nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒10‒20
57 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. An Estimated New-Keynesian Model with Unemployment as Excess Supply of Labor By Casares, Miguel; Moreno, Antonio; Vázquez Pérez, Jesús
  2. Firms' entry, monetary policy and the international business cycle By Cavallari, Lilia
  3. Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
  4. The Effect of Data Revisions on the Basic New Keynesian Model By María-Dolores, Ramón; Londoño, Juan M.; Vázquez Pérez, Jesús
  5. Structural and Cyclical Forces in the Labor Market During the Great Recession: Cross-Country Evidence By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  6. Regional inflation dynamics and inflation targeting in Peru By Winkelried, Diego; Gutierrez, José Enrique
  7. Fiscal policy, banks and the financial crisis By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in't Veld
  8. Fiscal Policy, Banks and the Financial Crisis By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld
  9. When Credit Bites Back: Leverage, Business Cycles and Crises By Oscar Jorda; Moritz Schularick; Alan Taylor
  10. Data Revisions in the Estimation of DSGE Models By Casares, Miguel; Vázquez Pérez, Jesús
  11. Quantizing Money By Ternyik, Stephen I.
  12. Fiscal deficits, financial fragility, and the effectiveness of government policies By Kirchner, Markus; van Wijnbergen, Sweder
  13. On the (in)effectiveness of fiscal devaluations in a monetary union By Anna Lipinska; Leopold von Thadden
  14. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  15. Notes for a new guide to Keynes (I): Wages, aggregate demand, and employment By Jordi Galí
  16. Sovereign Defaults and Banking Crises By Cesar Sosa-Padilla
  17. Macroeconomic Policy in DSGE and Agent-Based Models By Giorgio Fagiolo; Andrea Roventini
  18. Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  19. The Geography of the Great Recession By Enoch Hill; Alessandra Fogli; Fabrizio Perri
  20. Banks’ balance sheets and the macroeconomy in the Bank of Italy Quarterly Model By Claudia Miani; Giulio Nicoletti; Alessandro Notarpietro; Massimiliano Pisani
  21. Monetary policy implications of the dependence of long term interest rates on disagreement about macroeconomic forecasts By Eric Dor
  22. Assets matter: New and old views of monetary policy By Stan du Plessis
  23. Does Output Gap, Labor's Share or Unemployment Rate Drive Inflation? By Lanne, Markku; Luoto, Jani
  24. Time Variation in an Optimal Asymmetric Preference Monetary Policy Model By Cassou, Steven P.; Vázquez Pérez, Jesús
  25. Choosing the Pace of Fiscal Consolidation By Łukasz Rawdanowicz
  26. Deriving India's Potential growth from theory and structure By Ashima Goyal; Sanchit Arora
  27. Risk, uncertainty and monetary policy By Geert Bekaert; Marie Hoerova; Marco Lo Duca
  28. Two-sided learning in New Keynesian models: Dynamics, (lack of) convergence and the value of information By Christian Matthes; Francesca Rondina
  29. The federal funds rate and the conduction of the international orchestra By Antonio Ribba
  30. Financial intermediation, investment dynamics and business cycle fluctuations By Andrea Ajello
  31. The Federal Reserve's balance sheet and overnight interest rates By Jaime Marquez; Ari Morse; Bernd Schlusche
  32. Portugal - Assessing the Risks Around the Speed of Fiscal Consolidation in an Uncertain Environment By Stéphane Sorbe
  33. Markups and Entry in a DSGE Model By Cavallari, Lilia
  34. A Real Exchange Rate Based Phillips Curve By Konstantin Styrin; Oleg Zamulin
  35. Economic scenario of United States of America before and after 2012 U.S. Presidential Election By Sinha, Pankaj; Singhal, Anushree; Sondhi, Kriti
  36. Money supply in top tax system By Varma, Vijaya Krushna Varma
  37. Exchange rate pass-through, monetary policy, and variability of exchange rates By Konstantin Styrin; Oleg Zamulin
  38. Convergence dynamics of output: Economic Cycles: A Synthesis By Thierry Aimar; Francis Bismans; Claude Diebolt
  39. "Delaying the Next Global Meltdown" By Dimitri B. Papadimitriou; L. Randall Wray
  40. Characterizing food prices in India By Andaleeb Rahman
  41. A macroeconomic model with a financial sector By Markus K. Brunnermeier; Yuliy Sannikov
  42. Global excess liquidity and asset prices in emerging countries: a pvar approach By Sophie Brana; Marie-Louise Djibenou; Stéphanie Prat
  43. Endogenous risk in a DSGE model with capital-constrained financial intermediaries By Hans Dewachter; Raf Wouters
  44. A macroeconomic framework for quantifying systemic risk By Zhiguo He; Arvind Krishnamurthy
  45. Euro Area: Single Currency - National Money Creation By Stefan Kooths; Björn van Roye
  46. Firms, Destinations, and Aggregate Fluctuations By di Giovanni, Julian; Levchenko, Andrei A.; Mejean, Isabelle
  47. Portugal - Solid Foundations for a Sustainable Fiscal Consolidation By David Haugh; Stéphane Sorbe
  48. FDI and macroeconomic volatility: A close-up on the source countries By Kamel ABDELLAH ( GREThA, CNRS, UMR 5113 & ISG, UNIVERSITE DE TUNIS); Dalila NICET-CHENAF (GREThA, CNRS, UMR 5113); Eric ROUGIER (GREThA, CNRS, UMR 5113)
  49. “Pass-through in dollarized countries: should Ecuador abandon the U.S. Dollar?” By María Lorena Marí del Cristo; Marta Gómez-Puig
  50. Forecast robustness in macroeconometric models By Gunnar Bårdsen, Dag Kolsrud, and Ragnar Nymoen
  51. Demystifying China's fiscal stimulus By Fardoust, Shahrokh; Lin, Justin Yifu; Luo, Xubei
  52. Energy-Saving Technical Change By John Hassler; Per Krusell; Conny Olovsson
  53. Macroéconomie du court terme et politique climatique : Quelques leçons d'un modèle d'offre et demande globales By Jean-François FAGNART; Marc GERMAIN
  54. The Evolution of Education: A Macroeconomic Analysis By Diego Restuccia; Guillaume Vandenbroucke
  55. The macroeconomic forecasting performance of autoregressive models with alternative specifications of time-varying volatility By Todd E. Clark; Francesco Ravazzolo
  56. ÀHay un sesgo anti- laboral en los impuestos en AmŽrica Latina? By Eduardo Lora; Deisy Fajardo
  57. Monotonic models and cycles By José Alvaro Rodrigues-Neto

  1. By: Casares, Miguel; Moreno, Antonio; Vázquez Pérez, Jesús
    Abstract: Wage stickiness is incorporated to a New-Keynesian model with variable capital to drive endogenous unemployment uctuations de ned as the log di¤erence between aggregate labor supply and aggregate labor demand. We estimated such model using Bayesian econometric techniques and quarterly U.S. data. The second-moment statistics of the unemployment rate in the model give a good t to those observed in U.S. data. Our results also show that wage-push shocks, demand shifts and monetary policy shocks are the three major determinants of unemployment fl uctuations. Compared to an estimated New-Keynesian model without unemployment (Smets and Wouters, 2007): wage stickiness is higher, labor supply elasticity is lower, the slope of the New-Keynesian Phillips curve is flatter, and the importance of technology innovations on output variability increases.
