nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒10‒02
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Escaping the Great Recession By Francesco Bianchi; Leonardo Melosi
  2. How would monetary policy matter in the proposed African monetary unions? Evidence from output and prices By Asongu Simplice
  3. Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs? By Luisa F. Acuña Roa; Julian A. Parra Polania
  4. On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability By Maurice Obstfeld
  5. The New-Keynesian Liquidity Trap By John H. Cochrane
  6. Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices By Asongu Simplice
  7. New Empirics of monetary policy dynamics: evidence from the CFA franc zones By Asongu Simplice
  8. The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  9. Taxes, Debts, and Redistributions with Aggregate Shocks By Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  10. Effects of US Monetary Policy Shocks During Financial Crises - A Threshold Vector Autoregression Approach By Jasmine Zheng
  11. U.S. business cycles, monetary policy and the external finance premium By Enrique Martínez-García
  12. Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment By Jean-Stéphane Mésonnier; Dalibor Stevanovic
  13. Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling By Serena Ng; Jonathan H. Wright
  14. Optimal rules for central bank interest rates subject to zero lower bound By Singh, Ajay Pratap; Nikolaou, Michael
  15. Reviewing the Leverage Cycle By Ana Fostel; John Geanakoplos
  16. Education Policy and Intergenerational Transfers in Equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Gianluca Violante
  17. The Macro-dynamics of Sorting between Workers and Firms By Jeremy Lise; Jean-Marc Robin
  18. Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa? By Asongu Simplice
  20. Puzzling over the Anatomy of Crises: Liquidity and the Veil of Finance By Guillermo Calvo
  21. Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation By Mahmoudi, Babak
  22. Vision Versus Prudence: Government Debt Financing of Investment By John Freebairn; Max Corden
  23. Labor Market Institutions and the Response of Inflation to Macro Shocks in the EU: A Two-Sector Analysis By D'Adamo, Gaetano; Rovelli, Riccardo
  24. The world's dream, economic growth revisited By DE KONING, Kees
  25. Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default By Pablo D'Erasmo; Enrique G. Mendoza
  26. Macroeconomics: science or faith based discipline? By Bill Russell
  27. Micro price dynamics during Japan's lost decades By Nao Sudo; Kozo Ueda; Kota Watanabe
  28. On the Stratonovich – Kalman - Bucy filtering algorithm application for accurate characterization of financial time series with use of state-space model by central banks By Ledenyov, Dimitri O.; Ledenyov, Viktor O.
  29. Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities By Been-Lon Chen; Yu-Shan Hsu; Kazuo Mino
  30. An Early Warning System for Inflation in the Philippines Using Markov-Switching and Logistic Regression Models By Cruz , Christopher John; Mapa, Dennis
  31. Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness By Patrick A. Imam
  32. Wage Adjustment in the Great Recession By Michael W. Elsby; Donggyun Shin; Gary Solon
  33. Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients By Gonzalez-Astudillo, Manuel
  34. Does Banque de France control inflation and unemployment? By Kitov, Ivan; KItov, Oleg
  35. Long-run interest rate convergence in Poland and the EMU By Łukasz Goczek; Dagmara Mycielska
  36. Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach By Francesco Bianchi; Andrea Civelli
  37. The impact of the sovereign debt crisis on bank lending rates in the euro area By Stefano Neri
  38. Evaluating point and density forecasts of DSGE models By Wolters, Maik H.
  39. The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function By Hiew, Lee-Chea; Puah, Chin-Hong; Habibullah, Muzafar Shah
  40. How do financial reforms affect inequality through financial sector competition? Evidence from Africa By Asongu Simplice
  41. An issue with own-rates: Keynes borrows from Sraffa , Sraffa criticises Keynes, and present-day commentators get hold of the wrong end of the stick By Grieve Roy H
  42. Macroeconomic context and fiscal policy : Europe and Central Asia during 2000-2012 By Islam, Roumeen
  43. Faster solutions for Black zero lower bound term structure models By Leo Krippner
  44. The procyclicality of foreign bank lending: evidence from the global financial crisis By Ugo Albertazzi; Margherita Bottero
  45. Party alignment and political budget cycles: the Argentine provinces By Daniel Lema; Jorge M. Streb
  46. The Effects of Monetary Policy Shocks on a Panel of Stock Market Volatilities: A Factor-Augmented Bayesian VAR Approach By Fady Barsoum
  47. Inequality, Financial Development and Government: Evidence from Low-Income Developing Countries By Majeed, Dr. Muhammad Tariq
  48. How Governments Retrench In Crisis: The Case of Ireland By Niamh Hardiman; Muiris MacCarthaigh
  49. Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments By Scott R. Baker; Nicholas Bloom
  50. Prices and Supply Disruptions during Natural Disasters By Alberto Cavallo; Eduardo Cavallo; Roberto Rigobon
  51. Have we missed the right version of the Ramsey model? By Khelifi, Atef
  52. A financial systemic stress index for Greece By Dimitrios P. Louzis; Angelos T. Vouldis
  53. Role of regulation in micro finance: jurisdictional analysis By Ojo, Marianne
  54. Preparation of Data from the New SOEP Consumption Module: Editing, Imputation, and Smoothing By Jan Marcus; Rainer Siegers; Markus M. Grabka
  55. Fighting African Capital Flight: Empirics on Benchmarking Policy Harmonization By Asongu Simplice
  56. Firm Volatility in Granular Networks By Bryan Kelly; Hanno Lustig; Stijn Van Nieuwerburgh

  1. By: Francesco Bianchi; Leonardo Melosi
    Abstract: While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers’ behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning fiscal discipline, but this results in a sharp increase in macroeconomic instability once the economy is out of the recession. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. The policy trade-off can be resolved by committing to inflate away only the portion of debt resulting from an unusually large recession.
