nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒04‒13
67 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The comeback of inflation as an optimal public finance tool By Di Bartolomeo Giovanni; Acocella Nicola; Tirelli Patrizio
  2. Monetary Policy and Rational Asset Price Bubbles By Galí, Jordi
  3. Credit Risks and Monetary Policy Trade-Offs By Kevin x.d. Huang; J. scott Davis
  4. Financial Shocks, Unemployment, and Public Policy By Driffill, John
  5. Macroeconomic Stability and Heterogeneous Expectations By Nicolò Pecora; Alessandro Spelta
  6. Do Institutions and Culture Matter for Business Cycles? By Altug, Sumru G.; Canova, Fabio
  7. Notes for a New Guide to Keynes (I): Wages, Aggregate Demand, and Employment By Galí, Jordi
  8. Oil price shocks and monetary policy in a data-rich environment By Knut Are Aastveit
  9. International monetary transmission to the Euro area: Evidence from the U.S., Japan and China By Vespignani, Joaquin L.; Ratti, Ronald A
  10. Credit constraints, productivity shocks and consumption volatility in emerging economies. By Bhattacharya, Rudrani; Patnaik, Ila
  11. Downward nominal wage rigidities bend the Phillips curve By Mary C. Daly; Bart Hobijn
  12. Understanding global liquidity By Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
  13. Is the UK triple-A? By Polito, Vito; Wickens, Michael R.
  14. Fiscal Policy in a Depressed Economy: Was There a 'Free Lunch' in 1930s' Britain? By Crafts, Nicholas; Mills, Terence C
  15. Macroprudential Policy and Its Instruments in a Small EU Economy By Jan Frait; Zlatuse Komarkova
  16. Money in the Production Function: a new Keynesian DSGE perspective By Benchimol , Jonathan
  17. Household Leveraging and Deleveraging By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  18. Capital Flows and the Risk-Taking Channel of Monetary Policy By Valentina Bruno; Hyun Song Shin
  19. Financial Crises: Explanations, Types, and Implications By Claessens, Stijn; Kose, Ayhan
  20. Long Term Government Debt, Financial Fragility and Sovereign Default Risk By Christiaan van der Kwaak; Sweder van Wijnbergen
  21. The mystique surrounding the central bank’s balance sheet, applied to the European crisis By Reis, Ricardo
  22. How Optimal is US Monetary Policy? By Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
  23. Understanding Financial Crises: Causes, Consequences, and Policy Responses By Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
  24. How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data By Amiti, Mary; Weinstein, David E.
  25. Short and Long Interest Rate Targets By Pedro Teles; Isabel Correia; Bernardino Adao
  26. Time-Varying Oil Price Volatility and Macroeconomic Aggregates By Nora Traum; Michael Plante
  27. Finance at Center Stage: Some Lessons of the Euro Crisis By Obstfeld, Maurice
  28. Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries By Gabrisch, Hurbert; Orlowski, Lucjan; Pusch, Toralf
  29. The optimal design of a fiscal union By Dmitriev, Mikhail; Hoddenbagh, Jonathan
  30. Credit Default and Business Cycles: an investigation of this relationship in the Brazilian corporate credit market By Jaqueline Terra Moura Marins; Myrian Beatriz Eiras das Neves
  31. Implications for the Australian Economy of Strong Growth in Asia By Michael Plumb; Christopher Kent; James Bishop
  32. Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt By Guibaud, Stéphane; Nosbusch, Yves; Vayanos, Dimitri
  33. Commodity prices and the business cycle in Latin America: Living and dying by commodities? By Camacho, Maximo; Pérez-Quirós, Gabriel
  34. Identification and Inference Using Event Studies By Gürkaynak, Refet S.; Wright, Jonathan
  35. Fiscal Discoveries and Sudden Decouplings By Catão, Luis A. V.; Fostel, Ana; Rancière, Romain
  36. Transaction Taxes, Capital Gains Taxes and House Prices By Nicole Aregger; Martin Brown; Enzo Rossi
  37. The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World By Farmer, Roger E A; Nourry, Carine; Venditti, Alain
  38. Improving GDP Measurement: A Measurement-Error Perspective By Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
  39. Boom and Burst in Housing Market with Heterogeneous Agents (New Version) By Guido Ascari; Nicolò Pecora; Alessandro Spelta
  40. Capital, Trust and Competitiveness in the Banking Sector By Gehrig, Thomas
  41. A Macroeconomic Model with a Financial Sector By Yuliy Sannikov; Markus Brunnermeier
  42. Cinque azioni per la crescita e l’occupazione, in un contesto di politiche contro l’â€austerità espansiva†By Paolo Pini
  43. Why Do Americans Spend So Much More on Health Care than Europeans?--A General Equilibrium Macroeconomic Analysis By Hui He; Kevin x.d. Huang
