nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒03‒15
ninety-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The role of the Central Bank in the Economic Slow-down in Russia. By BLINOV, Sergey
  2. Le Policy mix de la zone UEMOA garantit-il la Stabilité Intérieure et la Croissance ? By Combey, Adama
  3. Inflation targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru By Armas, Adrián; Castillo, Paul; Vega, Marco
  4. An Empirical Study on the New Keynesian Wage Phillips Curve: Japan and the US By Muto, Ichiro; Shintani, Kohei
  5. Managing Short-Term Capital Flows in New Central Banking: Unconventional Monetary Policy Framework in Turkey By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  6. Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy By Federico Etro; Lorenza Rossi
  7. "Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States" By Eric Tymoigne
  8. Accommodative Monetary Policy and Macroprudential Safeguards By Evans, Charles L.
  9. The determinants of inflation differentials in the euro area By Moretti, Laura
  10. Capital controls as an instrument of monetary policy By Davis, Scott; Presno, Ignacio
  11. Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy By Virkola, Tuomo
  12. Real wages in the business cycle: an unresolved conflict between theory and facts in mainstream macroeconomics By Stirati, Antonella
  13. A Theory of the Intergenerational Dynamics of Inflation Beliefs and Monetary Institutions By Etienne Farvaque; Alexander Mihailov
  14. Monetary Policy and Heterogeneous Inflation Expectations in South Africa By Alain Kabundi, Eric Schaling and Modeste Some
  15. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  16. Central bank independence, policies and reforms: addressing political and economic linkages By Marianne, Ojo
  17. A Post-Crisis Reading of the 'Role of Monetary Policy' By Stan Du Plessis
  18. Managing Credit Bubbles By Alberto Martin; Jaume Ventura
  19. Exiting from QE By Fumio Hayashi; Junko Koeda
  20. Macroeconomic Consequences of Terms of Trade Episodes, Past and Present By Tim Atkin; Mark Caputo; Tim Robinson; Hao Wang
  21. Revisiting the matching function By Kohlbrecher, Britta; Merkl, Christian; Nordmeier, Daniela
  22. Policy Duration Effects, Quantitative Monetary Easing Policy, and Economic Growth: Evidence from Japanese Time Series Data By Masafumi Kozuka
  23. Forward guidance with an escape clause: When half a promise is better than a full one By Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
  24. A Simple Mineral Market Model: Can it produce Super Cycles in prices? By John T. Cuddington; Abdel M. Zellou
  25. An essay on horizontalism, structuralism and historical time By Mark Setterfield
  26. "Full Employment: The Road Not Taken" By Pavlina R. Tcherneva
  27. Forecasting recessions in real time By Knut Are Aastveit; Anne Sofie Jore; Francesco Ravazzolo
  28. A Century of Capital Structure: The Leveraging of Corporate America By John R. Graham; Mark T. Leary; Michael R. Roberts
  29. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'baye
  30. Equilibrium Models of Macroeconomic Science: What to Look For in (DSGE) Models? By Chatterjee, Sidharta
  31. Interest Rate Corridor, Liquidity Management and the Overnight Spread By Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
  32. Do Banks Lend Less in Uncertain Times? By Burkhard Raunig; Johann Scharler; Friedrich Sindermann
  33. New CNB measures to stimulate credit growth: problems and solutions By Vidakovic, Neven; Zbašnik, Dušan
  34. Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy By João Sousa Andrade; António Portugal Duarte
  35. Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions By Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
  36. Assessing the supply of the Maltese economy using a production function approach By Grech, Aaron George; Micallef, Brian
  37. Böhm-Bawerk meets Keynes: What does determine the interest rate, and can the latter become negative? By van Suntum, Ulrich
  38. Why didn't economists predict the Great Depression? By Taylor, Leon
  40. Kva skjer med oljeinvesteringane? By Mohn, Klaus
  41. Measuring the Impact of Exchange Rate Movements on Domestic Prices: A Cointegrated VAR Analysis By Nidhaleddine Ben Cheikh; Waël Louhichi
  42. Unemployment benefits, the ‘added worker effect’ and income distribution in a monetary economy By Guglielmo Forges Davanzati; Andrea Pacella
  43. Consolidation under the Europe’s New Fiscal Rules: Analyzing the Implied Minimum Fiscal Effort By Kuusi, Tero
  44. An Optimum Currency Crisis By Pasimeni, Paolo
  45. Forecasting the intraday market price of money By Andrea Monticini; Francesco Ravazzolo
  46. Macroprudential Policies as Buffer Against Volatile Cross-border Capital Flows By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  47. The demand for currency in Malta By Grech, Aaron George
  48. Learning From the Doers: Developing Country Lessons for Advanced Economy Growth By Anusha Chari; Peter Blair Henry
  50. An Empirical Test of Money Demand in Thailand from 1993 to 2012 By Jiranyakul, Komain; Opiela, Timothy
  51. Dollarization and the relationship between embi and fundamentals latin american countries By María Lorena Mari del Cristo; Marta Gómez-Puig
  52. On the relationship between public and private investment in the euro area By Dreger, Christian; Reimers, Hans-Eggert
  53. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  54. Continuous Markov equilibria with quasi-geometric discounting By Chatterjee, Satyajit; Eyigungor, Burcu
  55. Trade and Uncertainty By Dennis Novy; Alan M. Taylor
  56. Does the Great Recession imply the end of the Great Moderation? International evidence By Amélie Charles; Olivier Darné; Laurent Ferrara
  57. Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth By Bonatti, Luigi; Fracasso, Andrea
  58. The Safer, the Riskier: A Model of Financial Instability and Bank Leverage By Ryo Kato; Takayuki Tsuruga
  60. Exchange rate regime and household's choice of debt By Vidakovic, Neven
  61. The Institution of Macroeconomic Measurement in Indonesia Before the 1980s By Pierre van der Eng
  62. “Dollarization and the Relationship Between EMBI and Fundamentals Latin American Countries” By María Lorena Mari del Cristo; Marta Gómez-Puig
  63. ¿Puede un índice de sostenibilidad fiscal predecir la ocurrencia de crisis cambiarias? Evidencias para algunos países seleccionados By Cruz-Rodriguez, Alexis
  64. Slow Information Diffusion and the Inertial Behavior of Durable Consumption By Luo, Yulei; Nie, Jun; Young, Eric
  65. The Economics of Work Schedules under the New Hours and Employment Taxes By Casey B. Mulligan
  66. Price setting behaviour in Lesotho: Stylised facts from consumer retail prices By Mamello Amelia Nchake, Lawrence Edwards and Neil Rankin
  67. The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment: Working Paper 2014-02 By Jonathan Huntley
  68. Is There a Cooperative Bank Difference? By Leonardo Becchetti; Rocco Ciciretti; Adriana Paolantonio
  69. Model Uncertainty and Intertemporal Tax Smoothing By Luo, Yulei; Nie, Jun; Young, Eric
  70. Monetary Policy and Value Judgments : Did we forget Myrdal's legacy ? By Nicolas Barbaroux; Michel Bellet
  73. Consumer price indices and the identification problem By Courtney, Mark
  74. Can the UAE Avoid the Oil Curse by Economic Diversification? By Haouas, Ilham; Heshmati, Almas
  75. Is there a retirement consumption puzzle in Japan? Evidence based on panel data on households in the agricultural sector By Hori, Masahiro; Murata, Keiko
  76. Stochastic Model Specification Search for Time-Varying Parameter VARs By Eric Eisenstat; Joshua C.C. Chan; Rodney W. Strachan
  78. Cash management and payment choices: A simulation model with international comparisons By Arango, Carlos; Bouhdaoui, Yassine; Bounie, David; Eschelbach, Martina; Hernández, Lola
  79. An update on emu sovereign yield spread drivers in times of crisis: a panel data analysis By Marta Gómez-Puig; Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  80. Lucas paradox and allocation puzzle: Is the euro area different? By Herrmann, Sabine; Kleinert, Jörn
  81. Reserve requirements in the brave new macroprudential world By Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
  82. Heterogeniety and limited stock market Participation By Aase, Knut K.
  83. Socially Responsible and Conventional Investment Funds: Performance Comparison and the Global Financial Crisis By Leonardo Becchetti; Rocco Ciciretti; Ambrogio Dalo; Stefano Herzel
  84. Studying the Socio-Economics of Ageing using Social Accounting and Socio-Demographic Matrices. An application to Portugal. By Santos, Susana
  85. Stop Waiting Problem: Decision Rule with Ψ function and Application with Share Prices By Kohn, Wolfgang
  86. Market vs. residence principle : experimental evidence on the effects of a financial transaction tax By Jürgen Huber; Michael Kirchler; Daniel Kleinlercher; Matthias Sutter
  87. Relación entre el riesgo sistémico del sistema financiero y el sector real: un enfoque FAVAR By Wilmar Alexander Cabrera Rodríguez; Luis Fernando Melo Velandia; Daniel Parra Amado
  88. Trapped Factors and China's Impact on Global Growth By Nicholas Bloom; Paul Romer; Stephen Terry; John Van Reenen
  89. Aggregate Costs of Gender Gaps in the Labor Market: A Quantitative Estimate By Marc Teignier; David Cuberes
  90. Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market By Robert J. Hill; Iqbal A. Syed
  91. Estimates of the Price Elasticities of Natural Gas Supply and Demand in the United States By Arora, Vipin

  1. By: BLINOV, Sergey
    Abstract: This paper is looking into the causes of the GDP decline in Russia during 2008-2009 and the slow-down of the GDP growth during 2012-2013. The impact of the money supply on the GDP is discussed. Analogies are drawn with the crises in the USA: the Great Depression during 1929-1933 and the 2008-2009 crisis. Possible measures necessary for growth in Russia are investigated.
