nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒11‒14
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Does Inflation Targeting Matter ? An Experimental Investigation By Camille Cornand; Cheick Kader M’Baye
  2. Development of an explicit rule of monetary policy for the economy of Ukraine By Kozmenko, Serhiy; Savchenko, Taras
  3. Financial Stability in Open Economies By Ippei Fujiwara; Yuki Teranishi
  4. The U.S. economy and monetary policy By James Bullard
  5. Comments on the paper “Crunch time: fiscal crises and the role of monetary policy” By Eric S. Rosengren
  6. The Collective Individual Households or Coin economic theory By DE KONING, Kees
  7. Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data By Dong He; Honglin Wang
  8. Inflation and Output Comovement in the Euro Area: Love at Second Sight? By Michal Andrle; Jan Bruha; Serhat Solmaz
  9. Fiscal foundations of inflation: imperfect knowledge By Stefano Eusepi; Bruce Preston
  10. Would it have paid to be in the eurozone? By Michal Brzoza-Brzezina; Krzysztof Makarski; Grzegorz Wesolowski
  11. Implications of fiscal austerity for U. S. monetary policy By Eric S. Rosengren
  12. May austerity be counterproductive? By Pablo García Sánchez; Miguel Sebastián
  13. Observations on global financial cycles and recent emerging market volatility By Terrence J. Checki
  14. Monetary policy and financial stability By Eric S. Rosengren
  15. Inflation Targeting and Financial Stability: A Perspective from the Developing World By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  16. Opening remarks for the Transatlantic Economic Interdependence and Policy Challenges Conference By William C. Dudley
  17. TARGET2 imbalances and the need for a lender of last resort By Astarita, Caterina; Purificato, Francesco
  18. Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence By Olivier Coibion; Yuriy Gorodnichenko; Dmitri Koustas
  19. Should full employment be a mandate for central banks? By Eric S. Rosengren
  20. ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model By José Dorich; Michael K. Johnston; Rhys R. Mendes; Stephen Murchison; Yang Zhang
  21. Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states By Pidong Huang; Yoske Igarashi
  22. Why Ten $1’s Are Not Treated as a $10. By Pidong Huang; Yoske Igarashi
  23. Observations on the global economy and financial system By Terrence J. Checki
  24. The economic outlook and monetary policy: moving in the right direction By John C. Williams
  25. A regime-switching model of the yield curve at the zero bound By Jens H.E. Christensen
  26. Does Banque de France control inflation and unemployment? By Ivan Kitov; Oleg Kitov
  27. The euro area's tightrope walk: debt and competitiveness in Italy and Spain By Zsolt Darvas
  28. Learning about fiscal policy and the effects of policy uncertainty By Josef Hollmayr; Christian Matthes
  29. Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crises By Christopher F. Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan
  30. Intermediary balance sheets By Tobias Adrian; Nina Boyarchenko
  31. Regional Financial Arrangement: An Impetus for Regional Policy Cooperation By Siregar, Reza; Miyaki, Keita
  32. Realistic neoclassical multiplier By Jose-Victor Rios-Rull; Zhen Huo
  33. Honduras Since the Coup: Economic and Social Outcomes By Jake Johnston; Stephan Lefebvre
  34. What can civil society expect from academic macroeconomics? By Michel DE VROEY
  35. Effects of fiscal consolidation envisaged in the 2013 Stability and Convergence Programmes on public debt dynamics in EU Member States By Katia Berti; Francisco de Castro; Matteo Salto
  36. Inflation and Inflation Uncertainty: Evidence from Turkey, 1923–2012 By dogru, bulent
  37. The political polarization index By Marina Azzimonti
  38. Unemployment benefits and unemployment in the Great Recession: the role of macro effects By Marcus Hagedorn; Fatih Karahan; Iourii Manovskii; Kurt Mitman
  39. How stressed are banks in the interbank market? By Abbassi, Puriya; Fecht, Falko; Weber, Patrick
  40. Identifying Banking Crises Using Money Market Pressure: New Evidence For a Large Set of Countries By Zhongbo Jing; Jakob de Haan; Jan Jacobs; Haizhen Yang
  41. Are European sovereign bonds fairly priced? The role of modeling uncertainty By Leo de Haan; Jeroen Hessel; Jan Willem van den End
  42. Risky Investments with Limited Commitment By Thomas F. Cooley; Ramon Marimon; Vincenzo Quadrini
  43. Declining Labor Force Attachment and Downward Trends in Unemployment and Participation By Regis Barnichon; Andrew Figura
  44. Il Pay-as-You-Go pubblico e privato: davvero diversi? Un confronto Europa - Us By SALERNO, Nicola Carmine
  45. The Effect of Non-Linearity Between Credit Conditions and Economic Activity on Density Forecasts By Michal Franta
  46. Uncertainty and bank wholesale funding By Dinger, Valeriya; Craig, Ben
  47. Anatomy of international banking crises at the onset of the Great Recession By Stolbov, Mikhail
  48. La demografia dell’Italia e delle Regioni italiane. Uno sguardo alle proiezioni a medio-lungo termine By SALERNO, Nicola Carmine
  49. The economic recovery: past, present, and future By John C. Williams
  50. International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade By Mina Kim; Deokwoo Nam; Jian Wang; Jason Wu
  51. Mihail Manoilescu’s international trade theories in retrospect: how and when emerging economies must be protected? By Nikolay Nenovsky; Dominique Torre

  1. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Cheick Kader M’Baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We use laboratory experiments with human subjects to test the relevance of different inflation targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank only cares about inflation stabilization, announcing the inflation target does not make a di-fference in terms of macroeconomic performances compared to a standard active monetary policy. However, if the central bank also cares about the stabilization of the economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap although their average levels are not affected. This finding is consistent with those of the theoretical literature and provides a rationale for the adoption of a flexible inflation targeting regime.
