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

  1. Unconventional government debt purchases as a supplement to conventional monetary policy By Ellison , Martin; Tischbirek , Andreas
  2. Ramsey Monetary Policy in a New Keynesian Model with Endogenous Growth By Barbara Annicchiarico; Lorenza Rossi
  3. Monetary Policy and Rational Asset Price Bubbles By Jordi Galí
  4. The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints By Oscar Parkyn; Tugrul Vehbi
  5. Trend Shocks and Economic Development By Claude Francis Naoussi; Fabien Tripier
  6. Fiscal Policy in a Small Open Economy with Oil Sector and non-Ricardian Agents By Andrés González; Martha Rosalba López Piñeros; Norberto Rodríguez; Santiago Téllez
  7. Evolution of Russia’s Budgetary Policy in the 2000s: in Search of Financial Stability for the National Budget System By Sergey Drobyshevsky; Sergey Sinelnikov-Murylev; Ilya Sokolov
  8. Oil Price Uncertainty in a Small Open Economy By Yusuf Soner Baskaya; Timur Hulagu; Hande Kucuk
  9. Nonlinearity of the inflation-output trade-off and time-varying price rigidity By Antonia López-Villavicencio; Valérie Mignon
  10. The Turkish Approach to Capital Flow Volatility By Yasin Akcelik; Erdem Basci; Ergun Ermisoglu; Arif Oduncu
  11. Russian Banking System: Stability Factors In the Wake of 2008-2009 Crisis By Andrey Zubarev
  12. Modelling of cycles in the residential real estate market – interactions between the primary and the secondary market and multiplier effects By Hanna Augustyniak; Laszek Jacek; Krzysztof Olszewski; Joanna Waszczuk
  13. Market-Based Measurement of Expectations on Short-Term Rates in Turkey By Ibrahim Burak Kanli
  14. Optimal Public Debt Management and Liquidity Provision By George-Marios Angeletos; Fabrice Collard; Harris Dellas; Behzad Diba
  15. The Dark Side of Fiscal Stimulus By Holger Strulik; Timo Trimborn
  16. Capital Flows, Credit Booms, and Financial Crises in the Classical Gold Standard Era By Christopher M. Meissner
  17. Exchange Rates in Target Zones - Evidence from the Danish Krone By Mark P. Taylor; Stefan Reitz
  18. A Literature Overview of the Central Bank’s Knowledge Transparency By M. Haluk Guler
  19. Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study By Mark Weisbrot; Helene Jorgensen
  20. Identifying Drivers for the Accumulation of Household Financial Wealth By Maria Belén Zinni
  21. Securitization, housing market and banking sector behavior in a stock-flow consistent model By Fontana, Olimpia; Godin, Antoine
  22. “How systemic is Spain for Europe?” By Peter Claeys; Borek Vašícek
  23. How the Great Moderation Became a (Contained) Depression and What to Do About It By Barry Cynamon; Steven Fazzari; Mark Setterfield

  1. By: Ellison , Martin (University of Oxford); Tischbirek , Andreas (University of Oxford)
    Abstract: In response to the Great Financial Crisis, the Federal Reserve and the Bank of England have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
    Keywords: quantitative easing; large-scale asset purchases; preferred habitat; optimal monetary policy
    JEL: E40 E43 E52 E58
    Date: 2013–02–18
  2. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia, Department of Economics and Business)
    Abstract: We study Ramsey monetary policy in a New Keynesian (NK) model with endogenous growth and knowledge spillovers external to each firm. We find that in contrast with the standard NK model, the Ramsey dynamics implies deviation from full inflation targeting in response to technology and government spending shocks
    Keywords: Monetary Policy, Endogenous Growth, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2013–02–13
  3. By: Jordi Galí
    Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
    JEL: E44 E52
    Date: 2013–02
  4. By: Oscar Parkyn; Tugrul Vehbi
    Abstract: This paper investigates the macroeconomic effects of fiscal policy in New Zealand using a structural Vector Autoregression (SVAR) model. The model is the five-variable structural vector autoregression (SVAR) framework proposed by Blanchard and Perotti (2005), further augmented to allow for the possibility that taxes, spending and interest rates might respond to the level of the debt over time. We examine the dynamic responses of output, inflation and the interest rate to changes in government spending and revenues and analyse the contribution of shocks to New Zealand's business cycle for the period 1983:1-2010:2. We find that the effects of government expenditure shocks in New Zealand appear to be positive but small in the short-run at the cost of higher interest rates and lower output in the medium to long-run. The sign of the effects of tax policy changes are less clear cut, but again the effects on GDP appear similarly modest. Past fiscal policy is analysed through a historical decomposition of the shocks in the model. This suggests that discretionary fiscal policy has had a generally pro-cyclical impact on GDP over the last fifteen years, and a material impact on the real long-term interest rate. A fiscal expansion has a positive but limited impact on inflation.
