|
on Macroeconomics |
|
Issue of 2014‒02‒15
73 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Calderón, César (The World Bank); Duncan , Roberto (Ohio University); Schmidt-Hebbel, Klaus (Catholic University of Chile) |
| Abstract: | The literature has argued that developing countries are unable to adopt counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008 we find that the level of institutional quality plays a key role in countries' ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, re ected in extended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar. |
| Keywords: | Counter-cyclical macroeconomic policies, institutions, fiscal policy, monetary policy |
| JEL: | E43 E52 E62 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2014-003&r=mac |
| By: | Airaudo, Marco (School of Economics LeBow College of Business Drexel University); Olivero, María Pía (School of Economics LeBow College of Business Drexel University) |
| Abstract: | We study optimal monetary policy in a New Keynesian-DSGE model where the combination of a credit channel and customer-market features in banking gives rise to counter-cyclical credit spreads. In our setting, monopolistically competitive banks set lending rates in a forward-looking fashion as they internalize the fact that, due to borrowers. bank-specific (hence deep) habits, current interest rates also affect the future demand for loans by financially constrained. In particular, during a phase of economic expansion, banks might find it optimal to lower current lending rates to build up a larger customer base, which will be locked into a long-term relationship. The resulting counter-cyclicality of credit spreads makes optimal monetary policy depart substantially from the efficient allocation (and hence from price stability), under both discretion and commitment. Our analysis shows that the welfare costs of setting monetary policy under discretion (with respect to the optimal Ramsey plan) and of using simpler sub-optimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking. |
| Keywords: | Optimal monetary policy; Cost Channel; New-Keynesian model; Credit frictions; Deep habits; Credit spreads |
| JEL: | E32 E44 E50 |
| Date: | 2014–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2014_001&r=mac |
| By: | Wen, Yi (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3% ~ 4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide not only a justification for adopting a low inflation target by central banks, but also a plausible explanation for the robust positive relationship between moderate inflation and social unrest in developing countries where money is the major form of household financial wealth. |
| Keywords: | Liquidity Preference; Money Demand; Financial Intermediation; Velocity; Welfare Costs of Inflation |
| JEL: | D10 D31 D60 E31 E41 E43 E49 E51 |
| Date: | 2014–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-003&r=mac |
| By: | Saroj Bhattarai; Gauti Eggertsson; Raphael Schoenle |
| Abstract: | We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles. |
| JEL: | E31 E32 E52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19886&r=mac |
| By: | Carrera, César (Central Reserve Bank of Peru); Ramírez-Rondán, Nelson (Central Reserve Bank of Peru) |
| Abstract: | The Great Moderation is characterized for being a stable period in terms of macroeconomic conditions, specially in inflation. In terms of the sticky information theory, this environment may provide few incentives for agents to update information on inflation and then a new slope of the sticky information Phillips curve should be observed. We estimate the degree of information rigidity implied by the sticky information Phillips curve proposed by Mankiw and Reis (2002). Using threshold models we identify regimes of high and low inflation and find that each regime is associated with a specific degree of information stickiness. We find evidence that agents update information faster when inflation is higher. |
| Keywords: | Inflation, Sticky Information, Phillips Curve, Threshold model |
| JEL: | C22 C26 E31 E52 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2014-001&r=mac |
| By: | D'Agostino, Antonello; Mendicino, Caterina |
| Abstract: | This paper provides new insights into expectation-driven cycles by estimating a structural VAR with time-varying coefficients and stochastic volatility. We use survey-based expectations of the unemployment rate to measure expectations of future developments in economic activity. We find that the effect of expectation shocks on the realized unemployment rate have been particularly large during the most recent recession. Unanticipated changes in expectations contributed to the gradual increase in the persistence of the unemployment rate and to the decline in the correlation between the inflation and the unemployment rate over time. Our results are robust to the introduction of financial variables in the model. |
| Keywords: | Survey Expectations; Economic Fluctuations; Stochastic Volatility; Time Varying Vector Autoregression |
| JEL: | C32 E24 E32 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53607&r=mac |
| By: | Hyeongwoo Kim |
| Abstract: | We investigate the Bank of Korea's interest rate setting behavior using a discrete choice model, where the Monetary Policy Committee revises the target policy interest rate only when the gap between the current market interest rate and the optimal rate exceeds a certain threshold value. Using monthly frequency data since 2000, we evaluate an array of ordered probit models in terms of the in-sample fit. We find important roles for the output gap, inflation, and the won depreciation rate against the US dollar. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point, finding good out-of-sample predictability of our models. |
| Keywords: | Monetary Policy; Bank of Korea; Ordered Probit Model; Target RP Rate; Interbank Call Rate; Taylor Rule |
| JEL: | E52 E58 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2014-02&r=mac |
| By: | Grossman, Valerie (Federal Reserve Bank of Dallas); Mack, Adrienne (Federal Reserve Bank of Dallas); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas) |
| Abstract: | The Database of Global Economic Indicators (DGEI) of the Federal Reserve Bank of Dallas is aimed at standardizing and disseminating world economic indicators for the study of globalization. It includes a core sample of 40 countries with available indicators and broad coverage for quarterly real GDP, and the monthly series of industrial production (IP), Purchasing Managers Index (PMI), merchandise exports and imports, headline CPI, CPI (ex. food and energy), PPI/WPI inflation, nominal and real exchange rates, and official/policy interest rates (see Grossman, Mack, and Martínez-García (2013)). This paper aims to codify in a systematic way the chronology of global business cycles for DGEI. We propose a novel chronology based on IP data for a sample of 84 countries at a monthly frequency from 1980 until now, and assess the turning points obtained as a signal of the underlying state of the economy as tracked by the indicators of DGEI. We conclude by proposing and also evaluating global recession probability forecasts up to 12 months ahead. The logit model proposed uses the DGEI aggregate indicators to offer advanced warning of turning point in the global cycle—by this metric a global downturn in 2013 does not appear likely. |
| JEL: | C14 C82 E32 E65 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:169&r=mac |
| By: | Harri Kemp (Bureau for Economic Research, university of Stellenbosch) |
| Abstract: | In a recent paper, Borio et al (2013a) show that information embedded in the financial cycle can serve to improve measures of potential output and output gaps. It is argued that output may be on an unsustainable path despite low and stable inflation if financial imbalances are accumulating. Borio et al (2013a) show that incorporating information on the financial cycle yields measures of potential output and output gaps for the US, UK and Spain that are estimated more precisely and are more robust in real time. With its well-developed financial markets and relatively open capital markets, the South African economy is potentially susceptible to the build-up of the sort of financial imbalances that characterised the recent financial crisis. However, existing measures of the output gap for South Africa do not generally incorporate information on the financial cycle. Using the framework developed in Borio et al (2013a), a finance-neutral measure of the output gap is estimated for South Africa. The traditional HP-filter is extended to incorporate information on credit and property prices. Including financial cycle proxies result in output gaps that are estimated more precisely and are more robust to data revisions and the arrival of new data points (i.e. estimated output gaps are more robust in real time), while also reflecting the impact of financial variables on economic activity. As such, the estimated finance-neutral output gap seems to represent a more appropriate measure on which to base monetary policy decisions than the traditional inflation-neutral measures prevalent in the literature. |
| Keywords: | Potential output, output gap, financial cycle, monetary policy |