  44. The Macroeconomics of Modigliani-Miller By Gersbach, Hans; Haller, Hans; Müller, Jürg
  45. Rules and institutions for sound fiscal policy after the crisis By Daniele Franco (editor)
  46. Competing Bimetallic Ratios: Amsterdam, London and Bullion Arbitrage in the Mid-18th Century By Nogues-Marco, Pilar
  47. Labor Supply with Job Assignment under Balanced Growth By Michelacci, Claudio; Pijoan-Mas, Josep
  48. Assessing international efficiency By Jonathan Heathcote; Fabrizio Perri
  49. Portugal Ought Not Restructure Its Debt By Rodrigues, Pedro G.
  50. Shrinking Goods By Levy, Daniel; Snir, Avichai
  51. Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited By Cervellati, Matteo; Sunde, Uwe
  52. Sticky Wages in a Developing Country: Lessons from Structured Interviews in Pakistan By M. Ali Choudhary; Saima Mahmood; Sajawal Khan; Waqas Ahmed; Gylfi Zoega
  53. Worker Matching and Firm Value By Moen, Espen R; Yashiv, Eran
  54. Manufacturing Decline, Housing Booms, and Non-Employment By Kerwin Kofi Charles; Erik Hurst; Matthew J. Notowidigdo
  55. Don't trust anybody over 30: Youth unemployment and Okun's law in CEE countries By Hutengs, Oliver; Stadtmann, Georg
  56. Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries By Bang Nam Jeon; Maria Pia Olivero; Ji Wu
  57. Finance, Governments, and Trade By Bertola, Giuseppe; Lo Prete, Anna
  58. Household Interaction and the Labor Supply of Married Women By Eckstein, Zvi; Lifshitz, Osnat
  59. The implications of natural resource exports for non-resource trade By Harding, Torfinn; Venables, Anthony J
  60. Weathering the crisis and beyond: Perspectives for the Euro Area By Schmidt, Christoph M; Weigert, Benjamin
  61. What causes banking crises? An empirical investigation for the world economy By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong
  62. Does co-integration and causal relationship exist between the non-stationary variables for Chinese bank’s profitability? Empirical evidence By Mondher bellalah; Olivier Levyne; Omar Masood
  63. FDI and the labor share in developing countries: A theory and some evidence By Paul Maarek; Bruno Decreuse
  64. Can EU high indebted countries manage to fulfill fiscal sustainability? Some evidence from the solvency constraint By Andreea Stoian; Rui Henrique Alves
  65. Women, Medieval Commerce, and the Education Gender Gap By Bertocchi, Graziella; Bozzano, Monica
  66. L’insoutenable dynamique de la dette : Une analyse macroéconomique du défaut souverain By Michel Guillard; Hubert Kempf
  67. 50 is the new 30: Long-run trends of schooling and retirement explained by human aging By Strulik, Holger; Werner, Katharina

  1. By: Di Bartolomeo Giovanni; Acocella Nicola; Tirelli Patrizio
    Abstract: We challenge the widely held belief that New-Keynesian models cannot predict optimal positive inflation rates. In fact these are justified by the Phelps argument that monetary financing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of fiscal outlays. We also contradict the view that the Ramsey policy should minimize inflation volatility and induce near-random walk dynamics of public debt in the long-run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 financial crisis.
    Keywords: trend in‡ation, monetary and …scal policy, Ramsey plan
    JEL: E52 E58 J51 E24
    Date: 2013–04
  2. By: Galí, Jordi
    Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
    Keywords: Asset price volatility; Leaning against the wind policies; Monetary policy rules; Stabilization policies
    JEL: E44 E52
    Date: 2013–02
  3. By: Kevin x.d. Huang (Vanderbilt University); J. scott Davis (Federal Reserve Bank of Dallas)
    Abstract: Financial frictions and …financial shocks can affect the trade-off between inflation stabilization and output-gap stabilization faced by a central bank. Financial frictions lead to a greater response in output following any deviation of inflation from target and thus lead to an increase in the sacrifice ratio. As a result, optimal monetary policy in the face of credit frictions is to allow greater output gap instability in return for greater inflation stability. Such a shift in optimal monetary policy can be mimicked in a Taylor-type interest rate feedback rule that shifts weight to inflation and the lagged interest rate and away from output. However, the ability of the conventional Taylor rule to mimic optimal policy gets worse as credit market frictions and shocks intensify. By including a …financial variable like the lending spread in the monetary policy rule, the central bank can partially reverse this worsening output-inflation trade-off brought about by financial frictions and partially undo the effects of credit market frictions and shocks. Thus the central bank may want to include lending spreads in the policy rule even when …financial distortions are not explicitly part of the central bank's objective function.
    Keywords: Credit friction; Credit shock; Credit spread; Monetary policy trade-offs; Taylor rule
    JEL: E0 G0
    Date: 2013–03–25
  4. By: Driffill, John
    Abstract: This paper is based on presentation given at the June 2011 Conference of the Centre for Growth and Business Cycle Research at the University of Manchester. It reviews key features of the 2007-08 financial crisis, the subsequent 'great recession' and the European public debt problems; in the light of these it discusses new avenues of research that have been opened up in response to recent events.
    Keywords: DSGE models; financial shocks; fiscal policy; macroeconomics; quantitative easing; unemployment
    JEL: E30 E44 E60
    Date: 2013–01
  5. By: Nicolò Pecora (Department of Economics and Social Sciences, Università Cattolica del Sacro Cuore); Alessandro Spelta (Department of Economics and Management, University of Pavia)
    Abstract: The late 2000s financial crisis resulted in the collapse of large financial institutions, in the bailout of banks by national governments and downturns in stock markets around the world. Such a large set of outcomes put classical economic thinking under huge pressure. The 2007 crisis made many policy makers in a state of ”shocked disbelief”, as Alan Greenspan declared. Furthermore the recent macroeconomic literature have been stressing the role of heterogeneous expectations in the formulation of monetary policy and recent laboratory experiments provided more evidence about this phenomenon. We use a simple model made by the standard aggregate demand function, the New Keynesian Phillips curve and a Taylor rule to deal with different issues, such as the stabilizing effect of different monetary policies in a system populated by heterogeneous agents. The response of the system depends on the ecology of forecasting rules, on agents sensitivity in evaluating the past performances of the predictors and on the reaction to inflation. In particular we investigate whether the policy makers can sharpen macroeconomic stability in the presence of heterogeneous expectations about future inflation and output gap and how this framework is able to reduce volatility and distortion in the whole system.
    Date: 2013–03
  6. By: Altug, Sumru G.; Canova, Fabio
    Abstract: We examine the relationship between macroeconomic, institutional, and cultural indicators and cyclical fluctuations for European, Middle Eastern and North African Mediterranean countries. Mediterranean cycles are different from EU cycles: the duration of expansions is shorter; the amplitude and the output costs of recessions are larger; and cyclical synchronization is smaller. Differences in macroeconomic and institutional indicators partly account for the relative differences in cyclical synchronization. By contrast, differences in cultural indicators account for relative differences in the persistence, the volatility and the synchronization of cyclical fluctuations. Theoretical and policy implications are discussed.
    Keywords: Business cycles; institutions and culture; Mediterranean countries; synchronization.
    JEL: C32 E32
    Date: 2013–03
  7. By: Galí, Jordi
    Abstract: I revisit the General Theory's discussion of the role of wages in employment determination through the lens of the New Keynesian model. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage flexibility. I show that the latter is not always welfare improving.
    Keywords: employment stability; Monetary policy rules; Wage flexibility
    JEL: E32
    Date: 2013–01
  8. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway) and the University of Oslo)
    Abstract: This paper examines the impact of different types of oil price shocks on the U.S. economy, using a factor-augmented VAR (FAVAR) approach. The results indicate that when examining the effects of oil price shocks, it is important to account for the interaction between the oil market and the macroeconomy. I find that oil demand shocks are more important than oil supply shocks in driving several macroeconomic variables, and that the origin of demand shocks matter. Specifically, the U.S. economy and monetary policy respond differently to global demand shocks that have the effect of raising the price of oil and to oil-specific demand shocks.
