nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒01‒17
sixty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Intertemporal Coordination Failure and Monetary Policy By Ronny Mazzocchi
  2. Investment-Saving Imbalances with Endogenous Capital Stock By Ronny Mazzocchi
  3. An extended model of currency options applicable as policy tool for central banks with inflation targeting and dollarized economies By Arizmendi, Luis-Felipe
  4. The Effect of Labor and Financial Frictions on Aggregate Fluctuations By Francesco Zanetti; Haroon Mumtaz
  5. Government spending shocks, sovereign risk and the exchange rate regime By Dennis Bonam; Jasper Lukkezen
  6. Optimal policy and taylor rule cross-checking under parameter uncertainty By Bursian, Dirk; Roth, Markus
  7. Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation By Ronny Mazzocchi
  8. Welfare Reversals in a Monetary Union By Stéphane Auray; Aurélien Eyquem
  9. News-driven business cycles in small open economies By Gunes Kamber; Konstantinos Theodoridis; Christoph Thoenissen
  10. Understanding the Gains from Wage Flexibility: The Exchange Rate Connection By Jordi Galí; Tommaso Monacelli
  11. Optimal time-consistent fiscal policy under endogenous growth with elastic labour supply By Alfonso Novales; Rafaela Pérez; Jesús Rúiz
  12. Scope and Flaws of the New Neoclassical Synthesis By Ronny Mazzocchi
  13. Stabilization policy, rational expectations and price-level versus inflation targeting: a survey By Hatcher, Michael C.; Minford, Patrick
  14. The Euro Crisis and contradictions of Neoliberalism in Europe By Engelbert Stockhammer
  15. Labor Force Participation and Monetary Policy in the Wake of the Great Recession By Christopher J. Erceg; Andrew Levin
  16. Two monetary models with alternating markets By Camera, Gabriele; Chien, YiLi
  17. Optimal time-consistent fiscal policy in an endogenous growth economy with public consumption and capital By Alfonso Novales; Rafaela Pérez; Jesús Rúiz
  18. Modeling the impact of forecast-based regime switches on macroeconomic time series By Bel, K.; Paap, R.
  19. "Options for China in a Dollar Standard World: A Sovereign Currency Approach" By L. Randall Wray; Xinhua Liu
  20. Trust in government and fiscal adjustments By Bursian, Dirk; Weichenrieder, Alfons J.; Zimmer, Jochen
  21. Trust in the monetary authority By Bursian, Dirk; Faia, Ester
  22. Flexible prices, labor market frictions, and the response of employment to technology shocks By Mandelman, Federico S.; Zanetti, Francesco
  23. Accounting and the Macroeconomy: The Case of Aggregate Price-Level Effects on Individual Stocks By Konchitchki, Yaniv
  24. Central Bank Communication in the Financial Crisis: Evidence from a Survey of Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  25. Macroeconomic Effects of Sovereign Restructuring in a Monetary Union: A Model-based Approach By Lorenzo Forni; Massimiliano Pisani
  26. Challenges for monetary policy By Issing, Otmar
  27. Monetary Transmission in Brazil: Has the Credit Channel Changed? By Mercedes Garcia-Escribano
  29. Bank and sovereign debt risk By Paries, Matthieu Darraq; Faia, Ester; Palenzuela, Diego Rodriguez
  30. The Benefits of International Policy Coordination Revisited By Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula
  31. Bank's financial distress, lending supply and consumption expenditure By Damar, H. Evren; Gropp, Reint; Mordel, Adi
  32. Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies By Jose De Gregorio
  33. Was there a « Greenspan Conundrum » in the Euro area? By G. LAMÉ
  34. Monetary policy and risk taking By Angeloni, Ignazio; Faia, Ester; Lo Duca, Marco
  35. Game-theoretic foundations of monetary equilibrium By Camera, Gabriele; Gioffré, Alessandro
  36. German Economic Models, Transnationalization and European Imbalances By Hans-Michael Trautwein; Finn Marten Körner
  37. Policy Analysis and Forecasting in the World Economy: A Panel Dynamic Stochastic General Equilibrium Approach By Francis Vitek
  38. Economic Structure and Macroeconomic Uncertainty: Policy Implications for Bangladesh By Bernhard G. Gunter; Faisal Ahmed; A. F. M. Ataur Rahman; Jesmin Rahman
  39. Does Monetary Policy cause Randomness or Chaos? A Case Study from the European Central Bank By Sanderson, Rohnn
  40. Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico-Working Paper 331 By Dean Karlan, Jonathan Zinman
  41. Adding China to the Global Projection Model By Patrick Blagrave; Peter Elliott; Roberto Garcia-Saltos; Douglas Hostland; Douglas Laxton; Fan Zhang
  42. Which size and evolution of the government expenditure multiplier in France (1980-2010)? By G. CLÉAUD; M. LEMOINE; P.-A. PIONNIER
  43. Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten By Carmen Reinhart; Kenneth Rogoff
  44. "Colonial New Jersey's Paper Money Regime, 1709-1775: A Forensic Accounting Reconstruction of the Data" By FARLEY GRUBB
  45. Differing factor adjustment costs across industries: Evidence from Japan By Hirokazu Mizobata
  46. Oil price: the nature of the shocks and the impact on the French economy By J.-B. BERNARD; G. CLÉAUD
  47. The determinants of the volatility of returns on cross-border asset holdings By Faruk Balli; Syed Abul Basher; Faisal Rana
  48. Multifactor productivity estimates for France: what does it change to take capital and labour quality into account? By P.-Y. CABANNES; A. MONTAUT; P.-A. PIONNIER
  49. The European Central Bank's outright monetary transactions and the Federal Constitutional Court of Germany By Siekmann, Helmut; Wieland, Volker
  50. Economic Cycles and Their Synchronization: A Survey of Spectral Properties By L. Sella; G. Vivaldo; A. Groth; M. Ghil
  51. Mathematical Proof of the Breakdown of Capitalism By Kakarot-Handtke, Egmont
  52. External Imbalances and Financial Crises By Alan Taylor
  53. Evidencia empírica de endogeneidad monetaria en España (1980-2012) By Luis Cárdenas del Rey
  54. Consumption Externality and Indeterminacy under Increasing Returns to Scale and Endogenous Capital Depreciation By Gaowang Wang; Heng-fu Zou
  55. Is Public Debt Growth-Enhancing or Growth-Reducing? By Real Arai; Takuma Kunieda; Keigo Nishida
  56. Macro-prudential assessment of Colombian financial institutions’ systemic importance By Carlos León; Clara Machado; Andrés Murcia
  57. Transitions in labour market status in the European Union By Melanie Ward-Warmedinger; Corrado Macchiarelli
  58. The Mmeasurement of Underground Economy: A Dynamic-Simulation Based Approach By Amedeo Argentiero; Carlo Andrea BOLLINO
  59. Climate change and migration By Gómez, O.
  60. Does migration foster exports ? evidence from Africa By Ehrhart, Helene; Le Goff, Maelan; Rocher?, Emmanuel; Singh, Raju Jan

  1. By: Ronny Mazzocchi
    Abstract: The turn of century long period of sustained growth with low and stable inflation let the economic profession and the public opinion to think that the right theoretical foundation for macroeconomic policy had been found. However the Great Crisis of 2008 indicates a spectac- ular failure of this framework in dealing with sources of macroeconomic instability and providing policy advise. Financial instability is the new challenge for monetary policy. Most of the recent research indicates that financial crises follow prolonged unwinding of investment-saving imbalances which are not contemplated by the standard theoretical framework. This paper draws a dynamic model where investment- saving imbalances are allowed to develop. It introduces different types of feedback interest-rate rules in order to provide some preliminary indications for the conduct of monetary policy.
