nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒02‒03
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Policy Games with Distributional Conflicts By Alice Albonico; Lorenza Rossi
  2. The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression By Christina D. Romer; David H. Romer
  3. A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy By Ricardo J. Caballero; Emmanuel Farhi
  4. The Influence of the Taylor rule on US monetary policy By Pelin Ilbas; Øistein Røisland; Tommy Sveen
  5. Fiscal Stimulus in an Endogenous Job Separation Model By Ryuta Ray Kato; Hiroaki Miyamoto
  6. Interaction of Formal and Informal Financial Markets in Quasi-Emerging Market Economies By Harold Ngalawa; Nicola Viegi
  7. The Effectiveness of Central Bank Independence Versus Policy Rules By John B. Taylor
  8. Intangible Capital and the Excess Volatility of Aggregate Profits By Kegiang Hou; Alok Johri
  9. Simplified mathematical model of financial crisis By Krouglov, Alexei
  10. The Supply and Demand for Safe Assets By Gary B. Gorton; Guillermo Ordoñez
  11. Inflation drivers in new EU members By Martina Alexová
  12. Local Inflation: Reconsidering the International Comovement of Inflation By Marcel Förster; Peter Tillmann
  13. The Role of Consumer Leverage in Generating Financial Crises By Dilyana Dimova
  14. A Greek wedding in SADC? - Testing for structural symmetry towards SADC monetary integration By Marthinus C. Breitenbach; Francis Kemegue; Mulatu F. Zerihun
  15. The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis By Ricardo Reis
  16. Transparency and output stability: Empirical evidence By Ummad Mazhar
  17. Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium By T. BUYSE; F. HEYLEN
  18. Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy By Eric Schaling; Mewael F. Tesfaselassie
  19. Implications of Alternative Banking Systems By Cagri S. Kumruy; Saran Sarntisartz
  20. Using forecasts to uncover the loss function of FOMC members By Christian Pierdzioch; Jan-Christoph Rülke; Peter Tillmann
  21. The Transmission of US Financial Stress: Evidence for Emerging Market Economies By Fabian Fink; Yves S. Schüler
  22. Measuring Sovereign Contagion in Europe By Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon
  23. Does a low interest rate support private bubbles? By Benjamin Eden
  24. Markets Evolution After the Credit Crunch By Bianchetti, Marco; Carlicchi, Mattia
  25. Limited Commitment and the Legal Restrictions Theory of the Demand for Money By Leo Ferraris; Fabrizio Mattesini
  26. A Theory of Aggregate Consumption By Yun Kim; Mark Setterfield; Yuan Mei
  27. Costly intermediation and the Friedman rule By Benjamin Eden
  28. Confused confusers. How to stop thinking like an economist and start thinking like a scientist By Kakarot-Handtke, Egmont
  29. The effect of financialization on labor's share of income By Dünhaupt, Petra
  30. Effekte der österreichischen EU-Mitgliedschaft By Fritz Breuss
  31. Understanding Financial Crises: Causes, Consequences, and Policy Responses By Stijn Claessens; M. Ayhan Kose; Luc Laeven; Fabián Valencia
  32. Crude Oil Prices and Liquidity, the BRIC and G3 countries By Ratti, Ronald A; Vespignani, Joaquin L.
  33. Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets By McCauley, Robert N.
  34. On the stability of the Ramsey accumulation path By Bellino, Enrico
  35. Fiscal Space in the Euro zone By Frantisek Hajnovic; Juraj Zeman; Jan Zilinsky
  36. International Comparisons of Household Saving Rates and Hidden Income By Herbert Walther; Alfred Stiassny
  37. Banks, free banks, and U.S. economic growth By Matthew Jaremski; Peter Rousseau
  38. Economic Growth and Inequality: Evidence from the Young Democracies of South America By Manoel Bittencourt

  1. By: Alice Albonico (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: This paper shows that Limited Asset Market Participation generates an extra inflation bias when the fiscal and the monetary authority play strategically. A fully redistributive fiscal policy eliminates the extra inflation-bias, however, the latter is cancelled at the cost of reducing Ricardians' welfare. A fiscal authority which redistributes income only partially, reduces the inflation-bias, but rises Government spending. Despite a fully conservative monetary policy is necessary to get price stability, it implies a reduction in liquidity constrained consumers' welfare, in the absence of redistributive fiscal policies. Finally, under a crisis scenario price stability cannot be ensured by Ramsey without redistribution.
    Keywords: liquidity constrained consumers, optimal monetary and fiscal policy, strategic interaction, inflation bias, redistribution.
