nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒04‒06
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Central bank independence: monetary policies in selected jurisdictions (II) By Ayadi, Felix; Ojo, Marianne
  2. Optimal Monetary Policy in Response to Shifts in the Beveridge Curve By Mariya Mileva
  3. Are Public Preferences Reflected in Monetary Policy Reaction Functions? By Matthias Neuenkirch
  4. Does Short-Time Work Save Jobs? A Business Cycle Analysis By Almut Balleer; Britta Gehrke; Wolfgang Lechthaler; Christian Merkl
  5. Interaction-based Foundation of Aggregate Investment Shocks By Nirei, Makoto
  6. Credit Driven Investment, Heterogeneous Labor Markets and Macroeconomic Dynamics By Matthieu Charpe; Peter Flaschel; Hans-Martin Krolzig; Christian Proaño; Willi Semmler; Daniele Tavani
  7. Commitment vs. discretion in the UK: An empirical investigation of the monetary and fiscal policy regime By Tatiana Kirsanova; Stephanus le Roux
  8. The Effect of Unconventional Monetary Policy on the Macro Economy: Evidence from Japan's Quantitative Easing Policy Period By Masahiko Shibamoto; Minoru Tachibana
  9. Central bank independence: monetary policies in selected jurisdictions (III) By Ojo, Marianne; Ayadi, Felix
  10. Central bank independence: monetary policies in selected jurisdictions (I) By Felix, Ayadi; Marianne, Ojo
  11. Predicting Bank of England’s Asset Purchase Decisions with MPC Voting Records By Matthias Neuenkirch
  12. Three essays on imbalances in a monetary union. By HJORTSØ, Ida Maria
  13. Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model By Atsushi Tanaka
  14. Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe By Muhammad Khan; Mazen Kebewar; Nikolay Nenovsky
  15. The role of financial frictions in the 2007-2008 crisis: an estimated DSGE model By Rossana Merola
  16. The response of equity prices to movements in long-term interest rates associated with monetary policy statements: before and after the zero lower bound By Michael T. Kiley
  17. The impact of unconventional monetary policy on the market for collateral: The case of the French bond market. By Avouyi-Dovi, Sanvi; Idier, Julien
  18. Exchange rates, monetary policy statements, and uncovered interest parity: before and after the zero lower bound By Michael T. Kiley
  19. Monetary policy statements, Treasury yields, and private yields: before and after the zero lower bound By Michael T. Kiley
  20. Federal reserve forecasts: asymmetry and state-dependence By Julieta Caunedo; Riccardo DiCecio; Ivana Komunjer; Michael T. Owyang
  21. Europe´s crisis without end: The consequences of neoliberalism run amok By Thomas I. Palley
  22. On smoothing macroeconomic time series using HP and modified HP filter By Choudhary, Ali; Hanif, Nadim; Iqbal, Javed
  23. Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
  24. The Potential Instruments of Monetary Policy By C.A.E. Goodhart
  25. Uncertainty, expectations, and the business cycle. By LANG, Jan Hannes
  26. Money as gold versus money as water By Colignatus, Thomas
  27. On our own? The Icelandic business cycle in an international context By Bjarni G. Einarsson; Gudjón Emilsson; Svava J. Haraldsdóttir; Thórarinn G. Pétursson; Rósa B. Sveinsdóttir
  28. Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt By Stéphane Guibaud; Yves Nosbusch; Dimitri Vayanos
  29. Forecasting with Non-spurious Factors in U.S. Macroeconomic Time Series By Yohei Yamamoto
  30. Evidence on CO2 emissions and business cycles By Baran Doda
  31. The Icelandic banking collapse - was the optimal policy path chosen? By Thorsteinn Thorgeirsson; Paul van den Noord
  32. Tackling the instability of growth: A Kaleckian model with autonomous demand expenditures. By Olivier Allain
  33. What should we do about (Macro) Pru? Macro Prudential Policy and Credit. By Ray Barrell; Dilruba Karim
  34. The Condition and Problems of the Practical Use of China's Foreign-Exchange Reserves By Zhongling Qi
  35. Notes sur les bases et les effectifs militaires états-uniens à l'étranger. By Rémy Herrera; Joëlle Cicchini
  36. A theory of rollover risk, sudden stops, and foreign reserves By Sewon Hur; Illenin O. Kondo
  37. Modeling exchange rate dynamics in India using stock market indices and macroeconomic variables By Sinha, Pankaj; Kohli, Deepti
  38. A discrete-choice econometrician's tale of monetary policy identification and predictability. By SIRCHENKO, Andrei
  39. Is government spending a free lunch? -- evidence from China By Xin Wang; Yi Wen
  40. Do real-time Okun's law errors predict GDP data revisions? By Michelle L. Barnes; Fabià Gumbau-Brisa; Giovanni P. Olivei
  41. Local Deficits and Local Jobs: Can U.S. States Stabilize Their Own Economies? By Gerald Carlino; Robert P. Inman
  42. The IMF-FSB Early Warning Exercise: Design and Methodological Toolkit By International Monetary Fund
  43. Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited By Cervellati, Matteo; Sunde, Uwe

  1. By: Ayadi, Felix; Ojo, Marianne
    Abstract: Through an investigation of selected jurisdictions, this paper aims to contribute to the extant literature in investigating the relationship between central bank independence and price stability, as well as how such a relationship varies between different jurisdictions – even though it is widely argued that political and legislative interference is often contributory to price instability. This paper employs times series data to study the dynamics of central bank independence. It also employs bivariate cointegration methodology to examine the long-term relationship between inflation index and the different measures of financial development.
