nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒07‒15
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Did Greenspan Open Pandora's Box? Testing the Taylor Hypothesis and Beyond By Palma, Nuno
  2. Assessing the empirical relevance of Walrasian labor frictions to business cycle fluctuations By Joao Madeira
  3. Optimal monetary policy in a currency union with interest rate spreads By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  4. La coordination des politiques monétaire et budgétaire: Aperçu théorique By Daly, Hounaida; Smida, Mounir
  5. Fiscal policy and regional output volatility: Evidence from Russia By Eller, Markus; Fidrmuc, Jarko; Fungácová , Zuzana
  6. Estimating intertemporal elasticity of substitution in a sticky price model By Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari
  7. Monetary Policy and Debt Deflation: Some Computational Experiments By Carl Chiarella; Corrado Di Guilmi
  8. Chinese monetary expansion and the U.S. economy By Vespignani, Joaquin L.; Ratti, Ronald A
  9. Does Short-Time Work Save Jobs? A Business Cycle Analysis By Balleer, Almut; Gehrke, Britta; Lechthaler, Wolfgang; Merkl, Christian
  10. Do Structural Policies Affect Macroeconomic Stability? By Volker Ziemann
  11. Escaping a Liquidity Trap: Keynes’ Prescription Is Right But His Reasoning Is Wrong By Harashima, Taiji
  12. Disinflationary Booms? By Christian Merkl
  13. Unemployment Crises By Nicolas Petrosky-Nadeau; Lu Zhang
  14. Unconventional monetary policy of the ECB during the financial crisis: An assessment and new evidence By Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan
  15. Fear of Sovereign Default, Banks, and Expectations-Driven Business Cycles By Christopher M. Gunn; Alok Johri
  16. A defense of moderation in monetary policy By John C. Williams
  17. Asymmetry Reversals and the Business Cycle By Roberta Distante; Ivan Petrella; Emiliano Santoro
  18. Economic policy uncertainty in the US: Does it matter for the Euro Area? By Valentina Colombo
  19. Measuring the Financial Soundness of U.S. Firms, 1926–2012 By Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
  20. Job polarization and jobless recoveries in Japan: Evidence from 1984 to 2010 By Yosuke Furukawa; Hiroki Toyoda
  21. Animal Spirits as an Engine of Boom-Busts and Throttle of Productivity Growth By Christopher M. Gunn
  22. Sustainability of convergence in the context of macro-prudential policies in the European Union By TRIANDAFIL, Cristina Maria
  23. Unkonventionelle Geldpolitik: Warum die Europäische Zentralbank ihre Unabhängigkeit nicht verloren hat By Schwäbe, Carsten
  24. Does bank competition influence the lending channel in the euro area? By Fungácová, Zuzana; Solanko, Laura; Weill, Laurent
  25. Explaining Inflation in the Aftermath of the Great Recession By Robert G. Murphy
  26. Monetary Policy and the Real Economy: A Structural VAR Approach for Sri Lanka By Thanabalasingam Vinayagathasan
  27. Italy and the Euro Area Crisis: Securing Fiscal Sustainability and Financial Stability By Oliver Denk
  28. The Post-crisis Narrowing of International Imbalances: Cyclical or Durable? By Patrice Ollivaud; Cyrille Schwellnus
  29. Solving the DMP Model Accurately By Nicolas Petrosky-Nadeau; Lu Zhang
  30. Redemption By Catherine Mathieu; Henri Sterdyniak
  31. The effects of capital requirements on real economy: a cointegrated VAR approach for US commercial banks By Miele, Maria Grazia
  32. Reading Keynes in Buenos Aires: Prebisch and the Dynamics of Capitalism By Esteban Pérez Caldentey; Matias Vernengo
  33. A Simple Fiscal Stress Testing Model: Case Studies of Austrian, Czech and German Economies By Ondra Kamenik; Zdenek Tuma; David Vavra; Zuzana Smidova
  34. Fiscal Consolidation Across Government Levels - Part 1. How Much, What Policies? By Hansjörg Blöchliger
  35. Measuring the financial soundness of U.S. firms, 1926-2012 By Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
  36. Man-Bites-Dog Business Cycle By Kristoffer Nimark
  37. Imperfect Competition and Optimal Taxation By Andrea Colciago
  38. Clustered housing cycles By Rubén Hernández-Murillo; Michael T. Owyang; Margarita Rubio
  39. Negative Shocks, Job Creation, and Selection By Daniel Kopasker; Holger Görg; Hassan Molana; Catia Montagna
  40. Interwar Deflation and Depression By Bill Dorval; Gregor W. Smith
  41. Indeterminacy and utility-generating government spending under balanced-budget fiscal policies By Takeo Hori; Noritaka Maebayashi
  42. (Spillover) Effects of Labour Market Reforms in Germany and France By Claudia Busl; Atilim Seymen
  43. Inventory Behavior with Permanent Sales Shocks By Louis J. Maccini; Bartholomew Moore; Huntley Schaller
  44. Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation By Dirk Krueger; Alexander Ludwig
  45. Bank Lending Procyclicality and Credit Quality during Financial Crises By Guglielmo Maria Caporale; Stefano Di Colli; Juan Sergio Lopez
  46. Why Do Emerging Markets Liberalize Capital Outflow Controls? Fiscal versus Net Capital Flow Concerns By Joshua Aizenman; Gurnain Pasricha
  47. The People's Republic of China's Financial Policy and Regional Cooperation in the Midst of Global Headwinds By Azis, Iwan J.
  48. Macedonia’s exports and the gravity model By Josheski, Dushko; Apostolov, Mico
  49. Output supply and yield response of rice in Nigeria: implications for future rice policy By Boansi, David
  50. Testing for the existence of a bubble in the stock market By Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
  51. Integration of Central and Eastern European Countries: Increasing EU Heterogeneity? By Petr Rozmahel; Ludek Kouba; Ladislava Grochová; Nikola Najman
  52. Capital Controls in Brazil – Stemming a Tide with a Signal? By Yothin Jinjarak; Ilan Noy; Huanhuan Zheng
  53. Inferring Hawks and Doves from Voting Records By Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D.
  54. Card versus cash: empirical evidence of the impact of payment card interchange fees on end users’ choice of payment methods By Ardizzi, Guerino
  55. De la monnaie cosmopolitique By Parodi Maxime
  56. The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis By Alexander Popov; Neeltje van Horen
  57. How Important are Exports and Foreign Direct Investment for Economic Growth in the People’s Republic of China? By Xing, Yuqing; Pradhananga, Manisha
  58. Unemployment Insurance Take-up Rates in an Equilibrium Search Model By David Fuller; Stephane Auray; Damba Lkhagvasuren
  59. Estimating Dynamic Equilibrium Models with Stochastic Volatility By Jesus Fernandez-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez

  1. By: Palma, Nuno
    Abstract: The Taylor hypothesis is the conjecture that the 2007-2009 financial crisis and the 2008-present downturn have been caused by loose monetary policy during 2002-2006. According to the Taylor hypothesis the Fed deviated from well-know rules of monetary policy-making over this period, and this deviation caused an inefficient boom and subsequent bust. I use a well know economic model of the US aggregate economy (Christiano, Eichenbaum and Evans 2005) to test this hypothesis. I interpret shocks as deviations from Taylor-type rules. I conclude that the Taylor hypothesis for the Taylor rule fails to reproduce observed fluctuations in the data. Output increases only 0.3% at maximum which occurs at 2004:Q2. In the data, the output gap was at it's maximum in 2006:Q3. However, the Taylor hypothesis modified to incorporate persistence in the policy rule can partly explain the boom of the economy after 2001.
