nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒11‒22
sixty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Household and firm leverage, capital flows and monetary policy in a small open economy By Mara Pirovano
  2. Increasing Inequality and Financial Fragility in an An Agent Based Macroeconomic Model By Russo, Alberto; Riccetti, Luca; Gallegati, Mauro
  3. Distilling the Macroeconomic News Flow By Alessandro Beber; Michael W. Brandt; Maurizio Luisi
  4. Determinants of Non-Performing Loans in Central and Eastern European Countries By Bruna Škarica
  5. Robustifying optimal monetary policy using simple rules as cross-checks By Pelin Ilbas; Øistein Røisland; Tommy Sveen
  6. Entry and markup dynamics in an estimated business cycle model. By Lewis, Vivien; Stevens, Arnoud
  7. Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence By Coibion, Olivier; Gorodnichenko, Yuriy; Koustas, Dmitri
  8. Risks to price stability, the zero lower bound and forward guidance: A real-time assessment By Coenen, Günter; Warne, Anders
  9. Empirical assessment of stabilization effects of fiscal policy in Croatia By Ana Grdović Gnip
  10. The Financial Accelerator and the Optimal Lending Contract By Mikhail Dmitriev; Jonathan Hoddenbagh
  11. A Sticky Information Phillips Curve for South Africa By Monique Reid and Gideon Du Rand
  12. The Euro Area's Tightrope Walk: Debt and Competitiveness in Italy and Spain By Zsolt Darvas
  13. Capital, Credit Constraints and the Comovement between Consumer Durables and Nondurables By Been-Lon Chen; Shian-Yu Liao
  14. The Effects of the Saving and Banking Glut on the U.S. Economy By Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
  15. Recall and Unemployment By Shigeru Fujita; Giuseppe Moscarini
  16. Zero Lower Bound and Parameter Bias in an Estimated DSGE Model By Yasuo Hirose; Atsushi Inoue
  17. Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets By Kurmas Akdogan
  18. Factor income taxation, growth, and investment specific technological change By Monisankar Bishnu; Chetan Ghate; Pawan Gopalakrishnan
  19. Collateral monetary equilibrium with liquidity constraints in an infinite horizon economy. By Ngoc-Sang Pham
  20. China's March to Prosperity: Reforms to Avoid the Middle-income Trap By Vincent Koen; Richard Herd; Sam Hill
  21. Flexible prices, labor market frictions and the response of employment to technology shocks By Francesco Zanetti; Federico S. Mandelman
  22. Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies By Marc Pourroy
  23. From Social Contract to Arab Spring: Macroeconomic Adjustment under Regime Change By Joao Ricardo Faria; Peter McAdam
  24. Impacts of Cyclical Downturns on the Third Pillar of the RIS and Policy Responses By Davies, James B.; Yu, Xiaoyu
  25. Turning point chronology for the Euro-Zone: A Distance Plot Approach. By Peter Martey Addo; Monica Billio; Dominique Guegan
  26. Macroeconomic Determinants of Retirement Timing By Yuriy Gorodnichenko; Jae Song; Dmitriy Stolyarov
  27. Asia Chartbook: Crises, Credit and Debt, 1835-2013 By Carmen M. Reinhart
  28. Financial Markets Around the Great Recession: East Meets West By Peter Simmons; Yuanyuan Xie
  29. The Optimal Design of a Fiscal Union By Jonathan Hoddenbagh; Mikhail Dmitriev
  30. Volatility and Pass-through By David Berger; Joseph S. Vavra
  31. Central Banking after the Crisis: Brave New World or Back to the Future? Replies to a questionnaire sent to central bankers and economists By Emmanuel Carré; Jézabel Couppey-Soubeyran; Dominique Plihon; Marc Pourroy
  32. Are there any Animal Spirits behind the Scenes of the Euro area Sovereign Debt Crisis? By Emmanuel Mamatzakis
  33. Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy By Cosar, A. Kerem; Guner, Nezih; Tybout, James
  34. Auswirkungen der Arbeitsmarktöffnung am 1. Jänner 2014 auf den Wirtschafts- und Arbeitsstandort Österreich By Helmut Hofer; Michael Landesmann; Isilda Mara; Philip Schuster; Gerlinde Titelbach; Hermine Vidovic
  35. A Quest for Leading Indicators of the Turkish Unemployment Rate By H. Burcu Gurcihan; Gonul Sengul; Arzu Yavuz
  36. A Path Through the Wilderness: Time Discounting in Growth Models By Pedro Garcia Duarte
  37. The Bank of England and the British Economy, 1890-1913 By Nicholas Dimsdale
  38. Impact of money supply on stock bubbles By Sirucek, Martin
  39. Missing aggregate dynamics: on the slow convergence of lumpy adjustment models By David Berger
  40. Crowding Out Redefined: The Role of Reserve Accumulation By Carmen M. Reinhart; Takeshi Tashiro
  41. Topical issues related to the formation of the Islamic financial system: at the intersection of philosophy and practice By Magomet Yandiev
  42. La modélisation des interactions entre les corrélations et les volatilités des marchés financiers Marocain, Français, Américain et Japonais By Chiny, Faycal
  43. Inference on Impulse Response Functions in Structural VAR Models By Atsushi Inoue; Lutz Kilian
  44. Do oil price increases cause higher food prices? By Baumeister, Christiane; Kilian, Lutz
  45. Solow's Struggle with Medium-Run Macroeconomics: 1956-1995 By Michaël Assous
  46. Fiscal policy and MPC heterogeneity By Jappelli, Tullio; Pistaferri, Luigi
  47. Forecasting and Tracking Real-Time Data Revisions in Inflation Persistence By Tierney, Heather L.R.
  48. Forecasting the real price of oil in a changing world: A forecast combination approach By Baumeister, Christiane; Kilian, Lutz
  49. Who Creates Jobs? Estimating Job Creation Rates at the Firm Level By Huber, Peter; Oberhofer, Harald; Pfaffermayr , Michael
  50. Estimates of uncertainty around budget forecasts By John Clark; Caroline Gibbons; Susan Morrissey; Joshua Pooley; Emily Pye; Rhett Wilcox; Luke Willard
  51. Investment in financial literacy, social security and portfolio choice By Jappelli, Tullio; Padula, Mario
  52. Estimating the Number of Guaranteed Income Supplement Recipients Who Have Mistakenly Saved in Registered Retirement Savings Plans and Registered Pension Plans By Veall, Michael R.
  53. A comparison of numerical methods for the solution of continuous-time DSGE models By Juan Carlos Parra-Alvarez
  54. Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions By Andreas Buehn; Friedrich Schneider
  55. The Consumer Price Index: Recent Developments By Diewert, Erwin
  56. The Political intergenerational welfare state: A Unified framework By Monisankar Bishnu; Min Wang
  57. Taking Stock : An Update on Vietnam's Recent Economic Developments By World Bank
  58. Intergenerational Mobility and the Informative Content of Surnames By Maia Guell (The University of Edinburgh, CEP (LSE), CEPR & IZA), Jose V. Rodriguez Mora (The University of Edinburgh and CEPR), Christopher I. Telmer (Tepper School of Business, Carnegie Mellon University)
  59. "Hierarchy of Ideals in Market Interactions: An Application to the Labor Market" By Aurelie Charles
  60. Turkiye’de Konjonkturel Etkilerden Arindirilmis Cari Islemler Dengesi By Hakan Kara; Cagri Sarikaya

  1. By: Mara Pirovano (University of Antwerp, Faculty of Applied Economics; Catholic University of Leuven, Center of Economic Studies)
    Abstract: This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances.
