nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒03‒01
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal and Monetary Policies in Complex Evolving Economies By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini; Tania Treibich
  2. Balanced budget stimulus with tax cuts in a liquidity constrained economy By Vivek Prasad
  3. The composition of government spending and the multiplier at the Zero Lower Bound By Julien Albertini; Arthur Poirier; Jordan Roulleau-Pasdeloup;
  4. An Empirical Analysis of Business Cycles in a New Keynesian Model with Inventories By Marcel Förster
  5. Keynesian macroeconomics without the LM curve: IS-MP-IA model and Taylor rule applied to some CESEE economies By Josheski , Dushko
  6. Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  7. Can Intangible Capital Explain Cyclical Movements in the Labor Wedge? By Gourio, Francois; Rudanko, Leena
  8. Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns By Sebnem Kalemli-Ozcan; Emiliano E. Luttini; Bent Sørensen
  9. Interest Rate Determination in China: Past, Present, and Future By Dong He; Honglin Wang; Xiangrong Yu
  10. Disequilibrium, reproduction and money: a Classical approach By Carlo Benetti; Christian Bidard; Edith Klimovsky; Antoine Rebeyrol
  11. The effect of regulatory institutions on macroeconomic growth in Russia By Nikiforova, Vera; Valahov , Dmitriy; Nikiforov , Aleksandr
  12. Macroeconomics, Financial Crisis and the Environment. Strategies for a Sustainability Transition By Miklós Antal; Jeroen C.J.M. van den Bergh
  13. Revisiting the Matching Function By Britta Kohlbrecher; Christian Merkl; Daniela Nordmeier
  14. Fiscal Multipliers in Japan By Alan J. Auerbach; Yuriy Gorodnichenko
  15. On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  16. An Empirical Investigation of sectoral-Level Capital Investments in New Zealand By Weshah Razzak
  17. Comovement of oil prices with US economic indicators over the business cycle: facts and explanations By Yazid Dissou; Lilia Karnizova
  18. The Safety Trap By Ricardo J. Caballero; Emmanuel Farhi
  19. Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions By Christian R. Proaño; Christian Schoder; Willi Semmler
  20. Excerpts from a conversation about Longhorns, longnecks and liquidity: the economy and the course of monetary policy By Fisher, Richard W.
  21. An Estimated Search and Matching Model of the Japanese Labor Market By Ching-Yang Lin; Hiroaki Miyamoto
  22. Financial Literacy and Savings Account Returns By Deuflhard, Florian; Georgarakos, Dimitris; Inderst, Roman
  23. Employment polarization and the role of the apprenticeship system By Michelle Rendall; Franziska J. Weiss
  24. Mortgage Loan Characteristics , Unobserved Heterogeneity and the Performance of United Kingdom Securitised Sub-Prime Loans By Lanot, Gauthier; Leece, David
  25. Real and financial interacting oscillators: a behavioral macro-model with animal spirits By Ahmad Naimzada; Marina Pireddu
  26. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  27. Early Public Banks By Roberds, William; Velde, Francois R.
  28. Exchange-rate regimes and economic growth: An empirical evaluation By Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  29. Overview of Firm-Size and Gender Pay Gaps in Turkey: The Role of Informal Employment By Akar, Gizem; Balkan, Binnur; Tumen, Semih
  30. The sectorial impact of commodity price shocks in Australia By Stephen J. Knop; Joaquin L. Vespignani
  31. Life-Cycle Consumption and Children By Thomas H. Jørgensen
  32. Uncertainty and the preferred instrument for fiscal discipline under multitier government By Wouter VAN DER WIELEN
  33. JOEG Comments on "Have we missed the right version of the standard Ramsey Growth model?" By Khelifi, Atef
  34. The Labor Market Effects of Reducing Undocumented Immigrants By Andri Chassamboulli; Giovanni Peri
  35. Dividing the Pie: the Determinants of Labor’s Share of Income on the Firm Level By Michael Siegenthaler; Tobias Stucki
  36. Firm Dynamics and Residual Inequality in Open Economies By Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
  37. To Save or Save Not: Intergenerational Neutrality and the Expansion of New Zealand Superannuation By Andrew Coleman
  38. Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis By Phiri, Andrew
  39. The Bright but Right View? A New Type of Evidence on Entrepreneurial Optimism By Bengtsson, Ola; Ekeblom, Daniel
  40. Socially Responsible and Conventional Investment Funds: Performance Comparison and the Global Financial Crisis By Leonardo Becchetti; Rocco Ciciretti; Ambrogio Dalo; Stefano Herzel
  41. Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax By Huber, Jürgen; Kirchler, Michael; Kleinlercher, Daniel; Sutter, Matthias
