nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒02‒08
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal Monetary and Prudential Policies By Fabrice Collard; Harris Dellas; Behzad Diba; Olivier Loisel
  2. Fiscal Multiplier in a Credit-Constrained New Keynesian Economy By Engin Kara; Jasmin Sin
  3. Infrequent Fiscal Stabilization By Yuting Bai; Tatiana Kirsanova
  4. Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting By Michael Hatcher
  5. Using Micro Data on Prices to Improve Business Cycle Models By Engin Kara
  6. The influence of the Taylor rule on US monetary policy By Pelin Ilbas; Øistein Røisland; Tommy Sveen
  7. The ECB Unconventional Monetary Policies: Have They Lowered Market Borrowing Costs for Banks and Governments? By Urszula Szczerbowicz
  8. Escaping Expectation Traps: How Much Commitment is Required? By Christoph Himmels; Tatiana Kirsanova
  9. Monetary Policy conduct in Review: The Appropriate Choice of Instruments By Runchana Pongsaparn; Panda Ketruangroch; Dhanaporn Hirunwong
  10. Central Bank Balance Sheet and Policy Implications By Pornpinun Chantapacdepong; Nuttathum Chutasripanich; Bovonvich Jindarak
  11. Forecasting the Recovery from the Great Recession: Is This Time Different? By Kathryn M.E. Dominguez; Matthew D. Shapiro
  12. Financial Development and the Volatility of Income By Tiago Pinheiro; Francisco Rivadeneyra; Marc Teignier
  13. Unspanned Macroeconomic Factors in the Yields Curve By Laura Coroneo; Domenico Giannone; Michèle Modugno
  14. Cyclical Unemployment, Structural Unemployment By Peter A. Diamond
  15. Unemployment and endogenous reallocation over the business cycle By Carlos Carrillo-Tudela; Ludo Visschers
  16. One Hundred Years of Oil Income and the Iranian Economy: A curse or a Blessing? By Mohaddes, K.; Pesaran, M.H.
  17. Gold Returns By Robert J. Barro; Sanjay Misra
  19. On Financing Retirement with an Aging Population By Ellen R. McGrattan; Edward C. Prescott
  20. Expectations Traps and Coordination Failures with Discretionary Policymaking By Richard Dennis; Tatiana Kirsanova
  21. Asking About Wages: Results from the Bank of Canada’s Wage Setting Survey of Canadian Companies By David Amirault; Paul Fenton; Thérèse Laflèche
  22. Short-term GDP forecasting with a mixed frequency dynamic factor model with stochastic volatility By Massimiliano Marcellino; Mario Porqueddu; Fabrizio Venditti
  23. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data By Michael T. Owyang; Valerie A. Ramey; Sarah Zubairy
  24. Why are payment habits so heterogeneous across and within countries? Evidence from European countries and Italian regions By Guerino Ardizzi; Eleonora Iachini
  25. Incentives through the cycle: microfounded macroprudential regulation By Giovanni di Iasio; Mario Quagliariello
  26. Long and short-term effects of the financial crisis on labour productivity, capital and output By Oulton, Nicholas; Sebastia-Barriel, Maria
  27. Education Policy and Intergenerational Transfers in Equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Giovanni L. Violante
  28. The impact of volatility on economic growth By Aurelijus Dabušinskas; Dmitry Kulikov; Martti Randveer
  29. The accuracy of the European Commission's forecasts re-examined By Laura Gonzalez Cabanillas; Alessio Terzi
  30. Incentive Effects of Inheritances and Optimal Estate Taxation By Wojciech Kopczuk
  31. „Volcker/Vickers hybrid“?: The Liikanen Report and justifications for ring fencing and separate legal entities By Ojo, Marianne
  32. Authority Centrality and Hub Centrality as metrics of systemic importance of financial market infrastructures By Carlos Eduardo León Rincón; Jhonatan Pérez Villalobos
  33. Market Power, Governance and Innovation: OECD Evidence By Ugur, Mehmet
  34. Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems By Antoine Bommier; François Le Grand
  35. Is There Evidence of a Real Estate Collateral Channel Effect on Listed Firm Investment in China? By Jing Wu; Joseph Gyourko; Yongheng Deng
  36. Perceptions of unreported economic activities in Baltic Firms. Individualistic and non-individualistic motives By Jaanika Meriküll; Tairi Rõõm; Karsten Staehr
  37. Estimating the State Vector of Linearized DSGE Models without the Kalman Filter By Robert Kollmann

  1. By: Fabrice Collard (University of Bern); Harris Dellas (University of Bern); Behzad Diba (Georgetown University); Olivier Loisel (CREST(ENSAE))
    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: 2012–12
  2. By: Engin Kara; Jasmin Sin
    Abstract: Using a dynamic stochastic general equilibrium (DSGE) model that accounts for credit constraints, we study the effects of fiscal stimulus on the macroeconomy. We show that the presence of credit constraints results in larger fiscal multipliers than indicated by the standard DSGE models. If credit-crunch conditions persist, the multipliers become large enough for fiscal policy to be highly effective.