    Keywords: DSGE model, capital inflows, financial frictions, liability dollarization, financial stability
    JEL: E44 E47 E52 F41 F47
    Date: 2013–11
  2. By: Russo, Alberto; Riccetti, Luca; Gallegati, Mauro
    Abstract: The aim of this paper is to investigate the relationship between increasing inequality and financial fragility in an agent based macroeconomic model. We analyse the effects of a non-linear relationship between wealth and consumption on the evolution of the economic system. Preliminary results show that more inequality rises macroeconomic volatility, increasing the likelihood of observing large unemployment crises.
    Keywords: agent-based model, business cycle, inequality, crisis
    JEL: C63 D31 E21 E32
    Date: 2013–06
  3. By: Alessandro Beber; Michael W. Brandt; Maurizio Luisi
    Abstract: We propose a simple cross-sectional technique to extract daily factors from economic news released at different times and frequencies. Our approach can effectively handle the large number of different announcements that are relevant for tracking current economic conditions. We apply the technique to extract real-time measures of inflation, output, employment, and macroeconomic sentiment, as well as corresponding measures of disagreement among economists about these indices. We find that our procedure provides more timely and accurate forecasts of future changes in economic conditions than other real-time forecasting approaches.
    JEL: E0 E17 E27 E32 E37 E44 G0
    Date: 2013–11
  4. By: Bruna Škarica
    Abstract: This paper analyses the determinants of the changes in non-performing loans (NPL) ratio in selected European emerging markets. The model was estimated on a panel dataset using fixed effects estimator for seven Central and Eastern European (CEE) countries between Q3:2007 and Q3:2012. The analyzed countries are Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Romania and Slovakia. Although the literature on NPLs is quite extensive, this is the first empirical research on the countries of CEE region using aggregate, country – level data on problem loans. The results suggest that the primary cause of high levels of NPLs is an economic slowdown, which is evident from statistically significant and economically large coefficients on GDP, unemployment and inflation rate.
    Keywords: non-performing loans, macro-financial linkages, Central and Eastern Europe, panel regressions, financial stability
    JEL: E32 E44 E52 G10
    Date: 2013–11–19
  5. By: Pelin Ilbas (National Bank of Belgium, Research Department); Øistein Røisland (Norges Bank); Tommy Sveen (BI Norwegian Business School)
    Abstract: There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.
    Keywords: Model uncertainty, Optimal control, Simple rules
    JEL: E52 E58
    Date: 2013–11
  6. By: Lewis, Vivien; Stevens, Arnoud
    Abstract: How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the extent to which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.17 percent. While markup fluctuations due to sticky prices or exogenous shocks account for a large proportion of US inflation variability, endogenous changes in desired markups also play a non-negligible role.
    Date: 2013–10
  7. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Koustas, Dmitri (University of California, Berkeley)
    Abstract: The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the Eurosclerosis experience of the 1980s than traditional V-shaped recoveries of the past. In this paper, we revisit possible explanations for this rising persistence. First, we argue that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, so these cannot explain the rising persistence of unemployment. Second, monetary and fiscal policies can account for only part of the evolving unemployment persistence. Therefore, we turn to a third class of explanations: propagation mechanisms. We focus on factors consistent with four other cyclical patterns which have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. These factors include declining labor mobility, changing age structures, and the decline in trust among Americans. To determine how these factors affect unemployment persistence, this paper exploits regional variation in labor market outcomes across Western Europe and North America during 1970-1990, in contrast to most previous work focusing either on cross-country variation or regional variation within countries. The results suggest that only cultural factors can account for the rising persistence of unemployment in the U.S., but the evolution in mobility and demographics over time should have more than offset the effects of culture.
    Keywords: unemployment persistence, labor mobility, trust, demographics
    JEL: E24 E32 E52 J64 R11 R23
    Date: 2013–11
  8. By: Coenen, Günter; Warne, Anders
    Abstract: This paper employs stochastic simulations of the New Area-Wide Model - microfounded open-economy model developed at the ECB - to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent financial crisis. Using a formal measure of the balance of risks, which is derived from policy-makers' preferences about inflation outcomes, we first show that downside risks to price stability were considerably greater than upside risks during the first half of 2009, followed by a gradual rebalancing of these risks until mid-2011 and a renewed deterioration thereafter. We find that the lower bound has induced a noticeable downward bias in the risk balance throughout our evaluation period because of the implied amplification of deflation risks. We then illustrate that, with nominal interest rates close to zero, forward guidance in the form of a time-based conditional commitment to keep interest rates low for longer can be successful in mitigating downside risks to price stability. However, we find that the provision of time-based forward guidance may give rise to upside risks over the medium term if extended too far into the future. By contrast, time-based forward guidance complemented with a threshold condition concerning tolerable future inflation can provide insurance against the materialisation of such upside risks. --
    Keywords: monetary policy,deflation,zero lower bound,forward guidance,DSGE modelling,euro area
    JEL: E31 E37 E52 E58
    Date: 2013
  9. By: Ana Grdović Gnip (Faculty of Economics & Tourism Dr. Mijo Mirković, Juraj Dobrila University of Pula and Faculty of Economics, University of Ljubljana)
    Abstract: The aim of this paper is to assess the stabilization effects of fiscal policy in Croatia in a structural vector autoregression framework as proposed by Blanchard and Perotti (2002). Empirical studies of fiscal policy effects show that results are contradictory and do not unanimously agree, except for one fact: a positive government spending shock has a positive effect on output. This study inspects the effects of government spending and tax shocks on a set of macroeconomic variables (output, prices, interest rates, private consumption, private investment, employment and wages). Results prove that the fiscal transmission mechanism in Croatia works mainly in a Keynesian manner. Output reacts negatively to a tax shock and positively to government spending shock. The output multiplier is above 2 at impact and the effect is significant throught the whole time span. The negative effect of the tax shock is mostly driven by indirect (not direct) taxes, while the positive effect of a government spending shock is influenced by government consumption and government investment, but the effect of the latter is more significant when private consumption and private investment responses are observed.
    Keywords: fiscal policy, fiscal multiplier, spending shock, tax shock, SVAR, Croatia
    JEL: C32 E62 H30
    Date: 2013–11–13
  10. By: Mikhail Dmitriev; Jonathan Hoddenbagh
    Abstract: In the financial accelerator literature pioneered by Bernanke, Gertler and Gilchrist (1999) entrepreneurs are myopic and lenders suboptimally choose a safe rate of return on their loans. We derive the optimal lending contract for forward looking entrepreneurs and provide three main results. First, under the optimal contract we find that financial frictions do not amplify business cycle fluctuations. Second, we show that shocks to the variance of unobserved idiosyncratic productivity --- so-called ``risk shocks'' --- have little effect on the real economy under the optimal contract. Third, we find that amplification under the suboptimal contract depends on loose monetary policy: when interest rate setting follows a standard Taylor rule, the financial accelerator is significantly dampened or even reversed.
