nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒01‒07
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Great Moderation of Inflation: a structural analysis of recent U.S. monetary business cycles By Miguel Casares; Jesús Vázquez
  2. Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics By Ansgar Rannenberg
  3. Macroprudential Measures, Housing Markets, and Monetary Policy By Rubio, Margarita; Carrasco-Gallego, José A.
  4. Food Prices and Inflation Targeting in Emerging Economies. By Marc Pourroy; Benjamin Carton; Dramane Coulibaly
  5. Financial Frictions, Financial Shocks, and Aggregate Volatility By Fuentes-Albero, Cristina
  6. Optimal Monetary and Prudential Policies. By Collard, F.; Dellas, H.; Diba, B.; Loisel, O.
  7. Inflation and output in New Keynesian models with a transient interest rate peg By Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
  8. House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy By Gelain, Paolo; Lansing, Kevin J.; Mendicino, Caterina
  9. Uncertainty shocks in a model of effective demand By Susanto Basu; Brent Bundick
  10. Notes for a New Guide to Keynes (I): Wages, Aggregate Demand, and Employment By Jordi Galí
  11. Fiscal policy considerations in the design of monetary policy in Peru By Rossini, Renzo; Quispe, Zenón; Loyola, Jorge
  13. Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation By Flamini, Alessandro; Ascari, Guido; Rossi, Lorenza
  14. Monetary Policy and Herd Behavior: Leaning Against Bubbles. By Loisel, O.; Pommeret, A.; Portier, T.
  15. The Keynesian multiplier, news and fiscal policy rules in a DSGE model By Perendia, George; Tsoukis, Chris
  16. Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration By Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
  17. Drifting inflation targets and stagflation By Edward S. Knotek II; Shujaat Khan
  18. Labour Market Frictions, Monetary Policy and Durable Goods By Di Pace, Federico; Hertweck, Matthias S.
  19. Uncertain potential output: implications for monetary policy in small open economy By Traficante, Guido
  20. Financial stress and economic dynamics: the transmission of crises By Kirstin Hubrich; Robert J. Tetlow
  21. Rare shocks, great recessions By Vasco Cúrdia; Marco Del Negro; Daniel L. Greenwald
  22. Business Cycle Fluctuations and Private Savings in OECD Countries: A Panel Data Analysis By Yvonne Adema; Lorenzo Pozzi
  23. Financial system reforms and China’s monetary policy framework: A DSGE-based assessment of initiatives and proposals By Funke , Michael; Paetz , Michael
  24. The effect of commodity price shocks on underlying inflation: the role of central bank credibility By J. Scott Davis
  25. The business cycle implications of banks' maturity transformation By Martin M. Andreasen; Marcelo Ferman; Pawel Zabczyk
  26. The empirical implications of the interest-rate lower bound By Christopher Gust; David Lopez-Salido; Matthew E. Smith
  27. Selection and monetary non-neutrality in time-dependent pricing models By Carlos Carvalho; Felipe Schwartzman
  28. Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy By Jean-Sébastien Fontaine
  29. Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints By Taisuke Nakata
  30. Constructing a real-time coincident recession index: an application to the Peruvian economy By Mendoza, Liu; Morales, Daniel
  31. The emergence of profit and interest in the monetary circuit By Kakarot-Handtke, Egmont
  32. On the Welfare Effects of Credit Arrangements By Jonathan Chiu; Mei Dong; Enchuan Shao
  33. Labor-market polarization over the business cycle By Christopher L. Foote; Richard W. Ryan
  34. The Stability of the German Housing Market By Voigtländer, Michael
  35. Business cycle implications of internal consumption habit for new Keynesian models By Takashi Kano; James M. Nason
  36. Robustifying optimal monetary policy using simple rules as cross-checks By Pelin Ilbas; Øistein Røisland; Tommy Sveen
  37. Household Search and the Aggregate Labor Market By Mankart, Jochen; Oikonomou, Rigas
  38. The Bank of England as the World gold market-maker during the Classical gold standard era, 1889-1910 By Stefaano Ugolini
  39. A state-dependent model for inflation forecasting By Andrea Stella; James H. Stock
  40. Core import price inflation in the United States By Janet Koech; Mark A. Wynne
  41. Un modèle suédois pour la résolution de la crise de la dette souveraine en Europe By Dai, Meixing; MAZUY, Nicolas; RIOUX, Marie-Claude
  42. Engineering a paradox of thrift recession By Zhen Huo; Jose-Victor Rios-Rull
  43. Macro effects of capital requirements and macroprudential policy By Q. Farook Akram
  44. The Demand for Liquid Assets, Corporate Saving, and Global Imbalances By Bacchetta, Philippe; Benhima, Kenza
  45. Degreasing the wheels of finance By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  46. Cyclical Variation in Labor Hours and Productivity Using the ATUS By Burda, Michael C.; Hamermesh, Daniel S.; Stewart, Jay
  47. Does Trust Favor Macroeconomic Stability? By Marc Sangnier
  48. Product Market Frictions, Bargaining and Pass-Through By Mirko Abbritti
  49. Union bancaire européenne permet-elle de sauver l’euro ? By Dai, Meixing; SARFATI, Samuel
  50. The common error of common sense: an essential rectification of the accounting approach By Kakarot-Handtke, Egmont
  51. On some issues concerning definition of an economic recession By Jiří, Mazurek
  52. A Simple Interest Rate Model with Unobserved Components: The Role of the Interbank Reference Rate By Muto, Ichiro
  53. A multivariate analysis of savings, investment and growth in Nepal By Budha, Birendra
  54. Interrelación entre los mercados de derivados y el mercado de bonos soberanos del Perú y su impacto en las tasas de interés By Choy, Marylin; Cerna, Jorge
  55. The integrated macroeconomic accounts of the United States By Marco Cagetti; Elizabeth Ball Holmquist; Lisa Lynn; Susan Hume McIntosh; David Wasshausen
  56. Money creation and financial instability: An agent-based credit network approach By Lengnick, Matthias; Krug, Sebastian; Wohltmann, Hans-Werner
  57. Modélisation non-linéaire de l'impact des TIC sur la productivité du travail By Benjamin David
  58. Review Of Theories of Financial Crises By Assaf Razin; Itay Goldstein
  59. Wealth Effects Revisited 1975-2012 By Karl E. Case; John M. Quigley; Robert J. Shiller
  60. The Effects of Oil Price Uncertainty on the Macroeconomy By Soojin Jo
  61. Size-Dependent Regulations, Firm Size Distribution, and Reallocation By François Gourio; Nicolas A. Roys
  62. Wealth Effects and Consumption in Thailand By Phurichai Rungcharoenkitkul
  63. Full Employment and the Welfare State By Lindbeck, Assar
  64. Geometrical exposition of structural axiomatic economics (I): Fundamentals By Kakarot-Handtke, Egmont
  65. How to improve the economic and social performance of Eastern and Southern Mediterranean countries By Marek Dabrowski; Luc De Wulf
  66. The relationship between public education expenditure and economic growth: The case of India By Sayantan Ghosh Dastidar; Sushil Mohan; Monojit Chatterji
  67. The cyclicality of education, health, and social security government spending By António Afonso; João Tovar Jalles
  68. The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World By Roger E.A. Farmer; Carine Nourry; Alain Venditti
  69. Income distribution, profit, and real shares By Kakarot-Handtke, Egmont
  70. Optimal Factor Tax Incidence in Two-sector Human Capital-based Models By Been-Lon Chen; Chia-Hui Lu
  71. Russia’s Foreign Investments in 2011 By Ekaterina Iluykhina
  72. Russia’s Foreign Investments in 2010 By Ekaterina Iluykhina
  73. Measuring the Systemic Risk in Interfirm Transaction Networks By Hazama, Makoto; Uesugi, Iichiro
  74. The Growth of Low Skill Service Jobs and the Polarization of the U.S. Labor Market By Autor, David; Dorn, David
  75. The Surprisingly Swift Decline of U.S. Manufacturing Employment By Justin R. Pierce; Peter K. Schott
  76. Household Interaction and the Labor Supply of Married Women By Eckstein, Zvi; Lifshitz, Osnat
  77. The 1980s financial liberalization in the Nordic countries By Honkapohja, Seppo

  1. By: Miguel Casares (Departamento de Economía-UPNA); Jesús Vázquez (Departmento FAE II-UPV/EHU)
    Abstract: U.S. inflation has experienced a great moderation in the last two decades. This paper examines the factors behind this and other stylized facts, such as the weaker correlation ofinflation and nominal interest rate (Gibson paradox). Our findings point at lower exogenous variability of supply-side shocks and, to a lower extent, structural changes in money demand, monetary policy, and firms’ sticky pricing behavior as the main driving forces of the changes observed in recent U.S. business cycles.
