nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒06‒09
33 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Bank of Russia at the Crossroads: Does the Monetary Policy Needs Easing By Eugene Goryunov; Pavel Trunin
  2. Monetary Policy and Credit Cycles: A DSGE Analysis By Florina-Cristina Badarau; Alexandra Popescu
  3. The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan By Hiroshi Nakaota; Yuichi Fukuta
  4. Recovering from the Global Financial Crisis: achieving financial stability in times of uncertainty By Ojo, Marianne
  5. Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity By Franziska Bremus; Claudia Buch; Katheryn Russ; Monika Schnitzer
  6. Finance at Center Stage: Some Lessons of the Euro Crisis By Maurice Obstfeld
  7. Monetary Policy, R&D and Economic Growth in an Open Economy By Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing
  8. Coping with the Recent Financial Crisis, did Inflation Targeting Make Any Difference? By Armand Fouejieu Azangue
  9. Optimal Term Length for an Overconfident Central Banker By Etienne Farvaque; Norimichi Matsueda
  10. The Euro exchange rate during the European sovereign debt crisis – dancing to its own tune? By Michael Ehrmann; Chiara Osbat; Jan Strasky; Lenno Uusküla
  11. Worker Identity, Employment Fluctuations and Stabilization Policy By Snower, Dennis J.; Lechthaler, Wolfgang
  12. Design Failures in the Eurozone - can they be fixed? By Paul de Grauwe
  13. Energy and Capital in a New-Keynesian Framework By Verónica Acurio Vasconez; Gaël Giraud; Florent Mc Isaac; Ngoc Sang Pham
  14. Capital Flows in the Euro Area By Philip R. Lane
  15. An Integrated Financial Framework for the Banking Union: Don’t Forget Macro-Prudential Supervision By Dirk Schoenmaker
  16. Do Sound Public Finances Require Fiscal Rules Or Is Market Pressure Enough? By Michael Bergman; Michael M. Hutchison; Svend E. Hougaard Jensen
  17. Global Banks, Financial Shocks and International Business Cycles: Evidence from Estimated Models By Robert Kollmann
  18. Trend-cycle decomposition: implications from an exact structural identification By Mardi Dungey; Jan P.A.M. Jacobs; Jing Tian; Simon van Norden
  19. Testing for the Credit Crunch in Trinidad and Tobago Using an Alternative Method By Khemraj, Tarron; Primus, Keyra
  20. Macroeconomics and Politics in the Accumulation of Greece’s Debt: An econometric investigation, 1975-2009 By George Alogoskoufis
  21. The Decline of the U.S. Rust Belt: A Macroeconomic Analysis By Lee Ohanian; David Lagakos; Simeon Alder
  22. Policy Coordination, Convergence, and the Rise and Crisis of EMU Imbalances By Giuseppe Bertola
  23. An Economic Examination of Collateralization in Different Financial Markets By Xiao, Tim
  24. What are the causes of the growing trend of excess savings of the corporate sector in developed countries? An empirical analysis of three hypotheses. By Pérez Artica, Rodrigo; Brufman, Leandro; Martinez, Lisana
  25. Country adjustment to a ‘sudden stop’: Does the euro make a difference? By Daniel Gros; Cinzia Alcidi
  26. How Low-Carbon Green Growth Can Reduce Inequalities By Venkatachalam Anbumozhi; Armin Bauer
  27. Measuring Capital Services by Energy Use: An Empirical Comparative Study By Jürgen Bitzer; Erkan Gören
  28. The new decrease of interest rates by the ECB will be totally ineffective By Eric Dor
  29. Youth Unemployment in Korea: From a German and Transitional Labour Market Point of View By Schmid, Günther
  30. The Macroeconomics of Firms' Savings By Viktoria Hnatkovska; Roc Armenter
  31. Foreign Investors as Change Agents: The Swedish Firm Experience By Fogel, Kathy S.; Lee, Kevin K.; Lee, Wayne Y.; Palmberg, Johanna
  32. International fragmentation of production, trade and growth: Impacts and prospects for EU member states By Neil Foster; Robert Stehrer; Marcel Timmer
  33. ICT, Reallocation and Productivity By Eric J. Bartelsman

  1. By: Eugene Goryunov (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: This study develops the approach of corruption measurement based on the income-expenditure comparison. Using micro-level data on reported household earnings, expenditures and assets provided by Russian Longitudinal Monitoring Survey for the period 2000-2009 we find that households with workers in the public sector receive lower earnings than their private sector counterparts, but enjoy the same level of consumption expenditures, in other words there exists an expenditure-income gap in favor of the public sector. Controlling for the reported level of earnings, households with workers in the private sector do not show neither a significantly higher probability of possessing country houses, cars and computers, nor living in better housing conditions, nor having higher financial wealth. The analysis of current and accumulated savings, risk aversion and volatility of wages does not show any sign of distinction between two sectors. Thus, differences in assets and precautionary motives of workers cannot reconcile the sizeable expenditure-income gap. Unexplained differences are referred to unreported income, or bribes.