    JEL: E3
    Date: 2013–11–14
  11. By: Monique Reid and Gideon Du Rand
    Abstract: Mankiw and Reis (2002) propose the Sticky Information Phillips Curve as an alternative to the standard New Keynesian Phillips Curve, to address empirical shortcomings in the latter. In this paper, a Sticky Information Phillips curve for South Africa is estimated, which requires data on expectations of current period variables conditional on sequences of earlier period information sets. In the literature the choice of proxies for the inflation expectations and output gap measures are usually not well motivated. In this paper, we test the sensitivity of model fit and parameter estimates to a variety of proxies. We find that parameter estimates for output gap proxies based either on a simple Hodrik-Prescott filter application or on a Kalman filter estimation of an aggregate production function are significant and reasonable, whereas methods employing direct calculation of marginal costs do not yield acceptable results. Estimates of information updating probability range between 0.69 and 0.81. This is somewhat higher than suggested by alternative methods using micro-evidence (0.65 – 0.70 (Reid, 2012)). Lastly, we find that neither parameter estimates nor model diagnostics are sensitive to the choice of expectation proxy, whether it be constructed from surveyed expectations or the ad hoc VAR based forecasting methods.
    Keywords: South Africa, sticky information, Phillips curve
    JEL: E31 E3 E52
    Date: 2013
  12. By: Zsolt Darvas
    Abstract: 1) Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe. 2) In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory. 3) The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro-area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bank’s Outright Monetary Transactions could reduce borrowing costs.
    Keywords: competitiveness adjustment, debt sustainability, euro area, inflation
    JEL: E31 H68
    Date: 2013–10
  13. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shian-Yu Liao (Department of Economics, National Taiwan University, Taipei, Taiwan)
    Abstract: Evidence indicates that consumer durables are more flexibly priced than nondurable goods and services. In otherwise standard two-sector neoclassical sticky-price models with flexible durable prices, following monetary tightening, nondurables decrease but consumer durables increase. Friction in lending between households can resolve the comovement problem if durable prices are sticky. However, if durable prices are flexible, friction in lending fails to generate joint decline. This paper resolves the co-movement problem by adding capital into a model with flexible durable prices and friction in lending. When capital is needed in production, monetary tightening reduces the relative price of durables which induces investment and decreases firms’ real profits in the short run. Due to fewer profits remitted from firms, savers have a lower disposable income and cannot increase expenditures on consumer durables as much as otherwise. As a consequence, aggregate consumer durables decrease and there is a joint decline of nondurables and consumer durables.
    Keywords: Credit constraints, capital, consumer durables, nondurables, sticky price, comovement
    JEL: E21 E52 G10
    Date: 2013–10
  14. By: Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
    Abstract: We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
    JEL: E20 E21 E44 F32 G21
    Date: 2013–11
  15. By: Shigeru Fujita; Giuseppe Moscarini
    Abstract: Using data from the Survey of Income and Program Participation (SIPP) covering 1990-2011, we document that a surprisingly large number of workers return to their previous employer after a jobless spell and experience more favorable labor market outcomes than job switchers. Over 40% of all workers separating into unemployment regain employment at their previous employer; over a fifth of them are permanently separated workers who did not have any expectation of recall, unlike those on temporary layoff. Recalls are associated with much shorter unemployment duration and better wage changes. Negative duration dependence of unemployment nearly disappears once recalls are excluded. We also find that the probability of finding a new job is more procyclical and volatile than the probability of a recall. Incorporating this fact into an empirical matching function significantly alters its estimated elasticity and the time-series behavior of matching efficiency, especially during the Great Recession. We develop a canonical search-and-matching model with a recall option where new matches are mediated by a matching function, while recalls are free and triggered both by aggregate and job-specific shocks. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well our cross-sectional and cyclical facts through selection of recalled matches.
    JEL: E24 E32 J63
    Date: 2013–11
  16. By: Yasuo Hirose; Atsushi Inoue
    Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound constraint on the nominal interest rate. Our experiments show that most of the parameter estimates in a standard sticky-price DSGE model are not biased although some biases are detected in the estimates of the monetary policy parameters and the steady-state real interest rate. Nevertheless, in our baseline experiment, these biases are so small that the estimated impulse response functions are quite similar to the true impulse response functions. However, as the probability of hitting the zero lower bound increases, the biases in the parameter estimates become larger and can therefore lead to substantial differences between the estimated and true impulse responses.
    Date: 2013–09
  17. By: Kurmas Akdogan
    Abstract: We explore the asymmetric behaviour of inflation around the target level for inflation-targeting emerging markets. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out-of-sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high, especially at long-horizons.
    Keywords: Inflation, forecasting, nonlinear adjustment
    JEL: C32 E37
    Date: 2013
  18. By: Monisankar Bishnu (Indian Statistical Institute, New Delhi); Chetan Ghate (Indian Statistical Institute, New Delhi); Pawan Gopalakrishnan (Indian Statistical Institute, New Delhi)
    Abstract: We construct a tractable endogenous growth model with production externalities in which the public capital stock augments investment speci?c technological change. We characterize the ?rst best ?scal policy and show that there exist several labor and capital tax-subsidy combinations that decentralize the planner?s growth rate. The optimal factor income tax mix is therefore indeterminate which gives the planner the flexibility to choose policy rules from a large set. Our model explains why many advanced economies experiencing similar growth rates have widely varying factor income tax rates.
    Keywords: Investment Specific Technological Change, Endogenous Growth, Factor Income Taxation, Welfare, First best fiscal policy, Indeterminacy
    JEL: E2 E6 H2 O4
    Date: 2013–01
  19. By: Ngoc-Sang Pham (Centre d'Economie de la Sorbonne)
    Abstract: This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap.
    Keywords: Monetary economy, liquidity constraint, collateralized asset, infinite horizon, liquidity trap.
    JEL: D52 E5 C62
    Date: 2013–07
  20. By: Vincent Koen; Richard Herd; Sam Hill
    Abstract: China is well-placed to avoid the so-called “middle-income trap” and to continue to converge towards the more advanced economies, even though growth is likely to slow from near double-digit rates in the first decade of this millennium to around 7% at the 2020 horizon. However, in order to sustain vigorous growth and improve the well-being of most citizens, renewed reform momentum is required in a number of areas. The following ones are discussed in this paper: financial sector liberalisation; strengthening competition in markets for goods and services; education, research and innovation. Progress is also needed in other areas, notably in fostering more socially-inclusive forms of urbanisation and more environmentally-friendly growth. En marche pour la prospérité : Réformer pour poursuivre le rattrapage en Chine La Chine est bien placée pour ne pas rester un pays à revenu intermédiaire et continuer à converger vers les économies les plus avancées, même si la croissance est vraisemblablement amenée à ralentir, passant d’un rythme à deux chiffres pendant la première décennie de ce millénaire à environ 7% à l’horizon 2020. Toutefois, le maintien d’une croissance vigoureuse et améliorant le bien-être de la majorité des citoyens nécessite une accélération des réformes dans un certain nombre de domaines. Sont passés en revue dans ce document : la libéralisation du secteur financier ; renforcer la concurrence sur les marchés des biens et services ; l’éducation, la recherche et l’innovation. Des progrès sont également requis dans d’autres domaines, notamment pour promouvoir des formes d’urbanisation socialement plus inclusives et une croissance plus respectueuse de l’environnement.
