nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒06‒30
nineteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Uncertainty shocks, banking frictions, and economic activity By Dario Bonciani; Björn van Roye
  2. Nominal GDP Targeting and the Zero Lower Bound: Should We Abandon Inflation Targeting? By Billi, Roberto M.
  3. Monetary policy regime switches and macroeconomic dynamic By Andrew T. Foerster
  4. Optimal fiscal and monetary policy with occasionally binding zero bound constraints By Taisuke Nakata
  5. Using Financial Markets To Estimate the Macro Effects of Monetary Policy: By Pitschner, Stefan
  6. Fear of Sovereign Default, Banks, and Expectations-driven Business Cycles By Christopher M. Gunn; Alok Johri
  7. Sticky Price Inflation Index: An Alternative Core Inflation Measure By Ádám Reiff; Judit Várhegyi
  8. International transmission of financial stress: evidence from a GVAR By Jonas Dovern; Björn van Roye
  9. Domestic Versus International Determinants Of European Business Cycles: A GVAR Approach By Melisso Boschi; Massimiliano Marzo; Simone Salotti
  10. Sur les interactions entre politiques de dette publique et de transfert. By Bessec, Marie; Desbonnet, Audrey; Kankanamge, Sumudu; Weitzenblum, Thomas
  11. Inflation risk and the cross section of stock returns By Fernando M. Duarte
  12. Financial Frictions, Capital Misallocation, and Structural Change By Naohisa Hirakata; Takeki Sunakawa
  13. Is the Magnitude of Household Debt in Barbados a Concern? By Carter, Justin; Moore, Winston; Jackman, Mahalia
  14. Human capital, social mobility and the skill premium By Konstantinos Angelopoulos; James Malley; Apostolis Philippopoulos
  15. Resource Windfalls, Optimal Public Investment and Redistribution: The Role of Total Factor Productivity and Administrative Capacity By AREZKI Rabah; DUPUY Arnaud; GELB Alan
  16. China and Global Macroeconomic Interdependence By Rod TYERS
  17. Policy in adaptive financial markets—the use of systemic risk early warning tools By Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
  18. The Impact of Structural and Macroeconomic Factors on Regional Growth By Sabine D’Costa; Enrique Garcilazo; Joaquim Oliveira Martins
  19. Education, Birth Order, and Family Size By Bagger, Jesper; Birchenall, Javier A.; Mansour, Hani; Urzua, Sergio

  1. By: Dario Bonciani; Björn van Roye
    Abstract: In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy
    Keywords: Uncertainty Shocks, Financial frictions, Monetary Policy, Stochastic Volatility, Perturbation Methods, Third-order approximation
    JEL: E32 E52
    Date: 2013–06
  2. By: Billi, Roberto M. (Research Department, Central Bank of Sweden)
    Abstract: I compare nominal GDP level targeting to flexible inflation targeting in a small New Keynesian model subject to the zero lower bound on nominal policy rates. First, I study the performance of optimal discretionary policies. I find that, for a standard calibration, inflation targeting under discretion leaves the economy open to a deflationary trap. Nominal GDP level targeting under discretion, by contrast, provides a firm nominal anchor to the economy. Second, I study simple policy rules and the role of smoothing in the rules. With smoothing, a Taylor-type rule performs as well as a nominal GDP level rule. These result suggest that inflation targeting should not be ditched. Still, it can be improved significantly, by using policy rate smoothing to anchor inflation firmly.
    Keywords: nominal GDP target; optimal policy; simple rules; zero lower bound
    JEL: E31 E52 E58
    Date: 2013–06–01
  3. By: Andrew T. Foerster
    Abstract: This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to inflation deviations from target lead to different determinacy regions and different output, inflation, and interest rate distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with a fixed monetary policy rule, expectations of future policy switches produce different outcomes depending upon the switching type. Monetary authorities with given inflation objectives need to adjust their policy parameters to counteract expectations of future policy switches.
    Date: 2013
  4. By: Taisuke Nakata
    Abstract: This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound
    Date: 2013
  5. By: Pitschner, Stefan (Universitat Pompeu Fabra)
    Abstract: In this paper, I use high-frequency financial market estimates to identify the monetary policy shock in a non-recursive 133 variable FAVAR. All restrictions are imposed exclusively on impact, and only on financial market variables. Using the economy's underlying factor structure as the link between its real and financial sides, I find that high-frequency responses contain valuable information about the behavior of lower-frequency macro variables. Even though the proposed identification scheme does not fall back on any of the standard (FA) VAR identifying assumptions, it confirms the classical finding that monetary policy has strong and significant delayed effects on real activity. I also obtain stock market responses that are compatible with the efficient market hypothesis and find that consumer prices react very little to monetary policy.
