nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒05‒08
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal Consolidation in an Open Economy By Erceg, Christopher; Lindé, Jesper
  2. Output Gaps and Robust Monetary Policy Rules By Billi, Roberto M.
  3. Real Wages and Monetary Policy: A DSGE Approach By Bryan Perry; Kerk L. Phillips; David E. Spencer
  4. Fiscal Multipliers in Recessions By Matthew Canzoneri; Fabrice Collard; Harris Dellas; Behzad Diba
  5. Liquidity, Term Spreads and Monetary Policy By Yunus Aksoy; Henriqu S Basso
  6. Asymmetric monetary policy rules for open economies: Evidence from four countries By Caglayan, Mustafa; Jehan, Zainab; Mouratidis, Kostas
  7. Monetary policy and the flow of funds in the euro area By Riccardo Bonci
  8. The failure of financial macroeconomics and what to do about it By Chatelain, Jean-Bernard; Ralf, Kirsten
  9. On Graduation from Fiscal Procyclicality By Frankel, Jeffrey A.; Vegh, Carlos A.; Vuletin, Guillermo
  10. Leading Behavior of Interest Rate Term Spreads and Credit Risk Spreads in Korea By Won-Gi Kim; Noh-Sun Kwark
  11. Macroeconomic Surprises and Stock Returns in South Africa By Rangan Gupta; Monique Reid
  12. Financial Architecture and the Monetary Transmission Mechanism in Tanzania By Peter Montiel; Christopher Adam; Wilfred Mbowe; Stephen O’Connell
  13. Fiscal policy, entry and capital accumulation: hump-shaped responses By Brito, Paulo; Dixon, Huw
  14. Winners and Losers in the Global Financial Crisis By Ben Tengelsen
  15. The monetary growth order By G\"unter von Kiedrowski; E\"ors Szathm\'ary
  16. The Laffer Curve in an Incomplete-Markets Economy By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
  17. Taking Multi-Sector Dynamic General Equilibrium Models to the Data By Dixon, Huw; Kara, Engin
  18. Propping up Europe? By Jean Pisani-Ferry; Guntram B. Wolff
  19. A Variance Decomposition of Index-Linked Bond Returns By Francis Breedon
  20. Bailouts and longer term refinancing operations (LTROs): when temporary cures generate longer term economic concerns By Ojo, Marianne
  21. Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments By Jiménez, G.; Ongena, S.; Peydro, J.L.; Saurina, J.
  22. A simple empirical measure of central banks' conservatism By Levieuge, Grégory; Lucotte, Yannick
  23. 2012-13 Determinants of bank credit in small open economies: The case of six Pacific Island Countries By Parmendra Sharma, Neelesh Gounder
  24. Debt Overhangs: Past and Present By Carmen M. Reinhart; Vincent R. Reinhart; Kenneth S. Rogoff
  25. The Return of Financial Repression By Reinhart, Carmen
  26. Dynamic analysis of reductions in public debt in an endogenous growth model with public capital By Noritaka Maebayashi; Takeo Hori; Koichi Futagami
  27. The (Un-) importance of Chapter 7 wealth exemption levels By Jochen, Mankart
  28. Banking sector's international interconnectedness: Implications for consumption risk sharing in Europe By Thomas Nitschka
  29. Home Ownership, Savings, and Mobility Over The Life Cycle By Jonathan Halket; Santhanagopalan Vasudev
  30. "Measuring Macroprudential Risk through Financial Fragility: A Minskyan Approach" By Eric Tymoigne
  31. Working Paper 05-12 - The methodology developed by the Federal Planning Bureau to produce long-term scenarios By Nicole Fasquelle; Koen Hendrickx; Christophe Joyeux; Igor Lebrun
