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

  1. Monetary policy and fiscal stimulus with the zero lower bound and financial frictions By Rossana MEROLA
  2. Persistent Habits, optimal Monetary Policy Inertia and Interest Rate Smoothing By Corrado, L.; Holly, S.; Raissi, M.
  3. Macroeconomic effects of Federal Reserve forward guidance By Jeffrey R. Campbell; Charles Evans; Jonas D. M. Fisher; Alejandro Justiniano
  4. Monetary Policy in Transition – Essays on Monetary Policy Transmission Mechanism in China By Koivu, Tuuli
  5. Estimating Phillips Curves in turbulent times using the ECB's survey of professional forecasters By Gary Koop; Luca Onorante
  6. Structural and Cyclical Forces in the Labor Market During the Great Recession: Cross-Country Evidence By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  7. Debt-Deflation versus the Liquidity Trap : The Dilemma of Nonconventional Monetary Policy. By Gaël Giraud; Antonin Pottier
  8. Liquidity traps and expectation dynamics: Fiscal stimulus or fiscal austerity? By Benhabib , Jess; Evans, George W.; Honkapohja, Seppo
  9. The optimal inflation target in an economy with limited enforcement By Gaetano Antinolfi; Costas Azariadis; James Bullard
  10. Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions By Wang, Ping; Xie, Danyang
  11. Central bank communication on fiscal policy By Julien Allard; Marco Catenaro; Jean-Pierre Vidal; Guido Wolswijk
  12. Euler equations and money market interest rates: The role of monetary and risk premium shocks By Gareis, Johannes; Mayer, Eric
  13. Business cycles and financial crises: the roles of credit supply and demand shocks By James M Nason; Ellis Tallman
  14. Rezerv Opsiyonu Mekanizmasi By Koray Alper; A. Hakan Kara; Mehmet Yorukoglu
  15. The Supply of Skills in the Labor Force and Aggregate Output Volatility By Steven Lugauer
  16. Self-fulfilling credit cycles By Costas Azariadis; Leo Kaas
  17. The Stock Market Crash of 2008 Caused the Great Recession By Roger Farmer
  18. Labor disruption costs and real wages cyclicality By Cervini-Plá, María; Silva, José I.; López-Villavicencio, Antonia
  19. Liquidity, Innovation and Growth By Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
  20. Markov-perfect optimal fiscal policy : the case of unbalanced budgets By Salvador Ortigueira; Joana Pereira; Paul Pichler
  21. A global monetary tsunami? On the spillovers of US Quantitative Easing By Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland
  22. Consumption Dynamics During the Great Recession By Joseph Vavra; David Berger
  23. Financial market heterogeneity: Implications for the EMU By Gareis, Johannes; Mayer, Eric
  24. The forward guidance puzzle By Marco Del Negro; Marc Giannoni; Christina Patterson
  25. Gauging the effects of fiscal stimulus packages in the euro area By Günter Coenen; Roland Straub; Mathias Trabandt
  26. Inflação, Desemprego e Choques Cambiais: Estimativas Var Para a Economia Brasileira By Bernardo Patta Schettini; Raphael Rocha Gouvea; Adolfo Sachsida
  27. LEADS on Macroeconomic Risks to and from the Household Sector By Jonathan A. Parker
  28. Man-bites-dog business cycles By Kristoffer Nimark
  29. An affine multifactor model with macro factors for the German term structure: Changing results during the recent crises By Halberstadt, Arne; Stapf, Jelena
  30. Rearmament to the Rescue? New Estimates of the Impact of ‘Keynesian’ Policies in 1930s’ Britain By Nicholas Crafts; Terence C. Mills
  31. Fiscal Consolidation in Reformed and Unreformed Labour Markets: A Look at EU Countries By Turrini, Alessandro
  32. Generalizing the Taylor Principle: New Comment. By Barthélemy, J.; Marx, M.
  33. Uncertainty and Economic Activity: Evidence from Business Survey Data By Eric R. Sims
  34. Inflação Versus Desemprego: Novas Evidências Para o Brasil By Mário Jorge Mendonça; Adolfo Sachsida
  35. Leading indicators of crisis incidence: evidence from developed countries By Jan Babecký; Tomáš Havránek; Jakub Matějů; Marek Rusnák; Kateřina Šmídková; Bořek Vašíček
  36. Estado y política pública en Colombia By Estrada, Fernando
  37. Demographic Patterns and Household Saving in China By Steven Lugauer; Nelson Mark
  38. Skill-Biased Technological Change and Homeownership By Alexis Anagnostopoulos; Orhan Erem Atesagaoglu; Eva Carceles-Poveda
  39. Dynamic Scoring Through Creative Destruction By Oudheusden, P. van
  40. Índice de Desbalance Macroeconómico. By Carolina Arteaga; Carlos Huertas Campos; Sergio Olarte Armenta
  41. Challenges in Identifying and Measuring Systemic Risk By Lars Peter Hansen
  42. Information Acquisition in Rumor Based Bank Runs By Zhiguo He; Asaf Manela
  43. Macroeconomic uncertainty and the impact of oil shocks By Ine Van Robays
  44. Trade Policy and Wage Inequality: A Structural Analysis with Occupational and Sectoral Mobility By Erhan Artuç; John McLaren

  1. By: Rossana MEROLA (OECD, Economics Department and Université Catholique de Louvain)
    Abstract: Recent developments in many industrialized countries have triggered a debate on whether monetary policy is effective when the nominal interest rate is close to zero. When the nominal interest rate hits its lower bound, the monetary authority is no longer in a position to pursue a policy of monetary easing by lowering nominal interest rates further. In this paper, I assess the implications of the zero lower bound in a DSGE model with financial frictions. The analysis shows that in a framework with financial frictions, when the interest rate is at the lower bound, the initial impact of a negative shock is amplified and the economy is more likely to plunge into a recession. I assess whether different macro policies, such as the management of expectations by the central bank or a counter-cyclical fiscal stimulus, may help recover the economy from the recession. I find that the monetary authority might alleviate the recession by targeting the price-level. Fiscal stimulus represents an alternative solution especially when the zero lower bound constraint becomes binding, as fiscal multipliers may become larger than one. In analyzing discretionary fiscal policy, this paper also focuses on two crucial aspects: the duration of the fiscal stimulus and the presence of implementation lags.
