nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒03‒16
sixty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory By Thomas I. Palley
  2. Business cycle and monetary policy analysis with market rigidities and financial frictions By M. Casares; Luca Deidda; JE. Galdon-Sanchez
  3. Fiscal Limits and Monetary Policy By Eric M. Leeper
  4. Financial Intermediaries, Credit Shocks and Business Cycles By Yasin Mimir
  5. Monetary Policy, Inflation Illusion and the Taylor Principle – An Experimental Study By Wolfgang J. Luhan; Johann Scharler
  6. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  7. The Effects of Fiscal Policy on Consumption in Good and Bad Times By Hristov, Atanas
  8. Non-Linear Taylor Rule through Threshold Estimation By Bhaduri, Saumitra; Sethudurai, Raja
  9. China's Monetary Policy Communication: Money Markets not only Listen, They also Understand By Alicia Garcia-Herrero; Eric Girardin
  10. The United Kingdom: Economic Growth, a Draft Master Plan By De Koning, Kees
  11. Speculative Runs on Interest Rate Pegs By Marco Bassetto; Christopher Phelan
  12. Are Sticky Prices Costly? Evidence From The Stock Market By Yuriy Gorodnichenko; Michael Weber
  13. Interest Rate Expectations in the Media and Central Bank Communication By Michael J. Lamla; Jan-Egbert Sturm
  14. Nonlinearity of the inflation-output trade-off and time-varying price rigidity By Antonia López-Villavicencio; Valérie Mignon
  15. Fiscal Policy Stance in the European Union: The Impact of the Euro By Mencinger, Jernej; Aristovnik, Aleksander
  16. Shadow economies at times of banking crises: empirics and theory By Emilio Colombo; Luisanna Onnis; Patrizio Tirelli
  17. Role of Investment Shocks in Explaining Business Cycles in Turkey By Canan Yuksel
  18. Some Thought Experiments on the Changes in Labor Supply in Turkey By Murat Ungor
  19. Recessions after Systemic Banking Crises: Does it matter how Governments intervene? By Sweder van Wijnbergen; Timotej Homar
  20. Unexpected Consequences of Ricardian Expectations By Schlicht, Ekkehart
  21. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Augustin Landier; David Sraer; David Thesmar
  22. A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters By Pascal Michaillat; Emmanuel Saez
  23. Ageing and fiscal sustainability in a small euro area economy By Gabriela Lopes de Castro; José R. Maria; Ricardo Mourinho Félix; Cláudia Braz
  24. Portfolio balance effects of the SNB's bond purchase program By Andreas Kettemann; Signe Krogstrup
  25. The dark side of fiscal stimulus By Strulik, Holger; Trimborn, Timo
  26. On stabilization policy in sunspot-driven oligopolistic economies By Rodolphe Dos Santos Ferreira; Frédéric Dufourt
  27. Cyclical Variation in Labor Hours and Productivity Using the ATUS By Michael C. Burda; Daniel S. Hamermesh; Jay Stewart;
  28. Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration By Shinji Takagi; Hiroki Okada
  29. The Road to Sustainable Growth in Emerging Markets: The Role of Structural and Monetary Policies in Turkey By Aysan, Ahmet Faruk; Güler, Mustafa Haluk; Orman, Cüneyt
  30. The Real Consequences of Financial Stress By Stefan Mittnik; Willi Semmler; ;
  31. المؤشرات الاقتصادية وثيقة الارتباط بالاستثمار الحالة المصرية قبل وبعد ثورة 25 يناير 2011 By Abdelaal Mahmoud, Ashraf
  32. Growth-cycle nexus By Kodama, Masahiro
  33. A History of Tax Legislation in the Federal Republic of Germany By Matthias Uhl
  34. Transportation Data as a Tool for Nowcasting Economic Activity – The German Road Pricing System as an Example By Roland Döhrn
  35. Short and Long-term Effects of Environmental Tax Reform By Walid Oueslati
  36. Forecasting South African Macroeconomic Data with a Nonlinear DSGE Model By Mehmet Balcilar; Rangan Gupta; Kevin Kotze
  37. Slovakia: A Catching Up Euro Area Member In and Out of the Crisis By Fidrmuc, Jarko; Klein, Caroline; Price, Robert; Wörgötter, Andreas
  38. Canadian Monetary Policy Analysis using a Structural VARMA Model By Mala Raghavan; George Athanasopoulos; Param Silvapulle
  39. Public Spending as a Source of Endogenous Business Cycles in a Ramsey Model with Many Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  40. Monetary Neutrality under Evolutionary Dominance of Bounded Rationality By Gilberto Tadeu Lima; Jaylson Jair da Silveira
  41. Did Housing Policies Cause the Postwar Boom in Homeownership? By Matthew Chambers; Carlos Garriga; Donald E. Schlagenhauf
  42. The U.S. economy today: Between systemic crisis and permanent war. By Rémy Herrera
  43. The International Monetary System in Flux: Overview and Prospects By Pedro Bação; António Portugal Durate; Mariana Simões
  44. Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets By Robert N. McCauley
  45. Should Central Banks publish interest rate forecasts? - A Survey By Phan, Tuan
  46. House Prices, Collateral and Self-Employment By Manuel Adelino; Antoinette Schoar; Felipe Severino
  47. From Boom to Bust: A Typology of Real Commodity Prices in the Long Run By David S. Jacks
  48. How do financial reforms affect inequality through financial sector competition? Evidence from Africa By Asongu , Simplice A
  49. Optimal Health and Environmental Policies in a Pollution-Growth Nexus By Wang, Min; Zhao, Jinhua; Bhattacharya, Joydeep
  50. The Recent Decline in Employment Dynamics By Hyatt, Henry R.; Spletzer, James R.
  51. The challenges of EU governance and the quest for long-term growth By Renaud Thillaye
  52. Italian households’ opinions on the difficulty of saving By Antonio Bassanetti; Concetta Rondinelli
  53. The Role of Corporate Social Responsibility (CSR) in the Egyptian Banking Sector By Kamal, Mona
  54. Connect them where it hurts. The missing piece of the puzzle By Lorenzo Esposito
  55. Capital Inflows in a Small Open Economy: Costa Rica By Leon, Jorge
  56. Oscillatory Versus Quadratic Trends in Natural Resource Commodity Prices By Antonios Antypas; Phoebe Koundouri; Nikolaos Kourogenis
  57. International Prices and Exchange Rates By Ariel Burstein; Gita Gopinath
  58. Unemployment Compensation and the Allocation of Labor in Developing Countries By Charlot, Olivier; Malherbet, Franck; Ulus, Mustafa
  59. Labour Market Effects of Parental Leave Policies in OECD Countries By Olivier Thévenon; Anne Solaz
  60. Women, Medieval Commerce, and the Education Gender Gap By Graziella Bertocchi; Monica Bozzano

  1. By: Thomas I. Palley
    Abstract: This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT's construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT's polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT's oversimplifications of macroeconomic theory and policy.