  32. A dynamic analysis of bank bailouts and constructive ambiguity By Eijffinger, Sylvester C W; Nijskens, Rob
  33. Disintermediation or financial diversification? The case of developed countries By Boutillier, M.; Bricongne, J.C.
  34. War all die Aufregung umsonst? Über die Auswirkung der Einführung von Studiengebühren auf die Studienbereitschaft in Deutschland By Baier, Tina; Helbig, Marcel
  35. A New Micro-Foundation for Keynesian Economics By YOSHIKAWA Hiroshi
  36. Eurosystem debts, Greece, and the role of banknotes By John, Whittaker
  37. The Great Depression in Spain By Eduardo L. Giménez; María Montero
  38. "Managing Global Financial Flows at the Cost of National Autonomy: China and India" By Sunanda Sen

  1. By: Erceg, Christopher; Lindé, Jesper
    Abstract: This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
    Keywords: currency union; fiscal policy; monetary policy; New Keynesian Small Open Economy DSGE Model; zero lower bound constraint
    JEL: E52 E58
    Date: 2012–04
  2. By: Billi, Roberto M. (Research Department, Central Bank of Sweden)
    Abstract: Policymakers often use the output gap, a noisy signal of economic activity, as a guide for setting monetary policy. Noise in the data argues for policy caution. At the same time, the zero bound on nominal interest rates constrains the central bank's ability to stimulate the economy during downturns. In such an environment, greater policy stimulus may be needed to stabilize the economy. Thus, noisy data and the zero bound present policymakers with a dilemma in deciding the appropriate stance for monetary policy. I investigate this dilemma in a small New Keynesian model, and show that policymakers should pay more attention to output gaps than suggested by previous research.
    Keywords: output gap; measurement errors; monetary policy; zero lower bound
    JEL: E52 E58
    Date: 2012–03–01
  3. By: Bryan Perry (Department of Economics, Brigham Young University); Kerk L. Phillips (Department of Economics, Brigham Young University); David E. Spencer (Department of Economics, Brigham Young University)
    Abstract: Economists have long investigated the cyclical behavior of real wages in order to draw inferences regarding the relative stickiness of prices and wages. Recent studies have adopted techniques intended to identify monetary shocks and examined the response of real wages and output or employment to such shocks. A finding that real wages are procyclical in response to a positive monetary policy shock, for example, is taken as evidence that prices are stickier than wages. In this paper, we show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Accordingly, examining the response of real wages is not enough to sort out the relative stickiness of prices and wages. We use two prominent DSGE models to help us address this issue. These models incorporate both sticky wages and prices but in different ways. The first model (Huang, Liu, and Phaneuf, American Economic Review, 2004) is relatively simple and is not intended for policy analysis. Its relative simplicity allows us to approach the issues both analytically and through simulations. The second model (Smets and Wouters, American Economic Review, 2007) is a relatively complex model of the U.S. economy with many frictions and intended to be useful for policy analysis. Because of its complexity, we must rely principally on simulation exercises. Using these models we offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, we cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock.
    Keywords: real wages, monetary policy, DSGE models
    JEL: E32 E52 E10
    Date: 2012–04
  4. By: Matthew Canzoneri; Fabrice Collard; Harris Dellas; Behzad Diba
    Abstract: The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also fail to produce any significant asymmetry in the size of the multipliers over the business cycle. In this paper we employ a variant of the Curdia-Woodford model of costly financial intermediation to show that fiscal multipliers are strongly countercyclical. In particular, they can take values exceeding two during recessions, declining to values below one during expansions.
    Keywords: Government Spending Multipliers; Cyclicality; Financial Frictions
    JEL: E32 E62 H3
    Date: 2012–05
  5. By: Yunus Aksoy (Department of Economics, Mathematics & Statistics, Birkbeck); Henriqu S Basso (University of Warwick)
    Abstract: We propose a model that delivers endogenous variations in term spreads driven primarily by banks' portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks' portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations.
    Keywords: Yield Curve, Quantitative Easing, Maturity Risk, Bank Portfolio
    JEL: E43 E44 E52 G20
    Date: 2012–04
  6. By: Caglayan, Mustafa; Jehan, Zainab; Mouratidis, Kostas
    Abstract: This study presents an analytical framework to examine the policy reaction function of a central bank in an open economy context while allowing for asymmetric preferences. The paper then empirically examines the policy rule obtained from this framework using quarterly data for the US, Canada, Japan, and the UK. The results, based on GMM approach, provide evidence that domestic policy is affected by changes in the foreign interest rate and exchange rate. We also provide evidence of the presence of asymmetries in response to the inflation rate and output gap for all the sample countries.