    Keywords: DSGE monetary model, inflation moderation, structural changes.
    JEL: E32 E47
    Date: 2012
  2. By: Ansgar Rannenberg (Macroeconomic Policy Institute)
    Abstract: I add a moral hazard problem between banks and depositors as in Gertler and Karadi (2009) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke et al. (1999) (BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows my model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the "Great Recession". JEL Classification: E44, E43, E32
    Keywords: Leverage cycle, bank capital, financial accelerator, output effects of financial shock
    Date: 2012–10
  3. By: Rubio, Margarita; Carrasco-Gallego, José A.
    Abstract: The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies a¤ect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. Furthermore, when both policies are active, interest-rate shocks have weaker effects on the economy. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation.
    Keywords: macroprudential; monetary policy; collateral constraint; credit
    JEL: E32 E44 E58
    Date: 2012–12
  4. By: Marc Pourroy (Centre d'Economie de la Sorbonne); Benjamin Carton (CEPII); Dramane Coulibaly (EconomiX-CNRS - Université de Paris Ouest)
    Abstract: The two episodes of food price surges in 2007 and 2011 have been particularly challenging for developing and emerging economies' central banks and have raised the question of how monetary authorities should react to such external relative price shocks. We develop a new-keynesian small open-economy model and show that non-food inflation is a good proxy for core inflation in high-income countries, but not for middle-income and low-income countries. Although, in these countries we find that associating non-food inflation and core inflation may be promoting bably-designed policies, and consequently central banks should target headline inflation rather than non-food inflation. This result holds because non-tradable food represents a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food in consumption and the more detrimental lack of attention to the evolution in food prices.
    Keywords: Monetary policy, commodities, food prices, DSGE models.
    JEL: E32 E52 O23
    Date: 2012–12
  5. By: Fuentes-Albero, Cristina
    Abstract: I revisit the Great Inflation and the Great Moderation for nominal and real variables. I document that while financial price variables follow such a pattern; financial quantity variables experience a continuous immoderation. A model with financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better financial institutions. Financial shocks arise as relevant drivers of US business cycle fluctuations.
    Keywords: Great Inflation; Great Moderation; immoderation; financial frictions; financial shocks; structural breaks; Bayesian methods
    JEL: E32 E44 C11 C13
    Date: 2012–12
  6. By: Collard, F.; Dellas, H.; Diba, B.; Loisel, O.
    Abstract: The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability and has raised the question of whether and how to combine the corresponding main policy instruments (interest rate and bank-capital requirements). This paper offers a characterization of the jointly optimal setting of monetary and prudential policies and discusses its implications for the business cycle. The source of financial fragility is the socially excessive risk-taking by banks due to limited liability and deposit insurance. We characterize the conditions under which locally optimal (Ramsey) policy dedicates the prudential instrument to preventing inefficient risk-taking by banks; and the monetary instrument to dealing with the business cycle, with the two instruments co-varying negatively. Our analysis thus identifies circumstances that can validate the prevailing view among central bankers that standard interest-rate policy cannot serve as the first line of defense against financial instability. In addition, we also provide conditions under which the two instruments might optimally co-move positively and countercyclically.
    Keywords: Prudential policy – Capital requirements – Monetary policy – Ramsey-optimal policies.
    JEL: E32 E44 E52
    Date: 2012
  7. By: Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
    Abstract: Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve.
    Keywords: Time-series analysis ; Business cycles
    Date: 2012
  8. By: Gelain, Paolo; Lansing, Kevin J.; Mendicino, Caterina
    Abstract: Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.
    Keywords: asset pricing; excess volatility; credit cycles; housing bubbles; monetary policy; macroprudential policy
    JEL: E32 E44 G12 O40
    Date: 2012–12
  9. By: Susanto Basu; Brent Bundick
    Abstract: This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, the authors find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press.
    Keywords: Monetary policy ; Uncertainty ; Business cycles
    Date: 2012
  10. By: Jordi Galí
    Abstract: I revisit the General Theory's discussion of the role of wages in employment determination through the lens of the New Keynesian model. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage flexibility. I show that the latter is not always welfare improving.
    JEL: E24 E32 E58
    Date: 2012–12
  11. By: Rossini, Renzo (Central Reserve Bank of Peru); Quispe, Zenón (Central Reserve Bank of Peru); Loyola, Jorge (Central Reserve Bank of Peru)
    Abstract: We evaluate the financial and real linkages between fiscal and monetary policy in Peru, and show that during the recent export commodity price boom, public finances supported the implementation of monetary policy. In particular, the reduction of the net public debt has translated into a greater capability by the Central Bank to sterilize its FOREX interventions. Also, an active policy to enhance the development of the local capital markets, using the issuance of public bonds denominated in local currency as a benchmark, has created the incentive to de-dollarize banking credit. On the other hand, difficulty in fine-tuning public investment around the business cycle in recent years has led to periods of a fiscal stance that does not counteract the real business cycle. This raises the question of the possibility of adopting a structural rule for the public sector balance, based on structural fundamentals.
    Keywords: Central Bank Monetary Policy, Fiscal Policy, Macroeconomic Stabilization
    JEL: E52 E58 E63
    Date: 2012–11
  12. By: Lilia Cavallari (Università degli Studi di Roma Tre)
    Abstract: This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with firm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the well-known di¢ culties of business cycle models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results.
    Keywords: entry costs, firm entry, business cycle, investment costs.
    JEL: E31 E32 E52
    Date: 2012
  13. By: Flamini, Alessandro; Ascari, Guido; Rossi, Lorenza
    Abstract: Since the ’80s the volatility of output growth and inflation experienced by several industrialized countries has remarkably declined, what has been dubbed the “Great Moderation”. Various explanations have been proposed and likely all play some role. This paper shows that when an industrial transformation reduces the weight of the manufacturing sector relative to the services sector, the presence of sectoral heterogeneity in price stickiness leads to a significant decline in the volatility of inflation and output growth.