    Keywords: Oil demand shocks, Oil supply shocks, Business cycle, Monetary policy, Factor model, FAVAR
    JEL: C3 E31 E32 E4 E5 Q43
    Date: 2013–04–03
  9. By: Vespignani, Joaquin L.; Ratti, Ronald A
    Abstract: There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China‟s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods.
    Keywords: International monetary transmission, China‟s monetary aggregates, Euro area Commodity prices
    JEL: E40 E42 E52 E58
    Date: 2013–04–01
  10. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.
    Keywords: Macroeconomics ; Real business cycles ; Emerging market business cycle stylized facts ; Financial development
    JEL: E10 E32
    Date: 2013–03
  11. By: Mary C. Daly; Bart Hobijn
    Abstract: We show that the existence of downward nominal wage rigidities bends the short-run wage Phillips curve. We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long-run and the short-run Phillips curve. Comparing simulation results from the model with data on U.S. wage changes since the onset of the Great Recession, we show that downward nominal wage rigidities have likely played a role in shaping the dynamics of unemployment and wage growth from 2006 through 2012.
    Keywords: Wages ; Phillips curve
    Date: 2013
  12. By: Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
    Abstract: We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand. --
    Keywords: global liquidity,monetary policy,credit supply,credit demand,international business cycles,factor model,sign restrictions
    JEL: E5 E44 F3 C3
    Date: 2013
  13. By: Polito, Vito; Wickens, Michael R.
    Abstract: The immediate background to this paper is the downgrade of the U.K.'s credit rating in February 2013, the market's view that this should have occurred earlier and the emphasis in fiscal policy on reducing debt rather than recovery from recession. We propose a measure of the U.K. sovereign credit rating based on an open economy macroeconomic model that is simple to compute and easily automated. Whether based on an ad hoc debt-GDP limit or a DSGE model of an open economy, our measure downgrades the U.K.'s sovereign credit rating from the middle of 2008. From 2010 the rating improves and is nearly restored to triple-A by 2012.
    Keywords: credit ratings; debt default
    JEL: E62 H30 H60
    Date: 2013–03
  14. By: Crafts, Nicholas; Mills, Terence C
    Abstract: We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and time-series econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period when interest rates were at the lower bound. The scope for a 'Keynesian solution' to recession was much less than is generally supposed. In the later 1930s but not before Britain's exit from the gold standard, there was a 'fiscal free lunch' in the sense that deficit-financed government spending would have improved public finances enough to pay for the interest onthe extra debt.
    Keywords: defence news; Keynesian solution; multiplier; public works; self-defeating austerity
    JEL: E62 N14
    Date: 2013–01
  15. By: Jan Frait; Zlatuse Komarkova
    Abstract: This paper focuses on the way the macroprudential policy framework in a small EU economy should be designed. With reference to the experience of the Czech Republic's financial system and the Czech National Bank it provides definitions of financial stability and macroprudential policy as well as of their objectives. It then explains how systemic risk evolves over the financial cycle and outlines approaches to preventing systemic risk in the accumulation stage of the cycle and subsequently mitigating the materialisation of such risk if prevention fails. The paper argues that for the establishment of a macroprudential policy framework in a bank-based economy with a relatively simple and small financial sector, the phenomenon of procyclical behaviour has to stand centrally. Correspondingly, a macroprudential authority in such an economy has to look primarily at cyclically induced sources of systemic risks. Nevertheless, structural sources of systemic risks and associated instruments are discussed as well. The arguments for the recommended arrangements are supported by empirical investigations into the extent of procyclicality in European banks' lending behaviour and the contribution of the regulatory and accounting framework to it.
    Keywords: Financial stability, macroprudential policy, monetary policy, procyclicality, systemic risk.
    JEL: E52 E58 E61 G12 G18
    Date: 2012–12
  16. By: Benchimol , Jonathan (ESSEC Business School)
    Abstract: This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis. Our simulations suggest that money plays a negligible role in the dynamics of output and inflation, despite its inclusion in the production function. In addition, we introduce the flexible-price real money balances concept.
    Keywords: Money in the production function; DSGE; Bayesian estimation
    JEL: E23 E31 E51
    Date: 2013–02
  17. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: U.S. households' debt skyrocketed between 2000 and 2007, and has been falling since. This leveraging (and deleveraging) cycle cannot be accounted for by the liberalization, and subsequent tightening, of credit standards in mortgage markets observed during the same period. We base this conclusion on a quantitative dynamic general equilibrium model calibrated using macroeconomic aggregates and microeconomic data from the Survey of Consumer Finances. From the perspective of the model, the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor, because the responses of borrowers and lenders roughly wash out in the aggregate.
    JEL: E21 E44
    Date: 2013–04
  18. By: Valentina Bruno; Hyun Song Shin
    Abstract: We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.
    JEL: E5 F32 F33 F34 G21
    Date: 2013–04
  19. By: Claessens, Stijn; Kose, Ayhan
    Abstract: This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
    Keywords: asset booms; banking crises; credit booms; crises prediction; currency crises; debt crises; defaults; financial restructuring; policy implications; Sudden stops
    JEL: E32 E5 E6 F44 G01 H12
    Date: 2013–02
  20. By: Christiaan van der Kwaak (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We analyze the interaction between bank rescues, financial fragility and sovereign debt discounts. We construct a model that contains balance sheet constrained financial intermediaries financing both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. The introduction of the default possibility does not have any impact IF all government debt is short term. Interest rates on debt reflect higher default probabilities, but because all debt is short term, bank balance sheets are unaffected and no further negative effects arise through the endogenous sovereign debt channel. But once long term government debt is introduced, the possibility of capital losses on bank balance sheets arises. Then o utcomes significantly deteriorate compared to the short term debt only case. Higher interest rates on new debt lead to capital losses on banks' holding of existing long term government debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. This causes potentially conflicting macroeconomic effects of a debt financed recapitalization of banks. We investigate the case where the government announces a bankrecapitalization to occur 4 quarters after announcement. Under the parameter values chosen, the positive effects from an anticipated capital injection dominate the effects of the associated increase in sovereign default risk.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2013–04–02
  21. By: Reis, Ricardo
    Abstract: In spite of the mystique behind a central bank’s balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank’s main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.
    Keywords: central bank capital; Eurosystem; seignorage; sovereign debt crisis
    JEL: E58 F34
    Date: 2013–02
  22. By: Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
    Abstract: Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gain sfrom the 'Great Moderation' arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000.
    Keywords: Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation
    Date: 2013–05
  23. By: Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
    Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.