    Keywords: inflation; price stability; central bank independence; monetary policy; financial stability
    JEL: E5 E52 E58 K2
    Date: 2013–03–31
  2. By: Mariya Mileva
    Abstract: I build a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and analyze the optimal monetary policy response to an outward shift in the Beveridge curve. The results cover several cases depending on the reason for the shift. If the shift is due to a fall in the efficiency of matching, then the optimal response of the central bank is to stabilize inflation. On the other hand, if the shift arises from an increase in the elasticity of employment matches with respect to vacancies, then the policy maker faces a trade off between stabilizing inflation and unemployment. The optimal policy response to the efficient labor market shock changes when real wages are sticky but remains unchanged when home and market goods are imperfect substitutes, compared to the case when they are not. When contrasted to a Taylor rule that targets inflation and output growth, the optimal monetary policy is more aggressive in pursuit of its objectives
    Keywords: Beveridge curve; Optimal monetary policy; Labor market; Search and matching
    JEL: E24 E32 E52 J68
    Date: 2013–03
  3. By: Matthias Neuenkirch (University of Aachen)
    Abstract: In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976-1993 using the dynamic GMM estimator. We find, first, that interest rates do reflect society's preferences since the central banks raise rates when society's inflation aversion is above its long-run trend. Second, the reaction to inflation is non-linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation does not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.
    Keywords: Central Bank, Democratic Legitimation, Eurobarometer, Inflation Aversion, Monetary Policy, Public Preferences, Taylor Rules.
    JEL: D71 E31 E43 E52 E58
    Date: 2013
  4. By: Almut Balleer; Britta Gehrke; Wolfgang Lechthaler; Christian Merkl
    Abstract: This paper analyzes the effects of short-time work (i.e., government subsidized working time reductions) on unemployment and output fluctuations. The central question is whether the rule based component (i.e., the existence of the institution short-time work) and the discretionary component (i.e., rule changes) stabilize employment over the business cycle. In our baseline scenario the rule based component stabilizes unemployment fluctuations by 15% and output fluctuations by 7%. Given the small share of short-time work expenses in terms of GDP, the stabilization effects are large compared to other instruments such as the income tax system. By contrast, discretionary short-time work interventions do not have any statistically significant effect on unemployment. These effects are based on a structural VAR estimation which is identified using the output elasticity of short-time work estimated from German establishment paneldata. The model shows that non-effects of discretionary interventions may be due to their low persistence
    Keywords: Short-time work, fiscal policy, business cycles, search-and-matching, SVAR
    JEL: E24 E32 E62 J08 J63
    Date: 2013–03
  5. By: Nirei, Makoto
    Abstract: This paper demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. I develop a method to derive the distribution of the aggregate capital growth rate by embedding a fictitious tatonnement in a branching process. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. By incorporating this mechanism in a dynamic general equilibrium model with indivisible investment and sticky price, I provide the real business cycle theory with a driver of fluctuations: aggregate investment demand shocks that arise from idiosyncratic productivity shocks. Due to predetermined prices of goods, firms respond to investment shocks by adjusting labor and output, thereby causing the comovements of output and consumption with investment. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.
    Keywords: Business cycle, strategic complementarity, idiosyncratic shock, law of large numbers, criticality, fat tail
    JEL: E22 E32
    Date: 2013–03
  6. By: Matthieu Charpe; Peter Flaschel; Hans-Martin Krolzig; Christian Proaño; Willi Semmler; Daniele Tavani
    Abstract: In this paper we set up a baseline, but nevertheless advanced and complete model representing detailed goods market dynamics, heterogeneous labor markets, dual and cross-dual wage-price adjustment processes, as well as counter-cyclical government policies. The cyclical movements of output generate, through Okun's law, employment variations in the heterogeneous labor market. The core of the resulting Keynesian macrodynamics is however given by credit-financed investment behavior and loan-rate setting by credit suppliers. The framework is constructed in such way that simplified, lower dimensional versions of the model can be obtained by setting parameters describing specific feedback effects from one sector to another equal to zero. Starting from such low dimensional sub-dynamics, we show through a ``cascade of stable matrices'' approach that the local stability of the full 7D model is given if the feedback chains are sufficiently tranquil in their transmission mechanisms. However, local stability is the point of departure for the numerical investigation of local explosiveness and the forces that can bound such a behavior.
    Keywords: Macroeconomic (In-)Stability, Segmented Labor Markets, Business Cycles, Fiscal and Monetary Policy Rules
    JEL: E12 E24 E31 E52
    Date: 2013
  7. By: Tatiana Kirsanova; Stephanus le Roux
    Abstract: This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the UK. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intra-period leadership, we demonstrate that the past policy in the UK is better explained by optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers. We demonstrate that fiscal policy plays an important role in identifying the monetary policy regime.
    JEL: E52 E61 E63
    Date: 2013–03
  8. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Minoru Tachibana (School of Economics, Osaka Prefecture University, Japan)
    Abstract: This paper assesses the effectiveness of unonventional monetary policy on the macro ecnomy. It focuses on the Japanese economy during the Bank of Japan's quantitative easing policy period, and analyzes the effects of monetary policy shocks and systematic monetary policy using the vector autoregression model with simultaneous interaction between stock prices and policy decisions. The main finding is that unconventional monetary policy has a significant effect on the macro economy, which is closely in line with the existing evidence under the conventional monetary policy setting. The output effects work through the transmission linking the stock market and the real economy, while it plays a limited role in terms of the price effects. The analysis also suggests that the Bank of Japan's systematic policy responses mitigate severe downward pressure on the real economy generated from the stock market.