    JEL: E3 E5 E62
    Date: 2013–11
  2. By: Christina D. Romer; David H. Romer
    Abstract: This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz’s monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.
    JEL: E32 E58 N12
    Date: 2013–01
  3. By: Ricardo J. Caballero; Emmanuel Farhi
    Abstract: The global economy has a chronic shortage of safe assets which lies behind many re- cent macroeconomic imbalances. This paper provides a simple model of the Safe Asset Mechanism (SAM), its recessionary safety traps, and its policy antidotes. Public debt plays a central role in SAM as long as the government has spare fiscal capacity to back safe asset production. We show that Quantitative Easing type policies have positive effects on spreads and output. In contrast, Operation Twist type policies, where the duration of public debt held by the public is reduced, can be counterproductive. Mon- etary policy commitments work if they support future bad states of nature. All these policies depend on fiscal capacity. Once the latter runs out, short term cyclical policy becomes ineffective. In contrast, credible long run fiscal consolidation relaxes the fiscal capacity constraint and enhances the effectiveness of short term policy. An economy that is near its fiscal limits is susceptible to runs on its public debt and to destabilizing feedback loops. We also show that in a SAM world, safe asset producer economies can continuously run trade deficits supported by global demand for safe assets, but they do so at the risk of exhausting their fiscal capacity.
    JEL: E32 E4 E5 E52 E62 E63 F3 F33 F41 G01 G1 G28
    Date: 2013–01
  4. By: Pelin Ilbas (National Bank of Belgium, Research Department); Øistein Røisland (Norges Bank); Tommy Sveen (BI Norwegian Business School)
    Abstract: We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001-2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule.
    Keywords: optimal monetary policy, simple rules, central bank preferences
    JEL: E42 E52 E58 E61 E65
    Date: 2013–01
  5. By: Ryuta Ray Kato (International University of Japan); Hiroaki Miyamoto (International University of Japan)
    Abstract: This paper re-visits effects of fiscal expansion on employment and unemployment by focusing on both hiring and firing margins. We develop a dynamic stochastic general equilibrium model with labor search frictions in which job separation is endogenously determined. We study effects of fiscal stimuli in the form of government spending and hiring subsidies. The prediction of our model is in contrast with earlier studies that assume exogenous job separation. First, our model generates a larger size of the impact of a government spending shock on labor market variables than the model without endogenous separation. Second, while an increase in hiring subsidies increases employment and reduces unemployment in the model without endogenous separation, it reduces employment and increases unemployment in our model.
    Keywords: Fiscal Policy, Unemployment, Labor market, Search and matching, Endogenous separation
    JEL: E24 E62 J64
    Date: 2013–01
  6. By: Harold Ngalawa (School of Economics and Finance, University of KwaZulu-Natal); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks.
    Keywords: Informal financial sector, formal financial sector, monetary policy, general equilibrium
    JEL: E44 E47 E52 E58
    Date: 2013–01
  7. By: John B. Taylor (Stanford University)
    Abstract: This paper assesses the relative effectiveness of central bank independence versus policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Factors other than monetary policy rules are examined. Both de jure and de facto central bank independence at the Fed are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Fed. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential.
    Date: 2013–01
  8. By: Kegiang Hou; Alok Johri
    Abstract: Aggregate profits measured from NIPA data are over six times more volatile than output. We use recent estimates of the return on physical capital to decompose NIPA profits into the part that can be explained by capital income and a residual called net profits. We find that capital income explains only a small fraction of the overall volatility of NIPA profits, the net-profit series is over seven times more volatile than output with a contemporaneous correlation of .55. Most dynamic general equilibrium models of the business cycle cannot deliver this excess volatility of net-profits as they rely mainly on capital income to explain NIPA profits. We develop a model of the U.S. economy in which firms expend resources to create intangible capital (IC), which is an additional input in their production technology. The model is estimated using aggregate data on output growth and labor productivity. Simulations using two versions of the estimated model deliver pro-cyclical net profits that are over three times more volatile than output. IC investments are large and pro-cyclical and act to propagate shocks over time. Overall, the model explains aggregate US business cycles well on traditional metrics. In particular it does a good job of explaining observed movements in hours, productivity, output and the labor wedge without relying on preference shocks. As an external validation exercise, we show that the model is capable of delivering movements in IC investment that resemble recent estimates of R&D investment in the US. Moreover it delivers counter-cyclical markups along with a pro-cyclical profit share, another feature of the data. We emphasize that we do not use profit data to estimate the model so that any movements in profit over and above those of output are solely generated within the model as firms optimally reallocate resources between goods production and intangible capital creation.
