nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒11‒29
eighty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Liquidity, Quantitative Easing and Optimal Monetary Policy By Engin Kara; Jasmin Sin
  2. Excess Reserves, Monetary Policy and Financial Volatility By Primus, Keyra
  3. Monetary Union and Macroeconomic Stabilization By Dominik Groll
  4. Central Bank Independence and the Price-Output-Variability Trade-off By Landström, Mats
  5. Distributional Effects of Macroeconomic Policy Choices in Emerging Market Economies By Eswar S. Prasad
  6. Nominal GDP Targeting and the Monetary Policy Framework By Shakill Hassan and Chris Loewald
  7. Cyclical Fiscal Rules for Oil-Exporting Countries By Stephen Snudden
  8. Monetary policy and stock market volatility By Bleich, Dirk; Fendel, Ralf; Rülke, Jan-Christoph
  9. Central Bank Communications Before, During and After the Crisis: From Open-Market Operations to Open-Mouth Policy By Ianthi Vayid
  10. On the Impact of the Global Financial Crisis on the Euro Area By He, Xiaoli; Jacobs, Jan P.A.M.; Kuper, Gerard H.; Ligthart, Jenny E.
  11. Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve By Chang-Jin Kim; Pym Manopimoke; Charles R. Nelson
  12. Central banks need a new plan for 2014 By John H. Makin
  13. Unemployment Fluctuations in a Small Open-Economy Model with Segmented Labour Markets: The Case of Canada By Yahong Zhang
  14. Optimal Fiscal and Monetary Policy in Customer Markets By David M. Arseneau; Ryan Chahrour; Sanjay K. Chugh; Alan Finkelstein Shapiro
  15. Thinking ahead of the next big Crash By Bitros, George C.
  16. Disentangling economic recessions and depressions By Candelon, Bertrand; Metiu, Norbert; Straetmans, Stefan
  17. The International Monetary System: Where Are We and Where Do We Need to Go? By Rakesh Mohan; Michael Debabrata Patra; Muneesh Kapur
  18. The Italian financial cycle: 1861-2011 By Riccardo De Bonis; Andrea Silvestrini
  19. Pollution effects on labor supply and growth By Stefano Bosi; David Desmarchelier; Lionel Ragot
  20. Singapore: Staff Report for the 2013 Article IV Consultation By International Monetary Fund. Asia and Pacific Dept
  21. Uncertainty in the Money supply mechanism and interbank markets in Colombia By Camilo GOnzález; Luisa Silva; Carmiña Vargas; Andrés Velasco
  22. The Fiscal Theory of the Price Level - identification and testing for the UK in the 1970s By Fan, Jingwen; Minford, Patrick; Ou, Zhirong
  23. Repo Market – A Tool to Manage Liquidity in Financial Institutions By Nath, Golaka
  24. The Incidence and Persistence of Cyclical Job Loss in New Zealand By Maré, David C.; Fabling, Richard
  25. Sudan: Selected Issues By International Monetary Fund. Middle East and Central Asia Dept.
  26. Macroeconomic Determinants of Retirement Timing By Gorodnichenko, Yuriy; Song, Jae; Stolyarov, Dmitriy
  27. Are Capital Controls Prudential? An Empirical Investigation By Andrés Fernández; Alessandro Rebucci; Martín Uribe
  28. Financing Asset Sales and Business Cycles By Arnold, Marc; Hackbarth, Dirk; Puhan, Tatjana-Xenia
  29. China: An Institutional View of an Unusual Macroeconomy By David Dollar; Benjamin F. Jones
  30. Sovereign Risk and Belief-Driven Fluctuations in the Euro Area By Giancarlo Corsetti; Keith Kuester; André Meier; Gernot J. Mueller
  31. Impact of Financial Development and Globalization on Inflation: The Role of Remittance and Economic Growth in Bangladesh By Satti, Saqlain Latif; Shahbaz, Muhammad; Mujahid, Nooreen; Ali, Amjad
  32. The politics of fiscal effort in Spain and Ireland: Market credibility versus political legitimacy By Sebastian Dellepiane; Niamh Hardiman
  33. Impact of Inflation on Dividend Policy: Synchronization of Capital Gain and Interest Rate By Khan, Muhammad Irfan Khan; Meher, Muhammad Ayub Khan Mehar; Syed, Syed Muhammad Kashif
  34. DSGE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa By Rangan Gupta; Patrick T. kanda; Mampho P. Modise; Alessia Pacagnini
  35. Surveillance and Control of Fiscal Consolidation on a Supranational Level By Bas van Aarle
  36. Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR with Stochastic Volatility Approach By Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
  37. Central African Economic and Monetary Community (CEMAC): 2013 Staff Report on Common Policies for Member Countries By International Monetary Fund. African Dept.
  38. The Feldstein-Horioka Puzzle: Modern Aspects By Pavel Trunin; Andrey Zubarev
  39. The Role of Domestic and External Shocks in Poland: Results from an Agnostic Estimation Procedure By Michal Andrle; Roberto Garcia-Saltos; Giang Ho
  40. Shocking Stuff: Technology, Hours, and Factor Substitution By Cristiano Cantore; Miguel A. Leon-Ledesma; Peter McAdam; Alpo Willman
  41. Can news shocks account for the business-cycle dynamics of inventories? By Hyunseung Oh; Nicolas Crouzet
  42. The Legacy of Austerity in the Eurozone By De Grauwe, Paul; Ji, Yuemei
  43. Sudan: 2013 Article IV Consultation By International Monetary Fund. Middle East and Central Asia Dept.
  44. The Ideal Economy: A Prototype By Kakarot-Handtke, Egmont
  45. Forecasting Business Investment in the Short Term Using Survey Data By Österholm, Pär
  46. Making Monetary Policy More Effective: The Case of the Democratic Republic of the Congo By Felix Fischer; Charlotte J. Lundgren; Samir Jahjah
  47. Proposal for a Stabilisation Fund for the EMU By Delbecque, Bernard
  48. Income distribution and current account: A sectoral perspective By Jan Behringer; Till van Treeck
  49. Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment By Xavier Mateos-Planas; Giulio Seccia
  50. A Política Orçamental em Portugal entre Duas Intervenções do FMI: 1986-2010 By Carlos Fonseca Marinheiro
  51. Labour Market Dynamics in Spanish Regions: Evaluating Asymmetries in Troublesome Times By Sala, Hector; Trivín, Pedro
  52. Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models By Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi
  53. Spillovers to and from the Nordic Economies: A Macroeconometric Model Based Analysis By Francis Vitek
  54. Income Distribution and Current Account Imbalances By Christian A. Belabed; Thomas Theobald; Till van Treeck
  55. Probability and Severity of Recessions By Rachidi Kotchoni; dalibor Stevanovic
  56. Neglected implications of neoclassical capital-labour substitution for investment theory:another criticism of Say's Law By Fabio Petri
  57. A Generalized Steady-State Growth Theorem By Andreas Irmen
  58. Hyperbolical discounting and endogenous growth By Strulik, Holger
  59. Innovation diffusion, technological convergence and economic growth By R. Andergassen; F. Nardini; M. Ricottilli
  60. Thailand: 2013 Article IV Consultation By International Monetary Fund. Asia and Pacific Dept
  61. Global Factors in the Term Structure of Interest Rates By Mirko Abbritti; Salvatore Dell'Erba; Antonio Moreno; Sergio Sola
  62. Ita-coin: a new coincident indicator for the Italian economy By Valentina Aprigliano; Lorenzo Bencivelli
  63. Robust Multiple Regimes in Growth Volatility By Andros Kourtellos; Ioanna Stylianou; Chih Ming Tan
  64. Ideology and Online News By Matthew Gentzkow; Jesse M. Shapiro
  65. Income Distribution and Macroeconomics By Oded Galor; Joseph Zeira
  66. Currency Union with and without Banking Union By Bignon, Vincent; Breton, Régis; Rojas Breu, Mariana
  67. Reciprocity, Matching, and Wage Competition By Maria Micevski
  68. A Replication of "Meta-Analysis of the Effect of Fiscal Policies on Long-Run Growth" (European Journal of Political Economy, 2004) By W. Robert Reed; Nurul Sidek
  69. Habits and Envy: What Drives the Consumption Behavior of U.S. Households? Evidence from PSID, 1999-2009 By Kai D. Schmid; Moritz Drechsel-Grau
  70. Fiscal Consolidations and Public Debt in Europe By Gianluca Cafiso; Roberto Cellini
  71. La modélisation des interactions entre les coefficients de corrélation et les volatilités sur les marchés financiers Marocain, Français, Américain et Japonais By Chiny, Faycal
  72. Bayesian Inference in Regime-Switching ARMA Models with Absorbing States: The Dynamics of the Ex-Ante Real Interest Rate Under Structural Breaks By Chang-Jin Kim; Jaeho Kim
  73. Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR By Dale F. Gray
  74. The UK's public finances in the long run: the IFS model By Michael Amior; Rowena Crawford; Gemma Tetlow
  75. Public-Debt Financing in the case of External Debt By Gianluca Cafiso
  76. Money and Limited Enforcement in Multilateral Exchange By Nicola Amendola; Leo Ferraris
  77. Evaluating pay-as-you-go social security systems By Andreas Bachmann; Kaspar Wüthrich
  78. Determinants of firms' investment behaviour: A multilevel approach By Farla, Kristine
  79. Liquidity Issues in Indian Sovereign Bond Market By Nath, Golaka
  80. Assessing house prices in Germany: Evidence from an estimated stock-flow model using regional data By Kajuth, Florian; Knetsch, Thomas A.; Pinkwart, Nicolas
  81. Explaining Educational Attainment across Countries and over Time By Diego Restuccia; Guillaume Vandenbroucke
  82. Private infrastructure finance and investment in Europe By Inderst, Georg
  83. Shipping Market Financing: Special Features and the Impact of Basel III By Sambracos, Evangelos; Maniati, Marina
  84. Growth, Deficits and Uncertainty: Theoretical Aspects and Empirical Evidence By Eleftherios Goulas; Athina Zervoyianni
  85. The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models By Tack Yun; Eunmi Ko; Jinsook Kim
  86. What happens when the Kiwi flies? The sectoral effects of the exchange rate shocks By Ozer Karagedikli; Michael Ryan; Daan Steenkamp; Tugrul Vehbi

  1. By: Engin Kara; Jasmin Sin
    Abstract: We investigate optimal monetary policy design using a New Keynesian model that accommodates liquidity frictions. In this model, unlike the standard New Keynesian model, the central bank faces a trade-off between inflation and output stabilisation. Optimal policy requires a temporary deviation from price stability in response to a negative shock to the liquidity of private financial assets. We find that quantitative easing improves the trade-off between inflation and output by improving liquidity conditions in the economy.
