nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒10‒11
forty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada By Mikael Khan; Louis Morel; Patrick Sabourin
  2. Estimating Contract Indexation in a Financial Accelerator Model By Charles T. Carlstrom; Last: T. Carlstrom; Timothy S. Fuerst; Last: S. Fuerst; Alberto Ortiz; Last: Ortiz; Matthias Paustian; Last: Paustian
  3. Patterns of Convergence and Divergence in the Euro Area By Ángel Estrada; Jordi Galí; David López-Salido
  4. Effect of the zero lower bound on bond yield sensitivity to news in Canada in comparison with the UK and US By Richhild Moessner
  5. Estimating the Indian natural interest rate and evaluating policy By Ashima Goyal; Sanchit Arora
  6. Monetary Policy Frameworks in Asia : Experience, Lessons, and Issues By Peter J. Morgan
  7. What now for monetary policy? By John H. Makin
  8. ARCH and structural breaks in United States inflation By Bill Russell
  9. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Filippo Ippolito; Ali K. Ozdagli; Ander Perez
  10. Sector GDP concentration bias in the macro-money demand specification: New evidence for India By Subrahmanyam Ganti; Sridhar Talidevara
  11. Lumpy investment in sticky information general equilibrium By Verona, Fabio
  12. Macroeconomic Imbalances in the EU By Stefan Ederer; Peter Reschenhofer
  13. Financial sector-output dynamics in the euro area: Non-linearities reconsidered By Schleer, Frauke; Semmler, Willi
  14. Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory By Fabian Lindner
  15. Inflation, unemployment, and labour force. Phillips curves and long-term projections for Austria By Ivan Kitov; Oleg Kitov
  16. Innovation, reallocation and growth By Acemoglu, Daron; Akcigit, Ufuk; Bloom , Nicholas; Kerr , William
  17. Banking Globalization, Transmission, and Monetary Policy Autonomy By Linda S. Goldberg
  18. How Much Do Official Price Indexes Tell Us about Inflation? By Jessie Handbury; Tsutomu Watanabe; David E. Weinstein
  19. Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure By Chienyu Huang; Juin Jen Chang; Lei Ji
  20. Credit and Liquidity in Interbank Rates: a Quadratic Approach. By Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
  21. Central bank liquidity auction mechanism design and the interbank market By Ollikka, Kimmo; Tukiainen , Janne
  22. Sovereigns versus Banks: Credit, Crises, and Consequences By Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
  23. Universal banking, competition and risk in a macro model By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  24. Firms, destinations, and aggregate fluctuations By Julian Di Giovanni; Andrei A. Levchenko; Isabelle Méjean
  25. Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects By Marcus Hagedorn; Fatih Karahan; Iourii Manovskii; Kurt Mitman
  26. Africa's macroeconomic story By Hostland, Douglas; Giugale, Marcelo M.
  27. China's Capital Controls - Through the Prism of Covered Interest Differentials By Yin-Wong Cheung; Risto Herrala
  28. Scientific breakthroughs, innovation clusters and stochastic growth cycles By Stadler, Manfred
  29. Inequality,debt and taxation:the perverse relation between the productive and the non-productive assets of the economy By Mario Amendola; Jean Luc Gaffard; Fabricio Patriarca
  30. Demanda externa, términos de intercambio y el papel de la política monetaria durante la crisis de 2008 By Johana Maritsa Hernández Henao; Last: Hernández Henao
  31. Midas, transmuting all, into paper: The Bank of England and the Banque de France during the Revolutionary and Napoleonic Wars By Chadha , Jagjit S.; Newby, Elisa
  32. Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments By Scott R. Baker; Nicholas Bloom
  33. Crisi finanziaria globale, crisi sovrana e crisi bancaria: L'Italia e il confronto europeo By Pietro Alessandrini; Luca Papi; Andrea Filippo Presbitero; Alberto Zazzaro
  34. Illiquid Life Annuities By Hippolyte d’Albis; Johanna Etner
  35. Capital income shares and income inequality in the European Union By Schlenker, Eva; Schmid, Kai D.
  36. Lisbon Strategy implementation in 12 New EU Members – multivariate analysis of structural indicators By Magdalena Olczyk