| JEL: | E10 E40 E44 E47 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers208&r=mac |
| By: | Robert King; Yang Lu; Ernesto Pastén |
| Abstract: | How should policy be optimally designed when a monetary authority faces a private sector that is skeptical about policy announcements and makes inferences about the monetary authority’s ability to follow through on policy plans from economic data? To provide an answer to this question, we extend the standard New Keynesian macroeconomic model to include imperfect inflation control and Bayesian learning by private agents about whether the monetary authority is a committed type (capable of following through on announced plans) or an alternative type (producing higher and more volatile inflation). We find that the optimal pattern of inflation management depends critically on how skeptical the private sector is and how it views the alternative monetary authority whether the latter is just mechanically more inflationary or if it would mimic the committed monetary authority’s actions. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:717&r=mac |
| By: | Wood, richard |
| Abstract: | This article reviews internal and external balance policy issues in the Eurozone. The Swan diagram is used as a framework for assessing the policy actions needed to simultaneously restore both internal and external balance in selected Eurozone countries. A critical assessment is provided of using unit labour costs as an indicator of external competitiveness. It is argued that current macroeconomic policy settings are contributing to declining incomes, rising unemployment, high public debt and deflation, while failing to correct intra-Eurozone balance of payments disequilibria. A new macroeconomic policy plan is outlined for restoring economic growth and reducing external imbalances without raising public debt. |
| Keywords: | Macroeconomic policy; internal and external balance; competitiveness; public debt; deflation. |
| JEL: | E61 |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53569&r=mac |
| By: | Paolo Angelini (Banca d'Italia); Giuseppe Grande (Banca d'Italia); Fabio Panetta (Banca d'Italia) |
| Abstract: | More than three years since the outbreak of the sovereign debt crisis in the euro area the banking systems of several countries remain exposed to the vagaries of government bond markets. The paper analyzes the different channels through which sovereign risk affects banking risk (and vice versa), presents some new evidence on bank-sovereign links, and discusses policy options for addressing the related risks. |
| Keywords: | sovereign risk, sovereign debt crisis, global financial crisis, banking sector risk, bank regulation, contagion, credit crunch |
| JEL: | E44 E51 E58 G01 G21 G28 H63 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_213_14&r=mac |
| By: | Rodolfo Mendez-Marcano; Jose Pineda |
| Abstract: | In this paper we analyze the role played by fiscal sustainability shocks on the Bolivian economic growth performance. To do this, we impose restrictions on a VAR for the Bolivian economy that allow us to identify fiscal sustainability shocks. We argue that imposing long run identification restrictions in our tructural VAR is a new (applied to fiscal issues) and useful way to identify the macroeconomic impact of shocks on fiscal sustainability. Our results show a significant lost in the level of GDP in the Bolivian economy as a consequence of the sequence of adverse fiscal sustainability shocks this economy has experienced. Although, fiscal sustainability shocks have not permanent effect on Bolivia’s economic growth, the fact that adverse fiscal sustainability shocks has occurred during the period studied (in a significant way at least during the late 70s early 80s and at the late 90s early 2000s) have negatively affected Bolivian economic growth. Our results also show that inflation has been affected by fiscal sustainability shocks, especially the adverse shocks experienced during the period from 1977 to 1986, which ended in the hyperinflation in 1985. |
| Keywords: | SVAR; identifying restrictions; small open economies; fiscal policy; debt |
| JEL: | E32 E62 F41 H62 H63 O11 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1406&r=mac |
| By: | Claudio Borio |
| Abstract: | If the criteria for an institution's success are diffusion and longevity, then central banking has been hugely successful. But if the criterion is the degree to which it has achieved its goals, then the evaluation has to be more nuanced. Historically, those goals have included a changing mix of financial and monetary stability. Attaining monetary and financial stability simultaneously has proved elusive across regimes. Edging closer towards that goal calls for incorporating systematically long-duration and disruptive financial booms and busts - financial cycles - in policy frameworks. For monetary policy, this means leaning more deliberately against booms and easing less aggressively and persistently during busts. What is ultimately at stake is the credibility of central banking - its ability to retain trust and legitimacy. |
| Keywords: | financial cycle, balance sheet recessions, expectations gap, time inconsistency, regime shifts |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:440&r=mac |
| By: | Chase Coleman (Stern School, New York University); Kerk Phillips (Department of Economics, Brigham Young University) |
| Abstract: | This paper explores the merits of a DSGE model incorporating Schumpeterian type growth into an otherwise standard RBC model similar to the one in Phillips and Wrase (2006). We consider a model with two exogenous shocks. The first is a standard productivity shock. The second is an aggregate shock to the stock of basic knowledge and arrives as a Poisson process with an arrival rate influenced by economy-wide spending on R\&D. We show that this model is capable of generating both an observed total factor productivity and GDP series that is autocorrelated, even when all the shock processes are serially uncorrelated. We present empirical evidence that the driving process in our model is consistent with the behavior of the U.S. economy |
| Keywords: | autocorrelation, dynamic stochastic general equilibrium, business cycles, technology persistence, Schumpeterian, economic growth, GDP, TFP |
| JEL: | C63 E32 E37 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201401&r=mac |
| By: | Volker Böhm (Bielefeld University); Oliver Claas (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This paper analyzes the implications of right-to-manage wage bargaining between a producers’ syndicate and a workers’ union representing finite numbers of identical members in a monetary macroeconomic model of the AS–AD type with government activity. At given prices and price expectations, nominal wages are set according to a Nash bargaining agreement. Producers then choose labor demand and commodity supply to maximize profits at given output prices. The commodity market clears in a competitive fashion. Unique temporary equilibria are shown to exist for each level of relative power of the union. These equilibria may exhibit under- or overemployment, depending on the level of union power. The paper presents a complete comparative-statics analysis of the temporary equilibrium, in particular of the role of union power on employment, wages, and income distribution, including a variety of different qualitative features compared to the situation under efficient bargaining. These differences arise primarily from a supply-side effect of union power under the right-to-manage approach as compared to a demand-side effect under efficient bargaining. In addition, the dynamic evolution under perfect foresight is monotonic with two coexisting balanced steady states, one of which is stable under certain conditions. These properties are qualitatively identical to those under efficient bargaining or under perfect competition. |
| Keywords: | Collective Bargaining, Nash Bargaining, Union Power, Aggregate Supply-Aggregate Demand, Government Deficits, Perfect Foresight, Dynamics, Stability |
| JEL: | C78 D61 E24 E25 E31 E42 J52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:502&r=mac |
| By: | Tim Atkin; Mark Caputo; Tim Robinson; Hao Wang |
| Abstract: | The early 21st century saw Australia experience its largest and longest terms of trade boom. This paper places this recent boom in a long-run historical context by comparing the current episode with earlier cycles. While similarities exist across most episodes, current macroeconomic policy frameworks and settings are quite different to those of the past. This mitigated the broader macroeconomic consequences of the upswing and as the terms of trade decline may do likewise. |
| Keywords: | Commodity prices, terms of trade, macroeconomic policy |
| JEL: | E30 E60 N17 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-11&r=mac |
| By: | Ronald A. Ratti; Joaquin L. Vespignani |