    Keywords: Business Cycle, Financial Crisis, Great Moderation, Monetary Shocks, Persistence
    JEL: E32 E37 E4 E43 E5 E52 E58 E65
    Date: 2013–01–21
  2. By: Joao Madeira (Department of Economics, University of Exeter)
    Abstract: This paper describes and estimates (with a Bayesian likelihood approach) an otherwise standard dynamic stochastic general equilibrium model, with both sticky prices and wages, augmented with several labor market rigidities (of a Walrasian nature), namely: indivisible labor, predetermined straight time employment numbers (in which case, firms adjust overtime employment to respond to unexpected shocks), hiring expenses and convex adjustment costs. The results show all these frictions to be empirically important. Labor frictions are shown to have important implications to business cycle dynamics and economic policy making. Labor frictions imply TFP shocks have a greater role in accounting for business cycle dynamics. Labor frictions also imply fiscal policy to lead to a greater crowding out of private sector activity and monetary policy to be more e¤ective in achieving disinflation.
    Keywords: DSGE; New Keynesian, labor frictions; indivisible labor; labor adjustment costs; overtime; employment; hours.
    JEL: E20 E24 E30 E31 E32
    Date: 2013
  3. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We introduce “financial imperfections” - asymmetric net wealth positions, incomplete risksharing, and interest rate spread across member countries - in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In addition to, and independent from, the standard transmission mechanism associated with nominal rigidities, financial imperfections introduce a wealth redistribution role for monetary policy. Moreover, the two mechanisms reinforce each other and amplify the effects of monetary policy. On the normative side, financial imperfections, via interactions with nominal rigidities, generate two novel policy trade-offs. First, the central bank needs to pay attention to distributional efficiency in addition to macroeconomic (and price level) stability, which implies that a strict inflation targeting policy of setting union-wide inflation to zero is never optimal. Second, the interactions lead to a trade-off in stabilizing relative consumption versus the relative price gap (the deviation of relative prices from their efficient level) across countries, which implies that the central bank allows for less flexibility in relative prices. Finally, we consider how the central bank should respond to a financial shock that causes an increase in the interest rate spread. Under optimal policy, the central bank strongly decreases the deposit rate, which reduces aggregate and distributional inefficiencies by mitigating the drop in output and inflation and the rise in relative consumption and prices. Such a policy response can be well approximated by a spreadadjusted Taylor rule as it helps the real interest rate track the efficient rate of interest.
    Keywords: Price levels ; Money supply
    Date: 2013
  4. By: Daly, Hounaida; Smida, Mounir
    Abstract: Recently, monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence. Simultaneously in the fiscal area, market development has allowed public debt managers to focus more on cost minimization. This |"divorce'' of monetary and debt management functions in no way lessens the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. This paper analyzes these issues based on a review of the relevant literature and of country experiences from an institutional and operational perspective.
    Keywords: Politique monétaire, Politique budgétaire, Coordination.
    JEL: E5 E52 E58 E6 E61 E62
    Date: 2013–07–02
  5. By: Eller, Markus (BOFIT); Fidrmuc, Jarko (BOFIT); Fungácová , Zuzana (BOFIT)
    Abstract: This paper investigates the relationship between fiscal policy and output volatility in Russian regions between 2000 and 2009. System GMM estimation techniques are used to account for potential endogeneity between output volatility and fiscal developments. Our main finding is that fiscal activism, proxied by various measures of discretionary fiscal policy, contributes to output volatility and so induces macroeconomic instability at the regional level in Russia. This result corroborates previous studies using cross-country data. To reduce business cycle fluctuations, it would be necessary to curtail pro-cyclical fiscal activism at the regional level, e.g. via fiscal rules and sound institutions of fiscal federalism.
    Keywords: output volatility; automatic stabilizers; discretionary fiscal policy; dynamic panel models; Russia
    JEL: E32 E62 R11
    Date: 2013–06–17
  6. By: Kilponen, Juha (Bank of Finland Research); Vilmunen, Jouko (Bank of Finland Research); Vähämaa, Oskari (University of Turku)
    Abstract: Cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coefficient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984–2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature.
    Keywords: monetary policy; Bayesian estimation; non-separable utility
    JEL: E21 E32 E52
    Date: 2013–05–27
  7. By: Carl Chiarella; Corrado Di Guilmi
    Abstract: The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.
    Keywords: Financial fragility, monetary policy, debt deflation, agent based modelling, complex dynamics.
    JEL: E12 E31 E44
    Date: 2013–07
  8. By: Vespignani, Joaquin L.; Ratti, Ronald A
    Abstract: This paper examines the influence of monetary shocks in China on the U.S. economy over ‎‎1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through ‎effects in demand for imports, particularly that of commodities. China’s growth influences ‎world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. ‎China’s monetary expansion is also associated with significant decreases in the trade ‎weighted value of the U.S. dollar that is due to the operation of a pegged currency. China ‎manages the exchange rate and has extensive capital controls in place. In terms of the ‎Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a ‎managed exchange rate permit China to pursue an independent monetary policy with ‎consequences for the U.S.‎
    Keywords: International monetary transmission, U.S. Macroeconomics, China’s monetary policy
    JEL: E42 E5 E50 E52 E58
    Date: 2013–07–04
  9. By: Balleer, Almut (IIES, Stockholm University); Gehrke, Britta (University of Erlangen-Nuremberg); Lechthaler, Wolfgang (Kiel Institute for the World Economy); Merkl, Christian (University of Erlangen-Nuremberg)
    Abstract: In the Great Recession most OECD countries used short-time work (publicly subsidized working time reductions) to counteract a steep increase in unemployment. We show that short-time work can actually save jobs. However, there is an important distinction to be made: While the rule-based component of short-time work is a cost-efficient job saver, the discretionary component appears to be completely ineffective. In a case study for Germany, we use the rich data available to combine micro- and macroeconomic evidence with macroeconomic modeling in order to identify, quantify and interpret these two components of short-time work.
    Keywords: short-time work, fiscal policy, business cycles, search-and-matching, SVAR
    JEL: E24 E32 E62 J08 J63
    Date: 2013–06
  10. By: Volker Ziemann
    Abstract: Using a panel of OECD countries, this study assesses the linkages between structural policies and macroeconomic stability. Business cycle and time-series characteristics of GDP and its components are employed to define various measures for economic instability and for the persistence of adverse shocks. The results suggest that some growth-enhancing policies such as lowering employment protection also reduce macroeconomic fluctuations, while others may generate trade-offs between growth and stability. A pro-cyclical tax structure seems to help alleviating the persistence of adverse macroeconomic shocks.<P>Les politiques structurelles affectent-elles la stabilité macroéconomique ?<BR>À partir d’un panel de pays de l’OCDE, cette étude évalue les liens entre les politiques structurelles et la stabilité macroéconomique. Les caractéristiques du cycle économique et des séries temporelles du PIB et de ses composantes sont utilisées pour définir divers indicateurs de mesure de la stabilité économique et de la persistance de chocs néfastes. Les résultats donnent à penser que certaines mesures en faveur de la croissance, telles que l’allégement des dispositions de protection de l’emploi, peuvent aussi avoir pour effet de réduire les fluctuations macroéconomiques, alors que d’autres obligent à des arbitrages entre croissance et stabilité. Il semble qu’une structure pro-cyclique de la fiscalité aide à atténuer la persistance des chocs macroéconomiques néfastes.
    Keywords: business cycles, structural policies, macroeconomic stability, cycles conjoncturels, politiques structurelles, stabilité macroéconomique
    JEL: E32 E61 F41 G38 H21 I31 J51 J68 L51
    Date: 2013–07–03
  11. By: Harashima, Taiji
    Abstract: Keynes’ original intention in introducing the concept of a liquidity trap was to explain the reason why persistent large amounts of unutilized resources were generated during the Great Depression. This paper shows that this type of phenomenon cannot be explained in the framework of a traditional competitive market equilibrium. Instead, it can be understood in terms of a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path because a Nash equilibrium can conceptually coexist with Pareto inefficiency. Such a Nash equilibrium will be selected when an upwards time preference shock occurs. At this Nash equilibrium, monetary policies are useless but fiscal policies are very effective as Keynes argued, but for different reasons.