    Keywords: Monetary and fiscal policy interaction, Markov-switching DSGE models, uncertainty, shock-specific policy rules, zero lower bound
    JEL: E31 E52 E62 E63 D83
    Date: 2013
  2. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: We analyze the effects of monetary policy on economic activity in the proposed African monetary unions. Findings broadly show that: (1) but for financial efficiency in the EAMZ, monetary policy variables affect output neither in the short-run nor in the long-term and; (2) with the exception of financial size that impacts inflation in the EAMZ in the short-term, monetary policy variables generally have no effect on prices in the short-run. The WAMZ may not use policy instruments to offset adverse shocks to output by pursuing either an expansionary or a contractionary policy, while the EAMZ can do with the ‘financial allocation efficiency’ instrument. Policy implications are discussed.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  3. By: Luisa F. Acuña Roa; Julian A. Parra Polania
    Abstract: This manuscript can be divided into two main parts. The first one, using a simple example by Minford (2004) and Hatcher (2011), gives the reader a basic introduction to understand the comparison between two monetary-policy regimes: Inflation Targeting (IT) and Price-Level Targeting (PLT). The second part, using a model with a New Keynesian Phillips curve and a loss function (both of which incorporate partial indexation to lagged inflation), finds that for standard values of underlying parameters (i) the social loss associated to macroeconomic volatility may decrease about 26% by switching from IT to PLT and (ii) only when the initial level of indexation to lagged inflation is higher than 60% then it is better not to switch to PLT.
    Keywords: Inflation targeting, price-level targeting, indexation, macroeconomic stability Classification JEL: E52, E58
    Date: 2013–09
  4. By: Maurice Obstfeld (University of California, Berkeley, CEPR, and NBER (E-mail:
    Abstract: Banking systems have rapidly grown to a point where for many countries bank assets amount to multiples of GDP. As a consequence, governmentfs capacity to provide stability-enhancing fiscal guarantees against systemic crises can no longer be taken for granted. As regulation of dynamic financial markets will inevitably be imperfect, prudent governments need to adjust other facets of macroeconomic policy in order to mitigate financial instability. A precautionary approach to fiscal policy, leading to moderate levels of public debt relative to GDP over the medium term, is essential for the credibility of government promises to support the financial system, as well as the broader economy.
    Keywords: Fiscal policy, Financial stability, Monetary policy, Financial crisis, Banking crisis, Bank resolution
    JEL: E44 E58 E63 G15 G28
    Date: 2013–09
  5. By: John H. Cochrane
    Abstract: In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession prediction, and deflation and policy paradoxes are larger when prices are less sticky. I show that these puzzling predictions are artifacts of equilibrium selection. For the same interest-rate policy, different choices of multiple equilibria overturn all these results. A "local-to-frictionless" equilibrium, for the same interest rate policy, predicts mild inflation, no output reduction and negative multipliers during the liquidity trap, and its predictions approach the frictionless model smoothly.
    JEL: E12 E3 E4 E6
    Date: 2013–09
  6. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  7. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  8. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur’s net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Connection, financial sector, real economy, monetary policy transmission mechanism
    JEL: G20 E44 E52
    Date: 2013
  9. By: Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: A planner sets a lump sum transfer and a linear tax on labor income in an economy with incomplete markets, heterogeneous agents, and aggregate shocks. The planner's concerns about redistribution impart a welfare cost to fluctuating transfers. The distribution of net asset holdings across agents affects optimal allocations, transfers, and tax rates, but the level of government debt does not. Two forces shape long-run outcomes: the planner's desire to minimize the welfare costs of fluctuating transfers, which calls for a negative correlation between the distribution of net assets and agents' skills; and the planner's desire to use fluctuations in the real interest rate to adjust for missing state-contingent securities. In a model parameterized to match stylized facts about US booms and recessions, distributional concerns mainly determine optimal policies over business cycle frequencies. These features of optimal policy differ markedly from ones that emerge from representative agent Ramsey models like Aiyagari et al (2002).
    JEL: E62 H21 H63
    Date: 2013–09
  10. By: Jasmine Zheng
    Abstract: This paper analyzes the impact and effectiveness of conventional monetary policy during periods of low and high financial stress in the US economy. Using data from 1973Q1 to 2008Q4, the analysis is conducted by estimating a Threshold Vector Autoregression (TVAR) model to capture switching between the low and high financial stress regimes implied by the theoretical literature. The empirical findings support regime-dependent effects of conventional US monetary policy. In particular, the output response to monetary policy shocks is larger during periods of high financial stress than in periods of low financial stress. The existence of a cost channel effect during periods of high financial stress imply a worsening of the short run output-inflation trade off during financial crises. When the sample period is extended to 2012Q4, there is evidence that expansionary monetary policy continues to be effective during periods of high financial stress when the prevailing interest rate is at the zero lower bound. By keeping interest rates and credit spreads low, expansionary monetary policy helps shift the US economy from high to low financial stress regimes. Large expansionary monetary policy shocks also increase the likelihood of moving the economy out of a high financial stress regime.
    Keywords: Monetary policy, uncertainty, threshold vector autoregression models
    JEL: F44 E44 E52
    Date: 2013–09
  11. By: Enrique Martínez-García
    Abstract: I investigate a model of the U.S. economy with nominal rigidities and a financial accelerator mechanism à la Bernanke et al. (1999). I calculate total factor productivity and monetary policy deviations for the U.S. and quantitatively explore the ability of the model to account for the cyclical patterns of GDP (excluding government), investment, consumption, the share of hours worked, inflation and the quarterly interest rate spread between the Baa corporate bond yield and the 20-year Treasury bill rate during the Great Moderation. I show that the magnitude and cyclicality of the external finance premium depend nonlinearly on the degree of price stickiness (or lack thereof) in the Bernanke et al. (1999) model and on the specification of both the target Taylor (1993) rate for policy and the exogenous monetary shock process.> ; The strong countercyclicality of the external finance premium induces substitution away from consumption and into investment in periods where output grows above its long-run trend as the premium tends to fall below its steady state and financing investment becomes temporarily cheaper. The less frequently prices change in this environment, the more accentuated the fluctuations of the external finance premium are and the more dominant they become on the dynamics of investment, hours worked and output. However, these features—the countercyclicality and large volatility of the spread—are counterfactual and appear to be a key impediment limiting the ability of the model to account for the U.S. data over the Great Moderation period.
    Keywords: National security
    Date: 2013
  12. By: Jean-Stéphane Mésonnier; Dalibor Stevanovic
    Abstract: The recent crisis has revealed the potentially dramatic consequences of allowing the build-up of an overstretched leverage of the financial system, and prompted proposals by bank supervisors to significantly tighten bank capital requirements as part of the new Basel 3 regulations. Although these proposals have been fiercely debated ever since, the empirical question of the macroeconomic consequences of shocks to banks’ leverage, be they policy induced or not, remains still largely unsettled. In this paper, we aim to overcome some longstanding identification issues hampering such assessments and propose a new approach based on a data-rich environment at both the micro (bank) level and the macro level, using a combination of bank panel regressions and macroeconomic factor models. We first identify bank leverage shocks at the micro level and aggregate them to an economy-wide measure. We then compute impulse responses of a large array of macroeconomic indicators to our aggregate bank leverage shock, using the new methodology developed by Ng and Stevanovic (2012). We find significant and robust evidence of a contractionary impact of an unexpected shock reducing the leverage of large banks.
