nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒03‒30
63 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary policy and growth with trend inflation and financial frictions By Olmos, Lorena; Sanso Frago, Marcos
  2. Interest Rates Rigidities and the Fisher Equation By Belanger, Gilles
  3. Monetary and macroprudential policy in an estimated DSGE model of the Euro Area By Quint, Dominic; Rabanal, Pau
  4. Endogenous Firms Dynamics and Banking By Carla La Croce; Lorenza Rossi
  5. Liquidity Trap and Excessive Leverage By Anton Korinek; Alp Simsek
  6. New Keynesian versus old Keynesian government spending multipliers - A comment By Andrew Hughes Hallett; Ansgar Rannenberg; Sven Schreiber
  7. Consumer Debt Dynamics: Follow the Increasers By Braxton, John Carter; Knotek, Edward S.
  8. Anatomy of a Credit Crunch: From Capital to Labor Markets By Francisco J. Buera; Roberto Fattal-Jaef; Yongseok Shin
  9. Inflation expectation dynamics: the role of past present and forward looking information By Paul Hubert; Mirza Harun
  10. Structural Evolution of the Postwar U.S. Economy By Yuelin Liu; James Morley
  11. The role of the "Maximizing Output Growth Inflation Rate" in monetary policy By Dominique Pepin
  12. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  13. Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification By Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer
  14. Exit Strategies and Their Impact on the Euro Area - A Model Based View By Ansgar Belke
  15. How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries? By Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
  16. Money in modern macro models: A review of the arguments By Seitz, Franz; Schmidt, Markus A.
  17. Medium-term Fluctuations and the "Great Ratios" of Economic Growth By Christian Groth; Jakob B. Madsen
  18. State-Dependent Effects of Fiscal Policy. By Steven Fazzari; James Morley; Irina Panovska
  19. OECD Forecasts During and After the Financial Crisis: A Post Mortem By Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
  20. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  21. Effects of Commodity Price Shocks on Inflation: A Cross Country Analysis By Atsushi Sekine; Takayuki Tsuruga
  22. Analysing the Short Run Effects of China’s Economic Reform Agenda By Rod Tyers
  23. Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts By Anne-Laure Delatte; Julien Fouquau; Richard Portes
  24. Optimal Development Policies with Financial Frictions By Oleg Itskhoki; Benjamin Moll
  25. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Ander Perez; Ali Ozdagli; Filippo Ippolito
  26. The scale of predictability By Federico M. Bandi; Bernard Perron; Andrea Tamoni; Claudio Tebaldi
  27. The Federal Reserve: inside monetary policy By Williams, John C.
  28. Debt Redemption Fund: Conditio Sine Qua Non? Government Bonds in the Euro Area Crisis By Silke Tober
  29. Commodity-Price Comovement and Global Economic Activity By Ron Alquist; Olivier Coibion
  30. A two-year revision: cross comparison and modeling of Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, and Franklin Resources By Kitov, Ivan
  31. Finding Stability in a Time of Crisis: Lessons of East Asia for Eastern Europe By Paul D. McNelis
  32. Self-Monitoring or Reliance on Newswire Services: How Do Financial Market Participants Process Central Bank News? By Bernd Hayo; Matthias Neuenkirch
  33. The Stock Market, the Real Economy and Contagion By Dirk G Baur; Isaac Miyakawa
  34. Precautionary Saving and the Notion of Ambiguity Prudence By Loïc Berger
  35. Wirtschaftspolitische Herausforderungen 2014 By Gustav A. Horn; Alexander Herzog-Stein; Ansgar Rannenberg; Katja Rietzler; Silke Tober; Rudolf Zwiener
  36. A model of mortgage default By Campbell, John Y.; Cocco, João F.
  37. The crisis of the sovereign debts in the Eurozone: an overview By Frederic Teulon; Zied Ftiti; Khaled Guesmi
  38. Lending Standards and Countercyclical Capital Requirements under Imperfect Information By Gete, Pedro; Tiernan, Natalie
  39. A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters By Emmanuel Saez; Pascal Michaillat
  40. Growth Effects of Structural Reforms in Southern Europe: The case of Greece, Italy, Spain and Portugal By Janos Varga; Werner Roeger; Jan in 't Veld
  41. Hard work, and More: How to successfully conduct adjustment with official assistance By Martin Larch; Kristin Magnusson Bernard; Balint Tatar
  42. Une évaluation de la taille de l'économie informelle par un système complet de demande estimé sur données monétaires et temporelles. By Armagan Tuna Aktuna-Gunes; Christophe Starzec; François Gardes
  43. “Relative Movements of Real Wages and Output” – How does Keynes’s 1939 essay relate to his Principle of Effective Demand? By Jochen Hartwig
  44. Government Policy Ecosystem for Entrepreneurship Development in MSEs Sector By Bhat, Shabir A; Khan, Riyaz A
  45. Optimal Employment Contracts with Hidden Search By Rasmus Lentz
  46. Artificial Neural Networks and Aggregate Consumption Patterns in New Zealand By Daniel Farhat
  47. 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
  48. High-End Variety Exporters Defying Distance : Micro Facts and Macroeconomic Implications By Julien Martin; Florian Mayneris
  49. Consolidation on the revenue side and growth-friendly tax structures: an indicator based approach By Florian Wöhlbier; Caterina Astarita; Gilles Mourre
  50. The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning By Farzin, Y. Hossein; Wendner, Ronald
  51. A Note on Oil and Gas Production from Shale and Long-Run U.S. Economic Growth By Arora, Vipin
  52. Understanding Chinese consumption: The impact of hukou By Dreger, Christian; Wang, Tongsan; Zhang, Yanqun
  53. Dynamic Factor Models, Cointegration and Error Correction Mechanisms By Matteo Barigozzi; Marco Lippi; Matteo Luciani
  54. Directed Technical Change and Capital Deepening: A Reconsideration of Kaldor’s Technical Progress Function By Schlicht, Ekkehart
  55. How to switch off the cypriot financial crisis without weakening durably Europe ? By Jean Messiha; Bruno-Laurent Moschetto; Frederic Teulon
  56. Evaluating Alternatives to GDP as Measures of Social Welfare/Progress By Jeroen van den Bergh; Miklós Antal
  57. Erhöhung der EEG-Kosten als Investitionshemmnis für stromintensive Unternehmen By Bardt, Hubertus
  58. Information Processing, Pattern Transmission and Aggregate Consumption Patterns in New Zealand By Daniel Farhat
  59. Multiple Solutions in Systems of Functional Differential Equations By d'Albis, Hippolyte; Augeraud-Véron, Emmanuelle; Hupkes, Herman Jan
  60. Profit for Marxists By Kakarot-Handtke, Egmont
  61. Convergence and Divergence in Europe: Polish and Ukrainian Cases By Lukianenko, Dmytro; Chuzhykov, Viktor; Woźniak, Michał Gabriel; Antoniuk, Larysa; Bal-Woźniak, Teresa; Bolonek, Ryszarda; Dobija, Mieczysław; Fedirko, Natalia; Fedirko, Oleksandr; Firszt, Dariusz; Honcharuk, Andrii; Ilnytskyi, Denys; Jabłoński, Łukasz; Kaleniuk, Iryna; Kaliszuk, Ewa; Kleer, Jerzy; Olefir, Anna; Panchenko, Yevhen; Poruchnyk, Anatolii; Satsyk, Volodymyr; Savchuk, Volodymyr; Stępień, Kinga; Stolyarchuk, Yaroslava; Tatarenko, Nataliya; Tokarski, Tomasz; Tsyhankova, Tetiana
  62. Are All Sovereigns Equal? A Test of the Common Determination of Sovereign Spreads in the Euro Area By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  63. Who turned their back on the SPD? Electoral disaffection with the German Social Democratic Party and the Hartz reforms. By Baptiste Françon

  1. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.
