nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒11‒16
ninety papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Phillips Curve and a Micro-foundation of Trend Inflation By Harashima, Taiji
  2. Determinacy and Indeterminacy in Monetary Policy Rules with Money By John Keating; Andrew Lee Smith
  3. Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession By Dominik Menno; Tommaso Oliviero
  4. The Delayed Effects of Monetary Shocks in a Two-sector New Keynesian Model By Munechika Katayama; Kwang Hwan Kim
  5. Optimal State-dependent Monetary Policy Rules By Christian Baker; Richard W. Evans
  6. Decizii strategice ale politicii monetare By Dumitriu, Ramona; Stefanescu, Răzvan
  7. Provocările politicii monetare By Dumitriu, Ramona; Stefanescu, Razvan
  8. Macroprudential policy instruments and economic imbalances in the euro area By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  9. Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve By Kim, Chang-Jin; Manopimoke, Pym; Nelson, Charles
  10. Surprising Similarities: Recent Monetary Regimes of Small Economies By Andrew K. Rose
  11. Does Monetary Policy Respond to Commodity Price Shocks? By Ano Sujithan, Kuhanathan; Koliai, Lyes; Avouyi-Dovi, Sanvi
  12. On the use of monetary and macroprudential policies for financial stability in emerging markets By F. Gulcin Ozkan; D. Filiz Unsal
  13. Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail? By Ansgar Belke
  14. Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model By Jakub Mateju
  15. "Modern Money Theory 101: A Reply to Critics" By Eric Tymoigne; L. Randall Wray
  16. Wait-and-See: Investment Options under Policy Uncertainty By Nancy L. Stokey
  17. Deep habits, price rigidities and the consumption response to Government spending By Jacob, Punnoose
  18. House Prices, Heterogeneous Banks and Unconventional Monetary Policy Options By Andrew Lee Smith
  19. Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available By Wray , L. Randall; Fernandez Lommen, Yolanda
  20. Labor market heterogeneity and the aggregate matching function By Régis Barnichon; Andrew Figura
  21. Monetary policy, bank capital and credit supply: a role for discouraged and informally rejected firms By Popov, Alexander
  22. Understanding Non-Inflationary Demand Driven Business Cycles By Franck Portier; Paul Beaudry
  23. Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication By Michael J. Lamla; Lena Dräger; Damjan Pfajfar
  24. Distortions in the Neoclassical Growth Model: A Cross Country Analysis By Pedro Miguel Soares Brinca
  25. Global effects of unorthodox monetary policies By Desmond Lachman
  26. Goodbye Inflation Targeting, Hello Fear of Floating? Latin America after the Global Financial Crisis* By Reinhart, Carmen
  27. Economic Policy Uncertainty and Firm-Level Investment By Kang, Wensheng; Lee, Kiseok; Ratti, Ronald A.
  28. Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies. By Marc Pourroy
  29. Credit Cycles, Credit Risk and Countercyclical Loan Provisions By Martha López; Fernando TenjO; Héctor Zárate
  30. Creative Destruction with Credit Inflation By Qichun He; Heng-fu Zou
  31. Is quantity theory still alive? By Teles, Pedro; Uhlig, Harald
  32. "A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks" By Giovanni Bernardo; Emanuele Campiglio
  33. Central Banking after the Crisis: Brave New World or Back to the Future?. By Emmanuel Carré; Jézabel Couppey-Soubeyran; Dominique Plihon; Marc Pourroy
  34. Granularity in Banking and Growth: Does Financial Openness Matter? By F. Bremus; Claudia M. Buch
  35. Monetary Union, Banks and Financial Integration By Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
  36. Bank Overleverage and Macroeconomic Fragility By Ryo Kato; Takayuki Tsuruga
  37. The Fiscal Limit and Non-Ricardian Consumers By Alexander W. Richter
  38. Fiscal policy and external imbalances in a debt crisis: the Spanish case By Pablo Hernández de Cos; Juan F. Jimeno
  39. Théorie de la taxation optimale et politique de stabilisation : une incompatibilité théorique ?. By Aurélien Beleau
  40. Dynamic Optimal Taxation in Open Economies By Till Gross
  41. Macroeconomics, Financial Crisis and the Environment: Strategies for a Sustainability Transition By Miklós Antal; Jeroen van den Bergh
  42. A penalty function approach to occasionally binding credit constraints By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  43. The Agricultural Productivity Gap By Douglas Gollin; David Lagakos; Michael E. Waugh
  44. The Great Recession: a comparison of recession magnitudes in Europe, USA and Japan By Mazurek, Jiří
  45. The Great Recession: A Self-Fulfilling Global Panic By Eric van Wincoop; Philippe Bacchetta
  46. Repo Runs By Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
  47. Equipping Canadian Workers: Business Investment Loses a Step against Competitors Abroad By Benjaming Dachis; William B.P. Robson
  48. What Drives Fiscal Multipliers? The Role of Private Wealth and Debt By Sebastian Gechert; Rafael Mentges
  49. A tractable framework for zero lower bound Gaussian term structure models By Krippner, Leo
  50. International Transmission of Food Prices and Volatilities: A Panel Analysis By Lee , Hyun-Hoon; Park, Cyn-Young
  51. Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level? By Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
  52. Bank-Lending Standards, Loan Growth and the Business Cycle in the Euro Area By Sylvia Kaufmann; Johann Scharler
  53. Inequality, credit expansion and financial crises By Perugini, Cristiano; Hölscher, Jens; Collie, Simon
  54. Public Education Spending, Sectoral Taxation and Growth By Marion Davin
  55. Finding a Connection Between Exchange Rates and Fundamentals, How Should We Model Revisions to Forecasting Strategies? By Peter H. Sullivan
  56. Multiple Steady States under the Balanced Budget Rule- a Generalization By Fujio Takata
  57. Business Cycles with Revolutions By Lance Kent; Toan Phan
  58. Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff By Thomas Herndon; Michael Ash; Robert Pollin
  59. Financial exposure and the international transmission of financial shocks By Kamber, Gunes;; Thoenissen, Christoph
  60. Capital market inflation in emerging markets: The case of Brazil and South Korea By Bonizzi, Bruno
  61. On the Welfare Costs of Business-Cycle Fluctuations and Economic-Growth Variation in the 20th Century and Beyond By Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco-Neto, Afonso Arinos de Mello
  62. Structural change, aggregate demand and employment dynamics in the OECD, 1970-2010 By Jochen Hartwig
  63. Hartz IV ist tot – Es leben die Hartz-Reformen! By Andrey Launov; Klaus Wälde
  64. Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute By Claudia M. Buch; T. Körner; B. Weigert
  65. The Dow is Killing Me: Risky Health Behaviors and the Stock Market By Chad Cotti; Richard A. Dunn; Nathan Tefft
  66. Is the Long-run Equilibrium Wage-led or Profit-led? A Kaleckian Approach By Hiroaki Sasaki
  67. The Fragility of Short-Term Secured Funding Markets By Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
  68. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Bernd Hayo; Edith Neuenkirch
  69. Public infrastructure and economic growth in Pakistan: a dynamic CGE-microsimulation analysis By Vaqar Ahmed; Ahsan Abbas; Saira Ahmed
  70. Links between the trust in the ECB and its interest rate policy By Maciej Albinowski; Piotr Ciżkowicz; Andrzej Rzońca
  71. Short-term forecasts of French GDP: A dynamic factor model with targeted predictors By Bessec, Marie
  72. The accuracy of fiscal projections in South Africa By Estian Calitz; Krige Siebrits; Ian Stuart
  73. How to defi ne the Consumer Perceived Price Index? The case of Poland By Aleksandra Hałka; Tomasz Łyziak
  74. Conditional Eurobonds and the Eurozone Sovereign Debt Crisis By John Muellbauer
  75. Schooling Supply and the Structure of Production: Evidence from US States 1950–1990 By Ciccone, Antonio; Peri, Giovanni
  76. Bridging the banking sector with the real economy: a financial stability perspective By Costeiu, Adrian; Neagu, Florian
  77. The welfare effect of access to credit By Rojas Breu, Mariana
  78. Declining labor force attachment and downward trends in unemployment and participation By Régis Barnichon; Andrew Figura
  79. Der lender of last resort vor Gericht By Winkler, Adalbert
  80. The `Pile-up Problem' in Trend-Cycle Decomposition of Real GDP: Classical and Bayesian Perspectives By Kim, Chang-Jin; Kim, Jaeho
  81. Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy By A. Kerem Cosar; Nezih Guner; James Tybout
  82. Posterior-Predictive Evidence on US Inflation using Extended Phillips Curve Models with non-filtered Data By Nalan Basturk; Cem Cakmakli; Pinar Ceyhan; Herman K. van Dijk
  83. Financial Obstacles and Inter-Regional Flow of Funds By Benjamin Moll; Robert M. Townsend; Victor Zhorin
  84. International Competition and Distributive Class Conflict in an Open Economy Kaleckian Model By Hiroaki Sasaki; Ryunosuke Sonoda; Shinya Fujita
  85. Some Economics of Private Digital Currency By Joshua S. Gans; Hanna Halaburda
  86. Publication Bias in Measuring Intertemporal Substitution By Tomas Havranek
  87. Attribution Error in Economic Voting: Evidence from Trade Shocks By Rosa C. Hayes; Masami Imai; Cameron A. Shelton
  88. Corporate Cash Holding in Asia By Horioka, Charles Yuji; Terada-Hagiwara, Akiko
  89. Economic growth and balance of payments constraint in Vietnam By Rieber, Arsène; Bagnai, Alberto; Tran, Thi Anh-Dao
  90. Bayesian Inference in Regime-Switching ARMA Models with Absorbing States: The Dynamics of the Ex-Ante Real Interest Rate Under Structural Breaks By Kim, Chang-Jin; Kim, Jaeho

  1. By: Harashima, Taiji
    Abstract: The hybrid New Keynesian Phillips curve has been criticized for lacking a micro-foundation. In this paper, an alternative purely forward-looking model of the Phillips curve is constructed on the basis of a micro-foundation of trend inflation. In addition, another source of output gaps other than frictions―a Nash equilibrium of a Pareto inefficient path―is considered. The model indicates that the role of frictions has been overestimated and that frictions are less important than previously have been thought. The conventional monetary policy of utilizing frictions cannot necessarily stabilize inflation. In contrast, the monetary policy of controlling the government’s preference is very effective. A problem is that the effects of both types of monetary policy are not distinguishable.
