nep-mac New Economics Papers
on Macroeconomics
Issue of 2012‒11‒03
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. What is the SARB's inflation targeting policy, and is it appropriate? By Ellyne, Mark; Veller, Carl
  2. An Agent Based Decentralized Matching Macroeconomic Model By Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  3. Capital Regulation, Monetary Policy and Financial Stability By Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva
  4. Monetary and macroprudential policies By Paolo Angelini; Stefano Neri; Fabio Panetta
  5. Access policy and money market segmentation By Sébastien Philippe Kraenzlin; Thomas Nellen
  6. Monetary Policy and the Housing Market: A Structural Factor Analysis By Mattéo Luciani
  7. A Bounded Model of Time Variation in Trend Inflation, NAIRU and the Phillips Curve By Joshua C C Chan; Gary Koop; Simon M Potter
  8. Why Countries Matter for Monetary Policy Decision-Making in the ESCB By Bernd Hayo; Pierre-Guillaume Méon
  9. Feedback to the ECB's monetary analysis: the Bank of Russia's experience with some key tools By Alexey Ponomarenko; Elena Vasilieva; Franziska Schobert
  10. Medium-frequency cycles and the remarkable near trend-stationarity of output By Tom Holden
  11. A Model of Rule-of-Thumb Consumers With Nominal Price and Wage Rigidities By Sergio Ocampo Díaz
  12. Securitization and monetary transmission mechanism: evidence from italy (1999-2009) By M. Lopreite
  13. Tax Multipliers: Pitfalls in Measurement and Identification By Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
  14. Prices, productivity and irregular cycles in a walrasian labour market. By Luciano Fanti
  15. Macroeconomic Conditions and Leverage in Monetary Financial Institutions: Comparing European countries and Luxembourg By Gaston Giordana; Ingmar Schumacher
  16. Good Luck or Good Policy? An Expectational Theory of Macro-Volatility Switches. By Gaballo, G.
  17. Walrasian dynamics and the Phillips curve By Luciano Fanti; Piero Manfedi; Alberto D’Onofrio
  18. Policy Design in a Model with Swings in Risk Appetite By Bianca De Paoli; Pawel Zabczyk
  19. Was the Recent Downturn in US GDP Predictable? By Mehmet Balcilar; Rangan Gupta; Anandamayee Majumdar; Stephen M. Miller
  20. Dissecting saving dynamics: measuring wealth, precautionary and credit effects By Christopher Carroll; Jiri Slacalek; Martin Sommer
  21. An Information-Based Theory of International Currency By Zhang, Cathy
  22. Fiscal consolidations and banking stability By Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom
  23. News, Noise, and Fluctuations: An Empirical Exploration By Olivier J. Blanchard; Jean-Paul L’Huillier; Guido Lorenzoni
  24. "Fiscal Traps and Macro Policy after the Eurozone Crisis" By Greg Hannsgen; Dimitri B. Papadimitriou
  25. The Impact of Inflation Uncertainty on Economic Growth: A MRS-IV Approach By Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis
  26. Estimating bank loans loss given default by generalized additive models By Raffaella Calabrese
  27. Returns to labour and chaotic cycles of wage and employment. By Luciano Fanti
  28. On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century By Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco Neto, Afonso Arinos de Mello
  29. Social Security and Macroeconomic Risk in General Equilibrium By Peter Broer
  30. Learning from learners By Tom Holden
  31. Global and country-specific business cycle risk in time-varying excess returns on asset markets By Thomas Nitschka
  32. Theoretical Channels of International,Transmission During the Subprime Crisis to OCDE Countries : A FAVAR Model Under Bayesian Framework By Olfa Kaabia; Ilyes Abid
  33. End-of-the-year economic growth and time-varying expected returns By Stig V. Møller; Jesper Rangvid
  34. Top incomes, rising inequality, and welfare By Kevin J. Lansing; Agnieszka Markiewicz
  35. Dynamical Coupling, Nonlinear Accelerator and the Persistence of Business Cycles By Stefano Zambelli
  36. Asymmetries in Price-Setting Behavior: New Microeconometric Evidence from Switzerland By Bo E. Honoré; Daniel Kaufmann; Sarah Marit Lein
  37. Optimal Policy for Macro-Financial Stability By Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric Young
  38. Dynamic provisioning: a buffer rather than a countercyclical tool? By Santiago Fernandez de Lis; Alicia Garcia-Herrero
  39. The precaution of the rich and poor By Scott Fulford
  40. Tax-Subsidized Underpricing: Issuers and Underwriters in the Market for Build America Bonds By Cestau, Dario; Green, Richard; Schürhoff, Norman
  41. Germs, Social Networks and Growth By Fogli, Alessandra; Veldkamp, Laura
  42. Rare Disasters, Tail-Hedged Investments, and Risk-Adjusted Discount Rates By Martin L. Weitzman
  43. Mitigating Turkey's Trilemma Tradeoffs By Yasin Akcelik; Orcan Cortuk; Ibrahim M. Turhan
  44. Integration durch Währungsunion? Der Fall der Euro-Zone By Spahn, Peter
  45. Pension reform in an OLG model with heterogeneous abilities By T. BUYSE; F. HEYLEN; R. VAN DE KERCKHOVE