    Keywords: sticky wages, unemployment, business cycles, New-Keynesian models.
    JEL: C32 E30
    Date: 2012
  2. By: Cavallari, Lilia
    Abstract: This paper provides a theory of the international business cycle grounded on firms' entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry and counter-cyclical markups can generate fluctuations in macroeconomic aggregates and trade variables as large as those observed in the data while at the same time providing positive international comovements. Both firms' entry and sticky prices are essential for reproducing the synchronization of the business cycles found in the data.
    Keywords: firm entry; international business cycle; international comovements; variable markup; Taylor rule; exchange rate regimes
    JEL: E32 E52 F41
    Date: 2012–07
  3. By: Giovanni Dosi (Sant'Anna School of Advanced Studies, Pisa); Giorgio Fagiolo (Sant'Anna School of Advanced Studies, Pisa); Mauro Napoletano (OFCE, Nice, France); Andrea Roventini (Department of Economics (University of Verona))
    Abstract: This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the ``Keynes meeting Schumpeter'' formalism presented in \citet{DFR10}. To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a ``Schumpeterian'' innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one ``regime'' with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises.
    Keywords: agent-based Keynesian models, multiple equilibria, fiscal and monetary policies, income distribution, transmission mechanisms, credit constraints
    JEL: E32 E44 E51 E52 E62
    Date: 2012–01
  4. By: María-Dolores, Ramón; Londoño, Juan M.; Vázquez Pérez, Jesús
    Abstract: This paper proposes an extended version of the basic New Keynesian monetary (NKM) model which contemplates revision processes of output and inflation data in order to assess the importance of data revisions on the estimated monetary policy rule parameters and the transmission of policy shocks. Our empirical evidence based on a structural econometric approach suggests that although the initial announcements of output and inflation are not rational forecasts of revised output and inflation data, ignoring the presence of non well-behaved revision processes may not be a serious drawback in the analysis of monetary policy in this framework. However, the transmission of inflation-push shocks is largely affected by considering data revisions. The latter being especially true when the nominal stickiness parameter is estimated taking into account data revision processes.
    Keywords: indirect inference, monetary policy rule, NKM model, real-time data, non-rational forecast error
    JEL: C32 E30 E52
    Date: 2012
  5. By: Sala, Luca; Söderström, Ulf; Trigari, Antonella
    Abstract: We use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study four countries (the U.S., the U.K., Sweden, and Germany) during the financial crisis and the Great Recession. We estimate the model over the period prior to the financial crisis and use the model to interpret movements in GDP, unemployment, vacancies, and wages in the period from 2007 until 2011. We show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the U.S. Financial factors were also important in the U.K., but less so in Sweden and Germany. Reduced matching efficiency was considerably less important in the U.K. and Sweden than in the U.S., but matching efficiency improved in Germany, helping to keep unemployment low. A counterfactual experiment suggests that unemployment in Germany would have been substantially higher if the German labor market had been more similar to that in the U.S.
    Keywords: Business cycles; Financial crisis; Labor market matching
    JEL: E24 E32
    Date: 2012–10
  6. By: Winkelried, Diego (Banco Central de Reserva del Perú); Gutierrez, José Enrique (Superintendency of Banking, Insurance and Private Pension Funds)
    Abstract: The Central Reserve Bank of Peru (BCRP) has been targeting inflation for more than a decade, using Lima’s inflation as the operational measure. An alternative indicator is countrywide inflation, whose quality and real-time availability have improved substantially lately. Hence, given these two somehow competing measures of inflation, two interesting policy questions arise: what have been the implications for national inflation of targeting Lima’s inflation? Would shifting to a national aggregate significantly affect the workings of monetary policy in Peru? To answer these questions, we estimate an error correction model of regional inflations and investigate how shocks propagate across the country. The model incorporates (i) aggregation restrictions whereby each regional inflation is affected by an aggregate of neighboring regions, and (ii) long-run restrictions that uncover a single common trend in the system. The results indicate that a shock to Lima’s inflation is transmitted fast and strongly elsewhere in the country. This constitutes supporting evidence to the view that by targeting Lima’s inflation, the BCRP has effectively, albeit indirectly, targeted national inflation.
    Keywords: Regional inflation, inflation targeting, relative PPP, error correction model
    JEL: C32 C50 E31 E52 R10
    Date: 2012–10
  7. By: Robert Kollmann (ECARES, Université Libre de Bruxelles; Université Paris-Est; CEPR); Marco Ratto (Joint Research Centre, European Commission); Werner Roeger (DG-ECFIN, European Commission); Jan in't Veld (DG-ECFIN, European Commission)
    Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
    Keywords: financial crisis, bank rescue measures, fiscal policy
    JEL: E62 E32 G21 H63 F41
    Date: 2012–10
  8. By: Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld
    Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
    Keywords: financial crisis; bank rescue measures; fiscal policy
    JEL: E62 E32 G21 H63 F41
    Date: 2012–10
  9. By: Oscar Jorda; Moritz Schularick; Alan Taylor (Department of Economics, University of California Davis)
    Abstract: This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
    Keywords: leverage, booms, recessions, financial crises, business cycles, local projections.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2012–10–05
  10. By: Casares, Miguel; Vázquez Pérez, Jesús
    Abstract: Revisions of US macroeconomic data are not white-noise. They are persistent, correlated with real-time data, and with high variability (around 80% of volatility observed in US real-time data). Their business cycle effects are examined in an estimated DSGE model extended with both real-time and final data. After implementing a Bayesian estimation approach, the role of both habit formation and price indexation fall significantly in the extended model. The results show how revision shocks of both output and inflation are expansionary because they occur when real-time published data are too low and the Fed reacts by cutting interest rates. Consumption revisions, by contrast, are countercyclical as consumption habits mirror the observed reduction in real-time consumption. In turn, revisions of the three variables explain 9.3% of changes of output in its long-run variance decomposition.