  42. Recursive utility with dependence on past consumption; the continuous-time model By Aase, Knut K.
  43. Retirement Security in an Aging Society By James M. Poterba
  44. The economics of Bitcoin transaction fees By Nicolas Houy

  1. By: Giovanni Dosi (Scuola Superiore Sant'Anna, Pisa (Italy)); Giorgio Fagiolo (Scuola Superiore Sant'Anna, Pisa (Italy)); Mauro Napoletano (OFCE and SKEMA Business School, Sophia-Antipolis (France); Scuola Superiore Sant'Anna, Pisa (Italy)); Andrea Roventini (University of Verona (Italy); Scuola Superiore Sant'Anna, Pisa (Italy); OFCE and SKEMA Business School, Sophia-Antipolis (France)); Tania Treibich (Maastricht University (the Netherlands); GREDEG CNRS and University of Nice Sophia Antipolis (France))
    Abstract: In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, "discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Keywords: agent-based model, fiscal policy, monetary policy, banking crises, income inequality, austerity policies, disequilibrium dynamics
    JEL: C63 E32 E6 E52 G01 G21 O4
    Date: 2014–02
  2. By: Vivek Prasad (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper examines the macroeconomic effects of unexpected, exogenous, simultaneous, temporary cuts to income tax rates in an economy when the government follows a balanced budget fiscal rule and keeps money supply constant, and private agents face constraints on the ability to finance investments. The main results are that the tax cuts increase output, private consumption, and investment; the increases in output and consumption are significant and long-lasting; and the liquidity constraints play a major role in the shock's long-term persistence. Results are obtained from calibrating a modified version of the DSGE model of liquidity and business cycles by Kiyotaki and Moore (2012). The modifications are twofold: (i) distortionary taxes to labour and dividend incomes are added, and (ii) the government follows a balanced budget fiscal rule and keeps money supply constant. Results are qualitatively robust, but quantitatively sensitive, to assumptions regarding structural parameter values, and qualitatively and quantitatively sensitive to significant variations in the persistence of tax shocks.
    Keywords: Fiscal policy, taxation, balanced budget, liquidity constraints.
    JEL: E10 E20 E30 E44 E50 E62 H30
    Date: 2014–01
  3. By: Julien Albertini; Arthur Poirier; Jordan Roulleau-Pasdeloup;
    Abstract: We investigate the size of the multiplier at the ZLB in a New keynesian model. It ranges from around -0.25 to +1.5, depending on the extent to which government spending is productive, substitutable or not for private consumption.
    Keywords: Zero lower bound, New Keynesian, Government spending multiplier
    JEL: E31 E32 E52 E62
    Date: 2014–02
  4. By: Marcel Förster (University of Giessen)
    Abstract: This paper introduces inventories in an otherwise standard dynamic stochastic general equilibrium model. Firms accumulate inventories to facilitate sales, but face a cost of doing so in terms of costly storage of intermediate goods. Based on U.S. data we estimate the parameters of our model using Bayesian methods. The results show that accounting for inventory dynamics has a significant impact on parameter estimates and the following analyses. We find that inventories enter the New Keynesian Phillips curve as an additional and significant driving variable and make the inflation process less backward-looking. Moreover, impulse responses can change in terms of magnitude and persistence. The variance decompositionreveals substantial changes regarding the driving forces of inflation and the nominal interest rate when we consider inventory holding.
    Keywords: Inventories, Bayesian Estimation, DSGE Model, Business Cycles
    JEL: C13 E20 E30
    Date: 2014
  5. By: Josheski , Dushko
    Abstract: Applying IS-MP-IA model and the Taylor rule, this study finds that for selected CESEE economies (Albania, Bosnia and Herzegovina, Macedonia and Serbia), lower expected inflation rate, real exchange rate appreciation, a lower world interest rate which is calculated like a federal funds rate minus inflation in US, and more world output would help to increase output of the selected economies in the sample. A lower ratio of government consumption spending to GDP would also increase the output of the selected economies. Hence, fiscal prudence is needed, and the conventional approach of real depreciation to stimulate exports and raise real output does not apply to the selected CESEE economies. When private household consumption is in the model the coefficient on government spending to nominal GDP is insignificant implying that Ricardian equivalence does hold for the selected countries. These results are robust because they are controlled in the period of four decades from 1969 to 2013. Study uses 4 decadal dummies that control for each decade.
    Keywords: IS-MP-IA, Taylor Rule, Inflation targeting, monetary policy function, government spending to nominal GDP, world interest rates
    JEL: E52 F41
    Date: 2014–02
  6. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Michael J. Lamla (University of Essex and ETH Zurich); Damjan Pfajfar (EBC, CentER, University of Tilburg)
    Abstract: Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely the Phillips curve, the Taylor rule and the Income Fisher equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation, 46% consistent with the Taylor rule and 34% are in line with the Phillips curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor rule and the Phillips curve we observe a cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, consumers with theory- consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.
