nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒10‒18
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Price Versus Financial Stability: A role for money in Taylor rules? By John Keating; Lee Smith
  2. Financial soundness indicators and financial crisis episodes By Maria Th. Kasselaki; Athanasios O. Tagkalakis
  3. How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment By Isabelle SALLE; Marc-Alexandre SENEGAS; Murat YILDIZOGLU
  4. Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations By Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
  5. Learning and the Size of the Government Spending Multiplier. By E. QUAGHEBEUR
  6. International experiences and domestic opportunities of applying unconventional monetary policy tools By Judit Krekó; Csaba Balogh; Kristóf Lehmann; Róbert Mátrai; György Pulai; Balázs Vonnák
  7. Inflation Reports and Models: How Well Do Central Banks Really Write? By Ales Bulir; Jaromir Hurnik; Katerina Smidkova
  8. Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises By Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath
  9. Do central banks respond to exchange rate movements? A Markov-switching structural investigation By Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
  10. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  11. Growth beyond imbalances. Sustainable growth rates and output gap reassessment By Enrique Alberola; Ángel Estrada; Daniel Santabárbara
  12. Time Variation in Asset Price Responses to Macro Announcements By Linda S. Goldberg; Christian Grisse
  13. Central bank and government in a speculative attack model By Giuseppe Cappelletti; Lucia Esposito
  14. External Habit in a Production Economy By Chen, Andrew Y.
  15. The Decline, Rebound, and Further Rise in SNAP Enrollment: Disentangling Business Cycle Fluctuations and Policy Changes By Ganong, Peter; Liebman, Jeffrey B.
  16. Inflation, Unemployment and Economic Growth in a Schumpeterian Economy By Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
  17. Imperfect Credibility and Robust Monetary Policy By Richard Dennis
  18. Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive By Richard Dennis
  19. What drives consumer confidence in times of financial crises? Evidence for the Netherlands By Paul Neisingh; Ad Stokman
  20. Optimal Exchange Rate Policy in a Growing Semi-Open Economy. By Bacchetta, P.; Benhima, K.; Kalantzis, Y.
  21. On business cycles of variety and quality By Masashige Hamano
  22. The effects of monetary policy on asset prices bubbles: Some evidence By Jordi Galí; Luca Gambetti
  23. The Cyclicality of Search Intensity in a Competitive Search Model By Paul Gomme; Damba Lkhagvasuren
  24. Fiscal dynamics in a dollarized, oil-exporting country: Ecuador By María Lorena Marí Del Cristo; Marta Gómez-Puig
  25. Effects of Fiscal Policy in a Small Open Transition Economy: Case of Croatia By Milan Deskar-Škrbić; Hrvoje Šimović; Tomislav Ćorić
  26. Wage Subsidy in the DRC: A CGE Analysis By Jean Luc Erero, Daniel Djauhari Pambudi and Lumengo Bonga Bonga
  27. Roads or Schools? Political Budget Cycles with different types of voters. By Lopez Uribe, Maria del Pilar
  28. Cycle économique et comportement entrepreneurial sur données régionales françaises By Mathilde Aubry; Jean Bonnet; Patricia Renou-Maissant
  29. La macroéconomie à l'épreuve des faits By Jean-Luc Gaffard
  30. On optimal emission control – Taxes, substitution and business cycles By Lintunen , Jussi; Vilmi, Lauri
  31. Cash-In-Advance Constraint on R&D in a Schumpeterian Growth Model with an Endogenous Market Structure By Chien-Yu Huang; Juin-Jen Chang; Lei Ji
  32. Output volatility in the OECD: Are the member states becoming less vulnerable to exogenous shocks? By Jorge Andraz; Nélia Norte
  33. The Evolution of the U.S. Output-Inflation Tradeoff By Benjamin Wong
  34. Asset Prices, Macro Prudential Regulation, and Monetary Policy By Otaviano Canuto; Matheus Cavallari
  35. Rethinking the political economy of fiscal consolidation in two recessions in Ireland By Niamh Hardiman
  36. Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change By Mariano Kulish; Adrian Pagan
  37. Financial Frictions, Investment Delay and Asset Market Interventions By Shouyong Shi; Christine Tewfik
  38. Risk Sharing and Real Exchange Rate : The Roles of Non-tradable Sector and Trend Shocks By Huseyin Cagri Akkoyun; Yavuz Arslan; Mustafa Kilinc
  39. Managing Economic Shocks and Macroeconomic Coordination in an Integrated Region: ASEAN Beyond 2015 By Ruperto MAJUCA
  40. Employment-At-Will Exceptions and Jobless Recovery By DeNicco, James
  41. Optimal consumption under uncertainty, liquidity constraints, and bounded rationality By Ömer Özak
  42. The management of interest rate risk during the crisis: evidence from Italian banks By Lucia Esposito; Andrea Nobili; Tiziano Ropele
  43. Fiscal Imbalances and Current Account Adjustments in the European Transition Economies By Mirdala, Rajmund
  44. The Effects of Government Spending Shocks on the Real Exchange Rate and Trade Balance in Turkey By Cem Cebi; Ali Askin Culha
  45. Bank lending strategy, credit scoring and financial crises By Kleimeier S.; Dinh T.H.T.; Straetmans S.T.M.
  46. "Exit Keynes the Friedmanite, Enter Minsky's Keynes" By Robert J. Barbera
  47. Two Monetary Models with Alternating Markets By Gabriele Camera; YiLi Chien
  48. The decline of the U.S. labor share By Michael W.L. Elsby; Bart Hobijn; Aysegül Sahin
  49. Inequality, Debt and Taxation: The Perverse Relation between the Productive and the Non-Productive Assets of the Economy By Mario Amendola; Jean-Luc Gaffard; Fabrizio Patriarca
  50. RMB internationalisation and currency co-operation in East Asia By Volz, Ulrich
  51. Central bank refinancing, interbank markets, and the hypothesis of liquidity hoarding: evidence from a euro-area banking system By Massimiliano Affinito
  52. Typology of the French regional development: revealing the refugee/Schumpeter effects in new-firms startups By Rafik Abdesselam; Jean Bonnet; Patricia Renou-Maissant
  53. Explicit Evidence of an Implicit Contract By Andrew T. Young; Daniel Levy
  54. The interaction between firms and Government in the context of investment decisions: a real options approach By Diogo Barbosa; Vitor M. Carvalho; Paulo J. Pereira
  55. Consumption-Savings Decisions under Upward Looking Comparisons: Evidence from Germany, 2002-2011 By Moritz Drechsel-Grau; Kai D. Schmid
  56. Nowcasting Czech GDP in Real Time By Marek Rusnak
  57. The normal price. The case of the retail price of diesel fuel By Kossov, Vladimir; Kossova, Elena
  58. Profits and employment. By Skouras, Thanos
  59. Stress-Test Exercises and the Pricing of Very Long-Term Bonds. By Dubecq, Simon

  1. By: John Keating (Department of Economics, The University of Kansas); Lee Smith (Department of Economics, The University of Kansas)
    Abstract: This paper analyzes optimal monetary policy in a standard New-Keynesian model augmented with a financial sector. The banks in the model are subject to shocks which impede their ability and willingness to produce financial assets. We show these financial market supply shocks decrease both the natural rates of output and interest. The implication is that an optimizing central bank with real time data on only inflation, output, interest rate spreads and monetary aggregates will respond positively to the growth rate of monetary aggregates which signal movement in the natural rate from these financial shocks. This simple rule is implementable by central banks as it makes the policy instrument a function of only observables and does not require precise knowledge of the model or the parameters. The key is the use of the Divisia monetary aggregate which provides a parameter- and estimation- free approximation to the the true monetary aggregate. We show policy rules reacting to the Divisia monetary aggregate have well-behaved determinacy properties - satisfying a novel Taylor principle for monetary aggregates. Finally, we conclude with a minimax robust policy prescription given the uncertainty surrounding parameters driving the financial and other structural shocks.