    Keywords: Central Bank, monetary policy, monetary easing.
    JEL: E42 E51 E52 E58 E61 E63
    Date: 2013
  2. By: Florina-Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Alexandra Popescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate.
    Keywords: bank capital channel, credit cycles, financial stability, monetary policy.
    Date: 2012–09–18
  3. By: Hiroshi Nakaota (Faculty of Social Relations, Kyoto Bunkyo University); Yuichi Fukuta (Graduate School of Economics, Osaka University)
    Abstract: Many studies have observed the leading indicator property of the term spread (LIPTS), which indicates that the term spread\the difference between long- and short-term interest rates\ has the information on future economic conditions. We examine whether this property is related to the monetary policy or not using the Japanese monthly data with consideration for structural changes. Results of structural change tests show that the term spread has the predictive ability for the future economic activity from 1982:4 to 1997:8. Decomposing the term spread into three parts; one is explained by past monetary policy shocks, another is explained by expected future call rates and the other is the remaining part, we find that all three parts are significantly related to the future economic growth rate. Hence, we find that the monetary policy play an important role for the LIPTS.
    Keywords: leading indicator property of the term spread (LIPTS), term spread, future economic activity, monetary policy
    JEL: E32 E43 E44
    Date: 2013–05
  4. By: Ojo, Marianne
    Abstract: Why are some global financial crises more difficult to recover from and overcome than others? What steps are necessary in ensuring that financial stability and recovery is facilitated? What kind of environment has the previous financial environment evolved to and what kind of financial products have also contributed to greater vulnerability in the triggering of systemic risks? These are amongst some of the questions which this book attempts to address. In highlighting the role and importance of various actors in post crises reforms and the huge impacts certain factors and products have contributed in exacerbating the magnitude and speed of transmission of financial contagion, it also provides an insight into why global financial crises have become more complicated to address than was previously the case. As well as considering and highlighting why matters related to pro cyclicality and capital measures should not constitute the sole focus of attention of the G20's initiatives, the book is aimed at identifying other important issues such as liquidity risks and requirements which have constituted, to a large extent, the focus of international standard setters and regulators. It also aims to direct regulators, central bank officials and supervisors, academics, business and legal professionals and other relevant interested parties in the field to current and previously ignored issues such as the "cartelisation" of capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over-the-Counter) derivatives markets is evidenced by Basel III's focus. "Cartelisation" and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences. The aims and objectives of the book would not be complete by merely identifying and highlighting the general root causes of global financial crises, and current issues to be focussed on. Hence each chapter will also recommend (as well as highlight) measures which should be (and have been) put forward in order to address the issues and factors which contribute to the magnitude and severity of global financial crises.
    Keywords: Financial stability; pro cyclicality; supervisors; systemic risks; counter party risks
    JEL: E51 E52 E58 K2 M4 M41
    Date: 2013–04–29
  5. By: Franziska Bremus; Claudia Buch; Katheryn Russ; Monika Schnitzer
    Abstract: Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product.
    JEL: E32 E44 F4 G0 G21
    Date: 2013–05
  6. By: Maurice Obstfeld
    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 in situations of insolvency.
    JEL: E44 F36 G15 G21
    Date: 2013–04
  7. By: Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant.
    Keywords: monetary policy, economic growth, R&D, trade in intermediate goods.
    JEL: E41 F43 O30 O40
    Date: 2013–06
  8. By: Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The effects of the 2008/2009 financial crisis went largely among the financial markets and hit the real economy, generating one of the greatest global economic shocks. The aim of this study is to investigate whether inflation targeting has made a difference during this crisis. We first present some arguments suggesting that inflation targeters can be expected to do better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference concerning inflation rate and GDP growth. However, the rise in interest rates and inflation volatility during the crisis has been significantly less pronounced for targeters.
    Keywords: inflation targeting, financial crisis, macroeconomic performances, difference in difference.
