nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒06‒24
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Dormant Shocks and Fiscal Virtue By Francesco Bianchi; Leonardo Melosi
  2. Constrained Discretion and Central Bank Transparency By Francesco Bianchi; Leonardo Melosi
  3. Debt and Macroeconomic Stability: Debt and the Business Cycle By Volker Ziemann
  4. Policy multipliers under an interest rate peg of deterministic versus stochastic duration By Carlstrom, Chartles; Fuerst , Timothy; Paustian, Matthias
  5. The pitfalls of speed-limit interest rate rules at the zero lower bound By Brendon, Charles; Paustian, Matthias; Yates, Tony
  6. On the performance of Monetary Policy Committees By Etienne Farvaque; Piotr Stanek; Stephane Vigeant
  7. Debt and Macroeconomic Stability By Douglas Sutherland; Peter Hoeller; Rossana Merola; Volker Ziemann
  8. Does domestic output gap matter for inflation in a small open economy? By Aleksandra Hałka; Jacek Kotłowski
  9. Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the Need for a European Federal Union in a post-Keynesian Eurozone Center-Periphery Model (New Version) By Alberto Botta
  10. Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy By Mark Gertler; Nobuhiro Kiyotaki
  11. Asset Pricing Implications of Macroeconomic Interventions An Application to Climate Policy By Rajnish Mehra
  12. A Search-Theoretic Model of the Term Premium By Athanasios Geromichalos; Lucas Herrenbrueck; Kevin Salyer
  13. Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics By Douglas Sutherland; Peter Hoeller
  14. Is the Eurozone not a monetary union, but an extraordinary exchange rate union? By Sauer, Beate; Sell, Friedrich L.
  15. Debt and Macroeconomic Stability: Case studies By Rossana Merola
  16. Housing market bubbles and business cycles in an agent-based credit economy By Erlingsson, Einar Jon; Cincotti, Silvano; Stefansson, Hlynur; Sturlusson, Jon Thor; Teglio, Andrea; Raberto, Marco
  17. Economic System Failures: the U.S. case By DE KONING, Kees
  18. Expenditure, Confidence, and Uncertainty: Identifying Shocks to Consumer Confidence Using Daily Data By Marta Lachowska
  19. Concentration in Mortgage Lending, Refinancing Activity and Mortgage Rates By David S. Scharfstein; Adi Sunderam
  20. Euro Zone Debt Crisis: Implications for Indian Banking Sector By Swamy, Vighneswara
  21. Logit price dynamics By James Costain; Anton Nakov
  22. Fiscal multipliers in turbulent times: the case of spain By Pablo Hernández de Cos; Enrique Moral-Benito
  23. Why High Leverage is Optimal for Banks By Harry DeAngelo; René M. Stulz
  24. Central bank cooperation during the great recession By Francesco Papadia
  25. Time-Varying Parameters and Endogenous Learning Algorithms By Eric Gaus
  26. The 90% Public Debt Threshold: The Rise and Fall of a Stylised Fact By Balázs Égert
  27. A penalty function approach to occasionally binding credit constraints By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  28. Challenges to Sustain Poland's Growth Model By Balázs Égert; Rafał Kierzenkowski
  29. From Smith to Schumpeter: A Theory of Take-Off and Convergence to Sustained Growth By Pietro F. Peretto
  30. The growth effects on degrowth: what remains of the center-periphery model? By Issaoui, Fakhri; Boufateh, Talel; Guesmi, Mourad
  31. Efficient Risk Sharing with Limited Commitment and Storage By Árpád Ábrahám; Sarolta Laczóó
  32. Prices and Productivity: A France-Germany Comparison By Laurence Nayman
  33. Systematic consumption risk in currency returns By Mathias Hoffmann; Rahel Suter
  34. Growth on a Finite Planet: Resources, Technology, and Population in the Long Run By Pietro F. Peretto; Simone Valente

  1. By: Francesco Bianchi; Leonardo Melosi
    Abstract: We develop a theoretical framework to account for the observed instability of the link between inflation and …fiscal imbalances across time and countries. Current policy makers behavior influences agents' beliefs about the way debt will be stabilized. The standard policy mix consists of a virtuous …fiscal authority that moves taxes in response to debt and a central bank that has full control over inflation. When policy makers deviate from this Virtuous regime, agents conduct Bayesian learning to infer the likely duration of the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the Virtuous regime and inflation starts drifting in response to a fiscal imbalance. Shocks which were dormant under the Virtuous regime now start manifesting themselves. These changes are initially imperceptible, can unfold over decades, and accelerate as agents' beliefs deteriorate. Dormant shocks explain the run-up of US inflation and uncertainty in the 70s. The currently low long term interest rates and inflation expectations might hide the true risk of inflation faced by the US economy.
    Keywords: Fiscal Policy, Monetary Policy, Agents beliefs, Markov-switching models, Bayesian learning, Inflation
    JEL: D83 E52 E31 E62 E63
    Date: 2013
  2. By: Francesco Bianchi; Leonardo Melosi
    Abstract: We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents' pessimism accelerates once the central bank starts deviating. When the model is …fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to …five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents' expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation.