    Keywords: DSGE models, Monetary Policy, Fiscal Policy, Liquidity Trap, Credit constraints
    JEL: E32 E52 E58
    Date: 2012–12
  3. By: Yuting Bai; Tatiana Kirsanova
    Abstract: This paper studies discretionary non-cooperative monetary and fiscal policy stabilization in a New Keynesian model, where the fiscal policymaker uses a distortionary taxe as the policy instrument and operates with long periods between optimal time-consistent adjustments of the instrument. We demonstrate that longer fiscal cycles result in stronger complementarities between the optimal actions of the monetary and fiscal policymakers. When the fiscal cycle is not very long, the complementarities lead to expectation traps. However, with a sufficiently long fiscal cycle — one year in our model — no learnable time-consistent equilibrium exists. Constraining the fiscal policymaker in its actions may help to avoide these adverse effects.
    Keywords: Monetary and Fiscal Policy Interactions, Distortionary Taxes, Discretion, Infrequent Stabilization, LQ RE models
    JEL: E31 E52 E58 E61 C61
    Date: 2013–01
  4. By: Michael Hatcher
    Abstract: This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 per cent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing.
    Keywords: inflation targeting, price-level targeting, inflation risk, monetary policy.
    JEL: E52
    Date: 2013–01
  5. By: Engin Kara
    Abstract: I embed the pricing model proposed by Dixon and Kara (2011a, b) (i.e. a Generalized Taylor Economy (GTE)) into a state of the art instance of New Keynesian economics (e.g. Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007)). The GTE is built to account for one of the most important features of the data: hetero- geneity in price spells. I estimate the resulting model for the US using Bayesian methods. The new model matches key features of micro and macro data that would otherwise have been elusive.
    Keywords: DSGE models, reset inflation, GTE, Calvo.
    JEL: E32 E52 E58
    Date: 2012–11
  6. By: Pelin Ilbas (National Bank of Belgium); Øistein Røisland (Norges Bank (Central Bank of Norway)); 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: 2013–01–29
  7. By: Urszula Szczerbowicz
    Abstract: This paper evaluates the impact of all ECB unconventional monetary policies implemented between 2007 and 2012 on bank and government borrowing costs. We employ event-based regressions to measure the effect of each policy. The borrowing conditions for banks are represented by money market spreads and covered bond spreads while the sovereign bond spreads reflect government borrowing costs. The results show that sovereign bond purchasing programs (SMP, OMT) proved to be the most effective in lowering longer-term borrowing costs for both banks and governments with the largest impact in periphery euroarea countries. The strong impact in the euro-area periphery suggests that the central bank intervention in sovereign market is particularly effective when the sovereign risk is important. Furthermore, both covered bond purchase programs and 3-year loans to banks reduced bank refinancing costs.
