nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒03‒22
67 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Withstanding great recession like China By Wen, Yi; Wu, Jing
  2. Fiscal and monetary policies in complex evolving economies By Fagiolo G.; Treibich T.G.; Roventini A.; Napoletano M.; Dosi G.
  3. Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model By Bernd Hayo; Britta Niehof
  4. Search Frictions, Job Flows and Optimal Monetary Policy By Shoujian Zhang
  5. Liquidity Trap and Excessive Leverage By Anton Korinek; Alp Simsek
  6. Budget deficit, money growth and inflation: Empirical evidence from Vietnam By Khieu Van, Hoang
  7. Effects of ECB balance sheet policy announcements on inflation expectations By Richhild Moessner
  8. Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation By Bucher, Monika; Hauck, Achim; Neyer, Ulrike
  9. A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions By John Keating; Logan Kelly; Andrew Lee Smith; Victor J. Valcarcel
  10. Inflation Expectations Spillovers between the United States and Euro Area By Aleksei Netšunajev; Lars Winkelmann; ;
  11. REALLY UNCERTAIN BUSINESS CYCLES By Nicholas Bloom; Max Floetotto; Nir Jaimovich; Itay Saporta-Eksten; Stephen J. Terry
  12. Inequality and Debt in a Model with Heterogeneous Agents By Federico Ravenna; Nicolas Vincent
  13. The over-the-counter theory of the fed funds market: a primer By Afonso, Gara M.; Lagos, Ricardo
  14. On trend-cycle-seasonal interactions By Irma Hindrayanto; Jan Jacobs; Denise Osborn
  15. Technology, Wage Dispersion and Inflation By Shoujian Zhang
  16. Uncertainty Traps By Pablo Fajgelbaum; Edouard Schaal; Mathieu Taschereau-Dumouchel
  18. Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter? By Aurélien Leroy; Yannick Lucotte
  19. The Dynamics of Currency Crises---Results from Intertemporal Optimization and Viscosity Solutions By Christian Bauer; Philip Ernstberger
  20. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Jordi Gali; Luca Gambetti
  21. Volatility Transmission of Overnight Rate along the Yield Curve in Pakistan By Mahmood, Asif
  22. Topics in Fiscal Policy: Evidence from a Representative Survey of the German Population By Bernd Hayo; Matthias Uhl
  23. Monetary Policy and Tobin Taxes: A Welfare Analysis By Subramanian, Chetan; Shin, Jong Kook
  24. Openness and Optimal Monetary Policy By Giovanni Lombardo; Federico Ravenna
  25. Monetary policy effectiveness in China: evidence from a FAVAR model By Fernald, John G.; Spiegel, Mark M.; Swanson, Eric T.
  27. Can fiscal decentralization alleviate government consumption volatility? By Furceri, Davide; Sacchi, Agnese; Salotti, Simone
  28. The KOF Economic Barometer, Version 2014: A Composite Leading Indicator for the Swiss Business Cycle By Klaus Abberger; Boriss Siliverstovs; Jan-Egbert Sturm; Michael Graff
  29. Liquidity policies and systemic risk By Adrian, Tobias; Boyarchenko, Nina
  30. Economics at the Federal Reserve banks By Dudley, William
  31. Federal Reserve Communications and Newswire Coverage By Matthias Neuenkirch
  32. How Central Banks Learn the True Model of the Economy By Federico Ravenna
  33. International Financial Flows and the Irish Crisis By Philip R. Lane
  34. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'Baye
  35. The laffer curve and the debt-growth link in low-income Sub-Saharan African economies By Megersa, kelbesa
  36. Analysis of forecast errors in micro-level survey data By Paloviita, Maritta; Viren, Matti
  37. Analyzing and Forecasting Movements of the Philippine Economy using the Dynamic Factor Models (DFM) By Mapa, Dennis S.; Simbulan, Maria Christina
  38. The Multi-faceted Concept of Transparency By Forssbaeck, Jens; Oxel, Lars
  39. Fiscal devaluation scenarios: a quantitative assessment for the Italian economy By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
  40. Learning the Ramsey outcome in a Kydland & Prescott economy By Jasmina ARIFOVIC; Murat YILDIZOGLU
  41. Varying the Money Supply of Commercial Banks By Martin Shubik; Eric Smith
  42. Newborn Health and the Business Cycle: Is It Good to Be Born in Bad Times? By Aparicio Fenoll, Ainhoa; Gonzalez, Libertad
  43. The Truly General Theory of Employment: How Keynes Could Have Succeeded By Kakarot-Handtke, Egmont
  44. Political Competition and the Limits of Political Compromise By Alexandre B. Cunha; Emanuel Ornelas
  45. An Empirical Illustration of Index Construction using Israeli Data on Vegetables By ,; Diewert, Erwin
  46. Market Discipline at Thai Banks before the Asian Crisis By Jiranyakul, Komain; Opiela, Timothy
  47. Did consumers want less debt? Consumer credit demand versus supply in the wake of the 2008-2009 financial crisis By Gropp, Reint; Krainer, John; Laderman, Elizabeth
  48. Challenges for the construction of historical price indices: The case of Norway, 1777-1920. By Klovland, Jan Tore
  49. Creative accounting practices and measurement methods: Evidence from Turkey By Ozkaya, Ata
  50. A Tourism Conditions Index By Chang, C-L.; Hsu, H-K.; McAleer, M.J.
  51. Remarks at the fifth Data Management Strategies and Technologies Workshop By McAndrews, James J.
  52. Natural disasters and macroeconomic performance: The role of residential investment By Holger Strulik; Timo Trimborn
  53. International transmission of liquidity shocks between parent banks and their affiliates: the host country perspective By Małgorzata Pawłowska; Dobromil Serwa; Sławomir Zajączkowski
  54. The Consumption and Wealth Effects of an Unanticipated Change in Lifetime Resources By Tullio Jappelli; Mario Padula
  55. Price Discounts and the Measurement of Inflation By Kevin J. Fox; Iqbal A. Syed
  56. اشكالية البطالة فى دول مجلس التعاون الخليجي By Elasrag, Hussein
  57. Does Human Capital Risk Explain The Value Premium Puzzle? By Sylvain, Serginio
  58. Grooming Classifications: Exchange Rate Regimes and Growth in Transition Economies By Petreski, Marjan
  59. Economy as the value streams. Preliminary study. By Góralczyk, Andrzej
  60. Consumer Loans in Cambodia: Implications on Banking Stability By Meng, Channarith
  61. Bank Failures and the Source of Strength Doctrine By Vincent Bouvatier; Michael Brei; Xi Yang
  62. U.S. Treasury Auction Yields Before and During Quantitative Easing: Market Factors vs.Auction Specific Factors By Catherine L. Mann; Oren Klachkin
  63. Endogenous fertility with a sibship size effect. By Elise S. Brezis; Rodolphe Dos Santos Ferreira
  64. Investment to the Rescue By Vasily Astrov; Rumen Dobrinsky; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Michael Landesmann; Sebastian Leitner; Olga Pindyuk; Leon Podkaminer; Sandor Richter; Hermine Vidovic
  65. On Ricardo and Cambridge By Geoff C. Harcourt; Peter Kriesler
  66. BRICs versus Other Emerging Economies: The Case of India By Koumparoulis, Dimitrios Nikolaou
  67. Corruption’s and Democracy’s effects on Economic Growth By Zaouali, Amira

  1. By: Wen, Yi (Federal Reserve Bank of St. Louis); Wu, Jing (Tsinghua University, P.R.China)
    JEL: E32 E58 E62 H12 H50
    Date: 2014–03–09
  2. By: Fagiolo G.; Treibich T.G.; Roventini A.; Napoletano M.; Dosi G. (GSBE)
    Abstract: In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a central bank and a government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylized facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilize the economy requires unconstrained anti-cyclical fiscal policies, where automatic stabilizers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead,discipline-guided fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilization only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Keywords: Computational Techniques; Simulation Modeling; Business Fluctuations; Cycles; Monetary Policy; Financial Crises; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
    JEL: C63 E32 E52 G01 G21
    Date: 2014
  3. By: Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg)
    Abstract: We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent Financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting economic adjustment paths are similar to those of the theoretical model.