    Keywords: money supply, Great Depression, recession, central bank
    JEL: E41 E44 E51 E58 E65 G01 H12 N12 N14
    Date: 2014–03–04
  2. By: Combey, Adama
    Abstract: A policy mix characterized by a monetary policy whose main objective is price stability and fiscal policy under fiscal discipline can he permit to keep prices and production levels of social optimum to sustain economic growth ? In this paper, an index of the policy mix is ​​built for grouping into a single indicator, the interactions of decisions of monetary and fiscal policy on monetary, financial and economic zone conditions. Then we mobilize recent methodological developments in particular, technical estimation models of spatial-dynamic panel that provide opportunities to consider the effects of neighborhood and unobserved heterogeneity of countries of the region to analyze the effects of Policy mix on inflation, the output gap and economic growth. The results provide empirical evidence that the articulation of monetary and fiscal policy in the current state, contributes to price stability without producing effects of overall macroeconomic stability to support economic growth in the long term . The paper argues for completing the current policy mix with two new instruments: an attenuation mechanism of propagation of shocks affecting the level of inflation and a mecanisme for output stabilization.
    Keywords: Policy mix; internal Stability; Inflation, Output gap, Growth, Monetary Policy, Fiscal Policy; WAEMU.
    JEL: C36 E3 E31 E52 E62
    Date: 2014–02–28
  3. By: Armas, Adrián (Banco Central de Reserva del Perú); Castillo, Paul (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper provides an overview of the Reserve Requirements measures undertaken by the Central Bank of Peru. We provide a rationale for the use of these instruments as well as empirical evidence on their effectiveness. In general, the results show that a reserve requirement tightening has the desired effects on interest rates and credit levels both at banks and smaller financial institutions (cajas municipales).
    Keywords: Non-conventional monetary policy, Inflation Targeting, Reserve requirements.
    JEL: E51 E52 E58 G21
    Date: 2014–02
  4. By: Muto, Ichiro; Shintani, Kohei
    Abstract: We present an empirical analysis on the New Keynesian Wage Phillips Curve (NKWPC), which is derived by Gali (2011) as a micro-founded structural relationship between wage inflation and the unemployment rate under a sticky wage framework using data for Japan and the US. We find that the empirical fit of the NKWPC is generally superior for Japan. We also find that the slope of the NKWPC is much steeper in Japan than in the US. These results suggest that wages are less sticky in Japan than in the US. Inflation indexation plays a key role in the US, but is less important in Japan. Rolling estimations indicate that the NKWPC has flattened over time in Japan. Analysis of recent data indicates that in both countries the role of inflation indexation is quantitatively smaller than before, although this result might be influenced by low and stable inflation rates over the past few decades.
    Keywords: Wage; Unemployment rate: New Keynesian model; Phillips curve
    JEL: E24 E31 E32
    Date: 2014–02–25
  5. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: During the global financial crisis of 2008-2009, both advanced and emerging countries have implemented significant easing policies on monetary and fiscal fronts. Yet, the recovery, especially in advanced countries, was not as quick or strong as expected. These quantitative easing policies, coupled with weak recovery and restricted fiscal positions, have created not only abundant but also excessively volatile global liquidity conditions, leading to short-term and excessively volatile capital flows to emerging markets. To contain potential risks due to such flows, emerging countries have augmented their existing policy frameworks. Central Bank of the Republic of Turkey (CBRT), for example, has introduced two new policy tools in its new monetary policy framework: the asymmetric interest rate corridor and the reserve option mechanism. From a capital flows perspective, the interest rate corridor helps smooth fluctuations in supply of foreign funds, whereas the reserve option mechanism helps contain movements in demand for foreign funds. Both policies have been actively used by the CBRT and appeared to be effective in containing financial stability risks stemming from excessively volatile capital flows.
    Keywords: Capital flows, macroprudential policies, central banking
    JEL: E44 E52 E58
    Date: 2014
  6. By: Federico Etro (Department of Economics, University of Venice Ca' Foscari); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We reconsider the New-Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing and Bertrand competition, we obtain a modified New-Keynesian Phillips Curve with a lower slope. This reduces the level of nominal rigidities needed to obtain the estimated response of inflation to real marginal costs and to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, obtained through the linear quadratic approach, becomes less aggressive. Notably, the welfare gains from commitment decrease in more concentrated markets in reaction to inflationary shocks.
    Keywords: New Keynesian Phillips Curve, Real rigidities, Sticky prices, Optimal monetary policy, Infl?ation, Endogenous entry
    JEL: E3 E4 E5
    Date: 2014–03
  7. By: Eric Tymoigne
    Abstract: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits. Not only can they issue their own currency to pay public debt denominated in their own currency, but they can also easily bypass any self-imposed constraint on budgetary operations. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of the United States, the eurozone, and Australia, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and nonsovereign governments. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing further evidence of the interconnectedness of the treasury and the central bank in the United States.
    Keywords: Modern Money Theory; Monetary Policy; Fiscal Policy
    JEL: E02 E42 E52 E62
    Date: 2014–03
  8. By: Evans, Charles L. (Federal Reserve Bank of Chicago)
    Abstract: A speech delivered on February 4, 2014, at the Detroit Economic Club in Detroit, MI.
    Keywords: Monetary policy; inflation; macroprudential
    Date: 2014–02–04
  9. By: Moretti, Laura
    Abstract: Inflation differentials in the euro area have been persistent since the adoption of the single currency. This paper analyzes the impact of product and labor market regulation on inflation in a sample of 11 countries. The results show that, after the adoption of the euro, product market deregulation has a relevant and significant effect on the level of inflation, while higher labor market regulation increases the responsiveness of inflation to the output gap. --
    Keywords: Labor Market Deregulation,Product Market Deregulation,EMU,Inflation Rate
    JEL: E31 E58 E65 L51
    Date: 2014
  10. By: Davis, Scott (Federal Reserve Bank of Dallas); Presno, Ignacio (Federal Reserve Bank of Dallas)
    Abstract: Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.
    JEL: E32 E52 F32 F41
    Date: 2014–02–01
  11. By: Virkola, Tuomo
    Abstract: This paper studies the effects of discretionary fiscal policy shocks under different exchange rate regimes within a structural vector autoregressive (SVAR) model. We first suggest that by estimating the effects of fiscal policy shocks in two structurally similar small open economies that have opted for different monetary policy regimes (Finland and Sweden), we may control for the economic environment and study the effect of exchange rate regime on fiscal policy transmission. Second, we propose to augment the baseline model with quarterly fiscal forecasts and study fiscal policy shocks under fiscal foresight, i.e., when economic agents may anticipate and respond to fiscal policy measures prior to their implementation. Our findings suggests that discretionary fiscal policy is more effective under a fixed exchange rate regime than under a floating exchange rate regime. This is consistent with the conventional wisdom inherited from the Mundell-Fleming framework and with recent evidence that suggests the effectiveness of fiscal policy depends on the degree of monetary policy accommodation. We also find evidence that unanticipated (as opposed to standard SVAR) fiscal policy shocks have a larger expansionary effect on output than in the baseline.
    Keywords: fiscal policy, exchange rate regime, fiscal foresight
    JEL: E62 E63 F41 H30
    Date: 2014–03–03
  12. By: Stirati, Antonella
    Abstract: The focus of this paper is the recurring tension between mainstream macroeconomics and observed facts in connection with the difficult task of providing explanations of the business cycle consistent both with the traditional theory of income distribution and with the empirical evidence concerning the co-movements of real wages and employment over the cycle. The attempts to reconcile facts and theory have led to the continuous introduction of specific and arguably ad hoc hypotheses, in contrast with the search for greater theoretical rigour claimed by the various streams of macroeconomic modelling subsequent to the neo-classical synthesis. In addition, the specific assumptions introduced in the models, or their implications, are in turn often contradicted or, at best, not confirmed by subsequent empirical research. It is suggested in the conclusions that the difficulty of keeping together in a simple and consistent framework theory and facts reflects the flawed theoretical foundations of mainstream theory.
    Keywords: real wages in the business cycle; macroeconomic models
    JEL: E12 E24 E32
    Date: 2014–02–17
  13. By: Etienne Farvaque (Université du Havre, Faculté des A¤aires Internationales); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: We develop a stochastic overlapping-generations model with endogenously evolving heterogeneous beliefs on the degree of inflation protection to be provided by markets versus the monetary authority. It incorporates adaptive learning from inflation history and imperfect empathy in the cultural transmission of beliefs. Analytical results on endogenous inflation beliefs and socially-optimal inflation are derived first in a within-generation voting equilibrium that defines a particular degree of inflation aversion of a society's monetary institution. Then further theoretical and simulation analysis of the intergenerational dynamics of inflation and inflation beliefs provides insights into the long-run evolution of population types and social institutions, exploring the interactions of three central forces: the persistence of inflation, the degree of inflation aversion of the central bank and the recurrent irregular cycles of agent type proportions and subsequent majority switches. Our main contribution consists in showing how the endogenous transmission of inflation beliefs and monetary institutions in a stochastic economic environment can be understood as a process of intergenerational learning from history combined with a political economy mechanism that amends legislation and a socialization process that transmits experienced knowledge.