    Keywords: New Keynesian DSGE models, endogenous growth, financial frictions, trend inflation, unconventional monetary policy
    JEL: E31 E44 E58 O42
    Date: 2014
  2. By: Belanger, Gilles
    Abstract: The literature on nominal interest rates rigidity does not fully address its macroeconomic implications. How nominal interest rates rigidity would interact with the Fisher equation is simple, yet the implications are surprising. If nominal rates cannot catch up to real rates, the Fisher effect becomes inverted in the short term: big enough credit crunches bring deflation and central banks must lower interest rates to stimulate inflation. The paper shows that nominal interest rates rigidity is sufficient to characterize the little we know about inflation. It also shows that, unlike for other products, the pricing of loans is influenced by past negotiated loans, generating rigidity.
    Keywords: Interest Rate Rigidity, Inflation, Monetary Policy.
    JEL: E31 E43 E52
    Date: 2014–02–25
  3. By: Quint, Dominic; Rabanal, Pau
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and ?nancial frictions, and hence both monetary and macroprudential policy can play a role. We ?nd that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their e¤ects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. --
    Keywords: Monetary Policy,EMU,Basel III,Financial Frictions
    JEL: C51 E44 E52
    Date: 2014
  4. By: Carla La Croce (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We consider a DSGE model with flexible prices, monopolistic competitive banks and sticky interest rates, together with endogenous ?firms exit and entry decisions. We find that economies characterized by endogenous ?firms dynamics imply higher volatilities of both real and financial variables than those implied by a DSGE with monopolistic banking and a fixed number of firms, in response to both real and financial shocks. The model with endogenous exit, in line with the empirical evidence, implies: i) countercyclical exit; ii) an endogenous countercyclical bank markup and an endogenous countercyclical interest rate spread; iii) a quicker recovery in the aftermath of a financial crisis, when the macroprudential authority implements countercyclical capital requirements (Basel III). This policy is more stabilizing than Basel II as well as than an alternative Taylor rule explicitly targeting capital-to-asset ratio.
    Keywords: firms endogenous exit, bank markup, interest rate spread, macro- prudencial policies, Taylor rule.
    JEL: E32 E44 E52 E58
    Date: 2014–03
  5. By: Anton Korinek (John Hopkins University and NBER); Alp Simsek (MIT and NBER)
    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.
    Keywords: Leverage, liquidity trap.
    JEL: E32 E44
    Date: 2014–03
  6. By: Andrew Hughes Hallett (George Mason University and University of St Andrews); Ansgar Rannenberg (Macroeconomic Policy Institute); Sven Schreiber (Macroeconomic Policy Institute and Freie Universita?t Berlin)
    Abstract: Cogan et al. (2009, 2010) claim that the stimulus package passed by the United States Congress in February 2009 had a multiplier far below one. However, the stimulus’ multiplier strongly depends on the assumed monetary policy response. Based on official statements from the Fed chairman, the economic outlook, past behavior of the FOMC, optimal policy considerations, and financial market expectations, we find that in February 2009 a period of monetary accommodation of three years would have been a reasonable prediction. This implies that an appropriate real time assessment of the stimulus’ effects would have been more optimistic than Cogan et al.’s.
    Keywords: Obama fiscal stimulus, fiscal multiplier, interest rate forecasts
    JEL: E58 E62 E37 E47
    Date: 2014–02–28
  7. By: Braxton, John Carter (Federal Reserve Bank of Kansas City); Knotek, Edward S. (Federal Reserve Bank of Cleveland)
    Abstract: Consumer debt played a central role in creating the U.S. housing bubble, the ensuing housing downturn, and the Great Recession, and it has been blamed as a factor in the weak subsequent recovery as well. This paper uses micro-level data to decompose consumer debt dynamics by separating the actions of consumer debt increasers and decreasers, and then further decomposing movements into percentage and size margins among the increasers and decreasers. We view such a decomposition as informative for macroeconomic models featuring a central role for consumer debt. Using this framework, we show that variations in borrowing activity among the increasers explain four times as much of the total variation in consumer debt as variations among the decreasers who are shedding debt, whether through paydowns or defaults. We also provide micro-level evidence of a sharp decline in the percentage of increasers during the financial crisis that is qualitatively consistent with a binding zero lower bound on nominal interest rates, and evidence of a cycle in the average size of debt changes among the increasers that is related to rising collateral values pre-crisis coupled with additional financial frictions after the crisis.
    Keywords: consumer debt; deleveraging; zero lower bound; increasers; decreasers
    JEL: D14 E21 E32
    Date: 2014–03–21
  8. By: Francisco J. Buera; Roberto Fattal-Jaef; Yongseok Shin
    Abstract: Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch--i.e., a tightening of collateral constraints. When we simulate a credit crunch calibrated to match the observed decline in the ratio of debt to non-financial assets of the United States business sector following the 2007-8 crisis, our model generates a sharp decline in output--explained by a drop in aggregate total factor productivity and investment--and a protracted increase in unemployment. We then explore the micro-level impact by tracking the employment dynamics for firms of different sizes and ages. The credit crunch causes a much larger reduction in the net employment growth rate of small, young establishments relative to that of large, old producers, consistent with the recent empirical findings in the literature.
    JEL: E24 E44 L25
    Date: 2014–03
  9. By: Paul Hubert; Mirza Harun
    Abstract: Assuming that private agents need to learn inflation dynamics to form their inflation expectations and that they believe a hybrid New-Keynesian Phillips Curve (NKPC) is the true data generating process of inflation, we aim at establishing the role of forward-looking information in inflation expectation dynamics. We find that longer term expectations are crucial in shaping shorter-horizon expectations. Professional forecasters put a greater weight on forward-looking information presumably capturing beliefs about the central bank inflation target or trend inflation while lagged inflation remains significant. Finally,the NKPC-based inflation expectations model fits well for professional forecasts in contrast to consumers.
