocation of resources away from the most productive agents. The more the initial output fall is dampened with a temporary rise in inflation, the more the adverse future effects of the reallocation of resources are mitigated. Third, in a full welfare-based analysis of optimal monetary policy I show that it is optimal to have some inflation variability, even if the only shocks in the economy are productivity shocks. The optimal variability of inflation is small, but the costs of stabilising inflation too aggressively can be large. |
| JEL: | E44 E52 |
| Date: | 2010–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0385&r=mac |
| By: | Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This study examines empirically the information content of the euro area Bank Lending Survey for aggregate credit and output growth. The responses of the lending survey, especially those related to loans to enterprises, are a significant leading indicator for euro area bank credit and real GDP growth. Notwithstanding the short history of the survey, the findings are robust across various specifications, including “horse races” with other well-known leading financial indicators. Our results are supportive of the existence of a bank lending, balance sheet, and risk-taking channel of monetary policy. They also suggest that price as well as non-price conditions and terms of credit standards do matter for credit and business cycles. Finally, we discuss the implications for the 2007/2009 financial and economic crisis. JEL Classification: C23, E32, E51, E52, G21, G28. |
| Keywords: | bank lending survey, credit cycle, business cycle, monetary policy transmission, euro area. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101160&r=mac |
| By: | Sebastian Sienknecht (Department of Economics, Friedrich-Schiller-University Jena) |
| Abstract: | This paper shows how endogeneous inflation inertia is generated by a simple modificaton of the quadratic adjustment cost structure faced by economic agents. We derive the pertinent inflation relationships based on purely nominal rigidities and show that they always involve additional expectation terms which are absent in a Calvo-type environment. However, the structural differences do not prevent dynamic adjustment paths and theoretical moments to be similar under both rigidity assumptions. An extensive application of nominal adjustment frictions leads to a full-scale macroeconomic framework able to replicate empirical responses to an interest rate shock. |
| Keywords: | Inflation Dynamics, New Keynesian Phillips Curve, Business Fluctuations |
| JEL: | E31 E32 E52 |
| Date: | 2010–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-023&r=mac |
| By: | Juan Angel García (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the link between the perceived inflation risks in macroeconomic forecasts and the inflation risk premia embodied in financial instruments. We first provide some stylized facts about the term structure of inflation compensation, inflation expectations and inflation risk premia in the euro area bond market. Latent factor models like ours fit data well, but are often critisized for lacking economic interpretation. Using survey inflation risks, we show that perceived asymmetries in inflation risks help interpret the dynamics of long-term inflation risk premia, even after controlling for a large number of macro and financial factors. JEL Classification: G12, E31, E43. |
| Keywords: | Affine term structure models, state-space modelling, inflation compensation, inflation risk premia, inflation risks. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101162&r=mac |
| By: | Mumtaz, Haroon (Bank of England) |
| Abstract: | Changes in monetary policy and shifts in dynamics of the macroeconomy are typically described using empirical models that only include a limited amount of information. Examples of such models include time-varying vector autoregressions that are estimated using output growth, inflation and a short-term interest rate. This paper extends these models by incorporating a larger amount of information in these tri-variate VARs. In particular, we use a factor augmented vector autoregression extended to incorporate time-varying coefficients and stochastic volatility in the innovation variances. The reduced-form results not only confirm the finding that the great stability period in the United Kingdom is characterised by low persistence and volatility of inflation and output but also suggest that these findings extend to money growth and asset prices. The impulse response functions display little evidence of a price puzzle indicating that the extra information incorporated in our model leads to more robust structural estimates. |
| Keywords: | FAVAR; great stability; time-varying parameters; stochastic volatility |
| JEL: | E30 E32 |
| Date: | 2010–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0386&r=mac |
| By: | Troy Davig; Eric M. Leeper; Todd B. Walker |
| Abstract: | A rational expectations framework is developed to study the consequences of alternative means to resolve the "unfunded liabilities" problem--unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century. Beliefs based on that distribution determine the existence of and the nature of equilibrium. We consider policies that in expectation combine reaching a fiscal limit, some distorting taxation, modest inflation, and some reneging on the government's promised transfers. In the equilibrium, inflation-targeting monetary policy cannot successfully anchor expected inflation. Expectational effects are always present, but need not have large impacts on inflation and interest rates in the short and medium runs. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-09&r=mac |