    Keywords: asset price busts; banking crises; credit busts; currency crises; debt crises; defaults; global financial crisis; prediction of crises; restructuring; sudden stops; welfare cost
    JEL: E32 E5 E6 F44 G01 H12
    Date: 2013–01
  24. By: Amiti, Mary; Weinstein, David E.
    Abstract: We show that supply-side financial shocks have a large impact on firms’ investment. We do this by developing a new methodology to separate firm credit shocks from loan supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, idiosyncratic bank shocks i.e., movements in bank loan supply net of borrower characteristics and general credit conditions can have large impacts on aggregate loan supply and investment. We show that these idiosyncratic bank shocks explain 40 percent of aggregate loan and investment fluctuations.
    Keywords: credit constraints; financial markets; granular shock
    JEL: E44 G21
    Date: 2013–03
  25. By: Pedro Teles (Banco de Portugal, Universidade Catolica); Isabel Correia (Banco de Portugal); Bernardino Adao (Banco de Portugal)
    Abstract: A target for the short-term nominal interest rate does not pin down realized inflation. Neither does it pin down the term premia. Short and long rates are threrefore independent monetary policy instruments. A target of the term structure is equivalent to a peg of the returns on state-contingent nominal assets. These are the rates that should be targeted in order to pin down realized inflation.
    Date: 2012
  26. By: Nora Traum (North Carolina State University); Michael Plante (Research Department)
    Abstract: We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.
    Date: 2012
  27. By: Obstfeld, Maurice
    Abstract: Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macroeconomic stability. Recent events, in both Europe and the industrial world at large, challenge this assumption. After reviewing the roots of the euro crisis in financial-market developments, this essay draws some conclusions for the reform of euro area institutions. The euro area is moving quickly to correct one flaw in the Maastricht treaty, the vesting of all financial supervisory functions with national authorities. However, the sheer size of bank balance sheets suggest that the euro area must also confront a financial/fiscal trilemma: countries in the euro zone can no longer enjoy all three of financial integration with other member states, financial stability, and fiscal independence, because the costs of banking rescues may now go beyond national fiscal capacities. Thus, plans to reform the euro zone architecture must combine centralized supervision with some centralized fiscal backstop to finance bank resolution and deposit insurance.
    Keywords: banking union; euro crisis; financial stability; trilemma
    JEL: E44 F36 G15 G21
    Date: 2013–04
  28. By: Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University); Pusch, Toralf (Halle Institute for Economic Research)
    Abstract: This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ÔpushÕ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk.
    Keywords: Sovereign Default Risk, Euro area, Public Debt, Liquidity Risk, Counter-party Risk.
    JEL: E43 E63 G12
    Date: 2012–08
  29. By: Dmitriev, Mikhail; Hoddenbagh, Jonathan
    Abstract: We study the optimal design of a fiscal union within a currency union using an open economy model with nominal rigidities. We show that the optimal design of a fiscal union depends crucially on the degree of financial integration across countries as well as the elasticity of substitution between domestic and foreign goods. Empirical estimates of substitutability range between 1 and 12. If substitutability is low (around 1), risk-sharing occurs naturally via terms of trade movements even in financial autarky, country-level monopoly power is high and losses from terms of trade externalities dominate other distortions. On the other hand, if substitutability is high (greater than 1), risk-sharing does not occur naturally via terms of trade movements, country-level monopoly power is low and losses from nominal rigidities dominate other distortions. We show that members of a fiscal union should (1) coordinate labor and consumption taxes when substitutability is low to eliminate terms of trade distortions, and (2) coordinate contingent cross-country transfers when substitutability is high to improve risk-sharing, particularly when union members lose access to international financial markets. Contingent fiscal policy at the national level is also necessary to eliminate nominal rigidities in the presence of asymmetric shocks, and yields large welfare gains when goods are close substitutes.
    Keywords: Fiscal Union, International Macroeconomics
    JEL: E5 E58 F41
    Date: 2012–12
  30. By: Jaqueline Terra Moura Marins; Myrian Beatriz Eiras das Neves
    Abstract: The aim of this paper is to examine empirically whether the default of borrower companies in the Brazilian market rises in downturns. To this end, a probit model for the probability of default is developed based on credit microdata taken from the Credit Information System of the Central Bank of Brazil (SCR) and on macroeconomic variables. Our results provide evidence of a strong negative relationship between business cycle and credit default, going in accord to the literature dealing with corporate data. These effects are stronger than those found in our previous article for the case of default of individuals. This is an expected result, since the retail credit is more sprayed than the corporate credit. The macroeconomic variables that have the greatest effect on corporate defaults were GDP growth and inflation.
    Date: 2013–03
  31. By: Michael Plumb (Reserve Bank of Australia); Christopher Kent (Reserve Bank of Australia); James Bishop (Reserve Bank of Australia)
    Abstract: Strong growth in Asia, particularly in China, has had a profound impact on the Australian economy over the past decade. Most notable so far has been the boom in the resource sector, with commodity prices and hence Australia's terms of trade rising to historically high levels over a number of years. This has been accompanied by a sizeable appreciation of the exchange rate. While the terms of trade have passed their peak, the substantial investment in productive capacity of the resource sector in recent years is expected to provide a large boost to the production and exports of resources in coming years. In this paper we describe how the pattern of structural adjustment to the positive terms of trade shock has, to date, proceeded broadly in line with that suggested by a simple theoretical model that distinguishes between three broadly defined sectors: the resource sector, the 'other tradable' sector and the non-tradable sector. In particular, relative wages and prices adjusted in a way that facilitated the reallocation of factors of production towards the resource sector. While not all parts of the economy have benefited, the process of adjustment thus far has occurred relatively smoothly in a macroeconomic sense; inflation has remained within the target range, or not too far from it, unemployment has remained relatively low and output has grown at close to trend rates. This stands in stark contrast to some earlier episodes of terms of trade booms in Australia. We argue that macroeconomic adjustment to the current terms of trade shock has been facilitated by the appreciation of the exchange rate, the anchoring of inflation expectations and labour market dynamics whereby wage pressures in industries or regions experiencing strong conditions associated with the boom in resource investment have not spilled over to parts of the economy experiencing weaker conditions.
    Keywords: Australian macroeconomy; economic performance; terms of trade; resource boom; industry analysis
    JEL: E02 E20 N15 N17 Q33 Q43
    Date: 2013–03
  32. By: Guibaud, Stéphane; Nosbusch, Yves; Vayanos, Dimitri
    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.