    Keywords: Trend inflation; inflation persistence; central bank independence; The New Keynesian Phillips curve; the fiscal theory of the price level
    JEL: E31 E58 E63
    Date: 2013–11–08
  2. By: John Keating (Department of Economics, The University of Kansas); Andrew Lee Smith (Department of Economics, The University of Kansas)
    Abstract: Does Friedman’s k-percent rule guarantee a unique equilibrium outcome? We show analytically the answer to this question is sensitive to the method of aggregation. Focusing on broad measures of money, we show that fixing the growth rate of the true monetary aggregate will generate a unique rational expectations equilibrium. Since the true monetary aggregate is parametric, we show this determinacy result extends to the non-parametric Divisia monetary aggregate growth rule. Interestingly, Friedman’s proposal to fix the growth rate of the broad simple-sum monetary aggregate is shown to result in indeterminacy stemming from this aggregate’s inaccuracy in tracking the true monetary aggregate. Determinacy regions of interest rate rules reacting to the growth rate of monetary aggregates are also discussed and a novel Taylor principle is shown to hold for such rules when the monetary aggregate is accurately measured. All of these results are presented in the framework of the canonical New-Keynesian model.
    Keywords: Friedman’s k-percent Rule, Determinacy, Monetary Aggregates, Taylor Rules
    JEL: C43 E31 E40 E44 E51 E52 E58 E60
    Date: 2013–10
  3. By: Dominik Menno; Tommaso Oliviero
    Abstract: This paper quantifies the effects of credit spread and income shocks on aggregate house prices and households’ welfare. We address this issue within a stochastic dynamic general equilibrium model with heterogeneous households and occasionally binding collateral constraints. Credit spread shocks arise as innovations to the financial intermediation technology of stylized banks. We calibrate the model to the U.S. economy and simulate the Great Recession as a contemporaneous negative shock to financial intermediation and aggregate income. We find that (i) in the Great recession constrained agents (borrowers) lose more than unconstrained agents (savers) from the aggregate house prices drop; (ii) credit spread shocks have, by their nature, re-distributive effects and - when coupled with a negative income shock as in the Great Recession - give rise to larger (smaller) welfare losses for borrowers (savers); (iii) imposing an always binding collateral constraint, the non-linearity coming from the combination of the two shocks vanishes, and the re-distributive effects between agents’ types are smaller.
    Keywords: HousingWealth, Mortgage Debt, Borrowing Constraints, Heterogeneous Agents, Welfare, Aggregate Credit Risk
    JEL: E21 E32 E43 E44 I31
    Date: 2013
  4. By: Munechika Katayama; Kwang Hwan Kim
    Abstract: This paper studies a two-sector New Keynesian model that captures the hump-shaped response of non-durable and durable spending to a monetary shock when non-durable prices are sticky and durable goods are flexibly priced. Based on the estimated parameters, we show that habit formation and investment adjustment costs are not sucient to generate the gradual response of non-durable and durable spending in this setup. We find that nominal wage rigidity and non-separable preferences between consumption and labor are also necessary to delay the peak response of non-durable and durable spending in the estimated two-sector New Keynesian model.
    Keywords: Sticky Prices, Sticky Wages, Non-Separable Preferences, Two-sector New Keynesian Model
    JEL: E21 E30 E31 E32
  5. By: Christian Baker (Department of Economics, Brigham Young University); Richard W. Evans (Department of Economics, Brigham Young University)
    Abstract: This paper defines a monetary equilibrium and computes an optimal nonlinear, full-information, state-dependent monetary policy rule to which the monetary authority commits at the beginning of time. This type of optimal monetary policy represents a combination of the flexibility of discretion with the time consistency of commitment. The economic environment is a closed-economy general equilibrium model of incomplete markets with monopolistic competition, producer price stickiness, and a transaction cost motive for holding money. We prove existence and uniqueness of the competitive equilibrium given a monetary policy rule and prove existence of the optimal rule. We show that the optimal state-dependent monetary policy rule satisfies the standard results of the discretionary policy literature in that it keeps inflation and nominal interest rates low (Friedman rule) and reduces inefficient variance in prices. Lastly, we compare the optimal monetary policy rule to a limited-information Taylor rule. We find that the Taylor rule, based on observable macroeconomic variables, is able to closely approximate the economic outcomes of the model under the optimal full-information rule.
    Keywords: Optimal monetary policy, Money supply rules, Time consistency, Nonlinear solution methods
    JEL: E52 E42 E31 C68
    Date: 2013–10
  6. By: Dumitriu, Ramona; Stefanescu, Răzvan
    Abstract: The conduct of the monetary policy could be view as a series of decisions in which the objectives and tools are chosen. This paper explores some aspects of the strategic decisions of the monetary policy such as the roles played by central banks and other public authorities, the main constraints of the monetary policy and the phases of building a strategy. We also approach some changes induced by the recent global crisis in the conduct of the monetary policy.
    Keywords: Monetary Policy, Decision Making, Central Bank
    JEL: E50 E52 E58
    Date: 2013–11–05
  7. By: Dumitriu, Ramona; Stefanescu, Razvan
    Abstract: During the last decades, the monetary policy had to face significant changes caused by various processes. This paper explores the challenges induced by the recent global crisis to the central banks policies. We approach some possible solutions to the dramatic consequences of the crisis: the abandon of the monetarism and the return to Keynesian principles, orientation towards the full employment in detriment of the prices stability, a more intense coordination between fiscal and monetary policies and new regulations to prevent the banks involvement in asset price bubbles.
    Keywords: Monetary Policy, Global Crisis, Coordination between Policies, Macroeconomics Objectives
    JEL: E52 E58 E61
    Date: 2013–09–28
  8. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy tools - applied in a countercyclical fashion as known from the DSGE literature to the peripheral countries - could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial DSGE model and simulate the effects of macroprudential tools under the assumption of asymmetric shocks hitting the core and the periphery. We find that a countercyclical application of macroprudential tools is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect. JEL Classification: E32, E44, E58
    Keywords: DSGE with banking sector, euro-area imbalances, Macroprudential policy
    Date: 2013–09
  9. By: Kim, Chang-Jin; Manopimoke, Pym; Nelson, Charles
    Abstract: In this paper, we investigate the nature of structural breaks in inflation by estimating a version of the New Keynesian Phillips curve (NKPC) in the presence of a unit root in inflation. We show that, with a unit root in inflation, the NKPC implies an unobserved components model that consists of three components: a stochastic trend component, a component that depends upon current and future forecasts of real economic activity, and a stationary component which is potentially serially correlated (or a component of inflation that is not explained by the conventional forward-looking NKPC). Our empirical results suggest that, with an increase in trend inflation during the Great Inflation period, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone (2008), who show that the coefficients of the NKPC are functions of time-varying trend inflation.
    Keywords: New Keynesian Phillips Curve, Trend Inflation, Inflation Gap, Unobserved Components Model, Structural Breaks
    JEL: E3 E31
    Date: 2013–02–01
  10. By: Andrew K. Rose
    Abstract: In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath.
    JEL: E58 F33
    Date: 2013–11
  11. By: Ano Sujithan, Kuhanathan; Koliai, Lyes; Avouyi-Dovi, Sanvi
    Abstract: Commodity prices, especially oil prices, peaked in the aftermath of the financial crisis of 2007 and they have remained highly volatile. All things being equal, the increase in commodity prices may induce a similar tendency of inflation and hence become a monetary policy issue. However, the impact of the changes of commodity prices on inflation is not clear. In this paper, by using Markov-switching models we show that there is an implicit impact of commodity markets on short-term interest rates for a set of heterogeneous countries (the U.S., the Euro area, Brazil, India, Russia and South Africa) over the period from January 1999 to August 2012. Besides, the VAR models reveal that short-term interest rates respond to commodity volatility shocks whatever the country. Moreover, the linkage between commodity markets and monetary policy instruments is stronger since the recent financial crisis.
    Keywords: Markov - switching; Commodity prices; VAR models; Monetary Policy;
    JEL: E43 E52 E58
    Date: 2013–06
  12. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: This paper explores optimal monetary and macroprudential policy rules in an open-economy with significant exposure to external borrowing in the face of a sudden reversal of capital inflows. We consider optimal Taylor-type interest rate rules, where the policy rate is set as a function of inflation, output, and credit growth; and a macroprudential instrument is set as a function of credit growth. We have two key results. First, we find that, in the presence of macroprudential measures, there are no significant welfare gains from monetary policy also reacting to credit growth above and beyond its response to inflation. Thus, from a welfare point of view it is better to delegate ’lean against the wind’ squarely to macroprudential policy. Second, the source of borrowing (domestic versus foreign) plays a crucial role in the choice of policy instrument in responding to credit market developments. When the source of borrowing is external, monetary policy responses required to stabilize financial markets would be unduly large. In contrast, macroprudential instrument can directly influence the cost of credit and ease the fiancial markets. Therefore, emerging economies where foreign borrowing is typically sizeable are likely to find macroprudential measures particularly effective in promoting financial stability.
    Keywords: Financial instability; monetary policy; macroprudential measures; emerging markets; and financial crises
    JEL: E5 F3 F4
    Date: 2013–11
  13. By: Ansgar Belke
    Abstract: This paper briefly assesses the effectiveness of the different non-standard monetary policy tools in the Euro Area. Its main focus is on the Outright Monetary Transactions (OMT) Programme which is praised by some as the ECB’s “magic wand”. Moreover, it discloses further possible unintended consequences of these measures in the current context of weak economic activity and subdued growth going forward. For this purpose, it investigates specific risks for price stability and asset price developments in the first main part of the paper. It is not a too remote issue that the Fed does have a “tiger by the tail”, as Hayek (2009) expressed it, i.e. that the bank will finally have to accept either a recession or inflation and that there is no choice in between. Furthermore, it checks on whether the OMT programme really does not impose costs onto the taxpayer. Finally, it comes up with some policy implications from differences in money and credit growth in different individual countries of the Euro Area. The second main part of the paper assesses which other tools the ECB could use in order to stimulate the economy in the Euro Area. It does so by delivering details on whether and how the effectiveness of the ECB’s policies can be improved through more transparency and “forward guidance”.