    Keywords: Macroeconomic expectations, microdata, macroeconomic literacy, central bank communication, consumer forecast accuracy.
    JEL: C25 D84 E31
    Date: 2014–01
  7. By: Gourio, Francois (Federal Reserve Bank of Chicago); Rudanko, Leena (Boston University)
    Abstract: Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new evidence on cyclical variation in selling effort to discipline the exercise.
    Keywords: Business cycle; capital; labor wedge
    JEL: E13 E32
    Date: 2014–01–15
  8. By: Sebnem Kalemli-Ozcan; Emiliano E. Luttini; Bent Sørensen
    Abstract: Using a variance decomposition of shocks to GDP, we quantify the role of international factor income, international transfers, and saving in achieving risk sharing during the recent European crisis. We focus on the sub-periods 1990-2007, 2008-2009, and 2010 and consider separately the European countries hit by the sovereign debt crisis in 2010. We decompose risk sharing from saving into contributions from government and private saving and show that fiscal austerity programs played an important role in hindering risk sharing during the sovereign debt crisis.
    JEL: E2 E6 F15
    Date: 2014–02
  9. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research); Xiangrong Yu (Hong Kong Institute for Monetary Research)
    Abstract: How should we think about the determination of interest rates in China after interest rate liberalisation? Would effective deposit rates, lending rates and bond yields move higher or lower? We argue that interest rates in a liberalised environment would need to be anchored by the conduct of monetary policy. If monetary policy is to achieve the objective of price and output (or employment) stabilisation, the policy rate should be set close to China's equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate in China. Based on these we argue that interest rates on large deposits in the banking system and short-term money market rates would likely to move higher following interest rate liberalisation. The effect on effective lending rates is somewhat ambiguous as the contestability of the banking sector and the competition in bond markets are likely to increase after interest rate liberalisation. We leave the determination of the curvature of the yield curve to future research.
    Keywords: Interest Rate, Monetary Policy, Economic Reform, Chinese Economy, The People¡¦s Bank of China (PBC)
    JEL: E43 E52 O53 P24
    Date: 2014–02
  10. By: Carlo Benetti; Christian Bidard; Edith Klimovsky; Antoine Rebeyrol
    Abstract: We consider a bisector reproduction model in which money is introduced as a pure means of exchange issued by a bank at the producers' requests. Each capitalist aims at maximising accumulation in his own sector. Their plans are based on available quantities and expected prices. Effective prices are determined by a market-clearing mechanism. Temporary disequilibria occur in both physical and monetary terms. The settlement of the monetary balances is operated by means of a transfer of capital goods. Final allocations and effective productions are thus determined. The dynamics of the economy are those of a sequence of temporary disequilibria and let appear several possibilities (local or global stability, cycles) depending on the values of the parameters.
    Keywords: Classical Reproduction, Monetary prices, Disequilibrium, Growth, Cycle
    JEL: E11 E30 E32 O41
    Date: 2014
  11. By: Nikiforova, Vera; Valahov , Dmitriy; Nikiforov , Aleksandr
    Abstract: The paper analyses common Russian practice. The structural changes in the Russian economy are further stimulated by the improvement of the government regulation policy. The paper examines the factors and effects of the general economic growth and the integration processes. The paper examines the institutional changes in the government policy of economic regulation aimed at improving the country’s performance in the world financial system.
    Keywords: economic growth; government regulation; integration processes; institutional changes
    JEL: E4 E40 E44 G1 G18
    Date: 2014–02–16
  12. By: Miklós Antal; Jeroen C.J.M. van den Bergh
    Abstract: We raise fundamental questions about macroeconomics relevant to escaping the financial and 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 labour 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: 2014–02–18
  13. By: Britta Kohlbrecher; Christian Merkl; Daniela Nordmeier
    Abstract: Many labor market models use both idiosyncratic productivity and a vacancy free entry condition. This paper shows that these two features combined generate an equilibrium comovement between matches on the one hand and unemployment and vacancies on the other hand, which is observationally equivalent to a constant returns Cobb-Douglas function commonly used to model match formation. We use German administrative labor market data to show that the matching function correlation solely based on idiosyncratic productivity and free entry is very close to the empirical matching function. Consequently, we argue that standard matching function estimations are seriously biased if idiosyncratic productivity plays a role for match formation. In this case, they are not suitable for the calibration of labor market models
    Keywords: matching function, idiosyncratic productivity, job creation, vacancies
    JEL: E24 E32 J63 J64
    Date: 2014–02
  14. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: In this paper, we estimate government purchase multipliers for Japan, following the approach used previously for a panel of OECD countries (Auerbach and Gorodnichenko, 2013). This approach allows multipliers to vary smoothly according to the state of the economy and uses real-time forecast data to purge policy innovations of their predictable components. For a sample period extending from 1960 to 2012, estimates for Japan are quite consistent with those previously estimated for the OECD as well as those estimated using a slightly different methodology for the United States (Auerbach and Gorodnichenko, 2012). However, estimates based only on more recent observations are less stable and provide weaker support for the effectiveness of government purchases at stimulating economic activity, particularly in recession, although cyclical patterns in Japan make the dating of recessions a challenge.