    Keywords: Monetary policy rule; asymmetric preferences; open economy
    JEL: E58 E52 F41
    Date: 2012–04–26
  7. By: Riccardo Bonci (Bank of Italy)
    Abstract: This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest rates on the lending and borrowing activity in different economic sectors. We exploit the information content of the flow-of-funds statistics, providing the best framework to analyse the flow of funds from lenders to borrowers. After estimating a small VAR for the euro area, we extend the benchmark model with the flow-of-funds series, analysing the response of these variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit, firms cut down on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall in revenue associated with the slowdown in economic activity, while households increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy, the interest rate hike is followed by a short-run deceleration in credit growth, mainly driven by the response of banks.
    Keywords: euro area, monetary policy, flow of funds, credit growth.
    JEL: E32 E4 E52 G11
    Date: 2012–03
  8. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its “fundamental long term value”. Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.
    Keywords: asset prices; liquidity trap; monetary policy; financial stability; business cycles; liquidity trap; dynamic stochastic general equilibrium models
    JEL: E5 E6 E4 E3
    Date: 2012–05–01
  9. By: Frankel, Jeffrey A. (Harvard University); Vegh, Carlos A. (University MD); Vuletin, Guillermo (Colby College)
    Abstract: In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. In line with existing literature, we confirm the role of increased financial integration and lower output volatility in reducing overall procyclicality. In this paper, however, we focus on the role played by the quality of institutions. Indeed, the quality of institutions seems to be a key determinant of a country's ability to graduate. We provide a formal analysis, controlling for the endogeneity of institutions and other determinants of fiscal procyclicality, that strongly suggests that there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.
    JEL: E02 E32 E62 F41
    Date: 2012–04
  10. By: Won-Gi Kim (Department of Economics, Texas A&M University); Noh-Sun Kwark (Department of Economics, Sogang University, Seoul)
    Abstract: Interest rate term spreads and credit spreads have been well known to have a predictive power for future fluctuations of output in many developed countries. This study examines leading behaviors of interest rate term spreads and credit risk spreads in Korea in two ways. First, we apply various empirical methods for finding leading behavior of interest rate term spreads and credit risk spreads in business fluctuations over the period spanning from May 1995 to January 2012. Second, using structural VAR models, we decompose the sources of fluctuations of output and interest rate spreads into two sorts, permanent real shocks and temporary financial shocks and examine the impulse response of each variable to the shocks focusing on the leading behavior of the spreads over the business cycle. We establish successfully the leading behavior of the term spread and the credit risk spread in Korea that the term spread tends to increase and the credit risk spread tends to shrink about 4 to 6 months before an expansion. We also find that much of the output fluctuations are attributed to real shocks while fluctuations in the interest rate spreads come from temporary financial shocks.
    Keywords: Term spread; Credit risk spreads; Forecast-error variance decompo- sition
    JEL: E32 F3
    Date: 2012–03
  11. By: Rangan Gupta (Department of Economics, University of Pretoria); Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: The objective of this paper is to explore the sensitivity of industry-specific stock returns to monetary policy and macroeconomic news. The paper looks at a range of industry-specific South African stock market indices and evaluates the sensitivity of these indices to a various unanticipated macroeconomic shocks. We begin with an event study, which examines the immediate impact of macroeconomic shocks on the stock market indices, and then use a Bayesian Vector Autoregressive (BVAR) analysis, which provides insight into the dynamic effects of the shocks on the stock market indices, by allowing us to treat the shocks as exogenous through appropriate setting of priors defining the mean and variance of the parameters in the VAR. The results from the event study indicate that with the exception of the gold mining index, where the CPI surprise plays a significant role, monetary surprise is the only variable that consistently negatively affects the stock returns significantly, both at the aggregate and sectoral levels. The BVAR model based on monthly data, however, indicates that, in addition to the monetary policy surprises, the CPI and PPI surprises also affect aggregate stock returns significantly. However, the effects of the CPI and PPI surprises are quite small in magnitude and are mainly experienced at shorter horizons immediately after the shock.
    Keywords: Bayesian Vector Autoregressive Model, Event Study, Macroeconomic Surprises, Stock Returns.
    JEL: C22 C32 E31 E44 G1
    Date: 2012
  12. By: Peter Montiel; Christopher Adam; Wilfred Mbowe; Stephen O’Connell
    Date: 2012
  13. By: Brito, Paulo; Dixon, Huw (Cardiff Business School)
    Abstract: In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.