    Keywords: Monetary Aggregates, Optimal Monetary Policy, Taylor Rules, Financial Sector
    JEL: C43 E32 E41 E44 E51 E52 E58 E60
    Date: 2013–10
  2. By: Maria Th. Kasselaki (Bank of Greece); Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5-0.6 percentage points –p.p.) to abide by regulatory and supervisory demands, non performing loans (NPL) to total loans increase dramatically (by about 0.5-0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3-18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3-0.4 (5.0-7.0) p.p.).
    Keywords: Bank profitability; capital adequacy; asset quality; financial crisis.
    JEL: E44 E58 G21 G28 E61 E62 H61 H62 E32
    Date: 2013–05
  3. By: Isabelle SALLE; Marc-Alexandre SENEGAS; Murat YILDIZOGLU
    Abstract: This paper revisits the benefits of explicitly announcing an inflation target for the con- duct of monetary policy in the framework of an agent-based model (ABM). This framework offers a flexible tool for modeling heterogeneity among individual agents and their bounded rationality, and to emphasize, on this basis, the role of learning in macroeconomic dynamics. We consider that those three features (heterogeneity, bounded rationality, and learning) are particularly relevant if one desires to question the rationale for the monetary authorities to be transparent about the inflation target, and to achieve credibility. Indeed, the inflation targeting’s potential role in anchoring inflation expectations and stabilizing the inflation and the economy can be analyzed more realistically if we do not assume a representative agent framework based on substantial rationality in behaviors and expectations. Our results show that a dynamic loop between credibility and success can arise, and stabilize inflation, but only in the case of a learning environment that corresponds to a moderate degree in heterogeneity regarding the behavior and decisions of individual agents. In a more general way, we analyze, using this ABM, different assumptions about the nature of the economic volatility, and the degree of disclosure of the target.
    Keywords: Monetary Policy, Inflation Targeting, Credibility, Expectations, Agent-Based Model.
    JEL: C61 C63 E52 E58
    Date: 2013
  4. By: Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
    Abstract: Drawing on an extensive empirical literature that suggests persistent and time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting heuristics – one based on the current rate of inflation, the second anchored to the official inflation target – in a simple macrodynamic model. Decision makers switch between these forecasting heuristics based on satisficing evolutionary dynamics. We show that convergence towards an equilibrium consistent with the level of output and rate of inflation targeted by policy makers is achieved regardless of whether or not the satisficing evolutionary dynamics that guide the choices agents make between inflation forecasting strategies are subject to noise. We also show that full credulity – a situation where all agents eventually use the forecasting heuristic based on the target rate of inflation – is neither a necessary condition for realization of the inflation target, nor an inevitable consequence of the economy’s achievement of this target. These results demonstrate that uncertainty in decision making resulting in norm-based inflation expectations that are both heterogeneous and time-varying need not thwart the successful conduct of macroeconomic policy.
    Keywords: Inflation targeting; macroeconomic stability; heterogeneous expected inflation; satisficing evolutionary dynamics
    JEL: C73 E12 E52
    Date: 2013–10–01
    Abstract: This paper examines the government spending multiplier when economic agents form their expectations based on an adaptive learning scheme. The learning mechanism is such that the agents forecast future values of forward-looking variables using a linear function of an information set that does not contain the fiscal shock. Our impulse response analysis shows that the effects of a government spending shock change substantially when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with this adaptive learning mechanism crowds in private consumption and is associated with a positive comovement between real wages and hours worked. The learning model also relies less on consumption-leisure non-separability in utility and price stickiness to deliver high output multipliers, as opposed to the rational expectations benchmark. In the baseline calibration, the multiplier under learning is nearly twice as large as under rational expectations. These results are robust to a richer specification, irrespective of the financing strategy. An alternative adaptive learning model, where agents know the future path of taxes implied by the government spending shock, leads to results that differ to a large extent from those of the benchmark learning model and are largely incompatible with most of the empirical evidence
    Keywords: adaptive learning, DSGE, fiscal policy, fiscal multipliers, government spending
    JEL: E62 D83 D84 E32 E37
    Date: 2013–10
  6. By: Judit Krekó (Magyar Nemzeti Bank (central bank of Hungary)); Csaba Balogh (Magyar Nemzeti Bank (central bank of Hungary)); Kristóf Lehmann (Magyar Nemzeti Bank (central bank of Hungary)); Róbert Mátrai (Magyar Nemzeti Bank (central bank of Hungary)); György Pulai (Magyar Nemzeti Bank (central bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: This paper provides an overview of the impact of unconventional central bank instruments, the relevant international experiences and the room for application in Hungary. The use of unconventional instruments may be justified by the existence of financial market friction, turmoil, failure or constraint, when instruments that change the size and/or composition of central bank balance sheets may be more efficient in achieving monetary policy objectives than traditional interest rate policy. Empirical analyses found the unconventional instruments applied in developed countries successful in easing market tensions, increasing market liquidity and reducing yields. Although they proved to be unsuccessful in providing a boost to economic growth, they were able to mitigate the fall in lending and output. Vulnerable emerging countries with a lower credit rating and high external debt have much less room for manoeuvre to apply non-conventional instruments. Even liquidity providing instruments, which are otherwise considered the least risky, may result in exchange rate depreciation and flight of capital during a crisis. The interventions that involve risk taking by the government may add to market concerns about fiscal sustainability. Due to Hungary’s vulnerability, high country risk premium and large foreign exchange exposure, most of the instruments applied in other countries would entail financial stability risks at home. In theory, the sharp reduction in the supply of bank credit could provide sound justification for the use of unconventional central bank instruments in Hungary. It should be noted, however, that insufficient credit supply is mainly attributable to a lack of willingness by banks to lend, which can be less influenced by the Bank, rather than to any lack of capacity to lend. In addition to banks’ high risk aversion, uncertain macroeconomic environment and economic policy measures affecting the banking sector also decreased willingness to lend, which is beyond the authority of the central bank. Therefore, these instruments at most may have a role in preventing a possible future deterioration in banks’ lending capacity from becoming an obstacle to lending in a turbulent period.
    Keywords: monetary policy, unconventional tools, financial intermediation
    JEL: E44 E52 E58 E61
    Date: 2013
  7. By: Ales Bulir; Jaromir Hurnik; Katerina Smidkova
    Abstract: We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new ­Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.
    Keywords: Inflation targeting, Kalman filter, modeling, monetary policy communication.
    JEL: E17 E31 E32 E37
    Date: 2013–06
  8. By: Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath
    Abstract: We propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility, which can be interpreted as joining a monetary union or issuing foreign currency debt, debt is effectively real. By contrast, with low inflation credibility, sovereign debt is nominal and in a debt crisis a government may opt to inflate away a fraction of the debt burden rather than explicitly default. This flexibility potentially reduces the country's exposure to self-fulfilling crises. On the other hand, the government lacks credibility not to inflate in the absence of crisis. This latter channel raises the cost of debt in tranquil periods and makes default more attractive in the event of a crisis, increasing the country's vulnerability. We characterize the interaction of these two forces. We show that there is an intermediate inflation credibility that minimizes the country's exposure to rollover risk. Low inflation credibility brings the worst of both worlds—high inflation in tranquil periods and increased vulnerability to a crisis.
    JEL: E31 E4 E62 F34 G15
    Date: 2013–10
  9. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Hilde C. Bjørnland (BI Norwegian Business School and Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway))
    Abstract: Do central banks respond to exchange rate movements? According to Lubik and Schorfheide (2007) who estimate structural general equilibrium models with monetary policy rules, the answer is "Yes, some do". However, their analysis is based on a sample with multiple regime changes, which may bias the results. We revisit their original question using a Markov switching set up which explicitly allows for parameter changes. Fitting the data from four small open economies to the model, we find that the size of policy responses, and the volatility of structural shocks, have not stayed constant during the sample period (1982-2011). In particular, central banks in Sweden and the UK switched from a high response to the exchange rate in the 1980s and early 1990s, to a low response some time after inflation targeting was implemented. Canada also observed a regime change, but the decline in the exchange rate response was small relative to the increase in the response to inflation and output. Norway, on the other hand, did not observe a shift in the policy response over time, as the central bank has stayed in a regime of high exchange rate response prior and post implementing inflation targeting.