| Abstract: | This paper investigates the influence of liquidity in the major developed and major developing economies on commodity prices. Liquidity is taken to be M2. A novel finding is that unanticipated increases in the BRIC countries’ liquidity is associated with significant and persistent increases in commodity prices that are much larger than the effect of unanticipated increases in G3 liquidity, and the difference increases over time. Over 1999-2012 BRIC liquidity is strongly linked with global energy prices and global real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal prices is twice as large as that of G3 liquidity. Granger casualty goes from liquidity to commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and G3 liquidity and global output and global prices are cointegrated. We construct a structural factor-augmented error correction (SFAVEC) model. |
| Keywords: | Commodity Prices, BRIC countries, G3, Global liquidity, SFAVEC |
| JEL: | E31 E32 E51 F01 G15 Q43 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-13&r=mac |
| By: | Christophe Blot (Ofce,Sciences-po); Jérôme Creel (Ofce, Sciences-po, Escp Europe); Paul Hubert (Ofce,sciences-po); Fabien Labondance (Ofce, Sciences-po); Francesco Saraceno (Ofce: Sciences-po, LUISS) |
| Abstract: | This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J Schwartz’s conventional wisdom that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the leaning against the wind monetary policy approach. |
| Keywords: | Price stability, Financial stability,DCC-GARCH,VAR |
| JEL: | C32 E31 E44 E52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1402&r=mac |
| By: | Nie, Jun (Federal Reserve Bank of Kansas City); Fang, Lei |
| Keywords: | Unemployment; Unemployment Insurance (UI)Benefits; Matching Model; Human Capital; Labor Market |
| JEL: | E24 J08 |
| Date: | 2014–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp13-10&r=mac |
| By: | Zhiguo He; Arvind Krishnamurthy |
| Abstract: | Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic “stress test” linking a stress scenario to the probability of systemic risk states. |
| JEL: | E44 G01 G2 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19885&r=mac |
| By: | Thomas A. Lubik; Christian Matthes |
| Abstract: | We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the true state of the economy, as large subsequent revisions showed. It is the combination of learning about the economy and, more importantly, the use of data riddled with measurement error that resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy in the economy. |
| Keywords: | Federal Reserve, Great Moderation, Bayesian Estimation, Least Squares Learning |
| JEL: | C11 C32 E52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-16&r=mac |
| By: | Ronald A. Ratti; Joaquin L. Vespignani |
| Abstract: | It is found that over 1999:1-2012:12 China’s monetary expansion influences Japan through the effect of China’s growth on world commodity prices, increased demand for imports, and exchange rate policy. China’s monetary expansion is associated with significant increases in Japan’s industrial production, exports and inflation, and decreases in the trade-weighted yen. In contrast, U.S. monetary expansion results in contraction in Japan’s industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models are estimated. Results are robust to various contemporaneous restrictions for the effect of international monetary variables, the interaction of foreign and domestic variables and to factor augmented VAR to identify monetary shocks. |
| Keywords: | International Monetary shocks, Japanese economy, Oil/commodity prices, SVEC models |
| JEL: | E52 F41 F42 Q43 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-14&r=mac |
| By: | Winkler, Adalbert |
| Abstract: | Is the OMT program in violation of the ECB's mandate? This paper applies the economic argumentation put forth by the OMT's opponents and supporters before the Federal German Constitutional Court [Bundesverfassungsgericht] to the full allotment policy practiced by the ECB since October 2008. The comparison shows that if the OMT violates the ECB's mandate, the same holds for the full allotment policy. Ultimately, therefore, the ECB is not in court because of monetary financing, but rather as a lender of last resort. Accordingly, a court decision against the OMT would endorse an economic reasoning which contradicts 150 years of modern central bank history and would expose the euro area to the instabilities of financial markets. Such a monetary union is neither sustainable nor desirable. -- |
| Keywords: | lender of last resort,OMT program,full allotment policy |
| JEL: | E52 E53 F33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:207&r=mac |
| By: | Sylvérie Herbert (Sciences-po) |
| Abstract: | Debates on the appropriate response of fiscal policy to economic downturns, such as the debates on the merits of austerity measures in Europe, have been centered on the size of the fiscal multipliers. Indeed, empirical and theoretical evidence suggests larger multipliers at times of recession than in expansions,thereby conditioning the success of fiscal consolidation - the higher the multiplier,the more costly the austerity would be in terms of growth of output. We extend the technique of vector autoregressions (VARs) to account for the possibility of time-variant fiscal multipliers for France, Germany, Italy and the United States. We estimate a 3-variable non linear smooth transition vector autoregression, following Auerbach and Gorodnichenko (2012a) Our results suggest that the output multiplier of government purchases is significantly higher in recessions than expansions for the United States.France,and Germany. |
| Keywords: | Fiscal policy, smooth transition vector autoregression STVAR, fiscal multipliers, impulse response function,monetary policy. |
| JEL: | E62 E63 H50 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1401&r=mac |
| By: | Jair N. OJeda; Julián A. Parra Polanía; Carmiña O. Vargas |
| Abstract: | This document analyzes the macroeconomic effects of a boom in a small-open economy’s natural-resource sector. We study the effects of this shock on the most important macroeconomic variables, the resource reallocation across sectors and on welfare under alternative fiscal rules. We employ a DSGE featuring three productive sectors (non-tradable, manufacturing and commodity goods), government and two types of consumers (Ricardian and non-Ricardian). Our results show that the natural-resource boom leads to an initial reduction of the manufacturing sector’s employment and production. The opposite temporal effect is obtained in the remaining two productive sectors. However, the effect on welfare is positive for all consumers since the boom increases consumption in all households. Finally, we find that a countercyclical fiscal rule leads to a slight increase in welfare compared with a balanced-budget rule. |
| Keywords: | Fiscal rule, Natural-Resource Boom, Consumer Welfare, Equilibrium Model Classification JEL: E62, F47, H30, H63 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:807&r=mac |
| By: | Schleer, Frauke; Semmler, Willi |
| Abstract: | We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specific amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops. -- |
| Keywords: | Vector STAR,financial stress,financial cycle,real economy,regime-switching,euro area |
| JEL: | E2 E44 G01 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13068r&r=mac |
| By: | Miklós Antal; Jeroen van den Bergh |
| Abstract: | We raise fundamental questions about macroeconomics relevant to escaping the financial-economic crisis and shifting to a sustainable economy. First, the feasibility of decoupling environmental pressure from aggregate income is considered. Decoupling as a single environmental strategy is found to be very risky. Next, three main arguments for economic growth are examined: growth as progress, growth to avoid economic instability, and growth to offset unemployment due to labor productivity improvements. For each, we offer orthodox, heterodox and new responses. Attention is paid to progress indicators, feedback mechanisms affecting business cycles, and strategies to limit unemployment without the need for growth. Besides offering an economy-wide angle, we discuss the role of housing and mortgage markets in economic cyclicality. Finally, interactions between real economic and financial-monetary spheres are studied. This includes money creation, capital allocation and trade-offs between efficiency and operating costs of financial systems. Throughout, environmental and transition implications are outlined. |
| Keywords: | Financial-monetary system, GDP information, housing-mortgage markets, macroeconomics, positive and negative feedbacks, productivity trap |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:feu:wfeppr:y:2014:m:2:d:0:i:10&r=mac |
| By: | Auer, Simone (Federal Reserve Bank of Dallas) |
| Abstract: | This paper assesses the transmission of monetary policy in a large Bayesian vector autoregression based on the approach proposed by Banbura, Giannone and Reichlin (2010). The paper analyzes the impact of monetary policy shocks in the United States and Canada not only on a range of domestic aggregates, trade flows, and exchange rates, but also foreign investment income. The analysis provides three main results. First, a surprise monetary policy action has a statistically and economically significant impact on both gross and net foreign investment income flows in both countries. Against the background of growing foreign wealth and investment income, this result provides preliminary evidence that foreign balance-sheet channels might play an increasingly important role for monetary transmission. Second, the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time, suggesting that the investment instruments and the currency denomination of a country’s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy. Finally, the results support existing evidence on the effectiveness of large vector autoregressions and the Bayesian shrinkage approach in addressing the curse of dimensionality and eliminating price and exchange rate puzzles. |