  1. By: Ellyne, Mark; Veller, Carl
    Abstract: Since its adoption of inflation targeting in 2000, the South African Reserve Bank has been accused of placing too great an emphasis on meeting its inflation target, and too small an emphasis on the high rate of unemployment in the country. On the other hand, the SARB has regularly missed its inflation target. We attempt to characterise the SARB's inflation targeting policy by analysing the Bank's interest rate setting behaviour before and after the adoption of inflation targeting, making use of Taylor-like rules to determine whether the SARB has emphasised inflation, the output gap, the real exchange rate, and asset price deviations in its monetary policy. We find that the SARB has significantly changed its behaviour with the adoption of inflation targeting, and show that the SARB runs a very flexible inflation targeting regime, with strong emphasis on the output gap. Indeed, we find evidence that the emphasis on inflation is too low, and potentially conducive to instability in the inflation process.
    Keywords: South Africa; monetary policy; inflation targeting
    JEL: E58 E52
    Date: 2011–08–30
  2. By: Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: In this paper we present a macroeconomic microfounded framework with heterogeneous agents – households, firms, banks – which interact through a decentralized matching process presenting common features across four markets – goods, labor, credit and deposit. We study the dynamics of the model by means of computer simulation. Some macroeconomic properties emerge such as endogenous business cycles, nominal GDP growth, unemployment rate fluctuations, the Phillips curve, leverage cycles and credit constraints, bank defaults and financial instability, and the importance of government as an acyclical sector which stabilize the economy. The model highlights that even extended crises can endogenously emerge. In these cases, the system may remain trapped in a large unemployment status, without the possibility to quickly recover unless an exogenous intervention.
    Keywords: agent-based macroeconomics; business cycle; crisis; unemployment; leverage;
    JEL: E32 C63
    Date: 2012–10
  3. By: Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva
    Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of policy interest rate smoothing, and the stronger the policymaker’s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.
    Keywords: Financial Stability, Credit, Monetary Policy
    JEL: E44 E51
    Date: 2012
  4. By: Paolo Angelini (Banca d’Italia); Stefano Neri (Banca d’Italia); Fabio Panetta (Banca d’Italia)
    Abstract: We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. From a welfare perspective, the results do not yield a uniform ranking of the regimes and, at the same time, highlight important redistributive effects of both supply and financial shocks. JEL Classification: E44, E58, E61
    Keywords: Macroprudential policy, monetary policy, capital requirements
    Date: 2012–07
  5. By: Sébastien Philippe Kraenzlin; Thomas Nellen
    Abstract: We analyse deviations between interest rates paid in the Swiss franc unsecured money market and the respective Libor rate. First, banks that have access to the secured interbank market and the SNB's monetary policy operations pay less than banks without access. Second, domestically unchartered, foreign banks pay more than domestic banks. We find that these segmentations are limited both during normal times and during the financial crisis starting 2007 thanks to open access to the secured interbank market and the SNB's monetary policy operations. These findings reveal that a neglected aspect of monetary policy implementation matters, namely access policy.
    Keywords: access to central bank money, unsecured interbank money market, money market integration and segmentation, financialcrisis
    JEL: E58 G21 G28
    Date: 2012
  6. By: Mattéo Luciani
    Abstract: This paper studies the role of the Federal Reserve’s policy in the recent boom and bustof the housing market, and in the ensuing recession. By estimating a Structural DynamicFactor model on a panel of 109 US quarterly variables from 1982 to 2010, we find that,although the Federal Reserve’s policy between 2002 and 2004 was slightly expansionary,its contribution to the recent housing cycle was negligible. We also show that a morerestrictive policy would have smoothed the cycle but not prevented the recession. Wethus find no role for the Federal Reserve in causing the recession.
    Keywords: structural factor model; business cycle; monetary policy; housing
    JEL: C32 E32 E52 R20
    Date: 2012–10
  7. By: Joshua C C Chan; Gary Koop; Simon M Potter
    Abstract: In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non-accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time-varying Phillips curve and time-varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather use bounded random walks. For instance, trend inflation is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips.
