|
on Macroeconomics |
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Issue of 2012‒03‒28
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Bofinger, Peter; Debes, Sebastian; Gareis, Johannes; Mayer, Eric |
| Abstract: | Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that drive house prices, which, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior. |
| Keywords: | animal spirits; housing markets; monetary policy |
| JEL: | D83 E32 E52 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8804&r=mac |
| By: | Corsetti, Giancarlo; Kuester, Keith; Meier, André; Müller, Gernot |
| Abstract: | This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a 'sovereign risk channel' through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity. |
| Keywords: | fiscal policy; monetary policy; risk premium; sovereign risk; zero lower bound |
| JEL: | E32 E52 E62 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8779&r=mac |
| By: | Svensson, Lars E O |
| Abstract: | The Riksbank faces challenges with regard to each of its three core functions, conducting monetary policy with the objective of stabilising inflation around the inflation target and resource utilisation around a sustainable level, promoting a safe and efficient payment system and thereby conducting a policy for financial stability, and managing its financial assets to attain a good risk-adjusted rate of return without prejudice to the first two core functions. I conclude that the challenges are best met by focusing monetary policy exclusively on stabilising inflation around the inflation target and resource utilisation around a sustainable level and not treating the policy rate, housing prices or household debt as separate explicit or implicit target variables, by not confusing monetary policy with financial-stability policy but treating them as separate policies, and by eliminating the large unnecessary currency risk in the Riksbank’s balance sheet. |
| Keywords: | central bank asset management; macroprudential policy; monetary policy |
| JEL: | E42 E52 E58 G18 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8789&r=mac |
| By: | Buiter, Willem H. |
| Abstract: | The roles of central banks in the advanced economies have expanded and multiplied since the beginning of the crisis. The conventional monetary policy roles - setting interest rates in the pursuit of macroeconomic stability and acting as lender of last resort and market maker of last resort to provide funding liquidity and market liquidity to illiquid but insolvent counterparties - have both been transformed. With official policy rates near or at the effective lower bound, the size of the central bank's balance sheet and the composition of its assets and liabilities have become the new, 'poor man's', monetary policy instruments. The LLR and MMLR roles have expanded to include solvency support for SIFIs and, in the euro area, the provision of liquidity support and solvency support for sovereigns also. Concentrating too many financial stability responsibilities, including macro-prudential and micro-prudential regulation, in the central bank risks undermining the independence of the central bank where it is likely to be useful -- the conventional monetary policy roles. The non-inflationary loss-absorption capacity (NILAC) of the leading central banks is vast. For the ECB/Eurosystem we estimate it at no less than EUR3.2 trillion, for the Fed at over $7 trillion. This is tax payers' money that is not under the effective control of the fiscal authorities. The central banks have used their balance sheets and their NILACs to engage in quasi-fiscal actions that have been essential to prevent even greater financial turmoil and possible disaster, but that also have important distributional impacts between sectors, financial institutions, individuals and nations. The ECB was forced into this illegitimate role by the fiscal vacuum at the heart of the euro area; the Fed by the fiscal paralysis of the US Federal government institutions. |
| Keywords: | Accountability; Central banks; Financial stability; Non-inflationary loss absorption capacity |
| JEL: | E41 E52 E58 E63 G01 H63 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8780&r=mac |
| By: | Kollmann, Robert; Roeger, Werner; Veld, Jan in't |
| Abstract: | A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment. |
| Keywords: | financial crisis; fiscal stimulus; real activity; state support for banks |
| JEL: | E62 E63 G21 G28 H25 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8829&r=mac |
| By: | Fatás, Antonio; Mihov, Ilian |
| Abstract: | We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades. |
| Keywords: | Business Cycles; Fiscal Policy; Stabilization |
| JEL: | E32 E62 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8749&r=mac |
| By: | Corsetti, Giancarlo; Müller, Gernot |