    Keywords: modern monetary theory, money financed budget deficits, fiscal policy
    JEL: E00 E02 E10 E12 E24 E40 E58 E62 E63
    Date: 2013
  2. By: M. Casares; Luca Deidda; JE. Galdon-Sanchez
    Abstract: We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates a financial accelerator mechanism, borrowing constraints, and frictions on both setting prices and wages. After an adverse financial shock, the slow-adjustment process on wage cuts results in higher production marginal costs, lower firm earnings, and a subsequent reduction in equity that explains the increase in the cost of borrowing and the credit crunch. The real effects of adverse financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (real rigidities in the financial sector). In the monetary policy analysis, a Taylor (1983)-style rule performs slightly better when incorporating a small response coefficient to the spread between borrowing and saving interest rates.
    Keywords: financial accelerator; nominal rigidities; real rigidities
    JEL: E44 E32
    Date: 2013
  3. By: Eric M. Leeper
    Abstract: Every economy faces a "fiscal limit" that delivers the maximum government debt-GDP ratio that can be sustained without appreciable risk of default or higher inflation. But governments in advanced economies issue substantial nominal debt and nominal debt is a commitment to repay in nominal units. When such economies are approaching their fiscal limits, debt can be devalued through higher current and future inflation rates. The paper develops a simple bond market supply-demand apparatus to explain how fiscal policy can be a source of inflation, while monetary policy merely determines the timing of inflation.
    JEL: E31 E52 E62 E63
    Date: 2013–03
  4. By: Yasin Mimir
    Abstract: I document key business cycle facts of aggregate financial flows in the U.S. banking sector : (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium real business cycle model with a financial sector, that is capable of matching these newly documented stylized facts. An agency problem between banks and their depositors induces endogenous capital constraints for banks in obtaining funds from households. Empirically-disciplined shocks to bank net worth alter the ability of banks to borrow and to extend credit to firms. I find that these financial shocks are important not only for explaining the dynamics of financial flows but also for the dynamics of standard macroeconomic aggregates. They play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread. The tightness measure of credit conditions in the model tracks the index of tightening credit standards constructed by the Federal Reserve Board quite well.
    Keywords: Banks, Financial Fluctuations, Credit Frictions, Bank Equity, Financial Shocks
    JEL: E10 E20 E32 E44
    Date: 2013
  5. By: Wolfgang J. Luhan; Johann Scharler
    Abstract: We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, then the average inflation rate persistently deviates from the target. We find that these deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.
    Keywords: Taylor principle; interest rate rule; inflation illusion; laboratory experiment
    JEL: E30 E52 C90
    Date: 2013–02
  6. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial stability objective that speaks to the interaction between monetary and macroprudential policies. First, we find that interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they lead to greater financial instability in response to contractionary shocks, while they act as an automatic financial stabilizer in response to expansionary shocks. Second, we find that when the policy interest rate is the only instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. This has important implications for the role played by U. S. monetary policy in the run-up to the global financial crisis: the model suggests that the weak link in the U. S. policy framework was not the monetary policy stance after 2002, but rather the absence of an effective second policy pillar aimed at preserving financial stability.
    JEL: E44 E52 E61
    Date: 2013–02
  7. By: Hristov, Atanas
    Abstract: I examine the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the state of the public finances. I demonstrate that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes—defined by the conditioning states—with expansionary fiscal policy boosting consumption in recessions, having a nil effect on it in normal times or in fiscal stress, and strongly displacing consumption in mixed states when recession and fiscal stress coincide. This happens because the liquidity constrained households consume the additional income generated by an expansionary fiscal policy in recession, and save it in normal times or in fiscal stress when liquidity constraints are not binding. If recession and fiscal stress coincide, fiscal action have an extra distortionary effect on income, and consequently on consumption.
    Keywords: Fiscal policy; Consumption; Public Deficit, Debt; Liquidity constraints
    JEL: E20 E32 E62 H30
    Date: 2013–02–03
  8. By: Bhaduri, Saumitra; Sethudurai, Raja
    Abstract: This paper tries to identify non-linearity in the estimation of Taylor type reaction function for Reserve Bank of India using a threshold estimation technique of Hansen (2000). For the monthly data from March 2001 to October 2009 with Repo rate as the policy rate the estimation significantly identifies two thresholds with inflation and one threshold with output gap as threshold variables. We compared this model with that of a naïve univariate model and the typical Taylor type reaction function, the results are in support of the non-linear model in predicting the repo rate at turning points with more accuracy than the other two competing models.
    Keywords: Policy reaction function, threshold estimation, Taylor rule
    JEL: E5 E52 E58
    Date: 2013–03–08
  9. By: Alicia Garcia-Herrero (Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research); Eric Girardin (Aix-Marseille University and French National Center for Scientific Research (CNRS) and ˆ[cole des Hautes ˆ[tudes en Sciences Sociales (EHESS) and Hong Kong Institute for Monetary Research)
    Abstract: Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People's Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China's money markets not only listen to the PBoC's words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC's governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China's money markets.
    Keywords: China Monetary Policy Communication, Money Market
    JEL: E52 E58 E43
    Date: 2013–02
  10. By: De Koning, Kees
    Abstract: The U.K.’s recent economic developments can be broken down in two distinct periods. The period 2002-2008 was the period in which economic growth was satisfactory and individual households’ wages and salaries were increasing at a level higher than inflation rates. It was also the period that individual households withdrew equity out of their homes, by increasing their borrowing levels. This added to their disposable incomes. 2008 was the turning point when individual households not only lost £841 billion in net worth, but also did no longer make the £450 billion annual gain which happened over the years 2002-2007: a turn around equal to over 90% of 2008 GDP. Since 2008 individual households saw their wages and salaries grow below inflation levels. They also started to put more equity into their homes to the extent of some £78 billion over the period 2009-2011. Entrepreneurs can create an output gap by increasing production capacity above demand levels. Individual households can experience an income gap when their spending capacity cannot keep up with rising prices. My assessment is that the latter is the main cause of the current economic impasse. The draft master plan is based on two concepts: to lower the risks in the U.K economy for all households and to use accumulated savings more efficiently. Four proposals were formulated: Establish a National Mortgage Bank and a National Mortgage Insurance Company; to implement economic easing to counteract the imbalance between accumulated savings and spending power; to change the accounting rules for the banking sector in order to recognise risks from the moment of incurring such risks and to turn quantitative easing into quantitative strengthening (QS) by turning 80% instead of 20% of U.K. gilts into index linked gilts. If these proposals are acceptable, they will need the cooperation of the government, the opposition, the Bank of England, the banking sector, the company sector, the pension funds and the individual households in order to get Britain back to “Great” Britain.
    Keywords: U.K; economic growth; individual households'net worth; wages and salaries developments; output gap; income gap; national mortgage bank;economic easing;QE and QS; bank accounting rules;
    JEL: E21 E22 E24 E3 E43 E44 E58
    Date: 2013–02–14
  11. By: Marco Bassetto; Christopher Phelan
    Abstract: In this paper we show that interest rate rules lead to multiple equilibria when the central bank faces a limit to its ability to print money, or when private agents are limited in the amount of bonds that can be pledged to the central bank in exchange for money. Some of the equilibria are familiar and common to the environments where limits to money growth are not considered. However, new equilibria emerge, where money growth and inflation are higher. These equilibria involve a run on the central bank's interest target: households borrow as much as possible from the central bank, and the shadow interest rate in the private market is different from the policy target.