    Keywords: Bank capital ratios, macroeconomic fluctuations, panel, dynamic factor models
    JEL: C23 C38 E32 E51 G21 G32
    Date: 2013
  13. By: Serena Ng; Jonathan H. Wright
    Abstract: This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession which was unlike most other post-war recessions in the US in being driven by deleveraging and financial market factors. We document how recessions with financial market origins are different from those driven by supply or monetary policy shocks. This helps explain why economic models and predictors that work well at some times do poorly at other times. We discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts.
    JEL: C22 C32 E32 E37
    Date: 2013–09
  14. By: Singh, Ajay Pratap; Nikolaou, Michael
    Abstract: The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulations on US economy data. A number of issues for future study are proposed. --
    Keywords: Taylor rule,zero lower bound,liquidity trap,model predictive control,multiparametric programming
    JEL: E52 C61
    Date: 2013
  15. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices, and create bubbles. We show how leverage can be endogenously determined in equilibrium, and how it depends on volatility. We describe the dynamic feedback properties of leverage, volatility, and asset prices, in what we call the Leverage Cycle. We also describe some cross-sectional implications of multiple leverage cycles, including contagion, flight to collateral, and swings in the issuance volume of the highest quality debt. We explain the differences between the leverage cycle and the credit cycle literature. Finally, we describe an agent based model of the leverage cycle in which asset prices display clustered volatility and fat tails even though all the shocks are essentially Gaussian.
    Keywords: Leverage, Leverage cycle, Volatility, Collateral equilibrium, Collateral value, Liquidity wedge, Flight to collateral, Contagion, Adverse selection, Agent based models
    JEL: E32 E44 G01 G12 G14 G15
    Date: 2013–09
  16. By: Brant Abbott (University of British Columbia); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Yale University, IFS and NBER); Gianluca Violante (New York University, CEPR and NBER)
    Abstract: This paper compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor supply during college, government grants and loans, as well as private loans, complement parental transfers as sources of funding for college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by two percentage points in the long-run. Any further relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants (especially their need-based component) are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers.
    Keywords: Education, Financial Aid, Inter vivos Transfers, Credit Constraints, Equilibrium
    JEL: E24 I22 J23 J24
    Date: 2013–09
  17. By: Jeremy Lise (University College London); Jean-Marc Robin (Sciences-Po, Paris and University College London)
    Abstract: We develop an equilibrium model of on-the-job search with ex-ante heterogeneous workers and firms, aggregate uncertainty and vacancy creation. The model produces rich dynamics in which the distributions of unemployed workers, vacancies and worker-firm matches evolve stochastically over time. We prove that the surplus function, which fully characterizes the match value and the mobility decision of workers, does not depend on these distributions. We estimate the model on US labor market data from 1951-2007 and predict the fit for 2008-12. We use the model to measure the cyclicality of mismatch between workers and jobs.
    Keywords: On-the-job search; Heterogeneity; Aggregate fluctuations; Mismatch
    JEL: E24 E32 J63 J64
    Date: 2013–09
  18. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: This paper assesses the adjustment of inflation with financial dynamic fundamentals of money (financial depth), credit (financial activity) and efficiency. Three main findings are established. (1) There are significant long-run relationships between inflation and the fundamentals. (2) The error correction mechanism is stable in all specifications but in case of any disequilibrium, only financial depth is significant in adjusting inflation to the long-run relationship. (3) In the long-run, short-term adjustments in the ability of banks to transform money into credit do not matter in correcting inflation. This is most probably due to surplus liquidity issues. Policy implications are discussed.
    Keywords: Excess money; inflation; credit; Africa
    JEL: E31 E51 O55
    Date: 2013–04–14
  19. By: Yuzo Honda (Kansai University)
    Abstract: The effectiveness of nontraditional monetary policy is controversial at least in Japan. Making use of data from the quantitative easing monetary policy period, this paper presents statistical evidence on the effectiveness of nontraditional monetary policy. We empirically demonstrate that quantitative easing monetary policy, adopted by the Bank of Japan for the period from March 2001 to March 2006, had a stimulating effect on investment and production at least through Tobin's q channel. We also provide a simple and operational model in which an injection of base money lowers the interest rate on bonds, reduces the required rate of returns from capital stocks, and depreciates the value of domestic currency.
    Keywords: V Quantitative Easing, Vector Autoregressions, Stocks, Tobin's q, Asset Markets JEL Classification Number: E51
    JEL: E51
    Date: 2013–09
  20. By: Guillermo Calvo (Columbia University and NBER (E-mail:
    Abstract: The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not there to adequately trim its branches to keep it from toppling by its own weight or minor wind gusts. The issues raised in the paper are not entirely new but have been ignored in conventional theory. This is very strange because disregard for these key issues has lasted for more than half a century. Are we destined to keep on making the same mistake? The paper argues that a way to prevent that is to understand its roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to Sudden Stop, which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (a) why a credit boom may precede financial crisis, (b) why capital inflows grow in the run-up of balance-of-payments crises, and (c) why gross flows are pro-cyclical.
    Keywords: Financial Crises, Bubbles, Sudden Stop
    JEL: E32 E65 F32
    Date: 2013–09
  21. By: Mahmoudi, Babak
    Abstract: This paper investigates the long-run effects of open-market operations on the distributions of assets and prices in the economy. It offers a theoretical framework to incorporate multiple asset holdings in a tractable heterogeneous-agent model, in which the central bank implements policies by changing the supply of nominal bond and money. This model features competitive search, which produces distributions of money and bond holdings as well as price dispersion among submarkets. At a high enough bond supply, the equilibrium shows segmentation in the asset market; only households with good income shocks participate in the bond market. When deciding whether to participate in the asset market, households compare liquidity services provided by money with returns on bond. Segmentation in the asset market is generated endogenously without assuming any rigidities or frictions in the asset market. In an equilibrium with a segmented asset market, open-market operations affect households’ participation decisions and, therefore, have real effects on the distribution of assets and prices in the economy. Numerical exercises show that the central bank can improve welfare by purchasing bonds and supplying money when the asset market is segmented.