    Keywords: DSGE Models, Optimal Monetary Policy, liquidity, quantitative easing
    JEL: E44 E52 E58
    Date: 2013–09
  2. By: Primus, Keyra
    Abstract: This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve require- ments is successful in sterilizing excess reserves, it creates a procyclical e¤ect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess re- serves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables.
    Keywords: Excess Reserves, Reserve Requirements, Countercyclical Rule
    JEL: E4 E5 E52 E58
    Date: 2013–10
  3. By: Dominik Groll
    Abstract: It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers that countries do benefit from forming a monetary union under fairly general conditions. More importantly, it also reveals that a monetary union entails the inherent benefit of stabilizing private-sector expectations about future inflation. As a result, inflation rates are more stable in a monetary union
    Keywords: Monetary union, macroeconomic stabilization, welfare analysis, history dependence, inflation expectations
    JEL: F33 F41 E52
    Date: 2013–11
  4. By: Landström, Mats (School of Technology and Business Studies)
    Abstract: Data on central bank independence (CBI) and implementation dates of CBI-reforms were used to investigate the relationship between CBI and a possible trade-off between inflation variability and output variability. No such trade-off was found, but there might still be stabilization gains from CBI-reform.
    Keywords: price stability; output stability; monetary policy; Taylor curve; inflation
    JEL: E52 E58
    Date: 2013–11–19
  5. By: Eswar S. Prasad
    Abstract: Distributional consequences typically receive limited attention in economic models that analyze the effects of monetary and financial sector policies. These consequences deserve more attention since financial markets are incomplete, imperfect, and economic agents’ access to them is often limited. This limits households’ ability to insure against household-specific (or sector-specific) shocks and magnifies the distributional effects of aggregate macroeconomic fluctuations and associated policy responses. These effects are likely to be even larger in emerging market and low-income economies beset by financial frictions. The political economy surrounding distributional consequences can sometimes lead to policy measures that reduce aggregate welfare. I argue that it is important to take better account of distributional rather than just aggregate consequences when evaluating specific policy interventions as well as the mix of different policies.
    JEL: E5 E6 F4
    Date: 2013–11
  6. By: Shakill Hassan and Chris Loewald
    Abstract: A nominal income target may provide credibility to a commitment to keep real interest rates exceptionally low, until a target output level is reached -–even if expected inflation rises in the interim–- in economies where nominal interest rates are effectively at the zero lower bound, which is not the South African case. There are practical difficulties with adopting nominal income targeting as the monetary policy framework. These include issues on the choice of a target level, risk of unanchored in‡ation expectations, and increased likelihood of error due to data uncertainty and revisions. Responsiveness to output growth and supply shocks -–two important attractions of nominal income targeting - can be largely accommodated within flexible inflation targeting. Neither regime will automatically resolve the challenges posed to monetary policy by volatile capital flows and exchange rates, and asset price bubbles. The case for abandoning flexible in‡ation targeting, to adopt nominal income targeting, in South Africa and other emerging economies, is not compelling.
    Keywords: Monetary policy, nominal income targeting, Inflation targeting, Growth
    JEL: E52 E58
    Date: 2013
  7. By: Stephen Snudden
    Abstract: Structural budget-balance rules with countercyclical elements appear well suited to stabilize the macroeconomic volatility of oil-exporting countries and have been used successfully by other commodity exporters. Using a global DSGE model, the efficient design of such rules is found to depend on the source of oil price fluctuations and the oil exporters’ structural characteristics. The output-inflation tradeoff is of particular concern for oil exporters relative to non-oil exporters due to the pass through of oil prices into headline inflation. Fiscal rules are best when coordinated with inflation targeting monetary policy, but are still desirable for fixed exchange rate regimes.
    Keywords: Fiscal policy;Oil exporting countries;Oil prices;Business cycles;External shocks;Demand;Monetary policy;Economic models;Fiscal policy rules; automatic stabilizers; countercyclical fiscal policy; macroeconomic policy; oil price.
    Date: 2013–11–06
  8. By: Bleich, Dirk; Fendel, Ralf; Rülke, Jan-Christoph
    Abstract: We estimate forward-looking interest rate reaction functions in the spirit of Taylor (1993) for four major central banks augmented by implicit volatilities of stock market indices to proxy financial market stress. Our results suggest that the Bank of England, the Federal Reserve Bank and the European Central Bank systematically respond to an increase of the implicit volatility by a decrease in the interest rate. We take our results as strong evidence that central banks use interest rates to stabilize financial markets in periods of financial market stress. --
    Keywords: Monetary policy,Taylor rule,Asset prices
    JEL: E43 E58 G12
    Date: 2013
  9. By: Ianthi Vayid
    Abstract: The days when secrecy and opacity were the bywords of central banking are gone. The advent of inflation targeting in the early 1990s acted as the catalyst for enhanced transparency and communications in the conduct of monetary policy. In the wake of the 2007-09 global financial crisis, this trend accelerated, resulting in further striking advances in monetary policy and financial stability communications, including markedly the emergence of extraordinary forward guidance as a distinct policy tool under unconventional monetary policies. Drawing on the record to-date at major central banks, as well as on a growing body of related academic literature, this paper reviews the history and effectiveness of central bank communications before and especially since the crisis. It also highlights some of the challenges facing central banks, particularly those that have engaged heavily in unconventional monetary policies to support their economies since the crisis. Steering deftly a course back to normality will depend crucially on their ability to communicate effectively a credible strategy for an orderly exit from such policies. In this context, clear, deliberate, coordinated messages that are anchored in their mandate are of the essence.
    Keywords: Central bank research; Credibility; Financial stability; Inflation targets; Monetary policy framework; Monetary policy implementation
    JEL: E52 E58
    Date: 2013
  10. By: He, Xiaoli (University of Groningen); Jacobs, Jan P.A.M. (School of Economics and Finance, University of Tasmania); Kuper, Gerard H. (University of Groningen); Ligthart, Jenny E. (Tilburg University)
    Abstract: This paper analyses the impact of the Global Financial Crisis on the Euro area utilizing a simple dynamic macroeconomic model with interaction between monetary policy and fiscal policy. The model consists of an IS curve, a Phillips curve, a term structure relation, a debt accumulation equation and a Taylor monetary policy rule supplemented with a Zero Lower Bound, and a fiscal policy rule. The model is calibrated/estimated for EU-16 countries for the period 1980Q1{2009Q4. The impact of the Global Financial Crisis is studied by means of impulse responses following a combined, prolonged aggregate demand and public debt shock. The simulation mimicking the GFC turns out to work fairly well. However, the required size of the shock is quite large.
    Keywords: Global Financial Crisis; euro area; monetary policy; fiscal policy; New Neoclassical Synthesis model; Zero Lower Bound
    JEL: C51 C52 E63
    Date: 2013–10–16
  11. By: Chang-Jin Kim (Department of Economics, University ofWashington, and Department of Economics, Korea University); Pym Manopimoke (Department of Economics, University of Kansas); Charles R. Nelson (Department of Economics, University of Washington)
    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: C32 E12 E31
    Date: 2013
  12. By: John H. Makin (American Enterprise Institute)
    Abstract: Many major world economies are at risk of slipping from a period of falling inflation (disinflation) into outright negative inflation (deflation), and the eurozone is leading the trend. The European Central Bank and Fed in particular must strive to avoid this outcome by striking a balance between continuing quantitative easing and tightening monetary policy.
    Keywords: the Fed,quantitative easing,eurozone,European Central Bank,Economic outlook,deflation
    JEL: A E
    Date: 2013–11
  13. By: Yahong Zhang
    Abstract: The recent financial crisis and subsequent recession have spurred great interest in the sources of unemployment fluctuations. Previous studies predominantly assume a single economy-wide labour market, and therefore abstract from differences across sector-specific labour markets in the economy. In Canada, such differences are substantial. From 1991 to 2010, employment in the tradable sector is almost three times as volatile as that in the non-tradable sector, and wages are about twice as volatile. To capture the labour market differences at the sectoral level, I introduce a segmented labour market structure to a medium-scale dynamic stochastic general-equilibrium model with financial and labour market frictions and estimate the model using Canadian data from 1991 to 2010. I find that, in the long run, unemployment fluctuations are mainly driven by the shocks to firms’ net worth and production technology in the non-tradable sector and the shocks to the foreign interest rate. In the short run, however, it is the shocks to firms’ net worth in the tradable sector that account for about 50 per cent of unemployment fluctuations. I also find that inclusion of the recent financial crisis data in the estimation is crucial for assessing the effects of the financial wealth shocks.
    Keywords: Business fluctuations and cycles; Economic models; Labour markets
    JEL: E32 E44 J6
    Date: 2013
  14. By: David M. Arseneau (Federal Reserve Board); Ryan Chahrour (Boston College); Sanjay K. Chugh (Boston College); Alan Finkelstein Shapiro (Universidad de los Andes)
    Abstract: This paper presents a model in which some goods trade in "customer markets." In these markets, advertising plays a critical role in facilitating long-lived relationships. We estimate both policy and non-policy parameters of the model (which includes New-Keynesian frictions) on U.S. data, including advertising expenditures. The estimated parameters imply a large congestion externality in the pricing of customer market goods. This pricing inefficiency motivates the analysis of optimal policy. When the planner has access to a complete set of taxes and chooses them optimally, fiscal policy eliminates the externalities with large adjustments in the tax rates that operate directly in customer markets; labor tax volatility remains low. If available policy instruments are constrained to the interest rate and labor tax, then the latter displays large and procyclical fluctuations, while the implications for monetary policy are largely unchanged from the model with no customer markets.