    JEL: E62
    Date: 2014–02
  15. By: Kazuo Nishimura (Research Institute for Economics & Business Administration (RIEB), Kobe University, and KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality a ecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing e ect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.
    Keywords: Endogenous cycles, heterogeneous agents, public spending, public debt, borrowing constraint
    JEL: C62 E32 H23
    Date: 2014–02
  16. By: Weshah Razzak (The Treasury)
    Abstract: I extend the Glick and Rogoff (1995) aggregate time-series, empirical, intertemporal model of country-investment (and the current account) to a sectoral-level, and estimate it for New Zealand. I fit the model to panel data of eleven industries from 1988-2009. The sectoral-level investment growth is a function of lagged investment level, sector-specific TFP shocks, country-specific TFP shocks, and global TFP shocks. The estimates seem robust to government spending shocks and Terms of Trade shocks.
    Keywords: Investments, sectoral-level, TFP shocks, panel data
    JEL: E2 C2 C3
    Date: 2014–02
  17. By: Yazid Dissou (Department of Economics, University of Ottawa, Ottawa, ON); Lilia Karnizova (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: Empirical industry-level studies find a systematic pattern of output and price responses to variations in oil prices. This pattern depends on the energy-intensity of production and on the origin of oil price shocks. We build a multisector business cycle model that features endogenous production of oil, multiple sources of oil price movements and intersectoral input-output linkages. The model explains the observed sectoral heterogeneity in output and price responses to oil prices changes, previously emphasized by empirical studies. In addition, we show that accounting for the sectoral linkages helps amplify the predicted effects of oil price changes at the aggregate level.
    Keywords: oil price; multiple sectors; business cycle; industry effects
    JEL: E32 Q43 E37 D57
    Date: 2014
  18. By: Ricardo J. Caballero; Emmanuel Farhi
    Abstract: Recently, the global economy has experienced recurrent episodes of safe asset shortages. In this paper we present a model that shows how such shortages can generate macroeconomic phenomena similar to those found in liquidity trap scenarios. Despite the similarities, there are also subtle but important differences which carry significant impacts on the relative effectiveness of economic policy and potential market solutions to the underlying problem. For example, while forward guidance policies are typically more effective than quantitative easing ones in the standard liquidity trap environment, the opposite holds in safety trap contexts. Also, while asset bubbles (market solutions) and public debt are both effective in liquidity traps, only the latter are in safety traps. Essentially, a safe asset shortage is a deficit of a particular form of wealth (safe wealth), which the government has comparative advantage in supplying. Forward guidance and financial bubbles, which increase risky wealth and stimulate the economy in liquidity traps, fail to do so in safety traps as they are dissipated through higher spreads.
    JEL: E0 E1 E5 E52
    Date: 2014–02
  19. By: Christian R. Proaño (Department of Economics, The New School for Social Research); Christian Schoder (Department of Economics, Vienna University of Economics and Business); Willi Semmler (Department of Economics, The New School for Social Research)
    Abstract: We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.
    Keywords: financial stress, sovereign debt, economic growth, dynamic panel threshold regression
    JEL: E20 G15 H63
    Date: 2014–02
  20. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Date: 2014–02–21
  21. By: Ching-Yang Lin (International University of University); Hiroaki Miyamoto (International University of University)
    Abstract: This paper studies how well a simple search and matching model can describe aggregate Japanese labor market dynamics in a full information setting. We develop a discrete-time search and matching model with a convex vacancy posting cost and three shocks: productivity, separation, and markup shocks. We use the model as a data-generating process for our empirical analysis and estimate it by using Bayesian methods. The model is successful in replicating the behavior of unemployment and vacancies in Japan. However, we also find that the success of the model relies on shock processes that are not empirically plausible.
    Keywords: Search and matching model, Unemployment, Bayesian Estimation, Japanese labor market
    JEL: C11 C51 E24 J64
    Date: 2014–02
  22. By: Deuflhard, Florian; Georgarakos, Dimitris; Inderst, Roman
    Abstract: Savings accounts are owned by most households, but little is known about the performance of households’ investments. We create a unique dataset by matching information on individual savings accounts from the DNB Household Survey with market data on account-specific interest rates and characteristics. We document considerable heterogeneity in returns across households, which can be partly explained by financial sophistication. A one-standard deviation increase in financial literacy is associated with a 13% increase compared to the median interest rate. We isolate the usage of modern technology (online accounts) as one channel through which financial literacy has a positive association with returns.
