nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒01‒12
28 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint By Flotho, Stefanie
  2. Asymmetric Information in Credit Markets, Bank Leverage Cycles and Macroeconomic Dynamics By Rannenberg, Ansgar
  3. Liquidity Crises, Banking, and the Great Recession By Radde, Sören
  4. The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications By Olivier Coibion; Yuriy Gorodnichenko; Gee Hee Hong
  5. Fiscal Policy, Monetary Regimes and Current Account Dynamics By Hohberger, Stefan; Herz, Bernhard
  6. Monetary Policy Trade-Offs in a Portfolio Model with Endogenous Asset Supply By Schüder, Stefan
  7. Labour Market Frictions, Monetary Policy, and Durable Goods By Di Pace, Federico; Hertweck, Matthias S.
  8. On the (IR) Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View By Haider, Adnan; Jan, Asad; Hyder, Kalim
  9. The Aggregate Effects of the Hartz Reforms in Germany By Matthias S. Hertweck; Oliver Sigrist
  10. Explaining Irish Inflation During the Financial Crisis By Bermingham, Colin; Coates, Dermot; Larkin, John; O'Brien, Derry; O'Reilly, Gerard
  11. What Do Participation Fluctuations Tell Us About Labor Supply Elasticities? By Haefke, Christian; Reiter, Michael
  12. Rational Expectations Models with Anticipated Shocks and Optimal Policy By Winkler, Roland; Wohltmann, Hans-Werner
  13. Atypical Behavior of Money and Credit: Evidence From Conditional Forecasts By Afanasyeva, Elena
  14. Fiscal Austerity Measures: Spending Cuts vs. Tax Increases By Gerhard Glomm; Juergen Jung; Chung Tran
  15. Business cycle determinants of US foreign direct investments By Cavallari, Lilia; D'Addona, Stefano
  16. Taylor rule cross-checking and selective monetary policy adjustment By Roth, Markus; Bursian, Dirk
  17. Okun's Law: Fit at Fifty? By Laurence M. Ball; Daniel Leigh; Prakash Loungani
  18. A New Keynesian Triangle Phillips Curve By Malikane, Christopher
  19. Sovereign default and macroeconomic tipping points By Joy, Mark
  20. Macroprudential Regulation Versus Mopping Up After the Crash By Olivier Jeanne; Anton Korinek
  21. Dual liquidity crises under alternative monetary frameworks By Winkler, Adalbert; Bindseil, Ulrich
  22. Technological Innovation: Winners and Losers By Leonid Kogan; Dimitris Papanikolaou; Noah Stoffman
  23. Deregulation shock in product market and unemployment By Luisito Bertinelli; Olivier Cardi; Partha Sen
  24. Implications of Excess Liquidity in Fiji’s Banking System: An Empirical Study By Jayaraman, T.K.; Choong, Chee-Keong
  25. Removing bank subsidies leads inexorably to full reserve banking By Musgrave, Ralph S.
  26. Real-time macro monitoring and fiscal policy By Ley, Eduardo; Misch, Florian
  27. Review of Theories of Financial Crises By Itay Goldstein; Assaf Razin
  28. Should unemployment insurance be asset-tested? By Koehne, Sebastian; Kuhn, Moritz

  1. By: Flotho, Stefanie
    Abstract: This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy. --
    JEL: E52 E61 E63
    Date: 2012
  2. By: Rannenberg, Ansgar
    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: E20 E44 E30
    Date: 2012
  3. By: Radde, Sören
    Abstract: This paper presents a dynamic stochastic general equilibrium model which studies the business-cycle implications of financial frictions and liquidity risk at the bank-level. Following Holmstr m and Tirole (1998), demand for liquidity reserves arises from the anticipation of idiosyncratic operating expenses during the execution phase of bank-financed investment projects. Banks react to adverse aggregate shocks by hoarding liquidity while being forced to decrease their leverage. Both effects amplify recessionary dynamics, since they crowd out funds available for investment financing. This mechanism is triggered by a market liquidity squeeze modelled as a shock to the collateral value of banks assets. This novel type of aggregate risk induces a credit crunch scenario which shares key features with the Great Recession such as strong output decline, pro-cyclical leverage and counter-cyclical liquidity hoarding. Unconventional credit policy in the form of a wealth transfer from households to credit constrained banks is shown to mitigate the credit crunch. --
    JEL: E22 E32 E44
    Date: 2012
  4. By: Olivier Coibion; Yuriy Gorodnichenko; Gee Hee Hong
    Abstract: We study the cyclical properties of sales, regular price changes and average prices paid by consumers (“effective” prices) using data on prices and quantities sold for numerous retailers across many U.S. metropolitan areas. Inflation in the effective prices paid by consumers declines significantly with higher unemployment while little change occurs in the inflation rate of prices posted by retailers. This difference reflects the reallocation of household expenditures across retailers, a feature of the data which we document and quantify, rather than sales. We propose a simple model with household store-switching and assess its implications for business cycles and policymakers.