    JEL: E42 E43 E52 E61
    Date: 2013–03
  12. By: Yuriy Gorodnichenko; Michael Weber
    Abstract: We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs---broadly defined to include physical costs of price adjustment, informational frictions, etc.---are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide ``model-free'' evidence that sticky prices are indeed costly.
    JEL: E2 E3 E4 E5 G1
    Date: 2013–02
  13. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: While there is ample evidence how central bank communication and interest rate decisions are perceived by financial markets, insights regarding the response of the public is lacking. Media is known to be an important transmitter of news to the public. Based on articles in the Financial Times Europe, we test how expectations on the future course of monetary policy presented in the media are affected by central bank communication and interest rate decisions.
    Keywords: European Central Bank, monetary policy announcements, central bank communication, media expectations
    JEL: E52 E58
    Date: 2013–03
  14. 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
  15. By: Mencinger, Jernej; Aristovnik, Aleksander
    Abstract: In the recent years there has been an intense discussion whether the actual behaviour of fiscal authorities is consistent with cyclical stabilization objectives. The question of the appropriate fiscal policy is gaining recognition especially for the countries of the euro area after entering the European Monetary Union (EMU). Therefore, the aim of this paper is to evaluate the activity of the fiscal policy before and after the entrance to the euro zone for each individual EMU country in 1995–2010 period. For this purpose we will use the cyclical adjusted balance, which is the common tool used to estimate fiscal policy stance. The analysis of the cyclically adjusted balance gives an additional insight into the former activity arrangements of the fiscal policy, which contributes to gauge the ex-post estimation of the fiscal policy. On this base we can determine the causes of general government budgets imbalance in the past. Despite this fact, we should be aware of some caveats in the assessment of cyclical adjusted balance, which appear due the inconsistency in measurement of output gap and potential GDP growth. To evaluate pro-cyclical or countercyclical fiscal policy stance we compare the dynamic evaluation of the cyclically adjusted balance and output gap. Namely, changes of the cyclically adjusted balance in consecutive years indicate the orientation of fiscal policy, i.e. the fiscal impulse. By comparing the change in the cyclically adjusted balance and output gap between individual years, which indicates fluctuations in the economic cycle, it is possible to assess the orientation of fiscal policy, i.e. the fiscal position. The fiscal policy can be considered as countercyclical if it is expansive in the situation of negative output gap and restrictive in the situation, when the actual growth of GDP is above its potential rate. On the other hand, fiscal policy is characterized to be pro-cyclical if in the situation of negative output gap the government uses restrictive fiscal instruments and when the fiscal policy reacts expansionary in the situation of positive output gap, where the actual output exceeds the estimated potential GDP. In the empirical analysis we evaluate the fiscal policy stance for each country of the euro area. In the assessment of government behaviour we cover 14 countries in the 1995–2010 period. The results of the analysis generally confirm that the fiscal policy in most euro-area member states became more expansionary in the period after entering the EMU. Moreover, these preliminary findings were partly confirmed by a statistical analysis which shows statistically significant differences in expansionary fiscal policy between the aforementioned sub-periods. In addition, we might also conclude the average fiscal stance is expansionary when actual output is above its potential level, which implies a pro-cyclical bias in times of prosperity, and that the fiscal stance tends to be predominantly counter-cyclical when actual output is below its potential level. These conclusions can be associated with asymmetric fiscal behaviour after entering the euro area because the response of fiscal authorities to cyclical conditions in the economy depends on whether good or bad times are prevailing. These assertions reflect some conclusions made in other similar studies.
    Keywords: fiscal policy, fiscal policy stance, cyclically adjusted balance, output gap, SGP, EMU
    JEL: E62 E65 F36 H30
    Date: 2013–02
  16. By: Emilio Colombo; Luisanna Onnis; Patrizio Tirelli
    Abstract: This paper investigates the response of the shadow economy to banking crises. Our empirical analysis, based on a large sample of countries, suggests that the informal sector is a powerful buffer, which expands at times of banking crises and absorbs a large proportion of the fall in official output. To rationalise our evidence, we build a dynamic stochastic general equilibrium model which accounts for financial frictions and nominal rigidities. In line with the empirical literature on the shadow economy, we assume that in the informal sector access to external finance is limited, and the production technology is relatively more labour intensive. Following a banking shock in the official sector, the model predicts a large negative transmission to the unofficial economy: about 60% of the official sector contraction is absorbed by the growth of the shadow economy.
    Keywords: Financial crises, shadow economy, DSGE models
    JEL: E26 E32 E44
    Date: 2013–02
  17. By: Canan Yuksel
    Abstract: This paper aims to understand the role of investment shocks in explaining output fluctuations observed in Turkish economy. For this purpose a small open economy DSGE model is estimated on Turkish data for 2002:1-2012:2 period by Bayesian methods. Variance decomposition analysis shows that permanent technology shock is the key driving force of business cycles in Turkish economy and the role of investment shock is less spelled.
    Keywords: Open economy, Bayesian estimation, Business cycle
    JEL: E3 F4 C11
    Date: 2013
  18. By: Murat Ungor
    Abstract: Turkey has the lowest hours worked (the product of total employment and annual hours per worker, divided by the size of the working-age population) among the OECD countries. We study the changes in hours of work following Ohanian, Raffo, and Rogerson (Journal of Monetary Economics, 2008) and find that the intratemporal first-order condition from the neoclassical growth model accounts for the decline in total hours worked during 1998-2009 in Turkey. Hours worked increased in Turkey since 2009 and the model accounts for half of that increase between 2009 and 2011. Our findings suggest that time-varying taxes on consumption and labor play significant roles in explaining the hours worked in Turkey. The subsistence term is quantitatively important during 2003-2011. The presence of government consumption in the utility function does not seem very important.
    Keywords: Labor supply, employment, hours of work, growth model, taxes, Turkey
    JEL: E13 E20 E60 J22 O50
    Date: 2013
  19. By: Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam)
    Abstract: Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect.
    Keywords: Financial crises; intervention policies; zombie banks; economic recovery; bank restructuring; bank recapitalization
    JEL: E44 E58 G21 G28
    Date: 2013–03–04
  20. By: Schlicht, Ekkehart
    Abstract: Economists are widely familiar with the Ricardian equivalence thesis. It maintains that, given the time-path of government spending, a change in taxation does not alter the set of feasible life-time consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. In this note a surprising finding is established. Assuming that the agents in a standard infinite horizon growth model hold the very expectations the thesis proposes (“Ricardian expectations”), it is shown that these expectations are disappointed. This divergence from the Ricardian equivalence thesis is traced to the omission of interest payments on public debt as part of the households' disposable income. The non-equivalence is valid in a wide class of models. Further it is shown that a permanent deficit policy does not imply a violation of the government's budget constraint at any point of time in the future.