    Keywords: economic growth, productivity, convergence, patents, innovation, education, credit, research and development, China, living standards, catching-up, international migration, cities, business climate, urbanisation, renminbi, foreign exchange, investment, competition, development, financial sector, intellectual property rights, shadow banking, recherche et développement, droits de propriété intellectuelle, convergence, innovations, migration interne, renminbi, système bancaire parallèle, Chine, niveau de vie, crédit, rattrapage, climat des affaires, urbanisation, villes, brevets, réserves de change, concurrence, développement, secteur financier, éducation, croissance économique, productivité, investissement
    JEL: D61 E20 E22 E23 E24 E27 E42 E44 E52 F21 F23 F31 F32 F43 G23 G28 I25 J11 J21 J24 J61 N15 N25 N35 O11 O14 O15 O16 O19 O24 O31 O32 O34 O38 O47 O53 P21
    Date: 2013–11–12
  21. By: Francesco Zanetti; Federico S. Mandelman
    Abstract: Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs.
    Keywords: Technology shocks, employment, labor market frictions
    JEL: E32
    Date: 2013–11–13
  22. By: Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-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
    Date: 2013–10
  23. By: Joao Ricardo Faria (University of Texas at El Paso); Peter McAdam (University of Surrey)
    Abstract: Following the Arab-Spring protests, we examine macroeconomic interactions between a productive firm and a rent-seeking government characterized by a continuous probability of regime shift. The model is able to rationalize the early growth leaps witnessed in many Arab economies (the “Social Contractâ€), as well as their subsequent stagnation. Although post-Spring outcomes are judged benevolent, the macroeconomic inheritance is dependent on the earlier transition characteristics. The model thus sheds light on Arab economic evolutions, the shifting preferences and technologies of authorities and the likely success of economic reforms.
    JEL: E24 F5 N17
    Date: 2013–11
  24. By: Davies, James B.; Yu, Xiaoyu
    Abstract: This paper explores impacts of recessions on private pensions and retirement savings in Canada. We estimate that the 2008-09 recession saw declines in average family wealth and retirement assets of 11% and 14% respectively. Average wealth recovered by the end of 2010, but retirement assets remained 2% lower than before the recession. Losses were higher for those more exposed to the stock market, such as older workers and retirees with DC pension plans or large RRSPs. Without the recovery the recession would have reduced expected retirement income of future retirees by averages of 3.4% and 11.0% for DB and DC plans respectively. In order to analyze unemployment and early retirement effects, the paper examines a hypothetical economy with a recession once a decade. For DB plans, unemployment caused by recessions can reduce pensions by up to 25% if it strikes late and reduces final average pay. Early retirement may reduce DB pensions up to 50%. Overall, effects tend to be smaller with DC plans, but early career unemployment or early retirement can have substantial impacts. Enhancing CPP/QPP is compared with wide adoption of Pooled RPPs (PRPPs). Expected retirement income is higher with PRPPs but so is risk.
    Keywords: Pensions, Retirement, Recessions, Income, Assets, Wealth
    JEL: D31 E21 E32 H55
    Date: 2013–04–29
  25. By: Peter Martey Addo (Centre d'Economie de la Sorbonne et Università di Venezia - Dipartimento di Economia); Monica Billio (Università di Venezia - Dipartimento di Economia); Dominique Guegan (Centre d'Economie de la Sorbonne)
    Abstract: We propose a transparent way of establishing a turning point chronology for the Euro-zone business cycle. Our analysis is achieved by exploiting the concept of recurrence plots, in particular distance plots, to characterize and detect turning points of the business cycle. Firstly, we apply the concept of recurrence plots on the US Industrial Production Index (IPI) series: this serves as a benchmark for our analysis since it already exists a reference chronology for the US business cycle, provided by the Dating Committee of the National Bureau of Economic Research (NBER). We then use this concept to construct a turning point chronology for the Euro-zone business cycle. In particular, we show that this approach permits to detect turning points and study the business cycle without a priori assumptions on the statistical properties of the underlying economic indicator.
    Keywords: Economic cycles, Euro-zone, recurrence plots, turning points
    JEL: C14 C40 E32
    Date: 2013–03
  26. By: Yuriy Gorodnichenko; Jae Song; Dmitriy Stolyarov
    Abstract: We analyze lifetime earnings histories of white males during 1960-2010 and categorize the labor force status of every worker as either working full-time, partially retired or fully retired. We find that the fraction of partially retired workers has risen dramatically (from virtually 0 to 15 percent for 60-62 year olds), and that the duration of partial retirement spells has been steadily increasing. We estimate the response of retirement timing to variations in unemployment rate, inflation and housing prices. Flows into both full and partial retirement increase significantly when the unemployment rate rises. Workers around normal retirement age are especially sensitive to variations in the unemployment rate. Workers who are partially retired show a differential response to a high unemployment rate: younger workers increase their partial retirement spell, while older workers accelerate their transition to full retirement. We also find that high inflation discourages full-time work and encourages partial and full retirement. Housing prices do not have a significant impact on retirement timing.
    JEL: E24 H55 J26
    Date: 2013–11
  27. By: Carmen M. Reinhart
    Abstract: This Chartbook, which is a companion piece to Carmen M. Reinhart and Takeshi Tashiro (2013) “Crowding Out Redefined: The Role of Reserve Accumulation,” focuses on nine Asian economies: China, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore and Thailand. Like its predecessor (Reinhart, 2010), it provides a pictorial history, on a country-by-country basis. In addition to public debt, we trace out the evolution of its composition between domestic and external borrowing. Total external debt (public and private) and domestic credit are also included through 2013. This combination gives a broad (but not complete) picture of a country’s indebtedness. It should be ideally supplemented (where relevant) by indicators and trends in the shadow banking sector, as discussed in Shin (2013). It is also timeline of a country’s creditworthiness and financial turmoil (including its history, if any, with IMF programs).
    JEL: E51 F3 G01 H63 N25
    Date: 2013–11
  28. By: Peter Simmons; Yuanyuan Xie
    Abstract: The 2007-2009 great recession saw sharp drops in equity values world wide and associated strong real effects. We develop an world CAPM approach, extended to allow for infinite risk/return opportunities, short sales constraints, borrowing and saving rate differentials. With MSCI monthly data, we use this to estimate tangent portfolios, standard deviations and market prices of risk in each country. We find short selling has a strong impact, in the crisis the net supply of equity finance vanished. If short selling is impossible, investors should have switched into cash. Postcrisis it rose but was still lower than precrisis.
    Keywords: Great recession, World CAPM, Supply of risky finance
    JEL: G01 G18 E44 E65
    Date: 2013–11
  29. By: Jonathan Hoddenbagh; Mikhail Dmitriev
    Abstract: We study cooperative and non-cooperative fiscal policy in an open economy model where cross-country risk sharing is imperfect and countries face terms of trade externalities. We show that the optimal form of fiscal cooperation, or fiscal union, is defined by one parameter: the Armington elasticity of substitution between goods from different countries. We prove that members of a fiscal union should: (1) harmonize steady state income tax rates when the Armington elasticity is low in order to ameliorate terms of trade externalities; and (2) send fiscal transfers across countries when the Armington elasticity is high in order to improve risk sharing. Our analytical predictions hold both outside of and within currency unions. For standard calibrations, we find that the welfare gain from the optimal fiscal union is as high as 5% of permanent consumption when countries are able to trade safe government bonds, and can approach 20% when countries lose access to international financial markets. We also find that labor mobility significantly improves welfare and alleviates the need for a transfer union entirely.