    Keywords: Inflation and prices; Monetary policy framework; Transmission of monetary policy
    JEL: E3 E4 E5
    Date: 2013
  5. By: Hohberger, Stefan; Herz, Bernhard
    Abstract: The paper examines the stabilizing properties of fiscal policy for current account imbalances under alternative exchange rate regimes. Using a small open economy DSGE model with fiscal feedback rules, we investigate the dynamic responses of different shocks to macroeconomic variables and their implication for the current account. Our results imply that a fiscal response to the current account improves the stabilizing effect of most macroeconomic variables compared to a countercyclical response to output. The loss of national monetary policy when entering into a monetary union leads to higher variability and more persistence of the real exchange rate and the current account. Despite the stabilizing properties, fiscal policy intervention induces higher variability of output in the short-run and therefore faces a trade-off between stabilizing the external position and output --
    JEL: E62 F41 E61
    Date: 2012
  6. By: Schüder, Stefan
    Abstract: This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers choose an optimal capital structure and finance capital goods through credit, bonds and equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the law of one price. Within this general equilibrium model, it will be shown that central bank interventions may promote an inefficient international allocation of real capital. The application of expansive monetary interventions throughout the course of economic crises maintains the domestic stock of real capital at the cost of inflation, currency devaluation, distortions of interest rates and asset prices, and risk clusters on the central bank s balance sheet. Exchange rate stabilising interventions have the result that the central bank can also stabilise the domestic stock of real capital. However, such interventions produce either risk clusters on the central bank s balance sheet or changes in the domestic price level. --
    JEL: E10 E44 E52
    Date: 2012
  7. 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
  8. By: Haider, Adnan; Jan, Asad; Hyder, Kalim
    Abstract: This study investigates and searches for a stable money demand function for Pakistan’s economy, where monetary aggregate is considered as the nominal anchor. The stability of the money demand has been the focus of numerous debates due to evolving financial innovations and regulations. Earlier studies in Pakistan on the subject provide conflicting explanations due to inadequate specification and imprecise estimation of money demand. However, this study finds that money demand in Pakistan is stable, if specified properly. Therefore, for developing countries, like Pakistan, targeting of monetary aggregates or responding to deviations from the desirable path is important for effective implementation and communication of monetary policy stance and it should remain, if not primary, an auxiliary target in the monetary policy framework.
    Keywords: money demand; stability; monetarism
    JEL: E12 C20 E5 E41
    Date: 2012–12–24
  9. By: Matthias S. Hertweck; Oliver Sigrist (University of Basel)
    Keywords: SOEP gross worker flows, Hartz reform, matching efficiency, unemployment fluctuations
    JEL: E24 E32 J63 J64
    Date: 2013
  10. By: Bermingham, Colin (Central Bank of Ireland); Coates, Dermot (Central Bank of Ireland); Larkin, John (Central Bank of Ireland); O'Brien, Derry (Central Bank of Ireland); O'Reilly, Gerard (Central Bank of Ireland)
    Abstract: The recent financial crisis resulted in a steep contraction in the domestic economy together with a sharp decline in inflation. The Phillips curve model of inflation argues that inflation should be negatively related to economic performance and this would seem to be a potential explanatory factor in the behaviour of Irish inflation during the financial crisis. However, Ireland is a very open economy and the Phillips curve has been criticised as an inappro- priate model of inflation for Ireland on the basis that inflation is primarily imported from abroad with little role for domestic factors. We formally assess what role domestic economic activity has on inflation in Ireland. We make a number of findings. First, the deflation in Ireland was unusual by domestic historical and international standards. Second, we find the short-run unemployment gap is the most appropriate way to measure slack in the domestic economy. Third, having controlled for international factors, there is a relationship between the domestic economy and inflation. Fourth, the relationship is not stable over time but seems to depend on the state of the business cycle. Fifth, these types of models predict the actual fall in inflation during the financial crisis quite well. We conclude that these results support the idea that inflation is not purely externally determined in Ireland.