| Abstract: | During the global financial crisis 2007--2009 fiscal policy was widely used as a stabilization tool. Policymakers allowed a large build-up of public debt resulting from both automatic and discretionary expansionary measures. At the same time, calls for policy coordination stressed that international spillovers of fiscal policy might be sizeable. We reconsider the case for fiscal coordination by providing new evidence on the cross-border effects of discretionary fiscal measures. We rely on a vector autoregression model as well as on a quantitative business cycle model. We find that i) large spillover effects cannot be ruled out and, in contrast to conventional wisdom, ii) financial factors rather than trade flows lie at the heart of the international transmission mechanism. We discuss the implications of these results for policy coordination when markets price sovereign default risk, and put pressure on governments for implementing budget consolidation measures. |
| Keywords: | Financial Crisis; Fiscal Policy Coordination; Government spending; Spillover effects |
| JEL: | E62 F42 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8748&r=mac |
| By: | Giannone, Domenico; Lenza, Michele; Pill, Huw; Reichlin, Lucrezia |
| Abstract: | This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al., 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures. |
| Keywords: | interbank market; Non-standard monetary policy measures |
| JEL: | E5 E58 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8844&r=mac |
| By: | Cwik, Tobias; Mueller, Gernot; Schmidt, Sebastian; Wieland, Volker; Wolters, Maik H |
| Abstract: | In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models' implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development. |
| Keywords: | fiscal policy; Macroeconomic models; model comparison; model uncertainty; monetary policy; policy rules; robustness |
| JEL: | E52 E58 E62 F41 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8814&r=mac |
| By: | Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana |
| Abstract: | disturbances, generating macroeconomic instabilities. The adoption of inflation targeting (IT) by many emerging market economies has raised the questions about its relative suitability in dealing with these shocks compared with other regimes. This paper tests the robustness of inflation targeting compared to monetary targeting and exchange rate targeting regimes in coping with commodity terms of trade shocks. It uses a panel VAR technique to analyse in a comparative framework, aggregate impulse response functions and variance decompositions of variables to commodity terms of trade shocks. The results show that in general, IT countries respond better to commodity terms of trade shocks especially with respect to inflation and output gap. However, exchange rates are more volatile in IT countries than in exchange rate targeting countries. The results suggest that EMEs countries can reduce the adverse effects of commodity terms of trade fluctuations when they adopt inflation targeting, but they also need to pay attention to exchange rate movements. |
| Keywords: | In‡ation targeting, commodity terms of trade shocks, emerging markets, panel VAR. |
| JEL: | E52 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:273&r=mac |
| By: | James Costain (Banco de España); Beatriz de Blas (Universidad autónoma de Madrid) |
| Abstract: | We study simple fiscal rules for stabilizing the government debt level in response to asymmetric demand shocks in a country that belongs to a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. While rapid and flexible adjustment of public expenditure might seem institutionally or informationally infeasible, we discuss one concrete way in which this might be implemented: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeraire to an independent fi scal authority. Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner’s solution. |
| Keywords: | Fiscal authority, public wages, sovereign debt, monetary union |
| JEL: | E24 E32 E62 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1207&r=mac |
| By: | Devereux, Michael B; Senay, Ozge; Sutherland, Alan |
| Abstract: | Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions. |
| Keywords: | Country Portfolios; Financial Globalization; Nominal stability |
| JEL: | E52 E58 F41 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8830&r=mac |
| By: | Belliveau, Stefan |
| Abstract: | This working paper examines monetary aggregates as means of explaining economic activity. Comparative analysis of the Great Depression and the years 2007-11 is used to test the explanatory power of monetary aggregates in accordance with their use in monetarist explanations of the Great Depression. A conclusion from this analysis is that monetarist theory can structure monetary-aggregate data to produce useful insights about economic activity for the years 2007-11. |
| Keywords: | Price level; money supply; monetary policy; monetarism; Great Depression |
| JEL: | E31 N12 E50 |
| Date: | 2012–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37371&r=mac |
| By: | Chetan Ghate (Indian Statistical Institute, New Delhi); Radhika Pandey (National Institute of Public Finance and Policy); Ila Patnaik (National Institute of Public Finance and Policy) |