| By: | Willem Van Zandweghe; Alexander L. Wolman |
| Abstract: | We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above eight percent for a baseline calibration, and it varies non-monotonically with the degree of price stickiness. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-06&r=mac |
| By: | Junko Koeda (Faculty of Economics, University of Tokyo); Ryo Kato (Institute for Monetary and Economic Studies, Bank of Japan) |
| Abstract: | Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf724&r=mac |
| By: | Jordi Galí |
| Abstract: | Much recent research has focused on the development and analysis of extensions of the New Keynesian framework that model labor market frictions and unemployment explicitly. The present paper describes some of the essential ingredients and properties of those models, and their implications for monetary policy. |
| JEL: | E32 E52 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15871&r=mac |
| By: | Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefano Neri (Banca d’Italia, Economic Outlook and Monetary Policy Department, Via Nazionale, 91, 00184 Roma, Italy.); Livio Stracca (European Central Bank, DG International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the US and in the euro area. First, it establishes some stylised facts concerning key variables in the housing market, such as the real house price, residential investment and mortgage debt on the two sides of the Atlantic. Then, it presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of three structural shocks, (i) monetary policy, (ii) credit supply and (iii) housing demand shocks on the housing market and the broader economy. We find that similarities overshadow differences as far as the role of the housing market is concerned. We find evidence pointing in the direction of a stronger role for housing in the transmission of monetary policy shocks in the US, while the evidence is less clearcut for housing demand shocks. We also find that credit supply shocks matter more in the euro area. JEL Classification: E22, E44, E52. |
| Keywords: | Residential investment, House prices, Credit, Monetary Policy. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101161&r=mac |
| By: | Ferrara, L.; Koopman, S J. |
| Abstract: | The 2007 sub-prime crisis in the United States, prolonged by a severe economic recession spread over many countries around the world, has led many economic researchers to focus on the recent fluctuations in housing prices and their relationships with macroeconomics and monetary policies. The existence of common housing cycles among the countries of the euro zone could lead the European Central Bank to integrate more specifically the evolution of such asset prices in its assessment. In this paper, we implement a multivariate unobserved component model on housing market variables in order to assess the common euro area housing cycle and to evaluate its relationship with the economic cycle. Among the general class of multivariate unobserved component models, we implement the band-pass filter based on the trend plus cycle decomposition model and we allow the existence of two cycles of different periods. The dataset consists of gross domestic product and real house prices series for four main euro area countries (Germany, France, Italy and Spain). Empirical results show a strong relationship for business cycles in France, Italy and Spain. Moreover, French and Spanish house prices cycles appear to be strongly related, while the German one possesses its own dynamics. Finally, we find that GDP and house prices cycles are related in the medium-term for fluctuations between 4 and 8 years, while the housing market contributes to the long-term economic growth only in Spain and Germany. |
| Keywords: | House prices, Business cycles, Euro area, Unobserved components model. |
| JEL: | C13 C32 E32 R21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:275&r=mac |
| By: | Forte, Antonio |
| Abstract: | In this paper I try to find some empirical evidence of the European Central Bank’s behaviour from its outset, January 1999, to the mid 2007, using a Taylor-type rule. I test a new and simple method for estimating the output gap in order to avoid problems linked with the estimate of the potential output. Moreover, I analyse the significance of some explanatory variables in order to understand what the basis of the E.C.B. monetary policy decisions are. Finally, I find an important evidence of the role of the Euro-Dollar nominal exchange rate in the conduct of the Euro Area monetary policy. |
| Keywords: | Taylor Rule; European Central Bank; Euro-Dollar exchange rate |
| JEL: | E43 E58 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21785&r=mac |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a dynamic stochastic general equilibrium model: We identify shocks that shift the demand for collateral assets and allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-01&r=mac |
| By: | Faia, Ester (Goethe University Frankfurt); Lechthaler, Wolfgang (Kiel Institute for the World Economy); Merkl, Christian (Kiel Institute for the World Economy) |