    Keywords: business cycles, aggregate profits, Bayesian estimation, intangible capital, labor wedge, markups.
    JEL: E3
    Date: 2013–01
  9. By: Krouglov, Alexei
    Abstract: The framework of mathematical dynamics of economic systems is applied to the development of financial crisis. A view is proposed that the severity of financial crises can be explained by means of superposition of the fluctuations on connected markets exhibited in the form of a resonance phenomenon. The practical actions of the central banks are criticized as contradicting to theoretical implications of the model.
    Keywords: Financial crisis; business fluctuations
    JEL: E32 E44 G01
    Date: 2013–01–27
  10. By: Gary B. Gorton; Guillermo Ordoñez
    Abstract: There is a demand for safe assets, either government bonds or private substitutes, for use as collateral. Government bonds are safe assets, given the government's power to tax, but their supply is driven by fiscal considerations, and does not necessarily meet the private demand for safe assets. Unlike the government, the private sector cannot produce riskless collateral. When the private sector reaches its limit (the quality of private collateral), government bonds are net wealth, up to the government’s own limits (taxation capacity). The economy is fragile to the extent that privately-produced safe assets are relied upon. In a crisis, government bonds can replace private assets that do not sustain borrowing anymore, raising welfare.
    JEL: E0 E02 E2 E3 E32 E4 E41 G01 G12 G2
    Date: 2013–01
  11. By: Martina Alexová (National Bank of Slovakia, Research Department)
    Abstract: This paper focuses on the determinants of inflation for new European Union members during the period from 1996 to 2011. Detecting the drivers of inflation can be essential in designing structural reforms aimed at complementing the main objectives of monetary policy pursued in these countries. We utilize a structural vector error correction model to estimate long run relationships between inflation, mark-up and economic activity incorporating structural factors such as openness of the economy and production and analyse dynamic properties of the models. We find that half of the countries can be characterized by cost-push inflation and the rest by demand side factors. An appropriate monetary strategy to control inflation should accompany ECB monetary strategy in countries belonging to the euro area. The strategy should also maintain a credible currency peg in Lithuania, Latvia and Bulgaria and meet inflation targets in inflation targeting countries in addition with appropriate structural adjustments in labour markets and production capacity.
    Keywords: inflation, long run structural VARs, subset VEC model, mark-up, output gap, deficit, and commodity prices
    JEL: E C
    Date: 2012–12
  12. By: Marcel Förster (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: In this paper we reconsider the degree of international comovement of inflation rates. We use a dynamic hierarchical factor model that is able to decompose Consumer Price Index (CPI) inflation in a panel of countries into (i) a factor common to all inflation series and all countries, (ii) a factor specific to a given sub-section of the CPI, (iii) a country group-factor and (iv) a country-specific component. With its pyramidal structure, the model allows for the possibility that the global factor affects the country-group factor and other subordinated factors but not vice versa. Using quarterly data for industrialized and emerging economies from 1996 to 2011 we find that about two thirds of overall inflation volatility are due to country-specific determinants. For CPI inflation net of food and energy, the global factor and the CPI basketspecific factor account for less than 20% of inflation variation. We argue that "local inflation" rather than "global inflation" (Ciccarelli and Mojon (2010)) is a better description of the evidence. Only energy price inflation in industrial economies is dominated by common factors.
    Keywords: Inflation, Energy Prices, Monetary Policy, Globalization, Dynamic Hierarchical Factor Model
    JEL: E31 E32 F44
    Date: 2013
  13. By: Dilyana Dimova
    Abstract: Consumer leverage can generate financial crises characterized by increased bankruptcy, tightened credit access and reduced demand for goods.  This paper embeds financial frictions in the mortgage contracts of homeowners within a two-sector economy to show that even at moderate initial levels, household indebtedness can create a lasting financial downturn such as the subprime mortgage crisis.  Using two seemingly positive disturbances that triggered the subprime mortgage crisis - an increased housing supply and a relaxation of borrowing conditions - the model demonstrated that the subprime downturn was not a precedent but the natural consequence of financial frictions.  The oversupply of houses lowers asset prices and reduces the value of the real estate collateral used in the mortgage.  This worsens the leverage of indebted consumers and raised their bankruptcy prospects generating a pro-cyclical risk premium.  A relaxation of borrowing conditions turns credit-constrained households into a potential source of disturbances themselves when market optimism allows them to overleverage with little downpayment.  In both cases, the resulting excessive consumer leverage impairs household credit access for a lengthy after-shock period and diverts resources from their consumption.  Their reduced demand for goods may propagate the downturn to the rest of the economy depressing output in other sectors.  Adding credit constraints in the financial sector that provides housing mortgages deepens the negative impact of the shocks and makes recovery even more protracted.