    Date: 2012–10
  8. By: Bernd Hayo; Pierre-Guillaume Méon
    Keywords: European Central Bank, Monetary Policy Committee, Decision rules
    Date: 2012–04
  9. By: Alexey Ponomarenko (Bank of Russia); Elena Vasilieva (Bank of Russia); Franziska Schobert (Deutsche Bundesbank)
    Abstract: The paper investigates to what extent some basic tools of the ECBs monetary analysis can be useful for other central banks given their specific institutional, economic and financial environment. We take the case of the Bank of Russia in order to show how to adjust methods and techniques of monetary analysis for an economy that differs from the euro area as regards, for instance, the role of the exchange rate, the impact of dollarization and the functioning of sovereign wealth funds. A special focus of the analysis is the estimation of money demand functions for different monetary aggregates. The results suggest that there are stable relationships with respect to income and wealth and to a lesser extent to uncertainty variables and opportunity costs. Furthermore, the analysis also delivers preliminary results of the information content of money for inflation and for real economic development. JEL Classification: E41, E52, E58
    Keywords: Money demand, transition countries, cointegration analysis, inflation, real economic activity
    Date: 2012–09
  10. By: Tom Holden (University of Surrey)
    Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that generates large medium-frequency cycles while robustly matching the near trend-stationary path of observed output. This requires a model in which standard business cycle shocks lead to highly persistent movements around trend, without significantly altering the trend itself. The robustness of the trend also requires that we eliminate the scale effects and knife edge assumptions that plague most growth models. In our model, when products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, and shocks that affect invention rates change the proportion of industries with advanced technologies. In an estimated version of our model, a financial-type shock to the stock of ideas emerges as the key driver of the medium frequency cycle.
    JEL: E32 E37 L16 O31 O33 O34
    Date: 2012–10
  11. By: Sergio Ocampo Díaz
    Abstract: This document presents a dynamic stochastic general equilibrium model with rule of thumb (Non-Ricardian) agents and both nominal price and wage rigidities. The model follows closely that of Galí et al. (2004) and expands it to include a second way form of heterogeneity (besides the Non-Ricardian agents), namely the nominal wage stickiness á la Calvo, as in Erceg et al. (2000). Special attention is given to the algebraic details of the model. The model is calibrated and its dynamics are explored trough the analysis of impulse response functions.
    Date: 2012–04–26
  12. By: M. Lopreite
    Abstract: This paper investigates credit supply endogeneity in the Italian environment from 1999 to 2009. The study aims to shed more light on the relationship between securitization and the Italian monetary transmission mechanism during the two most recent financial crashes: the dot-com bubble burst (1998-1999) and the sub-prime mortgage crisis (2008-2009). Recently many works are focused on how securitization affects the relationship between credit channel and monetary policy. Altunbas et al. (2009) conclude that banks’ securitization increases loans supply insulating banking system from negative shocks of monetary policy. The empirical results show that securitization increases credit supply endogeneity reducing the effect of monetary policy on the Italian banking system.
    JEL: E32 E51 E52 G01
    Date: 2012
  13. By: Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
    Abstract: We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically-adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009. We also provide complementary evidence using Romer and Romer (2010) and Barro and Redlick (2011) data for the United States. On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues.
    JEL: E32 E62 F3 H20
    Date: 2012–10
  14. By: Luciano Fanti
    Abstract: A standard Cobb Douglas labour market model is used to examine the role of changes in prices and productivity on the stability. It is shown that in this walrasian labour market deterministic endogenous economic fluctuations, which are seemingly stochastic, emerge. Therefore it may be argued that the controversial - in empirical as well as theoretical recent literature – co-movement between variables does not necessarily ground on stochastic shocks on prices and technology as retained in the prevailing business cycle theory. In particular, we show that negative shocks on prices and productivity are always destabilising and trigger robust chaotic fluctuations.
    Date: 2012–09–01
  15. By: Gaston Giordana; Ingmar Schumacher
    Abstract: In this article we study the interaction between leading macroeconomic indicators (industrial production, stock prices, consumer sentiment and real interest rates) and financial sector leverage in major European countries. We base our analysis on monthly, country-aggregated panel VAR models for the pre-crisis period January 2003 to August 2008, and the crisis period September 2008 to June 2011. We find little evidence for a relationship between macroeconomic variables and leverage in the pre-crisis period, with only real interest rates having a negative short-term impact on leverage growth. We find positive feedback loops between sentiment and stock prices as well as MFI assets in the pre-crisis period, and a positive impact of real interest rate changes on equity and asset growth. Thus, balance sheet expansions were driven by sentiment and stock prices, while real interest changes allowed MFIs to profit from higher spreads. During the crisis period (starting in September 2008), we observe a countercyclical impact from leverage on sentiment and stock prices, while sentiment and stock prices bear a pro-cyclical impact on leverage. In contrast to this, MFI leverage in Luxembourg is negatively impacted by stock prices, suggesting significant impacts from marking-to-market. We conclude that leverage drives expectations of financial instability (via e.g. default expectations), while sentiment and stock prices drive financial institutions? investment decisions (via e.g. collateral value effects).