    Keywords: fiscal policy, monetary policy, advertising, customer markets
    JEL: E30 E50 E61 E63
    Date: 2013–11–18
  15. By: Bitros, George C.
    Abstract: The real estate bubble which burst in 2008 in the USA was not exclusively the result of “animal spirits”, “crowed madness” or “irrational exuberance”. It resulted primarily because of the specific policies that the government, the Federal Reserve Board, and the regulators pursued. Actually, on account of these policies, the surprise is not what happened. The surprise would have been if it had not happened. The reason for this assessment is that such central bank notions as “commitment” and “credibility” are pious pronouncements that do not amount to much when the push by organised interest groups comes to shove by politicians. In the face of this development, the urgent question is how to forestall the Federal Reserve Board from creating or coalescing to the creation of the next asset bubble, the crash of which may bring down the international monetary system. According to this paper, the solutions range from introducing an extended list of far-reaching institutional reforms to the monetary system in place, to upgrading the constitutional status of the Federal Reserve Board by transforming it into a fourth power of government, much like the judicial, to replacing it by a market based system of money provision and circulation. Which of these solutions is appropriate depends crucially on whether the Federal Reserve Board has control or not of either the money supply or the policy interest rate. But what is utterly inappropriate is not to do anything and wait until the next big crash.
    Keywords: Asset bubbles, monetary policy, monetary rules, central bank credibility, central bank constitutional status, free money
    JEL: E4 E42 E52 E58
    Date: 2013–11–15
  16. By: Candelon, Bertrand; Metiu, Norbert; Straetmans, Stefan
    Abstract: We propose a nonparametric test that distinguishes 'depressions' and 'booms' from ordinary recessions and expansions. Depressions and booms are defined as coming from another underlying process than recessions and expansions. We find four depressions and booms in the NBER business cycle between 1919 and 2009, including the Great Depression and the World War II boom. Our results suggest that the recent Great Recession does not qualify as a depression. Multinomial logistic regressions show that stock returns, output growth, and inflation exhibit predictive power for depressions. Surprisingly, the term spread is not a leading indicator of depressions, in contrast to recessions. --
    Keywords: Business cycles,Depression,Leading indicators,Multinomial logistic regression,Nonparametric statistics,Outlier
    JEL: C14 C35 E32
    Date: 2013
  17. By: Rakesh Mohan; Michael Debabrata Patra; Muneesh Kapur
    Abstract: The North Atlantic financial crisis of 2008-2009 has spurred renewed interest in reforming the international monetary system, which has been malfunctioning in many aspects. Large and volatile capital flows have promoted greater volatility in financial markets, leading to recurrent financial crises. The renewed focus on the broader role of the central banks, away from narrow price stability monetary policy frameworks, is necessary to ensure domestic macroeconomic and financial stability. Since international monetary cooperation might be difficult, though desirable, central banks in major advanced economies, going forward, need to internalize the implications of their monetary policies for the rest of the global economy to reduce the incidence of financial crises.
    Keywords: International monetary system;Monetary policy;Capital flows;Reserves accumulation;Surveillance;Central bank role;Developed countries;Emerging markets;Developing countries;Financial stability;Capital flows, central banks, currency internationalization, international monetary system, financial stability
    Date: 2013–11–05
  18. By: Riccardo De Bonis (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: In this paper we investigate the main features of the Italian financial cycle, extracted by means of a structural trend-cycle decomposition of the credit-to-GDP ratio, using annual observations from 1861 to 2011. In order to draw conclusions based on solid historical data, we provide a thorough reconstruction of the key balance-sheet time series of Italian banks, considering all the main assets and liabilities over the last 150 years. We come to three main conclusions. First, while there was a close correlation between loans and deposits (relative to GDP) until the mid-1970s, over the last 30 years this link has become more tenuous, and the volume of loans has increased in relation to deposits. The banks have covered this “funding gap†mainly by issuing new debt securities. Second, the Italian financial cycle has a much longer duration than traditional business cycles. Third, taking into account the deviation of the credit-to-GDP ratio from its trend, an acceleration of credit preceded a banking crisis in 8 out of the 12 episodes listed by Reinhart and Rogoff (2009). A Logit regression confirms a positive association between the probability of a banking crisis and a previous acceleration of the credit-to-GDP gap. However, there were also periods - such as the early 1970s - in which the growth of the credit-to-GDP ratio was not followed by a banking crisis.
    Keywords: banking system, credit-to-GDP ratio, financial cycle, unobserved components.
    JEL: C22 C82 E32 E44 G01 N10
    Date: 2013–10
  19. By: Stefano Bosi; David Desmarchelier; Lionel Ragot
    Abstract: Some recent empirical contributions have pointed out a significant negative impact of pollution on labor supply. These impacts have been largely ignored in the theoretical literature, which, instead, focused on the case of pollution effects on consumption demand. In this paper, we study the short and long-run effects of pollution in a Ramsey model where pollution and labor supply are nonseparable arguments in households’ preferences. We determine sufficient conditions for existence and uniqueness of a longterm equilibrium and we show how large (negative) effects of pollution on labor supply may promotes macroeconomic volatility (deterministic cycles near the steady state) through a flip bifurcation.
    Keywords: pollution, endogenous labor supply, Ramsey model.
    JEL: E32 O44
    Date: 2013–11–02
  20. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Context. Growth recovered and inflation declined sharply in 2013. Leverage has risen, with real estate a major beneficiary, but providing only a muted growth impulse. Intensive use of macroprudential measures recently stabilized house prices, which had grown rapidly. The financial sector has so far absorbed expectations of tapering by the Federal Reserve with limited volatility. Measures to encourage productivity growth continue to be rolled out, including through further tightening of foreign worker policies, which has pushed up wages. Outlook, risks and macroeconomic policies. Growth is likely to reach 3½ percent in 2013-14, supported by stronger G3 demand, despite softening in the region. A positive output gap and rising labor costs will raise core inflation, but headline inflation will stabilize on smaller asset price increases. External and domestic factors tilt the balance of growth risks to the downside. Cyclical conditions warrant a restrictive stance overall. The current policy of modest gradual appreciation is consistent with limiting the output gap and anchoring inflation expectations, while continued targeting of macroprudential policies will help contain asset prices and ensure prudent lending. The budgeted fiscal stimulus is warranted to support the goal of raising productivity to relieve future supply constraints. Financial sector issues. Significant risks have built up under very low interest rates, but appear manageable, although confirmation will come only once the cycle has turned. Regional and global interconnectedness also brings risks. A countercyclical capital buffer, stepped-up onsite bank inspections, strengthened fx liquidity management practices by banks, and vigorous enforcement of international AML/CFT commitments are advised. Higher leverage increases aggregate sensitivity to macroeconomic shocks and interest rate cycles, exacerbated by significant balance sheet heterogeneity. Demographic shifts. Prospective population aging and workforce shrinkage call for continuing to boost labor productivity, aided by the higher education levels of younger cohorts and continuing to tap foreign workers—though at a slower pace than previously. Recent commitments to strengthen social safety nets in a targeted manner, especially for the elderly, are welcome. External sector assessment. From a multilateral perspective and taking into account Singapore’s unique characteristics, the external position is stronger than warranted by fundamentals. Increased public spending and a tighter labor market caused by a slower pace of foreign worker inflows—consistent with the authorities’ plans—and appropriate adjustments in other countries should narrow the large current account surplus.
    Keywords: Article IV consultation reports;Economic growth;Monetary policy;Financial sector;Fiscal policy;Labor markets;Aging;Housing prices;Economic indicators;Staff Reports;Press releases;Singapore;
    Date: 2013–11–14
  21. By: Camilo GOnzález; Luisa Silva; Carmiña Vargas; Andrés Velasco
    Abstract: We set a dynamic stochastic model for the interbank daily market for funds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneous commercial banks, daily open market operations held by the Central Bank(auctions and window facilities), and idiosyncratic demand shocks and uncertainty in the daily auction. Analytical derivations of their decision making process show that banks involvement in the interbank market and open market operations depend on their individual requirement constraint and daily liquid assets. Our results do not show a linkage between the uncertainty in the money supply mechanism and activity in the interbank market. Equilibrium interest rate for the interbank market is derived, and is shown that it is distorted by uncertainty at the daily auction held by the monetary authority. Using data for Colombia, we test the main results of the model and corroborate the Martingale hypothesis for the interbank interest rate.
    Keywords: Interbank Market; Overnight Rates; Reserve Demand. Classification JEL: E44, E52, G21
    Date: 2013–11
  22. By: Fan, Jingwen (Cardiff Business School); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.
    Keywords: UK Inflation; Fiscal Theory of the Price Level; Identification; Testing; Indirect inference
    JEL: E31 E37 E62 E65
    Date: 2013–11
  23. By: Nath, Golaka
    Abstract: Repo is used in India as an instrument for monetary policy by institutionalizing daily Liquidity Adjustment Facility (LAF) which allows banks and Primary Dealers to manage their liquidity needs. Liquidity stress in the market has an impact on the short term interest rate. Entities not having adequate securities balances borrow funds from inter-bank uncollateralized call market and the call rates are prone to liquidity shocks in the system. The spread between Call and Repo rates is likely to widen when there is liquidity stress in the market. The study tried to find the determinant of the spread. It found that LAF window activity as well as total money market activity has an impact on the spread. In order to understand if the spread behaves in a different manner when the system has excess liquidity vis-à-vis shortage of liquidity, a Regime Switching model using Goldfeld and Quandt’s D-method for switching regression was used. The tests found that the monetary policy is stable in both the regimes and the effectiveness of monetary policy in both the regimes are not statistically different.
    Keywords: Repo, CBLO, Call, India, RBI, liquidity, financial crisis, central bank refinancing, spread, interbank market
    JEL: C30 E52 G11 G12 G18 G20
    Date: 2013–11–19
  24. By: Maré, David C. (Motu Economic and Public Policy Research Trust); Fabling, Richard (Motu Economic and Public Policy Research Trust)
    Abstract: In New Zealand, the impact of the Global Financial Crisis (GFC) was milder than in most other developed countries, with employment declining by 2.5 percent between 2008q4 and 2009q4. Job and worker turnover rates both declined, signalling a reduction in labour market liquidity and difficulties for new entrants and high-turnover groups of workers (Fabling and Maré, 2012). The current paper documents the extent and composition of employment change between 2000 and 2011, focusing on the 2008-2010 period, when the labour market impacts of the GFC were strongest. As in previous downturns, the incidence of cyclical job loss and unemployment fell disproportionately on young and unskilled workers. The paper identifies, by age, gender and earnings level, the sensitivity of employment growth and labour market flows to aggregate employment fluctuations and also to relative fluctuations across industries and regions. The accession rate is particularly sensitive to the economic cycle, most strongly for young workers. Differences in the size of cyclical employment fluctuations reflect differing responsiveness to common shocks and not exposure to different industry and local shocks. Finally, the paper traces outcomes for workers whose jobs end, summarising their duration out of work and the wage increases or reductions they experience when they secure employment. Workers who left or lost jobs spent longer out of work after the GFC and settled for lower earnings growth when they did find a job. Both of these effects had partly but not fully abated within 3 years of the onset of the GFC.