    Keywords: Liquidity trap; Monetary policy; Fiscal policy; Pareto inefficiency; Time preference
    JEL: E32 E52 E62
    Date: 2013–07–08
  12. By: Christian Merkl
    Abstract: This paper shows that announced credible disinflations under inflation targeting lead to a boom in a standard New Keynesian model (i.e. a disinflationary boom). This finding is robust with respect to various parameterizations and disinflationary experiments. Thus, it differs from previous findings about disinflationary booms under monetary targeting
    Keywords: Disinflation, Disinflationary Boom, Inflation Targeting
    JEL: E30 E31
    Date: 2013–07
  13. By: Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the large unemployment dynamics in the Great Depression. The limited response of wages to labor market conditions from credible bargaining and the congestion externality from matching frictions cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series.
    JEL: E24 E32 G01 G12
    Date: 2013–07
  14. By: Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan
    Abstract: We first sketch how central banks have used unconventional monetary policy measures by using three indicators based on the composition of the balance sheet of eleven central banks. Our analysis suggests that although the ECB’s balance sheet has increased dramatically during the crisis, the non-standard monetary policy measures had only a moderate impact on the composition of the ECB’s balance sheet compared to other central banks, such as the Fed and the Bank of England. Next, we take stock of research analysing the effects of unconventional monetary policy of the ECB after the onset of the crisis. A crucial question is to what extent these measures have been able to affect interest rates, thereby restoring the monetary policy transmission process and supporting the central bank objectives. Finally, we offer new evidence on the effectiveness of the ECB’s unconventional monetary policy measures, i.e. extended liquidity provision (LTRO) and the Securities Market Programme (SMP). Our results suggest that the LTRO interventions in general had a favorable (short-term) effect on government bond yields. Changes in the SMP only had a visible downward effect on bond yields in Summer 2011, when the program was reactivated for Italy and Spain, but this effect dissipated within a few weeks.
    Keywords: unconventional monetary policy; non-standard monetary policy; central bank balance sheet; European Central Bank
    JEL: E40 E50 E58 E60
    Date: 2013–05
  15. By: Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University)
    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 intermediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements.
    JEL: E3 E44 F36 F37 F4 G21
    Date: 2013–05
  16. By: John C. Williams
    Abstract: This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.
    Keywords: Monetary policy
    Date: 2013
  17. By: Roberta Distante (Fondazione Eni Enrico Mattei); Ivan Petrella (Department of Economics, Mathematics and Statistics, Birkbeck, University of London); Emiliano Santoro (Department of Economics and Finance, Catholic University of Milan and Department of Economics, University of Copenhagen)
    Abstract: The cross-sectional dynamics of the U.S. business cycle is examined through the lens of quantile regression models. Conditioning the quantiles of firm-level growth to different measures of technological change highlights a deep connection between counter-cyclical skewness and the transmission of aggregate disturbances. Asymmetry reversals emerge as the dominant source of cyclical variation in the probability density, generating a powerful amplification of aggregate shocks to firm technology. Designing and validating heterogeneous firm business cycle models should necessarily account for this empirical finding.
    Keywords: Corporate Growth, Conditional Quantiles, Business Cycles, Asymmetry Reversals
    JEL: C21 E32
    Date: 2013–05
  18. By: Valentina Colombo (University of Padova)
    Abstract: We investigate the effects of a US economic policy uncertainty shock on some Euro area macroeconomic aggregates with a number of Structural VARs. We model the indicators of economic policy uncertainty recently developed by Baker, Bloom and Davis (2013) jointly with a set of standard indicators of aggregate price and the business cycle for the two above indicated economic areas. According to our SVARs, a one standard deviation shock to US economic policy uncertainty leads to a statistically significant fall in the European industrial production and prices of −0.12% and −0.06%, respectively. The contribution of the US uncertainty shock on the European aggregates is shown to be quantitatively larger than the one exerted by an Euro area-specific uncertainty shock.
    Keywords: Economic policy uncertainty, US-Euro area spillovers, Structural Vector Autoregressions.
    JEL: E32 E52 F42
    Date: 2013–05
  19. By: Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
    Abstract: Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.
    JEL: E32 E44 G3
    Date: 2013–07
  20. By: Yosuke Furukawa (Graduate School of Economics, Kyoto University); Hiroki Toyoda (Graduate School of Economics, Kyoto University)
    Abstract: This study presents evidence for the existence of job polarization in Japan, identifies its effects across four age cohorts, and shows its relationship to Japan's business cycles during 1984-2010. The findings indicate that middle-skilled occupations decreased most sharply among the youngest workers. Our examination of the relationship between occupational categories and the business cycles demonstrates that job polarization is cyclical rather than gradual. Particularly, only employment in middle-skilled occupations did not recover after recessions. This finding underlies Japan's jobless recovery.
    Keywords: Jobless recoveries, job polarization, business cycles
    JEL: E24 E32 J23 J24
    Date: 2013–06
  21. By: Christopher M. Gunn (Department of Economics, Carleton University)
    Abstract: The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence,stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts as well as lower-frequency fluctuations.
    Keywords: expectations-driven business cycles, intermediation shocks, news shocks, great recession, financial accelerator
    JEL: E3 E44
    Date: 2013–06
  22. By: TRIANDAFIL, Cristina Maria (National Institute of Economic Research of the Romanian Academy, The National Bank of Romania.)
    Abstract: This postdoctoral research aimed to highlight sustainability convergence criteria in the context of financialisation, with impact on the prudential regulator. Based on complex analysis, the research work has revealed that countries in Central and Eastern Europe still face significant macroeconomic risks caused by fragile macroeconomic structures. These countries have been undergoing a catching up process that contributes to the amplification of divergence across the European Union. Being heavily dependent on external financial flows, these countries involve a high macro-prudential risk, affecting the pace of real convergence.
    Keywords: convergence, macro-prudential, sustenability, nominal and real economy
    JEL: E20 E60 E51 E52
    Date: 2013–06
  23. By: Schwäbe, Carsten
    Abstract: Die Banken- und Staatsschuldenkrise im Euroraum deckte wesentliche Strukturdefizite der Europäischen Währungsunion (EWU) auf und stellt nationale wie europäische Entscheidungsträger vor nie dagewesene, unvorhergesehene Herausforderungen. In diesem unsicheren Rahmen agiert ebenfalls die Europäische Zentralbank (EZB), die vor allem kurzfristig die Reaktion auf die Krise aktiv mitbestimmte und unterstützte. Sie flankierte die Reaktionen der europäischen Politik mit einem umfassenden Paket unkonventioneller geldpolitischer Maßnahmen wie dem Ankauf von Anleihen der von Schuldenkrisen betroffenen Eurostaaten. Der vorliegende Beitrag argumentiert, dass vor dem Hintergrund der unkonventionellen Geldpolitik bisher nicht von einem Verlust der Unabhängigkeit der EZB gesprochen werden kann. Die krisenbedingte Annäherung an die Politik sowie die Ausdehnung ihres geldpolitischen Instrumentariums an die Grenzen der Europäischen Verträge stellen eine mit Risiken verbundene, aber dennoch notwendige Reaktion der EZB auf die Krise dar, obgleich dadurch nur eine kurzfristige Stabilisierung, nicht aber die Beseitigung der Strukturdefizite der EWU erreicht werden kann. -- The banking and souvereign-debt crisis in the eurozone uncovered substantial structural deficits of the European Monetary Union (EMU) and represent unheard-of and unforeseen chal-lenges for the national and European decision makers. In this unstable atmosphere the European Central Bank (ECB) has to operate, too. It supported the political reaction on the crisis by carrying out especially short-term policies such as the purchase of governmental bonds of states concerned by the debt crisis. This article argues that referring to the unconventional monetary policy a loss of independence of the ECB cannot yet be identified. The convergence between the monetary and the fiscal authority due to the crisis as well as the extension of its monetary apparatus to the legal limit of the European Treaties represent a strategy associated with risks, but nevertheless a necessary reaction of the ECB, although in this way only a short-term stabilization and not a disposal of the structural deficits of the EMU can be achieved.