    Keywords: Great Moderation; sectoral asymmetries; price stickiness; new Keynesian model; persistence; volatility
    JEL: E31 E32 E37 E52
    Date: 2012–12
  14. By: Loisel, O.; Pommeret, A.; Portier, T.
    Abstract: We study the role of monetary policy when asset-price bubbles may form due to herd behavior in investment in an asset whose return is uncertain. To that aim, we build a simple general-equilibrium model whose agents are households, entrepreneurs, and a central bank. Entrepreneurs receive private signals about the productivity of the new technology and borrow from households to publicly invest in the old or the new technology. The three main results of the paper are that bubbles (informational cascades) can occur in this general equilibrium setting; that the central bank can detect them even though it has directly access to less information than the investors; and that the central bank can eliminate bubbles by manipulating the interest rate. Indeed, monetary policy, by affecting the investors' cost of resources, can make them invest in the new technology if and only if they receive an encouraging private signal about its productivity. In doing so, it makes their investment decision reveal their private signal, and therefore prevents herd behavior and the asset-price bubble. We also show that such a “leaning against the wind" monetary policy, contingent on the central bank's information set, may be preferable to laisser-faire, in terms of ex ante welfare.
    Keywords: Monetary Policy – Asset Prices – Informational Cascades – Bubbles.
    JEL: E52 E32
    Date: 2012
  15. By: Perendia, George; Tsoukis, Chris
    Abstract: We extend the standard Smets-Wouters (2007) medium-sized DSGE model in two directions, namely to analyse the effects of news and the Keynesian multiplier, and secondly to incorporate a fiscal policy rule. We show that both the news channel and the government spending fiscal policy rule significantly improve the model fit to data. News shows up significantly, but most of its contribution comes from the fiscal rule as opposed to consumption. We then calculate the fiscal multipliers which appear more Keynesian (with a higher effect on output and a positive effect on consumption, more persistent) than argued in much preceding literature.
    Keywords: DSGE model; news; fiscal policy; Taylor rule; Keynesian multiplier
    JEL: E12 E62 O23
    Date: 2012–12
  16. By: Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
    Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen’s inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models.
    Keywords: Business cycles
    Date: 2012
  17. By: Edward S. Knotek II; Shujaat Khan
    Abstract: The 1970s provided the United States its first experience with the phenomenon of stagflation—simultaneously high inflation and poor economic performance in terms of unemployment and GDP. Economists continue to debate the root causes of stagflation. The conventional view is that sharp increases in the price of oil during the decade were to blame: large increases in oil prices raise inflation, which saps purchasing power from consumers and businesses and thus hurts economic activity. But a number of economists also point to a role for monetary policy in generating stagflation, in particular through “go-stop” monetary policy: because inflation tends to move slowly, a period of accommodative monetary policy followed by a sharp tightening of policy can result in stagflation, as output turns down quickly but inflation remains high from the “go” phase. ; This paper examines the ability of monetary policy to generate stagflation. Using a relatively standard macroeconomic model, it shows that stagflation arises regularly in cases where the monetary authority allows its inflation target to move around. If households and firms face great uncertainty about the monetary authority’s inflation target, this scenario is also conducive to the emergence of stagflation—even if the inflation target actually remains unchanged. Thus, the paper finds that limiting monetary policy uncertainty and drift in the inflation target during normal times through clearly communicated, credible, and fixed inflation targets would essentially eliminate the possibility of stagflation from monetary factors.
    Date: 2012
  18. By: Di Pace, Federico; Hertweck, Matthias S.
    Abstract: The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our benchmark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the extensive margin.
    Keywords: durable production; labour market frictions; sectoral comovement; monetary policy
    JEL: E21 E23 E31 E52
    Date: 2012–12
  19. By: Traficante, Guido
    Abstract: A huge literature analyzes the performance of simple rules in closed-economy models when the policy-maker observes only a noisy measure of the state of the economy. This paper extends the analysis to a small-open economy new keynesian model. Passing from a closed-economy model to an open-economy one, there is another simple policy rule available to the central bank, namely the exchange rate peg. Hence, evaluating the performance of simple rules allows us to assess if the choice of the exchange rate regime depends on the uncertainty about the true state of the economy. Evaluating the conduct of monetary policy in terms of a Taylor rule, this paper shows that not reacting to the exchange rate yields better outcomes in terms of a standard loss function and quantifies for which parameter configuration in terms of the reaction to the exchange rate and the domestic inflation rate, the fixed exchange rate regime is to be preferred. The analysis is done both with complete and with incomplete information.
    Keywords: small open economy; exchange rate regime; monetary policy rules; uncertainty
    JEL: E52 F31
    Date: 2012–12
  20. By: Kirstin Hubrich; Robert J. Tetlow
    Abstract: The recent financial crisis and the associated decline in economic activity have raised some important questions about economic activity and its links to the financial sector. This paper introduces an index of financial stress--an index that was used in real time by the staff of the Federal Reserve Board to monitor the crisis--and shows how stress interacts with real activity, inflation and monetary policy. We define what we call a stress event--a period affected by stress in both shock variances and model coefficients--and describe how financial stress affects macroeconomic dynamics. We also examine what constitutes a useful and credible measure of stress and the role of monetary policy. We address these questions using a richly parameterized Markov-switching VAR model, estimated using Bayesian methods. Our results show that allowing for time variation is important: the constant-parameter, constant-shock-variance model is a poor characterization of the data. We find that periods of high stress coefficients in general, and stress events in particular, line up well with financial events in recent U.S. history. We find that a shift to a stress event is highly detrimental to the outlook for the real economy, and that conventional monetary policy is relatively weak during such periods. Finally, we argue that our findings have implications for DSGE modeling of financial events insofar as researchers wish to capture phenomena more consequential than garden-variety business cycle fluctuations, pointing away from linearized DSGE models toward either MS-DSGE models or fully nonlinear models solved with global methods.
    Date: 2012
  21. By: Vasco Cúrdia; Marco Del Negro; Daniel L. Greenwald
    Abstract: We estimate a DSGE model where rare large shocks can occur, but replace the commonly used Gaussian assumption with a Student´s t-distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student´s t specification is strongly favored by the data, even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession from the sample. We also show that inference about low-frequency changes in volatility—and, in particular, inference about the magnitude of the Great Moderation—is different once we allow for fat tails.
    Keywords: Equilibrium (Economics) ; Stochastic analysis ; Recessions ; Business cycles
    Date: 2012
  22. By: Yvonne Adema (Erasmus University Rotterdam); Lorenzo Pozzi (Erasmus University Rotterdam)
    Abstract: We investigate the cyclicality of the private savings to GDP ratio for a panel of 19 OECD countries over the period 1971-2009. We find robust evidence that the private savings ratio is countercyclical. Three theories unambiguously predict a higher private savings ratio during recessions: a Ricardian offset effect, the presence of credit constraints, and precautionary savings. We find evidence only for the latter theory. Our estimations take into account a large number of econometric complications: persistence in the savings ratio, endogeneity of the regressors, cross-country parameter heterogeneity, cross-sectional dependence, stationarity issues, omitted variables, and instrument strength.
