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on Macroeconomics |
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Issue of 2013‒09‒24
47 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Daniel Kienzler; Kai Daniel Schmid |
| Abstract: | We show that actively stabilizing economic activity plays a more prominent role in the conduct of monetary policy when potential output is subject to hysteresis. We augment a basic NewKeynesian model by hysteresis in potential output and contrast simulation outcomes of this extended model to the standard model. We find that considering hysteresis allows for a more realistic propagation of macroeconomic shocks and persistent movements in output after monetary shocks. Our central policy implication of active output gap stabilization arises from stability analyses and welfare considerations. |
| Keywords: | Monetary Policy, Hysteresis, Potential Output, Output Gap Mismeasurement |
| JEL: | E32 E50 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:116-2013&r=mac |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption. |
| Keywords: | Determinacy; Generalized Taylor Principle; Sticky prices; Price indexation; Habit formation; Steady-state inflation |
| JEL: | E31 E52 E58 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-52&r=mac |
| By: | Polito, Vito; Wickens, Michael R. |
| Abstract: | This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis. |
| Keywords: | credit ratings; EMU; euro crisis; fiscal policy |
| JEL: | E52 E62 H63 H68 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9521&r=mac |
| By: | Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo |
| Abstract: | The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output. |
| Keywords: | China; Crises; DSGE model; Financial Frictions; Indirect Inference |
| JEL: | C1 E3 E44 E52 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9422&r=mac |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A. |
| Abstract: | There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods. |
| Keywords: | International monetary transmission, China’s monetary aggregates, Euro area Commodity prices |
| JEL: | E52 E58 F31 F42 |
| Date: | 2013–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49707&r=mac |
| By: | Matthias Neuenkirch (University of Aachen); Pierre Siklos (Wilfrid Laurier University) |
| Abstract: | This paper examines the policy rate recommendations of the Bank of Canada's Governing Council (GC) and the C.D. Howe Institute's Monetary Policy Council (MPC)since 2003. We find, first, that differences in the median recommendations between the MPC and the GC are persistent but small (i.e., 25 bps). The median MPC recommendation is based on a higher steady state real interest rate. However, the response of the MPC and the GC to output and inflation shocks are, for the most part, comparable. Second, we are also able to examine the individual recommendations for the MPC. Estimates of the determinants of consensus inside the MPC or disagreement with the GC yield some useful insights. For example, disagreements are more likely when rates are proposed to rise than at other times. Equally interesting is the finding that the Bank of Canada conditional commitment on the overnightrate in 2009-10 has a relatively larger restricting impact on the MPC's median recommendation than the GC'starget rate. |
| Keywords: | Bank of Canada, central bank communication, committee behaviour, monetary policy committees,shadow councils, Taylorrules. |
| JEL: | E43 E52 E58 E61 E69 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201341&r=mac |
| By: | Esteban Pérez Caldentey; Matías Vernengo |
| Abstract: | The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind’, which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘the divine coincidence’, which means that stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level. The third proposition is that of stability. This means that the inflation target is part of an equilibrium configuration which generates convergence following any small disturbance to its initial conditions. These propositions are derived from a closed economy setting which is not representative of the countries that actually have adopted inflation targeting frameworks. Currently there are 27 countries, 9 of which are classified as industrialized and 18 as developing countries that have explicitly implemented a fully fledged inflation targeting regime (FFIT). These countries are open economies and are concerned by the evolution of the external sector and the exchange rate as proven by their interventions in the foreign exchange markets. We show that these three core propositions and the practice of inflation targeting are inoperative in an open economy context. |
| Keywords: | Inflation Targeting, Open Economies, Exchange Rate |
| JEL: | E42 E58 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp324&r=mac |
| By: | Derek Anderson; Ben Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; Stephen Snudden |
| Abstract: | The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region, forward-looking, DSGE model developed by the Economic Modeling Division of the IMF for policy analysis and international economic research. Using a 5-region version of the GIMF, this paper illustrates the model’s macroeconomic properties by presenting its responses under a wide range of experiments, including fiscal, monetary, financial, demand, supply, and international shocks. |