    Keywords: Fiscal policy, business cycle fluctuations, vector autoregression, debt feedback
    JEL: C32 E32 E62
    Date: 2013–02–08
  5. By: Claude Francis Naoussi; Fabien Tripier
    Abstract: This article explores the role of trend shocks in explaining the specificities of business cycles in developing countries using the methodology introduced by Aguiar and Gopinath (2007) [“Emerging Market Business Cycles: The Cycle Is the Trend” Journal of Political Economy 115(1)]. We specify a small open economy model with transitory and trend shocks on productivity to replicate the differences in the business cycle behavior observed between developed, emerging, and Sub-Saharan Africa countries. Our results suggest a strong relationship between the weight of trend shocks in the source of fluctuations and the level of economic development. The weight of trend shocks is (i) higher in Sub-Saharan Africa countries than in emerging and developed countries, (ii) negatively correlated with the level of income, the quality of institutions, and the size of the credit market, and (iii) uncorrelated with the volatility of aid received by countries, the inflation rate, and the trend in trade-openness.
    Keywords: Business Cycle;Permanent shocks;Growth;Africa;Small open economy
    JEL: E32 F41 O55
    Date: 2013–01
  6. By: Andrés González; Martha Rosalba López Piñeros; Norberto Rodríguez; Santiago Téllez
    Abstract: In this paper we develop a dynamic stochastic general equilibrium fiscal model for the Colombian economy. The model has three main components: the existence of non-Ricardian households, price and wage rigidities, and a fiscal authority that finances government spending partly with public debt. The model is calibrated to capture the empirical evidence on the macroeconomic effects of government spending and it is used to study the effect of an oil price shock under different fiscal policy rules. Our results show that fiscal multipliers in Colombia are positive in a way consistent with the evidence. Our analysis also shows that a structural fiscal rule delivers a better outcome in terms of macroeconomic volatility relative to a balanced budget rule or a countercyclical fiscal rule.
    Date: 2013–02–17
  7. By: Sergey Drobyshevsky (Gaidar Institute for Economic Policy); Sergey Sinelnikov-Murylev (Gaidar Institute for Economic Policy); Ilya Sokolov (Gaidar Institute for Economic Policy)
    Abstract: This paper deals with 2008-2009 crisis which marked a new stage of Russia’s budgetary policy. Although the budget situation in Russia is presently much better than in the majority of the developed countries, reservation of high dependence on oil proceeds, observed trends in in the structure of expenditure obligations indicate the preservation of high risks of an unbalanced budget in long term perspective. Provision of budgetary and macroeconomic balance require adoption of urgent measures both in the sphere of tax policy and budget outlays.
    Keywords: budget policy, financial stability, tax policy, fiscal policy, national budget.