| Abstract: | This paper presents a comprehensive set of stylised facts for business cycles in India from 1950 - 2009. We find that the nature of the business cycle has changed dramatically after India's liberalisation reforms in 1991. In particular, after the the mid 1990s, the properties of India's business cycle has moved closer in key respects to select advanced countries. This is consistent with India's structural transformation from a pre-dominantly agricultural and planned developing economy to a more market based industrial-income economy. We also identify in what respects the behaviour of the Indian business cycle is different from that of other advanced economies, and closer to that of other less developed economies. This is the first exercise of this kind to generate an exhaustive set of stylised facts for India using both annual and quarterly data. |
| Keywords: | Macroeconomics, Real Business Cycles, Emerging Market DSGE Models, Volatility and Growth |
| JEL: | E10 E32 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:11-05&r=mac |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research) |
| Abstract: | Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched. |
| Keywords: | DSGE, emerging economy, rigidities, stability, optimization, Taylor rule |
| JEL: | E26 E52 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2012-004&r=mac |
| By: | Gong, Liutang; Zou, Heng-fu |
| Abstract: | In this paper, we have studies the effects of macroeconomic policies on foreign asset accumulation in a wealth effect model used by Bardhan (1967), Kurz (1968), Calvo (1980) and Blanchard (1983). Our results differ dramatically from the ones in Obstfeld (1981). In particular, we have shown that government spending always reduces foreign asset accumulation (or increases foreign borrowing). While Obstfeld's model turned the conventional Mundell-Fleming model on its head, our wealth effect approach has restored its validity. |
| Keywords: | Foreigh Asset Accumulation; Becker's Time Preference; Macroeconomic Policies |
| JEL: | E58 B22 E63 |
| Date: | 2012–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37431&r=mac |
| By: | R. Anton Braun (Federal Reserve Bank of Atlanta (Email: r.anton. braun@gmail.com)); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University, and the Canon Institute for Global Studies (Email: nakajima@kier.kyoto-u.ac.jp)) |
| Abstract: | We compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis. |
| Keywords: | Sovereign Debt Crisis, Deflation, Fiscal Risk, Leverage, Borrowing Constraint |
| JEL: | E31 E62 H60 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:12-e-02&r=mac |
| By: | Jang, Tae-Seok; Sacht, Stephen |
| Abstract: | In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto- and cross-covariances of the data which are slightly better than or equal to a model where rational expectations are assumed. This implies that the bounded rationality model provides some structural insights on the expectation formation process at the macro-level for the Euro Area. First, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Second, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap. |
| Keywords: | Animal Spirits; Bounded Rationality; Euro Area; New-Keynesian Model; Simulated Method of Moments |
| JEL: | E12 C53 E32 D83 |
| Date: | 2012–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37399&r=mac |
| By: | liu, luke |
| Abstract: | This study explores how monetary policy changes flow through the banking sector in Australia. Drawing on data between 2004 and 2010, we divide banks into three groups according to their size, and examine the impact of cash rate change on lending of different types of loans. We found the response of bank lending after a monetary policy change varies with the size of the bank as well as the types of loan. |
| Keywords: | monetary policy; transmission mechanism; bank size |
| JEL: | E42 E52 G32 |
| Date: | 2012–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37489&r=mac |
| By: | Acharya, Viral V; Naqvi, Hassan |
| Abstract: | We examine how the banking sector may ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, to induce effort, loan officers are compensated based on the volume of loans. Volumebased compensation also induces greater risk-taking; however, due to lack of commitment, loan officers are penalized ex post only if banks suffer a high enough liquidity shortfall. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality’ leaves banks flush with liquidity, lowering the sensitivity of bankers’ payoffs to downside risks and inducing excessive credit volume and asset price bubbles. The seeds of a crisis are thus sown. |
| Keywords: | bubbles; flight to quality; moral hazard |
| JEL: | E32 G21 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8851&r=mac |
| By: | Stüber, Heiko (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]) |