    Keywords: Financial frictions, consumer leverage, credit-constrained consumers, subprime mortgage crisis, pro-cyclical risk-premium
    JEL: E21 E27 E44 G21 G33
    Date: 2012–11–28
  14. By: Marthinus C. Breitenbach (Department of Economics, University of Pretoria); Francis Kemegue (Department of Economics, University of Pretoria, and Framingham University, USA); Mulatu F. Zerihun (Department of Economics, University of Pretoria)
    Abstract: This paper investigates structural symmetry among SADC countries in order to establish, judged by modern OCA theory, which of these countries may possibly make for a good monetary matrimony and which countries may be left out in the cold. SADC remains adamant that it would conclude monetary union by 2018. It can ill afford a repeat of the type of financial and fiscal instability brought about by ex ante structural economic differences and asynchronous business cycles in the EU. This study contributes to the literature on macro-economic convergence in the SADC region. We make use of the Triples test to analyse each country’s business cycles for symmetry and then evaluate SADC countries’ ratio of relative intensity of co-movements in business cycles with co-SADC country and versus that of major trade partners. We find that not all countries in SADC conform to OCA criteria judged by both asymmetrical business cycles and weak co-movements in business cycles.
    Keywords: Triples test, optimal currency area, SADC, structural symmetry
    JEL: E32 F15 F33
    Date: 2012–12
  15. By: Ricardo Reis
    Abstract: In spite of the mystique behind a central bank's balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank's main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.
    JEL: E58 F34
    Date: 2013–01
  16. By: Ummad Mazhar
    Abstract: This paper focuses on the empirical link between monetary policy transparency and output volatility. The questions addressed are: (i) Does transparency about policy processes stabilize output? (ii) Do different aspects of transparency differ qualitatively or quantitatively in terms of their effects on output volatility? Controlling for many standard structural sources of output stability, and using a data set of 80 countries over 1998 to 2007, our results show that transparency has a stabilizing influence on output volatility. However, it has less influence on output volatility than other structural sources of stabilization. Further, among the dimensions of transparency we find that operational transparency (covering control errors and macroeconomic disturbances) has the most robust stabilizing effect on output volatility. Whenever significant, political transparency (covering prioritization of objective and institutional arrangements) tends to increase output volatility, whereas other components have insignificant or negligible influence.
    Keywords: Monetary Policy Transparency; Central Bank Independence; Transparency Index; Output Stabilization
    JEL: E63 C33
    Date: 2013–01–29
  17. By: T. BUYSE; F. HEYLEN
    Abstract: We study the effects of fiscal consolidation within a dynamic general equilibrium model with overlapping generations. Our contribution to the theoretical consolidation literature is threefold. (i) Individual decisions of time allocation between work, leisure and education are fully endogenous in our model. (ii) We pay particular attention to also modeling public employment and production. We distinguish public employees in the construction of infrastructure, in education, and in the production of useful public consumption goods. (iii) We go beyond the analysis of the usual economic aggregates (such as GDP) and also look at the welfare impact of different fiscal consolidation strategies on current and future generations of both high and low-ability individuals. Our main findings are as follows. As to output effects, we confirm that expenditure based consolidation is better than labor or capital tax based consolidation. Truly expansionary output effects after spending cuts, however, can only be observed for private output. We do generally not observe them when we consider GDP and include the value added produced by public employees. Our results for welfare bring even more nuance on the possibility of expansionary fiscal consolidation. When aggregated over all generations that are alive at the time consolidation is started, almost all consolidation strategies bring about net negative welfare effects. Only the youngest and future generations experience positive welfare effects. Interestingly, the positive effects for these generations are smaller under spending based adjustments in the area of education, investment, and overall public employment, than under tax based adjustments. Robustness tests by changing key assumptions of our model never imply changes of these conclusions, quite on the contrary.