    Date: 2012–05–22
  9. By: Etienne Farvaque (Faculty of International Affairs, The University of Le Havre); Norimichi Matsueda (School of Economics, Kwansei Gakuin University)
    Abstract: This paper discusses the implications of overconfidence when it affects a monetary policy-maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Embedding them in a standard New Keynesian framework, we derive the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should be lengthened when these two types of biases increase concurrently.
    Keywords: central banker; overcondence; legal mandate; optimal term length
    JEL: E58 H11
    Date: 2013–06
  10. By: Michael Ehrmann; Chiara Osbat; Jan Strasky; Lenno Uusküla
    Abstract: This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions
    Keywords: exchange rates, fundamentals, announcements, sovereign debt crises
    JEL: E52 E62 F31 F42 G14
    Date: 2013–05–24
  11. By: Snower, Dennis J. (Kiel Institute for the World Economy); Lechthaler, Wolfgang (Kiel Institute for the World Economy)
    Abstract: This paper provides a model of "social hysteresis" whereby long, deep recessions demotivate workers and thereby lead them to change their work ethic. In switching from a pro-work to an anti-work identity, their incentives to seek and retain work fall and consequently their employment chances fall. In this way, temporary recessions may come to have permanent effects on aggregate employment. We also show that these permanent effects, along with the underlying identity switches, can be avoided through stabilization policy. The size of the government expenditure multiplier can be shown to depend on the composition of identities in the workforce.
    Keywords: economics of identity, work ethic, hysteresis, business cycle policy
    JEL: E24 E60 J21 J28
    Date: 2013–05
  12. By: Paul de Grauwe
    Abstract: I analyze the nature of the design failures of the Eurozone. I argue first that the endogenous dynamics of booms and busts that are endemic in capitalism continued to work at the national level in the Eurozone and that the monetary union in no way disciplined these into a union-wide dynamics. On the contrary the monetary union probably exacerbated these national booms and busts. Second, the existing stabilizers that existed at the national level prior to the start of the union were stripped away from the member-states without being transposed at the monetary union level. This left the member states “naked” and fragile, unable to deal with the coming national disturbances. I study the way these failures can be overcome. This leads me to stress the role of the ECB as a lender of last resort and the need to make macroeconomic policies more symmetric so as to avoid a deflationary bias in the Eurozone. I conclude with some thoughts on political unification, and the dangers of unification without democratic legitimacy.
    JEL: E44 E58 E61 F32 G01 H63
    Date: 2013–04
  13. By: Verónica Acurio Vasconez (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Florent Mc Isaac (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Ngoc Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: The economic implications of oil price shocks have been extensively studied since the oil price shocks of the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model is available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) two possible reactions of real wages: either a decrease (as in the US) or an increase (as in Japan). We construct a New-Keynesian DSGE model, which takes the case of an oil-importing economy where oil cannot be stored and where fossil fuels are used in two different ways: One part of the imported energy is used as an additional input factor next to capital and labor in the intermediate production of manufactured goods, the remaining part of imported energy is consumed by households in addition to their consumption of the final good. Oil prices, capital prices and nominal government spendings are exogenous random processes. We show that, without capital accumulation, the stagflationary effect is accounted for in general, and provide conditions under which a rise (resp. a declinr) of real wages follows the oil price shock.
    Keywords: New-Keynesian model; DSGE; oil; capital accumulation; stagflation
    Date: 2012–12
  14. By: Philip R. Lane
    Abstract: We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.
    JEL: E42 F32 F41
    Date: 2013–04
  15. By: Dirk Schoenmaker
    Abstract: This essay reviews the sequencing of the functions of supervision, resolution, deposit insurance and the fiscal backstop in the Banking Union. All these functions deal with the soundness of individual banks. In the run-up to the 2007-2009 financial crisis, we overlooked the bigger picture of the stability of the wider financial system. This essay puts forward a concrete proposal for conducting macro-prudential policy in the prospective Banking Union. We suggest giving the lead on applying macro-prudential tools in the Banking Union to the ECB to foster a coherent approach, with important input from the national competent authorities to allow for much needed differentiation at the national level. Next, we argue that the ECB should separate the macro-prudential and micro-prudential functions. Otherwise, we may again be bogged down by the details of individual banks (micro), while losing sight of emerging imbalances in the wider financial system (macro).
    JEL: E58 G01 G21 G28
    Date: 2013–04
  16. By: Michael Bergman; Michael M. Hutchison; Svend E. Hougaard Jensen
    Abstract: This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute.