| Abstract: | "So far little empirical evidence exists on how real wages of newly hired workers react to business cycle conditions. This paper aims at filling this gap for Germany by analyzing the cyclical behavior of real wages of newly hired workers while controlling for 'cyclical upgrading' and 'cyclical downgrading' in employee/employer matches over the cycle. The analysis is undertaken for the 1977 to 2009 period using administrative longitudinal matched employer-employee wage data. I find that an increase in the unemployment rate of one percentage point decreases the real wages of job entries within given firm-jobs by about 1.27 percent. In light of the magnitude of the entry-wage cyclicality it seems that introducing wage rigidity in the Mortensen- Pissarides model in order to amplify realistic volatility of unemployment is not supported by the data. Further I show that the procyclicality of the employment/ population ratio is identical to the procyclicality of real entry wages. This counters the view of many macroeconomists that wages are much less cyclical than employment and unemployment." (Author's abstract, IAB-Doku) ((en)) |
| Keywords: | Reallohn, Lohntheorie, Lohnelastizität, Konjunkturzyklus, Arbeitslosigkeit, Lohnstarrheit |
| JEL: | E24 J31 E32 |
| Date: | 2012–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:201206&r=mac |
| By: | Javier Andrés (Universidad de Valencia); José Boscá (Universidad de Valencia); Francisco Ferri (Universidad de Valencia) |
| Abstract: | We study the size of fi scal multipliers in response to a government spending shock under different household leverage conditions in a general equilibrium setting with search and matching frictions. We allow for different levels of household indebtedness by changing the intensive margin of borrowing (loan-to-value ratio), as well as the extensive margin, defi ned as the number of borrowers over total population. The interaction between the consumption decisions of agents with limited access to credit and the process of wage bargaining and vacancy posting delivers two main results: (a) higher initial leverage makes it more likely to fi nd output multipliers higher than one; and (b) a positive government expenditure shock always produces a positive multiplier for vacancies and employment. The latter result is in sharp contrast to models in which some households do not have access to the fi nancial market (RoT consumers), in which the implied labor market responses to fi scal shocks are inconsistent with the empirical evidence. We also fi nd that the impact on GDP of consolidations is lower when consumers have a more limited capacity to borrow, and that increasing government spending in an episode of intense private deleveraging can still generate positive and signifi cant effects on consumption and output, although the fi scal output (employment) multiplier decreases (increases) with the intensity of the credit crunch. In the model with indebted impatient households we also observe that output (employment) multipliers decrease (increase) markedly with the degree of shock persistence and increase with the degree of price stickiness. |
| Keywords: | Fiscal multipliers, private leverage, labour market search |
| JEL: | E24 E44 E62 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1215&r=mac |
| By: | Acharya, Viral V; Merrouche, Ouarda |
| Abstract: | We study the liquidity demand of large settlement (first-tier) banks in the UK and its effect on the Sterling Money Markets before and during the sub-prime crisis of 2007-08. Liquidity holdings of large settlement banks experienced on average a 30% increase in the period immediately following 9th August, 2007, the day when money markets froze, igniting the crisis. In the UK, unlike in the US until October 2008, the remuneration of reserves accounts provides strong incentives for banks to park liquidity at the central bank rather than lend in the market. We show that following this structural break, settlement bank liquidity had a precautionary nature in that it rose on calendar days with a large amount of payment activity and for banks with greater credit risk. We establish that the liquidity demand by settlement banks caused overnight inter-bank rates to rise and volumes to decline, an effect virtually absent in the pre-crisis period. This liquidity effect on inter-bank rates occurred in both unsecured borrowing as well as borrowing secured by UK government bonds. Further, using bilateral data we show that the effect was more strongly linked to lender risk than to borrower risk. |
| Keywords: | cash; contagion; counterparty risk; funding risk; money markets; rollover risk; systemic risk |
| JEL: | E42 E58 G21 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8859&r=mac |
| By: | Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick |
| Abstract: | Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments. |
| Keywords: | Capital controls; International reserves |
| JEL: | E58 F36 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8753&r=mac |
| By: | Volodymyr Vysochansky (Uzhhorod University) |
