nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒08‒16
24 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary Policy Regimes and Inflation in the New-Keynesian Model By Bartholomew Moore
  2. Chinese monetary expansion and the U.S. economy By Vespignani, Joaquin L.; Ratti, Ronald A
  3. Bank size and macroeconomic shock transmission: Are there economic volatility gains from shrinking large, too big to fail banks? By Uluc Aysun
  4. ECB monetary policy in the recession: a New Keynesian (old monetarist) critique By Robert L. Hetzel
  5. Learning Leverage Shocks and the Great Recession. By Pintus, P. A.; Suda, J.
  6. Strict Fiscal Rules and Macroeconomic Stability: The Case of Social VAT. By Fève, P.; Matheron, J.; Sahuc,J-G.
  7. Are Credit Shocks Supply or Demand Shocks? By Bijapur, Mohan
  8. Markov Switching and the Taylor Principle By Christian Murray; Nikolsko-Rzhevskyy Alex; Papell David
  9. Output Growth and Unexpected Government Expenditures By Escobari, Diego; Mollick, André Varella
  10. Monetary policy expectations at the zero lower bound By Michael D. Bauer; Glenn D. Rudebusch
  11. Health and Health Behaviors during the Worst of Times: Evidence from the Great Recession By Tekin, Erdal; McClellan, Chandler; Minyard, Karen Jean
  12. U.K. Monetary Policy: Observations on its Theory and Practice By SGB Henry
  13. The determinants of the deviations from the interest rate parity condition By Uluc Aysun; Sanglim Lee
  14. (When) does money growth help to predict Euro-area inflation at low frequencies? By Schreiber, Sven
  15. The Laffer Curve in an Incomplete-Market Economy. By Fève, P.; Matheron, J.; Sahuc,J-G.
  16. Structural oil price shocks and policy uncertainty By Kang, Wensheng; Ratti, Ronald A.
  17. Oil shocks, policy uncertainty and stock market return By Kang, Wensheng; Ratti, Ronald A.
  18. A new methodology for a quarterly measure of the output gap By Marco Cacciotti; Cecilia Frale; Serena Teobaldo
  19. Ending the Crisis With Guaranteed Employment and Retraining By Jon D. Wisman; Aaron Pacitti
  20. The Objective Benefits of Subjective Well-Being By Jan-Emmanuel De Neve; Ed Diener; Louis Tay; Cody Xuereb
  21. Firm-Level Hiring Difficulties: Persistence, Business Cycle and Local Labour Market Influences By Fabling, Richard; Maré, David C.
  22. What Does the 1930s’ Experience Tell Us about the Future of the Eurozone? By Crafts, Nicholas
  23. Collateral constraints and macroeconomic asymmetries By Luca Guerrieri; Matteo Iacoviello
  24. Does Tourism Predict Macroeconomic Performance in Pacific Island Countries? By Paresh Kumar Narayan; Susan S Sharma; Deepa Bannigidadmath

  1. By: Bartholomew Moore (Fordham University)
    Abstract: This paper shows that plausible modifications to the Taylor rule for monetary policy can help explain several empirical anomalies to the behavior of inflation in the new--Keynesian general equilibrium model. The key anomalies considered are (1) the persistence of inflation, both in reduced form and after conditioning on inflation's driving processes, (2) the positive correlation between the output gap and the change in the inflation rate, and (3) the apparent bias in survey measures of expected inflation. The Taylor rule in this model includes the now standard assumption that the central bank smoothes changes to its target interest rate. It also includes Markov switching of a persistent inflation target between a low target rate and a high target rate. The model is calibrated to match Benati's (2008) result that, historically, changes in monetary policy lead to a statistically significant change in the persistence of inflation. Matching Benati's result requires a reduction in an exogenous, hence structural, source of persistence. However, inflation in the model inherits additional, non-structural, persistence from the process that governs the inflation target. As a result, the model is able to replicate measures of inflation persistence, even after conditioning on inflation's driving processes. Agents with rational expectations and knowledge of the current inflation target will be aware of the possibility of a future target switch, causing their expectations to appear biased in small samples. Finally, with sticky nominal prices a discrete drop to the low-inflation target requires a loss of output while previously-set prices adjust.