    Keywords: Global Financial Crisis, cyclical job loss, unemployment, earnings growth
    JEL: E24 E32 J21
    Date: 2013–11
  25. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: Sudan faces difficult challenges in the conduct of its monetary policy following South Sudan’s secession in 2011. Sudan’s economic conditions deteriorated rapidly after this permanent shock. The fiscal deficit widened owing to the loss of oil revenues and delays in fiscal adjustment. Monetization of the fiscal deficit led to high inflation, which reached 47.8 percent in March 2013. An understanding of the effects of monetary policy on macroeconomic variables (such as output, employment and prices) and the channels through which these effects are transmitted is critical for effective policy formulation and timely implementation, and for ensuring macro-financial stability.
    Keywords: Monetary transmission mechanism;Monetary policy;Taxation;Gold;Natural resources;Global competitiveness;Reserves adequacy;Selected issues;Sudan;
    Date: 2013–11–01
  26. By: Gorodnichenko, Yuriy (University of California, Berkeley); Song, Jae (U.S. Social Security Administration); Stolyarov, Dmitriy (University of Michigan)
    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.
    Keywords: retirement, business cycles
    JEL: E24 H55 J26
    Date: 2013–11
  27. By: Andrés Fernández; Alessandro Rebucci; Martín Uribe
    Abstract: A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.
    JEL: E6 F3 F4 F5 G0 G1
    Date: 2013–11
  28. By: Arnold, Marc; Hackbarth, Dirk; Puhan, Tatjana-Xenia
    Abstract: This paper analyzes the decision of firms to sell assets to fund investments (financing asset sales). We document empirical patterns of financing asset sales that cannot be explained with traditional motives for selling assets, such as financial distress or financing constraints. Using a structural model, we show that financing asset sales attenuate the debt overhang problem, because they imply lower wealth transfers from equity to debt than identical but equity financed investments. This motive to reduce the wealth transfer problem can explain how financing asset sales empirically relate to firm characteristics, and to business cycles.
    Keywords: Asset Sales, Wealth Transfer Problem, Leverage, Business Cycles, Real Options
    JEL: D92 E44 G12 G32 G33
    Date: 2013–11
  29. By: David Dollar; Benjamin F. Jones
    Abstract: China presents several macroeconomic patterns that appear inconsistent with standard stylized facts about economic development and hence inconsistent with the standard neoclassical growth model. We show that Chinese macroeconomic patterns instead appear consistent with an environment where state control of factor markets can promote aggressive output goals. We consider the micro-institutional features that can sustain this behavior, emphasizing the hukou system and state control over capital allocation, and present a simple model built on these features. The model can explain several puzzling facts about the Chinese economy, including its unusually low labor share and unusually high saving and investment rates. Interestingly, the model also shows that free-market reforms can initially take the economy further from global macroeconomic norms.
    JEL: E02 E2 O11 P2
    Date: 2013–11
  30. By: Giancarlo Corsetti; Keith Kuester; André Meier; Gernot J. Mueller
    Abstract: Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.†The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
    Keywords: Sovereign debt;Euro Area;Fiscal risk;Risk premium;Fiscal policy;Monetary policy;Economic models;Sovereign risk channel, monetary union, euro area, zero lower bound, risk premium, pooling of sovereign risk
    Date: 2013–11–06
  31. By: Satti, Saqlain Latif; Shahbaz, Muhammad; Mujahid, Nooreen; Ali, Amjad
    Abstract: The present study investigates the impact of financial development and globalization on inflation by incorporating foreign remittances and economic growth in inflation function in case of Bangladesh. The study covers the period of 1976Q1-2012Q4. We have applied structural break unit root test to examine integrating properties of the variables. The long run relationship between the variables is examined by applying newly developed cointegration approach by Bayer and Hanck, (2013) accommodating structural breaks in the series. Our results confirm the presence of cointegration between the variables in the presence of structural breaks. We find that financial development increases inflation. Globalization stimulates inflation. Economic growth declines inflation but foreign remittances raises it. The causality analysis reveals the bidirectional causality between financial development and inflation. The feedback effect exists between economic growth and inflation and, same is true for financial development and economic growth. Foreign remittances Granger cause inflation and inflation Granger cause foreign remittances.
    Keywords: Financial Development, Globalization, Inflation, Bangladesh
    JEL: E1
    Date: 2013–11–13
  32. By: Sebastian Dellepiane (School of Government and Public Policy University of Strathclyde); Niamh Hardiman (School of Politics and International Relations University College Dublin)
    Abstract: Austerity measures in response to Eurozone crisis have tended to be conceived, debated, and implemented as if only the technical parameters of budget management mattered. But policies that impose budgetary hardships on citizens, whether in the form of increased taxes or cuts to public spending go right to the heart of voter expectations about what it is both appropriate and acceptable for governments to do. Pro-cyclical measures that worsen an already difficult situation in a recession run counter to deep-seated norms and expectations in European countries, built up over decades of democratic governance, whereby governments are expected to provide offsetting protection for their citizens against the vicissitudes of the market. If austerity measures are held to be unavoidable in response to market turbulence, and especially if this view is underwritten by international authorities, new challenges of political legitimation are likely to arise. These issues are explored through the experiences of Spain and Ireland.
    Keywords: legitimacy, credibility, Eurozone crisis, Spain, Ireland
    JEL: E43 E62 E63 E65 H12
    Date: 2013–11–26
  33. By: Khan, Muhammad Irfan Khan; Meher, Muhammad Ayub Khan Mehar; Syed, Syed Muhammad Kashif
    Abstract: The study evaluates the impact of consumer’s buying power regarded as overall CPI on the dividend policy of firms. Dividend yield is used as a proxy of dividend policy. There are two separate equations to explain the phenomenon. The predicted values of capital gain yield against inflation and other supporting variables were first estimated and these predicted values along with interest rate were then put to check the dependency of dividend policy. Its theoretical background is related to classical discussion among financial researchers about the inflation-hedging capabilities of stock investment in short to medium-run. Study is carried out on stocks listed at Karachi Stock Exchange to see the overall behavior of Pakistani Stock Market. Sample of KSE-30 index for six financial years from 2007 to 2011 for the study is used. Following the 2-stage least square regression, the empirical results of the study illustrate that capital gain is affected by inflation levels prevailing for the year and its relationship is of inverse in nature. The market is following the global trend in this perspective. On the other hand, dividend yield is also not independent with inflationary effect. Interest rate is found to be positively related with dividend yield. This behavior of interest rate in the market is astonishing. It may be deduced that in the context of Pakistan, moneary policy and business activities improve simultaneously.
    Keywords: Stock Return, Inflation, Dividend Yield, Monetary Policy, Debt to Equity Ratio, 2-Stage Least Square Regression
    JEL: E31 G00 G12 G3
    Date: 2013–11–20
  34. By: Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria); Mampho P. Modise (Department of Economics, University of Pretoria); Alessia Pacagnini (Dipartimento di Economia, Metodi Quantitativi e Strategie d'Impresa (DEMS), Facoltà di Economia, Università degli Studi di Milano-Bicocca)
    Abstract: Inflation forecasts are a key ingredient for monetary policymaking - especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables,e.g. such as alternative measures of inflation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and non-modeled) in comparison with forecasts reported by other models, such as the AR(1).
    Keywords: DSGE model, in ation, core variables, non-core variables
    JEL: C11 C32 C53 E27 E47
    Date: 2013–11
  35. By: Bas van Aarle
    Abstract: Strengthening budgetary surveillance and coordination of budgetary policy measures in the EU is of vital importance for economic stability and growth. The decentralised decision making structure in most areas of budgetary policies, requires the need to balance national and common objectives; clearly also given the context of highly integrated goods-, labour-, and financial markets that lead to significant interdependencies and spillovers, as e.g. the recent financial crisis and economic slowdown demonstrate. We analyse the progress that is underway in the current budgetary governance framework in the EU -including the recent new instruments in the form of the Macroeconomic Imbalance procedure, the European Semester, Stability Bonds, the European Financial Stability Facility, Euro+ Pact and Europe 2020. This paper surveys supranational governance in the EU, and the coordination of national policies, including concepts of fiscal federalism, multi-level governance and open coordination methods, control and systems methods and macro-finance. We relate this exercise to the current context of budgetary stress in the aftermath of the global financial crisis and economic slowdown which has strongly impacted on the economies and public finances of the Member States. We consider financial market conditions that have exerted a particular strong influence in the European debt crisis and evaluate specifically the merits and risks relating to proposals for the introduction of Eurobonds. We conclude by formulating the policy recommendations on streamlining EU economic and budgetary governance that could be drawn from our analysis.
    Keywords: Academic research, challenges for welfare system, competitiveness, economic strategy, EU integration, European economic policy, European governance, European Monetary Union, Institutional reforms, acroeconomic disequilibria, multi-level governance
    JEL: C70 D70 E30 E60 H60 H70 H80
    Date: 2013–11
  36. By: Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
    Abstract: This paper investigates the evolution of monetary transmission mechanism in Malawi between 1981 and 2010 using a time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. We evaluate how the responses of real output and general price level to bank rate, exchange rate and credit shocks have changed over time since Malawi adopted financial reforms in 1980s. The paper finds that inflation, real output and exchange rate responses to monetary policy shocks changed over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of a price puzzle as found in the previous literature on Malawi. However, the statistical significance of the private credit supply remains weak and this calls for more financial reforms targeting the credit market which can contribute to monetary transmission and promote further economic growth in Malawi.