    Keywords: Phillips Curve, Financial Crisis, Threshold Model
    JEL: E31 E37
    Date: 2012–12
  11. By: Haefke, Christian; Reiter, Michael
    Abstract: In this paper we use information on the cyclical variation of labor market participation to learn about the aggregate labor supply elasticity. For this purpose, we extend the standard labor market matching model to allow for endogenous participation. A model that is calibrated to replicate the variability of unemployment and participation, and the negative correlation of unemployment and GDP, implies an aggregate labor supply elasticity along the extensive margin of around 0.3 for men and 0.5 for women. This is in line with recent micro-econometric estimates. --
    JEL: E24 E32 J21
    Date: 2012
  12. By: Winkler, Roland; Wohltmann, Hans-Werner
    Abstract: This paper investigates optimal policy in the presence of anticipated (or news) shocks. We determine the optimal unrestricted and restricted policy response in a general rational expectations model and show that, if shocks are news shocks, the optimal unrestricted control rule under commitment contains a forward-looking element. As an example, we lay out a micro-founded hybrid New Keynesian model and show i) that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size and ii) that the inclusion of forward-looking elements enhances distinctly the performance of simple optimized interest rate rules. --
    JEL: E52 E32 C61
    Date: 2012
  13. By: Afanasyeva, Elena
    Abstract: Great Recession 2007-2008 has revived interest to quantity aggregates (money and credit) and their role as indicators of financial instability for monetary and macroprudential policy. However, many of the previous empirical studies inspecting indicator properties used univariate methods and did not explicitly account for endogenous interactions of variables. We use a multivariate approach (Bayesian VAR) to detect periods of atypical behavior in money and credit in the US and in Euro Area. We find that atypical behavior of these variables is associated with periods of financial distress and (or) banking crises in the US. Moreover, we detect an unsustained credit boom prior to the Great Recession in both Euro Area and in the US. There is a link between this boom and the short-term interest rates in both regions: conditioning on the short-term interest rates substantially reduces the degree of atypical expansionary behavior of money and credit in 2003-2007. --
    JEL: E47 E51 E32
    Date: 2012
  14. By: Gerhard Glomm (Department of Economics, Towson University); Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted.
    Keywords: Fiscal consolidation, welfare, distributional effects, overlapping generations, dynamic general equilibrium.
    JEL: E21 E63 H55 J26 J45
    Date: 2013–01
  15. By: Cavallari, Lilia; D'Addona, Stefano
    Abstract: This paper investigates the role of output fluctuations and exchange rate volatility in driving US foreign direct investments (FDI). Using a sample of 46 economies over the period 1982-2009, we provide evidence of a positive relation between US FDI and host country’s cyclical conditions. Allowing for asymmetry over the business cycle, we find that the output elasticity of foreign investments is higher in booms than in recessions. An increase in exchange rate volatility, on the other hand, has a strong deterrent effect on US foreign investments. This effect is fairly stable over the business cycle.
    Keywords: FDI; business cycle; cyclical output; exchange rate volatility
    JEL: E32 F23 C23
    Date: 2012–12
  16. By: Roth, Markus; Bursian, Dirk
    Abstract: The Taylor rule is a widely used concept in monetary macroeconomics and has been used in various areas either for positive or normative analyses. We examine whether the robustifying nature of Taylor rule cross-checking in the spirit of R island and Sveen (2011) also carries over to the case of parameter uncertainty. We find that adjusting monetary policy based on this kind of cross-checking can on average improve the outcome for the monetary authority in selected specifications. This, however, strongly depends on the functional form and also on the degree of the parameter misspecification as well as the information set of the monetary authority. In those specifications, increasing the relative weight attached to Taylor rule cross-checking results in a trade-off as higher average gains in terms of a reduction of loss are accompanied by higher standard deviations of the relative losses. --
    JEL: E52 E47 E58
    Date: 2012
  17. By: Laurence M. Ball; Daniel Leigh; Prakash Loungani
    Abstract: This paper asks how well Okun’s Law fits short-run unemployment movements in the United States since 1948 and in twenty advanced economies since 1980. We find that Okun’s Law is a strong and stable relationship in most countries, one that did not change substantially during the Great Recession. Accounts of breakdowns in the Law, such as the emergence of “jobless recoveries,” are flawed. We also find that the coefficient in the relationship—the effect of a one percent change in output on the unemployment rate—varies substantially across countries. This variation is partly explained by idiosyncratic features of national labor markets, but it is not related to differences in employment protection legislation.