    Keywords: Inflation targeting, inflation expectations, monetary policy, New Keynesian model, laboratory experiments
    JEL: D82 D83 E52 E58
    Date: 2013
  2. By: Kozmenko, Serhiy; Savchenko, Taras
    Abstract: The paper explains the expediency of developing an explicit rule of monetary policy for the economy of Ukraine. It studies the stages of its development, proving the expediency of formation of monetary rules for money aggregates, evaluates equilibrium values of the rule’s parameters based on the use of the modified Hodrick-Prescott filter, and determines the possible parameters of the monetary rule and their estimated coefficients by developing multivariate regression models.
    Keywords: monetary policy rule, central bank, monetary policy, the Hodrick-Prescott filter, inflation targeting.
    JEL: E50 E52 E58
    Date: 2013–03–01
  3. By: Ippei Fujiwara; Yuki Teranishi
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in its own country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.
    Keywords: Sacrifice Ratio, Time-Varying Parameters
    JEL: E50 F41
    Date: 2013–10
  4. By: James Bullard
    Abstract: June 10, 2013. Presentation. "The U.S. Economy and Monetary Policy." 19th Conference of Montreal—Entering the Next Economy: New Realities, New Frontiers, Montreal, Canada.
    Keywords: Monetary policy ; Economic conditions
    Date: 2013
  5. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the U. S. Monetary Policy Forum, New York, New York, February 22, 2013.
    Keywords: Financial crises ; Monetary policy
    Date: 2013
  6. By: DE KONING, Kees
    Abstract: The collective individual households or coin economic theory aims to study how savings have been and are being allocated to the various asset classes and how they are being used. The main conclusion from this study is that some savings can be held in the financial sector and stay there while other savings are transferred to the real or business sector in order to increase output and create employment. An analysis of the Balance Sheet of Households and Nonprofit Organizations as produced on a quarterly and annual basis by the Federal Reserve Bank in the U.S. helps to underpin this theory. For instance the net financial assets of individual households in 1985 were 1.93 the nominal GDP level in that year. In 2013 as per end of June it had reached the level of 2.90 times the forecasted GDP for 2013. The main reasons are that financial assets allocated to share equities do not represent the volume amounts of savings transferred to the company sector. Greed and fear may influence the financial assets allocated to shares rather than expected future profits. The second reason is that U.S. government debt is a type of consumer debt; once used it rapidly loses its GDP value. Government debt also does not create a cash flow, like the company sector does. Savings can only be allocated once and if they stay in the financial sector, they do not help the business sector to develop. The 1929 Great Depression started off with a boom-bust stock market, followed by a run on the banks. So, on a smaller scale did the bubble burst in 2000-2001.The current financial crisis was a home mortgage crisis, which not only affected property prices, but also the collective individual households income earnings and allocation of incomes. Over the period 2008-2012 5.4 million households lost their homes through repossession or 1 in 10 households with a mortgage. More than 20 million households or 1 in 6 households were involved in foreclosure proceedings during the same period. The collective individual households changed their spending habits from 2008 onwards. They repaid $1.15 trillion of the national home mortgage portfolio and funded the construction of over 4 million new homes out of incomes and savings. Of course, the demand for goods and services dropped with all the unemployment and income effects, the latter increasing at below inflation levels. The U.S. government’s reaction was funding an accumulated deficit of $ 7 trillion since 2008; on top of this the Federal Reserve spent another $2 trillion on buying up government and other securities. This amounts to $57,000 per individual household. The main reason that the use of these funds has been so ineffective is that it did not address the core cause of the fall in demand: the wish and the need by individual households to restore their individual balance sheet. The coin economic theory may help to show that financial sector (equals savings) growth does not equate to GDP growth. In this article the theory explores the allocation of savings, the role of interest rates, the causes of financial crises, the savers and borrowers’ philosophies, the difference between financial sector companies as savings distributors and real businesses as users of savings for production purposes and the possible correction mechanisms including economic easing. The latter method implies no additional borrowings for individual households but a temporary transfer from their own financial assets to the income side of individual households
    Keywords: balance sheet of households,savings in financial sector and real sector,economic growth,asset allocation, economic theories, economic easing, quantitative easing, flexi-tax,
    JEL: B22 E44 E58 E61 E62 G1
    Date: 2013–10–24
  7. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research)
    Abstract: We investigate how monetary policy in a mixed financial system such as that of China, which is characterized by a juxtaposition of quantity- and price-based policy instruments and the co-existence of regulated and market-determined interest rates, affects bank lending. Using a newly constructed loan-level dataset, we find that loan rates but not loan size are affected by both the regulated and the market-determined interest rates and that loan size is instead affected by an implicit quota that is imposed on aggregate bank lending through window guidance. We interpret this finding to be evidence of credit rationing.