| Abstract: | World financial crisis unveiled the shaky state of modern monetary system, based on a centralized fiat money supply and fractional-reserve banking. The scale of the crisis and the threat of major inflation, which has already become a reality on commodities markets, confirm the instability of the monetary system. In order to discover weak spots of the system and consider possible solutions on how to remove them, it is necessary to revise the nature of its elements, first of all, money. The article is devoted to the issues of commodities backed money and approaches of its implementation. Model of unregulated money creation/withdrawal, which is based on ETF technology and exchange infrastructure, is proposed as an incentive to stimulate discussion about possible improvement of the modern monetary system. |
| Keywords: | money, commodities, exchange traded funds, monetary system regulation |
| JEL: | E4 E5 G1 |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:nos:wuwpfi:vysochansky_volodymyr.52267-250212_01&r=mac |
| By: | Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics) |
| Abstract: | We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke et al. (1999) setup, where financial frictions enter through the price of loans, and the Kiyotaki and Moore (1997) model, where they concern the quantity of loans. We take both models to the US data and check how well they fit it on several margins. Overall, comparing the models favors the framework of Bernanke et al. (1999). However, even this model is not able to make a clear improvement over the benchmark New Keynesian model, and the Kiyotaki and Moore (1997) underperforms it on several margins. Furthermore, none of the extensions explains the 2007-09 recession as significantly more “financial” than several previous ones. |
| Keywords: | financial frictions, DSGE models, DSGE-VAR, Bayesian analysis |
| JEL: | E30 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:109&r=mac |
| By: | Alvarez, Fernando E; Lippi, Francesco |
| Abstract: | We model the pricing decisions of a multi-product firm that faces a fixed 'menu' cost: once the cost is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decision in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products that are sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The cumulative response of output to a monetary shock is the product of three terms: the steady state standard deviation of price changes, the average time elapsed between price changes, and a function of both the number of products and the size of the monetary shock. The size of the cumulative response of output and the length of the half-life of the response of aggregate prices to a monetary shock increase with the number of products, both of them more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model. |
| Keywords: | economies of scope in price changes; fixed costs; impulse responses; menu cost; monetary shocks; optimal control in multiple dimensions; quasi-variational inequalities |
| JEL: | E3 E5 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8863&r=mac |
| By: | Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo |
| Abstract: | Based on well-known evidence on labor supply elasticities, several authors have concluded that women should be taxed at lower rates than men. We evaluate the quantitative implications and merits of this proposition. Relative to the current system of taxation, setting a proportional tax rate on married females equal to 4% (8%) increases output and married female labor force participation by about 3.9% (3.4%) and 6.9% (4.0%), respectively. Gender-based taxes improve welfare and are preferred by a majority of households. Nevertheless, welfare gains are higher when the U.S. tax system is replaced by a proportional, gender-neutral income tax. |
| Keywords: | Labour Force Participation; Taxation; Two-earner Households |
| JEL: | E62 H31 J12 J22 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8735&r=mac |
| By: | Guido Menzio; Irina A. Telykova; Ludo Visschers |
| Abstract: | We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality. |
| Keywords: | Directed search, Labor reallocation, Lifecycle |
| JEL: | E24 J63 J64 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1210&r=mac |
| By: | Coeurdacier, Nicolas; Rey, Hélène; Winant, Pablo |
| Abstract: | We propose a simple quantitative method to linearize around the risky steady state of a small open economy. Unlike when the deterministic steady state is used, the net foreign asset position is well defined. We allow for both stochastic income and stochastic interest rate. |
| Keywords: | steady state |
| JEL: | E10 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8751&r=mac |
| By: | Mitsuru Katagiri (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mitsuru.katagiri@boj.or.jp)) |
| Abstract: | In this paper I investigate the effects of changes in demand structure caused by population aging on the Japanese economy using a multi-sector new Keynesian model with job creation/destruction. I consider upward revisions in forecast for the speed of Japanese population aging as unexpected shocks to its demand structure. I find that the shocks caused around 0.3 percent point deflationary pressure on year-to-year inflation, 0.3 to 0.4 percent point increase in unemployment rates, and 1.8 percent point decrease in real GDP from the early 1990s to the 2000s in Japan. I also find that the repetition of such upward revisions made those effects look more persistent. |