    Keywords: Bayesian learning, reputation, uncertainty, inflation expectations, Markov-switching models, impulse response
    JEL: E52 D83 C11
    Date: 2013
  3. By: Volker Ziemann
    Abstract: Using a large panel of OECD countries this paper studies the link between debt and macroeconomic stability by comparing the evolution of balance sheet aggregates and economic output in high- and lowdebt environments. While the relationship between debt and economic growth has been extensively studied in the literature, only little attention has been paid to the impact of debt on volatility and higher moments of output growth distributions. This paper fills in this gap. Debt-fuelled expansions are found to typically last longer but to culminate in a more sizeable downturn. The greater amplitude of business cycles in high-debt environments reflects higher macroeconomic volatility but also higher tail risks and adverse asymmetries in output growth distributions. The induced welfare losses justify policy interventions aiming at preventing excessive build-ups in debt ex-ante.<P>Endettement et stabilité macroéconomique : L'endettement et le cycle économique<BR>S’appuyant sur un vaste ensemble de pays de l’OCDE, ce document étudie le lien entre la dette et la stabilité macroéconomique en comparant l’évolution des agrégats des bilans et de la production économique dans des contextes d’endettement élevé et de faible endettement. Si la relation entre la dette et la croissance économique a fait l’objet de nombreuses études, il n’a guère été prêté attention à l’impact de la dette sur la volatilité et les moments supérieurs des distributions de la croissance de la production. Ce document comble cette lacune. Il constate que les phases d’expansion financée par le recours à l’endettement durent généralement plus longtemps mais se terminent par un ralentissement plus marqué de l’activité. La plus grande amplitude des cycles conjoncturels en situation de fort endettement reflète une plus haute instabilité macroéconomique mais aussi des risques extrêmes plus élevés et des asymétries défavorables dans les distributions de la croissance de la production. Les pertes de bien-être liées à ces phénomènes justifient les interventions des pouvoirs publics visant à éviter une accumulation excessive de dette ex ante.
    Keywords: debt, macroeconomic stability, amplitude of business cycles, stabilité macroéconomique, amplitude des cycles conjoncturels
    JEL: C23 E32 E44 F34 G01 H63
    Date: 2012–12–04
  4. By: Carlstrom, Chartles (Federal Reserve Bank of Cleveland); Fuerst , Timothy (University of Notre Dame); Paustian, Matthias (Bank of England)
    Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest in linearised sticky price model. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen’s inequality-type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline non-linear model. However, the difference between the two is less pronounced in the non-linear models. The errors from a linear approximation are much larger for the stochastic exit model than for the deterministic exit model. Thus, we conclude that the deterministic exit model should be preferred.
    Keywords: Fiscal multiplier; fixed interest rates; New Keynesian model; zero lower bound
    JEL: E32
    Date: 2013–06–14
  5. By: Brendon, Charles (European University Institute); Paustian, Matthias (Bank of England); Yates, Tony (Bank of England)
    Abstract: We show that interest rate rules that feed back on the growth rates of target variables (such as output or asset prices) may induce recessions in the presence of a zero lower bound, through purely self-fulfilling dynamics. This pathology is illustrated in a small New Keynesian model with interest rates responding to the growth rate of output, and in a version of a model by Matteo Iacoviello where interest rates respond to the growth rate of house prices and credit. Our results provide a cautionary note, contrasting with previous work which has suggested several desirable properties of speed-limit rules, namely that they are devices enabling the policymaker (i) to side-step uncertainty about natural rates, (ii) to counter booms and busts in asset prices or (iii) to implement optimal commitment policies.
    Keywords: Speed-limit rules; commitment; zero lower bound; self-fulfilling prophecies
    JEL: E52 E58 E61
    Date: 2013–06–14
  6. By: Etienne Farvaque (EDEHN-Université du Havre & Skema Business School, Lille (France)); Piotr Stanek (Cracow University of Economics); Stephane Vigeant (Equippe – Universités de Lille & IESEG School of Management, Lille (France))
    Abstract: This paper examines the influence of the biographical experience of monetary policy committee members on their performance in managing inflation and output volatility. Our sample covers major OECD countries in the 1999 to 2010 period. Using data envelopment analysis, we study the efficiency of monetary policy committees. Then, we look at the determinants of these performances. The results in particular show that (i) a larger number of governors is more efficient, except in crisis time, (ii) a policymakers' background influence the performance, with a positive role for committee members issued from academia, central banks and the financial sector. It is also shown that some committees have reduced the inefficiency created by the crisis more rapidly than others.