    Keywords: Monetary Policy, Bank Lending, The People's Bank of China (PBC)
    JEL: E52 E58 G21 G34
    Date: 2013–10
  8. By: Michal Andrle; Jan Bruha; Serhat Solmaz
    Abstract: This paper discusses comovement between inflation and output in the euro area. The strength of the comovement may not be apparent at first sight, but is clear at business cycle frequencies. We propose a new estimation approach to trimmed mean inflation, determining jointly the upper and lower quantiles to be trimmed, as well as the frequency bandwidth of real output that best aligns inflation with the output cycle. Our results suggest that at business cycle frequency, the comovement of output and core inflation is high and stable, and that inflation lags behind the output cycle with roughly half of its variance. The strong relationship between output and inflation hints at the importance of demand shocks for the euro area business cycle.
    Keywords: Business cycle, core inflation, demand shocks, trimmed mean.
    JEL: C10 E32 E50
    Date: 2013–08
  9. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession.
    Keywords: Inflation (Finance) ; Fiscal policy ; Monetary policy ; Debts, Public
    Date: 2013
  10. By: Michal Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics); Grzegorz Wesolowski (National Bank of Poland, Warsaw School of Economics)
    Abstract: Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy.
    Keywords: optimum currency area, euro-area accession, emerging market
    JEL: E32 E58 E65
    Date: 2013–10–23
  11. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at The Global Interdependence Center Central Banking Conference, Milan, Italy, May 16, 2013.
    Keywords: Monetary policy ; Fiscal policy
    Date: 2013
  12. By: Pablo García Sánchez; Miguel Sebastián (Universidad Complutense de Madrid)
    Abstract: This paper investigates the impact that fiscal policy has on economic activity and sovereign debt during economic downturns in the euro area, mainly Germany and Spain. Our theoretical and empirical framework shows that the macroeconomic returns of austerity crucially depend on the values of fiscal multipliers. We find that, for the Spanish economy, even if policy makers just focus on the public debt ratio, ignoring output and unemployment, policies of deficit reduction may be self-defeating, especially if carried on via tax increases. In fact, counter cyclical policies beat deficit consolidation policies in stabilizing the sovereign debt ratio, no matter if shocks are on aggregate supply or aggregate demand. By contrast, in the German case, we cannot reject the hypothesis that austerity works, even under a sluggish economy.
    Keywords: Sovereign Debt, Fiscal Policy, Fiscal Multipliers
    JEL: E62 H30 H63
    Date: 2013–10
  13. By: Terrence J. Checki
    Abstract: Remarks at the Thirty-Seventh Annual Jackson Hole Symposium, Jackson Hole, Wyoming.
    Keywords: Capital ; Business cycles ; Monetary policy ; International finance ; Financial crises ; Emerging markets ; Flow of funds
    Date: 2013
  14. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Business and Industry Association of New Hampshire and the New Hampshire Bankers Association, Saint Anselm College, Manchester, New Hampshire, March 27, 2013.
    Keywords: Monetary policy ; Financial stability
    Date: 2013
  15. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear or floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an “integrated” IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure – and possibly to the real exchange rate – to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism.
    Date: 2013–09
  16. By: William C. Dudley
    Abstract: Remarks at the Transatlantic Economic Interdependence and Policy Challenges Conference, Federal Reserve Bank of New York, New York City.