    Keywords: Employment by age, Endogeous growth, Fiscal consolidation, Overlapping generations
    JEL: E62 H63 J22 O41
    Date: 2012–12
  18. By: Eric Schaling; Mewael F. Tesfaselassie
    Abstract: Available evidence supports the view that growth is faster in more open economies. In order to analyze the implications of openness and growth on determinacy and learnability of worldwide rational expectations equilibria we develop a two-country New Keynesian model with growth. We analyze these issues for contemporaneous data and expectations-based monetary policy rules. Our results highlight how growth matters for the overall effect of opening an economy to more trade, as we find that (i) under the contemporaneous data policy rule the conditions for determinacy and learnability become more stringent on account of openness but less stringent on account of growth, so that growth weakens the effect of openness, (ii) under the expectations-based policy rule the conditions for determinacy and learnability also become more stringent on account of openness while on account growth the conditions for determinacy become \emph{more} stringent (thus reinforcing the effect of openness) but those for learnability become \emph{less} stringent (thus weakening the effect of openness). As in \citet{BS09} the elasticity of intertemporal substitution is key to our result but within a framework that is consistent with long-run labor supply and balanced growth facts
    Keywords: trend growth,open economy,monetary policy rules,determinacy,learning
    JEL: E58 E61 F31 F41
    Date: 2013–01
  19. By: Cagri S. Kumruy; Saran Sarntisartz
    Abstract: A signicant number of individuals are unwilling to deposit their savings into the banking sector since it does not operate according to their religious beliefs. In this paper we provide a model that aims to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems? Our model shows that an alternative banking system would arise if individuals have religious concerns. Moreover, we show that in an economy populated with a certain number of religiously concerned individuals, the existence of an alternative baking system can generate relatively higher growth and improve welfare.
    JEL: E21 E62 H55
    Date: 2013–01
  20. By: Christian Pierdzioch (University of Hamburg); Jan-Christoph Rülke (University of Vallendar); Peter Tillmann (University of Giessen)
    Abstract: We revisit the sources of the bias in Federal Reserve forecasts and assess whether a precautionary motive can explain the forecast bias. In contrast to the existing literature, we use forecasts submitted by individual FOMC members to uncover members' implicit loss function. Our key finding is that the loss function of FOMC members is asymmetric: FOMC members incur a higher loss when they underpredict (overpredict) inflation and unemployment (real GDP) as compared to an overprediction (underprediction) of similar size. Our findings add to the recent controversy on the relative quality of FOMC forecasts compared to staff forecasts. Together with Capistran's (2008) finding of similar asymmetries in Federal Reserve staff forecasts our results suggest that differences in predictive ability do not stem from differences in preferences. This is underlined by our second result: forecasts remain biased even after accepting an asymmetric loss function.
    Keywords: Federal Open Market Committee; forecasting; asymmetric loss function;monetary policy
    JEL: E58 E37 E27
    Date: 2013
  21. By: Fabian Fink (Department of Economics, University of Konstanz, Germany); Yves S. Schüler (Department of Economics, University of Konstanz, Germany)
    Abstract: We provide empirical evidence that US financial stress shocks (US-FSSs) are an important driver for economic dynamics and fluctuations in emerging market economies (EMEs). Applying a structural vector auto regression, we analyze the international transmission of US-FSSs to eight EMEs using monthly data from 1999 to 2012. US-FSSs are identified as unexpected changes in the financial conditions index of the Federal Reserve Bank of Chicago. Findings indicate that a typical EME experiences similar negative effects as the US economy in response to US-FSSs. Our results emphasize that the transmission through international financial interconnections is dominant, while contagion through trade is inessential. Further, with regard to fluctuations in real economic activity, US-FSSs are as important as all other external factors jointly. In general, US-FSSs represent a crucial driver for volatility in the emerging world; also at business cycle frequencies.
    Keywords: Financial Stress Shocks, International Transmission, Emerging Markets, SVAR
    JEL: E44 F30 G10
    Date: 2013–01–18
  22. By: Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon
    Abstract: This paper analyzes the sovereign risk contagion using credit default swaps (CDS) and bond premiums for the major eurozone countries. By emphasizing several econometric approaches (nonlinear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS has been remarkably constant for the period 2008-2011 even though a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different eurozone countries is stable, and the risk spillover among these countries is not affected by the size of the shock, implying that so far contagion has remained subdue. Results for the CDS sample are confirmed by examining bond spreads. However, the analysis of bond data shows that there is a change in the intensity of the propagation of shocks in the 2003-2006 pre-crisis period and the 2008-2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms.
    JEL: E58 F34 F36 G12 G15
    Date: 2013–01
  23. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: I examine the argument that a low interest rate policy can lead to “overvalued†private assets or privately created bubbles (private bubbles). Using the standard approach to bubbles, I find that a policy of a low real interest rate may support private bubbles but a policy of a low nominal interest rate may actually reduce the importance of private bubbles. I then attempt a less conventional way of modeling bubbles focusing on the supply of private bubbles. The paper uses results from the Friedman rule literature, the fiscal approach to the price level and the literature on rational bubbles.
    Keywords: Interest Rate Policy, The Friedman Rule, The Fiscal Approach to Bubbles.