    Keywords: unconventional monetary policy;quantitative easing;credit easing;sovereign bond spreads;covered bond spreads;Euribor-OIS spread
    JEL: E43 E44 E52 E58
    Date: 2012–12
  8. By: Christoph Himmels; Tatiana Kirsanova
    Abstract: In this paper we study the degree of precommitment that is required to eliminate multiplicity of policy equilibria, which arise if the policy maker acts under pure discretion. We apply a framework developed by Schaumburg and Tambalotti (2007) and Debortoli and Nunes (2010) to a standard New Keynesian model with government debt. We demonstrate the existence of expectation traps under limited commitment and identify the minimum degree of commitment which is needed to escape from these traps. We find that the degree of precommitment which is sufficient to generate uniqueness of the Pareto-preferred equilibrium requires the policy maker to stay in office for a period of two to five years. This is consistent with monetary policy arrangements in many developed countries.
    Keywords: Limited Commitment, Commitment, Discretion, Multiple Equilibria, Monetary and Fiscal Policy Interactions
    JEL: E31 E52 E58 E61 C61
    Date: 2012–12
  9. By: Runchana Pongsaparn (Bank of Thailand); Panda Ketruangroch (Bank of Thailand); Dhanaporn Hirunwong (Bank of Thailand)
    Abstract: TIn achieving price stability, a common mandate of monetary policy, central banks can choose different ways to conduct monetary policy. The difference in the conduct of monetary policy lies in the instrument they use not in the monetary policy regime per se. The paper finds that the higher the level of financial development, the higher degree of monopoly power (uniqueness) in exports and the stronger the institution, the more likely a country will use interest rate as the main monetary policy instrument. Furthermore, based on three criteria: (1) controllability of policy instrument and monetary conditions (2) the degree of counter-cyclicality and (3) the effectiveness of instrument in influencing inflation and output, interest rate appears to be an appropriate monetary policy instrument for Thailand. So far, performance of the current monetary policy framework in Thailand has been fine, with transparency through communication with the general public being one of the key factors contributing to the performance and policy effectiveness.
    Keywords: Economic Rationales for Central Banking
    Date: 2012–10–21
  10. By: Pornpinun Chantapacdepong (Bank of Thailand); Nuttathum Chutasripanich (Bank of Thailand); Bovonvich Jindarak (Bank of Thailand)
    Abstract: Recently, weak central bank financial positions, especially of emerging economies, have brought into the public spotlight whether it will constrain or obstruct the policy implementation in the long run or not. The country case studies and statistical performance showed that the central bank capital erosion does not directly relate to the policy effectiveness, but it creates the vulnerabilities to the monetary policy process. The key factor helping achieve the policy objectives, even with the losses or negative capital is “central bank credibility”. The policy choices to reduce such vulnerabilities are also discussed in this paper.
    Keywords: Central Bank Balance Sheet and Policy Implications
    JEL: E58 E52 E47
    Date: 2012–10–21
  11. By: Kathryn M.E. Dominguez; Matthew D. Shapiro
    Abstract: This paper asks whether the slow recovery of the US economy from the trough of the Great Recession was anticipated, and identifies some of the factors that contributed to surprises in the course of the recovery. It constructs a narrative using news reports and government announcements to identify policy and financial shocks. It then compares forecasts and forecast revisions of GDP to the narrative. Successive financial and fiscal shocks emanating from Europe, together with self-inflicted wounds from the political stalemate over the US fiscal situation, help explain the slowing of the pace of an already slow recovery.
    JEL: E32 E37 N10
    Date: 2013–02
  12. By: Tiago Pinheiro; Francisco Rivadeneyra; Marc Teignier
    Abstract: This paper presents a general equilibrium model with endogenous collateral constraints to study the relationship between financial development and business cycle fluctuations in a cross-section of economies with different sizes of their financial sector. The financial sector can amplify or dampen the volatility of income by increasing or reducing the business cycle effects of technological shocks. We find a non-monotonic relationship between the volatility of income and financial development measured by total borrowing and lending. A more developed financial system unambiguously increases the income level however the volatility can rise or fall depending on the degree of financial development.
    Keywords: Credit and credit aggregates; Financial stability
    JEL: E32 E60
    Date: 2013
  13. By: Laura Coroneo; Domenico Giannone; Michèle Modugno
    Abstract: We show that two macroeconomic factors have an important predictive content for governmentbond yields and excess returns. These factors are not spanned by the cross-section of yields andare well proxied by economic growth and real interest rates.