    Keywords: Private Savings; Business Cycles; Ricardian offset; Credit Constraints; Precautionary Savings; Dynamic Panel; Cross-Sectional Dependence
    JEL: C23 E21 E32
    Date: 2012–12–17
  23. By: Funke , Michael (BOFIT); Paetz , Michael (BOFIT)
    Abstract: This paper evaluates various financial system reform initiatives and proposals in China in a DSGE modelling setting. The key reform steps analysed include phasing out benchmark interest rates, deepening the direct finance market, reducing government’s quantity-based intervention on financial institutions. Our counterfactual model simulation results suggest that the reforms will be beneficial only, if Chinese monetary policy continues to rely on quantity-based interventions on financial institutions or tightens the interest rate rule.
    Keywords: DSGE model; financial sector reform; monetary policy; China
    JEL: E42 E52 E58
    Date: 2012–12–11
  24. By: J. Scott Davis
    Abstract: This paper seeks to document and explain the effect of a commodity price shock on underlying core inflation, and how that effect changes both across time and across countries. Impulse responses derived from a structural VAR model show that across many countries there was a break in the response of core inflation to a commodity price shock. In an earlier period, a shock to commodity prices would lead to a large and significant increase in core inflation, but in later periods, the effect was insignificant. ; To explain this, we construct a large-scale DSGE model with both headline and core inflation, and most significantly, a mechanism whereby fluctuations in inflation caused by purely transitory shocks can become incorporated into long-term inflation expectations. Inflation has a trend and a cyclical component. Private agents cannot distinguish between the two, so a cyclical fluctuation in inflation may be confused for a shift in the trend component. Bayesian estimation reveals that there was a change between the earlier and the later periods in the parameter that governs the anchoring of expectations. Impulse responses derived from simulations of the model show that this change in the effect of commodity prices on core inflation is driven by the change in the anchoring of inflation expectations.
    Keywords: Price levels
    Date: 2012
  25. By: Martin M. Andreasen (Aarhus University); Marcelo Ferman (LSE - London School of Economics and Political Science); Pawel Zabczyk (Bank of England)
    Abstract: This paper develops a DSGE model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. Within an RBC framework, we show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US. JEL Classification: E32, E44, E22, G21
    Keywords: Banks, DSGE model, Financial frictions, Long-term credit, Maturity transformation
    Date: 2012–11
  26. By: Christopher Gust; David Lopez-Salido; Matthew E. Smith
    Abstract: Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009-2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model generates lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration.
    Date: 2012
  27. By: Carlos Carvalho; Felipe Schwartzman
    Abstract: Given the frequency of price changes, the real effects of a monetary shock are smaller if adjusting firms are disproportionately likely to be ones with prices set before the shock. This selection effect is important in a large class of sticky-price models with time-dependent price adjustment. We characterize conditions on the distribution of the duration of price spells associated with the real effects of monetary shocks, and provide a very general analytical characterization of the real effects of such shocks. We find that: 1) Selection is stronger and real effects are smaller if the hazard function of price adjustment is more strongly increasing; 2) Selection is weaker and real effects are larger if there is sectoral heterogeneity in price stickiness; 3) Selection is stronger and real effects are smaller if the durations of price spells are less variable. We also show that 4) If monetary shocks affect primarily the level of nominal aggregate demand, the mean and variance of price durations are sufficient statistics for the real effects of such shocks.
    Keywords: Monetary policy ; Inflation (Finance)
    Date: 2012
  28. By: Jean-Sébastien Fontaine
    Abstract: Most central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions and they do not distinguish between dates with and without scheduled announcements. This assumption is not innocuous when estimating the policy rule based on daily frequency. For the 1994-2011 period, and using an otherwise standard term structure model, I find that accounting for discrete changes leads to economically different estimates. Only the model based on discrete changes depicts a picture that is consistent with existing evidence on the monetary policy rule and risk premium. I study the information content of key policy announcements in the period from the end of 2008, where the policy rate reached a lower bound in the US, until the end of 2011.
    Keywords: Asset Pricing; Financial markets; Interest rates
    JEL: E43 E44 E47 G12 G13
    Date: 2012
  29. By: Taisuke Nakata (New York University)
    Abstract: During the Great Recession, the government provided large fiscal stimulus in an economic environment characterized by a high degree of uncertainty on the future course of the economy while the nominal interest rate was constrained at the zero lower bound. While many papers have analyzed the effects of fiscal policy at the zero lower bound, they all do so in a deterministic environment. This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic environment. In the presence of uncertainty, the government chooses to increase its spending when at the zero lower bound by a substantially larger amount than it would in the deterministic environment. The welfare effect of fiscal policy is nuanced in the stochastic environment if the government cannot commit. Although the access to government spending policy increases welfare in the face of a large deflationary shock, it can decrease welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound.
    Date: 2012
  30. By: Mendoza, Liu (Universidad Peruana de Ciencias Aplicadas); Morales, Daniel (Rimac Seguros)
    Abstract: In everyday macroeconomic analysis, businessmen and policymakers monitor many variables in order to assess the current situation of a country’s business cycle. However, making this assessment is extremely difficult, especially on the verge of recessions: does a drop in one or more of these series reveal the beginning of a recession? Or is it a signal of a temporal deceleration? To answer these questions we have constructed a monthly probabilistic coincident index to detect how close we are of a recession in the Peruvian economy using a non-linear Markov-switching model. In the construction of this index, we have explored the informational content of tendency surveys and international economic variables. We find that the index detected with promptness and reliability the recent recession period associated with the international financial crisis even in real-time analysis. However, since it has been developed with information comprising eight years due to limited data availability, its future recession detection capability has yet to endure the test of time.
    Keywords: business cycles, Markov-switching models, recession index, business tendency surveys
    JEL: C32 E32 E44
    Date: 2012–11
  31. By: Kakarot-Handtke, Egmont
    Abstract: Efficient progress of the monetary theory of production (MTP) is hampered by an unsatisfactory account of how profit and interest emerge in the monetary circuit. As matter of fact, this question puzzled already the classics. It seems evident that it cannot be answered by applying the usual tools. The present paper’s purpose is to overcome the deadlock. This is done by setting the circulation approach on general structural axiomatic foundations.
    Keywords: new framework of concepts; structure-centric; axiom set; monetary circuit; quantity of money; transaction money; profit; distributed profit; rate of interest; profit ratio equalization; profit and interest puzzle
    JEL: E19 B59 E40 B41
    Date: 2012–02–11
  32. By: Jonathan Chiu; Mei Dong; Enchuan Shao
    Abstract: This paper studies the welfare effects of different credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, a deviation from the Friedman rule is always sub-optimal. Moreover, credit arrangements can be welfare-reducing, because increased consumption by credit users will drive up the price level so that money users have to reduce consumption when facing a binding liquidity restraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Price discrimination under the optimal mechanism helps internalize the price effects. First, small deviations from the Friedman rule are no longer welfare-reducing. Second, increasing the access to credit becomes welfare-improving. Finally, the model is extended to study the welfare effects of credit systems when credit serves as means of payment, and endogenous credit constraint.
    Keywords: Credit and credit aggregates; Payment; clearing; and settlement systems
    JEL: E40 E50
    Date: 2012
  33. By: Christopher L. Foote; Richard W. Ryan
    Abstract: During the last few decades, labor markets in advanced economies have become “polarized” as relative labor demand grows for high- and low-skill workers while it declines for middle-skill workers. This paper explores how polarization has interacted with the U.S. business cycle since the late 1970s. Consistent with previous work, the authors find that recessions are strongly synchronized across workers with different skills. Even high-skill workers favored by polarization suffer during recessions; this is particularly true during the last two downturns. Additionally, there is no evidence that polarization is driving the recent drop in the job-finding rate that has caused an adverse shift in the Beveridge curve. With this synchronization in mind, the authors then investigate the labor-market transitions of unemployed workers during recessions. When job-finding rates fall in recessions, middle-skill workers appear no more apt to leave the labor force or take low- or high-skill jobs than they are during booms. All in all, the results imply that current distress in the U.S. labor market extends far beyond middle-skill workers, and that recessions in general do not induce reallocation of middle-skill workers to jobs with better long-term outlooks.