| Keywords: | Economic models;Monetary policy;Financial sector;External shocks;Fiscal policy;Fiscal consolidation;Government expenditures;Demand;business cycle, fiscal multipliers; fiscal consolidation; fiscal policy; general equilibrium models, interest rates, macroeconomic interdependence, monetary policy, policy effects, simulation. |
| Date: | 2013–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/55&r=mac |
| By: | Yan Carriere-Swallow; Pablo Garcia-Silva |
| Abstract: | This paper recounts Chile’s experience with capital account policies since the 1990s. We present how two external shocks were confronted under very different macroeconomic and capital account frameworks. We show that during the 1997-98 Asian-LTCM-Russia crisis, a closed capital account and relatively rigid exchange rate severely constrained the monetary policy response to the shock, aggravating the fall in domestic demand. During the 2008-09 crisis, a full-fledged inflation targeting framework allowed the authorities to implement a significant countercyclical response. We argue that domestic stability considerations lay behind the policy regime switch toward capital account liberalization from 1999 onwards. |
| Keywords: | Capital account;Chile;Capital account liberalization;Capital controls;Financial crisis;Monetary policy;Inflation targeting;Global Financial Crisis 2008-2009;capital controls, monetary policy, exchange rate policy, small-open economy, inflation targeting |
| Date: | 2013–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/107&r=mac |
| By: | Pierre L. Siklos |
| Abstract: | Words are critical in how the public perceives the work of central banks and the quality of monetary policy. Press releases that accompany policy rate decisions and, where available, the minutes of central bank committee meetings, are focal points for the media in public discussions about the conduct of monetary policy. Using data from five countries, I examine whether the language used by central banks has changed since the global financial crisis (GFC) began. Briefly, I find that concerns about financial stability peaked just as the global financial crisis reached its zenith. However, concerns over uncertainty about the current and anticipated state of the economy have also risen over time. More generally, central bank speak became more aggressive throughout the crisis years. More conventional expressions about the current stance of monetary policy took a back seat to other concerns in central bank policy statements and minutes. |
| Keywords: | central bank communication, financial stability, language analysis |
| JEL: | E52 E58 E61 E69 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-58&r=mac |
| By: | Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi |
| Abstract: | We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact. |
| Keywords: | impulse responses; inattentiveness; monetary shocks; sticky prices |
| JEL: | E5 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9488&r=mac |
| By: | Hideaki Hirata; M. Ayhan Kose; Christopher Otrok; Marco Terrones |
| Abstract: | We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices. |
| Keywords: | Housing prices;Asset prices;Business cycles;Developed countries;Time series;monetary policy; interest rates; business cycles; financial cycles |
| Date: | 2013–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/38&r=mac |
| By: | Lane, Philip R. |
| Abstract: | We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area. |
| Keywords: | capital flows; euro; imbalances |
| JEL: | E42 F32 F41 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9493&r=mac |
| By: | Cheng Hoon Lim; Ivo Krznar; Fabian Lipinsky; Akira Otani; Xiaoyong Wu |
| Abstract: | This paper gauges if, and how, institutional arrangements are correlated with the use of macroprudential policy instruments. Using data from 39 countries, the paper evaluates policy response time in various types of institutional arrangements for macroprudential policy and finds that the macroprudential framework that gives the central bank an important role is associated with more timely use of macroprudential policy instruments. Policymakers may also tend to use macroprudential instruments more quickly if the ability to conduct monetary policy is somehow constrained. This finding points to the importance of coordination between macroprudential and monetary policy. |
| Keywords: | Macroprudential Policy;Financial stability;Central banks;Monetary policy;Central bank role;macroprudential, institutions, instruments, systemic risk, credit, interest rate. |
| Date: | 2013–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/166&r=mac |
| By: | David Backus; Mikhail Chernov; Stanley E. Zin |
| Abstract: | Identification problems arise naturally in forward-looking models when agents observe more than economists. We illustrate the problem in several macro-finance models with Taylor rules. When the shock to the rule is observed by agents but not economists, identification of the rule's parameters requires restrictions on the form of the shock. We show how such restrictions work when we observe the state directly, indirectly, or infer it from observables. |
| JEL: | E43 E52 G12 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19360&r=mac |
| By: | Nimark, Kristoffer P |
| 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. |
| Keywords: | Business cycles; News media |
| JEL: | E3 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9517&r=mac |