| Abstract: | Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically, a currency area calibrated to the European Monetary Union) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cuts and hiring subsidies deliver larger multipliers, as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with non-walrasian labour markets. |
| Keywords: | fiscal multipliers, fiscal packages, labour market frictions |
| JEL: | E62 H30 J20 H20 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4849&r=mac |
| By: | John Muellbauer |
| Abstract: | It is widely acknowledged that the recent generation of DSGE models failed to incorporate many of the liquidity and financial accelerator mechanisms revealed in the global financial crisis that began in 2007. This paper complements the papers presented at the 2009 BIS annual conference focused on the role of banks and other financial institutions by analysing the role of household decisions and their interplay with credit conditions and asset prices in the light of empirical evidence. In DSGE models without financial frictions, asset prices are merely a proxy for income growth expectations and play no separate role. On UK aggregate consumption evidence, section 2 of the paper shows this is strongly contradicted by the data, for all possible discount rates and both for a perfect foresight and an empirical rational expectations approach to measuring income expectations. However, an Ando-Modigliani consumption function generalised to include a role for liquidity, uncertainty, time varying credit conditions, wealth and housing collateral effects, as well as income expectations, explains the data well. Section 3 reports new evidence on the striking rejection on aggregate data of the consumption Euler equation central to all DSGE models. Section 4 shows that UK micro evidence is consistent with the generalised Ando-Modigliani model. Section 5 discusses the limitations of recent DSGE models with financial frictions and housing. Section 6 discusses some business cycle implications of amplification mechanisms and non-linearities operating via households and residential construction. It reconsiders econometric methodology appropriate for designing better evidence-based central bank policy models. |
| Keywords: | household decisions, housing markets, wealth, business cycle models, consumption |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:306&r=mac |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, Bangor University, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marqués-Ibáñez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls. JEL Classification: E44, E55, G21. |
| Keywords: | bank risk, monetary policy, credit crisis. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101166&r=mac |
| By: | Shigenori Shiratsuka (Associate Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka boj.or.jp)); Wataru Takahashi (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.takahashi boj.or.jp)); Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Keywords: | sociate Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka boj.or.jp) |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-20&r=mac |
| By: | J.E. Boscá; R. Doménech; J. Ferri |
| Abstract: | This paper analyses the effects of introducing typical Keynesian features, namely rule-of-thumb consumers and consumption habits, into a standard labour market search model. It is a well-known fact that labour market matching with Nash-wage bargaining improves the ability of the standard real business cycle model to replicate some of the cyclical properties featuring the labour market. However, when habits and rule-of-thumb consumers are taken into account, the labour market search model gains extra power to reproduce some of the stylised facts characterising the US labour market, as well as other business cycle facts concerning aggregate consumption and investment behaviour. |
| Keywords: | general equilibrium, labour market search, habits, rule-of-thumb consumers |
| JEL: | E24 E32 E62 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:0912&r=mac |
| By: | Jarkko Jääskelä (Reserve Bank of Australia); Rebecca McKibbin (Reserve Bank of Australia) |
| Abstract: | Expectations of the future play a key role in the transmission of monetary policy. Over recent years, a lot of theoretical and applied macroeconomic research has been based on the assumption of rational expectations. However, estimated models based on this assumption typically fail to capture the dynamics of the economy unless mechanical sources of persistence, such as habit formation in consumption and/or indexation to past prices, are imposed. This paper develops and estimates a small open economy model for Australia assuming two different types of expectations: rational expectations and learning. Learning – where expectations are formed by extrapolating from the historical data – can be an alternative means to generate the persistence observed in the data. The paper has four key findings. First, learning does not reduce the importance of conventional mechanical forms of persistence. Second, despite this, the model with learning is able to generate real exchange rate dynamics that are consistent with empirical models but which are absent in standard theoretical models. Third, there is some tentative evidence that learning is preferred over rational expectations in terms of fitting the data. Fourth, since the adoption of inflation targeting, agents appear to be using a longer history of data to form their expectations, consistent with greater stability of inflation. |
| Keywords: | Learning; expectations; new Keynesian model; regime shifts |