    Keywords: Labor market ; Unemployment ; Business cycles
    Date: 2012
  34. By: Voigtländer, Michael
    Abstract: The last decade has been marked by cycles of excessive boom and bust in the housing market. However, not all countries have experienced high volatility in their house prices. Indeed, Germany has been unique in retaining flat price levels over the whole period and failing to respond to any of the macroeconomic shocks. The main reason for this stability can be found in real estate finance and in the existence of a sophisticated rental market. While in other countries monetary stimuli are effectively transmitted to the real economy via the housing market, the German insistence on prudential lending isolates the housing market from financial market distortions. By demanding high deposits, aligning lending to the mortgage lending value instead of the market value and by offering predominantly fixed-rate mortgages, banks reduce the risk of defaults and thus contribute to stability in the market. This system has evolved as a result not of regulations but of a sophisticated rental market which enables households to save their own funds for house purchases. This, in turn, explains the preference for fixed-rate mortgages.
    Keywords: German housing market; housing finance; transmission of monetary policy; rental market
    JEL: E2 R20 E44
    Date: 2012–12–01
  35. By: Takashi Kano; James M. Nason
    Abstract: We study the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that internal consumption habit often improves the ability of NKDSGE models to match the spectra of output and consumption growth. Nonetheless, the fit of NKDSGE models with internal consumption habit is susceptible to the sources of nominal rigidity, to spectra identified by permanent productivity shocks, to the choice of monetary policy rule, and to the frequencies used for evaluation. These vulnerabilities indicate that the specification of NKDSGE models is fragile.
    Keywords: Consumption (Economics) ; Keynesian economics
    Date: 2012
  36. By: Pelin Ilbas (National Bank of Belgium); Øistein Røisland (Norges Bank (Central Bank of Norway)); Tommy Sveen (BI Norwegian Business School)
    Abstract: There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that by placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.
    Keywords: Model uncertainty, optimal control, simple rules
    JEL: E52 E58
    Date: 2012–12–18
  37. By: Mankart, Jochen; Oikonomou, Rigas
    Abstract: Sharing risks is one of the essential economic roles of families. The importance of this role increases in the amount of uncertainty that households face in the labor market and in the degree of incompleteness of financial markets. We develop a theory of joint household search in frictional labor markets under incomplete financial markets. Households can insure themselves by savings and by timing their labor market participation. We show that this theory can match one aspect of the US data that conventional search models, which do not incorporate joint household search, cannot match. In the data, aggregate employment is pro-cyclical and unemployment counter-cyclical, but their sum, the labor force, is acyclical. In our model, and in the US data, when a family member loses his job in a recession, the other family member joins the labor force to provide insurance.
    Keywords: Heterogeneous Agents, Family Self Insurance, Labor Market Search, Aggregate Fluctuations
    JEL: E24 E25 E32 J10 J64
    Date: 2012–12
  38. By: Stefaano Ugolini (Sciences Po Toulouse and LEREPS – University of Toulouse 1 Capitole.)
    Abstract: This paper studies the microfoundations of the so-called “gold device” policy by analysing a new dataset on the Bank of England’s operations in the gold market at the heyday of the classical gold standard. It explains that “gold devices” must be understood in connection to the Bank’s role as gold market-maker in London and to the position of London as world gold market. Contrary to the literature, the paper shows that “gold devices” were sophisticated monetary policy tools intended to complement – not to substitute – interest rate policy and aimed at smoothing – not at hampering – international adjustment. These findings demonstrate the potential of adopting a microstructural approach to the study of monetary policy, and call for a reassessment of efficiency measurement for the gold standard.
    Keywords: Monetary policy, Gold standard, Gold market, Market
    JEL: E58 G24 L11 L14 N23
    Date: 2012–12–10
  39. By: Andrea Stella; James H. Stock
    Abstract: We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the NAIRU has increased.
    Date: 2012
  40. By: Janet Koech; Mark A. Wynne
    Abstract: The cross-section distribution of U.S. import prices exhibits some of the fat-tailed characteristics that are well documented for the cross-section distribution of U.S. consumer prices. This suggests that limited-influence estimators of core import price inflation might outperform headline or traditional measures of core import price inflation. We examine whether limited influence estimators of core import price inflation help forecast overall import price inflation. They do not. However, limited influence estimators of core import price inflation do seem to have some predictive power for headline consumer price inflation in the medium term.
    Keywords: Price levels ; Forecasting
    Date: 2012
  41. By: Dai, Meixing; MAZUY, Nicolas; RIOUX, Marie-Claude
    Abstract: Une double crise bancaire et souveraine dans plusieurs pays de la zone euro appelle à chercher des solutions innovantes et à revisiter des solutions ayant déjà fait preuve. L’expérience suédoise de la résolution d’une crise immobilière et bancaire dans les années 1990, qui a engendré un quasi doublement de la dette publique, s’inscrit dans la deuxième catégorie et peut se révéler fort instructive pour inspirer les décideurs politiques à trouver leurs propres solutions pour les crises actuelles au sein de la zone euro.
    Keywords: Crise de la zone euro; crise bancaire; crise de la dette souveraine; cadre budgétaire; déficit budgétaire
    JEL: E62 E02 E65 H63 F36 H61
    Date: 2012–12–21
  42. By: Zhen Huo; Jose-Victor Rios-Rull
    Abstract: We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe.
    Keywords: Recessions
    Date: 2012
  43. By: Q. Farook Akram (Norges Bank (Central Bank of Norway))
    Abstract: I investigate macro effects of higher bank capital requirements on the Norwegian economy and their use as a macroprudential policy instrument under Basel III. To this end, I develop a macroeconometric model where the capital adequacy ratio, lending rates, asset prices and credit interact with each other and with the real economy. The empirical results suggest that changes in capital requirements are primarily transmitted via lending rates to the other variables in the model. The proposed increases in capital requirements under Basel III are found to have significant effects especially on house prices and credit. I also derive optimal paths for the countercyclical capital buffer in response to various shocks. The buffer is found to equal its imposed ceiling of 2.5% in response to most of the shocks considered while its duration varies in the range of 1-12 quarters depending on the shock and its persistence.
    Keywords: Basel III, Capital requirements, Macroprudential policy
    JEL: C52 C53 E52 G38
    Date: 2012–12–20
  44. By: Bacchetta, Philippe; Benhima, Kenza
    Abstract: In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries.
    Keywords: Capital flows; Credit constraints; Global imbalances
    JEL: E22 F21 F41 F43
    Date: 2012–12
  45. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: Can there be too much trading in financial markets? To address this question, we construct a dynamic general equilibrium model, where agents face idiosyncratic preference and technology shocks. A financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The opportunity to do so reduces the demand for the liquid asset and, hence, its value. The optimal policy response is to restrict (but not eliminate) access to the financial market. The reason for this result is that the portfolio choice exhibits a pecuniary externality: An agent does not take into account that by holding more of the liquid asset, he not only acquires additional insurance but also marginally increases the value of the liquid asset which improves insurance for other market participants.