    JEL: E21 E22 E31 E32 E52
    Date: 2013
  2. By: Ronny Mazzocchi
    Abstract: The current consensus in macroeconomics, or New Neoclassical Synthesis (NNS), is based on dynamically stochastic general equilibrium (DSGE) modeling with a RBC core to which nominal rigidities are added by way of imperfect competition. The strategy is to minimize the frictions that are required to reproduce both persistent real effects of monetary policy and interaction of interest and prices in a rigorous framework with intertemporal optimization, forward-looking behavior and continuously clearing markets. Unfortunately this Òequi- libriumÓ framework do not allow to discuss the effects and the rela- tions between financial markets and real economy, which were the core of the economic crisis of 2008. This paper presents a dynamic model with endogenous capital stock whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances.
    JEL: E21 E22 E31 E32 E52
    Date: 2013
  3. By: Arizmendi, Luis-Felipe
    Abstract: The purpose of this paper is to provide a new set of tools for policy makers at central banks. Based on the Garman-Kohlhagen formula for currency options, this research extends it with the Taylor-rule expression used for inflation targeting, thus obtaining the corresponding Call and Put options and higher-degree partial derivatives known as "Greeks" for key variables such as the policy target domestic interest rate and the output gap.
    Keywords: Inflation Targeting, Central bank policies, Exchange rates, Currency options.
    JEL: E4 E44 E58 F31 G13
    Date: 2013–03–05
  4. By: Francesco Zanetti; Haroon Mumtaz
    Abstract: This paper embeds labor market search frictions into a New Keynesian model with financial frictions as in Bernanke, Gertler and Gilchrist (1999).� The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model.� The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock.� For monetary policy, technology and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions since robust changes in hiring lead to persistent movements in employment and the return on capital that reinforce the original effect of financial frictions.� For cost-push, labor supply, marginal efficiency of investment and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt that lowers the exernal finance premium.
    Keywords: Financial frictions, search and matching frictions, New Keynesian model
    JEL: E24 E32 E52
    Date: 2013–12–24
  5. By: Dennis Bonam; Jasper Lukkezen
    Abstract: Keynesian theory predicts output responses upon a fiscal expansion in a small open economy to be larger under fixed than floating exchange rates. We analyse the effects of fiscal expansions using a New Keynesian model and find that the reverse holds in the presence of sovereign default risk. By raising sovereign risk, a fiscal expansion worsens private credit conditions and reduces consumption; these adverse effects are offset by an exchange rate depreciation and a rise in exports under a float, yet not under a peg. We find that output responses can even be negative when exchange rates are held fixed, suggesting the possibility of expansionary fiscal consolidations.
    Keywords: Fiscal policy, government spending, exchange rate regime, sovereign risk, New Keynesian model, expansionary fiscal consolidation
    JEL: E32 E52 E62
    Date: 2013–12
  6. By: Bursian, Dirk; Roth, Markus
    Abstract: We examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way. --
    Keywords: Optimal monetary policy,parameter uncertainty,Taylor rule
    JEL: E47 E52 E58
    Date: 2013
  7. By: Ronny Mazzocchi
    Abstract: The outbreak of the financial crisis of 2007 has generated a lively debate on the real or alleged faults of the Federal Reserve (Fed). Some economists argue that in the period 2002-2005 the U.S. central bank has taken its target interest rate below the level implied by monetary pricinciples that had been followed for the previous 20 years. One can characterize this decision as a deviation from a policy rule such as a Taylor rule. This behavior determined the end of the Great Moderation and gave birth to the Great Recession. In this paper I challenge this view. I show how the deviations from the Taylor-ruleÕs hypothetical interest rate can be explained by the ambiguity on inflation indicators to use. I also explain how the Great Deviation was instead caused by an error in the estimate of one of the fundamental components of the Taylor rule, i.e. the natural rate of interest. Too expansionary mone- tary policy of the Fed was therefore not due to discretionary choices, but to a structural problem of the Taylor rule. Finally, I show how an adaptive rule based only on observable variables would have avoided the huge gap between short-term rates and natural rates
    JEL: E52 E58 G01 G28
    Date: 2013
  8. By: Stéphane Auray (CREST-Ensai, Bruz, F-35170, France ; Université du Littoral Côte d’Opale, F-59375 Dunkerque, France ; CIRPEE, Canada); Aurélien Eyquem (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.
    Keywords: Monetary Union, Financial Markets Incompleteness, Sticky Prices, Fiscal and Monetary Policy
    JEL: E32 E63 F32 F41 F42
    Date: 2013
  9. By: Gunes Kamber; Konstantinos Theodoridis; Christoph Thoenissen
    Abstract: The focus of this paper is on expectations driven business cycles in small open economies. We make two significant contributions. First, we identify news shocks for a set advanced small open economies using the methodology of Beaudry et al. (2011). We find, in line with the previous VAR evidence for the US economy that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Second, we develop a small open economy model with financial frictions, along the lines of Jermann and Quadrini (2012) that is able to replicate the positive co-movements identified in the data.
    Keywords: News shocks, business cycles, open economy macroeconomics, financial frictions, VAR
    JEL: E32 F4
    Date: 2014–01
  10. By: Jordi Galí; Tommaso Monacelli
    Abstract: We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely so in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.
    Keywords: sticky wages, nominal rigidities, New Keynesian model, stabilization policies, exchange rate policy, currency unions, monetary policy rules
    JEL: E32 E52 F41
    Date: 2013–12
  11. By: Alfonso Novales (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid. Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Rafaela Pérez (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Jesús Rúiz (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid))
    Abstract: In an endogenous growth model with public consumption and investment and an elastic labour supply, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We compare the Markovian optimal policy with the Ramsey policy, extending previous works that characterized optimal fiscal policy either in an exogenous growth framework, assuming an exogenously given split of income between consumption and investment, or an inelastic supply of labour. The Markov-perfect policy implies a higher income tax rate. To compensate for the lower disposable income, a larger proportion of government spending is allocated to consumption than those chosen under a commitment constraint on the part of the government. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. The welfare loss relative to the benevolent planner’s solution is mainly due to the difference in growth rates.
    Keywords: ime-consistency, Markov-perfect optimal policy, Ramsey optimal policy, Endogenous growth, Income tax rate, Government spending composition.