    Keywords: Zentralbanken,Unabhängigkeit,Finanzkrise,Währungsunion,central bank independence,financial crisis,monetary union
    JEL: E58 E65 F36
    Date: 2013
  24. By: Fungácová, Zuzana (BOFIT); Solanko, Laura (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper examines how bank competition influences the bank lending channel in the Euro area countries. Using a large panel of banks from 12 euro area countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy through the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that the bank market power has a significant impact on monetary policy effectiveness. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy.
    Keywords: bank competition; bank lending channel; monetary policy; euro area
    JEL: E52 G21
    Date: 2013–06–25
  25. By: Robert G. Murphy (Boston College)
    Abstract: This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I find evidence that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore two reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that the sticky-information approach is better able to explain the recent path of inflation than the sticky-price approach.
    Keywords: Inflation, Phillips curve, Great Recession, Sticky Information
    JEL: E30 E31
    Date: 2013–07–02
  26. By: Thanabalasingam Vinayagathasan (National Graduate Institute for Policy Studies)
    Abstract: This paper attempts to identify the monetary policy indicator that better explains the Sri Lankan monetary policy transmission mechanism. This study also estimates how shocks stemming from foreign monetary policy and/or oil price affect domestic macroeconomic variables. To that end, we use a seven variable structural VAR model by utilizing monthly time series data from Sri Lanka covering the period from January 1978 to December 2011. Impulse response functions and variance decompositions are used to describe the relationships among variables. Our empirical findings suggest that the interest rate shocks play a significant and better role in explaining the movement of economic variables than monetary aggregate shocks or exchange rate shocks. Second, the targeting of reserve money is a better strategy for the Sri Lankan economy than a focus on narrow or broad money. Third, our findings clearly show that foreign monetary policy shocks and oil price shocks do not seem to affect the domestic economy. Finally, the inclusion of oil price in the SVAR model helped us overcome the puzzles that often appear in the existing literature in monetary economics.
    Date: 2013–07
  27. By: Oliver Denk
    Abstract: Italy’s policy of fiscal consolidation and growth-friendly structural reforms has substantially improved its economic prospects, but the adverse sentiment that the country has faced in the sovereign bond market over the past years has deep roots. It reflects lingering anxieties over the euro area’s future, as well as persistent economic and financial difficulties, in particular the high level of public debt and low potential growth. The government has rightly aimed to halt the rise in the public debt-to-GDP ratio and put it on a downward path. This could be achieved with either a balanced government budget or a small fiscal surplus. While additional fiscal tightening would have negative effects on output in the short term, it would be rewarded by faster debt reduction and lower risk of renewed financial-market reactions. In any case, the automatic stabilisers should be allowed to work.<p> Concerns about fiscal sustainability and the prolonged recession have spilled over to the financial sector. Lending conditions are tight, non-performing loans are high and rising, and capital has flowed out of Italy to the core countries of the euro area. The Bank of Italy should continue to ensure that banks increase provisions against losses, and strengthen their capital asset position by raising new equity from private sources, including from foreign stakeholders, by retaining earnings and by disposing of non-core assets. Resolution of the fiscal, economic and financial crisis in Italy depends in part on action at the euro area level. As a member of the euro area, Italy has benefited from the establishment of the European Stability Mechanism, the announcement by the European Central Bank of the Outright Monetary Transactions scheme and the plans for a euro-area banking union.<P>L'Italie et la crise de la zone euro : Assurer la viabilité des finances publiques et la stabilité financière<BR>La politique d’assainissement des finances publiques de l’Italie et ses réformes structurelles porteuses de croissance ont nettement amélioré ses perspectives économiques, mais il reste que la mauvaise image du pays sur le marché de la dette souveraine, ces dernières années, a des causes profondes. Celle-ci est le signe d’inquiétudes persistantes quant à l’avenir de la zone euro et de difficultés économiques et financières qui perdurent, notamment le haut niveau de la dette publique et la faiblesse du potentiel de croissance. Le gouvernement s’est à juste titre fixé comme objectif de donner un coup d’arrêt à la hausse du ratio dette publique/PIB et de l’orienter ensuite à la baisse. Un budget public équilibré, ou bien un léger excédent budgétaire, pourraient lui permettre d’y parvenir. Un tour de vis budgétaire supplémentaire aurait certes des effets négatifs transitoires sur la production, mais il devrait être suivi d’une réduction plus rapide de la dette et d’une diminution du risque de nouvelles réactions des marchés financiers. En tous cas, il conviendra de laisser jouer les stabilisateurs automatiques. Les inquiétudes quant à la viabilité budgétaire et à la récession qui dure ont rejailli sur le secteur financier. Les conditions de prêt sont restrictives, le stock de prêts non productifs important et en hausse tandis que les capitaux quittent l’Italie en direction des pays du coeur de la zone euro. La Banque d’Italie doit veiller à ce que les banques augmentent leur niveau de provisions pour pertes et renforcent leur position en actifs financiers en levant de nouveaux capitaux auprès de sources privées, y compris auprès d’actionnaires étrangers, en réinvestissant leurs bénéfices et en se débarrassant de leurs actifs non essentiels. La résolution de la crise budgétaire, économique et financière en Italie dépend en partie de l’action menée au niveau de la zone euro. L’Italie étant membre de la zone euro, elle a bénéficié de la création du Mécanisme européen de stabilité, de l’annonce du programme d’opérations monétaires sur titres de la Banque centrale européenne et des projets d’union bancaire de la zone euro.