    Keywords: survey expectations; inflation; new keynesian; Philipps curve
    JEL: E31
    Date: 2014–03
  10. By: Yuelin Liu (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously-estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips Curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.
    Keywords: Time-varying parameters, Mixture innovations, Lucas critique, Great Moderation, Natural Rate of Unemployment, Phillips Curve
    JEL: C11 E24 E32
    Date: 2013–06
  11. By: Dominique Pepin (CRIEF)
    Abstract: The paper discusses the role of monetary policy when potential output depends on the inflation rate. If the intention of the central bank is to maximize actual output growth, then it has to be credibly committed to a strict inflation targeting rule, and to take the MOGIR (the Maximizing Output Growth Inflation Rate) as the target.
    Date: 2014–03
  12. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Monetary Policy and Banks and the Rise of Global Protectionism; Global Interdependence Center; Banque de France; Paris, France 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 gave similar remarks on March 6 in London.
    Keywords: Economy; Monetary policy; Economic conditions;
    Date: 2014–03–10
  13. By: Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer (Federal Reserve Bank of Dallas)
    Abstract: We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much stronger dynamic effects and greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy’s effects with those of changes in expected macrofundamentals. In fact, estimates from identified monetary policy changes lead to a reversal of U.S. states’ ranking by credit’s sensitivity to policy. We also extend Romer and Romer (2004)’s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.
    Keywords: Monetary Transmission; Lending Channel; Monetary Policy Identification; Banking
    JEL: E44 E50 G21
    Date: 2014–03–01
  14. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyses exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: Federal funds rate; exit strategies; global spillovers; international policy coordination; sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–01
  15. By: Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
    Abstract: In this study we examine the dynamic interactions between credit growth and output growth using the spillover index approach of Diebold and Yilmaz (2012). Based on quarterly data on credit growth and GDP growth over the period 1957Q1-2012Q4 for the G7 countries we find that: i) spillovers between credit growth and GDP growth evolve rather heterogeneously over time and across countries, and increase during extreme economic events. ii) Spillovers between credit growth and GDP growth are of bidirectional nature, indicating bidirectional causation between the financial and real sectors. iii) In the period shorty before and on the onset of the global financial crisis, the link between credit growth and GDP growth becomes more pronounced. In particular, the financial sector plays a dominant role during the early stages of the crisis, while the real sector quickly takes over as the dominant source of spillovers. iv) Interestingly, credit growth in the US is the dominant transmitter of shocks internationally, and especially to other countries' real sectors in the run up period to (and during) the global financial crisis. Overall, our results suggest feedback effects between the financial and the real sectors that create rippling effects within and between the G7 countries during the global financial crisis.
    Keywords: Business cycles, Financial cycles, Spillovers, Crisis, Recession
    JEL: C32 E32 E44 E51 F42
    Date: 2014–03
  16. By: Seitz, Franz; Schmidt, Markus A.
    Abstract: This paper provides an overview of the role of money in modern macro models. In particular, we are focussing on New Keynesian and New Monetarist models to investigate their main findings and most significant shortcomings in considering money properly. As a further step, we ask about the role of financial intermediaries in this respect. In dealing with these issues, we distinguish between narrow and broad monetary aggregates. We conclude that for theoretical as well as practical reasons a periodic review of the definition of monetary aggregates is advisable. Despite the criticism brought forward by the recent New Keynesian literature, we argue that keeping an eye on money is important to monetary policy decision-makers in order to safeguard price stability as well as, as a side-benefit, ensure financial market stability. In a nutshell: money still matters. -- Das Papier gibt einen Überblick über die Rolle monetärer Variablen in modernen Makromodellen. Im Mittelpunkt stehen Neukeynesianische und Neumonetaristische Modelle. Ihre Hauptergebnisse werden dargestellt, wobei ein spezieller Fokus darauf gelegt wird, welche Bedeutung monetäre bzw. Liquiditätsvariablen spielen. Darüber hinaus wird untersucht, welche Rolle Finanzintermdediären in dieser Hinsicht zukommt. Insgesamt wird dabei zwischen engen und bereiten Geldmengenaggregaten unterschieden und auch die (theoretische und praktische) Adäquanz traditioneller Geldmengendefinitionen hinterfragt. Wir schlussfolgern, dass es trotz der vielfältigen Kritik an geldmengenorientierten Ansätzen für die Geldpolitik essenziell ist, Geldmengenentwicklungen zu analysieren, soll Preisstabilität und Finanzstabilität erreicht bzw. gesichert werden.
    Keywords: money,New Keynesian model,New Monetarist model,financial intermediaries
    JEL: E51 E52 E58
    Date: 2014
  17. By: Christian Groth (Department of Economics, Copenhagen University); Jakob B. Madsen (Department of Economics, Monash University)
    Abstract: Evidence for the OECD countries show that the “great ratios”, such as the unemployment rate, factor shares, Tobin’s q and the investment-capital ratio, fluctuate significantly on medium-term frequencies of 10-40 years duration. To explain these medium-term fluctuations, we establish a macro-dynamic model where the q-theory of investment is combined with sluggish real-wage adjustment in the labour market. In this framework, responses to shocks show persistence and amplification. A high degree of real-wage rigidity combined with a low elasticity of factor substitution leads to damped internal oscillations and hump-shaped impulse-response functions.
    Keywords: Medium-term cycles, Tobin’s q, real-wage Phillips curve, elasticity of factor substitution, endogenous oscillations
    JEL: E3 G1 O4
    Date: 2013
  18. By: Steven Fazzari (Washington University in St. Louis); James Morley (School of Economics, University of New South Wales); Irina Panovska (Rauch Business Center, Lehigh University)
    Abstract: We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We provide formal comparisons for nonlinearity in the responses of output to government spending and develop a method to compare the difference between impulse response functions across states of the economy. Our empirical findings support state-dependent effects of fiscal policy. The government spending multiplier is larger and more persistent when capacity utilization is low. The estimated multiplier is large (1.6) for more than half of the sample observations, even when the interest rate is not at the zero lower bound.
    Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics, Impulse-Response Comparison, Bayesian
    JEL: C32 E32 E62
    Date: 2013–12
  19. By: Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
    Abstract: This paper assesses the OECD’s projections for GDP growth and inflation during the global financial crisis and recovery, focussing on lessons that can be learned. The projections repeatedly over-estimated growth, failing to anticipate the extent of the slowdown and later the weak pace of the recovery – errors made by many other forecasters. At the same time, inflation was stronger than expected on average. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. In the recovery, there is little evidence that an underestimate of the impact of fiscal consolidation contributed significantly to forecast errors. Instead, the repeated conditioning assumption that the euro area crisis would stabilise or ease played an important role, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. But placing these errors in a historical context illustrates that the errors were not without precedent: similar-sized errors were made in the first oil price shock of the 1970s. In response to the challenges encountered in forecasting in recent years and the lessons learnt, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, to improve their ability to monitor near-term developments and to better account for international linkages and financial market developments. Prévisions de l'OCDE pendant et après la crise financière : Post mortem Ce document évalue les projections de l'OCDE relatives à la croissance du PIB et à l'inflation durant la crise financière mondiale et lors de la reprise, tout en mettant l'accent sur les leçons qui peuvent être tirées. Les projections ont surestimé la croissance de façon répétée, à défaut d'anticiper l'ampleur du ralentissement puis, plus tard, le faible rythme de la reprise — des erreurs commises par de nombreux autres prévisionnistes. Simultanément, l'inflation a été, en moyenne, plus forte que prévu. L'analyse des erreurs relatives à la croissance montre que les prévisions de l'OCDE durant les années de crise économiques ont été plus importantes dans les pays dotés d'une plus grande ouverture au commerce international et d'une plus grande présence de banques étrangères. Durant la reprise, il y a peu d'évidences qu'une sous-estimation de l'impact de la consolidation budgétaire ait conduit de manière significative aux erreurs. Au lieu de cela, l'hypothèse de conditionnement répétée que la crise de la zone euro devrait se stabiliser ou a joué un rôle important, avec une croissance plus faible que prévu dans les pays européens où les écarts de rendement des obligations étaient plus élevés que ce qui avait été supposé. Mais placer ces erreurs dans un contexte historique montre que les erreurs ne sont pas sans précédent: des erreurs de taille similaire ont été faites lors du premier choc des prix du pétrole dans les années 70. En réponse aux difficultés rencontrées dans les prévisions au cours des dernières années et les leçons apprises, l'OCDE et d'autres organisations internationales ont cherché à améliorer leurs techniques et procédures de prévision, afin d'améliorer leur capacité à surveiller l'évolution à court terme et à mieux appréhender les liens internationaux et l'évolution du marché financier
    Keywords: fiscal policy, inflation, forecasting, economic fluctuations, economic outlook, performance économique, prévisions, fluctuations économiques, inflation, politique budgétaire
    JEL: E17 E27 E31 E32 E37 E62 E66 F47 G01
    Date: 2014–03–17
  20. By: M. Ege Yazgan (Istanbul Bilgi University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation targeting (IT) regime. During the low-inflation IT regime, inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels. Overall, IT in Turkey, which was successful in lowering and maintaining inflation at acceptable levels, also appears to be associated with faster convergence in inflation rates at the expense of slower convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey.
    JEL: E31 F41
    Date: 2014–03
  21. By: Atsushi Sekine; Takayuki Tsuruga
    Abstract: Using local projections, this paper investigates eects of commodity price shocks on in ation. We estimate impulse responses of the consumer price indexes (CPIs) to a commodity price shock, based on a monthly panel consisting of 120 countries. Our results from the local projections suggest that the CPIs are almost fully adjusted within a year in response to a commodity price shock and thus eects of commodity price shocks are transitory. We then explore the possibility that the responses of the CPIs may be dependent on the in ation regimes. Based on the smooth transition autoregressive models that use the past in ation rate as a transition variable, we nd that commodity price shocks have more persistent eects on in ation in the low in ation regime than in the high in ation regime. Our analysis also shows that, in the high in ation regime, there are (i) stabilizing roles of the exchange rate on consumer prices; and (ii) large dierences in price responses between developed and developing countries. However, these eects are not detected in the low in ation regime. Our ndings suggest that business cycle factors may play an important role in understanding eects of commodity price shocks on the CPIs.
    Keywords: Labor demand; Commodity prices, in ation, pass-through, local projections, smooth transition autoregressive models
    JEL: E31 E37 Q43
  22. By: Rod Tyers
    Abstract: China’s size limits its capacity to source further growth from exports and so the inevitable turn inward is in progress, as suggested by declining gross flows on its balance of payments relative to its GDP. Thus far, key home policy drivers have been fiscal expansion and public investment, though provincial indebtedness will constrain these in future and growth will be driven by the government’s reform agenda, which includes further industrial reform and “internationalisation”. The short run effects of these domestic policy and external shocks are examined using a model of the Chinese economy that takes explicit account of oligopoly behaviour. The results confirm that further fiscal expansions, even with large public investment components, will not contribute the major share of new growth, but industrial reform in heavy manufacturing and services would reduce costs and foster growth in output, private consumption and modern sector employment. At the same time, while China’s private investment, and hence its overall performance, will be sensitive to the uncertain effects of internationalisation increased nominal exchange rate flexibility would offer a reliable cushion.
    Keywords: China, fiscal policy, industry policy reform, oligopoly, price caps, privatisation, internationalisation, capital account liberalization
    JEL: C54 C68 D58 E17 E62 L13 L43
    Date: 2014–03
  23. By: Anne-Laure Delatte; Julien Fouquau; Richard Portes
    Abstract: Is the pricing of sovereign risk linear during bearish episodes? Or can initial shocks on economic fundamentals be exacerbated by endogenous factors that create nonlinearities? We test for nonlinearities in the sovereign bond market of European peripheral countries during the debt crisis and explain them. Our estimates based on a panel smooth threshold regression model during January 2006 to September 2012 show four main findings: 1) Peripheral sovereign spreads are subject to significant nonlinear dynamics. 2) The deterioration of market conditions for financial names changes the way investors price risk of the sovereigns. 3) The spreads of European peripheral countries have been priced above their historical values, given fundamentals, because of amplification effects. 4) Two CDS indices on financial names unambiguously stand out as leading drivers of these amplification effects.
    JEL: C23 E44 F34 G12 H63
    Date: 2014–03
  24. By: Oleg Itskhoki; Benjamin Moll
    Abstract: We study optimal dynamic Ramsey policies in a standard growth model with financial frictions. For developing countries with low financial wealth, the optimal policy intervention increases labor supply and lowers wages, resulting in higher entrepreneurial profits and faster wealth accumulation. This in turn relaxes borrowing constraints in the future, leading to higher labor productivity and wages. The use of additional policy instruments, such as subsidized credit, may be optimal as well. In the long run, the optimal policy reverses sign. Taking advantage of the tractability of our framework, we extend the model to study its implications for optimal exchange rate and sectoral industrial policies.