    JEL: E61 E62 H21
    Date: 2013–06
  12. By: Ronny Mazzocchi
    Abstract: The current consensus in macroeconomics represented by the New Neoclassical Synthesis (NNS) is based on dynamically stochastic general equilibrium (DSGE) modeling with Real Business Cycle (RBC) core to which nominal rigidities are added by way of imperfect competition. The claim is that the NNS model is capable of rigorously reproducing observable phenomena and is able to provide a microeconomically well-founded basis for the design of optimal policy rules, since it is amenable to welfare analysis. Nevertheless these results come at the price of many ad-hocery and other shortcomings which are indispensable for intertemporal equilibrium modelling of the current kind. Moreover the NNS did not let us think about the financial crisis and the macroeconomic imbalances that were forming in the years of the Great Moderation.
    JEL: B22 D50 E21 E22
    Date: 2013
  13. By: Hatcher, Michael C. (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We survey recent literature comparing inflation targeting (IT) and price-level targeting (PT) as macroeconomic stabilization policies. Our focus is on New Keynesian models and areas which have seen significant developments since Ambler’s (2009) survey: the zero lower bound on nominal interest rates; financial frictions; and optimal monetary policy. Ambler’s main conclusion that PT improves the inflation-output volatility trade-off in New Keynesian models is reasonably robust to these extensions, several of which are attempts to address issues raised by the recent financial crisis. The beneficial effects of PT therefore appear to hang on the joint assumption that agents are rational and the economy New Keynesian. Accordingly, we discuss recent experimental and survey evidence on whether expectations are rational, as well as the applied macro literature on the empirical performance of New Keynesian models. In addition, we discuss a more recent strand of applied literature that has formally tested New Keynesian models with rational expectations. Overall the evidence is not conclusive, but we note that New Keynesian models are able to match a number of dynamic features in the data and that behavioural models of the macroeconomy are outperformed by those with rational expectations in formal statistical tests. Accordingly, we argue that policymakers should continue to pay attention to PT.
    JEL: E52
    Date: 2013–12
  14. By: Engelbert Stockhammer (Kingston University)
    Abstract: Neoliberalism has not given rise to a sustained profit-led growth process, but to a finance-dominated accumulation regime in which growth relies either on financial bubbles and rising household debt (‘debt-driven growth’) or on net exports (‘export-driven growth’). The financial crisis that began in the market for derivatives on the US subprime mortgage market has translated into the worst recession since the 1930s. In Europe the crisis has been amplified by an economic policy architecture (the Stability and Growth Pact) that aimed at restricting the role of fiscal policy and insulating monetary policy and central banks from national governments. The crisis has thus led to a sharp economic divergence between core and peripheral countries. Contrary to the situation in the (export-driven) Germanic core of Europe, the crisis is escalating in the (debt-driven) southern countries of Europe. The paper interprets the policy regime as the outcome of national elites’ attempt to use European integration as a means to constrain nation states. The result is a policy regime that has fatally weakened nation states as regards their fiscal and monetary capacities without creating a European state.
    Keywords: Euro crisis, neoliberalism, European economic policy, European integration, financial crisis, sovereign debt crisis
    JEL: E02 E12 E5 E6 F5 P16
    Date: 2014–01
  15. By: Christopher J. Erceg; Andrew Levin
    Abstract: In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during “normal times†(that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.
    Keywords: Economic recession;United States;Labor markets;Unemployment;Monetary policy;labor force participation, unemployment, and monetary policy rules
    Date: 2013–12–16
  16. By: Camera, Gabriele; Chien, YiLi
    Abstract: We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money - reduced-form vs. explicit role - neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money. --
    Keywords: cash-in-advance,matching,microfoundations,money,inflation
    JEL: E1 E4 E5
    Date: 2013
  17. By: Alfonso Novales (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid. Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Rafaela Pérez (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Jesús Rúiz (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid))
    Abstract: In an endogenous growth model with public consumption and public investment, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We show that under the time-consistent, Markov policy, the economy lacks any transitional dynamics and also that there is local and global determinacy of equilibrium. We compare the Markovian optimal policy with the Ramsey policy as well as with the solution to the planner’s problem under lump-sum taxation. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest.
    Keywords: Time-consistency, Markov-perfect optimal policy, Ramsey optimal policy, Endogenous growth, Income tax rate, Government spending composition.
    JEL: E61 E62 H21
    Date: 2013–06
  18. By: Bel, K.; Paap, R.
    Abstract: Forecasts of key macroeconomic variables may lead to policy changes of governments, central banks and other economic agents. Policy changes in turn lead to structural changes in macroeconomic time series models. To describe this phenomenon we introduce a logistic smooth transition autoregressive model where the regime switches depend on the forecast of the time series of interest. This forecast can either be an exogenous expert forecast or an endogenous forecast generated by the model. Results of an application of the model to US inflation shows that (i) forecasts lead to regime changes and have an impact on the level of inflation; (ii) a relatively large forecast results in actions which in the end lower the inflation rate; (iii) a counterfactual scenario where forecasts during the oil crises in the 1970s are assumed to be correct leads to lower inflation than observed.
    Keywords: forecasting, inflation, nonlinear time series, regime switching
    Date: 2013–08–08
  19. By: L. Randall Wray; Xinhua Liu
    Abstract: This paper examines the fiscal and monetary policy options available to China as a sovereign currency-issuing nation operating in a dollar standard world. We first summarize a number of issues facing China, including the possibility of slower growth, global imbalances, and a number of domestic imbalances. We then analyze current monetary and fiscal policy formation and examine some policy recommendations that have been advanced to deal with current areas of concern. We next outline the sovereign currency approach and use it to analyze those concerns. We conclude with policy recommendations consistent with the policy space open to China.
    Keywords: China; Policy Space; Fiscal and Monetary Policy; Sectoral Balances Approach; Minsky; Sovereign Currency; Modern Money Theory; Middle-Income Trap; Financial Instability
    JEL: E2 E5 E6 F4 G2 G3 H5 H6 H7 H63 H72
    Date: 2014–01
  20. By: Bursian, Dirk; Weichenrieder, Alfons J.; Zimmer, Jochen
    Abstract: The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior the expectation is that mainly high trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy. --
    Keywords: trust,debt sustainability,fiscal reaction function,euro area,EU
    JEL: H62 E62
    Date: 2013
  21. By: Bursian, Dirk; Faia, Ester
    Abstract: Trust in policy makers uctuates signi…cantly over the cycle and a¤ects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust a¤ects agentsstochastic discount factors, namely the price of future risk, and through this it interacts with the monetary trans- mission mechanism. Using data from the Eurobarometer surveys we analyze the link between trust and the transmission mechanism of macro and monetary shocks: empirical results are in line with theoretical ones. --
    Keywords: trust evolutionary games,trust driven expectations,monetary transmission mechanism
    JEL: E0 E5
    Date: 2013
  22. By: Mandelman, Federico S. (Federal Reserve Bank of Atlanta); Zanetti, Francesco (Oxford University)
    Abstract: Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs.