    Keywords: public debt, Italy, fiscal sustainability, budget deficit, financial stability, non-performing loans, banking system, fiscal council, balanced-budget rule, capital ratios, loan loss provisions, pension reforms, TARGET2, dette publique, Italie, déficit budgétaire, stabilité financière, viabilité des finances publiques, prêts non productifs, système bancaire, réforme des retraites, conseil budgétaire, ratios de fonds propres, règle d’équilibre des finances publiques, prêts dispositions pour pertes, TARGET2
    JEL: E5 E6 G2 H5 H6
    Date: 2013–06–25
  28. By: Patrice Ollivaud; Cyrille Schwellnus
    Abstract: After peaking in the first half of 2008, international imbalances declined sharply during the global crisis of 2008-09, in part reflecting cyclical factors such as large contractions in domestic demand on the back of bursting housing bubbles in a number of deficit countries, as well as large declines in cross-border capital flows, interest rates and commodity prices. This paper suggests that business and housing cycles alone account for around half of the decline in international imbalances, with real exchange rate and fiscal adjustments explaining only around one fifth. A range of stylised scenarios for the major trading areas that extends the short-term projections in OECD Economic Outlook No. 93 of May 2013 to 2020 suggests that in the absence of policy adjustments beyond 2014 international imbalances could rebound as output gaps gradually close and housing markets normalise, though to levels below the pre-crisis peak. Ambitious fiscal adjustment in countries with the largest remaining fiscal imbalances and selected structural reforms could offset the cyclical rebound in international imbalances and prevent diverging net asset positions in most areas. Moreover, ambitious fiscal and structural policy adjustments would provide some margin in case upside risks to international imbalances -- such as renewed housing booms that could be triggered by a rebound in cross-border capital flows or higher oil prices -- materialise.<P>La baisse des déséquilibres mondiaux après la crise : Cyclique ou durable ?<BR>Après avoir atteint des sommets dans la première moitié de l’année 2008, les déséquilibres mondiaux ont largement baissé durant la crise de 2008-09, reflétant en partie des facteurs cycliques tels que la contraction de la demande intérieure liée notamment à l’éclatement des bulles immobilières dans de nombreux pays déficitaires, ou bien des diminutions importantes dans les flux internationaux de capitaux, les taux d’intérêt et les prix des matières premières. Ce papier soutient que les cycles liés à la conjoncture et au marché du logement expliquent à eux seuls environ la moitié de la baisse des déséquilibres mondiaux, tandis que les mouvements des taux de change et les corrections budgétaires seulement un cinquième. Un éventail de scénarios stylisés pour les principales zones commerciales qui étendent les projections à courtterme des Perspectives économiques de l’OCDE No. 93 de mai 2013, jusqu’en 2020 suggère qu’en l’absence d’une révision des politiques au-delà de 2014, les déséquilibres mondiaux pourraient remonter du fait de la fermeture des écarts de production et de la normalisation sur le marché des logements, mais toutefois à des niveaux inférieurs au sommet d’avant la crise. Des ajustements budgétaires ambitieux pour les pays avec les plus importants déséquilibres budgétaires, ajoutées à des réformes structurelles sélectionnées peuvent contrebalancer la remontée cyclique des déséquilibres mondiaux et empêcher des positions nettes extérieures divergentes. En outre, des révisions ambitieuses des politiques budgétaires et structurelles fourniraient une marge en cas de réalisation de risques à la hausse sur les déséquilibres mondiaux, tels qu’un nouveau boom immobilier qui viendrait d’une remontée des flux internationaux de capitaux ou bien des prix du pétrole plus élevés.
    Keywords: macroeconomic policies, current account adjustment, global imbalances, politique macro-économique, déséquilibres mondiaux, ajustement de la balance courante
    JEL: E60 F32 F40
    Date: 2013–06–25
  29. By: Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: An accurate global algorithm is critical for quantifying the dynamics of the Diamond-Mortensen-Pissarides model. Loglinearization understates the mean and volatility of unemployment, overstates the unemployment-vacancy correlation, and ignores impulse responses that are an order of magnitude larger in recessions than in booms. Although improving on loglinearization, the second-order perturbation in logs also induces large errors. We demonstrate these insights in the context of Hagedorn and Manovskii (2008). Once solved accurately, their small surplus calibration fails to explain the Shimer (2005) puzzle. While the volatility of labor market tightness is close to the data, the unemployment volatility is too high.
    JEL: E24 E32
    Date: 2013–07
  30. By: Catherine Mathieu (Ofce sciences-po); Henri Sterdyniak (Ofce sciences-po)
    Abstract: The economic crisis which started in 2008 led to a strong rise in public debts. The sovereign debt crisis in euro area southern countries breached the unity of the euro area and weakened the single currency concept. The paper shows that this situation is not due to a lack of fiscal discipline in Europe, but to drifts in financial capitalism and to an inappropriately designed euro area economic policy framework. Public debts homogeneity needs to be resettled in Europe. European public debts should become safe assets again, and should not be subject to financial markets’ assessment.European Member States should not be requested to pay for past sins through austerity measures, and should not strengthen fiscal discipline through rules lacking economic rationale. The paper deals with recent proposals which have been made to improve euro area governance (redemption fund, Eurobonds, public debt guarantee by the ECB). The paper advocates for a full guarantee of government bonds for the Member States who commit to an economic policy coordination process, which should target GDP growth and coordinated reduction of imbalances.
    Keywords: EU fiscal policy;EU governance
    JEL: E62 N14
    Date: 2013–05
  31. By: Miele, Maria Grazia
    Abstract: This paper addresses the following questions: which was the contribution of banks’assets to the US’ expansion in the period until the financial crisis? Did commercial banks respect capital requirements? The two questions are strictly interrelated as, according to a recent literature, business cycle is directly related to banks’ capital requirements for market and credit risk. The analysis highlight that US commercial banks actually respected capital requirements but these were not relevant in the explanation of US growth; it confirms that most of the growth can instead be explained by the rise in productivity. Nevertheless, the analysis does not consider the role of the non banking intermediation (investment banks, broker dealers, mutual funds, etc.) that steadily increased until the crisis. Its effects over real economy could be investigated in further work.
    Keywords: commercial banks, crisis, capital requirements, business cycle
    JEL: E32 E44 G01 G21
    Date: 2013–07–08
  32. By: Esteban Pérez Caldentey; Matias Vernengo
    Abstract: Keynes had a profound influence on Prebisch in terms of the diagnosis about the main failures of market economies and the need to pursue pro-active and anti-cyclical policies. However, Prebisch was critical of some aspects of Keynes’ General Theory of Employment, Interest and Money, in particular on the theory of interest and the multiplier. His attitude can be explained by a difference in the object and method of analysis. Prebisch interests focused on dynamics and the cycle, themes that were peripheral to Keynes’ central message. Prebisch’s Keynesian influence and his rejection of some aspects of Keynes magnum opus explains why at the same time that Prebisch is often described as the Latin American Keynes, he is portrayed as concerned mainly with the long-run development problem of Latin America and without proper consideration to demand factors as fundamental determinants of output and employment.