    Keywords: Central bank transparency; euro area; forward guidance; non-standard monetary policies; outright monetary transactions, quantitative easing; segmentation of credit markets
    JEL: E52 E58 F32
    Date: 2013–10
  14. By: Jakub Mateju (CERGE-EI, Prague and Czech National Bank)
    Abstract: This paper analyzes both the cross-sectional and time variation in aggregate monetary policy transmission from nominal short term interest rates to price level. Using Bayesian TVP-VARs where the structural interest rate shocks are identi_ed by sign restrictions, we show that monetary policy transmission became stronger over the last decades. This applies both to developed and emerging economies. Monetary policy sacrifice ratios (the output costs of disination induced by monetary policy tightening) gradually decreased from their peak in the 1980's. Exploring the cross-country and time variation in panel regressions, we show that when a country adopted ination targeting regime, monetary transmission became stronger (by about 0.8 p.p. of price level response to 1 p.p. shock to the policy rate) and sacrifice ratios decreased. In periods of banking crises, the transmission from monetary policy interest rate shocks to prices is weaker (by about 1 p.p. of price level response to a 1 p.p. shock to the policy rate) and the related costs in output are higher. Further, countries with higher domestic credit to GDP have stronger transmission while countries with higher foreign debt seem to be less inuenced by domestic monetary policy.
    Keywords: monetary policy transmission, TVP-VAR, sign-restrictions
    JEL: E52 C54
    Date: 2013–11
  15. By: Eric Tymoigne; L. Randall Wray
    Abstract: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.
    Keywords: Modern Money Theory; Price Stability; Full Employment; Financial Stability; Money
    JEL: B5 E10 E11 E12 E31 E42 E58 E6 F41
    Date: 2013–11
  16. By: Nancy L. Stokey
    Abstract: This paper develops a model of investment decisions in which uncertainty about a one-time change in tax policy induces the firm to temporarily stop investing—to adopt a wait-and-see policy. After the uncertainty is resolved, the firm exploits the tabled projects, generating a temporary investment boom.
    JEL: D92 E22 E32 H32
    Date: 2013–11
  17. By: Jacob, Punnoose (Reserve Bank of New Zealand)
    Abstract: This paper presents the novel implications of introducing price rigidities into a model of good-specific habit formation, for the response of private consumption following a positive government spending shock. With 'deep' habits in demand, the price elasticity of demand rises after the fiscal expansion and it is optimal for the firm to lower the mark-up while increasing production. This in turn raises the demand for labour and the real wage rises. Consequently, agents raise consumption at the expense of leisure and overcome the negative wealth effect of the fiscal shock. We show that increasing price stickiness in a model with deep habits hinders the crowding-in of consumption. If the degree of price stickiness is high enough, consumption is crowded out by government spending. These dynamics are in stark contrast to those in traditional models where price rigidities are known to weaken the crowding-out of consumption.
    JEL: E21 E31 E62
    Date: 2013–01
  18. By: Andrew Lee Smith (Department of Economics, The University of Kansas)
    Abstract: Bank regulators acknowledge that large U.S. commercial banks allocate considerably more resources to originating and trading off-balance sheet assets than their smaller counter parts. In this paper: (i) I show the asset concentration in these large banks moves closely with home prices due to the collateralized nature of off-balance sheet assets. (ii) I then develop a general equilibrium capable of capturing this asset redistribution between heterogeneous banks. When home prices fall, endogenously tightening leverage constraints force the big productive banks to unload real-estate secured debt to small unproductive banks. The redistribution to less productive banks sets off an asset price spiral in the model - amplifying typical downturns into deep recessions. The model has predictions for the joint behavior of finance premiums, output, home prices and the share of assets held by large banks. (iii) I use a VAR to confirm the model's predictions for these variables are consistent with the data. (iv) Finally, I use this empirically verified model to examine the effectiveness of unconventional monetary policyin mitigating a recession generated by a drop in housing demand. Despite the fact that both equity injections into "Too Big to Fail" banks and asset purchases by the Fed such as "QE 1/2/3" mitigate the crisis, the nuances of the policies are important. A prolonged asset purchase program is preferable to a short-term equity injection.
    Keywords: Financial Crises, Financial Frictions, Housing, Unconventional Monetary Policy
    JEL: E32 E44 G01 G21
    Date: 2013–11
  19. By: Wray , L. Randall (Asian Development Bank); Fernandez Lommen, Yolanda (Asian Development Bank)
    Abstract: This paper examines the fiscal and monetary policy options available to the People’s Republic of China (PRC) as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance should be gradually relaxed so that local government and corporate budgets can be tightened. By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation.
    Keywords: fiscal and monetary policy options; sectoral balances approach; sovereign currency approach; middle-income trap; modern money theory
    JEL: E60 E61 E62 O23
    Date: 2013–10–15
  20. By: Régis Barnichon; Andrew Figura
    Abstract: The matching function -a key building block in models of labor market frictions- implies that the job finding rate depends only on labor market tightness. We estimate such a matching function and find that the relation, although remarkably stable over 1967-2007, broke down spectacularly after 2007. We argue that labor market heterogeneities are not fully captured by the standard matching function, but that a generalized matching function that explicitly takes into account worker heterogeneity and market segmentation is fully consistent with the behavior of the job finding rate. The standard matching function can break down when, as in the Great Recession, the average characteristics of the unemployed change too much, or when dispersion in labor market conditions -the extent to which some labor markets fare worse than others- increases too much.
    Keywords: job finding, aggregate, composition, dispersion
    JEL: J6 E24 E32
    Date: 2010–10
  21. By: Popov, Alexander
    Abstract: This paper conducts the first empirical study of the bank balance sheet channel using data on discouraged and informally rejected firms in addition to information on the formal loan granting process. I take advantage of a unique survey data on the credit experience of firms in 8 economies that use the euro or are pegged to it over 2004-2007, and analyze the effect of monetary policy and the business cycle on bank lending and risk-taking. Identification rests on exploiting 1) the exogeneity of monetary policy to local business cycles, and 2) firm-level and bank-level data to separate the supply of credit from changes in the level and composition of credit demand. Consistent with previous studies, I find that lax monetary conditions increase bank credit in general and bank credit to ex-ante risky firms in particular, especially for banks with lower capital ratios. Importantly, I find that the results are considerably stronger when data on informal credit constraints are incorporated. JEL Classification: E32, E51, E52, F34, G21
    Keywords: bank capital, bank lending channel, business cycle, cross-border lending, monetary policy
    Date: 2013–09
  22. By: Franck Portier (Toulouse School of Economics); Paul Beaudry (University of British Columbia)
    Abstract: During the last thirty years, US business cycles have been characterized by coun- tercyclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. In this paper we show that non-inflationary demand driven business cycles can be easily explained if one moves away from the rep- resentative agent framework on which the New Keynesian model and the RBC model are based. We show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. As we use an extremely simple framework, we discuss the gener- ality of the results and develop a modified New Keynesian model with non inflationary demand driven fluctuations. We also document the relevance of our main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.
    Date: 2013
  23. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Lena Dräger (University of Hamburg, Germany); Damjan Pfajfar (University of Tilburg, Netherlands)
    Abstract: Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with the Phillips Curve, the Taylor Rule and the Income Fisher Equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation and the Taylor Rule, while 25% are in line with the Phillips Curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor Rule and the Phillips curve we observe a strong cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.
    Keywords: Macroeconomic expectations, microdata, macroeconomic literacy, central bank communication, consumer forecast accuracy
    JEL: C25 D84 E31
    Date: 2013–11
  24. By: Pedro Miguel Soares Brinca
    Abstract: This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of OECD countries for the 1970-2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.
    JEL: E27 E30 E32 E37
    Date: 2013–11–02
  25. By: Desmond Lachman (American Enterprise Institute)
    Abstract: In the aftermath of the Great Recession, major central banks have scrambled to support economic recovery and to avoid deflation through highly accommodative and unorthodox monetary policy stances. Although relatively successful in the short term, these policies have given rise to incipient asset- and credit-market bubbles and to spillover effects on the emerging-market economies.
    Keywords: Monetary policy,Global economic outlook,central banks,AEI Economic Perspectives
    JEL: A E
    Date: 2013–11
  26. By: Reinhart, Carmen
    Abstract: This paper focuses on some of the macroeconomic risks that lie ahead for Latin America. The discussion is informed by my work on crises and capital flows and their macroeconomic consequences. The trends and initial conditions that allowed the region to weather the global economic storm of 2008-2009 are discussed, as is the subsequent reversal of some of those benign trends. I review the historical patterns connecting large capital inflow surges, or “capital flow bonanzas,” with the likelihood of a variety of crises—banking, currency, external default and inflation. For Latin America, in particular, large capital flow bonanzas have seldom ended well. The implications for inflation of importing (via less than fully flexible exchange rates) the expansionary policy of the “North” are discussed.
    Keywords: capital inflows, appreciation, currency crises, banking crises, inflation, debt
    JEL: E3 E31 F3 F30 G01 N16 N26
    Date: 2013–04
  27. By: Kang, Wensheng; Lee, Kiseok; Ratti, Ronald A.
    Abstract: This paper examines the effect of economic policy uncertainty and its components on firm-level investment. It is found that economic policy uncertainty in interaction with firm-level uncertainty depresses firms’ investment decisions. When firms are in doubt about costs of doing business due to possible changes in regulation, cost of health care and taxes, they become more guarded with investment plans. The effect of economic policy uncertainty on firm-level investment is greater for firms with higher firm-level uncertainty and during a recession. News-based policy shock has a significantly negative long-term effect on firms’ investment. Federal expenditure forecast interquartile range shock has a significant negative effect in the short- and long-run. Policy uncertainty does not seem to influence the investment decisions of the very largest firms (about 20% of listed firms).
    Keywords: Policy uncertainty, Firm investment, Stock price volatility
    JEL: E22 E61 G31
    Date: 2013–10–01
  28. By: Marc Pourroy (Centre d'Economie de la Sorbonne)
    Abstract: Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of “indicator countries”, providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies.
    Keywords: Inflation-targeting, foreign exchange interventions, Gaussian mixture model.
    JEL: E31 E40 E58 F31
    Date: 2013–10
  29. By: Martha López; Fernando TenjO; Héctor Zárate
    Abstract: In this paper we investigate the impact of rapid credit growth on ex ante credit risk. We present micro-econometric evidence of the positive relationship between rapid credit growth and deterioration in lending portfolios: Loans granted during boom periods have higher probability of default than those granted during periods of slow credit growth. In addition, given their importance for macroprudential policy, we evaluate the effectiveness of the implementation of the countercyclical loan provisions. We find a negative relationship between the amplitude of credit cycles and this kind of macroprudential tool.