| Keywords: | Population Aging, Matching, Productivity, Deflation |
| JEL: | E24 E31 J11 J64 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:12-e-03&r=mac |
| By: | Eloísa Ortega (Banco de España); Juan Peñalosa (Banco de España) |
| Abstract: | La crisis económica que ha afectado a los países industrializados en los últimos años ha sido singular por su intensidad, complejidad y por las dificultades para su superación. El objetivo de este trabajo es analizar los factores que han determinado que la crisis haya adquirido en España una profundidad y duración superiores a las de episodios anteriores y que la salida de la recesión esté encontrando obstáculos significativos. La pertenencia de España a la UEM es un aspecto crucial a considerar, pues contribuye tanto a explicar la acumulación de desequilibrios en la expansión como a condicionar la naturaleza del ajuste en la crisis, dado que la batería de instrumentos de política económica se ha reducido significativamente. Los desequilibrios macroeconómicos y financieros acumulados en la etapa de alto crecimiento (boom inmobiliario, exceso de endeudamiento y pérdida de competitividad), todos ellos estrechamente interrelacionados, representaban factores de vulnerabilidad, pero, incluso los fundamentos aparentemente más sólidos en otros ámbitos, como en el caso de la situación presupuestaria y del mercado laboral, han mostrado sus debilidades en la crisis. La experiencia a lo largo de los últimos cuatro años permite extraer algunas lecciones en relación con el sector exterior, el mercado inmobiliario, la política fiscal y el mercado de trabajo, que alertan, en particular, sobre la necesidad de evitar la complacencia en la gestión de la política económica en las etapas de auge y sobre la urgencia de adaptar en España la estructura de los mercados de bienes y factores y el comportamiento de los agentes a los requisitos que impone la pertenencia a una unión monetaria |
| Keywords: | Economía española, UEM, crisis económica, competitividad, mercado inmobiliario, endeudamiento |
| JEL: | E60 E65 F32 G01 H12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1201&r=mac |
| By: | Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España); Pilar Poncela (Universidad Autónoma de Madrid) |
| Abstract: | We develop a twofold analysis of how the information provided by several economic indicators can be used in Markov-switching dynamic factor models to identify the business cycle turning points. First, we compare the performance of a fully non-linear multivariate specifi cation (one-step approach) with the “shortcut” of using a linear factor model to obtain a coincident indicator which is then used to compute the Markov-switching probabilities (two-step approach). Second, we examine the role of increasing the number of indicators. Our results suggest that one step is generally preferred to two steps, although its marginal gains diminish as the quality of the indicators increases and as more indicators are used to identify the non-linear signal. Using the four constituent series of the Stock-Watson coincident index, we illustrate these results for US data. |
| Keywords: | Business cycles, output growth, time series |
| JEL: | E32 C22 E27 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1202&r=mac |
| By: | Helmut Hofer; Tibor Hanappi (Institut für Höhere Studien (IHS) / Department of Economics & Finance); Sandra Müllbacher (Institut für Höhere Studien (IHS) / Department of Economics & Finance) |
| Abstract: | In the Great Recession market income of the households in Austria has been reduced and unemployment increased. In this paper we examine the impact of automatic stabilizers on cushioning such income losses. We use ITABENA, an Austrian tax-benefit model, to analyze how shocks on market income and employment are mitigated by taxes and transfers. In the case of a proportional income shock 46 percent of the shock will be absorbed by automatic stabilizers in Austria. For the unemployment shocks automatic stabilizers absorb 68 percent. Automatic stabilizers increase the redistributive effects of the Austrian tax benefit system. We find that recent changes in the income tax code have almost no impact on the size of automatic stabilizers in Austria. |
| Keywords: | automatic stabilization, microsimulation, tax reforms |
| JEL: | E32 E63 H2 H31 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:jku:nrnwps:2012_03&r=mac |
| By: | Repullo, Rafael; Suarez, Javier |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans' probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation; Basel capital requirements; Capital market frictions; Credit rationing; Loan defaults; Relationship banking; Social cost of bank failure |
| JEL: | E44 G21 G28 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8897&r=mac |
| By: | von Hagen, Jürgen; Zhang, Haiping |
| Abstract: | Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output. |
| Keywords: | financial development; financial frictions; foreign direct investment; international capital flows; limited commitment |