    Keywords: Barro-Ricardo equivalence; Ricardian equivalence; fiscal policy; debt; taxation; rational expectations; Ricardian expectations; Barro expectations
    JEL: E2 E12 E6 H6
    Date: 2013
  21. By: Augustin Landier; David Sraer; David Thesmar
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    JEL: E51 E52 G2 G21 G3
    Date: 2013–02
  22. By: Pascal Michaillat; Emmanuel Saez
    Abstract: This paper presents a parsimonious equilibrium business cycle model with trade frictions in the product and labor markets. The model features unemployment and unsold production and its general equilibrium can be represented very simply: as the intersection of an aggregate supply and an aggregate demand, with product market tightness acting as a price. The aggregate supply represents the expected amount of sales by firms given product market tightness and optimal hiring on the labor market. The aggregate demand represents optimal product consumption given product market tightness—consumers can also spend their income on an unproduced good. We use a search-and-matching structure to realistically represent trade frictions in the product and labor markets. In such a structure, it is not price or wage but market tightness that equalizes supply to demand. In fact, the frictions create situations of bilateral monopoly in price and wage setting that make price and wage indeterminate. To resolve this indeterminacy, we take price and wage as parameters, thus disconnecting price and wage determination from our analysis. Since the equilibrium representation is very transparent and tractable, we are able to obtain a broad range of comparative statics with respect to demand and supply shocks. The model is also suited to think about inventories, labor hoarding, income and wealth inequality. It can be extended to a dynamic environment.
    JEL: E12 E24 E32 E63
    Date: 2013–02
  23. By: Gabriela Lopes de Castro; José R. Maria; Ricardo Mourinho Félix; Cláudia Braz
    Abstract: Population ageing is a key trend in Western economies. The impact of this trend will be widespread, affecting investment and saving decisions over the next decades, and represents a major challenge to policymakers. Debt sustainability issues in euro area economies may (re)emerge, particularly given the pay-as-you-go nature of most public pension systems. In a decentralised fiscal policy framework, ageing and the respective policy response might intensify the latent macroeconomic imbalances that underlie the ongoing sovereign debt crisis. In this paper, we include a stylised pension system in an open economy New-Keynesian general equilibrium model with non-Ricardian agents. The model is used to assess the macroeconomic impacts of ageing in a small euro area economy. The results suggest that the impact can be significant, depending on the magnitude and pace of the ageing dynamics, the existing rules for social benefits and the policy response. It can be inferred from the results that supranational policy coordination at euro area level is crucial to foster economic and financial stability.
    JEL: E62 F41 H62 J11
    Date: 2013
  24. By: Andreas Kettemann; Signe Krogstrup
    Abstract: This paper carries out an empirical investigation of the impact on bond spreads of the announcement, purchases and exit from the SNB's bond purchase program in 2009-2010. We find evidence in favor of a narrowing yield spread of covered bonds as a result of the program. The effect materialized in the days following the announcement of the SNB's intention to buy bonds issued by private sector borrowers, as markets learned that the SNB was buying covered bonds. The specification of the bond spreads used allows us to identify this effect as a discounted portfolio balance effect of the expected purchases, as distinct from policy signalling. In contrast, we find no evidence of a further effect of the actual purchases and subsequent sales on bond spreads.
    Keywords: portfolio balance, credit spread, corporate spread, unconventional monetary policy, central bank asset purchases, credit easing, zero lower bound
    JEL: E5 G1
    Date: 2013
  25. By: Strulik, Holger; Trimborn, Timo
    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
  26. By: Rodolphe Dos Santos Ferreira (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I); Frédéric Dufourt (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. We show that a well designed taxation-subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single efficient equilibrium. At the macroeconomic level, implementing this stabilization policy leads to significant welfare gains, attributable to a quantitatively dominant "efficient stabilization effect". This effect, while important, is typically ignored in the traditional computations of the welfare costs of aggregate fluctuations (e.g., Lucas, 2003).
    Keywords: Business cycles; Stabilization policy; Indeterminacy; Sunspot equilibria; Oligopolistic competition.
    Date: 2013–02–17
  27. By: Michael C. Burda; Daniel S. Hamermesh; Jay Stewart;
    Abstract: We examine monthly variation in weekly work hours using data for 2003-10 from the Current Population Survey (CPS) on hours/worker, from the Current Employment Survey (CES) on hours/job, and from the American Time Use Survey (ATUS) on both. The ATUS data minimize recall difficulties and constrain hours of work to accord with total available time. The ATUS hours/worker are less cyclical than the CPS series, but the hours/job are more cyclical than the CES series. We present alternative estimates of productivity based on ATUS data and find that it is more pro-cyclical than other productivity measures.
    Keywords: time use, business cycles, productivity, ATUS, labor hoarding
    JEL: E23 J22
    Date: 2013–03
  28. By: Shinji Takagi (Graduate School of Economics, Osaka University); Hiroki Okada (Graduate School of Economics, Osaka University)
    Abstract: This note explores the signaling effect of foreign exchange market intervention in countries, such as Japan, the United Kingdom and the United States, where separate agencies are responsible for intervention and monetary policy. An important part of the signaling effect operates when an entity conducting intervention makes a credible commitment to a change in future monetary policy, suggesting that its effectiveness hinges upon whether the central bank is independent of government oversight. We test this conjecture by comparing the consistency of intervention and future monetary policy in Japan before and after April 1998, when central bank independence was established by the new Bank of Japan Law. As expected, the signaling effect of intervention weakened after the central bank became independent.
    Keywords: foreign exchange market intervention; Japanese intervention; central bank independence; signaling effect of intervention
    JEL: E42 F31 F33
    Date: 2013–03
  29. By: Aysan, Ahmet Faruk; Güler, Mustafa Haluk; Orman, Cüneyt
    Abstract: The last decade witnessed an unprecedented economic growth in Emerging Market Economies (EMEs). EMEs have also been the main drivers of growth in the recovery following the global financial crisis. Nevertheless, EMEs continue to face a number of institutional and structural challenges that may pose risks to the sustainability of their recent growth performance, with potentially significant repercussions for the world economy. In this paper, we present a detailed account of Turkey’s experience in dealing with various institutional and structural challenges during the last decade and provide evidence that taking the right steps can enable EMEs materialize their full growth potential going forward. Successful institutional and structural reforms can also provide room for monetary policymakers to effectively navigate their economies through turbulent times such as the recent global financial crisis.