    Keywords: technology shocks; employment; labor market frictions
    JEL: E32
    Date: 2013–12–01
  23. By: Konchitchki, Yaniv
    Abstract: This study sheds new light on the cross-sectional effects of inflation, which have substantial implications for stock valuation. I use financial statement analysis to examine systematic stock-valuation effects of aggregate price-level changes on individual companies, focusing on the implications for both researchers and investment practitioners. I develop inflation-adjustment procedures that are straightforward for investors to implement in real time for extracting the inflation effect on individual companies. I find that inflation-based investment strategies conditioned on information available to investors as of the initial investment and rebalancing dates result in significant risk-adjusted returns. I also investigate the sources of abnormal returns to inflation-based investment strategies. Specifically, I estimate two separate components of the inflation effect on individual companies, one based on only monetary holdings (using the net position of monetary holdings) and the other based on only nonmonetary holdings. Investigating the stock-valuation implications of extracting the components-based inflation effect reveals striking evidence. In particular, investing based on the inflation effect on companies’ net monetary holdings results in insignificant abnormal hedge returns. In contrast, investing based on the inflation effect on companies’ nonmonetary holdings consistently yields economically and statistically significant abnormal hedge returns. These findings indicate that inflation-based abnormal hedge returns are driven not by the exposure of companies’ net monetary holdings to inflation but, rather, by the exposure of their nonmonetary holdings to inflation. These results are consistent with the fact that companies’ nonmonetary holdings are usually held for several years and thus accumulate inflationary effects over time whereas their monetary holdings are, on average, naturally hedged because the exposure of monetary assets cancels the exposure of monetary liabilities for the average company. In addition, I examine the direction of the stock returns to real-time investment strategies.
    Keywords: Accounting; Aggregate Price Levels; Capital Markets; Financial Statement Analysis; Forecasting; Hedge; Inflation; Investment; Macroeconomics; Returns; Stock Valuation
    JEL: E01 E02 E31 G23 M21 M41
    Date: 2013
  24. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    Abstract: In this paper, we study whether central bank communication has a positive effect on market participants’ perception of central banks’ (i) credibility, (ii) unorthodox measures, and (iii) independence. We utilise a survey of more than 500 financial market participants from around the world who answered questions in reference to the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed). We find that market participants believe that the Fed communicates best, followed by the BoE, ECB, and BoJ. Similar rankings are found on the issues of credibility, satisfaction with unconventional monetary policy, and possible deterioration in independence. Using ordered probit models, we show that central bank communication has a positive effect on how central banks are perceived and understood, as it enhances credibility, increases satisfaction with unorthodox measures, and fosters perceived independence of central banks.
    Keywords: Central Bank, Communication, Credibility, Financial Crisis, Financial Market Participants, Independence, Survey, Unconventional Monetary Policy
    JEL: E52 E58
    Date: 2014
  25. By: Lorenzo Forni; Massimiliano Pisani
    Abstract: We assess the macroeconomic effects of a sovereign restructuring in a small economy belonging to a monetary union by simulating a dynamic general equilibrium model. In line with the empirical evidence, we make the following three key assumptions. First, sovereign debt is held by domestic agents and by agents in the rest of the monetary union. Second, after the restructuring the sovereign borrowing rate increases and its increase is fully transmitted to the borrowing rate paid by the domestic agents. Third, the government cannot discriminate between domestic and foreign agents when restructuring. We show that the macroeconomic effects of the restructuring depend on: (a) the share of sovereign bonds held by residents in the country as compared to that held by foreign residents, (b) the increase in the spread paid by domestic agents and (c) its net foreign asset position at the moment of the restructuring. Our results also suggest that the sovereign restructuring implies persistent reductions of output, consumption and investment, that can be large, in particular if the share of public debt held domestically is large, the private foreign debt is high and the spread paid by the government and the households does increase.
    Keywords: Sovereign debt;Monetary unions;Public debt;Debt restructuring;Fiscal consolidation;Fiscal policy;Economic models;Fiscal policy, DSGE modeling, sovereign restructuring
    Date: 2013–12–26
  26. By: Issing, Otmar
    Abstract: The financial crisis which started in 2007 has caused a tremendous challenge for monetary policy. The simple concept of inflation targeting has lost its position as state of the art. There is a debate on whether the mandate of a central bank should not be widened. And, indeed, monetary policy has been very accommodative in the last couple of years and central banks have modified their communication strategies by introducing forward guidance as a new policy tool. This paper addresses the consequences of these developments for the credibility, the reputation and the independence of central banks. It also comments on the recent debate among economists concerning the question whether the ECB's OMT program is compatible with its mandate. --
    Keywords: ECB,OMT,central banking
    Date: 2013
  27. By: Mercedes Garcia-Escribano
    Abstract: This paper investigates the transmission of monetary policy by private banks in Brazil during the recent easing cycle. The analysis presented uses a panel dataset with information on lending by private banks in Brazil and concludes that monetary transmission through lending volumes was not impaired. Instead, the observed diminished lending appears to be related to supply and demand factors, as well as to the rapid expansion of public banks’ lending.
    Keywords: Monetary transmission mechanism;Brazil;Monetary policy;Business cycles;Credit expansion;Banks;Private sector;Loans;monetary transmission, monetary policy, credit growth
    Date: 2013–12–17
  28. By: Riccardo Fiorentini (Department of Economics (University of Verona)); Guido Montani (University of Pavia)
    Abstract: The European Council of 8 February 2013, with its decision to cut the EU budget to 1% of GDP, made a great mistake: it aggravated the recession of the European economy and, tacitly, admitted that a European recovery policy is impossible. In this paper the Authors show that with an annual EU budget of only 1.19% of GDP, a recovery plan of 2% of GDP is possible, in order to fill the gap in European aggregate demand for investment and consumption. The twofold aim of this exercise is to show that European parties and leaders can put forward an alternative economic policy to austerity and that European fiscal imbalance is one of the major causes of the crisis of democracy in Europe
    Keywords: Recovery, European Union, Federalism
    JEL: E62 F42 F55
    Date: 2013–03
  29. By: Paries, Matthieu Darraq; Faia, Ester; Palenzuela, Diego Rodriguez
    Abstract: Euro area data show a positive connection between sovereign and bank risk, which increases with banks' and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks' runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk. --
    Keywords: liquidity risk,sovereign risk,capital regulations
    JEL: E5 G2
    Date: 2013
  30. By: Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula
    Abstract: This paper uses two of the IMF’s DSGE models to simulate the benefits of international fiscal and macroprudential policy coordination. The key argument is that these two policies are similar in that, unlike monetary policy, they have long-run effects on the level of GDP that need to be traded off with short-run effects on the volatility of GDP. Furthermore, the short-run effects are potentially much larger than those of conventional monetary policy, especially in the presence of nonlinearities such as the zero interest rate floor, minimum capital adequacy regulations, and lending risk that depends in a convex fashion on loan-to-value ratios. As a consequence we find that coordinated fiscal and/or macroprudential policy measures can have much larger stimulus and spillover effects than what has traditionally been found in the literature on conventional monetary policy.