    Keywords: Monetary Policy; Impact Identication; FAVAR; Financial Markets; Efficient Market Hypothesis
    JEL: E44 E52 E58
    Date: 2013–05–01
  6. By: Christopher M. Gunn; Alok Johri
    Abstract: What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the "news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy.
    Keywords: expectations-driven business cycles, sovereign defaults; financial inter-mediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements
    JEL: E3 E44 F36 F37 F4 G21
    Date: 2013–06
  7. By: Ádám Reiff (Magyar Nemzeti Bank (central bank of Hungary)); Judit Várhegyi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: We show that in both time-dependent and state-dependent sticky price models, prices of sticky price products (i.e. whose price changes rarely) contain more information about medium term inflation developments than those of flexible price products (i.e. whose price changes frequently). We do this by establishing a novel measure for the extent of forwardlookingness of newly set prices, and showing that it is at least 60% when the monthly price change frequency is less than 15%. This result is robust across various sticky price models. On the empirical front, we show that the Hungarian sticky price inflation index indeed has a forward-looking component, as it has favorable inflation forecasting properties on the policy horizon of 1-2 years to alternative inflation indicators (including core inflation). Both theoretical and empirical results suggest that the sticky price inflation index is a useful indicator for inflation targeting central banks.
    Keywords: sticky prices, core inflation, inflation measurement
    JEL: E31 E37 E58
    Date: 2013
  8. By: Jonas Dovern; Björn van Roye
    Abstract: We analyze the international transmission of financial stress and its effects on economic activity. We construct country specific monthly financial stress indexes (FSI) using dynamic factor models from 1970 until 2012 for 20 countries. We show that there is a strong co-movement of the FSI during financial crises and that the FSI of financially open countries are relatively more correlated to FSI in other countries. Subsequently, we investigate the international transmission of financial stress and its impact on economic activity in a Global VAR (GVAR) model. We show that i) financial stress is quickly transmitted internationally, ii) financial stress has a lagged but persistent negative effect on economic activity, and iii) that economic slowdowns induce only limited financial stress
    Keywords: Financial stress, Financial crises, Business Cycles, Dynamic Factor Model, Global VAR
    JEL: E32 E52 F36 F37 F41
    Date: 2013–06
  9. By: Melisso Boschi; Massimiliano Marzo; Simone Salotti
    Abstract: We investigate the sources of macroeconomic (output and inflation) variability in selected European countries within and outside the European Monetary Union: Germany, Italy, Austria, the UK and Poland. Using quarterly data from 1985:1 to 2005:4, we estimate a Global Vector Autoregressive (GVAR) model that includes fifteen countries and regions, covering more than 90 per cent of the World GDP. We find that domestic factors explain most of the macroeconomic variability over the short horizon, i.e. from zero to four quarters, but become progressively dominated by international ones at larger horizons. Regional factors appear to be particularly important. As for output, we detect no significant differences between countries currently members of the European Monetary Union and non-members. As for inflation, on the contrary, regional factors are more influential than those of the rest of the world for the EMU member countries, differently from non-members..
    Keywords: Business cycle, inflation, European Monetary Union, Global VAR (GVAR)
    JEL: C32 E32
    Date: 2013–05
  10. By: Bessec, Marie; Desbonnet, Audrey; Kankanamge, Sumudu; Weitzenblum, Thomas
    Abstract: Dans cet article, nous analysons les interactions entre les politiques de dette publique et de transfert dans le modèle de Floden [2001], que nous étendons en modélisant la dynamique transitoire d’un état stationnaire à un autre. Dans un premier temps, dans le cas où la dette aurait atteint un niveau élevé, nous montrons qu’il est possible de mettre en œuvre une politique de désendettement de l’Etat qui ne détériore pas le bien-être, en l’associant à un ajustement transitoire du transfert. Dans un second temps, nous proposons un équilibre intégrant les incitations à court terme de surprendre les agents en modifiant les niveaux de dette publique et de transferts. Nous montrons que l’optimum de long terme sur la dette et les transferts proposé par Floden [2001] n’est pas stable au regard de ces incitations. Quantitativement, l’équilibre que nous obtenons s’éloigne considérablement de ce dernier.
    Abstract: In this paper, we investigate the interactions between public debt and transfer policies in a framework based on Floden [2001], that we extend to allow for transitional dynamics between steady states. First, we show that, starting from a high level of public debt, it is possible to implement a policy that reduces public debt without generating welfare losses, as long as it is associated with transitory transfers adjustments. Secondly, we define and compute an equilibrium that takes into consideration the government’s incentive to implement unexpected adjustments in both public debt and transfers. We show that the long run equilibrium over public debt and transfers in Floden [2001] is not stable with respect to these short term incentives. Simulations reveal that our equilibrium and Floden [2001]’s one considerably differ in quantitative terms.