    Keywords: Monetary policy ; Banks and banking, Central ; Macroeconomics ; European Central Bank ; Monetary policy - Europe ; Globalization ; Euro ; Economic and Monetary Union ; International economic integration
    Date: 2013
  17. By: Astarita, Caterina; Purificato, Francesco
    Abstract: This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis. The development of these balances reflects the change in the distribution of the monetary base among the EMU Member States. During the sovereign debt crisis, while some countries, among which Germany, registered a decisive inflow of monetary base, some others, as Italy, shown an outflow. The main conclusion of the paper is that the dynamics in TARGET2 is rather due to a fall in the level of confidence in the capacity of the EMU to survive than to disparities in the level of competitiveness among countries of the Eurozone as a part of the literature maintained. In turn, this crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions of creating a mechanism working as “lender of last resort” for the Eurozone Member States. Two elements, in particular, support this thesis. On the one hand, most of the monetary base outflow occurred in coincidence with those political decisions which determined deterioration in the expectation about the degree of solvency of the periphery countries. On the other hand, the fiscal consolidation that the periphery countries implemented destabilized the economy as a result of a negative conjuncture and a monetary policy ineffective in reducing the interest rate.
    Keywords: payment system, monetary policy, fiscal policy, financial crisis
    JEL: E42 E52 E58 E62 F32 F34 F36
    Date: 2013–10
  18. By: Olivier Coibion; Yuriy Gorodnichenko; Dmitri Koustas
    Abstract: The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the Eurosclerosis experience of the 1980s than traditional V-shaped recoveries of the past. In this paper, we revisit possible explanations for this rising persistence. First, we argue that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, so these cannot explain the rising persistence of unemployment. Second, monetary and fiscal policies can account for only part of the evolving unemployment persistence. Therefore, we turn to a third class of explanations: propagation mechanisms. We focus on factors consistent with four other cyclical patterns which have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. These factors include declining labor mobility, changing age structures, and the decline in trust among Americans. To determine how these factors affect unemployment persistence, this paper exploits regional variation in labor market outcomes across Western Europe and North America during 1970-1990, in contrast to most previous work focusing either on cross-country variation or regional variation within countries. The results suggest that only cultural factors can account for the rising persistence of unemployment in the U.S., but the evolution in mobility and demographics over time should have more than offset the effects of culture.
    JEL: E24 E32 E52 J64 R11 R23
    Date: 2013–10
  19. By: Eric S. Rosengren
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at the Federal Reserve Bank of Boston's 57th economic conference, "Fulfilling the Full Employment Mandate - Monetary Policy and the Labor Market", Federal Reserve Bank of Boston, Boston, Massachusetts, April 12, 2013.
    Keywords: Employment (Economic theory) ; Monetary policy ; Banks and banking, Central
    Date: 2013
  20. By: José Dorich; Michael K. Johnston; Rhys R. Mendes; Stephen Murchison; Yang Zhang
    Abstract: This report provides a detailed technical description of an updated version of the Terms-of-Trade Economic Model (ToTEM II), which replaced ToTEM (Murchison and Rennison 2006) in June 2011 as the Bank of Canada’s quarterly projection model for Canada. ToTEM has been improved along a number of dimensions, with important changes to the model structure, including: (i) multiple interest rates, (ii) sector-specific demand specifications for consumption, housing investment and inventory investment, (iii) a role for financial wealth in household consumption, and (iv) rule-of-thumb price and wage setters. These new features remove some of the restrictions on model dynamics implied by assumptions in ToTEM, making ToTEM II more general and flexible than its predecessor. Furthermore, most of ToTEM II’s parameters are now formally estimated using full information estimation techniques, leading to significantly improved in-sample goodness of fit. The report discusses the model’s estimation and reviews the most important changes in the model’s properties. Finally, some important applications of ToTEM II in addressing recent policy questions are provided.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: E17 E20 E30 E40 E50 F41
    Date: 2013
  21. By: Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter)
    Abstract: This paper investigates a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and with individual money holdings in the set {0, 1, 2}. It is shown that three kinds of monetary steady state exist generically: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states. A full-support steady state exists if and only if a non-full-support steady state exists. Stability of these steady states is also studied. Both pure-strategy and mixedstrategy full-support steady states are locally stable. However, non-full-support steady states are unstable.
    Keywords: random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003).
    JEL: C62 C78 E40
    Date: 2013
  22. By: Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter)
    Abstract: We study the stability of monetary steady states in a random matching model of money where money is indivisible, the bound on individual money holding is finite, and the trading protocol is buyer take-it-or-leave-it offers. The class of steady states we study have a non-full-support money-holding distribution and are constructed from the steady states of Zhu (2003). We show that no equilibrium path converges to those steady states if the initial distribution has a different support.
    Keywords: random matching model; monetary steady state; instability; Zhu (2003).
    JEL: C62 C78 E40
    Date: 2013
  23. By: Terrence J. Checki
    Abstract: Remarks at the IIF Annual Meeting of Latin America Chief Executives, Santiago, Chile.