  37. Net interoffice accounts of global banks: the role of domestic funding. By D’Avino, C.
  38. Currency Union with and without Banking Union. By Bignon, V.; Breton, R.; Rojas Breu, M.
  39. Market Structure and Exchange Rate Pass-Through By Raphael S. Schoenle; Raphael A. Auer
  40. What fiscal policy is most effective? A Meta Regression Analysis By Sebastian Gechert
  41. Contributions to a history of prices in Norway: Monthly price indices, 1777-1920 By Jan Tore Klovland
  42. Investment dynamics with information costs By Verona, Fabio
  43. An Asian Perspective on Global Financial Reforms By Peter J. Morgan; Victor Pontines
  44. Modeling Hyperinflation Phenomenon: A Bayesian Approach By Rolando Gonzales Martínez; Last: Gonzales Martínez
  45. Risky institutions: political regimes and the cost of public borrowing in early modern Italy By Chilosi, David
  46. Institution-Induced Productivity Differences and Patterns of International Capital Flows By Matsuyama, Kiminori

  1. By: Mikael Khan; Louis Morel; Patrick Sabourin
    Abstract: In this paper, the authors propose a measure of underlying inflation for Canada obtained from estimating a monthly factor model on individual components of the CPI. This measure, labelled the common component of CPI, has intuitive appeal and a number of interesting features. In particular, it is not affected by sector-specific price movements that can distort the signal in many other measures of underlying inflation, and appears to capture price movements that are indicative of aggregate demand fluctuations in the Canadian economy. This indicator may serve as a useful complement to existing measures of underlying inflation monitored by the Bank of Canada.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices; Monetary policy framework
    JEL: C1 E31 E32 E52 E58
    Date: 2013
  2. By: Charles T. Carlstrom; Last: T. Carlstrom (Federal Reserve Bank of Cleveland); Timothy S. Fuerst; Last: S. Fuerst (University of Notre Dame; Federal Reserve Bank of Cleveland); Alberto Ortiz; Last: Ortiz (Centro de Estudios Monetarios Latinoamericanos; EGADE Business School); Matthias Paustian; Last: Paustian (Bank of England)
    Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principle conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.
    Keywords: Agency costs; financial accelerator; business cycles.
    JEL: E32 E44
    Date: 2013–06
  3. By: Ángel Estrada; Jordi Galí; David López-Salido
    Abstract: We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples.
    Keywords: macroeconomic convergence, labor markets, competitiveness, inflation differentials, current account imbalances, relative prices
    JEL: E24 F31 O47
    Date: 2013–10
  4. By: Richhild Moessner
    Abstract: The interest rate channel of monetary policy works both through short- and long-term interest rates. At the zero lower bound of the policy rate, monetary policy can still be effective through unconventional monetary policy measures. We study whether the sensitivity of Canadian government bond yields to domestic and US macroeconomic data surprises changed at the zero lower bound, and compare the results with those for the United Kingdom and the United States. We find that the sensitivity of government bond yields to domestic economic news was reduced only at shorter maturities in Canada than in the United Kingdom and the United States. Moreover, we find that it was reduced less strongly in Canada than in the United Kingdom. This suggests that in Canada monetary policy lost less of its effectiveness than in the United Kingdom, and only up to shorter horizons than in the United Kingdom and the United States.
    Keywords: Monetary policy; zero lower bound; economic news; government bond yields
    JEL: E52 E58
    Date: 2013–09
  5. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Sanchit Arora (Indira Gandhi Institute of Development Research)
    Abstract: We estimate the unobserved time-varying natural interest rate (NIR) and potential output for the Indian economy using the Kalman Filter. Estimation is a special challenge in an emerging market because of limited length of data series and ongoing structural change. A key result in the literature is the NIR is imprecisely estimated. Structural aspects of the economy used in our estimation turn out, however, to improve the precision of the NIR estimates, although potential output continues to be imprecisely estimated. Turning points are well captured and estimates obtained for the output gap elasticity of aggregate supply and the interest elasticity of aggregate demand.The estimated NIR is used as an indicator of the monetary policy stance, which is found to be broadly contractionary and procyclical for the period under study.
    Keywords: Natural interest rate; potential output; Kalman filter; monetary policy
    JEL: E32 E43 E52
    Date: 2013–09
  6. By: Peter J. Morgan (Asian Development Bank Institute (ADBI))
    Abstract: This paper analyzes the evolution of East Asian monetary policy frameworks over the past two decades, chiefly in response to shocks from the Asian financial crisis of 1997–1998 and the global financial crisis (GFC) of 2007–2009. The Asian financial crisis showed the importance of exchange rate flexibility and credible policy frameworks, leading to increased central bank independence, greater focus on inflation policy and more flexible exchange rates. A key lesson of the GFC was the importance of containing systemic financial risk and the need for a “macroprudential†approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. Emerging economies face particular challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops†or reversals of capital inflows. The paper reviews the history of East Asian monetary policy frameworks since 1990; describes current monetary policy frameworks, including issue of price versus financial stability for a central bank and the policies a central bank can use to manage financial stability; the monetary policy transmission mechanism based on financial linkages and financial deepening; assesses policy outcomes including inflation targeting and responses to the “Impossible Trinityâ€; and makes overall conclusions. The paper finds that East Asian central banks have generally managed inflation and growth well over the past decade, but the difficulties faced by central banks of advanced countries in the aftermath of the GFC suggests that not all problems have been solved yet.
    Keywords: Monetary policy framework, Asia, Asian financial crisis, central bank independence, Capital Inflows, inflation policy
    JEL: E52 E58 F31 F32 G18
    Date: 2013–09
  7. By: John H. Makin (American Enterprise Institute)
    Abstract: Although the Fed’s original purpose was primarily to provide liquidity during financial crises and ensure a low and stable rate of inflation, it is now expending more energy on targeting lower unemployment and higher growth. Monetary policy, however, is ill-suited to achieving these goals.