    Keywords: Economic Growth, Structural and Institutional Reforms, Crises, Monetary Policy, Turkey, Central and Eastern Europe
    JEL: E52 E63 F30 F43 N10 O10
    Date: 2013–02–26
  30. By: Stefan Mittnik; Willi Semmler; ;
    Abstract: We introduce a dynamic banking–macro model, which abstains from conventional mean– reversion assumptions and in which—similar to Brunnermeier and Sannikov (2010)—adverse asset–price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector. To assess such phenomena empirically, we employ a multi–regime vector autoregression (MRVAR) approach rather than conventional linear vector autoregressions. We conduct bivariate empirical analyses, using country–specific financial–stress indices and industrial production, for the U.S., the UK and the four large euro–area countries. Our MRVAR–based impulse–response studies demonstrate that, compared to a linear specification, response profiles are dependent on the current state of the economy as well as the sign and size of shocks. Previous multi–regime–based studies, focusing solely on the regime–dependence of responses, conclude that, during a high–stress period, stress–increasing shocks have more dramatic consequences for economic activity than during low stress. Conducting size–dependent response analysis, we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches. Our findings also suggest that, in states of high financial stress, large negative shocks to financial–stress have sizeable positive effects on real activity and support the idea of “unconventional” monetary policy measures in cases of extreme financial stress.
    Keywords: banking–sector instability, financial stress, monetary policy, nonlinear VAR, regime dependence
    JEL: E2 E6 C13
    Date: 2013–02
  31. By: Abdelaal Mahmoud, Ashraf
    Abstract: Abstract The purpose of this paper is to highlight the global and local economic indicators strictly (tightly)correlated with the investment trend which has a great role in preparing the investment climate to achieve high rates of domestic and foreign investment (Egypt Case :Before and after 25th Jan Revolution). For example, many economic studies have showed a causal correlation between the investment and growth rates, i.e. on one side, improving the investment rates increases the growth rates and on the other side, increasing the growth rate may be considered as an importance factor in attracting more investments especially the foreign one. In addition, studies showed negative correlation between inflation and investment rate, i.e. decreasing the Inflation rates leads to increasing the investment rates as the inflation rate reflects the extent of economic stability and denotes the capability of the central bank of achieving this stability.
    Keywords: NA
    JEL: E2 E22 F21
    Date: 2013–01–15
  32. By: Kodama, Masahiro
    Abstract: This research sheds light on the negative correlation between economic growth and business cycle in less developed economies. Whereas many previous studies explain the negative correlation from a viewpoint in which business cycle affects economic growth, we attempt to present a hypothesis based on the other influence direction in which economic growth affects business cycle. We investigate the validity of the hypothesis using two methods: econometric analysis and numerical analysis. We find that the econometric analysis supports our hypothesis. The numerical analysis shows that the effect of the proposed hypothesis produces the negative correlation between economic growth and business cycle.
    Keywords: Developing countries, Economic growth, Economic development, Business cycles, Growth, Less Developed Economies
    JEL: E32 O40
    Date: 2013–02
  33. By: Matthias Uhl (University of Marburg)
    Abstract: This paper presents a historical account of legislated tax changes in the Federal Republic of Germany from 1964 to 2010, thus establishing a database appropriate for the macroeconometric analysis of the fiscal policy transmission mechanism. Ninety-five quantitatively important pieces of tax legislation are identified and characterized along several dimensions: Tax changes are classified as “endogenous” or “exogenous” with regard to current macroeconomic conditions, and their revenue impact and timing is reported. The evolution of tax acts is described, capturing changes in tax measures and associated revenue impacts over the whole legislative process. The exposition is also a comprehensive qualitative description of major tax changes and the motivation behind them over the last four decades.
    JEL: E62 H20 K34 N00
    Date: 2013
  34. By: Roland Döhrn
    Abstract: There is a broad agreement that transportation activity is closely linked to the business cycle. Nevertheless, data from the transportation sector have not been part of the tool kit of business cycle analysts due to long publications lags. With the disseminations of electronic road pricing systems, up to date figures on transportation activity are available for an increasing number of countries. This paper analyses the performance of the German toll statistics for nowcasting industry production. It confirms that between January 2007, when the toll data were published first, and July 2012 the seasonally adjusted toll data show a closer correlation with industry production than business surveys like the ifo business climate or the PMI. Compared to this the forecasting power out of sample is disappointing. Though showing somewhat smaller forecast errors than the alternative models tested the advantage of the toll based models is not statistically significant as a rule. Given the small publication lead against industry production and the publication lag against business sentiment indicators one should not be over-enthusiastic on the opportunities of the toll data as a nowcasting tool, though they surely mean an addition to the business cycle analysts’ tool box.
    Keywords: Transportation data; nowcasting; forecasting performance
    JEL: E32 E37
    Date: 2013–01
  35. By: Walid Oueslati (Centre for Rural Economy, Newcastle University)
    Abstract: This paper examines the macroeconomic effects of an environmental tax reform in a growing economy. A model of endogenous growth based on human capital accumulation is used to numerically simulate the growth effects of different environmental tax reforms and compute their impact on welfare in the short and the long-term. Our results suggest that the magnitude of these effects depends on the type of tax reform. Thus, only environmental tax reform that aims to use the revenue from environmental tax to reduce wage tax and increase the proportion of public spending within GDP, enhances both growth and welfare in the long-term. However, the short-term effect remains negative.
    Keywords: Tax reform, Endogenous Growth, Human Capital, Environmental Externality, Transitional Dynamics, Welfare cost
    JEL: E62 I21 H22 Q28 O41 D62
    Date: 2013–01
  36. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (The School of Economics, Faculty of Commerce, University of Cape Town)
    Abstract: This paper considers the forecasting performance of a nonlinear dynamic stochastic general equilibrium (DSGE) model. The results are compared to a wide selection of competing models, which include a linear DSGE model and a variety of vector autoregressive (VAR) models. The parameters in the VAR models are estimated with classical and Bayesian techniques; where some of the Bayesian models are augmented with stochastic-variable-selection, time-varying parameters, endogenous structural breaks and various forms of prior-shrinkage (which includes the Minnesota prior as well). The structure of the DSGE models follows that of New-Keynesian varieties, which allow for several nominal and real rigidities. The nonlinear DSGE model makes use of the second-order solution method of Schmitt-Grohe and Uribe (2004) and a particle filter to generate values for the unobserved variables. Most of the parameters in the models are estimated using maximum likelihood techniques. The models are applied to South African macroeconomic data, with an initial in-sample period of 1960Q1 to 1999Q4. The models are then estimated recursively, by extending the in-sample period by a quarter, to generate successive forecasts over the out-of-sample period, 2000Q1 to 2011Q4. We find that the forecasting performance of the nonlinear DSGE model is almost always significantly superior to that of it's linear counterpart; particularly over longer forecasting horizons. The nonlinear DSGE model also outperforms the selection of VAR models in most cases.
    Keywords: Macroeconomic Forecasting, Linear and Nonlinear New-Keynesian DSGE, Vector Autoregressions, Bayesian Methods
    JEL: E0 C5 C11 C61 C63
    Date: 2013–03
  37. By: Fidrmuc, Jarko (Zeppelin University); Klein, Caroline (OECD); Price, Robert (affiliation not available); Wörgötter, Andreas (OECD, Paris)
    Abstract: The Slovak economy experienced a strong but short recession in 2009. The recovery afterwards was driven by exports and investment. While GDP growth was one of the strongest in OECD, employment did not reach the pre-crisis level and unemployment remains stubbornly high. This paper argues that Slovakia joined the euro area after a period of unprecedented real appreciation, which generated a threat for competitiveness of its export-oriented manufacturing industry. The response combined internal devaluation with productivity increasing measures, including capital deepening and laying off low productivity workers. While this strategy was successfully restoring an external equilibrium, its consequences for domestic demand and employment are less positive. This development is compared with Estonia and Slovenia, two other small and very open economies, recently entering the euro area.