    Keywords: New Keynesian Model, Financial Crisis, Stochastic Differential Equation, Monetary Policy, Taylor Rule
    JEL: C02 C63 E44 E47 E52 F41
    Date: 2014
  4. By: Shoujian Zhang (University of St Andrews)
    Abstract: Job creation and job destruction are investigated in an economy featured by search frictions in both labour and goods markets. We show that both the unemployment rate and the endogenous job destruction rate increase when the inflation rate rises, because the demand declines due to the increase in the cost of holding money. Our numerical exercises suggest that the destruction of lower productivity jobs and the creation of higher productivity jobs may be inefficiently low under the zero nominal interest rate, which in turn causes the deviation of optimal long run monetary policy from the Friedman rule.
    Keywords: inflation, search frictions, money, welfare
    JEL: E24 E52
    Date: 2014–03–12
  5. By: Anton Korinek; Alp Simsek
    Abstract: We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' ex-ante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.
    JEL: E32 E44
    Date: 2014–03
  6. By: Khieu Van, Hoang
    Abstract: This study empirically examines the nexus among budget deficit, money supply and inflation by using a monthly data set from January 1995 to December 2012 and a SVAR model with five endogenous variables, inflation, money growth, budget deficit growth, real GDP growth and interest rate. Since real GDP and budget deficit are unavailable on the monthly basis, we interpolate those series using Chow and Lin’s (1971) annualized approach from their annual series. Overall, we found that money growth has positive effects on inflation while budget deficit growth has no impact on money growth and therefore inflation. In addition, budget deficit is autonomous from shocks to other variables. The estimation results also reveal that the State Bank of Vietnam implemented tightening monetary policy in response to positive shocks to inflation by reducing money growth but the response was relatively slow because it took three months for the monetary authority to fully react to such shocks. Finally, interest rate was not an effective instrument for fighting inflation but it was significantly and positively influenced by inflation.
    Keywords: Inflation; Money Growth; Budget Deficit; Structural Vector Auto-regressive Model.
    JEL: E31 E58 E61
    Date: 2014–01–31
  7. By: Richhild Moessner
    Abstract: We investigate whether ECB balance sheet policy announcements in the wake of the global financial crisis have affected the ECB.s monetary policy credibility as measured by long-term inflation expectations, by looking at their effects on euro area inflation swap rates of maturities up to 10 years. We consider asset purchase programmes and long-term refinancing operations with maturities above 6 months. We find that these announcements only led to a slight increase in long-term inflation expectations. We therefore find no strong evidence to suggest that ECB balance sheet policy announcements have led to much higher long-term inflation expectations, suggesting that the monetary policy credibility of the ECB has not been harmed by these policies.
    Keywords: Monetary policy; central bank communication; balance sheet policies; inflation expectations
    JEL: E52 E58
    Date: 2014–03
  8. By: Bucher, Monika; Hauck, Achim; Neyer, Ulrike
    Abstract: This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. The frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at its disposal to impose an impact on bank loan supply. Lowering the rate on the deposit facility has, taken for itself, a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound. --
    Keywords: interbank market,monetary policy,monetary policy implementation,zero lower bound,loan supply
    JEL: E52 E58 G21
    Date: 2014
  9. By: John Keating (University of Kansas, Department of Economics, Lawrence, KS 66045); Logan Kelly (University of Wisconsin, Department of Economics, River Falls, WI 54022); Andrew Lee Smith (University of Kansas, Department of Economics, Lawrence, KS 66045); Victor J. Valcarcel (University of Wisconsin, Center for Economic Research, River Falls, WI 54022)
    Abstract: In their classic 1999 paper, "Monetary policy shocks: What have we learned and to what end?," Christiano, Eichenbaum, and Evans (CEE) investigate one of the most widely used methods for identifying monetary policy shocks of its time. Unfortunately, their approach is no longer viable, at least not in its original form. A major problem stems from the recent behavior of two key variables in their model, the Fed Funds rate and non-borrowed reserves. We develop a new identification scheme that remedies these difficulties but maintains the basic CEE framework. Our empirical specification is motivated by a standard New Keynesian DSGE model augmented by a simple financial structure. The model provides theoretical support for variables we use in place of certain variables that were used in the classic VAR approach outlined in CEE. One significant innovation is our use of Divisia M4, the broadest monetary aggregate currently available for the United States, as the policy indicator variable. We obtain four major empirical results that support the use of a properly measured broad monetary aggregate as the policy variable. First, policy shocks have significant effects on output and on the price level, even when an interest rate is included in our model -- contradicting the New-Keynesian argument that monetary aggregates are redundant. Second, we develop a model that is not subject to the output, price or liquidity puzzles common to this literature -- contradicting the view that using the interest rate as the policy indicator generally yields more reasonable responses than a monetary aggregate. Third, during normal conditions policy shocks from our Divisia-based model have similar effects on variables to those found in the Fed Funds model of monetary policy, and where there are differences our model with Divisia M4 obtains results that are more consistent with standard economic theory. Fourth, our preferred specification produces plausible responses to a monetary policy shock in samples that include or exclude the recent financial crisis.
    Keywords: Monetary Policy Rules, Output Puzzle, Price Puzzle, Liquidy Puzzle, Financial Crisis, Divisia Index Number, Dynamic Stochastic General Equilibrium (DSGE) Model
    JEL: E3 E4 E5
    Date: 2014–03
  10. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: We quantify spillovers of inflation expectations between the United States (US) and Euro Area (EA) based on break-even inflation (BEI) rates. In contrast to previous studies, we model US and EA BEI rates jointly in a structural vector autoregressive (SVAR) model. The SVAR approach allows to identify US and EA specific inflation expectations shocks. By modeling the heteroscedasticity of the data, we are able to test the identifying restrictions of structural shocks and analyze time-varying spillovers. Adjusted for BEI risk premia, our main result suggests that spillovers of inflation expectations increase during times of macroeconomic stress. We document a significant impact of the European sovereign debt crisis on US expectations. The finding contributes to the discussion about a weakening of inflation control by national central banks and speaks in favor of internationally coordinated policy actions, especially during crisis times.