    JEL: E50 F41 F42
    Date: 2013–11–14
  30. By: David Berger; Joseph S. Vavra
    Abstract: Time-variation in microdata matters empirically for aggregate dynamics: using confidential BLS data we document a robust positive relationship between aggregate exchange rate pass-through and the dispersion of item-level price changes. Furthermore, we find large time-variation in microeconomic dispersion. Ignoring this variation causes huge, time-varying bias when estimating pass-through. For example, constant pass-through specifications are overstated by 50 percent during the mid-1990s and understated by 200 percent during the 2008 trade-collapse. This purely empirical result arises naturally if items differ in their "responsiveness" to cost shocks. More responsive items should have greater price change dispersion and pass-through. We formally estimate price-setting models with alternative forms of heterogeneity and show only heterogeneous responsiveness explains our results. Interestingly, our evidence does not support "uncertainty" shocks as an explanation for countercyclical dispersion but does suggest promising alternatives.
    JEL: E10 E30 E31 F31
    Date: 2013–11
  31. By: Emmanuel Carré (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-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; macroprudential policy; financial stability
    Date: 2013–10
  32. By: Emmanuel Mamatzakis
    Abstract: This paper reveals the underlying market’s preferences over the on going Euro area sovereign debt crisis. It builds on a loss function with reference to the ‘basis’, the difference between the spread over swap and Credit Default Swap (CDS) for sovereign bonds. This loss function is general and flexible as it nests both a lin-lin and quad-quad functional form. The sample covers those Euro area member states most at risk of default namely: Greece, Portugal, Ireland, Spain and Italy. Results show that market’s preferences for some Euro area countries, in particular Greece, have shifted towards pessimism post the Emergency Financing Mechanism (EFM) and troika. If anything, market’s reading of Euro area debt crisis points to the direction of serious misalignments post EFM and troika fuelled by growing pessimism and thus uncertainty. Having derived market’s preferences, we explore the impact of some specific market characteristics and fiscal rules and fiscal institutions on those preferences. Fiscal rules and institutions appear to improve market’s perception over fiscal sustainability, whilst the 3M Euribor, 3M Eurepo, outstanding debt to GDP, and iTraxx main investment grade index also shape market’s preferences.
    Keywords: Economic Voting; Greek Crisis; EU; Government Constraints; Accountability
    JEL: E43 E44 G00 G01 G10
    Date: 2013–07
  33. By: Cosar, A. Kerem (University of Chicago Booth School of Business); Guner, Nezih (MOVE, Barcelona); Tybout, James (Pennsylvania State University)
    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
  34. By: Helmut Hofer; Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Isilda Mara (The Vienna Institute for International Economic Studies, wiiw); Philip Schuster; Gerlinde Titelbach; Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary Impact of opening full labour market access to Bulgarians and Romanians as of 1 January 2014 the case of Austria The study analyses the migration potential and the impact on Austria’s economy that is to be expected after the lifting of access restrictions for Bulgarian and Romanian nationals as of 1 January 2014. Estimates show that in the years 2014 and 2015 net migration from the EU-2 to Austria will account for 5700 and 5300 additional migrants, respectively, solely due to the full liberalisation of the labour market. About three quarters of EU-2 migrants are expected to come from Romania. The macroeconomic impact of opening the labour market in January 2014 is being assessed by using the general equilibrium model TaxLab. Given the fact that persons with a higher educational level may work in Austria already now under certain conditions, it can be expected that after the liberalisation larger shares of persons with a lower level of education will migrate to Austria. The simulations reveal that in the years following the opening of the labour market, employment will be by about 6700 persons higher than it would be without liberalisation in 2014 and by about 10,300 persons above that level in 2015. The employment effect results not only from the higher population flows but also from the activation of a part of those Bulgarian and Romanian migrants who have been resident in Austria already before the liberalisation. The additional labour force supply together with labour market frictions cause a temporary marginal increase in the overall unemployment rate by only 0.03 percentage points in both 2014 and 2015. The additional labour supply will have a very minor dampening effect on wage growth. As compared to a scenario where the current restrictions are maintained, wages will rise by about 0.2 percentage points more slowly. The strongest losses in wage growth will occur for the low-skilled and the smallest losses in the case of the high-skilled workforce. As a result of the rise in employment and the increased capital stock, value-added will rise as well. The simulation shows that gross domestic product in 2014 and 2015 will be higher by about 0.09% and 0.13%, respectively, than it would be without labour market liberalisation.
    Keywords: migration, EU accession – Bulgaria and Romania, impact on EU labour markets, impact on Austria, labour mobility, forecasts and impact analysis
    JEL: J00 J61 J21 J11 J82 E17
  35. By: H. Burcu Gurcihan; Gonul Sengul; Arzu Yavuz
    Abstract: This paper examines various variables that are likely to be associated with the Turkish non-agricultural unemployment rate in search of indicators to summarize and forecast the state of the labor market. We consider a total of 72 series that reflect aggregate economic activity, labor market conditions, expectations over future economic activity, global economic trends and credit conditions. We use Granger causality tests, correlation analyses and individual out of sample forecast performance of these series to assess their informativeness about the unemployment rate. We find that Business Tendency Survey indicators and some series that measure the global economic conditions satisfy all three criteria of informativeness. Moreover, the composite index constructed from series selected based upon out of sample predictive power improves short-term forecast performance of the autoregressive benchmark model, where we use only lagged values of the unemployment rate.
    Keywords: Leading Indicator,Unemployment Rate,GrangerCausality Test
    JEL: C32 E24
    Date: 2013
  36. By: Pedro Garcia Duarte
    Abstract: Although economists have recognized long ago that “time enters into all economic questions”, the ways they treated and modeled time has varied substantially in the last century. While in the 1930s there was a distinctive Cambridge tradition against discounting utilities of future generations, to which Frank Ramsey subscribed, postwar neoclassical growth economists (of the “Ramsey-Cass-Koopmans model”) applied the discount factor either to individual’s or to social planner’s decision-making as a technical requirement of dynamic general equilibrium models. My goal in this article is to shed some historical light on how a practice that was condemned as ethically indefensible when applied to intergenerational comparisons became a technical requirement in dynamic models of either a consumer or a planner deciding the intertemporal allocation of resources.
    Keywords: time discount; growth models; Ramsey-Cass-Koopmans model; economic dynamics
    JEL: B22 B23 E32
    Date: 2013–11–12
  37. By: Nicholas Dimsdale
    Abstract: The paper examines the behavior of the British economy 1890-1913 by using a newly assembled quarterly data set.� This provides a basis for estimating a small macroeconomic model, which can be used to explore the relationship between the policy responses of the Bank of England and the course of the economy.� It is one of the few papers to make use of UK quarterly data and seeks to extend the earlier work of Goodhart (1972).� The paper goes on to look into the determinants of external and internal gold flows and relates these to an extensive historical literature.� The outcome is compared with the traditional representation of the working of the gold standard, as set out in the well-known Interim Report of the Cunliffe Committee (1918).� It is found that operation of the model accords in general with the views of the Committee.� The views of the Committee were applicable to the pre 1914 gold standard, but less so to the restored interwar gold standard. The next question to be considered is how far the Bank observed 'The Rules of the Game' in the sense of relating the reserves of the commercial banks to the gold reserves held at the Bank.� It is shown that the relationship between the Bank's reserves and the reserves of the commercial banks was severely distorted by the massive gold movements of 1895-6.� These flows were associated with US political conflicts over the monetization of silver.� With the exception of this episode, the Bank is shown to have had a limited measure of discretion in operating the gold standard.� The final question to be considered is whether a similar model can be estimated from US data and related to the views of Friedman and Schwartz.