    Keywords: evolving beliefs, in?ation aversion, adaptive learning, voting equilibrium, cultural transmission, monetary institutions
    JEL: D72 D83 E31 E58 H41 J10
    Date: 2014–03–01
  14. By: Alain Kabundi, Eric Schaling and Modeste Some
    Abstract: This paper examines the relationship between in‡ation and in‡ation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate in‡ation expectations of individual agents as the weighted average of lagged in‡ation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged in‡ation and the opposite is true for analysts. The results reveal that the SARB has succesfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to ccommodate private agents' expectations.
    Keywords: Monetary policy, Inflation Targeing, Heterogeneous Inflation Expectations, Expectations Trap
    JEL: C51 E52 E58
    Date: 2014
  15. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: President Charles Plosser offers his views on growth, unemployment, and inflation expectations. He also discusses why the Fed faces a communications challenge with the economy so close to the unemployment threshold of 6.5 percent. He then explains why he favors the Fed providing more information to indicate how monetary policy will evolve as economic conditions change. Read the speech.
    Keywords: Monetary policy; Economy; Economic conditions;
    Date: 2014–03–06
  16. By: Marianne, Ojo
    Abstract: Whilst economic, political linkages and relationships constitute the theme of this paper, the paper also attempts to address why central bank independence still lacks certain vital attributes which embody adequate governance and accountability mechanisms - which are necessary if better results in relation to longer term economic and political objectives, in particular, are to be achieved. From this perspective, the growing importance of the shift to a focus on distinguishing between micro and macro prudential regulation is illustrated. The need for such distinction is not just evidenced through the creation of agencies responsible for such affairs within particular jurisdictions which are considered in this paper, but also through the increased realisation and need for greater focus on decision making responsibilities which are to be assigned to political and economic entities at supra national levels. Financial stability, it appears, has more to do with a mere focus on longer term objectives. Financial stability is also concerned with the ability to sustain long term policy objectives whilst being flexible enough to respond effectively to short term unpredictabilities.
    Keywords: inflation targeting; monetary policies; central banks; fiscal policies; accountability; governance arrangements; momentum effects
    JEL: E2 E5 G2 K2
    Date: 2014–03–07
  17. By: Stan Du Plessis
    Abstract: In 1967 Milton Friedman delivered “The Role of Monetary Policy’ as his presidential address to the American Economic Association (AEA). In its published version – Friedman (1968) – it has become, arguably, the most influential paper in modern monetary economics and was recently included in the AEA’s list of the twenty most influential papers published in the first century of the American Economic Review. But the influence of Friedman’s address is based on an interpretation that seriously distorts the content of his main argument. His emphasis on (i) the inadequacy of interest rate policy and (ii) the primacy of financial stability among the positive goals of monetary policy have been ignored or neglected. While balance sheet policies have become ‘unconventional’ in the modern consensus, these policies held a central position in Friedman’s work. I support this argument with a textual analysis of Friedman’s address, read in the light of his preceding scholarship on monetary policy. This reinterpretation is relevant in a world where the balance sheets of central banks have returned to centre stage as has the priority for financial stability.
    Keywords: Milton Friedman, Monetary policy, interest rate policy, balance sheet policies, Financial Stability
    JEL: B22 E52 E58
    Date: 2014
  18. By: Alberto Martin; Jaume Ventura
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The "equilibrium" bubble size depends on investor sentiment, however, and it typically does not coincide with the "optimal" bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the "optimal" bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the "equilibrium" bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it.
    JEL: E32 E44 O40
    Date: 2014–03
  19. By: Fumio Hayashi; Junko Koeda
    Abstract: We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. There are two regimes, one of which is QE (quantitative easing). The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response and counter-factual analyses yield two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE can be expansionary.
    JEL: E52
    Date: 2014–02
  20. 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
  21. By: Kohlbrecher, Britta; Merkl, Christian; Nordmeier, Daniela (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    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." (Author's abstract, IAB-Doku) ((en))
    Keywords: Arbeitsmarkttheorie, Matching, offene Stellen, Arbeitslose
    JEL: E24 E32 J63 J64
    Date: 2014–02–27
  22. By: Masafumi Kozuka (Faculty of Policy Studies, University of Marketing and Distribution Sciences)
    Abstract: In this paper, we examine the influences of policy duration effects and quantitative monetary easing policy (QMEP) brought into effect by Bank of Japan from 2001-2006 on economic growth toward future periods. We employed a simple equation with the term spread explaining economic growth and obtained the following results. The positive effects of the term spread on economic growth over the subsequent 21 and 24 months decreased in 2001. And the estimated coefficients on term spread are negative and significant after the shift in both cases. Then, we conclude that the QMEP and policy duration effects in 2000s worked on economic growth in Japan to some extent.
    Keywords: term spread, zero interest rate policy, quantitative easing policy, policy duration effects, economic growth
    JEL: E44 E52 G10
    Date: 2014–03
  23. By: Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
    Abstract: We incorporate an escape clause into a model with forward guidance and find that such clause is welfare improving as it allows the monetary authority to avoid cases in which the cost of reduced flexibility is too high. The escape clause provides the central bank with another instrument (additional to the promised policy rate), the announced threshold. Under zero-lower-bound episodes, such threshold is a more suitable instrument to respond to an increase in the size of the recessionary shock. However, in extreme cases (i.e. when the shock is enormous), the optimal response is to make an unconditional promise and further reduce the promised rate.
    Keywords: Forward guidance, escape clause, zero lower bound, central bank communication Classification JEL: E47, E52, E58
    Date: 2014–03
  24. By: John T. Cuddington (Division of Economics and Business, Colorado School of Mines); Abdel M. Zellou (Independent Petroleum Consultant)
    Abstract: This paper develops a stylized supply-demand model for a mineral / nonrenewable commodity. It embodies important distinctions between short-run and long-run mineral supply and the derived demand for minerals as intermediate goods in production sectors with differing intensities of use. This framework is used to address the question: under what conditions might one expect to observe super cycles (i.e. cycles with a period of 20-70 years) in minerals prices? A plausible time path for GDP growth and the structural transformation that accompanies economic development in an emerging region is specified. Using these drivers and reasonable supply and demand parameters, price dynamics are simulated. The result is an asymmetric price cycle with a peak price that is about 250\% above trend and an expansion phase that lasts for about 20 years. Thus, this simple model is capable of producing a single cycle with a frequency and amplitude in the range estimated in the empirical literature on super cycles. As other regions reach the development `take-off' phase, additional super cycles should emerge.
    Keywords: Super Cycles, Long Cycles, Metal Markets, Metals’ Intensity of Use
    JEL: E32 E22 E37
    Date: 2012–07
  25. By: Mark Setterfield
    Abstract: Beyond agreement on the basic principles of money’s endogeneity, the development of Post-Keynesian monetary theory has been characterized by considerable dissent and debate. One important aspect of this debate concerns the shape of the credit supply curve in quantity of credit/interest rate space. The argument in this chapter is that that there can be, and to an extent already is, agreement that the horizontal credit supply curve is not a special case, and that the existence of an indeterminate dynamic credit supply schedule provides a general framework capable of accommodating both horizontalist and structuralist arguments. These arguments rest on the distinction between logical and historical time and, in particular, the claim that any construct (including, for example, a credit supply schedule) that is akin to a determinate long run equilibrium relationship is anathema to the methodological foundations of Post-Keynesian economics.
    Keywords: Endogenous money, horizontalism, structuralism, historical time, supply of credit
    JEL: E12 E42 E43 E51
    Date: 2014–03
  26. By: Pavlina R. Tcherneva
    Abstract: It is common knowledge that John Maynard Keynes advocated bold government action to deal with recessions and unemployment. What is not commonly known is that modern "Keynesian policies" bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run. This paper corrects this misconception and outlines "the road not taken"; that is, the long-term program for full employment found in Keynes's writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives. The analysis herein focuses on why the private sector ordinarily fails to produce full employment, even during strong expansions and in the presence of strong government action. It articulates the reasons why the job of the policymaker is, not to "nudge" private firms to create jobs for all, but to do so itself directly as a matter of last resort. This paper discusses various designs of direct job creation policies that answer Keynes's call for long-run full employment policies.
    Keywords: Unemployment as a Monetary Phenomenon; Long-run Full Employment; John Maynard Keynes; Social Economy; Aggregate Demand Management
    JEL: B3 E2 E6 H1 H31 J68
    Date: 2014–03
  27. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway)); Anne Sofie Jore (Norges Bank (Central Bank of Norway)); Francesco Ravazzolo (Norges Bank (Central Bank of Norway))
    Abstract: We review several methods to define and forecast classical business cycle turning points in Norway. In the paper we compare the Bry - Boschan rule (BB) with a Markov Switching model (MS), using alternative vintages of Norwegian Gross Domestic Product (GDP) as the business cycle indicator. The timing of business cycles depends on the vintage and the method used. BB provides the most reasonable definition of business cycles. The forecasting exercise, where the models are augmented with surveys or financial indicators, respectively, leads to the conclusion that the BB rule applied to density forecasts of GDP augmented with either the consumer confidence index or a financial conditions index provides the most timely predictions of peaks. For troughs, augmenting with surveys or financial indicators does not increase forecastability.