    Keywords: Slovak Republic, Estonia, Slovenia, crisis, job-less recovery, domestic demand
    JEL: E20 F41 G01
    Date: 2013–03
  38. By: Mala Raghavan; George Athanasopoulos; Param Silvapulle
    Abstract: This paper builds a structural VARMA (SVARMA) model for investigating Canadian monetary policy. Despite the support for a VARMA model for monetary policy analysis, the traditional VAR and SVAR models have predominantly been used in the literature mainly due to difficulties associated with the identification and estimation of such a model. Using the scalar component model (SCM) proposed by Athanasopoulos and Vahid (2008a), this paper first identifies a VARMA model and then constructs a SVARMA model for Canadian monetary policy. We included the SVAR model in our study for a comparison purpose. Relative to this model, the impulse responses generated by the SVARMA model appear to be consistent with those predicted by various economic theoretical models, and solves the economic puzzles found commonly in the empirical literature on monetary policy. The successful construction and implementation of the SVARMA model for Canadian monetary policy analysis along with its promising impulse responses, indicate the suitability of this framework for small open economies.
    Keywords: VARMA models, Identification, Impulse responses, Open economy, Transmission mechanism
    Date: 2013
  39. By: Kazuo Nishimura (Institute of Economic Research, Kyoto University - Kyoto University); Carine Nourry (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Venditti (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie)
    Abstract: We introduce public spending, financed through income taxation, in the Ramsey model with heterogeneous agents. Public spending as a source of welfare generates more complex dynamics. In contrast to previous contributions focusing on similar models but with wasteful public spending, limit cycles through Hopf bifurcation and expectation-driven fluctuations appear if the degree of capital-labor substitution is large enough to be compatible with capital income monotonicity. Moreover, unlike frameworks with a representative agent, our results do not require externalities in production and are compatible with a weakly elastic labor supply with respect to wage.
    Keywords: endogenous cycles; indeterminacy; heterogeneous agents; public spending; endogenous labor supply; borrowing constraint
    Date: 2013–02
  40. By: Gilberto Tadeu Lima; Jaylson Jair da Silveira
    Abstract: We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock. To this end, we develop an approach based on a new analytical notion to which we refer as boundedly rational inattentiveness. We investigate the behavior of the price level in an context in which a firm can either pay a cost to update its information set and establish the optimal price (Nash strategy) or freely use information from the previous period and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. Although the bounded rationality strategy is the only survivor in the long-run evolutionary equilibrium, money is nonetheless neutral. The evolutionary learning dynamics takes the information-updating process to an equilibrium configuration in which, despite all firms play the bounded rationality strategy, the corresponding price level is the symmetric Nash equilibrium price.
    Keywords: bounded rationality; evolutionary dynamics; monetary neutrality
    JEL: E31 C73 D83
    Date: 2013–02–20
  41. By: Matthew Chambers; Carlos Garriga; Donald E. Schlagenhauf
    Abstract: After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history. The objective in this paper is to quantify the contribution of government interventions in housing markets in the expansion of U.S. homeownership using an equilibrium model of tenure choice. In the model, home buyers have access to a menu of mortgage choices to finance the acquisition of a house. The government also provides special programs through provisions of the tax code. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the boom in homeownership in 1960. The decomposition suggests that government policies have significant importance. For example, the expansion in maturity of the fixed-rate mortgage to 30 years can account for 12 percent of the increase. Housing policies, such as the introduction of the mortgage interest deduction or the taxation of housing services can have significant effects on homeownership.
    JEL: E32 N1 R20
    Date: 2013–02
  42. By: Rémy Herrera (Centre d'Economie de la Sorbonne)
    Abstract: This paper studies the U.S. economy from an original point of view: that of the links existing between crisis and war. The first part analyzes the workings of the current crisis, considered to be a “systemic” one. The second part places the U.S. economy at the very heart of this crisis. The third part emphasizes the limitations of the anti-crisis policies that are being implemented, as well as the “currency war” issue. Then, the central focus moves towards U.S. warfare as a permanent feature. In a fifth part, the author examines the control exercized by finance capital on the military sector, including military-industrial complex and privately owned military companies. And finally, it examines how these links between crisis and war exacerbe the current capitalist contradictions.
    Keywords: United States, military sector, defence, war, crisis, finance.
    JEL: E32 E62 G38 H56 P12 P43
    Date: 2013–02
  43. By: Pedro Bação (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Durate (Faculty of Economics, University of Coimbra and GEMF, Portugal); Mariana Simões (Faculty of Economics, University of Coimbra, Portugal)
    Abstract: This paper analyses the architecture of the International Monetary System (IMS) and the role of reserve currencies in it. We begin by describing the evolution of the IMS from the Gold Standard to the Bretton Woods system and the European integration process that led to the creation of the euro. We then discuss the role played by the euro in the IMS as an international reserve currency. Drawing on econometric estimations, we extrapolate the evolution of the shares in international reserves of the euro, the US dollar and the renminbi. In the discussion, we take into account the current sovereign debt crisis and the possibility of a currency war taking place as a result of the reportedly excessive undervaluation of the renminbi and of the expansionist monetary policies undertaken in several advanced economies, namely in the USA. The text ends with a review of proposals for reducing the likelihood of currency wars, which may disrupt the functioning of the current IMS.
    Keywords: currency war; euro; financial crisis; International Monetary System; exchange rate misalignments.
    JEL: E52 F31 F33 G15
    Date: 2013–01
  44. By: Robert N. McCauley (Asian Development Bank Institute (ADBI))
    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. When central banks in the receiving countries resist exchange rate appreciation and buy dollars against domestic currency, they end up investing in medium-term bonds in reserve currencies. In the process they fund themselves (or “sterilize†the expansion of local bank reserves) by issuing safe assets in domestic currency to domestic investors. Thus, calm periods, marked by leveraged investing in emerging markets, lead 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: global equity markets, porfolio investment, Emerging Markets, central banks
    JEL: E58 F3 G15
    Date: 2013–01
  45. By: Phan, Tuan
    Abstract: As a particular form of transparency, nowadays some central banks publish their interest rate forecasts while many others refuse to do that. Whether the publication is good or bad for economic performance and social welfares is now a hotly debatable subject. This paper provides a review of the literature in both theoretical and empirical aspects. We also establish a criteria table which could be used as a preliminary guideline for central banks in answering the question whether they should reveal the forecasts, and how to publish the policy rate inclinations. The suggested conclusion is that interest rate projections should be considered as one of the last items that central banks should reveal and they should be very careful in publishing its policy rate forecasts.