    Keywords: Ex ante credit risk, credit cycles, countercyclical provisioning. Classification JEL:E32, E51, E60, G18, G21
    Date: 2013–11
  30. By: Qichun He (Central University of Finance and Economics); Heng-fu Zou (Development Research Group, World Bank)
    Abstract: We propose creative destruction as the channel for inflation to impact growth. The banks reap revenue from higher rates of credit growth, attracting more labor into banks and decreasing the profit of entrepreneurs. But when the revenue is achieved by issuing more credit to entrepreneurs, part of the revenue goes to entrepreneurs, attracting more resources into R&D. When banks retain a larger share of the revenue, the former effect dominates and credit inflation retards growth. When entrepreneurs get the larger share, the latter effect dominates and credit inflation increases growth. The welfare implications are also analyzed. Empirical evidence from the U.S. and China is provided.
    Keywords: Creative Destruction, Credit Inflation, Credit Demand Function, Nash Bargaining
    JEL: E31 G21 O31
    Date: 2013–08
  31. By: Teles, Pedro; Uhlig, Harald
    Abstract: This paper investigates whether the quantity theory of money is still alive. We demonstrate three insights. First, for countries with low inflation, the raw relationship between average inflation and the growth rate of money is tenuous at best. Second, the fit markedly improves, when correcting for variation in output growth and the opportunity cost of money, using elasticities implied by theories of Baumol-Tobin and Miller-Orr. Finally, the sample after 1990 shows considerably less inflation variability, worsening the fit of a one-for-one relationship between money growth and inflation, and generates a fairly low elasticity of money demand. JEL Classification: E31, E41, E42, E50
    Keywords: inflation targeting, money demand, money demand elasticity, quantity theory
    Date: 2013–11
  32. By: Giovanni Bernardo; Emanuele Campiglio
    Abstract: This paper presents a small macroeconomic model describing the main mechanisms of the process of credit creation by the private banking system. The model is composed of a core unit--where the dynamics of income, credit, and aggregate demand are determined--and a set of sectoral accounts that ensure its stock-flow consistency. In order to grasp the role of credit and banks in the functioning of the economic system, we make an explicit distinction between planned and realized variables, thanks to which, while maintaining the ex-post accounting consistency, we are able to introduce an ex-ante wedge between current aggregate income and planned expenditure. Private banks are the only economic agents capable of filling this gap through the creation of new credit. Through the use of numerical simulation, we discuss the link between credit creation and the expansion of economic activity, also contributing to a recent academic debate on the relation between income, debt, and aggregate demand.
    Keywords: Banking System; Credit Creation; Growth; Aggregate Demand; Macroeconomic Modeling
    JEL: E20 E51 G21 O42
    Date: 2013–10
  33. By: Emmanuel Carré (Centre d'Economie de Paris Nord); Jézabel Couppey-Soubeyran (Centre d'Economie de la Sorbonne); Dominique Plihon (Centre d'Economie de Paris Nord); Marc Pourroy (Centre d'Economie de la Sorbonne)
    Abstract: This paper provides a snapshot of the current state of central banking doctrine in the aftermath of the crisis, using data from a questionnaire produced in 2011 and sent to central bankers (from 13 countries plus the euro zone) and economists (31) for a report by the French Council of Economic Analysis to the Prime Minister. The results of our analysis of the replies to the questionnaire are twofold. First, we show that the financial crisis has led to some amendments of pre-crisis central banking. We highlight that respondents to the questionnaire agree on the general principle of a ‘broader’ view of central banking extended to financial stability. Nevertheless, central bankers and economists diverge or give inconsistent answers about the details of implementation of this ‘broader’ view. Therefore, the devil is once again in the details. We point out that because of central bankers' conservatism, a return to the status quo cannot be excluded.
    Keywords: Central banking, financial crisis, financial stability, macroprudential, financial supervision architecture.
    JEL: E44 E52 G01 G18
    Date: 2013–10
  34. By: F. Bremus; Claudia M. Buch
    Abstract: We explore the impact of large banks and of financial openness for aggregate growth. Large banks matter because of granular effects: if markets are very concentrated in terms of the size distribution of banks, idiosyncratic shocks at the bank-level do not cancel out in the aggregate but can affect macroeconomic outcomes. Financial openness may affect GDP growth in and of itself, and it may also influence concentration in banking and thus the impact of bank-specific shocks for the aggregate economy. To test these relationships, we use different measures of de jure and de facto financial openness in a linked micro-macro panel dataset. Our research has three main findings: First, bank-level shocks significantly impact on GDP. Second, financial openness lowers GDP growth. Third, granular effects tend to be stronger in financially closed economies.
    Keywords: bank market structure, financial openness, granular effects, growth
    JEL: G21 E32
    Date: 2013–10
  35. By: Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
    Abstract: This paper analyzes a two-country model of money and banks to examine the conditions under which the creation of a monetary union between two countries is optimal. Is is shown that if agents resort to banks to adjust their monetary holdings through borrowing and if nobody can force them to repay their debts, it may be optimal for both countries to set up two different currencies, along with strictly positive conversion costs. A necessary condition for this is that credit market integration is limited. This arises even though both countries are perfectly identical.
    Keywords: Monetary union; credit; default; limited commitment;
    JEL: E42 G21
    Date: 2013–06
  36. By: Ryo Kato; Takayuki Tsuruga
    Abstract: This paper develops a dynamic general equilibrium model that explicitly includes a banking sector engaged in a maturity mismatch. We demonstrate that rational competitive banks take on excessive risks systemically, resulting in overleverage and ine¢ ciently high crisis probabilities. The model accounts for the banks seemingly over-optimistic outlook about their own solvency and the asset prices, compared to the social optimum. The result calls for policy intervention to reduce the high crisis probabilities. To this end, the government can commit to bailing out banks through public supply of liquidity or a low-interest rate policy. As opposed to the intention of the government, however, expectations of a bailout could incentivize banks to be even more overleveraged, leaving the economy exposed to higher crisis probabilities.
    Keywords: Financial crisis, Liquidity shortage, Maturity mismatch, Credit externalities, Financial regulation
    JEL: E3 G01 G21
  37. By: Alexander W. Richter
    Abstract: The U.S. faces exponentially rising entitlement obligations. I introduce a fiscal limit?a point where higher taxes are no longer a feasible financing mechanism?into a Perpetual Youth model to assess how intergenerational redistributions of wealth and the maturity of government debt impact the consequences of explosive government transfers. Intergenerational transfers of wealth strengthen the expectational effects of the fiscal limit and magnify the likelihood of stagflation. A longer average maturity of debt weakens these effects in the short/medium-runs but still increases stagflation in the long-run. Delaying reform increases the severity and duration of the stagflationary period.
    Keywords: Finite Lifetime; Long-Term Debt; Policy Uncertainty; Fiscal Limit; Entitlement Reform
    JEL: E62 E63 H60 E43
    Date: 2013–11
  38. By: Pablo Hernández de Cos (Banco de España); Juan F. Jimeno (Banco de España)
    Abstract: In this paper we reflect on the role that fiscal policy could play in the resolution of the crisis in Eurozone countries crippled by both public and private debt, and beset by growth and competitiveness problems. As an illustration, we revisit the Spanish case, a paradigmatic example of the economic difficulties created by high debt and internal and external imbalances. After describing the build-up of fiscal and macroeconomic imbalances in Spain during the period 1995-2007, we first discuss how the correction of macroeconomic imbalances conditions progress on the fiscal consolidation front and, secondly, how fiscal consolidation affects the correction of imbalances. We conclude that the role that national fiscal policies can play in these countries to expand demand and reduce the costs of solving external and internal imbalances seems limited. Also, overall, the best contribution that fiscal policy can achieve under these constraints is through a better targeting of government expenditures and tax reforms, aimed at introducing permanent measures to stabilise debt ratios. These could then be combined with productivity-enhancing structural reforms and with improvements in product market regulation to increase competition, so that the short-term costs of the internal devaluation required are reduced
    Keywords: macro imbalances, fiscal policy, euro crisis
    JEL: E62 H30 J11
    Date: 2013–11
  39. By: Aurélien Beleau (Centre d'Economie de la Sorbonne)
    Abstract: This paper intends to analyze some macroeconomic aspects in the framework of the Optimal Taxation Theory. First of all Optimal Taxation filiation will be considered in studying the three functions of the state described in Musgrave's work. The collective book published in 1994, and entitled Modern Public Finance, provides the pieces of integration of the “macroeconomic” function of the state. These models which aim to justify and to base state intervention in the private sphere on microfoundations will be tested. The results show that welfare maximization is not an adequate tool to evaluate public sector impact. Examination of model assumptions shows that optimal stabilization models are built upon a “minimalist” conception of the state, interference of which represents a “social cost”.
    Keywords: Welfare function, state, public economics, fiscal policy, optimal taxation.
    JEL: D60 E62 H00 H21
    Date: 2013–06
  40. By: Till Gross (Department of Economics, Carleton University)
    Abstract: This paper analyzes optimal capital taxation in open economies with strategic interaction in a neo-classical growth model. With a territorial or source-based tax system, I show that optimal capital taxes in steady state are zero for a large open economy, thereby generalizing the result previously established only for the special cases of a closed and a small open economy. If the steady-state assumption is relaxed, optimal capital taxes are still zero when marginal utilities of private and public consumption are bounded, or when the utility function is quasi- linear in consumption. Moreover, in the latter case the solution is also time-consistent. For the residential or world-wide tax principle, however, countries are not able to tax all factors of production, so capital income taxes are generally non-zero except in the limiting cases of a closed or small open economy. Allowing for both residential and territorial taxes restores zero capital taxes.
    Keywords: Dynamic Optimal Taxation, Open Economy, Ramsey Taxation, Capital Taxes
    JEL: H21 E62
    Date: 2013–08–06
  41. By: Miklós Antal; Jeroen van den Bergh
    Abstract: We raise fundamental questions about macroeconomics relevant to escaping the financial-economic crisis and shifting to a sustainable economy. First, the feasibility of decoupling environmental pressure from aggregate income is considered. Decoupling as a single environmental strategy is found to be very risky. Next, three main arguments for economic growth are examined: growth as progress, growth to avoid economic instability, and growth to offset unemployment due to labor productivity improvements. For each, we offer orthodox, heterodox and new responses. Attention is paid to progress indicators, feedback mechanisms affecting business cycles, and strategies to limit unemployment without the need for growth. Besides offering an economy-wide angle, we discuss the role of housing and mortgage markets in economic cyclicality. Finally, interactions between real economic and financial-monetary spheres are studied. This includes money creation, capital allocation and trade-offs between efficiency and operating costs of financial systems. Throughout, environmental and transition implications are outlined.