| JEL: | E32 E52 E63 F41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2010-02&r=mac |
| By: | Stephen G. Cecchetti; Craig S. Hakkio |
| Abstract: | Transparency is one of the biggest innovations in central bank policy of the past quarter century. Modern central bankers believe that they should be as clear about their objectives and actions as possible. However, is greater transparency always beneficial? Recent work suggests that when private agents have diverse sources of information, public information can cause them to overreact to the signals from the central bank, leading the economy to be too sensitive to common forecast errors. Greater transparency could be destabilizing. While this theoretical result has clear intuitive appeal, it turns on a combination of assumptions and conditions, so it remains to be established that it is of empirical relevance. ; In this paper we study the degree to which increased information about monetary policy might lead to individuals coordinating their forecasts. Specifically, we estimate a series of simple models to measure the impact of inflation targeting on the dispersion of private sector forecasts of inflation. Using a panel data set that includes 15 countries over 20 years we find no convincing evidence that adopting an inflation targeting regime leads to a reduction in the dispersion of private sector forecasts of inflation. While for some specifications adoption of inflation target does seem to reduce the standard deviation of inflation forecasts, the impact is rarely precise and always small. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-01&r=mac |
| By: | Massimiliano Marcellino (European University Institute, Badia Fiesolana - Via dei Roccettini 9, I-50014 San Domenico di Fiesole (FI), Italy. Bocconi University and CEPR.); Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides evidence on the reliability of euro area real-time output gap estimates. A genuine real-time data set for the euro area is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2006. It turns out that real-time estimates of the output gap are characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability, while data revisions seem to play a minor role. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real time estimates are much more correlated with final estimates than for the euro area, data revisions play a larger role, but overall the unreliability in real time of the US output gap measures detected in earlier studies is confirmed in the more recent period. Moreover, despite some difference across output gap estimates and forecast horizons, the results point clearly to a lack of any usefulness of real-time output gap estimates for inflation forecasting both in the short term (one-quarter and one-year ahead) and the medium term (two-year and three-year ahead). By contrast, some evidence is provided indicating that several output gap estimates are useful to forecast real GDP growth, particularly in the short term, and some appear also useful in the medium run. No single output gap measure appears superior to all others in all respects. JEL Classification: E31, E37, E52, E58. |
| Keywords: | Output gap, real-time data, euro area, inflation forecasts, real GDP forecasts, data revisions. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101157&r=mac |
| By: | Wyplosz, Charles (Asian Development Bank Institute) |
| Abstract: | This paper contrasts the United States (US) and European situations during the crisis and examines how much of the crisis has been imported by Europe from the US. The paper argues that Europe never had a chance to avoid contagion from the US. It also documents the relatively limited reaction of both monetary and fiscal authorities. Muted fiscal policy actions may well be a consequence of the Stability and Growth Pact despite its having been de facto suspended. While the European Central Bank (ECB) intervened promptly and massively to attempt to maintain liquidity in the money market, it has been slow in dealing with the upcoming recession. The concluding remarks consider the differences that the monetary union has made and their relevance. |
| Keywords: | us european economic crisis; global financial crisis; europe imported financial crisis |
| JEL: | E42 E58 E61 F32 F33 |
| Date: | 2010–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0207&r=mac |
| By: | Alberto Martin; Jaume Ventura |
| Abstract: | We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibrium dispersion in the rates of return to investment. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. Because of this, bubbly episodes channel resources towards productive investment raising the growth rates of capital and output. The model also illustrates that the existence of bubbly episodes requires some investment to be dynamically inefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however, might be generated by an expansionary episode itself. |
| JEL: | E32 E44 O40 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15870&r=mac |
| By: | Fang Yao |
| Abstract: | This paper presents an approach to identify aggregate price reset hazards from the joint dynamic behavior of inflation and macroeconomic aggregates. The identification is possible due to the fact that inflation is composed of current and past reset prices and that the composition depends on the price reset hazard function. The derivation of the generalized NKPC links those compostion effects to the hazard function, so that only aggregate data is needed to extract information about the price reset hazard function. The empirical hazard function is generally increasing with the age of prices, but with spikes at the 1st and 4th quarters. The implication of this finding for sticky price modeling is that the pricing decision is characterized by both time- and state-dependent aspects. |