    Keywords: Monetary policy, liquidity, financial markets
    JEL: E52 E58 E59
    Date: 2012–12
  46. By: Burda, Michael C. (Humboldt University Berlin); Hamermesh, Daniel S. (University of Texas at Austin); Stewart, Jay (U.S. Bureau of Labor Statistics)
    Abstract: We examine monthly variation in weekly work hours using data for 2003-10 from the Current Population Survey (CPS) on hours/worker, from the Current Employment Survey (CES) on hours/job, and from the American Time Use Survey (ATUS) on both. The ATUS data minimize recall difficulties and constrain hours of work to accord with total available time. The ATUS hours/worker are less cyclical than the CPS series, but the hours/job are more cyclical than the CES series. We present alternative estimates of productivity based on ATUS data and find that it is more pro-cyclical than other productivity measures.
    Keywords: time use, macroeconomic fluctuations, work hours
    JEL: E23 J22
    Date: 2012–12
  47. By: Marc Sangnier (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: This paper investigates the relationship between trust and macroeconomic volatility. An illustrative model rationalizes the relationship between trust and volatility. In this model, trust relaxes credit constraints and diminishes investment's procyclicality. I provide empirical evidence for the basic predictions of the model. Then, I show that higher trust is associated with lower macroeconomic volatility in a cross section of countries. This relationship persists when various covariates are taken into account. I use inherited trust of Americans as an instrumental variable for trust in their origin country to overcome reverse causality concerns. Using changes in inherited trust over the 20th century, I do not find clear evidence that increasing trust is also associated with decreasing volatility across time at the country level.
    Keywords: Trust, volatility, macroeconomic stability, social capital.
    JEL: E02 E30 N10
    Date: 2012–10
  48. By: Mirko Abbritti (School of Economics and Business Administration, University of Navarra)
    Abstract: Empirical evidence shows that the pass-through of cost shocks to prices is very low, and delayed. This is in stark contrast with the standard framework of monopolistic competition used in macro models, which, absent nominal rigidities, implies complete pass-through of cost shocks to prices. This paper develops a model of pricing dynamics in business to business relationships where incomplete pass-through arises endogenously. The model is based on two assumptions. First, both retailers and wholesalers invest resources to form new, long-term, business relationships. Second, once a business relationship is formed, the prices and the quantities of the intermediate good exchanged are set in a bilateral bargaining between wholesalers and retailers. The repeated nature of the interactions between firms raises the question of whether wholesale prices are allocative. We show that wholesale prices still play an allocative role in the model, but this role is likely to be quite limited.
    Keywords: price dynamics, product market frictions, price bargain, customer relations, real rigidities, incomplete pass-through
    JEL: E10 E30
    Date: 2012–11–14
  49. By: Dai, Meixing; SARFATI, Samuel
    Abstract: L’épineux problème d’interaction négative entre crise de la dette souveraine et crise bancaire au niveau national empêche une transmission efficace des effets de la politique monétaire unique et menace l’existence même de la zone euro. En réponse à la crise de l’euro et après avoir essayé des mesures de rigueur budgétaire et de stabilisation financière, les dirigeants européens, ont décidé de créer une union bancaire. Les caractéristiques de cette nouvelle union ne sont pas encore clairement définies et sa construction pourrait être semée d’embuches.
    Keywords: Union bancaire européenne; crise de la zone euro; crise bancaire; crise de la dette souveraine
    JEL: E02 E58 G28 F36 G21
    Date: 2012–12–21
  50. By: Kakarot-Handtke, Egmont
    Abstract: The present paper takes the explanatory superiority of the integrated monetary approach for granted. It will be demonstrated that the accounting approach could do even better provided it frees itself from theoretically ill-founded notions like GDP and other artifacts of the equilibrium approach. National accounting as such does not provide a model of the economy but is the numerical reflex of the underlying theory. It is this theory that will be scrutinized, rectified and ultimately replaced in the following. The formal point of reference is ‘the integrated approach to credit, money, income, production and wealth’ of Godley and Lavoie.
    Keywords: new framework of concepts; structure-centric; axiom set; primacy of theory; income; profit; distributed profit; money; flow; residual; transaction matrix; general complementarity
    JEL: E01 B41
    Date: 2012–08–20
  51. By: Jiří, Mazurek
    Abstract: In the article it is shown that current definitions of economic recessions are unsatisfactory. NBER definition of an economic recession is only qualitative, so it does not enable identifying recession unequivocally. Another often used ‘technical definition’ of a recession takes into account only quarter-to-quarter changes in real GDP without considering changes in population, so in some cases economy can be in recession while real GDP per capita is actually increasing, and vice versa. Hence, the aim of the article is to propose new quantitative definition of an economic recession based both on economic and population growth or decline respectively. The use of the proposed definition is illustrated on examples of recent economic development in selected countries of the European Union.
    Keywords: definition of a recession; European Union; population growth; recession
    JEL: E32 O52 B41
    Date: 2012–12–22
  52. By: Muto, Ichiro
    Abstract: In this study, we theoretically investigate the potential role of the reference rate in stabilizing or destabilizing an interbank market with an environment where individual banks cannot fully identify the nature of underlying shocks affecting their interbank transactions. We show that a noise-free reference rate based on a sufficient number of sample transactions can help to make the market interest rate less volatile, whereas the stabilizing effects of the reference rate are significantly reduced if the reported interest rates contain some noisy components. Nevertheless, by increasing the number of sample transactions reflected in the reference rate, the adverse effects of the noise can be mitigated (or eliminated) provided the noise is idiosyncratic to individual transactions. However, if the noise is common to multiple transactions, then the adverse effects of the noisy reference rate cannot be reduced simply by increasing the number of sample transactions. This suggests that the noise in the interest rates reported by just a few of large banks can end up making the entire market more volatile, thereby impairing the transmission mechanism of monetary policy.
    Keywords: Interbank Market; Reference Rate; LIBOR; Imperfect Information; Financial Stability; Transmission Mechanism of Monetary Policy
    JEL: E43 G14 E44
    Date: 2012–12–11
  53. By: Budha, Birendra
    Abstract: This paper examines the relationship between the gross domestic savings, investment and growth for Nepal using annual time series data for the period of 1974/75 to 2009/10. The study employs the Autoregressive Distributed Lag (ARDL) approach to test for cointegration and Error correction based Granger causality analysis for exploring the causality between the variables. Empirical results show that there exist cointegration between gross domestic savings, investment and gross domestic product when each of these is taken as dependent variable. Granger causality analysis shows that there exists short-run bidirectional causality between investment and gross domestic product as well as between gross domestic savings and investment. Nevertheless, no short-run causality is found between gross domestic savings and gross domestic product. Thus, the policy of accelerating growth by promoting investment works to some extant only since the long-run investment multiplier is below one.
    Keywords: gross domestic savings; gross fixed capital formation; gross domestic product
    JEL: E2
    Date: 2012–12
  54. By: Choy, Marylin (Banco Central de Reserva del Perú); Cerna, Jorge (Banco Central de Reserva del Perú)
    Abstract: Una de las consecuencias de las políticas monetarias expansivas aplicadas en los países desarrollados es el crecimiento de los mercados financieros en países emergentes como el Perú. No solo se observa una evolución de los mercados domésticos, sino que su integración a los mercados internacionales es cada vez mayor. Por ello es importante analizar la interrelación entre los mercados financieros y sus implicancias en la formación de precios de los activos locales. Especial atención merece el mercado de derivados de monedas por ser el que mayor impacto puede tener en los otros mercados locales, ante condiciones de arbitraje. Este documento tiene como objetivo evaluar el funcionamiento de los mercados monetarios y de derivados peruanos y su implicancia en los rendimientos de los bonos soberanos y en las tasas de interés domésticas en general.