    Keywords: Fiscal policy;Macroprudential Policy;Monetary policy;Stabilization measures;International cooperation;Economic models;Monetary Policy, Fiscal Policy, Macroprudential Policy, International Policy Coordination, International Spillovers, Nonlinearities, Fiscal Multipliers, Macrofinancial Linkages, Prudential Regulation
    Date: 2013–12–23
  31. By: Damar, H. Evren; Gropp, Reint; Mordel, Adi
    Abstract: The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment, where even temporary adverse credit supply shocks are associated with significant real effects. --
    Keywords: credit supply,banking,financial crisis,consumption expenditure,liquid assets,consumption smoothing
    JEL: E21 E44 G21 G01
    Date: 2013
  32. By: Jose De Gregorio
    Abstract: This paper analyzes the unprecedented resilience of Latin American countries to the global financial crisis. It argues that sound macroeconomic conditions, which allowed an unusual monetary and fiscal expansion, exchange rate flexibility, a strong and well--regulated financial system, high level of reserves, and a bit of luck coming from very high terms of trade, were central to good economic performance. Persevering along the road of strong macroeconomic and financial policies is necessary, but not sufficient, to go from recovery to sustained growth.
    Keywords: Economic recovery;Latin America;Emerging markets;Economic growth;Monetary policy;Reserves accumulation;Fiscal policy;Financial systems;Global Financial Crisis 2008-2009;Latin America, macroeconomic management, financial policies, resilience
    Date: 2013–12–20
  33. By: G. LAMÉ (Insee)
    Abstract: This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use an averaging-estimator approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone's sovereign yield curve. I then look for episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate and its expected average path in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum" between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena.
    Keywords: Affine term structure models, unspanned macro risks, monetary policy, expectation hypothesis, term premium
    JEL: C51 E43 E44 E47 E52 G12
    Date: 2013
  34. By: Angeloni, Ignazio; Faia, Ester; Lo Duca, Marco
    Abstract: We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output. --
    Keywords: bank runs,risk taking,monetary policy
    JEL: E5 G2
    Date: 2013
  35. By: Camera, Gabriele; Gioffré, Alessandro
    Abstract: Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement - external or not. Simply put, monetary systems cannot operate independently of institutions - formal or informal - designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring. --
    Keywords: Social norms,repeated games,cooperation,payment systems
    JEL: E4 E5 C7
    Date: 2013
  36. By: Hans-Michael Trautwein (University of Oldenburg - International Economics & ZenTra); Finn Marten Körner (University of Oldenburg - International Economics & ZenTra)
    Abstract: Germany’s net exports and macroeconomic policy stance are controversial issues in current debates about the Eurozone debt crisis. This paper shows that both are characteristics of what has been described in a variety of political economy literatures as the German socio-economic model. We argue that the model has evolved in three stages, from the economic miracle of the post-war era through the era of “Germany Inc.” and Bundesbank hegemony to the present transnationalization of German industries and finance. The three stages of the German model – or Models D, mark I - III – correspond closely to the exchange rate regimes of Bretton Woods, the European Monetary System and European Monetary Union (EMU). We describe them in three analogous settings that specify their different working conditions under the respective exchange-rate regime, following a chronology of success, dynamic instability and transformation. We point out that, while the German economy has under-gone substantial changes, there are two different mindsets of model thinking in Germany that have been remarkably persistent in public debate. We refer to these two mindsets as ordoliberalism and neo-mercantilism. Ordoliberalism is the normative mindset of policy speakers and academic econo-mists, whereas neo-mercantilism is the practical mindset of policymakers and business leaders. We discuss the differences and complementary uses of these modes of German model thinking and draw attention to their flaws and inadequacies at the present stage of European integration and transnationalization of the German economy.
    Keywords: macroeconomic policy regimes, export-led growth, global imbalances, ordoliberalism, neo-mercantilism
    JEL: E61 F43 N14 O43
    Date: 2014–01
  37. By: Francis Vitek
    Abstract: This paper develops a structural macroeconometric model of the world economy, disaggregated into thirty five national economies. This panel unobserved components model encompasses an approximate linear panel dynamic stochastic general equilibrium model featuring a monetary transmission mechanism, a fiscal transmission mechanism, and extensive macrofinancial linkages, both within and across economies. A variety of monetary policy analysis, fiscal policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated, based on a Bayesian framework for conditioning on judgment.
    Keywords: Monetary transmission mechanism;Spillovers;Monetary policy;Fiscal policy;Economic forecasting;Cross country analysis;Economic models;Monetary policy analysis; Fiscal policy analysis; Spillover analysis; Forecasting
    Date: 2013–12–19
  38. By: Bernhard G. Gunter (American University and Bangladesh Development Research Center (BDRC)); Faisal Ahmed (International Monetary Fund (IMF)); A. F. M. Ataur Rahman (North South University); Jesmin Rahman (International Monetary Fund (IMF))
    Abstract: This paper begins with examining Bangladesh’s economic structural transformation during 1980-2010, which is compared and contrasted with the transformation of India and Pakistan. It then calculates and compares the three countries’ macroeconomic volatility and uncertainty for the observation period (1980-2010), using unbiased volatility and uncertainty measures. It also reviews the evolution of Bangladesh’s macroeconomic uncertainty for each decade (i.e., the 1980s, 1990s and the 2000s). It shows, for example, that Bangladesh’s GDP volatility and uncertainty have been increasing over time. Reflecting on the fact that macroeconomic uncertainty has a negative impact on investment and growth, the paper derives various policy implications for Bangladesh, highlighting the importance of economic diversification, countercyclical monetary policy, smoothing external factors, and building up reserves and buffers.
    Keywords: structural change, volatility, uncertainty, Bangladesh, India, Pakistan
    Date: 2014–01
  39. By: Sanderson, Rohnn
    Abstract: Using the HICP (Harmonized Index of Consumer Prices) the author tests the series for the makeup of its dynamic components both before and after the start of stage three of the European Central Bank’s (ECB) monetary policy directive. While it appears ECB is meeting its stated objective, it is perhaps more important to address the composition of the lag and volatility of monetary policy to see how a policy change alters the fundamental dynamic structure of an economic system. The HICP data provides a good natural experiment for assessing structural change. This is important because while a policy may achieve its goal(s), in doing so it may alter the fundamental nature of how that system behaves, potentially causing the system to be more volatile or more sensitive to exogenous shocks in the future. Changes to the fundamental nature of a dynamic system can mean that future policies, that are similar to the present policies, could have very different impacts on that very same system in terms of both long run and short run effects. The paper finds that while the ECB may be meeting its stated objectives, it may be potentially increasing the degree and severity of future short run deflationary/inflationary cycles from similar policies in the future due to the type of random and deterministic components in the system. More data and further study is needed to determine the long-term affects of monetary policy in economic systems as many economic cycles are indeed very long.