    Keywords: Business Cycles, Interest Rate, Multiplier, Center-Periphery JEL Classification: B22, E32, E40, F55
    Date: 2013
  33. By: Ondra Kamenik; Zdenek Tuma; David Vavra; Zuzana Smidova
    Abstract: This paper develops a simple model-based framework for stress testing fiscal consolidation strategies under different scenarios of future shocks. A baseline scenario assuming a gradual debt consolidation is presented and by assuming different future developments (e.g. lower potential growth) and/or model specification in terms of a fiscal rule confidence bands around the baseline are obtained. Trade-offs between costs and benefits are evaluated, in terms of cumulative output loss and primary surpluses, as well as political difficulty of fiscal strategies and risk of failed consolidation. The model is applied to Austria, Czech Republic and Germany. This working paper relates to the 2013 OECD Economic Surveys of Austria, Czech Republic and Germany. (<P>Un modèle de simulation simple de crise budgétaire - études de cas des économies autrichienne, allemande et tchèque<BR>Ce document de travail présente un modèle simple permettant de tester des stratégies de consolidation budgétaire face à différents scénarios de chocs futurs. Le scénario de référence suppose une consolidation progressive de la dette et présente différentes évolutions futures (exemple : potentiel de croissance inférieur) et /ou une spécification du modèle sous la forme de bandes de confiance des règles budgétaires autour du scénario de référence. Ce document évalue les compromis entre les coûts et les avantages en termes de perte cumulative de production et d’excédents primaires ainsi que la difficulté d’application des stratégies budgétaires d’un point de vue politique et le risque d’échec de la consolidation budgétaire. Le modèle est appliqué à l’Autriche, la République tchèque et l’Allemagne. Ce document de travail a trait aux Etudes Economiques de l’OCDE de l’Autriche, de la République tchèque et de l’Allemagne, 2013.(
    Keywords: fiscal policy, Central Europe, structural deficit, debt consolidation, politique budgétaire, déficit structurel, consolidation de la dette, Europe centrale
    JEL: E62 E63 E65
    Date: 2013–07–01
  34. By: Hansjörg Blöchliger
    Abstract: This paper provides an overview of fiscal consolidation efforts at the central and sub-central government level, both during the current and past consolidation episodes. After experiencing a deficit and debt hike during the crisis, sub-central debt is mostly stabilising. So far, sub-central consolidation has been mainly achieved through spending cuts, while overall revenues remained largely stable. Sub-central tax revenues rose a bit, but intergovernmental transfers went down slightly. Sub-central governments in a few countries need to consolidate further, if they want to reach debt levels of 2007 or 2011 by the year 2026, as shown by fiscal gap calculations. During past consolidation episodes, sub-central consolidation increased the probability of debt stabilisation at the general government level. Reductions in intergovernmental grants improved the success rate. Central and sub-central deficits tended to move in parallel, although some subcentral governments experienced a “second trough” three or four years after consolidation had started. The paper suggests a number of instruments that could help sub-central governments consolidate their budgets, and argues in favour of amendments to sub-central fiscal rules.<P>Assainissement budgétaire aux différents niveaux d'administration - Partie 1. Quelles politiques pour quel degré d'assainissement ?<BR>Le présent rapport offre une vue d’ensemble des efforts d’assainissement budgétaire déployés par les administrations centrales et infranationales, aussi bien dans le cadre de l’actuelle phase d’assainissement qu’au cours des phases antérieures. Après une augmentation de leur déficit et de leur dette pendant la crise, les administrations infranationales voient leur dette se stabiliser d’une manière générale. À ce jour, elles sont essentiellement parvenues à assainir leurs finances en réduisant les dépenses, tandis que les recettes globales sont restées stables dans une large mesure. Si les recettes fiscales des administrations infranationales ont progressé de façon modérée, les transferts interadministrations ont enregistré une légère baisse. Dans quelques pays, les administrations infranationales doivent assainir davantage leurs finances si elles veulent atteindre les niveaux d’endettement de 2007 ou 2011 d’ici 2026, comme le montrent les chiffres de l’écart sur l’ajustement budgétaire. Les précédentes phases d’assainissement des finances publiques au niveau infranational ont accru la probabilité de stabilisation de la dette au niveau de l’État. Les réductions des dons interadministrations se sont traduites par une amélioration du taux de réussite. Les déficits publics aux niveaux central et infranational ont généralement évolué en parallèle, bien que certaines administrations infranationales aient enregistré une « rechute » trois à quatre ans après le début de la phase d’assainissement. Un certain nombre d’instruments susceptibles d’aider les administrations infranationales à assainir leurs finances sont proposés dans le rapport, où il est également préconisé d’apporter des modifications à leurs règles budgétaires.
    Keywords: fiscal federalism, sub-national fiscal policy, fiscal consolidation at sub-national level, sub-national debt, fédéralisme budgétaire, politique budgétaire au niveau infranational, assainissement des finances publiques au niveau infranational, dette des administrations infranationales
    JEL: E65 H60 H77
    Date: 2013–06–28
  35. By: Andrew G. Atkeson; Andrea L. Eisfeldt; Pierre-Olivier Weill
    Abstract: Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.
    Keywords: Business cycles
    Date: 2013
  36. By: Kristoffer Nimark
    Abstract: The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. In particular, we analyze the consequences of information structures in which some types of signals are more likely to be observed after unusual events. Such signals may increase both uncertainty and disagreement among agents and when embedded in a simple business cycle model, can help us understand why we observe (i) occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of expectations as measured by survey data. These results are consequences of optimal updating by agents when the availability of some signals is positively correlated with tail-events. The model is estimated by likelihood based methods using individual survey responses and a quarterly time series of total factor productivity along with standard aggregate time series. The estimated model suggests that there have been episodes in recent US history when the impact on output of innovations to productivity of a given magnitude were more than eight times as large compared to other times.
    Date: 2013–06
  37. By: Andrea Colciago
    Abstract: This paper provides optimal labor and dividend income taxation in a general equilibrium model with oligopolistic competition and endogenous firms' entry. In the long run the optimal dividend income tax corrects for inefficient entry. The dividend income tax depends on the form of competition and nature of the sunk entry costs. In particular, it is higher in market structures characterized by competition in quantities with respect to those characterized by price competition. Oligopolistic competition leads to an endogenous countercyclical price markup. As a result offsetting the distortions over the business cycle requires deviations from full tax smoothing.
    Keywords: Firms' Entry; Market Stuctures; Market Distortions; Optimal Dividend Income Tax
    JEL: E62 L13
    Date: 2013–06
  38. By: Rubén Hernández-Murillo; Michael T. Owyang; Margarita Rubio
    Abstract: Past studies have argued that housing is an important driver of business cycles. Housing markets, however, are highly localized, while business cycles are often measured at the national level. We model a national housing cycle using a panel of cities while also allowing for idiosyncratic departures from the national cycle. These departures occur for clusters of cities that experience simultaneous idiosyncratic housing recessions. We estimate the clustered Markov-switching model proposed in Hamilton and Owyang (2012) using city-level building permits data, a series commonly used at the national level as a business cycle indicator. We find that cities do not form housing regions in the traditional, geographic sense. Instead, similarities in factors affecting the demand for housing (such as the average winter temperature and the unemployment rate) appear to be more important determinants of cyclical comovements than similarities in factors affecting the supply for housing (such as housing density and geographic constraints in the availability of developable land).
    Keywords: Business cycles ; Housing ; Economic indicators
    Date: 2013
  39. By: Daniel Kopasker; Holger Görg; Hassan Molana; Catia Montagna
    Abstract: High inter-country variability characterises the responsiveness of both output to (exogenous) shocks and employment to output contractions. We argue that intercountry differences in firm-size distributions contribute to explaining this variability. Within an open economy model, we show that competitive selection processes are an important channel through which a shock affects aggregate employment. Intra-industry selection is then shown to influence the effectiveness of active labour market policies in countering the employment and welfare effects of a negative shock. We estimate a measure of the shape parameter of firm size distribution and study its effect on the employment-output relationship for a number of OECD countries. Our results confirm the key predictions of the theory.
    Keywords: Job creation, employment subsidies, competitive selection, international trade
    JEL: E22 E64 F12 F41
    Date: 2013–07
  40. By: Bill Dorval (Queen's University); Gregor W. Smith (Queen's University)
    Abstract: Interwar macroeconomic history is a natural place to look for evidence on the correlations between (a) deflation and depression and (b) unexpected deflation and depression. We apply time-series methods to measure unexpected deflation or inflation for 26 countries from 1922 to 1939. The results suggest much variation across countries in the degree to which the ongoing deflation of the 1930s was unexpected. There is a significant, positive correlation between deflation and depression for the entire period but relatively little evidence of a role for unexpected deflation.
    Keywords: inflation expectations, interwar period, Great Depression
    JEL: E31 E37 N10
    Date: 2013–07
  41. By: Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Graduate School of Economics, Osaka University)
    Abstract: We reexamine indeterminacy and utility-generating public spending under balanced- budget rules in a simple one-sector growth model. The introduction of consumption tax (subsidy) as well as subsidies for savings and labor modify indeterminacy con- ditions in the existing studies. We show that if consumption subsidies and income taxes exist, indeterminacy occurs even when private and public consumption are Edgeworth substitutes and public spending and leisure are separable in the utility function. Indeterminacy also occurs even when they are weak Edgeworth comple- ments if consumption tax and subsidies for savings and labor are present. Surpris- ingly, when they are strong Edgeworth complements, the stronger external effects of public consumption tend to lower the possibility of equilibrium indeterminacy in the presence of consumption tax.