    Keywords: International economic relations ; Fiscal policy ; Banks and banking, Central ; Bank of Japan ; European Central Bank ; Monetary policy ; Financial stability ; Financial market regulatory reform ; Risk ; Business cycles ; Emerging markets
    Date: 2013
  24. By: John C. Williams
    Abstract: Presentation to the Portland Business Journal CFO of the Year Awards Luncheon, Portland, Oregon, May 16, 2013
    Keywords: Economic conditions ; Monetary policy
    Date: 2013
  25. By: Jens H.E. Christensen
    Abstract: This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve decisions to provide further monetary stimulus, whether through asset purchases or forward guidance.
    Date: 2013
  26. By: Ivan Kitov; Oleg Kitov
    Abstract: We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. The set of nested models starts with a simplistic version without autoregressive terms and one lagged term of explanatory variable. The lag is determined empirically together with all coefficients. The model is estimated using the Boundary Element Method (BEM) with the least squares method applied to the integral solutions of the differential equations. All models include one structural break might be associated with revisions to definitions and measurement procedures in the 1980s and 1990s as well as with the change in monetary policy in 1994-1995. For the GDP deflator, our original model provided a root mean squared forecast error (RMSFE) of 1.0% per year at a four-year horizon for the period between 1971 and 2004. The rate of CPI inflation is predicted with RMSFE=1.5% per year. For the naive (no change) forecast, RMSFE at the same time horizon is 2.95% and 3.3% per year, respectively. Our model outperforms the naive one by a factor of 2 to 3. The relationships for inflation were successfully tested for cointegration. We have formally estimated several vector error correction (VEC) models for two measures of inflation. At a four year horizon, the estimated VECMs provide significant statistical improvements on the results obtained by the BEM: RMSFE=0.8% per year for the GDP deflator and ~1.2% per year for CPI. For a two year horizon, the VECMs improve RMSFEs by a factor of 2, with the smallest RMSFE=0.5% per year for the GDP deflator.
    Date: 2013–11
  27. By: Zsolt Darvas (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Bruegel, Brussels, Belgium and Corvinus University Budapest)
    Abstract: Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe. In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory. The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro-area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bank's Outright Monetary Transactions could reduce borrowing costs.
    Keywords: competitiveness adjustment; debt sustainability; euro area; inflation
    JEL: E31 H68
    Date: 2013–10
  28. By: Josef Hollmayr; Christian Matthes
    Abstract: The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. ; Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming the agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes
    Date: 2013
  29. By: Christopher F. Baum (Boston College; DIW Berlin); Margarita Karpava (MediaCom London); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Andreas Stephan (Jönköping International Business School; DIW Berlin)
    Abstract: This paper studies the impact of credit rating agency (CRA) announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities.
    Keywords: Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate
    JEL: G24 G01 G12 G14 E42 E43 E44 F31 F42
    Date: 2013–11–01
  30. By: Tobias Adrian; Nina Boyarchenko
    Abstract: We document the cyclical properties of the balance sheets of different types of intermediaries. While the leverage of the bank sector is highly procyclical, the leverage of the nonbank financial sector is acyclical. We propose a theory of a two-agent financial intermediary sector within a dynamic model of the macroeconomy. Banks are financed by issuing risky debt to households and face risk-based capital constraints, which leads to procyclical leverage. Households can also participate in financial markets by investing in a nonbank “fund” sector where fund managers face skin-in-the-game constraints, leading to acyclical leverage in equilibrium. The model also reproduces the empirical feature that the banking sector’s leverage growth leads the financial sector’s asset growth, while leverage in the fund sector does not precede growth in financial-sector assets. The procyclicality of the banking sector is due to its risk-based funding constraints, which give a central role to the time variation of endogenous uncertainty.
    Keywords: Intermediation (Finance) ; Uncertainty ; Households - Economic aspects ; Bank loans ; Business cycles
    Date: 2013
  31. By: Siregar, Reza; Miyaki, Keita
    Abstract: The primary objective of our study is to look into possible catalytic roles that CMIM, a regional financial arrangement among ASEAN+3 economies and its surveillance unit(AMRO) can play in enhancing macroeconomic policy cooperation in this region. The key questions that the study hopes to address are: can CMIM and AMRO provide impetuses for deeper and more meaningful macroeconomic policy cooperation in the region? What are the policy areas and what could be the catalytic roles for CMIM and AMRO in promoting policy cooperation?
    Keywords: CMIM, AMRO, ASEAN+3, Regional Financial Cooperation
    JEL: E61 F15 F33
    Date: 2013–10–29
  32. By: Jose-Victor Rios-Rull; Zhen Huo
    Abstract: Standard neoclassical models are unable to generate large values for the fiscal multiplier, the aggregate economic response to increased government spending. Empirical estimates place the multiplier between 0.7 and 1.0. Standard models deliver figures close to zero. In an earlier policy paper, we modified the standard model, with features of demand-based productivity. These modifications raised the figure to just 0.17, still very far from the range found in the empirical literature.