    Keywords: Open-Market Operation, Distributional Effects, Segmented Asset Market, Heterogeneous Agents, Competitive Search
    JEL: E00 E4 E5
    Date: 2013–09–21
  22. By: John Freebairn (Department of Economics, The University of Melbourne); Max Corden (Department of Economics, The University of Melbourne)
    Abstract: This article explores the arguments for and against the use of government debt to finance large-scale public investments. Relative to the options of higher taxation or lower other expenditures, debt finance means that both the costs and the benefits of the investment fall on future generations. Debt funded public investments can be an important component of a fiscal stimulus policy package, especially when the effectiveness of monetary policy is limited. While the vision arguments presume socially beneficial investment projects are chosen, political choices often involve projects with low benefit cost ratios. More debt involves higher and higher costs, not only interest costs, but also laxer fiscal choices, a weaker basis for macroeconomic policy to counter future economic shocks, and in extreme cases a loss of policy autonomy. An independent and transparent body to undertake benefit cost assessments of investment projects, and with public release and scrutiny, would support a higher level of debt finance.
    Keywords: Government investment, fiscal policy, debt finance
    JEL: E62 H54 O43
    Date: 2013–09
  23. By: D'Adamo, Gaetano (Universidad de Valencia); Rovelli, Riccardo (University of Bologna)
    Abstract: We model empirically the role of labor market institutions in affecting the response of inflation to labor market and exchange rate shocks in the EU. We adopt a simple Phillips curve framework, treating separately the sectors producing traded and non-traded goods. Our results show that labor market institutions have a significant role in affecting cross-country differences in inflation adjustment for the "sheltered" (non-trading) sector; the effects in the "exposed" (trading) sector are also significant but more limited. Increased wage coordination and more expenditure on LM policies (active or total) flatten the Phillips curve in both sectors. More active LM policies also reduce the persistence of inflation. However, but only in the non-trading sector, this effect is more than offset (in 15 countries out of 21) by the presence of stronger wage coordination, which increases the persistence of inflation. Finally, the adjustment of inflation to the real exchange rate, i.e. the exchange rate pass-through, is largely unaffected by institutional variables; only for non-tradables there is a strong negative effect of increased union density.
    Keywords: labor market institutions, inflation determinants, two-sector models
    JEL: E31 J50 J60
    Date: 2013–09
  24. By: DE KONING, Kees
    Abstract: Financial sector companies are different from those in the real sector. In the real sector the price for consumer goods and services is a price reflecting all costs which have been made to produce the output. Profits reflect the difference between the sales price and the costs base. The “guiding hand principle” helps entrepreneurs to make rational decisions. In the financial sector the managers do not produce anything else than “considered opinions”. The money entrusted to them belongs to the individual households. The prices quoted by the financial sector managers are based on guesses about future cash flows over the funds entrusted to them. There is no clear costs concept in financial sector companies as only future events will determine the true costs picture. The key difference between the two sectors is that real sector companies work with historical costs and the financial sector with future costs. The difference between the two sectors is immense as no one can really predict what the future holds in economic terms. In the U.S., where the combined balance sheet of individual households has been collected for many years, the statistics show that the financial assets net of liabilities on home mortgages and consumer durable goods are now 81% of total individual household assets. The remainder 19% is constituted by non-financial assets. This 81% was practically four times the annual personal income level of U.S. households in 2012. The net financial assets were also 3.5 times U.S.GDP in 2012. This figure alone shows the dominance of the financial sector over the real sector. However the picture for jobs and incomes is totally different. Nearly all jobs and incomes out of jobs are derived from the real sector. In 2011 the U.S. financial sector employed 5.8 million out of the 141 million employed persons or 4.1% of the total number of people employed in the States in that year. About 4% of the workforce manages financial assets which are 3.5 times GDP values, while 96% of the labour force works in the real sector. Job levels and disposable incomes are central to economic prosperity and they are the drivers of demand levels. The experience over the last 10 years has shown that the collective (mis)management of financial assets, especially on the home mortgages front, has been the principal cause of the downturn in jobs and incomes. The collective mistakes made by the U.S. financial sector in risk taking can be exemplified by the fact that, over the period 2004-2012, 21.4 million households out of the 53 million households in the U.S. who had a mortgage were affected by foreclosure proceedings and 5.4 million of them lost their homes. In all respects the individual households were the losers: on the jobs and incomes front; on the asset prices front as well as on the government debt front In this paper questions will be raised why no volume control measures were put in place to control the excessive growth in home mortgage volumes as compared to income growth of individual households. Questions will also be raised about quantitative easing policies which main aim was to lower the costs (price) of borrowings, rather than repair the income loss to individual households -a volume loss-. Evidence collected from the individual household statistics over the last 5 years show that individual households wanted and needed to repair their own balance sheets first, before entering into more borrowings, irrespective of the price. This paper aims to set out how the U.S. financial sector became the key player in causing the U.S. economy and with it most of the world economy to stumble and what can be done to shorten the adjustment period if a financial debacle affecting individual households has taken place.
    Keywords: economic growth, mortgage lending excess, indivdual households income growth,economic easing, financial sector, real sector,quantitative easing,bank reforms
    JEL: E0 E21 E24 E5 E58
    Date: 2013–09–25
  25. By: Pablo D'Erasmo; Enrique G. Mendoza
    Abstract: International historical records on public debt show infrequent episodes of outright default on domestic debt. Reinhart and Rogoff (2008) document these events and argue that they constitute a “forgotten history” in Macroeconomics. This paper develops a theory of domestic sovereign default in which distributional incentives, interacting with default costs, make default part of the optimal policy of a utilitarian social planner. The model supports equilibria with debt subject to default risk in which rising wealth inequality reduces the optimal debt and increases default probabilities and spreads. A quantitative experiment calibrated to European data shows that, in the observed range of inequality in the distribution of bond holdings, the model accounts for 1/3rd of the average debt and spreads of about 400 basis points. Default risk reduces sharply the sustainable debt, except when the weights in the government’s payoff function value the utility of bond holders more than their share of the wealth distribution. If the former is sufficiently larger than the latter, the model supports debt ratios similar to European averages exposed to low default probabilities.