    Keywords: Derivados, monedas, bonos, arbitraje, política monetaria
    JEL: E43 E44 E52 F31 G12 G13
    Date: 2012–11
  55. By: Marco Cagetti; Elizabeth Ball Holmquist; Lisa Lynn; Susan Hume McIntosh; David Wasshausen
    Abstract: The integrated macroeconomic accounts (IMAs), produced jointly by the Bureau of Economic Analysis (BEA) and the Federal Reserve Board (FRB), present a sequence of accounts that relate income, saving, investment in real and financial assets, and asset revaluations to changes in net worth. In this paper we first provide some background information on the IMAs and on their construction. Next, we discuss the usefulness of the IMAs, focusing for instance on the evolution of household net worth and its components, a set of series that has appeared frequently in discussions of the causes and effects of the recent financial crisis. We also discuss some of the challenges associated with integrating nonfinancial and financial data sources, that is, the current and capital accounts statistics from BEA's national income and product accounts (NIPAs) and the financial account statistics from FRB's flow of funds accounts (FFAs). In the final section, we discuss future plans for improving the IMAs, including a proposed framework and methodology for breaking out the financial business sector into three subsectors: 1) Central bank, 2) Insurance and pension funds, and 3) Other financial business.
    Date: 2012
  56. By: Lengnick, Matthias; Krug, Sebastian; Wohltmann, Hans-Werner
    Abstract: The authors pick up the standard textbook approach of money creation and develop a simple agent-based alternative. They show that their model is well suited to explain the endogenous creation of money. Although more general, their model still contains the standard results as a limiting case. The authors also uncover a potential instability that is hidden in the standard approach but easily recognized within a strict individual-based and stock-flow consistent version. They show in detail how individual interactions build up systemic risk and how banking crises are triggered by the maturity mismatch of different cash-flows and spread by the depreciation of non-performing loans (e.g. interbank or government debt). --
    Keywords: financial instability,endogenous money,agent-based macroeconomics,stock-flow consistency,disequilibrium analysis
    JEL: E42 E51 C63 G01
    Date: 2012
  57. By: Benjamin David
    Abstract: This paper focuses on dynamic of diffusion of Information and Communications Technology (ICT) and their impact on labor productivity. Our contribution lies in taking into account the non-linearity of this relationship arguing successively integration time and a time when new productivity gains appear. The existence of this particular sequence is modeled using a Logistic Smooth Transition model (LSTR) which permits to verify the delayed effect assumed for nine of the twelve countries studied. Different values of the adjustment periods across them are related to the structural characteristics of economies considered.
    Keywords: ICT, Solow Paradox, Labor productivity, Delayed effect, LSTR model
    JEL: E22 J24 O33 O57
    Date: 2012
  58. By: Assaf Razin (Tel Aviv University); Itay Goldstein (University of Pennsylvania)
    Abstract: The last few years have been characterized by great turmoil in the world’s financial markets; starting from the collapse of housing prices in the US, followed by the meltdown of leading financial institutions in the US and Europe, and then the ongoing challenge to the European monetary union. These events exhibit ingredients from all types of financial crises in recent history: banking crises, currency crises, credit frictions, market freezes, and the bursting of asset bubbles. In this survey, we provide a review of the analytical underpinnings of these types of crises and the directions in which they influenced future literature and the way they explain recent events.
    Date: 2012
  59. By: Karl E. Case (Wellesley College); John M. Quigley; Robert J. Shiller (Cowles Foundation, Yale University)
    Abstract: We re-examine the links between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption. In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending. The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.
    JEL: E02 G1 R31
    Date: 2012–12
  60. By: Soojin Jo
    Abstract: This paper investigates the effect of oil price uncertainty on real economic activity using a quarterly VAR with stochastic volatility in mean. Stochastic volatility allows oil price uncertainty to vary separately from changes in the level of oil prices, and thus the impact of oil price uncertainty can be examined in a more flexible yet tractable way. In addition, this paper substantially improves on the recovery of a historical uncertainty series by incorporating an additional uncertainty indicator, i.e., a realized volatility series from daily oil price data, into the estimation process. The estimation results show that an oil price uncertainty shock alone has negative effects on world industrial production.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: E32 C32 Q43
    Date: 2012
  61. By: François Gourio; Nicolas A. Roys
    Abstract: In France, firms with 50 employees or more face substantially more regulation than firms with less than 50. As a result, the size distribution of firms is visibly distorted: there are many firms with exactly 49 employees. We model the regulation as a sunk cost that must be paid the first time the firm reaches 50 employees, and we estimate the model using indirect inference by fitting these salient features of the size distribution. The key finding is that the legislation acts like a sunk cost equivalent to approximately one year of an average employee salary. Removing the regulation improves labor allocation across firms, leading to a productivity gain of around 0.3%, holding the number of firms fixed. However, if firm entry is elastic, the steady-state gains are significantly smaller.
    JEL: E23 L11 L25 O1
    Date: 2012–12
  62. By: Phurichai Rungcharoenkitkul (Bank of Thailand)
    Abstract: The effects of changes in wealth on consumption in Thailand are estimated, using a cross-sectional household survey conducted in 2010. It is found that consumption, after conditioning for income and household characteristics, is increasing in wealth, whether measured in terms of net worth or gross asset values. The estimated elasticity of consumption with respect to wealth is 0.06, while the estimated income elasticity is 0.60. The corresponding marginal propensity to consume out of wealth is estimated to be around 0.02-0.03. Physical assets, such as housing, matter for consumption more than financial assets, with the elasticity being about five-fold larger. Durable goods consumption is found to be much more sensitive to wealth than consumption of non-durable goods. The paper also discusses evidence that wealth eects may vary across households, and can be explained by the levels of existing wealth and certain household characteristics.
    Keywords: consumption, wealth effects
    JEL: E21 C21 D91
    Date: 2011–03–10
  63. By: Lindbeck, Assar (Research Institute of Industrial Economics (IFN))
    Abstract: What were the asserted complementarities between the welfare state and full-employment policies, and why do these complementarities look less convincing today?
    JEL: E24 J20 J21
    Date: 2012–12–28
  64. By: Kakarot-Handtke, Egmont
    Abstract: Behavioral assumptions are not solid enough to be eligible as first principles of theoretical economics. Hence all endeavors to lay the formal foundation on a new site and at a deeper level actually need no further vindication. Part (I) of the structural axiomatic analysis submits three nonbehavioral axioms as groundwork and applies them to the simplest possible case of the pure consumption economy. The geometrical analysis makes the interrelations between income, profit and employment under the conditions of market clearing and budget balancing immediately evident. Part (II) applies the differentiated axiom set to the analysis of qualitative and temporal aggregation.