    JEL: E62 E52 E58 G01 H61 H68
    Date: 2013
  8. By: Yusuf Soner Baskaya; Timur Hulagu; Hande Kucuk
    Abstract: We analyze business cycle implications of oil price uncertainty in an oil-importing small open economy, where oil is used for both consumption and production. In our framework, higher volatility in oil prices works through two main channels. On the one hand, it makes the marginal product of capital riskier, creating an incentive to substitute away from capital. On the other hand, it increases the demand for precautionary savings, which might imply higher capital accumulation in response to a rise in oil price uncertainty depending on whether agents have access to an alternative asset, international bond in our model. We show that the fall in investment following a rise in the volatility of real oil prices in the case of financial integration is more than twice the fall in investment observed under financial autarky. Moreover, the interaction between shocks to the level and volatility of oil prices is quantitatively important: initial responses of investment, output and consumption to a rise in oil prices are almost doubled, when there is a simultaneous rise in the volatility of oil prices.
    Keywords: Oil price, stochastic volatility, financial market integration
    JEL: E20 E32 F32 F41 Q43
    Date: 2013
  9. By: Antonia López-Villavicencio; Valérie Mignon
    Abstract: Relying on the backward-looking Phillips curve; we estimate the level of inflation that erodes price rigidity and investigate its time constancy. To this end; we employ smooth transition regression models with rolling regressions to account for varying threshold inflation levels. Studying six advanced countries over the 1970-2012 period; our results show that both the slope of the Phillips curve and the threshold; trend inflation that erodes price rigidity are time varying. These characteristics could not be captured by a static linear or nonlinear model; illustrating the rich flexibility embedded in our proposed model.
    Keywords: Phillips curve;inflation;price rigidity;nonlinearity;menu costs
    JEL: E31 C22
    Date: 2013–01
  10. By: Yasin Akcelik; Erdem Basci; Ergun Ermisoglu; Arif Oduncu
    Abstract: The shock waves of the 2008-09 global financial crisis and the 2011-12 Eurozone debt crisis hit emerging markets from the trade, the finance and the expectations channels. We focus on the finance channel in this paper. We first discuss the challenges arising from capital flow volatility in emerging economies in general. We then focus on the Turkish approach and describe in detail the new policy mix implemented by the Central Bank of the Republic of Turkey during the 2008-2012 period and the results obtained. This approach differs from others in its emphasis on the use of macroprudential policy measures rather than capital flow measures for improving domestic financial stability in face of volatile capital flows.
    Keywords: Capital flow volatility, macroprudential policy, capital flow measures
    JEL: E44 E52 E58
    Date: 2013
  11. By: Andrey Zubarev (Gaidar Institute for Economic Policy)
    Abstract: This paper discusses different approaches to theoretical and empirical models of bank defaults. Through constructed binary probabilistic models of defaults the paper reveals key factors which have an impact on the viability of Russian banks during the financial crisis of 2008 to 2009. Policy recommendations of the Central Bank of Russia and the banking supervision and regulation aimed at preventing bank defaults in the event of such crises in the future are formulated based on the model results.
    Keywords: bank default, financial crisis, binary models, policy of the Central Bank of Russia.
    JEL: E41 E51 E58 G21 G24 G28
    Date: 2013
  12. By: Hanna Augustyniak (National Bank of Poland, Economic Institute); Laszek Jacek (National Bank of Poland, Economic Institute; Warsaw School of Economics); Krzysztof Olszewski (National Bank of Poland, Economic Institute); Joanna Waszczuk (National Bank of Poland, Economic Institute)
    Abstract: While analysing the housing market, we focus on the short-term modelling of the housing units market instead of analysing the long-term housing space market. In this context, even a minor change in factors affecting the real estate market leads, due to the multiplier effect, to strong shocks on the demand side, and, consequently, to an excessive reaction of the supply side. These shocks, depending on the price elasticity of supply and demand, may disappear or explode. This articles presents the modelling of cycles in the residential real estate market. We focus on price changes and the number of housing units in the primary and secondary market. We find that in order to smooth the housing cycle, the housing demand needs to be smoothed. This can be achieved with the use of fiscal policy, prudential regulations and housing policy.