    Keywords: Central bank, transparency, interest rate forecasts
    JEL: E58
    Date: 2013–03–01
  46. By: Manuel Adelino; Antoinette Schoar; Felipe Severino
    Abstract: This paper documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation.
    JEL: E24 G01 G30
    Date: 2013–03
  47. By: David S. Jacks
    Abstract: This paper considers the evidence on real commodity prices over 160 years for 30 commodities representing 7.89 trillion USD worth of production in 2011. In so doing, it suggests and documents a complete typology of real commodity prices, comprising long-run trends, medium-run cycles, and short-run boom/bust episodes. The findings of the paper can be summarized as follows: real commodity prices of both energy and non-energy commodities have been on the rise from 1950 across all weighting schemes; there is a consistent pattern, in both past and present, of commodity price super-cycles which entail decades-long positive deviations from these long-run trends with the latest set of super-cycles likely at their peak; these commodity price super-cycles are punctuated by booms and busts which are historically pervasive and becoming more exacerbated over time. These last elements of boom and bust are also found to be particularly bearing in determining real commodity price volatility as well as potentially bearing in influencing growth in commodity exporting economies.
    JEL: E3 N7 Q30
    Date: 2013–03
  48. By: Asongu , Simplice A
    Abstract: In the first empirical study on how financial reforms have been instrumental in mitigating inequality through financial sector competition, we contribute at the same time to the macroeconomic literature on measuring financial development and respond to the growing field of economic development by means of informal sector promotion. Hitherto, unexplored financial sector concepts of formalization, semi-formalization and informalization are introduced. Four main findings are established: (1) while formal financial development decreases inequality, financial sector formalization increases it; (2) whereas semi-formal financial development increases inequality, the effect of financial semi-formalization is unclear; (3) both informal financial development and financial informalization have an income equalizing effect and; (4) non-formal financial development is pro-poor. Policy implications are discussed.
    Keywords: Financial Development; Shadow Economy; Poverty; Inequality; Africa
    JEL: E00 G20 I30 O17 O55
    Date: 2013–01–01
  49. By: Wang, Min; Zhao, Jinhua; Bhattacharya, Joydeep
    Abstract: This paper shows how policies aimed at insuring health risks and those intended to improve the environment are (and should be) deeply intertwined. In the model economy, inspired by recent Chinese experience, pollution raises the likelihood of poor health in the future prompting agents to self insure against anticipated, rising medical expenses. The increased saving generates more capital while capital use by firms generates more pollution. Along the transition, sucha pollution-growth nexus may be attractive from a capital-accumulation perspective; however, rising pollution, via the health channel, definitely hurts welfare. Availability of private health insurance to top up pay-as-you-go coverage of medical bills together with a Pigouvian tax on emissions can replicate the first best.
    Keywords: pollution; health; overlapping generations model; saving
    JEL: E2 O13
    Date: 2013–03–08
  50. By: Hyatt, Henry R. (U.S. Census Bureau); Spletzer, James R. (U.S. Census Bureau)
    Abstract: In recent years, the rate at which workers and businesses exchange jobs has declined in the United States. Between 1998 and 2010, rates of job creation, job destruction, hiring, and separation declined dramatically, and the rate of job-to-job flows fell by about half. Little is known about the nature and extent of these changes, and even less about their causes and implications. In this paper, we document and attempt to explain the recent decline in employment dynamics. Our empirical work relies on the four leading datasets of quarterly employment dynamics in the United States – the Longitudinal Employer-Household Dynamics (LEHD), the Business Employment Dynamics (BED), the Job Openings and Labor Turnover Survey (JOLTS), and the Current Population Survey (CPS). We find that changes in the composition of the labor force and of employers explain relatively little of the decline. Exploiting some identities that relate the different measures to each other, we find that job creation and destruction could explain as much of a third of the decline in hires and separations, while job-to-job flows may explain more of the decline. We end our paper with a discussion of different possible explanations and their relative merits.
    Keywords: hires, separations, job creation, job destruction, job-to-job flows
    JEL: E24 J63
    Date: 2013–02
  51. By: Renaud Thillaye
    Abstract: The research paper assesses the opportunities and challenges raised by the post-crisis EU governance system with regard to the transition of European economies towards a new growth model balancing economic performance with social cohesion and environmental responsibility. It begins with questioning the term of ‘governance’ and with a hint at the 'multi-level governance' literature available in EU studies. This section suggests that the EU's nature is one of multiple and innovative policymaking methods. Any assessment of the EU's added value must investigate the actual policy direction and the effectiveness of a complex EU governance architecture, by looking in particular at how EMU coordination frameworks interacts with Community-based policies. The paper focuses then on the goals, the processes and the financial instruments underpinning the Europe 2020 Strategy, bearing in mind the limits encountered by the Lisbon Strategy during the last decade. It finds that the Strategy, albeit carefully balanced, does not avoid the risk of a 'capability-expectations' gap. Implementation would gain, on the one side, from more consistent legal and financial instruments at EU level, and from a more supportive macroeconomic environment in the euro area on the other. The third section examines the way in which Europe 2020 cohabits with other frameworks of coordination within the European Semester, such as the reformed Stability and Growth Pact, and the new Macroeconomic Imbalance Procedure. Potential clashes between diverging objectives and their legal bases are identified and tested against the views of practitioners (8 interviews were conducted in parallel to the research) and throughout a case-study based on how the Semester has so far impacted on three countries: Finland, France and Italy. The European Commission's Annual Growth Surveys for 2011, 2012 and 2013 are also analysed. This research reveals a prioritisation of fiscal consolidation and short-term, market-based adjustment policies over the longer-term objectives pursued by the Europe 2020 Strategy. The collective outcome of these policies, and the impact of national reforms on the whole EU, tend to be overlooked as well. Nevertheless, there is substantial room for manoeuvre and dialogue between the Commission and individual countries. The paper concludes that ways should be found to shield Europe 2020 objectives from overwhelming stability considerations in the Euro Area, and contains some suggestions for further innovations of governance in that respect. A greater differentiation between countries according to their position might be necessary. The conclusion also argues that it fells to national governments, parliaments and parties to seize the opportunity of the European Semester to frame challenges differently and to push for alternative solutions.
    Keywords: Economic strategy; EU integration; European economic policy; European governance; European Monetary Union; Good governance; Institutional reforms
    JEL: E02
    Date: 2013–02
  52. By: Antonio Bassanetti (Banca d'Italia); Concetta Rondinelli (Banca d'Italia)
    Abstract: The paper investigates the opinions of Italian families on the advisability and the possibility of saving. The analysis was carried out using the monthly micro-data underlying the Italian consumer survey conducted by Isae up to 2010 and by Istat thereafter. The results show that in recent years there has been a sharp increase in the proportion of households that consider it appropriate to save. This appears to be closely related to their expectations about the cyclical situation, in particular unemployment, pointing to a strengthening of the precautionary motive. By contrast, since the second half of the last decade only a small number of households state that they have actually been able to save. This also seems to be linked to the structural characteristics of the household. The growing gap between the advisability and the possibility of saving is greater for the elderly and, among young people, for those living alone, renting their accommodation and working under a fixed-term employment contract. The discrepancy is greater for households that reside in the larger municipalities.