    Keywords: Monetary Policy, Markov Switching, Inflation Persistence, Expectations
    JEL: E52 E31 D84
    Date: 2013
  2. 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: 2013–08–04
  3. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper investigates the transmission of macroeconomic shocks to production in a model that includes a large and a small bank. The two banks are differentiated by parameters that govern their sensitivities to their own and their borrowers’ balance sheets and simulations show that the large (small) bank responds more to demand/financial (supply) shocks. Bank-level evidence generally supports the model’s assumptions but indicates that the large banks’ sensitivities and the sensitivity to borrower balance sheets are more important. Incorporating U.S. macroeconomic shocks into the empirical model illustrates a stronger transmission through large bank lending. Shrinking banks can, therefore, decrease volatility.
    Keywords: bank size, economic fluctuations, call report data, too big to fail, DSGE model
    JEL: E44 E32 G21 E02
    Date: 2013–08
  4. By: Robert L. Hetzel
    Abstract: Use of the New Keynesian model to identify shocks points to contractionary monetary policy as the cause of the Great Recession in the Eurozone.
    Keywords: Monetary policy ; Recessions ; Keynesian economics
    Date: 2013
  5. By: Pintus, P. A.; Suda, J.
    Abstract: This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their economic environment. When agents update their beliefs about the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with the actual leverage innovations, the learning model predicts the correct magnitude for the Great Recession, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the impact of learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks. Finally, we illustrate how learning with a misspecified model that ignores real/financial linkages also contributes to magnify financial shocks.
    Keywords: Borrowing Constraints, Collateral, Leverage, Learning, Financial Shocks, Recession
    JEL: E32 E44 G18
    Date: 2013
  6. By: Fève, P.; Matheron, J.; Sahuc,J-G.
    Abstract: This paper studies the local dynamic properties of a simple general equilibrium model with Social VAT. Strict balanced budget rules often lead to real indeterminacy of aggregate equilibrium, leaving room for «sunspots» fluctuations. In a closed-economy setup, social VAT escapes this property and only reduces the aggregate labor supply elasticity. However, the quantitative effects are weak.
    Keywords: Macroeconomic stability, Social VAT, Labor supply elasticity, Aggregate fluctuations.
    JEL: E32 E62
    Date: 2013
  7. By: Bijapur, Mohan
    Abstract: This paper provides new insights into the relationship between the supply of credit and the macroeconomy. We present evidence that credit shocks constitute shocks to aggregate supply in that they have a permanent effect on output and cause inflation to rise in the short term. Our results also suggest that the effects on aggregate supply have grown stronger in recent decades.
    Keywords: Financial crisis; Potential output; Inflation; Credit crunch.
    JEL: E31 E32
    Date: 2013–07–21
  8. By: Christian Murray (University of Houston); Nikolsko-Rzhevskyy Alex (Lehigh University); Papell David (University of Houston)
    Abstract: Early research on the Taylor rule typically divided the data exogenously into pre-Volcker and Volcker-Greenspan subsamples.  We contribute to the recent trend of endogenizing changes in monetary policy by estimating a real-time forward-looking Taylor rule with endogenous Markov switching coefficients and variance. The response of the interest rate to inflation is regime dependent, with the pre and post-Volcker samples containing monetary regimes where the Fed did and did not follow the Taylor principle. While the Fed consistently adhered to the Taylor principle before 1973 and after 1984, it followed the Taylor principle from 1975-1979 and did not follow the Taylor principle from 1980-1984.  We also find that the Fed only responded to real economic activity during the states in which the Taylor principle held.  Our results are consistent with the idea that exogenously dividing postwar monetary policy into pre-Volcker and post-Volcker samples misleading. The greatest qualitative difference between our results and recent research employing time varying parameters is that we find that the Fed did not adhere to the Taylor Principle during most of Paul Volcker’s tenure, a finding which accords with the historical record of monetary policy.
    Keywords: Markov Switching, Taylor Principle, Taylor Rule
    JEL: E52 C24
    Date: 2013–08–05
  9. By: Escobari, Diego; Mollick, André Varella
    Abstract: This paper takes into account the dynamic feedback between government expenditures and output in a model that separates the effects of expected and unexpected government expenditures on output. We allow for standard determinants based on Solow’s growth model, as well as financial globalization and trade openness measures for a sample of 56 industrial and emerging market economies over the 1970-2004 period. We find that unanticipated government expenditures have negative and significant effects on output growth, with higher effects in developed economies. Along with savings responses, we interpret these results based on how fiscal policy reacts to business cycles. Anticipated government expenditures have negative - but smaller effects - on output growth. These results are very robust to a recursive treatment of expectations, which reinforces the role of new information in an increasingly integrated world economy.