    JEL: E60 F40 O0
    Date: 2014–03
  25. By: Ander Perez (Universitat Pompeu Fabra); Ali Ozdagli (Federal Reserve Bank of Boston); Filippo Ippolito (Universitat Pompeu Fabra)
    Abstract: This paper studies the importance of bank lending to firms for the transmission of monetary policy to the real economy. We employ a novel dataset that enables us to measure bank-dependence of firms accurately, and show that the stock prices of bank-dependent firms are significantly more responsive to monetary policy shocks, controlling for firm leverage and financial constraints. We explore the channels through which this effect occurs, and find that bank dependent firms that borrow from financially distressed banks display a much stronger sensitivity to monetary policy shocks. This finding is consistent with an active bank lending channel, according to which the strength of a bank's balance sheets matters for monetary policy transmission. We also show that bank dependent firms that hedge against interest rate risk display a much lower sensitivity to monetary policy shocks, consistent with an interest rate channel that operates via the pass-through of interest rates, associated with the widespread use of floating-rates in bank loans and credit line agreements. Taken together, these results suggest that bank lending to firms plays an important role in the transmission of monetary policy, but that there is significant heterogeneity across bank dependent firms in their reaction to monetary policy shocks.
    Date: 2013
  26. By: Federico M. Bandi; Bernard Perron; Andrea Tamoni; Claudio Tebaldi
    Abstract: We view economic time series as the result of a cascade of shocks occurring at different times and different frequencies (scales). We suggest that economic relations that are found to be elusive when using raw data may hold true for different layers (details) in the cascade of economic shocks. This observation leads to a notion of a scale-specific predictability. Using direct extraction of the details and two-way aggregation, we provide strong evidence of risk compensations in market returns, as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets, at frequencies lower than the business cycle. JEL classification: C22, E32, E44, G12, G17 Keywords: long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis.
    Date: 2014
  27. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Speech to Seattle University Albers School of Business, Seattle, Washington, March 5, 2014
    Date: 2014–03–05
  28. By: Silke Tober
    Abstract: Fiscal austerity has not led to a return of confidence and it is not at all certain that the current crisis strategy can be sustained politically and will eventually succeed. Government bonds of crisis-hit countries have lost their safe asset status and high risk premiums are impairing monetary transmission. Within its mandate the ECB is in principal able to do what it takes to put an end to this crisis, but only if euro area governments tow the same line. A well-designed debt redemption fund could restore confidence and enhance growth by repairing the monetary transmission mechanism and allowing the expansionary monetary policy of the ECB to reach the crisis-hit countries. Combined with additional policies to foster growth and rebalancing in the euro area, a temporary debt redemption fund could be instrumental in engineering an economic turn-around. The paper touches upon the recent OMT-decision of the German Federal Constitutional Court, euro(basket)bonds and eurobills.
    Keywords: Debt Redemption Fund, OMT, safe assets, TARGET2, constitutional court, current account imbalances
    Date: 2014
  29. By: Ron Alquist; Olivier Coibion
    Abstract: Guided by the predictions of a general-equilibrium macroeconomic model with commodity prices, we apply a new factor-based identification strategy to decompose the historical sources of changes in commodity prices and global economic activity. The model yields a factor structure for commodity prices in which the factors have an economic interpretation: one factor captures the combined contribution of all aggregate shocks that affect commodity markets only through general equilibrium effects while other factors represent direct shocks to commodity markets. The model also provides identification conditions to recover the structural interpretation from a factor decomposition of commodity prices. We apply these methods to a cross-section of real commodity prices since 1968. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis indicates that commodity-related shocks have contributed only modestly to global business cycle fluctuations.
    JEL: E3 F4
    Date: 2014–03
  30. By: Kitov, Ivan
    Abstract: Approximately two years ago we presented results of price modeling and extensive statistical analysis for share prices of five banks: Bank of America (BAC), Franklin Resources (BEN), Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS). Using monthly closing prices (adjusted for splits and dividends) as a proxy to stock prices, we estimated the best fit (LSQ) quantitative price models based on the decomposition into two defining consumer price indices selected from a large set of various consumer price indices (CPIs). It was found that there are two pairs of similar price models BAC/MS and GS/JPM, with a standalone model for BEN. Using five estimated models we formulated a procedure for selection the company with the highest return depending on the future evolution of defining CPIs. Here, we revisit the original models with new data for the period between October 2012 and February 2014. All revised models are practically the same as the original ones that validates our approach to price modeling. For the pair Bank of America and Morgan Stanley, we correctly predicted that both prices would rise synchronously (the observed return since October 2012 is approximately 75%) as driven by a higher rate of increase in the price index of owner’s rent of primary residence and rent of shelter. Goldman Sachs and JPMorgan Chase have risen by ~40% in line with a higher rate of growth in the index of food and beverages relative to two rent related indices. Franklin Resources has risen by only 25% as defined by a different pair of CPIs. All five models are robust and do not demonstrate any signs of upcoming failure in the near future. They may be used for stock market analysis.
    Keywords: share price, modeling, CPI, prediction, USA, bankruptcy
    JEL: E44 G1 G2 G3
    Date: 2014–03–22
  31. By: Paul D. McNelis (Fordham University and Hong Kong Institute for Monetary Research)
    Abstract: This paper examines the options of small open economies in Eastern Europe pegged to the Euro, in a time of crisis. Specifically, should Bosnia and Herzegovina, Bulgaria, Latvia and Lithuania move to full Euro area accession, as Estonia, Slovakia, and Slovenia have done, or follow the examples of Poland, the Czech Republic, and Hungary and opt out of the Euro area? This paper argues that going forward to full monetary union offers benefits over a pure fixed exchange-rate regime. Specifically, the experience of Hong Kong at the time of the Asian crisis in the late 1990's, illustrates the benefits of a credible currency link during a time of crisis.
    JEL: E52 E62 F41
    Date: 2014–03
  32. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: We study how financial market participants process news from four major central banks—the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed), using a novel survey of 450 financial market participants from around the world. Our results indicate that, first, respondents rely more on newswire services to learn about central bank events than on self-monitoring. In general, the Fed is watched most closely, followed by the ECB, the BoE, and the BoJ. Second, we estimate ordered probit models to relate the two different types of central bank watching to the perceived importance of central bank events and the reliability of media coverage. Our results indicate that financial agents have to rely on newswire services to appropriately cope with a globalised market environment and digest news. However, when respondents consider an event particularly important, they tend to self-monitor it, especially when the event is taking place in their home region.
    Keywords: Central Bank Communication, Financial Market Participants, Information Processing, Interest Rate Decisions, Newswire Services, Reliability, Survey
    JEL: D83 E52 E58
    Date: 2014
  33. By: Dirk G Baur (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Isaac Miyakawa (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: In this paper we analyze the link between stock market performance and macroe conomic performance for a large number of countries. We study the short-run and long-run relationships and find that stock market returns do not coherently predict future macroeconomic changes for the majority of countries, i.e. the estimates vary considerably both across prediction horizons and across countries. Moreover, we test whether the financial and real economy dynamic linkages increased in the financial crisis in 2008 implying “macro-financial” contagion. The crisis-specific analysis of macro-financial linkages broadens the perspective of existing studies of financial contagion. Our findings indicate that the stock market does not merely reflect future economic conditions but also influences them justifying policy responses as witnessed during the 2008 financial and economic crisis.