    Keywords: leverage; macroeconomic conditions; Panel VAR; GMM estimation
    JEL: G21 G32 E32
    Date: 2012–10
  16. By: Gaballo, G.
    Abstract: In an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone.
    Keywords: non-fundamental volatility; perpetual learning; comovements in expectations; professional forecasters.
    JEL: E3 E5 D8
    Date: 2012
  17. By: Luciano Fanti; Piero Manfedi; Alberto D’Onofrio
    Abstract: The paper aims to contribute to the debate on the theoretical foundation as well as the policy implications of the Phillips’ curve. First, we show that Walrasian labour markets with persistent excess demand provide predictions on the relation between the growth rate of wages and the unemployment rate. Second we provide a careful theoretical characterisation of such a relation. This allows to show that what has been traditionally called the Phillips curve would in such a case only be a statistical artifact. Such findings may have far-reaching implications. First, the simplest dynamic neoclassical labour market “resurrects” the Phillips curve in the long run, showing that such a curve is correctly predicted by the law of demand and supply, as in the neoclassical view, though as a long-run, rather than transitory, phenomenon. Second, this theoretically funded Phillips, though persisting in the long run as in the Keynesian view, should be considered with a larger caution as a macroeconomic policy tool.
    Keywords: Walrasian labour market, persistent excess demand, unemployment, Phillips curve.
    JEL: J20 G32
    Date: 2012–09–01
  18. By: Bianca De Paoli; Pawel Zabczyk
    Abstract: This paper studies the policy implications of habits and cyclical changes in agents' appetite for risk-taking. To do so, it analyses the non-linear solution of a New Keynesian (NK) model, in which slow-moving habits help match the cyclical properties of risk-premia. Our findings suggest that the presence of habits and swings in risk appetite can materially affect policy prescriptions. As in Ljungqvist and Uhlig (2000), a counter-cyclical fiscal instrument can eliminate habit-related externalities. Alternatively, monetary policy can partially curb the associated overconsumption by responding to risk premia. Specifically, periods in which risk premia are elevated (compressed) merit a looser (tighter) policy stance. However, the associated welfare gains appear quantitatively small.
    Keywords: Policy design, cyclical risk aversion, New Keynesian model, habit formation
    JEL: E32 G12
    Date: 2012–10
  19. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Anandamayee Majumdar (Department of Biostatistics, University of North Texas Health Science Center, School of Public Health, Fort Worth, Texas, 76107, USA); Stephen M. Miller (College of Business, University of Las Vegas, Nevada)
    Abstract: This paper uses small set of variables-- real GDP, the inflation rate, and the short-term interest rate -- and a rich set of models -- athoeretical and theoretical, linear and nonlinear, as well as classical and Bayesian models -- to consider whether we could have predicted the recent downturn of the US real GDP. Comparing the performance by root mean squared errors of the models to the benchmark random-walk model, the two theoretical models, especially the nonlinear model, perform well on the average across all forecast horizons in out-of-sample forecasts, although at specific forecast horizons certain nonlinear athoeretical models perform the best. The nonlinear theoretical model also dominates in our ex ante forecast of the Great Recession, suggesting that developing forward-looking, microfounded, nonlinear, dynamic-stochastic-general-equilibrium models of the economy, may prove crucial in forecasting turning points.
    Keywords: Forecasting, Linear and non-linear models
    JEL: C32 R31
    Date: 2012–10
  20. By: Christopher Carroll (Johns Hopkins University and National Bureau of Economic Research); Jiri Slacalek (European Central Bank); Martin Sommer (International Monetary Fund)
    Abstract: We argue that the U.S. personal saving rate's long stability (from the 1960s through the early 1980s), subsequent steady decline (1980s-2007), and recent substantial increase (2008-2011) can all be interpreted using a parsimonious `buffer stock' model of optimal consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between `target' and actual wealth, with the target wealth determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the saving rate's long-term decline, while fluctuations in net wealth and uncertainty capture the bulk of the business-cycle variation. JEL Classification: E21, E32
    Keywords: Consumption, saving, wealth, credit availability, uncertainty
    Date: 2012–09
  21. By: Zhang, Cathy
    Abstract: This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. A calibration of the generalized model shows that for the U.S. dollar, the welfare cost of losing international status ranges from 1.3% to 2.1% of GDP per year.