    Keywords: clientele effects; debt management; government debt; interest rates; preferred habitat
    JEL: E43 G11 G12 H21 H63
    Date: 2013–03
  33. By: Camacho, Maximo; Pérez-Quirós, Gabriel
    Abstract: We analyze the dynamic interactions between commodity prices and output growth of the seven greatest exporters Latin American countries: Argentina, Brazil, Colombia, Chile, Mexico, Peru and Venezuela. Using a novel definition of Markov-switching impulse response functions, we find that the responses of their respective output growths to commodity price shocks are time dependent, size dependent and sign dependent. Overall, the major evidence of asymmetries in output growth responses occurs when commodity price shocks lead to regime shifts. Accordingly, we consider that the design of optimal counter-cyclical stabilization policies in this region should take into account that the reactions of the economic activity vary considerably across business cycle regimes.
    Keywords: Emerging Markets; Non linearities
    JEL: E32 F43
    Date: 2013–02
  34. By: Gürkaynak, Refet S.; Wright, Jonathan
    Abstract: We discuss the use of event studies in macroeconomics and finance, arguing that many important macro-finance questions can only be answered using event studies with high-frequency financial market data. We provide a broad picture of the use of event studies, along with their limitations. As examples, we study financial markets' responses to specific events that help address questions such as the slope of bond demand functions and the efficacy of central bank liquidity programs. We also study the change in financial market responses to news in payrolls and unemployment in response to former Fed Chairman Greenspan's statement that payrolls are more informative.
    Keywords: Bond Markets; Event Study; High-Frequency Data; Identification; TAF
    JEL: E43 E52 E58 G12 G14
    Date: 2013–03
  35. By: Catão, Luis A. V.; Fostel, Ana; Rancière, Romain
    Abstract: The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which become discernable only during bad times. Key ingredients are cross-country differences in the volatility and persistence of fiscal revenue shocks combined with asymmetric information on country-specific fiscal shocks. Differences in the cyclicality of fiscal revenues affect the option value of borrowing and resulting default risk; unobservability of fiscal shocks makes bond pricing responsive to market actions. When tax revenues are hit by common positive shocks, no country increases net debt and interest spreads stay put. When a common negative revenue shock hits and is persistent, low volatility countries adjust spending while others resort to borrowing. This difference signals a relative deterioration of fiscal outlooks, interest spreads jump and decoupling takes place.
    Keywords: Default; Eurozone Debt Crisis; Fiscal Gaps; Information Asymmetry; Perfect Bayesian Equilibrium; Pesistence; Sovereign Debt; Volatility
    JEL: E62 F34 G15 H3
    Date: 2013–02
  36. By: Nicole Aregger; Martin Brown; Enzo Rossi
    Abstract: Motivated by the search for instruments to contain future housing bubbles, we examine the impact of transaction taxes and capital gains taxes on residential house price growth. We exploit the variation in taxation across Swiss cantons, as well as within-canton changes in taxation over time. We relate these taxes to house price growth observed for 92 regions of the country during the period 1985 - 2009. Our results suggest that higher taxes on capital gains exacerbate house price dynamics while transaction taxes have no impact on house price growth. These findings support the existence of a lock-in effect of capital gains taxes on housing supply. They further suggest that taxes on real estate capital gains and transaction values are not suitable measures to prevent excessive house price growth.
    Keywords: House prices, Transaction tax, Capital gains tax, Macroprudential policy
    JEL: E32 H24 R21
    Date: 2013
  37. By: Farmer, Roger E A; Nourry, Carine; Venditti, Alain
    Abstract: Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not.
    Keywords: asset pricing; efficient markets; excess volatility
    JEL: E32 E44 G10 G12 G14
    Date: 2013–01
  38. By: Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Pennsylvania); Jeremy Nalewaik (Division of Research and Statistics, Board of Governors, Federal Reserve Board); Frank Schorfheide (Department of Economics, University of Pennsylvania); Dongho Song (Department of Economics, University of Pennsylvania)
    Abstract: We provide a new and superior measure of U.S. GDP, obtained by applying optimal signal-extraction techniques to the (noisy) expenditure-side and income-side estimates. Its properties - particularly as regards serial correlation - differ markedly from those of the standard expenditure-side measure and lead to substantially-revised views regarding the properties of GDP.
    Keywords: Income, Output, expenditure, business cycle, expansion, contraction, recession, turning point, state-space model, dynamic factor model, forecast combination
    JEL: E01 E32
    Date: 2013–04–03
  39. By: Guido Ascari (Department of Economics and Management, University of Pavia); Nicolò Pecora (Department of Economics and Social Sciences, Università Cattolica del Sacro Cuore); Alessandro Spelta (Department of Economics and Management, University of Pavia)
    Abstract: We study the housing market using a partial "dis"-equilibrium dynamic model in which the rational expectations hypothesis is relaxed in favor of chartist-fundamentalist mechanism to allows for the endogenous development of bubbles. Our model is able to replicate the recent house price dynamics in the US, with the preference shock being the main forcing variable. We also analyze the role of the interest rate policy. Our model supports the view that anchoring the interest rate to the change in house price would have reduced the volatility and the distortion in the price dynamics.
    Keywords: Heterogeneous agents, house price, agent-based model
    JEL: E3 E4
    Date: 2013–03
  40. By: Gehrig, Thomas
    Abstract: This note critically assesses the Basel reform process of capital regulation. It highlights the political nature of this process and argues that the absence of clearly spelled-out societal objectives has been detrimental in furthering stability and soundness of the banking systems in the run-up of the 2007/8 financial crisis. The positive externalities of bank capital have not hitherto been explicitly been taken into consideration.
    Keywords: bank capital; Basel process of capital regulation; trust
    JEL: E58 G01 G21 H63
    Date: 2013–02
  41. By: Yuliy Sannikov (Princeton University); Markus Brunnermeier (Princeton University)
    Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplication effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in downturns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other by not maintaining adequate capital cushion.
    Date: 2012
  42. By: Paolo Pini
    Abstract: Five actions for growth and employment, in a context of policy against “expansionary austerityâ€. Economic crisis in Italy cannot wait for political uncertainty. We need urgently some interventions to tackle with the need to contrast the double-dip in real economy, and support growth and employment. Five areas are stressed: a) infrastructures and territory conservations; b) employment and income for young people; c) innovations in workplaces; d) credit crunch and finance; e) wages, taxes and fiscal drag. Interventions in these areas require financial resources, and within the “austerity expansionary scenario†there is no rooms for growth and employment. We need to change this scenario in Europe, where growth and employment are stifled by tight budgets.