| By: | Beaudry, Paul; Portier, Franck |
| Abstract: | There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established. |
| Keywords: | Business Cycles; Expectations; News; Pigou; Recessions |
| JEL: | E3 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9624&r=mac |
| By: | Kyle Jurado; Sydney C. Ludvigson; Serena Ng |
| Abstract: | This paper exploits a data rich environment to provide direct econometric estimates of time-varying macro uncertainty, defined as the common variation in the unforecastable component of a large number of economic indicators. Our estimates display significant independent variations from popular uncertainty proxies, suggesting that much of their variation is not driven by uncertainty. Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular uncertainty proxies, but when they do occur, they have larger and more persistent correlations with real activity. Our estimates provide a benchmark to evaluate theories for which uncertainty shocks play a role in business cycles. |
| JEL: | E0 E27 E3 E44 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19456&r=mac |
| By: | Manmohan Singh |
| Abstract: | Financial lubrication in markets is indifferent to margin posting via money or collateral; the relative price(s) of money and collateral matter. Some central banks are now a major player in the collateral markets. Analogous to a coiled spring, the larger the quantitative easing (QE) efforts, the longer the central banks will impact the collateral market and associated repo rate. This may have monetary policy and financial stability implications since the repo rates map the financial landscape that straddles the bank/nonbank nexus. |
| Keywords: | Monetary policy;Money markets;Central banks;velocity of collateral; IS/LM; quantitative easing; central banks; repo rate |
| Date: | 2013–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/186&r=mac |
| By: | Yi Wen (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 7%-10% (or more) to avoid 10% annual inflation. In other words, raising the U.S. inflation target from 2% to 3% amounts to roughly a 0.5 percentage reduction in aggregate consumption. The astonishingly large welfare costs of inflation arise because inflation tightens liquidity constraints by destroying the buffer-stock value of money, thus raising the volatility of consumption at the household level. Such an inflation-induced increase in the idiosyncratic consumption-volatility at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of a credit and banking system can reduce the welfare costs of inflation by alleviating liquidity constraints, with realistic credit limits the cost of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our finding not only provides a justification for adopting a low inflation target by central banks, but also offers a plausible explanation for the robust positive relationship between inflation and social unrest in developing countries where money is the major form of household financial wealth. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:204&r=mac |
| By: | Anosova, Daria; Sonin, Konstantin; Vanags, Alf; Zasova, Anna |
| Abstract: | In terms of output decline and increase in unemployment, the economic recession in Latvia that started during the 2008-09 financial crisis was one of the most severe in the world. Using both decomposition of the unemployment rate into structural and cyclical components and Mortensen and Pissarides’ search and matching approach, we demonstrate that the changes in unemployment should be attributed primarily to cyclical, rather than structural factors; as of 2013, a large share of Latvian unemployment is still cyclical. Our results provide important implications for anti-crisis policy in Latvia and elsewhere in the world: the surge in unemployment was largely a consequence of Latvia’s austerity policy. |
| Keywords: | Beveridge curve; cyclical unemployment; labour market matching; structural unemployment |
| JEL: | E24 J60 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9525&r=mac |
| By: | Cheng Hoon Lim; Rishi S Ramchand; Hong Wang; Xiaoyong Wu |
| Abstract: | This paper surveys institutional arrangements for macroprudential policy in Asia. Central banks in Asia typically have a financial stability mandate, and play a key role in the macroprudential framework. Smaller and more open economies with prudential regulation inside the central bank tend to have institutional arrangements that give the central bank a leading role. In larger and more complex economies where prudential regulation is outside the central bank, the financial stability mandate is usually shared with other agencies and the government tends to play a leading role. Domestic policy coordination is typically performed by a financial stability committee/other coordination body while cross-border cooperation is largely governed by Memoranda of Understanding. |
| Keywords: | Macroprudential Policy;Asia;Central banks;Financial stability;Central bank role;banking, financial stability, institutional arrangements, macroprudential, regulation |
| Date: | 2013–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/165&r=mac |
| By: | Russell Cooper; Guan Gong; Ping Yan |