    Keywords: international currencies; monetary search; liquidity; information frictions
    JEL: E42 E4
    Date: 2013–10–18
  22. By: Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom
    Abstract: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities increases relative to other assets.
    Keywords: Fiscal consolidations; bank balance sheets; portfolio re-balancing; banking stability
    JEL: E62 G11 H30 G21
    Date: 2012–10–23
  23. By: Olivier J. Blanchard (IMF, MIT and NBER); Jean-Paul L’Huillier (EIEF); Guido Lorenzoni (Northwestern University and NBER)
    Abstract: We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information and these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in agents’ estimates of these fundamentals (noise). We use a simple forward-looking model of consumption to address some methodological issues: structural VARs cannot be used to identify news and noise shocks in the data, but identification is possible via a method of moments or maximum likelihood. Next, we use U.S. data to estimate both our simple model and a richer DSGE model with the same information structure. Our estimates suggest that noise shocks play an important role in short-run consumption fluctuations.
    Keywords: Exportaciones, Aggregate shocks, business cycles, vector autoregression, invertibility
    JEL: E32 C32 D83
    Date: 2012–09
  24. By: Greg Hannsgen; Dimitri B. Papadimitriou
    Abstract: The United States must make a fundamental choice in its economic policy in the next few months, a choice that will shape the US economy for years to come. Pundits and policymakers are divided over how to address what is widely referred to as the "fiscal cliff," a combination of tax increases and spending cuts that will further weaken the domestic economy. Will the United States continue its current, misguided, policy of implementing European-style austerity measures, and the economic contraction that is the inevitable consequence of such policies? Or will it turn aside from the fiscal cliff, using a combination of its sovereign currency system and Keynesian fiscal policy to strengthen aggregate demand? Our analysis presents a model of what we call the "fiscal trap"—a self-imposed spiral of economic contraction resulting from a fundamental misunderstanding of the role and function of fiscal policy in times of economic weakness. Within this framework, we begin our analysis with the disastrous results of austerity policies in the European Union (EU) and the UK. Our account of these policies and their results is meant as a cautionary tale for the United States, not as a model.
    Date: 2012–10
  25. By: Mustafa Caglayan (Department of Economics, The University of Sheffield); Ozge Kandemir (Department of Economics, The University of Sheffield); Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: We empirically investigate inflation uncertainty effects on output growth for the US by implementing a Markov regime switching model as we account for endogeneity problems. We show that inflation uncertainty -obtained from a Markov regime switching GARCH model - has a negative and regime dependent impact on output growth. Moreover, we find that the smooth probability of high growth regime falls long before the recent financial crisis was imminent. This might be driven by a regime dependent causality, an issue which has been left unexplored.
    Keywords: Growth; inflation uncertainty; Markov-switching modeling; Markov-switching GARCH.
    JEL: E31 E32
    Date: 2012
  26. By: Raffaella Calabrese (University of Milano-Bicocca)
    Abstract: With the implementation of the Basel II accord, the development of accurate loss given default models is becoming increasingly important. The main objective of this paper is to propose a new model to estimate Loss Given Default (LGD) for bank loans by applying generalized additive models. Our proposal allows to represent the high concentration of LGDs at the boundaries. The model is useful in uncovering nonlinear covariate effects and in estimating the mean and the variance of LGDs. The suggested model is applied to a comprehensive survey on loan recovery process of Italian banks. To model LGD in downturn conditions, we include macroeconomic variables in the model. Out-of-time validation shows that our model outperforms popular models like Tobit, decision tree and linear regression models for different time horizons.
    Keywords: downturn LGD, generalized additive model, Basel II
    Date: 2012–10–22
  27. By: Luciano Fanti
    Abstract: This paper discusses the dynamics of a standard (double Cobb-Douglas) labour market under the circumstance of changes in returns to labour. Despite the simplicity as well as the vast diffusion of this model, such an issue has so far escaped closer scrutiny by economic dynamics literature. This investigation shows: i) possible chaotic behaviours in a simple walrasian market, ii) the multiple roles that returns to labour play on the stability, and iii) the corresponding implications for stabilization policy.
    Keywords: chaos, walrasian labour market, returns to labor
    JEL: E3 J0
    Date: 2012–09–01
  28. By: Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco Neto, Afonso Arinos de Mello
    Abstract: Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost ofbusiness cycles are very small. Our paper has several original contributions. First, in computingwelfare costs, we propose a novel setup that separates the effects of uncertainty stemming frombusiness-cycle uctuations and economic-growth variation. Second, we extend the sample fromwhich to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence.So, we employ also pre-WWII data. Third, we take an econometric approach and computeexplicitly the asymptotic standard deviation of welfare costs using the Delta Method.Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era.They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. Forexample, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumptionif we consider only permanent shocks and 0.61% of consumption if we consider only transitoryshocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimatein Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the totalwelfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same guresfor the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.