    Keywords: utility-generating public spending, indeterminacy, balanced-budget rule
    JEL: E32 E62
    Date: 2013–07
  42. By: Claudia Busl; Atilim Seymen
    Abstract: In this paper we analyze the (potential) effects of labour market and fiscal policy reforms by heterogeneous European countries—Germany and France—on the domestic and foreign economy. We test the implications of the gains in matching efficiency and reduced unemployment benefits induced by the German Hartz reforms in a two-country RBC model with frictions in the labour market, which replicates the data quite well. We then explore the reform possibilities in the French labour market and their potential (inter)national effects by calibrating the model to recent data. Both home and foreign economies benefit from labour market reforms in the home economy in our framework.
    Keywords: Labour market reforms, search and matching, dynamic stochastic general equilibrium models
    JEL: E24 E61 E65 F42 J38 J63
    Date: 2013–06
  43. By: Louis J. Maccini (Johns Hopkins University); Bartholomew Moore (Fordham University); Huntley Schaller (Carleton University)
    Abstract: Empirically, sales are I(1). Starting from this fact, we derive three startling results. First, the variance of production is equal to the variance of sales in the long run. Second, this result holds regardless of the strength of production smoothing, stockout avoidance, or cost shocks. Third, at business cycle horizons, the conditional variance of production is greater than that of sales. We explain -- analytically and intuitively -- four traditional inventory puzzles and three puzzles about inventories and monetary policy.
    Keywords: Inventories, Production Smoothing, Stockout Avoidance, Cointegration, Monetary Policy Effects
    JEL: E22 E23
    Date: 2013
  44. By: Dirk Krueger (Department of Economics, University of Pennsylvania); Alexander Ludwig (University of Cologne, Faculty of Management, Economics and Social Sciences)
    Abstract: In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogeneous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogenous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generation a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2013–03–27
  45. By: Guglielmo Maria Caporale; Stefano Di Colli; Juan Sergio Lopez
    Abstract: This paper analyses macroeconomic and financial determinants of bad loans applying a SVAR approach to investigate whether excessive loans granted during expansionary phases can explain the more than proportional increase in non-performing loans during contractionary periods. The results indicate that the effects of a permanent shock to bad loans on the excess of credit are significant and persistent for bad loans to firms, but not for bad loans to households or in the case of Cooperative Credit Banks, who adopt more efficient lending policies.
    Keywords: loan losses, macroeconomic determinants, Italian banking system, SVAR
    JEL: E44 G01 G21 C22
    Date: 2013
  46. By: Joshua Aizenman; Gurnain Pasricha
    Abstract: In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in recent decades. Liberalization of capital outflow controls can allow emerging-market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000s compared with the 1980s. In line with this decline in external repression revenues and their growth accelerations in the 2000s, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Overheating and foreign exchange valuation concerns arising from NKI pressures were important, but so were financial stability concerns and concerns about macroeconomic volatility. Emerging markets facing high volatility in net capital inflows and higher short-term balance-sheet exposures liberalized outflows less. Countries eased outflows more in response to higher appreciation pressures in the exchange market, stock market appreciation, real exchange rate volatility, net capital inflows and accumulation of reserves.
    Keywords: Debt Management; Financial system regulation and policies; International topics; Recent economic and financial developments
    JEL: E43 E52 E58 C22
    Date: 2013
  47. By: Azis, Iwan J. (Asian Development Bank)
    Abstract: Although growth deceleration in the People’s Republic of China (PRC) is inevitable, if the country’s new direction of financial policy (on exchange rate, capital flows, banking, capital market) can be achieved, it will be good not only for the country but also for the rest of Asia. This is consistent with the increased degree of Asia’s integration and interdependence. But given the nature of financial contagion and spillovers across countries and asset classes, the financial headwinds from global crisis may require regional cooperation in safety nets provision, as the domestic policy in the PRC and other Asian countries is likely insufficient. Equally essential is the cooperation among Asian regulators to secure financial stability and enhance market liquidity. If coordinated well, such cooperation can also strengthen Asia’s collective voice to ensure that harmonization of international rules does not mean applying the same laws in all jurisdictions, and that the global debates on bank-centric regulations do not have adverse consequences on Asian capital markets.
    Keywords: PRC financial policy; global headwind; Asia interdependence; regional cooperation; financial regulation
    JEL: E52 E58 F31 F36 G15 G18
    Date: 2013–06–01
  48. By: Josheski, Dushko; Apostolov, Mico
    Abstract: This paper examines the export performance of the Republic of Macedonia to its main trading partners; hence we focus on the major importing countries which are most present in the Macedonian trade balance. The data used in this article are analyzed with gravity model, which has good characteristics and very stable performance. Further, the data sample is formed on the Balkan countries i.e. Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Romania, Slovenia, Turkey and Serbia and Montenegro. The results show that the domestic country GDP is positively correlated with the exports from the source country to target countries and that Balkan countries have positive propensities to import from Macedonia, however it was found that populations of source country and target country are negatively correlated with exports from the source country to target countries. Additionally, the business cycles had no positive effect on Macedonian export to the target countries.
    Keywords: exports, gravity model, Macedonia
    JEL: E30 F10 O10 P20
    Date: 2013
  49. By: Boansi, David
    Abstract: With the local rice industry of Nigeria been hindered by inconsistent government policies, improper methods of production, high cost and scarcity of vital inputs of production among other constraints, domestic production of rice has failed to catch up with the increasing pace of consumption. In spite of the strong agricultural and natural resource base it hauls, Nigeria spends a total of about US$11 billion annually on importation of rice, wheat, sugar and fish. Attempts by previous regimes and the current government to reverse the net rice importer status of the country has proven futile regardless of the high tariffs imposed on imports, quantitative restriction through the use of quota and outright ban between the years 1986 and 1995. To inform future rice policy decisions on the way forward, the current study analyzed the output supply and yield response of rice in Nigeria. The results show that output of rice increases with increasing harvested area of rice, increasing farm gate price of rice, increasing nominal rate of assistance and increasing labor availability. It however decreases with increasing price of maize. Yield increases with increasing farm gate price of rice, nominal rate of assistance and labor availability. It however decreases with increasing harvested area of rice and price of maize. To improve on its rice supply, it is advised that policy measures be devised to couple area expansion with intensification to help mitigate the adverse effect of area expansion on yield, reduce labor shortages through appropriate investment in development of the rural communities (to help minimize rural-urban migration), ensure continuous government support to the sector, maintain fair prices for local rice farmers, and ensure appropriate transmission in times of price increment.
    Keywords: Output supply response, yield response, nominal rate of assistance, government policies
    JEL: E61 Q11 Q14 Q17 Q18
    Date: 2013–07–02
  50. By: Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
    Abstract: Are specific developments in stock prices in line with fundamentals or do they reflect a rising bubble? And if the latter result applies, how is it possible to detect a bubble in real time? The answer to this question is of utmost relevance for a number of areas, not least for either financial market participants or for central banks aiming at pursuing a policy of 'leaning against the wind'. In this study, we make use of a sample of 17 OECD industrialised countries and the euro area over the sample period 1969 Q1 - 2008 Q3 and carry out univariate and multivariate panel tests to find evidence of bubbles in the stock market of those countries over the past four decades. --
    JEL: E37 E44 E51
    Date: 2013
  51. By: Petr Rozmahel; Ludek Kouba; Ladislava Grochová; Nikola Najman
    Abstract: The paper assesses the heterogeneity of an enlarged European Union and discusses the role and contribution of CEECs on the development of this heterogeneity over time. The two central research questions are: What are the factors that distinguish between successful and less successful CEE countries in terms of the EU enlargement? How was heterogeneity in the EU developed in the last decade? Using cluster analysis methods allow the focusing on heterogeneity in the five selected dimensions of interest: Institutions and Governance; Single Market and Openness; Macroeconomic Policies; Symmetry and Convergence; and Competitiveness. We can find that the specific macroeconomic policies followed by CEE countries during the transformation period were less decisive for a successful transition than the level of (non-elite) political stability, the quality of institutional framework, the maturity and compatibility of informal institutions and the initial level of economic development. We also can find substantial convergence in terms of economic indicators in the EU in the period considered but none or a very slow convergence in terms of institutional indicators. The negative consequences of such heterogeneity were strengthened by the crisis. As a consequence the tensions caused by these different speeds of convergence in different fields challenge the long-term sustainability of EMU, and the consequences of this situation should be more intensively discussed in the EU. We also argue that the experience of transition of CEE countries holds valuable lessons for the currently discussed reforms of the southern periphery of Europe. Similarly to the CEECs before their entrance to the EU, the periphery countries need to find a direction to head for in the next 10-15 years. Budgetary savings are inevitable; nevertheless positive long-term visions should be formulated as well.