    Keywords: Entry; Ramsey; fiscal policy; macroeconomic dynamics
    JEL: E22 D92 E32 D92
    Date: 2012–04
  14. By: Ben Tengelsen (Department of Economics, Brigham Young University)
    Keywords: Global Financial Crisis, Fiscal Policy, Recession Length.
    JEL: E62 E63 F02
    Date: 2012–04
  15. By: G\"unter von Kiedrowski; E\"ors Szathm\'ary
    Abstract: Growth of monetary assets and debts is commonly described by the formula of compound interest which for the case of continuous compounding is the exponential growth law. Its differential form is dc/dt = i c where dc/dt describes the rate of monetary growth, i the compounded interest rate and c the actual principal. Exponential growth of this type is fixed to be neither resource-limited nor self-limiting which is in contrast to real economic growth (such as the GDP) which may have exponential, but also subexponential, linear, saturation, and even decline phases. As a result assets and debts commonly outgrow their economic fundament giving rise to the financial equivalent of Malthusian catastrophes after a certain interval of time. We here introduce an alternative for exponential compounding and propose to replace dc/dt = i c by dc/dt = i c^p where the exponent p (called reaction order in chemistry) is a quantity which will be termed monetary growth order. The monetary growth order p is seen as a tuning handle which enables to adjust gross monetary growth to real economic growth. It is suggested that the central banks take a serious look to this control instrument which allows tuning in crisis situations and immediate return to the exponential norm if needed.
    Date: 2012–04
  16. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Abstract: This paper is a quantitative investigation into the characteristics of the Laffer curve in a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents. We show that the shape of the Laffer curves related to taxes on labor, capital and consumption dramatically changes depending on which of transfers or government debt are adjusted to make the government budget constraint hold. When transfers are adjusted, the Laffer curve has the traditional shape. However, when debt is adjusted, the Laffer curve looks like a horizontal S, in which case fiscal revenues can be associated with up to three diferent levels of taxation. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete.
    Keywords: , , , , , , , Laffer Curve, Incomplete Markets, Labor Supply, Precautionary Savings, Public Debt
    JEL: E6 H6
    Date: 2012–04
  17. By: Dixon, Huw (Cardiff Business School); Kara, Engin
    Abstract: We estimate and compare two models, the Generalized Taylor Economy (GTE) and the Multiple Calvo model (MC), that have been built to model the distributions of contract lengths observed in the data. We compare the performances of these models to those of the standard models such as the Calvo and its popular variant, using the ad hoc device of indexation. The estimations are made with Bayesian techniques for the US data. The results indicate that the data strongly favour the GTE.
    Keywords: DSGE models; Calvo; Taylor; price-setting
    JEL: E32 E52 E58
    Date: 2012–04
  18. By: Jean Pisani-Ferry; Guntram B. Wolff
    Abstract: The Bank of England, the Federal Reserve (Fed) and the European Central Bank (ECB) have responded to the crisis with exceptional initiatives resulting in a major increase in their balance sheets. After the ECBâ??s end-2011 launch of three-year bank refinancing (LTRO), there has been speculation that all three have de facto embarked on â??quantitative easingâ??. However, major differences remain: the Bank of England and Fed have mostly relied on large-scale purchases of government bonds, while the ECB has relied on lending to financial institutions with repurchase agreements of collateral (repos). The LTRO has successfully mitigated funding needs and reduced interbank stress, and has had a significant impact on sovereign bond yields in southern euro-area countries, and increased southern banksâ?? government debt holdings, while northern banks have reduced sovereign exposure. The LTRO has had only weak effects on funding for households and non-financial corporations; credit dynamics remain weak particularly in the southern euro area. Underlying structural problems relating to banks, the macroeconomic adjustment and the euro areaâ??s governance need to be addressed before financial stability and economic growth can return. Monetary policy cannot fundamentally address these problems and is made less effective by economic/institutional heterogeneity. This Policy Contribution is based on a briefing paper prepared for the European Parliament Economic and Monetary Affairs Committeeâ??s Monetary Dialogue of 25 April 2012. In the video below, Jean Pisani-Ferry and Guntram Wolff discuss the findings of this policy contribution. <iframe width="400" height="288" src="" frameborder="0" allowfullscreen></iframe>
    Date: 2012–04
  19. By: Francis Breedon (Queen Mary, University of London)
    Abstract: We undertake a variance decomposition of index-linked bond returns for the US, UK and Iceland. In all cases, news about future excess returns is the key driver though only for Icelandic bonds are returns independent of inflation.