    Keywords: Central banking, Committees, DEA, Economic volatility, Governance
    JEL: D20 D78 E31 E52 E58 E65
    Date: 2013
  7. By: Douglas Sutherland; Peter Hoeller; Rossana Merola; Volker Ziemann
    Abstract: Debt levels have surged since the mid-1990s and have reached historic highs across the OECD. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks. Furthermore, high debt levels hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Measures of financial leverage give less warning and typically only deteriorate once the economy begins to slow and asset prices are falling. Government debt typically rises after the onset of a recession, suggesting that there is a migration of debt across balance sheets. Some policies, such as robust micro prudential regulation and frameworks to deal with debt overhangs and maintain public debt at prudent levels, can help economies withstand adverse shocks. Other policy options, such as addressing biases in tax codes that favour debt financing and targeted macro-prudential policies, will help bring down debt levels and address future run ups in debt.<P>Endettement et stabilité macroéconomique<BR>Les niveaux d’endettement sont montés en flèche depuis le milieu des années 90 et atteignent des sommets historiques dans la zone de l’OCDE. Un endettement important peut créer des vulnérabilités, qui amplifient et répercutent les chocs macroéconomiques et les variations des prix des actifs. Par ailleurs, dans ces conditions, les ménages et les entreprises n’ont plus la possibilité de lisser leur consommation et leurs investissements et les gouvernements d’amortir les chocs négatifs. L’expérience semble indiquer que, lorsque les niveaux d’endettement du secteur privé, en particulier ceux des ménages, sont supérieurs à la tendance, la probabilité de récession s’accroît. Les indicateurs du levier financier donnent moins de signaux d’alerte et ne se détériorent généralement qu’une fois que l’activité économique commence à se ralentir et que le prix des actifs baissent. La dette publique augmente généralement après le début d’une récession, ce qui laisse penser que la dette migre entre les bilans. Certaines mesures telles que la mise en place d’une réglementation micro-prudentielle efficace et de cadres permettant de faire face au surendettement et de maintenir la dette publique à des niveaux prudents peuvent aider les économies à résister à des chocs défavorables. D’autres actions possibles, comme la correction de certains biais dans les codes des impôts qui favorisent le financement par l’emprunt et des mesures macro-prudentielles ciblées, aideront à réduire les niveaux d’endettement et à contenir le gonflement de la dette dans l’avenir.
    Keywords: debt, macroeconomic stability, dette, stabilité macroéconomique
    JEL: E32 E6 G20 H63
    Date: 2012–12–06
  8. By: Aleksandra Hałka (National Bank of Poland, Economic Institute); Jacek Kotłowski (National Bank of Poland, Warsaw School of Economics)
    Abstract: In the paper we have investigated to what extent the behaviour of CPI inflation depends on changes in domestic economic activity in Polish economy which is usually described as a small open economy. We conducted a disaggregated analysis using price indices at the COICOP 4-digit level. We specified a small open economy Phillips curve for individual price indices. Additionally we investigated the exchange rate pass through at COICOP group levels. We found that more than 50 per cent of the categories react to the output gap. According to our expectations the categories which are mostly linked to the output gap are services but also non-durable goods. We identified that only small share of prices of durable and semi-durable goods react to domestic demand which can be explained to some extent by globalization process. We also found that more than one third of the price indices respond to exchange rate movements and/or foreign inflation. The impact of exchange rate is most substantial for durable and semi-durable goods which are to large extent perceived as tradable goods. Finally we aggregated the price indices for items sensitive to domestic economic activity and formed an index which, taking into account uncertainty and substantial lags in calculating output gap, may be used as an alternative measure of domestic inflationary pressure.
    Keywords: Inflation, monetary policy, Phillips curve, dissagregated price indices, output gap, exchange rate pass-through
    JEL: C53 E31 E37 E52
    Date: 2013
  9. By: Alberto Botta (Department of Political and Social Sciences, University of Pavia and Department of Law and Economics, Mediterranean University of Reggio Calabria)
    Abstract: In this paper we study the role of the eurozone’s institutional design in determining the sovereign debt crisis of the peripheral euro countries by means of a post-Keynesian eurozone center-periphery model. Within this framework, three points are formally addressed. (1) The incomplete nature of the eurozone with respect to a full-fledged federal union has significantly contributed to generating diverging trends and conflicting claims between central and peripheral eurozone countries in the aftermath of the 2007- 2008 financial meltdown. (2) Center-periphery diverging trends may disappear and a systemic crisis may occur should financial turbulences deepen in big peripheral economies, possibly spreading to the center. (3) Fiscal austerity does not address the core problems of the eurozone. The creation of a European federal government, capable of implementing anti-cyclical fiscal policies through a federal budget, and of a government banker constitutes the most promising solution to stabilize the macroeconomic picture of peripheral countries and to tackle the crisis. The unlimited bond-buying program recently launched by the ECB is a positive albeit mild step in the right direction away from the extreme monetarism that shaped eurozone institutions thus far.
    Keywords: eurozone debt crisis, post-Keynesian center-periphery model
    JEL: E02 H63
    Date: 2013–05
  10. By: Mark Gertler; Nobuhiro Kiyotaki
    Abstract: We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    JEL: E44
    Date: 2013–06
  11. By: Rajnish Mehra
    Abstract: This paper illustrates that evaluating alternate abatement polices that affect the growth path of an economy on the basis of their effects on asset valuation may not be welfare enhancing. We show that the class of abatement polices considered in the integrated assessment literature are robust with respect to the choice of a discount factor if lifetime consumption equivalents are used as a metric. We argue against a global welfare function in the presence of significant global household heterogeneity. While economic analysis is a useful tool for evaluating different policies for a homogenous class of households, inter household comparisons are an ethical issue.