| Abstract: | This paper studies the employment and productivity implications of new labor regulations in China. These new policies were intended to protect workers' employment conditions by, among other things, increasing firing costs and increasing compensation. We estimate a model of costly labor adjustment from data prior to the policy. We use the estimated model to simulate the effects of the policy. We find that increases in severance payments lead to sizable job creation, a significant reduction in labor reallocation and an increase in the exit rate. A policy of credit market liberalization will reduce employment, increase labor reallocation and increase wages. The estimated elasticity of labor demand implies that an increase in the base wage leads to sizable job losses. |
| JEL: | E24 J08 J2 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19324&r=mac |
| By: | Sami Alpanda; Sarah Zubairy |
| Abstract: | In this paper, we investigate the effects of housing-related tax policy measures on macroeconomic aggregates using a dynamic general-equilibrium model. The model features borrowing and lending across heterogeneous households, financial frictions in the form of collateral constraints tied to house prices, and a rental housing market alongside owner-occupied housing. Using our model, we analyze the effects of changes in housing-related tax policy measures on the level of output, tax revenue and household debt, along with other macroeconomic aggregates. The tax policies we consider are (i) increasing property tax rates, (ii) eliminating the mortgage interest deduction, (iii) eliminating the depreciation allowance for rental income, (iv) instituting taxation of imputed rental income from owner-occupied housing and (v) eliminating the property tax deduction. We find that among these fiscal tools, eliminating the mortgage interest deduction would be the most effective in raising tax revenue, and in reducing household debt, per unit of output lost. On the other hand, eliminating the depreciation allowance for rental income would be the least effective. Our experiments also highlight the differential welfare impact of each tax policy on savers, borrowers and renters. |
| Keywords: | Economic models; Fiscal Policy |
| JEL: | E62 H24 R38 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-33&r=mac |
| By: | Manoel Bittencourt (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria); Monaheng Seleteng (Department of Economics, University of Pretoria) |
| Abstract: | In this paper we investigate the role of inflation rates in determining economic growth in fifteen sub-Saharan African countries, which are all members of the Southern African Development Community (SADC), between 1980 and 2009. The results, based on panel time-series data and analysis, suggest that inflation has had a detrimental effect to growth in the region. All in all, we highlight not only the fact that inflation has offset the Mundell-Tobin effect and consequently reduced, the much needed, economic activity in the region, but also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community. |
| Keywords: | In?ation, Growth, SADC |
| JEL: | E31 O11 O42 O55 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201354&r=mac |
| By: | Gao, Liping; Kim, Hyeongwoo; Saba, Richard |
| Abstract: | This paper evaluates the degree of the pass-through effect of the oil price shock to six CPI sub-indices in the US. We report substantially weaker pass-through effects in less energy-intensive sectors compared with those in more energy-intensive sectors. We attempt to find an explanation for this from the role of spending adjustments when there’s an unexpected change in the oil price. Using linear and nonlinear framework, we find substantial decreases in the relative price in less energy-intensive sectors, but not in energy-intensive sectors, which may be due to a substantial decrease in the demand for goods and services in those CPI sub-baskets. Our findings are consistent with those of Edelstein and Kilian (2009) in the sense that spending adjustments play an important role in price dynamics in response to unexpected changes in the oil price. |
| Keywords: | Oil Price Shocks; Pass-Through Effect; Consumer Price Sub-Index; Income Effect; Threshold Vector Autoregressive Model |
| JEL: | E21 E31 Q43 |
| Date: | 2013–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49565&r=mac |
| By: | Fernando Martin (Federal Reserve Bank of St. Louis) |
| Abstract: | Recent events in the U.S. and Europe have renewed interest in the desirability of imposing constraints on fiscal policy. In the U.S., the implementation of large and persistent deficits as a response to the financial crisis and subsequent recession motivated debates about debt ceilings and brought back proposals for balanced-budget-rules. In the Eurozone, the fiscal crisis driven by excessive debt has forced some governments to enact austerity programs, consisting both of tax increases and expenditure cuts. The objective of this paper is to evaluate the effects of putting constraints on the ability of politicians to run fiscal policy, with an emphasis on how monetary policy interacts with such restrictions. The institutional experiments conducted include balanced budget rules and cooperation between government agencies in setting policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:213&r=mac |
| By: | Reis, Ricardo |