    Keywords: Index-linked bonds, Variance decomposition, Real interest rate
    JEL: E43 G12
    Date: 2012–01
  20. By: Ojo, Marianne
    Abstract: It is increasingly becoming apparent to domestic and international investors that the European Central Bank’s bond buying programme which commenced in May 2010, “a way of correcting market dislocations that were hampering the central bank’s conduct of monetary policy”, and its provision of much cheaper Longer Term Refinancing Operations (LTROs), constitute more of temporary, expected continuous measures aimed at addressing the Euro zone’s sovereign debt problems (through fostering demand for sovereign debt and damping increases in yields). This paper is aimed at evaluating means whereby a redress of the Euro zone’s sovereign debt problems could be effectively achieved. In addition to present regulatory efforts and regulatory measures, it also considers other measures - one of which aims to combine “quantitative easing” schemes with other policies which would effectively address the need to reduce the debt burden of countries such as Greece, Portugal, Spain, Ireland and Italy, whilst incorporating corrective measures which lead to a growth in economic activities as well as increased competitiveness. The emphasis on tough fiscal measures - rather than the need for more stringent regulatory financial reforms is also considered to have played a contributory role – not only in the difficulty encountered by heavily indebted countries in reducing their levels of sovereign debts, but also creating further debts.
    Keywords: bond swaps; Greek debt crisis; sovereign debt restructuring; bailouts; Securities Markets Programme; bond yields; domestic bondholders; fiscal; monetary policies; Basel III; Capital standards; Liquidity Standards; macro prudential policy tools; Over-the-Counter (OTC) derivatives; Credit-Default-Swaps (CDS); disclosure; bank; regulation; leverage ratios
    JEL: E02 K2 A1 D02 D8 G01
    Date: 2012–04–30
  21. By: Jiménez, G.; Ongena, S.; Peydro, J.L.; Saurina, J. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical ‘dynamic’ provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy.
    Keywords: bank capital;dynamic provisioning;credit availability;financial crisis.
    JEL: E51 E58 E60 G21 G28
    Date: 2012
  22. By: Levieuge, Grégory; Lucotte, Yannick
    Abstract: In this paper we suggest a simple empirical and model-independent measure of Central Banks' Conservatism, based on the Taylor curve. This new indicator can easily be extended in time and space, whatever the underlying monetary regime of the considered countries. We demonstrate that it evolves in accordance with the monetary experiences of 32 OECD member countries from 1980, and is largely equivalent to the model-based measure provided by Krause & Méndez [Southern Economic Journal, 2005]. We finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of Central Banks.
    Keywords: Central Banks' preferences; Conservatism; Taylor curve; Taylor rule
    JEL: E43 E58 E52 E47
    Date: 2012–04–28
  23. By: Parmendra Sharma, Neelesh Gounder
    Keywords: Bank private sector credit, South Pacific, cross-country analysis
    JEL: E51 G21 C23 E44
  24. By: Carmen M. Reinhart; Vincent R. Reinhart; Kenneth S. Rogoff
    Abstract: We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.
    JEL: E44 E62 E63 F30 F41 H6 H63 N1
    Date: 2012–04
  25. By: Reinhart, Carmen
    Abstract: Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is more subtle and takes the form of 'financial repression'. Consistent negative real interest rates are equivalent to a tax on bond holders and, more generally, savers. In the heavily regulated financial markets of the Bretton Woods system, a variety of financial domestic and international restrictions facilitated a sharp and rapid reduction or 'liquidation' of public debt from the late 1940s to the 1970s. The restrictions or regulatory measures of that era had their origins in what would now come under the heading of 'macroprudential' concerns in the wake of the severe banking crises that swept many countries in the early 1930s. The surge in public debts that followed during the Great Depression and through World War II only made the case for stable and low interest rates and directed credit more compelling to policymakers. The resurgence of financial repression in the wake of the 2007-2009 financial crises alongside the surge in public debts in advanced economies is documented here. This process of financial 'de-globalization' may have only just begun.
    Keywords: capital controls; debt; financial repression; inflation; interest rates; regulation
    JEL: E2 E3 E6 F3 F4 H6 N10
    Date: 2012–04
  26. By: Noritaka Maebayashi (Graduate School of Economics, Osaka University); Takeo Hori (College of Economics, Aoyama Gakuin University); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large.