    JEL: E44 E6 G00 G12 G31 H00 O1 Q54
    Date: 2013–06
  12. By: Athanasios Geromichalos; Lucas Herrenbrueck; Kevin Salyer (Department of Economics, University of California Davis)
    Abstract: A consistent empirical feature of bond yields is that term premia are, on average, positive. That is, investors in long term bonds receive higher returns than investors in similar (i.e.\ same default risk) shorter maturity bonds over the same holding period. The majority of theoretical explanations for this observation have viewed the term premia through the lens of the consumption based capital asset pricing model. In contrast, we harken to an older empirical literature which attributes the term premium to the idea that short maturity bonds are inherently more liquid. The goal of this paper is to provide a theoretical justification of this concept. To that end, we employ a model in the tradition of modern monetary theory extended to include assets of different maturities. Short term assets always mature in time to take advantage of random consumption opportunities. Long term assets do not, but agents may liquidate them in a secondary asset market, characterized by search-and-bargaining frictions a la Duffie, Garleanu, and Pedersen (2005). In equilibrium, long term assets have higher rates of return to compensate agents for their relative lack of liquidity. Consistent with empirical findings, our model predicts a steeper yield curve for assets that trade in less liquid secondary markets.
    Keywords: monetary-search models, liquidity, over-the-counter markets, yield curve
    JEL: E31 E43 E52 G12
    Date: 2013–06–14
  13. By: Douglas Sutherland; Peter Hoeller
    Abstract: How does debt affect macroeconomic stability? The answer to this question has important implications, because both public and private debt levels have reached historic highs across the OECD. While accumulating debt can help smooth real activity, at high levels debt creates weaknesses in corporate, household and government balance sheets. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks across the economy and internationally. The empirical evidence shows that high debt levels impair the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks. The empirical evidence also suggests that when private sector debt levels, particularly for households, rise above trend the likelihood of recession increases. Furthermore, when debt levels are high, recessions tend to be more severe.<P>Dette et stabilité macroéconomique : Aperçu général des études existantes et faits constatés<BR>Quels sont les effets de l’endettement sur la stabilité macroéconomique ? La réponse à cette question a des conséquences importantes car les niveaux d’endettement publics et privés atteignent des sommets historiques dans les pays de l’OCDE. S’il est vrai que l’accumulation de dettes peut aider à lisser l’activité réelle, un endettement élevé affaiblit les bilans des entreprises, des ménages et de l’État. Un fort endettement peut être à l’origine de vulnérabilités, qui amplifient et répercutent les chocs macroéconomiques et les variations des prix des actifs dans l’économie et au plan international. L’expérience montre que des niveaux élevés d’endettement limitent la possibilité pour les ménages et les entreprises de lisser leur consommation et leurs investissements et, pour les gouvernements, d’amortir les chocs défavorables. Les données d’observations semblent aussi indiquer que lorsque la dette du secteur privé, en particulier celle des ménages, dépasse la tendance, la probabilité de récession s’accroît. Par ailleurs, lorsque les niveaux d’endettement sont élevés, les récessions sont généralement plus sévères.
    Keywords: debt, business cycle, recession, macroeconomic stability, dette, récession, cycles économiques, stabilité macroéconomique
    Date: 2012–12–07
  14. By: Sauer, Beate; Sell, Friedrich L.
    Abstract: The Target imbalances within the Eurozone can be interpreted as a sign of a missing balance of payments adjustment mechanism for the member countries. As the Eurozone lacks a fiscal union, in economic theory it is more an exchange rate union or a system of fixed exchange rates than a monetary union. In the latter, there would not be any national balances of payments, but only one for the whole Eurozone. This paper will show why the Target System is a crucial indicator for the Eurozone not being a monetary union, but an exchange rate union and why countries holding Target liabilities against the European System of Central Banks can be compared to a reserve currency country, e.g. like the US during the Bretton-Woods-System. --
    Keywords: Target Imbalances,Balance of Payments Crisis,Balance of Payments Adjustment Mechanism,Eurozone,Fixed Exchange Rates,Fiscal Union
    JEL: E40 E41 E42 E50 E52
    Date: 2013
  15. By: Rossana Merola
    Abstract: Accumulating debt raises concerns about its implications for macroeconomic stability. This paper sheds light on the implications of high indebtedness for the macroeconomic volatility by identifying the main drivers of the evolution of debt in a set of countries. The country choice was based on large deleveraging episodes of total economy debt, identified by turning point dating. The analysis shows that GDP is more volatile in the phase of deleveraging. However, countries can be distinguished into two groups. In a first set of countries (Germany, Israel, Mexico and the United States) economic activity has often rebounded during the phase of deleveraging. On the contrary, in a second group of countries, the higher volatility during the deleveraging phase has been accompanied by sluggish economic activity. Countries in this second group (for instance, Japan and Sweden) share the common characteristic that higher indebtedness was driven by a boom in asset prices. When asset prices burst, the financial sector cuts credit supply, which weighs on economic activity. The results also suggest that many episodes of debt leveraging have been naturally driven by boom in asset price used as collateral or by financial liberalisation, which have facilitated excessive borrowing.<P>Endettement et stabilité économique : Études de cas<BR>L’accumulation de dettes amène à se préoccuper des répercussions de ce phénomène sur la stabilité économique. Ce document met en lumière les conséquences d’un niveau élevé d’endettement du point de vue de l’instabilité macroéconomique en identifiant les principaux déterminants de l’évolution de la dette dans un certain nombre de pays. Les pays choisis ont connu de longues périodes de désendettement, identifiées par la datation du point de retournement. L’analyse montre que les PIB est plus variable au cours de la phase de désendettement. On distingue toutefois deux groupes de pays. Dans un premier groupe (Allemagne, Israël, Mexique et États-Unis), l’activité économique a souvent rebondi durant la phase de désendettement. Dans un second groupe, au contraire, la plus forte instabilité caractérisant la phase de désendettement s’est accompagnée d’une atonie de l’activité économique. Les pays du second groupe (Japon et Suède, par exemple) ont en commun le fait que leur niveau plus élevé d’endettement a été imputable à une explosion des prix des actifs. Lorsque les prix des actifs flambent, le secteur financier réduit l’offre de crédit, ce qui pèse sur l’activité économique. Les résultats semblent indiquer aussi que, dans bien des cas, les épisodes de désendettement ont fait suite naturellement à une poussée des prix des actifs utilisés comme nantissement ou à une libéralisation financière, qui a facilité un recours excessif à l’emprunt.