    Keywords: Optimal monetary policy, financial accelerator, lower bound on nominal interest rates, price-level targeting, fiscal stimulus
    JEL: E31 E44 E52 E58
    Date: 2012–10–30
  2. By: Corrado, L.; Holly, S.; Raissi, M.
    Abstract: Dynamic stochastic general equilibrium models featuring imperfect competition and nominal rigidities have become central for the analysis of the monetary transmission mechanism and for understanding the conduct of monetary policy. However, it is agreed that the benchmark model fails to generate the persistence of output and inflation that is observed in the data. Moreover, it cannot provide a theoretically well-grounded justification for the interest rate smoothing behaviour of monetary authorities. This paper attempts to overcome these deficiencies by embedding a multiplicative habit specification in a New Keynesian model. We show that this particular form of habit formation can explain why monetary authorities smooth interest rates.
    Keywords: Multiplicative habits, interest rate inertia, optimal monetary policy.
    JEL: D12 E52 E43
    Date: 2012–10–29
  3. By: Jeffrey R. Campbell; Charles Evans; Jonas D. M. Fisher; Alejandro Justiniano
    Abstract: A large output gap accompanied by stable inflation close to its target calls for further monetary accommodation, but the zero lower bound on interest rates has robbed the Federal Open Market Committee (FOMC) of the usual tool for its provision. We examine how public statements of FOMC intentions—forward guidance—can substitute for lower rates at the zero bound. We distinguish between Odyssean forward guidance, which publicly commits the FOMC to a future action, and Delphic forward guidance, which merely forecasts macroeconomic performance and likely monetary policy actions. Others have shown how forward guidance that commits the central bank to keeping rates at zero for longer than conditions would otherwise warrant can provide monetary easing, if the public trusts it. ; We empirically characterize the responses of asset prices and private macroeconomic forecasts to FOMC forward guidance, both before and since the recent financial crisis. Our results show that the FOMC has extensive experience successfully telegraphing its intended adjustments to evolving conditions, so communication difficulties do not present an insurmountable barrier to Odyssean forward guidance. Using an estimated dynamic stochastic general equilibrium model, we investigate how pairing such guidance with bright-line rules for launching rate increases can mitigate risks to the Federal Reserve’s price stability mandate.
    Keywords: Macroeconomics - Econometric models ; Monetary policy ; Federal Reserve banks
    Date: 2012
  4. By: Koivu, Tuuli (Bank of Finland Research)
    Abstract: China’s economic development has been exceptionally robust since the end of the 1970s, and the country has already emerged as the second biggest economy in the world. In this study, we seek to illuminate the role of the monetary policy in this successful economic performance and as a part of the extensive economic reforms of the last two decades. The five empirical essays seek to discover which monetary policy tools are the most used and most effective for guiding China’s economic development. In addition, we explore which monetary policy transmission channels are functioning and to what extent monetary policy impacts inflation and real economic developments in China. The results indicate that the conduct of monetary policy in China differs substantially from what is typical for an advanced market economy, where an independent central bank often aims to hit an inflation target by simply controlling the target interest rate. First, China’s monetary policy toolkit is highly diverse. Besides a collection of administrated interest rates, it contains quantitative policy tools and direct guidelines. Second, China’s central bank is not independent in its decision-making. For these reasons, it is exceptionally challenging to measure the monetary policy stance or to distinguish monetary policy from other macroeconomic policies in China’s case. This has been taken into account in this study by using a variety of monetary-policy indicators. Our results suggest that China’s monetary-policy implementation and its transmission to the real economy still rely heavily on quantitative policy tools and direct guidelines; interest rates play a much smaller role, in terms of both usage and effectiveness. Overall, our findings suggest that the direct link between monetary policy and real economic performance is weak in China. On the other hand, this study clearly shows that monetary policy has played a key role in price developments, which tells us that monetary policy has been an important factor in China’s economic success.
    Keywords: China; monetary policy; economic growth; inflation; exchange rates
    JEL: E50 P30
    Date: 2012–10–26
  5. By: Gary Koop (University of Strathclyde); Luca Onorante (European Central Bank)
    Abstract: This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”. JEL Classification: E31, C53, C11.
    Keywords: Inflation expectations, survey of professional forecasters, Phillips curve, Bayesian, financial crisis.