    Keywords: DSGE models, data revisions, business cycles
    JEL: C32 E30
    Date: 2012
  11. By: Ternyik, Stephen I.
    Abstract: The quantization of money guides us with methodical precision to the decisive role of the quantitative reserve requirement as the single cause-effect systemics of cyclical processes in the advanced monetary production economy.This research compiles the foundation and ultimate conclusion of quantum monetary science and points to a more exact formulation of monetary economics.
    Keywords: quantum monetary science; monetary quantum; monetophysics
    JEL: B41
    Date: 2012
  12. By: Kirchner, Markus; van Wijnbergen, Sweder
    Abstract: Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-out mechanism that works through reduced private access to credit when banks accumulate sovereign debt under a leverage constraint. Our results show that, when banks invest a substantial fraction of their assets in sovereign debt, the effectiveness of fiscal stimulus policies may be impaired because deficit-financed fiscal expansions may tighten financial conditions to such an extent that private demand is crowded out. We also analyze the macroeconomic effectiveness of liquidity support to commercial banks through recapitalizations or loans by the government and the impact of different ways of financing those policies. --
    Keywords: financial intermediation,fiscal policy,sovereign debt
    JEL: E44 E62 H30
    Date: 2012
  13. By: Anna Lipinska; Leopold von Thadden
    Abstract: This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal policies and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilized by the central bank and on whether the tax shift is anticipated.
    Date: 2012
  14. By: Guido Ascari (Università di Pavia); Giorgio Fagiolo (Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (Department of Economics (University of Verona))
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, DSGE Models, RBC Model
    JEL: C1 E3
    Date: 2012–01
  15. By: Jordi Galí
    Abstract: I revisit the General Theory's discussion of the role of wages in employment determination through the lens of the New Keynesian model. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage flexibility. I show that the latter is not always welfare improving.
    Keywords: wage flexibility, monetary policy rules, employment stability.
    JEL: E32
    Date: 2012–09
  16. By: Cesar Sosa-Padilla
    Abstract: Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates.
    Keywords: sovereign default, banking crisis, credit crunch, optimal fiscal policy, Markov perfect equilibrium, endogenous cost of default, domestic Debt.
    JEL: F34 E62
    Date: 2012–09
  17. By: Giorgio Fagiolo (Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (Department of Economics (University of Verona))
    Abstract: The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework — the New Neoclassical Synthesis — grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects – known in the literature as agent-based computational economics (ACE) – and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary and Fiscal Policies, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent- Based Models, Great Recession, Crisis
    JEL: B41 B50 E32 E52
    Date: 2012–02
  18. By: Gabriel Jiménez (Banco de España); Steven Ongena (CentER - Tilburg University; CEPR); José-Luis Peydró (Universitat Pompeu Fabra, Barcelona; Barcelona Graduate School of Economics); Jesús Saurina (Banco de España)
    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 unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. The resultant 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 uphold firm credit availability and performance.
    Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
    JEL: E51 E58 E60 G21 G28
    Date: 2012–10
  19. By: Enoch Hill; Alessandra Fogli; Fabrizio Perri
    Abstract: This paper documents, using county level data, some geographical features of the US business cycle over the past 30 years, with particular focus on the Great Recession. It shows that county level unemployment rates are spatially dispersed and spatially correlated, and documents how these characteristics evolve during recessions. It then shows that some of these features of county data can be generated by a model which includes simple channels of transmission of economic conditions from a county to its neighbors. The model suggests that these local channels are quantitatively important for the amplification/muting of aggregate shocks.
    JEL: E32 R12
    Date: 2012–10
  20. By: Claudia Miani (Banca d'Italia); Giulio Nicoletti (Banca d'Italia); Alessandro Notarpietro (Banca d'Italia); Massimiliano Pisani (Banca d'Italia)
    Abstract: We investigate the relationship between macroeconomic conditions and banks' balance sheets by referring to a modified version of the Bank of Italy Quarterly Model (BIQM), regularly used for forecasting and policy analysis. In particular, we examine how regulatory bank capital and private sector default probabilities affect interest rates on loans and, ultimately, economic activity. To this end, we build an enriched version of the model to include a number of banking variables. The changes introduced in the model result in an amplification of the responses of macroeconomic variables to monetary policy and world demand shocks, although, in normal times, the effect is not large.
    Keywords: bank regulatory capital, loan interest rates, Italian economy.
    JEL: E17 E27 E51 G21
    Date: 2012–09
  21. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Abstract: Recent studies show that disagreement regarding the future evolution of activity, inflation, or long and short interest rates, significantly forecasts holding excess returns. These studies include the papers of Buraschi and Whelan (2012), Barillas and Nimark (2012), Xiong and Yan (2010), Wu (2009) Such results challenge the common view that, under the expectations hypothesis of the term structure, the excess holding return should be unpredictable. The new evidence thus means that the risk premium is time-varying, moving as a function of disagreement. It is useful to discuss the potential implications of such theoretical results and empirical evidence on related monetary policy issues.
    Date: 2012–12
  22. By: Stan du Plessis (Department of Economics, University of Stellenbosch)
    Abstract: An extraordinary consensus on the goals and conduct of monetary has been undermined by the international financial crisis and the faltering recovery in many economies. There is an evident need to pay closer attention to developments of asset markets and in the financial sector, which has opened a discussion on the appropriate goals for monetary policy. Meanwhile central banks have employed controversial balance sheet operations to restore market stability and encourage economic recovery. This paper argues that both these developments reflect earlier concerns in monetary policy: prior to the modern consensus both balance sheet policies and an emphasis on financial stability were central concerns of monetary authorities and the future of monetary policy is likely to rhyme with its past.
    Keywords: monetary policy, interest rate policy, balance sheet operations, financial stability
    JEL: E51 E52 E58
    Date: 2012
  23. By: Lanne, Markku; Luoto, Jani
    Abstract: We propose a new methodology for ranking in probability the commonly proposed drivers of inflation in the New Keynesian model. The approach is based on Bayesian model selection among restricted VAR models, each of which embodies only one or none of the candidate variables as the driver. Simulation experiments suggest that our procedure is superior to the previously used conventional pairwise Granger causality tests in detecting the true driver. Empirical results lend little support to labor share, output gap or unemployment rate as the driver of U.S. inflation.
    Keywords: Inflation; New Keynesian Phillips curve; Bayesian variable selection
    JEL: C32 C52 E31 C11
    Date: 2012
  24. By: Cassou, Steven P.; Vázquez Pérez, Jesús
    Abstract: This paper considers a time varying parameter extension of the Ruge-Murcia (2003, 2004) model to explore whether some of the variation in parameter estimates seen in the literature could arise from this source. A time varying value for the unemployment volatility parameter can be motivated through several means including variation in the slope of the Phillips curve or variation in the preferences of the monetary authority.We show that allowing time variation for the coefficient on the unemployment volatility parameter improves the model fit and it helps to provide an explanation of inflation bias based on asymmetric central banker preferences, which is consistent across subsamples.