    Keywords: Forecast densities, Turning points, Real-time data
    JEL: C32 C52 C53 E37 E52
    Date: 2014–02–13
  28. By: John R. Graham; Mark T. Leary; Michael R. Roberts
    Abstract: Unregulated U.S. corporations dramatically increased their debt usage over the past century. Aggregate leverage – low and stable before 1945 – more than tripled between 1945 and 1970 from 11% to 35%, eventually reaching 47% by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes. Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role. Despite this increase among unregulated firms, a combination of stable debt usage among regulated firms and a decrease in the fraction of aggregate assets held by regulated firms over this period resulted in a relatively stable economy-wide leverage ratio during the 20th century.
    JEL: E44 E62 G32
    Date: 2014–03
  29. By: Ummad Mazhar (Shaheed Zulkar Ali Bhutto Institute of Science and Technology, 90-100 Clifton, Block 5, Karachi, Pakistan); Cheick Kader M'baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.
    Keywords: Forecasts transparency, monetary policy transparency, central banking, in flation volatility, output volatility
    JEL: E58 E63 C33 C36
    Date: 2014
  30. By: Chatterjee, Sidharta
    Abstract: Models in macroeconomic sciences are designed with the aim of understanding and then simulating the real world economic and monetary policy making. There has been a considerable debate over how to model the real world economic phenomena, and how correctly those models allow explanations of general equilibrium; that is, whether the models with their assumed parameters are able to expound on critical aspects of monetary policy making. Some models are structured to provide naïve explanations of the monetary policy process, while others are higher order complex models that attempt to elucidate the dynamicity of economic equilibrium. Dynamic Stochastic General Equilibrium (DSGE) model is one of such a complex model which has found the flavour of the time following its rapid adoption by Central Banks around the world. But strong contentions rebate the usefulness and question its effectiveness over other standard tools of macroeconomic and monetary policymaking process. Many scholars debate that DSGE models are far from perfect, to render it efficient in public policy making, although its adoption has been one such phenomenal. This paper aims to discuss in some detail about such debates relating to the contentious issues which arose on account of the failure of DSGE models to effectively detect the recent financial crisis the subprime of 2008. Hence, the present study revolves around a formal analysis of the epistemology of econometric modeling involving complex dynamic systems in real world policy making, and discusses whether if new models like DSGE could in fact help explain general equilibrium, or if they fail, then what to look for in their failure.
    Keywords: DSGE models, macroeconomic equilibrium, monetary policy
    JEL: E1 E12 E17
    Date: 2014–02–22
  31. By: Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
    Abstract: Recently, massive global liquidity has compelled many emerging market economies to change their monetary policy frameworks in order to address the financial stability challenges posed by volatile capital flows. In this respect, as of the second half of 2010, the Central Bank of the Republic of Turkey (CBRT) has developed additional policy instruments to support the adoption of financial stability as a complementary objective to price stability. Liquidity management has actively been used in conjunction with a wide interest rate corridor to smooth excessive volatility in shortterm capital inflows. As a result, the spread between the Borsa Istanbul overnight repo interest rate and the CBRT average funding rate (overnight spread) has become wider and more volatile. We analyze the determinants of the overnight spread using data from both the traditional and the new monetary policy episodes and empirically document that this spread has recently been influenced by various factors which are directly or closely related to the liquidity policy of the CBRT.
    Keywords: Overnight interest rate; liquidity policy; monetary policy; operational framework
    JEL: E43 E52 C22
    Date: 2014
  32. By: Burkhard Raunig; Johann Scharler; Friedrich Sindermann
    Abstract: We study the development of bank lending in the U.S. after four large jumps in uncertainty using an event study approach. We find that more liquid banks reduce lending less than banks with smaller liquidity ratios after a surge in uncertainty. Lending by smaller banks is also less responsive to increases in uncertainty. Banks with a higher capitalization ratio keep up lending to a greater extent, but the effect is only significant for banks which are not part of a multi-bank holding company. This heterogeneity across banks suggests that declines in bank lending following increases in uncertainty are partly the result of a reduced supply of bank loans.
    Keywords: uncertainty, bank loan supply, event study
    JEL: E44 E20 E30
    Date: 2014–03
  33. By: Vidakovic, Neven; Zbašnik, Dušan
    Abstract: The paper analyses the new measure implemented by Croatian national bank (CNB). The measure is a decrease in the reserve requirement, but the actual release of funds is contingent on increase in lending to firms. This new measure is significant because for the first time in Croatia there is a measure whose purpose is to affect specifically credit policy of the banks. Although this new measure has good intentions it does not solve the problem of why highly liquid banking system in Croatia is not willing to increase lending. The reason for lack of credit growth lies in two separate problems. The first problem is the willingness of banks to have more credit risk and the second problem is the way monetary policy is conducted in Croatia.
    Keywords: conduct of monetary policy, banks, credit
    JEL: E51 E58 G21
    Date: 2014–02
  34. By: João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: The Fiscal Compact has created new responsibilities in terms of quantitative measures of excess demand in the economy. The concept of structural budget balance is dependent on cycle values. As a consequence one of the primary responsibilities of economics is to build a good indicator of the magnitude of short term disequilibrium. Knowledge of the magnitude of the excess demand in the economy is essential for an appropriate application of the Fiscal Compact. The usual empirical concepts of output gap are not sufficiently well designed to give an accurate view of the negative excess demand when there are output breaks in the economy. The information produced by different (quasi-) official output gaps is quite often misleading, contributing to a rise in the unemployment rate. We propose a solution that might contribute to solve this problem that is clearly a crucial one for the PIIGS in times of crisis.
    Keywords: Structural deficit, output gap, Cobb-Douglas production function filter, Beveridge and Nelson filter and Hodrick-Prescott filter.
    JEL: C01 E62 H30 H63
    Date: 2014–05
  35. By: Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga
    Abstract: A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls.
    Keywords: Financial crises, Credit externalities, Bailouts, Macroprudential policies
    JEL: E32 G01 G18
    Date: 2014–03
  36. By: Grech, Aaron George; Micallef, Brian
    Abstract: After outlining the various methods used to estimate potential output, this article presents estimates for Malta derived from one of the most commonly used methods, i.e. the production function approach. Given the uncertainty surrounding these kinds of estimates, they are compared with those made for Malta by other institutions using different methods. Based on this analysis and on a cross-country comparison, a number of policy recommendations and final observations are made.
    Keywords: potential output, production function, output gap, business cycle, Malta
    JEL: E23 E32
    Date: 2014–02
  37. By: van Suntum, Ulrich
    Abstract: 100 years after Böhm-Bawerks death and nearly 70 years after Keynes has died there is still fundamental controversy about the factors which determine the interest rate in the long run. While Economists in the Austrian tradition see it as solely driven by real phenomena, Keynesian authors mainly stress the monetary factors. Likewise, the current phase of low interest rates is explained in most different ways by prominent economists. While many blame the expansive monetary policy, others point to excess capital supply in ageing industrial states. The present paper seeks to combine these explanations by the use of a stock-flow-consistent macro-model. It is argued that theories in the tradition of Böhm-Bawerk and Keynes respectively do not at all preclude each other but, on the contrary, can nicely be combined. -- Auch 100 Jahre nach dem Tode Böhm Bawerks und nahezu 70 Jahre nach dem Tod von Keynes sind die langfristigen Bestimmungsgründe des Zinses noch immer umstritten. Den realwirtschaftlichen Theorien der österreichischen Schule stehen die vorwiegend monetären keynesianischen Erklärungsansätze nach wie vor scheinbar unversöhnlich gegenüber. Auch die aktuellen Niedrigzinsen werden von prominenten Ökonomen ganz unterschiedlich erklärt. Viele sehen sie als direkte Folge der expansiven Geldpolitik der Notenbanken, andere verweisen dagegen auf einen Kapitalangebotsüberschuss in den alternden Industriegesellschaften. Der vorliegende Beitrag versucht, diese Sichtweisen im Rahmen eines Strom-Bestandgrößen-konsistenten Makromodells miteinander zu kombinieren. Es wird gezeigt, dass sich die Erklärungsansätze in der Tradition von Böhm-Bawerks und Keynes keineswegs ausschließen, sondern gut gegenseitig ergänzen.
    Keywords: public debt,stock flow consistent model,monetary policy
    JEL: E10 E40 E50
    Date: 2014
  38. By: Taylor, Leon
    Abstract: Economists failed to forecast the Great Depression, perhaps because they had lacked reason to theorize enough about business cycles. Since theory is a public good, the market produces too little of it. The prospect of ex post fame may induce theory; but fame comes from explaining famous events, not from averting adverse events. Also, learning-by-doing induces theory by cutting its cost, favoring the first theories to be developed. These dealt with markets – not business cycles – in the decades before the Depression.
    Keywords: Great Depression, theory of business cycles, history of macroeconomic thought, marketplace of ideas, learning by doing.
    JEL: B10 E32
    Date: 2014–03–07
    Date: 2014
  40. By: Mohn, Klaus (UiS)
    Abstract: Etter 10 år med kraftig vekst tyder mykje på at aktiviteten i petroleumsnæringa no er i ferd med å flate ut. Det oljeprisdrivne oppsvinget i investeringane på norsk kontinentalsokkel har gitt viktige vekstimpulsar til fastlandsøkonomien, og var ei av hovudårsakene til at norsk økonomi ikkje opplevde det same tilbakeslaget som resten av Europa i etterkant av Finanskrisa 2008. Med bakgrunn i kraftig kostnadsauke legg aksjemarknaden no press på oljeselskapa for å kutte kostnadar, skjerpe kapitaldisiplinen og sikre utbyttekapasiteten. Mykje tyder derfor på at oljeinvesteringane i Noreg no passerer toppen, og at ringverknader til leverandørnæringa og fastlandsøkonomien vil avta dei neste åra.