    Date: 2012–02
  6. By: Sala, Luca (Department of Economics and IGIER); Söderström, Ulf (Monetary Policy Department, Central Bank of Sweden); Trigari, Antonella (Department of Economics and IGIER)
    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; Beveridge curve
    JEL: E24 E32
    Date: 2012–10–01
  7. By: Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics); Antonin Pottier (CIRED)
    Abstract: This paper examines quantity-targeting monetary policy in a two-period economy with fiat money, endogenously incomplete markets of financial securities, durable goods and production. Short positions in financial assets and long-term loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to the loan. We show that Collateral Monetary Equilibria exist and prove there is also a refinement of the Quantity Theory of Money that turns out to be compatible with the long-run non-neutrality of money. Moreover, only three scenarios are compatible with the equilibrium condition : 1) either the economy enters a liquidity trap in the first period ; 2) or a credible ex-pansionary monetary policy accompanies the orderly functioning of markets at the cost of running an inflationary risk ; 3) else the money injected by the Central Bank increases the leverage of indebted investors, fueling a financial bubble whose bursting leads to debt-deflation in the next period with a non-zero probability. This dilemma of monetary policy highlights the default channel affecting trades and production, and provides a rigorous foundation to Fisher’s debt deflation theory as being distinct from Keynes’ liquidity trap.
    Keywords: Central Bank, liquidity trap, collateral, default, deflation, quantitative easing, debt-deflation.
    JEL: D50 E40 E44 E50 E52 E58 G38 H50
    Date: 2012–10
  8. By: Benhabib , Jess (New York University); Evans, George W. (University of Oregon, University of St. Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However “fiscal switching rules” that automatically kick in without discretionary fine tuning can be equally effective.
    Keywords: adaptive learning; monetary policy; fiscal policy; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2012–10–09
  9. By: Gaetano Antinolfi; Costas Azariadis; James Bullard
    Abstract: We formulate the central bank’s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income and public information. Households are segmented into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner’s problem is equivalent to choosing inflation and nominal interest rates consistent with a resource constraint, and with an incentive constraint that ensures credit agents prefer the superior consumption- smoothing power of loans to that of currency. We show that the optimum inflation rate is positive, because inflation reduces the value of the outside option for credit agents and raises their debt limits.
    Keywords: Inflation targeting ; Deflation (Finance) ; Monetary policy
    Date: 2012
  10. By: Wang, Ping; Xie, Danyang
    Abstract: This paper studies the consequences of labor-market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labor-market frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second-best world with pre-existing distortionary taxes.
    Keywords: Cash Constraints; Nonsuperneutrality of Money; the Friedman rule; Labor-Market Frictions
    JEL: O42 D90 E41
    Date: 2012–10–29
  11. By: Julien Allard; Marco Catenaro (European Central Bank); Jean-Pierre Vidal (European Central Bank); Guido Wolswijk (European Central Bank)
    Abstract: While the established literature on central bank communication has traditionally dealt with communication of monetary policy messages to financial markets and the wider public, central bank communication on fiscal policy has so far received little attention. This paper empirically reviews the intensity of central banks’ fiscal communication by five central banks (the US Federal Reserve, the ECB, the Bank of Japan, the Bank of England and the Swedish Riksbank) over the period 1999-2011. To that end, it develops a fiscal indicator measuring the fiscal-related communication in minutes or introductory statements. Our findings indicate that the ECB communicates intensively on fiscal policies in both positive as well as normative terms. Other central banks more typically refer to fiscal policy when describing foreign developments relevant to domestic macroeconomic developments, when using fiscal policy as input to forecasts, or when referring to the use of government debt instruments in monetary policy operations. The empirical analysis also indicates that the financial crisis has overall increased the intensity of central bank communication on fiscal policy. It identifies the evolution of the government deficit ratio as a driver of the intensity of fiscal communication by central banks in the euro area, the US and Japan, and for Sweden since the start of the crisis. In England the fiscal share in central bank communication is related to developments in government debt as of the start of the crisis. JEL Classification: E58, E61, E63
    Keywords: Central bank communication, fiscal policy, quantification of verbal information
    Date: 2012–09
  12. By: Gareis, Johannes; Mayer, Eric
    Abstract: This paper challenges the view that the observed negative correlation between the Federal Funds rate and the interest rate implied by consumption Euler equations is systematically linked to monetary policy. By using a Monte Carlo experiment, we show that stochastic risk premium disturbances have the capability to drive a wedge between the interest rate targeted by the central bank and the implied Euler equation interest rate such that the correlation between actual and implied rates is negative. --
    Keywords: Euler Interest Rate,Monetary Policy,Risk Premium Shocks
    JEL: E10 E43 E44 E52
    Date: 2012
  13. By: James M Nason; Ellis Tallman
    Abstract: This paper explores the hypothesis that the sources of economic and financial crises differ from noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and noncrisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.