    Keywords: International transmissions, break-even inflation, credibility of monetary policy, structural vector autoregressive (SVAR) analysis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2014–03
  11. By: Nicholas Bloom; Max Floetotto; Nir Jaimovich; Itay Saporta-Eksten; Stephen J. Terry
    Abstract: We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
    Keywords: uncertainty, adjustment costs, and business cycles.
    JEL: D92 E22 D8 C23
    Date: 2014–03
  12. By: Federico Ravenna; Nicolas Vincent
    Abstract: We propose a DSGE model with income heterogeneity to help discriminate across competing explanations of the cross-sectional divergence in debt-to-income ratios in US data. We show that for a DSGE model to be consistent with the data, the divergence in income growth should not be anticipated and should happen in an economy with low cost of access to financial intermediation. Differential productivity growth across the top and bottom-income quantile of the population has a much smaller impact on debt accumulation by the bottom income-quantile relative to a cross-sectional tax reallocation.
    Keywords: Inequality, Debt, DSGE model
    JEL: E21 E32 E44
    Date: 2014
  13. By: Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of New York)
    Abstract: We present a dynamic over-the-counter model of the fed funds market, and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the Discount Window lending rate, and the interest rate on bank reserves.
    Keywords: Fed funds market; search; bargaining; over-the-counter
    JEL: C78 D83 E44 G1
    Date: 2014–12–01
  14. By: Irma Hindrayanto; Jan Jacobs; Denise Osborn
    Abstract: Traditional unobserved component models assume that the trend, cycle and seasonal components of an individual time series evolve separately over time. Although this assumption has been relaxed in recent papers that focus on trend-cycle interactions, it remains at the core of all seasonal adjustment methods applied by official statistical agencies around the world. The present paper develops an unobserved components model that permits non-zero correlations between seasonal and non-seasonal shocks, hence allowing testing of the uncorrelated assumption that is traditionally imposed. Identification conditions for estimation of the parameters are discussed, while applications to observed time series illustrate the model and its implications for seasonal adjustment.
    Keywords: trend-cycle-seasonal decomposition; unobserved components; state-space models; seasonal adjustment; global real economic activity; unemployment
    JEL: C22 E24 E32 E37 F01
    Date: 2014–03
  15. By: Shoujian Zhang (University of St Andrews)
    Abstract: We study the effect of inflation on the wage dispersions due to firm heterogeneity and on-the-job search, in the context of a labour market á la Postel-Vinay and Robin (International Economic Review 43, 2002) and micro-founded money demand. The productivity distribution of firms is firstly assumed to be exogenously given and we find that a rise of inflation diminishes the wage dispersion. We then allow the firms to adjust their productivity level by investment. We then find that a rise in inflation can makes firms' productivity less dispersed by driving the least productive firms not profitable and thus out of business, because the demand declines due to the increase in the cost of holding money. This decrease in productivity dispersion furthermore also diminishes the wage dispersion.
    Keywords: inflation, search frictions, wage dispersion
    JEL: E24 E52
    Date: 2014–03–12
  16. By: Pablo Fajgelbaum; Edouard Schaal; Mathieu Taschereau-Dumouchel
    Abstract: We develop a theory of endogenous uncertainty and business cycles in which short-lived shocks can generate long-lasting recessions. In the model, higher uncertainty about fundamentals discourages investment. Since agents learn from the actions of others, information flows slowly in times of low activity and uncertainty remains high, further discouraging investment. The unique equilibrium of this economy displays uncertainty traps: self-reinforcing episodes of high uncertainty and low activity. While the economy recovers quickly after small shocks, large temporary shocks may have nearly permanent effects on the level of activity. The economy is subject to an information externality but uncertainty traps remain even in the efficient allocation. We extend our framework to include additional features of standard business cycle models and show, in that context, that uncertainty traps can substantially worsen recessions and increase their duration, even under optimal policy interventions.
    JEL: E32
    Date: 2014–03
  17. By: Nicholas Bloom
    Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
    Keywords: Uncertainty, risk, volatility, investment
    JEL: E2 E3 O3 O4
    Date: 2014–03
  18. By: Aurélien Leroy (Laboratoire d’Economie d’Orléans); Yannick Lucotte (ESG Management School; Department of Economics,)
    Abstract: This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.
    Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model
    JEL: C23 D4 E43 E52 G21 L10
    Date: 2014
  19. By: Christian Bauer; Philip Ernstberger
    Abstract: We apply an infinite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend off speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.
    Keywords: intertemporal optimization; currency crises; policy design
    JEL: C61 E58 E61 F3
    Date: 2014
  20. By: Jordi Gali; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which, after a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    JEL: E52 G12
    Date: 2014–03
  21. By: Mahmood, Asif
    Abstract: This paper presented the empirical results of the volatility transmission of overnight rate along the yield curve in case of Pakistan. The results indicate that the volatility transmission of overnight repo rate is higher at the shorter end of the yield curve while lower at the longer end. These results are in line with both theoretical and empirical underpinning of the interest rates volatility transmission process found in other countries. Moreover, the results also suggest that the pass-through level of overnight volatility transmission to other market interest rates decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. This indicates the enhancement of effective and smooth transmission of SBP policy rate changes to other market interest rates under the current framework. However, absence of any explicit desired level of operational target in the monetary policy framework of SBP still imparts higher volatility in interest rates when compared to other countries following the similar interest rate corridor framework.
    Keywords: monetary policy, volatility, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2014–03–09
  22. By: Bernd Hayo (University of Marburg); Matthias Uhl (University of Marburg)
    Abstract: Using a representative survey of the German population, this paper studies individual consumption responses to a recent payroll tax reduction. Our results show that 55% of the respondents spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic determinants of consumption responses suggests that temporary and permanent tax changes have a similar impact, that interest rates are an important determinant of consumption responses to tax changes, and that households with higher income have a higher propensity to consume.
    Keywords: Survey evidence Fiscal policy Public debt Public preferences Consumption Labour supply
    JEL: E21 E62 H30 J22
    Date: 2014
  23. By: Subramanian, Chetan; Shin, Jong Kook
    Abstract: �This paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic aThis paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic and foreign goods.
    Keywords: Noise traders; Fixed exchange rates; Tobin taxes; Optimal monetary policy.
    JEL: E E42 E52 F41
    Date: 2014–03–08
  24. By: Giovanni Lombardo; Federico Ravenna
    Abstract: We show that the composition of international trade has important implications for the optimal volatility of the exchange rate, above and beyond the size of trade flows. Using an analytically tractable small open economy model, we characterize the impact of the trade composition on the policy trade-off and on the role played by the exchange rate in correcting for price misalignments. Contrary to models where openness can be summarized by the degree of home bias, we find that openness can be a poor proxy of the welfare impact of alternative monetary policies. Using input-output data for 25 countries we document substantial differences in the import and non-tradable content of final demand components, and in the role played by imported inputs in domestic production. The estimates are used in a richer small-open-economy DSGE model to quantify the loss from an exchange rate peg relative to the Ramsey policy conditional on the composition of imports. We find that the main determinant of the losses is the share of non-traded goods in final demand.