    Keywords: Financial-monetary system, GDP information, housing-mortgage markets, macroeconomics, positive and negative feedbacks, productivity trap
    Date: 2013–11
  42. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: Occasionally binding credit constraints (OBC) have recently been explored as a promising way of modeling financial frictions. However, given their highly non-linear nature, most of the literature has concentrated on small models that can be solved using global methods. In this paper, we investigate the workings of OBC introduced via a smooth penalty function. This allows us to move towards richer models that can be used for policy analysis. Our simulations show that in a deterministic setting the OBC approach delivers welcome features, like asymmetry and non-linearity in reaction to shocks. However, feasible local approximations, necessary to generate stochastic simulations, suffer from fatal shortcomings that make their practical application questionable.
    Keywords: financial frictions, DSGE models, occasionally binding constraints, penalty function
    JEL: E30 E44
    Date: 2013
  43. By: Douglas Gollin; David Lagakos; Michael E. Waugh
    Abstract: According to national accounts data, value added per worker is much higher in the non-agricultural sector than in agriculture in the typical country, and particularly so in developing countries. Taken at face value, this “agricultural productivity gap” suggests that labor is greatly misallocated across sectors. In this paper, we draw on new micro evidence to ask to what extent the gap is still present when better measures of sector labor inputs and value added are taken into consideration. We find that even after considering sector differences in hours worked and human capital per worker, as well as alternative measures of sector output constructed from household survey data, a puzzlingly large gap remains.
    JEL: E01 E24 J61 O11 O13 O15 O18 O41 R11
    Date: 2013–11
  44. By: Mazurek, Jiří
    Abstract: In this article recession magnitudes in Europe, the USA and Japan during the Great Recession are compared. The strongest recessions (of severe category) occurred in Latvia, Lithuania and Estonia, while recessions in Japan and the USA were significantly weaker. Even the strongest recession (in Latvia) was found smaller in its magnitude than the Great Depression 1929-1933 in the USA. Hence, comparisons of the Great Recession to the Great Depression in the literature are somewhat exaggerated.
    Keywords: Europe; Japan; recession; recession magnitude; USA.
    JEL: E32 O47 O51 O52 O57
    Date: 2013–11–13
  45. By: Eric van Wincoop (University of Virginia); Philippe Bacchetta (University of Lausanne)
    Abstract: While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitude around the globe. This synchronicity is surprising in the context of both existing theory and past business cycle experience. Theory implies that perfect co-movement can only happen when countries are perfectly integrated, in sharp contrast to the observed home bias in goods and financial markets. We develop a two-country model that allows for self-fulfilling business cycle panics and is consistent with high internationl co-movements and the worldwide increase in perceived uncertainty. We show that limited integration of goods and financial markets is sufficient for business cycle panics to be perfectly synchronized across countries. Moreover, a panic is more likely with tight credit, low interest rates, and unresponsive fiscal policy. We argue that the world was particularly vulnerable to such global panics in 2008.
    Date: 2013
  46. By: Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
    Abstract: The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. The present paper develops a dynamic equilibrium model and analyzes under what conditions such instability can be a consequence of market-wide changes in expectations. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.
    Keywords: Investment banking; repurchase agreements; tri-party repo; bilateral repo; money market mutual funds; asset-backed commercial paper; bank runs.
    JEL: E44 E58 G24
    Date: 2013–11
  47. By: Benjaming Dachis (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: After several years of relatively robust performance, Canada is lagging its peers in business investment growth, according to a new report by the C.D. Howe institute. In “Equipping Canadian Workers: Business Investment Loses a Step against Competitors Abroad,” authors Benjamin Dachis and William B.P. Robson find 2013 growth in new private-sector plant and equipment spending per worker in Canada seems likely to lag investment abroad, with strength in the more natural-resource-oriented provinces offset by weakness in Central Canada and the Maritimes.
    Keywords: Economic Growth and Innovation
    JEL: E2
    Date: 2013–11
  48. By: Sebastian Gechert; Rafael Mentges
    Abstract: We show that fiscal multiplier estimations may be biased by movements in asset and credit markets, as they facilitate spurious correlations of changes in cyclically adjusted revenues and spending with GDP growth via wrong identifications and an omitted variable bias, thus overstating episodes of expansionary consolidations and downplaying contractionary consolidations. When controlling for asset and credit market movements in otherwise standard approaches to identification, we find multipliers to increase on average by 0.3 to 0.6 units. Consolidations are thus more likely to be contractionary and more harmful to growth than expected by some strands of the existing literature.
    Keywords: multiplier effects, fiscal policy, asset markets, credit markets
    JEL: C22 E62 H30
    Date: 2013
  49. By: Krippner, Leo (Reserve Bank of New Zealand)
    Abstract: When nominal interest rates are near their zero lower bound (ZLB), as in many developed economies at the time of writing, it is theoretically untenable to apply the popular class of Gaussian affine term structure models (GATSMs) given their inherent material probabilities of negative interest rates. Hence, I propose a new and tractable modification for GATSMs that enforces the ZLB, and which approximates the fully arbitrage-free but much less tractable framework proposed in Black (1995). I apply my framework to United States yield curve data, with robust estimation via the iterated extended Kalman filter, and first show that the two-factor results are very similar to those from a comparable Black model. I then estimate two- and three-factor models with longer-maturity data sets to illustrate that my ZLB framework can readily be applied in circumstances that would be computationally burdensome or infeasible within the Black framework.
    JEL: E43 G12 G13
    Date: 2013–01
  50. By: Lee , Hyun-Hoon (Kangwon National University); Park, Cyn-Young (Asian Development Bank)
    Abstract: High and volatile food prices pose a significant policy challenge around the world, and an understanding of the dynamics of food price inflation and volatility is essential in designing appropriate policy responses. Using the panel data for 72 countries from 2000 to 2011, the paper assesses the international transmission of food price inflation and volatilities as well as the effects of various internal and external factors on domestic food price inflation and volatility. The paper offers evidence in support of the international transmission of food price inflation and volatility. Specifically, the paper finds that the domestic food price inflation in Asia is strongly associated with the lagged value of global food price inflation (using the FAO food price index), while volatility spillovers from global to domestic food prices are rather contemporaneous. The paper also finds that both national food price inflation rates and volatilities are strongly associated with both intra- and extra- regional food price inflation rates and volatilities, respectively. The findings also suggest that higher economic growth rates, greater shares of food in merchandise imports, and smaller increases in the share of food in merchandise imports lead to lower domestic food price inflation. An appreciation of local currency, greater political stability, and higher income level are also found to lower domestic food price inflation. On the other hand, higher economic growth rates lead to lower volatilities of food prices.
    Keywords: Food price inflation; food price volatility; food price transmission; food security; food policy
    JEL: E31 F49 N50 N55 Q18
    Date: 2013–08–30
  51. By: Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
    Abstract: We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve. The results are consistent with the predominance of real effects over nominal effects. Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range. Good-by- good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation.
    Keywords: Real exchange rates, Law of One Price, Sticky prices, Nonparametric test for monotonicity
    JEL: E31 F31 D40
  52. By: Sylvia Kaufmann; Johann Scharler
    Abstract: We study the relationship between bank lending standards, loan growth and the business cycle in the euro area and the US within a vector error correciton model using Bayesian estimation methods. To deal with the short data series available for the euro area, we exploit information from the estimated US system to improve the estimation of the euro area system. We find that tighter bank lending standards are associated with lower loan growth as well as lower output growth in both areas. Differences in reactions appear in the strength and the persistence of responses.
    Keywords: Bank Lending Standards, Bayesian Cointegration Analysis
    JEL: E40 E50
    Date: 2013–10
  53. By: Perugini, Cristiano; Hölscher, Jens; Collie, Simon
    Abstract: In the three decades leading up to the financial crisis of 2008/09, income inequality rose across much of the developed world. This has led to a vigorous debate as to whether widening inequality was somehow to blame for the crisis. At the heart of this debate is the question of whether rising inequality leads to private sector credit booms, which are, in turn, widely accepted as a macroeconomic risk factor. Despite growing interest, empirical evidence on an inequality-fragility relationship is limited. That which does exist fails to tip the balance of evidence conclusively one way or the other. This research adds to this scarce body of evidence. Based on an econometric analysis of a panel of eighteen OECD countries covering the period 1970-2007, this study finds a statistically significant, positive relationship between income concentration and private sector indebtedness when controlling for conventional credit determinants. The implications of such a relationship are twofold. First, the view that the distribution of income is irrelevant to macroeconomic outcomes (implicit in mainstream economic thought) needs a second look. Second, if policy makers wish to make the financial system more robust, they should cast the net wider than regulatory and monetary policy reforms, and consider the effects of changes to the distribution income.
    Keywords: Income inequality, Credit booms, Financial crises, Financial de-regulation
    JEL: D31 E51 G1
    Date: 2013–10–08
  54. By: Marion Davin (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: This paper examines the interplay between public education expenditure and economic growth in a two-sector model. We reveal that agents’ preferences for services, education and savings play a major role in the relationship between growth and public education expenditures, as long as production is taxed at a different rate in each sector.
    Keywords: Public education, Two-sector model, Sectoral taxes, Endogenous growth.
    JEL: E62 I25 O41
    Date: 2013–10
  55. By: Peter H. Sullivan
    Abstract: In this paper I compare the performance of three approaches to modeling temporal instability of the relationship between the euro-dollar exchange rate and macroeconomic fundamentals. Each of the three approaches considered -- adaptive learning, Markov-switching and Imperfect Knowledge Economics (IKE) -- recognize that market participants revise forecasting strategies, at least intermittently, and, as a result, the relationship between the exchange rate and fundamentals is temporally unstable. The central question in the literature addressed by this paper is which of the three approaches to modeling revisions of market participants' forecasting strategies is most empirically relevant for understanding the connection between currency fluctuations and fundamentals? One of the objectives of comparing the out-of-sample forecasting of the three approaches to change is to test to what extent growth-of-knowledge considerations, as proposed by Frydman and Goldberg (2007, 2011), are empirically relevant for our understanding of currency fluctuations. I find that only the IKE model, developed from Sullivan (2013) is able to significantly outperform the random walk benchmark, suggesting that different sets of fundamentals matter during different time periods in ways that do not conform to an overarching probability law.