    JEL: E44 E6 F34 H63
    Date: 2013–09
  26. By: Bill Russell
    Abstract: Whether or not macroeconomics is a science depends on the scientific nature of macroeconomic theories and how the discipline responds when the empirical evidence fails to match the underlying assumptions and predictions of the theories. By way of an example, four conditions for macroeconomics to be a science are developed and used to examine the ‘modern’ theories of the Phillips curve. It is found that while the discipline in general maintains one condition it routinely violates the other three. This suggests the macroeconomics discipline has some way to go before it can call itself a ‘pure science’.
    Keywords: Methodology, Phillips curve, inflation, structural breaks, nonstationary data, macroeconomics
    JEL: B41 C20 E31
    Date: 2013–09
  27. By: Nao Sudo; Kozo Ueda; Kota Watanabe
    Abstract: We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the U.S. scanner data. Second, regular prices are almost as flexible as those in the U.S. and Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable and maintained throughout the sample period. Fourth, during Japan's lost decades, temporary sales have played an increasingly important role in households' consumption expenditure. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment in particular indicators associated with a labor market while other components of price changes are not.
    Keywords: Business cycles ; Price levels ; Monetary policy
    Date: 2013
  28. By: Ledenyov, Dimitri O.; Ledenyov, Viktor O.
    Abstract: The central banks introduce and implement the monetary and financial stabilities policies, going from the accurate estimations of national macro-financial indicators such as the Gross Domestic Product (GDP). Analyzing the dependence of the GDP on the time, the central banks accurately estimate the missing observations in the financial time series with the application of different interpolation models, based on the various filtering algorithms. The Stratonovich – Kalman – Bucy filtering algorithm in the state space interpolation model is used with the purpose to interpolate the real GDP by the US Federal Reserve and other central banks. We overviewed the Stratonovich – Kalman – Bucy filtering algorithm theory and its numerous applications. We describe the technique of the accurate characterization of the economic and financial time series with application of state space methods with the Stratonovich – Kalman - Bucy filtering algorithm, focusing on the estimation of Gross Domestic Product by the Swiss National Bank. Applying the integrative thinking principles, we developed the software program and performed the computer modeling, using the Stratonovich – Kalman – Bucy filtering algorithm for the accurate characterization of the Australian GDP, German GDP and the USA GDP in the frames of the state-space model in Matlab. We also used the Hodrick-Prescott filter to estimate the corresponding output gaps in Australia, Germany and the USA. We found that the Australia, Germany on one side and the USA on other side have the different business cycles. We believe that the central banks can use our special software program with the aim to greatly improve the national macroeconomic indicators forecast by making the accurate characterization of the financial time-series with the application of the state-space models, based on the Stratonovich – Kalman – Bucy filtering algorithm.
    Keywords: Wiener filtering theory, Stratonovich optimal non-linear filtering theory, Stratonovich – Kalman – Bucy filtering algorithm, state space interpolation technique, financial time-series, nonlinearities, stochastic volatility; Markov switching, Bayesian estimation. Gaussian distribution, econophysics, econometrics, central bank, integrative thinking.
    JEL: C4 C46 C5 C51 C52 C53 C58 C6 E5 E58
    Date: 2013–09–27
  29. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Yu-Shan Hsu (Department of Economics, National Chung Cheng University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: In one-sector neoclassical growth models, consumption externalities lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state only if there is a labor-leisure tradeoff. This paper shows that in a two-sector neoclassical growth model, even without a labor-leisure tradeoff, consumption spillovers easily lead to an inefficient allocation in a steady state and indeterminate equilibrium toward a steady state. Negative consumption spillovers that yield over-accumulation of capital in a one-sector model may lead to under-accumulation or an over-accumulation of capital in two-sector models depending on the relative capital intensity between sectors. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy.
    Keywords: two-sector model, consumption externalities, efficiency, indeterminacy
    JEL: E21 E32 O41
    Date: 2013–08
  30. By: Cruz , Christopher John; Mapa, Dennis
    Abstract: With the adoption of the Bangko Sentral ng Pilipinas (BSP) of the Inflation Targeting (IT) framework in 2002, average inflation went down in the past decade from historical average. However, the BSP’s inflation targets were breached several times since 2002. Against this backdrop, this paper develops an early warning system (EWS) model for predicting the occurrence of high inflation in the Philippines. Episodes of high and low inflation were identified using Markov-switching models. Using the outcomes of regime classification, logistic regression models are then estimated with the objective of quantifying the possibility of the occurrence of high inflation episodes. Empirical results show that the proposed EWS model has some potential as a complementary tool in the BSP’s monetary policy formulation based on the in-sample and out-of sample forecasting performance.
    Keywords: Inflation Targeting, Markov Switching Models, Early Warning System
    JEL: C5 C52 E37
    Date: 2013
  31. By: Patrick A. Imam
    Abstract: Abstract Empirical evidence is mounting that, in advanced economies, changes in monetary policy have a more benign impact on the economy—given better anchored inflation expectations and inflation being less responsive to variation in unemployment—compared to the past. We examine another aspect that could explain this empirical finding, namely the demographic shift to an older society. The paper first clarifies potential transmission channels that could explain why monetary policy effectiveness may moderate in graying societies. It then uses Bayesian estimation techniques for the U.S., Canada, Japan, U.K., and Germany to confirm a weakening of monetary policy effectiveness over time with regards to unemployment and inflation. After proving the existence of a panel co-integration relationship between ageing and a weakening of monetary policy, the study uses dynamic panel OLS techniques to attribute this weakening of monetary policy effectiveness to demographic changes. The paper concludes with policy implications.
    Keywords: Monetary policy;United States;Canada;Japan;United Kingdom;Germany;Developed countries;Aging;Population;Economic models;Cross country analysis;Demographic shift, monetary transmission mechanism, life-cycle model
    Date: 2013–09–06
  32. By: Michael W. Elsby; Donggyun Shin; Gary Solon
    Abstract: Using 1979-2011 Current Population Survey data for the United States and 1975-2011 New Earnings Survey data for Great Britain, we study wage behavior in both countries, with particular attention to the Great Recession. Real wages are procyclical in both countries, but the procyclicality of real wages varies across recessions, and does so differently between the two countries. U.S. distributions of year-to-year nominal wage change show many workers reporting zero change (suggesting wage stickiness) and many reporting nominal reductions (suggesting wage flexibility), but both findings could be distorted by reporting error. The British data, which are based on employers’ payroll records, show much lower prevalence of zero wage change, but still show surprisingly frequent nominal wage cuts. The complex constellation of empirical regularities defies explanation by simple theories.
    JEL: E24 E32 J3 J64
    Date: 2013–09
  33. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime.