    Date: 2013–10–24
  38. By: Sirucek, Martin
    Abstract: This article is focus on the effect and implications of changes in money supply in US on stock bubble rise on the US capital market, which is represented by the Dow Jones Industrial Average index. This market was chosen according to the market capitalization. The attention of paper is focused on problems, if according to the results of empirical analysis is the money supply significant factor which cause the bubbles and if during the time growth the significancy and impact of this macroeconomic factor on stock index.
    Keywords: money supply, stock market, stock bubbles, granger causality, Dickey-Fuller test
    JEL: E52 G15
    Date: 2013–10–07
  39. By: David Berger (Northwestern University)
    Abstract: When the microeconomic adjustment underlying an aggregate variable is lumpy, conventional VAR procedures often imply less persistence than there really is. This is relevant for non-, semi- and structural models in macroeconomics. The extent to which persistence is underestimated decreases with the level of aggregation, yet convergence is very slow and the bias is likely to be present for sectoral data in general and, in some cases, for aggregate series as well. Paradoxically, while idiosyncratic productivity and demand shocks smooth away microeconomic non-convexities and are often used as a justification for approximating aggregate dynamics with linear models, their presence exacerbates the bias. We propose procedures to correct for the bias and provide various applications. In one of them, the difference in the speed with which inflation responds to sectoral and aggregate shocks disappears once we account for the "missing aggregate dynamics" bias.
    Date: 2013
  40. By: Carmen M. Reinhart; Takeshi Tashiro
    Abstract: It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased “liability” home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.
    JEL: E02 E5 F30 F4 G01 G15 H6
    Date: 2013–11
  41. By: Magomet Yandiev (Department of Economics, Lomonosov Moscow State University)
    Abstract: The so-called Islamic finance is an intensively developing segment of the world finance. It puts a great amount of not so much practical but complex theoretical questions to the financial regulator and professional participants of financial markets. In search of answers financial analytics have to use some philosophical tools of scientific analysis and decision-making. Just a question to illustrate the problem: “At what level (protein, cell, DNA, molecule, atom, proton, etc.) does pork cease to be meat tabooed for Muslims and become a biological material that may be used?â€
    Keywords: Islamic finance, Islamic banking, riba, gharar, maisir
    JEL: F29 F30 G00 E44
    Date: 2013–11
  42. By: Chiny, Faycal
    Abstract: L'analyse des corrélations, constitue le pilier d’une stratégie réussie de diversification du portefeuille d’actions. Plus faibles sont les corrélations au sein d’un même portefeuille, plus importants seront les profits potentiels que nous pouvons en obtenir. Dans un contexte local, ceci est équivalent à l’étude des corrélations entre tous les rendements des valeurs ciblées par un investisseur sur un seul marché. Mais à l’échelle internationale, cette tache devient plus difficile car on est appelé à analyser toutes les relations entres les rendements sur les différents marchés internationaux. Erb, Harvey et Viskant (1994) et Longin et Solnik (1995), ont démontré que ces corrélations, varient avec le temps selon des phases cycliques dans les économies. Nous allons alors étudier au niveau international, la relation entre les corrélations et la volatilité des rendements des indices boursiers de 4 pays : le Maroc, la France, les Etas Unis et le Japon, et ce, du 01/01/2002 au 31/12/2012 et essayer de trouver s’il existe ou non, une relation de cause à effet
    Keywords: Variation des corrélations dans le temps, modèle GARCH, gestion du portefeuille
    JEL: C22 E44 G15
    Date: 2013–11–18
  43. By: Atsushi Inoue; Lutz Kilian
    Abstract: Skepticism toward traditional identifying assumptions based on exclusion restrictions has led to a surge in the use of structural VAR models in which structural shocks are identified by restricting the sign of the responses of selected macroeconomic aggregates to these shocks. Researchers commonly report the vector of pointwise posterior medians of the impulse responses as a measure of central tendency of the estimated response functions, along with pointwise 68 percent posterior error bands. It can be shown that this approach cannot be used to characterize the central tendency of the structural impulse response functions. We propose an alternative method of summarizing the evidence from sign-identified VAR models designed to enhance their practical usefulness. Our objective is to characterize the most likely admissible model(s) within the set of structural VAR models that satisfy the sign restrictions. We show how the set of most likely structural response functions can be computed from the posterior mode of the joint distribution of admissible models both in the fully identified and in the partially identified case, and we propose a highest-posterior density credible set that characterizes the joint uncertainty about this set. Our approach can also be used to resolve the long-standing problem of how to conduct joint inference on sets of structural impulse response functions in exactly identified VAR models. We illustrate the differences between our approach and the traditional approach for the analysis of the effects of monetary policy shocks and of the effects of oil demand and oil supply shocks.
    Date: 2013–07
  44. By: Baumeister, Christiane; Kilian, Lutz
    Abstract: U.S. retail food price increases in recent years may seem large in nominal terms, but after adjusting for inflation have been quite modest even after the change in U.S. biofuel policies in 2006. In contrast, increases in the real prices of corn, soybeans, wheat and rice received by U.S. farmers have been more substantial and can be linked in part to increases in the real price of oil. That link, however, appears largely driven by common macroeconomic determinants of the prices of oil and agricultural commodities rather than the pass-through from higher oil prices. We show that there is no evidence that corn ethanol mandates have created a tight link between oil and agricultural markets. Rather increases in food commodity prices not associated with changes in global real activity appear to reflect a wide range of idiosyncratic shocks ranging from changes in biofuel policies to poor harvests. Increases in agricultural commodity prices in turn contribute little to U.S. retail food price increases, because of the small cost share of agricultural products in food prices. There is no evidence that oil price shocks have caused more than a negligible increase in retail food prices in recent years. Nor is there evidence for the prevailing wisdom that oil-price driven increases in the cost of food processing, packaging, transportation and distribution are responsible for higher retail food prices. Finally, there is no evidence that oil-market specific events or for that matter U.S. biofuel policies help explain the evolution of the real price of rice, which is perhaps the single most important food commodity for many developing countries. --
    Keywords: globalization,inflation,consumer prices,pass-through,agriculture,crop prices,corn,ethanol,biofuel,food crisis,food price volatility
    JEL: Q42 Q11 Q43 E31
    Date: 2013
  45. By: Michaël Assous (GREDEG CNRS; University of Paris 1)
    Abstract: Solow has repeatedly called for the development of models that combine equilibrium and out-of equilibrium outcomes or what he called a macroeconomics of the medium-run. This paper recounts the history of Solow’s different attempts to address this issue. It starts in early 1950s when Solow developed his long-run growth model and it ends in the mid-1990s with the publication of A Critical Essay on Modern Macroeconomic Theory co-written with Frank Hahn. This narrative involves different economists associated with various research traditions, going from the neo-classical synthesis in the 1960s, the New Classical Economics in the 1970s and the New Keynesianism in the 1980s.