    Keywords: Reductions in public debt, Debt policy rule, Public capital, Endogenous Growth
    JEL: E62 H54 H63
    Date: 2012–04
  27. By: Jochen, Mankart
    Abstract: This paper examines the effects of the Chapter 7 wealth exemption level on welfare, bankruptcy filings, debt and asset holdings. I build on the heterogeneous agent life cycle model by Livshits, MacGee, and Tertilt (2007) which features uninsurable income and expense shocks. I extend their model by allowing borrowers to simultaneously invest in the risk free asset. When a borrower defaults on her debt by filing for Chapter 7 bankruptcy, she can keep her assets up to the wealth exemption level. Wealth exemption levels are important for two reasons. First, they explain the credit card debt puzzle identified by Gross and Souleles (2002b). Around thirty percent of borrowers, both in the model and in the data, who borrow at high interest rates simultaneously save at low interest rates. Second, ignoring the exemption level biases results because it overstates the costs of defaulting. At the same time, wealth exemption levels are unimportant in the sense that they have an impact only at low exemption levels. The effects of increases in the exemption level fade out very quickly. There is no strong positive relationship between exemption levels, which vary across U.S. states, and default rates in the model. This is in contrast to the previous literature, but consistent with the data. The reason is that those borrowers who might default do not own much wealth. Therefore, only very few households are affected by increases in the exemption level. A further result is that aggregate savings are increasing in the exemption level because a high exemption level gives poor agents who might default an incentive to save.
    Keywords: Personal bankruptcy law, wealth exemption level, asset portfolios, credit card debt puzzle
    JEL: E21 D31 K35
    Date: 2012–05
  28. By: Thomas Nitschka
    Abstract: Cross-border asset and liability holdings allow countries to insulate their consumption streams from idiosyncratic output shocks, i.e. consumption risk sharing. By contrast, banks' international interconnectedness spread the U.S. subprime mortgage crisis to various economies with adverse macroeconomic consequences. This paper evaluates the partial impact of banks' cross-border links on the ability of their host countries to share consumption risk internationally. It shows that the impact of banks' links to the non-bank sector in the rest-of-the-world on consumption risk sharing is negligible while strong interbank links are associated with relatively little consumption risk sharing of banks' host countries.
    Keywords: banking sector, cross-border assets, consumption risk sharing, interconnectedness,systemic risk
    JEL: E2 F15 G15
    Date: 2012
  29. By: Jonathan Halket; Santhanagopalan Vasudev
    Abstract: In a Bewley model with endogenous price volatility, home ownership and mobility across locations and jobs, we assess the contribution of financial constraints, housing illiquidities and house price risk to home ownership over the life cycle. The model can explain the rise in home ownership and fall in mobility over the life cycle. While some households rent due to borrowing constraints in the mortgage market, factors that effect propensities to save and move, such as risky house values and transactions costs, are more important determinants of the ownership rate.
    Date: 2012–03–01
  30. By: Eric Tymoigne
    Abstract: This paper presents a method to capture the growth of financial fragility within a country and across countries. This is done by focusing on housing finance in the United States, the United Kingdom, and France. Following the theoretical framework developed by Hyman P. Minsky, the paper focuses on the risk of amplification of shock via a debt deflation instead of the risk of a shock per se. Thus, instead of focusing on credit risk, for example, financial fragility is defined in relation to the means used to service debts, given credit risk and all other sources of shocks. The greater the expected reliance on capital gains and debt refinancing to meet debt commitments, the greater the financial fragility, and so the higher the risk of debt deflation induced by a shock if no government intervention occurs. In the context of housing finance, this implies that the growth of subprime lending was not by itself a source of financial fragility; instead, it was the change in the underwriting methods in all sectors of the mortgage markets that created a financial situation favorable to the emergence of a debt deflation. Stated alternatively, when nonprime and prime mortgage lending moved to asset-based lending instead of income-based lending, the financial fragility of the economy grew rapidly.