    Keywords: Transmission Mechanism, price puzzle, Financial Reforms, Bayesian TVP-VAR
    JEL: C49 D12 D91 E21 E44
    Date: 2013
  37. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES: Context. Strong area-wide economic performance in 2012 was largely driven by public investment financed by high oil revenues. GDP growth is expected to slow down in 2013 due to a decline in oil production, moderation in public investment and the political crisis in Central African Republic. Albeit robust in recent years, economic growth has been insufficient to significantly improve income per capita. While macroeconomic stability has been maintained, with moderate inflation, the region’s main challenge is to implement structural policies necessary to help promote sustainable and inclusive growth. The region remains vulnerable to a possible decline in oil prices. Key policy recommendations: Policy mix. The fiscal stance should be more cautious in some countries where policy buffers are insufficient to withstand shocks. The recent easing of monetary policy has been appropriate given the positive inflation outlook. Reserves coverage remains adequate and the real effective exchange rate is broadly in line with fundamentals but the issue of only partial repatriation of foreign exchange reserves by some member states needs be resolved. Fiscal policy coordination. The fiscal surveillance framework should be revised to limit pro-cyclicality and better ensure long-term fiscal sustainability of oil rich countries. Monetary policy framework. In the context of the peg of the CFA Franc to the euro, the operational framework for monetary policy needs to be revised to improve management of systemic liquidity and make it an efficient tool of macroeconomic management. Financial sector. To reduce risks to financial sector stability, strengthening the capacity of the regional regulator, strictly enforcing prudential requirements and expediting the restructuring of unviable institutions are among key priorities. Financial deepening requires structural financial sector reforms related to credit information, security of collaterals, creditor rights and payment system. Growth. More effective regional integration could help boost and sustain diversified and inclusive growth. Reinforcing regional institutions and improving the coordination of national development plans are needed to optimize the region’s potential. Regional efforts to boost private sector investment should aim at improving governance and the business climate, one of the most challenging in Africa.
    Keywords: Economic growth;Central African Economic and Monetary Community;Fiscal policy;Global competitiveness;Fiscal reforms;Financial sector;Economic integration;Monetary policy;Bank supervision;Economic indicators;Staff Reports;Press releases;
    Date: 2013–11–06
  38. By: Pavel Trunin (Gaidar Institute for Economic Policy); Andrey Zubarev (RANEPA)
    Abstract: The primary purpose of this paper is to test the hypothesis of capital mobility reduction in the wake of the global financial crisis of 2008-2009. Through the constructed models we tested hypotheses about the long- and short-term mobility of global capital by estimating the correlation between savings and investment rates. The paper also deals with the question of capital mobility in Russia. Recommendations on monetary policy in Russia in the coming years based on the obtained findings were made.
    Keywords: Feldstein-Harioka puzzle, capital mobility, monetary policy
    JEL: E52
    Date: 2013
  39. By: Michal Andrle; Roberto Garcia-Saltos; Giang Ho
    Abstract: This paper discusses interlinkages between Poland and the euro zone using a simple and agnostic econometric approach. Specifically, we estimate a trend-cycle VAR model using data for real and nominal variables, imposing powerful but uncontroversial assumptions that allow us to identify how external factors affect the evolution of business cycles in Poland in the period 1999-2012. Our results suggest that developments in the euro zone can explain about 50 percent of poland’s output and interest rate business cycle variance and about 25 percent of the variance of inflation.
    Keywords: External shocks;Poland;Business cycles;Inflation;Interest rates;Exchange rates;Economic models;Poland, euro zone, trend-cycle VAR, external shocks
    Date: 2013–10–29
  40. By: Cristiano Cantore (University of Surrey); Miguel A. Leon-Ledesma (University of Kent); Peter McAdam (University of Surrey & European Central Bank); Alpo Willman (European Central Bank)
    Abstract: The response of hours to technology shocks is a key controversy in macroeconomics. We show that differences between RBC and NK models hinge on highly restrictive views of technology. We introduce CES production technologies and demonstrate that the response of hours depends on the factor-augmenting nature of shocks and the capital-labor substitution elasticity in both models. We develop analytical expressions to establish the thresholds determining its sign. This opens new margins for shock identification combining theory and VAR evidence. We discuss how our models provide new robust restrictions for empirical work, especially using the labor income share.
    JEL: E32 E23 E25
    Date: 2013–11
  41. By: Hyunseung Oh (Columbia University); Nicolas Crouzet (Columbia University)
    Abstract: The procyclicality of inventory investment is a central feature of US business cycles. As such, it provides a test for the recent literature on news shocks, which argues that anticipated changes in fundamentals are important sources of aggregate fluctuations. We show that, in a range of inventory models, anticipated shocks to fundamentals generate booms of a peculiar kind: consumption and investment increase, but inventories fall persistently. During these booms, production and inventory investment are dominated by intertemporal substitution, as firms satisfy sales out of inventory stock and delay production until the realization of the anticipated shock. This mechanism is surprisingly difficult to overturn. We derive analytical parameter restrictions which guarantee procyclical inventory dynamics in response to news shocks, and show that standard calibrations considered in the literature do not come close to satisfying the restrictions. Furthermore, the introduction of the frictions studied by the news literature, such as variable capacity utilization and adjustment costs, is not sufficient to restore the procyclicality of inventories. We use the models' restrictions on the comovement of sales and inventories to identify news shocks in postwar US data. We find that the identified shock leads to a diffusion in TFP, but has a short implementation lag and accounts for a small fraction of long-run movements in TFP, inventories and sales.
    Date: 2013
  42. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: The recent slight improvement in the GDP growth rates in the eurozone has led European policy-makers to proclaim victory and assert that the austerity programmes imposed within the eurozone are paying off. But is this really the case? In this Commentary Paul De Grauwe and Yuemei Ji argue that the improvement in the eurozone business cycle is the result of the ECB’s announcement of its Outright Monetary Transaction (OMT) programme, and that austerity has left a legacy of unsustainable debt that will test the political resilience of the debtor countries.
    Date: 2013–10
  43. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context: The July 2011 secession of South Sudan led to the buildup of large economic imbalances in Sudan. The authorities responded in June 2012 with a comprehensive package of corrective measures, which laid the ground for a much-needed adjustment process. The reform process was expected to continue in 2013, through a second package of measures, which the authorities recently put together, but has yet to be implemented. The March 2013 agreement with South Sudan on oil and security matters is offering an opportunity to continue the adjustment process by implementing bold reforms to address the post-secession challenges. Outlook and risks: Risks are mainly to the downside and risks include domestic political instability and volatile security conditions, notably tensions at the border with South Sudan. Strong and steady implementation of reforms is crucial for improving macroeconomic stability and enhancing medium-term growth prospects. Focus of the Article IV discussions: Discussions focused on: (i) near-term policies for restoring macroeconomic stability; and (ii) a medium-term strategy for rebuilding the economy and implementing policies for sustained and inclusive growth, higher employment, and poverty reduction. Policy recommendations: Action is needed on the following fronts: (i) fiscal adjustment grounded in a sound medium-term framework, including a gradual phase-out of fuel and wheat subsidies, and strengthening of social safety nets thus making way for higher quality spending; (ii) a tighter monetary stance to address high inflation and exchange rate pressures; (iii) unification of the exchange rates and markets together with further exchange rate flexibility; and (iv) further liberalization of the economy and improvement in the business environment in order to boost private sector-led growth. Staff-Monitored Program: Strong corrective policy measures to address the large economic imbalances and reforming the economy are needed to serve as the basis for a successor staff-monitored program. Debt relief: Relief is predicated on reaching out to creditors, normalizing relations with international financial institutions, and establishing a track record of cooperation with the IMF on policies and payments.
    Keywords: Article IV consultation reports;Political economy;Economic growth;Fiscal policy;External debt;Fiscal reforms;Monetary policy;Multiple currency practices;Exchange rate regimes;Financial sector;Economic indicators;Staff Reports;Press releases;Sudan;
    Date: 2013–11–01
  44. By: Kakarot-Handtke, Egmont
    Abstract: Standard economics starts with behavioral assumptions that are formally expressed as axioms. This approach met with little scientific success but still enjoys some popularity for lack of a convincing alternative. To replace the subjective formal foundations by objective structural axioms is the first task of this paper. To give a correct account of how the monetary economy works is the second. This entails an explanation of the continuous clearing of both the product and the labor market in the random consumption economy, that is, of how the economy could establish ongoing full employment and price stability in principle.
    Keywords: new framework of concepts; structure-centric; axiom set; consumption economy; Profit Law; directed random changes; complexity; simulation; market clearing; budget balancing; product market; labor market
    JEL: B59 C63 E19
    Date: 2013–11–19
  45. By: Österholm, Pär (National Institute of Economic Research)
    Abstract: In this paper, forecasting models for Swedish business investment growth which make use of data from Sweden’s most important business survey – the Economic Tendency Survey – are evaluated. An out-of-sample forecast exercise using nine years of quarterly real-time data is conducted. The results suggest that the survey data have informational value that can be used to improve forecasts. Perhaps not surprisingly, the time series with the highest predictive power for business investment growth tend to be based on data for the investment goods industry. Forecasts based on a simple arithmetic mean of individual model forecasts do well in the evaluation and should accordingly be useful when forecasting Swedish business investment in practice.
    Keywords: Out-of-sample forecasts; Real-time data
    JEL: E22 E27
    Date: 2013–11–19
  46. By: Felix Fischer; Charlotte J. Lundgren; Samir Jahjah
    Abstract: The paper looks at the challenges of conducting monetary policy in a context of high dollarization of the banking system and weak institutions in the Democratic Republic of the Congo. The empirical analysis confirms the limited effectiveness of the Central Bank of Congo in controlling inflation, despite a rapid policy response to inflation shocks. Options available to enhance the effectiveness of monetary policy are limited. After exploring the pros and cons of different exchange regimes we conclude that strengthening the current monetary policy framework remains the first-best option, given the country’s exposure to frequent terms-of-trade shocks.
    Keywords: Monetary policy;Republic of Congo;Central bank autonomy;Dollarization;Exchange rate regimes;dollarization, monetary policy, inflation, exchange rate regime, dedollarization, financial deepening.
    Date: 2013–11–05
  47. By: Delbecque, Bernard
    Abstract: This paper argues that it should be possible to complement Europe’s Economic and Monetary Union with an insurance-type shock absorption mechanism to increase the resilience of member countries to economic shocks and reduce output volatility. Such a mechanism would neither require the establishment of a central authority, nor would it lead to permanent transfers between countries. For this mechanism to become a reality, however, it would be necessary to overcome certain technical problems linked to the difficulty of anticipating correctly the position of an economy in the business cycle.