    Date: 2012–10–17
  29. By: Peter Broer
    Abstract: <p>This paper studies the interaction between macro-economic risk and paygo social security. For this, it uses an applied general equilibrium model with overlapping generations of risk-averse households. </p><p>The sources of risk are productivity shocks and depreciation shocks. The risk profile of pensions differs from that of financial assets because pensions are linked partially to future wage rates and productivity. The model is used to discuss the effects of changes in the social security system on labor supply, private saving, and welfare in a closed economy. The author finds that switching from Defined Benefit to Defined Contribution is generally welfare improving, if current generations are compensated, while a switch from a wage-indexed Defined Benefit system to a price-indexed system is generally welfare deteriorating. A reduction in the size of the pay-as-you-go system does not yield clear results: if current generations are compensated, some future generations lose, and others gain.</p>
    Date: 2012–10
  30. By: Tom Holden (University of Surrey)
    Abstract: Traditional macroeconomic learning algorithms are misspecified when all agents are learning simultaneously. In this paper, we produce a number of learning algorithms that do not share this failing, and show that this enables them to learn almost any solution, for any parameters, implying learning cannot be used for equilibrium selection. As a by-product, we are able to show that when all agents are learning by traditional methods, all deep structural parameters of standard new-Keynesian models are identified, overturning a key result of Cochrane (2009; 2011). This holds irrespective of whether the central bank is following the Taylor principle, irrespective of whether the implied path is or is not explosive, and irrespective of whether agents’ beliefs converge. If shocks are observed then this result is trivial, so following Cochrane (2009) our analysis is carried out in the more plausible case in which agents do not observe shocks.
    JEL: E3 E52 D83
    Date: 2012–10
  31. By: Thomas Nitschka
    Abstract: Deviations of national industrial production indexes from trend explain time variation in excess returns on the G7 countries' stock markets. This paper highlights that this finding is driven by a global, common component in the national production gaps. The global component is not a mirror image of the U.S. business cycle. Quite to the contrary, a "rest-ofthe-world" production gap explains time variation in U.S. stock market excess returns while the U.S.-specific production gap does not. However, both U.S.-specific and global gap components explain time-varying excess returns on U.S. bonds. The relative importance of the U.S.-specific risk gap increases with the maturity of bonds.
    Keywords: bond return, business cycle risk, excess returns, industrial production, predictability, stock return
    JEL: E32 F44 G15
    Date: 2012
  32. By: Olfa Kaabia; Ilyes Abid
    Abstract: This paper studies whether and how U.S. shocks are transmitted to other OECD economies in the case of the subprime crisis. Using a large data set of financial and macroeconomic variables in 17 OECD countries from 1980:Q1 to 2006:Q2, we characterize the transmission channels by the interpretable factors and make a structural analysis using FAVAR models under a Bayesian approach. Our main findings suggest that differences exist in the contagion effects. This implies that no generalizations can be made for OECD countries even of equal economic size and in the same geographic region. Our results show that a large portion of the variance of domestic economic variables is explained by global factors and that the interest rate shock appears to play an important role in the spillover mechanism from the U.S to the OECD countries.
    Keywords: Transmission channels, Contagion, Bayesian estimation and FAVAR models.
    JEL: E44 F20 G15 G01 C11 C32
    Date: 2012
  33. By: Stig V. Møller (Aarhus University, Department of Economics and Business and CREATES); Jesper Rangvid (Copenhagen Business School, Department of Finance)
    Abstract: We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi?nding of our paper that economic growth and growth in economic confidence (consumer con?dence and business con?dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi?dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi?dence, and returns.
    Keywords: End-of-the-year (fourth-quarter) economic growth, expected returns, consumer con?fidence, purchasing managers index, risk compensation
    JEL: E44 G12 G14
    Date: 2012–10–22
  34. By: Kevin J. Lansing (Federal reserve Bank of San Francisco and Norges Bank (Central Bank of Norway)); Agnieszka Markiewicz (Erasmus University Rotterdam)
    Abstract: This paper develops a general-equilibrium model of skill-biased technological change that approximates the observed shifts in the shares of wage and non-wage income going to the top decile of U.S. households since 1980. Under realistic assumptions, we find that all agents can benefit from the technology change, provided that the observed rise in redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.
    Keywords: Income inequality, Skill-biased technological change, Capital-skill complementarity, Redistribution, Welfare.