    Keywords: International Trade, Exchange Rate Regimes, Non-tradable Goods, Optimal Policy
    JEL: E3 E42 E52 F41
    Date: 2014
  25. By: Fernald, John G. (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Swanson, Eric T. (Federal Reserve Bank of San Francisco)
    Abstract: We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
    Keywords: Measuring China’s economy; dynamic factor model; factor-augmented VAR; monetary policy
    JEL: C3 E4 E5
    Date: 2014–02
  26. By: Santos, Rui (Universidade Portucalense)
    Abstract: In the setting of a dynamic general equilibrium model we ask the following question: What happens if the interest rate is settled exogenously in a level that differs from the one which emerges from equilibria in the markets? Although the subject of the setting of the interest rate by an external authority on a level that differs from the so called natural interest rate has recently attracted a lot of attention in the literature, the assumption of full general equilibrium has tended to be maintained throughout. The main contribution of this paper is that we allow explicitly for disequilibrium in markets, as is the tradition in other economic models, when the price is settled on a level above or below the equilibrium price. Our main conclusion is that an exogenously imposed interest rate drives the output of the economy to a level below the one that emerges from a general equilibrium without external intervention.
    Keywords: Interest rate; General equilibrium; Disequilibrium
    JEL: E13 E21 E43 E60
    Date: 2011–05–25
  27. By: Furceri, Davide; Sacchi, Agnese; Salotti, Simone
    Abstract: We analyse how fiscal decentralization affects the volatility of government consumption extending the existing literature that mainly deals with the effects of the former on government size. Using data for 97 developed and developing countries from 1971 to 2010, we find that a higher degree of fiscal decentralization leads to lower government consumption volatility. This result holds for the sub-sample of advanced economies, while it is not confirmed for those less-developed. This mechanism seems to work mainly through a lower volatility of the non-discretionary spending, which typically belongs to the central government’s policy. We also confirm existing findings according to which country size lowers government spending volatility. Thus, given a minimum level of development, fiscal decentralization reforms can reduce spending volatility by distributing power to sub-central governments, particularly in smaller countries which are usually more prone to volatility.
    Keywords: Fiscal policy, fiscal decentralization, spending volatility, automatic stabilisers, country size
    JEL: E62 H60 H71 H72
    Date: 2014–03
  28. By: Klaus Abberger (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Michael Graff (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper presents a composite leading indicator for the Swiss business cycle corresponding to the growth rate cycle concept. It is the result of a complete overhaul of the KOF Economic Barometer that has been published by the KOF Swiss Economic Institute on a monthly basis since 1976. In line with this tradition, the calculation of the new KOF Barometer comprises two main stages. The first consists of the variable selection procedure; and in the second stage these variables are subsequently transformed into one leading indicator. Whereas in the previous versions of the KOF Barometer six to 25 variables survived the first stage, the new - less discretionary and more automated – version of the first stage is much more generous. Currently, out of a set of 476 variables resulting in 4356 transformations thereof that are tested in the first stage, 219 variables manage to enter the second stage. The increased number of variables underlying the second stage allows a relatively stable and robust KOF Barometer – compared to its previous versions – that has hence no longer to rely on filtering techniques to reduce the noise in the final indicator. In a (pseudo-) real-time analysis the characteristics of the new KOF Barometer are compared to the previous versions and other alternatives.
    Keywords: Business cycles, growth rate cycles, composite indicators, leading indicators, principal component analysis, real-time simulations
    JEL: E32 E37
    Date: 2014–03
  29. By: Adrian, Tobias (Federal Reserve Bank of New York); Boyarchenko, Nina (Federal Reserve Bank of New York)
    Abstract: The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries’ leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies’ implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.
    Keywords: liquidity regulation; systemic risk; DSGE; financial intermediation
    JEL: E02 E32 G00 G28
    Date: 2014–12–01
  30. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the American Economic Association 2014 Annual Meeting, Philadelphia, Pennsylvania
    Keywords: Research Group; prudential policy; GSE reform; macroeconomic policy; triparty repo reform; reference rate reform; Markets Group; microeconomic policy
    JEL: E00
    Date: 2014–01–04
  31. By: Matthias Neuenkirch
    Abstract: In this paper, we explore the determinants of newswire coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward‐looking communications made in the period May 1999–May 2004. We find, first, that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by Chairman Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of newswire coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, newswire coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his chairmanship.
    Keywords: Central Bank Communication; Federal Open Market Committee; Federal Reserve; Monetary Policy; Newswire Coverage
    JEL: D83 E52 E58
    Date: 2014–01–29
  32. By: Federico Ravenna
    Abstract: Policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. We investigate how policy choices affect learning of the true model of the economy when the policymaker’s model is mis-specified. We ask under what conditions can the central bank learn the correct specification of the model describing the economy, and what is the impact of exogenous shocks and of adopting an optimal monetary policy on the speed of learning. Slow learning can occur simply because identifying the correct model at standard confidence levels requires a long data sample. We show that neither real-time learning by the policymaker or the private sector, nor the adoption of an optimal policy, affect the speed of detection of model misspecification. Detection speed depends instead on the relative volatility of supply and demand shocks.
    Keywords: Learning, Optimal policy, Model misspecification
    JEL: E58
    Date: 2014
  33. By: Philip R. Lane (Trinity College Dublin)
    Abstract: This paper explores the contribution of international financial flows to the boom-bust-recovery cycle in Ireland. It finds that a nuanced interpretation is required, in that bank-intermediated debt inflows certainly contributed to the amplification of the property boom during 2003-2007 but that other types of international flows have played a stabilising role through a variety of mechanisms, with a new wave of inflows a key component of the current recovery phase.
    Keywords: international capital flows, euro crisis, Irish crisis
    JEL: E42 E60 F32 F33
  34. By: Ummad Mazhar (Shaheed Zul kar Ali Bhutto Institute of Science and Technology - Shaheed Zul kar Ali Bhutto Institute of Science and Technology); Cheick Kader M'Baye (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: 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; inflation volatility; output volatility
    Date: 2014–03–06
  35. By: Megersa, kelbesa
    Abstract: The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is sensitive to the level of debt. Our paper tries to address the question of non linearity in the long term relationship between public debt and economic growth. Specifically, we set out to test if there exists an established ‘laffer curve’ type relationship, where debt contributes to economic growth up to a certain point (maximal threshold) and then starts to have a negative effect on growth afterwards. To carry out our tests, we have used a methodology that delivers a superior test of bell shapes, in addition to the traditional test based on a regression with a quadratic specification. The results show evidence of a bell-shaped relationship between economic growth and total public debt in a panel of low income Sub-Saharan African economies. This supports the hypothesis that debt has some positive contribution to economic growth in low-income countries, albeit up to a point. If debt goes on increasing beyond the level where it would be sustainable, it may start to be a drag on economic growth.