    Keywords: cycles, deleveraging, debt management, case studies, cycles, études de cas, désendettement, Gestion de la dette
    JEL: E44 E65 H60 H63
    Date: 2012–12–07
  16. By: Erlingsson, Einar Jon; Cincotti, Silvano; Stefansson, Hlynur; Sturlusson, Jon Thor; Teglio, Andrea; Raberto, Marco
    Abstract: In this paper the authors present an agent-based model of a credit network economy. The artificial economy includes different economic agents that interact using simple behavioral rules through various markets, i.e., the consumption goods market, the labor market, the credit market and the housing market. A set of computational experiments, based on numerical simulations of the model, have been carried out in order to explore the effects of different households' creditworthiness conditions required by the banking system to grant a mortgage. The authors find that easier access to credit inflates housing prices, triggering a short run output expansion, mainly due to the wealth effect. Also, with a more permissive policy towards household mortgages, and thus higher levels of credit, the artificial economy becomes more unstable and prone to recessions usually caused by falling housing prices. Often the authors find that an initial crisis can leave firms in a fragile state. If the situation is not cured, a subsequent crisis can lead to mass bankruptcies of firms with catastrophic effects on the credit sector and on the real economy. With stricter conditions on household mortgages the economy is more stable and does not fall into serious recessions, although a too severe regulation can slow down economic growth. --
    Keywords: Credit cycles,housing market,agent-based model,subprime lending
    JEL: E20 E25 G21 R31 R38
    Date: 2013
  17. By: DE KONING, Kees
    Abstract: Tax Freedom Day memorises the day in a calendar year that individual households no longer transfer their income to their government, but start earning an income for the household. In the same manner one could also define a “Debt Freedom Day” as the day that individual households no longer have to repay government debt. Income and debt are the two economic features which tie together individual households with the company sector, the banks, the central bank, the pension funds and their government. The economic system failures -very evident since 2008- occur as a consequence of the accumulation of debt (its volume), the price paid for the debt, the maturity of the debt entered into as well as the transfer systems used to transfer debt risks back to individual households without them having any say over whether they would like such risks or not. Individual households are always the ultimate income and debt “bearers” in a country. For most countries the “Debt Freedom Day” is a long way off and many unborn babies will have to carry the implications of current decisions during their future working life. It is for this reason that more thought needs to be given to the volume and the price of different types of debts affecting individual households and to the transfer systems which have been set up to provide benefits for a few but transfer the risks of money flows to the masses. To draw specific conclusions it is easiest to use a specific country example. In this paper the U.S. situation has been chosen, as it, among developed nations, provides the highest quality of statistically relevant data within the shortest time period. The analysis focuses on the excessive home mortgage lending levels in the U.S. over the period 2000-2006; excessive in relation to the income growth of individual households. It emphasizes that financial markets in their lending activities are not guided by the same principles as companies; supply of credit is a judgement of the long term income earning capacity, not the use of such household’s income in acquiring products and services. It also points out that collectively the financial sector can easily overestimate such households’ capacity for their own short term gains. No management system is in place to manage the growth and the quality of the national households’ mortgage portfolio, neither in the U.S. nor elsewhere. Once reality sets in and losses are recognised, the reverse process of less credit, lower house building levels and lower house prices set in. Individual households adjust their spending levels by reducing their outstanding debt, to the detriment of demand levels. Companies will react by slowing down investments, laying off workers and reducing pay levels below price rises. The Fed responded by buying up debt titles to the extent of $ 2 trillion. This money was neither earned, nor borrowed, but just printed.
    Keywords: mortgage debt, households income, Fannie Mae and Freddy Mac,Federal Reserve bank, quantitative easing, economic easing, pension funds
    JEL: E21 E24 E4 E43 E44
    Date: 2013–06–14
  18. By: Marta Lachowska (W.E. Upjohn Institute for Employment Research)
    Abstract: The importance of consumer confidence in stimulating economic activity is a disputed issue in macroeconomics. Do changes in confidence represent autonomous fluctuations in optimism, independent of information on economic fundamentals, or are they a reflection of economic news? I study this question by using high-frequency microdata on spending and consumer confidence, and I find that consumer confidence contains information relevant to predicting spending, independent from other indicators. The exogenous movements in consumer confidence lead to very short fluctuations in consumer spending, consistent with the hypothesis that more consumer confidence reflects less uncertainty about the future.