    Keywords: Unconventional monetary policy, Vector autoregression model, Interaction between monetary policy and stock market, Effects of monetary policy shocks, Systematic monetary policy responses
    JEL: E52 E58
    Date: 2013–04
  9. By: Ojo, Marianne; Ayadi, Felix
    Abstract: A sufficient and appropriate degree of central bank independence is widely acknowledged to be necessary for the goal of achieving price stability. However, despite the levels of independence claimed to be enjoyed by several central banks, recent events indicate shifts in focus of monetary policy objectives by various prominent central banks. The impact of political and government influences on central banks' monetary policies has been evidenced from the recent financial crisis – and in several jurisdictions. Many central banks have adjusted monetary policies having been influenced by political pressures which have built up as a result of the recent crises. However such lack of absolute independence (from political spheres) could prove symbiotic in the sense that, despite the need for a certain degree of independence from political interference, certain events which are capable of devastating consequences, namely, a drastic disruption of the system's financial stability, need to be responded to as quickly and promptly as possible. Is it possible for a central bank with absolute independence to operate effectively – particularly given the close links between many central banks and their Treasury in several countries? It may be inferred that central banks' crucial roles in establishing a macro prudential framework provide the key to bridging the gap between macro economic policy and the regulation of individual financial institutions. This however, on its own, is insufficient – close collaboration and effective information sharing between central banks and regulatory authorities is paramount.
    Keywords: central banks; stability; regulation; financial crises; macro prudential; Basel III; systemic risk; supervision; liquidity; monetary policy; inflation targeting
    JEL: E52 E58 E6 K2
    Date: 2013–04–02
  10. By: Felix, Ayadi; Marianne, Ojo
    Abstract: Even though the Congress and the Administration are responsible for determining fiscal policy measures, these measures impact the Fed Reserve's monetary policy decisons. The indirect effect of fiscal policy on the conduct of monetary policy through its influence on the overall economy and the economic outlook and the impact of federal tax and spending programs on the Fed Reserve' s key macroeconomic objectives - maximum employment and price stability, is notable in several situations and instances. Hence, how independent is the Fed Reserve really from government and fiscal policy influences? Could it not be said that the Government really has a dual role in fiscal and monetary policy setting?Would it really be in the interest of accountability to delegate more powers to an already relatively powerful Fed Reserve? Recent changes in the delegation of supervisory responsibilities in the UK, namely the transfer of bank supervision from the Financial Services Authority back to the Bank of England, and the resulting increased scope of the Bank of England's powers, would appear to suggest that in certain cases, regulatory bodies as well as central banks, should assume greater functions in certain capacities. Accordingly, jurisdiction specific cases have to be viewed individually and based on prevailing circumstances. Whilst it is argued by some, that a reduction in central bank autonomy by subjecting its actions and decisions to legislative procedures and approvals, could result in more serious problems which would aggravate the stability of the economy and financial system, consequences of lack of close collaboration, coordination and timely exchange of information between tripartite authorities such as the relationship which exists between the UK's Financial Services Authority, the Bank of England and the Treasury were witnessed during the Northern Rock Crisis. Hence it could be argued that the problem does not necessarily relate to a subjection of actions and decisions for approvals, but how well the authorities involved are able to communicate and coordinate information between them effectively. Subjecting actions and decisions of the central bank to other authorities could actually incorporate greater accountability and transparency into the supervisory and regulatory framework. Through an investigation of selected jurisdictions, this paper aims to contribute to the extant literature in investigating the relationship between central bank independence and price stability, as well as how such a relationship varies between different jurisdictions – even though it is widely argued that political and legislative interference is often contributory to price instability.
    Keywords: central banks; stability; regulation; financial crises; macro prudential; Basel III; systemic risk; supervision; liquidity; monetary policy
    JEL: E52 E58 E6 K2
    Date: 2013–03–30
  11. By: Matthias Neuenkirch (University of Aachen)
    Abstract: We use MPC voting records to predict changes in the volume of asset purchases. We find, first, that minority voting favoring an increase in the volume of asset purchases raises the probability of an actual increase at the next meeting. Second, minority voting supporting a higher Bank Rate decreases the likelihood of further asset purchases.
    Keywords: Asset Purchases, Bank of England, Monetary Policy, Monetary Policy Committee, Predictability, Voting Records
    JEL: E43 E52 E58
    Date: 2013
  12. By: HJORTSØ, Ida Maria
    Abstract: This thesis investigates the implications of imbalances within a monetary union. In the first chapter, I study how international financial frictions lead to international imbalances and affect optimal fiscal policy in a two-country, two-good DSGE model of a monetary union. I show that the presence of international imbalances affects the optimal conduct of cooperative fiscal policies when the traded goods are complements. Government expenditures optimally play a cross-country risk sharing role which is in conflict with the domestic stabilization role: optimal fiscal policy consists in setting government expenditures such as to reduce international imbalances at the expense of higher domestic inefficiencies. In the second chapter, I assess the implications of strategic fiscal policy interactions in a two-country DSGE model of a monetary union with nominal rigidities and international financial frictions. I show that the fiscal policy makers face an incentive to set fiscal policy such as to switch the terms of trade in their favour. This incentive results in a Nash equilibrium characterized by excessive inflation differentials as well as sub-optimally high current account imbalances within the monetary union. There are thus non-negligeable welfare losses associated with strategic fiscal policy making in a monetary union. The third chapter investigates empirically the degree of risk sharing in the European Economic and Monetary Union (EMU), using two different methods. The first measure relates to the capacity of consumption smoothing. This measure indicates that risk sharing is rather low and that the introduction of the common currency did not lead to higher intra-EMU risk sharing. The second measure is based on the welfare losses associated with deviations from full risk sharing. These welfare losses have fallen since the introduction of the common currency. However, this is mostly due to changes in macroeconomic risk - not to changes in risk sharing per se.