    Keywords: Business cycles ; Forecasting ; Financial markets ; Economic history
    Date: 2012
  14. By: Koray Alper; A. Hakan Kara; Mehmet Yorukoglu
    Abstract: [TR] Bu calisma, sermaye hareketlerindeki asiri oynakligin makroekonomik ve finansal istikrar uzerindeki olumsuz etkilerini sinirlamak amaciyla Turkiye Cumhuriyet Merkez Bankasi’nin (TCMB) gelistirdigi araclardan biri olan Rezerv Opsiyonu Mekanizmasini (ROM) tanitmaktadir. Calismada, ROM’un ongorulen isleyis bicimi ele alinmakta ve olasi etkileri diger alternatif araclarla karsilastirilmaktadir. Degerlendirmeler, ROM’un makroekonomik ve finansal istikrara yonelik faydali bir arac olarak kullanilabilecegine isaret etmektedir. [EN] The aim of this study is to introduce a monetary policy instrument recently designed by the Central Bank of Turkey, Reserve Option Mechanism (ROM), which aims at reducing the adverse impact of volatile capital flows on the macroeconomic and financial stability. We describe the transmission channels of the ROM and compare them with other alternative instruments. Our analysis concludes that ROM has the potential to be a useful policy tool for macroeconomic and financial stability.
    Date: 2012
  15. By: Steven Lugauer (Department of Economics, University of Notre Dame)
    Abstract: The cyclical volatility of U.S. gross domestic product suddenly declined during the early 1980s and remained low for over 20 years. I develop a labor search model with worker heterogeneity and match-specific costs to show how an increase in the supply of high-skill workers can contribute to a decrease in aggregate output volatility. In the model, firms react to changes in the distribution of skills by creating jobs designed specifically for high-skill workers. The new worker-firm matches are more profitable and less likely to break apart due to productivity shocks. Aggregate output volatility falls because the labor market stabilizes on the extensive margin. In a simple calibration exercise, the labor market based mechanism generates a substantial portion of the observed changes in output volatility.
    Keywords: Business Cycles, Skill Supply, Demographics
    JEL: E32 J24
    Date: 2012–06
  16. By: Costas Azariadis; Leo Kaas
    Abstract: This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.
    Keywords: Credit ; Business cycles
    Date: 2012
  17. By: Roger Farmer (University of California Los Angeles)
    Abstract: This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer's model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
    Date: 2012
  18. By: Cervini-Plá, María; Silva, José I.; López-Villavicencio, Antonia
    Abstract: In this paper, we propose a matching and search model with adjustment costs in the form of labor disruption charges that can generate counter-cyclical real wages. Empirically, we use a measure of wage cyclicality based on the generalized impulse response function of real wages to a shock in a cycle measure. We provide evidence that wages in the United States are counter-cyclical during the first few quarters. The calibration and simulated results of the model match remarkably well the counter-cyclicality obtained from our empirical model.
    Keywords: Labor disruption costs; real wages; matching frictions; wage cyclicality
    JEL: E32 E24 J63 J32
    Date: 2012–10–29
  19. By: Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
    Abstract: Many countries simultaneously suffer from high inflation, low growth and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation on welfare, growth and the size of the financial sector. A novel feature is that the innovation sector is decentralized. Financial intermediaries arise endogenously to provide liquidity to this sector. Consistent with the data but in contrast to previous work, reducing inflation generates large growth gains. These large gains cannot be easily reproduced by imposing a cash-in-advance constraint in the innovation sector.
    Keywords: Inflation; Growth; Search; Innovation; Credit.
    JEL: E5 O42
    Date: 2012–11–04
  20. By: Salvador Ortigueira; Joana Pereira; Paul Pichler
    Abstract: We study optimal time-consistent fiscal policy in a neoclassical economy with endogenous government spending, physical capital and public debt. We show that a dynamic complementarity between the households’ consumption-savings decision and the government’s policy decision gives rise to a multiplicity of expectations-driven Markov-perfect equilibria. The long-run levels of taxes, government spending and debt are not uniquely pinned down by economic fundamentals, but are determined by expectations over current and future policies. Accordingly, economies with identical fundamentals may significantly differ in their levels of public indebtedness
    Keywords: Optimal fiscal policy, Markov-perfect equilibrium, Time-consistent policy, Expectation traps
    JEL: E61 E62 H21 H63
    Date: 2012–10
  21. By: Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland
    Abstract: The paper analyses the global spillovers of the Federal Reserve’s unconventional monetary policy measures since 2007. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of emerging markets (EMEs) into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: capital flows; emerging markets; Federal Reserve; monetary policy; panel data; portfolio choice; quantitative easing; spillovers; United States
    JEL: E52 E58 F32 F34 G11
    Date: 2012–10
  22. By: Joseph Vavra (University of Chicago); David Berger (Yale University)
    Abstract: Business cycle models typically abstract from the distinction between durable and non-durable consumption. However, in the 2007 recession, durable expenditures fell by three times as much as GDP while non-durable expenditures fell by slightly less than GDP. We show that simple extensions of business cycle models (both with and without complete markets) that assume frictionless durable adjustment are no more successful at matching the behavior of consumption, as they imply a decline in durable expenditures that is too large and a decline in non-durable expenditures that is too small, relative to the recession. Motivated by micro evidence, we introduce fixed costs of durable adjustment into the incomplete markets model and show that the model is able to match the behavior of consumption in the most recent recession. Fixed costs dampen the volatility of durable expenditures and amplify the volatility of non-durable expenditures, as a large fraction of households hold wealth in illiquid durables. In addition, the model implies non-linear dynamics that are in line with time-series data: durable expenditures respond more strongly to shocks during booms than during recessions. Finally, we provide additional evidence that supports our model: using micro panel data we show that households with a large fraction of wealth in durables are less able to insure against income shocks.