    Keywords: economic growth, Robert Solow, Medium-Run macroeconomics, dynamics, multiple equilibria
    JEL: B22 O4 E12 E13 N1 B31
    Date: 2013–11
  46. By: Jappelli, Tullio; Pistaferri, Luigi
    Abstract: We use responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume. We find that the marginal propensity to consume (MPC) is 48 percent on average, and that there is substantial heterogeneity in the distribution. We find that households with low cash-on-hand exhibit a much higher MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent. Furthermore, we find that redistributing 1% of national disposable income from the top to the bottom decile of the income distribution would boost aggregate consumption by 0.33%. --
    Keywords: Marginal Propensity to Consume,Fiscal Policy,Consumption Heterogeneity
    JEL: E21 D91
    Date: 2013
  47. By: Tierney, Heather L.R.
    Abstract: The purpose of this paper is to examine the forecasting ability of sixty-two vintages of revised real-time PCE and core PCE using nonparametric methodologies. The combined fields of real-time data and nonparametric forecasting have not been previously explored with rigor, which this paper remedies. The contributions of this paper are on the three fronts of (i.) analysis of real-time data; (ii.) the additional benefits of using nonparametric econometrics to examine real-time data; and (iii.) nonparametric forecasting with real-time data. Regarding the analysis of real-time data revisions, this paper finds that the third quarter releases of real-time data have the largest number of data revisions. Secondly, nonparametric regressions are beneficial in utilizing the information provided by data revisions, which typically are just a few tenths in magnitude but are significant enough to statistically affect regression results. The deviations in window widths can be useful in identifying potential problematic time periods such as a large spike in oil prices. The third and final front of this paper regards nonparametric forecasting and the best performing real-time data release with the three local nonparametric forecasting methods outperforming the parametric benchmark forecasts. Lastly, this paper shows that the best performing quarterly-release of real-time data is dependent on the benchmark revision periods. For vintages 1996:Q1 to 2003:Q3, the second quarter real-time data releases produce the smaller RMSE 58% of the time and for vintages 2003:Q4 to 2011:Q2, the third quarter real-time data releases produce forecasts with smaller RMSE approximately 60% of the time.
    Keywords: Nonparametric Forecasting, Real-Time Data, Monetary Policy, Inflation Persistence
    JEL: C14 C53 E52
    Date: 2013–11–08
  48. By: Baumeister, Christiane; Kilian, Lutz
    Abstract: The U.S. Energy Information Administration (EIA) regularly publishes monthly and quarterly forecasts of the price of crude oil for horizons up to two years, which are widely used by practitioners. Traditionally, such out-of-sample forecasts have been largely judgmental, making them difficult to replicate and justify. An alternative is the use of real-time econometric oil price forecasting models. We investigate the merits of constructing combinations of six such models. Forecast combinations have received little attention in the oil price forecasting literature to date. We demonstrate that over the last 20 years suitably constructed real-time forecast combinations would have been systematically more accurate than the no-change forecast at horizons up to 6 quarters or 18 months. MSPE reduction may be as high as 12% and directional accuracy as high as 72%. The gains in accuracy are robust over time. In contrast, the EIA oil price forecasts not only tend to be less accurate than no-change forecasts, but are much less accurate than our preferred forecast combination. Moreover, including EIA forecasts in the forecast combination systematically lowers the accuracy of the combination forecast. We conclude that suitably constructed forecast combinations should replace traditional judgmental forecasts of the price of oil. --
    Keywords: forecast combination,real-time data,model misspecification,structural change,oil price
    JEL: Q43 C53 E32
    Date: 2013
  49. By: Huber, Peter (Austrian Institute of Economic Research); Oberhofer, Harald (University of Salzburg); Pfaffermayr , Michael (University of Innsbruck)
    Abstract: This paper analyzes econometric models of the Davis, Haltiwanger and Schuh (1996) job creation rate. In line with the most recent job creation literature, we focus on employment-weighted OLS estimation. Our main theoretical result reveals that employment-weighted OLS estimation of DHS job creation rate models provides biased marginal effects estimates. The reason for this is that by definition, the error terms for entering and exiting firms are non-stochastic and non-zero. This violates the crucial mean independence assumption requiring that the conditional expectation of the errors is zero for all firms. Consequently, we argue that firm entries and exits should be analyzed with separate econometric models and propose alternative maximum likelihood estimators which are easy to implement. A small-scale Monte Carlo analysis and an empirical exercise using the population of Austrian firms point to the relevance of our analytical findings.
    Keywords: DHS job creation rate; firm size; firm age; maximum likelihood estimation; three-part model; multi-part model; Monte Carlo simulation
    JEL: C18 C53 D22 E24 L25 L26 M13
    Date: 2013–11–15
  50. By: John Clark (Treasury, Government of Australia); Caroline Gibbons (Treasury, Government of Australia); Susan Morrissey (Treasury, Government of Australia); Joshua Pooley (Treasury, Government of Australia); Emily Pye (Department of Foreign Affairs and Trade, Australian Aid program, Government of Australia); Rhett Wilcox (Treasury, Government of Australia); Luke Willard (Treasury, Government of Australia)
    Abstract: We use past forecast errors to construct confidence intervals around Australian Government Budget forecasts of key economic and fiscal variables. These confidence intervals provide an indication of the extent of uncertainty around the point estimate forecasts presented in the Budget.
    Keywords: Confidence intervals, forecast errors
    JEL: E17 H68
    Date: 2013–11
  51. By: Jappelli, Tullio; Padula, Mario
    Abstract: We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return and the cost of stock market participation. Since literacy depreciates over time and has a cost related to current consumption, investors simultaneously choose how much to save, the portfolio allocation, and the optimal investment in literacy. This last depends on households' resources, its preference parameters and on how much financial literacy affects the returns on risky assets and the stock market participation cost, and the returns on social security wealth. The model implies one should observe a positive correlation between stock market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that the stock of financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations later in life. Using microeconomic cross-country data, we find support for these predictions. --
    Keywords: Financial Literacy,Portfolio Choice,Saving
    JEL: E2 D8 G1 J24
    Date: 2013
  52. By: Veall, Michael R.
    Abstract: Richard Shillington (1999, 2003) estimates that one-third of near-seniors have made Registered Retirement Savings Plans (RRSP) contributions in error as their asset holdings are low enough to suggest that they will likely be Guaranteed Income Supplement (GIS) recipients. Hence they are likely to make RRSP withdrawals at age 65 or older that will be subject to GIS phaseouts. These can make the realized RRSP rate of return low or even negative. This paper reconsiders the Shillington estimate, noting that for an individual age 64 likely to receive GIS, it would appear under many scenarios that the dominating strategy is to cash out the RRSP immediately. Taxfiler data from the Longitudinal Administrative Database is used to examine RRSP withdrawals that actually are subject to GIS phaseouts. The available data, while imperfect, suggest that in part because there are significant RRSP withdrawals during the ages 60 to 64, the Shillington estimate is too high by perhaps a factor of two. However, this is still a large number of seniors. Registered Pension Plan contributions could also arguably be considered as subject to this issue, although relatively few Defined Benefit RPPs allow for cashout at age 64. Some policy implications are considered.
    Keywords: Guaranteed Income Supplement phaseouts; effective return on Registered Retirement Savings Plan contributions; effective return on Registered Pension P
    JEL: J26 E21 D31
    Date: 2013–04–29
  53. By: Juan Carlos Parra-Alvarez (Aarhus University and CREATES)
    Abstract: This paper evaluates the accuracy of a set of techniques that approximate the solution of continuous-time DSGE models. Using the neoclassical growth model I compare linear-quadratic, perturbation and projection methods. All techniques are applied to the HJB equation and the optimality conditions that define the general equilibrium of the economy. Two cases are studied depending on whether a closed form solution is available. I also analyze how different degrees of non-linearities affect the approximated solution. The results encourage the use of perturbations for reasonable values of the structural parameters of the model and suggest the use of projection methods when a high degree of accuracy is required.