    Keywords: Debt Deflation; Minsky; Financial Fragility; Systemic Risk
    JEL: E12 E32 E44
    Date: 2012–04
  31. By: Nicole Fasquelle; Koen Hendrickx; Christophe Joyeux; Igor Lebrun
    Abstract: The Federal Planning Bureau has a long tradition in providing long-term projections focused on the evolution of social expenditure within an overall framework of public finance, using the MALTESE system of models. This outlook is based on different scenarios: demographic, socio-economic, macroeconomic and welfare adjustment. The purpose of this publication is to describe the methodology for the construction of the socio-economic and macroeconomic scenarios and to illustrate it by presenting the main results from the 2011 projection for the Annual Report of the Study Group on Ageing.
    JEL: E6 H53 H55 J1 J2
    Date: 2012–03–06
  32. By: Eijffinger, Sylvester C W; Nijskens, Rob
    Abstract: Bailout expectations have led banks to behave imprudently, holding too little capital and relying too much on short term funding to finance long term investments. This paper presents a model to rationalize a constructive ambiguity approach to liquidity assistance as a solution to forbearance. Faced with a bank that chooses capital and liquidity, the institution providing liquidity assistance can commit to a mixed strategy: never bailing out is too costly and therefore not credible, while always bailing out causes moral hazard. In equilibrium, the bank chooses above minimum capital and liquidity, unless either capital costs or the opportunity cost of liquidity are too high. We also find that the probability of a bailout is higher for a regulator more concerned about bank failure, and when the bailout penalty for the bank is higher; this suggests that forbearance is not entirely eliminated by adopting ambiguity.
    Keywords: banking; commitment; Lender of Last Resort; liquidity; regulation
    JEL: E58 G21 G28
    Date: 2012–04
  33. By: Boutillier, M.; Bricongne, J.C.
    Abstract: Measuring an intermediation rate is a good way of capturing the importance of the role of financial intermediaries in a given economy and their position in the face of the growth in market financing. Results show a quite sizeable decline in the financial intermediation rate in France over the period concerned, characterised by the strong growth of capital markets and the increasing use made by non-financial agents of non-intermediated financing. This development should nevertheless be treated cautiously, for several reasons. First, because it stems largely from the internationalisation of the financing and investing movements of resident financial institutions (FIs) and of market financing received by non-financial agents. Thus, an increasing proportion of resident FIs' assets are held vis-à-vis non-residents and a growing share of the financing received by residents comes from the "Rest of the world", mainly from non-resident FIs. Second, because an analysis of the revenue of financial intermediaries confirms the change in their price setting practices and a shift in their activities. Lastly, because the choice by non-financial agents is not only made between intermediaries and direct-market access. First of all, this article analyses the changes in the intermediation rate in France and abroad. A growing share Is accounted for by the Rest of the world, while the financing of the national economy by resident FIs has declined. Conversely, resident FIs have developed their operations with the Rest of the world. A broader concept of intermediation is then proposed in order to deal with the so-called decline in financial intermediation. A complementary view of intermediation revenue makes it possible to measure the developments in resident FIs' earnings and to understand the changes that have enabled them to maintain their revenue.
    Keywords: financial intermediation rate, intermediation aggregates, financial intermediaries, international financial integration, geographical diversification of investments, banks' price scale fixing, intermediation revenue, financial intermediation services indirectly measured (FISIM), production of financial institutions.
    JEL: E01 E21 F36 G2
    Date: 2012
  34. By: Baier, Tina; Helbig, Marcel
    Abstract: Dem vorliegenden Beitrag liegt die Forschungsfrage zugrunde, ob Studienberechtigte in Deutschland durch Studiengebühren von einem Studium abgehalten werden. Diese Fragestellung ist aus mindestens zwei Aspekten relevant: Erstens gibt es bislang nur wenige Arbeiten, die, bezogen auf die Bundesrepublik, den Effekt von Studiengebühren auf die Studierneigung untersuchen, und zweitens motiviert die hierzulande unterdurchschnittliche Studierneigung eine empirische Überprüfung der Wirkungsweise von Studiengebühren. Mit den Daten der HIS-Studienberechtigtenbefragungen der Jahre 1999 bis 2008 wird zunächst mit einer Mehrebenenanalyse überprüft, ob es durch die Einführung von Studiengebühren zu einem Rückgang in der Studierneigung gekommen ist. Aufgrund der methodischen Kritikpunkte, die man an dieser Stelle der Analysestrategie entgegenhalten kann, werden diese Ergebnisse weiter mit einer Difference - in - Differences (DiD) Schätzung validiert. Mit keiner der durchgeführten Analysen kann ein negativer Effekt von Studiengebühren auf die Studierneigung identifiziert werden. In Reaktion auf diese Ergebnisse wird in einem weiteren Schritt aus der Rational-Choice-Theorie heraus gefragt, warum sich kein negativer Effekt auf die Studierneigung beobachten lässt, obgleich sich die monetären Kosten für ein Studium erhöht haben. Die Ergebnisse sprechen dafür, dass es mit der Einführung der Studiengebühren zu einer Aufwertung der Erträge für ein Studium gekommen ist. --
    Keywords: Studiengebühren,Bildungsungleichheit,Difference in Differences
    Date: 2011
  35. By: YOSHIKAWA Hiroshi
    Abstract: Standard micro-founded macroeconomics starts with optimization exercises to derive the precise behavior of the representative agent and regards the macroeconomy as a homothetic enlargement of a micro agent. This paper takes a different approach and presents a new micro-foundation for Keynesian economics. The key concept is stochastic macro-equilibrium, which is a natural extension of the labor search theory.