    Date: 2012
  23. By: Gareis, Johannes; Mayer, Eric
    Abstract: This paper evaluates business cycle and welfare effects of cross-country mortgage market heterogeneity for a monetary union. By employing a calibrated two-country New Keynesian DSGE model with collateral constraints tied to housing values, we show that a change in cross-country institutional characteristics of mortgage markets, such as the LTV ratio, is likely to be an important driver of an asymmetric development in housing markets and real economic activity of member states. Our welfare analysis suggests that the welfare of the home country where the reform is implemented increases substantially. In contrast, the rest of the EMU's welfare falls due to spillover effects with magnitude depending on the size of the home country. --
    Keywords: housing,LTV ratio,monetary union,cross-country heterogeneity
    JEL: E32 E44 F41
    Date: 2012
  24. By: Marco Del Negro; Marc Giannoni; Christina Patterson
    Abstract: With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy—a phenomenon we call the “forward guidance puzzle.” We explain why this is the case and describe one approach to addressing this issue.
    Keywords: Banks and banking, Central ; Interest rates ; Federal Open Market Committee ; Stochastic analysis ; Equilibrium (Economics) ; Monetary policy
    Date: 2012
  25. By: Günter Coenen (European Central Bank); Roland Straub (European Central Bank); Mathias Trabandt (Board of Governors of the Federal Reserve System)
    Abstract: We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditurebased fiscal stimulus measures, the total multiplier is below unity. JEL Classification: C11, E32, E62
    Keywords: Fiscal policy, fiscal multiplier, European Economic Recovery Plan, DSGE modelling, Bayesian inference, euro area
    Date: 2012–10
  26. By: Bernardo Patta Schettini; Raphael Rocha Gouvea; Adolfo Sachsida
    Abstract: Este artigo estima um modelo Vetorial Autorregressivo (VAR) da curva de Phillips, com choques cambiais, para a economia brasileira. Foram estimadas várias especificações, com diferentes frequências de dados, que confirmaram a robustez dos resultados. Os resultados econométricos sugerem que: i) o impacto de um choque cambial na inflação (pass-through cambial) é de aproximadamente 0,04 ponto percentual (p.p.) na inflação do mês seguinte ao choque (ou 0,48 p.p. na inflação anualizada); ii) um choque médio na taxa de desemprego demora ao redor de 18 meses para desaparecer; iii) uma inovação de 0,058 p.p. na expectativa de inflação é carregada para a inflação, que atinge um máximo de 0,049 p.p. no mês seguinte ao choque (o que corresponde a um acréscimo na inflação anualizada de 0,58 p.p.); e iv) choques na série de inflação não afetam a taxa de desemprego, isto é, mais inflação não reduz a taxa de desemprego. We estimate a VAR model of the Phillips curve with an exchange rate shock to the Brazilian economy. Several different specifications, with different time frequencies, were estimated. Overall the results were robust to these changes, and can be summed up in the following: i) the pass-through to the next month inflation is around 0.04 percentage points (p.p.) (0.48 p.p. over the annualized inflation); ii) a shock on the unemployment rate lasts for 18 months; iii) a shock on the expectations are carried to the next month inflation (0.58 p.p. over the annualized inflation); and iv) a shock on the inflation rate has no effect over the unemployment rate. That is, more inflation does not reduce unemployment.
    Date: 2012–01
  27. By: Jonathan A. Parker
    Abstract: This chapter describes a system, called the LEADS system, for providing market participants, regulators, and households with information on the reallocation of resources within, from, and to the household sector in response to macroeconomic events. The household sector is both a propagator of shocks to the economy, as wealth is redistributed across households with differing propensities to consume, and an originator of risky claims held in systemically important places, as losses are shifted from households to creditors such as financial institutions. Information about these exposures, like information generally, is conveyed by prices and so is under-produced by markets. The LEADS system – collection, analysis, and distribution of information on household exposures to macroeconomic risk factors – can potentially lead to better macroeconomic performance through better informed public policy and private decision- making
    JEL: E44 G01 G18
    Date: 2012–11
  28. By: Kristoffer Nimark (CREI)
    Abstract: The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. We present a tractable model that features an information structure in which some types of signals are more likely to be observed after unusual events. Counterintuitively, more signals may then increase uncertainty. When embedded in a simple business cycle model, the proposed information structure can help us understand why we observe (i) large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of expectations as measured by survey data. These results are consequences of optimal updating by agents when the availability of some signals is positively correlated with tail-events. The model is estimated by likelihood based methods using raw survey data and a quarterly time series of total factor productivity along with standard aggregate time series. The estimated model suggests that there have been episodes in recent US history when the impact on output of innovations to productivity of a given magnitude were up to twice as large compared to normal times.