    Keywords: the Federal Reserve,Monetary policy,Federal reserve policy,Economic outlook
    JEL: A E
    Date: 2013–10
  8. By: Bill Russell
    Abstract: United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.
    Keywords: Philips curve, ARCH, structural breaks, inflation, markup
    JEL: C22 E31
    Date: 2013–10
  9. By: Filippo Ippolito; Ali K. Ozdagli; Ander Perez
    Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.
    Keywords: bank lending channel, monetary policy transmission, firm financial constraints, bank financial health, floating interest rates
    JEL: G21 G32 E52
    Date: 2013–09
  10. By: Subrahmanyam Ganti (Indira Gandhi Institute of Development Research); Sridhar Talidevara
    Abstract: Money serves as an intermediate target variable for transmitting monetary policy actions in macroeconomic management. In this connection, no other macro-behavioural function is subjected to more modelling modifications and regression rigors than the macro-money demand function. Monetary policy planning crucially depends on the parameters of the money demand function. An emerging market economy undergoes structural change in the sector GDP composition when compared to that of a structurally (invariant) mature advanced economy. This obviously introduces a bias in the estimation of the income elasticity of money demand parameter if the structural change were not modelled into the money demand function. The present study tries to incorporate this structural change into the money demand function as an additional variable besides the aggregate GDP and interest rate as the conventional scale and opportunity cost parameters variables respectively. The simplified algebra permits us to proxy the sector GDP concentration variable by the numbers equivalent Herfindahl index(H) For the opportunity cost variable,1-3 year deposit rate and the call money rate are alternatively used. Maximum Likelihood estimates of the have thrown up a statistically highly significant positive coefficient of the H variable besides equally highly significant scale and opportunity cost variables with their expected positive and negative coefficients respectively. This empirical evidence suggests that without this variable, the conventional specification of the money demand function contains a serious policy-centric specification error. Also, the implication of the result is that as the sector GDP concentration increases, the demand for real money balances increases less proportionately, indicating presence of economies of scale.
    Keywords: Sector GDP Concentration, Macro-Money Demand Specification, Numbers Equivalent Herfindahl Index
    JEL: E01 E41 E51 E52
    Date: 2013–09
  11. By: Verona, Fabio (Bank of Finland Research)
    Abstract: In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.
    Keywords: sticky information; general equilibrium; lumpy investment; business cycle
    JEL: D83 E10 E22 E32
    Date: 2013–08–17
  12. By: Stefan Ederer; Peter Reschenhofer
    Abstract: This paper aims to identify different growth patterns in the EU which led to the emergence of macroeconomic imbalances. It provides a detailed statistical picture of the evolution of various macroeconomic variables on the demand as well as on the supply side, before, in and after the financial and economic crisis of 2008/09. It investigates the causes and discusses various ’channels’ which led to macroeconomic imbalances by means of a descriptive analysis of the key determinants of macroeconomic developments, such as wage and price developments, productivity growth etc. Special emphasis is given to developments of the share of labour in national income, the real interest rate and the real exchange rate. The analysis of this data set provides a comprehensive picture of the underlying causes for the specific growth patterns as well as a first assessment of their role in the development of macroeconomic imbalances within the EU. It derives tentative conclusions as to how macroeconomic imbalances can arise in a monetary union and how they can be addressed properly by economic policy.
    Keywords: EU integration, European economic policy, European governance, European Monetary Union, Macroeconomic disequilibria
    JEL: E61 F41
    Date: 2013–09
  13. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for euro area countries. Our study employs newly constructed financial condition indices that incorporate extensively banking variables. We apply a nonlinear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the financial sector-output linkages. The VSTAR model appears appropriate since it allows for smooth regime changes and asymmetric dynamics. We find that regime-switching takes place rather smoothly which dampens the negative output response after a shock in the financial sector in the selected euro area countries. Moreover, linearity cannot be rejected for all countries over some extensive time period questioning non-linearities in the financial sector-output nexus as unambiguous feature. In particular, we show that the negative effect of financial stress on output typically observed is not always present. This holds specifically for the time before the Lehman collapse, even if this is a model-defined high stress regime. After the collapse, we observe strong amplification mechanisms. This suggests that events leading to a strong economic breakdown are rare but large events and related to financial cycles which exhibit low frequency. --
    Keywords: Vector STAR,financial stress,financial cycle,real economy,regime-switching,euro area
    JEL: E2 E44 G01
    Date: 2013
  14. By: Fabian Lindner
    Abstract: The paper presents a critique of loanable funds theory by using simple accounting relationships. It is shown that many economists identify saving and the credit supply by interpreting the macroeconomic saving-investment identity as a budget constraint. According to that interpretation, more saving through lower consumption (and government spending) leads to a higher supply of credit and thus more funds to be invested by firms for investment. The paper shows that proponents of this theory commit accounting fallacies or need very strong and somewhat peculiar assumptions for their theory to hold. In the first step, the concepts of \saving" and \credit" will be clearly distinguished using simple accounting. It will be shown that credit is not limited by anybody's saving and that no one has to abstain from consumption in order for a credit to be provided. Also, it will be shown that financial saving (an increase in net financial assets) through a reduction in expenses reduces other economic units' ability to spend and save. The identification of saving and the provision of credit is likely to stem from the invalid application of neoclassical growth models to a monetary economy. In those models, there are either only tangible assets, so that no coordination failures in financial saving can occur, or in those models real goods are lent and borrowed, not money.