    Date: 2012
  13. By: Atsushi Tanaka (School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, we develop a simple dynamic optimization model of a central bank, in which the bank’s profit affects its balance sheet. The model derives the transversality condition that is necessary for a central bank to be sustainable and to conduct an optimal monetary policy. In this sense, the transversality condition needs to be satisfied to maintain central bank credibility. We discuss some factors affecting the transversality condition and show that what is important to satisfy the condition and thus to maintain central bank credibility is not capital alone but the financial strength that generates no sustained loss.
    Keywords: central bank, capital, financial strength, credibility, monetary policy
    JEL: E5
    Date: 2013–03
  14. By: Muhammad Khan (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Mazen Kebewar (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans, University of Aleppo, Faculty of Economics - Department of Statistics and Management Information Systems); Nikolay Nenovsky (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties
    Keywords: Inflation, inflation uncertainty, real uncertainty, monetary regimes, Eastern Europe
    Date: 2013–03–25
  15. By: Rossana Merola
    Abstract: After the banking crises experienced by many countries in the 1990s and in 2008, financial market conditions have turned out to be a relevant factor for economic fluctuations. The purpose of this paper is to determine whether frictions in financial markets are important for business cycles, and whether the recent 2007-2008 crisis has enhanced (or reduced) the size of some shocks and the role played by financial factors in driving economic fluctuations. The analysis is based on both versions of the Smets and Wouters DSGE model (2003, 2007), which are estimated using Bayesian techniques. The two versions differ because the Smets and Wouters (2007) version entails a risk premium shock, which captures that interest rate faced by firms and households might be different from the policy rate because of some unmodelled frictions. Both versions are augmented to include an endogenous financial accelerator mechanism as in Bernanke, Gertler and Gilchrist (1999), which arises from information asymmetries between lenders and borrowers that create inefficiencies in financial markets. The analysis is based on the same data-set as in the Smets and Wouters model, but extended to 2010. One first set of results suggests that the recent crisis has amplified the relevance of financial factors, as well as unmodelled frictions. Overall, this paper proves that the Smets and Wouters model augmented with a financial accelerator mechanism is suitable to capture much of the historical developments in U.S. financial markets that led to the financial crisis in 2007-2008. In particular, the concomitance of a peak in leverage ratio and the deepening of the recession supports the argument that leverage and credit have an important role to play in shaping the business cycle, in particular the intensity of recessions.
    Keywords: Business cycle, financial frictions, Bayesian estimation.
    JEL: C11 E32 E44
    Date: 2013–03
  16. By: Michael T. Kiley
    Abstract: Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing. We propose a strategy to identify the comovement between interest rate and equity price movements induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available. A decline in long-term interest rates induced by monetary policy statements prior to 2009 is accompanied by a 6- to 9-percent increase in equity prices. This association is substantially attenuated in the period since the zero-lower bound has been binding - with a policy-induced 100 basis-point decline in 10-year Treasury yields associated with a 1½- to 3-percent increase in equity prices. Empirical analysis suggests this attenuation does not represent a change in responses to monetary-policy induced movements in interest rates, but reflects the importance of both short- and long-term interest rates.
    Date: 2013
  17. By: Avouyi-Dovi, Sanvi; Idier, Julien
    Abstract: We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.
    Keywords: Monetary policy; Collateral; Liquidity; Volatility; French bond market;
    JEL: G10 C22 C53
    Date: 2012–02
  18. By: Michael T. Kiley
    Abstract: While uncovered interest parity (UIP) fails unconditionally, UIP conditional on monetary policy actions remains a cornerstone of macroeconomic models used for monetary policy analysis. We posit that monetary policy actions are partially revealed by FOMC statements and propose a new identification strategy to uncover the degree to which such policy actions induce comovement in exchange rates and long-term interest rates consistent with uncovered interest parity. We reach three conclusions. First, there is evidence in favor of UIP at long horizons, conditional on monetary policy actions, for Dollar/Euro and Dollar/Yen exchange rates. Second, short-run movements in exchange rates following monetary policy surprises are consistent with the overshooting prediction of Dornbusch (1976), although our approach cannot test UIP at short horizons. Finally, we examine the degree to which monetary policy statements since the onset of the zero-lower bound (ZLB) on the short-term interest rate in the United States have engendered different comovement between long-term interest rates and exchange rates and find little evidence for a change in relationships.
    Date: 2013
  19. By: Michael T. Kiley
    Abstract: Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing - both "unconventional" strategies. We examine whether the effect of such actions on Treasury yields have passed through to private yields to a degree comparable to experience before 2008. In order to perform this examination, we propose a strategy to identify the comovement between Treasury yields and private yields induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available, or when other systematic factors may be important. Our strategy implies that least squares regressions, even within an event window, can be misleading, and our empirical results find evidence for such misleading effects. Implementation of our instrumental variables strategy suggests that the movements in Treasury yields induced by monetary policy statements have passed through to private yields, but to a smaller degree than typical prior to the end of 2008. This may suggest that the effectiveness of unconventional policy actions in stimulating activity are attenuated relative to conventional policy actions.