    Keywords: Monetary policy, Exchange rates, Inflation targeting, Markov switching, Small open economy
    JEL: C68 E52 F41
    Date: 2013–10–10
  10. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income agents. A model incorporating capital-skill complementarity in pro- duction and differential access to capital and labour markets is de- veloped to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We fi…nd that the tax rate for high income agents is opti- mally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be the most volatile and counter-cyclical. We further fi…nd that the optimal response to output-enhancing capi- tal equipment technology and spending cuts is to increase the progres- sivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
    JEL: E24 E32 E62
    Date: 2013–10
  11. By: Enrique Alberola (Banco de España); Ángel Estrada (Banco de España); Daniel Santabárbara (Banco de España)
    Abstract: ‘The Great Recession’ was preceded by a prolonged period of high growth accompanied by low and stable inflation, the so called ‘Great Moderation’. During that period, potential growth estimates were trending upwards and output gaps remained small. However, other imbalances were progressively accumulating, eventually bringing about the worst crisis in decades. Standard potential growth estimates, which consider inflation as the only indicator of macroeconomic imbalances, along with the stability of inflation in that period, therefore provided misleading signals to policymakers. This paper introduces a methodology to obtain sustainable growth rates, as an alternative measure to potential growth. Sustainable growth is defined as the output growth that does not generate or widen macroeconomic imbalances, identified through a wide set of domestic and external indicators. This allow us to reassess the behavior of output gaps in the US, the UK, Spain, Germany and China both in ‘the Great Moderation’ period and during ‘the Great Recession’. In countries with large imbalances, sustainable growth rates are more stable than potential growth resulting in output gaps that were substantially larger in the period prior to the crisis.
    Keywords: sustainable growth, macroeconomic imbalances, output gaps, potential growth
    JEL: E32 F44 G01
    Date: 2013–10
  12. By: Linda S. Goldberg; Christian Grisse
    Abstract: Although the effects of economic news announcements on asset prices are well established, these relationships are unlikely to be stable. This paper documents the time variation in the responses of yield curves and exchange rates using high frequency data from January 2000 through August 2011. Significant time variation in news effects is present for those announcements that have the largest effects on asset prices. The time variation in effects is explained by economic conditions, including the level of policy rates at the time of the release, and risk conditions: government bond yields increase in response to "good news", but less so when risk is elevated. Risk conditions matter since they can capture the effects of uncertainty on the information content of news announcements, the interaction of monetary policy and financial stability objectives of central banks, and the effect of news announcements on the risk premium.
    JEL: E43 E44 E52 F31 G12 G14 G15
    Date: 2013–10
  13. By: Giuseppe Cappelletti (Bank of Italy); Lucia Esposito (Bank of Italy)
    Abstract: This paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals.
    Keywords: global games, complementarities, signaling, self-fulfilling expectations, multiple equilibria, crises, regime change, policy interactions
    JEL: C7 D8 E5 E6 F3
    Date: 2013–09
  14. By: Chen, Andrew Y. (OH State University)
    Abstract: A unified framework for understanding asset prices and aggregate fluctuations is critical for understanding both issues. I show that a real business cycle model with external habit preferences and capital adjustment costs provides one such framework. The estimated model matches the first two moments of the equity premium and risk-free rate, return and dividend predictability regressions, and the second moments of output, consumption, and investment. The model also endogenizes a key mechanism of consumption-based asset pricing models. In order to address the Shiller volatility puzzle, external habit, long-run risk, and disaster models require the assumption that the volatility of marginal utility is countercyclical. In the model, this countercyclical volatility arises endogenously. Production makes precautionary savings effects show up in consumption. These effects lead to countercyclical consumption volatility and countercyclical volatility of marginal utility. External habit amplifies this channel and makes it quantitatively significant.
    JEL: E21 E30 G12
    Date: 2013–10
  15. By: Ganong, Peter (Harvard University); Liebman, Jeffrey B. (Harvard University)
    Abstract: Approximately 1-in-7 people and 1-in-4 children received benefits from the US Supplemental Nutrition Assistance Program (SNAP) in July 2011, both all-time highs. We analyze changes in SNAP take-up over the past two decades. From 1994 to 2001, coincident with welfare reform, take-up fell from 75% to 54% of eligible people. The take-up rate then rebounded, and, following several policy changes to improve program access, stabilized at 69% in 2007. Finally, take-up and enrollment rose dramatically in the Great Recession, with take-up reaching 87% in 2011. We find that changes in local unemployment can explain at least two-thirds of the increase in enrollment from 2007 to 2011. Increased state adoption of relaxed income and asset thresholds and temporary changes in program rules for childless adults explain 18% of the increase. Total SNAP spending today is 6% higher than it would be without these increases in eligibility. The recession-era increase in benefit levels is also likely to have increased enrollment.
    JEL: E24 E62 H53 I38
    Date: 2013–10
  16. By: Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
    Abstract: This study analyzes the effects of inflation on the long-run nexus between unemployment and economic growth. We introduce money demand via a cash-in-advance (CIA) constraint on R&D investment into a scale-invariant Schumpeterian growth model with matching frictions in the labor market. Given the CIA constraint on R&D, a higher inflation that raises the opportunity cost of cash holdings leads to a decrease in innovation and economic growth, which in turn decreases labor-market tightness and increases unemployment. In summary, the model predicts a positive relationship between inflation and unemployment, a negative relationship between inflation and R&D, and a negative relationship between inflation and economic growth. These theoretical predictions are consistent with recent empirical evidence. Therefore, when inflation is a fundamental variable that affects the economy, unemployment and economic growth exhibit a negative relationship.
    Keywords: inflation; unemployment; innovation; economic growth.
    JEL: E24 E41 O3 O4
    Date: 2013–10
  17. By: Richard Dennis
    Abstract: This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank’s approximating model, the paper’s main findings are as follows. First, a central bank’s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.
    Keywords: Imperfect Credibility, Robust Policymaking, Time-consistency
    JEL: E58 E61 C63
    Date: 2013–10
  18. By: Richard Dennis
    Abstract: We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household’s risk sensitivity, but not by the fiscal authority’s. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decision makers.
    Keywords: Asset prices, business cycles, risk-sensitivity, Markov-Perfect fiscal policy
    JEL: E63 C61
    Date: 2013–10
  19. By: Paul Neisingh; Ad Stokman
    Abstract: Five years after Lehman Brothers defaulted, the Dutch consumer confidence is still very low. Based on a monthly time series analysis from 1978 onwards, we provide evidence that general economic indicators are not sufficient to explain consumer sentiment. We show that during the Great Recession confidence drops are magnified by the decline in the public’s trust in the financial sector and in Europe. Next to financial stability, price stability and political stability are found to be crucial for consumer confidence. Furthermore, we identify autonomous waves of optimism and pessimism. We interpret this as evidence of Keynes’ notion of animal spirits. Full recovery of consumer confidence might take long.
    Keywords: consumer confidence; trust; animal spirits; financial crisis
    JEL: D03 E21 E32 E44
    Date: 2013–09
  20. By: Bacchetta, P.; Benhima, K.; Kalantzis, Y.
    Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modeling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.
    Keywords: China, exchange rate policy and international reserves.