    Date: 2013
  33. By: Jake Johnston; Stephan Lefebvre
    Abstract: This paper presents a broad overview of economic and social trends in Honduras since 2006, including the years following the military coup of June 2009. It finds that economic inequality in Honduras has increased dramatically since 2010, while poverty has worsened, unemployment has increased and underemployment has risen sharply, with many more workers receiving less than the minimum wage. While some of the decline was initially due to the global recession that began in 2008, much of it is a result of policy choices, including a decrease in social spending.
    Keywords: honduras, poverty, employment, inequality
    JEL: F F5 E E2 E6
    Date: 2013–11
  34. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Academic macroeconomics as it has been practiced for the last three decades has a bad reputation, especially after the onset of the 2008 recession. The aim of this paper is to reflect on this state of affairs. To begin, I draw a comparison between Keynesian and Lucasian macroeconomics, bringing to light that they are based on different tenets. Next, I claim that because of its higher internal consistency, Lucasian macroeconomics is superior to Keynesian. However, I also claim that espousing it bears a heavy price — in particular a limited usefulness for policymaking and an inability to come to grips with economic crises.
    Keywords: Keynesian macroeconomics, Lucas, Real Business Cycle models
    JEL: B E E
    Date: 2013–05–31
  35. By: Katia Berti; Francisco de Castro; Matteo Salto
    Abstract: This paper presents a simple analysis of the public debt-to-GDP ratio responses to fiscal consolidation efforts envisaged in the 2013 Stability and Convergence Programmes presented by EU Member States. In this paper we assess the response of the debt-to-GDP ratio to the fiscal consolidation efforts envisaged in the 2013 Stability and Convergence Programmes (SCPs) presented by EU Member States, under different assumptions on the underlying fiscal multipliers. The effects of fiscal consolidation are assessed against a counterfactual no-consolidation scenario, in which the structural primary balance is kept constant at 2012 value. We show that large fiscal multipliers lead to temporary increases in the debt ratio following consolidation, relative to the no-consolidation baseline. However, for high but plausible values of the multipliers, such counter-intuitive effects are relatively short-lived (maximum three years from the beginning of the consolidation programme). Increases in the debt ratio are anyway more protracted if financial markets react myopically to consolidation efforts (demanding higher yields). Despite the possible negative short-term effects, consolidation is needed as the debt dynamic in absence of policy intervention is in many cases quite steep and further debt increases would raise the likelihood of a self-defeating dynamics in the future. Based on our simple analytical framework, short-term increases in the debt ratio (relative to baseline) following consolidation could take place for a group of countries expected to experience high fiscal multipliers, including Belgium, Cyprus, France, Greece, Italy, Ireland, Portugal, Slovenia and Spain.
    JEL: E62 H63
    Date: 2013–09
  36. By: dogru, bulent
    Abstract: In this study, relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analysis for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed.
    Keywords: Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model
    JEL: C32 E31
    Date: 2013–06–14
  37. By: Marina Azzimonti
    Abstract: American politics have become increasingly polarized in recent decades. To the extent that political polarization introduces uncertainty about economic policy, this pattern may have adversely affected the economy. According to existing theories, a rise in the volatility of fiscal shocks faced by individuals should result in a decline in economic activity. Moreover, if polarization is high around election dates, businesses and households may be induced to delay decisions that involve high reversibility costs (such as investment or hiring under search costs). Testing these theories has been challenging given the low frequency at which existing polarization measures have been computed (in most studies, the series is available only biannually). In this paper, I provide a novel high-frequency measure of polarization, the political polarization index (PPI). The measure is constructed monthly for the period 1981-2013 using a search-based approach. I document that while the PPI fluctuates around a constant mean for most of the sample period prior to 2007, it has exhibited a steep increasing trend since the Great Recession. Evaluating the effects of this increase using a simple VAR, I find that an innovation to polarization significantly discourages investment, output, and employment. Moreover, these declines are persistent, which may help explain the slow recovery observed since the 2007 recession ended.
    Keywords: Economic policy ; Uncertainty ; Business cycles
    Date: 2013
  38. 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.
    Keywords: Recessions ; Unemployment ; Unemployment insurance ; Wages ; Employment ; Job creation
    Date: 2013
  39. By: Abbassi, Puriya; Fecht, Falko; Weber, Patrick
    Abstract: We use a unique data set that comprises each bank's bids in the Eurosystem's main refinancing operations and its recourse to the LOLR facility (a) to derive banks' willingness-to-pay for liquidity through a one-week repo and (b) to show that a bank's willingness-to-pay is a good indicator for the probability that this bank draws on the LOLR facility. Our results suggest (i) that banks' willingness-to-pay for liquidity indeed reflects refinancing conditions in the interbank market and (ii) that the willingness-to-pay can serve as an early warning indicator for banking distress. --
    Keywords: banks,liquidity,LOLR facility,repos,money markets,frictions
    JEL: D44 E42 E58 G21
    Date: 2013
  40. By: Zhongbo Jing; Jakob de Haan; Jan Jacobs; Haizhen Yang
    Abstract: We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals.