    JEL: E24 E32
    Date: 2013–01
  18. By: Malikane, Christopher
    Abstract: We propose a solution to address the observed negative sign on the marginal cost variable in new Keynesian Phillips curve estimations. Our solution is based on an elaborate specification of the cost function faced by firms and the formulation of a reduced-form production function which is characterised by non-linear input-output relations. The resultant Phillips curve features the standard hybrid expectational term, labour share, output gap, speed-limit effects and supply shock variables. In general, GMM estimations of the model for developed and emerging markets yield a positive and significant coefficient on the labour share and the output gap. We conclude that supply shock variables are essential to the empirical validity of the cost-based Phillips curve.
    Keywords: new Keynesian Phillips curve; marginal cost; supply shocks
    JEL: E31 B22
    Date: 2013–01–03
  19. By: Joy, Mark (Central Bank of Ireland)
    Abstract: This paper examines the impact of macroeconomic fundamentals on the probability of sovereign default and the probability of exit from default while allowing explicitly for model uncertainty. Model uncertainty is addressed by employing Bayesian model-averaging techniques, averaging over a very large number of different empirical models that each endeavour to explain entry to and exit from periods of sovereign default for defaulting countries over the period 1975 to 2010. Default probabilities are estimated and then used to price sovereign bond spreads. Key findings are: (i) large budget deficits and high interest payments on external debt represent key macroeconomic tipping points for sovereign default; (ii) for exiting periods of default, reducing public debt matters most. These results are robust to both narrow and wide definitions of sovereign default and, due to use of model-averaging techniques, robust to model uncertainty.
    Keywords: Sovereign default, risk, model uncertainty
    JEL: E62 F34 G12 G13 G15
    Date: 2012–09
  20. By: Olivier Jeanne; Anton Korinek
    Abstract: This paper compares ex-ante policy measures (such as macroprudential regulation) and ex-post policy interventions (such as bailouts) to respond to financial crises in models of financial amplification, i.e. models in which falling asset prices, declining net worth and tightening financial constraints reinforce each other. The optimal policy mix in such models involves a combination of both types of measures since they offer alternative ways of mitigating binding financial constraints. Comparing their relative merits, ex-post policy interventions are only taken once a crisis has materialized and are therefore better targeted, whereas ex-ante measures are blunter since they depend on crisis expectations. However, ex-post interventions distort incentives and create moral hazard. This introduces a time consistency problem, which can in turn be solved by ex-ante policy measures. Limiting ex-post transfers to the revenue accumulated in a bailout fund reduces welfare.
    JEL: E44 G18 H23
    Date: 2013–01
  21. By: Winkler, Adalbert; Bindseil, Ulrich
    Abstract: In a dual liquidity crisis, both the government and the banking sector are under severe funding stress. By nature, dual crises have the potential of being particularly disruptive and damaging. Thus, understanding their mechanics, how they unfold and how they can be addressed under various monetary and international financial regimes, is crucial. We capture the logic of a dual crisis through a new, rigorous approach. A closed system of financial accounts allows for a systematic comparative review of underlying liquidity shocks as well as built-in liquidity buffers, including their limits beyond which a credit crunch materializes. Based on this we are able to (i) make precise the otherwise vague interpretations of liquidity flows and policy options; (ii) compare capacities to absorb shocks under alternative international financial systems; (iii) explain how various constraints interact; (iv) draw lessons for achieving higher resilience against self-fulfilling confidence crises. Most importantly, we analyze the role of a number of potential constraints to an elastic central bank liquidity provision, namely the availability of central bank eligible assets, limits deliberately imposed on the central bank`s ability to lend to or purchase assets of banks and governments (including monetary financing prohibitions), and limits in a fixed exchange rate regime relating to the gold or foreign currency reserves of the central bank. --
    JEL: E50 E58 E42
    Date: 2012
  22. By: Leonid Kogan; Dimitris Papanikolaou; Noah Stoffman
    Abstract: We analyze the effect of innovation on asset prices in a tractable, general equilibrium framework with heterogeneous households and firms. Innovation has a heterogenous impact on households and firms. Technological improvements embodied in new capital benefit workers, while displacing existing firms and their shareholders. This displacement process is uneven: newer generations of shareholders benefit at the expense of existing cohorts; and firms well positioned to take advantage of these opportunities benefit at the expense of firms unable to do so. Under standard preference parameters, the risk premium associated with innovation is negative. Our model delivers several stylized facts about asset returns, consumption and labor income. We derive and test new predictions of our framework using a direct measure of innovation. The model's predictions are supported by the data.