    Keywords: Oljeproduksjon; investeringar; kapitalmarknad; konjunkturar
    JEL: E22 E32 E44 G31
    Date: 2014–03–06
  41. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper measures the pass-through of exchange rate changes into domestic inflation within a cointegrated VAR (CVAR) framework. This issue is of particular interest for the euro area (EA) as Member Sates cede their national currencies and no longer have options of using monetary policy to respond to local conditions. In fact, a common exchange rate shock, in the absence of a national monetary policy, may have differential impact on EA countries, leading notably to possible divergence in inflation levels. Using quarterly data for 12 EA covering 1980:1 to 2010:4, we report a large degree of heterogeneity in the rates of pass-through across our sample, especially, between "peripheral" and "core" EA economies. For instance, prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. This outcome would have important implications for the general risk perceived by foreign firms and investors regarding the inflationary environment within each EA country.
    Keywords: Exchange Rate, Domestic prices, Cointegration, Euro area
    JEL: C32 E31 F31
    Date: 2014–03
  42. By: Guglielmo Forges Davanzati (University of Salento); Andrea Pacella (University of Sannio)
    Abstract: This paper focuses on the effects of public expenditure for unemployment benefits on the path of income distribution, within the theoretical framework of the monetary theory of production. By contrast to the standard view that unemployment benefits produce bad macroeconomic performances, it will be argued that – by increasing total demand – they boost the level of employment. The increase in the level of employment contributes to generate an ‘added worker effect’, which, in turn, pushes the Government to pay further unemployment benefits. At the same time, once firms’ fixed capital has been completely exploited, firms’ money profits at the aggregate level grow. This, in turn, generates inflationary pressures which reduces real wages. Moreover, following the Smithian argument that increase in demand fosters division of labour within firms, this policy can increase labour productivity, thus eventually counterbalancing the inflationary pressures associated to profits increases. A different policy option has been suggested, where – for the sake of allowing more ‘security’ to workers - the State directly supplies them with goods and services.
    Keywords: monetary theory of production, wage bargaining, unemployment benefits
    JEL: E12 H53 J50 J65
    Date: 2014–02
  43. By: Kuusi, Tero
    Abstract: The new EU fiscal framework builds on several overlapping target measures and convergence rules. Thus, it is not clear how strict goals the framework sets for public finances. In this paper we build a simulation framework that solves the minimum fiscal effort under different assumptions on the initial state of the economy and the expected economic conditions during the consolidation. We then use the model to analyze several fiscal consolidations. We find that Germany, France, Spain and Italy are currently in compliance with our measure of minimum fiscal effort, but Spain is at risk of falling behind the required pace of consolidation in the near future. As a historical reference we revisit the Finnish Great Depression of the early 1990s. We find that the consolidation was in compliance with the fiscal rules, but during the first years of the consolidation the difficulty of detecting the phase of the business cycle could have considerably increased the restrictiveness of the rules. Finally, we address the looming sustainability gap in the Finnish public finances that reflects the cost of aging population. Under no policy change the required correction is found to become substantial by 2030.
    JEL: E61 E62 H6
    Date: 2014–02–28
  44. By: Pasimeni, Paolo
    Abstract: This paper presents an ex-post assessment of the current situation of the Economic and Monetary Union (EMU) in light of the conditions prescribed by the theory of Optimum Currency Areas (OCA). The analysis shows that those conditions were satisfied at very different degrees. Factors mobility has clearly increased since the inception of the Eurozone, with an important difference between free movement of capital, which can be considered as fully accomplished, and labour mobility, which has improved, but to a lower degree. Prices and wages flexibility was initially lower compared to other regions, like the US, but has improved over time. The similarity of business cycles among different economies joining the euro was a condition not respected at the beginning, which probably led to sustained imbalances within the Eurozone. Finally, fiscal union was the main missing element of the initial construction of the Eurozone, and still is. The common budget is so exiguous that its effectiveness as shock absorption mechanism is negligible. The analysis then shows how some of the concerns raised on the eve of the euro did actually materialize, even if not immediately. First, in its first decade the Eurozone did not experience major turbulences, because growing financial integration was compensating the need for fiscal transfers, through the private insurance channel. Second, once the long-feared shock hit, the mechanism proved weak and non-resilient. The inherent weaknesses of the EMU became evident. Third, as it had been foreseen, the cost of the adjustment after the shock fell mainly on labour, with much higher and longer unemployment in the Eurozone than both non-Eurozone EU and the US. Fourth, as the theory suggested, the lack of common mechanisms of adjustment dramatically increased socio-economic divergences within the EMU.
    Keywords: EMU; Optimum Currency Areas; Socio-economic Divergences; Fiscal Union; Political Union.
    JEL: B22 E61 F15 F33
    Date: 2013–11–24
  45. By: Andrea Monticini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Francesco Ravazzolo (Norges Bank and BI Norwegian Business School)
    Abstract: Central banks' operations and eciency arguments would suggest that the intraday interest rate should be set to zero. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. Long memory approaches or a combination of them to account for model uncertainty outperform random walk, autoregressive and moving average benchmarks in terms of point and density forecasting. The relative accuracy is higher when the full distribution is predicted. We also document that such statistical accuracy can provide economic gains in investment strategies based on lending in the intraday market.
    Keywords: interbank market, intraday interest rate, forecasting, density forecasting, policy tools.
    JEL: C22 C53 E4 E5
    Date: 2014–02
  46. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing Bruno and Shin (2013a,b)’s methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.
    Keywords: Capital Flows, Macroprudential Policies
    JEL: E58 F32 F34
    Date: 2014
  47. By: Grech, Aaron George
    Abstract: This article studies the demand for one particular component of the money stock, currency, in Malta in the light of the existing theoretical and empirical framework. In particular, it argues that the commonly applied analytical framework needs to be tweaked slightly for it to better explain the reasons underpinning the relatively high currency demand in Malta compared with other euro area countries.
    Keywords: money demand, currency, Malta
    JEL: E41 E44
    Date: 2014–02
  48. By: Anusha Chari; Peter Blair Henry
    Abstract: From 1980 to 1992, emerging and developing countries grew by 3.4 percent per year. Their annual rate of growth increased to 5.4 percent between 1993 and 2012. No such increase occurred for advanced nations, whose average growth from 1980-2012 was roughly constant (excluding the impact of the 2008-09 Recession). Developing nations turned themselves around by embracing discipline—sustained commitment to a pragmatic and flexible growth strategy. Three illustrations of discipline through the lens of trade, fiscal, and debt reforms in the developing world offer relevant, practical lessons for recovery in advanced economies and continued catch-up growth in developing nations.
    JEL: E62 E65 F43 O11 O19 O57
    Date: 2014–02
    Date: 2014
  50. By: Jiranyakul, Komain; Opiela, Timothy
    Abstract: The present study uses the most recent time series data obtained from the Bank of Thailand during the first quarter of 1993 and the fourth quarter of 2012 to investigate the long-run relationship between M1, M2, and M3 money demands and the two determinants (real GDP and interest rate). We use the model specification of Stock and Watson (1993) and Ball (2001). Our estimation techniques include Johansen cointegration test and the dynamic ordinary least squares (DOLS). We find that the DOLS procedure is not applicable for our data set. However, our results from Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand, real GDP and interest rate. In the short run, only a change in real GDP affects M1 money holding. The instability of M1 money demand function makes it difficult for monetary authority to pursuit meaningful conducts of monetary policy.
    Keywords: Money Demand, Real Income, Interest Rate, Cointegration, Dynamic OLS
    JEL: C2 C22 E41
    Date: 2014–03
  51. By: María Lorena Mari del Cristo (Department of Economic Theory, Universitat de Barcelona); Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona and RFA-IREA)
    Abstract: This paper presents empirical evidence on the interrelationship that exists between the evolution of the Emerging Markets Bonds Index (EMBI) and some macroeconomic variables in seven Latin American countries; two of them (Ecuador and Panama), full dollarized. We make use of a Cointegrated Vector framework to analyze the short run effects from 2001 to 2009. The results suggest that EMBI is more stable in dollarized countries and that its evolution influences economic activity in non-dollarized economies; suggesting that investors confidence might be higher in dollarized countries where real and financial economic evolution are less tied than in non-dollarized ones.