    JEL: E62 G12 G14 H60
    Date: 2013–04
  17. By: Robert Kollmann (ECARES, Université Libre de Bruxelles a)
    Abstract: This paper takes a two-country model with a global bank to US and Euro Area (EA) data. The estimation results (based on Bayesian methods) suggest that global banking strengthens the positive international transmission of real economic disturbances. Shocks that originate in the banking sector account for roughly 20% of the forecast error variance of investment, and about 5% of the forecast variance of US and EA GDP. Bank shocks explain 5%-20% of the fall in US and EA real activity, during the Great Recession.
    Date: 2012
  18. By: Mardi Dungey; Jan P.A.M. Jacobs; Jing Tian; Simon van Norden
    Abstract: A well-documented property of the Beveridge-Nelson trend-cycle decomposition is the perfect negative correlation between trend and cycle innovations. We show how this may be consistent with a structural model where trend shocks enter the cycle, or cyclic shocks enter the trend and that identification restrictions are necessary to make this structural distinction. A reduced-form unrestricted version such as that of Morley, Nelson and Zivot (2003) is compatible with either option, but cannot distinguish which is relevant. We discuss economic interpretations and implications using US real GDP data.
    Date: 2013
  19. By: Khemraj, Tarron; Primus, Keyra
    Abstract: This paper examines whether the decline in loans to the private sector in Trinidad and Tobago from mid-2009 was caused by a demand-induced or the credit crunch phenomenon. The study presents an alternative methodology for estimating the credit crunch. The new methodology emphasizes an aggregate banking model in which excess liquidity and interest rate spread are important stylized facts. The analytical framework is used to identify shocks to loans and deposits that are found to be empirically related to excess liquidity. Using Two-Stage Least Squares (TSLS), we estimate auxiliary regressions of random deposit and loan shocks. The results suggest that weak loan demand instead of a supply-induced credit crunch best explains the decline.
    Keywords: Credit Crunch, Excess Liquidity, Loanable Funds Model
    JEL: E51 G21
    Date: 2013–06
  20. By: George Alogoskoufis
    Abstract: This paper focuses on an econometric investigation of the macroeconomic and political factors that contributed to Greece’s excessive debt accumulation and its failure to adequately address its fiscal imbalances, from the restoration of democracy in 1974 till the crisis of 2009. The econometric investigation is based on a model in which two political parties alternate in power, and in which governments choose primary expenditure and taxes to minimize deviations from politically determined expenditure and tax targets, subject to a debt accumulation equation. The model predicts a political equilibrium in which primary expenditure and taxes follow feedback rules which go in the direction of stabilizing the debt to GDP ratio. However, this stabilization incentive is weaker in election years. The model also predicts potential partisan differences in the evolution of primary expenditure and taxes, due to the different preferences of political parties. Estimates of government reaction functions to public debt for the period 1975-2009 suggest a rather weak stabilizing reaction of primary deficits to public debt. This stabilizing reaction disappears in election years, which are characterized by strong fiscal expansions. We find no evidence of partisan differences in the reaction of primary deficits to inherited debt, but we do find evidence of lower primary deficits in the post-1992 Maastricht treaty period. Overall the model accounts for the accumulation of Greece’s government debt in terms of the trend increase in primary expenditure, the positive shocks to primary expenditure in election years and the weak stabilizing reaction of government revenue, due to tax smoothing.
    Keywords: macroeconomics and politics, government debt, primary deficit, stabilization, elections, political parties, Greece
    JEL: E6 H6 C5
    Date: 2013–03
  21. By: Lee Ohanian (University of California Los Angeles); David Lagakos (Arizona State University); Simeon Alder (University of Notre Dame)
    Abstract: Some regions of the United States fared much worse than others since the end of WWII. In this paper we document that those regions faring worst in terms of wage and employment growth from 1950-2000 tended to be those in which workers earned the largest wage premiums in 1950. We use this evidence to develop a theory of the decline of the ``Rust Belt'' region, which was highly unionized and paid workers substantially more than other workers of similar skill levels. We develop our theory in a two-region, open-economy version of the Neoclassical Growth model, which we parameterize to match key features of regional and aggregate data. We then use the model to ask how much differently the Rust Belt would have fared if its labor market had not been as distorted.