    Keywords: asymmetric preferences, time varying parameter, conditional unemployment volatility
    JEL: E61 E31 E52
    Date: 2012
  25. By: Łukasz Rawdanowicz
    Abstract: In many OECD countries debt has soared to levels threatening fiscal sustainability, necessitating its reduction over the medium to longer term. This paper uses stylised simulations in a small, calibrated macroeconomic model which features endogenous interactions between fiscal policy, growth and financial markets. Simulations are done for a hypothetical economy, reflecting key characteristics of fiscally stressed OECD countries. Given the assumed objective to stabilise debt at a 60% of GDP target within 20 years, a consolidation path is chosen by maximising cumulative GDP growth and minimising cumulative squared output gaps. The simulations highlight four issues. First, lowering the debt-to-GDP ratio within a finite horizon requires big initial consolidation which can be largely unwound if debt is to be stabilised at a lower level. Second, some frontloading of the adjustment turns out to be optimal in case of an interest rate shock. Third, debt reduction with high fiscal multipliers, hysteresis effects and adverse market reactions involves protracted large negative output gaps and deflation. This stresses the importance of selecting reasonable fiscal targets consistent with market conditions. Fourth, delaying the attainment of the debt target by two years has generally little implications for initial consolidation, though under adverse conditions this would result in much higher debt and slower growth.<P>Choisir le rythme de l'assainissement budgétaire<BR>Dans de nombreux pays de l'OCDE, la dette a atteint des niveaux menaçant la viabilité budgétaire, nécessitant sa réduction à moyen et à long terme. Ce document utilise des simulations stylisées mises en oeuvre avec un petit modèle macroéconomique calibré qui tient compte des interactions endogènes entre la politique budgétaire, la croissance et les marchés financiers. Les simulations sont réalisées pour une économie fictive reflétant les principales caractéristiques des pays de l'OCDE en difficulté budgétaire. Compte tenu de l'objectif de stabiliser la dette à 60% du PIB à horizon de 20 ans, le chemin de l’assainissement est choisi par la maximisation de la croissance cumulée du PIB et par la minimisation des carrés des écarts de production. Les simulations mettent en évidence quatre problèmes. Tout d'abord, l'abaissement du ratio dette sur PIB à horizon fini exige une grande consolidation initiale qui peut être largement annulée par la suite si la dette doit être stabilisée à un niveau inférieur. Deuxièmement, une montée en charge plus rapide de l’assainissement est optimale en cas de chocs de taux d'intérêt. Troisièmement, en cas de multiplicateurs fiscaux élevés, de phénomènes d'hystérèse et de réactions défavorables des marchés, la réduction de la dette implique des périodes prolongées d’écarts de production négatifs importants et de déflation. Cela souligne l'importance de choisir des objectifs budgétaires raisonnables et compatibles avec les conditions de marché. Quatrièmement, reporter l'assainissement et l’atteinte des objectifs de dette de deux ans a généralement des répercussions légères sur la consolidation initiale, mais dans des conditions défavorables, il en résulte une dette beaucoup plus élevée et une croissance beaucoup plus lente.
    Keywords: fiscal rules, fiscal consolidation, sovereign debt, government budget balance, assainissement budgétaire, règle budgétaire, dette souveraine, équilibre budgétaire du gouvernement
    JEL: E61 E62 H6
    Date: 2012–09–24
  26. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Sanchit Arora (Indira Gandhi Institute of Development Research)
    Abstract: Estimates suggest that Indian aggregate supply is elastic but subject to upward shocks. If supply shocksmake a high persistent contribution to inflation, it implies second round pass through is occurring, implying growth has reached its potential. This measure of potential growth draws on both theory and the structure of the Indian economy. It turns out supply shocks largely explain inflation. Output reached potential only in the years 2007-08 when growth rates exceeded 9 percent. In the period 2010-11 there was no sustained excess of growth over potential. Inflation was due to multiple supply shocks, rather than second round effects. Estimated linear and Markov switching policy rules suggest there wasovercorrection in 2011.They show a two percent underestimate of potential output leads to a 50 basis point rise in policy rates.
    Keywords: Potential growth, demand and supply shocks, Markov switching policy rules
    JEL: E22 E32 E52
    Date: 2012–09
  27. By: Geert Bekaert (Graduate School of Business, Columbia University); Marie Hoerova (ECB); Marco Lo Duca (ECB)
    Abstract: The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular.
    Keywords: Monetary policy, Option implied volatility, Risk aversion, Uncertainty, Business cycle, Stock market volatility dynamics
    JEL: E44 E52 G12 G20 E32
    Date: 2012–10
  28. By: Christian Matthes; Francesca Rondina
    Abstract: This paper investigates the role of learning by private agents and the central bank (two-sided learning) in a New Keynesian framework in which both sides of the economy have asymmetric and imperfect knowledge about the true data generating process. We assume that all agents employ the data that they observe (which may be distinct for different sets of agents) to form beliefs about unknown aspects of the true model of the economy, use their beliefs to decide on actions, and revise these beliefs through a statistical learning algorithm as new information becomes available. We study the short-run dynamics of our model and derive its policy recommendations, particularly with respect to central bank communications. We demonstrate that two-sided learning can generate substantial increases in volatility and persistence, and alter the behavior of the variables in the model in a significant way. Our simulations do not converge to a symmetric rational expectations equilibrium and we highlight one source that invalidates the convergence results of Marcet and Sargent (1989). Finally, we identify a novel aspect of central bank communication in models of learning: communication can be harmful if the central bank's model is substantially mis-specified.
    Keywords: asymmetric information, learning, monetary policy
    JEL: E52
    Date: 2012–09
  29. By: Antonio Ribba
    Abstract: In the first thirteen years of EMU, monetary policy choices of the European Central Bank (ECB) in setting the short-term interest rate have followed, systematically, monetary policy decisions made by the Federal Reserve System (Fed). For, despite the presence of variable lags with respect to Fed decisions, turning points of European short-term interest rates have been largely anticipated by movements in the federal funds rate. In this paper we show that, in the context of a bivariate cointegrated system, a clear long-run US dominance emerges. Moreover, the structural analysis reveals that a permanent increase in the federal funds rate causes a permanent one-for-one movement in the eonia rate.
    Keywords: Monetary policy, Identification, Structural Cointegrated VARs;
    JEL: C32 E5
    Date: 2012–10
  30. By: Andrea Ajello
    Abstract: I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 35% of GDP and 60% of investment volatility.