    Keywords: Saving, Wealth, Investment, Production, Financial Markets
    JEL: E21 E22 E23 E44 E50
    Date: 2013
  15. By: Ivan Kitov; Oleg Kitov
    Abstract: We model the rate of inflation and unemployment in Austria since the early 1960s within the Phillips/Fisher framework. The change in labour force is the driving force representing economic activity in the Phillips curve. For Austria, this macroeconomic variable was first tested as a predictor of inflation and unemployment in 2005 with the involved time series ended in 2003. Here we extend all series by nine new readings available since 2003 and re-estimate the previously estimated relationships between inflation, unemployment, and labour force. As before, a structural break is allowed in these relationships, which is related to numerous changes in definitions in the 1980s. The break year is estimated together with other model parameters by the Boundary Element Method with the LSQ fitting between observed and predicted integral curves. The precision of inflation prediction, as described by the root-mean-square (forecasting) error is by 20% to 70% better than that estimated by AR(1) model. The estimates of model forecasting error are available for those time series where the change in labour force leads by one (the GDP deflator) or two (CPI) years. For the whole period between 1965 and 2012 as well as for the intervals before and after the structural break (1986 for all inflation models) separately, our model is superior to the na\"ive forecasting, which in turn, is not worse than any other forecasting model. The level of statistical reliability and the predictive power of the link between inflation and labour force imply that the National Bank of Austria does not control inflation and unemployment beyond revisions to definitions. The labour force projection provided by Statistic Austria allows foreseeing inflation at a forty-year horizon: the rate of CPI inflation will hover around 1.3% and the GDP deflator will likely sink below zero between 2018 and 2034.
    Date: 2013–09
  16. By: Acemoglu, Daron (MIT, CEPR and NBER); Akcigit, Ufuk (University of Pennsylvania and NBER); Bloom , Nicholas (Stanford University, NBER and CEPR); Kerr , William (Harvard University, Bank of Finland, and NBER)
    Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
    Keywords: entry; growth; industrial policy; innovation; R&D; reallocation; selection
    JEL: E02 L11 O31 O32 O33
    Date: 2013–09–25
  17. By: Linda S. Goldberg
    Abstract: International financial linkages, particularly through global bank flows, generate important questions about the consequences for economic and financial stability, including the ability of countries to conduct autonomous monetary policy. I address the monetary autonomy issue in the context of the international policy trilemma: countries seek three typically desirable but jointly unattainable objectives: stable exchange rates, free international capital mobility, and monetary policy autonomy oriented toward and effective at achieving domestic goals. I argue that global banking entails some features that are distinct from broad issues of capital market openness captured in existing studies. In principal, if global banks with affiliates established in foreign markets can reduce frictions in international capital flows then the macroeconomic policy trilemma could bind tighter and interest rates will exhibit more co-movement across countries. However, if the information content and stickiness of the claims and services provided are enhanced relative to a benchmark alternative, then global banks can weaken the trilemma rather than enhance it. The result is a prediction of heterogeneous effects on monetary autonomy, tied to the business models of the global banks and whether countries are investment or funding locations for those banks. Empirical tests of the trilemma support this view that global bank effects are heterogeneous, and also that the primary drivers of monetary autonomy are exchange rate regimes.
    JEL: E44 F36 G32
    Date: 2013–10
  18. By: Jessie Handbury; Tsutomu Watanabe; David E. Weinstein
    Abstract: Official price indexes, such as the CPI, are imperfect indicators of inflation calculated using ad hoc price formulae different from the theoretically well-founded inflation indexes favored by economists. This paper provides the first estimate of how accurately the CPI informs us about “true” inflation. We use the largest price and quantity dataset ever employed in economics to build a Törnqvist inflation index for Japan between 1989 and 2010. Our comparison of this true inflation index with the CPI indicates that the CPI bias is not constant but depends on the level of inflation. We show the informativeness of the CPI rises with inflation. When measured inflation is low (less than 2.4% per year) the CPI is a poor predictor of true inflation even over 12-month periods. Outside this range, the CPI is a much better measure of inflation. We find that the U.S. PCE Deflator methodology is superior to the Japanese CPI methodology but still exhibits substantial measurement error and biases rendering it a problematic predictor of inflation in low inflation regimes as well.