    Keywords: Expenditure, consumer confidence, vector autoregression
    JEL: E21 E32 C32
    Date: 2013–06
  19. By: David S. Scharfstein; Adi Sunderam
    Abstract: We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
    JEL: E44 E52 G21 G23 L85
    Date: 2013–06
  20. By: Swamy, Vighneswara
    Abstract: Abstract The Euro zone debt crisis has indeed jeopardized the recovery plans put in place post global crisis by regulators, policy makers and the sovereigns. Though, the crisis is epicentered in the Eurozone, the knock-on effects of the crisis are felt all across the globe. The emerging and developing economies (EDEs) are also expected to post lower growth on account of worsening external environment and a weakening internal demand. This paper while presenting the contemporary literature on the topic, analyses the causes for sovereign debt crisis and presents the implications of sovereign debt crises and draws lessons for banking sectors more particularly in the context of emerging markets like that of India.
    Keywords: Sovereign debt crisis, Credit Risk, Endogenous Default, Banking Crisis
    JEL: E22 E32 E42 F33 G01 G11
    Date: 2013–06–15
  21. By: James Costain (Banco de España); Anton Nakov (Banco de España)
    Abstract: We propose a near-rational model of retail price adjustment consistent with microeconomic and macroeconomic evidence on price dynamics. Our framework is based on the idea that avoiding errors in decision making is costly. Given our assumed cost function for error avoidance, the timing of firms’ price adjustments is determined by a weighted binary logit, and the prices they choose are determined by a multinomial logit. We build this behavior into a DSGE model, estimate the decision cost function by matching microdata, and simulate aggregate dynamics using a tractable algorithm for heterogeneous-agent models. Both errors in the prices firms set, and errors in the timing of these adjustments, are relevant for our results. Errors of the first type help make our model consistent with some puzzling observations from microdata, such as the coexistence of large and small price changes, the behavior of adjustment hazards, and the relative variability of prices and costs. Errors of the second type increase the real effects of monetary shocks, by reducing the correlation between the value of price adjustment and the probability of adjustment, (i.e., by reducing the\selection effect»). Allowing for both types of errors also helps reproduce the effects of trend inflation on price adjustment behavior. Our model of error-prone pricing in many ways resembles a stochastic menu cost (SMC) model, but it has less free parameters than most SMC models have, and unlike those models, it does not require the implausible assumption of i.i.d. adjustment costs. Our derivation of a weighted logit from control costs oers an alternative justication for the adjustment hazard derived by Woodford (2008). Our assumption that costs are related to entropy is similar to the framework of Sims (2003) and the subsequent\rational inattention» literature. However, our setup has the major technical advantage that a firm’s idiosyncratic state variable is simply its price level and productivity, whereas under rational inattention a firm’s idiosyncratic state is its prior (which is generally an infinite-dimensional object).
    Keywords: nominal rigidity, logit equilibrium, state-dependent pricing, near rationality, information-constrained pricing
    JEL: E31 D81 C72
    Date: 2013–02
  22. By: Pablo Hernández de Cos (Banco de España); Enrique Moral-Benito (Banco de España)
    Abstract: What are the output responses to fiscal policy? Despite important advances reported in the literature, quantifying the size of the fiscal multiplier remains a challenge. Indeed, the quest to estimate a unique fiscal multiplier is probably an ill-posed one. The magnitude of the multiplier may well depend on country- and time-specific characteristics of the fiscal stance under scrutiny. In this paper, we estimate state-specific multipliers for Spain depending on the state of the economy in several of its dimensions. The government spending multiplier is estimated to be larger during recessions and periods of banking stress, but much smaller (or even negative) during periods of weak public finances. Combining these three dimensions into a single global turmoil indicator by the use of principal component analysis, the estimated multipliers are 1.4 for crisis (or turbulent) times and 0.6 for tranquil times
    Keywords: fiscal policy, fiscal multiplier
    JEL: E62 H30
    Date: 2013–06
  23. By: Harry DeAngelo; René M. Stulz
    Abstract: Liquidity production is a central role of banks. We show that, under idealized conditions, high leverage is optimal for banks when there is a market premium for (socially valuable) liquid financial claims and no deviations from Modigliani and Miller (1958) due to agency problems, deposit insurance, taxes, or any other distortions. Our model can explain (i) why bank leverage increased over the last 150 years or so, (ii) why high bank leverage per se does not necessarily cause systemic risk, and (iii) why limits on the leverage of regulated banks impede their ability to compete with unregulated shadow banks. Our model indicates that MM’s debt-equity neutrality principle is inapplicable to banks. Because debt-equity neutrality assigns zero weight to the social value of liquidity, it is an inappropriately equity-biased baseline for assessing whether the high leverage ratios of real-world banks are excessive.
    JEL: E42 E51 G01 G21 G32 L51
    Date: 2013–06
  24. By: Francesco Papadia
    Abstract: During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability. In comments appended to this Policy Contribution, Edwin Truman, Senior Fellow, Peterson Institute for International Economics, concludes in favour of making the swap network permanent, while William Dudley, President of the Federal Reserve Bank of New York, stresses the importance of central banks around the world being able to coordinate closely so that there can be a viable, credible backstop on a global basis.