    Date: 2012
  31. By: Jaime Marquez; Ari Morse; Bernd Schlusche
    Abstract: This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation that is consistent with the FOMC's exit principles, we project that the federal funds rate increases to 70 basis points, settling in a corridor bracketed by the discount rate and the interest rate on excess reserves, as excess reserves of depository institutions decline to near zero.
    Date: 2012
  32. By: Stéphane Sorbe
    Abstract: This paper illustrates possible trade-offs between two different fiscal consolidation strategies in Portugal: sticking to the nominal fiscal targets in the EU-IMF programme or allowing automatic stabilisers to work, while sticking to the structural primary deficit targets implied by the programme. The analysis is based on stochastic simulations in which random shocks affect the main economic variables in the framework of a small macroeconomic model. The model captures the mutual interdependences between the fiscal position, financial conditions and activity and notably the impact of public debt developments on investors’ confidence and interest rates. Results suggest that under the large fiscal consolidation programme that is currently implemented, both fiscal policy strategies considered would in most cases result in sustainable debt dynamics. Both strategies also entail risks, but of a different nature: the risk of a deeper recession if sticking to nominal targets and the risk of higher debt if letting automatic stabilisers play. Sensitivity analyses show that these risks could be reduced by stimulating potential growth through structural reform and by choosing “growth friendly” fiscal consolidation instruments that have lower multipliers. By reducing recessionary risks, a small fiscal multiplier also increases the relative benefits of sticking to nominal deficit targets, while the benefits of automatic stabilisers are larger if the multiplier is high. This Working Paper relates to the 2012 OECD Economic Survey of Portugal (<P>Portugal : évaluer les risques autour du rythme d'assainissement budgétaire dans un environnement incertain<BR>Ce document illustre les compromis possibles entre deux stratégies de consolidation budgétaire au Portugal : respecter les cibles budgétaires nominales du programme de l’Union Européenne et du FMI ou laisser jouer les stabilisateurs automatiques tout en respectant les objectifs de déficit structurel primaire impliqués par le programme. L’analyse se fonde sur des simulations stochastiques dans lesquelles des chocs aléatoires affectent les principales variables économiques dans le cadre d’un petit modèle macroéconomique. Le modèle tient compte des interdépendances mutuelles entre la situation budgétaire, les conditions financières et l’activité, et notamment l’impact de l’évolution de la dette publique sur la confiance des investisseurs et les taux d’intérêt. Les résultats suggèrent que, dans le cadre du programme d’assainissement budgétaire important qui est actuellement mis en oeuvre, les deux stratégies budgétaires considérées se traduiraient dans la plupart des cas par une dynamique d’endettement soutenable. Ces deux stratégies comportent également des risques, mais de nature différente : le risque d’une récession plus marquée si les cibles nominales sont respectées et le risque d’une dette plus élevée en laissant jouer les stabilisateurs automatiques. Les analyses de sensibilité des résultats montrent que ces risques pourraient être réduits en stimulant le potentiel de croissance de l’économie par des réformes structurelles et en choisissant des instruments de consolidation budgétaires favorables à la croissance, c’est-à-dire avec de plus faibles multiplicateurs. En réduisant les risques de récession, un multiplicateur budgétaire faible augmente aussi les avantages relatifs de respecter les cibles budgétaires nominales, tandis que les avantages des stabilisateurs automatiques sont d’autant plus grands que le multiplicateur est élevé. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Portugal, 2012 (
    Keywords: automatic stabilisers, Portugal, fiscal multipliers, public debt sustainability, risk analysis, fan charts, stabilisateurs automatiques, Portugal, multiplicateurs budgétaires, viabilité de la dette publique, analyse de risques, graphiques en éventail
    JEL: C53 E62 H63
    Date: 2012–09–19
  33. By: Cavallari, Lilia
    Abstract: This paper provides a DSGE model with firm entry. Simulations show that the model matches the synchronization of markups and entry observed in the data while at the same time reproducing empirically plausible moments for key macroeconomic variables. Sticky prices are essential for these results.
    Keywords: endogenous entry; firm dynamics; monopolistic competition; market power; markups
    JEL: E32 E37
    Date: 2012–10–08
  34. By: Konstantin Styrin (New Economic School); Oleg Zamulin (National Research University – Higher School of Economics)
    Abstract: It has been noted in many papers that primary commodity exporting economies and developing countries frequently respond to movements in the real exchange rate as part of their monetary policies. For many central banks, this variable is the primary indicator of real activity. At the same time, smoothing the real exchange rate fluctuations has certain inflationary costs. In a way, this trade-off between inflation and the real exchange rate is identical to a standard Phillips curve. This paper derives an exact theoretical expression for this “real exchange rate based Phillips curve,” and finds empirical support for its existence in the data for a number of primary commodity exporting economies such as Australia, Canada, New Zealand and others. It turns out that the correct right-hand-side variable in the Phillips curve is not the real exchange rate itself, but rather its deviation from the fundamental value, which is a function of the international price of exported commodities. The empirical counterpart of the fundamental real exchange rate is obtained from a cointegrating equation for the real exchange rate and the countryspecific price index of exported commodities. As is frequently found in other Phillips curve studies, empirical tests point towards the accelerationist specification, which can be rationalized by dominance of adaptive expectations in price-setting behavior.
    Keywords: Real exchange rate; inflation; Phillips curve; commodity currencies
    JEL: E31 E32 F31
    Date: 2012–10
  35. By: Sinha, Pankaj; Singhal, Anushree; Sondhi, Kriti
    Abstract: This paper examines the economic scenario of the United States, before and after the 2012 US Presidential election by analyzing various macroeconomic variables such as GDP, Public Debt, Exchange Rate, Social Benefit Spending, Trade, Budget Deficit/ Surplus, Unemployment Rate, Inflation and others. We forecast the macroeconomic variables post 2012 using ARIMA modeling and present a picture of the U.S. economy post 2012 US Presidential election. With GDP growth being the major focus, both the parties are formulating policies to promote faster economic recovery by making reforms to reduce the $1 trillion deficit and maintain a balanced budget. Democratic Candidate Barack Obama has policies in place to increase investment in healthcare and education, open up opportunities, favour middle class families, a better trained workforce, double up exports and cuts in military expenses. Whereas Republican Candidate Mitt Romney’s focus is to achieve energy independence, open trade, champion small businesses and lower the tax rates along with lowering expenses. In this paper, we analyze the impact of expected outcome of 2012 U.S. presidential election on various macroeconomic variables of U.S. economy. The findings indicate that GDP is expected to grow at an average of about 2 percent and that a recession is not impending in 2013. Also going by the current policies, it is forecasted that U.S. exports and imports are expected to increase as the U.S. economy recovers. Barack Obama’s policies will inflate the Budget deficit while Mitt Romney’s strategy will lower the US Public Debt and Budget deficit. ARIMA models indicate that with the continuance of present government’s policies, budgetary deficit is estimated to decrease to 4.55 percent of GDP in 2014 from a maximum of 10.1 percent of GDP in 2010.