    Keywords: public debt, economic growth, laffer curve, low-income countries, Sub-Saharan Africa
    JEL: C1 C12 C14 C4 E62 G01 H5 H61 H63 H68 N17 O1 O11 O55 P52
    Date: 2014–03–12
  36. By: Paloviita, Maritta (Bank of Finland Research); Viren, Matti (Bank of Finland Research)
    Abstract: This paper studies forecasts errors at the micro level using two alternative survey data sets. The main focus is on inflation and real GDP growth forecasts in the ECB Survey of Professional Forecasters. For comparison, inflation forecasts in the US Survey of Professional Forecasters are also examined. Our analysis indicates that forecast errors are positively related to the subjective uncertainties based on probability distributions, but not to disagreement (standard deviation of point forecasts). We also show that forecast errors, which are rather persistent, are related to forecast revisions. Revisions of expectations generally lead to larger forecast errors. Subjective uncertainty measures, which are available at the time of forecasting, are useful in assessing future forecast errors.
    Keywords: forecasting; survey data; expectations
    JEL: C53 E31 E37
    Date: 2014–02–25
  37. By: Mapa, Dennis S.; Simbulan, Maria Christina
    Abstract: The country’s small and open economy is vulnerable to both internal and external shocks. Is it therefore important for policy makers to have timely forecasts on the movement of the country’s Gross Domestic Product (GDP), whether it will increase or decrease in the current quarter, to be able to guide them in coming up with appropriate policies to mitigate say, the impact of a shock. The current method used to forecast the movements of the GDP is the composite Leading Economic Indicators System (LEIS) developed by the National Economic Development Authority (NEDA) and the National Statistical Coordination Board (NSCB). The LEIS, using 11 economic indicators, provides one-quarter forecast of the movement of the GDP. This paper presents an alternative, and perhaps better, procedure to the LEIS in nowcasting the movements of the GDP using the Dynamic Factor Model (DFM). The idea behind the DFM is the stylized fact that economic movements evolve in a cycle and are correlated with co-movements in a large number of economic series. The DFM is a commonly used data reduction procedure that assumes economic shocks driving economic activity arise from unobserved components or factors. The DFM aims to parsimoniously summarize information from a large number of economic series to a small number of unobserved factors. The DFM assumes that co-movements of economic series can be captured using these unobserved common factors. This paper used 31 monthly economic indicators in capturing a common factor to nowcast movements of GDP via the DFM. The results show that the common factor produced by the DFM performed better in capturing the movements of the GDP when compared with the LEIS. The DFM is a promising and useful methodology in extracting indicators of the country’s economic activity.
    Keywords: Dynamic Factor Model, Leading Economic Indicators, Common Factor
    JEL: C4 E3 E61
    Date: 2014–03
  38. By: Forssbaeck, Jens (Lund University); Oxel, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: Transparency has become a catchword and in the economic-political debate is often seen as a universal remedy for all sorts of problems. In this paper, we analyze and discuss the meaning and use of the concept of transparency in economic research. We look for common denominators across different areas where the concept is used, and find that transparency in essence is about reductions in information asymmetries, and therefore entails the transfer of information from a sender to a receiver. Transparency goes beyond mere information disclosure in that it has a demand-side dimension: the information transferred should be trustworthy and have a value to the receiver. We emphasize the distinction between ex ante transparency – related to predictability – and ex post transparency – related to accountability. In economics, increased transparency is mostly rationalized on grounds of improving efficiency, but sometimes transparency is properly viewed simply as a right to know. Complementarities between different types of transparency are pervasive, and its causes and effects typically co-determined – i.e. transparency is endogenous. As a means to improve competitiveness and economic growth, transparency of economic policy and corporate as well as institutional transparency interact. We challenge the view that more transparency is always better and argue for concave net benefits and the existence of optimal transparency, but optimality varies across policy areas, institutional settings, industries and individual firms.
    Keywords: Asymmetric Information; Transfer of Information; Moral Hazard; Adverse Selection; ransparency; Optimal Transparency; Ex Ante Transparency; Ex Post Transparency; Predictability; Accountability; Economic Policy; Economic Growth
    JEL: D82 E24 E27 E37 E52 E58 E62 G38 M10
    Date: 2014–03–07
  39. By: Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
    Abstract: We study the potential impact of fiscal devaluation policies on the Italian economy using IGEM, a dynamic general equilibrium model for the Italian economy developed at the Department of Treasury of the Italian Ministry of the Economy and Finance. The simulations show that fiscal devaluation policies are likely to produce slight improvements on the external position of the economy only in the short run, while the output gains seem to persist in the long run. Non-negligible distributional effects across households are also observed, since taxation on consumption tends to be regressive.
    Keywords: Fiscal devaluation, DGE, structural reforms, Italy
    JEL: E10 C50 E60
    Date: 2014–02
  40. By: Jasmina ARIFOVIC; Murat YILDIZOGLU
    Abstract: We study learning in the Kydland and Prescott environment. Our policy maker evaluates its potential strategies regarding the announced and the actual inflation rate using its mental model. This model is forward looking and adaptive at the same time. \r\nThere are two types of agents: Believers who set their inflation forecast equal to the announced inflation, and nonbelievers who form static optimal forecast coupled with a forecast error correction mechanism. Our results show that the economy can reach near Ramsey outcomes most of the time. In the absence of believers, the economies almost always converge to the Ramsey outcome. \r\nIn their experiments with human subjects, Arifovic and Sargent (2003) showed that experimental economies reach and stay close to the Ramsey outcome most of the time, giving support to the \'just do it\' policy recommendation. In light of the experimental findings, our model is of particular interest as it is the only agent-based or adaptive learning model that consistently selects the Ramsey outcome.
    Keywords: learning in the Kydland-Prescott environment, artificial neural networks, Ramsey outcome
    JEL: E50 C45 C72 D60
    Date: 2014
  41. By: Martin Shubik (Cowles Foundation, Yale University); Eric Smith (Santa Fe Institute)
    Abstract: We consider the problem of financing two productive sectors in an economy through bank loans, when the sectors may experience independent demands for money but when it is desirable for each to maintain an independently determined sequence of prices. An idealized central bank is compared with a collection of commercial banks that generate profits from interest rate spreads and flow those through to a collection of consumer/owners who are also one group of borrowers and lenders in the private economy. We model the private economy as one in which both production functions and consumption preferences for the two goods are independent, and in which one production process experiences a shock in the demand for money arising from an opportunity for risky innovation of its production function. An idealized, profitless central bank can decouple the sectors, but for-profit commercial banks inherently propagate shocks in money demand in one sector into price shocks with a tail of distorted prices in the other sector. The connection of profits with efficiency-reducing propagation of shocks is mechanical in character, in that it does not depend on the particular way profits are used strategically within the banking system. In application, the tension between profits and reserve requirements is essential to enabling but also controlling the distributed perception and evaluation services provided by commercial banks. We regard the inefficiency inherent in the profit system as a source of costs that are paid for distributed perception and control in economies.
    Keywords: Commercial banking, Continuous time, Money supply
    JEL: C73 E51
    Date: 2014–03
  42. By: Aparicio Fenoll, Ainhoa (Collegio Carlo Alberto); Gonzalez, Libertad (Universitat Pompeu Fabra)
    Abstract: We study the effect of the cycle on the health of newborn babies using 30 years of birth-certificate data for Spain. We find that babies are born healthier when the local unemployment rate is high. Although fertility is lower during recessions, the effect on health is not the result of selection, since the main result survives the inclusion of parents' fixed-effects. Analysis of National Health Survey data shows that fertility-age women engage in healthier behaviors during recessions (in terms of exercise, sleep, smoking and drinking) and report better overall health. We conclude that maternal health is a plausible mediating channel.