    Keywords: Dynamic Panels, Economic Growth, Expected and Unexpected Government Expenditures, Globalization.
    JEL: E32 E62 F43
    Date: 2013–08
  10. By: Michael D. Bauer; Glenn D. Rudebusch
    Abstract: Obtaining monetary policy expectations from the yield curve is difficult near the zero lower bound (ZLB). Standard dynamic term structure models, which ignore the ZLB, can be misleading. Shadow-rate models are better suited for this purpose, because they account for the distributional asymmetry in projected short rates induced by the ZLB. Besides providing better interest rate fit and forecasts, our shadow-rate models deliver estimates of the future monetary policy liftoff from the ZLB that are closer to survey expectations. We also document significant improvements for inference about monetary policy expectations when macroeconomic factors are included in the term structure model.
    Keywords: Monetary policy ; Macroeconomics - Econometric models
    Date: 2013
  11. By: Tekin, Erdal (Georgia State University); McClellan, Chandler (Georgia State University); Minyard, Karen Jean (Georgia State University)
    Abstract: While previous studies have shown that recessions are associated with better health outcomes and behaviors, the focus of these studies has been on the relatively milder recessions of the late 20th century. In this paper, we examine if the previously established counter-cyclical pattern in health and heath behaviors is held during the Great Recession. Using data from the Behavioral Risk Factor Surveillance System (BRFSS) between 2005 and 2011 and focusing on a wide range of outcomes capturing health and health behaviors, we show that the association between economic deterioration and these outcomes has weakened considerably during the recent recession. In fact, majority of our estimates indicate that the relationship has practically become zero, though subtle differences exist among various sub-populations. Our results are consistent with the evidence emerging from several recent studies that suggests that the relationship between economic activity and health and health behaviors has become less noticeable in the recent years.
    Keywords: health, recession, business cycle, health behavior
    JEL: E32 I00 I10 I12 I14 I15
    Date: 2013–07
  12. By: SGB Henry
    Abstract: In a dramatic change from the euphoria in the early 2000s based on a widespread belief in the “success” of the partial independence of the Bank of England, UK policymakers are now faced with great uncertainties about the future. The Coalition government responded to the financial crisis by changing the responsibilities for banking supervision and regulation and creating new institutions to deal with them. The UK was not alone in such moves and there is increased attention world-wide to greater regulatory powers and state-dependent provisioning as key to any future financial architecture. However, changes to the conduct of monetary policy are also necessary. Using the UK experience up to 2008 as a case study, we argue that the authorities here placed too much faith in the proposition that inflation-forecast targeting by an independent central bank was all that was needed. Over the previous two decades evidence accumulated that both undermined the belief that the low inflation with stable growth during the so-called “Great Moderation” was due to the new policy regime and that showed systemic risk in the financial sector was rapidly growing. We maintain that these two things were in evidence well before the financial crisis in 2008–9 and the leadership at the BoE was in error not to factor them into their interest rate decisions early on. Had this evidence been taken more seriously and had proactive action been taken based upon it, the effects of the world-wide financial crisis on the UK would very probably have been smaller. This episode highlights both the shortcomings in the DSGE paradigm favoured by the BoE and other central banks for their macroeconomic analysis as well as the very considerable difficulties in practice in creating the sort of open and transparent monetary institutions envisaged in the academic literature.
    Date: 2013
  13. By: Uluc Aysun (University of Central Florida, Orlando, FL); Sanglim Lee (Korea Energy Economics Institute, 132 Naesonsunhwan-ro, Uiwang-si, Gyeonggi-do, Korea)
    Abstract: This paper shows that the deviation from the uncovered interest parity (UIP) condition is equally large in advanced and emergingmarket economies. Using monthly data, and a GARCH-M model we find that a large share of these deviations in both country groups are explained by time varying risk premium. To more clearly identify risk premium shocks, we then estimate a two country, New Keynesian, DSGE model using a Bayesian methodology and quarterly data. The results suggest that at the quarterly frequency, the large deviations from the UIP condition and the high explanatory power of risk premium is only observed for emerging market economies.