    Keywords: ARIMA; Box-Jenkins; U.S. economy; forecast; US 2012 presidential election; macroeconomic variables; presidential debate
    JEL: O1 F4 N1 O11 C53 C5 O24 E17 E6 F31
    Date: 2012–10–04
  36. By: Varma, Vijaya Krushna Varma
    Abstract: In the future economic system, as suggested by TOP Tax system, the total money supply (real money and debt money/loan money) to be necessary for circulation in banks should be at the minimum level of 100% and at maximum level 110% of the value of GDP of the country. Out of this total money supply in the economic system, 99.7% of the money will be in dematerialised (non physical) form in the accounts of citizens, Governments and companies. Only small portion of money, equalling just 0.3% of the total money in the economic system, will be in physical form i.e. currency notes or coins. All high valued paper currency notes will be demonetised.
    Keywords: Money supply; monetary system; monetary policy
    JEL: E51 E42 E5 E52
    Date: 2012–01–12
  37. By: Konstantin Styrin (New Economic School); Oleg Zamulin (National Research University – Higher School of Economics)
    Abstract: We document that contribution of identified US monetary shock to exchange rate variability differs across currencies and is inversely related to the degree of a country’s US dollar exchange rate pass-through into import prices. We explore this empirical pattern under the assumption that each central bank, when choosing its monetary policy, takes into account in which currency its country’s exports and imports are denominated. The choice of imports invoicing currency will affect both the degree of exchange rate pass-through and the monetary policy response. Different shape of monetary policy reaction function will result in different contribution of monetary shocks to the exchange rate dynamics. We illustrate this mechanism using a simple general equilibrium model.
    Keywords: Exchange rate; pass-through; invoicing currency; monetary policy; monetary shocks; variance decomposition
    JEL: F41 F42
    Date: 2012–05
  38. By: Thierry Aimar (BETA, UMR 7522, Université de Lorraine.); Francis Bismans (BETA, UMR 7522, Université de Lorraine.); Claude Diebolt (BETA, UMR 7522, Université de Strasbourg & Humboldt-Universität zu Berlin.)
    Date: 2012
  39. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: It's a mistake to interpret the unfolding disaster in Europe as primarily a "sovereign debt crisis." The underlying problem is not periphery profligacy, but rather the very setup of the European Monetary Union (EMU)—a setup that even now prevents a satisfactory resolution to this crisis. The central weakness of the EMU is that it separates nations from their currencies without providing them with adequate overarching fiscal or monetary policy structures—it's like a United States without a Treasury or a fully functioning Federal Reserve. Without addressing this basic structural weakness, Euroland will continue to stumble toward the cliff—and threaten to pull a tottering US financial system over the edge with it.
    Date: 2012–02
  40. By: Andaleeb Rahman (Indira Gandhi Institute of Development Research; Institute of Economic Growth)
    Abstract: This paper seeks to improve our understanding of the behaviour of wholesale price index (WPI) of 24 selected food products in India over a long period of time. The hypothesis of declining trend in prices is not found for all commodities although we do find that price of food grains exhibit a negative trend as a result of positive productivity shock. Two main finding of this paper in the context of cyclical behaviour of prices are: asymmetry in the duration spent in boom and slump and the fact that the price cycle does not have a consistent shape. This has implications for formulating counter cyclical policies.
    Keywords: Price level, Cycles
    JEL: E31 E32
    Date: 2012–09
  41. By: Markus K. Brunnermeier (Department of Economics, Princeton University); Yuliy Sannikov (Department of Economics, Princeton University)
    Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in down turns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other and the economy by not maintaining adequate capital cushion.
    Date: 2012–10
  42. By: Sophie Brana (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Marie-Louise Djibenou (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Stéphanie Prat (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear.
    Keywords: Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis
    Date: 2012–03–01
  43. By: Hans Dewachter (National Bank of Belgium, Research Department; University of Leuven); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: This paper proposes a perturbation-based approach to implement the idea of endogenous financial risk in a standard DSGE macro-model. Recent papers, such as Mendoza (2010), Brunnermeier and Sannikov (2012) and He and Krishnamurthy (2012), that have stimulated the research field on endogenous risk in a macroeconomic context, are based on sophisticated solution methods that are not easily applicable in larger models. We propose an approximation method that allows us to capture some of the basic insights of this literature in a standard macro-model. We are able to identify an important risk-channel that derives from the risk aversion of constrained intermediaries and that contributes significantly to the overall financial and macro volatility. With this procedure, we obtain a consistent and computationally-efficient modelling device that can be used for integrating financial stability concerns within the traditional monetary policy analysis.
    Date: 2012–10
  44. By: Zhiguo He (University of Chicago, Booth School of Business; NBER); Arvind Krishnamurthy (Northwestern University,Kellogg School of Management; NBER)
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a Fed “stress test” linking a stress scenario to the probability of systemic risk states.
    Keywords: Liquidity, Delegation, Financial Intermediation, Crises, Financial Friction, Constraints
    JEL: G12 G2 E44
    Date: 2012–10
  45. By: Stefan Kooths; Björn van Roye
    Abstract: The Eurosystem has been pursuing a crisis management policy for more than four years now. This policy aims primarily at maintaining financial stability in the euro area by providing vast liquidity support to commercial banks that are operating in nationally segmented banking systems. As a side effect, the national central banks substitute money market operations for cross-border capital flows. The national central banks are thus increasingly engaging in substantial balance-of-payments financing, and financial risks are being shifted from investors to European taxpayers via the Eurosystem. Symptomatically, this shows up in exploding TARGET2 positions in the national central banks' balance sheets. The longer this process continues, the stronger the centrifugal forces become that ultimately might break up the single currency. Instead of a fiscal union, a euro-area-wide regulatory approach is required. In addition to establishing a uniform scheme for banking regulation, supervision and resolution, we recommend that contingent convertible bonds (CoCos) be introduced to provide a major source of refinancing for the banking industry. Since CoCos cannot be introduced overnight, national and European banking resolution funds would be needed in the short run. These funds would not rescue banks but they would kick in as soon as a bank's equity is depleted in order to wind up failing banks in a systemically prudent way
    Keywords: Balance-of-payments financing, Target2, Eurosystem, Monetary policy, Financial crisis, Euro area, Financing mechanisms
    JEL: E42 E51 E58 F32 F34
    Date: 2012–08
  46. By: di Giovanni, Julian; Levchenko, Andrei A.; Mejean, Isabelle
    Abstract: This paper provides a forensic account of the role of individual firms in generating aggregate fluctuations using data covering the universe of French firms for the period 1990–2007. We derive a theoretically-founded set of estimating equations that decompose firms’ annual sales growth rate into different components. The firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.