| JEL: | C53 E52 F41 F42 |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:170&r=mac |
| By: | Roy H Grieve (Department of Economics, University of Strathclyde) |
| Abstract: | The purpose of this paper is to highlight the curiously circular course followed by mainstream macroeconomic thinking in recent times. Having broken from classical orthodoxy in the late 1930s via Keynes’s General Theory, over the last three or four decades the mainstream conventional wisdom, regressing rather than progressing, has now come to embrace a conception of the working of the macroeconomy which is again of a classical, essentially pre-Keynesian, character. At the core of the analysis presented in the typical contemporary macro textbook is the (neo)classical model of the labour market, which represents employment as determined (given conditions of productivity) by the terms of labour supply. While it is allowed that changes in aggregate demand may temporarily affect output and employment, the contention is that in due course employment will automatically return to its ‘natural’ (full employment) level. Unemployment is therefore identified as a merely frictional or voluntary phenomenon: involuntary unemployment - in other words persisting demand-deficient unemployment - is entirely absent from the picture. Variations in aggregate demand are understood to have a lasting impact only on the price level, not on output and employment. This in effect amounts to a return to a Pigouvian conception such as targeted by Keynes in the General Theory. We take the view that this reversion to ideas which should by now be obsolete reflects not the discovery of logical or empirical deficiencies in the Keynes analysis, but results rather from doctrinaire blindness and failure of scholarship on account of which essential features of the Keynes theory have been overlooked or misrepresented. There is an urgent need for a critical appraisal of the current conventional macroeconomic wisdom. |
| Keywords: | Keynes’s General Theory, ‘classical’ macroeconomics, involuntary unemployment, the AD/AS model |
| JEL: | B12 B22 E13 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1401&r=mac |
| By: | Brümmerhoff, Dieter; Grömling, Michael |
| Abstract: | Durch die anstehende Revision der Volkswirtschaftlichen Gesamtrechnungen rechnet sich auch Deutschland reicher: Das Bruttoinlandsprodukt wird merklich höher ausfallen, wie schon bei den früheren Revisionen, und auch das Anlagevermögen nimmt rechnerisch deutlich zu. Bedeutsam hierfür ist die Erweiterung des Investitionsbegriffs, der künftig insbesondere die FuE-Ausgaben einschließt. Dieser Beitrag zeigt, welche Bedeutung dies für die Wirkungsanalyse haben wird. -- |
| Keywords: | National Accounting,Research and Development,Income Distribution,Business Cycles,Economic Growth |
| JEL: | E01 E25 E32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:roswps:133&r=mac |
| By: | Joshua C.C. Chan; Gary Koop; Simon M. Potter |
| Abstract: | In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non-accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time-varying Phillips curve and time-varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather use bounded random walks. For instance, trend inflation is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips curve. |
| Keywords: | trend inflation, non-linear state space model, natural rate of unemployment, inflation targeting, Bayesian |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-10&r=mac |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Tam, Xuan S. (City University of Hong Kong); Young, Eric R. (University of Virginia) |
| Abstract: | In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as “develeraging” (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have “worked.” We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate. |
| JEL: | D9 E21 K35 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-002&r=mac |
| By: | Emi Nakamura; Jón Steinsson; Miao Liu |
| Abstract: | China has experienced remarkably stable growth and inflation in recent years according to official statistics. We construct alternative estimates using detailed information on Chinese household purchasing patterns. As households become richer, a smaller fraction of total expenditures are spent on necessities such as grain and a larger fraction on luxuries such as eating out. We use systematic discrepancies between cross-sectional and time-series Engel curves to construct alternative estimates of Chinese growth and inflation. Our estimates suggest that official statistics present a smoothed version of reality. Official inflation rose in the 2000's, but our estimates indicate that true inflation was still higher and consumption growth was overstated over this period. In contrast, inflation was overstated and growth understated during the low-inflation 1990's. Similar patterns emerge from the data whether we base our estimates on major categories such as food or clothing as a fraction of total expenditures or subcategories such as grain as a fraction of food expenditures or garments as a fraction of clothing expenditures. |
| JEL: | D12 E21 E31 O11 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19893&r=mac |
| By: | Mark Weisbrot; Stephan Lefebvre; Joseph Sammut |
| Abstract: | This paper compares the performance of the Mexican economy with that of the rest of the region over the past 20 years, based on the available economic and social indicators, and with its own past economic performance. Among the results it finds that Mexico ranks 18th out of 20 Latin American countries in growth of real GDP per person, the most basic economic measure of living standards; Mexico’s poverty rate of in 2012 was almost identical to the poverty rate of 1994; real (inflation-adjusted) wages for Mexico were almost the same in 2012 as in 1994; and unemployment has increased significantly. It also notes that if NAFTA had been successful in restoring Mexico’s pre-1980 growth rate – when developmentalist economic policies were the norm – Mexico today would be a relatively high income country, with income per person significantly higher than that of Portugal or Greece. It is unlikely that immigration reform would be a major political issue in the United States, since relatively few Mexicans would seek to cross the border. |
| Keywords: | mexico, nafta, trade, poverty, employment, inequality |
| JEL: | F F5 E E2 E6 F1 F4 F13 F16 F17 F18 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2014-03&r=mac |
| By: | Michael Ehrmann; Michael Ziegelmeyer |
| Abstract: | Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income. |
| Keywords: | Length: 39 pages |
| JEL: | D12 E43 E52 G21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp084&r=mac |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou , Theophilos (Democritus University of Thrace, Department of Economics); Matthaiou, Maria- Artemis (Democritus University of Thrace, Department of Economics); Chrysanthidou, Efthymia (Democritus University of Thrace, Department of Economics) |
| Abstract: | In this paper, we investigate the forecasting ability of the yield curve in terms of the U.S. real GDP cycle. More specifically, within a Machine Learning (ML) framework, we use data from a variety of short (treasury bills) and long term interest rates (bonds) for the period from 1976:Q3 to 2011:Q4 in conjunction with the real GDP for the same period, to create a model that can successfully forecast output fluctuations (inflation and output gaps) around its long-run trend. We focus our attention in correctly forecasting the instances of output gaps referred for the purposes of our analysis here as recessions. In this effort, we applied a Support Vector Machines (SVM) technique for classification. The results show that we can achieve an overall forecasting accuracy of 66,7% and a 100% accuracy in forecasting recessions. |
| Keywords: | Yield Curve; Recession Forecasting; SVM |
| JEL: | E43 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2014_008&r=mac |
| By: | Tovonony Razafindrabe |
| Abstract: | This paper develops an estimated multi-country open economy dynamic stochastic general equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess international transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of different size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endogenous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price inflation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from inflation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import inflation. |
| Keywords: | Pass-through, multi-country DSGE, Bayesian estimation, monetary policy |
| JEL: | F31 F41 E52 C11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-6&r=mac |