    Keywords: Time-varying policy rule coefficients, monetary and fiscal policy interactions, nonlinear state-space models
    JEL: C11 C32 E63
    Date: 2013–07–16
  34. By: Kitov, Ivan; KItov, Oleg
    Abstract: We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. Following the original problem formulation by Fisher and Phillips, the set of nested models starts with a simplistic version without autoregressive terms and one lagged term of explanatory variable. The lag is determined empirically together with all coefficients. The model is estimated using the Boundary Element Method (BEM) with the least squares method applied to the integral solutions of the differential equations. All models include one structural break might be associated with revisions to definitions and measurement procedures in the 1980s and 1990s as well as with the change in monetary policy in 1994-1995. For the GDP deflator, our original model provided a root mean squared forecast error (RMSFE) of 1.0% per year at a four-year horizon for the period between 1971 and 2004. The same RMSFE is estimated with eight new readings obtained since 2004. The rate of CPI inflation is predicted with RMSFE=1.5% per year. For the naive (no change) forecast, RMSFE at the same time horizon is 2.95% and 3.3% per year, respectively. Our model outperforms the naive one by a factor of 2 to 3. The relationships for inflation were successfully tested for cointegration. We have formally estimated several vector error correction (VEC) models for two measures of inflation. In the VAR representation, these VECMs are similar to the Phillips curves. At a four year horizon, the estimated VECMs provide significant statistical improvements on the results obtained by the BEM: RMSFE=0.8% per year for the GDP deflator and ~1.2% per year for CPI. For a two year horizon, the VECMs improve RMSFEs by a factor of 2, with the smallest RMSFE=0.5% per year for the GDP deflator. This study has validated the reliability and accuracy of the linear and lagged relationships between inflation, unemployment, and the change in labour force between 1970 and 2012.
    Keywords: monetary policy, inflation, unemployment, labour force, Phillips curve, measurement error, forecasting, cointegration, France
    JEL: C32 E31 E6 J21 J64
    Date: 2013–09–27
  35. By: Łukasz Goczek (Faculty of Economic Sciences, University of Warsaw); Dagmara Mycielska (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The aim of the article is to examine the degree of the long-run interest rate convergence in the context of Poland's joining the EMU. In this perspective, it is frequently argued that the expectations of Poland's participation in the EMU should manifest themselves in long-run interest rate convergence. This should be visible in the long-run fall of interest rate risk premium in Poland. In contrast, the paper raises the question of the actual speed of such convergence and questions the existence of this phenomenon in Poland. Confirmation of the hypothesis concerning slow convergence in the risk premium is essential to the analysis of costs of the Polish accession to the EMU. The main hypothesis of the article is verified using a Vector Error-Correction Mechanism model of an Uncovered Interest Rate Parity and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, interest rate convergence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013
  36. By: Francesco Bianchi; Andrea Civelli
    Abstract: Under the Globalization Hypothesis for inflation, as globalization increases, global economic slack should progressively replace the domestic gap in driving inflation. In order to assess the empirical support for this theoretical prediction, we use impulse response functions of inflation to domestic and foreign output gap shocks from a TV-VAR model estimated for eighteen countries. The main results of the analysis are twofold: First, the structural results show that global slack affects the dynamics of inflation in many countries, yet these effects do not get stronger over time. Second, a panel analysis that exploits the cross-section characteristics of the response functions shows that globalization, measured in terms of openness and business cycles integration, is positively related to the effects of global slack on inflation. The degree of openness of a country and its economic integration into the global economy are complementary rather than overlaid forces.
    Keywords: Globalization, Inflation, Time-variation, VAR
    JEL: E31 F02 F41
    Date: 2013
  37. By: Stefano Neri (Banca d'Italia)
    Abstract: Since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions, hindering the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households. This paper makes an empirical assessment of the impact of the tensions on bank lending rates in the main euro-area countries, concluding that they have had a significant impact on the cost of credit in the peripheral countries. A counterfactual exercise indicates that if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011. These results are robust to alternative measures of the cost of credit and econometric techniques.
    Keywords: sovereign debt crisis, bank lending rates, seemingly unrelated regression
    JEL: C32 E43 G21
    Date: 2013–06
  38. By: Wolters, Maik H.
    Abstract: This paper investigates the accuracy of forecasts from four DSGE models for inflation, output growth and the federal funds rate using a real-time dataset synchronized with the Fed's Greenbook projections. Conditioning the model forecasts on the Greenbook nowcasts leads to forecasts that are as accurate as the Greenbook projections for output growth and the federal funds rate. Only for inflation the model forecasts are dominated by the Greenbook projections. A comparison with forecasts from Bayesian VARs shows that the economic structure of the DSGE models which is useful for the interpretation of forecasts does not lower the accuracy of forecasts. Combining forecasts of several DSGE models increases precision in comparison to individual model forecasts. Comparing density forecasts with the actual distribution of observations shows that DSGE models overestimate uncertainty around point forecasts. --
    Keywords: DSGE models,Bayesian VAR,forecasting,model uncertainty,forecast combination,density forecasts,real-time data,Greenbook
    JEL: C53 E31 E32 E37
    Date: 2013
  39. By: Hiew, Lee-Chea; Puah, Chin-Hong; Habibullah, Muzafar Shah
    Abstract: Using the consumer theory approach as suggested by Habibullah (2009), this study aims to shed new light on monetary authority by incorporating advertising expenditure, a variable that has been neglected in the past, into study of the money demand function in Indonesia. In addition, different measurements of monetary aggregates (simple-sum and Divisia money) have been used in the estimation to provide better insight into the selection of a suitable monetary policy variable for the case of Indonesia. Empirical findings from the error-correction model (ECM) indicate that the advertising expenditure variable has a significant impact on the demand for money. Furthermore, as compared to simple-sum money, the model that used Divisia monetary aggregates rendered more plausible estimation results in the estimation of money demand function.
    Keywords: Advertising Expenditure, Divisia Money, Money Demand
    JEL: C43 E41 M37
    Date: 2013
  40. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: In the first empirical study on how financial reforms have been instrumental in mitigating inequality through financial sector competition, we contribute at the same time to the macroeconomic literature on measuring financial development and respond to the growing field of economic development by means of informal sector promotion. Hitherto, unexplored financial sector concepts of formalization, semi-formalization and informalization are introduced. Four main findings are established: (1) while formal financial development decreases inequality, financial sector formalization increases it; (2) whereas semi-formal financial development increases inequality, the effect of financial semi-formalization is unclear; (3) both informal financial development and financial informalization have an income equalizing effect and; (4) non-formal financial development is pro-poor. Policy implications are discussed.