    Keywords: newborn health, business cycle, Spain
    JEL: E32 I10 J13
    Date: 2014–03
  43. By: Kakarot-Handtke, Egmont
    Abstract: There is not much use to attack standard economics because deep in his heart the representative economist long knows that he is tied to a degenerating research program. The problem is, rather, that it seems to be exceedingly difficult to build up a convincing alternative. Keynes, for one, tried and was successful – albeit not fully. Unfortunately, he got some basics wrong. The conceptual consequence of the present paper is to discard the accustomed subjective-behavioral axioms and to take objective-structural axioms as the formal point of departure for the analysis of employment as the main practical issue of economics.
    Keywords: new framework of concepts; structure-centric; axiom set; price setter; full employment; multiplier; price mechanism; profit mechanism
    JEL: B59 E12 E24
    Date: 2014–03–12
  44. By: Alexandre B. Cunha; Emanuel Ornelas
    Abstract: We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if they expect future governments to do the same. We find that, if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative trade-off between restricting political competition and constraining the ability of governments to issue debt.
    Keywords: Political turnover, efficient policies, public debt
    JEL: E61 E62 H30 H63
    Date: 2014–03
  45. By: ,; Diewert, Erwin
    Abstract: The paper illustrates how various commonly used index number formulae perform using monthly data on seasonal commodities (seven types of vegetable) that was collected by the Israeli Consumer Price Index program. The paper calculates standard Laspeyres, Paasche and Fisher indexes (fixed base and chained) for the years 1998-2002 and then compares these indexes with the types of index used by statistical agencies that make use of lagged expenditure data instead of current expenditure data. Rolling year annual Mudgett-Stone indexes are also calculated. Month to month Lowe, Young and Geometric Young indexes that make use of lagged annual baskets are calculated and found to have small amounts of substitution bias. The monthly chained Fisher index is found to have substantial downward chain drift bias but the month to month Rolling Year GEKS index performs well.
    Keywords: Laspeyres, Paasche, Fisher, Lowe, Young and Mudgett-Stone price indexes, Consumer Price Indexes, seasonal commodities, substitution bias, chain drift.
    JEL: C43 C81 E01 E31
    Date: 2014–03–11
  46. By: Jiranyakul, Komain; Opiela, Timothy
    Abstract: This paper tests the effect of systemic risk on deposit market discipline by interacting proxies for systemic risk with bank-specific default-risk variables. Discipline is measured by estimating a supply of deposit funds function at Thai banks from 1992 to 1997. The results show that supply decreases as bank-specific risk increases. Also, the sensitivity of funds to changes in bank-specific risk increases as systemic risk rises. Additionally, depositors decrease their sensitivity to deposit rates, decreasing the ability of banks to offset deposit drains by raising rates. Although banking system risk increases, discipline decreases the share of deposits at the riskiest banks.
    Keywords: Market discipline, market monitoring, systemic risk, banking and currency crises
    JEL: E44 G21
    Date: 2014–03
  47. By: Gropp, Reint; Krainer, John; Laderman, Elizabeth
    Abstract: We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board's Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in non-boom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth. --
    Keywords: credit supply,deleveraging,households,financial crisis
    JEL: E21 G21
    Date: 2014
  48. By: Klovland, Jan Tore (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper reviews some methodological and practical problems encountered in the construction of historical price indices. The underlying data sets in such studies are often characterized by heterogenous and incomplete price series. It is shown that by using the repeat sales method for constructing the subindices for individual commodity groups some of the main problems can be overcome. The procedures are illustrated by material from the construction of monthly price indices for Norway from the year 1777 to 1920. The price indices shed new light on two great wartime in ationary episodes in Norway: 1807-1817 and 1913-1920. In spite of a 61-fold increase in the price level in the rst period and a 4-fold increase in the second, it is found that, after in ation had been brought under control, prices reverted to a level consistent with the purchasing power parity principle.
    Keywords: Price index; price history; purchasing power parity.
    JEL: E31 N13 N14
    Date: 2014–03–05
  49. By: Ozkaya, Ata
    Abstract: A fiscal rule imposed when the budget is not transparent yields more creative accounting to circumvent it and less fiscal adjustment, generating hidden deficits/debts in public sector. This study focuses on creative accounting practices of governments and adds to the literature by measuring hidden debts of the Turkish public sector ranging from the period 1989 to 2010. Accordingly, the author shows that the IMF has been misinformed, indeed has been misled by the Turkish authorities regarding the magnitude of public debt stock at the late 90'. The lacking information deteriorated the IMF' forecasts, which might be one of the main reasons for the failure of the IMF' planned fiscal consolidation at the outset of 2000-2001 crisis. The author' methodology can easily be adapted to any other country in order to identify the different margins on which governments can cheat and manipulate the Government Finance Statistics. --
    Keywords: fiscal rules,creative accounting,contingent liabilities,hidden public debt,IMF policies
    JEL: E62 H61 H63 H83
    Date: 2014
  50. By: Chang, C-L.; Hsu, H-K.; McAleer, M.J.
    Abstract: __Abstract__ This paper uses monthly data from April 2005 to August 2013 for Taiwan to propose a novel tourism indicator, namely the Tourism Conditions Index (TCI). TCI accounts for the spillover weights based on the Granger causality test and estimates of the multivariate BEKK model for four TCI indicators to predict specific tourism and economic environmental indicators for Taiwan. The foundation of the TCI is the Financial Conditions Index (FCI), which is derived from the Monetary Conditions Index (MCI). The empirical findings show that TCI weighted by spillovers reveal greater significance in forecasting the Composite Index (CI), an economic environmental indicator, than the Tourism Industry Index (TII), which is an existing indicator for the tourism industry that is listed on the Taiwan Stock Exchange (TWSE). Moreover, previous values of the alternative TCI and TII are shown to contain useful information in predicting both tourism and economic environmental factors. Overall, the new Tourism Conditions Index is straightforward to use and also provides useful insights in predicting tourism arrivals and the current economic environment.