    Keywords: Financial literacy; savings accounts; interest rates; household finance
    JEL: D12 E21 G11 G21
    Date: 2014–01
  23. By: Michelle Rendall; Franziska J. Weiss
    Abstract: This paper studies the effects of the apprenticeship system on innovation and labor market polarization. A stylized model with two key features is developed: (1) apprentices are more productive due to industry-specific training, but (2) from the firm’s perspective, when training apprentices, technological innovation is costly since training becomes obsolete. Thus, apprentices correlate with slower adoption of skillreplacing technologies, but also less employment polarization. We test this hypothesis on German regions given local variation in apprenticeship systems until 1976. The results shows no employment polarization related to apprentices, but similar displacement of non-apprentices as in the US.
    Keywords: Apprentices, educational system, employment polarization, technology adoption
    JEL: E24 I24 J24 J62 O33
    Date: 2014–02
  24. By: Lanot, Gauthier (Department of Economics, Umeå School of Business and Economics,); Leece, David (Keele Management School)
    Abstract: The research estimates a competing risk model of mortgage terminations on samples of UK securitised subprime mortgages. Given the argued role of these types of loan in the recent financial crisis then it is important to better understand their performance and supposed idiosyncratic behaviour. The methodological and empirical advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving initial mortgage choices and dynamic selection over time. Moreover, we estimate specific coefficients for this unobserved heterogeneity and determine the correlation between the unobserved components of default and prepayment. The paper demonstrates the need for researchers and practitioners to jointly estimate household choices whiles controlling for selectivity through unobserved heterogeneity.
    Keywords: Subprime mortgages; unobserved heterogeneity; household behaviour; loan performance
    JEL: C13 C25 C51 D10 D14 E44 G21
    Date: 2014–02–20
  25. By: Ahmad Naimzada; Marina Pireddu
    Abstract: In this paper we propose a model in which the real side of the economy, described via a Keynesian good market approach, interacts with the stock market with heterogeneous speculators, i.e., optimist and pessimist fundamentalists. Employing analytical and numerical tools, we detect the mechanisms and the channels through which instabilities get transmitted between markets. In order to perform such analysis, we introduce the “interaction degree approach”, which allows us to study the complete three-dimensional system by decomposing it into two subsystems, i.e., the isolated financial and real markets, easier to analyze, that are then interconnected through a parameter describing the interaction degree between the two markets. Next, we derive the stability conditions both for the isolated markets and for the whole system with interacting markets. Finally, we show how to apply the “interaction degree approach” to its role becomes more ambiguous when the markets are interconnected. However, our numerical simulations suggest that increasing the bias has generally a destabilizing effect. our model. To this aim, we first classify the possible scenarios according to the stability/instability of the isolated financial and real markets. For each of those frameworks we consider different possible parameter configurations and we show, both analytically and numerically, which are the effects of increasing the degree of interaction between the two markets. In particular, we find that the instability of the real market seems to have stronger destabilizing effects than the instability of the financial market: in fact, the former gets transmit- ted and possibly amplified by the connection with the financial market, while the latter gets dampened and possibly eliminated by the connection with the real market. We conclude our analysis by showing which are the effects of an increasing bias. Although it is clearly destabilizing when markets are isolated,
    Keywords: Nonlinearities, complex dynamics, oscillators, Keynesian models; animal spirits, behavioral finance.
    JEL: C62 D84 E12 E32 G02
    Date: 2014–02
  26. By: Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
    Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.
    Keywords: Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods.
    JEL: C53 E52 F31 F37 G17
    Date: 2014–02
  27. By: Roberds, William (Federal Reserve Bank of Atlanta); Velde, Francois R. (Federal Reserve Bank of Chicago)
    Abstract: Publicly owned or commissioned banks were common in Europe from the fifteenth century. This survey argues that while the early public banks were characterized by great experimentation in their design, a common goal was to create a liquid and reliable monetary asset in environments where such assets were rare or unavailable. The success of these banks was however never guaranteed, and even well-run banks could become unstable over time as their success made them susceptible to fiscal exploitation. The popularization of bearer notes in the eighteenth century broadened the user base for the public banks’ money but was also accompanied by increased fiscal abuse. Wartime demands of the Napoleonic Era resulted in the reorganization or dissolution of many early public banks. A prominent exception was the Bank of England, whose adept management of a fiscally backed money provided a foundation for the development of central banks as they exist today.
    Keywords: Central banks; exchanges bank; public banks
    JEL: E58 N13
    Date: 2014–02–11
  28. By: Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: Based on a dataset of 123 economies, this paper empirically investigates the relation between exchange-rate regimes and economic growth. We find that growth performance is best under intermediate exchange rate regimes, while the smallest growth rates are associated with flexible exchange rates. Nevertheless, this conclusion is tempered when we analyze the countries by income level: even though countries that adopt intermediate exchange-rate regimes are characterized by higher economic growth, the higher the level of income, less difference in growth performance across exchange rate regimes.