    Keywords: Fiscal policy; public debt; transfers; Fiscalité; dette publique; transferts; transition;
    JEL: E20 E60 H20 H60
    Date: 2012
  11. By: Fernando M. Duarte
    Abstract: I establish that inflation risk is priced in the cross section of stock returns: Stocks that have low returns during inflationary times command a risk premium. I estimate a market price of inflation risk that is comparable in magnitude to the price of risk for the aggregate market. Inflation is therefore a key determinant of risk in the cross section of stocks. The inflation premium cannot be explained by either the Fama-French factors or industry effects. Instead, I argue the premium arises because high inflation lowers expectations of future real consumption growth. To formalize and test this hypothesis, I develop a consumption-based general equilibrium model. The model generates a price of inflation risk consistent with my empirical estimates, while simultaneously matching the joint dynamics of consumption and inflation, the aggregate equity premium, and the level and slope of the yield curve. My model suggests that the costs of inflation are significant: A representative agent would be willing to give up 1.5 percent of lifetime consumption to eliminate all inflation risk.
    Keywords: Rate of return ; Inflation (Finance) ; Risk
    Date: 2013
  12. By: Naohisa Hirakata (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Takeki Sunakawa (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, International Department), Bank of Japan (E-mail:
    Abstract: We develop a two-sector growth model with financial frictions to examine the effects of a decline in the working population ratio and change in the structure of household demand on sectoral TFP and structural change. Our findings are twofold. First, with financial frictions, a decline in labor input reduces the real interest rate and increases excess demand for borrowing, tightening collateral constraints at a given credit-to-value ratio and generating capital misallocation and lower sectoral TFP. Second, compared to the case with no financial frictions, such changes in sectoral TFP impede structural changes driven by the change in the structure of household demand.
    Keywords: Financial frictions, heterogeneous firms, capital misallocation, total factor productivity, structural change
    JEL: E23 E44 O41 O47
    Date: 2013–06
  13. By: Carter, Justin; Moore, Winston; Jackman, Mahalia
    Abstract: This paper provides an assessment of the size and composition of household debt in Barbados over the period 1990 to 2010. First, the study estimates the size of household indebtedness, with particular emphasis on recent trends in household debt and the main providers of credit. Second, it attempts to show how household debt varies with key macroeconomic indicators. Finally, a cursory look at the concerns resulting from rising household debt is taken. Unlike previous studies on household debt in Barbados (Craigwell & Kaidou-Jeffery, 2010; Moore & Williams, 2008), this paper does not constrain the analysis to household debt extended by commercial banks. This more holistic approach allows the authors to capture any emerging institutional trends that might be of interest to policymakers.
    Keywords: Household debt, personal loans, Barbados,
    JEL: E51 G21 G23 O54
    Date: 2012–12–31
  14. By: Konstantinos Angelopoulos; James Malley; Apostolis Philippopoulos
    Abstract: This paper considers the role of human capital accumulation of agents differentiated by skill type in the joint determination of social mobility and the skill premium. Our approach allows us to evaluate the dynamic e¤ects of tax reforms and education spending policies on economic e¢ ciency as well as on social and wage inequality. The analysis contributes to the literature by showing that endogenous so- cial mobility, human capital for skilled and unskilled labour, and exter- nalities from skilled human capital on social mobility are key channels through which tax-spending policy is transmitted.
    Keywords: social mobility, skill premium, tax and education policy
    JEL: E62 J31 J62
    Date: 2013–06
  15. By: AREZKI Rabah; DUPUY Arnaud; GELB Alan
    Abstract: This paper studies the optimal public investment decisions in countries experiencing a resource windfall. To do so, we use an augmented version of the Permanent Income framework with public investment faced with adjustment costs capturing the associated administrative capacity as well as government direct transfers. A key assumption is that those adjustment costs rise with the size of the resource windfall. The main results from the analytical model are threefold. First, a larger resource windfall commands a lower level of public capital but a higher level of redistribution through transfers. Second, weaker administrative capacity lowers the increase in optimal public capital following a resource windfall. Third, higher total factor productivity in the non-resource sector reduces the degree of des-investment in public capital commanded by weaker administrative capacity. We further extend our basic model to allow for ?investing in investing? ? that is public investment in administrative capacity ? by endogenizing the adjustment cost in public investment. Results from the numerical simulations suggest, among other things, that a higher initial stock of public administrative ?know how? leads to a higher level of optimal public investment following a resource windfall. Implications for policy are discussed.