    Keywords: Economic crisis; Economic policy; Growth and employment
    JEL: E6 H5 J08 O3
    Date: 2013–03–30
  43. By: Hui He (Shanghai University of Finance and Economics); Kevin x.d. Huang (Vanderbilt University)
    Abstract: Empirical evidence suggests that both leisure time and medical care are important for maintaining health. We develop a general equilibrium macroeconomic model in which taxation is a key determinant of the composition of these two inputs in the endogenous accumulation of health capital. In our model, higher taxes lead to using relatively more leisure time and less medical care in maintaining health. We find that the difference in taxation can account for a large fraction of the difference in health expenditure-GDP ratio and almost all of the difference in time input for health production between the US and Europe.
    Keywords: Taxation, Time allocation, Health expenditure, Macroeconomics, General equilibrium
    JEL: E0 H0
    Date: 2013–03–25
  44. By: Gersbach, Hans; Haller, Hans; Müller, Jürg
    Abstract: We examine the validity of a macroeconomic version of the Modigliani-Miller theorem. For this purpose, we develop a general equilibrium model with two production sectors, risk-averse households and financial intermediation by banks. Banks are funded by deposits and (outside) equity and monitor borrowers in lending. We impose favorable manifestations of the underlying frictions and distortions. We obtain two classes of equilibria. In the first class, the debt-equity ratio of banks is low. The first-best allocation obtains and banks' capital structure is irrelevant for welfare: a macroeconomic version of the Modigliani-Miller theorem. However, there exists a second class of equilibria with high debt-equity ratios. Banks are larger and invest more in risky technologies. Default and bailouts financed by lump sum taxation occur with positive probability and welfare is lower. Imposing minimum equity capital requirements eliminates all inefficient equilibria and guarantees the global validity of the macroeconomic version of the Modigliani-Miller theorem.
    Keywords: Banking; Capital Requirements; Capital Structure; Financial intermediation; General Equilibrium; Modigliani-Miller
    JEL: D53 E44 G2
    Date: 2013–03
  45. By: Daniele Franco (editor) (Bank of Italy)
    Abstract: The volume collects the essays presented at the 13th Workshop on Public Finance organised by Banca d'Italia in Perugia on 31 March-2 April 2011. The workshop concentrated on the measures aimed at guaranteeing sustainable budget policies in the aftermath of the global crisis started in 2008, affording special consideration to rules and institutions. Session 1 analysed the experiences that took shape in individual states thanks to their own budget frameworks and institutions. Session 2 investigated the evolution and the reform of European fiscal guidelines. Session 3 dealt with independent authorities and the rules intended to put a check on public expenditure. The final session was devoted to possible future developments of national norms and budget institutions.
    Keywords: institutions, fiscal policy, crisis
    JEL: E32 E62
    Date: 2012–11
  46. By: Nogues-Marco, Pilar
    Abstract: This article analyzes the stability of bimetallism for countries operating in integrated bullion markets who enact different legal ratios. I articulate a new theoretical framework to demonstrate that two countries can both be bimetallic only if they coordinate their legal ratios. The theoretical framework is applied to the mid-18th century when London’s legal ratio was 3.8% higher than that of Amsterdam. I find that Amsterdam was effectively on the bimetallic standard, whereas London was on a de facto gold standard.
    Keywords: arbitrage; bimetallic stability; bullion market integration; melting-minting points; monetary policy; specie-point mechanism
    JEL: E42 F15 N13 N23
    Date: 2013–01
  47. By: Michelacci, Claudio; Pijoan-Mas, Josep
    Abstract: We consider a competitive equilibrium growth model where technological progress is embodied into new jobs that are assigned to workers of different skills. In every period workers decide whether to actively participate in the labor market and if so how many hours to work on the job. Balanced growth requires that the job technology is complementary with the worker’s total labor input in the job, which is jointly determined by his skill and his working hours. Since lower skilled workers can supply longer hours, we show that the equilibrium features positive assortative matching (higher skilled workers are assigned to better jobs) only if differences in consump- tion are small relative to differences in worker skills. When the pace of technological progress accelerates, wage inequality increases and workers participate less often in the labor market but supply longer hours on the job. This mechanism can explain why, as male wage inequality has increased in the US, labor force participation of male workers of different skills has fallen while their working hours have increased.
    Keywords: job heterogeneity; participation; wage inequality; working hours
    JEL: E24 G31 J31
    Date: 2013–01
  48. By: Jonathan Heathcote; Fabrizio Perri
    Abstract: This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare.
    Keywords: Risk ; Business cycles
    Date: 2013
  49. By: Rodrigues, Pedro G.
    Abstract: At the epicenter of the international financial crisis is a debt crisis where low-quality assets and the slowdown in economic activity have made creditors worldwide wary of the ability and willingness of debtors to comply with their obligations. In this context of indebtedness, now perceived as excessive, where expenses on interest are growing, some defend debt restructuring to alleviate this burden. This brief note aims to contribute towards the current debate with an analysis of the benefits and costs related to the possible but uncertain unilateral decision by Portugal to alleviate its expenses on interest. Considering i) the most recent international evidence that suggests that in the majority of the cases a debt restructuring is accompanied by a banking crisis and/or by a currency crisis, ii) that Portugal does not meet any of the cost-minimizing criteria, and iii) that an exit from the euro would probably be inevitable as a result of such a decision, we conclude that Portugal ought not restructure its debt.
    Keywords: Debt crisis; International financial crisis; Restructuring; Troika;
    JEL: E62 H63
    Date: 2012–06–04
  50. By: Levy, Daniel; Snir, Avichai
    Abstract: If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information.
    Keywords: Quantity Adjustment, Cognitive Costs of Attention, Information Processing
    JEL: E31 L11 L16 L42
    Date: 2013–01–22
  51. By: Cervellati, Matteo; Sunde, Uwe
    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 man 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: Life Expectancy; Lifetime Labor Supply; Longevity; Rectangularization of the Survival Function; Schooling
    JEL: E20 J22 J24 J26 O11
    Date: 2013–03
  52. By: M. Ali Choudhary (University of Surrey and State Bank of Pakistan); Saima Mahmood (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Waqas Ahmed (State Bank of Pakistan); Gylfi Zoega (Birkbeck College)
    Abstract: We contribute to the growing literature on the empirical evidence for wage rigidity using structured interviews for Pakistan. The novelty of the study consists of using data from a developing country which provides the basis for a comparison with studies performed in the developed countries. Our sample of 1189 managers finds widespread support for downward nominal wage rigidity while real wage rigidity is less pronounced although still present. Concerns about the adverse effects of wage reductions on effort, morale, the most productive workers leaving (adverse selection) and the minimum-wage largely explain the presence of nominal wage rigidity. All sectors, irrespective of time, take minimum-wage changes into account when setting wages so that the law very much sets wage expectations.