    Date: 2013
  20. By: Julieta Caunedo; Riccardo DiCecio; Ivana Komunjer; Michael T. Owyang
    Abstract: We jointly test the rationality of the Federal Reserve’s Greenbook forecasts of infiation, unemployment, and output growth using a multivariate nonseparable asymmetric loss function. We find that the forecasts are rationalizable and exhibit directional asymmetry. The degree of asymmetry depends on the phase of the business cycle: The Greenbook forecasts of output growth are too pessimistic in recessions and too optimistic in expansions. The change in monetary policy that occured in the late 1970s has been attributed in the literature to the Fed coming to terms with the difficulties in predicting real variables. Our results offer an alternative explanation: A combination of different preferences over expansions and recessions and less frequent recessions in the latter part of the sample.
    Keywords: Forecasting ; Rational expectations (Economic theory)
    Date: 2013
  21. By: Thomas I. Palley
    Abstract: This paper argues the euro zone crisis is the product of a toxic neoliberal economic policy cocktail. The mixing of that cocktail traces all the way back to the early 1980s when Europe embraced the neoliberal economic model that undermined the income and demand generation process via wage stagnation and widened income inequality. Stagnation was serially postponed by a number of developments, including the stimulus from German re-unification and the low interest rate convergence produced by creation of the euro. The latter prompted a ten year credit and asset price bubble that created fictitious prosperity. Postponing stagnation in this fashion has had costs because it worsened the ultimate stagnation by creating large build-ups of debt. Additionally, the creation of the euro ensconced a flawed monetary system that fosters public debt crisis and the political economy of fiscal austerity. Lastly, during this period of postponement, Germany sought to avoid stagnation via export-led growth based on wage repression. That has created an internal balance of payments problem within the euro zone that is a further impediment to resolving the crisis. There is a way out of the crisis. It requires replacing the neoliberal economic model with a structural Keynesian model; remaking the European Central Bank so that it acts as government banker; having Germany replace its export-led growth wage suppression model with a domestic demand-led growth model; and creating a pan-European model of wage and fiscal policy coordination that blocks race to the bottom tendencies within Europe. Countries, particularly Germany, can implement some of this agenda on their own. However, much of the agenda must be implemented collectively, which makes change enormously difficult. Moreover, the war of ideas in favor of such reforms has yet to be won. Consequently, both politics and the ruling intellectual climate make success unlikely and augur a troubled future.
    Keywords: Financial crisis, euro zone, neoliberalism
    JEL: E00 E24
    Date: 2013
  22. By: Choudhary, Ali; Hanif, Nadim; Iqbal, Javed
    Abstract: In business cycle research, smoothing data is an essential step in that it can influence the extent to which model-generated moments stand up to their empirical counterparts. To demonstrate this idea, we compare the results of McDermott’s (1997) modified HP-filter with the conventional HP-filter on the properties of simulated and actual macroeconomic series. Our simulations suggest that the modified HP-filter proxies better the true cyclical series. This is true for temporally aggregated data as well. Furthermore, we find that although the autoregressive properties of the smoothed observed series are immune to smoothing procedures, the multivariate analysis is not. As a result, we recommend and hence provide series-, country- and frequency specific smoothing parameters.
    Keywords: Business Cycles; Cross Country Comparisons; Smoothing Parameter; Time Aggregation
    JEL: C32 C43 E32
    Date: 2013–03–28
  23. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
    Abstract: In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.
    JEL: E52 F37 F41
    Date: 2013–03
  24. By: C.A.E. Goodhart
    Abstract: None
    Date: 2012
  25. By: LANG, Jan Hannes
    Abstract: This thesis adds to the recent quantitative literature that considers variations in uncertainty as impulses driving the business cycle. In chapter one a flexible partial equilibrium model that features heterogeneous firms, uncertainty shocks and various forms of capital adjustment costs is built in order to reassess whether temporarily higher uncertainty can cause recessions. It is then shown that while uncertainty shocks to demand can cause the bust, rebound and overshoot dynamics reminiscent of recessions, uncertainty shocks to total factor productivity are likely to lead to considerable and prolonged booms in economic activity. The reason for this result is that while the expectational effect of uncertainty shocks is negative and similar in magnitude for both types of uncertainty shocks, the positive distributional effect is an order of magnitude larger for total factor productivity than for demand. Chapter two then derives and implements an identification strategy for uncertainty shocks within a Structural Vector Autoregression framework that is consistent with the way these shocks are commonly modeled in the literature. For the US it is shown that such model consistent uncertainty shocks lead to considerable booms in investment and employment and only explain a small fraction of the variation in the cross-sectional sales variance. Once uncertainty shocks are identified as the shocks that only affect dispersion upon impact, they cause a moderate drop, rebound and overshoot of investment and a large increase in the cross-sectional dispersion of revenues. The results suggest that the standard timing assumption that the expectational effect of uncertainty shocks leads the distributional effect seems questionable. Finally, chapter three analyses endogenous variations in uncertainty and their effect on aggregate dynamics that result from imperfect information in the presence of occasional regime shifts. In a tentative model parameterization to the German manufacturing industry during the Financial Crisis it is shown that after a temporary regime shift imperfect information leads endogenously to higher forecast standard errors compared to full information, as well as higher cross-sectional dispersion of mean forecasts and forecast standard errors. It is then shown that these endogenous variations in uncertainty can lead to considerable downward amplification and some propagation of aggregate investment and revenues during a temporary downward regime shift.