| JEL: | E44 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8750&r=mac |
| By: | Lippi, Francesco; Trachter, Nicholas |
| Abstract: | We characterize policies for the supply of liquidity in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. We show that a socially efficient provision of liquidity involves a trade-off between insurance and production incentives. Two scenarios are studied: if no aggregate information is available to the policy maker, constant flat expansions are socially beneficial if unproductive spells are sufficiently long. If some aggregate information is available, a socially beneficial state-dependent policy prescribes expanding the supply of liquidity in recessions and contracting it in expansions. |
| Keywords: | Friedman rule; Heterogenous agents; Incomplete markets; Liquidity; Precautionary savings; State dependent policy. |
| JEL: | E5 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8890&r=mac |
| By: | Abbi M Kedir; Nor Yasmin Mhd Bani |
| Abstract: | The investigation of the growth-volatility link is an important one in empirical macroeconomics. There is no empirical evidence supporting the predictions of recent theoretical models that incorporate and explicitly recognize the role of human capital in this link. Using a panel data, we show empirically how the detrimental effect of output volatility on growth is diluted by education. We provide robustness checks and policy implications of our finding. |
| Keywords: | Growth; volatility; education; dynamic system (GMM). |
| JEL: | E32 F43 O40 O49 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:12/04&r=mac |
| By: | Krishnamurthy, Arvind; Nagel, Stefan; Orlov, Dmitry |
| Abstract: | We measure the repo funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral. We find that repo played only a small role in funding private sector assets prior to the crisis, as most repos are backed by Treasury and Agency collateral. Repo with private sector collateral contracts during the crisis, but the magnitude is relatively insignificant compared with the contraction in asset-backed commercial paper (ABCP). While relatively small in aggregate, the contraction in repo particularly affected key dealer banks with large exposures to private sector securities, which then had knock-on effects on security markets, and led these dealer banks to resort to the Fed's emergency lending programs. We also find that haircuts in MMF-to-dealer repo rise less than the dealer-to-dealer or dealer-to-hedge fund repo haircuts reported in earlier papers. This finding suggests that the contraction in repo led dealers to take defensive actions, given their own capital and liquidity problems, raising credit terms to their borrowers. The picture that emerges from these findings looks less like a traditional bank run of depositors and more like a credit crunch among dealer banks. |
| Keywords: | Dealer Banks; Financial Crisis; Repurchase Agreements; Shadow Banking |
| JEL: | E51 G01 G21 G24 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8795&r=mac |
| By: | König, Michael; Lorenz, Jan; Zilibotti, Fabrizio |
| Abstract: | We develop a tractable dynamic model of productivity growth and technology spillovers that is consistent with the emergence of real world empirical productivity distributions. Firms can improve productivity by engaging in in-house R&D, or alternatively, by trying to imitate other firms’ technologies subject to limits to their absorptive capacities. The outcome of both strategies is stochastic. The choice between in-house R&D and imitation is endogenous, and based on firms’ profit maximization motive. Firms closer to the technological frontier have less imitation opportunities, and tend to choose more often in-house R&D, consistent with the empirical evidence. The equilibrium choice leads to balanced growth featuring persistent productivity differences even when starting from ex-ante identical firms. The long run productivity distribution can be described as a traveling wave with tails following Zipf’s law as it can be observed in the empirical data. Idiosyncratic shocks to firms’ productivities of R&D reduce inequality, but also lead to lower aggregate productivity and industry performance. |
| Keywords: | absorptive capacity; growth; innovation; productivity difference; quality ladder; spillovers |
| JEL: | E10 O40 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8843&r=mac |
| By: | Seko, Miki; Sumita, Kazuto; Yoshida, Jiro |
| Abstract: | A model of the term structure of lease rates in a frictionless economy is developed and its predictions are compared with data on residential leases in Japan. The model shows that the initial lease rate for a cancellable lease must be set higher than that for a non-cancellable lease because the former rate will be repeatedly adjusted downward when the market rent decreases. More importantly, the term structure of lease rates is always upward-sloping for cancellable leases. Empirical findings show a sharp contrast with the theory. Fixed-term lease rates are often higher than open-ended long-term lease rates. Moreover, in the fixed-term lease sample, the term structure of lease rates is downward-sloping. The term structure is also heterogeneous by tenant’s income. |