    JEL: E01 E31 E5
    Date: 2013–10
  19. By: Chienyu Huang (Southwestern University of Finance and economics); Juin Jen Chang (Institute of economics, Academia Sinica Taiwan); Lei Ji (Ofce sciences-po,skema Business School)
    Abstract: In this paper we explore the effects of monetary policy on the number of firms, firm market size, inflation and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance CIA constraints on two distinct types of RD investment in-house RD and entry investment. This allows us to match the empirical evidence and provides novel implications to the literature. We show that if in-house RD (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the number of firms and inflation, but decreases the firm size and economic growth. By contrast, if entry investment variety expansion-type RD is subject to the CIA constraint, these variables adversely respond to such a monetary policy. Besides, our model generates rich transitional dynamics in response to a change in monetary policy, when RD entry is restricted by a cash constraint.
    Keywords: CIA constraints on RD, endogenous market structure,monetary policy,economic growth
    JEL: O30 O40 E41
    Date: 2013–09
  20. By: Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
    Abstract: We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.
    Keywords: Quadratic term-structure model, liquidity risk, credit risk, interbank market, unconventional monetary policy.
    JEL: E43 E44 G12 G21
    Date: 2013
  21. By: Ollikka, Kimmo (Government Institute for Economic Research); Tukiainen , Janne (Government Institute for Economic Research and Helsinki Center of Economic Research)
    Abstract: We study whether the mechanism design in the central bank liquidity auctions matters for the interbank money market interest rate levels and volatility. Furthermore, we compare different mechanisms to sell liquidity in terms of revenue, efficiency and auction stage interest rate levels and volatility. Most importantly, we ask which mechanism is the best at implementing the target policy interest rates to the interbank market and what are the trade-offs involved. We construct a relatively general model of strategic bidding with interdependent valuations, and combine it with a stylized model of the interbank market. The novel feature of the model is that the expectations of the interbank market outcomes determine the valuations in the liquidity auctions. The model captures the relevant features of how the European Central Bank sells liquidity. We use simulations to compare discriminatory price, uniform price and Vickrey auctions to a posted price mechanism with full allotment. In order to analyze interactions between the primary and the secondary market under four different mechanisms, we need to make a lot of assumptions and simplications. Given this caveat, we find that posted prices with full allotment is clearly the superior alternative in terms of implementing the policy interest rate to the interbank markets. This comes at the cost of less revenue compared to the revenue maximizing discriminatory price auction, but surprisingly, will not result in efficiency losses compared even to the Vickrey auction.
    Keywords: ECB liquidity auctions; interbank markets; mechanism design; multi-unit auctions; monetary policy; posted-prices
    JEL: C63 C72 D02 D44 D53 E43 E44 E52 E58 G21
    Date: 2013–09–17
  22. By: Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013–10
  23. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Vladislav Damjanovic (Department of Economics, University of Exeter); Charles Nolan (University of Glasgow)
    Abstract: A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.
    Keywords: Financial intermediation in DSGE models, separating commercial and investment banking, competition and risks, systematic and idiosyncratic risks, bailouts, deposit insurance and economic wedges.
    JEL: E13 E44 G11 G24 G28
    Date: 2013
  24. By: Julian Di Giovanni; Andrei A. Levchenko; Isabelle Méjean
    Abstract: This paper uses a database covering the universe of French firms for the period 1990- 2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded decomposition of firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms directly contribute to aggregate fluctuations; and (ii) aggregate fluctuations can arise from idiosyncratic shocks due to input-output linkages across the economy. Firm linkages are approximately three times as important as the direct effect of firm shocks in driving aggregate fluctuations.
    Keywords: Aggregate Fluctuations, Firm-Level Shocks, Large Firms, Linkages.
    JEL: E32 F12 F41
    Date: 2013–10
  25. By: Marcus Hagedorn; Fatih Karahan; Iourii Manovskii; Kurt Mitman
    Abstract: We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively.
    JEL: E24 J63 J64 J65
    Date: 2013–10
  26. By: Hostland, Douglas; Giugale, Marcelo M.
    Abstract: Much of Sub-Saharan Africa's post-independence macroeconomic history has been characterized by boom-bust cycles. Growth accelerations have been common, but short lived. Weak policy formulation and implementation led to large external and fiscal imbalances, excessive debt accumulation, volatile inflation, and sharp exchange rate fluctuations. This characterization changed, however, in the mid-1990s, when debt relief and better macroeconomic policy began to provide a source of stability that has helped sustain robust growth throughout much of the region. In resource rich countries, the process was supported over the past few years by a dramatic increase in commodity prices. But resources are only one part of the story. Growth has exhibited impressive resilience even in the face of negative external shocks, as in 2008-2009. While the short-term outlook remains positive, over the medium term policy makers face new challenges. Several countries have the potential to greatly expand natural resource production and become major commodity exporters; volatile resource revenue will complicate their fiscal and monetary planning. Rising investor appetite for financial assets of frontier markets and the development of domestic debt markets will continue to broaden the menu of and trade-offs among financing options at a time when global interest rates may start sloping upward. Complex financing arrangements -- notably for private-public or public-public partnerships in infrastructure -- will become more common and will generate new types of fiscal commitments and contingencies.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Environmental Economics&Policies
    Date: 2013–10–01
  27. By: Yin-Wong Cheung (City University of Hong Kong and Hong Kong Institute for Monetary Research); Risto Herrala (Bank of Finland)
    Abstract: We study the renminbi (RMB) covered interest differential - an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China's policy.