    Keywords: banking crises; money market pressure index
    JEL: C43 E44 G21
    Date: 2013–10
  41. By: Leo de Haan; Jeroen Hessel; Jan Willem van den End
    Abstract: This paper examines the extent to which large swings of sovereign yields in euro area countries during the sovereign debt crisis can be attributed to fundamentals. We focus on the inherent uncertainty in bond yield models, which is often overlooked in the literature. We show that the outcomes are strongly affected by modeling choices with regard to i) the confidence bands for the model prediction, ii) the assumption whether the model coefficients are similar across countries or not, iii) the sample selection, iv) the inclusion of financial variables and v) the choice of time-varying coefficients. These choices affect the explanatory power of macro fundamentals and the extent of mispricing. We find substantial misalignment compared to fundamentals for Greek yields, in most specifications also for Portugal and Ireland, but for the other EMU countries, including Spain and Italy, the evidence is less clear cut. This calls for modesty in interpreting bond yield models and for cautiousness when using them in policymaking.
    Keywords: Sovereign bond; Interest rate; Risk premium
    JEL: E43 E44 F34 G15
    Date: 2013–10
  42. By: Thomas F. Cooley; Ramon Marimon; Vincenzo Quadrini
    Abstract: Over the last three decades there has been a dramatic increase in the size of the financial sector and in the compensation of financial executives. This increase has been associated with greater risk-taking and the use of more complex financial instruments. Parallel to this trend, the organizational structure of the financial sector has changed with the traditional partnership replaced by public companies. The organizational change has increased the competition for managerial talent, which may have weakened the commitment between investors and managers. We show how increased competition and the weaker commitment can raise the managerial incentives to undertake risky investment. In the general equilibrium, this change results in higher risk-taking, a larger and more productive financial sector with greater income inequality (within and across sectors), and a lower market valuation of financial institutions.
    JEL: E25 E44 G01 G3
    Date: 2013–10
  43. By: Regis Barnichon; Andrew Figura
    Abstract: The US labor market witnessed two apparently unrelated secular movements in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in participation since the early 2000s. Using CPS micro data and a stock- �ow accounting framework, we show that a substantial, and hitherto unnoticed, factor behind both trends is a decline in the share of nonparticipants who are at the margin of participation. A lower share of marginal nonparticipants implies a lower unemployment rate, because marginal nonparticipants enter the labor force mostly through unemployment, while other nonparticipants enter the labor force mostly through employment.
    Keywords: marginal participant, want a job, stock-flow decomposition
    JEL: J6 E24
    Date: 2013–10
  44. By: SALERNO, Nicola Carmine
    Abstract: Data from Stability Programs (European Countries) and from Us Congress Budget Office and Us Bureau of Census are collected to investigate the burden each worker will have to bear in the future in order to finance pension and health care provisions. If the private side of the system is based, exclusively or mainly, on the insurance pooling, is there any substantial difference between Europe and Us, with respect to future challenges. Is insurance pooling really different from pay-as-you-go financing, in a context of rapid population ageing? The structural roots of future challenges appears the same for Europe and Us, and perhaps also the policy solution. This paper is self standing but, at the same time, it is part of the broader project "Present and Future of PayGo in Italy, Europe and Us". All chapters will be collected in a book edited by Nicola Carmine Salerno.
    Keywords: multipillar; multipillar system; pension; pensions; health care; insurance; paygo; pay as you go; pay-as-you-go; accumulation; pooling; insurance pooling; burden; active people; workers; long term; mid-long term; projections; welfare; welfare system; welfare institutions; structural reform; welfare reforming; welfare restructuring; ageing; population ageing; distortive effects; depressive effects; endogenous; endogenous growth; endogenous inefficiencies; finanza pubblica; public finances; scienza delle finanze; sustainability; public budget; pillar; pillars; private pillars; complementary pillars; pension funds; health care funds; Obama; Medicare; Medicaid
    JEL: E0 E6 H0 H50 H53 H60 I00 I18 J1 J10 J11
    Date: 2013–11–04
  45. By: Michal Franta
    Abstract: This paper examines the effect of non-linearities on density forecasting. It focuses on the relationship between credit markets and the rest of the economy. The possible non-linearity of this relationship is captured by a threshold vector autoregressive model estimated on the US data using Bayesian methods. Density forecasts thus account for the uncertainty in all model parameters and possible future regime changes. It is shown that considering non-linearity can improve the probabilistic assessment of the economic outlook. Moreover, three illustrative examples are discussed to shed some light on the possible practical applicability of density forecasts derived from non-linear models.