    Keywords: Aggregate Volatility; Firm-Level Shocks; Large Firms; Linkages
    JEL: E32 F12 F41
    Date: 2012–10
  47. By: David Haugh; Stéphane Sorbe
    Abstract: Owing to slow growth and a relatively weak fiscal position, Portugal’s public debt had been rising for almost a decade when the global crisis struck, sharply increasing the deficit. The loss of confidence in Portuguese and other euro area sovereign bonds required international financial support. Weak fiscal performance reflects a wide range of fiscal structural problems resulting in poor control of expenditure. At both the central and local levels, this was compounded by the non-transparent accumulation of payment arrears, future spending obligations via Public-Private Partnerships (PPPs) and off-balance sheet debt in state-owned enterprises (SOEs). In line with the EU-IMF programme, the government is steadfastly implementing an ambitious front-loaded consolidation plan underpinned by a wide range of structural reforms. In a context of weak private sector demand, the government’s ability to regain control over public debt dynamics depends crucially on avoiding spending overruns. This will require reinforcing the fiscal framework to improve expenditure control, tackling payment arrears and avoiding further negative surprises from loss-making SOEs, PPPs and local governments. The success of the programme will also require maintaining social consensus around it, notably through continuous attention to its implications for the poorest. If growth is far lower than projected in the programme, the automatic stabilisers could be allowed to operate at least partially to reduce the risks of a deeper recession and higher unemployment. This Working Paper relates to the 2012 OECD Economic Survey of Portugal (<P>Portugal : Mettre en place des bases solides pour un assainissement budgétaire durable<BR>En raison de la lenteur de la croissance et d’une situation budgétaire relativement médiocre, la dette publique du Portugal était en augmentation depuis près d’une décennie lorsque la crise mondiale a frappé, creusant sensiblement le déficit. La perte de confiance dans les obligations souveraines du Portugal et des autres pays de la zone euro a exigé un soutien financier international. Les mauvais résultats budgétaires reflètent un large éventail de problèmes structurels se traduisant par un contrôle déficient des dépenses. Au niveau central comme au niveau local, ce dérapage des dépenses a été aggravé par l’accumulation non transparente d’arriérés de paiement, d’obligations de dépenses futures au titre des partenariats public-privé (PPP) et de dettes extrabudgétaires contractées par les entreprises publiques. En application du programme UE-FMI, les pouvoirs publics s’emploient à mettre en oeuvre un plan d’assainissement ambitieux, intensif dans sa phase initiale et étayé par un large éventail de réformes structurelles. Face à la faiblesse de la demande du secteur privé, la capacité des pouvoirs publics de regagner la maîtrise de l’évolution de la dette publique dépend de façon cruciale de la possibilité d’éviter des dépassements de dépenses. Il faudra pour cela renforcer le cadre budgétaire afin d’améliorer le contrôle des dépenses, de limiter les arriérés de paiement et d’éviter d’autres mauvaises surprises du côté des entreprises publiques déficitaires, des PPP et des collectivités locales. Pour aboutir, le programme devra aussi préserver le consensus social dont il fait l’objet, notamment en tenant compte continument de ses incidences pour les pauvres. Si la croissance est bien inférieure aux prévisions du programme, on pourrait laisser jouer les stabilisateurs automatiques au moins en partie pour réduire les risques d’un approfondissement de la récession et d’une aggravation du chômage. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Portugal, 2012 (
    Keywords: automatic stabilisers, Portugal, local government, fiscal rules, public-private partnerships, state-owned enterprises, fiscal frameworks, fiscal council, public debt sustainability, budgeting, EU funds, Madeira, entreprise publique, stabilisateurs automatiques, Portugal, partenariats public-privé, règles budgétaires, collectivités locales, cadre budgétaire, conseil budgétaire, viabilité de la dette publique, procédure budgétaire, fonds structurels européens, Madère
    JEL: E62 H54 H61 H63 H70
    Date: 2012–09–13
    Abstract: Macroeconomic determinants of FDI are seldom analyzed from the perspective of source countries, priority being given to host country characteristics. In a gravity set-up, we show that output volatility of source country has a significant adverse impact on FDI flowing to developing economies that can offset the positive effect of domestic cycles. We also find that the standard positive FDI-effect of structural reforms such as trade openness is reduced by higher output volatility levels in host countries, and that FDI coming from non-traditional sources is less reactive to output instability and macroeconomic risk than FDI coming from traditional sources.
    Keywords: Output volatility, Inflation, FDI, gravity model, source countries, European Union, Middle East and North Africa
    JEL: C23 C24 F15 F21 F31
    Date: 2012
  49. By: María Lorena Marí del Cristo (Faculty of Economics, University of Barcelona); Marta Gómez-Puig (Faculty of Economics, University of Barcelona)
    Abstract: In this article we examine the convenience of dollarization for Ecuador today. As Ecuador is strongly integrated financially and commercially with the United States, the exchange rate pass-through should be zero. However, we sustain that rising rates of imports from trade partners other than the United States and subsequent real effective exchange rate depreciations are causing the pass-through to move away from zero. Here, in the framework of the Vector Error Correction Model, we analyse the impulse response function and variance decomposition of the inflation variable. We show that the developing economy of Ecuador is importing inflation from its main trading partners, most of them emerging countries with appreciated currencies. We argue that if Ecuador recovered both its monetary and exchange rate instruments it would be able to fight against inflation. We believe such an analysis could be extended to other countries with pegged exchange rate regimes.
    Keywords: Pass-through, shocks, dollarized countries, structural VECM JEL classification: E31; F31; F41
    Date: 2012–10
  50. By: Gunnar Bårdsen, Dag Kolsrud, and Ragnar Nymoen (Department of Economics, Norwegian University of Science and Technology, Statistics Norway, and University of Oslo)
    Abstract: The paper investigates explanations for forecasting invariance to structural breaks. After highlighting the role of policy, we isolate possible structural invariance in a simplified dynamic macro model that nevertheless has features in common with the standard model of aggregate demand and aggregate supply. We find, as expected, that structural breaks in growth rates and in the means of cointegrating relationships will always damage some of the variables. But we also find examples of "insulation" from shocks. The results about partial robustness is a property of the economy itself (here represented by the DGP) and not of the forecasts.