| Abstract: | Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression and less than Japan during its lost decade. This paper asks why this happened, with a particular focus on the slump between 2000 and 2007. It describes the main facts of Portugal's recent economic history, evaluates some possible explanations for its dismal performance, and proposes a new hypothesis based on the misallocation of abundant capital flows from abroad. I put forward a model of credit frictions to show that if financial integration exceeds financial deepening, productivity will fall, generating a slump as relatively unproductive firms in the nontradables sector expand at the expense of more productive tradables firms. This explanation can also potentially account for the similarities and the differences between Portugal on the one hand, and Ireland and Spain on the other, during this period, and for some features of the crash in Portugal after 2010. |
| Keywords: | Eurozone; Financial imperfections; Sudden stop |
| JEL: | E32 E65 F32 F43 N14 O52 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9591&r=mac |
| By: | Mariano Kulish (University of New South Wales); Adrian Pagan (University of Sydney) |
| Abstract: | Structural change has been conjectured to lead to an upward bias in the estimated forward expectations coefficient in New-Keynesian Phillips curves. We present a simple New-Keynesian model that enables us to assess this proposition. In particular, we investigate the issue of upward bias in the estimated coefficients of the expectations variable in the New-Keynesian Phillips curve based on a model where we can see what causes the structural breaks and how to control for them. We find that structural breaks in the means of the series can often change the properties of instruments a great deal, and may well be a bigger source of small-sample bias than that due to specification error. Moreover, we also find that the direction of the specification bias is not predictable. It is necessary to check for weak instruments before deciding that the magnitude of any estimator bias reflects specification errors coming from structural change. |
| Keywords: | expectations; structural change; regime change; weak instruments; IV estimation; Phillips curves |
| JEL: | C13 C32 C63 E52 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-11&r=mac |
| By: | Piketty, Thomas; Zucman, Gabriel |
| Abstract: | How do aggregate wealth-to-income ratios evolve in the long run and why? We address this question using 1970-2010 national balance sheets recently compiled in the top eight developed economies. For the U.S., U.K., Germany, and France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise of wealth-income ratios in recent decades, from about 200-300% in 1970 to 400-600% in 2010. In effect, today's ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries (600-700%). This can be explained by a long run asset price recovery (itself driven by changes in capital policies since the world wars) and by the slowdown of productivity and population growth, in line with the β=s/g Harrod-Domar-Solow formula. That is, for a given net saving rate s= 10%, the long run wealth-income ratio β is about 300% if g= 3% and 600% if g= 1.5%. Our results have important implications for capital taxation and regulation and shed new light on the changing nature of wealth, the shape of the production function, and the rise of capital shares. |
| Keywords: | Capital; Income; Saving; Wealth |
| JEL: | E21 E22 E25 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9588&r=mac |
| By: | Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin |
| Abstract: | The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks' balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard. -- |
| Keywords: | Banking Union,Europe,Single Supervisory Mechanism,Risk Sharing |
| JEL: | E02 E42 G18 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:svrwwp:022013&r=mac |
| By: | Francisca Guedes de Oliveira (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto); Leonardo Costa (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto) |
| Abstract: | A VAT Laffer Curve is estimated for the EU-27 countries in the period 2000-2010. Results show that countries such as Portugal are already in the prohibitive range of the curve. Structural differences exist between low growth years and high growth years. Collected VAT revenue is smaller in low growth years than in high growth years, which illustrates the existence of a VAT automatic stabilizer effect. The VAT rate that maximizes VAT revenue is slightly higher in low growth years, which can be explained by changes in the structure of consumption and of VAT collection enforcement. A procyclical VAT rate policy increases the underlying business cycle volatility and may also have as an outcome the increase of overall government intertemporal collected VATR. |
| Keywords: | VAT Laffer Curve, EU-27, Portugal, Business Cycle |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cap:wpaper:022013&r=mac |
| By: | Manuela Goretti; Marcos Souto |
| Abstract: | High corporate indebtedness can pose an important threat to the adjustment processes in some of the Euro area periphery countries, through its drag on investment as well as the possible migration of private sector losses to the sovereign balance sheet. This paper examines the macroeconomic implications of corporate debt overhang in recent years, confirming empirical evidence in the literature on the relationship between a firm’s balance sheet position and its investment choices, especially beyond certain threshold levels. Building on an event study of past crisis experiences with corporate deleveraging, it also discusses the expected macro-financial impact of the ongoing deleveraging processes in these countries, presenting available policy options to facilitate an orderly balance-sheet adjustment and support a return to productivity and growth. |