    JEL: E32 E44 H23 O33
    Date: 2012–10–23
  35. By: Stefano Zambelli
    Abstract: Many of the research questions and research programs that were posed and suggested by Richard Goodwin are still highly relevant for various methodological, empirical and theoretical reasons. In this paper, we address the issue of whether highly articulated and complex economic interactions can be represented by a simplified low dimensional model. We follow the valuable insight offered by Goodwin (1947) concerning the importance of dynamical coupling and the potential role of analog and/or digital computers in studying them fruitfully. Here, we extend the nonlinear, flexible accelerator - dynamic multiplier model of business cycle by Goodwin (1951), to the case in which these economies are coupled through trade. The dynamics implied by the coupling are studied in analogy with the well known Fermi-Pasta-Ulam problem (Fermi et al., 1955). We show that for nonlinear economies, even when they are exactly the same, i.e. having the same structural behavioral equations, the very rich dynamics depend crucially on the initial conditions. This result is somewhat unexpected.
    Keywords: Business cycles, coupled economies, analog and digital computations, Fermi-Pasta-Ulam problem, computable economics, algorithmic social sciences, Richard Goodwin, analogy and induction
    Date: 2012
  36. By: Bo E. Honoré; Daniel Kaufmann; Sarah Marit Lein
    Abstract: In this paper we follow the recent empirical literature that has specified reduced-form models for price setting that are closely tied to (S, s)-pricing rules. Our contribution to the literature is twofold. First, we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity. Second, we use the estimator to examine asymmetries in price-setting behavior. Using micro price data underlying the Swiss CPI we find that a substantial share of asymmetries in the frequency of price changes can be traced back to a rising aggregate price level. We show that asymmetries would be reduced substantially in the absence of aggregate inflation.
    Keywords: Asymmetric price setting, downward nominal price rigidity, front loading, menu-cost model, heterogeneity, CPI micro data, panel data
    JEL: E31 E4 E5 C3 C23
    Date: 2012
  37. By: Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric Young
    Abstract: In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy make r has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.
    Keywords: Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro-financial stability, macro-prudential policies
    JEL: E52 F37 F41
    Date: 2012–10
  38. By: Santiago Fernandez de Lis; Alicia Garcia-Herrero
    Abstract: This paper analyzes whether dynamic provisioning systems act as a dampener -as intended- or as a buffer. After briefly reviewing the literature, we explain the rationale for dynamic provisions and analyze the experience of three of the few countries that adopted them: Spain, Colombia and Peru. We conclude that in the case of Spain, which is the only one where dynamic provisions worked over a complete cycle, the fact that market discipline only operated in the downturn implied that the system acted more as a buffer than as a dampener. We also observe that even rule-based systems tend to be applied in a discretionary way, since they require a very reliable calibration of the cycle "ex ante", an assumption that has proven unrealistic. The comparison of the Spanish system versus the Peruvian and Colombian raises interesting policy conclusions on whether dynamic provisioning should be applied differently to industrial versus emerging countries.
    Keywords: Financial Stability, Macroprudential, Anticyclical
    JEL: E52 E58
    Date: 2012–10
  39. By: Scott Fulford (Boston College)
    Abstract: Do households use savings to buffer against income fluctuations? Despite its common use to understand household savings decisions, the evidence for the buffer-stock model is surprisingly weak and inconsistent. This paper develops new testable implications based on a property of the model that the assets that households target for precautionary reasons should encapsulate all preferences and risks and the target should scale one for one with permanent income. I test these implications using the Survey of Consumer Finances in the United States. Those with incomes over $60,000 fit the model predictions very well, but below $60,000 households become increasingly precautionary. Income uncertainty is unrelated to the level of precaution. Moreover, households hold substantially weaker precautionary tendencies than standard models with yearly income shocks predict. Instead I propose and estimate a model of monthly disposable income shocks and a minimum subsistence level that can accommodate these findings.
    Keywords: Buffer-stock model; Precaution; Household finance
    JEL: E21 D91
    Date: 2012–09–15
  40. By: Cestau, Dario; Green, Richard; Schürhoff, Norman
    Abstract: Build America Bonds (BABs) were issued by states and municipalities for twenty months as an alternative to tax-exempt bonds. The program was part of the 2009 fiscal stimulus package. The bonds are taxable to the holder, but the federal Treasury rebates 35% of the coupon payment to the issuer. The stated purpose of the program was to provide municipal issuers with access to a more liquid market by making them attractive to foreign, tax-exempt, and tax-deferred investors. We evaluate one aspect of the liquidity of the bonds---the underpricing when the bonds are issued. We show that the structure of the rebate creates additional incentives to underprice the bonds when they are issued, and that the underpricing is larger for BABs than for traditional municipals, controlling for characteristics such as size of the issue or the trade. This suggests that the bonds are not more liquid, contrary to the stated purpose of the program, or that issuers and underwriters are strategically underpricing the bonds to increase the tax subsidy, or both. Several findings point to strategic underpricing. There is a negative correlation between the underwriter's spread and the underpricing. The underpricing for BABs is quite evident for institutional and interdealer trades, while that for tax-exempts is primarily for smaller sales to customers. Counterfactuals for our estimated structural model also suggest strategic underpricing.