| Keywords: | Sticky prices, Aggregate hazard function, Bayesian estimation |
| JEL: | E12 E31 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-020&r=mac |
| By: | Roberto Cortes Conde (Department of Economics, Universidad de San Andres) |
| Keywords: | monetary reform, banking reform, depression, 1930, Argentina |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:98&r=mac |
| By: | Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine |
| Abstract: | In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity is explained by the Friedman rule. The optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment-risk sharing during the day. |
| Keywords: | Friedman rule; monetary policy; Overnight liquidity; intraday liquidity; random-relocation models |
| JEL: | E31 E51 E58 |
| Date: | 2009–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:13096&r=mac |
| By: | Janett Neugebauer; Dennis Wesselbaum |
| Abstract: | This paper investigates the role of staggered wages and sticky prices in explaining stylized labor market facts. We build on a partial equilibrium search and matching model and expand the model to a general equilibrium model with sticky prices and/or staggered wages. We show that the core model creates too much volatility in response to a technology shock. The sticky price model outperforms the staggered wage model in terms of matching volatilities, while the combination of both rigidities matches the data reasonably well |
| Keywords: | Search and Matching, Staggered Wages, Sticky Prices |
| JEL: | E24 E32 J64 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1608&r=mac |
| By: | Kodama, Masahiro |
| Abstract: | The objective of this paper is to shed light on mechanism which increases fluctuation in consumption of least developed countries. In general large fluctuation in consumption makes consumers worse off. This fact suggests that accumulation of knowledge on the generating mechanism of the large consumption fluctuation very likely contributes to welfare improvement of the least developed countries, through policies stabilizing consumption. We specifically investigated the fluctuation in consumption, through the numerical analysis with a dynamic macroeconomic model. |
| Keywords: | Consumption, LDC, Developing countries |
| JEL: | E21 E32 F41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper227&r=mac |
| By: | James Mitchell; Garratt, A., Vahey, S.P. |
| Abstract: | We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Broadening our empirical analysis to consider output gap measures derived from linear time trends, as well as more flexible trends, generates very different point estimates of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some observations, reflecting the pervasive nature of model uncertainty in our US data. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:342&r=mac |
| By: | Filippo Taddei |
| Abstract: | This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity. |
| Keywords: | Liquidity; private information; robust pooling equilibrium; bond yield |
| JEL: | E2 E3 G14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:138&r=mac |
| By: | Federico S. Mandelman; Pau Rabanal; Juan F. Rubio-Ramírez; Diego Vilán |
| Abstract: | In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error–correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-03&r=mac |
| By: | Alberto F. Alesina; Andrea Stella |
| Abstract: | In this paper we critically review the literature on the political economy of monetary policy, with an eye on the questions raised by the recent financial crisis. We begin with a discussion of rules versus discretion. We then examine the issue of Central Banks independence both in normal times and in times of crisis. Then we review the literature of electoral manipulation of policies. Finally we address international institutional issues concerning the feasibility, optimality and political sustainability of currency unions in which more than one country share the same currency. A brief review of the Euro experience concludes the paper. |
| JEL: | E52 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15856&r=mac |
| By: | Marcus Miller; Joseph E. Stiglitz |
| Abstract: | An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts—threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset ‘fire-sales’ to pay down debts, however. We discuss how official intervention in the form of ‘super’ Chapter 11 actions can help prevent asset price correction causing widespread economic disruption. |
| JEL: | E32 G21 G32 G33 G34 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15817&r=mac |
| By: | Naohisa Hirakata (Deputy Director, Research and Statistics Department, Bank of Japan. (E-mail: naohisa.hirakata@boj.or.jp)); Nao Sudo (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail: nao.sudou@boj.or.jp)); Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail: kouzou.ueda@boj.or.jp)) |