    Keywords: Dollarization, emerging markets, Latin American countries, Cointegrated VAR, EMBI, exchange rate regime
    JEL: C32 E44 F30
    Date: 2014–02
  52. By: Dreger, Christian; Reimers, Hans-Eggert
    Abstract: This paper explores the long run relationship between public and private investment in the euro area in terms of capital stocks and gross investment flows. Panel techniques accounting for international spillovers are employed. While private and public capital stocks are cointegrated, the evidence is quite fragile for public and private investment flows. They enter a long run relationship only after fundamental drivers of private investment, such as demand and financing costs are included. According to the impulse response analysis, private investment reacts to shocks in public investment both in terms of stock and flow variables. In contrast, public investment is rather exogenous. Therefore, the lack of public investment might have restricted private investment and GDP growth in the euro area. The results have strong implications for the future direction of fiscal austerity programs to combat the euro area debt crisis. --
    Keywords: public and private investment,fiscal austerity,panel VAR
    JEL: C23 E22 E62
    Date: 2014
  53. By: Joseph P. Byrne (Department of Economics, Heriot-Watt University, UK); Dimitris Korobilis (Department of Economics, Adam Smith Business School, University of Glasgow, UK); Pinho J. Ribeiro (Department of Economics, Adam Smith Business School, University of Glasgow, UK)
    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 arameters (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
  54. By: Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Eyigungor, Burcu (Federal Reserve Bank of Philadelphia)
    Abstract: We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision maker strictly prefers lotteries over the next period's assets. We then extend the standard model to have lotteries and establish the existence of an MPE with continuous decision rules. The models with and without lotteries are numerically compared, and it is shown that the model with lotteries behaves more in accord with economic intuition.
    Keywords: Quasi-geometric; Quasi-hyperbolic; Time consistency; Markov Perfect Equilibrium; Debt Limit; Continuous Solutions; Lotteries;
    JEL: C73 D11 D90 E21 H63 P16
    Date: 2014–02–27
  55. By: Dennis Novy; Alan M. Taylor
    Abstract: We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of international trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. We show that in response to an uncertainty shock firms optimally adjust their inventory policy by cutting their orders of foreign intermediates disproportionately strongly. In the aggregate, this response leads to a bigger contraction in international trade flows than in domestic economic activity. We confront the model with newly-compiled monthly aggregate U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and the cyclical behavior of international trade.
    JEL: E3 F10
    Date: 2014–02
  56. By: Amélie Charles (Audencia Recherche - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Laurent Ferrara (DGEI-DAMEP - Banque de France, EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: After years of low macroeconomic volatility since the early eighties, well documented and referred to as the Great Moderation period in the literature, the 2008-2009 worldwide recession adversely impacted output levels in most of advanced countries. This Great Recession period was characterized by a sharp apparent increase in output volatility. In this paper we evaluate whether this sudden event is likely to be temporary. Whether or not this new volatility regime is likely to persist would have strong macroeconomic effects, especially on business cycles. Based on break detection methods applied to a set of advanced countries, our empirical results do not give evidence to the end of the Great Moderation period but rather that the Great Recession is characterized by a dramatic temporary effect on the output growth but not on its volatility. In addition, we show that neglecting those breaks both in mean and in variance can have large effects on output volatility modelling. Last we empirically show that observed breaks during the Great Recession are to some extent related to uncertainty measures.
    Keywords: Great Recession; Great Moderation; breaks; volatility; uncertainty
    Date: 2014–02–27
  57. By: Bonatti, Luigi; Fracasso, Andrea
    Abstract: There is a widespread consensus that China’s growth paradigm needs a rebalancing away from investment and external demand and towards consumption and domestic demand. This rebalancing process is supposed to be accompanied by the transition towards Renminbi’s full convertibility. In contrast, it is controversial to what extent this adjustment will accelerate the slowdown of China’s growth, which will likely occur because of other structural factors. We address these issues by means of a two-country two-stage (before and after Renminbi’s full convertibility) model, which reproduces some qualitative features of China’s growth pattern and its relationship with the US. We analyze to what extent altering the Chinese exchange rate policy, as well as other structural and policy variables, may have (short-, medium- and long-term) effects on the evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will not only expose the economy to the risks of free capital mobility, but will also renounce to important policy instruments for controlling the dynamics of China’s economy and the allocation of the national resources.
    Keywords: Growth rebalancing; global imbalances; currency convertibility; Chinese economy
    JEL: E42 F33 F41 F43 O41
    Date: 2014–01
  58. By: Ryo Kato; Takayuki Tsuruga
    Abstract: We examine the role of bank leverage to explain why the 2007-08 financial crisis unfolded at a time when the economy appears to be less fragile to crisis risks. To this end, we extend the model introduced by Diamond and Rajan (2012) to a variant where the probability of financial crises varies endogenously. In our model, aggregate liquidity shock plays a key role in precipitating a crisis because high liquidity demand in a highly leveraged banking system is likely to expose the economy to greater crisis risks. We consider an example of a “safe” environment where liquidity demand tends to be low on average. Using numerical analysis, we show that the “safer” environment could incentivize banks to raise their leverage, resulting in a banking system that is more vulnerable to liquidity shocks.
    Keywords: Bank run, Financial crisis, Maturity mismatch
    JEL: E3 G01 G21
    Date: 2014–03
    Date: 2014
  60. By: Vidakovic, Neven
    Abstract: The paper looks at the impact of the exchange rate regime and the household’s choice of debt. One of the characteristics of economic transition in eastern European countries was an increase in overall debt holding. Standard economic theory assumes the relationship S=I. According to this relationship the households should use debt only for purchases of durable goods; however in some eastern European countries there was a large increase in consumer loans which are not recognized under standard no-ponzi assumption of economic models. This paper aims to investigate the case when debt is used to live above household’s budget constraint. Our model shows a significant impact on the choice of the amount the debt the households are willing to hold is due to the choice of the exchange rate regime made by the central bank. The models investigates household’s behavior in two main cases: stable exchange rate regime (exchange rate regime with FX risk) and variable exchange rate regime (exchange rate regime without exchange rate risk). The households make different choices under alternate exchange rate regime; this pattern of is behavior shown in the model and verified by the data.
    Keywords: credit, exchange rate, dynamic programming
    JEL: C61 E51 E58
    Date: 2014–03–06
  61. By: Pierre van der Eng
    Abstract: Macro-economic measurement goes back to the 17th century and became common practice in Western countries since the late-19th century. Since then, the growth and composition of some of the largest economies in Asia, particularly India and Japan, was also probed. And since the 1940s government agencies in many Asian countries were given responsibility for the development and implementation of consistent national accounting practices to assist in the planning of economic development. While this was in principle also the case in Indonesia in the 1950s, it took into the 1970s before consistent processes of macroeconomic measurement were put in place that facilitated the analysis of long-term economic growth. This paper asks why there was a delay. It finds that institutional discontinuities and limited resources prevented the establishment of consistent and well defined national accounting practices until the late-1970s.
    Keywords: national accounts, economic growth, Indonesia
    JEL: B41 E01 N15 O11 O47
    Date: 2014–02
  62. By: María Lorena Mari del Cristo (Faculty of Economics, University of Barcelona); Marta Gómez-Puig (Faculty of Economics, University of Barcelona)
    Abstract: This paper presents empirical evidence on the interrelationship that exists between the evolution of the Emerging Markets Bonds Index (EMBI) and some macroeconomic variables in seven Latin American countries; two of them (Ecuador and Panama), full dollarized. We make use of a Cointegrated Vector framework to analyze the short run effects from 2001 to 2009. The results suggest that EMBI is more stable in dollarized countries and that its evolution influences economic activity in non-dollarized economies; suggesting that investors confidence might be higher in dollarized countries where real and financial economic evolution are less tied than in non-dollarized ones.
    Keywords: Dollarization, emerging markets, Latin American countries, Cointegrated VAR, EMBI, exchange rate regime. JEL classification: C32, E44, F30
    Date: 2014–03
  63. By: Cruz-Rodriguez, Alexis
    Abstract: The aim of this article is to assess whether a fiscal sustainability indicator (FSI) can be used as an early warning indicator for predicting the probability that a currency crisis occurs. Using the FSI developed by Croce and Juan-Ramón (2003) and two different definitions of currency crisis, a probit model is estimated. The results suggest that the lagged FSI has an explanatory power over currency crises in a selection of countries.
    Keywords: Currency crises, foreign exchange, fiscal sustainability, probit model.
    JEL: E62 F31 F33
    Date: 2014–02–28
  64. By: Luo, Yulei; Nie, Jun; Young, Eric
    Abstract: This paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion (SID) due to noisy observations and learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of income, durable consumption, and nondurable consumption at the aggregate level. Specifically, we find that SID can significantly improve the model’s predictions for: (i) smoothness in durable and nondurable consumption, (ii) autocorrelation of durable consumption, and (iii) contemporaneous correlation between durable and nondurable consumption. Furthermore, we discuss that incorporating a fixed cost into our SID model does a better job of reproducing the infrequent adjustments of durable consumption at the individual level and the slow adjustments at the aggregate level.
    Keywords: Durability, Slow Learning, Slow Information Diffusion, Infrequent Adjustments, Consumption Stickiness
    JEL: D8 D81 E2 E21
    Date: 2014–03
  65. By: Casey B. Mulligan
    Abstract: Hours, employment, and earnings taxes are economically distinct, and all three are either introduced or expanded by the Affordable Care Act beginning in 2014. The tax wedges push some workers to work more hours per week (for the weeks that they are on a payroll), and others to work less, with an average weekly hours effect that tends to be small and may be in either direction. A conservative estimate of the law’s average employment rate impact is negative two or three percent. The ACA’s tax wedges and ultimately its behavioral effects vary substantially across groups, with the elderly experiencing hardly any new disincentive and unmarried household heads experiencing tax wedges that are about twice the average. My estimates suggest that 3-4 percent of the workforce will work less than the legislated 30-hour threshold solely to avoid the implicit and explicit full-time employment taxes.