    JEL: E5 F4 O1
    Date: 2013–03
  53. By: Moen, Espen R; Yashiv, Eran
    Abstract: This paper studies the hiring and firing decisions of firms and their effects on firm value. This is done in an environment where the productivity of workers depends on how well they match with their co-workers and the firm acts as a coordinating device. Match quality derives from a production technology whereby workers are randomly located on the Salop circle, and depends negatively on the distance between the workers. It is shown that a worker's contribution in a given firm changes over time in a nontrivial way as co-workers are replaced with new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of employment, firm output and the distribution of firm values. The paper stresses the role of horizontal differences in worker productivity, as opposed to vertical, assortative matching issues. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm value and age distributions.
    Keywords: complementarity; firing; firm value; hiring; match quality; optimal stopping; Salop circle; worker value
    JEL: E23 J62 J63
    Date: 2013–03
  54. By: Kerwin Kofi Charles; Erik Hurst; Matthew J. Notowidigdo
    Abstract: We assess the extent to which manufacturing decline and housing booms contributed to changes in U.S. non-employment during the 2000s. Using a local labor market design, we estimate that manufacturing decline significantly increased non-employment during 2000-2007, while local housing booms decreased non-employment by roughly the same magnitude. The effects of manufacturing decline persist through 2011, but we find no persistent non-employment effects of local housing booms, most plausibly because housing booms were associated with subsequent busts of similar magnitude. We also find that housing booms significantly reduce the likelihood that displaced manufacturing workers remain non-employed, suggesting that housing booms "mask" non-employment growth that would have otherwise occurred earlier in the absence of the booms. Applying our estimates to the national labor market, we find that housing booms reduced non-employment growth by roughly 30 percent during 2000-2007 and that roughly 40 percent of the aggregate increase in non-employment during 2000-2011 can be attributed to manufacturing decline. Collectively, our results suggest that much of the non-employment growth during the 2000s can be attributed to manufacturing decline and these effects would have appeared in aggregate statistics earlier had it not been for the large, temporary increases in housing demand.
    JEL: E24 E32 J21
    Date: 2013–04
  55. By: Hutengs, Oliver; Stadtmann, Georg
    Abstract: In recent years youth unemployment rates across Europe soared, causing the European Commission to take actions through initiatives to counter this development. This article examines youth unemployment development in selected CEE countries and compares them to the EU 15. We use Okun's law and estimate age and country specific Okun coefficients for five different age cohorts. Our results show that young people display much higher Okun coefficients than their older peers, thus confirming that young people are more prone to macroeconomic shocks. This result might be a justification for additional governmental intervention and active labour market policies favouring young people. --
    Keywords: Okun's law,labor market,youth unemployment
    JEL: E24 F50 C23
    Date: 2013
  56. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Maria Pia Olivero (Drexel University); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994-2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries¡¦ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and became more conspicuous in recent years than before. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries' reliance on funds from their parent bank, the subsidiaries' entry mode, and the capital account openness and banking market structure in host countries.
    Keywords: Internal Capital Markets, Multinational Banking, Transmission of Financial Shocks
    JEL: E44 F43 G21
    Date: 2013–05
  57. By: Bertola, Giuseppe; Lo Prete, Anna
    Abstract: We study how financial transactions may respond to exogenous variation in trade opportunities not only directly, but also through policy channels. In more open economies, governments may find it more difficult to fund and enforce public policies that substitute private financial transactions, and more appealing to deregulate financial markets. We propose a simple theoretical model of such policy-mediated relationships between trade and financial development. Empirically, we document in a country panel dataset that, before the 2007-08 crisis, financial market volumes were robustly and negatively related to the share of government consumption in GDP in regressions that also include indicators of financial regulation and trade openness, and we seek support for a causal interpretation of this result in instrumental variable specifications.
    Keywords: financial reforms; government size; openness; private credit
    JEL: E60 F13 G18
    Date: 2013–02
  58. By: Eckstein, Zvi; Lifshitz, Osnat
    Abstract: Changing social norms, as reflected in the interactions between spouses, are hypothesized to affect the employment rates of married women. A model is built in order to estimate this effect, in which the employment of married men and women is the outcome of an internal household game. The type of the household game is exogenously determined as either Classical or Modern. In the former type of household, the spouses play a Stackelberg leader game in which the wife’s labor supply decision is based on her husband’s employment outcome while the latter type of household is characterized by a symmetric and simultaneous game that determines the spouses’ joint labor supply as Nash equilibrium. Females in Modern households are predicted to have higher employment rates than women in Classical households if they have narrower labor market opportunities and/or higher relative risk aversion. The household type is exogenously determined when the couple gets married and is treated as unobserved heterogeneity. The model is estimated using the Simulated Moments Method (SMM) and data from the Panel Study of Income Dynamics (PSID) survey for the years 1983-93. The estimated model provides a good fit to the trends in employment rates and wages. We estimate that 38 percent of households are Modern and that the participation rate of women in those households is almost 80 percent, which is about 10 higher than in Classical households. Meanwhile, the employment rate among men is almost identical in the two types of household.
    Keywords: dynamic discrete choice; household game; household labor supply
    JEL: E24 J2 J3
    Date: 2013–01
  59. By: Harding, Torfinn; Venables, Anthony J
    Abstract: Foreign exchange windfalls such as those from natural resource revenues change non-resource exports, imports, and the capital account. We study the balance between these responses and, using data on 41 resource exporters for 1970-2006, show that the response to a dollar of resource revenue is, approximately, to decrease non-resource exports by 75 cents and increase imports by 25 cents, implying a negligible effect on foreign saving. The negative per dollar impact on exports is larger for countries which have good institutions and higher income levels. These countries have a higher share of manufacturing in their non-resource exports, and we show that manufactures are more susceptible than other products to being crowded out by resource exports.
    Keywords: Dutch disease; exports; imports; natural resources; resource curse; trade
    JEL: E21 E62 F43 H63 O11 Q33
    Date: 2013–01
  60. By: Schmidt, Christoph M; Weigert, Benjamin
    Abstract: The euro area is experiencing a severe and highly complex crisis. It comprises three problem areas, the difficulties of some highly indebted European sovereigns to ascertain funding at palatable cost, the disconcerting fragility of the European banking system and disappointing growth prospects in the euro area periphery. To make matters even worse, these problems have developed into a systemic crisis of the European Monetary Union (EMU), since observers have apparently developed fundamental doubts over its integrity. To overcome this systemic crisis, it would not be sufficient, if only the stronger euro area economies provided more solidarity, nor would it be sufficient, if only all of Europe adhered to ironclad budgetary discipline from now on. A European Redemption Pact could be a strong political commitment to the EMU and offer a bridge between the proponents of fiscal discipline and structural reform and those governments advocating for more support. This pact would entail two indispensable aspects, the codification of a credible and coherent reform path and a temporary and limited instrument for joint refinancing.