    Keywords: global stock markets; real economic activity; predictive regressions; contagion; financial crises; co-integration
    JEL: C22 C32 E44 G01 G14 G15 G18
    Date: 2014–01–01
  34. By: Loïc Berger
    Abstract: This letter develops a set of simple conditions under which an individual iswilling to save an extra amount of money due to the presence of ambiguity onits second period wealth. This extra precautionary saving motive is naturallyassociated to the notion of ambiguity prudence.
    Keywords: ambiguity aversion; non-expected utility; uncertainty; saving; prudence
    JEL: D81 D91 E21
    Date: 2013–11
  35. By: Gustav A. Horn; Alexander Herzog-Stein; Ansgar Rannenberg; Katja Rietzler; Silke Tober; Rudolf Zwiener
    Abstract: Effectively ending the crisis in the euro area remains the key policy challenge in 2014. As monetary policy has exhausted its conventional options, fiscal policy is called upon to provide an expansionary impulse by raising public investment. The high level of risk premiums in the crisis-hit countries continues to impair monetary policy transmission. If governments agreed on a temporary debt redemption fund, the ECB could engage in large-scale unconventional policy measures such government bond purchases to cancel out sovereign yield differentials in the euro area. Monetary policy could then stimulate the economy in the crisis-hit countries.The coalition agreement is pointing in the right direction regarding the labor market. The pension proposals, however, are patchwork and unable to solve the fundamental problem of an excessive lowering of the pension level and the concomittant higher risk of old-age poverty.
    Date: 2014
  36. By: Campbell, John Y.; Cocco, João F.
    Abstract: This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Heterogeneity in borrowers' labor income risk is important for explaining the higher default rates on adjustable-rate mortgages during the recent US housing downturn, and the variation in mortgage premia with the level of interest rates. --
    Keywords: household finance,loan to value ratio,loan to income ratio,mortgage affordability,negative home equity,mortgage premia
    JEL: G21 E21
    Date: 2014
  37. By: Frederic Teulon; Zied Ftiti; Khaled Guesmi
    Abstract: The public debt crisis threatening the survival of the euro area. This crisis could appear as a byproduct of the global financial crisis. In fact, it refers to structural problems specific to Europe and the question of optimal currency area which has been in place since 1999. The sovereign debt crisis highlights a number of inconsistencies and difficulties faced by the rescue measures in European countries "devices". This crisis has its roots in the European construction itself, a Stability Pact that guaranteed nothing in the debt sustainability in the absence of political solutions and with enlargements precipitates. It opens the way to several options: issuing eurobonds, fiscal federalism or separation of the euro area.
    Keywords: Public debt; Fiscal deficit; Default risk; EMU.
    JEL: H5 H6 E6
    Date: 2014–02–25
  38. By: Gete, Pedro; Tiernan, Natalie
    Abstract: We propose a quantitative model of lending standards with two reasons for inefficient credit: lenders' moral hazard from deposit insurance or government guarantees, and imperfect information about the persistence of asset price growth, which generates incorrect but rational beliefs in the lenders. We calibrate the model to match recent credit boom-bust episodes. Then we study which patterns of real estate price growth and banks' beliefs could serve as early warning indicators of a crisis. Finally, we propose a Value-at-Risk (VaR) rule to implement the capital requirements. The VaR framework ensures that the probability of banks not having enough equity to cover their losses is maintained at a certain level. Capital requirements should be state-contingent and lean against lenders' beliefs by tightening after periods of asset price growth. However, the relationship between asset price growth and financial risk is not monotone and this should be integrated in the setting of the capital requirements and early warning indicators.
    Keywords: Lending Standards, Capital Requirements, Leverage Rules, VaR, Basel III
    JEL: E44 G2 G21 G28
    Date: 2014–03
  39. By: Emmanuel Saez (UC Berkeley); Pascal Michaillat (London School of Economics)
    Abstract: This paper presents a parsimonious equilibrium business cycle model with trade frictions in the product and labor markets. The model features unemployment and unsold production and its general equilibrium can be represented very simply: as the intersection of an aggregate supply and an aggregate demand, with product market tightness acting as a price. The aggregate supply represents the expected amount of sales by firms given product market tightness and optimal hiring on the labor market. The aggregate demand represents optimal product consumption given product market tightness--consumers can also spend their income on an unproduced good. We use a search-andmatching structure to realistically represent trade frictions in the product and labor markets. In such a structure, it is not price or wage but market tightness that equalizes supply to demand. In fact, the frictions create situations of bilateral monopoly in price and wage setting that make price and wage indeterminate. To resolve this indeterminacy, we take price and wage as parameters, thus disconnecting price and wage determination from our analysis. Since the equilibrium representation is very transparent and tractable, we are able to obtain a broad range of comparative statics with respect to demand and supply shocks. The model is also suited to think about inventories, labor hoarding, income and wealth inequality. It can be extended to a dynamic environment.
    Date: 2013
  40. By: Janos Varga; Werner Roeger; Jan in 't Veld
    Abstract: This paper develops a semi-endogenous growth model for analysing the intertemporal effects of structural reforms in Southern European countries (Italy, Spain, Portugal and Greece). The model follows the product variety paradigm in a semi-endogenous setting, and includes a disaggregation of labour into different skill groups. We use a comprehensive set of structural indicators in order to calibrate the model to important macroeconomic ratios and levels of productivity and employment. Our results show that structural reforms yield significant economic gains in the medium and long run. The results point to the importance of product market reforms and labour market related education and tax reforms as the most promising areas of structural policy interventions. This paper also argues for placing more emphasis on education policy which is key in upgrading the labour force, especially in these countries where the share of low skilled labour is among the highest in the euro area.
    JEL: E10 O20 O30 O41
    Date: 2013–12
  41. By: Martin Larch; Kristin Magnusson Bernard; Balint Tatar
    Abstract: What is needed for a country to successfully adjust after a crisis episode is a subject of much debate including in the euro area where four out of seventeen countries were in a full economic adjustment programme by end 2013. We identify adjustment needs by a country's decision to approach the IMF for official assistance. We then investigate the factors conducive to successful exit from official assistance during more than 170 adjustment episodes by means of a panel regression framework. We define success as a resumption of growth and a significant debt reduction. Our econometric results suggest hard work, i.e. policy action such as fiscal adjustment and decisive financial sector repair, play an important role for the probability of a successful exit. We also find that more stringent conditionality, especially in the structural area, increases the chances of success. Supportive external conditions further enhance the prospects for a durable and successful exit. These results also hold up when success is instead defined as the ability of the country to finance itself on capital markets.