    Date: 2012
  26. By: Colignatus, Thomas
    Abstract: The rules of the Eurozone cause the euro to function as the gold standard. The US economy performs better in some respects, partly because of the advantages of fiat money. The treaty on the EMU has to be adapted in order not to become dependent upon current ad hoc measures, with the loss of welfare over the years 2008-2013+. If Eurozone nations create their own national Economic Supreme Courts, then an optimal currency area can still come about without transfer to Brussels of national sovereignty on the budget. When consumers and agents can have deposits at a local branch of the European Central Bank, a system of deposit insurance has been established by itself. Advisable is a split-up between (1) the primary payment system with retail banks that are franchises of the ECB, (2) the secundary savings and loans banks, and (3) the tertiary investment banks. The shadow banking system must be redressed, with every financial transaction having an identified regulation. Conforming to an earlier proposal the ECB can create funds to redress debt. Notably, 400 billion euro can be created and invested in bank capital, and be directly neutralised by the capital requirement of 10.5%. Another 400 billion can be used to clean up the debt of Greece and Italy. Their participation in the Eurozone was a political decision and thus the Eurozone must bear the consequences. To satisfy the no-bailout-condition, Greece and Italy could create economic zones comparable to the lease of Hong Kong, where companies could invest and operate under international law for the next 40 years.
    Keywords: Economic stability; monetary policy; economic crisis; euro; European Central Bank; bank capital; risk free rate; fiscal policy; tax; external balance; Economic Supreme Court; optimal currency area; investment; investment banks; Banking Union
    JEL: E00 A10 P16
    Date: 2013–04–02
  27. By: Bjarni G. Einarsson; Gudjón Emilsson; Svava J. Haraldsdóttir; Thórarinn G. Pétursson; Rósa B. Sveinsdóttir
    Abstract: This paper analyses the properties of the Icelandic business cycle and whether it is synchronised with the business cycles of other developed countries. We start by identifying business cycle turning points and the average amplitude and duration of expansionary and contractionary periods in Iceland. We then extract the cyclical component of a large set of economic variables to document key stylised facts of the Icelandic business cycle. The resulting regularities of the domestic business cycle are also compared to business cycle regularities of other developed countries. Finally, we attempt to identify underlying structural shocks through long-run identification restrictions on a vector autoregressive (VAR) representation of the data, and look at the interconnection of these underlying shocks in Iceland and other developed countries. Our results suggest that although the characteristics of the domestic business cycle are in some aspects similar to business cycles in other developed countries, there are some important differences. Furthermore, our results indicate that the domestic business cycle is to a large extent asymmetric to the business cycle of other developed countries. These findings should be of importance for policymakers, and serve as a useful benchmark for modelling the Icelandic economy. The results should also serve as an important input for the analysis of the appropriate monetary and exchange rate regime for Iceland.
    Date: 2013–03
  28. By: Stéphane Guibaud; Yves Nosbusch; Dimitri Vayanos
    Abstract: We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different lifecycle stages in an overlapping-generations economy. An optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing. If agents are more risk-averse than log, then an increase in the long-horizon clientele raises the price and optimal supply of long-term bonds—effects that we also confirm empirically in a panel of OECD countries. Moreover, under the optimal maturity structure, catering to clienteles is limited and long-term bonds earn negative expected excess returns.
    JEL: E43 G11 G12 H21 H63
    Date: 2013–03
  29. By: Yohei Yamamoto
    Abstract: Time instability in factor loadings can induce an overfitting problem in forecasting analyses since the structural change in factor loadings inflates the number of principal components and thus produces spurious factors. This paper proposes an algorithm to estimate non-spurious factors by identifying the set of observations with stable factor loadings based on the recursive procedure suggested by Inoue and Rossi (2011). I found that 51 out of 132 U.S. macroeconomic time series of Stock and Watson (2005) have stable factor loadings. Although crude principal components provide eight or more factors, there are only one or two non-spurious factors. The forecasts using non-spurious factors significantly improve out-of-sample performance.
    Keywords: dynamic factor model, principal components, structural change, spurious factors, out-of-sample forecasts, overfitting
    JEL: C12 C38 E17
    Date: 2013–02
  30. By: Baran Doda
    Abstract: CO2 emissions and GDP are positively correlated over the business cycle. Most climate change researchers would agree with the preceding intuitive statement despite the absence of a study that formally analyzes the relationship between emissions and GDP at business cyclefrequencies. The current paper attempts to address this gap in the literature by providing a simple, rigorous and consistent analysis of the relationship in a comprehensive cross country panel. To this end, I decompose the aggregate emissions and GDP series into their growth and cyclical components using the HP filter and focus on the cyclical components. Four robustfacts emerge from this analysis: i) Emissions are procyclical and cyclically more volatile than GDP in a typical country; ii) Cyclical volatility of emissions is negatively correlated with GDP per capita across countries; iii) Procyclicality of emissions is positively correlated with GDP per capita across countries; and iv) The composition of GDP is crucial for the business cycle properties of emissions but the relationship is complex. I undertake and report an extensive set of robustness checks which corroborate these findings. Finally, I propose some preliminarythoughts on the mechanisms that may be generating the data with these properties.
    Date: 2012–04
  31. By: Thorsteinn Thorgeirsson; Paul van den Noord
    Abstract: This study examines the economic policies of the Icelandic government in the wake of the banking collapse of 2008 in terms of counter-factual policy options. The path chosen was important for the recovery but policy makers faced alternative policy options for handling the many difficult situations that arose, with potential implications for government finances and economic growth. We utilize two complementary macroeconomic models to assess the decisions taken and the recovery and on that basis develop counter-factual scenarios of how the crisis could have played out if the decisions had been different. Four alternative scenarios are considered involving different ways to deal with the collapse: i) adopt a more pro-cyclical fiscal policy, ii) allow the ISK exchange rate to drop without imposing capital controls, iii) pay the interest expense on the initial Icesave agreement, or iv) rescue the banks as Ireland did. Macroeconomic model simulations are performed to assess the impact of different decisions involving public finances on economic growth, unemployment and other macroeconomic variables over the period 2008-2025. The results are compared to the actual path taken. Addressing this question is potentially interesting in its own right and also from the point of view of other countries that have experienced similar crises but have responded differently.