| Keywords: | Corporate sector;Europe;Debt burden;Euro Area;Financial crisis;Debt restructuring;Corporate Investment, Debt overhang, Deleveraging, Crisis, Euro Area |
| Date: | 2013–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/154&r=mac |
| By: | Manik L. Shrestha; Marco Marini |
| Abstract: | This paper presents a statistical analysis of revisions in quarterly gross domestic product (GDP) of the Group of Twenty countries (G-20) since 2000. The main objective is to assess whether the reliability of early estimates of quarterly GDP has been weakened from the turmoil of the 2008 financial crisis. The results indicate that larger and more downward revisions were observed during the years 2008 and 2009 than in previous years. |
| Keywords: | Gross domestic product;Group of Twenty;Business cycles;Data quality assessment framework;Gross Domestic Product, Quarterly National Accounts, Revisions Analysis. |
| Date: | 2013–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/60&r=mac |
| By: | Soumia Zenasni (University of Tlemcen, Algeria); Abderrezak Benhabib (University of Tlemcen, Algeria) |
| Abstract: | The objective of this paper is to investigate the empirical relationship between capital account liberalization and economic growth in three Maghreb countries (Algeria, Mo- rocco, and Tunisia) using the GMM technique. The study of this relationship has al- ways been of particular interest (Alesina and al 1994; De Gregorio 1996; Edwards 2001; Agénor 2001; Ishii and Habermeier 2002; Prasad and al. 2003; Buiter and Taci 2003; Henry 2007; Dhrifi 2009; Eichengreen, Gullapalli and Panizza 2009; Bakare A. S. 2011; Vithessonthi and Tongurai 2012). The results are mitigated and can be classified into two categories: negative and positive effects. As a matter of fact, some authors have showed that capital account liberalization hasn't a significant effect on economic growth (Grilli and Milesi-Ferretti 1995; Rodrick 1998; Kraay 1998; O'Donnell 2001; Edison and al. 2002). On the contrary, several theoretical and empirical studies assert that capital account liberalization can help countries to improve significantly their eco- nomic growth rate (Gurley and Shaw 1955, McKinnon 1973; Quinn 1997; Levine and Zervos 1998; Chan-Lau and Chen 2001; Bekaert and al. 2005; Levchenko and al. 2008; Mensi and al. 2010, Hassana, Sanchezb & Yu 2011). The estimation results show that capital account liberalization is a good factor in fostering economic growth in Maghreb countries. |
| Keywords: | capital account liberalization, financial development, economic growth, Maghreb countries, GMM technique |
| JEL: | E44 G20 F43 C33 |
| Date: | 2013–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:40-2012&r=mac |
| By: | Klimczuk, Andrzej; Klimczuk-Kochańska, Magdalena |
| Abstract: | Under the conditions of the global financial and economic crisis restructuring undertaken by companies often is associated with the optimization of operating costs in the dimension of human capital. Relatively little popular technique is responsible outplacement, which can reduce the risk of long-term unemployment and maintains the key competencies by the employees and organizations. At the same time public and private employment services usually have no experience in implementing outplacement programs. Small and medium-sized enterprises have difficulties in availability of those services. This paper is based on a critical analysis of the literature and a study conducted in Podlaskie Voivodship in 2012 under the project 'Innovations in the corner -- testing and implementation of new methods of outplacement'. The study included a series of in-depth interviews, focus groups and quantitative CATI research among entrepreneurs and employees. Main conclusions lead to the claim that outplacement should be popularized as good practice of corporate social responsibility. The implementation of such programs can be done by increasing the role of social economy actors -- in particular non-governmental organizations that carry out tasks in the field of labor market policy. -- W warunkach globalnego kryzysu finansowego i gospodarczego podejmowana przez przedsiębiorstwa restrukturyzacja wiąże się często z optymalizacją kosztów działalności w wymiarze kapitału ludzkiego. Relatywnie mało popularną jest technika odpowiedzialnych zwolnień monitorowanych, która umożliwia ograniczenie ryzyka długotrwałego bezrobocia oraz pozwala na zachowanie kompetencji kluczowych tak przez pracowników, jak i organizacje. Jednocześnie publiczne i niepubliczne służby zatrudnienia przeważnie nie mają doświadczenia w realizacji programów outplacement. Programy te są też trudno dostępne dla małych i średnich przedsiębiorstw. Referat opiera się na krytycznej analizie literatury przedmiotu oraz badaniach przeprowadzonych w województwie podlaskim w 2012 roku w ramach projektu „Innowacje na zakręcie - testowanie i wdrażanie nowych metod outplacementu”. Badania obejmowały serię indywidualnych wywiadów pogłębionych, zogniskowanych wywiadów grupowych oraz badanie ilościowe CATI wśród przedsiębiorców i pracowników. Główne wnioski prowadzą do twierdzenia, iż outplacement powinien być upowszechniany jako dobra praktyka społecznej odpowiedzialności biznesu. Realizacja programów może odbywać się poprzez zwiększenie roli podmiotów gospodarki społecznej - w szczególności organizacji pozarządowych realizujących zadania z zakresu polityki rynku pracy. |