    JEL: E4
    Date: 2012–12–11
  24. By: Bianchetti, Marco; Carlicchi, Mattia
    Abstract: We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS. We also discuss a qualitative explanation of these effects based on the consideration of credit and liquidity variables. Then, we focus our attention on the diffusion of collateral agreements among OTC derivatives market counterparties, and on the consequent change of paradigm for pricing derivatives. We illustrate the main qualitative features of the new market practice, called CSA discounting, and we point out the most relevant issues for market players associated to its adoption.
    Keywords: crisis; liquidity; credit; counterparty; risk; fixed income; Libor; Euribor; Eonia; OIS – Libor basis; yield curve; forward curve; discount curve; single curve; multiple curve; collateral; CSA discounting; no arbitrage; pricing; interest rate derivatives; FRA; swap; OIS; basis swap; forward rate; CDS spread; ECB monetary policy; ISDA
    JEL: E43 G12 G13
    Date: 2012–12–19
  25. By: Leo Ferraris (University of Rome "Tor Vergata"); Fabrizio Mattesini (University of Rome "Tor Vergata")
    Abstract: This paper addresses the "rate of return" puzzle of monetary theory. Similarly to the legal restrictions theory of the demand for money, we assume that Government bonds are subject to a minimum purchase requirement. Differently from this theory, however, we assume that intermediaries, when issuing private notes, cannot commit to always redeem them. First, we study an environment with legal restrictions to intermediation and show that cash and interest bearing bonds both circulate in the economy. Then, we drop the legal restrictions and show that also with active intermediation, under limited commitment, there is an equilibrium with rate of return dominance. A positive interest rate provides the intermediaries with the incentive to issue and redeem their notes.
    Keywords: Money, Government Bonds, Rate of Return Dominance, Legal Restrictions
    JEL: E40
    Date: 2013–01–21
  26. By: Yun Kim (Department of Economics, Trinity College); Mark Setterfield (Department of Economics, Trinity College); Yuan Mei (Department of Economics, University of Chicago)
    Abstract: We develop a Keynesian model of aggregate consumption. Our theory emphasizes the importance of the relative income hypothesis and debt-finance for understanding household consumption behavior. It is shown that particular importance attaches to how net debtor households service their debts, and that the treatment of debt servicing commitments as a substitute for savings by these households creates the potential for “sudden stops” in consumption spending (and hence aggregate demand). The implications for aggregate consumption of changes in the distribution of income and changes in the composition of employment are also explored.
    Keywords: Consumption, household borrowing, household debt, relative income hypothesis
    JEL: E12 E21
    Date: 2013–01
  27. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: I examine the implementation of the Friedman rule under the assumption that age dependent lump sum transfers are possible and private intermediation is costly. This is done both in an infinitely lived agents model and in an overlapping generations model. I argue that in addition to a zero nominal-interest-rate policy (the so called Friedman rule) a transfer to young agents, or a government loan program is required for satiating agents with real balances. The paper also contributes to the understanding of Friedman's original article and discusses related questions about the size of the financial sector. It is shown that the adoption of the (modified) Friedman rule will crowd out private lending and borrowing. I also look at the social value of a market for contingent claims and argue that resources spent on operating a market for accidental nominal bequests are a waste from the social point of view in spite of the fact that individuals have an incentive to trade in such markets.
    Keywords: The Friedman Rule, Accidental bequests, The optimal size of the financial sector, Government loans
    JEL: E0 E4
    Date: 2012–12–04
  28. By: Kakarot-Handtke, Egmont
    Abstract: The present paper takes it as an indisputable fact that subjective-behavioral thinking leads, for deeper methodological reasons, with inner necessity to inconclusive filibustering about the agents’ economic conduct and therefore has to be replaced by something fundamentally different. The key argument runs as follows: (a) the subjective-behavioral approach can not, as a matter of principle, afford a correct profit theory, (b) without a correct profit theory it is impossible to comprehend how the monetary economy works, (c) without this knowledge economic policy proposals are unjustifiable, (d) thinking like an economist may be hazardous to the economy.