| By: | Duca, John V. (Federal Reserve Bank of Dallas) |
| Abstract: | This paper analyzes how risk and other factors altered the relative use of short-term business debt funded by the shadow banking system since the early 1960s. Results indicate that the share was affected over the long-run not only by changing information and reserve requirement costs, but also by shifts in the impact of regulations on bank versus nonbank credit sources—such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow share rose when deposit interest rate ceilings were binding, the economic outlook improved, or risk premia declined, and fell when event risks disrupted financial markets. |
| Keywords: | shadow banking; regulation; financial frictions; credit rationing |
| JEL: | E44 E50 N12 |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1401&r=mac |
| By: | Ito, Hiro (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute) |
| Abstract: | This paper presents a theoretical framework for policy making based on the “impossible trinity” or the “trilemma” hypothesis. A simple optimization model shows that placing more weight in terms of preference for each of the three open macroeconomic policies—exchange rate stability, financial market openness, and monetary policy independence—contributes to a higher level of achievement in that particular policy. The paper goes on to develop the first empirical framework in the literature to investigate the joint determination of the triad open macroeconomic policies based on the trilemma hypothesis. Results from applying the seemingly unrelated regression estimation method and employing other robustness checks show that simple economic and structural fundamentals determine the trilemma policy combinations. Finally, the paper examines how deviations from the “optimal” trilemma policy combinations evolve around the time of a financial crisis. |
| Keywords: | trilemma hypothesis; macroeconomic policy; exchange rate stability; financial market openness; monetary policy independence; financial crisis; policy combination |
| JEL: | F15 F21 F31 F36 F41 O24 |
| Date: | 2014–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0456&r=mac |
| By: | Thomas Nitschka |
| Abstract: | Based on a vector autoregressive model, this paper shows that time variation in monthly excess returns on Swiss government bonds and stocks is predominantly driven by news of inflation and dividends, respectively. This finding is in marked contrast to US evidence which points to a more prominent role of excess return news in this respect. The bond market findings for both Switzerland and the US are consistent with the view that market participants put more weight on news of macroeconomic, i.e. long-term inflation, risks in periods of exceptionally low real interest rates and in crisis periods than in normal times. |
| Keywords: | bond return, news components, stock return, variance decomposition |
| JEL: | E44 G12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2014-01&r=mac |
| By: | BLINOV, Sergey |
| Abstract: | For effective economic growth, intentional “creation” of unemployment is required to be followed up by its «elimination». From Okun’s law one can infer an interesting corollary: growing unemployment without reducing GDP increases the economy’s potential. This corollary can be proved theoretically (unlike Okun’s law which is an empirical law). There were two causes of the USSR’s economic slowdown on the eve of its breakup. One of them was a shortage of labor which is identical to lack of unemployment. However strange it may seem, but the economic problems of modern Russia have the same root cause. |
| Keywords: | employment; Okun’s law; economic growth; productivity |
| JEL: | E24 J01 J08 N14 |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53591&r=mac |
| By: | Javier García-Cicco; Markus Kirchner; Santiago Justel |
| Abstract: | We set up and estimate a DSGE model of a small open economy to assess the role of domestic financial frictions in propagating foreign shocks. In particular, the model features two types of financial frictions: one in the relationship between depositors and banks (following Gertler and Karadi, 2011) and the other between banks and borrowers (along the lines of Bernanke et al, 1999). We use Chilean data to estimate the model, following a Bayesian approach. We find that the presence of financial frictions increases the importance of foreign shocks in explaining consumption, inflation, the policy rate, the real exchange rate and the trade balance. In contrast, under financial frictions the role of these foreign shocks in explaining output and investment is somehow reduced. The behavior of the real exchange rate and its interaction with the financial frictions is key to understand the results. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:722&r=mac |
| By: | Plosser, Charles I. (Federal Reserve Bank of Philadelphia) |
| Abstract: | President Plosser discusses why he thinks the economy is on firmer footing than it has been for the past several years. He also discusses why he believes it is appropriate to end asset purchases and why he supported the FOMC's decision in January to continue to reduce the pace of purchases. |
| Date: | 2014–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpsp:91&r=mac |
| By: | Mervyn King; David Low |
| Abstract: | Over the past couple of decades, and especially since the financial crisis in 2008-09, real interest rates have collapsed. For much of the past two years they have been negative, but they have been trending down for some while. But how far have real rates fallen? This note computes a measure of the “world” real interest rate and, where possible, a measure of the implied future real rate. It also makes public our estimates of the “world” real interest rate so they can be used by other researchers. |
| JEL: | E4 E43 G12 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19887&r=mac |
| By: | Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University) |
| Abstract: | We quantify the effects of the Affordable Care Act using a stochastic general equilibrium overlapping generations model with endogenous health capital accumulation calibrated to match U.S. data on health spending and insurance take-up rates. The introduction of an insurance mandate and the expansion of Medicaid, that are at the core of the Affordable Care Act, increase the insurance coverage rate of workers from 76 to 90 percent while simultaneously causing a reduction in capital accumulation, labor supply and aggregate output. Individuals in poor health with low income experience welfare gains while high income individuals in good health experience welfare losses. The insurance mandate, enforced by penalties and subsidies, reduces the adverse selection problem in private health insurance markets and counteracts the crowding-out effect of the Medicaid expansion. In addition, an alternative design of the insurance mandate with more aggressive penalties can lead to universal insurance coverage at smaller efficiency and welfare losses. |
| Keywords: | Affordable Care Act 2010, insurance mandate, Medicaid, endogenous health capital, life-cycle health spending and financing, dynamic stochastic general equilibrium model, Grossman health capital. |
| JEL: | H51 I18 I38 E21 E62 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2014-01&r=mac |
| By: | Fisher, Richard W. (Federal Reserve Bank of Dallas) |
| Abstract: | "Obviously, businesses cannot create jobs without the means for investing in job-creating expansion, so, yes, monetary policy is necessary to propel job creation. But as I have shown you tonight, the store of bank reserves awaiting discharge into the economy through our banking system is vast, yet it lies fallow." |
| Date: | 2014–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:144&r=mac |
| By: | Fisher, Richard W. (Federal Reserve Bank of Dallas) |
| JEL: | E52 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:143&r=mac |
| By: | McCarthy, Yvonne (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland) |
| Abstract: | The life-cycle theory of consumption draws a well-established distinction between the implications for consumption of changes in wealth perceived to be of a "transitory" as opposed to a "permanent" nature. In this paper, using a unique combination of regulatory and survey micro-data, we examine the importance of the life-cycle theory, in estimating housing wealth effects for the Irish mortgage market. In the aftermath of the recent financial crisis, this market has experienced substantial levels of house price declines and negative equity. Thus, house price expectations are likely to be of major importance in influencing housing wealth effects. Our results suggest that mortgaged Irish households exhibit a relatively large wealth effect out of housing when compared with other countries and, in accordance with the life-cycle theory, households' price expectations are influencial in determining the consumption repsonse to shocks. |
| Keywords: | Consumption, House Prices, Income, Wealth |
| JEL: | E21 R30 D12 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:06/rt/13&r=mac |
| By: | He, Hui (Shanghai University of Finance and Economics); Huang, Feng (Shanghai University of Finance and Economics); Liu, Zheng (Federal Reserve Bank of San Francisco); Zhu, Dongming (Shanghai University of Finance and Economics) |