    Keywords: Uncovered Interest Rate Parity, Forward Premium Puzzle, Time Varying Risk Premium
    JEL: E32 E44 F31 F33 F44
    Date: 2013–08
  14. By: Schreiber, Sven
    Abstract: Short answer: It helps a lot when other important variables are excluded from the information set. Longer answer: We revisit claims in the literature that money growth is Granger-causal for inflation at low frequencies. Applying frequency-specific tests in a comprehensive system setup for euro-area data we consider various theoretical predictors of inflation. A general-to-specific testing strategy reveals a recursive structure where only the unemployment rate and long-term interest rates are directly Granger-causal for low-frequency inflation movements, and all variables affect money growth. We therefore interpret opposite results from bivariate inflation/money growth systems as spurious due to omittedvariable biases. We also analyze the resulting four-dimensional system in a cointegration framework and find structural changes in the long-run adjustment behavior, which do not affect the main conclusions, however. --
    Keywords: money growth,granger causality,quantity theory,unemployment
    JEL: E31 E40
    Date: 2013
  15. By: Fève, P.; Matheron, J.; Sahuc,J-G.
    Abstract: This paper investigates the characteristics of the Laffer curve in a neoclassical growth model of the US economy with incomplete markets and heterogeneous agents. The shape of the Laffer curve changes depending on which of transfers or government debt are varied to balance the government budget constraint. While the Laffer curve has the traditional shape when transfers vary, it looks like a horizontal S when debt varies. In this case, fiscal revenues can be associated with up to three different levels of taxation. This finding occurs because the tax rates change non-monotonically with public debt when markets are incomplete.
    Keywords: Laffer Curve, Incomplete Markets, Labor Supply, Precautionary Savings, Public Debt.
    JEL: E0 E60
    Date: 2013
  16. By: Kang, Wensheng; Ratti, Ronald A.
    Abstract: Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty. Oil-market specific demand shocks account for 30% of conditional variation in economic policy uncertainty and 21.5% of conditional variation in CPI forecast interquartile range after 24 months. Positive shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada.
    Keywords: Oil prices; policy uncertainty; structural VAR
    JEL: E31 E60 Q41 Q43
    Date: 2013–04–07
  17. By: Kang, Wensheng; Ratti, Ronald A.
    Abstract: Oil price shocks and economic policy uncertainty are interrelated and influence stock market return. For the U.S. an unanticipated increase in policy uncertainty has a significant negative effect on real stock returns. A positive oil-market specific demand shock (indicating greater concern about future oil supplies) significantly raises economic policy uncertainty and reduces real stock returns. The direct effects of oil shocks on real stock returns are amplified by endogenous policy uncertainty responses. Economic policy uncertainty and oil-market specific demand shock account for 19% and 12% of the long-run variability in real stock returns, respectively. As a robustness check, (domestic) economic policy uncertainty is shown to also significantly influence real stock returns in Europe and in energy-exporting Canada.
    Keywords: Oil shocks; economic policy uncertainty; stock returns; structural VAR
    JEL: E44 E60 Q41 Q43
    Date: 2013–02–05
  18. By: Marco Cacciotti; Cecilia Frale; Serena Teobaldo
    Abstract: This paper presents a new mixed frequency methodology to estimate output gaps and potential output on a quarterly basis. The methodology strongly relies on the production function method commonly agreed at the European level (D'Auria,2010) but it significantly improves it allowing to assess the impact of real time forecast for GDP and other underlying variables. This feature of the model is particularly welcome in the current Italian budgetary framework which has foreseen the introduction of the principle of a budget balance in structural terms in the Constitution. By allowing to measure output gap with a quarterly span on the basis of recent developments indicators, the methodology provides interesting hints on the cyclical position of the economy in real time to be used for deriving cyclically-adjusted fiscal aggregates.
    Keywords: output gaps, potential output, mixed frequency models
    JEL: E32 E37 C53
    Date: 2013–08
  19. By: Jon D. Wisman; Aaron Pacitti
    Abstract: Since 2008, the U.S. economy has been mired in the second worst economic crisis in its history. Conceivably, massive government spending could bring the economy out of this slump as massive war spending ultimately ended the Great Depression of the 1930s. However, a far superior strategy exists: Guaranteeing employment accompanied by retraining to enable all unemployed workers to become absorbed into the regular work force. Beyond ending the crisis, the superiority of this strategy is that it would institutionalize a procedure for insuring that, in an increasingly technologically dynamic and open economy, workers would possess the necessary skills for available jobs. Guaranteeing employment would also eliminate the ecological costs associated with the need to seek growth to generate employment at practically any cost. Finally, it would establish a new moral social contract whereby everyone is granted the dignity that accompanies being a productive member of society. Welfare for those able to work could disappear, along with the degradation and humiliation that accompanies it.