    Keywords: Exchange rate regime; economic growth
    JEL: E42 F31
    Date: 2014–01
  29. By: Akar, Gizem; Balkan, Binnur; Tumen, Semih
    Abstract: This paper documents two new facts linking firm-size and gender pay gaps to informal employment using micro-level data from Turkey. First, we show that the firm-size wage gap, defined as larger firms paying higher wages to observationally equivalent workers, is greater for informal employment than formal employment. And, second, we find that the gender pay gap is constant across different firm-size categories for formal employment, while it is a decreasing function of firm size for informal employment. These two facts jointly suggest that the informality status of a job is a valuable source of information in understanding the underlying forces determining firm-size and gender wage gaps. We propose and discuss the relevance of alternative mechanisms that might be generating these facts.
    Keywords: Informal employment; wage differentials; firm size; gender discrimination; THLFS.
    JEL: C21 E24 J31 J71
    Date: 2014–02–21
  30. By: Stephen J. Knop; Joaquin L. Vespignani
    Abstract: It is found that commodity price shocks largely affect the mining, construction and manufacturing industries in Australia. However, the financial and insurance sector is found to be relatively unaffected. Mining industry profits and nominal output substantially increase in response to commodity price shocks. Construction output is also found to increase significantly, especially in response to a bulk commodities shock, as a result of increased demand for resource related construction. Increased demand for construction has a positive spillover effect to parts of the manufacturing industry that supply the construction sector with intermediate inputs, such as the non-metallic mineral sub industry. In contrast, other manufacturing sub industries with only tenuous links to the resources sector such as textiles, clothing and other manufacturing, are relatively unresponsive to commodity price shocks.
    Keywords: Commodity prices, Commodity shocks, Australian economy
    JEL: E00 E30 F20
    Date: 2014–02
  31. By: Thomas H. Jørgensen (Copenhagen University)
    Abstract: I show that conventional estimators based on the consumption Euler equation, extensively used in studies of intertemporal consumption behavior, produce inconsistent estimates of the effect of children on consumption if potentially binding credit constraints are ignored. As a more constructive contribution, I supply a tractable approach to obtaining bounds on the effect of children and a structural estimation strategy when households face constraints. Finally, I estimate the effect of children on consumption using the Panel Study of Income Dynamics (PSID) for the US and high quality Danish administrative register data. Results suggest that children does not affect household consumption in the same magnitude previously assumed.
    Keywords: Consumption, Children, Life Cycle, Credit Constraints, Structural Estimation
    JEL: D12 D14 D91 E21
    Date: 2014–01–21
  32. By: Wouter VAN DER WIELEN
    Abstract: This paper assesses the impact of budgetary uncertainty on the optimum instrument for fiscal discipline. In addition to exogenous uncertainty, with respect to both the savings and damages of the public deficit, the model accommodates for externalities as a result of a multitier government structure. Hence, the model approximates fiscal discipline measures within federations and especially within a monetary union. Alternative to the frequently proposed fiscal rule constraining the magnitude of the public deficit, the paper sets forth a price control (i.e. a penalty) as a policy instrument. The preferred instrument for fiscal discipline is found to be dependent on the slopes of the marginal savings and damage curves, the savings uncertainty and the correlation between uncertainty in savings and damage as well as between member states' savings shocks. In particular, strongly asymmetric shocks to budgetary policy run a borrowing constraint undesirable. The latter is stressed as exceptionally disturbing as EMU member states are still considered to be asymmetric in their stochastics, while stressing borrowing constraints as the principal instrument for fiscal discipline.
    Date: 2014–02
  33. By: Khelifi, Atef
    Abstract: The goal of this note is to expose an important discussion with the highly ranked “Journal of Economic Growth” (Referees and Editors), on the paper titled: “Have we missed the right version of the standard Ramsey Growth model?” (Drafts of October 2013 and January 2014). This paper which is still under improvement today has been selected for a presentation in several conferences, and is already winner of a “Best Paper Award”. The distinguished author Peter Ireland who provided helpful comments, and who confirmed the importance of this contribution, is pleased to be acknowledged. The paper discussed has for goal to alert all Economists and Professionals on the fact that the widely used Ramsey model is most likely a misleading version. Indeed, it has been misunderstood historically that savings could in some cases enter directly the Utility function, and this has been seriously impacting for the resulting dynamics of the model.