    Date: 2013–10
  48. By: Jan Behringer; Till van Treeck
    Abstract: We analyse the link between income distribution and the current account through a descriptive analysis for the G7 countries and a series of panel estimations for the G7 countries and a larger sample of 20 countries for the period 1972-2007. We find that, firstly, rising personal inequality leads to a decrease of household net lending and the current account, ceteris paribus. The effect is strong for top household income shares, but much weaker for the Gini coefficient of household income. This finding is consistent with consumption externalities resulting from upward-looking status comparisons. Secondly, an increase in the corporate financial balance leads to an increase in the current account, i.e., consumers do not fully 'pierce the corporate veil'. There is also tentative evidence that the corporate net lending and the current account increase as a result of a decline in the share of wages in value added. The joint effects of changes in personal and functional income distribution contribute to a significant degree to explaining the global current account imbalances prior to the Great Recession.
    Keywords: Income distribution, current account determinants, household saving, corporate saving, panel data analysis
    JEL: C23 E2 E21 F32 F41 G3
    Date: 2013
  49. By: Xavier Mateos-Planas (Queen Mary University of London); Giulio Seccia (University of Southampton)
    Abstract: This paper studies economies with complete markets where there is positive default on consumer debt. In a simple tractable two-period model, households can default partially, at a finite punishment cost, and competitive intermediaries price loans of different sizes separately. This environment yields only partial insurance. The default-based pricing of debt makes it too costly for the borrower to achieve full insurance and there is too little trade in securities. This framework is in contrast with existing literature. Unlike the literature with default, there are no restrictions on the set of state contingent securities that are issued. Unlike the literature on lack of commitment, limited trade arises without need of debt constraints that rule default out. Compared with the latter, the present approach appears to imply more consumption inequality. An extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general validity of this approach and its main implications.
    Keywords: Consumer default, Complete markets, Endogenous incomplete markets, Risk-based pricing, Risk sharing
    JEL: E21 E44 D52
    Date: 2013–11
  50. By: Carlos Fonseca Marinheiro (GEMF/Faculdade de Economia da Universidade de Coimbra e Vogal do Conselho das Finanças Públicas, Portugal)
    Abstract: Entre 1986 (adesão à União Europeia) e 2010 (ano anterior ao terceiro pedido de assistência financeira externa), Portugal apresentou défices orçamentais persistentes. A combinação entre a consequente acumulação de dívida e a década de 2000 de estagnação económica culminou na perda súbita de acesso a financiamento externo, tornando inevitável um pedido de assistência financeira externa em 2011, o terceiro desde o restaurar da democracia em 1974. A acumulação de desequilíbrios orçamentais ocorreu mesmo em períodos caracterizados por dinamismo económico e por um ambiente externo favorável, como o que se seguiu à adesão, ou no período que antecedeu a criação do euro. A ausência de vontade política de consolidar as finanças públicas em períodos de expansão económica acabou por resultar na necessidade de prosseguir uma política orçamental restritiva nos períodos de contracção da economia, ampliando esse efeito recessivo, e assim dificultando a própria consolidação orçamental, obtendo-se o pior resultado possível. A resolução de forma permanente deste problema de política económica necessita de uma profunda reforma do enquadramento orçamental, que impeça a repetição destes erros de política, bem como de reformas estruturais que ampliem o potencial de crescimento da economia portuguesa e assim sustentem a necessária consolidação orçamental.
    Keywords: Portugal, Fiscal Policy, Public Debt.
    JEL: E61 E62 H60
    Date: 2013–11
  51. By: Sala, Hector (Universitat Autònoma de Barcelona); Trivín, Pedro (Universitat Autònoma de Barcelona)
    Abstract: The Spanish labour market disproportionately booms in expansions and bursts in recessions; meanwhile, its regions' relative position persists: those with the highest unemployment rates in 1996 were also in the worse position in 2012. To examine this twofold feature, we apply Blanchard and Katz's (1992) methodology and evaluate how the Spanish labour market reacts to regional employment shocks in a variety of cases. Shock responses are channelled via changes in unemployment, labour market participation, and spatial mobility. Our results provide evidence of asymmetric responses across business cycle phases (1996-2007 and 2008-2012). While changes in participation rates are the main adjustment mechanism in expansion, unemployment and spatial mobility become the central ones in recession. We also provide evidence of real wage rigidities in both periods, but strong asymmetries in house prices, which are sticky in recession but notably reactive in expansion. We conclude with a cluster analysis showing that high and low unemployment regions have similar responses in the short-run while, in the long-run, the former are more reactive in terms of spatial mobility. Overall, we provide evidence that people are more willing to migrate when a regional shock occurs in relatively worse economic contexts.
    Keywords: employment, unemployment, regional labour markets, Spain
    JEL: J20 E24 J61 R11
    Date: 2013–11
  52. By: Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi
    Abstract: This paper investigates the long-run effects of public debt and inflation on economic growth. Our contribution is both theoretical and empirical. On the theoretical side, we develop a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in dynamic heterogeneous panel data models with cross-sectionally dependent errors. The relative merits of the CS-DL approach and other existing approaches in the literature are discussed and illustrated with small sample evidence obtained by means of Monte Carlo simulations. On the empirical side, using data on a sample of 40 countries over the 1965-2010 period, we find significant negative long-run effects of public debt and inflation on growth. Our results indicate that, if the debt to GDP ratio is raised and this increase turns out to be permanent, then it will have negative effects on economic growth in the long run. But if the increase is temporary, then there are no long-run growth effects so long as debt to GDP is brought back to its normal level. We do not find a universally applicable threshold effect in the relationship between public debt and growth. We only find statistically significant threshold effects in the case of countries with rising debt to GDP ratios.
    Keywords: Long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence, debt, inflation and growth, debt overhang.
    JEL: C23 E62 F34 H6
    Date: 2013–11–21
  53. By: Francis Vitek
    Abstract: This paper analyzes the transmission of shocks and policies among and across the Nordic economies and the rest of the world. This spillover analysis is based on a pair of estimated structural macroeconometric models of the world economy, disaggregated into thirty five national economies. We find that the Nordic economies are heavily exposed to external macroeconomic and financial shocks, but have significant scope to mitigate their domestic macroeconomic impacts through coordinated policy responses, given their high degree of regional integration.
    Keywords: Spillovers;Denmark;Finland;Sweden;Norway;Economic integration;Trade integration;Fiscal policy;Macroprudential Policy;Cross country analysis;Spillover analysis; Trade linkages; Financial linkages; External risks; Policy coordination
    Date: 2013–11–05
  54. By: Christian A. Belabed; Thomas Theobald; Till van Treeck
    Abstract: We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specific institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.
    Keywords: income distribution, relatve income hypothesis, household debt, stock flow consistency, current account, institutions
    JEL: D31 D33 E21 E25 F32 F41
    Date: 2013
  55. By: Rachidi Kotchoni; dalibor Stevanovic
    Abstract: This paper advances beyond the prediction of the probability of a recession by also considering its severity in terms of output loss and duration. First, Probit models are used to estimate the probability of a recession at period t + h from the information available at period t. Next, a Vector Autoregression (VAR) augmented with diffusion indices and an inverse Mills ratio (IMR) is fitted to selected measures of real economic activity. The latter model is used to generate two forecasts: an average forecast, and a forecast under pessimistic assumption that a recession occurs at the forecast horizon. The severity of recessions is then predicted as the gap between these two forecasts. Finally, a zero-inflated Poisson model is fitted to historical durations of recessions. Our empirical results suggest that U.S. recessions are fairly predictable, both in terms of occurrence and severity. Out-of-sample experiments suggest that the inclusion of the IMR in the VAR model significantly improves its forecasting performance.
    Keywords: Duration of recession, Forecasting Real Activity, Probability of Recessions, Probit, Vector Autoregression, Zero Inflated Poisson
    JEL: C3 C5 C35 E27 E37
    Date: 2013
  56. By: Fabio Petri
    Abstract: Neoclassical capital-labour substitution correctly understood is unable to prove a tendency toward the full employment of resources because it leaves investment indeterminate if the full employment of labour is not assumed to start with; then Say's Law loses plausibility because of the inevitable presence of accelerator-type influences on investment, even neglecting the inconsistencies of neoclassical capital theory; and wage decreases cause a decrease of investment, undermining the 'neoclassical synthesis' criticism of Keynes. The way a negatively interest-elastic investment function is obtained by Romer without assuming the full employment of labour, that is through adjustment costs, relies on several grave mistakes. The recent DSGE models which directly assume that investment equals savings are not supported by general equilibrium theory because the latter theory is admitted by the specialists not to be a positive theory, nor can those models rely on the neoclassical synthesis or monetarism because of the critique of this paper (besides the capital critique), so they must be discarded too.
    JEL: E2 B5
    Date: 2013–10
  57. By: Andreas Irmen (CREA, University of Luxembourg)
    Abstract: Uzawa’s steady-state growth theorem (Uzawa (1961)) is generalized to a neoclassical economy that uses current output, e. g., to create technical progress or to manufacture intermediates. The difference between aggregate final-good production and these resources is referred to as net output. The new generalized steady-state growth theorem holds since net output exhibits constant returns to scale in capital and labor. This insight provides an understanding for why technical change is labor-augmenting in steady state even if capital-augmenting technical change is feasible. By example, this point is made for three recent growth models that allow for endogenous capital- and labor-augmenting technical change, namely, Irmen (2013), Acemoglu (2003), and Acemoglu (2009), Chapter 15. The reduced form of these models is shown to be consistent with the generalized steady-state growth theorem.
    Keywords: Steady-State Growth, Capital Accumulation, Uzawa’s Theorem, Endogenous Direction of Technical Change
    JEL: E10 O10 O40
    Date: 2013
  58. By: Strulik, Holger
    Abstract: This paper provides the exact analytical solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, an equivalence result holds. If hyperbolical discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias and the entailed time-inconsistency of savings plans are harmless for economic growth. The result is robust to the introduction of non-homothetic utility and a variable elasticity of intertemporal substitution in consumption. --
    Keywords: hyperbolic discounting,time-inconsistency,endogenous growth,adjustment dynamics
    JEL: D91 E21 O40
    Date: 2013
  59. By: R. Andergassen; F. Nardini; M. Ricottilli
    Abstract: The paper investigates the mechanics through which novel technological principles are developed and diffused throughout an economy consisting of a technologically heterogeneous ensemble of firms. In the model entrepreneurs invest in the discovery and in the diffusion of a technological principle and their profit flow depends on how many firms adopt the innovation and on how long it takes other entrepreneurs to improve it. We show that technological convergence emerges from the competition among entrepreneurs for the profit flow and characterize the economy's growth rate.