    Keywords: new framework of concepts; structure-centric; axiom set; objectivestructural; income; profit; General Complementarity; subjective-behavioral; methodological individualism; opus magnum
    JEL: E00 D00 A11 B41
    Date: 2013–01–28
  29. By: Dünhaupt, Petra
    Abstract: Numerous studies have analyzed the decline in labor's share of income, but only few have linked it to the increase in financialization. The process of financialization can roughly be described as an increasing importance of the financial sector which had an impact on the distribution between wages and profits on the one hand, and retained earnings and financial income in the form of dividends and interests on the other hand. This paper seeks to explore the relationship between financialization and labor's share of income using a time-series cross-section data set of 13 countries over the time period from 1986 until 2007. The results suggest that there is indeed a relationship between increasing dividend and interest payments of non-financial corporations and the decline of the share of wages in national income. Other factors that can be accounted for the decline relate to globalization and a decrease in the bargaining power of labor. --
    Keywords: Financialization,functional income distribution,labor's share
    JEL: E25 E44 F4
    Date: 2013
  30. By: Fritz Breuss
    Abstract: Das Kernelement der Europäischen Integration, der „Binnenmarkt“, feiert heuer das 20-jährige Bestehen. Österreich hat seit dem Beitritt zur EU im Jahr 1995 an allen vertiefenden Schritten der EU-Integration teilgenommen. Nicht nur politisch ist Österreich durch die EU-Mitgliedschaft moderner, europäischer geworden, es hat auch ökonomisch auf allen Stufen der Integration profitiert: Ostöffnung (zusätzliches BIP-Wachstum +0,2 Prozentpunkte pro Jahr), EU-Mitgliedschaft (Teilnahme am EU-Binnenmarkt: +0,6 Prozentpunkte), WWU-Teilnahme (+0,4 Prozentpunkte) und EU-Erweiterung (+0,4 Prozentpunkte). Die aus Modellsimulationen abgeleiteten Integrationseffekte durch die Teilnahme an allen Integrationsstufen verstärkten das Wachstum des österreichischen BIP insgesamt um ½ bis 1 Prozentpunkt pro Jahr. Die Plausibilität dieser Modellergebnisse wird durch den Vergleich der Wirtschaftsentwicklung Österreichs mit anderen EU-Ländern und Drittländern unterstrichen. So entsprach der Wachstumsvorsprung Österreichs vor Deutschland und der Schweiz den genannten Integrationseffekten. Dieser „Wachstumsbonus“ ist ohne die Integrationswirkungen der Teilnahme Österreichs an allen EU-Projekten schwer bis gar nicht erklärbar.
    Keywords: European Integration, Single Market, Monetary Union, EU Enlargement, Model Simulations, Country Study
    JEL: E27 F12 F15 F33 F41 F53
    Date: 2013–01
  31. By: Stijn Claessens (International Monetary Fund); M. Ayhan Kose (International Monetary Fund); Luc Laeven (International Monetary Fund); Fabián Valencia (International Monetary Fund)
    Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.
    Keywords: global financial crisis, sudden stops, debt crises, banking crises, currency crises, defaults, restructuring, welfare cost, asset price busts, credit busts, prediction of crises.
    JEL: E32 F44 G01 E5 E6 H12
    Date: 2013–01
  32. By: Ratti, Ronald A; Vespignani, Joaquin L.
    Abstract: Unanticipated increases in the BRIC countries’ liquidity lead to significant and persistent increases in real oil prices, global oil production and global real aggregate demand. Unanticipated shocks to the liquidity of developed countries over 1997:01-2011:12 do not. The relative contribution to real oil price of liquidity in BRIC countries to liquidity in developed countries is much greater since 2005 than before 2005. China and India drive the results for the effect of BRIC countries’ liquidity on real oil price and global oil production. China and India and Brazil and Russia reinforce one another on the effect of liquidity on global real aggregate demand. Due to the difference between countries as commodity importers/exporters, the liquidity of Brazil and Russia increases significantly with a rise in real oil price and that of China and India decreases significantly with a rise in real oil price. It is shown that the strong rebound in oil price during 2009 is mostly due to strong effects of shocks to liquidity in the BRIC countries. The analysis helps in assessing the importance of the BRIC economies in the upsurge of the real price of crude oil.
    Keywords: Oil Price; BRIC countries; China and India; Global liquidity
    JEL: E51 E31 G15 F01 Q43
    Date: 2012–11–01
  33. By: McCauley, Robert N. (Asian Development Bank Institute)
    Abstract: This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets, leading to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.