    Keywords: dynamic systems, Hurst exponent, chaos, long-term memory, monetary policy
    JEL: C50 E40 G18
    Date: 2013–12–18
  40. By: Dean Karlan, Jonathan Zinman
    Abstract: The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing.
    Keywords: credit; microcredit
    JEL: E51 G21
    Date: 2013–07
  41. By: Patrick Blagrave; Peter Elliott; Roberto Garcia-Saltos; Douglas Hostland; Douglas Laxton; Fan Zhang
    Abstract: We extend the Global Projection Model (GPM) to include a separate block for China. China plays an important role in shaping global economic outcomes, given its sheer size and trade integration with other key economies, its demand for commodities, and its policies. Also, the Chinese economy has several unique features which differentiate it from the rest of emerging Asia. These features (the use of multiple monetary-policy instruments and a managed-floating exchange-rate policy) mean that a separate treatment of China allows for a better consideration of China, as well as how the rest of emerging Asia behaves.
    Keywords: Forecasting models;China;Monetary policy;Inflation;Exchange rate regimes;Commodity prices;China, Global Macroeconomic Model, spillovers
    Date: 2013–12–19
  42. By: G. CLÉAUD (Insee); M. LEMOINE (Insee); P.-A. PIONNIER (Insee)
    Abstract: The importance of the stimulus packages that were injected in most advanced economies from the start of the financial crisis and the speed at which budgets are now being consolidated in Europe has revived the long-lasting debate on the size of fiscal multipliers. In this study, we focus on government expenditures on goods and services. Our conclusion following Blanchard and Perotti (2002) for the identification of government spending shocks is that the multiplier is significant and not far from 1 on impact and becomes statistically insignificant after about 3 years in France. We provide numerous robustness checks concerning the definition of expenditures, assumptions about data stationarity, the role of expectations and the choice of the sample. Moreover, using a time-varying SVAR model, our main findings are (1) that the multiplier did not evolve significantly at any horizon since the beginning of the 1980s and (2) that the variance of shocks hitting the economy evolves a lot more than the model autoregressive parameters. Even in alternative specifications where the Bayesian priors are pushed towards time-variation, the main evolution that we uncover is a (non-significant) decrease of the medium term expenditure multiplier, partly linked to a more aggressive monetary policy since the 1990s. We do not find evidence of an increase of the multiplier during every recession in France, contrary to the finding of Auerbach and Gorodnichenko (2012) for the United States. At least, business cycle conditions do not seem to be the main driver of the evolution of the expenditure multiplier in the last 30 years in France.
    Keywords: Government expenditure multiplier, Evolution, TV-SVAR
    JEL: E62 C54
    Date: 2013
  43. By: Carmen Reinhart; Kenneth Rogoff
    Abstract: Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial Repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.
    Keywords: Financial crisis;Sovereign debt;Debt conversion;Debt restructuring;External debt;Public debt;Inflation;Economic growth;Developed countries;Emerging markets;Financial crises, sovereign debt crises, deleveraging, credit cycles, financial repression, debt restructuring
    Date: 2013–12–24
  44. By: FARLEY GRUBB (Department of Economics,University of Delaware)
    Abstract: Forensic accounting techniques are used to construct new data series on emissions, redemptions, and bills outstanding for colonial New Jersey paper money. These components are further separated into the amounts initially legislated and planned, and the amounts actually executed. Not only are these data improvements over the prior data in the literature, but they provide a more complete and nuanced accounting of colonial New Jersey’s paper money regime than what has been done previously for any British North American colony. Enough detail of the forensic accounting exercise is given for scholars to reproduce the data series from the original sources.
    Keywords: bills of credit, colonial money supply, land banks, monetary redemption, paper money
    JEL: E51 N11
    Date: 2014
  45. By: Hirokazu Mizobata (Institute of Economic Research, Kyoto University)
    Abstract: In this Paper, we use industry data from Japan to examine the joint behavior of investment and hiring. We estimate factor adjustment costs in industries and focus on the industrial difference in such costs. Our analisis reveals that heavy industries such as steel and transport equipment need relatively large adjustment costs. A comparison between the U.S and Japan reveals thet the ratio of labor adjustment costs in total adjustment costs tends to be higher in Japan. Our findings are useful in considering the mechanism of factor adjustment costs.
    Keywords: joint estimation of investment and hiring, substitutability, complementarity, industry-level adjustment costs
    JEL: E22 E24 J23
    Date: 2014–01
  46. By: J.-B. BERNARD (Insee); G. CLÉAUD (Insee)
    Abstract: Since the late 70s and the first two oil shocks, many economic studies have explored the link between changes in oil prices and global economic growth. However, the causes of the variations in oil price have changed over this period. Thus the impact of these shocks on the economy may also differ. Developing a structural VAR model and the bootstrap-after-bootstrap methodology, this paper offers to identify three types of exogenous shocks to explain the dynamic of the real price of oil. This study then analyzes the impact on the French economy of these three shocks by identifying the channels through which these effects transit with a VARX model integrating data on exports and interest rates. We find that the effects of an increase in the real price of oil, and the channels through which it affects the French economy, greatly differ depending on the nature of the shocks. The 80s were mostly dominated by oil supply shocks. Restricting oil production results in a significant decrease in the French Gross Domestic Product (GDP). The shock of the late 2000s can be explained by the development of global activity and the high demand for oil in emerging economies. A positive global activity shock causes a significant increase in French GDP, while the general price level is not impacted by the increase in oil prices.
    Keywords: real price of oil, SVAR, historical decomposition, bootstrap-after-bootstrap, transmission channels
    JEL: E32 Q41 Q43
    Date: 2013
  47. By: Faruk Balli; Syed Abul Basher; Faisal Rana
    Abstract: Using both panel and cross-sectional models for 28 industrialized countries observed from 2001 to 2009, we report a number of findings regarding the determinants of the volatility of returns on cross-border asset holdings (i.e., equity and debt). Greater portfolio concentration and an increase in assets held in emerging markets lead to an elevation in earning volatility, whereas more financial integration and a greater share held in Organization for Economic Cooperation and Development countries and by the household sector cause a reduction in the return volatility. Larger asset holdings by offshore financial corporations and non-bank financial institutions cause higher market volatility, although they affect volatility in the equity and bond markets in the opposite way. Overall, both panel and cross-sectional estimations provide very similar results (albeit of different magnitude) and are robust to the endogeneity problem.