| Abstract: | Based on the financial accelerator model of Bernanke et al. (1999), we develop a dynamic general equilibrium model for a chain of credit contracts in which financial intermediaries (hereafter FIs) as well as entrepreneurs are subject to credit constraints. Financial intermediation takes place through chained-credit contracts, lending from the market to FIs, and from FIs to entrepreneurs. Calibrated to U.S. data, our model shows that the chained credit contracts enhance the financial accelerator effect, depending on the net worth distribution across sectors: (1) our model reinforces the effects of the net worth shock and the technology shock, compared with a model that omits the FIs' credit friction a la Bernanke et al. (1999); (2) the sectoral shock to FIs has a greater impact than the sectoral shock to entrepreneurs; and (3) the redistribution of net worth from entrepreneurs to FIs reduces the amplification of the technology shock. The key features of the results arise from the asymmetry of the two borrowing sectors: smaller net worth and larger bankruptcy costs of FIs relative to those of entrepreneurs. |
| Keywords: | Chain of Credit Contracts, Net Worth of Financial Intermediaries, Cross-sectional Net Worth Distribution, Financial Accelerator effect |
| JEL: | E22 E44 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-30&r=mac |
| By: | Martin Fukac; Adrian Pagan |
| Abstract: | In this paper we review the evolution of macroeconomic modelling in a policy environment that took place over the past sixty years. We identify and characterise four generations of macro models. Particular attention is paid to the fourth generation -- dynamic stochastic general equilibrium models. We discuss some of the problems in how these models are implemented and quantified. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-08&r=mac |
| By: | Mora, Nada (Federal Reserve Bank of Kansas City); Logan, Andrew (Oxford Economics) |
| Abstract: | This paper assesses how shocks to bank capital may influence a bank’s portfolio behaviour using novel evidence from a UK bank panel data set from a period that pre-dates the recent financial crisis. Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank’s capital in this (pre-crisis) sample period were coupled with a loan response that lasted up to three years. Banks also responded to scarce regulatory capital by raising their deposit rate to attract funds. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to non-residents to instrument bank capital’s impact on UK resident lending. A fall in capital brought about a significant drop in lending in particular, to private non-financial corporations. In contrast, household lending increased when capital fell, which may indicate that – in this pre-crisis period – banks substituted into less risky assets when capital was short. |
| Keywords: | Bank capital; bank lending |
| JEL: | E44 F34 G21 |
| Date: | 2010–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0387&r=mac |
| By: | Angel Muñoz; Angel Melguizo; David Tuesta; JoaquÃn Vial |
| Abstract: | En este documento analizamos los costes fiscales a corto y medio plazo derivados de la reforma estructural del sistema de pensiones, tomando a Chile como ejemplo. El sistema de pensiones chileno, basado en cuentas de capitalización individual gestionadas por el sector privado está funcionando desde hace casi 30 años, lo que permite analizar con garantÃas el impacto de los sistemas de pensiones privados en las cuentas públicas. Además, en la actualidad se está implementando una reforma que cambia radicalmente el pilar solidario. En este documento sostenemos que aunque los costes de la transición fiscal son mucho menores que sus beneficios, suelen ser altos y persistentes, por lo que es aconsejable una consolidación fiscal antes de embarcarse en el proceso. Esto también permite solventar la falta de cobertura que provoca la informalidad del mercado de trabajo, como se demuestra para Chile, Colombia, México y Perú. Finalmente, en términos más generales, la posibilidad de “exportar†este tipo de reforma de las pensiones no solo depende de su diseño especÃfico, si no de la calidad las instituciones públicas y de regulación del mercado. |
| Keywords: | Reforma de las pensiones, deuda implÃcita, costes fiscales, pilar solidario, pensión mÃnima, Chile |
| JEL: | E62 H55 H68 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:0913&r=mac |
| By: | J.E. Boscá; R. Doménech; J. Ferri |
| Abstract: | This paper uses REMS, a Rational Expectations Model of the Spanish economy designed by Boscá et al (2007) to analyse the effects of lowering the overall tax edge to the level prevailing in the US. Our results partially confirm previous findings in the literature: a reduction in the overall tax wedge of 19.5 points, in order to reach the US levels, has a positive effect in the long run, increasing total hours by about 7 per cent and GDP by about 8 percentage points. In terms of GDP per adult, these results account for ¼ of the gap with respect to the US, but imply a reduction of only one percentage point in the labour productivity gap. The rise in total hours per adult is explained by a similar increase in both hours per employee and the employment rate of about 3.5 percentage points, allowing hours per adult to converge to levels only slightly lower than those in the US. |
| Keywords: | General equilibrium, tax wedge, tax reforms, fiscal policy, labour market. |
| JEL: | E32 E62 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:0910&r=mac |
| By: | Ray Barrell; Iana Liadze |