| Abstract: | We use China’s large-scale reform of state-owned enterprises (SOE) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary savings for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. After the reform, a cumulative of over 35 million SOE workers have been laid off, although government employees kept their “iron rice bowl.” The change in unemployment risks for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps us estimate the importance of precautionary savings. In our estimation, we correct a self-selection bias in occupational choices and we disentangle the effects of uncertainty from pessimistic outlook. We obtain evidence that precautionary savings contribute to about one-third of the wealth accumulations for SOE workers between 1995 and 2002. Precautionary savings motive is thus an important factor that drives the observed rising Chinese saving rate. |
| Keywords: | Precautionary saving; uncertainty; structural change; self-selection bias; permanent income hypothesis; difference-in-difference methods |
| JEL: | C20 E21 P31 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-04&r=mac |
| By: | Kliber, Pawel |
| Abstract: | In the article we present some extension for the classical problem of dynamic investment optimization. We take the neoclassical model of growth with one product and many consumption goods. The number of consumption goods can be infinite and the consumption bundle is defined on some abstract, measurable space. The instantaneous social utility of consumption is measured as the integral of individual utilities of the consumption goods. The process of transforming product into consumption goods is described by another measure. The performance of the economy is measured by current value of the total utility in some planning horizon. We show that the problem of choosing optimal consumption paths for each good can be decomposed into 1) problem of choosing optimal aggregate consumption, which can be solved using standard methods of optimal control theory, 2) problem of distribution aggregate consumption into consumption of specific goods. |
| Keywords: | optimal growth, golden rule, optimal control, multiple consumption goods, optimal consumption plans |
| JEL: | C61 E13 E22 O41 |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53636&r=mac |
| By: | Ramiz Rahmanov (Central Bank of the Republic of Azerbaijan) |
| Abstract: | We measure the response of household consumption of different income groups to social spending during the 2002-2012 period using the aggregated Household Budget Survey Data. We find that households respond more strongly to changes in pensions than to changes in allowances and in-kind transfers. The very weak response of households to changes in allowances and in-kind transfers, both of which are transitory income, is consistent with the permanent income hypothesis. The estimates of pension elasticities suggest that the response of the low income group to changes in pensions is the strongest, whereas the response of the middle income group is the weakest. We further find that, in aggregate, households of all income groups do not exhibit habit persistence. |
| Keywords: | social spending, consumption, permanent income hypothesis, welfare, Azerbaijan |
| JEL: | E21 E61 H24 H55 I31 |
| Date: | 2014–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp02-2014&r=mac |
| By: | Philip Turner |
| Abstract: | The global long-term interest rate now matters much more for the monetary policy choices facing emerging market economies than a decade ago. The low or negative term premium in the yield curve in the advanced economies from mid-2010 has pushed international investors into EM local bond markets: by lowering local long rates, this has considerably eased monetary conditions in the emerging markets. It has also encouraged much increased foreign currency borrowing in international bond markets by emerging market corporations, much of it by affiliates offshore. These developments strengthen the feedback effects between bond and foreign exchange markets. They also have significant implications for local banking systems. |
| Keywords: | Term premium, international corporate bonds, monetary policy triangle, currency mismatches |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:441&r=mac |
| By: | Rodolfo Mendez-Marcano |
| Abstract: | On the ground of the significance and potential dual-nature of oil price shocks- they may act simultaneously like pure technology and pure expenditure shocks- in the context of the oil-countries-net oil-exporters with a substantial share of oil-income on their total export an/or fiscal-income. The paper questions the validity in such context of Gal´ı (1999)’s influential methodology for evaluating- so far, negatively- the empirical merits of it aimed to restore such validity by disentangling oil-price shocks from the rest of shocks. The comparison of the results from the application of both methodologies to Norway, Mexico, Russia, Trinidad&Tobago and Venezuela, besides supporting the dual-nature hypothesis and the necessity of such disentangling, proves the latter to be instrumental to get results consistent with Gal´ı (1999)’s. Additionally, the paper unveil some startling facts about the effects of oil–price shocks in this context—remarkably, the prevalence of their technological-nature when oil-income has a higher weight on export— than on fiscal-income, and of their expenditure-nature otherwise—and shed some light on the influence of institutional reform on such effects. |
| Keywords: | SVAR; identifying restrictions; small open economies; oil economies; dutch disease; resource curse |
| JEL: | C32 E32 F41 F44 Q33 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1405&r=mac |
| By: | Conefrey, Thomas (Central Bank of Ireland); Liebermann, Joelle (Central Bank of Ireland) |
| Abstract: | This Letter describes the construction of a new monthly business cycle indicator of the Irish economy. The index of economic activity draws information from a range categories of data covering output, income, employment, external demand and credit. A statistical method is used to extract a single factor from this panel of variables which is common to each of the series and explains most of the variation across all the data. The index captures the steep decline in economic activity at the height of the financial crisis and the recovery which has taken place since 2010. The weak external environment and subdued domestic demand since the beginning of 2013 is reflected in a decline in the index over recent months. The coincident indicator can be updated regularly to provide analysts and policymakers with a timely assessment of the current state of the economy. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:03/el/13&r=mac |
| By: | Josh Stillwagon (Department of Economics, Trinity College) |
| Abstract: | Monthly interest rate forecasts from nearly 50 major banks are used to directly examine the expectations hypothesis of the term structure, for the US, UK, Switzerland, and Canada. Using polynomially cointegrated VARs, there is clear evidence of a time-varying risk premium which moves inversely with consumer sentiment and the level of, and/or change in, the interest rate. A one point fall in consumer sentiment or 1% fall in the interest rate appear to increase the premium by several basis points each, often estimated with t-values in the double or even triple digits! |
| Keywords: | Expectations hypothesis, survey data, time-varying risk premium, consumer sentiment, zero lower bound, polynomial cointegration |
| JEL: | E43 G12 C22 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1401&r=mac |
| By: | Morten Bech; Todd Keister |
| Abstract: | We study the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), we show how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank's rate corridor. Adding a committed liquidity facility allows the central bank to mitigate these effects. By pricing committed liquidity appropriately, the central bank can determine either the equilibrium liquidity premium or the quantity of liquid assets held by banks, but not both. We argue that the optimal pricing arrangement will depend on local market conditions. |
| Keywords: | Basel III, liquidity regulation, liquidity premium, liquidity coverage ratio, committed liquidity facility |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:439&r=mac |
| By: | Claudio Borio; Piti Disyatat; Mikael Juselius |
| Abstract: | A popular strategy for estimating output gaps is to anchor them to structural economic relationships. The resulting output gaps, however, are often highly sensitive to numerous auxiliary assumptions inherent in the approach. This complicates their use in policymaking. We illustrate the point using the Phillips curve, arguably the most popular structural relationship in this context. Depending on the specification, we show that conditioning on this relationship either introduces a trend in the output gap - which is conceptually unappealing - or has little effect on it - which defeats the purpose of the exercise. Moreover, the estimated gaps perform poorly in real time, with large ex-post revisions. The opaqueness of the approach, which increases greatly with the dimension of the estimated system, can mask these problems. In order to address these limitations, we propose a more parsimonious and transparent approach to embedding economic information that is less vulnerable to misspecification. As an illustration, we apply the corresponding parsimonious multivariate filter to US data. We find that proxies for the financial cycle, notably credit growth, but also unemployment contain significant information and help generate robust real-time output gap estimates. |