    JEL: E61 F33 G01 H81
    Date: 2014–02
  42. By: Armagan Tuna Aktuna-Gunes (Centre d'Economie de la Sorbonne - Paris School of Economics); Christophe Starzec (Centre d'Economie de la Sorbonne - Paris School of Economics); François Gardes (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We use the demand system approach to estimate the size of informal economy in Turkey following the methodology based on the analysis of the individual consumption behaviour proposed by Pissarides, Weber [1989], Lyssiotou et al. [2004] and Fortin et al. [2009]. We extend this method by taking into account both the monetary expenditures and time spent on domestic activities. The necessary information of money and time inputs in consumption on the household's level is obtained by a statistical match of the Turkish Family Budget and Time Use surveys [2006]. As expected, the estimated model size of the informal economy in Turkey using the full (time plus money) expenditure is higher than those obtained by only monetary expenditure approach (in average 40.6% and 33.5% of GDP for self employers and 20.7% and 14.1% of GDP for wage-earners respectively) and also higher than that obtained by more conventional macroeconomic methods (35.1%).
    Keywords: Informal economy, complete demand system, full expenditures.
    JEL: D01 D12 E26 C81
    Date: 2014–03
  43. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Keynes’s essay “Relative Movements of Real Wages and Output” is widely believed to be an important amendment to his General Theory because, in this essay, Keynes relaxed his core assumption of decreasing marginal returns to labour. Non-decreasing marginal returns, however, do not sit comfortably with the prime innovation of the General Theory: the Principle of Effective Demand. This will be demonstrated by performing – for the first time in the literature – numerical simulations with Keynes’s Aggregate-Demand-Aggregate-Supply (D/Z) model. The view that Keynes’s 1939 essay constitutes an important amendment to his General Theory thus has to be put into perspective.
    Keywords: Keynes, effective demand, D/Z model, marginal returns to labour
    JEL: B31 E12
    Date: 2014–03
  44. By: Bhat, Shabir A; Khan, Riyaz A
    Abstract: Government Policy Ecosystem is central to the entrepreneurship development in any economy and generally includes Policies relating to government spending, taxation and regulation etc. There are two distinct channels through which government Policy ecosystem impacts the rate of entrepreneurship; the first is through its impact on the quantity and quality of inputs going into the entrepreneurial process and the second is through the impact of Policy on the institutional structure that determines the rules of the game under which the entrepreneurial process unfolds. The present study aims to assess the ‘Government Policy Ecosystem’ existing in the Jammu & Kashmir State towards the overall entrepreneurship development in the Micro and Small Enterprises (MSEs) Sector. The study is based on the response of the representative respondents {existing MSEs Sector entrepreneurs from all the three regions (Jammu, Kashmir and Ladakh) of the state} against the parameters: Policy focus and nature; Taxation and other regulatory Policies; and Policy implementation structure. Findings indicate that to the extent the Policy implementation structure is made proper and more coordination is brought in among the EPAs in implementing the state polIcies , there will be a remarkable entrepreneurship development in the MSEs Sector of the State. Towards the end of the study for the robust entrepreneurship development in Micro and Small Enterprises Sector of the State, on the basis of the findings, certain suggestions have been put forth for the improvement in the existing ‘Government Policy Ecosystem’ for MSEs Sector.
    Keywords: Government Policy Ecosystem, Micro and Small Enterprises Sector (MSEs), Entrepreneurship Development, and Entrepreneurship Promotional Agencies (EPAs).
    JEL: E6
    Date: 2014–03–14
  45. By: Rasmus Lentz
    Abstract: In this paper I explore optimal employment contract design in a random search framework, where workers search on and off the job for employment opportunities similar to that of Lentz (2010) and Bagger and Lentz (2013). The worker determines the frequency by which employment opportunities arrive through a costly choice of search intensity, which is unobserved by the firm and cannot be directly contracted upon. Firms differ in productivity by which they employ workers. Firms compete over workers in terms of utility promises in a fashion otherwise similar to that of Postel-Vinay and Robin (2002). As in Burdett and Coles (2003) and Burdett and Coles (2010), optimal tenure conditional contracts are shown to be back loaded to discourage the worker from generating outside competitive pressure. The analysis establishes existence, uniqueness and provides characterization of the core mechanism. The paper applies the framework to the analysis of firm provided general human capital training. It is shown that more productive firms provide more training and pay higher wages.
    JEL: E24 J01 J24 J31 J33 J41 J6 J63 J64
    Date: 2014–03
  46. By: Daniel Farhat (Department of Economics, University of Otago, New Zealand)
    Abstract: This study engineers a household sector where individuals process macroeconomic information to reproduce consumption spending patterns in New Zealand. To do this, heterogeneous artificial neural networks (ANNs) are trained to forecast changes in consumption. In contrast to existing literature, results suggest that there exists a trained ANN that significantly outperforms a linear econometric model at out-of-sample forecasting. To improve the accuracy of ANNs using only in-sample information, methods for combining private knowledge into social knowledge are explored. For one type of ANN, relying on an expert is beneficial. For most ANN structures, weighting an individual's forecast according to how frequently that individual's ANN is a top performer during in-sample training produces more accurate social forecasts. By focusing only on recent periods, considering the severity of an individual's errors in weighting their forecast is also beneficial. Possible avenues for incorporating ANN structures into artificial social simulation models of consumption are discussed.
    Keywords: Artificial neural networks, forecasting, aggregate consumption, social simulation
    JEL: C45 E17 E27
    Date: 2014–03
  47. 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
  48. By: Julien Martin (Université de Montréal - UdeM (CANADA) - Université de Montréal - UdeM (CANADA)); Florian Mayneris (UCL - Université Catholique de Louvain - Université Catholique de Louvain (UCL) - Belgique, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, IRES - Institut de recherches économiques et sociales - Université Catholique de Louvain (UCL) - Belgique)
    Abstract: We develop a new methodology to identify high-end variety exporters in French fi rm level data. We show that they do not export to many more countries, but they export to more distant ones. This comes with a greater geographic diversi cation of their aggregate exports. In contrast to low-end export(er)s, we find that distance has almost no eff ect on high-end variety export(er)s. We also show that high-end export(er)s are more sensitive to the average income of the destination country. Because of this di erent sensitivity to gravity variables at the micro-level, specializing in the production of high-end varieties has two macroeconomic implications for countries. First, the sources of a country's aggregate exports volatility are modi ed. The higher sensitivity to per capita income increases the sensitivity of high-end variety exports to destination-speci c demand shocks, and thus their volatility on a given market. However, their lower sensitivity to distance allows for a greater geographic diversi cation of their exports, which in turn reduces aggregate volatility through a portfolio e ect. Second, the lower sensitivity to distance allows highend varieties to bene t more from demand growth, especially when it arises in distant markets.