    Keywords: Financial Development; Shadow Economy; Poverty; Inequality; Africa
    JEL: E00 G20 I30 O17 O55
    Date: 2013–01–01
  41. By: Grieve Roy H (Department of Economics, University of Strathclyde)
    Abstract: Scholars who in recent years have studied the Sraffa papers held in the Wren Library of Trinity College, Cambridge, have concluded from Sraffa’s critical (but unpublished) observations on Chapter 17 of Keynes’s General Theory that he rejected Keynes’s central proposition that the rate of interest on money may come to ‘rule the roost’, thus dragging the economy into recession. While Sraffa does indeed express dissatisfaction with Chapter 17, the commentators have, we believe, misunderstood his concern: we suggest that he was unhappy with the ‘own-rates’ terminology employed by Keynes rather than with the substance of the theory developed in Chapter 17.
    Keywords: Chapter 17 of Keynes’s General Theory, commodity-rates, own-rates of interest
    JEL: B22 B31 E12 E43
    Date: 2013–09
  42. By: Islam, Roumeen
    Abstract: This paper examines the interaction between fiscal policy and the broader macroeconomic context in open economies. It asks two questions. First, what was the relationship between fiscal policy and current account balances in countries in Europe and Central Asia during the past dozen years? Second, how might changes in (a) output composition and (b) financial sector profitability affect revenues and thus, the assessment of the underlying structural fiscal balance? The study finds that, for flexible exchange rate countries, expansionary fiscal policy has been associated with wider current account deficits. Moreover, changes in net exports and in financial sector profitability may have significant impacts on fiscal balances because of changes in revenues from the value-added tax and the corporate profits tax as a share of gross domestic product. These findings suggest that the countries of Europe and Central Asia have reason to be prudent in terms of fiscal policy choices, even as gross domestic product rises.
    Keywords: Debt Markets,Economic Theory&Research,Currencies and Exchange Rates,Emerging Markets,Access to Finance
    Date: 2013–09–01
  43. By: Leo Krippner
    Abstract: The Black framework offers a theoretically appealing way to model the term structure and gauge the stance of monetary policy when the zero lower bound of interest rates becomes constraining, but it is time consuming to apply using standard numerical methods. I outline a faster Monte Carlo simulation method for Black implementions, illustrate its performance for a one factor model, and then discuss the ready extension to models with multiple factors.
    Keywords: Black framework, zero lower bound; shadow short rate; term structure model
    JEL: E43 G12 G13
    Date: 2013–09
  44. By: Ugo Albertazzi (Bank of Italy); Margherita Bottero (Bank of Italy)
    Abstract: We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.
    Keywords: foreign banks, credit crunch, bank balance sheet channel, functional distance
    JEL: E44 G15 G14 G21
    Date: 2013–07
  45. By: Daniel Lema; Jorge M. Streb
    Abstract: The links between subnational political budget cycles (PBCs) and the national government in federal countries have seldom been studied. We study the behavior of the budget balance, public expenditures, and revenues in Argentine provinces during the 1985–2001 period. We find that in election years public expenditures increase, but revenues also do — a result exactly contrary to the predictions of rational opportunistic models of aggregate PBCs — and the budget deficit does not increase significantly. Since the increase in provincial revenues is due to larger federal transfers, we incorporate the influence of party alignment between governors and president. Public expenditures in election years increase in aligned provinces because of larger federal transfers, without affecting the budget deficit; in contrast, the budget deficit tends to increase in unaligned provinces. The federal government thus plays a key role in subnational PBCs, with an electoral cycle in the allocation of federal transfers.
    Keywords: political budget cycles, federal countries, discretional transfers, tactical allocation, party alignment, distributive politics
    JEL: D72 E62
    Date: 2013–09
  46. By: Fady Barsoum (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper investigates the response of stock market volatility to a monetary policy shock using a structural factor-augmented Bayesian vector autoregressive (FAVAR) model. We construct a monthly dataset of realized volatilities of the constituents of the S&P500 index and extract volatility factors from this dataset using a suitable dynamic factor model (DFM). The volatility factors are included in a structural FAVAR model where the dynamic response of stock market volatility to a monetary policy shock is analyzed. This approach does not only allow us to study the response of the aggregate market volatility but also the responses of all the volatilities of the single stocks and the different sectors included in the dataset. In general, the results show that the stock market returns decrease and the stock market volatility increases following a monetary policy tightening. Although the magnitude of the volatility response to monetary policy shocks varies between the different stocks and sectors, the dynamics of the response does not differ widely. Both the magnitude and dynamics of the volatility response depend on the sample period examined.
    Keywords: dynamic factor model, Bayesian estimation, factor-augmented vector autoregression, monetary policy, stock market volatility, long memory
    JEL: C32 C38 C58 E52
    Date: 2013–02–15
  47. By: Majeed, Dr. Muhammad Tariq
    Abstract: The purpose of this study is to examine the impact of financial and economic development on cross-country income inequality using a panel data set from 50 low-income developing counties over a long period 1970-2008. The results show that financial development helps in reducing inequalities, however a non-monotonic relationship between financial development and inequality does not hold. The study finds a non-monotonic relationship between inequality and level of economic development, thus this study supports Kuznets inverted-U hypothesis. The government emerges as a major player in reducing income inequalities as its role is significant in all models. Policy makers should primarily focus on achieving the higher levels of economic development to reduce increasing inequalities. Since financial development, reduces inequalities irrespective of its level, policy makers need to focus more on improvements in financial reforms.
    Keywords: Inequality; Financial Development; Government; Developing Countries
    JEL: C23 D31 E4 E51 H10
    Date: 2013–09–30
  48. By: Niamh Hardiman (UCD Geary Institute, School of Politics and International Relations, University College Dublin); Muiris MacCarthaigh (School of Politics, International Studies and Philosophy, Queens University Belfast)
    Abstract: The Irish experience of fiscal retrenchment under crisis conditions poses new questions of governance, the evolving answers to which are likely to involve importance changes in the state’s organizational profile and in its policy competences. The government is required to formulate and implement extremely tough choices, particularly since Ireland entered an EU-IMF loan programme in November 2010. Yet government does retain some policy discretion in the priorities it adopts in the composition of budget adjustment and in the distributive impact of cuts. This paper sets out to explore where the adjustments have been made through examination both of the composition of budgets and of the organizational configuration of state institutions, and it analyses how these outcomes can be accounted for. The paper draws upon a new official database setting out a detailed compositional analysis of Irish public spending between 2008 and 2012, and upon the Irish State Administration Database ( through which the organizational aspects of the state's policy capacity can be analysed.