| Abstract: | In this note we compare consumption behaviour in the US and the UK with a special focus on the scale of, and differences in, the impacts of changes in income, financial and housing wealth, both over time and between countries. It is common to claim that theory tells us housing wealth is not wealth, and hence it should not impact on consumption. We investigate these issues first by searching for patterns of cointegration and causality between consumption, income and wealth in the UK and the US. Using these results we investigate the effects of changes in asset prices on consumption in the UK and the US using the National Institute Global Model, NiGEM under different sets of assumptions. A temporary 10 percent fall in the price of houses will in both countries increase the savings ratio by around 1 percentage point, with the effect being marginally larger in the UK than the US. It is relatively clear from the data, but not from theory, that a permanent change in real house prices will have a similar effect on the saving ratio. Hence a 30 per cent fall in real house prices in either country would raise saving by around 1½ percentage points. The effects of a fall in equity prices of a similar magnitude would have about a sixth of the effects, as we would expect from estimated equations. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:344&r=mac |
| By: | M.Deidda |
| Abstract: | The existence of capital market imperfections causes business investment decisions to be strongly dependent on households' private wealth allocation. I claim that if a link exists between private wealth and business decisions, it should be stronger in countries with less developed capital markets. Here, I test this theoretical prediction assessing the relationship between initial household net wealth and the probability of switching to entrepreneurship in Italy and the United States, using household-level data from the Survey of Household Income and Wealth (SHIW) and the Panel Survey of Income Dynamics (PSID). Although Italy and the United States are both developed countries, there are striking differences between the two in terms of transaction costs, downpayment requirements and participation in financial markets. I formulated several theoretical predictions, which are then compared with the data at hand. First of all, I argue that initial wealth should matter more for potential Italian entrepreneurs, who may encounter greater difficulties than their US counterparts in obtaining sufficient funds from a bank or financial institution to start a business. From this perspective, "informal markets" (i.e. help from friends or relatives) should play a more significant role for potential entrepreneurs in Italy, especially for those who are more likely to be constrained. Secondly, I claim that a well developed financial market, by reducing household exposure to financial risk, would positively affect transition into entrepreneurship. Therefore, I fill a gap in the literature introducing a portfolio diversification index, calculated as the inverse of the Herfindhal index, in order to assess the level of financial sophistication. Last but not least, I simultaneously estimate the probability of switching to entrepreneurship and changes in net wealth. Using a sample selection model with endogenous switching makes it possible to deal with endogeneity issues, related to the fact that households may actually accumulate assets prior to setting up a business. |
| Keywords: | entrepreneurship; business start up; financial development |
| JEL: | E21 G20 L26 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201004&r=mac |
| By: | Fabio Panetta (Banca d'Italia); Federico M. Signoretti (Banca d'Italia) |
| Abstract: | The paper analyzes developments in bank lending in Italy during the financial crisis, assessing the relative contribution of demand and supply factors to lending deceleration. We find that the slowdown in lending was mainly due to a reduction in demand. For households, this can be attributed to the weakness of the real estate market and to the fall in consumption; for firms, a diminution in financing needs, due in turn to the sharp contraction of investment. Credit market indicators and empirical studies suggest that lending growth may also have been curbed by tensions in credit supply. These tensions mainly reflected the increase in borrower risk, as well as the impact of the crisis – especially in its first phase – on banks’ capital, liquidity, and ability to access external funding. Econometric analyses corroborate these indications, suggesting that the overall impact of banks’ conditions on the lending slowdown was modest. Over the next few months, supply tensions could persist, but the risk of a limitation of credit will be moderated by the economic recovery and the consequent reduction in borrower default risk. There will also be support from public interventions, which have provided financial support to firms, improving their creditworthiness, and strengthened banks’ capital and liquidity position. |
| Keywords: | credit demand and supply, financial crisis, Italian economy. |
| JEL: | E51 E58 E65 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_63_10&r=mac |
| By: | James Mitchell; Martin Weale; Solomou, S. |
| Abstract: | We derive monthly and quarterly series of UK GDP for the inter-war period from a set of indicators that were constructed at the time. We proceed to illustrate how the new data can contribute to our understanding of the economic history of the UK in the 1930s and have also used the series to draw comparisons between recession profiles in the 1930s and the post-war period. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:348&r=mac |