    Keywords: Housing market cycles; disequilibrium; banking sector; regulation
    JEL: E32 E44 E37 R21 R31
    Date: 2013
  13. By: Ibrahim Burak Kanli
    Abstract: This paper aims to serve two purposes. First, it evaluates the ability of various financial market instruments to capture market expectations on short-term rate. Second, it proposes an alternative approach to obtain estimates of term premium inherent in alternative returns. Empirical results reveal that Turkish lira (TRY) returns implied by USD/TRY forward rates dominate all other return types for predicting the overnight interbank repo rate, followed by TRY interbank bid rate. Moreover, these return types are found to contain the lowest and least volatile term premium. However, forecasting ability of returns declines significantly with the introduction of the new policy framework by the Central Bank of Turkey, which utilizes “controlled degree of uncertainty” in o/n rates as an additional tool. In the recent period TRY interbank bid and ask rates stand out as returns with the highest ability to represent market expectations.
    Keywords: Monetary policy, expectations on short-term rate, market-based measures of expectations, term premium
    JEL: E43 E52 G12
    Date: 2013
  14. By: George-Marios Angeletos; Fabrice Collard; Harris Dellas; Behzad Diba
    Abstract: We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the tax burden of servicing the entire outstanding debt. We first document how this trade-off upsets the optimality of tax smoothing and, in contrast to the standard paradigm, helps induce a unique and stable steady-state level of debt in the deterministic version of the model. We next study the optimal policy response to fiscal and financial shocks in the stochastic version. We finally show how the results extend to a variant model in which the financial friction afflicts consumers rather than firms.
    JEL: E4 E6 H6
    Date: 2013–02
  15. By: Holger Strulik; Timo Trimborn
    Abstract: Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e. to the period in which a deficit spending program terminates. We show that recent time series analyses as well as economic models of different schools of thought predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is predicted to be lower than it could be without deficit spending. We set up a simple model that explains this phenomenon. Using phase diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without the deficit spending program. This fact explains why aggregate output is below its laissez faire level as well. We then calibrate an extended version of the model for the US and demonstrate how fiscal stimulus slows down recovery from a recession in the medium-run.
    Keywords: fiscal stimulus; government spending; output multiplier; economic recovery
    JEL: E60 H30 H50 O40
    Date: 2013–01–28
  16. By: Christopher M. Meissner
    Abstract: The classical gold standard period, 1880-1913, witnessed deep economic integration. High capital imports were related to better growth performance but may also have created greater volatility via financial crises. I first document the substantial output losses from various types of crises. I then explore the relationship between crises and two forces highlighted in the recent literature on financial crises: international capital movements and credit growth. Neither factor is sufficient to explain financial crises in this period. Instead, interactions between the informational environment, the fiscal situation, the exchange rate regime, and events beyond a nation’s borders all help explain crises. Some examples are provided.
    JEL: E5 E65 G01 N10 N20
    Date: 2013–02
  17. By: Mark P. Taylor; Stefan Reitz
    Abstract: Although the ERM II rules allow the Danish krone to fluctuate against the euro within an official target zone of 4.5%, most of the time the exchange rate has remained in a narrow range around its unconditional mean. Estimating a Smooth Transition Autoregression Target Zone (STARTZ) model confirms that the exchange rate exhibits target zone dynamics consistent with a band of approximately 0.75 percent around its unconditional mean. We conclude that the Danmark Nationalbank intervention policy of intra-marginal operations successfully managed an informal target zone in the foreign exchange market.
    Keywords: Target Zone, STARTZ model, Intervention
    JEL: E58 F31 G15
    Date: 2013–02
  18. By: M. Haluk Guler
    Abstract: Central bank transparency has received great deal of attention in recent years. However, the theoretical literature has not yet reached a consensus on the effect a higher degree of transparency has on economic welfare. In this paper, we focus one aspect of transparency, the transparency of ‘knowledge’ which refers to the disclosure of central bank forecasts about economic variables. In view of the ongoing theoretical disagreement concerning the economic effects of transparency, this paper provides an overview of the literature by looking first at the earlier studies built on the time-inconsistency models in the Barro-Gordon theoretical framework. We then investigate more recent strands of literature, which rely on the assumption that central banks are credible. Last, we conclude on the economic reasons for the mixed results of models and briefly mention the scope for further research.