    Date: 2012
  22. By: Giuseppe Bertola
    Abstract: If economic integration fosters expectations of institutional and productivity convergence, then international capital flows should be driven by consumption-smoothing anticipation of future income growth patterns as well as by factor-intensity equalization. In the euro area, financial market integration eased accumulation of international imbalances but does not appear to have resulted in the expected institutional convergence. The resulting crisis casts doubt on the sustainability not only of international imbalances, but also of the current configuration of the European integration process. A robust and coherent European market and policy integration process would require supranational implementation of the behavioral constraints and contingent redistribution schemes that traditionally operate within National socio-economic systems, and have been weakened in recent experience by uncoordinated policy competition.
    JEL: E63 F36 F21 F42
    Date: 2013–04
  23. By: Xiao, Tim
    Abstract: Tim Xiao: This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.
    Keywords: unilateral/bilateral collateralization, partial/full/over collateralization, asset pricing, plumbing of the financial system, swap premium spread, OTC/cleared/listed financial markets.
    JEL: E44 G12 G18 G24 G28 G32 G33
    Date: 2012–05–01
  24. By: Pérez Artica, Rodrigo; Brufman, Leandro; Martinez, Lisana
    Abstract: We analyze a sample of manufacturing firms from Germany, France, Italy, Japan, and UK during the period 1997-2011, and find an increasing trend of excess savings (defined as the difference between gross saving and capital formation), and a gradual decline of gross capital formation. This trend is accompanied by a steady deleveraging process and a decrease in the share of operating assets in total assets. This process is more acute among the more credit constrained, the more volatile, and the less dynamic firms.
    Keywords: formation, liquidity demand, financial leverage, financial constraints
    JEL: E2 G3
    Date: 2013–06
  25. By: Daniel Gros; Cinzia Alcidi
    Abstract: A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete.
    JEL: E20 F32 F36 H60
    Date: 2013–04
  26. By: Venkatachalam Anbumozhi (Asian Development Bank Institute (ADBI)); Armin Bauer
    Abstract: Half of the world’s population—3 billion people—lives below the poverty line, and Asia has the largest share. In pursuit of sustainable economic development and poverty alleviation, there is great potential among low-income households for green consumption, production, innovation, and entrepreneurial activity. This paper shows how an inclusive green growth model can uplift the poor through entrepreneurship and fiscal policy reforms. To make the case, this paper cites examples of institutions and policies in Asia that have successfully generated and tapped into the potentials of low-income households. Low-income households are recognized as resilient, value-conscious consumers and creative entrepreneurs in the inclusive and green growth paradigm. Low-income households can be the engine of a new development strategy; they can be a source of innovation for providing basic services in a green way. Evidence suggests that, without effective financial systems, not all market actors can sustain their businesses. Therefore, policy interventions are necessary to encourage and financially support enterprises to adopt best available technologies and incorporate innovative practices that are environmentally beneficial. The paper recommends fflexible redistributive and transformative public expenditure schemes and finance sector development to surmount the bottlenecks towards achieving inclusive and green growth.
    Keywords: Green growth, low-carbon, Inequality, Asia, low-income households, redistributive and transformative public expenditure schemes, inclusive growth
    JEL: E62 H61 Q2 Q3 Q4
    Date: 2013–05
  27. By: Jürgen Bitzer (University of Oldenburg, Department of Economics); Erkan Gören
    Abstract: From an engineering perspective, a capital good’s service is energy conversion – e.g., the physical ‘work’ done by a machine – and can thus be measured directly by the energy consumed in production. We show important empirical advantages of our concept over traditional measures. The empirical application reveals that our concept avoids a number of conceptual problems of the latter. Furthermore, our measure is more sensitive to fluctuations in economic activity and therefore captures the utilization of the capital stock better. In a growth accounting exercise, this results in higher TFP growth rates, especially in times of global recession.
    Keywords: capital service, utilization, energy consumption, total factor productivity, growth accounting
    JEL: E22 D24 O47
    Date: 2013–04
  28. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Abstract: On May 2 the ECB has decreased the interest rate on the main refinancing operations of the Eurosystem by 25 basis points, to 0.50%, starting from the operation to be settled on 8 May 2013. The interest rate on the marginal lending facility will also be decreased by 50 basis points, to 1.00%. This short paper explains the structural reasons why the current monetary policy conducted by the ECB is ineffective.