    JEL: E58 F31 F41
    Date: 2013
  21. By: Masashige Hamano (CREA, Université de Luxembourg)
    Abstract: This paper explores the role played by product variety and quality in a real business cycle model. Firms are heterogeneous in terms of their specific quality as well as pro- ductivity levels. Firms which have costly technology enter in a period of high aggregated demand and produce high quality goods. Thus, the average quality level and number of available varieties are procyclical, as in the data. The model can replicate the observed inflationary bias in the conventional Consumer Price Index due to a rise in the number of new product varieties and quality.
    Keywords: Entry and exit, firm heterogeneity, the Schumpeterian destruction, product quality, business cycles
    JEL: D21 E23 E32 L11 L60
    Date: 2013
  22. By: Jordi Galí; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using vector-autoregressive models with time-varying parameters. Under our baseline identification scheme, the evidence cannot be easily reconciled with conventional views on the effects of interest rate changes on asset price bubbles.
    Keywords: leaning against the wind policies, .nancial stability, in.ation targeting, asset price booms.
    JEL: E52 G12
    Date: 2013–10
  23. By: Paul Gomme (Concordia University and CIREQ); Damba Lkhagvasuren (Concordia University and CIREQ)
    Abstract: Shimer's puzzle is that the textbook Diamond-Mortensen-Pissarides model exhibits fluctuations in labor market variables that are an order of magnitude too small. Introducing search effort of the unemployed brings the model's predictions for these fluctuations very close to those seen in the data. The search cost function and the matching technology are intimately related and thus should be estimated simultaneously. Ignoring worker search effort leads to a large upward bias in the elasticity of matches with respect to vacancies. Evidence in support of the model's prediction of procyclical search effort is presented.
    Keywords: Variable Search Effort, Educational Differences in Unemployment Volatility, Endogenous Matching Technology, Time Use, Wage Posting, Competitive Search
    JEL: E24 E32 J63 J64
    Date: 2013–09
  24. By: María Lorena Marí Del Cristo (Economic Theory Department. Universitat de Barcelona); Marta Gómez-Puig (Economic Theory Department. Universitat de Barcelona and Risk Center-IREA)
    Abstract: This paper examines the relationship between fiscal variables and economic activity in Ecuador. We use a macro-level dataset covering twelve years of full dollarization to explore the link between government spending, oil revenues, non-oil tax revenues and the economic activity index. The cointegrated VAR approach is adopted to identify the permanent and transitory shocks that affect both fiscal and macroeconomic variables. We identify two forces that push the fiscal system out of equilibrium: namely, economic activity and fiscal spending. The tax revenues variable is purely adjusting, consistent with the tax smoothing theory (Barro, 1979), but risking fiscal discipline. In a dollarized country, since there is no possibility of earning the “inflation tax” or printing new money, taxes should not be the adjusting forces, but the pushing ones. Our results suggest that Ecuador should recover control of its monetary policy to enable and promote both economic and tax diversification in order to find a substitute for oil exports, the main source of government revenues.
    Keywords: Cointegrated VAR, fiscal sustainability, fiscal shocks, debt, Ecuador
    JEL: C32 E62 H60
    Date: 2013–09
  25. By: Milan Deskar-Škrbić (Arhivanalitika Ltd.); Hrvoje Šimović (Faculty of Economics and Business, University of Zagreb); Tomislav Ćorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we use structural VAR model to analyze dynamic effects of (discretionary) fiscal shocks on economic activity of private sector in Croatia from 2000Q1-2012Q2. Due to the fact that Croatia is a small open transition economy we assume that shocks of foreign origination can have notable effects on its performance. Therefore, original Blanchard-Perotti identification method is extended by introducing variables that represent external (foreign) demand shocks. The results show that the government spending has a positive and statistically significant effect on private aggregate demand and private consumption, and net (indirect) taxes have a negative and statistically significant effect on private consumption and private AD (statistically significant in the first quarter).
    Keywords: fiscal policy, small open economy, Croatia, SVAR
    JEL: E62 C32 H30 H20 H50
    Date: 2013–10–07
  26. By: Jean Luc Erero, Daniel Djauhari Pambudi and Lumengo Bonga Bonga
    Abstract: This paper analyses wage subsidies on lower-skilled formal workers in the Democratic Republic of Congo (DRC). A multi-sectoral empirically-calibrated general equilibrium model capturing the economy-wide transactions between the formal and informal sectors is used to analyse one policy simulation in the DRC. The short and long run simulation in which the government provides wage subsidy to lower-skilled workers indicates that the government is able to significantly improve the deficiencies of the formal and informal households’ real disposable incomes. There is a general increase across formal and informal sectors in real household disposable incomes due to wage subsidy. The simulation results show that subsidy allocation narrowed the income gap between high and low income households, and between formal and informal sectors as well. The result seems somewhat insightful for wage policy simulation as the wage subsidy that targets lower-skilled formal workers increases real GDP from the expenditure side by 1.19% and 3.19% in the short and long run, respectively, from the baseline economy.
    Keywords: wage subsidy, informal sector, CGE model, Democratic Republic of Congo
    JEL: C68 D58 E24 E26 O17 R28
    Date: 2013
  27. By: Lopez Uribe, Maria del Pilar
    Abstract: Using a new Colombian data set (1830-2000), we analyze how changes in the electoral legislation with regard to the characteristics of voters (in terms of education and income levels) has affected fiscal policy in electoral times. In line with economic theory, we show that after the law was reformed in 1936 the composition of the expenditure shifted towards social spending (like education, health, and welfare benefits) but there was decreased spending on infrastructure and investment projects (like roads). Consistent with the literature, we also find: 1.The timing and the size of the political budget cycles changed after 1936 and 2.After 1936 there was a shift in the funding mechanisms from indirect tax revenues to more debt.
    Keywords: Political Budget Cycles, Expenditure composition, Revenue composition, Elections, Colombia
    JEL: D72 D78 E62 H61
    Date: 2013
  28. By: Mathilde Aubry (EM Normandie, Métis Research Department); Jean Bonnet (CREM UMR CNRS 6211, Université de Caen Basse-Normandie, UFR SEG (Sciences Economiques et Gestion), Normandie Université, France); Patricia Renou-Maissant (CREM-UMR CNRS 6211, Université de Caen Basse-Normandie, UFR SEG (Sciences Economiques et Gestion), Normandie Université, France)
    Abstract: - In French: Dans cet article, nous étudions les liens existants entre les créations d'entreprises, le PIB et le taux de chômage en France à partir de données régionales sur la période 1993-2011. Les interactions sont analysées tant à court terme qu'à long terme sous une double dimension : régionale et nationale. Les fluctuations du PIB représentent un indicateur avancé des créations de nouvelles entreprises au niveau national mais cet effet disparaît au niveau régional. Les créations d'entreprises et le taux de chômage se sont révélés étroitement liés aussi bien à court terme qu'à long terme et ont permis de mettre en évidence la présence des effets refugee et Schumpeter. Dans la majorité des régions françaises l’effet refugee domine à court terme : une augmentation du taux de chômage se traduit par une augmentation du nombre des créations d’entreprises. En France les créations d’entreprises sont donc principalement impulsées par des motifs de nécessité. - In English: In this paper, we study the links between new-firm startups, growth domestic product (GDP) and unemployment rate in France using a quarterly data basis over the 1993-2011 period. Interactions are analyzed, in the short and long run, in two main dimensions: the regional and the national dimensions. Fluctuations in GDP are an early indicator of the new-firm startups at the national level but this effect disappears at the regional level. Unemployment rates and new-firm startups are closely linked and so in the short-run as well as in the long-run and show evidence of the presence of the refugee’s effect and the Schumpeter’s effect. In most of the regions, the refugee’s effect seems to be dominant: the increase of the unemployment rate leads to an increase in the entrepreneurial activity. In France new-firm startups are mainly driven by necessity motives.Creation-Date: 2013-10
    Keywords: Business cycle, “Entrepreneurship capital”, New firm formation, Schumpeter effect, Refugee effect
    JEL: L26 E32 R11
  29. By: Jean-Luc Gaffard (OFCE Sciences Po; University of Nice-Sophia Antipolis, France; Skema Business School)
    Abstract: L'objet de cet article est de proposer une lecture de l'évolution des faits et des idées économiques, dans la perspective de montrer que les vieilles idées resurgissent sous de nouveaux atours, au point d’en cacher les lacunes et de rendre les crises, non seulement, difficiles à prévoir, mais même à imaginer. Vouloir incriminer la seule finance et l'incapacité des économistes d’en cerner les véritables arcanes pour les expliquer ne saurait suffire, pas plus d’ailleurs que ne le saurait la tentative de construire une macroéconomie pour temps de crise différente de celle pour temps calmes. Les crises ne viennent pas de nulle part. Elles sont le fruit d’une longue maturation dont les clés sont difficilement perceptibles par temps calme, mais existent bel et bien.