    Keywords: CEE countries, cluster analysis, European governance, European Monetary Union, European integration, European economic policy, European heterogeneity
    JEL: E63 F15 F42
    Date: 2013–06
  52. By: Yothin Jinjarak; Ilan Noy; Huanhuan Zheng
    Abstract: Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent emerging markets implementing them. We focus on Brazil, which instituted five changes in its capital account regime in 2008-2011. Using the synthetic control method, we construct counterfactuals (i.e., Brazil with no policy change) for each of these changes. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls were relaxed. We hypothesize that price-based capital controls’ only perceptible effect is to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government’s willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.
    JEL: E60 F32 G23
    Date: 2013–07
  53. By: Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We analyze revealed policy preferences in monetary policy committees. From the voting records of the Bank of England we estimate the policy preferences with spatial models of voting. We analyze systematic patterns in these policy preferences. We find that internal committee members tend to hold centrist policy preferences while pronounced policy preferences are generally held by external members. Committee members with a career in academia and the industry hold more diverse policy preferences whereas committee members with central bank experience exhibit little heterogeneity in preferences. The median voter does not vary systematically according to career background.
    Keywords: Voting records;Central Banking;Committees;Ideal points.
    JEL: E58 E59 C11
    Date: 2013
  54. By: Ardizzi, Guerino
    Abstract: Interchange fees in card payments are a mechanism to balance costs and revenues between banks for the joint provision of payment services. However, such fees represent a relevant input cost used as a reference price for the final fee charged to the merchants, who may be reluctant to accept cards and induce the cardholder to withdraw cash. In this paper, we empirically verify for the first time the effect of the interchange fee on the decision to withdraw cash and compare it with that of paying with payment cards, considering a balanced panel data set of Italian issuing banks. Finally, results show that there is a positive correlation between the cash usage and the level of the interchange fees. Accordingly, regulation of the multilateral interchange fee level may be an effective tool in reducing cash payments at the point of sale, although there is no clear evidence that a zero interchange fee rate (or a close-to-zero rate) would be optimal.
    Keywords: MIF, interchange fee, payment card, ATM, POS, cash
    JEL: E4 E41 E42 E5 E51 G21 L14
    Date: 2013–05–29
  55. By: Parodi Maxime (Ofce sciences-po)
    Abstract: Une monnaie cosmopolitique est une monnaie commune à plusieurs nations et fondée explicitement sur une forme de co-souveraineté. Une telle monnaie n’est possible qu’en acceptant une politique monétaire et des politiques budgétaires et fiscales fondées sur des raisons partagées, où chacun est responsable des engagements monétaires qu’il prend et coresponsable de la capacité de chacun à mener une politique économique adéquate. Pour durer, cette monnaie exige une attention soutenue sur les divergences macroéconomiques entre les partenaires et les difficultés que rencontrent chacun ; elle impose une concertation ouverte sur les raisons de ces divergences et de ces difficultés ; elle nécessite une force de propositions sur les remèdes possibles, à court,moyen etlong terme ;enfin, elle exige la coopération volontaire de chacun,à condition toutefois d’en avoir la capacité. Une telle coopération monétaire repose sur une union cosmopolitique, qui est comme une société toujours en train de se faire mais jamais achevée entre des partenaires conservant leur souveraineté.Une telle union n’écrit pas de contrat social ; elle ne promulgue pas nécessairement de lois ou de traités pour résoudre ses problèmes, même lorsqu’elle est convaincue de la nécessité d’une réponse collective au problème. Face à certains problèmes hautement conflictuels, il n’y aura ainsi pas d’autre choix que d’en passer à chaque fois par le jugement commun des gouvernements cosouverains. Dans ce cas, la seule garantie que peuvent espérer obtenir les partenaires de l’union, c’est que le jugement commun traduira le mieux possible l’esprit de l’union, la volonté de continuer à faire le chemin ensemble.
    JEL: E42 E61 F42
    Date: 2013–06
  56. By: Alexander Popov; Neeltje van Horen
    Abstract: Using loan-level data, we find that syndicated lending by European banks with sizeable balance sheet exposures to impaired sovereign debt was negatively affected after the start of the euro area sovereign debt crisis. We also observe a reallocation away from foreign (especially US) markets. The overall reduction in lending is not driven by changes in borrower demand and/or quality, or by other types of shocks to bank balance sheets. The slowdown in lending is lower for banks that reduced their debt holdings in the later stages programs.
    Keywords: Sovereign debt; bank lending; international transmission
    JEL: E44 F34 G21 H63
    Date: 2013–06
  57. By: Xing, Yuqing (Asian Development Bank Institute); Pradhananga, Manisha (Asian Development Bank Institute)
    Abstract: The global financial crisis and the recent growth slowdown in the People’s Republic of China (PRC) have led to questions about the sustainability of the PRC’s growth. The commonly used argument is that the PRC is too dependent on external demand and that it needs to rebalance its economy toward domestic consumption. However, conventional measures of external demand—share of net exports and exports as a share of gross domestic product (GDP)—are biased and do not accurately measure the contribution of external demand to GDP growth. In this paper, the authors propose two measures that provide a more accurate estimate of the vulnerability of the PRC economy to external shocks, in the form of sudden drops in exports and foreign direct investment (FDI). Based on their findings, the authors conclude that the PRC economy remains highly dependent on external demand in the form of exports and FDI, and rebalancing the economy toward domestic demand has not yet been achieved.
    Keywords: prc economy; growth; external demand; gdp accounting
    JEL: E01 F43
    Date: 2013–07–01
  58. By: David Fuller (Concordia University and CIREQ); Stephane Auray (CREST-ENSAI); Damba Lkhagvasuren (Concordia University and CIREQ)
    Abstract: In the US unemployment insurance (UI) system, only a fraction of those eligible for benefits actually collect them. We estimate this fraction using CPS data and detailed state-level eligibility criteria. We find that the fraction of eligible unemployed collecting benefits has been persistently below one, and is countercyclical. We show these empirical facts can be explained in an equilibrium search model where firms finance UI benefits via a payroll tax, and are heterogeneous with respect to their specific tax rate, which is experience rated. In equilibrium, low tax firms effectively offer workers an alternative UI scheme featuring a faster job arrival rate and a higher wage offer. Some eligible workers prefer the ``market'' scheme and thus do not collect UI. Quantitatively, the model does well matching key moments in the data. In addition, if all eligible unemployed collect, benefit expenditures increase by 29% and welfare increases by 0.43%. Average search effort decreases, but the unemployment rate and duration decrease as vacancy creation increases.
    Keywords: unemployment insurance, take-up, matching frictions, search
    JEL: E61 J32 J64 J65
    Date: 2013–06–26
  59. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania, NBER, CEPR, and FEDEA); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Duke University, Federal Reserve Bank of Atlanta, and FEDEA)
    Abstract: We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data.
    Keywords: Dynamic equilibrium models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2013–05–08

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