    JEL: B41 E44 E47 G32
    Date: 2014–01–01
  51. By: McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Fifth Data Management Strategies and Technologies Workshop, Federal Reserve Bank of New York, New York City
    Keywords: Consumer Credit Panel (CCP); data innovation; data stewardship; Survey of Consumer Expectations (SCE)
    JEL: C40 C80 E20
    Date: 2014–02–04
  52. By: Holger Strulik; Timo Trimborn
    Abstract: Recent empirical research has shown that income per capita in the aftermath of natural disasters is not necessarily lower than before the event. Income remains in many cases not significantly affected or, perhaps even more surprisingly, it responds positively to natural disasters. Here, we propose a simple theory, based on the neoclassical growth model, that explains these observations. Specifically we show that GDP is driven above its pre-shock level when natural disasters destroy predominantly residential housing (or other durable goods). Disasters destroying mainly productive capital, in contrast, are predicted to reduce GDP. Insignificant responses of GDP can be expected when disasters destroy about twice as much residential structures as productive capital. We show that disasters, irrespective of whether their impact on GDP is positive, negative, or insignificant, entail considerable losses of aggregate welfare. --
    Keywords: natural disasters,economic recovery,residential housing,economic growth
    JEL: E20 O40 Q54 R31
    Date: 2014
  53. By: Małgorzata Pawłowska (Narodowy Bank Polski and Warsaw School of Economics); Dobromil Serwa (Narodowy Bank Polski and Warsaw School of Economics); Sławomir Zajączkowski (Narodowy Bank Polski)
    Abstract: In this study we analyze how funding liquidity shocks affecting large international banks were transmitted to Polish subsidiaries and branches of these banks in recent years. We investigate differences in the effects of liquidity shocks on banks owned by both Polish and foreign institutions. All Polish banks reacted to liquidity shocks after Lehman Brothers failure; however, only Polish subsidiaries and branches of foreign parent banks adjusted their funding after liquidity shocks had taken place during the sovereign debt crisis of the Eurozone. Mortgage lending in foreign currencies was also affected by liquidity shocks during the crisis. Our results suggest that the intragroup links between banking institutions can serve both as an important channel for international transmission of liquidity shocks and as a stabilizing mechanism during liquidity crises.
    Keywords: liquidity shocks, international transmission, parent banks, affiliate banks, Poland
    JEL: E44 F34 G32
    Date: 2014
  54. By: Tullio Jappelli (University of Naples Federico II, CSEF and CEPR); Mario Padula (University “Ca’ Foscari” of Venice and CSEF)
    Abstract: In 2000 Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of €20,000-30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees.
    Keywords: Severance Pay, Consumption, Wealth Accumulation
    JEL: D12 D91 E21
    Date: 2014–03–05
  55. By: Kevin J. Fox (School of Economics, Australian School of Business, the University of New South Wales); Iqbal A. Syed (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: Consumers are very responsive to sales, yet statistical agency practice typically under-weights sale prices in the Consumer Price Index (CPI), with some agencies excluding sale prices completely. Evidence is lacking on how this may impact on both the representativeness of prices included in the CPI and on estimates of in ation. We use high-frequency scanner data from US supermarkets to explore if there is any systematic directional impact. The key finding is that the exclusion of sales prices introduces a systematic effect. We also find that even when sales prices are included they are systematically under-weighted, but the under-weighting remains fairly stable over time so that in ation measurement is not significantly affected.
    Keywords: Cost-of-living, CPI, Regular prices, Retail sales, RYGEKS, Scanner data
    JEL: C43 E31
    Date: 2014–01
  56. By: Elasrag, Hussein
    Abstract: The aim of this paper is to study unemployment and job creation in the GCC countries. Population growth rates in all six Gulf Cooperation Council (GCC) states are at 3% or more, with large numbers of expatriates – in some states, such as the UAE and Qatar, outnumbering locals – creating a disproportionately young population across the GCC. Unaddressed, unemployment could reach 40% for youths aged between 20 and 24, and higher for women. Creating appropriate job opportunities for nationals, and reducing current unemployment, is a critical focus of GCC governments.
    Keywords: unemployment , job creation , GCC countries, Population growth rates
    JEL: E0 J0 J64 J65
    Date: 2014–01
  57. By: Sylvain, Serginio
    Abstract: Using a general equilibrium model with endogenous growth, I show that risk to human capital leads to a “Value” premium in equity returns. In particular, firms with relatively more firm-specific human capital or more positive covariance between asset growth and returns on human capital are less valuable (and hence have greater Book-to-Market Equity) and yield greater expected equity returns since human capital is more tied to the fate of said firms. Thus, I reproduce some of the results of Fama and French (1996) and show that in the model their HmL factor is a proxy for human capital risk as measured by macroeconomic and financial variables such as the covariance between human capital growth, or labor income growth, with the growth rate of firm assets. The model implies relatively lower investment-to-asset ratio and lower average asset growth for Value firms as observed in data and as argued in Zhang (2005). Furthermore, the model yields counter-cyclical Value premium and relative Book-to-Market Equity, greater long-run risk exposure for Value firms, and failure of the CAPM. Hence, it replicates several results from the related literature.
    Keywords: Adjustment cost, Book-to-Market Equity, Endogenous growth, General equilibrium, Human capital, Value Premium
    JEL: E20 G10 G12
    Date: 2014–03–14
  58. By: Petreski, Marjan
    Abstract: The objective of this paper is to test the exchange rate regime – growth nexus in transition economies by looking if and how some inherent characteristics of the transition process might have affected the de-facto classifications of exchange rate regimes. 28 transition countries of Central and Eastern Europe and the Commonwealth of Independent States are investigated over 1991-2007 and three de facto classifications of exchange rate regimes are considered. As usual in the empirical literature, initially, the exchange rate regime effect on growth differs across classifications. However, further investigation suggests that the three classifications usually disagree around some inherent characteristics of the transition process, like the higher trade openness of the countries, the episodes of high inflation and the bank system reform and interest rate liberalization. Results indicate that high inflation likely determined disagreement in early transition, while trade openness and interest rate liberalization in late transition. After classifications have been cleaned of the disagreeing points, the final results, corrected for the potential selectivity bias, suggest that both pegs and intermediate regimes of all three classifications significantly outperform floats in terms of economic growth, the average effect being slightly lower for pegs.
    Keywords: exchange rate regime classifications; economic growth; transition economies
    JEL: E42 F31
    Date: 2014
  59. By: Góralczyk, Andrzej
    Abstract: Economy can be generally described as a bunch of value streams. At least a part of capital accumulation is assumed to be the consequence of value stream blockage, and a means too keep such blockage. Negative relation between capital accumulation and foreign trade balance coming out from this assumption is supported by the data from national accounts, and hence justify the idea of economy as the value streams. A lot of research ideas are following this assertion, most of them promising results useful for socio-economic policies, and for optimizing institutions and business practices in order to make them more conductive to capital flows.
    Keywords: value streams, economic stability, economy growth, economic shocks, scaling in economy
    JEL: A10 A12 B00 B50 C00 C50 E20 F01 O10 Y20
    Date: 2014–03–17
  60. By: Meng, Channarith
    Abstract: This paper analyzes the fast development of consumer loans including housing loans in Cambodia to check whether or not such a development posts any stability risk to banking system in Cambodia. Using stress-testing method, the paper finds that current level of consumer loans provided by banks does yet creates a big threat to the banking stability in Cambodia. Rather, the surge reflects consequences of positive development in the banking system and economy as a whole, including the rise of middle-income class, changing family structure, stronger competition among banks, and more widespread financial literacy.
    Keywords: Housing loans, consumer loans, stress testing, banking stability, Cambodia, financial crisis
    JEL: E58 G01 G21 G28 O16
    Date: 2014–03–05
  61. By: Vincent Bouvatier; Michael Brei; Xi Yang
    Abstract: This paper examines the determinants of bank failures in the US banking system during the recent financial crisis. The analysis employs a dataset on the financial statements of FDIC-insured commercial banks and their bank holding companies, along with information on bank failures, mergers, and acquisitions. The econometric evidence suggests that failed banks have been characterized by significantly higher loan growth rates, well ahead of the financial crisis, coupled with higher exposures to the mortgage market segment and to funding in the form of brokered deposits. We also find evidence that commercial banks have been less likely to fail, when they belonged to well-capitalized and profitable bank holding companies with lower exposures to short-term funding. Our results provide empirical support for the recent modifications in bank regulation and supervision which introduce countercyclical components for capital buffers and a more comprehensive supervision of consolidated banking groups.