    Keywords: Chômage, crise, dépression, inflation
    JEL: E
    Date: 2013–10
  30. By: Lintunen , Jussi (Finnish Forest Research Institute); Vilmi, Lauri (Bank of Finland, Monetary Policy and Research Department)
    Abstract: This paper studies the cyclical properties of optimal emission taxes and emissions using a real business cycle model with a stock pollutant. We derive conditions for the procyclicality of optimal emission tax and show that the tax is in typical conditions procyclical. The possibility of a countercyclical behavior of the emission tax increases if 1) the pollution is short-lived and the emission transfer into environmental damages rapidly 2) emissions are countercyclical, 3) marginal damages are strongly increasing and 4), in disutility case, the marginal utility of consumption increases with the increase in the intensity of the harmful environmental process. In the climate change context we show that the optimal carbon tax is procyclical irrespectively on the production technology. Instead, the technology is a key determinant of the cyclicality of the emissions. The optimal carbon tax correlates almost fully with the consumption and as a rule-of thumb, it could be indexed to the consumption level of the economy. The relative scale of tax deviations relative to the consumption deviations is determined by the inverse of the intertemporal elasticity of substitution. Comparison between the optimal emission tax and an optimally set constant emission tax shows that the constant tax leads to very slightly higher emissions but the general economic effects are next to negligible.
    Keywords: optimal emission tax; cyclical properties
    JEL: E32 Q54 Q58
    Date: 2013–10–09
  31. By: Chien-Yu Huang (School of Economics, Southwest University of Finance and Economics, China); Juin-Jen Chang (Institute of Economics, Academia Sinica, Taipei, Taiwan); Lei Ji (School of Economics, Shanghai School of Economics and Finance, China)
    Abstract: In this paper we explore the effects of monetary policy on the number of firms, firm market size, ination and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance (CIA) constraints on two distinct types of R&D investment - in-house R&D and entry investment. This allows us to match empirical evidence and provides novel implications to the literature. We show that if in-house R&D (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the the number of rms and ination, but decreases the rm size and economic growth. By contrast, if entry investment (variety expansion-type R&D) 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 R&D/entry is restricted by a cash constraint.
    Keywords: CIA constraints on R&D, endogenous market structure, monetary policy, economic growth
    JEL: O30 O40 E41
    Date: 2013–09
  32. By: Jorge Andraz (Faculdade de Economia, Universidade do Algarve and CEFAGE-UE); Nélia Norte (Faculdade de Economia, Universidade do Algarve and CEFAGE-UE)
    Abstract: This paper analysis the vulnerability of the OECD member states to external shocks by estimating the degree of asymmetric effects from positive and negative shocks. We use asymmetric conditional heteroscedasticity models with endogenously determined regime changes in a context of progressive moderation in both moments. The results suggest that recessions are associated with higher volatility and significant leverage effects. The estimated impacts of negative and positive shocks amount to 0.961 and 0.028, respectively. The disaggregated analysis over different periods reveals an increasing pattern of these asymmetries, as well as huge differences among the countries. The country-specific analysis suggest an increasing vulnerability to negative exogenous shocks in Australia, Denmark, Finland, Japan, Mexico, the Netherlands, Turkey and the United Kingdom, although with different levels, and decreasing vulnerability in Canada, Greece, Italy and New Zealand. Finally, some economies seem to have developed higher levels of immunity to external shocks by reaching balanced effects from positive and negative shocks. Among these are the largest European economies, together with the northern economies, the United States and the wealthiest economies of Luxembourg and Switzerland.
    Keywords: GDP; Volatility; Structural change; Business cycles; GARCH.
    JEL: C22 E23 E32
    Date: 2013
  33. By: Benjamin Wong
    Abstract: This paper proposes quantifying the evolution of the U.S. output-inflation tradeoff using a Time-Varying Parameter Structural VAR. This methodology circumvents issues with existing methods which tend to be either reduced form in nature or rely on more ad hoc assumptions regarding sample split dates and both trend output and trend inflation. Working through U.S. data since the 1970s reveals only a slight change in the tradeoff from around 1.70 to 1.75 percentage points of real output growth per percentage point increase in trend inflation. This contrasts with claims that the U.S. Phillips Curve has flattened dramatically.
    Keywords: Sacrifice Ratio, Time-Varying Parameters
    JEL: C32 C54 E31 E66
    Date: 2013–10
  34. By: Otaviano Canuto; Matheus Cavallari
    Keywords: Finance and Financial Sector Development - Debt Markets Banks and Banking Reform Private Sector Development - Emerging Markets Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Macroeconomics and Economic Growth
    Date: 2013–05
  35. By: Niamh Hardiman (School of Politics and International Relations, University College Dublin, UCD Geary Institute)
    Abstract: Ireland has been taken to be an exemplary case of successful growth-promoting fiscal retrenchment, not once but twice – first, in the fiscal consolidation undertaken in the late 1980s, which was taken as one of the classic original instances of ‘expansionary fiscal contraction’, and again now, in the context of meeting the fiscal deficit targets set by the current EC-ECB-IMF loan conditions. This paper argues that many of the apparent lessons drawn from Ireland’s experience turn out to be more complex and even misplaced upon closer inspection. Ireland was never an instance of ‘expansionary fiscal contraction’ in the sense in which it now understood, in the late 1980s; and the conditions that facilitated the restoration of growth at that time are no longer possible now.Firstly, the paper shows that standard methodologies for identifying the object of interest in fiscal consolidation misses out on what is really central, which is the ongoing politics of ‘fiscal effort’. Secondly, this approach challenges conventional ideas about the primacy of spending cuts over tax increases. Thirdly, Ireland’s fiscal stabilization in the earlier period depended on devaluation, international growth, and strong social pacts. None of these conditions is present in the ‘internal devaluation’ under way since 2008. Ireland has committed to fulfilling the terms of the EU-ECB-IMF loan programme, but there are few grounds for anticipating that this will of itself result in the resumption of growth. Fiscal adjustment efforts are much more painful without the growth-promoting contextual conditions that were present in the earlier period.
    Keywords: fiscal policy, fiscal consolidation, austerity, political parties, Ireland
    JEL: H24 H63
    Date: 2013–10–08
  36. By: Mariano Kulish (UNSW); Adrian Pagan (University of Sydney)
    Abstract: Many papers which have estimated models with forward looking expectations have reported that the magnitude of the coefficients of the expectations term is very large when compared with the effects coming from past dynamics. This has sometimes been regarded as implausible and led to the feeling that the expectations coefficient is biased upwards. A relatively general argument that has been advanced is that the bias could be due to structural changes in the means of the variables entering the structural equation. An alternative explanation is that the bias comes from weak instruments. In this paper we investigate the issue of upward bias in the estimated coefficients of the expectations variable based on a model where we can see what causes the breaks and how to control for them. We conclude that weak instruments are the most likely cause of any bias and note that structural change can affect the quality of instruments. We also look at some empirical work in Castle et al. (2011) on the NK Phillips curve in the Euro Area and U.S, assessing whether the smaller coefficient on expectations that Castle et al. (2011) highlight is due to structural change. Our conclusion is that it is not. Instead it comes from their addition of variables to the NKPC. After allowing for the fact that there are weak instruments in the estimated re-specified model it would seem that the forward coefficient estimate is actually quite high rather than low.