    Keywords: Ramsey model; Optimal Growth; Optimal control; Dynamic programming; Savings decision
    JEL: D00 D91 E0 O40 O41
    Date: 2014–02
  34. By: Andri Chassamboulli; Giovanni Peri
    Abstract: A key controversy in US immigration reforms is how to deal with undocumented workers. Some policies aimed at reducing them, such as increased border security or deportation will reduce illegal immigrants as well as total immigrants. Other policies, such as legalization would decrease the illegal population but increase the legal one. These policies have different effects on job creation as they affect the firm profits from creating a new job. Economists have never analyzed this issue. We set up and simulate a novel and general model of labor markets, with search and legal/illegal migration between two countries. We then calibrate it to the US and Mexico labor markets and migration. We find that policies increasing deportation rates have the largest negative effect on employment opportunities of natives. Legalization, instead has a positive employment effect for natives. This is because repatriations are disruptive of job matches and they reduce job-creation by US firms. Legalization instead stimulates firms' job creation by increasing the total number of immigrants and stimulating firms to post more vacancies some of which are filled by natives.
    JEL: E24 J15 J64
    Date: 2014–02
  35. By: Michael Siegenthaler (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Tobias Stucki (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper is the first to study the factors determining labor’s share of income on the level of the individual firm, employing an unusually informative panel data set. The empirical examination is concerned with Switzerland which stands out as one of the very few developed countries with a stable labor share. Broadly confirming results from previous cross-country and industry-level studies, we find that the main factor decreasing the labor share in the estimation period is the increase in the share of workers using ICT in the firm. The main reasons why Switzerland’s labor share remained almost constant are its relatively slow-rate of technological progress and shifts towards industries with above-average labor shares.
    Keywords: Labor share, factor income distribution, firm-level analysis
    JEL: D33 E25 J24 O30
    Date: 2014–02
  36. By: Felbermayr, Gabriel (University of Munich); Impullitti, Giammario (University of Nottingham); Prat, Julien (CREST)
    Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic regulatory reform.
    Keywords: wage inequality, international trade, directed search, firm dynamics, product and labor market regulation
    JEL: F12 F16 E24
    Date: 2014–02
  37. By: Andrew Coleman (The Treasury)
    Abstract: Increases in longevity mean the size of New Zealand’s public retirement income programme, New Zealand Superannuation, will automatically expand unless the age of eligibility is increased. This paper analyses the consequences of expanding New Zealand Superannuation on a save-as-you-go basis through the New Zealand Superannuation Fund rather than on a pay-as-you-go basis. These funding mechanisms differ in terms of their effects on different cohorts, on long run tax rates, on capital accumulation, and on risk. The paper argues that an automatic pay-as-you-go funded expansion of New Zealand Superannuation is unattractive on many grounds, even if pay-as-you-go funding remains for much of the programme. In addition to reducing long run tax rates, the use of save-as-you-go funding through the New Zealand Superannuation Fund provides households with a means of reducing income risk over the course of their lives.
    Keywords: Retirement income policy; prefunding; intergenerational economics
    JEL: E21 H55
    Date: 2014–02
  38. By: Phiri, Andrew
    Abstract: Purpose: This purpose of this study is to examine the asymmetric adjustment effects for the purchasing power parity (PPP) for South Africa against her main currency trading partners; namely, the US, the UK, the Euro area, China and Japan. Design/Methodology/Approach: This study presents a two-fold empirical approach by using nominal exchange rate and aggregate price level data collected monthly for the periods 1971-2013. As a first step, the paper tests for nonlinear integration properties on the real exchange rate as computed as the nominal exchange rate adjusted for price differentials between the domestic and foreign price levels. The paper then proceeds to investigate asymmetric cointegration and error correction effects between nominal exchange rates and aggregate price differentials; and further supplements the empirical analysis by investigating granger causal effects between the variables. Findings: While the study is able to validate significant asymmetric PPP effects between South Africa and all her main currency exchange partners through the application of asymmetric unit root tests; the evidence presented when examining these PPP effects through the use of threshold cointegration and error correction analysis exempts the relationship explored between South African and the Euro area. Furthermore, the causal effects are found to run uni-directional from exchange rates to aggregate price differentials for all significant asymmetric cointegration relations. Originality/value: This study makes a novel contribution to literature by confirm significant asymmetric PPP effects between South Africa and her main currency exchange partners from both a unit root and a co-integration perspective.