    Keywords: Yield curve; Government Bonds; factor models; forecasting
    JEL: C33 C53 E43 E44 G12
    Date: 2013–01
  14. By: Peter A. Diamond
    Abstract: Whenever unemployment stays high for an extended period, it is common to see analyses, statements, and rebuttals about the extent to which the high unemployment is structural, not cyclical. This essay views the Beveridge Curve pattern of unemployment and vacancy rates and the related matching function as proxies for the functioning of the labor market and explores issues in that proxy relationship that complicate such analyses. Also discussed is the concept of mismatch.
    JEL: E24 E32 E6 J23
    Date: 2013–02
  15. By: Carlos Carrillo-Tudela; Ludo Visschers
    Abstract: We build an analytically and computationally tractable stochastic equilibrium model of unemployment in heterogeneous labor markets. Facing search frictions within markets and reallocation frictions between markets, workers endogenously separate from employment and endogenously reallocate between markets, in response to changing aggregate and local conditions. Empirically, using the 1986-2008 SIPP panels, we document the occupational mobility patterns of the unemployed, finding notably that occupational change of unemployed workers is procyclical. The heterogeneous-market model yields highly volatile countercyclical unemployment, and is simultaneously consistent with procyclical reallocation, countercyclical separations and a negativelysloped Beveridge curve. Moreover, the model exhibits unemployment duration dependence, which (when calibrated to long-term averages) responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, the model is also consistent with different employment and reallocation outcomes as workers gain experience in the labor market, on average and over the business cycle.
    Keywords: Unemployment, Business Cycle, Search, Endogenous Separations, Reallocation, Occupational Mobility
    JEL: E24 E30 J62 J63 J64
    Date: 2013–01
  16. By: Mohaddes, K.; Pesaran, M.H.
    Abstract: This paper examines the impact of oil revenues on the Iranian economy over the past hundred years, spanning the period 1908-2010. It is shown that although oil has been produced in Iran over a very long period, its importance in the Iranian economy was relatively small up until the early 1960s. It is argued that oil income has been both a blessing and a curse. Oil revenues when managed appropriately are a blessing, but their volatility (which in Iran is much higher than oil price volatility) can have adverse effects on real output, through excessively high and persistent levels of inflation. Lack of appropriate institutions and policy mechanisms which act as shock absorbers in the face of high levels of oil revenue volatility have also become a drag on real output. In order to promote growth, policies should be devised to control in?ation; to serve as shock absorbers negating the adverse effects of oil revenue volatility; to reduce rent seeking activities; and to prevent excessive dependence of government finances on oil income.
    Keywords: Oil price volatility, oil income, rent seeking, inflation, macroeconomic policy.
    JEL: E02 N15 Q32
    Date: 2013–01–29
  17. By: Robert J. Barro; Sanjay Misra
    Abstract: From 1836 to 2011, the average real rate of price change for gold in the United States is 1.1% per year and the standard deviation is 13.1%, implying a one-standard-deviation confidence band for the mean of (0.1%, 2.1%). The covariances of gold’s real rate of price change with consumption and GDP growth rates are small and statistically insignificantly different from zero. These negligible covariances suggest that gold’s expected real rate of return—which includes an unobserved dividend yield—would be close to the risk-free rate, estimated to be around 1%. We study these properties within an asset-pricing model in which ordinary consumption and gold services are imperfect substitutes for the representative household. Disaster and other shocks impinge directly on consumption and GDP but not on stocks of gold. With a high elasticity of substitution between gold services and ordinary consumption, the model can generate a mean real rate of price change within the (0.1%, 2.1%) confidence band along with a small risk premium for gold. In this scenario, the bulk of gold’s expected return corresponds to the unobserved dividend yield (the implicit rental income from holding gold) and only a small part comprises expected real price appreciation. Nevertheless, the uncertainty in gold returns is concentrated in the price-change component. The model can explain the time-varying volatility of real gold prices if preference shocks for gold services are small under the classical gold standard but large in other periods particularly because of shifting monetary roles for gold.