    JEL: E24 I13 J22
    Date: 2014–02
  66. By: Mamello Amelia Nchake, Lawrence Edwards and Neil Rankin
    Abstract: This paper documents some of the main features of price setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. The sample of data covers 229 product items for 345 retail outlets. The paper has three main objectives. Firstly, it presents key indicators of price setting behaviour such as the frequency of price changes, the average size of price changes and the probability of price changes at the retail outlet level. Secondly, it identifies some of the dynamic features of price changes, including the synchronization of price changes and the relationship between the frequency and size of price changes and the duration of the existing price. Finally, the paper compares the stylised facts on price setting behaviour in Lesotho to other countries and South Africa in particular. The findings of the paper corroborate those in the international empirical literature. Substantial heterogeneity in price setting behaviour is found across products, outlets and time. Variations in inflation are strongly correlated with the average size of price changes, but rising inflation raises the frequency of price increases and reduces the frequency of price decreases. Surprisingly, the frequency and size of price changes in Lesotho differ substantially from those in South Africa, despite the presence of common retail chains and their joint membership in a customs union and common monetary area. Further research is required to unpack the sources of heterogeneity in the setting of prices and the stark differences in price setting behaviour in Lesotho and South Africa.
    Keywords: Lesotho, price changes, price rigidity, Inflation
    JEL: E31 D40 D21 L21
    Date: 2014
  67. By: Jonathan Huntley
    Abstract: The Congressional Budget Office's analyses of the long-term effects of changes in federal fiscal policy include the effects of changes in federal budget deficits on aggregate output and income. Those effects depend on the responses of private saving and net inflows of foreign capital to changes in deficits. This paper reviews empirical estimates of those two effects and explains how changes in private saving and net inflows of foreign capital can offset some of the effects of changes in deficits on national saving and private domestic investment. In its analyses, CBO uses a range of estimates to reflect the high degree of uncertainty surrounding the magnitude of those offsets. On the basis of results published in the empirical literature, CBO concludes that for each dollar’s increase in the federal deficit, the effect on investment ranges from a decrease of 15 cents to a decrease of 50 cents, with a central estimate of a decrease of 33 cents.
    Date: 2014–02–28
  68. By: Leonardo Becchetti (Department of Law, Economics, and Institutions, University of Rome Tor Vergata, Italy); Rocco Ciciretti (Department of Economics and Finance, University of Rome Tor Vergata, Italy; RCEA, Italy); Adriana Paolantonio (Food and Agriculture Organization of the United Nations (FAO), Italy)
    Abstract: We compare characteristics of cooperative and non cooperative banks at world level in a time spell including the global financial crisis. Cooperative banks have higher net loans/total assets ratio, lower income from non traditional activites and lower shares of derivatives over total assets than non cooperative banks. From an econometric point of view, we find that the cooperative bank specialization has a positive and significant effect on the net loans/total assets ratio in the overall sample period and in the post financial crisis subperiod. Derivatives (both in terms of assets and revenues) have a quantitatively strong and significant negative effect on the same dependent variable during both time spells. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with the value added growth of the manufacturing sector with the exception of the two extremes of self-financing sectors and sectors in high need of external finance.
    Keywords: cooperative banks, value added, global financial crisis
    JEL: G21 O40 E44
    Date: 2014–02
  69. By: Luo, Yulei; Nie, Jun; Young, Eric
    Abstract: In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.
    Keywords: Robustness, Model Uncertainty, Taxation Smoothing
    JEL: D8 H3 H5
    Date: 2014
  70. By: Nicolas Barbaroux (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I); Michel Bellet (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: Myrdal's works are usually analysed with a dual and separated point of view : on the one hand the methodological papers concerning the value problem and based on a strong non neutrality thesis ; on the other part the theoretical analysis concerning monetary theory and policy, with a Wicksellian filiation. In fact both the dimensions are strongly connected by a common way : the application of the Hägerström's Swedish guillotine between is and ought, but also the construction of a bridge between economic science and political views on social engineering and economic policy. Myrdal wants to address this problem : how economic science can become politically relevant ? This paper analyses two stages of that unique project : the proposition of a "technology of economics" (1930), and the selection process for a "norm for monetary policy" (1939). It shows that Myrdal distorts an initial end and means scheme by proposing some intermediary concepts between positive and normative fields. From a theoretical and statistical framework and an explicit value judgment these concepts enable to elaborate an iterative tree of selection of a speci-c monetary policy. If the Myrdal's project encounters difficulties in conciliating a non-cognitivist thesis with economic prescriptions and in proposing a tractable method, it remains an important benchmark for the analysis of the links between positive and normative views concerning monetary policy.
    Keywords: value judgment; monetary policy; positive analysis; normative analysis
    Date: 2014–02–26
    Date: 2014
    Date: 2014
  73. By: Courtney, Mark
    Abstract: Conventionally, consumer price indices are constructed on the assumption that we are observing a stable system of consumer demand, and that all price movements are, therefore, the result of supply-side changes. This often leads to an emphasis on consumer price substitution and to a recommendation that we should allow for it by using the geometric mean for first-stage aggregation. This paper argues, on the basis of economic theory and from observations on the UK clothing sub-index, that demand-side changes are also important in generating price movements. For most items we are unable to solve the resulting identification problem of whether supply-side or demand-side influences predominate: in these circumstances, the appropriate formula to use for first-stage aggregation is one that makes no assumptions about the cause of price changes – i.e. one that uses an arithmetic rather than a geometric average. Allowing for both sources of price movements also affects the way in which elementary aggregates should be defined: this should be on the basis of both demand and supply characteristics, in order to minimise problems that arise when aggregating disparate products.
    Keywords: Consumer price indices, first-stage aggregation, identification problem, demand-side changes, geometric mean, elasticity of substitution
    JEL: E31
    Date: 2013
  74. By: Haouas, Ilham (Abu Dhabi University); Heshmati, Almas (Sogang University)
    Abstract: Recent research conclude that the GCC economies have failed to address the oil curse. They are far behind other countries, especially those in the G7, which possess huge reserves of oil wealth but have undertaken economic diversification to correct the ill-effects of an oil curse. This paper takes an in-depth look into the UAE economy as a model but also as a reminder of the struggles ahead. The findings support the fact that the UAE is facing an oil curse. Declining levels of total factor productivity, GDP volatility, negative returns on investment, and a labor force that is too reliant on government's supply of jobs are among the many reasons that support the thesis. The UAE has made good progress in recent years to diversify its economy. However, the drivers of economic growth in the UAE are vulnerable to external shocks outside of the Emirate's control. It is now critical that the UAE take steps to mitigate economic disruptions that might result from these shocks. In this case study the UAE economic performance is examined, and a data-driven roadmap for sustainable growth is suggested. The analysis shows that greater efforts are needed to stimulate the diversification of the production base by encouraging increased domestic, especially private, investment. Well-targeted policies should be adopted to accelerate reform and facilitate the involvement of the private sector in the economy.
    Keywords: growth accounting, TFP, oil curse, economic diversification, UAE
    JEL: C22 E20 L16 L71 O11 O53
    Date: 2014–02
  75. By: Hori, Masahiro; Murata, Keiko
    Abstract: Taking advantage of annual panel data on part-time farmer households, this paper investigates whether a retirement consumption puzzle is observed in Japan. Our analysis shows that households’ expenditure does decline after the retirement of the household head and that changes in family size and in life-style/preferences cannot fully explain this decline. Unanticipated negative income shocks such as health problems appear to provide a partial explanation. However, our analysis also suggests that there are myopic households that lacked the discipline to accumulate sufficient savings for retirement.
    Keywords: Retirement, Household consumption, Life cycle/Permanent income hypothesis
    JEL: D12 E21 J26
    Date: 2014–02
  76. By: Eric Eisenstat; Joshua C.C. Chan; Rodney W. Strachan
    Abstract: This article develops a new econometric methodology for performing stochastic model specification search (SMSS) in the vast model space of time-varying parameter VARs with stochastic volatility and correlated state transitions. This is motivated by the concern of over-fitting and the typically imprecise inference in these highly parameterized models. For each VAR coefficient, this new method automatically decides whether it is constant or time-varying. Moreover, it can be used to shrink an otherwise unrestricted timevarying parameter VAR to a stationary VAR, thus providing an easy way to (probabilistically) impose stationarity in time-varying parameter models. We demonstrate the effectiveness of the approach with a topical application, where we investigate the dynamic effects of structural shocks in government spending on U.S. taxes and GDP during a period of very low interest rates.
    Keywords: Bayesian Lasso, shrinkage, fiscal policy
    JEL: C11 C52 E37 E47
    Date: 2014–03
    Date: 2014
  78. By: Arango, Carlos; Bouhdaoui, Yassine; Bounie, David; Eschelbach, Martina; Hernández, Lola
    Abstract: Despite various payment innovations, today, cash is still heavily used to pay for low-value purchases. This paper develops a simulation model to test whether standard implications of the theory on cash management and payment choices can explain the use of payment instruments by transaction size. In particular, using diary survey data from Canada, France, Germany and the Netherlands, we test the assumption that cash is still the most efficient payment instrument, and the idea that people hold cash for precautionary reasons when facing uncertainty about their future purchases. The results of the simulations show that these two factors are significant determinants of the high shares of low-value cash payments in Canada, France and Germany. Yet, they are not so crucial in the Netherlands, which exhibits a significant share of low-value card transactions. We discuss how the differences in payment markets across countries may explain the performance of the model. --
    Keywords: Cash management,Payment Choices
    JEL: C61 E41 E47
    Date: 2014
  79. By: Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona); 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: We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries.