    Date: 2012
  29. By: Halberstadt, Arne; Stapf, Jelena
    Abstract: Using arbitrage-free affine models, we analyze the dynamics of German bond yields and risk premia for the period 1999 to 2010 (EMU). We estimate two model specifications, one with only latent factors, and another one with a Taylor-type rule comprising a price and a real activity factor drawn from a large macroeconomic data set as additional driving forces. We apply several statistical methods to select those time series from which the factors are actually extracted. The macroeconomic factors, notably the real activity factor, help to improve the fit of the model. Moreover, the inclusion of the macroeconomic factors allows us to analyze their effect on the risk aversion of market participants. Looking at the impact of the recent crises, we see that particularly the market prices of risk for the real activity and the price factor changed most dramatically. Offsetting safe haven flows, which affect shorter maturities in particular, explain why yield risk premia increase less at the short end as compared to longer maturities in times of crisis. A liquidity stress factor included in the macro model mirrors this slope influencing effect of the safe haven flows and leads to smoother forward rates for yield risk premia. --
    Keywords: affine term structure models,macroeconomic factors,risk premia,liquidity,financial crisis
    JEL: E43 E52 G12
    Date: 2012
  30. By: Nicholas Crafts (University of Warwick); Terence C. Mills (Loughborough University)
    Abstract: We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and ‘defense news’. We find that the government expenditure multiplier was in the range 0.5 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was much lower than is generally supposed. We do find that rearmament gave a substantial boost to real GDP after 1935 but this was because the private sector responded to news of massive future defense spending and does not imply that the multiplier effect of temporary public works programs would have been large.
    Keywords: defense news; multiplier; public works; rearmament
    JEL: E62 N14
    Date: 2012–11
  31. By: Turrini, Alessandro (European Commission)
    Abstract: This paper estimates the impact of fiscal consolidation on unemployment and job market flows across EU countries using a recent database of consolidation episodes built on the basis of a “narrative” approach (Devries et al., 2011). Results show that the impact of fiscal consolidation on cyclical unemployment is temporary and significant mostly for expenditure measures. As expected, the impact of fiscal policy shocks on job separation rates is much stronger in low-EPL countries, while high-EPL countries suffer from a stronger reduction in the rate at which new jobs are created. Since a reduced job-finding rate corresponds to a longer average duration of unemployment spells, fiscal policy shocks also tend to have a stronger impact on long-term unemployment if EPL is stricter. Results are broadly confirmed when using "top-down" fiscal consolidation measures based on adjusting budgetary data for the cycle.
    Keywords: fiscal consolidation, unemployment, job market flows, employment protection legislation, labour market reforms
    JEL: E62 J63 J65
    Date: 2012–10
  32. By: Barthélemy, J.; Marx, M.
    Abstract: In this paper, we provide determinacy conditions, i.e. conditions ensuring the existence and uniqueness of a bounded solution, in a purely forward-looking linear Markov switching rational expectations model. We thus settle the debate between Davig and Leeper (2007) and Farmer et al. (2010). The conditions derived by the former are valid in a subset of bounded solutions only depending on a finite number of past regimes, that we call Markovian. However, in the complete bounded solution space, the new determinacy conditions we derive are tighter. Nevertheless, when unique, the solution coincides with the Markovian solution of Davig and Leeper (2007). We finally illustrate our results in the standard new-Keynesian model studied by Davig and Leeper (2007) and Farmer et al. (2010).
    Keywords: Markov switching, DSGE, indeterminacy.
    JEL: E31 E43 E52
    Date: 2012
  33. By: Eric R. Sims (Department of Economics, University of Notre Dame)
    Abstract: This paper uses survey expectations data from both Germany and the United States to construct empirical proxies for time-varying business-level uncertainty. Access to the con?dential micro data from the German IFO Business Climate Survey permits construction of uncertainty measures based on both ex-ante disagreement and on ex-post forecast errors. Ex-ante disagreement is strongly correlated with dispersion in ex-post forecast errors, lending credence to the widespread practice of proxying for uncertainty with disagreement. Surprise movements in either measure are associated with signi?cant reductions in production that abate fairly quickly. We extend our analysis to US data, measuring uncertainty with forecast disagreement from the Business Outlook Survey administered by the Federal Reserve Bank of Philadelphia. In contrast to the German case, surprise increases in forecast dispersion lead to large and persistent reductions in production and employment.
    Keywords: Macroeconomic Uncertainty, Forecast Errors
    JEL: E
    Date: 2012–06
  34. By: Mário Jorge Mendonça; Adolfo Sachsida
    Abstract: O objetivo deste artigo é estimar a curva de Phillips novo-keynesiana (NKPC) para o Brasil. Para tal aplica-se o método GMM-HAC, devido à presença de problemas de especificação inicialmente observados. Uma investigação minuciosa para checar a robustez dos resultados incluiu reestimar a NKPC com base em diferentes proxies para variáveis do modelo tal como o uso de amostras de dimensão temporal distintas. De maneira geral, os seguintes resultados merecem destaque. Primeiro, a expectativa futura de inflação e a inflação passada têm relevância na dinâmica da inflação. Contudo, o papel das expectativas parece aumentar no período mais recente a partir de 2002. Para dados a partir de 1995, o efeito das expectativas é menor ou semelhante ao da inércia inflacionária. Segundo, para a maior parte das regressões estimadas, não foi possível rejeitar a hipótese de que a soma dos coeficientes da inflação passada e da expectativa de inflação seja igual à unidade. Em terceiro lugar, o efeito do desemprego sobre a inflação parece estar localizado no curto prazo. Para a maior parte dos casos em que as variáveis proxies foram usadas, esta relação foi observada com efeito negativo. No longo prazo, o efeito do desemprego parece ser nulo na formação da inflação. Por fim, parece haver uma quebra estrutural no efeito de uma mudança do câmbio sobre a inflação. Com dados a partir de 2002, o efeito de um choque cambial é negativo. Contudo, com a amostra ampliada desde 1995, o efeito de uma desvalorização cambial é positivo sobre a inflação. Palavras-chave: curva de Phillips; inflação; desemprego; choque cambial; GMM-HAC. The goal of this article is to estimate the New Keynesian Phillips Curve for Brazilian economy. Due to some specifications problems in regressions estimated by IV method, the GMM-HAC methodology was used in order to address them. We noted the robustness of the results performing a detailed investigation that was based not only on different proxies for the dependent variable and the regressors but also on samples with. distinct temporal dimensions. Among the main achievements of this study, the following are more remarkable. Firstly, the inflationary inertia and expectation of inflation are important variables for the dynamic of inflation although the relevance of expectation seems to be more relevant in a more recent period from 2002 onwards. When one estimates the NKPC using data from 1995, the effect of expectation get down and becomes close to the inertia. In second place, the majority of regressions did not reject the hypothesis derived from structural form that the sum of coefficients of lagged inflation and expectation of inflation is equal to unity. Thirdly, the effect of unemployment on inflation seems to present in short term. In the long run, the estimations do not able to detect any impact of unemployment on the dynamic of inflation. Finally, the structural break marks the relationship between the exchange rate and inflation. The regressions estimated with data from 2002, the effect of exchange rate shock is negative. But, when one uses data from 1995, this shock has a positive impact on inflation. Keywords: Phillips curve; inflation; rational expectations; unemployment; exchange rate shock; GMM-HAC method.