    Date: 2013–05
  29. By: Schmid, Günther (WZB - Social Science Research Center Berlin)
    Abstract: By conventional statistics, youth unemployment seems to be quite moderate in Korea: ‘only’ 9.6 percent of the ‘active’ youth labour force was unemployed compared to 21.4 percent in EU-27 in 2011. Germany, with a youth unemployment rate of 8.5 percent, is one of the very few European countries outperforming Korea. But the Korean case is in one respect unusual. From the perspective of intergenerational risk sharing Korea’s youth unemployment rate is 4.6 times higher than the unemployment rate of adults aged 45 to 54; in Germany, this figure is only 1.7. Further peculiarities come up if unemployment is measured by the number of youth not in employment, education or training (NEET) in percent of the total youth population. Korea’s NEET figures are at the top in OECD countries, especially for youth with tertiary education. This paper throws some light to explain this conundrum: It sketches, first, the main causes of youth unemployment and the general policy interventions; because a large part of the problem is structural, possible immediate measures to avoid long-term scar effects for the unemployed youth are briefly reviewed; differences between Europe and the United States show in particular the importance of automatic stabilizers like unemployment insurance in order to reduce the pressure on unfavourable risk sharing for youth in times of recession. The main part is devoted to possible lessons for Korea from Europe, in particular from Germany. Dual education and vocational training systems that emphasise middle level and market oriented skills are identified as institutional device both for fairer intergenerational risk sharing as well as for a smoother transition from school to work. In its outlook, the paper comes back to the puzzle of highly and academically inflated youth unemployment by referring to a possible hidden cause in Korea: A strong insurance motive might explain the overall striving for an academic degree inducing not only wasteful congestion at labour market entries but also unfair job allocation through credentialism.
    Keywords: unemployment, education, vocational training, labour market policy, transitional labour markets, risk sharing
    JEL: E24 I24 J64
    Date: 2013–05
  30. By: Viktoria Hnatkovska (University of British Columbia); Roc Armenter (Federal Reserve Bank of Philadelphia)
    Abstract: The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend distributions to shareholders when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of firms with net savings observed in the period 2000-2007. We also find that the rise in corporate savings over the past 40 years can be mostly attributed to a fall in the cost of equity relative to debt, driven by lower dividend taxes.
    Date: 2012
  31. By: Fogel, Kathy S. (University of Arkansas); Lee, Kevin K. (California State University); Lee, Wayne Y. (University of Arkansas); Palmberg, Johanna (Entrepreneurship Forum, CESIS, KTH)
    Abstract: Institutional theory suggests that informal institutions effectively constrain human behavior. Culturally embedded norms and values align corporate governance with socially acceptable outcomes. We argue that active foreign investors can act as agents of change in corporate governance. Investigating changes in ownership and control of Swedish firms, we find that active foreign investors’ participation in conjunction with a reduction of control by the largest domestic shareholder, improves firm performance through more efficient capital utilization and labor productivity. Firms move away from a Swedish stakeholder orientation toward an Anglo-American shareholder wealth maximization focus.
    Keywords: Foreign Direct Investors; Informal Institution; Business Culture
    JEL: E02 G32 G34 G38 M14
    Date: 2013–05–24
  32. By: Neil Foster; Robert Stehrer; Marcel Timmer
    Abstract: There has been an ongoing trend towards increasing internationalisation of production over the past two decades or so. This implies that countries become more dependent on demand from foreign countries but also that countries and industries are able to source intermediates from different countries, an activity referred to as ‘offshoring’. Whereas the former aspect means an increasing dependency on foreign markets, the second aspect implies that countries and industries source at lower costs making them more productive and competitive. Using the World Input-Output Database (WIOD) we first provide an overview of these trends over the period 1995-2011 for 40 advanced and emerging countries with a specific focus on the EU as a whole and the individual EU member states. In the second part of the paper we show results from an econometric analysis to explain growth performance, focusing on the impacts of the increasing internationalisation of production.
    JEL: E20 F15 F43
    Date: 2013–04
  33. By: Eric J. Bartelsman
    Abstract: This paper starts by reviewing medium- to long-term growth prospects provided in recent academic and policy research. The paper argues that, owing to the on-going advances in ICT, much higher growth is technologically feasible, but that a considerable amount of churn and reallocation across firms in the market sector. Next, the paper presents evidence on recent patterns of reallocation in EU countries. Based on theoretical findings from heterogeneous firm dynamics models, the paper will describe how various types of policy could affect the processes of allocation and selection and thereby growth prospects. Finally, the paper will combine empirical and theoretical insights to point towards promising policy directions. Conditional on the policy environment, labor productivity growth in the EU of 2.5 percent per year for the next 20-30 years appears attainable.
    JEL: E23 J63 L16 O40
    Date: 2013–04

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