    Keywords: NDF Implied RMB Interest Rate, Capital Controls, Asymmetric Response, Macro Determinants, Credit Market Tightness
    JEL: E44 F31 F32
    Date: 2013–09
  28. By: Stadler, Manfred
    Abstract: We develop a dynamic stochastic general-equilibrium model of science, education and innovation to explain the simultaneous emergence of innovation clusters and stochastic growth cycles. Firms devote human-capital resources to research activities in order to invent higher quality products. The technological requirements in climbing up the quality ladders increase over time but this hampering effect is compensated for by an improving qualification of researchers allowing for a sustainable process of innovation and scale-invariant growth. Jumps in human capital, triggered by scientific breakthroughs, induce innovation clusters across industries and generate long-run growth cycles. --
    Keywords: Science,Education,Innovation clusters,Stochastic growth cycles
    JEL: C61 E32 O33
    Date: 2013
  29. By: Mario Amendola (Università degli studi di Roma La Sapienza); Jean Luc Gaffard (Ofce); Fabricio Patriarca (Università degli studi di Roma La Sapienza)
    Keywords: Assets,debt,inequality,taxation
    JEL: D3 E2
    Date: 2013
  30. By: Johana Maritsa Hernández Henao; Last: Hernández Henao (Centro de Estudios Monetarios Latinoamericanos)
    Abstract: Esta investigación tiene como propósito investigar la respuesta de la economía colombiana frente a un choque a los términos de intercambio y una caída en la demanda de exportaciones. Asimismo, se está interesado en dilucidar el papel que desempeña la autoridad monetaria en presencia de dichos choques. Para tal fin, se calibra un modelo de equilibrio general dinámico y estocástico para una economía pequeña y abierta. El comportamiento del banco central se modela mediante dos reglas de interés tipo Taylor. En la primera, el banco central persigue únicamente objetivos de inflación. En la segunda, está interesado en la estabilización de precios y del producto. Los hallazgos subrayan una gran vulnerabilidad de la economía a choques externos. Asimismo, la ejecución de una política monetaria anticíclica en Colombia durante la reciente crisis, puede interpretarse a partir del modelo como un escenario donde la autoridad monetaria puso un mayor peso en los efectos adversos de las exportaciones sobre el productos que en los términos de intercambio sobre el PIB.
    Keywords: términos de intercambio, política monetaria, DSGE.
    JEL: E52 G28
    Date: 2013–01
  31. By: Chadha , Jagjit S. (Keynes College, University of Kent, Canterbury); Newby, Elisa (Bank of Finland, Monetary Policy and Research Department)
    Abstract: This paper assesses Revolutionary and Napoleonic wartime economic policy. Suspension of gold convertibility in 1797 allowed the Bank of England to nurture British monetary orthodoxy. The Order of the Privy Council suspended gold payments on Bank of England notes and afforded simultaneous protection to the government and the Bank in pursuit of the conflicting goals of price stability and war finance. The government, the Bank of England and the commercial banks formed a loose alliance drawing on due political and legal processes and also paid close attention to public opinion. We suggest that the ongoing solvency of the Bank of England was facilitated by suspension and allowed the Bank to continue to make substantial profits throughout the Wars. It became acceptable for merchants to continue to trade with non-convertible Bank of England notes and for the government to finance the war effort, even with significant recourse to unfunded debt. These aspects combined to create a suspension of convertibility that did not undermine the currency. By contrast, the Assignats debacle had cost the French monetary system its reputation in the last decade of the 18th century and so Napoleonic .finance had to evolve within a more rigid and limiting framework.
    Keywords: monetary orthodoxy; suspension of convertibility; war finance
    JEL: C61 E31 E42 E58 N13
    Date: 2013–09–16
  32. 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.
    Keywords: Uncertainty, natural disasters, political shocks, growth
    JEL: D92 E22 D8 C23
    Date: 2013–10
  33. By: Pietro Alessandrini (Universit… Politecnica delle Marche, MoFiR); Luca Papi (Universit… Politecnica delle Marche, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: Questo lavoro analizza le diverse fasi della recente crisi economico-finanziaria, ponendo l'accento sull'entita' del credit crunch in Italia e nel resto d'Europa, al fine di cogliere le similitudini ma, soprattutto, le differenze tra i paesi centrali e quelli periferici ell'area dell'euro, tra i quali l'Italia. In particolare, ci concentreremo sul legame tra crisi del debito sovrano e crisi bancaria: l'instaurarsi di un circolo vizioso tra instabilita' finanziaria e difficolta' delle finanze ubbliche Š, infatti, uno degli elementi alla base della profonda fase di stagnazione delle conomie periferiche dell'area euro.