    JEL: F31 C58 E44 E47
    Date: 2013–11–10
  56. By: Fujio Takata (Graduate School of Economics, Kobe University)
    Abstract: When governments levy taxes on labour income on the basis of a balanced budget rule, this rule causes a nonlinear system.Thus, multiple steady states in an economy exist, which can cause multiple movement patterns in an economy. This article deals with the existence of these multiple steady states. Schmitt-GrohLe and Uribe (1997) discusses this issue, but does not necessarily show the clear existence of steady states. On a more general assumption of increasing marginal disutility of labour, however, we show that there can be two steady states in the economy, one with superior, the other with inferior economic performance.
    Keywords: Multiple steady states; Balanced budget rule; Labour income taxation; Divisible labour
    JEL: C62 E13 E21 E32 H24
    Date: 2013–10
  57. By: Lance Kent (Department of Economics, College of William and Mary); Toan Phan (Department of Economics, UNC-Chapel Hill)
    Abstract: This paper develops an empirical macroeconomic framework to analyze the relationship between major political disruptions and business cycles of a country. We combine a new dataset of political revolutions (mass domestic political campaigns to remove dictators and juntas) across the world since 1960, with coup data and traditional macro data (of output, investment, trade, inflation and exchange rate). We then build a panel vector-autoregression model with two novel ingredients: (1) political disruptions and (2) an estimated probability of such disruptions. We find that both terms have statistically and economically significant impacts on business cycles. Interestingly, the impacts of the second term dominate those of the first, both statistically and economically. This suggests that our measure of political risk captures an important source of time-varying uncertainty and volatility in many countries.
    Keywords: business cycles, political risk, time-varying uncertainty, panel VAR
    Date: 2013–11–05
  58. By: Thomas Herndon; Michael Ash; Robert Pollin
    Abstract: Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.Media requests: please contact Debbie Zeidenberg. >> Download the paper here1,2>> "Debt and Growth: A Response to Reinhart and Rogoff" in The New York Times, April 29, 2013>> Supplemental Technical Critique of Reinhart and Rogoff's "Growth in a Time of Debt">> Robert Pollin and Michael Ash's op ed in the Financial Times>> Data and code files upon which the results are based >> Text document describing the files in the code and data archive>> Concordance between variable names in the RR working spreadsheet and the HAP data and code>> Additional spreadsheet with the following columns: country; year; public debt/GDP ratio; public debt/GDP category; real GDP growth. Columns are calculated from data and formulas in the Reinhart and Rogoff working spreadsheet and can be used, e.g., with pivot tables, to replicate the results in RR 2010 and HAP. >> Updated and more complete data and code package (as of May 17, 2013), as referenced in "Debt and Growth: A Response to Reinhart and Rogoff" in The New York Times, April 29, 2013. Code and data are open-source under the BSD 2-clause license ( Documentation is here. >> A sample of the media coverage of the study1 The paper was updated at 1:35 pm on April 17, with the following corrections: (1) The notes to Table 3: "Spreadsheet refers to the spreadsheet error that excluded Australia, Austria, Canada, and Denmark from the analysis." is corrected to read: "Spreadsheet refers to the spreadsheet error that excluded Australia, Austria, Belgium, Canada, and Denmark from the analysis." (2) Page 13:�“Thus, in the highest, above-90-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950-2009 sample declines to only 2.5 percent per year in the 1980-2009 sample” is corrected to read "Thus, in the lowest, 0–30-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950–2009 sample declines to only 2.5 percent per year in the 1980–2009 sample." 2 The paper was updated at 9:36 am on April 22, with the following changes: (1) Table 3 has been expanded to show the effect of each of the errors�in RR�(spreadsheet error, selective year exclusion, and country weighting) separately and the effect of all interactions of the errors.�Text in the section "Summary: years, spreadsheet, weighting, and transcription" (p.10) has been updated to describe the expanded table. �No results have changed. (2) On p. 5, the text: "Outside the US, the series for some countries do not begin until 1957 and that for Italy is unavailable before 1980. Eight countries are available from 1946, sixteen from 1950, and all countries but Italy and Greece enter the dataset by 1957," has been changed to: "Outside the US, the series for some countries do not begin until the 1950’s and that for Greece is unavailable before 1970. Nine countries are available from 1946, seventeen from 1951, and all countries but Greece enter the dataset by 1957," and the text "real GDP growth is unavailable for Spain for 1959–1980" has been added.
    Date: 2013
  59. By: Kamber, Gunes;; Thoenissen, Christoph (Reserve Bank of New Zealand)
    Abstract: This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.
    JEL: E32 J6
    Date: 2013–01
  60. By: Bonizzi, Bruno
    Abstract: This paper aims to investigate the dynamics of capital markets in emerging markets in a period of financial integration. It takes the case of Brazil and South Korea, two key emerging markets in the global economy, to assess the relationship between capital flows and equity prices. This is analysed through Jan Toporowski’s theory of “capital market inflation”, which explains the movements of equity prices in relation to the inflows of funds into the capital market. The main argument put forward is that the foreign capital inflows into the emerging equity markets have substantially concurred to create the excess liquidity that gives rise to a process of capital market inflation. This contributes both to extend Toporowski’s theory to the context of emerging financially open countries, and to give a new perspective to the debates over financial globalisation by proposing the theory of capital market inflation as a framework to understand the mechanics of capital flows to emerging markets. The empirical evidence available from Brazil and South Korea suggests that this is a consistent and instructive framework of analysis.
    Keywords: Finance, Capital Market, Asset Price, Capital Gain, Globalisation
    JEL: E12 O16
    Date: 2013–09
  61. By: Guillén, Osmani Teixeira de Carvalho; Issler, João Victor; Franco-Neto, Afonso Arinos de Mello
    Abstract: The main objective of this paper is to propose a novel setup that allows estimating sepa-rately the welfare costs of the uncertainty stemming from business-cycle uctuations and fromeconomic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfarecosts requires dealing with degenerate bivariate distributions. Levi s Continuity Theorem andthe Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginaldistributions. Under Normality, we show that the parameters of the original marginal distri-butions are not a¤ected, providing the means for calculating separately the welfare costs ofbusiness-cycle uctuations and of economic-growth variation.Our empirical results show that, if we consider only transitory shocks, the welfare cost ofbusiness cycles is much smaller than previously thought. Indeed, we found it to be negative- -0:03% of per-capita consumption! On the other hand, we found that the welfare cost ofeconomic-growth variation is relatively large. Our estimate for reasonable preference-parametervalues shows that it is 0:71% of consumption US$ 208:98 per person, per year.
    Date: 2013–11–04
  62. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The paper combines Baumol’s model of structural change with a model of aggregate demand growth in the Keynesian-Kaleckian tradition to predict the dynamics of aggregate employment. The model for the demand regime is estimated with – and Baumol’s model for the productivity regime is calibrated on – OECD data. The trajectory for employment predicted by the combination of the two models tracks the actual employment dynamics in the OECD over the period 1970-2010 remarkably well.
    Keywords: Structural change, demand growth, productivity growth, employment dynamics, OECD panel data
    JEL: C23 E12 E13 E20 O41
    Date: 2013–10
  63. By: Andrey Launov (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany); Klaus Wälde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: Die Hartz IV Reform des Arbeitsmarktes ist eine der politisch umstrittensten Reformen, die seit der Wiedervereinigung in der Bundesrepublik durchgeführt wurden. Mit ihr werden Gefährdungen des Lebensstandards bis hin zu Armut verbunden. Gleichzeitig konnte die Bundesrepublik ihre Arbeitslosenquote über die letzten Jahre so stark senken wie fast kein anderes Land in Europa oder in anderen Ländern der OECD. Welche Rolle spielen die Hartz Reformen in dieser Erfolgsgeschichte? Andrey Launov und Klaus Wälde (2013a) zeigen, dass die Hartz IV Gesetzte de facto keinen erwähnenswerten Beitrag lieferten zur Reduktion der Arbeitslosigkeit. Gleichzeitig waren die anderen Reformen, Hartz I bis Hartz III, umso hilfreicher.
    Keywords: employment agencies, unemployment benefits, labour market, reform, unemployment
    JEL: E24 J64 J68
    Date: 2013–11–01
  64. By: Claudia M. Buch; T. Körner; B. Weigert
    Abstract: The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks’ balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard.
    Keywords: banking union, Europe, single supervisory mechanism, risk sharing
    JEL: E02 E42 G18
    Date: 2013–10
  65. By: Chad Cotti (University of Connecticut); Richard A. Dunn (Texas A&M University); Nathan Tefft (University of Washington)
    Abstract: We investigate how risky health behaviors and self - reported health vary with the Dow Jones Industrial Average (DJIA) and during stock market crashes. Because stock market indices are leading indicators of economic performance, this research contributes to our understanding of the macroeconomic determinants of health. Existing studies typically rely on the unemployment rate to proxy for economic performance, but this measure captures only one of many channels through which the economic environment may influence individual health decisions. We find that large, negative monthly DJIA returns, decreases in the level of the DJIA, and stock market crashes are widely associated with worsening self-reported mental health and more cigarette smoking, binge drinking, and fatal car accidents involving alcohol. These results are consistent with predictions from rational addiction models and have implications for research on the association between consumption and stock prices.
    Keywords: stock market, risky health behaviors, business cycle, alcohol, cigarettes
    JEL: I1 E32 G1
    Date: 2013–06
  66. By: Hiroaki Sasaki
    Abstract: This paper presents a Kaleckian growth model in which (i) the rate of capacity utilization, the profit share, and the rate of employment are adjusted in the medium run, and (ii) the normal rate of capacity utilization and the expected rate of growth are adjusted in the long run. Both the Kalecki type and the Marglin-Bhaduri type investment functions are introduced. Using the model, we examine which regime is obtained in the long-run equilibrium, the wage-led regime or the profit-led regime.
    Keywords: Kaleckian model; long-run equilibrium; wage-led; profit-led
    JEL: E12 E24 O41
  67. By: Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
    Abstract: This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants depend on the borrower’s (endogenous) balance sheet and on (exogenous) fundamentals. Systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.
    Keywords: Investment banking; securities dealers; repurchase agreements; runs; financial fragility; collateral; systemic risk.
    JEL: E44 E58 G24
    Date: 2013
  68. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about mone-tary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens’ trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We con-clude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    Keywords: ECB, Economic knowledge, German public attitudes, Institutional trust
    JEL: D83 E52 E58
    Date: 2013
  69. By: Vaqar Ahmed; Ahsan Abbas; Saira Ahmed
    Abstract: The role of infrastructure in economic growth and welfare has been studied extensively across the literature over the past three decades. We use a dynamic CGE model linked to a microsimulation model to estimate the macro-micro impact of public infrastructure investment. Two approaches to public investment are considered in our simulations. In the first, production taxes finance the additional public infrastructure investment and in the second, foreign borrowing provides resources. Our results reveal that public infrastructure investments have the same direction of impact whether funded by taxation or international borrowing, particularly when looking at macroeconomic gains and poverty reduction in the long run. However, in the very short run, tax financing puts a strain on output in the industrial sector and thus reduces economic growth in the short run. The financing from international borrowing has a Dutch disease-like impact in the short run, as indicated by a decline in exports.