    Date: 2012–08
  35. By: Jan Babecký (Czech National Bank); Tomáš Havránek (Czech National Bank; Charles University, Institute of Economic Studies); Jakub Matějů (Czech National Bank; Center for Economic Research and Graduate Education - Economics Institue (CERGE-EI)); Marek Rusnák (Czech National Bank; Charles University, Institute of Economic Studies); Kateřina Šmídková (Czech National Bank; Charles University, Institute of Economic Studies); Bořek Vašíček (Czech National Bank)
    Abstract: We search for early warning indicators that could indicate important risks in developed economies. We therefore examine which indicators are most useful in explaining costly macroeconomic developments following the occurrence of economic crises in EU and OECD countries between 1970 and 2010. To define our dependent variable, we bring together a (continuous) measure of crisis incidence, which combines the output and employment loss and the fiscal deficit into an index of real costs, with a (discrete) database of crisis occurrence. In contrast to recent studies, we explicitly take into account model uncertainty in two steps. First, for each potential leading indicator, we select the relevant prediction horizon by using panel vector autoregression. Second, we identify the most useful leading indicators with Bayesian model averaging. Our results suggest that domestic housing prices, share prices, and credit growth, and some global variables, such as private credit, are risk factors worth monitoring in developed economies. JEL Classification: C33, E44, E58, F47, G01
    Keywords: Early warning indicators, Bayesian model averaging, macro-prudential policies
    Date: 2012–10
  36. By: Estrada, Fernando
    Abstract: Our hypothesis: during the twentieth century governments used state emergency measures to overcome its economic crisis. Such measures did better on the revenue in fiscal expenditures, thereby caused severe imbalances of public policy. It holds that in Colombia there has been no welfare state (welfare state) but a state which relates reductionist proposals "minimum state" in the terms used by Robert Nozick.
    Keywords: Colombia; Economy; Tax_Power; Economic_crisis; Welfare_state
    JEL: E62 D63 D33 D30 D60 H23 H26
    Date: 2012
  37. By: Steven Lugauer (Department of Economics, University of Notre Dame); Nelson Mark (Department of Economics, University of Notre Dame)
    Abstract: This paper studies how changing demographics can explain much of the evolution of China's household saving rate from 1955 to 2009. We undertake a quantitative investigation using an overlapping generations model in which agents live for 85 years. Agents begin to exercise decision making when they are 20. From age 20 to 63, they work. From age 20 to 49, they also provide for children. Dependent children's consumption enters into the parent's utility, and parents choose the consumption level of the young until they leave the household. Working agents transfer a portion of their labor income to their retired parents and save for their own retirement. Retirees live of of their accumulated assets and support from current workers. We present agents in the parameterized model with the future time-path of the demographics, interest rates and wages as given by the data and analyze their saving decisions. The simulated model accounts for nearly all the observed increase in the household saving rate from 1955 to 2009.
    Keywords: Saving Rate, Life-Cycle, China, Demographics, Overlapping Generations
    JEL: E2 J1
    Date: 2010–12
  38. By: Alexis Anagnostopoulos (Department of Economics, Stony Brook University); Orhan Erem Atesagaoglu (Department of Economics, Stony Brook University); Eva Carceles-Poveda (Department of Economics, Stony Brook University)
    Abstract: In the United States, the residential housing market went through important changes over the period from the 1970s to the mid-1990s. Although the aggregate homeownership rate was relatively constant during that period, the distribution of homeownership rates by age changed in remarkable ways. While younger households saw substantial declines in homeownership rates, the opposite happened for older households. In this paper, we argue that the skill-biased technological change (SBTC) that began during the 1970s has been an important factor behind the observed change in the distribution of homeownership rates by age. We build a life cycle model in which skills are accumulated on-the-job through experience: learning by doing. Early in life, households have lower levels of skills and therefore lower earnings. SBTC increases the returns to skill, widening the wage gap between young and old ages. As a consequence, it takes more time for young households to become homeowners given frictions in financial markets (e.g. downpayment requirements) and housing markets (e.g. large and indivisible houses), in line with consumption smoothing behaviour. On the other hand, older households that could not afford a house before may now become homeowners, given higher returns to skill. Our analysis confirms this conjecture, namely, that SBTC shifts the distribution of homeownership from the young to the old.