    Keywords: financial crises, bank failures, bank regulation
    JEL: G21 E58 G32
    Date: 2014
  62. By: Catherine L. Mann (International Business School, Brandeis University); Oren Klachkin (International Business School, Brandeis University)
    Abstract: We construct a dataset for every U.S. Treasury auction from 2003 to 2012. We find that market factors known before the auction -- FedFunds rate, S&P, VIX -- are all significant for the auction high-yield, but the relationships differ before vs. during QE and between Bond and Bills auctions. Auction-specific innovations matter for the auction high-yield. Bills auctions have a forecastable component based on information from the previous auction of that maturity. Bidder types may differ systematically. Indirect bidders in the Bond auctions may bid relatively ‘low’ compared to the average bid and Primary Dealers may bid ‘high’. These relationships differ before vs. during QE. These results suggest that quantitative easing implemented in the secondary market has affected the auction market for U.S. Treasury securities.
    Keywords: Federal Reserve, quantitative easing, foreign official, Dutch auction, US Treasury securities
    JEL: E43 E58 F34 F49
  63. By: Elise S. Brezis; Rodolphe Dos Santos Ferreira
    Abstract: Since the seminal work of Becker, the dynamics of endogenous fertility has been based on the trade-off faced by parents between the quantity and the quality of their children. However, in developing countries, when child labor is an indispensable source of household income, parents actually incur a negative cost for having an extra child, so that the trade-off disappears. The purpose of this paper is to restore the Beckerian quantity-quality trade-off in the case intergenerational transfers are upstream, so as to keep fertility endogenous. We do that by adding a negative “sibship size effect” on human capital formation to the standard Becker model. With a simple specification, we obtain multiplicity of steady states or, more fundamentally, the possibility of a jump from a state with high fertility and low income to a state with low fertility and high income, triggered by a continuous increase in the productivity of human capital formation.
    Keywords: Endogenous fertility, Intergenerational transfers, Human capital formation, Demographic transition.
    JEL: E24 J13
    Date: 2014
  64. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The Vienna Institute for International Economic Studies (wiiw) expects GDP in Central, East and Southeast Europe (CESEE) to pick up speed and grow on average by 2-3% over the forecast period 2014-2016 a major driving force rooted in an upward reversal of public and private investment. The question remains, however, whether investment-led growth in the CESEE countries is merely a statistical base effect of a few replacement investments or an indication of a profound paradigmatic shift. Increasing evidence suggests the latter for a number of reasons. During the ongoing economic crisis, public investment was severely reduced. However, in times of extreme uncertainty, the private sector is hesitant to invest. Hence, the public sector has to take the lead. It seems that the time for action has now come. This holds especially true for the New Member States, where towards the end of the previous year additional efforts were made to raise the absorption rate of the funds allocated within the context of the EU multiannual financial framework for 2007-2013 that was about to come to a close. Over the remaining disbursement period of the biennium 2014-2015 substantially higher amounts of EU-funded investment are to be expected. Given that, in practically all cases, national co-financing is also required, CESEE public capital investment will increase, with private investors likely following in its slipstream. Apart from a number of transport infrastructure projects, a host of thermal power plant projects are in the pipeline, as are several major investments in the construction and expansion of nuclear power plants across the region. Apart from public and semi-public infrastructure investment initiatives that have the potential to spur subsequent private investment, improving growth prospects in the euro area, the CESEE economies’ main trading partner, are likely to encourage export industries in the region to modernise and increase their capital stock. This should help avert a lapse into a deflationary spiral and foster a shift towards better equilibrium with lower unemployment rates over the medium term. However, substantial downward risks include possible effects from the current Russia-Ukraine conflict; in particular the interruption of energy supplies, potential trade embargoes or additional interest rate risk premia. All this could adversely affect investment-led growth in CESEE.
    Keywords: Central and East European new EU Member States, Southeast Europe, financial crisis, Balkans, Russia, Ukraine, Kazakhstan, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, deleveraging, exchange rates, fiscal consolidation
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2014–03
  65. By: Geoff C. Harcourt (School of Economics, Australian School of Business, the University of New South Wales); Peter Kriesler (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: David Ricardo’s key place in the history of economic thought is well established. However, both the understanding of his Principles of Political Economy and Taxation and its role in the development of economic analysis is much more controversial. Cambridge economists have contributed significantly to both of these issues. They have played an important part in two extremely divergent interpretations of Ricardo’s place in the development of economic thought. Understanding how Ricardo has been viewed in Cambridge does not result in homogeneity, but in a spectrum of interpretations. In this paper, we focus on the role of Ricardo’s Principles in the development of economics as seen by Cambridge economists.
    Keywords: Ricardo, Cambridge School, History of economic thought, short period, long period
    JEL: B12 B20 B41 E10
    Date: 2014–01
  66. By: Koumparoulis, Dimitrios Nikolaou
    Abstract: In late April 2013, Jim O’Neill retired as chairman of Goldman Sachs (GS). The 56-year-old British economist, among other accomplishments, left his mark on the still unfolding globalization story by coining the acronym BRIC, referring to the four rapidly developing nations—Brazil, Russia, India and China—that seemed ready a decade ago to challenge the economic supremacy of the United States, Japan, and Western Europe. Since O’Neill invented the term in 2001, the BRICs have evolved in very different ways and have developed at very different rates. While China’s economy continues to boom, though off its torrid pace of a few years ago, Russia’s economic growth rate slowed last year to an estimated 3.4 percent, according to its Federal Statistics Service—down from 4.3 percent in 2011 and 4.5 percent the year before. Brazil’s gross domestic product grew just 0.9 percent in 2012, while India’s expanded at a 5 percent rate. As O’Neill bows out, perhaps a bigger story than the BRICs today—one that deserves more attention in the board room—is the large number of countries that are now competing with the BRICs, even outpacing them, often for the same reasons the BRICs have done well. What this means, looking ahead, is that corporate executives, as they review their global plans, have more options than ever before available to them.
    Keywords: BRICs, India, Emerging Markets, Foreign Direct Investment, Elections
    JEL: E66
    Date: 2014
  67. By: Zaouali, Amira
    Abstract: Economists have a long argue that political process such as democracy and corruption are important for economic growth. Our objective in this paper is to demonstrate that one of democracy's indirect posititive effects is its ability to mitigate the negative effect of corruption on economic growth. Although most democratic countries in our sample have a high level of corruption, the electoral mechanism inhibits leaders from engaging in acts of corruption that cause damage to economic performance and thus jeopardize their political survival. Utilizing a dynamic panel data approach for more than 40 countries over the period 2000- 2011, the results show that in democratic countries, corruption has no significant effect on economic growth, while the non-democratic countries suffer the negative effects of corruption that retard economic growth.
    Keywords: Corruption, Democracy, Economic Growth, dynamic panel.
    JEL: C23 E02 O43 O47
    Date: 2014–03–18

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