    Keywords: capital flows; safe assets; international flow funds; vix; global liquidity
    JEL: E58 F30 G15
    Date: 2013–01–27
  34. By: Bellino, Enrico
    Abstract: The Ramsey (1928) accumulation path is characterized as a saddle-path in the standard presentations of the model based on the works of Cass (1965) and Koopmans (1965). From a mathematical stance a saddle-path is unstable: if the system is exactly on that path, it converges to the steady state of the system; if it diverges slightly from that path, it shifts indefinitely from the steady state. The 'transversality' condition is then invoked in the Ramsey model to prevent the system from following such divergent paths; from the economical point of view this condition can be interpreted as a perfect foresight assumption. This kind of instability, which is typical of infinite horizon optimal growth models, has been sometime considered to account for actual economic crises. The claim would seem to be grounded on the idea that if the consumer optimizes myopically, i.e., by only considering the current and the subsequent period, the ensuing dynamics diverges almost surely from the steady state equilibrium. Convergence requires perfect foresight. The present work aims to challenge this conclusion, which seems not inherent to the choice problem between consumption and savings, but it is due to the presumption that the consumer must face this problem in an infinite horizon setting. The Ramsey problem of selection of the accumulation path will be re-proposed here within a framework where consumer's ability to optimize over the future is assumed to be imperfect. However, the ensuing path will converge to the steady state, without assuming perfect foresight. Myopia is thus not ultimately responsible for the instabilities of the 'optimal' accumulation path. Explanations of instability phenomena of actual economic systems (crises, bubbles, etc.) must be sought in other directions, probably outside the strait-jacket of the optimization under constraint.
    Keywords: Ramsey model; transversality condition; bounded rationality; convergence; saddle path
    JEL: E22 B22 E21
    Date: 2013–01–28
  35. By: Frantisek Hajnovic (National Bank of Slovakia, Research Department); Juraj Zeman (National Bank of Slovakia, Research Department); Jan Zilinsky (University of Chicago)
    Abstract: This paper uses data from 1995 to 2008 to estimate debt limits in the European Union countries derived from the budgetary responses to debt levels before the crisis. Based on work by the IMF (Ostry, 2010), we present our suggested approach and estimate the fiscal reaction functions and the implied critical debt levels of EU governments. Since many countries did not take advantage of the boom years for consolidation, the fiscal space – availability of debt financing – in the euro zone has shrunk, especially in countries where the response to rising debt levels has historically been weak. We conclude by stressing a need for structural changes in budget policy (shifts in the reaction on debt) or risk default in cases where fiscal space was negative or has been squeezed.
    Keywords: fiscal space, fiscal policy, public debt, consolidation, critical debt level, EU
    JEL: E21 E27 C53
    Date: 2012–12
  36. By: Herbert Walther (Department of Economics, Vienna University of Economic and Business); Alfred Stiassny (Department of Economics, Vienna University of Economic and Business)
    Abstract: In this paper, we argue that shadow activities and different levels of marketization of household production systematically distort international comparisons of aggregate gross household saving rates (HSRs): Higher shares of hidden income increase observed HSRs. Panel data for 18 (24) OECD-countries covering a period of a decade show that gross HSRs are positively related to the degree of corruption (used as a proxy for the propensity to shift economic activities into the shadow) and to the share of income from property and self employment. At the same time, gross HSRs are negatively related to the female employment rate, the ratio of indirect taxes to direct taxes, and to the tax wedge. One plausible story behind these phenomena might be that unobserved consumption and wages in the shadow labor market induce an upward bias in observed HSRs and profit shares, while the price level effects of a higher share of indirect taxes and a ‘welfare state’ effect lower observed HSRs.
    Keywords: National Accounts, Saving Rate, Hidden Income, Shadow Economy, Corruption, Dynamic Panels
    JEL: E01 E21 O17
    Date: 2013–01
  37. By: Matthew Jaremski (Department of Economics, Colgate University); Peter Rousseau (Department of Economics, Vanderbilt University)
    Abstract: The “Federalist financial revolution†may have jump-started the U.S. economy into modern growth, but the Free Banking System (1837-1862) did not play a direct role in sustaining it. Despite lowering entry barriers and extending banking into developing regions, we find in county-level data that free banks had little or no effect on growth. The result is not just a symptom of the era, as state-chartered banks seem to have strong and positive effects on manufacturing and urbanization.
    Keywords: Free banking; antebellum banking; financial liberalization; finance-led growth
    JEL: E0 N0
    Date: 2012–12–13
  38. By: Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: We investigate in this paper whether income growth has played any role on inequality in all nine young South American democracies during the period 1970-2007. The results, based on dynamic panel time-series analysis, robustly suggest that income growth has indeed played a progressive role in reducing inequality during the period. Moreover, the results suggest that this negative relationship is even stronger in the 1990s and early 2000s, a period in which the continent achieved macroeconomic stabilisation, political consolidation and much improved economic performance. On the contrary, during the 1980s (the so-called "lost decade"), the negative income growth experienced by the continent at the time has hit the poor the hardest, or alternatively speaking, it has played a regressive role on inequality. All in all, we suggest that consistent growth, and all that it encompasses, is an important equaliser which should not be discarded as a serious option by policy makers interested in a more equal income distribution.
    Keywords: Growth, inequality, South America
    JEL: E20 O11 O15 O54
    Date: 2013–01

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