    Keywords: Phillips Curve, structural change
    Date: 2013–10–08
  37. By: Shouyong Shi; Christine Tewfik
    Abstract: We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the US data, we quantitatively examine how aggregate activity is affected by a shock to equity liquidity and a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment.
    Keywords: Financial frictions; Liquidity; Asset market interventions; Investment delay; Equity; Collateral.
    JEL: E3 G1
    Date: 2013–10–04
  38. By: Huseyin Cagri Akkoyun; Yavuz Arslan; Mustafa Kilinc
    Abstract: In this paper, we show that tradable and non-tradable TFP processes of the US and Europe have unit roots and can be modeled by a vector error correction model (VECM). Then, we develop a standard two country and two good (tradable and non-tradable) DSGE model. Our model implies that using cointegrated TFP processes improves the real exchange rate (RER) volatility and risk sharing puzzles compared to the model with transitory TFP processes. Cointegrated TFP shocks, or trend shocks, generate signi?cant income e¤ects, and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks break the tight link between relative consumption and RER for low and high values of trade elasticity parameters.
    Keywords: Trends Shocks, Risk Sharing, Real Exchange Rates
    JEL: E32 F41 F44
    Date: 2013
  39. By: Ruperto MAJUCA (De La Salle University, Manila)
    Abstract: We examine the transmission of economic shocks both from the rest of the world into the ASEAN region, as well as the transmission of such shocks from the rest of the row and ASEAN into a typical AMS. The approach we take is three-pronged. First, we will look into the trade and financial linkages of a "typical" AMS. By "typical", we mean representative AMSs, e.g., Singapore for a developed country, Philippines or Indonesia for ASEAN5 economies and Vietnam for the CLMV (Cambodia, Lao, Myanmar, Vietnam) economies. We look at trade and financial linkages between these typical AMSs, the ASEAN as a whole, and the rest of the world. Second, we employ a specialized type of vector autoregression (VAR) model to decompose the shocks into trade shocks, financial shocks, and commodity price shocks. This we do for the typical AMS in relation to ASEAN and the rest of the world. By decomposing the shocks into their constituent components, we hope to glean important insights on, among others, which component shocks are more important for the typical AMS. Third, we estimate a global projection model in order to analyze how key macroeconomic variables (GDP, inflation, unemployment rate, interest rate, and exchange rate) are interrelated across regions (e.g., U.S., EU, Japan, China) and how these shocks are transmitted across these regions, and from these regions into ASEAN and a typical AMS. This way, we hope to trace how a shock originating from the U.S., for example, will impact EU's, Japan's, China's, and eventually ASEAN's, and a typical AMS's GDP, inflation, unemployment, interest rate, and exchange rates. We then conclude with an analysis of the implications of these on how to manage the economic shocks in an integrated region, as well as the implications for macroeconomic policy coordination in the region
    Keywords: regional integration, macroeconomic shocks, spillovers, vector autogressions, global projection model, Bayesian estimation
    JEL: C32 C51 E31 E52 F15 F41 F42 F43 F47
    Date: 2013–09
  40. By: DeNicco, James (Drexel University)
    Abstract: In this paper I study the effects on jobless recovery of diminishing the power of an employer to fire an employee through Employment-At-Will Exceptions (EWEs). I do so by using a dynamic panel with quarterly data ranging from 1976 to 2010 for the 50 states in the United States. I test both changes in state unemployment rates and state-weighted GDP growth in single variable regressions and VAR regressions. My contribution to the literature is threefold. First, I show two of the three EWEs contribute significantly to jobless recovery in the U.S. The statistical tests in this paper show that Implied Contract Exceptions slow decreases in the unemployment rate during recovery from recession by between 0.025 and 0.033 percentage points per quarter, and Covenant of Good Faith and Fair Dealing Exceptions do so by between 0.039 and 0.055 percentage points per quarter. Second, I lend support to the predictions of theory that increased firing costs decrease the rate of hiring during recoveries. Third, I resolve differences in the various sources documenting the three types of EWEs in different states.
    Keywords: Employment at will; jobless recovery
    JEL: E24 E32 J23 J32 J83 K12 K31
    Date: 2013–07–29
  41. By: Ömer Özak (Southern Methodist University)
    Abstract: I study how boundedly rational agents can learn a “good” solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. Using an empirically plausible theory of learning I propose a class of adaptive learning algorithms that agents might use to choose a consumption rule. I show that the algorithm always has a globally asymptotically stable consumption rule, which is optimal. Additionally, I present extensions of the model to finite horizon settings, where agents have finite lives and life-cycle income patterns. This provides a simple and parsimonious model of consumption for large agent based models.
    Keywords: Adaptive learning models, bounded rationality, dynamic programming, consumption function, behavioral economics, liquidity constraint, saving behavior .
    JEL: C6 D8 D9 E21
    Date: 2013–09
  42. By: Lucia Esposito (Bank of Italy); Andrea Nobili (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: Changes in interest rates constitute a major source of risk for banks’ business activity and can diversely affect their financial conditions and performance. We use a unique dataset to analyse Italian banks’ exposure to interest rate risk during the crisis, relying on the standardized duration gap approach proposed by the Basel Committee. We provide evidence that banks managed their overall interest rate risk exposure by means of on-balance-sheet restructuring complemented by hedging with financial derivatives. But the complementary relationship between risk-management decisions differs significantly across banks. The different impact of a future increase in interest rates on banks’ economic value will be a matter of concern for policymakers when they return to a less accommodative monetary policy stance.
    Keywords: interest rate risk, derivatives, hedging, financial crisis
    JEL: E43 G21
    Date: 2013–09
  43. By: Mirdala, Rajmund
    Abstract: Origins and implications of twin deficits occurrence in a large scale of countries seems to be a center of rigorous empirical as well as theoretical investigation for decades. The reality of persisting fiscal and current account deficits became obvious in many advanced as well as advancing, emerging and low-income countries seemingly without a direct association with the phase of business cycle or trends in key fundamental indicators. European transition economies experienced current account deficits during the most of the pre-crisis period. Despite generally improved economic environment and high rates of economic growth it seems that countries with weaker nominal anchor experienced periods of persisting fiscal imbalances during the most of the pre-crisis period. Crises period affected both fiscal stance of government budgets and current account pre-crisis levels and trends in all countries from the group. As a result, leading path of both indicators significantly changed. In the paper we analyze effects of fiscal policies on current accounts in the European transition economies. Our main objective is to investigate causal relationship between fiscal policy discretionary changes and associated current account adjustments. We identify episodes of large current account and fiscal policy changes to provide an in-depth insight into frequency as well as parallel occurrence of deteriorations (improvements) in current accounts and fiscal stance of government budgets. From employed VAR model we estimate responses of current accounts in each individual country to the cyclically adjusted primary balance shocks.
    Keywords: fiscal imbalances, current account adjustments, economic crisis, vector autoregression, impulse-response function
    JEL: C32 E62 F32 F41 H60
    Date: 2013–08
  44. By: Cem Cebi; Ali Askin Culha
    Abstract: This study aims to investigate the e¤ects of government spending shocks on the real exchange rate and foreign trade balance in Turkey for the period of 2002.I - 2012.IV within a structural VAR framework. The analysis shows that a positive shock to government spending tends to induce real exchange rate appreciation and deterioration in trade balance. We also ?nd that composition of the government spending matters. While shocks to government non-wage consumption generate an appreciation in the real exchange rate and worsening of the trade balance, e¤ects of government investment shocks remain insignificant. Furthermore, the analysis demonstrates that shocks to government spending are associated with a rise in taxes, which points to the existence of a spending- driven tax adjustment process in Turkey.