    Keywords: Asset return volatility, financial integration, international portfolio choice, asset holdings, endogeneity bias
    JEL: E44 F36 G15
    Date: 2014–01
  48. By: P.-Y. CABANNES (Insee); A. MONTAUT (Insee); P.-A. PIONNIER (Insee)
    Abstract: Potential growth estimates and forecasts generally rely on a decomposition of GDP growth into three production factors: the volume of labour, the volume of capital and a residual term called multifactor productivity (MFP). This residual term is often considered as the contribution to growth of technical progress even if it represents, more generally, all sources of growth not already taken into account by the first two production factors. The amplitude of this residual term may be reduced if the contribution to growth of labour and capital quality is also measured, i.e. by taking into account that different capital and labour types may have different productivities. From 1979 to 2010, on the whole economy excluding agriculture, real estate and non-market services, net capital stock grows at a rate of 2.5% a year and capital quality at 0.4% a year. The contribution of capital quality is higher when firms invest more. Over the same period, aggregate hours of work remain globally stable whereas labour quality grows at 0.5% a year. From 1994 to 2007 on the whole economy, taking quality effects into account reduces the MFP growth rate from 1.3% to 0.9% a year and subtracting business cycle effects further reduces it to 0.7% a year. Starting from this new MFP estimate and making different assumptions on the evolution of quality effects, on capital accumulation and on the evolution of the labour force, we propose three potential growth scenarios over 2015-2025. Most of the uncertainty comes from MFP projections. If one assumes that MFP will recover its pre-2008 growth rate or that it will be reduced by a small or large extent, potential growth can be projected between 1.2% and 1.9% a year.
    Keywords: growth accounting, multifactor productivity, capital services, labour services, potential growth
    JEL: E01 E22 E24 O47
    Date: 2013
  49. By: Siekmann, Helmut; Wieland, Volker
    Abstract: This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions. --
    Keywords: ECB,OMT,fiscal policy,monetary policy
    Date: 2013
  50. By: L. Sella (Department of Economics “S. Cognetti de Martiis", University of Turin, Italy, CNR-Ceris, Moncalieri, Italy); G. Vivaldo (Istituto Nazionale di Fisica Nucleare (INFN), Turin, Italy); A. Groth (Environmental Research & Teaching Institute and Geosciences Department, Ecole Normale Supérieure, France); M. Ghil (, Environmental Research & Teaching Institute and Geosciences Department, Ecole Normale Supérieure, France, Department of Atmospheric & Oceanic Sciences and Institute of Geophysics & Planetary Physics, University of California, USA)
    Abstract: The present work applies several advanced spectral methods to the analysis of macroeconomic fluctuations in three countries of the European Union: Italy, The Netherlands, and the United Kingdom. We focus here in particular on singular-spectrum analysis (SSA), which provides valuable spatial and frequency information of multivariate data and that goes far beyond a pure analysis in the time domain. The spectral methods discussed here are well established in the geosciences and life sciences, but not yet widespread in quantitative economics. In particular, they enable one to identify and describe nonlinear trends and dominant cycles | including seasonal and interannual components that characterize the deterministic behavior of each time series. These tools have already proven their robustness in the application on short and noisy data, and we demonstrate their usefulness in the analysis of the macroeconomic indicators of these three countries. We explore several fundamental indicators of the countries' real aggregate economy in a univariate, as well as a multivariate setting. Starting with individual single-channel analysis, we are able to identify similar spectral components among the analyzed indicators. Next, we consider combinations of indicators and countries, in order to take different effects of comovements into account. Since business cycles are cross-national phenomena, which show common characteristics across countries, our aim is to uncover hidden global behavior across the European economies. Results are compared with previous findings on the U.S. indicators (Groth et al., 2012). Finally, the analysis is extended to include several indicators from the U.S. economy, in order to examine its influence on the European market.
    Keywords: Advanced Spectral Methods, European Business Cycle, Frequency Domain, Time Domain
    JEL: C15 C60 E32
    Date: 2013–12
  51. By: Kakarot-Handtke, Egmont
    Abstract: The existence proof of general equilibrium, which is based on subjective-behavioral axioms, is replaced by the existence proof of a final turning point, which is based on objective-structural axioms. The final turning point is characterized by an irreversible switch from profits to losses for the business sector as a whole and marks the beginning of the breakdown of the monetary economy. This has nothing to do with any market failures or irrationalities. The final turning point can be preceded by an arbitrary number of temporary profit/loss reversals and is in full accordance with the households’ optimal intertemporal consumption plans.
    Keywords: new framework of concepts; structure-centric; axiom set; consumption economy; Profit Law; simulation; market clearing; budget balancing; final turning point; existence proof
    JEL: B59 D90 E19
    Date: 2014–01–13
  52. By: Alan Taylor
    Abstract: Consider two views of the global financial crisis. One view looks across the border: it blames external imbalances, the unprecedented current account deficits and surpluses in recent years. Another view looks within the border: it faults domestic financial systems where risks originated in excessive credit booms. We can use the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. The credit boom explanation is the most plausible predictor of crises since the late nineteenth century; global imbalances have only a weak correlation with financial distress compared to indicators drawn from the financial system itself.
    Keywords: Financial crisis;Current account;Credit expansion;Capital flows;Business cycles;Financial crises, financial openness, capital controls, current account, external imbalances
    Date: 2013–12–20
  53. By: Luis Cárdenas del Rey (Departamento de Economía Aplicada, Universidad Complutense de Madrid (UCM))
    Abstract: En este trabajo se contrasta la hipótesis de endogeneidad monetaria en la economía española durante el período 1980-2012 desde un enfoque kaleckiano. Se aporta evidencia de las fluctuaciones y oscilaciones cíclicas de los agregados monetarios y el volumen de crédito bancario, junto con las relaciones de cointegración y de causalidad existentes entre las variables. Además, como los resultados de la tasa de variación no son concluyentes se desarrolla un modelo de Vectores Autorregresivos (VAR) con objeto de estimar el comportamiento de las variables M3 y créditos durante el período 1998-2012. Por lo tanto, esta investigación supone una renovación de las estimaciones realizadas hasta la fecha para la economía española.
    Abstract: This paper deals with the monetary endogeneity hypothesis in the Spanish economy during the period 1980-2012 from a Kaleckian approach. Evidence of fluctuations and cyclical fluctuations of monetary aggregates and the volume of bank credit is provided, along with cointegration and causality between variables. Furthermore, as the results of the rate of change is inconclusive Vector Autoregressive model (VAR) in order to estimate the behavior of the variables M3 and credits during the period 1998 to 2012 is developed. Therefore, this research is a renewal of the estimates to date for the Spanish economy.
    Keywords: Endogenous money, Granger causality test, VAR, Endogeneidad monetaria, Causalidad de Granger, VAR.
    JEL: E41 E47 E51
    Date: 2013–12
  54. By: Gaowang Wang (Central University of Finance and Economics); Heng-fu Zou (Central University of Finance and Economics)
    Abstract: This paper incorporates negative consumption externality embodying "jealousy" and "running away from the Joneses" into Guo and Lansing (2007)'s model with production externality and endogenous depreciation, and examines how consumption externality helps to generate equilibrium indeterminacy together with production externality. Specifically, the existence of consumption externality reduces the upper and lower bounds of production externality for local indeterminacy, and when the degree of consumption externality increases, the upper and lower bounds of production externalities for local indeterminacy are both reduced.