| Keywords: | Potential output, output gap, Phillips curve, financial cycle |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:442&r=mac |
| By: | Cheremukhin, Anton A. (Federal Reserve Bank of Dallas); Tutino, Antonella (Federal Reserve Bank of Dallas); Restrepo-Echavarria, Paulina (Federal Reserve Bank of Dallas) |
| Abstract: | We present a theory of targeted search, where people with a finite information processing capacity search for a match. Our theory explicitly accounts for both the quantity and the quality of matches. It delivers a unique equilibrium that resides in between the random matching and the directed search outcomes. The equilibrium that emerges from this middle ground is inefficient relative to the constrained Pareto allocation. Our theory encompasses the outcomes of the random matching and the directed search literature as limiting cases. |
| Keywords: | matching; assignment; search; efficiency; information |
| JEL: | C78 D83 E24 J64 |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1402&r=mac |
| By: | Michal Jurek (Department of Banking, Poznan University of Economics) |
| Abstract: | The purpose of this report is to analyse the structure of ownership in the financial sector in the selected old (France, Germany, Greece, Italy, Sweden, the United Kingdom) and new (the Czech Republic, Hungary, Poland) EU Member States. This subject is particularly important to the proper understanding of the scale and scope of the process of financialisation in the EU countries. General objective of the report is the investigation and evaluation of the evolution of the structure of ownership in the financial sector across the EU and its consequences with the special consideration of relations between this process and withdrawal of the State from the financial sector. In order to accomplish this target, extensive research is undertaken. It encompasses the analysis of the types of financial institutions functioning in selected countries. Areas of competition, cooperation and interdependence between different types of financial institutions are identified, as well as similarities and differences in the present composition and structure of the financial sector in particular EU countries and factors behind inter-country differences. Finally, comparative analysis of evolution of structure of financial sector and its driving forces in particular countries and group of countries is presented. |
| Keywords: | financial institutions, financial sector, banking and finance, ownership structure, market concentration, mergers and acquisitions, privatization |
| JEL: | E44 E50 G21 G22 G32 G34 N24 |
| Date: | 2013–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper16&r=mac |
| By: | Nikolaus Hautsch (University of Vienna); Dieter Hess (University of Cologne); Fuyu Yang (University of East Anglia) |
| Abstract: | We propose a Bayesian framework for nowcasting GDP growth in real time. Using vintage data on macroeconomic announcements we set up a state space system connecting latent GDP growth rates to agencies' releases of GDP and other economic indicators. We propose a Gibbs sampling scheme to filter out daily GDP growth rates using all available macroeconomic information. The sample draws from the resulting posterior distribution, thereby allowing us to simulate backcasting, nowcasting, and forecasting densities. A stochastic search variable selection procedure yields a data-driven way of selecting the relevant GDP predictors out of a potentially large set of economic indicators. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2012_56&r=mac |
| By: | Christensen, Jens H.E. (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco) |
| Abstract: | The ability of the usual factors from empirical arbitrage-free representations of the term structure—that is, spanned factors—to account for interest rate volatility dynamics has been much debated. We examine this issue with a comprehensive set of new arbitrage-free term structure specifications that allow for spanned stochastic volatility to be linked to one or more of the yield curve factors. Using U.S. Treasury yields, we find that much realized stochastic volatility cannot be associated with spanned term structure factors. However, a simulation study reveals that the usual realized volatility metric is misleading when yields contain plausible measurement noise. We argue that other metrics should be used to validate stochastic volatility models. |
| Keywords: | arbitrage-free Nelson-Siegel model; term structure modeling; interest rate risk; model validation |
| JEL: | C51 C52 E43 G12 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-03&r=mac |
| By: | Marcus Cobb |
| Abstract: | When evaluating the economy’s performance, Gross Domestic Product (GDP) is the most often used indicator and it is therefore also one of the most often forecasted. Due to the shortcomings of the traditional fixed-base methods, many countries have adopted chain-linking to avoid price structure obsolescence. This has meant that GDP’s well-known accounting identities hold only approximately raising challenges for those reading the numbers, but also for forecasters that follow approaches that rely on these accounting properties. Oddly enough, the issue of aggregation is hardly mentioned in forecasting. This omission could be the result of everybody adopting the chain-linking methodology with ease and considering it unnecessary to make a point out of it, but it could also originate from ignoring the issue altogether. Whatever the reason for this omission, it could lead practitioners that are unfamiliar with the method to make unnecessary mistakes. This document presents explicitly the role of prices in a bottom-up forecasting framework and, based on it, argues that they should be taken into account when generating aggregate forecasts based on the accounting identities. Also, something that should be taken into consideration by practitioners is that discrepancies due to aggregation inaccuracy are not necessarily negligible. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:721&r=mac |
| By: | Rodrigo Caputo; Mariel Siravegna |
| Abstract: | This paper addresses three policy questions related to the episodes of real exchange rate (RER) appreciation in the aftermath of the 2008-09 global financial crisis. First, we determine the extent to which recent movements in RER, in several countries, are driven by changes in RER determinants (fundamentals) and correction of past misalignments or if they constitute a movement away from equilibrium (i.e. a misalignment itself). Second, we quantify the importance of non-fundamental variables such as the interest rate differential, the rate of growth of foreign reserves and credit growth in affecting the RER short-run dynamics. Third, we assess the impact of the exchange rate regime on the RER speed adjustment, distinguishing between emerging and developed economies. We conclude that countries that experienced a significant RER appreciation, in the aftermath of the 2009 crises, were undervalued before the crisis hit. In this context, movements in the RER after the crisis were driven by correction of past misalignments as well as a reaction to movements in economic fundamentals. Finally, emerging economies with less flexible exchange rate regimes show a slower speed of RER adjustment towards its long-run equilibrium. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:718&r=mac |
| By: | Elasrag, Hussein |
| Abstract: | At present in line with shariah principles several Islamic financial institutions are engaged in product development activities globally to cater the needs of a wide range of parties. However, considering the essentiality for these institutions to innovate and operate within the ambits of shariah, need of the shariah supervision cannot be over stated. This research is focused on the topic of Governance Shariah supervisory system. Among the main issues surround corporate governance in Islamic financial institutions is the role of the Sharia Supervisory). The main role of the Shariah supervisory system is to ensure the compliance of Sharia law along the entire business process. The Shariah supervisory system therefore plays a vital harmonizing role in Islamic banking, particularly with its function as the Sharia-compliance gatekeeper. The paper attempts to discuss these functions in detail and tries to shed a little light on established laws in Malaysia regarding regulations of the Shariah supervisory system and operations of Islamic financial institutions. |
| Keywords: | Corporate governance, Sharia Governance, Sharia Supervisory, Islamic banking, Islamic finance |
| JEL: | E5 E58 G0 G02 G18 G3 G30 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53489&r=mac |