    Keywords: Purchasing power parity (PPP); Threshold co-integration; Threshold unit root tests; South Africa
    JEL: C32 E31 E58 F31
    Date: 2014–02–13
  39. By: Bengtsson, Ola (Lund University); Ekeblom, Daniel (Department of Economics)
    Abstract: Existing empirical evidence suggests that entrepreneurs are optimists, a finding researchers often interpret as evidence of a behavioral bias in entrepreneurial decision-making. We revisit this claim by analyzing an unusually large survey dataset (180,814 responses) that allows us to create a good measure of entrepreneurial optimism. Our measure is based on the individual’s beliefs about nationwide economic conditions, unlike measures that prevail in the literature of an individual’s beliefs about her personal future economic conditions. Beliefs about nationwide economic conditions form a good measure of optimism because they are completely uncorrelated with the individual’s own life or work situation (which is not optimism) and therefore do not respond to an individual’s objective situation, which may affect beliefs about her personal future economic conditions. Our data highlight the importance of measuring optimism correctly. About half of the survey respondents differ in their beliefs about nationwide and own conditions. In addition, our measure of optimism makes it possible to relate an individual’s beliefs to actual outcomes. We can thereby test, in a novel way, whether entrepreneurial optimism is a behavioral bias or not. We show that entrepreneurs have more favorable beliefs about nationwide conditions and then that these entrepreneurs’ beliefs are relatively good predictors of the future. We conclude from these two findings that entrepreneurs are less biased towards optimism than non-entrepreneurs are biased towards pessimism. Additional evidence pertaining to education, which arguably correlates positively with rational decision-making, supports this conclusion. We show that entrepreneurs are more educated and their beliefs about the future are more similar to educated peoples’ beliefs. In summary, our paper documents that entrepreneurial optimism is an important real-world phenomenon, yet, it may not be a behavioral bias that gives rise to irrational decision-making.
    Keywords: Entrepreneurship; Forecast; Optimism; Survey data
    JEL: C83 D84 E27 L26
    Date: 2014–02–19
  40. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Rocco Ciciretti (University of Rome "Tor Vergata"); Ambrogio Dalo (CEIS University of Rome "Tor Vergata"); Stefano Herzel (University of Rome Tor Vergata)
    Abstract: We investigate the performance of Socially Responsible Funds (SRFs) and Conventional Funds (CFs) in different market segments during the 1992-2012 period. From an unbalanced sample of more that 22,000 funds, we define a matched sample using a beta-distance measure to match any SRF with the \nearest neighbor" CF in terms of risk factors. Using this novel matching approach and a recursive analysis, we identify several switch points in the lead/lag relationship between the two investment styles over time in different market segments (geographical area and size). A relevant finding of our analysis is that SRFs played an "insurance role" outperforming CFs during the 2007 global financial crisis.
    Keywords: Socially Responsible Investment Fund; Jensen's Alpha; Global Financial Crisis.
    JEL: D84 E44 F30 G17 C53
    Date: 2014–02–18
  41. By: Huber, Jürgen (University of Innsbruck); Kirchler, Michael (University of Innsbruck); Kleinlercher, Daniel (University of Innsbruck); Sutter, Matthias (European University Institute)
    Abstract: While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.
    Keywords: Financial Transaction Tax, experimental finance, residence principle, market principle
    JEL: C91 G10 E62
    Date: 2014–02
  42. By: Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Motivated by the problems of the conventional model in rationalizing market data, we derive the equilibrium interest rate and risk premiums using recursive utility in a continuous time model. We relax one restriction on dynamic utility, in that we do not assume irrelevance of past consumption for current marginal utility. One motive for this extension is added realism, another is that the state prices depend on past consumption. We use the stochastic maximum principle and forward/backward stochastic differential equations to derive two ordinally equivalent versions. The resulting equilibrium is consistent with reasonable values of the parameters of the utility functions when calibrated to market data, under various assumptions.
    Keywords: The equity premium puzzle; the risk-free rate puzzle; recursive utility; past dependence; the stochastic maximum principle; forward/backward stochastic differential equations
    JEL: D51 D53 D90 E21 G10 G12
    Date: 2014–02–20
  43. By: James M. Poterba
    Abstract: The share of the U.S. population over the age of 65 was 8.1 percent in 1950, 12.4 percent in 2000, and is projected to reach 20.9 percent by 2050. The percent over 85 is projected to more than double from current levels, reaching 4.2 percent by mid-century. The aging of the U.S. population makes issues of retirement security increasingly important. Elderly individuals exhibit wide disparities in their sources of income. For those in the bottom half of the income distribution, Social Security is the most important source of support; program changes would directly affect their well-being. Income from private pensions, assets, and earnings are relatively more important for higher-income elderly individuals, who have more diverse income sources. The trend from private sector defined benefit to defined contribution pension plans has shifted a greater share of the responsibility for retirement security to individuals, and made that security more dependent on choices they make. A significant subset of the population is unlikely to be able to sustain their standard of living in retirement without higher pre-retirement saving.
    JEL: E21 G11 H55 J14
    Date: 2014–02
  44. By: Nicolas Houy (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We study the economics of Bitcoin transaction fees in a simple static partial equilibrium model with the specificity that the system security is directly linked to the total computational power of miners. We show that any situation with a fixed fee is equivalent to another situation with a limited block size. In both cases, we give the optimal value of the transaction fee or of the block size. We also show that making the block size a non binding constraint and, in the same time, letting the fee be fixed as the outcome of a decentralized competitive market cannot guarantee the very existence of Bitcoin in the long-term.
    Keywords: Bitcoin, transaction fee, mining, crypto-currency
    JEL: D23 E42
    Date: 2014

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