    Keywords: Government Spending Shocks, Real Exchange Rate, Trade Balance, SVAR
    JEL: E62 H30
    Date: 2013
  45. By: Kleimeier S.; Dinh T.H.T.; Straetmans S.T.M. (GSBE)
    Abstract: Adverse selection inherent in the bank-borrower relationship typically intensifies during crises. This problem is expecially severe in emerging markets, characterized by weak institutions and banks with poorly developed monitoring and screening abilities. Exploiting a unique sample of Vietnamese loans, we show that by updating their credit scoring models banks can significantly improve their screening abilities. Our results suggest that a crisis fundamentally changes default patterns and that a model based on post-crisis data outperforms models based on pre-crisis data. We conclude that updating credit scoring models is a viable alternative to credit rationing for banks and, in combination with relationship lending, can lead to improved loan pricing, efficiency and profitability.
    Keywords: Financial Markets and the Macroeconomy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance;
    JEL: E44 G21 O16
    Date: 2013
  46. By: Robert J. Barbera
    Abstract: Perhaps the most indictable offense that mainstream economists committed, from 1988 through 2008, was to retrace Keynes's path of discovery from 1924 (A Tract on Monetary Reform) through 1936 (The General Theory). Wholesale deregulation of finance and categorical confidence in a reductionist role for central banks came into being as the conventional wisdom embraced the 1924 view that free markets and stable prices alone give us the best chance for economic stability. In the aftermath of the grand asset market boom-and-bust cycle of 2008-9, we are jettisoning Keynes circa 1924 for the Keynes of 1936. In effect, we study business cycles but seem incapable of extricating the economics profession from reciting its assigned lines as the play unfolds.
    Date: 2013–09
  47. By: Gabriele Camera (Economic Science Institute, Chapman University); YiLi Chien (Research Division, Federal Reserve Bank of St. Louis)
    Abstract: We examine two monetary models with periodic interactions in centralized and decentralized markets: the cash-in-advance model and the model in Lagos and Wright (2005). Given conformity of preferences, technologies and shocks, both models reduce to a single di?erence equation. In stationary equilibrium, such equations coincide when the price distortion present in one model, due to Nash bargaining, is replicated in the other using a tax on cash revenues. In that case, the quantitative implications for the welfare cost of in?ation in each model are also comparable. Di?erences in the model’s performance reduce to di?erences in the pricing mechanism assumed to govern those transactions that must be settled with the exchange of cash.
    Keywords: cash-in-advance, matching, microfoundations, money, in?ation
    JEL: E1 E4 E5
    Date: 2013
  48. By: Michael W.L. Elsby; Bart Hobijn; Aysegül Sahin
    Abstract: Over the past quarter century, labor’s share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession. Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor’s share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years. ; Prepared for Brookings Panel on Economic Activity, September 19-20, 2013.
    Keywords: Monetary policy
    Date: 2013
  49. By: Mario Amendola (Università degli Studi di Roma 'La Sapienza'); Jean-Luc Gaffard (OFCE Sciences Po; Skema Business School; University of Nice-Sophia Antipolis, France); Fabrizio Patriarca (Università degli Studi di Roma 'La Sapienza')
    Abstract: The explosion of the global financial crisis in 2008 and its transmission to the real economies have been interpreted as calling for new kinds of regulation of the banking and the financial systems that would have allowed reestablishing a virtuous relation between the real and the financial sectors of the economy. In this paper we maintain the different view that the financial crisis and the ensuing real crisis have roots in the strong increase in incomes inequality that has been taking place in the Western world in the last thirty years or so. This has created an all around aggregate demand deficiency crisis that has strongly reduced prospects and opportunities for investments in productive capacities and shifted resources toward other uses, thus feeding a perverse relation between the productive and the non-productive assets of the economy. In this context the way out of the crisis is re-establishing the right distributive conditions: which cannot be obtained by a policy aimed at relieving the weight of private debts but calls for a redistribution through taxes on the incomes of non-productive sectors, according to a fine tuning that should prevent from excessive taxations transforming positive into negative effects.
    Keywords: Assets, debt, inequality, taxation
    JEL: D30 E20
    Date: 2013–10
  50. By: Volz, Ulrich
    Abstract: This paper scrutinises the state of RMB internationalisation and its likely progress over the coming years and discusses its implications for currency co-operation in East Asia. As part of its internationalisation, the RMB is gradually delinked from the dollar, which will effectively put an end to the East Asian dollar standard that has shaped the region's financial architecture over the last three decades and that has provided a relatively high degree of intra-regional exchange rate stability. Because of the close trade and investment ties that have developed across the region, the East Asian countries, especially the ASEAN countries which are striving to create an ASEAN Economic Community, will continue to manage their exchange rates and stabilise their currencies against one another to facilitate cross-border investment and commerce. But instead of a replacing of the dollar standard with an RMB standard we are likely to see some rather loose and informal exchange rate co-operation in East Asia based on currency baskets, with China herself moving towards a managed exchange rate system guided by a currency basket. --
    Keywords: RMB internationalisation,key currencies,Chinese economy,East Asian monetary co-operation,currency baskets
    JEL: E58 F33
    Date: 2013
  51. By: Massimiliano Affinito (Bank of Italy)
    Abstract: This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à-vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market.
    Keywords: liquidity, financial crisis, central bank refinancing, interbank market
    JEL: G21 E52 C30
    Date: 2013–09
  52. By: Rafik Abdesselam (COACTIS, Université Lumière Lyon 2); Jean Bonnet (CREM-UMR CNRS 6211, Université de Caen Basse-Normandie, UFR SEG (Sciences Economiques et Gestion), Normandie Université, France); Patricia Renou-Maissant (CREM-UMR CNRS 6211, Université de Caen Basse-Normandie, UFR SEG (Sciences Economiques et Gestion), Normandie Université, France)
    Abstract: We study the relationships between unemployment rate and new-firm startups rate in France using a quarterly data basis over the 1993-2011 period. At the national level we identify that the refugee effect explains the dynamics of entrepreneurship in France over the period 2000-2011. New French firms are mostly set up for necessity motives. At the regional level data analysis methods allow to obtain different classes of regions that represent different type of developments. For each of these classes we are able to identify the existence of refugee/Schumpeter effects both in the short-run and in the long-run.
    Keywords: New firm formation, Business cycle, Schumpeter effect, refugee effect, data analysis methods, panel data
    JEL: L26 E32 R11 C23 C38
    Date: 2013–10
  53. By: Andrew T. Young; Daniel Levy (Bar-Ilan University)
    Abstract: We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers—a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the “secret formula,” at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude that the perceived costs of breaking the implicit contract were large.
    Keywords: Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long-Term Relationship, Price Rigidity, Sticky Prices, Price Adjustment, Quality Rigidity, Quality Adjustment, Nickel Coke, Coca-Cola, Secret Formula, Real Thing
    JEL: E12 E31 K00 K12 K22 K23 L14 L16 L66 M21 M31 N80 A14
    Date: 2013–10
  54. By: Diogo Barbosa (Banco de Portugal and Faculdade de Economia, Universidade do Porto); Vitor M. Carvalho (CEF.UP and Faculdade de Economia, Universidade do Porto); Paulo J. Pereira (CEF.UP and Faculdade de Economia, Universidade do Porto)
    Abstract: Given the global financial crisis and, particularly, the European sovereign-debt crisis, European countries have the urgent need to promote output growth. However, due to the current financial constraints, it is difficult for the Governments to stimulate economic growth by directly increasing investment. Alternatively, they can promote private investment, either by reducing the uncertainty and costs, or by directly subsidizing those investments. In this paper we try to analyze alternative solutions to promote investment, and hence economic growth, under a context of Government austerity. We develop a real options model in order to study optimal investment decisions, considering both the point of view of firms and Government. So, we incorporate the Government in the baseline real options model, and we use this extended model to drive the optimal behavior for firms and Government on their decision to invest and promote investment, respectively. To be more realistic, the model takes into account, not only inefficiencies (both concerning the implementation and management of the project), but also the economic benefits of investing, i.e., the investment multiplier effect in the economy. We also make a sensitivity analysis for the key parameters and define regions for different types of investment. Alternative solutions are also considered. Among the main conclusions we find that the probability of being optimal for the Government to subsidize private investment rather than investing directly is greater the larger the private investment multiplier effect, the tax rates, the private present value of the profit flows, the private cost of the investment and, also, the inefficiency level of the Government.