| By: | Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Storesletten, Kjetil (University of Oslo); Violante, Giovanni L. (New York University) |
| Abstract: | What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity. |
| Keywords: | Progressivity; Income distribution; Skill investment; Labor supply; Partial insurance; Valued government expenditures; Welfare |
| JEL: | D30 E20 H20 H40 J22 J24 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:496&r=mac |
| By: | Sindy Olea |
| Abstract: | The purpose of this document is to study the impact of inflation surprises in nominal and real benchmark bonds, and to compare these results with the response on the derivate market, Swap Promedio Cámara (SPC) both pesos and UF. This analysis is relevant because the prices of financial assets of the fixed income market have implicit future inflation expectations, therefore to quantify the impact of an inflation surprise on fixed income rates enables to evaluate market overreactions and possible changes in investment strategies of different market players involved in the fixed income market and its derivative. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchee:104&r=mac |
| By: | Kakarot-Handtke, Egmont |
| Abstract: | Krugman has recently revitalized IS-LM with a number of succinct analytical pieces on his blog. The reverberations were remarkable. Economists, however, are known often not grasp the full content of their own and, a fortiori, of others’ models. This happened to Keynes in the days of high theory and to Krugman in these days. Keynes applied a defect formalism, which is here replaced by objective-structural axioms. This yields the correct relationship between retained profit, saving, and investment which in turn makes it clear after the event that the IS-part of the IS-LM construct never could bear any substantive theoretical load. |
| Keywords: | new framework of concepts; structure-centric; axiom set; Hicks; Allais |
| JEL: | B59 E12 E13 |
| Date: | 2014–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53608&r=mac |
| By: | Gabriel P. Mathy |
| Abstract: | Stock market volatility was extremely high during the Great Depression relative to any other period in American history. At the same time, large negative and positive discontinuous jumps in stock returns can be detected using the Barndor-Nielsen and Shephard (2004) test for jumps in financial time-series. These jumps coincided with periods when stock volatility was high as the arrival of new information about the uncertain future drove both the record stock volatility and the record jumps in stock returns. A timeline of the Depression is outlined, with important events that drove uncertainty highlighted such as the collapse of the banking system, policy changes, the breakdown of the gold standard, monetary policy uncertainty, and war jitters. JEL classification: |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2014-02&r=mac |
| By: | Santra, Swarup; Kumar, Rajesh; Bagaria, Nidhi |
| Abstract: | Conventionally, the economic growth of a country is appraised in form of gross domestic product (GDP). In Bihar, the per capita net state domestic product (NSDP) is the lowest among the major states in Inida, and it is only one-third of the national level of per capita GDP. The services, industry, and agricultural sectors contributed 52 per cent, 28 per cent, and 20 per cent to India’s overall GDP respectively, in 2006. However, the contribution of these major sectors to GDP at state level is not uniform. For Bihar at state level, the share of primary sector is continuously decreasing over the stated time period. For the secondary sector, the share had decreased after bifurcation of Bihar, however, that share increased a little bit in 2009-2010. And similar to the India average, the share for Tertiary sector is continuously increasing at 60% of NDDP. The dictrics like Patna, Begusarai, Munger and Bhagalpur which are higher per capita NDDP, are very less share in primary sector. The most important part here is the very low share of industrial sector. However, the share of industrial sector has started increased during the period 2005-2010. Structure of Bihar’s economy is changing not only at state level, but at district level also. And these changes need to be more casious planning and good initiatives from Govt. And the change is already in its way. |
| Keywords: | Bihar, Net District Domestic Product (NDDP), Sectoral Contribution, Structural Change |
| JEL: | E00 O11 O40 |
| Date: | 2014–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53285&r=mac |
| By: | El-Baz, Osama |
| Abstract: | This paper investigates the relationship between current account and government budget balances. We tested the validity of the Twin Deficits Hypothesis (TDH)in Egypt, using annual time series data for the period (1990-2012). We rejected the TDH, as granger causality tests proved a reverse causal relationship running from the current account deficit to the budget deficit. A "twin divergence" was found to exist between the two deficits in the short run, also the Vector Error Correction Model (VECM) proved the existence of a negative long run equilibrium relationship between both current account and government budget balances, with a relatively high speed of adjustment toward the equilibrium position; as it takes about one year and 4 months to restore the equilibrium position after divergence occurs. |
| Keywords: | Macroeconomics, twin deficits, Cointegration, Vector Error Correction Model. |
| JEL: | C3 E2 F0 |
| Date: | 2014–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53428&r=mac |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou , Theophilos (Democritus University of Thrace, Department of Economics); Matthaiou, Maria- Artemis (Democritus University of Thrace, Department of Economics) |
| Abstract: | A healthy and stable banking system resilient to financial crises is a prerequisite for sustainable growth. Minimization of a) the associated systemic risk and b) of the contagion effect in a banking crisis is a necessary condition to achieve this goal. The Central Bank is in charge of this significant undertaking via a close and detailed monitoring of the banking network that can significantly limit the outbreak of a crisis and a subsequent contagion. In this paper, we propose the use of an auxiliary monitoring system that is both efficient on the required resources and can promptly identify a set of banks that are in distress so that immediate and appropriate action can be taken by the supervising authority. We use the interrelations between banking institutions for efficient monitoring of the entire banking network employing tools from Complex Networks theory. In doing so, we introduce the Threshold Minimum Dominating Set (T-MDS). The T-MDS is used to identify the smallest most efficient subset of banks able to act as a) sensors of distress of a manifested banking crisis and b) provide a path of possible contagion. Moreover, at the discretion of the regulator, the methodology is versatile in providing multiple layers of supervision and monitoring by setting the appropriate threshold levels. We propose the use of this method as a supplementary monitoring tool in the arsenal of a Central Bank. Our dataset includes the 122 largest American banks in terms of their total assets. The empirical results show that when the T-MDS methodology is applied, we can have an efficient supervision of the whole banking network, by monitoring just a small subset of banks. We will show that, the proposed methodology is able to achieve an efficient overview of the 122 banks by only monitoring 47 T-MDS nodes. |
| Keywords: | Complex networks; Minimum Dominating Set; Banking supervision; Interbank loans |
| JEL: | D85 E58 G28 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2014_007&r=mac |
| By: | Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business); Serhiy Stepanchuk (École Polytechnique Fédérale de Lausanne) |
| Abstract: | Using a stylized two period model we obtain portfolio solutions from two solution approaches that belong to the class of local approximation methods – the approach of Judd and Guu (2001, hereafter ’JG’) and the approach of Devereux and Sutherland (2010, 2011, hereafter ’DS’) – and compare them with the true portfolio solution. We parameterize the model to match mean, standard deviation, skewness and kurtosis of return data on aggregate MSCI stock market indices. The optimal equity holdings in the true solution depend on the size of uncertainty, and the precise form of this relationship is determined by the distributional properties of equity returns. While the DS method and the JG approach provide the same portfolio solution as the size of uncertainty goes to zero, else the two solutions can differ substantially. Because under the DS method portfolio holdings are never approximated in the direction of the size of uncertainty, even higher-order approximations lead to the (zero-order) constant solution in our example model. In contrast, the JG solution generally varies as the size of uncertainty changes, and already a second-order JG solution can account for effects of skewness and kurtosis of equity returns. |
| Keywords: | Country Portfolios, Solution Methods |
| JEL: | E44 F41 G11 G15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp162&r=mac |