    Keywords: Build America bonds; financial intermediation; incentive conflicts; municipal finance; underpricing
    JEL: E44 E63 G23 H74
    Date: 2012–10
  41. By: Fogli, Alessandra; Veldkamp, Laura
    Abstract: Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, how does this effect operate and how big is it? Using network analysis tools, we explore how different social structures affect technology diffusion and thereby a country’s rate of technological progress. The network model also explains why societies with a high prevalence of contagious disease might evolve toward growth-inhibiting social institutions and how small initial differences can produce large divergence in incomes. Empirical work uses differences in the prevalence of diseases spread by human contact and the prevalence of other diseases as an instrument to identify an effect of social structure on technology diffusion.
    Keywords: development; disease; economic networks; growth; pathogens; social networks; technology diffusion
    JEL: E02 I1 O1 O33
    Date: 2012–10
  42. By: Martin L. Weitzman
    Abstract: What is the best way to incorporate a risk premium into the discount rate schedule for a real investment project with uncertain payoffs? The standard CAPM formula suggests a beta-weighted average of the return on a safe investment and the mean return on an economy-wide representative risky investment. Suppose, though, that the project constitutes a tail-hedged investment, meaning that it is expected to yield positive payoffs in catastrophic states of nature. Then the model of this paper suggests that what should be combined in a weighted average are not the two discount rates, but rather the corresponding two discount factors. This implies an effective discount rate schedule that declines over time from the standard CAPM formula down to the riskfree rate alone. Some simple numerical examples are given. Implications are noted for discounting long-term public investments and calculating the social cost of carbon in climate change.
    JEL: E43 G11 G12 Q54
    Date: 2012–10
  43. By: Yasin Akcelik; Orcan Cortuk; Ibrahim M. Turhan
    Abstract: We study the trilemma configuration of the Turkish economy for the period between 2002 and 2012. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an \impossible trinity" (trilemma) for Turkey, following Aizenman, Chinn and Ito (ACI, 2008). This includes calculating the trilemma indices and regressing them on a constant. We show that there is a misspecification with ACI approach and improve the specification by applying a Kalman filter to the classical linear regression that enables us to capture the time-varying importance of policy decisions within the trilemma framework. By comparing the residuals of each approach, we show that Kalman filter analysis has superior results. Then, our analysis continues by revealing a role for central bank foreign reserves and required reserves in mitigating the trilemma tradeoffs { we show that foreign reserves to GDP ratio and required reserve ratio have positive significant impact on the residuals obtained from the trilemma regression, thus making the policy tradeoffs smaller.
    Keywords: Trilemma, impossible trinity, required reserves, international reserves, central bank policies
    JEL: E44 E58 F39 F41
    Date: 2012
  44. By: Spahn, Peter
    Abstract: -- Old OCA theory recommends to unite homogenous countries so that their macroeconomic interrelations do not pose severe stabilisation problems. New OCA theory rightly criticizes the 1960s flavour of the old approach and believes in the endogenous emergence of an OCA if countries use the facilities of an integrated financial market for their catching-up. Whereas in theories of intertemporal optimisation single agents and national economies succeed to go from indebtedness to development, in EMU they were tempted live beyond their intertemporal budget constraint. Professional observers tended to tolerate high current account deficits and loss of competitiveness as temporary phenomena by relying on the Lawson Doctrine. Actually, some EMU countries could avoid insolvency only by monetising their balance of payment deficit.
    Keywords: optimal currency union,integration,intertemporal balance of payments,Walters critique,Lawson doctrine
    JEL: E61 E63 E65 F02
    Date: 2012
    Abstract: We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth, are all endogenous. Within each generation we distinguish individuals with high, medium or low ability to build human capital. This extension allows to investigate also the effects of pension reform on the income and welfare levels of different ability groups. Particular attention goes to the income at old-age and the welfare level of low-ability individuals. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and aggregate welfare, positive effects in a pay-as-you-go system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. Such a regime does, however, imply welfare losses for the current low-ability generations, and rising inequality in welfare. Complementing or replacing this ‘intelligent’ pay-as-you-go system by basic and/or minimum pension components is negative for aggregate welfare, employment and growth. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate.
    Keywords: employment by age; endogenous growth; retirement; pension reform; heterogeneous abilities; overlapping generations
    JEL: E62 H55 J22 J24
    Date: 2012–08

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