    Keywords: Accesso al credito, banche, credit crunch, crisi bancaria, crisi sovrana
    JEL: E51 G21 H63
    Date: 2013–09
  34. By: Hippolyte d’Albis; Johanna Etner
    Abstract: In this article, we consider illiquid life annuity contracts and show that they may be preferred to Yaari (1965)'s liquid contracts. In an overlapping-generation economy, liquid life annuities are demanded only if the equilibrium is dynamically inefficient. Alternatively, an equilibrium displaying a positive demand for illiquid life annuities is efficient. In this latter case, the welfare at steady-state is larger if illiquid life annuity contracts are available.
    Keywords: annuity, overlapping generation model
    JEL: E21 D11
    Date: 2013
  35. By: Schlenker, Eva; Schmid, Kai D.
    Abstract: In this paper, we measure the effect of changing capital income shares upon inequality of gross household income. Using EU-SILC data covering 17 EU countries from 2005 to 2011 we find that capital income shares are positively associated with the concentration of gross household income. Moreover, we show that the transmission of a shift in capital income shares into the personal distribution of income depends on the concentration of capital income in an economy. Using fixed effect models we find that changing capital income shares play an important role in the development of household income inequality. Hence, in many industrialized countries income inequality has by no means evolved independently from the observed structural shift in factor income towards a higher capital income share over the last decades. --
    Keywords: Factor Shares,Income Inequality,EU-SILC,Fixed Effects
    JEL: D31 D33 E6 E25
    Date: 2013
  36. By: Magdalena Olczyk (Gdansk University of Technology, Gdansk, Poland)
    Abstract: The aim of this article is to identify diversity between the EU-15 and the New Members in their implementation of the Lisbon Strategy in the period 2000-2010. By analyzing a set of structural indicators, we aim to fill a gap in the literature: a lack of publications providing complex evaluation of the implementation of the Lisbon Strategy using measurable indicators. The results of our analyses confirm the hypothesis of a large gap between the EU-15 countries and the 12 New Members in key areas of the Lisbon Strategy. According to rankings given by our taxonomic analyses, a high level of the indicators selected is confirmed only for the EU-15 countries and only three New Members belong to a group presenting the average level of these indicators. This study demonstrates a need for a significant intensification of the EU cohesion policy, which is one of the main tools for achieving the Lisbon Strategy goals.
    Keywords: Lisbon Strategy, Lisbon targets, European Union, multivariate analysis, structural indicators
    JEL: C00 E60 O52 P11
    Date: 2013–09
  37. By: D’Avino, C.
    Abstract: Using US banks' balance sheet data, this paper examines the responsiveness of net interoffice accounts, that is, the net liabilities of parent offices due to their foreign-related offices, to variations in different types of domestic funding. Furthermore, it investigates whether the relationship between net interoffice accounts and domestic policy-steered rates depends on cross-sectional differences in the funding structure of global banks. Estimation results suggest that domestic interbank and repo borrowings are important drivers of net interoffice accounts, the latter being significant during the crisis period. A negative relationship between policy rates and net interoffice accounts is observed only for those global banks with a relatively higher share of repo borrowings.
    Keywords: US global banks, net interoffice accounts, funding.
    JEL: G21 F34 E58
    Date: 2013
  38. By: Bignon, V.; Breton, R.; Rojas Breu, M.
    Abstract: This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.
    Keywords: banks, currency union, credit, default, limited commitment.
    JEL: E42 E50 F3 G21
    Date: 2013
  39. By: Raphael S. Schoenle (Economics Department, Brandeis University); Raphael A. Auer (Swiss National Bank)
    Abstract: In this paper, we first document that two predictions of the heterogeneous firm version of the Dornbusch (1987) pricing model are confirmed in micro data on US import prices: while the rate at which a firm reacts to changes in its own cost is U-shaped in market share, the rate at which it reacts to competitors’ prices is hump-shaped in market share. Second, using the theory as a guidance, we present an expression for price changes in industry equilibrium that can be broken down into a component due to the direct cost response at the firm level, and another one due to price complementarities faced by the firm at the industry level. We show empirically that taking into account a sector’s market structure and the interplay of heterogeneity in reaction to own cost and reaction to the competition can substantially improve our understanding of the variation in pass-through rates across sectors and trade partners. The direct imperfect cost pass-through channel and the indirect price complementarity channel play approximately equally important roles in determining pass-through but partly offset each other. Including only one of these channels in an empirical analysis results in a failure to explain variation in the aggregate equilibrium rate of pass-through.
    Keywords: Exchange Rate Pass-Through, U.S. Import Prices, Market Structure, Price Complementarities
    JEL: E3 E31 F41
    Date: 2013–09
  40. By: Sebastian Gechert
    Abstract: We apply meta regression analysis to a unique data set of 104 studies on multiplier effects with 1069 reported multipliers in order to derive stylized facts and to quantify the differing effectiveness of the composition of fiscal impulses, adjusted for the interference of study-design characteristics and sample specifics. As a major result, we find that public spending multipliers are close to one and about 0.3 to 0.4 units larger than tax and transfer multipliers. Public investment multipliers are even larger by approximately 0.5 units. Reported multipliers vary with study-design, thus, policy consulting based on a certain multiplier study should lay open by how much specification affects the results. Our meta analysis provides guidance concerning influential factors, their sign and magnitude.