    Keywords: new framework of concepts; structure-centric; axiom set; supersymmetry; general equilibrium; dimensionless variables; income; profit; distributed profit; retained profit; full employment; money; credit; Say’s Law
    JEL: E00 D00
    Date: 2012–05–15
  65. By: Marek Dabrowski; Luc De Wulf
    Abstract: In this brief the authors analyze the key challenges facing the MED11 countries and propose policy measures that could improve the region’s economic and social performance.
    Keywords: Macroeconomics and macroeconomic policy, Trade, economic integration and globalization, Middle East and North Africa
    Date: 2012–11
  66. By: Sayantan Ghosh Dastidar; Sushil Mohan; Monojit Chatterji
    Abstract: The paper reviews the theoretical and the empirical case for public investment in education in India. Though the theoretical literature provides a backing for such a policy, the empirical literature fails to find a robust relation between education expenditure and growth. Expenditure on education is a necessary but not a sufficient condition for growth. It seems that the effectiveness of education expenditure depends on the institutional and labour market characteristics of the economy. The effectiveness of education investments also depends on other factors such as trade openness. Due to these aforesaid factors, we argue that the empirical relation between education expenditure and growth for India has been inconsistent.
    Keywords: Public education expenditure, economic growth, trade openness, India
    JEL: E60 E62 H52 I25
    Date: 2012–12
  67. By: António Afonso; João Tovar Jalles
    Abstract: We use a panel of developed and emerging countries for the period 1970-2008 to assess the cyclicality of education, health, and social security government spending. We mostly find acyclical behaviour, but evidence also points to counter-cyclicality for social security spending, particularly in OECD countries, consistent with the operation of automatic stabilizers. JEL Classification: C23, E62, H50.
    Keywords: business cycle, output gap, functional spending, panel analysis.
    Date: 2012–09
  68. By: Roger E.A. Farmer; Carine Nourry; Alain Venditti
    Abstract: Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not.
    JEL: E44 G01 G12 G14
    Date: 2012–12
  69. By: Kakarot-Handtke, Egmont
    Abstract: This paper clarifies first the nature and significance of financial profit by applying the structural axiom set as consistent point of departure. As a crucial result the fundamental theorem of income distribution emerges. It states: profit is no factor income. Since the individual firm is blind to this structural fact it subjectively interprets profit as some kind of reward. As a matter of fact, firms do not ‘make’ profit, they only redistribute it among themselves. With profit consistently defined it is possible to determine the nominal and real shares of the elementary income categories wage income and distributed profit.
    Keywords: new framework of concepts; structure-centric; axiom set; financial profit; distributed profit; retained profit; key ratios; period core; invisible redistributor; nominal wage share; real wage share
    JEL: E25 E20
    Date: 2012–03–02
  70. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chia-Hui Lu (Department of Economics, National Taipei University)
    Abstract: This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.
    Keywords: two-sector model, human capital, optimal factor tax incidence
    JEL: E62 H22 O41
    Date: 2012–12
  71. By: Ekaterina Iluykhina (Gaidar Institute for Economic Policy)
    Abstract: This paper deals with the flow of foreign investments in the Russian Federation
    Keywords: Russian economy, foreign investments
    JEL: E22
    Date: 2012
  72. By: Ekaterina Iluykhina (Gaidar Institute for Economic Policy)
    Abstract: This paper deals with the flow of foreign investments in the Russian Federation
    Keywords: Russian economy, foreign investments
    JEL: E22
    Date: 2012
  73. By: Hazama, Makoto; Uesugi, Iichiro
    Abstract: Using a unique and massive data set that contains information on interfirm transaction relationships, we examine default propagation along the trade credit channel and for the first time provide direct and systematic evidence of its existence and relevance. Not only do we implement simulations in order to detect prospective defaulters, we also estimate the probabilities of actual firm bankruptcies and compare the predicted defaults and actual defaults. We find, first, that an economically sizable number of firms are predicted to fail when their customers default on their trade debt. Second, these prospective defaulters are indeed more likely to go bankrupt than other firms. Third, a certain type of firm-bank relationships, in which a bank extends loans to many of the firms in the same supply chain, significantly reduces firms' bankruptcy probability, providing evidence for the existence and relevance of ”deep pockets” as documented in Kiyotaki and Moore (1997).
    Keywords: interfirm networks, trade credit, default propagation
    JEL: E32 G21 G32 G33
    Date: 2012–12
  74. By: Autor, David (MIT); Dorn, David (CEMFI, Madrid)
    Abstract: We offer an integrated explanation and empirical analysis of the polarization of U.S. employment and wages between 1980 and 2005, and the concurrent growth of low skill service occupations. We attribute polarization to the interaction between consumer preferences, which favor variety over specialization, and the falling cost of automating routine, codifiable job tasks. Applying a spatial equilibrium model, we derive, test, and confirm four implications of this hypothesis. Local labor markets that were specialized in routine activities differentially adopted information technology, reallocated low skill labor into service occupations (employment polarization), experienced earnings growth at the tails of the distribution (wage polarization), and received inflows of skilled labor.
    Keywords: skill demand, job tasks, inequality, polarization, technological change, occupational choice, service occupations
    JEL: E24 J24 J31 J62 O33
    Date: 2012–12
  75. By: Justin R. Pierce; Peter K. Schott
    Abstract: This paper finds a link between the sharp drop in U.S. manufacturing employment after 2001 and the elimination of trade policy uncertainty resulting from the U.S. granting of permanent normal trade relations to China in late 2000. We find that industries where the threat of tariff hikes declines the most experience greater employment loss due to suppressed job creation, exaggerated job destruction and a substitution away from low-skill workers. We show that these policy-related employment losses coincide with a relative acceleration of U.S. imports from China, the number of U.S. firms importing from China, the number of Chinese firms exporting to the U.S., and the number of U.S.-China importer-exporter pairs.
    JEL: E0 F1 J0
    Date: 2012–12
  76. By: Eckstein, Zvi (Interdisciplinary Center (IDC) Herzliya); Lifshitz, Osnat (Academic College of Tel-Aviv Yaffo)
    Abstract: Changing social norms, as reflected in the interactions between spouses, are hypothesized to affect the employment rates of married women. A model is built in order to estimate this effect, in which the employment of married men and women is the outcome of an internal household game. The type of the household game is exogenously determined as either Classical or Modern. In the former type of household, the spouses play a Stackelberg leader game in which the wife's labor supply decision is based on her husband's employment outcome while the latter type of household is characterized by a symmetric and simultaneous game that determines the spouses' joint labor supply as Nash equilibrium. Females in Modern households are predicted to have higher employment rates than women in Classical households if they have narrower labor market opportunities and/or higher relative risk aversion. The household type is exogenously determined when the couple gets married and is treated as unobserved heterogeneity. The model is estimated using the Simulated Moments Method (SMM) and data from the Panel Study of Income Dynamics (PSID) survey for the years 1983-93. The estimated model provides a good fit to the trends in employment rates and wages. We estimate that 38 percent of households are Modern and that the participation rate of women in those households is almost 80 percent, which is about 10 higher than in Classical households. Meanwhile, the employment rate among men is almost identical in the two types of household.
    Keywords: dynamic discrete choice, household labor supply, household game
    JEL: E24 J2 J3
    Date: 2012–12
  77. By: Honkapohja, Seppo (Bank of Finland)
    Abstract: The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market economies since World War II. Denmark experienced some banking problems but managed to avoid a systemic crisis. This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises.
    Keywords: financial repression; credit rationing; capital account controls; financial deregulation
    JEL: E42 F36 G28
    Date: 2012–12–14

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