    Keywords: Infrastructure, Economic Growth, Poverty, Pakistan, Computable General Equilibrium
    JEL: C68 E22 H54 I38
    Date: 2013
  70. By: Maciej Albinowski (Warsaw School of Economics); Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics and Monetary Policy Council in Narodowy)
    Abstract: We contribute to the new, albeit fast-growing empirical literature on the determinants of trust in central banks. Like in most other studies we use panel data models based on the Eurobarometer survey on trust in the European Central Bank. Firstly, we confirm the main conclusion from previous studies that the trust in the ECB has suffered from the crisis’ outburst. Moreover, households perceive the ECB’s responsibility for the occurrence of the crisis to go beyond the responsibility of other institutions. This finding casts some doubt on the central bank’s ability to manage expectations in a country having been hit by a severe negative demand shock, while this ability is precondition of the central banks’ power to boost aggregate demand when its interest rates are at the zero lower bound. Secondly (and most importantly), in addition to previous studies, we examine the links between the trust in the ECB and its policy. Our main result is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and go against the ‘fundamental shock’ hypothesis which would imply positive effects of aggressive cuts for trust in the ECB. These findings are robust to changes in the estimation method, the definition of the lack of confidence shock, control variables and countries under consideration. We also show that it cannot be easily rejected as spurious.
    Keywords: trust in central banks, zero lower bound, lack-of-confidence shock, Eurobarometer, panel data
    JEL: C23 E58 H12
    Date: 2013
  71. By: Bessec, Marie
    Abstract: In recent years, factor models have received increasing attention from both econometricians and practitioners in the forecasting of macroeconomic variables. In this context, Bai and Ng (2008) find an improvement in selecting indicators according to the forecast variable prior to factor estimation (targeted predictors). In particular, they propose using the LARS-EN algorithm to remove irrelevant predictors. In this paper, we adapt the Bai and Ng procedure to a setup in which data releases are delayed and staggered. In the pre-selection step, we replace actual data with estimates obtained on the basis of past information, where the structure of the available information replicates the one a forecaster would face in real time. We estimate on the reduced dataset the dynamic factor model of Giannone, Reichlin and Small (2008) and Doz, Giannone and Reichlin (2011), which is particularly suitable for the very short-term forecast of GDP. A pseudo real-time evaluation on French data shows the potential of our approach.
    Keywords: Factor model; GDP forecasting; Large dataset; Targeted predictors; Variable selection;
    JEL: C22 E32 E37
    Date: 2013–09
  72. By: Estian Calitz (Department of Economics, University of Stellenbosch); Krige Siebrits (Department of Economics, University of Stellenbosch); Ian Stuart (Treasury, Government of South Africa)
    Abstract: Forecasting accuracy is important for fiscal policy credibility. Three questions are posed. Firstly, are the forecasts by South Africa’s National Treasury good, compared to those of non-government economists? The paper compares Treasury’s forecasts to non-government projections and to those of other countries and over time. With reference to the mean absolute error and the root mean square error (van der Watt, 2013), it is concluded that nongovernment economists do not necessarily forecast GDP and inflation better than Treasury. Secondly, have the forecasts by National Treasury been good, over time and compared to those of other countries? The forecast error (the final figure minus the budget estimate) is calculated, using data for 2000/01-2010/11. This is most relevant because retrospectively the outcome of fiscal policy is analysed and judged with reference to final figures. National Treasury’s budget forecast errors are found to be significant. Margins of error in forecasting revenue, expenditure and GDP have partially neutralised each other in terms of their impact on the budget balance as a percentage of GDP. Except towards the end of the period, the fiscal balance was better than budgeted. On average and calculated as a percentage of GDP, revenue forecasting inaccuracies made the biggest contribution to inaccurate estimates of the budget balance, but this is largely explained by GDP forecasting inaccuracies. SA fiscal forecasts show a smaller forecast error than that of 14 member countries of the European Union. Thirdly, has the forecasting ability of National Treasury improved over time? A trend line shows higher Treasury forecast errors towards the end of the period and an underestimation bias for GDP and revenue forecasts. A simple example of the dynamics of fiscal politics is presented to demonstrate that a persistent underestimation of revenue could also erode fiscal credibility.
    Keywords: fiscal policy, fiscal forecasts, fiscal credibility
    JEL: E60 H3 H61 H62
    Date: 2013
  73. By: Aleksandra Hałka (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski)
    Abstract: Inflation perceived by consumers may differ from official statistics particularly due to different baskets of goods and services lay people and statisticians consider and by consumer loss aversion to price increases. Such effects, as suggested by the Prospect Theory, are confirmed in many empirical studies, showing that consumers are substantially influenced by prices of frequent purchases and that price increases are perceived more strongly than price decreases. Following those observations, particularly useful in interpreting a jump of inflation perception in some of the EMU economies after the euro introduction, an alternative price index, i.e. the Index of Perceived Inflation, was proposed by Brachinger (2006) and Brachinger (2008). The role of price changes of frequently bought goods and services in determining consumer opinions on price changes was also significant in Poland, especially after its accession to the EU. To assess whether this effect is of a systematic nature, in this paper we develop different indices of price changes of frequently bought goods and services in Poland, including the Index of Perceived Inflation. Then we evaluate these indices vs. CPI inflation in terms of their impact on consumer inflation perception, as proxied with survey data. The results suggest that Polish consumers observe a relatively wide range of goods and services and that both factors suggested by the Prospect Theory seem to influence their opinions on evolution of prices in the past. Having the measure of perceived inflation – i.e. the Consumer Perceived Price Index (CPPI) – that seems more adequate than current CPI inflation on the one hand and survey-based measures of perceived inflation scaled with respect to the trend of CPI inflation on the other hand, we use it as a scaling factor to derive a probability measure of consumer inflation expectations in Poland. Then we compare forecasting accuracy of this measure with respective results based on the measure of consumer inflation expectations quantified in a standard manner.
    Keywords: Inflation, inflation perceptions, inflation expectations, survey, consumers.
    JEL: D12 D84 E31
    Date: 2013
  74. By: John Muellbauer
    Abstract: This paper proposes that all new euro area sovereign borrowing be in the form of jointly guaranteed Eurobonds.� To avoid classic moral hazard problems and to insure the guarantors against default, each country would pay a risk premium conditional on economic fundamentals to a joint debt management agency.� This suggests that these bonds be called 'Euro-insurance-bonds'.� While the sovereign debt markets have taken increasing account of the economic fundamentals, the signal to noise ratio has been weakened by huge market volatility, so undercutting incentives for appropriate reforms and obscuring economic realities for voters.� This paper uses an econometric model to show that competitiveness, public and private debt to GDP, and the fall-out from housing market crises are the most relevant economic fundamentals.� Formula-based risk spreads based on these fundamentals would provide clear incentives for governments to be more oriented towards economic reforms to promote long-run growth than mere fiscal contraction.� Putting more weight on incentives that come from risk spreads, than on fiscal centralisation and the associated heavy bureaucratic procedures, would promote the principle of subsidiarity to which member states subscribe.� The paper compares Euro-insurance-bonds incorporating these risk spreads with other policy proprosals.
    Keywords: Sovereign spreads, eurobonds, eurozone sovereign debt crisis, subsidiarity
    JEL: E43 E44 G01 G10 G12
    Date: 2013–10–29
  75. By: Ciccone, Antonio (Universitat Pompeu Fabra); Peri, Giovanni (University of California)
    Abstract: We find that over the period 1950–1990, states in United States absorbed increases in the supply of schooling due to tighter compulsory schooling and child labor laws mostly through within-industry increases in the schooling intensity of production. Shifts in the industry composition towards more schooling-intensive industries played a less important role. To try and understand this finding theoretically, we consider a free trade model with two goods/industries, two skill types, and many regions that produce a fixed range of differentiated varieties of the same goods. We find that a calibrated version of the model can account for shifts in schooling supply being mostly absorbed through within-industry increases in the schooling intensity of production even if the elasticity of substitution between varieties is substantially higher than estimates in the literature.
    Keywords: human capital; skills; schooling; labor demand; United States
    JEL: E24 I20 J23 J24
    Date: 2013–09–13
  76. By: Costeiu, Adrian; Neagu, Florian
    Abstract: This paper builds a macro-prudential tool designed to assess whether the banking sector is adequately prepared to orderly withstand losses resulting from normal or stressed macroeconomic and microeconomic scenarios. The link between the banking sector and the real sector is established via the corporate sector channel. The macro-prudential tool consists of a two-step approach. In the first step, we build a model for the probability of default (PD) in the corporate sector, so as to quantify oneyear ahead developments in the quality of banks' corporate loans. The framework is established using micro data, with a bottom-up approach. The second step consists of bridging the PD model with a macroeconomic module in order to capture the feedback effects from the macroeconomic stance into the banking sector, via the corporate sector channel. The macro-prudential tool is tested on the Romanian economy. JEL Classification: G32, G21, E17
    Keywords: financial stability, macro-prudential analysis, probability of default, ROC
    Date: 2013–09
  77. By: Rojas Breu, Mariana
    Abstract: I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption-risk sharing more inefficient. I calibrate the model using U.S. data on credit-card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare.