    JEL: E44 G12 N20
    Date: 2013–02
  18. By: LUISITO BERTINELLI (University of Luxembourg CREA); OLIVIER CARDI (University Panthéon-Assas ERMES and Ecole Polytechnique); PARTHA SEN (Department of Economics, Delhi School of Economics, Delhi, India)
    Abstract: In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the e®ects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive mar- gin. We ¯nd 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 ¯xed 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 una®ected in the long-run. The sensitivity analysis reveals that product market deregulation is more e®ective in countries where labor market regulation is high, product markets are initially highly regulated, unemployment bene¯ts are smaller and labor force is more responsive.
    Keywords: Imperfect competition; Endogenous markup; Search theory; Unemployment; Deregulation.
    JEL: E24 J63 L16
    Date: 2012–11
  19. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: A problem facing the United States is financing retirement consumption as its population ages. Policy analysts increasingly advocate savings-for-retirement systems, but are concerned with insufficient savings opportunities with limited government debt. This concern is unwarranted. First, there is more productive capital than commonly assumed in macroeconomic modeling. Second, if the policy reform subsumes the elimination of capital income taxes, then the value of business equity increases relative to the capital stock. Phasing in a switch from the current U.S. system to a savings-for-retirement system without capital income taxes increases welfare of all current and future cohorts.
    JEL: E20 G18 H21 H61
    Date: 2013–02
  20. By: Richard Dennis; Tatiana Kirsanova
    Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is first necessary to understand how an economy arrives to a particular equilibrium. In this paper we employ notions of learnability and self-enforceability to motivate and identify equilibria of particular interest. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our methods for identifying equilibria of interest. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.
    Keywords: Discretionary policymaking, multiple equilibria, coordination, equilibrium selection.
    JEL: E52 E61 C62 C73
    Date: 2013–01
  21. By: David Amirault; Paul Fenton; Thérèse Laflèche
    Abstract: The Bank of Canada conducted a Wage Setting Survey with a sample of 200 private sector firms from mid-October 2007 to May 2008. Results indicate that wage adjustments for the Canadian non-union private workforce are overwhelmingly time dependent, with a fixed duration of one year, and are clustered in the first four months of the year, suggesting that wage stickiness may not be constant over the year. Ad hoc adjustments between these fixed dates are rare, but when they do occur they are almost always upward and often in response to tight labour markets. The market wage rate is the most important factor managers consider when setting wages for their employees. Depending on firm size, different strategies are used to gain information about the market wage. Other important factors taken into account when setting wages include the firm’s profitability, its difficulty in attracting staff and workers’ productivity. While many managers acknowledge a link between the wage decision and inflation, very few use formal wage indexation rules such as a cost-of-living adjustment. Rather, most describe an informal backward-looking link. Survey results also suggest that managers are very reluctant to cut nominal base wages in times of weak demand. Managers are more likely to cut incentive pay, which would allow some flexibility in total compensation even if base pay is inflexible, or reduce the quantity of labour inputs (hours and employees).
    Keywords: Labour markets; Transmission of monetary policy
    JEL: E24 J33 M52
    Date: 2013
  22. By: Massimiliano Marcellino (European University Institute and Bocconi University); Mario Porqueddu (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: In this paper we develop a mixed frequency dynamic factor model featuring stochastic shifts in the volatility of both the latent common factor and the idiosyncratic components. We take a Bayesian perspective and derive a Gibbs sampler to obtain the posterior density of the model parameters. This new tool is then used to investigate business cycle dynamics and to forecast GDP growth at short-term horizons in the euro area. We discuss three sets of empirical results. First, we use the model to evaluate the impact of macroeconomic releases on point and density forecast accuracy and on the width of forecast intervals. Second, we show how our setup allows us to make a probabilistic assessment of the contribution of releases to forecast revisions. Third, we design a pseudo out-of-sample forecasting exercise and examine point and density forecast accuracy. In line with findings in literature on Bayesian Vector Autoregressions (BVAR), we find that stochastic volatility contributes to an improvement in density forecast accuracy.