    Keywords: Consumption Externality, Production Externality, Indeterminacy, Endogenous Depreciation
    JEL: C62 E21 E22
    Date: 2014–01
  55. By: Real Arai (Graduate School of Social Sciences, Hiroshima University); Takuma Kunieda (Department of Economics and Finance,City University of Hong Kong); Keigo Nishida (Faculty of Economics, Fukuoka University)
    Abstract: To understand mixed evidence provided by empirical studies for the relationship between the accumulation of public debt and economic growth, it is necessary to consider not only the crowd-out effect of public debt on economic growth but also the growth-enhancing crowd-in effect that cannot be uncovered by the traditional theoretical achievements. We develop a dynamic general equilibrium model with infinitely lived agents and derive an inverted U-shaped relationship between the accumulation of public debt and economic growth. The analysis focuses on both crowd-out and crowd-in effects that public debt has on private investment in a financially constrained economy and clarifies the mechanism inducing the inverted U-shaped relationship in the growth process. When the public debt-to-GDP ratio is below a certain threshold level, the crowd-in effect dominates the crowd-out effect and the accumulation of public debt promotes economic growth. When the public debt-to-GDP ratio exceeds the threshold level, the accumulation of public debt begins to hinder economic growth with the crowd-out effect dominating the crowd-in effect.
    Keywords: Economic growth; Public debt; Crowd-in effect; Financial market imperfections
    JEL: O41 E62
    Date: 2014–01
  56. By: Carlos León; Clara Machado; Andrés Murcia
    Abstract: This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis. The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution. The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution’s systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making.
    Keywords: Systemic Importance, Systemic Risk, Fuzzy Logic, Principal Component Analysis, Financial Stability, Macro-prudential. Classification JEL: D85, C63, E58, G28
    Date: 2013–12
  57. By: Melanie Ward-Warmedinger; Corrado Macchiarelli
    Abstract: This paper presents information on labour market mobility in 23 EU countries, using Eurostat’s Labour Force Survey (LFS) data over the period 1998-2008. More specifically, it discusses alternative measures of labour market churning; including the ease with which individuals can move between employment, unemployment and inactivity over time. The results suggest that the probability of remaining in the same labour market status between two consecutive periods is high for all countries. Nonetheless, transitions from unemployment and inactivity back into the labour market are relatively weak in the euro area and central eastern European EU (CEE EU) countries compared to Denmark and, particularly, Sweden. Moreover, comparisons of transition probabilities over time suggest that – until the onset of the financial crisis – the probability of remaining in unemployment over two consecutive periods decreased in Sweden, the euro area, and, to a lesser extent, Denmark, while it increased in the average CEE EU countries. At the same time, however, successful labour market entries (from outside the labour market) increased in the average CEE EU countries, Denmark and Sweden. On the basis of an index for labour markets turnover used in the paper (Shorrocks, 1987), labour markets in Spain, Luxemburg, the Netherlands, Denmark and Sweden are the most mobile on average, with these results mainly reflecting higher mobility of people below the age of 29, highly educated and female workers. We also find that mobility of all worker groups has generally increased over time in the euro area, Denmark and Sweden. Finally, we ask whether some of the observed changes in mobility can be broadly restraint to some “macro” explanatory factors, including part time and temporary employment, unemployment and structure indicators. The results provide a mixed picture, suggesting that the sense of mobility strongly varies across countries.
    Keywords: Transition probabilities, labour market mobility, LFS micro data, EU countries
    JEL: J21 J60 J82 E24
    Date: 2013–11
  58. By: Amedeo Argentiero; Carlo Andrea BOLLINO
    Abstract: This paper presents a theoretical contribution to model and dynamically analyze underground economy. We build a DSGE model with two sectors and one homogeneous good produced either by the sunlight and the underground firm. The sunlight firm is subject to distortionary taxation, whereas the underground firm evades taxation. The economy is subject to stochastic uncorrelated technology shocks on total factor productivity on private sectors and public labor. The demand side of the economy is populated by an infinite number of households with preferences defined over legal good consumption, public expenditure and labor services on a period-by-period basis. The government collects taxation from the sunlight sector and fights tax evasion through audit activity undertaken by public officers. When detected, underground firms are subject to regular taxation and additional fine payments. We simulate the model under the productivity shocks for Italy, over the sample 1974:01-2011:02. We find that in Italy underground economy share of GDP is on average about 23%. The dynamic behavior of the model shows that: (i) an efficient audit activity has a negative impact on public accounts thus generating a tradeoff between the reduction of underground economy and the worsening of public finance; (ii) sunlight production has a greater relative volatility with respect to undeground production; iii) all variables of the underground sector appear to be negatively correlated with the corresponding ones of regular economy. This implies that underground activity is a sort of buffer for the economy, whenever the business cycle is in downturn phases.
    Date: 2013–11–04
  59. By: Gómez, O.
    Abstract: The present literature review aims to provide a panoramic view of the different ways in which the link between climate change and migration has been addressed in the existing literature, building on the recent non-annotated bibliography issued by the International Organization for Migration in December 2012. After a brief introduction of the background and the plurality of methodologies behind academic studies about the connection of the two phenomena, the review identifies four main themes and debates ongoing in the literature, namely: (1) scale and location of the climate induced migration, (2) mechanisms behind its occurrence, (3) emerging recognition of migration as adaptation, not only as an impact, and (4) measures for its management. Gaps in need of further work are divided into areas for analysis and areas for advocacy. Included among the former are more in situ knowledge production, focus on cities and additional research following a differentiated approach— e.g., gendered. Advocacy approaches need to motivate further research, maintaining advances against the stigmatization of migrants. The review is informed by human security ideas, which are presented as buttressing analyses at levels different from the national, facilitating joined-up thinking and providing a flexible framework to accommodate multiple layers of climate- migration interaction.
    Keywords: Global environmental change, human mobility, adaptation, environmental refugees, displacement, human security, human security methodology
    Date: 2013–11–30
  60. By: Ehrhart, Helene; Le Goff, Maelan; Rocher?, Emmanuel; Singh, Raju Jan
    Abstract: This paper aims at assessing the impact of migration on export performance and more particularly the effect of African migrants on African trade. Relying on a new data set on international bilateral migration recently released by the World Bank spanning from 1980 to 2010, the authors estimate a gravity model that deals satisfactorily with endogeneity. The results first indicate that the pro-trade effect of migration is higher for African countries, a finding that can be partly explained by the substitution between migrants and institutions (the existence of migrant networks compensating for weak contract enforcement, for instance). This positive association is particularly important for the exports of differentiated products, suggesting that migrants also play an important role in reducing information costs. Moreover, focusing on intra-African trade, the pro-trade effect of African migrants is larger when migrants are established in a more geographically and ethnically distant country. All these findings highlight the ability of African migrants to help overcome some of the main barriers to African trade: the weakness of institutions, information costs, cultural differences, and lack of trust.
    Keywords: Economic Theory&Research,Population Policies,Free Trade,Trade Policy,Emerging Markets
    Date: 2014–01–01

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