    Date: 2012–04
  36. By: John, Whittaker
    Abstract: The public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, rose from €47.8bn to €180.5bn between January 2010 and September 2011. €17.1bn of the rise in eurosystem debt was due to an 86% increase in the Greek issue of euro banknotes. If EU/IMF loans to Greece cease, they will be replaced by larger Greek borrowing from the eurosystem, for as long as Greece stays in the euro. Eurozone governments would only escape from lending to Greece if access of the Bank of Greece to eurosystem credit were restricted. But this would impede the clearance of payments out of Greece, it would imply that cross-border payments by means of euro banknotes would also have to be restricted, and it would force Greece out of the euro.
    Keywords: eurozone operations; TARGET2;
    JEL: E42 E58
    Date: 2011–11–14
  37. By: Eduardo L. Giménez; María Montero (Universidade de Vigo)
    Abstract: In the decade of the 1930s the Spanish economy reported an slowdown of 20%, less severe than what occurred in the US, France and Germany, but very similar to the Italian and British experiences. In this paper we study two issues concerning this period of the Spanish economy: Did the World Depression account for the slump in the Spanish economy? And, why did the Spanish economy –unlike others– still show no signs of recovery at the onset of the Spanish Civil War (1936-1939)? We find that TFP accounts for most of the slowdown throughout this period, and the terms of trade explain the evolution of foreign trade. These findings suggest that (i) the origin of the Spanish downturn had a domestic source –with a drop in GDP, investment and imports–; (ii) the external economic and political situation affected the Spanish economy with some delay –with a drop in foreign trade and investment–; and, (iii) the socio-political situation delineated the recovery pattern.
    Keywords: The Great Depression, Spanish economy, Foreign Trade.
    JEL: E30 F40 N14 N44
    Date: 2012
  38. By: Sunanda Sen
    Abstract: The narrative as well as the analysis of global imbalances in the existing literature are incomplete without the part of the story that relates to the surge in capital flows experienced by the emerging economies. Such analysis disregards the implications of capital flows on their domestic economies, especially in terms of the "impossibility" of following a monetary policy that benefits domestic growth. It also fails to recognize the significance of uncertainty and changes in expectation as factors in the (precautionary) buildup of large official reserves. The consequences are many, and affect the fabric of growth and distribution in these economies. The recent experiences of China and India, with their deregulated financial sectors, bear this out. Financial integration and free capital mobility, which are supposed to generate growth with stability (according to the "efficient markets" hypothesis), have not only failed to achieve their promises (especially in the advanced economies) but also forced the high-growth developing economies like India and China into a state of compliance, where domestic goals of stability and development are sacrificed in order to attain the globally sanctioned norm of free capital flows. With the global financial crisis and the specter of recession haunting most advanced economies, the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete, not only by missing an important link in the prevailing network of global trade and finance, but also by ignoring the structural changes in these developing economies--many of which are related to the pattern of financialization and turbulence in the advanced economies.
    Keywords: Global Current Account Imbalances; Impossible Trinity; Capital Mobility; Official Reserves; Monetary Policy; National Autonomy; Efficient Market
    JEL: E31 E52 F42 O16 O53
    Date: 2012–04

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