    Date: 2013–03
  32. By: Olivier Allain (Centre d'Economie de la Sorbonne et Université Paris Descartes Sorbonne Paris Cité)
    Abstract: This article presents a Kaleckian model enriched by introducing autonomous public expenditure which grows at an exogenous rate. It shows that the usual properties are not affected in the short run: growth is wage-led. But long run properties are strongly affected: public expenditure plays a role as an automatic stabilizer so that the accumulation rate converges on the growth rate of public expenditure. The effect of a change in income distribution on the growth rate is then only transient. However, the impacts on the level of variables (output, capital stock, labor, etc.) remain permanent. The research here also shows that this theoretical framework can provide a solution (depending on the parameters) to the ‘second’ Harrod knife-edge problem. In this case, Kaleckian outcomes are consistent with the convergence of the current utilization rate on the ‘normal’ rate, a result which has not been found in the existing literature.
    Keywords: Kaleckian models, utilization rate, Harrod instability, income distribution, automatic stabilizers.
    JEL: E12 E2 E25 E62
    Date: 2013–03
  33. By: Ray Barrell; Dilruba Karim
    Abstract: Credit growth is widely used as an indicator of potential financial stress, and it plays a role in the new Basel III framework. However, it is not clear how good an indicator it is in markets that have been financially liberalised. We take a sample of 14 OECD countries and 14 Latin American and East Asian countries and investigate early warning systems for crises in the post Bretton Woods period. We show that there is a limited role for credit in an early warning system, and hence little reason for the Basel III structure. We argue that the choice of model for predicting crises depends upon both statistical criteria and on the use to which the model is to be put.
    Date: 2012
  34. By: Zhongling Qi (Advanced Research Centers, Keio University)
    Abstract: Although it controls monetary policies, a central bank can occasionally experience a situation where its financial situation worsens and excessive liabilities occur. In such instances, the central bank may be unable to fulfill its policy objectives. This study focuses on the People's Bank of China (PBC), which is the central bank of China and possesses large foreign reserves, and investigates whether the costs it has incurred during its intervention in the foreign exchange market have contributed to its present financial situation. We then discuss future estimated PBC results. Against the background of an expanding international balance of payments surplus, the PBC continued intervention in the foreign exchange market to ensure Renminbi exchange rate stability. This intervention rapidly increased foreign reserves. This study examines the PBC balance sheet to estimate the costs of its foreign exchange market intervention after January 2002 using several assumptions. The results show that the losses experienced through its intervention policy are expansionary, and were 18.5% of its overseas assets by the end of 2011. Analyzing the factors affecting intervention costs individually, we see that exchange rate changes have a higher impact than interest rate fluctuations on intervention costs, and this effect can be identified at an earlier stage. The study concludes that the improvement of its financial situation, whilst still fulfilling its monetary policies, will be a significant challenge for the PBC.
    Date: 2013–03
  35. By: Rémy Herrera (Centre d'Economie de la Sorbonne); Joëlle Cicchini (Centre d'Economie de la Sorbonne)
    Abstract: This paper, mainly methodological, aims at providing an estimation of the number of U.S. military bases and personnel worldwide. The first part proposes a periodization of the spread of U.S. military bases. The second part exposes the official statistical data disseminated by the US Department of Defense. The third part analyzes in a critical way the main limitations of these data, and suggests some revisions. The fourth and last part gives a brief outline on networks of military bases on the northern countries which are strategic allies of the United States.
    Keywords: Military sector, military bases, military personnel, defence, United States.
    JEL: E62 H56 P43
    Date: 2013–03
  36. By: Sewon Hur; Illenin O. Kondo
    Abstract: Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies.
    Date: 2013
  37. By: Sinha, Pankaj; Kohli, Deepti
    Abstract: Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting its market movement. This study concerns with some of the usual macroeconomic variables which, in theory, are expected to affect the exchange rate between two countries. Indian Rupee is currently losing its value to the Dollar which could certainly be seen to affect the Indian economy adversely. This paper attempts to investigate the interactions between the foreign exchange and stock market in India as well as determine some of the economic factors which could have influenced the Indian rupee vis-à-vis the US Dollar over the period 1990-2011. This paper studies the effect of exchange rate on three market indices; BSE Sensex index, BSE IT sector index and BSE Oil & Gas sector index for the period January 2006 to March 2012. No significant interactions were found between foreign exchange rate [USD/INR] and stock returns. Economic variables like inflation differential, lending interest rates and current account deficit (as a percentage of GDP) are found to significantly affect the exchange rate [USD/INR]. This study also analyzes how the real GDP of India is currently behaving with respect to the exchange rate. It is found that they share a negative relationship which is highly statistically significant
    Keywords: current account deficit as a percentage of GDP, exchange rate, GDP, inflation differential, IT, lending interest rates, Oil & Gas, public debt, stock price index, Sensex
    JEL: E6 F31 F37
    Date: 2013–01–15
  38. By: SIRCHENKO, Andrei
    Abstract: This thesis studies the econometric identification and predictability of monetary policy. It addresses the discrete and collective nature of policy decisions, and the use of the real-time versus currently available revised data. The first chapter combines the ordered probit model, novel real-time data set and policy-making meetings as a unit of observation to estimate highly systematic reaction patterns between policy rate decisions and incoming economic data. The paper measures the empirical significance of the rate discreteness and demonstrates that both the discrete-choice approach and real-time "policy-meeting" data do matter in the econometric identification of monetary policy. The estimated rules surpass the market anticipation made one day prior to a policy meeting, both in and out of sample. The second chapter provides empirical evidence that a prompter release of policy- makers’ votes could improve the predictability of policy decisions. The voting patterns reveal strong and robust predictive content even after controlling for policy bias and responses to inflation, real activity, exchange rates and financial market indicators. They contain information not embedded in the spreads and moves in the market interest rates, nor in the explicit forecasts of the next policy decision made by market analysts. Moreover, the direction of policymakers’ dissent explains the direction of analysts’ forecast bias. The third chapter develops a two-stage model for ordinal outcomes (such as discrete changes to the policy interest rates) that are characterized by abundant observations, potentially generated by different processes, in the middle neutral category (no change to the rate). In the context of policy rate setting, the first stage, a policy inclination decision, determines policy stance (loose, neutral or tight) as a reaction to economic conditions, whereas two amount decisions at the second stage are driven mostly by the institutional features. There are three types of zeros: "neutral" zeros, generated directly by the neutral policy stance, and two kinds of "offset" zeros, "loose" and "tight" zeros, generated by the loose or tight stance, offset at the second stage. The model is applied to the individual policymakers’ votes for the interest rate. Both the empirical applications and simulations demonstrate superiority with respect to the conventional models.