    Date: 2013–06
  25. By: Eric Gaus (Ursinus College)
    Abstract: The adaptive learning has primarily focused on decreasing gain learning and constant gain learning. As pointed out theoretically by Marcet and Nicolini (2003) and empirically by Milani (2007) an endogenous learning mechanism may explain key economic behaviors, such as recurrent hyperinflation or time varying volatility. This paper evaluates the mechanism used in those papers in addition to proposing an alternative endogenous learning algorithm. The proposed algorithm outperforms the Marcet and Nicolini's algorithm in simulations and may result in exotic dynamics.
    Keywords: Learning, Rational Expectations, Endogenous Learning
    JEL: E52 D83
    Date: 2013–03–01
  26. By: Balázs Égert
    Abstract: This paper puts the original Reinhart-Rogoff dataset, made public by Herndon et al. (2013), to a formal econometric test to pin down debt thresholds endogenously. We show that the nonlinear relation from debt to growth is not very robust. Taken with a pinch of salt, our results suggest, however, that a negative association between debt and growth may set in at debt levels as low as 20% of GDP. Further (and greater) thresholds may exist but their magnitude is highly uncertain. For general government debt (1960-2009), the threshold beyond which this negative relation kicks in is considerably higher at about 50%. Finally, individual country estimates reveal a large amount of cross-country heterogeneity. For some countries including the United States, a nonlinear negative link can be detected at about 30% of GDP. For others, the thresholds are surrounded by a great amount of uncertainty or no nonlinearities can be established. This instability may be a result of threshold effects changing over time within countries and depending on economic conditions, not captured in our estimations. Overall, our results can be seen as a formal econometric confirmation that the 90% public debt threshold is not in the Reinhart-Rogoff data. But our results also seem to suggest that public debt be associated with poor economic performance at fairly moderate public debt levels. If high debt results in low growth, an issue of causality that is not systematically examined in this paper, then this suggests rather low debt-GDP ratios would be appropriate. Furthermore, the absence of threshold effects or low estimated thresholds may not preclude the emergence of further threshold effects, especially as public debt levels are rising to unprecedentedly high levels.<P>Le seuil de la dette publique à 90 % : L'ascension et la chute d'un fait stylisé<BR>Ce document met la base de données originale de Reinhart et Rogoff, rendu public par Herndon et al. (2013), à un test économétrique formelle afin d’identifier des seuils de la dette de façon endogène. Nous montrons que la relation non linéaire de la dette à la croissance n'est pas très robuste. Pris avec une pincée de sel, nos résultats suggèrent, cependant, qu'une association négative entre la dette et la croissance peut exister à un niveau d'endettement aussi bas que 20% du PIB. D'autres seuils (plus élevés) peuvent exister, mais leur ampleur est hautement incertaine. Pour la dette consolidée des administrations publiques (1960 2009), le seuil au-delà duquel cette relation négative entre en action est considérablement plus élevée à environ 50%. Enfin, les estimations des différents pays révèlent une grande hétérogénéité entre les pays. Pour certains pays, dont les États-Unis, un lien négatif non linéaire peut être détecté à environ 30% du PIB. Pour d'autres, les seuils sont entourés d'une grande incertitude ou aucuns effets non-linéaires ne peuvent être établis. Cette instabilité peut être le résultat d'effets de seuil en évolution au fil du temps au sein des pays et en fonction des conditions économiques, ne figurent pas dans nos estimations. Dans l'ensemble, nos résultats peuvent être considérés comme une confirmation économétrique formelle que le seuil de la dette publique à 90% n'est pas dans les données de Reinhart et Rogoff. Mais nos résultats semblent également indiquer que la dette publique est associée à une mauvaise performance économique à des niveaux d'endettement public relativement modérés. Si une dette publique entraine une faible croissance économique, une question de causalité qui n'est pas systématiquement examinée dans le présent document, alors ceci suggère que de plutôt faibles ratios d'endettement publiques du PIB serait approprié. En outre, l'absence d'effets de seuil ou de faibles seuils estimés ne peut pas empêcher l'émergence de nouveaux effets de seuil, d'autant plus que les niveaux de la dette publique sont en hausse à des niveaux sans précédent.
    Keywords: public debt, economic growth, nonlinearity, threshold effects, dette publique, croissance économique, non-linéarité, effet de seuil
    JEL: E6 F3 F4 N4
    Date: 2013–06–06
  27. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: Occasionally binding credit constraints (OBC) have recently been explored as a promising way of modeling financial frictions. However, given their highly non-linear nature, most of the literature has concentrated on small models that can be solved using global methods. In this paper, we investigate the workings of OBC introduced via a smooth penalty function. This allows us to move towards richer models that can be used for policy analysis. We show that in a deterministic setting the OBC approach delivers welcome features, like asymmetry and non-linearity in reaction to shocks. However, feasible local approximations, necessary to generate stochastic simulations, suffer from fatal shortcomings that make their practical application questionable.