    Keywords: Corporate finance; Fixed investment decisions; Financing policy; Fiscal policy; Real options
    JEL: E22 E62 G31 G32 H32
    Date: 2013–10
  55. By: Moritz Drechsel-Grau; Kai D. Schmid
    Abstract: We demonstrate that interpersonal comparisons lead to ”keeping up with the Joneses”-behavior. Using annual household data from the German Socio-Economic Panel, we estimate the causal effect of changes in reference consumption, defined as the consumption level of all households who are perceived to be richer, on household savings and consumption. When controlling for own income, an increase in reference consumption of 100 euros leads to an increase in consumption of 10 to 25 euros. Upper middle class households are most strongly affected. Our findings provide valuable input for macroeconomic models that consider the economic consequences of interdependent preferences.
    Keywords: Household Savings, Household Consumption, Reference Consumption, Interdependent Preferences, Relative Income Hypothesis, Income Inequality
    JEL: D11 D12 E21
    Date: 2013
  56. By: Marek Rusnak
    Abstract: The prominent measure of the current state of the Czech economy, gross domestic product (GDP), is available only with a significant lag of roughly 70 days. In this paper, we employ a Dynamic Factor Model (DFM) to nowcast Czech GDP in real time. Using multiple vintages of historical data and taking into account the publication lags of various monthly indicators, we evaluate the real-time performance of the DFM over the 2005–2012 period. The results suggest that the accuracy of model-based nowcasts is comparable to that of the judgmental nowcasts of the Czech National Bank (CNB). Our results also suggest that foreign variables are crucial for the accuracy of the model, while omitting financial and confidence indicators does not worsen the nowcasting performance. Finally, we show how releases of new data can be viewed through the lens of the dynamic factor model.
    Keywords: Dynamic factor model, GDP, nowcasting, real-time data.
    JEL: C53 C82 E52
    Date: 2013–07
  57. By: Kossov, Vladimir; Kossova, Elena
    Abstract: For the large majority of goods, the price dispersion between countries does not exceed 1:10. Diesel fuel stands out, with a dispersion which exceeds 1:100. Given a constant oil price the difference in diesel fuel prices between countries is caused by the different taxes. The average share of taxes in the price determines the normal price. An estimation of the normal price of diesel fuel is made using an econometric model (using 79 countries, 1998-2008 by even years). Of greatest interest to economic policy are normal prices for countries with economies in transition and developing countries. This paper is organized as follows. In the introduction a definition of the term "normal price" and why it is important are presented. The first chapter is devoted to the notion of "price level" both international and national. The normal price is calculated using an econometric model. The estimation of the normal price of goods is determined by the international component and deviation of the normal price by the national one. In the second chapter the results of evaluating the parameters of the econometric model and the values of normal prices are given. In the third chapter price deviations in Russia and Kazakhstan are discussed and it is concluded that they have reached the maximum value, above which mass protests may result.
    Keywords: budget revenue; diesel fuel price; motor fuel tax; mass protests; normal price; oil rent; price level
    JEL: C23 D49 E37 Q48
    Date: 2013–03–20
  58. By: Skouras, Thanos
    Abstract: The volume of profits in an economy is a magnitude, which is out of sight of orthodox macroeconomic textbooks and effectively ignored by neoclassical macroeconomics. In contrast, Kalecki’s approach brings to the forefront the sources of profits and makes possible their further analysis. In a previous paper, the sources of profits and their impacts, as well as the inter-relations among them are examined one by one. The sustainability of the profits’ sources tends to have inevitable limits, which are discussed and elucidated. Given these limits, two phases in the operation of the sources may be distinguished, with a beneficial phase being transformed into a pathological one, as the limits are breached. Consequently, profits may be distinguished according to the source from which they flow, as well as the phase in which they arise. Taking into account both source and phase, a terminology is proposed to highlight the distinctive character of the different kinds of profits. The present paper briefly reviews this analysis and terminology and, based on this, goes on to consider the relationship between profits and employment. The concept of ‘wasted profits’ is first presented and developed. This is followed by an assessment of the alleged opposition between profits and employment. Finally, the employment effects that the different kinds of profits tend to bring forth, are examined and compared to each other on the basis of appropriate elasticities.
    Keywords: profits, employment,elasticities of employment,sources and sustainability of profits, beneficial and pathological phases,'wasted profits'.
    JEL: A10 B50 E00 P10 P16
    Date: 2013–10–12
  59. By: Dubecq, Simon
    Abstract: La première partie de cette thèse introduit une nouvelle méthodologie pour la réalisation d’exercices de stress-tests. Notre approche permet de considérer des scénarios de stress beaucoup plus riches qu’en pratique, qui évaluent l’impact d’une modification de la distribution statistique des facteurs influençant les prix d’actifs, pas uniquement les conséquences d’une réalisation particulière de ces facteurs, et prennent en compte la réaction du gestionnaire de portefeuille au choc. La deuxième partie de la thèse est consacrée à la valorisation des obligations à maturité très longues (supérieure à 10 ans). La modélisation de la volatilité des taux de très long terme est un défi, notamment du fait des contraintes posées par l’absence d’opportunités d’arbitrage, et la plupart des modèles de taux d’intérêt en absence d’opportunités d’arbitrage impliquent un taux limite (de maturité infinie) constant. Le deuxième chapitre étudie la compatibilité du facteur "niveau", dont les variations ont un impact uniforme sur l’ensemble des taux modélisés, a fortiori les plus longs, avec l’absence d’opportunités d’arbitrage. Nous introduisons dans le troisième chapitre une nouvelle classe de modèle de taux d’intérêt, sans opportunités d’arbitrage, où le taux limite est stochastique, dont nous présentons les propriétés empiriques sur une base de données de prix d’obligations du Trésor américain.
    Abstract: In the first part of this thesis, we introduce a new methodology for stress-test exercises. Our approach allows to consider richer stress-test exercises, which assess the impact of a modification of the whole distribution of asset prices’ factors, rather than focusing as the common practices on a single realization of these factors, and take into account the potential reaction to the shock of the portfolio manager.
 The second part of the thesis is devoted to the pricing of bonds with very long-term time-to-maturity (more than ten years). Modeling the volatility of very long-term rates is a challenge, due to the constraints put by no-arbitrage assumption. As a consequence, most of the no-arbitrage term structure models assume a constant limiting rate (of infinite maturity). The second chapter investigates the compatibility of the so-called "level" factor, whose variations have a uniform impact on the modeled yield curve, with the no-arbitrage assumptions. We introduce in the third chapter a new class of arbitrage-free term structure factor models, which allows the limiting rate to be stochastic, and present its empirical properties on a dataset of US T-Bonds.
    Keywords: Choc; Copule; Risque Extrême; Tests de Résistance; Modèle à Facteur; Risque Systémique; Gestion de Portefeuille; Obligations Souveraines; Taux d’intérêt; Structure par Terme; Modèle Affine; Facteur Niveau; Facteur Pente; Distribution Stable; Taux de Long-Terme Stochastique; Absence d'arbitrage; Shock; Copula; Extreme Risk; Stress-Tests; Factor Model; Systemic Risk; Portfolio Management; Sovereign Bonds; Interest Rate; Term Structure; Affine Model; No Arbitrage; Level Factor; Slope Factor; Stable Distribution; Stochastic Long-Term Rate;
    JEL: E43 G11
    Date: 2013–01

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