| Keywords: | activation policy,restructuring anticipation,unemployment,outplacement stakeholders,local partnerships and pacts,regional and local development,cross-sectoral cooperation,outplacement |
| JEL: | E24 G34 M54 R58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esconf:82139&r=mac |
| By: | Comin, Diego; Mestieri, Martí |
| Abstract: | We study the lags with which new technologies are adopted across countries, and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820. |
| Keywords: | great divergence; technology diffusion; transitional dynamics |
| JEL: | E13 O14 O33 O41 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9466&r=mac |
| By: | Chong Wang; Neng Wang; Jinqiang Yang |
| Abstract: | We develop an analytically tractable consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks. We find that risk aversion and intertemporal substitution have very different effects on both consumption and the steady-state savings target. Moderate changes in risk aversion have large effects on consumption and buffer-stock savings. With permanent shocks, it takes many years to reach the steady-state savings target. We also find that large discrete income shocks (jumps) occurring at low frequencies can be very costly. Unlike conventional wisdom, transitory shocks can generate very large precautionary savings demand, especially for low transitory income states. |
| JEL: | E21 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19319&r=mac |
| By: | Craig, Steven G.; Hemissi, Wided; Mukherjee, Satadru; Sørensen, Bent E |
| Abstract: | This paper successfully fits a model of forward looking government savings behavior to data from the U.S. state Unemployment Insurance (UI) programs 1976-2008. Specifically, we find states do not perfectly smooth tax rates in Barro's sense, but follow behavior consistent with a buffer stock model where politicians trade-off their desire to immediately expend all savings against the fear of running out of funds. We find that states increase benefits or lower taxes when savings balances are high. State UI budgets, as rationalized by the buffer stock model, display surpluses that are more pro-cyclical than Barro's model would imply but substantially less cyclical than contemporaneous budget balance. |
| Keywords: | forward looking politicians; impatience; precautionary saving |
| JEL: | E21 H11 H74 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9520&r=mac |
| By: | Dean Karlan (Economic Growth Center, Yale University); Santosh Anagol (The Wharton School, University of Pennsylvania); Alvin Etang (Economic Growth Center, Yale University) |
| Abstract: | We examine the returns from owning cows and buffaloes in rural India. We estimate that when valuing labor at market wages, households earn large, negative average returns from holding cows and buffaloes, at negative 64% and negative 39% respectively. This puzzle is mostly explained if we value the household’s own labor at zero (a stark assumption), in which case estimated average returns for cows is negative 6% and positive 13% for buffaloes. Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong? We discuss potential explanations, including labor market failures, for why livestock investments may persist. |
| Keywords: | Savings, Investment, Profits, Livestock, Labor markets |
| JEL: | E21 M4 Q1 O12 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1031&r=mac |
| By: | Buiter, Willem H.; Rahbari, Ebrahim |
| Abstract: | This paper considers the economic and political drivers of sovereign default, focusing on countries rich enough to render sovereign default a ‘won’t pay’ rather than a ‘can’t pay’ phenomenon. Unlike many private contracts, sovereign debt contracts rely almost exclusively on self-enforcement rather than on third-party enforcement. Among the social costs of sovereign default are contagion and concentration risk, both within and outside the jurisdiction of the sovereign, and ‘rule of law externalities’. We consider illiquidity as a separate trigger for sovereign default and emphasize the role of lenders of last resort for the sovereign. Not only do political economy factors drive sovereign insolvency, they also influence the debt sustainability analyses performed by national and international agencies. We consider it likely that the absence of sovereign defaults in the advanced economies since the (West) German defaults of 1948 and 1953 until the Greek defaults of 2012 was a historical aberration that is unlikely to be a reliable guide to the future. |
| Keywords: | fiscal sustainability; intertemporal budget constraint; political economy.; solvency; sovereign default; strategic default |
| JEL: | E62 E63 F34 F41 G01 G18 H26 H63 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9492&r=mac |
| By: | Sergey Belev (Gaidar Institute for Economic Policy); Tatiana Tischenko (Gaidar Institute for Economic Policy); Ilya Sokolov (Gaidar Institute for Economic Policy) |
| Abstract: | This paper deals with 2012 Russia's state budget. Authors speak about general characteristics of the budget system in Russia. They analyse revenues from major taxes and main parameters of the federal budget in 2012 and for 2012-2014, explain budget expenditures and give prospects of the budgetary and tax policy in Russia.. |