    JEL: O31 O33 O41 E19
    Date: 2013–11
  60. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Context. The Thai economy has shown an impressive resilience to shocks and staged a strong recovery in 2012. However, growth slowed significantly in the first half of 2013 on account of the expiration of some domestic stimulus programs that were taken in 2012 in the wake of the flood disaster and weak external demand. The economy is being supported by strong fundamentals and expansionary fiscal and monetary policies. The government is seeking to shift public expenditure from boosting domestic consumption to infrastructure investment. Volatile capital flows have presented a challenge to macroeconomic policy. Outlook and risks. Growth is expected to recover in the second half of the year, but at a more gradual pace than in the past, with low inflation. The global economy presents downside risks from a possible slowdown in EM growth and capital flow volatility. In addition, the impact of unwinding policies to boost consumption may be larger than anticipated, while public investment projects might be delayed. Labor skills mismatches and infrastructure bottlenecks are holding back potential growth. Policy recommendations. With solid macroeconomic conditions, the key challenge is to foster higher inclusive growth with stability. Key recommendations are: ? Creating fiscal space for priority spending and gradually rebuilding policy buffers to prepare for adverse shocks. The government’s commitment to fiscal discipline would be buttressed by strengthening the medium-term fiscal framework. ? Allowing the exchange rate to continue to move flexibly in line with fundamentals and respond with a mix of macroeconomic policies and, if needed, capital flow measures to deal with capital flow surges. ? While the banking sector remains sound, the regulatory and supervisory frameworks for specialized and non-bank institutions needs to be strengthened. ? Planned infrastructure investments should be implemented to enhance competitiveness and promote inclusive growth.
    Keywords: Article IV consultation reports;Economic growth;Demand;Fiscal policy;Public investment;Capital flows;Debt sustainability;Monetary policy;Banking sector;Credit expansion;Economic indicators;Staff Reports;Press releases;Thailand;
    Date: 2013–11–11
  61. By: Mirko Abbritti; Salvatore Dell'Erba; Antonio Moreno; Sergio Sola
    Abstract: This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis.
    Keywords: Interest rate structures;Bonds;Monetary policy;Developed countries;Economic models;Yield Curve, Global Factors, FAVAR, Affine Term Structure Models, Term Premium
    Date: 2013–11–05
  62. By: Valentina Aprigliano (Bank of Italy); Lorenzo Bencivelli (Bank of Italy)
    Abstract: In this paper we present a coincident indicator for the Italian economy, Ita-coin. We construct a multivariate filter based on a broad information set, whose dimension is reduced by the Generalized Dynamic Factor Model (GDFM) approach proposed by Forni et al. (2002). A regression based on the least absolute shrinkage and selection operator (LASSO) is used to estimate Ita-coin. Most Italian macroeconomic indicators are characterized by high short-term volatility and the 2008-2009 crisis has affected the volatility of both the high- and low-frequency components and the relationships between the variables have become more unstable. LASSO regression allows us to select recursively the relevant information about the comovement of the variables over time. Our indicator displays a satisfactory performance in the pseudo real-time validation as a timely cyclical indicator.
    Keywords: Factor analysis, frequency-domain, LASSO regression, business cycle.
    JEL: C5 E1
    Date: 2013–10
  63. By: Andros Kourtellos (Department of Economics, University of Cyprus, Cyprus; The Rimini Centre for Economic Analysis (RCEA), Italy); Ioanna Stylianou (Department of Economics, University of Cyprus, Cyprus); Chih Ming Tan (Department of Economics, University of North Dakota, USA; The Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: In this paper we uncover growth volatility regimes and identify their robust determinants using a large international panel of countries. In doing so we propose a novel empirical methodology that allows us to simultaneously deal with two key elements of model uncertainty, namely theory uncertainty and parameter heterogeneity, by unifying two recent econometric techniques: Bayesian Model Averaging and Threshold Regression. We find ample evidence of parameter heterogeneity and model uncertainty. Our results highlight the role of Macroeconomic Policy, Institutional variables, and Neoclassical growth variables in generating multiple volatility regimes.
    Keywords: growth volatility, multiple regimes, threshold regression
    JEL: C59 O40 Z12
    Date: 2013–08
  64. By: Matthew Gentzkow; Jesse M. Shapiro
    Abstract: News consumption is moving online. If this move fundamentally changes how news is produced and consumed it will have important ramifications for politics. In this chapter we formulate a model of the supply and demand of news online that is motivated by descriptive features of online news consumption. We estimate the demand model using a combination of microdata and aggregate moments from a panel of Internet users. We evaluate the fit of the model to key features of the data and use it to compute the predictions of the supply model. We discuss how such a model can inform debates about the effects of the Internet on political polarization and other outcomes of interest.
    JEL: D83 L86
    Date: 2013–11
  65. By: Oded Galor; Joseph Zeira
    Abstract: This paper analyzes the role of income distribution in macroeconomic analysis. The study demonstrates that the long-run equilibrium depends on the initial distribution of income. In accordance with empirical evidence concerning the conelation between income distribution and output, an economy that is characterized by a relatively equal distribution of wealth is likely to be wealthier in the long run. The study may, therefore, provide an additional explanation for the persistent differences in per-capita output across countries. Furthermore, the paper may shed light on cross-countries differences macroeconomic adjustment to aggregate shocks.
    Keywords: Wealth distribution, income distribution, growth, capital market imperfections
    Date: 2013
  66. By: Bignon, Vincent; Breton, Régis; Rojas Breu, Mariana
    Abstract: This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.
    Keywords: E42; E50; F3; G21;
    Date: 2013
  67. By: Maria Micevski (Department of Economics, University of Konstanz, Germany)
    Abstract: The presented model demonstrates how the coexistence of reciprocal and selfish types influences the formation of employment relationships, their profitability, wage differentials, wage competition, and unemployment in the presence of moral hazard. Wage and profitability differentials result from the differences in workers’ reactions to the managers’ wage offers. Moreover, these behavioral differences affect managers’ preferences for worker types. Thus, managers might make higher offers to attract the preferred worker type in a competitive labor market with excess supply of labor compared to a situation without competition. The resulting competitive matching allocates favored reciprocal workers to reciprocal managers. Consequently, unemployment arises first among unfavored reciprocal and selfish workers, respectively.
    Keywords: reciprocity, gift exchange, matching, profitability, wage differentials, wage competition, unemployment
    JEL: D03 D21 E24 J31
    Date: 2013–11–21
  68. By: W. Robert Reed (University of Canterbury); Nurul Sidek
    Abstract: This study replicates Nijkamp & Poot (2004), henceforth N&P, and performs a variety of robustness checks. Using a sample of fiscal policy studies published between 1983-1998, N&P concluded that certain types of fiscal policies were more likely to confirm prior beliefs about their impact on economic growth than others. N&P also identified study attributes that impacted the likelihood of confirmation. We first demonstrate that we are able to exactly replicate their findings. We then attempt an alternative replication, returning to the original studies, and independently categorizing them using N&P’s general classification scheme. We also investigate the implications of a number of methodological improvements on their analysis. Our analysis produces results that are qualitatively similar to N&P, though very few of our results are statistically significant. We use the lessons learned from this replication effort to suggest directions for future meta-analysis studies on the subject of fiscal policy and economic growth.
    Keywords: Meta-analysis, Fiscal Policy, Economic Growth, Generalized Ordered Logit
    JEL: C25 E62 H5
    Date: 2013–09–29
  69. By: Kai D. Schmid; Moritz Drechsel-Grau
    Abstract: In this paper we estimate the relevance of habits versus interpersonal comparisons for the consumption behavior of U.S. households. We exploit information from the recently released consumption expenditure data of the Panel Study of Income Dynamics (PSID) covering the time span from 1999 to 2009. We find that both habits, measured as lagged consumption, and envy motives, measured as reactions of consumption to consumption changes of households that are perceived to be richer, matter substantially. Hence, household consumption is not only determined by habit persistence but also by interpersonal comparisons. Most importantly, our estimations reveal that envy motives might play a much more prominent role for households' consumption choices than habits do.
    Keywords: Household Consumption, Reference Consumption, Habits, Relative Income Hypothesis, Difference GMM, PSID
    JEL: C23 D12 D91 E21
    Date: 2013
  70. By: Gianluca Cafiso; Roberto Cellini
    Abstract: The objective of this paper is to gain insights into the relationship between deficit-reducing policies and the evolution of the debt/GDP ratio. We consider past events of fiscal consolidation in a selected group of EU countries and check what is the associated change of the debt/GDP ratio both from a short and medium-term perspective. As for the medium-term perspective, we do also differentiate between tax-based and savings-based fiscal consolidations. Our results point towards a positive short-term effect, while the medium-term effect turns out to be negative. Savingsbased fiscal consolidations result to be less negative on the debt/GDP ratio’s evolution than tax-based ones.
    Keywords: Fiscal consolidations;debt/GDP ratio;Europe
    JEL: H63 E63
    Date: 2013–11
  71. By: Chiny, Faycal
    Abstract: The analysis of correlations forms the basis of portfolio diversification and the lower the correlation between two assets the greater the potential benefit to be obtained by diversification. In the national context this typically involves the analyses of the correlation between the returns on national stock market sectors. But internationally this task turns to be more difficult because we have to analyze the relationships between returns on different and distant international markets. Erb, Harvey and Viskant (1994) and Longin and Solnik (1995) have shown that these correlations vary over time according to phases in the economic cycles. We will analyze at the international level the relationship between correlation and volatility of returns of stock indexes of 4 stock markets: Morocco, France, U.S.A and Japan from January 01, 2002 to December 31, 2012. We then investigate possible factors that cause the time variation in these correlations.
    Keywords: Time-Varying Correlations, diversification strategy, financial markets
    JEL: C22 E44 G15
    Date: 2013–11–18
  72. By: Chang-Jin Kim (Department of Economics, University ofWashington, and Department of Economics, Korea University); Jaeho Kim (Dept. of Economics, Univ. of Washington, Seattle, WA)
    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 multimove 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 empiricalresults 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
    Date: 2013
  73. By: Dale F. Gray
    Abstract: The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.
    Keywords: Banking sector;Credit expansion;Sovereign debt;Credit risk;Cross country analysis;Economic models;contingent claims analysis (CCA), global vector autoregression (GVAR).