    Keywords: financial frictions; DSGE models; occasionally binding constraints; penalty function
    JEL: E30 E44
    Date: 2013–06
  28. By: Balázs Égert; Rafał Kierzenkowski
    Abstract: Notwithstanding a very strong economic performance over the past decade or so, Poland’s per capita income is substantially lower in comparison with the United States and per capita income growth will be sharply slowing down over the coming decades under the scenario of gradual policy changes mostly because of population ageing. Bold structural reforms are needed to boost labour productivity and labour resource utilisation. This paper argues that in order to increase labour resource utilisation, policy action should focus on raising the effective retirement age, encourage childbearing and lower high unemployment rates for young people and the unskilled via increased and more efficient active labour market policies. Labour productivity could be boosted via rendering the tax system more growth friendly, reducing product market regulation (including heavy government involvement in the economy, high administrative costs of running and starting businesses and increasing competition in uncompetitive segments of the economy). Investing in human capital and encouraging innovation are also essential for long-term productivity growth.<P>Les défis pour soutenir le modèle de croissance économique en Pologne<BR>En dépit d’une performance économique remarquable au cours de la dernière décennie, le PIB par habitant de la Pologne est nettement plus faible en comparaison avec les États-Unis et la croissance du PIB par tête va fortement ralentir au cours des prochaines décennies, selon un scénario de changements progressifs de politiques économiques essentiellement en raison du vieillissement de la population. Des réformes structurelles audacieuses sont nécessaires pour accroître la productivité du travail et l'utilisation des ressources du travail. Cet article soutient que pour augmenter l'utilisation des ressources du travail, l'action de politique économique devrait se concentrer sur l'augmentation de l'âge effectif du départ à la retraite, d'encourager la maternité et de diminuer les taux de chômage élevés pour les jeunes et les travailleurs peu qualifiés via des politiques actives du marché du travail plus étendues et plus efficaces. La productivité du travail pourrait être stimulée par un système fiscal plus favorable à la croissance, par la réduction de la réglementation des marchés de produits (y compris la forte implication du gouvernement dans l'économie, les coûts administratifs élevés de fonctionnement et de création d'entreprises, et en augmentant la concurrence dans les segments non compétitifs de l'économie). Investir dans le capital humain et encourager l'innovation sont également essentiels pour la croissance de la productivité à long terme.
    Keywords: economic growth, Poland, potential growth, structural reforms, croissance économique, réforme structurelle, Pologne, croissance potentielle
    JEL: E6 F3 F4 N4
    Date: 2013–06–05
  29. By: Pietro F. Peretto
    Abstract: This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of firm size and a set of equations that express the relevant endogenous variables – GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production – as functions of firm size. It also obtains closed-form solutions for the dates of the events that drive the economy's phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave profile replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of …firms and entrepreneurs to Smithian market expansion.
    Keywords: Endogenous Growth, Firm Size, Market Structure, Take-off
    JEL: E10 L16 O31 O40
    Date: 2013
  30. By: Issaoui, Fakhri; Boufateh, Talel; Guesmi, Mourad
    Abstract: Although economic growth is considered one of topics the most discussed and studied by economists, some questions are hitherto unexplored. In this article we will try to address one of these issues by studying the effect of growth shocks of hegemonic countries on the growth of peripheral countries. By using a structural VAR model, we have shown that the peripheral countries integration in trade relations with the center countries, although it may allow the growth of short and medium term, it prevents them, to confirm their long-term economic independence.
    Keywords: Growth, Center-Periphery, Development
    JEL: E61 O4 P2
    Date: 2013–06–18
  31. By: Árpád Ábrahám; Sarolta Laczóó
    Abstract: We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (non-contractible and/or non-observable) storage technology. Positive public storage relaxes future participation constraints and may hence improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation.
    Keywords: risk sharing, limited commitment, hidden storage, dynamic contracts
    JEL: E20
    Date: 2013–04
  32. By: Laurence Nayman
    Abstract: This study compares French and German manufacturing price levels in 2007 and investigates in both countries over the 1991-2010 period value added price growth rates in manufacturing and services. Using the ICOP methodology and the data from the Eurostat production surveys, we calculate production price levels in the French and German manufacturing sector. Results show they are quite close to each other. As to growth rates, using national accounts data, while German manufacturing value added prices have been relatively stable between 1995 and 2010, French manufacturing prices have been falling. This relative decrease could be attributed to the relative fall in the French gross margins over the last years. This gap is not replicated in the aggregate value added prices. The latter have been rising more steeply in France than in Germany, and this is due to price fluctuations in services. The increase in the French compensation rate in services has been significantly larger than the hourly labour productivity. In Germany, with falling unit labour costs over the 2005-2007 years in the manufacturing sector, German firms could hoard substantial gross margins that, however, have only been partly allocated to investment.
    Keywords: France;Germany;relative price level;hourly labour productivity;unit labour costs;gross margins;investment
    JEL: E31 J24 J30 L60 O47
    Date: 2013–05
  33. By: Mathias Hoffmann; Rahel Suter
    Abstract: We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.
    Keywords: Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model
    JEL: E44 F31 F44 G12 G15
    Date: 2013–06
  34. By: Pietro F. Peretto; Simone Valente
    Abstract: We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We find a pseudo-Malthusian equilibrium in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or collapse. Introducing a minimum resource requirement per capita, we obtain constant population even under complementarity.
    Keywords: Endogenous Innovation, Resource Scarcity, Population Growth, Fertility Choices
    JEL: E10 L16 O31 O40
    Date: 2013

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