| Keywords: | Russian economy, state budget, tax revenues, budget system, fiscal policy |
| JEL: | E62 H20 H50 H61 H70 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:gai:ppaper:149&r=mac |
| By: | Bin Wang; Tao Sun |
| Abstract: | This paper investigates macroprudential policies and their role in containing systemic risk in China. It shows that China faces systemic risk in both the time (procyclicality) and cross-sectional (contagion) dimensions. The former is reflected as credit and asset price risks, while the latter is reflected as the links between the banking sector and informal financing and local government financing platforms. Empirical analysis based on 171 banks shows that some macroprudential policy tools (e.g., the reserve requirement ratio and house-related policies) are useful, but they cannot guarantee protection against systemic risk in the current economic and financial environment. Nevertheless, better-targeted macroprudential policies have greater potential to contain systemic risk pertaining to the different sizes of the banks and their location in regions with different levels of economic development. Complementing macroprudential policies with further reforms, including further commercialization of large banks, would help improve the effectiveness of those policies in containing systemic risk in China. |
| Keywords: | Macroprudential Policy;China;Financial risk;Banking sector;Systemic risk, Macroprudential policies, Effectiveness |
| Date: | 2013–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/75&r=mac |
| By: | Comin, Diego; Rode, Johannes |
| Abstract: | We estimate the effect of the diffusion of photovoltaic (PV) systems on the fraction of votes obtained by the German Green Party. The logistic diffusion of PV systems offers a new identification strategy. We take first differences and instrument adoption rates (i.e. the first difference in the diffusion level) by lagged diffusion levels. The existing rationales for non-linearities in diffusion, and ubiquity of logistic curves ensure that our instrument is orthogonal to variables that directly affect voting patterns. We find that the diffusion of domestic PV systems caused 25 percent of the increment in green votes between 1998 and 2009. |
| Keywords: | feed-in tariff; PV systems; technology diffusion; voting |
| JEL: | E13 O14 O33 O41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9573&r=mac |
| By: | Andreas A. Jobst; Li L. Ong; Christian Schmieder |
| Abstract: | The global financial crisis has placed the spotlight squarely on bank stress tests. Stress tests conducted in the lead-up to the crisis, including those by IMF staff, were not always able to identify the right risks and vulnerabilities. Since then, IMF staff has developed more robust stress testing methods and models and adopted a more coherent and consistent approach. This paper articulates the solvency stress testing framework that is being applied in the IMF’s surveillance of member countries’ banking systems, and discusses examples of its actual implementation in FSAPs to 18 countries which are in the group comprising the 25 most systemically important financial systems (“S-25â€) plus other G-20 countries. In doing so, the paper also offers useful guidance for readers seeking to develop their own stress testing frameworks and country authorities preparing for FSAPs. A detailed Stress Test Matrix (STeM) comparing the stress test parameters applie in each of these major country FSAPs is provided, together with our stress test output templates. |
| Keywords: | Banking sector;Stress testing;Financial systems;Group of Twenty;Economic models;Risk management;Financial Sector Assessment Program;Basel III, Financial Sector Assessment Plan (FSAP), G-20, macroprudential, S-25, satellite models, solvency, stress testing, surveillance. |
| Date: | 2013–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/68&r=mac |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | I have been doing research in macroeconomics since the late 1960s, almost 50 years. In this paper I pause and take stock. The paper is part personal reflections on macroeconometric modeling, part a road map of the techniques of macroeconometric modeling, and part comments on what I think I have learned about how the macroeconomy works from my research in this area. |
| Keywords: | Macroeconometric modeling |
| JEL: | E10 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1908&r=mac |
| By: | Heather D. Gibson; Stephen G. Hall; George S. Tavlas |
| Abstract: | We investigate the impact of the economic fundamentals, sovereign credit ratings, political uncertainty, and the ECB’s Securities Markets Program (SMP) on Greek sovereign spreads. Our findings show that sovereign downgrades and political uncertainty appear to have been drivers of the sharp rises in Greek sovereign spreads from 2008-9 onwards, over-and-above the impact of the economic fundamentals. Our findings also show that prior to 2008-2009, the markets failed to incorporate Greece’s deteriorating fundamentals into the price of Greek sovereigns. We demonstrate that, once markets reassessed their pricing of Greek credit risk, the change in the influence of the fundamentals came swiftly and abruptly, exhibiting overshooting characteristics. The SMP reduced spreads while it was in operation. |
| Keywords: | euro area financial crisis, sovereign spreads |
| JEL: | E63 G12 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:13/20&r=mac |