    Keywords: forecasting, business cycle, mixed-frequency data, nonlinear models, nowcasting
    JEL: E32 C22 E27
    Date: 2013–01
  23. By: Michael T. Owyang; Valerie A. Ramey; Sarah Zubairy
    Abstract: A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jordà’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.
    JEL: E62
    Date: 2013–02
  24. By: Guerino Ardizzi (Bank of Italy); Eleonora Iachini (Bank of Italy)
    Abstract: The aim of this work is to arrive at a better understanding of the underlying reasons for the slow adoption of electronic payment instruments in Italy. Our findings indicate that a pivotal role in explaining Italy’s lag in abandoning cash is played by development factors, such as innovative capability and income per capita. Surprisingly, although the shadow economy is important, it is not decisive in explaining the limited use of electronic retail payment instruments.
    Keywords: payment instruments, cash demand, financial inclusion, retail payments
    JEL: E26 E42 E41
    Date: 2013–01
  25. By: Giovanni di Iasio (Bank of Italy); Mario Quagliariello (European Banking Authority)
    Abstract: We provide a micro-based rationale for macroprudential capital regulation by developing a model in which bankers can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings that force liquidation (deterioration risk). Low fundamental risk of assets guarantees benevolent funding conditions and banks are able to expand their balance sheets. The high continuation value would, in principle, improve incentives. However, the rise in asset demand and prices may jeopardize bankers' efforts whenever the liquidation price is high enough. This imposes socially inefficient liquidation which can be corrected with a capital requirement that aligns bankers' incentives. We show that a microprudential regulatory regime that disregards the equilibrium effect of asset prices on incentives performs poorly as low fundamental risk may induce high deterioration risk. Overall, the model suggests a theoretical foundation for the countercyclical capital buffer of Basel III, since it prescribes a macroprudential regulatory regime in which the equilibrium feedback effect is fully taken into account.
    Keywords: macroprudential regulation, incentives, financial stability, Basel III, Value-at-Risk, market-based financial intermediaries, financial crises
    JEL: E44 D86 G18
    Date: 2013–01
  26. By: Oulton, Nicholas (Bank of England); Sebastia-Barriel, Maria (Bank of England)
    Abstract: The behaviour of labour productivity in the United Kingdom since the onset of the recession in early 2008 constitutes a puzzle. Over four years after the recession began labour productivity is still below its previous peak level. This paper considers the hypothesis that economic capacity can be permanently damaged by financial crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labour productivity and a long-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The main finding is that a banking crisis as defined by Reinhart and Rogoff on average reduces the short-run growth rate of labour productivity by between 0.6% and 0.7% per year and the long-run level by between 0.84% and 1.1% (depending on the method of estimation), for each year that the crisis lasts. A banking crisis also reduces the long-run level of capital per worker by an average of about 1%. The corresponding effect on GDP per capita is about double the effect on GDP per worker since there is a long-run, negative effect on the employment ratio.
    Keywords: productivity; financial; banking crisis; recession
    JEL: E23 E32 J24 O47
    Date: 2013–01–24
  27. By: Brant Abbott (University of British Columbia); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Cowles Foundation, Yale University); Giovanni L. Violante (New York University)
    Abstract: This paper compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor supply during college, government grants and loans, as well as private loans, complement parental transfers as sources of funding for college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by two percentage points in the long-run. Any further relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants (especially their need-based component) are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers.