| Keywords: | lease contracts; term structure; cancellation option; hedonic regression; residential real estate; option premium; Japan |
| JEL: | E43 L85 R31 R21 |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37395&r=mac |
| By: | Reinhart, Carmen |
| Abstract: | We document that the global scope and depth of the crisis the began with the collapse of the subprime mortgage market in the summer of 2007 is unprecedented in the post World War II era and, as such, the most relevant comparison benchmark is the Great Depression (or the Great Contraction, as dubbed by Friedman and Schwartz, 1963) of the 1930s. Some of the similarities between these two global episodes are examined but the analysis of the aftermath of severe financial crises is extended to also include the most severe post-WWII crises as well. As to the causes of these great crises, we focus on those factors that are common across time and geography. We discriminate between root causes of the crises, recurring crises symptoms, and common features (such as misguided financial regulation or inadequate supervision) which serve as amplifiers of the boom-bust cycle. There are recurring temporal patterns in the boom-bust cycle and their broad sequencing is analyzed. |
| Keywords: | debt; default; financial crises; financial repression |
| JEL: | E6 F3 N0 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8742&r=mac |
| By: | Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Wenlang Zhang (Hong Kong Monetary Authority); Gaofeng Han (Hong Kong Monetary Authority); Tommy Wu (Hong Kong Monetary Authority) |
| Abstract: | Little is known about the total factor productivity of the non-tradable sectors in China. In this paper we estimate productivity growth of the non-tradable sectors by studying the relative price movements of the non-tradable sectors vis-a-vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the non-tradable sectors have risen significantly faster than those of the tradable sectors, and China's internal real exchange rate has appreciated at a faster pace than the renminbi real effective exchange rate. We also find the non-tradable sectors have seen much lower productivity growth than the tradable sectors, and such productivity differentials are large when compared to other economies. We argue that if productivity growth in the non-tradable sectors remains slow, China will likely see more difficulty in rebalancing its growth pattern and higher inflationary pressures in the medium term. As such, it is important for the authorities to take policy actions to raise productivity growth in the non-tradable sectors. |
| Keywords: | Tradable and Non-Tradable Sectors, Internal Real Exchange Rate, Total Factor Productivity |
| JEL: | E31 F31 F43 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:082012&r=mac |
| By: | Diego Restuccia; Guillaume Vandenbroucke |
| Abstract: | An average person born in the United States in the second half of the nineteenth century completed 7 years of schooling and spent 58 hours a week working in the market. By contrast, an average person born at the end of the twentieth century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30 percent. What explains these trends? We consider a model of human capital and labor supply to quantitatively assess the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work. We find that the observed increase in wages and life expectancy account for 80 percent of the increase in years of schooling and 88 percent of the reduction in hours of work. Rising wages alone account for 75 percent of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25 percent of the increase in schooling and almost none of the decrease in hours of work. |
| Keywords: | Schooling, hours of work, productivity, life expectancy, trends, United States |
| JEL: | E1 I25 J11 O4 |
| Date: | 2012–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-450&r=mac |
| By: | Gonul Sengul |
| Abstract: | This paper analyzes rates of inflow to and outflow from unemployment for Turkey since 2006. The average rate of exiting unemployment (outflow) within a month is 9.4 percent, while the average rate of transiting from employment to unemployment (inflow) is 1.3 percent. Moreover, the analysis of flow rates for different age and education groups show that these rates change significantly across groups. The paper decomposes changes in unemployment into contributions from inflow and outflow rates and finds that the volatility of inflow rates is the main driving force of the change in the unemployment rate in Turkey. |
| Keywords: | Unemployment,Worker Flows, Job Finding Rate, Separation Rate |
| JEL: | E24 J6 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1210&r=mac |
| By: | Guimarães, Bernardo; Sheedy, Kevin D. |
| Abstract: | Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment. |
| Keywords: | institutions; political economy; power struggle; property rights; time inconsistency |
| JEL: | E02 O43 P48 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8855&r=mac |