| By: | Martin Weale |
| Abstract: | Economics focuses on choices that people make and the factors that influence them. Most of these choices are micro-economic in character- decisions to purchase one good rather than another good. But there are two choices which have clear and direct implications for the whole economy. The first is the choice between work and leisure and the second is the choice between consumption and saving. The choice between work and leisure is a proximate determinant of the level of economic activity. In a small open economy, such as the UK, the amount of capital employed per worker is determined internationally by rates of return in capital markets; thus, for any given level of overall productivity it is fair to say that the work/leisure choices normally determines output. By contrast the consumption/saving choice has little influence on output in the short term, if the economy is not suffering from recessionary unemployment. But in the longer term it determines how much of the domestic capital stock is owned by domestic residents rather than by foreigners. If the capital stock is owned by foreigners property income has to be paid to them out of domestic output, so that national income is lower than domestic output. Conversely if domestic saving runs ahead of the need to finance the domestic capital stock the country will be a net recipient of income from abroad and income will exceed output. In either case it is fair to say that, while saving has no impact on output it does determine future national income and thus consumption opportunities. Over the last twenty-five years policy-makers’ attention has been focused on policies designed to alter the balance between work and leisure; indeed the government has an explicit aim of delivering high labour force participation from people of working age. By contrast it has no explicit policy with reference to overall saving in the economy although policy has referred to some specific forms of saving by households (such as pension saving) and the government’s macro-economic framework established clear target rules for government saving, i.e. the surplus or deficit on the government’s current account. For the government to adopt overall saving as a formal policy goal would mean that it would have to settle on an appropriate definition of saving. As this paper shows, there are several possible definitions of saving. However, for a government taking a long-term view of the nation’s affairs, this report argues that of some of the possible definitions are unsuitable, facilitating the choices which might be made for a policy goal. This report begins by discussing different measures of saving and, in particular the way in which they treat capital gains. The UK’s saving record is then put in an international context and more detailed sectoral and historical data are discussed. The concept of savings adequacy is then explored. Finally conclusions are drawn. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:340&r=mac |
| By: | Marcelo Bianconi; Joe A. Yoshino |
| Abstract: | This paper presents empirical evidence on the effects of three nominal risk factors, local interest spreads, US interest spread, and US federal funds rate signal-to-noise ratio on the value of firms and on the cross-listing decision of firms destined to three major markets in North America, Asia, and Europe. We use firm-level data in 29 countries of cross-listing origin over a six year period, from 2000-2005. We find consistent and robust evidence that the US federal funds rate signal-to-noise ratio risk factor in the Sharpe sense provides an important benchmark for firm value across the universe of publicly traded companies; and this effect is larger for smaller firms that cross-list abroad. Countries in Asia, Europe, and South America tend to seek more funds abroad through cross-listing relative to other regions in this sample. In general, we find that the lagged local interest risk factor is positively related to current probability of cross listing. Small firms located in Asia, medium firms located in Europe, and large firms located in Asia, Europe, and South America have a higher relative probability of cross listing abroad. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:tuf:tuftec:0748&r=mac |
| By: | Angel Melguizo; Angel Muñoz; David Tuesta; JoaquÃn Vial |
| Abstract: | In this paper we analyze the short and medium term fiscal costs stemming from structural pension reform, taking Chile as workhorse. The Chilean pension system, based on individual capital accounts managed by the private sector, has been in operation for almost 30 years, providing a rich evidence of the impact of pension systems on public accounts. Besides, a recent reform that crucially changes the solidarity pillar is being implemented now. In the paper we argue that although much lower than its benefits, fiscal transition costs tend to be high and persistent, so a fiscal consolidation prior to the reform is advisable. This also allows filling the coverage holes that labour market informality generates, as illustrated for Chile, Colombia, Mexico and Peru. Finally, in more general terms, the exportability of this type of pension reform depends not only on its specific design, but on the quality of market and public institutions. |
| Keywords: | Pension reform, implicit debt, fiscal costs, solidarity pillar, minimum pension, Chile |
| JEL: | E62 H55 H68 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:0915&r=mac |