    Keywords: Education, Education policy, Public finance, Financial aid, Inter vivos transfers, Altruism, Overlapping generations, Credit constraints, Labor supply, Equilibrium
    JEL: E24 I22 J23 J24
    Date: 2013–02
  28. By: Aurelijus Dabušinskas; Dmitry Kulikov; Martti Randveer
    Abstract: This paper investigates the impact of macroeconomic volatility on growth in a panel of 121 countries over the period 1980 to 2010. We confirm the Ramey and Ramey (1995) result that macroeconomic volatility is negatively related to economic growth using a different empirical methodology and a newer dataset. Among the issues that await further work are the interaction of financial development and volatility, potential non-linearities of the impact of macroeconomic volatility on growth, and issues related to the endogeneity of growth and volatility in the context of empirical growth regression models
    Keywords: economic growth, macroeconomic volatility, growth regressions, panel data
    JEL: E40 O40 C33
    Date: 2013–02–04
  29. By: Laura Gonzalez Cabanillas; Alessio Terzi
    Abstract: This paper analyses the Commission's forecast track record, by building on previous analyses. The extension of the observation period to 2011 allows a first analysis of forecast accuracy during the years of the economic and financial crisis. Over the full timespan, forecasts for the EU and euro area are found to be generally unbiased. The same holds true for the outlook for most Member States, largely confirming earlier results. Moreover, the Commission services track record appears generally in line with that of the OECD, IMF and Consensus Economics, and in some cases better. Finally, while the analysis points to a limited impact of the crisis on the accuracy of the Commission's current-year forecasts, a significant deterioration of the accuracy of year-ahead projections is found. This applies in particular for the forecasts of GDP, investment, inflation and the government budget balance, due mainly to larger forecast errors in the recession year 2009, which by all standards proved exceptional and unanticipated by institutional and market forecasters.
    JEL: E17 E27 E37
    Date: 2012–12
  30. By: Wojciech Kopczuk
    Abstract: I consider nonlinear taxation of income and bequests with a joy-of-giving bequest motive and explicitly characterize the estate tax rate structure that maximizes social planner's welfare function. The solution trades off correction of externality from giving and discouraging effort of children due to income effect generated by bequests. The analysis shows that optimality of a positive tax on bequests in this context rests on the strength of the effect of bequests on behavior of future generations, and suggests that inheritance rather than estate tax is better suited to implement the corresponding policy.
    JEL: E21 H2
    Date: 2013–02
  31. By: Ojo, Marianne
    Abstract: Whilst some valid and justified arguments have been put forward in favour of ring fencing, that is, constructing a fire-wall between consumer and investment banks, and that such activities can be achieved without re structuring banks into separate legal entities, the Liikanen Report highlights why there is need for such re structuring. As well as considering the merits of ringfencing and the establishment of separate legal activities and entities, this paper aims to highlight why a suitable model aimed at mitigating risks of contagion can to a large extent, be justified on a cost-benefit analysis basis. Furthermore, the paper ultimately concludes that even though a greater degree of separation of legal entities and activities persist with the model which is referred to as „total separation“, a certain degree of independence between bank activities would also be necessary under ring fencing if its purposes and objectives are to be fulfilled.
    Keywords: Vickers Report; Volcker's Rule; Liikanen Report; ring fencing; recovery plans; resolution plans; bail-outs; loss absorption; systemic risks; leverage ratios; liquidity; capital requirements; de-leveraging
    JEL: E02 K2 G2 D02 G3 G01
    Date: 2013–02–04
  32. By: Carlos Eduardo León Rincón; Jhonatan Pérez Villalobos
    Abstract: Network analysis has been applied to identify systemically important financial institutions after the 2008 financial crisis. Such applications have stressed the importance of centrality within the too-connected-to-fail concept. Yet, despite their well-known importance for financial stability, financial market infrastructures’ centrality has not been equally covered by literature. Some particularities of strictly hierarchical (i.e. directed and acyclic) networks may explain the inconvenience arising from using basic metrics of centrality, and may explain why assessing centrality has been limited to financial institutions’ case. This paper addresses the assessment of systemic importance for Colombian financial infrastructures by means of the estimation of authority centrality and hub centrality. Their particular advantage consists of assessing importance as the mutually reinforcing centrality arising from nodes pointing to other nodes (i.e. hubs) and from nodes being pointed-to by other nodes (i.e. authorities), even in the case of directed and acyclic networks. Results are valuable since they quantitatively support financial authorities’ efforts to (i) identify systemically important financial infrastructures under the too-connected-to-fail concept; (ii) focus the intensity of oversight, supervision and regulation where the infrastructure-related systemic impact is the greatest; and (iii) enhance their policy and decision-making capabilities.