    JEL: E52 E58 E59
    Date: 2013
  19. By: Mark Weisbrot; Helene Jorgensen
    Abstract: The IMF makes policy recommendations to European countries through its Article IV consultations and resulting papers. This paper examines IMF policy recommendations to see whether they have contributed to the ongoing crisis in Europe, and also how they might affect other European Union goals such as those of Europe 2020, which seeks to reduce social exclusion, promote public investment in research and development, and promote employment and education. The paper examines the policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011 (IMF 2012c).
    Keywords: ILO, IMF, article Iv,
    JEL: E F E5 E6 J
    Date: 2013–01
  20. By: Maria Belén Zinni (University of Rome "Tor Vergata")
    Abstract: Household financial assets and liabilities display considerable variation across countries and over time. This article investigates empirically the role of some of the key Life Cycle Model variables and other relevant factors behind household financial wealth disparities using data from 40 countries over the period 1995-2009. To the author's knowledge, it uses the largest macroeconomic dataset on household financial assets and liabilities assembled to date. The results are in line with the aggregative implications of the Life Cycle Model in that the wealth-to-income ratio decreases with income per capita growth and increases with the expected length of retirement. The study also presents empirical evidence for the role of financial and demographic developments on the accumulation of financial assets and liabilities by the household sector.
    Keywords: Household sector balance sheets, financial wealth, household assets, household liabilities,financial development
    JEL: E01 E21
    Date: 2013–02–13
  21. By: Fontana, Olimpia; Godin, Antoine
    Abstract: This paper focuses on the different balance sheet management behavior of private banks and worker households, when assets are traded in the market. The authors take into consideration the securitization process, through which mortgage loans to households are converted into tradable securities which are held by investment banks in order to make profits. The demand for deposits by speculative households and realized capital gains on selling of mortgage-backed securities in the secondary market produce an inflation balloon in security markets, even though the authors apply the Basel III agreements to private banking behavior. --
    Keywords: securitization,stock-flow consistent modelling,active banking
    JEL: E12 G11 E44
    Date: 2013
  22. By: Peter Claeys (Faculty of Economics, University of Barcelona); Borek Vašícek (Czech Czech National Bank, Economic Research Department)
    Abstract: We use the forecast-error variance decompositions from a VAR with daily sovereign bonds spreads since 2000 to detail the linkages between EU sovereign bond markets and banks over time. Using new summary statistics on the matrix of bilateral linkages, we show Spain is systemic for Europe. Its fiscal problems expose it to trouble in sovereign bond markets of the other Club Med countries, whereas its internationally grown banking sector transmits domestic economic trouble to the rest of Europe. This spillover has substantially increased since the outbreak of the Fiscal Crisis in the Eurozone in May 2010. We develop a real-time indicator to follow the degree of spillover on a daily basis.
    Keywords: spillover, contagion, sovereign bond spreads, fiscal policy, Eurozone, financial crisis, sovereign ratings.. JEL classification: G12, C14, E43, E62, G12, H62, H63
    Date: 2013–02
  23. By: Barry Cynamon (Weidenbaum Center on the Economy, Government, and Public Policy, Washington University in St. Louis); Steven Fazzari (Department of Economics, Washington University in St. Louis); Mark Setterfield (Department of Economics, Trinity College)
    Abstract: The Great Recession was deep and the subsequent recovery has been slower than most economists predicted. This article summarizes the message of a recent book that presents perspectives from a group of Keynesian economists who warned prior to 2007 of dangerous trends that could lead to these unfavorable outcomes. We discuss how the debt-fueled consumer boom leading up to the Great Recession was unsustainable and how rising inequality has compromised demand generation during the feeble recovery. We conclude the article by considering how public policy must respond in coming years.
    Keywords: Great Recession, Great Moderation, economic recovery, Keynesian macroeconomics
    JEL: E21 E25 E61
    Date: 2013–02

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