    Keywords: multiplier effects, fiscal policy, meta analysis
    JEL: E27 E62 H30
    Date: 2013
  41. By: Jan Tore Klovland (Norwegian School of Economics (NHH))
    Abstract: This study reports the outcome of an effort to collect market price data for Norway with a view to constructing monthly price indices from the year 1777 to 1920. The material covers data on commodity prices from agriculture, shery, dairying, manufacturing and mining. Indices of the wholesale and producer price index families are constructed, using the repeat sales method for constructing the underlying price series. Separate indices for commodity exports and imports are also presented. The new wholesale price index, as well as the export and import price indices, are linked to existing price indices after 1920 and brought forward to the end of 1940. The price indices shed new light on two great wartime inflationary episodes in Norway: 1807-1817 and 1913-1920. In spite of a 61-fold increase in the price level in the first period and a 4-fold increase in the second, it is found that, after inflation had been brought under control, prices reverted to a level consistent with the purchasing power parity principle.
    Keywords: Price index, Price history, Purchasing power parity
    JEL: E31 N13 N14
    Date: 2013–10–03
  42. By: Verona, Fabio (Bank of Finland Research)
    Abstract: Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates.
    Keywords: investment dynamics; information costs; inattentiveness; lumpy investment
    JEL: D21 D83 D92 E22
    Date: 2013–08–28
  43. By: Peter J. Morgan (Asian Development Bank Institute (ADBI)); Victor Pontines
    Abstract: The purpose of this study is to better understand the likely impact on Asian economies and financial institutions of various recent global financial reforms, including Basel III capital adequacy and liquidity rules. Part one reviews the lessons of the global financial crisis (GFC) of 2007–09 and their relevance for Asian economies. Part two describes the major regulatory reforms that have been announced and possible concerns about their impacts on emerging economies. Part three reviews the literature aimed at quantifying the impacts of Basel III capital adequacy rules. Part four develops our methodology and analysis of the quantitative impact of Basel III capital adequacy rules on a panel of Southeast Asian financial institutions with emphasis on the effect on economic growth. Finally, the study concludes with a discussion on the policy implications of the results obtained from the previous section for Asian financial sectors and economies. Overall, we find that the Basel III capital adequacy rules are likely to have limited impacts on economic growth in Asia, but other financial regulations, including liquidity standards and rules for over-the-counter (OTC) derivatives, could have stunting effects on financial development in the region.
    Keywords: Financial Reform, global financial crisis, Basel III, regulatory reform, Capital Adequacy Ratio, Asian economies, Southeast Asian, financaial institutions
    JEL: E17 G01 G18 G21
    Date: 2013–08
  44. By: Rolando Gonzales Martínez; Last: Gonzales Martínez (Unidad de Análisis de Políticas Económicas y Sociales, Bolivian Government)
    Abstract: Hyperinflations are short-lived episodes of economic instability in prices which characteristically last twenty months or less. Classical statistical techniques applied to these small samples could lead to an incorrect inference problem. This paper describes a Bayesian approach for modeling hyper-inflations which improves the modeling accuracy using small-sample inference based on specific parametric assumptions. A theory-congruent model for the Bolivian hyperinflation was estimated as a case study.
    Keywords: Hyperinflation, Bayesian methods
    JEL: E31 C11
    Date: 2013–04
  45. By: Chilosi, David
    Abstract: This paper tests whether and how political regimes influenced the cost of public borrowing by comparatively and quantitatively examining a newly compiled dataset on public annuities in early modern Italy. The analysis finds that overall political regimes mattered a lot, but there were important differences across their dimensions. Fiscal centralisation, particularly in the eighteenth century, was not associated with significant decreases in the interest rates. Jurisdictional fragmentation was on the whole the most important variable, with feudalism and to a lesser extent clerical influence significantly increasing the cost of borrowing. Constitution al representation was even more important than jurisdictional fragmentation within republics, but a republican constitution had an ambivalent effect: while it decreased the risk of default it could also lead to an increase in interest rates, depending on the specific institutional setting, contingency and path-dependency.
    JEL: N0 E6
    Date: 2013–05
  46. By: Matsuyama, Kiminori (Department of Economics, Northwestern University, Evanston, USA)
    Abstract: This paper studies theoretically how the cross-country differences in the institutional quality (IQ) of the domestic credit markets shape the patterns of international capital flows when such IQ differences cause productivity differences across countries. IQ affects productivity by changing productivity-agency cost trade-offs across heterogeneous investment projects, which have opposite effects on the investment and capital flows from exogenous productivity differences. The overall effect of IQ could generate U-shaped responses of the investment and capital flows. This means that capital could flow from middle-income to low-income and high-income countries; and starting from a low IQ, a country could experience both growth and a current account surplus after an institutional reform. More generally, the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions.
    Keywords: Credit composition, domestic financial frictions, endogenous productivity, institutional quality, intertemporal trade, pledgeability, productivity-agency cost trade-off, reverse capital flows, U-shaped patterns
    JEL: E22 F49 O16
    Date: 2013–10

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