    Date: 2012–10–06
  51. By: Fardoust, Shahrokh; Lin, Justin Yifu; Luo, Xubei
    Abstract: China's government economic stimulus package in 2008-09 appears to have worked well. It seems to have been about the right size, included a number of appropriate components, and was well timed. Its subnational component was designed to maximize the impact of the stimulus package on the economy and minimize the potential procyclical elements that are usually built into subnational fiscal mechanisms in federal countries. Moreover, China's massive fiscal stimulus played an important role in the overall recovery of the global economy. Using a simple analytical framework, this paper focuses on two key factors behind the success of the stimulus: investments in bottleneck-easing infrastructure projects and countercyclical nature of subnational spending based on the assumption that well-chosen infrastructure projects could improve business climate and thereby crowd in the private investment. The paper concludes that the expansionary subnational government spending played a key role in strengthening the overall impact of the stimulus and sustaining growth. It also highlights the importance of public investment quality and cautions about the sustainability of local government financing through the domestic banking system and increases in local governments off balance sheet or contingent liabilities. These lessons may be of particular relevance today for China, as well as other countries, in formulating policy response to another global economic slowdown or crisis, possibly as a result of the Eurozone turmoil. For China, investing in urban infrastructure and green economy, as well as in higher quality and better targeted social services, will be crucial for improving income inequality and inducing a more inclusive growth path.
    Keywords: Debt Markets,Subnational Economic Development,Banks&Banking Reform,Economic Theory&Research,Emerging Markets
    Date: 2012–10–01
  52. By: John Hassler; Per Krusell; Conny Olovsson
    Abstract: We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energy-saving technical change appears to respond strongly to the oil-price shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.
    JEL: E0 O30 Q32
    Date: 2012–10
  53. By: Jean-François FAGNART (Facultés universitaires Saint-Louis , CEREC et UCLouvain, IRES); Marc GERMAIN (Université de Lille 3, EQUIPPE et UCLouvain, IRES)
    Abstract: Nous introduisons le concept d'empreinte carbone dans un modèle offre globale et demande globale avec formation imparfaitement concurrentielle des prix et salaires et en examinons les propriétés de l'équilibre en présence d'une politique climatique. Nous étudions deux instruments possibles de cette politique, une taxe carbone ou un quota de permis de pollution. Nous montrons qu'à court terme la politique climatique (ou son durcissement) constitue à la fois un choc d'offre globale négatif et un choc de demande globale positif. Elle provoque donc des effets inflationnistes mais a un impact ambigu sur l'activité économique, l'emploi et le chômage. Ce n'est que dans une économie avec des rigidités nominales de salaire suffisantes que la politique climatique stimulera - sous certaines conditions - l'activité à court terme. Dans tous les cas de figure, elle pèsera négativement sur les salaires réels. Nous étudions encore les interactions entre la politique climatique et les politiques macroéconomiques traditionnelles de demande (stimulus budgétaire ou monétaire) et d'offre (baisse des cotisations sociales). Les effets multiplicateurs de ces politiques sont influencés par l'existence d'une politique climatique et diffèrent selon l'instrument choisi (taxe ou permis). Nous montrons les conditions sous lesquelles une réforme combinant durcissement de la politique climatique et baisse des cotisations sociales sur le travail peut engendrer un double dividende (réduction de l'empreinte carbone, baisse du chômage), sans pénaliser les salaires réels des travailleurs. Une telle politique a toutefois des effets incertains sur le solde des finances publiques.
    Keywords: offre et demande globales, politique climatique, taxe carbone, permis de pollution aggregate demand and supply, climate policy, carbon tax, pollution permits
    JEL: E10 E60 Q58
    Date: 2012–07–31
  54. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? We develop a model of human capital accumulation that features a non-degenerate distribution of educational attainment in the population. We use this framework to assess the quantitative contribution of technological progress and changes in life expectancy in explaining the evolution of educational attainment. The model implies an increase in average years of schooling of 24 percent which is the increase observed in the data. We find that technological variables and in particular skill-biased technical change represent the most important factors in accounting for the increase in educational attainment. The strong response of schooling to changes in income is informative about the potential role of educational policy and the impact of other trends affecting lifetime income.
    Keywords: educational attainment, schooling, skill-biased technical progress, human capital.
    JEL: E1 O3 O4
    Date: 2012–10–06
  55. By: Todd E. Clark (Federal Reserve bank of Cleveland); Francesco Ravazzolo (Norges Bank (Central Bank of Norway) and BI Norwegian Business School)
    Abstract: This paper compares alternative models of time-varying macroeconomic volatility on the basis of the accuracy of point and density forecasts of macroeconomic variables. In this analysis, we consider both Bayesian autoregressive and Bayesian vector autoregressive models that incorporate some form of time-varying volatility, precisely stochastic volatility (both with constant and time-varying autoregressive coefficients), stochastic volatility following a stationary AR process, stochastic volatility coupled with fat tails, GARCH and mixture of innovation models. The comparison is based on the accuracy of forecasts of key macroeconomic time series for real-time post War-II data both for the United States and United Kingdom. The results show that the AR and VAR specifications with widely-used stochastic volatility dominate models with alternative volatility specifications, in terms of point forecasting to some degree and density forecasting to a greater degree.
    Keywords: Stochastic volatility, GARCH, forecasting
    JEL: E17 C11 C53
    Date: 2012–10–09
  56. By: Eduardo Lora; Deisy Fajardo
    Abstract: Los impuestos a la n—mina junto con los salarios m’nimos han producido un notable encarecimiento de los costos laborales en AmŽrica Latina desde los noventa. Puesto que, simult‡neamente, las tasas de tributaci—n de las empresas se han reducido, esta nota analiza si, como resultado, hay un sesgo anti-laboral de los impuestos en los pa’ses latinoamericanos. Se utiliza una metodolog’a contable que permite calcular las tasas efectivas de tributaci—n del trabajo y del capital y comparar ambas entre s’. Como en los pa’ses desarrollados, en AmŽrica Latina las cargas tributarias est‡n sesgadas en contra de los ingresos laborales, en el sentido de que las tasas efectivas de los impuestos al trabajo (directos y a la n—mina) son mayores que las tasas efectivas de los impuestos al capital. Entre los pa’ses analizados, Venezuela, Guatemala, Colombia y Brasil tienen los mayores sesgos anti-laborales.
    JEL: E61 F33 F34 F36 F53 G01
    Date: 2012–10
  57. By: José Alvaro Rodrigues-Neto
    Abstract: A partitional model of knowledge is monotonic if there exists a linear order on the state space such that, for every player, each element of her partition contains only a sequence of consecutive states. In monotonic models, the absence of alternating cycles is equivalent to the property that, for every pair of players, the join of their partitions contains only singletons. Under these equivalent conditions any set of posterior beliefs for the players is consistent (i.e., there is a common prior). We describe the lattice properties of monotonic models, develop a test to check if a model is monotonic, propose a simple sufficient condition for non-monotonicity, and provide some examples. We also study models having circular orders, a weakening of monotonicity.
    JEL: C02 D80 D82 D83
    Date: 2012–10

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