    Keywords: debt sustainability; Euro crisis; European redemption pact; financial market regulation; governance of the euro area
    JEL: E42 E60 F24 G28 H6
    Date: 2013–03
  61. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong
    Abstract: We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model’s implied residuals on unfi…ltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises — provided the government acts swiftly to counteract such a shock as happened in this sample.
    Keywords: Banking; DSGE; Indirect Inference
    JEL: E0
    Date: 2013–03
  62. By: Mondher bellalah; Olivier Levyne; Omar Masood (THEMA, Universite de Cergy-Pontoise; Institue Superieur de Commerce de Paris, ISC Paris; Royal Business School, University of East London)
    Abstract: This study aims to give the analysis of the determinants of banks’ profitability in the Kingdom of China over the period starting 2003. The paper investigates the co-integration and causal relationship between total assets (TA) and total equity (TE) of Saudi banks. The analysis employs Augmented Dickey Fuller (ADF) test, Johansen’s cointegration test, Granger causality test. Analyzing the cointegration and other tests on Saudi Arabian banking sector over the study period, the relationships between the two variables are examined. The empirical results have found strong evidence that the variables are co-integrated.
    Keywords: Banking, bank profitability, total assets, total equity, co-integration.
    JEL: E50 F30 F17 G01 G21
    Date: 2013
  63. By: Paul Maarek; Bruno Decreuse (THEMA, Universite de Cergy-Pontoise; Aix-Marseille School of Economics)
    Abstract: We address the effects of FDI on the labor share in developing countries. Our theory relies on the impacts of FDI on wage and labor productivity in a frictional labor market. FDI have two opposite effects on the labor share: a negative force originated by technological advance, and a positive force due to increased labor market competition between firms. We test this theory on aggregate panel data through fixed effects and IV estimates. We examine the relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. We show that FDI have decreased the labor share in the host countries of our dataset. This impact amounts to between 10% to 20% of the mean labor share in our sample.
    Keywords: FDI; Matching frictions; Firm heterogeneity; Technological advance
    JEL: E25 F16 F21
    Date: 2013
  64. By: Andreea Stoian (Department of Finance, Bucharest University of Economic Studies); Rui Henrique Alves (Faculdade de Economia, Universidade do Porto)
    Abstract: The public finance constraints introduced by the Maastricht Treaty have been subject to numerous debates among economists. Balassone and Franco (2000) pointed out, for instance, that the fulfillment of these constraints allows for fiscal discipline and flexibility and excludes any bias from an unsustainable fiscal policy in the long run. But data shows that many of the advanced economies have exceeded the limits for budgetary deficits and public debt since 1993. Therefore, the question on whether fiscal policy is sustainable naturally arises. The aim of this paper is to investigate the achievement of the solvency constraint for the European Union high indebted countries using a simple public debt dynamic model. The required primary surplus is estimated under different scenarios, namely: (i) a baseline that aims at stabilizing public debt; (ii) a 60% of GDP scenario; and (iii) a minimum public debt scenario that differs among the countries under analysis. From results, we try to draw conclusions on what really matters for fiscal sustainability.
    Keywords: Fiscal policy, primary balance, public debt, fiscal sustainability, Maastricht Treaty
    JEL: E62 H62 H63
    Date: 2012–08
  65. By: Bertocchi, Graziella; Bozzano, Monica
    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 upper-primary 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; family types.; Italian Unification; medieval commerce; political institutions
    JEL: E02 H75 I25 J16 N33 O15
    Date: 2013–02
  66. By: Michel Guillard (Université d’Evry Val d’Essonne, EPEE); Hubert Kempf (Ecole Normale Supérieure de Cachan)
    Abstract: Nous étudions la question de la soutenabilité de la dette publique dans le cadre d’un modèle macroéconomique prenant explicitement en compte l’interaction des politiques monétaire et budgétaire ainsi que la possibilité de défaut sur la dette publique. Nous différencions la notion de “seuil de défaut” de celle de “seuil d’insoutenabilité”. Le seuil de défaut correspond à la limite d’endettement de l’Etat. Le défaut survient lorsque le marché ne reconnaît plus à l’Etat la capacité d’honorer la totalité de sa dette. Le “seuil d’insoutenabilité” peut être atteint pour des niveaux de dette plus faible. Le marché continue à affecter une probabilité positive au remboursement complet de la dette. Pour autant, lorsque ce seuil est dépassé, la prime de risque réclamée par le marché pèse si lourdement sur les comptes publics que le défaut devient, en absence de choc macroéconomique favorable, inévitable. Nous montrons également qu’un “défaut réussi” implique une règle de défaut respectant le critère de soutenabilité de la dette après défaut, la soutenabilité signifiant ici que la prime de risque après défaut doit être suffisamment faible pour assurer que la part de la dette dans le PIB puisse continuer à décroître. Une règle de défaut efficiente doit impliquer une réduction suffisante de la dette publique.
    Keywords: Dette publique, Défaut souverain, Risque de défaut, Soutenabilité
    JEL: E6 F4
    Date: 2012–07
  67. By: Strulik, Holger; Werner, Katharina
    Abstract: Workers in the US and other developed countries retire no later than a century ago and spend a significantly longer part of their life in school, implying that they stay less years in the work force. The facts of longer schooling and simultaneously shorter working life are seemingly hard to square with the rationality of the standard economic life cycle model. In this paper we propose a novel theory, based on health and aging, that explains these long-run trends. Workers optimally respond to a longer stay in a healthy state of high productivity by obtaining more education and supplying less labor. Better health increases productivity and amplifies the return on education. The health accelerator allows workers to finance educational efforts with less forgone labor supply than in the previous state of shorter healthy life expectancy. When both life-span and healthy life expectancy increase, the health effect is dominating and the working life gets shorter if the preference for leisure is sufficiently strong or the return on education is sufficiently large. We calibrate an extended version of the model and show that it is capable to predict the historical trends of schooling and retirement. --
    Keywords: healthy life expectancy,longevity,education,retirement,labor supply,compression of morbidity
    JEL: E20 I25 J22 O10 O40
    Date: 2013

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