    Keywords: savings, qualitative surveys, disposable income
    JEL: E21 D80
    Date: 2013–02
  53. By: Kamal, Mona
    Abstract: Given the global recognition of Corporate Social Responsibility (CSR) of the financial institutions in developed countries and the lack of interest in the relevance of this concept in Egypt, it is essential to investigate the relation between Corporate Social Responsibility and Financial Performance (i.e. CSR-FP link) in the Egyptian banking sector. This paper explores, empirically, this association. The results imply a negative and statistically significant relationship between CSR-dimensions and banks’ profitability. This empirical evidence is consistent with the neoclassical economists’ point of view that practicing CSR by an organization is associated with competitive disadvantages.
    Keywords: Corporate Social Responsibility (CSR), Egypt, Banking Sector, Profitability.
    JEL: E50 G0
    Date: 2013–03
  54. By: Lorenzo Esposito (Banca d'Italia)
    Abstract: The crisis has shown that banks that are too big to fail are at the core of the international financial system. These institutions are thus at the centre of a powerful wave of re-regulation of the banking system. Overall, the proposals developed to strengthen the capacity of big banks to weather future crises, starting with Basel 3, point in the right direction, but they are missing an essential element. SIFIs have a peculiar nature. Their most salient feature is that because of their size, interconnectedness and similar strategies, a crisis of one tends to become a crisis of all. Hence, it is essential to have a mechanism in place to link them together beforehand. The paper analyzes measures that can serve this end. It then proposes a tool designed to give SIFIs a shared interest in behaving correctly, i.e. taking into account the externality implied by their very existence.
    Keywords: financial crisis, too big to fail, macro-prudential, stability fund
    JEL: E60 G01 G28
    Date: 2013–02
  55. By: Leon, Jorge
    Abstract: This document illustrates the inflows of capital to a small and open economy such as Costa Rica using the Metzler Diagram. The simplicity of the Metzler Diagram provides clarity to understand the motivation for the inflows of capital, as well as a framework to analyze the policy options available to the policy-makers.
    Keywords: Capital Inflows, Open Economy, Metzler
    JEL: E65 F32
    Date: 2013
  56. By: Antonios Antypas (Department of Banking and Financial Management, University of Piraeus); Phoebe Koundouri; Nikolaos Kourogenis (Department of Banking and Financial Management, University of Piraeus.)
    Abstract: In this paper we introduce a model for the description of natural resources�� price paths, which in contrast to the existing literature, captures non-linear trends by means of a simple trigonometric function. We then use a set of model selection criteria to compare our trigonometric trend model with Slade��s (1982) quadratic trend model, as well as a more general one, that nests both of these models. We estimate the models using price series of the main fuel and metal resources prices, analyzed by the relevant literature, and ��nd that in most cases the trigonometric trend model is selected as the one better ��tting the data. Our results have implications for the long-run projection of natural resources prices and, consequently, for the relevance of the Hotelling rule.
    Keywords: Oscillatory trend, quadratic trend, Hotelling rule, natural resources�prices, model selection.
    JEL: E3 C22
    Date: 2013–02–19
  57. By: Ariel Burstein; Gita Gopinath
    Abstract: We survey the recent empirical and theoretical developments in the literature on the relation between prices and exchange rates. After updating some of the major findings in the empirical literature we present a simple framework to interpret this evidence. We review theoretical models that generate insensitivity of prices to exchange rate changes through variable markups, both under flexible prices and nominal rigidities, first in partial equilibrium and then in general equilibrium.
    JEL: E3 F12 F15 F4
    Date: 2013–02
  58. By: Charlot, Olivier (University of Cergy-Pontoise); Malherbet, Franck (University of Rouen); Ulus, Mustafa (Galatasaray University)
    Abstract: This paper studies the effects of the introduction of unemployment compensation (UC) in countries characterized by pervasive informality. We provide a simple framework to analyze the impact of UC on the allocation of workers between formal and informal activities, as well as the allocation of workers between sectors featuring different incentives to go informal. We show that a reasonable amount of UC may reduce informality, while larger amounts of UC induce large disincentives to go formal because of the level of taxation involved. We also argue that the financing of UC should be part and parcel of a well- conceived UC system. We show that UC finance based on payroll taxes is likely to entail an excess level of informality resulting from cross-subsidies between heterogenous sectors. The introduction of a simple layoff tax meant to finance the UC system is then shown to reduce informality, hence highlighting how a well-designed financing scheme may be used as a supplementary instrument to curb informality.
    Keywords: informality, labor market imperfections, unemployment compensation
    JEL: E24 E26 J60 L16 O1
    Date: 2013–02
  59. By: Olivier Thévenon; Anne Solaz
    Abstract: This paper considers how entitlements to paid leave after the birth of children affect female labour market outcomes across countries. Such entitlements are granted for various lengths of time and paid at different rates, reflecting the influence of different objectives including: enhancing children’s wellbeing, promoting labour supply, furthering gender equality in labour market outcomes, as well as budget constraints. Although parental care is beneficial for children, there are concerns about the consequences of prolonged periods of leave for labour market outcomes and gender equality. This paper therefore looks at the long-run consequences of extended paid leave on female, male, and gender differences in prime-age (25-54) employment rates, average working hours, and earnings in 30 OECD countries from 1970 to 2010.<P> It finds that extensions of paid leave lengths have a positive, albeit small, influence on female employment rates and on the gender ratio of employment, as long as the total period of paid leave is no longer than approximately two years. Additional weeks of leave, however, exert a negative effect on female employment and the gender employment gap. This paper also finds that weeks of paid leave positively affect the average number of hours worked by women relative to men, though on condition – once again – that the total duration of leave does not exceed certain limits. By contrast, the provision of paid leave widens the earnings gender gap among full-time employees.
    JEL: E24 J16 J38
    Date: 2013–01–10
  60. By: Graziella Bertocchi; Monica Bozzano
    Abstract: We investigate the historical determinants of the education gender gap in Italy in the late nineteenth century, immediately following the country’s Unification. We use a comprehensive newly-assembled database including 69 provinces over twenty-year sub-samples covering the 1861-1901 period. We find robust evidence that female primary school attainment, relative to that of males, is positively associated with the medieval pattern of commerce, along the routes that connected Italian cities among themselves and with the rest of the world. The effect of medieval commerce is particularly strong at the non-compulsory upperprimary level and persists even after controlling for alternative long-term determinants reflecting the geographic, economic, political, and cultural differentiation of medieval Italy. The long-term influence of medieval commerce quickly dissipates after national compulsory primary schooling is imposed at Unification, suggesting that the channel of transmission was the larger provision of education for girls in commercial centers.
    Keywords: education gender gap, medieval commerce, Italian Unification, political institutions, family types;
    JEL: E02 H75 I25 J16 N33 O15
    Date: 2013–02

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