    Keywords: Money; limited participation; risk sharing; credit;
    JEL: E41 E51
    Date: 2013
  78. By: Régis 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- flow 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
  79. By: Winkler, Adalbert
    Abstract: Ist das OMT-Programm der EZB mandatswidrig? Dieser Beitrag wendet die ökonomische Argumentation der OMT-Kritiker vor dem deutschen Bundesverfassungsgericht auf die seit Oktober 2008 praktizierte Vollzuteilungspolitik an. Der Vergleich zeigt, dass danach auch die Vollzuteilungspolitik mandatswidrig ist. Die EZB steht daher nicht als Staatsfinanzierer, sondern als lender of last resort vor Gericht. Ein Richterspruch gegen das OMT würde folglich eine ökonomische Argumentation bestätigen, die 150 Jahren moderner Zentralbankgeschichte widerspricht und den Euroraum den Instabilitäten von Finanzmärkten ausliefert. Ein solcher Währungsraum ist weder funktionsfähig noch wünschenswert. --
    Keywords: lender of last resort,OMT-Programm,Vollzuteilungspolitik
    JEL: E52 E53 F33
    Date: 2013
  80. By: Kim, Chang-Jin; Kim, Jaeho
    Abstract: In the case of a flat prior, a conventional wisdom is that Bayesian inference may not be very different from classical inference, as the likelihood dominates the posterior density. This paper shows that there are cases in which this conventional wisdom does not apply. An ARMA model of real GDP growth estimated by Perron and Wada (2009) is an example. While their maximum likelihood estimation of the model implies that real GDP may be a trend stationary process, Bayesian estimation of the same model implies that most of the variations in real GDP can be explained by the stochastic trend component, as in Nelson and Plosser (1982) and Morley et al. (2003). We show such dramatically different results stem from the differences in how the nuisance parameters are handled between the two approaches, especially when the parameter estimate of interest is dependent upon the estimates of the nuisance parameters for small samples. For the maximum likelihood approach, as the number of the nuisance parameters increases, we have higher probability that the moving-average root may be estimated to be one even when its true value is less than one, spuriously indicating that the data is `over-differenced.' However, the Bayesian approach is relatively free from this pile-up problem, as the posterior distribution is not dependent upon the nuisance parameters.
    Keywords: pile-up problem, ARMA model, Unobserved-Components Model, Profile likelihood, marginal powterior density, Trend-Cycle decomposition
    JEL: C11 E32
    Date: 2013–10
  81. By: A. Kerem Cosar; Nezih Guner; James Tybout
    Abstract: This paper explores the combined effects of reductions in trade frictions, tariffs, and firing costs on firm dynamics, job turnover, and wage distributions. It uses establishment-level data from Colombia to estimate an open economy dynamic model that links trade to job flows in a new way. The fitted model captures key features of Colombian firm dynamics and labor market outcomes, as well changes in these features during the past 25 years. Counterfactual experiments imply that integration with global product markets has increased both average income and job turnover in Colombia. In contrast, the experiments find little role for this country’s labor market reforms in driving these variables. The results speak more generally to the effects of globalization on labor markets in Latin America and elsewhere.
    Keywords: international trade, firm dynamics, size distribution, labor market frictions, inequality
    JEL: F12 F16 E24 J64 L11
    Date: 2013–11
  82. By: Nalan Basturk (Erasmus University Rotterdam Econometric Institute, Tinbergen Institute); Cem Cakmakli (University of Amsterdam Department of Quantitative Economics, Koç University); Pinar Ceyhan (Erasmus University Rotterdam Econometric Institute, Tinbergen Institute); Herman K. van Dijk (Erasmus University Rotterdam Econometric Institute, Tinbergen Institute, VU University Amsterdam Department of Econometrics)
    Abstract: Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended Phillips Curve (PC) models. It is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic PC models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities. Forward and backward looking expectation components for inflation are incorporated and their relative importance is evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long run stability between inflation and marginal costs. Backward-looking inflation appears stronger than forward-looking one. Levels and volatilities of inflation are estimated more precisely using rich PC models. The extended PC structures compare favorably with existing basic Bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years.
    Keywords: New Keynesian Phillips curve, unobserved components, time varying parameters, level shifts, inflation expectations, survey data
    JEL: C11 C32 E31 E37
    Date: 2013–11
  83. By: Benjamin Moll; Robert M. Townsend; Victor Zhorin
    Abstract: Motivated by evidence from the micro data that the type of financial frictions faced by individuals varies across regions within countries, we develop a general equilibrium framework that encompasses different micro financial underpinnings. We use it to compare the implications of two concrete frictions, limited commitment and moral hazard, and argue that these have potentially very different implications at both the macro and the micro level. Aggregate productivity is depressed in the two regimes but for completely different reasons: under limited commitment capital is misallocated across heterogeneous firms. In contrast, under moral hazard, productivity is endogenously lower at the firm level because entrepreneurs exert suboptimal effort. Occupational choice, productivity and firm size distribution, income and wealth inequality, and the speed of individual transitions also differ markedly. We also present an economy with different frictions in different regions. Such mixture regimes turn out to be different from simple convex combinations of the pure moral hazard and pure limited commitment regimes, and they produce interregional patterns of aggregate income, capital and labor flows and external finance that resemble rural-urban patterns observed in the data.
    JEL: D82 E2 O1
    Date: 2013–11
  84. By: Hiroaki Sasaki; Ryunosuke Sonoda; Shinya Fujita
    Abstract: This paper constructs an open economy Kaleckian model in which the international competition affects the bargaining process between firms and workers, and investigates the effect of such bargaining on macroeconomy. If the real exchange rate has little impact on the trade balance, the economy is stable, whereas if it has a larger impact on the trade balance, the economy is unstable. Moreover, we show that the effect of a change in the bargaining power on aggregate demand depends not only on the demand regimes but also on which agent bears the burden arising from the international price competition.
    Keywords: Kaleckian model, Open economy, International price competition, Wage bargaining
    JEL: E12 F43 J50
  85. By: Joshua S. Gans; Hanna Halaburda
    Abstract: This paper reviews some recent developments in digital currency, focusing on platform-sponsored currencies such as Facebook Credits. In a model of platform management, we find that it will not likely be profitable for such currencies to expand to become fully convertible competitors to state-sponsored currencies.
    Keywords: Bank notes; Economic models; Payment clearing and settlement systems
    JEL: D42 E4 L51
    Date: 2013
  86. By: Tomas Havranek (Czech National Bank and Charles University, Prague)
    Abstract: I examine 2,735 estimates of the elasticity of intertemporal substitution in consumption (EIS) reported in 169 published studies. The literature shows strong publication bias: researchers report negative and insignificant estimates less often than they should, which pulls the mean estimate up by about 0.5. When I correct the mean for the bias, for macro estimates I get zero, even though the reported t - statistics are on average two. The corrected mean of micro estimates for asset holders is around 0.3–0.4. Calibrations of the EIS greater than 0.8 are inconsistent with the bulk of the empirical evidence.
    Keywords: Elasticity of intertemporal substitution, consumption, publication bias, meta-analysis
    JEL: E21 C83
    Date: 2013–10
  87. By: Rosa C. Hayes (Federal Reserve Bank of New York); Masami Imai (Department of Economics, Wesleyan University); Cameron A. Shelton (Claremont McKenna College)
    Abstract: This paper exploits the international transmission of business cycles to examine the prevalence of attribution error in economic voting in a large panel of countries from 1990-2009. We find that voters, on average, exhibit a strong tendency to oust incumbent governments during an economic downturn, regardless of whether the recession is home-grown or merely imported from trading partners. However, we find important heterogeneity in the extent of attribution error. A split sample analysis shows that countries with more experienced voters, more educated voters, and possibly more informed voters—all conditions which have been shown to mitigate other voter agency problems—do better in distinguishing imported from domestic growth.
    Keywords: Economic voting; Political agency problem
    JEL: E3 E6
    Date: 2013–10
  88. By: Horioka, Charles Yuji (University of the Philippines); Terada-Hagiwara, Akiko (Asian Development Bank)
    Abstract: In this paper, we analyze the determinants of corporate saving in the form of changes in the stock of cash for 11 Asian economies using firm-level data from the Oriana Database for the 2002–2011 period. We find some evidence that cash flow has a positive impact on the change in the stock of cash, which suggests that Asian firms are borrowing constrained and that they save more when their cash flow increases so that they will be able to finance future investments. Moreover, we find in the developed economy sample that, as expected, cash flow has a positive impact on the change in the stock of cash only in the case of the smallest firms, which are more likely to be borrowing constrained, and find in the developing economy sample that, as expected, the positive impact of cash flow on the change in the stock of cash declines with firm size. In addition, we find that the cash flow sensitivity of cash declined after the global financial crisis. Finally, we find some evidence that Tobin’s q has a positive impact on the change in the stock of cash.
    Keywords: corporate saving; corporate investment; borrowing constraints; liquidity constraints; cash flow; cash holdings; cash flow sensitivity of cash; Tobin’s q; firm size; productivity shocks; Asia; Oriana Database; financial sector development; global financial crisis
    JEL: D92 E21 E22 G11 O53
    Date: 2013–10–22
  89. By: Rieber, Arsène; Bagnai, Alberto; Tran, Thi Anh-Dao
    Abstract: Our paper examines the long run relationship between economic growth and the current account balance equilibrium by relying on the BoP constrained growth model. We find that Vietnam grew less than the rate predicted when the period 1985 to 2010 as a whole is considered, but with different behavior for the 1998-2010 sub-period. The relative price effect is neutral, allowing the volume effects to dominate in setting the BoP constraint. The high income elasticities of exports enable growth in the advanced countries to have a multiplier effect on the Vietnamese economy. However, this effect is hindered by a high ‘appetite’ for imports coming from Asia. We also assess the impact of the current crisis on Vietnam’s growth for the period 2011 to 2017.
    Keywords: Economic growth; BoP constrained growth model; Multi country model; Asia; Vietnam;
    JEL: E12 F43 O11 O53
    Date: 2013–06
  90. By: Kim, Chang-Jin; Kim, Jaeho
    Abstract: One goal of this paper is to develop an efficient Markov-Chain Monte Carlo (MCMC) algorithm for estimating an ARMA model with a regime-switching mean, based on a multi-move sampler. Unlike the existing algorithm of Billio et al. (1999) based on a single-move sampler, our algorithm can achieve reasonably fast convergence to the posterior distribution even when the latent regime indicator variable is highly persistent or when there exist absorbing states. Another goal is to appropriately investigate the dynamics of the latent ex-ante real interest rate (EARR) in the presence of structural breaks, by employing the econometric tool developed. We argue Garcia and Perron's (1996) conclusion that the EARR rate is a constant subject to occasional jumps may be sample-specific. For an extended sample that includes recent data, Garcia and Perron's (1996) AR(2) model of EPRR may be misspecified, and we show that excluding the theory-implied moving-average terms may understate the persistence of the observed ex-post real interest rate (EPRR) dynamics. Our empirical results suggest that, even though we rule out the possibility of a unit root in the EARR, it may be more persistent and volatile than has been documented in some of the literature including Garcia and Perron (1996).
    Keywords: ARMA model with Regime Switching, Multi-move Sampler, Single-Move Sampler, Metropolis-Hastings Algorithm, Absorbing State, Ex-Ante Real Interest Rate.
    JEL: C11 E4
    Date: 2013–08

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