    Keywords: Ireland, Retrenchment, Public Administration, fiscal politics, economic crisis
    JEL: E62 H40 H61 H83
    Date: 2013–09–26
  49. By: Scott R. Baker; Nicholas Bloom
    Abstract: A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.
    JEL: D92 E2 O4
    Date: 2013–09
  50. By: Alberto Cavallo; Eduardo Cavallo; Roberto Rigobon
    Abstract: We study the daily behavior of supermarket prices and product availability following two recent natural disasters: the 2010 earthquake in Chile and the 2011 earthquake in Japan. In both cases there was an immediate and persistent effect on product availability. The number of goods available for sale fell 32% in Chile and 17% in Japan from the day of the disaster to its lowest point, which occurred 61 and 18 days after the earthquakes, respectively. Product availability recovered slowly, and a significant share of goods remained out of stock after six months. By contrast, prices were stable for months, even for goods that were experiencing severe shortages. These trends are present at all levels of aggregation, but there is heterogeneity across categories. We further look at the frequency and magnitudes of price changes in both countries and find that the results in Chile are consistent with pricing models where retailers have fear of "customer anger". In Japan the evidence suggests a bigger role for supply disruptions that restricted the ability of retailers to re-stock goods after the earthquake.
    JEL: E20 E30 O57 Q54
    Date: 2013–09
  51. By: Khelifi, Atef
    Abstract: Unexpectedly, and as a result of a simple exercise of intellectual curiosity, the resolution of the Ramsey growth problem with a Utility function underlying relative preferences for consumption and savings, provides remarkable results and interpretations. An advanced microeconomic analysis of this particular assumption which follows consequently, and presumably the sole one of the literature, appears to bring important new insights to the consumer theory, and to lead reasonably to the question of the validity of the current version of the Ramsey model.
    Keywords: Ramsey model; Optimal Growth; Optimal control; Savings decision
    JEL: D5 D91 E1 E2 O41
    Date: 2013
  52. By: Dimitrios P. Louzis (Bank of Greece); Angelos T. Vouldis (Bank of Greece)
    Abstract: The paper develops a financial systemic stress index (FSSI) for Greece. We present a methodology for constructing and evaluating a systemic stress index which: i) adopts the suggestion of Hollo et al. (2012) [Hollo, Kremer, and Duca (2012) “CISS – A ‘Composite Indicator of Systemic Stress’ in the Financial System” ECB Working Paper 1426] to incorporate time-varying correlations between different market segments, and uses a multivariate GARCH approach which is able to capture abrupt changes in correlations; ii) utilizes both market and balance sheet data; and iii) evaluates the FSSI utilizing the results of a survey, conducted among financial experts, in order to construct a benchmark chronology of financial crises for Greece, which in turn is used to investigate whether changes in the FSSI are good indicators for financial crises. The results show that the FSSI is able to provide a precise periodization of crises.
    Keywords: Financial crisis; systemic stress; stress index; multivariate GARCH.
    JEL: G01 G10 G20 E44
    Date: 2013–03
  53. By: Ojo, Marianne
    Abstract: This paper not only addresses how linkages, direct and facilitating linkages, can benefit microfinance institutions – and particularly in jurisdictions where the Savings Group Outreach involvement is particularly low, but also illustrates ways and means whereby group lending and other more recent innovative methods used by micro lenders to secure repayments, could increase the desired effects, efficiency and impact of microfinance in selected jurisdictions. In so doing, it addresses some of the existing and persisting problems of micro finance in rural areas. An innovative aspect of the paper is evidenced through its recommendation of the Micro-Savings Requirement Scheme - which offers numerous benefits – as will be highlighted in this paper.
    Keywords: microfinance; regulation; agency theory; Micro-Savings Requirement Scheme
    JEL: E2 E6 G2 G21 G23 G28 K2
    Date: 2013–09–18
  54. By: Jan Marcus; Rainer Siegers; Markus M. Grabka
    Abstract: This documentation describes the data preparation of the new consumption module in the German Socio-Economic Panel Study (SOEP) and introduces the content and structure of the generated dataset "hconsum." In 2010, the SOEP for the first time included a detailed consumption module in the household questionnaire. This documentation discusses several methodological challenges of the new module and suggests possible remedies. The methodological challenges include inconsistencies between monthly and annual consumption information, missing values, and a high incidence of heaping.
    Keywords: SOEP, consumption, heaping, imputation, generalized beta of the second kind
    JEL: C81 D30 E21
    Date: 2013
  55. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: With earthshaking and heartbreaking trends in African capital flight provided by a new database, this paper complements existing literature by answering some key policy questions on the feasibility of and timeframe for policy harmonization in the battle against the economic scourge. The goal of the paper is to study beta-convergence of capital flight across a set of 37 African countries in the period 1980-2010 and to discuss the policy implications. Three main findings are established. (1) African countries with low capital flight rates are catching-up their counterparts with higher rates, implying the feasibility of policy harmonization towards fighting capital flight. (2) Petroleum-exporting and conflict-affected countries significantly play out in absolute and conditional convergences respectively. (3) Regardless of fundamental characteristics, a genuine timeframe for harmonizing policies is within a horizon of 6 to 13 years. In other words, full (100%) convergence within the specified horizon is an indication that policies and regulations can be enforced without distinction of nationality or locality.
    Keywords: Econometric modeling; Big push; Capital flight; Debt relief; Africa
    JEL: C50 E62 F34 O19 O55
    Date: 2013–07–20
  56. By: Bryan Kelly; Hanno Lustig; Stijn Van Nieuwerburgh
    Abstract: We propose a network model of firm volatility in which the customers’ growth rate shocks influence the growth rates of their suppliers, larger suppliers have more customers, and the strength of a customer-supplier link depends on the size of the customer firm. Even though all shocks are i.i.d., the network model produces firm-level volatility and size distribution dynamics that are consistent with the data. In the cross section, larger firms and firms with less concentrated customer networks display lower volatility. Over time, the volatilities of all firms co-move strongly, and their common factor is concentration of the economy-wide firm size distribution. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions.
    JEL: E1 G10
    Date: 2013–09

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