    Keywords: employer of last result, inequality, unemployment, inadequate demand
    JEL: E24 J38 H10
    Date: 2013
  20. By: Jan-Emmanuel De Neve; Ed Diener; Louis Tay; Cody Xuereb
    Abstract: The aim of this paper is to survey the "hard" evidence on the effects of subjective well-being. In doing so, we complement the evidence on the determinants of well-being by showing that human well-being also affects outcomes of interest such as health, income, and social behaviour. Generally, we observe a dynamic relationship between happiness and other important aspects of our lives, with influence running in both directions.
    Keywords: Unemployment, aggregate demand, matching frictions
    JEL: E10 E30 E24 E21
    Date: 2013–08
  21. By: Fabling, Richard (Motu Economic and Public Policy Research Trust); Maré, David C. (Motu Economic and Public Policy Research Trust)
    Abstract: We examine the correlates of reported hiring difficulties at the firm level using linked employer-employee and panel survey data over 2005-2011, focussing on the relative influence of firm-level characteristics, persistence, the business cycle and local labour market liquidity. At both the aggregate and the firm-level, hiring difficulties eased after the onset of the Global Financial Crisis. Even in the presence of large cyclical changes in demand and labour market conditions, firm-level persistence is a dominant feature of the data, with one- and two-year lags of reported hiring difficulties both positively related to current difficulties. Firms paying higher wages are more likely to report difficulties when trying to hire skilled workers, while firms with more long tenure workers are less likely to report any difficulty hiring. Local labour market conditions appear unrelated to reported hiring difficulties.
    Keywords: hiring difficulties, hard-to-fill vacancies, local labour market, Global Financial Crisis
    JEL: E24 J23 J63 M51
    Date: 2013–07
  22. By: Crafts, Nicholas (University of Warwick)
    Abstract: If the Eurozone follows the precedent of the 1930s, it will not survive. The attractions of escaping from the gold standard then were massive and they point to a strategy of devalue and default for today’s crisis countries. A fully-federal Europe with a banking union and a fiscal union is the best solution to this problem but is politically infeasible. However, it may be possible to underpin the Euro by a ‘Bretton-Woods compromise’ that accepts a retreat from some aspects of deep economic integration since exit entails new risks of financial crisis that were not present eighty years ago.
    Keywords: economic disintegration; Eurozone; financial repression; gold standard; macroeconomic trilemma; political trilemma
    Date: 2013
  23. By: Luca Guerrieri; Matteo Iacoviello
    Abstract: A model with collateral constraints displays asymmetric responses to house price changes. When housing wealth is high, collateral constraints become slack, and the response of consumption and hours to shocks that move house prices is positive yet small. When housing wealth is low, collateral constraints become tight, and the response of consumption and hours to house price changes is negative and large. This finding is corroborated using evidence from national, state-level, and MSA-level data. Wealth effects computed in normal times may underestimate the response to large house price declines. Debt-relief policies may be far more effective during protracted housing slumps.
    Date: 2013
  24. By: Paresh Kumar Narayan (Deakin University); Susan S Sharma (Deakin University); Deepa Bannigidadmath (Deakin University)
    Abstract: In this paper we examine whether tourism predicts macroeconomic variables in Pacific Island countries (PICs), namely, Fiji, the Solomon Islands, PNG, Vanuatu, Samoa, and Tonga. We form seven panels of PICs—one full panel of six countries and six panels where, one-by-one, each country is excluded from the panel. We apply the Westerlund and Narayan (2012a) panel regression framework, where the null hypothesis is that visitor arrivals do not predict macroeconomic variables, which we proxy with 11 indicators, for panels of countries. We find that visitor arrivals consistently predict exports and money supply, and to a lesser extent, exchange rates and GDP.
    Keywords: Tourism; Macroeconomic variables; GDP; Money Supply; Panel Data; Predictive Regression Model.

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