    Keywords: Continuous-Time DSGE Models, Linear-Quadratic Approximation, Perturbation Method, Projection Method
    JEL: C63 C68 E32
    Date: 2013–11–15
  54. By: Andreas Buehn; Friedrich Schneider
    Abstract: This paper presents the various methods to estimate the size of the shadow economy, their strengths and weaknesses. The purpose of the paper is twofold. Firstly, it demonstrates that no ideal method to estimate the size and development of the shadow economy exists. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy as well as on a comparison of the size of the shadow economy using different estimation methods.
    Keywords: shadow economy estimates, MIMIC approach, methods to estimate the shadow economy, advantages and disadvantages of the measurement methods
    JEL: D78 E26 H2 H11 H26 K42 O5 O17
    Date: 2013–10
  55. By: Diewert, Erwin
    Abstract: The 2004 International Labour Office Consumer Price Index Manual: Theory and Practice summarized the state of the art for constructing Consumer Price Indexes (CPIs) at that time. In the intervening decade, there have been some significant new developments which are reviewed in this paper. The CPI Manual recommended the use of chained superlative indexes for a month to month CPI. However, subsequent experience with the use of monthly scanner data has shown that a significant chain drift problem can occur. The paper explains the nature of the problem and reviews possible solutions to overcome the problem. The paper also describes the recently developed Time Dummy Product method for constructing elementary index numbers (indexes at lower levels of aggregation where only price information is available).
    Keywords: Consumer Price Indexes, superlative indexes, chain drift, scanner data, Time Product Dummy method, GEKS method for making international comparisons, R
    JEL: C43 E31
    Date: 2013–10–24
  56. By: Monisankar Bishnu (Indian Statistical Institute, New Delhi); Min Wang (Peking University)
    Abstract: We provide a complete characterization of intergenerational welfare state with education and pension under probabilistic voting where voters internalize the general equilibrium effects materializing in their life-span. We show that as public education is introduced in the economy through the political process of voting, it always increases (reduces) the accumulation of human capital (physical capital), but strikingly, has no effect on the political equilibrium of PAYG social security tax. On the other hand, the introduction of a politically determined PAYG social security most defnitely reduces physical capital accumulation, however it will reduce the human capital accumulation if only if the public education is already present in the economy. Otherwise, it may lead to an increase in the human capital accumulation. We also demonstrate that the general equilibrium effects are crucial to sustain the social security program, and explain why the presence of PAYG social security may not provide su› cient incentive for public investment in education. Finally, we show that the simultaneous arrangement of public education and pension can increase the long-run growth if and only if the relative political weight of the old is small so that the pension program is thin, which makes the result of Boldrin and Montes (2005) study conditional on the intergenerational distribution of voting power in our political economy setup.
    Keywords: Education, Social security, Probabilistic voting, Markov Perfect Equilibrium, Endogenous growth
    JEL: E6 H3 H52 H55 D90
    Date: 2013–05
  57. By: World Bank
    Keywords: Finance and Financial Sector Development - Debt Markets Banks and Banking Reform Private Sector Development - Emerging Markets Economic Theory and Research Finance and Financial Sector Development - Currencies and Exchange Rates Macroeconomics and Economic Growth
    Date: 2013–07
  58. By: Maia Guell (The University of Edinburgh, CEP (LSE), CEPR & IZA), Jose V. Rodriguez Mora (The University of Edinburgh and CEPR), Christopher I. Telmer (Tepper School of Business, Carnegie Mellon University)
    Abstract: We propose a new methodology for measuring intergenerational mobility in economic wellbeing. Our method is based on the joint distribution of surnames and economic outcomes.It circumvents the need for intergenerational panel data, a long-standing stumbling block for understanding mobility. A single cross-sectional dataset is sufficient. Our main idea is simple. If `inheritance' is important for economic outcomes, then rare surnames should predict economic outcomes in the cross-section. This is because rare surnames are indicative of familial linkages. Of course, if the number of rare surnames is small, this won't work. But rare surnames are abundant in the highly-skewed nature of surname distributions from most Western societies. We develop a model that articulates this idea and shows that the more important is inheritance, the more informative will be surnames. This result is robust to a variety of different assumptions about fertility and mating. We apply our method using the 2001 census from Catalonia, a large region of Spain. We use educational attainment as a proxy for overall economic well-being. Our main finding is that mobility has decreased among the dfferent generations of the 20th century. A complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method. Our model and our data allow us to examine one possible explanation for the observed decrease in mobility. We find that the degree of assortative mating has increased over time. Overall, we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner.
    Keywords: Surnames, intergenerational mobility, cross-sectional data analysis, population genetics, assortative mating, siblings.
    JEL: C31 E24 J1
  59. By: Aurelie Charles
    Abstract: This paper argues that a hierarchy of ideals exists in market interactions that sets the benchmark on the norm of fairness associated with these interactions, thus affecting pricing decisions associated with market exchange. As norms emerge, an ideal determines the criteria of optimal behavior and serves as a basis for market exchange. Norms homogenize the diversity of commodities in market interactions according to a hierarchy of norms and values. The paper then goes on to illustrate how this hierarchy of ideals works in the labor market, leading to inequality of access to jobs and wages between groups of individuals. Groups socially perceived to be diverging from the context-dependent dominant ideal are likely to suffer most in market interactions.
    Keywords: Market Exchange, Norms, Optimality, Labour Market
    JEL: B00 D1 E31 J31 J71 P00
    Date: 2013–11
  60. By: Hakan Kara; Cagri Sarikaya
    Abstract: Turkiye’de son yillarda cari islemler aciginin yuksek seviyelerde dalgali bir seyir izlemesi ve buna paralel olarak gundeme gelen kirilganliklar, dis dengeyi makroekonomik istikrari saglamaya yonelik politikalarin merkezine oturtmaktadir. Cari islemler dengesine dair politika tasariminin saglikli bir sekilde yapilabilmesi icin oncelikle herhangi bir donemde cari acigin ne kadarinin konjonkturel (cevrimsel) ne kadarinin yapisal unsurlara atfedilebilecegi sorusunun yanitlanmasi gerekmektedir. Bu calisma basit bir yontemle ic talep, dis talep ve dis ticaret fiyatlarindaki konjonkturel etkileri arindirarak cari islemler dengesinin uzun vadeli ana egilimini tespit etmeyi amaclamaktadir. Cesitli varsayimlar altinda yapilan hesaplamalar, son 10 yillik donemde cari islemler dengesinde yapisal (konjonkturel etkilerle aciklanamayan) bir bozulmaya isaret etmektedir. Yakin donemde ise cari islemler aciginin milli gelire orani yuzde 5 civarinda istikrarli bir ana egilim sergilemektedir. Calismanin bulgulari, cari denge dinamiklerinin ve buna yonelik uygulanan politikalarin anlasilmasina katkida bulunmaktadir.
    Keywords: Cari Denge, Dis Ticaret, Is Cevrimi, Cevrim Uyarlamasi, Filtreleme
    JEL: E32 F14 F32
    Date: 2013

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