    Keywords: Homeownership, Incomplete Markets, Skill-Biased Technological Change.
    JEL: E2
    Date: 2012–09
  39. By: Oudheusden, P. van (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We examine the dynamic feedback effects of fiscal policies on the government budget and economy activity in a calibrated general equilibrium framework featuring endogenous growth through creative destruction. For several European countries, we find that making tax incentives with respect to research effort more generous is the least costly way, in terms of the impact on the government budget, to promote economic growth. It is almost three times as cost effective as lowering the tax rate on capital income. When non-distorting financing options are excluded, adjusting the consumption tax to finance more generous tax incentives for research effort leads to the smallest loss in economic efficiency and the largest welfare gain.
    Keywords: Dynamic Scoring;Creative Destruction;Endogenous Growth;Calibration;Taxation.
    JEL: E62 H2 H3
    Date: 2012
  40. By: Carolina Arteaga; Carlos Huertas Campos; Sergio Olarte Armenta
    Abstract: La reciente crisis financiera internacional volvió a dar relevancia a la formación de ciertos desbalances macroeconómicos que pueden aumentar las vulnerabilidades de una economía frente a choques adversos. En el caso de las economías emergentes, flujos elevados de capital podrían exacerbar estos desequilibrios e intensificar sus efectos negativos. Así, este trabajo se enfoca en cuatro variables que la literatura económica ha identificado como generadoras de señales en la formación de desbalances macroeconómicos: la cuenta corriente, la tasa de cambio real, el crédito y los precios de la vivienda. Para cada una de ellas se calcularon desviaciones sobre sus medidas de largo plazo y a partir de su componente principal se construyó un Índice de Desbalance Macroeconómico (IDM). El IDM para Colombia, al igual que un índice similar para 10 países, mostró que en 21 episodios de crisis estudiados, se presentaron desbalances macroeconómicos y se observó una relación positiva entre el nivel acumulado del IDM y la probabilidad de crisis a un año.
    Date: 2012–11–01
  41. By: Lars Peter Hansen
    Abstract: Sparked by the recent “great recession” and the role of financial markets, considerable interest exists among researchers within both the academic community and the public sector in modeling and measuring systemic risk. In this essay I draw on experiences with other measurement agendas to place in perspective the challenge of quantifying systemic risk, or more generally, of providing empirical constructs that can enhance our understanding of linkages between financial markets and the macroeconomy.
    JEL: E44
    Date: 2012–11
  42. By: Zhiguo He; Asaf Manela
    Abstract: We study information acquisition and withdrawal decisions when a liquidity event triggers a spreading rumor and exposes a solvent bank to a run. Uncertainty about the bank's liquidity and potential failure motivates agents who hear the rumor to acquire additional signals. Depositors with unfavorable signals may wait and thus gradually run on the bank, leading to an endogenous aggregate withdrawal speed. A bank run equilibrium exists when agents aggressively acquire information. We study threshold parameters (e.g. liquidity reserve and deposit insurance) that eliminate runs. Public provision of solvency information can eliminate runs by indirectly crowding-out individual depositors' effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs
    JEL: E61 G01 G21
    Date: 2012–11
  43. By: Ine Van Robays (European Central Bank)
    Abstract: This paper evaluates whether macroeconomic uncertainty changes the impact of oil shocks on the oil price. Using a structural threshold VAR model, we endogenously identify different regimes of uncertainty in which we estimate the effects of oil demand and supply shocks. The results show that higher macroeconomic uncertainty, as measured by higher world industrial production volatility, significantly increases the responsiveness of oil prices to oil shocks. This implies a lower price elasticity of oil demand and supply in the uncertain regime, or in other words, that both oil curves become steeper when uncertainty is high. The difference in oil demand elasticities is both statistically and economically meaningful. Accordingly, varying uncertainty about the macroeconomy can explain time variation in the oil price elasticity and hence in oil price volatility. Also the impact of oil shocks on economic activity appears to be significantly stronger in uncertain times. JEL Classification: E31, E32, Q41, Q43
    Keywords: Oil prices, uncertainty, price elasticity, threshold VAR, sign restrictions
    Date: 2012–10
  44. By: Erhan Artuç; John McLaren
    Abstract: A number of authors have argued that a worker's occupation of employment is at least as important as the worker's industry of employment in determining whether the worker will be hurt or helped by international trade. We investigate the role of occupational mobility on the effects of trade shocks on wage inequality in a dynamic, structural econometric model of worker adjustment. Each worker in our specification can switch either industry, occupation, or both, paying a time-varying cost to do so in a rational-expectations optimizing environment. We find that the costs of switching industry and occupation are both high, and of similar magnitude, but in simulations we find that a worker's industry of employment is much more important than either the worker's occupation or skill class in determining whether or not she is harmed by a trade shock.
    JEL: E24 F13 F16
    Date: 2012–11

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