    Keywords: Sovereign bond spreads, Panel data, Eurozone
    JEL: C33 C52 E44 F36 G15
    Date: 2014–03
  80. By: Herrmann, Sabine; Kleinert, Jörn
    Abstract: This paper examines the Lucas Paradox and the Allocation Puzzle of international capital flows referring to a panel data set of EMU countries and major industrialized and emerging economies. Overall, the results do not provide evidence in favour of the Lucas Paradox and the Allocation Puzzle. Rather, in line with neoclassical expectations, net capital flows are allocated according to income and growth differentials. The 'downhill' flow of capital from rich to poor economies was particularly pronounced in intra-euro area capital flows and after the introduction of the common currency. If we control for the fact that the assumptions of the neoclassical model are not perfectly given in emerging markets, the Lucas Paradox and the Allocation Puzzle can be dismissed for these countries too. However, in periods of financial stress, the neoclassical behaviour of financial flows is to some extent dampened. --
    Keywords: Financial integration,International Capital Flows,European Monetary Union
    JEL: E22 F21 F36 O16 O
    Date: 2014
  81. By: Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
    Abstract: Using a new, large data set on quarterly reserve requirements for the period 1970-2011, this paper provides new evidence on the use of reserve requirements as a countercyclical macroprudential tool in developing countries. The appeal of reserve requirements lies in the pro-cyclical behavior of the exchange rate over the business cycle in developing countries. This enormously complicates the use of interest rates as a countercyclical instrument (because of its effect on the exchange rate) and calls for a second instrument. The paper suggests that conflicts may arise between the microprudential and macroprudential policy stances.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Banks&Banking Reform
    Date: 2014–02–01
  82. By: Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. Two ordinally equivalent versions are considered, each associated with a different set of risk premiums and interest rate. The first version has consumption history dependent marginal utility and is homogeneous of degree one in consumption, the second version is homothetic. When solving the resulting sup-convolution problem, this gives non-trivial results. A heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio. This results in stable and plausible values for the preference parameters of the two agents.
    Keywords: The equity premium puzzle; the risk-free rate puzzle; recursive utility; utility gradients; the stochastic maximum principle; heterogeneity; limited market participation
    JEL: D51 D53 D90 E21 G10 G12
    Date: 2014–02–28
  83. By: Leonardo Becchetti (Department of Law, Economics, and Institutions, University of Rome Tor Vergata, Italy); Rocco Ciciretti (Department of Economics and Finance, University of Rome Tor Vergata, Italy; RCEA, Italy); Ambrogio Dalo (Department of Economics and Finance, University of Rome Tor Vergata, Italy); Stefano Herzel (Department of Economics and Finance, University of Rome Tor Vergata, Italy)
    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
  84. By: Santos, Susana
    Abstract: In looking for empirical evidence about the activity of countries, a proposal is made for studying (measuring and modelling) the activity of countries through the use of Social Accounting Matrices (SAMs) and Socio-Demographic Matrices (SDMs). SAMs and SDMs are presented as tools that have specific features for conducting studies in several different areas, particularly in the Socio-Economics of Ageing, as well as for supporting policy decision processes. Based on methodological principles that are derived mainly from the works of Richard Stone, emphasis is placed on the desirability of working in a matrix format, which includes not only people (SDM), but also, at the same time, activities, products, factors of production and institutions (SAM). This is considered to be a way of capturing the relevant network of linkages and the corresponding multiplier effects for the subsequent modelling of the activity of the countries studied. The exposition of this proposal is accompanied by an example applied to Portugal.
    Keywords: Social Accounting Matrix; Macroeconomic Policy; Socio-Demographic Matrices
    JEL: E61 J11
    Date: 2014–02
  85. By: Kohn, Wolfgang
    Abstract: In this paper the stop-waiting strategy of Franz Bruss is set into a simple probabilistic framework and applied to the apple share prices from 1984 to 2013. Within the probabilistic framework a heuristic and a mathematical decision rule using the $\Psi$ function is developed. The results are in line with Bruss's theory. We apply the stop-waiting strategy to the Apple share prices and compare the results with a simple start-end and chart technique strategy. --
    Keywords: Optimal Stopping Problem,Mathematical Tools,Share Market
    JEL: C65 E47 G17
    Date: 2014–03–04
  86. By: Jürgen Huber; Michael Kirchler; Daniel Kleinlercher; Matthias Sutter
    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
  87. By: Wilmar Alexander Cabrera Rodríguez; Luis Fernando Melo Velandia; Daniel Parra Amado
    Abstract: Este documento estima los efectos de choques de origen financiero y real sobre un conjunto de variables de la economía colombiana. Para ello, se utiliza un modelo FAVAR que incorpora dos factores no observados, los cuales recogen la dinámica de 111 variables de la economía colombiana entre el primer trimestre de 2003 y el primer trimestre de 2013. El modelo FAVAR desarrollado en este trabajo corresponde a una extensión del modelo propuesto por Bernanke et al. [2005], que supone que las series, además de ser explicadas por el componente común, también son modeladas por un componente idiosincrático. Con dicha estimación se realizan dos ejercicios: (i) Análisis de impulso respuesta de las variables económicas frente a choques en los factores real y financiero y (ii) cuantificar el efecto que tiene un evento de estrés en el sector financiero sobre el sector real y viceversa; para ello se propone el CoFaR, medida alterna al CoVaR que recientemente ha sido utilizada en la literatura económica (Adrian y Brunnermeier [2011]). Los resultados obtenidos sugieren que los estrechos vínculos entre los dos sectores propagan los choques en ambas direcciones. En particular, el sector financiero reacciona de manera más rápida ante un choque en la actividad real, en comparación con el efecto de un choque financiero al sector real.
    Keywords: Riesgo Sistémico, Modelo FAVAR, CoVaR Classification JEL: C50, G28, E60
    Date: 2014–02
  88. By: Nicholas Bloom; Paul Romer; Stephen Terry; John Van Reenen
    Abstract: In a general equilibrium product-cycle model, lower trade barriers in-crease Southern purchasing power, which lifts long-run growth by increasing the profit from innovation. In the short run, factors of production must be reallocated inside firms, which lowers the opportunity cost of innovation, generating an additional "trapped factor" effect. Starting from a baseline OECD growth rate of 2% we find that trade integration with low-wage countries in the decade around China's WTO accession could have increased long-run growth to 2.4%. There is an additional short-run trapped factors effect, raising growth to 2.7%. China accounts for about half of these growth increases.
    Keywords: Innovation, trade, China, endogenous growth
    JEL: D92 E22 D8 C23
    Date: 2014–03
  89. By: Marc Teignier (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)); David Cuberes (University of Sheffield)
    Abstract: This paper examines the quantitative effects of gender gaps in entrepreneurship and labor force participation on aggregate productivity and income per capita. We simulate an occupational choice model with heterogeneous agents in entrepreneurial ability, where agents choose to be workers, self-employed or employers. The model assumes that men and women have the same talent distribution, but we impose several frictions on women's opportunities and pay in the labor market. In particular, we restrict the fraction of women participating in the labor market. Moreover, we limit the number of women who can work as employers or as self-employed and, finally, women who become workers receive a lower wage. Our model shows that gender gaps in entrepreneurship and in female workers' pay affect aggregate productivity negatively, while gender gaps in labor force participation reduce income per capita. Specifically, if all women are excluded from entrepreneurship, average output per worker drops by almost 12% because the average talent of entrepreneurs falls down, while if all women are excluded from the labor force income per capita is reduced by almost 40%. In the cross-country analysis, we find that gender gaps and their implied income losses differ importantly across geographical regions, with a total income loss of 27% in Middle East and North Africa and a 10% loss in Europe.
    Keywords: Span of control, Aggregate productivity, Entrepreneurship talent, Gender inequality
    JEL: E2 J21 J24 O40
    Date: 2014
  90. By: Robert J. Hill (Karl-Franzens University of Graz); Iqbal A. Syed (University of New South Wales)
    Abstract: Disequilibrium in the housing market can be detected by comparing the actual price-rent ratio with its equilibrium counterpart obtained from the user-cost condition. Empirical implementation of this idea, however, is problematic because of quality differences between sold and rented dwellings. We develop a hedonic method that resolves this problem even in the presence of omitted variables. Applying this method to a data set consisting of 730,000 individual price and rent transactions we find that quality adjusting significantly reduces the actual price-rent ratio. We then insert these quality adjusted price-rent ratios into the user cost condition to check for departures from equilibrium.
    Keywords: House price and rent indexes; Quality adjustment; Hedonic imputation; Capital gains; Fisher index; Real estate market; Rental yield
    JEL: C43 E01 E31 R31
    Date: 2014–03
  91. By: Arora, Vipin
    Abstract: I estimate short and long-run price elasticities of U.S. natural gas supply and demand. For robustness, the estimates are based on data of varying frequencies and samples, some of which include the recent U.S. shale gas boom. Aside from the numbers themselves, there are two main conclusions. As expected, U.S. price elasticities of natural gas supply are higher in both the short and long-run when the e�ffects of shale are included in the sample (post-2007). The calculated price elasticities of natural gas demand are also more responsive than recent estimates, but in-line with earlier ones.
    Keywords: Natural gas, sign restriction, shale, elasticity, long-run, short-run
    JEL: C32 E37 Q41
    Date: 2014–03–06

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