    Date: 2012
  39. By: Xin Wang; Yi Wen
    Abstract: Most empirical studies based on U.S. data suggest that the fiscal multiplier is less than 1 (e.g., Barro and Redlick, 2011). However, Keynes argued that the multiplier would be the largest when markets have failed to the greatest extent in coordinating economic activities (such as during the Great Depression with rampant unemployment and low capacity utilization). As a large developing country with high household saving rates, a large pool of rural labor force, and a wide range of market failures, China offers a unique opportunity to test the Keynesian notion that government expenditures (even as a pure waste of aggregate resources) can have a fiscal multiplier larger than 1 on aggregate income. Perhaps even more exceptional is China’s extensive use of government spending as a major policy tool to stimulate the economy over the past three decades. Based on both aggregate time-series data and panel data from 29 Chinese provinces, we find that the fiscal multiplier in China is larger than 2. We provide a theoretical model with market failures and Monte Carlo analysis to rationalize our empirical findings. Specifically, we build a model that can generate the same multiplier and business cycles observed in China and use the model as a data-generating process to gauge whether structural vector autoregressions can yield consistent estimates of the theoretical multiplier in short samples. Our analysis supports the large multiplier found in China but also suggests that government spending may not necessarily be a free lunch despite the large multiplier.
    Keywords: Government spending policy ; Multiplier (Economics) ; Economic conditions - China ; China
    Date: 2013
  40. By: Michelle L. Barnes; Fabià Gumbau-Brisa; Giovanni P. Olivei
    Abstract: Using U.S. real-time data, we show that changes in the unemployment rate unexplained by Okun's Law have significant predictive power for GDP data revisions. A positive (negative) error in Okun's Law in real time implies that GDP will be later revised to show less (more) growth than initially estimated by the statistical agency. The information in Okun's Law errors about the true state of real economic activity also helps to improve GDP forecasts in the near term. Our findings add a new dimension to the interpretation of real-time Okun's Law errors, as they show that these errors can convey information other than a change in potential GDP, the equilibrium unemployment rate, or the use of labor's intensive margin.
    Keywords: Unemployment ; Gross domestic product
    Date: 2013
  41. By: Gerald Carlino; Robert P. Inman
    Abstract: Using a sample of the 48 mainland U.S. states for the period 1973-2009, we study the ability of U.S. states to expand own state employment through the use of state deficit policies. The analysis allows for the facts that U.S. states are part of a wider monetary and economic union with free factor mobility across all states and that state residents and firms may purchase goods from “neighboring” states. Those purchases may generate economic spillovers across neighbors. Estimates suggest that states can increase own state employment by increasing their own deficits. There is evidence of spillovers to employment in neighboring states defined by common cyclical patterns among state economies. For large states, aggregate spillovers to its economic neighbors are approximately two-thirds of own state job growth. Because of significant spillovers and possible incentives to free-ride, there is a potential case to actively coordinate (i.e., centralize) the management of stabilization policies. Finally, job effects of a temporary increase in state own deficits persist for at most one to two years and there is evidence of negative job effects when these deficits are scheduled for repayment.
    JEL: E62 H74 H77 R23
    Date: 2013–03
  42. By: International Monetary Fund
    Abstract: One of the G-20's first reactions to the financial crisis that erupted by late 2008 was to task the IMF and the Financial Stability Board (FSB) with establishing a joint Early Warning Exercise (EWE). This Occasional Paper presents an overview of the IMF's contributions to the EWE. Part I sets out the process, analytical framework, outputs, and dissemination of the EWE, as well as the collaboration with the FSB. Part II describes the main analytical tools deployed in the exercise as of September 2010. As new tools are developed (or become available), they are being added to the EWE or substituted for other models. Once the global economy returns to more stable conditions, the EWE is likely to become the more forward-looking exercise it was initially meant to be, focusing primarily on low-probability, high-impact events (e.g., tail risks). Over time, as new sources of systemic risks emerge and new analytical tools become available, the EWE framework will continue to adapt.
    Date: 2012–07–31
  43. By: Cervellati, Matteo (University of Bologna); Sunde, Uwe (University of Munich)
    Abstract: This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, nor a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the "rectangularization" of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of US men born 1840-1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours.
    Keywords: longevity, life expectancy, schooling, lifetime labor supply, rectangularization of the survival function
    JEL: E20 J22 J24 J26 O11
    Date: 2013–03

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