    JEL: E20 E32 G10 G12
    Date: 2013–01
  23. By: Luisito Bertinelli (University of Luxembourg CREA); Olivier Cardi (University Pantheon-Assas ERMES and Ecole Polytechnique); Partha Sen (Delhi School of Economics)
    Abstract: In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive mar- gin. We find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force. For a calibration capturing alternatively European and the U.S. labor markets, a deregulation episode, which lowers the markup by 3 percent- age points, results in a fall in the unemployment rate by 0.17 and 0.07 percentage point, respectively, while the labor share is almost unaffected in the long-run. The sensitivity analysis reveals that product market deregulation is more effective in countries where labor market regulation is high, product markets are initially highly regulated, unemployment benefits are smaller and labor force is more responsive.
    Keywords: Imperfect competition; Endogenous markup; Search theory; Unemployment; Deregulation
    JEL: E24 J63 L16
    Date: 2012
  24. By: Jayaraman, T.K.; Choong, Chee-Keong
    Abstract: The reasons behind the frequent occurrences of excess liquidity, especially in the recent months since 2007, are well known and documented. They include low investor confidence following the military coups and related political uncertainties with their lingering effects for a while. What are unknown and not studied in detail are the long term effects of excess liquidity on various key economic variables. Utilizing the VAR methodology, this paper examines the effects of excess liquidity on loans, lending rate, exchange rate and price level. The findings are that excess liquidity is a major component of forecast variation in loans, exchange rate and lending rate.
    Keywords: Excess liquidity; loans; monetary policy; cointegration test; variance decomposition
    JEL: E43 O11 E42
    Date: 2012–08–01
  25. By: Musgrave, Ralph S.
    Abstract: The recent banking crisis laid bare a long standing and inherent defect in fractional reserve banking: the fact that fractional reserve is unlikely to work for long without taxpayer backing. Changing bank regulations in such a way that banks are never a burden on taxpayers leads inexorably to full reserve banking. Full reserve involves splitting the banking industry into two halves. A safe half where depositors earn no interest, but they do have instant access to their money, and a second half in which depositors do earn a dividend or interest, but instant access is not guaranteed and depositors bear the losses when the investments or loans to which their money is channelled go wrong. Whether the second half counts as “banking” is debatable. Also whether that split is within banks or involves splitting the banking industry into two different types of institution is unimportant. It is virtually impossible for a full reserve bank to fail, thus there is no implicit taxpayer subsidy of such banks. As to the safe half, deposits are not loaned on or invested, thus the relevant money is not put at risk. And as to the “investment” half, if the value of the relevant loans or investments fall, then depositors lose in the same way as investors lose given a stock market set back. And stock market set-backs do not cause the same sort of crises as bank panics. The reduced amount of lending based economic activity and increased amount of non-lending based activity that results from full reserve is an entirely predictable result of removing bank subsidies. Far from reducing GDP, removing subsidies normally increases GDP, and there is no reason to suppose GDP would not rise as a result of removing bank subsidies: i.e. switching to full reserve banking. Section I sets out the argument, and section II deals with some common criticisms of full reserve banking.
    Keywords: Banks; full reserve; fractional reserve; narrow banking; bank subsidies;
    JEL: E5
    Date: 2013–01–03
  26. By: Ley, Eduardo; Misch, Florian
    Abstract: This paper considers the effects of inaccurate real-time output data on fiscal management, both with respect to budgetary planning and fiscal surveillance. As newer and better information becomes available, output data available in real time get revised and are likely to conflict with final figures that are only released some years later. Nevertheless, fiscal policy needs to be inevitably based on real-time figures. The paper develops a simple modeling framework to formalize these linkages and combines it with a newly compiled dataset from the International Monetary Fund's World Economic Outlook, comprising final and real-time output data for 175 countries, over a period of 17 years. We simulate the effects of output revisions on revisions of the overall balance, the structural balance and debt accumulation. It finds that output revisions may have substantial effects on the ability of governments to correctly estimate the overall balance and the structural fiscal balance in real time, and that the effects may imply substantial debt accumulation.
    Keywords: Emerging Markets,Economic Theory&Research,Debt Markets,Fiscal&Monetary Policy,Science Education
    Date: 2013–01–01
  27. By: Itay Goldstein; Assaf Razin
    Abstract: In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third one deals with currency crises. We discuss the evolutions of these branches of the literature and how they have been integrated recently to explain the turmoil in the world economy. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.
    JEL: E61 F3 F33 G01 G1
    Date: 2013–01
  28. By: Koehne, Sebastian; Kuhn, Moritz
    Abstract: Empirical studies show that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question and find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment, but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. The welfare gain from introducing asset-increasing benefits is substantial and amounts to 1.5 % of consumption when comparing steady states and 0.8 % of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare. --
    JEL: E21 H21 J65
    Date: 2012

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