    Date: 2013–10–23
  74. By: Michael Amior (Institute for Fiscal Studies); Rowena Crawford (Institute for Fiscal Studies); Gemma Tetlow (Institute for Fiscal Studies)
    Abstract: This working paper describes how the IFS’s model of the UK’s long-run public finances (and those of its constituent nations) is constructed. Our model projects tax revenues, public spending and hence public borrowing and debt up to 2062–63. This is done for the UK as a whole and also separately for Scotland and the rest of the UK. The type of model we have built seeks to answer questions of the type ‘is current fiscal policy sustainable without additional taxes needing to be raised or cuts to public spending imposed either now or in the future?’.
    Date: 2013–11
  75. By: Gianluca Cafiso
    Abstract: The objective of this paper is to assess whether non-residents’ holdings of a country’s debt make a difference for debt stabilization, where non-residents’ holdings are considered external debt according to a Balance of Payments perspective. The analysis is empirical and considers the case of Italy, one of the world’s largest debt issuer. We detect two possible channels through which external debt might alter the conditions for debt stabilization. Among these, we focus on the Interest Rate Determination in the primary market of Government Bonds. Our results point out the irrelevance of the investors base for debt stabilization.
    Keywords: External Debt;Auction Redemption Yield;Debt Stabilization;Vector Auto Regression;Regime Switch
    JEL: E63 F34 G11 H63
    Date: 2013–11
  76. By: Nicola Amendola (University of Rome Tor Vergata); Leo Ferraris (Universidad Carlos III Madrid and University of Rome Tor Vergata)
    Abstract: We propose a model in which money performs an essential role in the process of exchange, despite the presence of a multilateral clearing house. Agents are assumed to be anonymous and unable to make binding commitments. The clearing house can detect deviations but it cannot identify the individual deviator, hence, it punishes all traders collectively. The records of past deviations can be kept for a limited amount of time, after which they are wiped out. These features are enough to make room for a record-keeping device, such as money, that strictly improves the functioning of the clearing house.
    Keywords: Money, Essentiality, Multilateral trade
    JEL: D50 E40 E42
    Date: 2013–11–25
  77. By: Andreas Bachmann; Kaspar Wüthrich
    Abstract: This paper proposes a new method for welfare analysis of unfunded social security systems. Based on an overlapping generations model with endogenous labor supply, we derive a formula for the evaluation of existing pay-as-you-go social security systems that depends on impulse response functions and projected growth rates only. We propose an implementation strategy based on reduced form estimates of a VAR model that is valid under weak assumptions about the deep structure of the model. Our method is related to the sufficient statistic approach (Chetty, 2009). For the current system in the United States, we find that a transitory increase in the payroll tax rate along with higher pension benefits leads to a welfare increase mainly due to welfare gains of today's retirees. A scenario analysis demonstrates the robustness of this result.
    Keywords: unfunded social security system; sufficient statistic; overlapping generations; reduced form VAR
    JEL: E62 H55
    Date: 2013–11
  78. By: Farla, Kristine (UNU-MERIT / MGSoG)
    Abstract: This paper investigates micro and macro determinants of firms' investment behaviour using firm data from 101 developing and emerging economies. A substantial number of firms in our sample does not invest in fixed capital or invests little relative to sales revenue. Using a multilevel probit model we study what factors trigger investment and using a multilevel Heckman selection model we study what factors influence a firm's investment to sales ratio. Although we find that both micro and macro determinants explain investment behaviour, firms' investment behaviour is heterogeneous in nature and has little dependency on a country's macroeconomic setting. In addition, we find that, on average, firms which are completely foreign owned have a relatively lower investment to sales ratio. Finally, we find evidence which suggests that the probability of investing is higher for firms located in countries with more property rights protection and control of corruption and we find some evidence which suggests that foreign owned firms located in countries with `good' institutions invest relatively more.
    Keywords: Multilevel, Investment, Foreign ownership, Institutions
    JEL: E22 F20 O11 O12 O43
    Date: 2013
  79. By: Nath, Golaka
    Abstract: Liquidity is one of the most important factors after credit risk that affects the bond yields. The paper uses various measures of liquidity to understand their determinants in Indian sovereign bond market. The Liquidity measured by parameters like Turnover Ratio and Amihud Illiquidity Indicator show that these parameters not only have instantaneous relationship with bond yield but contemporaneous relationship with themselves. Impact Cost is not found to have any explanatory power. Financial crisis had marginal impact on the Indian sovereign bond market. It functioned well during the crisis period without much deterioration in general market liquidity condition as RBI injected large amount of liquidity to the system within a limited time period to ensure stability in the financial markets in India. However, the notion of flight to safety was evident as traders started investing largely in Government bonds shunning credit products as the credit quality in general started to dip. This was duly supported by large issuances of Government bonds. The study also finds that the electronic order matching system for government bonds has been successful in improving liquidity and reducing volatility in the market.
    Keywords: liquidity, liquidity premium, bond yield, Indian Sovereign Bonds, Impact Cost, Turnover Ratio, NDS-OM, Liquidity Adjustment Facility
    JEL: C58 E43 E44 G12
    Date: 2013–05–18
  80. By: Kajuth, Florian; Knetsch, Thomas A.; Pinkwart, Nicolas
    Abstract: Based on a stock-flow model of the housing market we estimate the relationship of house prices and explanatory macroeconomic variables in Germany using a regional panel dataset for 402 administrative districts. Using regional data exploits the variation across local housing markets and overcomes time-series data limitations. We take the regression residuals as a measure for deviations of actual house prices from their fundamental equilibrium level. The model specification allows to aggregate district-level residuals for various regional subsets. During the past two years for Germany as a whole single-family house prices appeared to be in line with their fundamental equilibrium level, whereas apartment prices significantly exceeded the fundamental price suggested by the model. The overvaluation of apartments is higher in towns and cities and most pronounced in the major seven cities, while single-family houses in cities appear to be only moderately above their fundamental levels. --
    Keywords: fundamental house prices,regional house prices,housing demand and supply
    JEL: E32 R21 R31
    Date: 2013
  81. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Consider the following facts. In 1950 the richest ten-percent of countries attained an average of 8 years of schooling whereas the poorest ten-percent of countries attained 1.3 years, a 6-fold difference. By 2005, the difference in schooling declined to 2-fold. The fact is that schooling has increased faster in poor than in rich countries. What explains educational attainment differences across countries and their evolution over time? We develop an otherwise standard model of human capital accumulation with two important features: non-homothetic preferences and an operating labor supply margin. We use the model to assess the quantitative contribution of productivity and life expectancy differences across countries in explaining educational attainment. Calibrating the parameters of the model to reproduce the historical time-series data for the United States, we find that the model accounts for 90 percent of the difference in schooling levels between rich and poor countries in 1950 and 64 percent of the increase in schooling over time in poor countries. The model generates a faster increase in schooling in poor than in rich countries consistent with the data. These results highlight the importance of productivity and development in education, emphasizing the crucial role of productivity improvements in poor countries relative to often-discussed educational policies.
    Keywords: Schooling, productivity, life expectancy, education policy, labor supply.
    JEL: O1 O4 E24 J22 J24
    Date: 2013–11–21
  82. By: Inderst, Georg
    Abstract: This study discusses the structure and development of private infrastructure finance in Europe in a global context. It examines the contribution of private capital to the financing of infrastructure investment needs. A 'big picture' is created by putting the various financing instruments and investment vehicles into a simple frame, i.e. percentages of GDP. There is scope for the development of alternative financing arrangements (such as public-private partnerships) and investment vehicles (such as project bonds and suitable investment funds). However, the traditional ways of corporate (and public) capital expenditure as well bank lending, need to keep working in Europe. Institutional investors can play a bigger role as a source of finance but expectations should be realistic. There are a number of barriers in place, regulatory and otherwise, that need to be worked on. --
    JEL: E22 G23
    Date: 2013
  83. By: Sambracos, Evangelos; Maniati, Marina
    Abstract: Shipping sector constitutes a sector with special characteristics that considerably differentiate it from the other sub-sectors of international transport. The maximisation of benefits for each one of the special market characteristics form a highly dynamic environment, with high risk of loss of invested capital. Within this framework, commercial banks, being the main source of financing shipping market, which is characterised by high capital and operating costs, have to take into account various variables in order to minimise the risk and maximise the return. The last is of particular importance considering the recent regulatory framework for banks applied by the Basel III, which has been elaborated on the grounds of inappropriateness of Basel II.
    Keywords: Finance, Shipping Market, Basel, Risks
    JEL: E32 G15 G32 R40
    Date: 2013–10–01
  84. By: Eleftherios Goulas (Department of Economics, University of Patras, Greece); Athina Zervoyianni (Department of Economics, University of Patras, Greece; The Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: We examine the relationship between fiscal deficits and per-capita income growth in a panel of 27 European countries, allowing for perceived risks, in terms of fiscal sustainability, associated with additional government spending. Such risks are proxied by the conditional variability of manufacturing production and stock market returns and by the unconditional variability of two survey-based economic sentiment indicators. To help clarifying how fiscal variables impact on growth and to provide a point of reference for the interpretation of the empirical results a structural growth model is first identified. We find evidence of an asymmetric relationship, in that fiscal deficits give rise to adverse growth effects if they coincide with high uncertainty regarding the prospects of the economy and no significant negative growth effects in the low-uncertainty case.
    Keywords: growth, fiscal policy, government budget constraint, uncertainty
    JEL: O40 E60 H60 D80
    Date: 2013–06
  85. By: Tack Yun (Seoul National University); Eunmi Ko (Seoul National University); Jinsook Kim (Seoul National University)
    Abstract: Our goal in this paper is two-fold. First, we develop a class of term structure models that allow for the role of bounded rationality by incorporating either information-processing constraint or fear for mis-specification into affine term structure models. We indentify a set of sufficient conditions to generate the observational equivalence between affine term-structure models with rational inattention and a fear for model misspecification. The presence of bounded rationality creates a new additional factor that is not spanned by conventional factors such as level, slope, and curvature factors. Second, our empirical results indicate that substantial amounts of information capacity constraint and robustness preference for model misspecification are needed to explain the observed behavior of yields.
    Date: 2013
  86. By: Ozer Karagedikli; Michael Ryan; Daan Steenkamp; Tugrul Vehbi
    Abstract: We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the nontradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.
    JEL: C22 C32 E21
    Date: 2013–11

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