    Keywords: Resource Windfall; Public Investment; Total Factor Productivity; Administrative capacity
    JEL: E60 F34 H21
    Date: 2013–06
  16. By: Rod TYERS
    Abstract: China’s economy is now a member of the small group of large economic regions that interact strategically over macroeconomic policy. Critics see it as having developed at the expense of both investment and employment in the US, Europe and Japan while proponents emphasise improvements in their terms of trade and reductions to the cost of financing that stem from China’s supply of light manufactures, its demand for Western capital and luxury goods and its high saving. Insights into the international implications of China’s growth and saving are here derived from a simple global general equilibrium model that embodies elemental short run macroeconomic behaviour. The model emphasises bilateral linkages via both trade and investment and so helps clarify the international effects of both China’s expansion, its high saving and of the new “inward focus†of its macroeconomic policy regime. Foreign worker displacement and slow investment emerge as the key consequences of China’s growth for the other large economies and its turn inward could indeed stimulate a resurgence of employment and investment there.
    Keywords: China, Macroeconomic modelling, Macroeconomic coordination
    Date: 2013–05
  17. By: Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong
    Abstract: How can a systemic risk early warning system (EWS) facilitate the financial stability work of policymakers? In the context of evolving financial market dynamics and limitations of microprudential policy, this study examines new directions for financial macroprudential policy. A flexible macroprudential approach is anchored in strategic capacities of systemic risk EWSs. Tactically, macroprudential applications are founded on information about the level, structure, and institutional drivers of systemic financial stress and aim to manage the financial system risk and imbalances in two dimensions: across time and institutions. Time-related EWS policy applications are analyzed in pursuit of prevention and mitigation. EWS applications across institutions are considered via common exposures and interconnectedness. Care must be taken in the calibration of macroprudential applications, given their reliance on quality of the underlying systemic risk-modeling framework.
    Keywords: Business cycles ; Regulation ; Financial stability
    Date: 2013
  18. By: Sabine D’Costa; Enrique Garcilazo; Joaquim Oliveira Martins
    Abstract: This papers aims to understand the impact of nation-wide structural policies such as product market regulation in six upstream sectors and employment protection legislation and that of macroeconomic factors on the productivity growth of OECD regions. In particular we explore how this effect varies with the productivity gap of regions with their country’s frontier region. We use a policy-augmented growth model that allows us to simultaneously estimate the effects of macroeconomic and structural policies on regional productivity growth controlling for region-specific determinants of growth. We estimate our model with an unbalanced panel dataset consisting of 217 regions from 22 OECD countries covering the period 1995 to 2007. We find a strong statistical negative effect of product market regulation on regional productivity growth in five of the six upstream sectors considered and the effects are differentiated with respect to the productivity gap. Our estimates also reveal that dispersion of policies hurts regional productivity growth suggesting that policy complementarity can boost productivity growth. The effects of employment protection legislation are negative overall and are especially detrimental to productivity growth in lagging regions. The three macroeconomic factors we consider also influence regional performance: inflation has a negative effect on regional growth and government debt has a positive effect on average. When differentiating the effects by the distance to the frontier, trade-openness is more beneficial to lagging regions and the negative effects of inflation are less negative in lagging regions. These results reveal a strong link between nation-wide policies and the productivity of regions, which carries important policy implications, mainly that these effects should be taken into account in the policy design.
    Keywords: regional productivity growth, regional impact of structural policies, spatial impact of national policies
    JEL: E66 R12
    Date: 2013–06–13
  19. By: Bagger, Jesper (Royal Holloway, University of London); Birchenall, Javier A. (University of California, Santa Barbara); Mansour, Hani (University of Colorado Denver); Urzua, Sergio (University of Maryland)
    Abstract: We introduce a general framework to analyze the trade-off between education and family size. Our framework incorporates parental preferences for birth order and delivers theoretically consistent birth order and family size effects on children's educational attainment. We develop an empirical strategy to identify these effects. We show that the coefficient on family size in a regression of educational attainment on birth order and family size does not identify the family size effect as defined within our framework, even when the endogeneity of both birth order and family size are properly accounted for. Using Danish administrative data we test the theoretical implications of the model. The data does not reject our theory. We find significant birth order and family size effects in individuals' years of education thereby confirming the presence of a quantity-quality trade off.
    Keywords: quantity-quality trade off, fertility models, fixed-effects, instrumental variables
    JEL: E20 E24 D52
    Date: 2013–06

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