    Keywords: density forecasting, nonlinearity, threshold autoregressive model.
    JEL: C11 C32 E44
    Date: 2013–09
  46. By: Dinger, Valeriya; Craig, Ben
    Abstract: In this paper we relate a bank's choice between retail and wholesale liabilities to real economic uncertainty and the resulting volatility of bank loan volumes. We argue that since the volume of retail deposits is slow and costly to adjust to shocks in the volume of bank assets, banks facing more intense uncertainty and more volatile loan demand tend to employ more wholesale liabilities rather than retail deposits. We empirically confirm this argument using a unique dataset constructed from the weekly reports of the 122 largest U.S. commercial banks. The high frequency of the data allows us to employ dynamic identification schemes. Given the evidence presented in this paper we argue that regulatory measures targeting a cap on wholesale funding would limit funding uncertainty but will increase the exposure to asset-side shocks. --
    Keywords: wholesale funding,retail deposits,bank uncertainty,loan volume volatility
    JEL: G21 E44
    Date: 2013
  47. By: Stolbov, Mikhail
    Abstract: The paper examines a wide range of potential predictors of 25 international banking crises that broke out in 2007–2011 on the basis of cross–sectional logit models and the BCT (binary classification tree) algorithm, a novel technique in assessing the causes of banking crises. The major determinants of the crises arise from excessive credit depth (measured as private credit to GDP ratio) and illiquidity of the banking sector (credits to deposits ratio). The implementation of explicit deposit insurance schemes is also a pro–crisis factor due to the moral hazard effect they tend to cause. On the contrary, higher values of remittance inflows to GDP decrease the susceptibility to banking crises. These findings are robust under both methodologies. Lower bank concentration, bigger values of cost to income ratios as well as a higher level of economic liberalization make countries more vulnerable to banking crises, as derived from the logit analysis.
    Keywords: banking crises, Great Recession, logit analysis, binary classification tree
    JEL: E44 G21
    Date: 2013–10–26
  48. By: SALERNO, Nicola Carmine
    Abstract: The demographic database of Istat ( explored and the main facts are extracted and described, both at the aggregate national level as well as at the regional one. This paper is completely self-standing but, at the same time, poses the basis for a more general analysis that will be dedicated to the functioning and sustainability of pay-as-you-go to finance the welfare system in developed countries. Other chapters follow.
    Keywords: pay-as-you-go; welfare;welfare system, demography, cohorts, sustainability, health care, pensions, Italy, Regions, Italian Regions, structural reforms, Istat, dependency ratio, dependency, modified dependency ratio, ageing, public finance, public finances, Awg, Ecofin, Oecd, Ragioneria Generale dello Stato, financial sustainability
    JEL: E60 H0 H5 H51 H52 H53 H55 I0 I1 I3 I31 J00 J1 J11 J14 J18
    Date: 2013–10–29
  49. By: John C. Williams
    Abstract: Presentation to the Sonoma County Economic Development Board, Rohnert Park, California, June 28, 2013
    Keywords: Economic conditions ; Recessions
    Date: 2013
  50. By: Mina Kim (Bureau of Labor Statistics); Deokwoo Nam (City University of Hong Kong); Jian Wang (Federal Reserve Bank of Dallas and Hong Kong Institute for Monetary Research); Jason Wu (Federal Reserve Board)
    Abstract: The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of Renminbi (RMB) appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This finding can be attributed to the fact that around 40% of the goods never experienced a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards.
    Keywords: Price Stickiness, Menu Cost Model, International Trade Prices, RMB, Exchange Rate Pass-Through
    JEL: E31 F14 F31
    Date: 2013–10
  51. By: Nikolay Nenovsky; Dominique Torre
    Abstract: Mihail Manoilescu was one of the main intellectual personalities of the interwar period in Romania. He was known as a politician and a central banker, but also as an economist. From the very beginning of his theoretical and practical career, or at least from the late 1920s till the end of his life, Manoilescu’s ideas and theories were marked by a clear continuity and consistency based on the theory of protectionism. His defence of protectionism is generally presented as clumsy and founded on incorrect method. This paper contributes to a testament of Manoilescu’s conclusions, the validity of which we test in two different paradigms. Section 2 presents the theory of protectionism formulated by the author. Section 3 tries to interpret Manoilescu’s views in modern terms. It presents arguments assimilating his analysis to some post-Marxist presentations of the after-war period. It also develops a Ricardian model proving that Manoilescu’s intuitions can be verified in a Ricardian context. The last section concludes.
    Keywords: Mihail Manoilescu, theory of protectionism, gains from trade
    JEL: B22 B26 E42
    Date: 2013–10

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