    Keywords: Financial market infrastructures, systemic risk, authority, hub, centrality, HITS algorithm, too-connected-to-fail. Classification JEL:D85, E42, G2
    Date: 2013–02
  33. By: Ugur, Mehmet
    Abstract: The aim of this paper is to investigate the relationship between market power, governance and patenting activity in a sample of 25 OECD countries from 1988-2007. Controlling for a wide range of innovation predictors, we report that governance quality is related positively with patenting activity in the full sample and in samples of countries with higher-than-average per-capita GDP, governance scores and economic openness. Secondly, the relationship between market power and innovation has a U-shape in the full sample, but inverted-U shape in split samples. Third, when interacted with governance, market power tends to have an offsetting effect that weakens the positive relationship between governance and innovation. These findings are robust to a range of control variables such as per-capita GDP, income inequality, depth of equity markets, labour share in national income, economic globalization and military expenditures. Our findings indicate that governance is a significant factor that explain innovation and that blanket statements about the relationship between competition and innovation as well as the kind of reforms necessary to foster innovation can be misleading.
    Keywords: Economic governance; innovation; patenting; market power
    JEL: E02 B52 O3
    Date: 2012–11
  34. By: Antoine Bommier (ETH Zurich, Switzerland); François Le Grand (EMLyon Business School)
    Abstract: We investigate whether the set of Kreps and Porteus (1978) preferences include classes of preferences that are stationary, monotonic and well-ordered in terms of risk aversion. We prove that the class of preferences introduced by Hansen and Sargent (1995) in their robustness analysis is the only one that fulfills these properties. The paper therefore suggests a shift from the traditional approach to studying the role of risk aversion in recursive problems. We also provide applications, in which we discuss the impact of risk aversion on asset pricing and risk sharing.
    Keywords: risk aversion; recursive utility; robustness; ordinal dominance; risk free rate; equity premium; risk sharing
    JEL: E2 E43 E44
    Date: 2013–01
  35. By: Jing Wu; Joseph Gyourko; Yongheng Deng
    Abstract: Previous research on the United States and Japan finds economically large impacts of changing real estate collateral value on firm investment. Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, we estimate investment equations that yield no evidence of a collateral channel effect. One reason for this stark difference appears to be that some of the most dominant firms in China are state-owned enterprises (SOEs) which are unconstrained in the sense that they do not need to rely on rising underlying property collateral values to obtain all the financing necessary to carry out their desired investment programs. However, we also find no collateral channel effect for non-SOEs when we perform our analysis on disaggregated sets of firms. Norms and regulation in the Chinese capital markets and banking sector can account for why there is no collateral channel effect operating among these firms. We caution that our results do not mean that there will be no negative fallout from a potential real estate bust on the Chinese economy. There are good reasons to believe there would be, just not through a standard collateral channel effect on firm investment.
    JEL: E22 G11 G31 R11 R3 R39
    Date: 2013–02
  36. By: Jaanika Meriküll; Tairi Rõõm; Karsten Staehr
    Abstract: This paper analyses managerial dishonesty in the form of economic activity not reported to the authorities. We employ data from a survey of Baltic firm managers, who were asked to assess the prevalence of unreported profits, employment and wages in their industry and to give their views on a range of questions related to various reasons for dishonest behaviour. Unreported economic activities are perceived to be widespread, although their extent and composition vary across the three countries. We employ a principal component analysis of the survey answers and identify three clusters capturing both individualistic and nonindividualistic motives for dishonest behaviour: 1) reciprocity towards government; 2) rational choice related motives; and 3) norms towards society as proxied by the tolerance of illegal activities. The econometric analysis indicates that all three motives are related to perceptions of unreported activities in the Baltic countries
    Keywords: unreported economic activity, tax evasion, tax morale, norms, governance, social coherence, Baltic countries
    JEL: E61 F36 F41
    Date: 2013–02–04
  37. By: Robert Kollmann
    Keywords: DSGE Models; Kalman Filter; smoothing
    JEL: E37 C32 C68
    Date: 2013–01

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