    Keywords: Vertical di erentiation ; Gravity ; Distance ; Volatility
    Date: 2013–10
  49. By: Florian Wöhlbier; Caterina Astarita; Gilles Mourre
    Abstract: The paper examines potential challenges arising at Member State level from the need and scope for either consolidating on the revenue side or shifting taxes away from labour. It uses a systematic indicator-based screening to identify Member States that may face a challenge in each of these two policy areas. The first quantitative screening is applied to identify Member States that have a need and room for shifting taxation away from labour to other tax bases. The analysis of labour taxation looks at overall labour taxation and at taxation of two specific groups considered to be rather responsive to labour supply incentives, namely low-skilled workers and second-earners. A second screening aims at identifying at Member States that might consider using taxation – in addition to expenditure control – to consolidate their public finances and steer them onto a sustainable path. This screening looks into the potential need for substantial fiscal consolidation and the availability of 'tax space'. Robustness checks are carried out to test how far the screening results depend on the screening approach. These checks overall confirm the outcome of the main screening approach. However, both screenings need to be complemented with in-depth country analysis before being able to draw firm policy conclusions.
    JEL: E62 H2 J2
    Date: 2014–02
  50. By: Farzin, Y. Hossein; Wendner, Ronald
    Abstract: The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition paths of most countries’ saving rates exhibit a statistically significant hump-shaped pattern. Prior literature shows that CES production may imply a hump-shaped pattern of the saving rate (Goméz, 2008). However, the implied magnitude of the hump falls short of what is seen in empirical data. We introduce two non-standard features of preferences into a neoclassical growth model with CES production: hyperbolic discounting and short planning horizons. We show that, in contrast to the commonly accepted argument, in general (except for the special case of logarithmic utility) a model with hyperbolic discounting is not observationally equivalent to one with exponential discounting. We also show that our framework implies a hump-shaped saving rate dynamics that is consistent with empirical evidence. Hyperbolic discounting turns out to be a major factor explaining the magnitude of the hump of the saving rate path. Numerical simulations employing a generalized class of hyperbolic discount functions, which we term regular discount functions, support the results.
    Keywords: Saving rate dynamics, non-monotonic transition path, hyperbolic discounting, regular discounting, short-term planning, neoclassical growth model
    JEL: D91 E21 O40
    Date: 2014–03–19
  51. By: Arora, Vipin
    Abstract: The short-term economic benefits of oil and gas production from shale for the U.S. economy have been widely discussed, but the long-term effects remain unclear. These long-run impacts likely depend upon the degree to which such oil and gas production can impact growth in capital per worker or technological progress throughout the economy. Oil or gas production from shale can lead to economic growth through economy-wide increases in capital per worker directly through investment in the oil and gas extraction sector and along the supply chain. Alternatively, the availability of low cost natural gas in large quantities may lead to replacement or additions to capital stock outside of oil and gas extraction and related industries. Oil and gas production can lead to economy-wide technology gains directly through the application of technologies used in extraction and related activities in other sectors. There is much greater upside and uncertainty, however, surrounding if such production can lead to technological growth in other sectors indirectly. Are there currently important and productive technologies not being used or applied that become plausible because of lower-cost natural gas? Will there be transformative technologies developed for use with lower-cost natural gas that currently do not exist? And might each of these individually lead to other technologies that currently do not exist?
    Keywords: Productivity; shale; economic growth; oil and gas
    JEL: E00 O40 Q33 Q43
    Date: 2014–03–24
  52. By: Dreger, Christian (BOFIT); Wang, Tongsan (BOFIT); Zhang, Yanqun (BOFIT)
    Abstract: Capital investment and exports have driven China’s remarkable economic growth for decades, but recent trends have put pressure on the government to move to a more consumption-driven model of growth. Unfortunately, China’s institutional framework does little at the moment to spur household consumption. While the country’s weak social security setup and highly regulated financial markets are routinely cited as disincentives to private consumption, the role of the hukou household registration system in depressing consumption gets less attention. Controlling for income levels on datasets from 2002 and 2007, we show the average propensity to consume is significantly lower for internal migrants to cities. Official figures suggest that China in 2013 had about 260 million internal migrants. These individuals are often separated from their families for long periods and denied access to public services in the cities where they work. The government’s current urbanization strategy calls for increasing migrant populations in cities, which, in the absence of hukou reform, is likely to further dampen consumption.
    Keywords: Chinese private consumption; urbanization strategy; hukou system
    JEL: E21 O15 R23
    Date: 2014–02–17
  53. By: Matteo Barigozzi; Marco Lippi; Matteo Luciani
    Keywords: dynamic factor models for I (1) variables; cointegration; granger representation theorem
    JEL: C00 C01 E00
    Date: 2014–02
  54. By: Schlicht, Ekkehart
    Abstract: This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor’s technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizsäcker (1966, 1966b). The hybrid model so obtained accounts for balanced growth in a way that appears less arbitrary than the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions.
    Keywords: directed technical change; directed technological change; bias in innovation; technical progress function; neoclassical production function; Harrod neutrality; Hicks neutrality; Cambridge theory of distribution; marginal productivity theory; Kaldor; Kennedy; von Weizsäcker; Solow model
    JEL: O30 O40 E12 E13 E25 B31 B59
    Date: 2014–03–17
  55. By: Jean Messiha; Bruno-Laurent Moschetto; Frederic Teulon
    Abstract: The two major banks in Cyprus - Bank of Cyprus and Laiki Popular Bank - have lost more than 4 billion EUR because of their exposure to the Greek bond market. In this paper, we look at how the European Union has responded to banking and financial problems that have affected Cyprus since the end of 2011. Although the financial crisis is minor in absolute terms, it showed that even the failure of a small country can generate systemic risk throughout the euro area. The rescue plan drawn up by the European Commission, the European Central Bank and the IMF (Troika) was adopted later. Taxation of deposits and the establishment of exchange controls is an unprecedented situation that could affect investor confidence in the euro area. Furthermore the tutelage of Cyprus gives authorities very small margins of action and may jeopardize the future of this country.
    Keywords: Crise financière, Chypre, Dette publique, Mécanisme Européen de Solidarité, Zone euro.
    JEL: E50 G15 G21
    Date: 2014–02–25
  56. By: Jeroen van den Bergh; Miklós Antal
    Abstract: Proposed alternatives to GDP as a measure of social welfare or human progress are briefly evaluated. Four main categories are considered, namely ISEW and GPI based on corrections of GDP, sustainable or green(ed) GDP, genuine savings/investments and composite indexes. All these alternatives turn out to suffer from various shortcomings. Nevertheless, several of them represent a considerable improvement over GDP information in approximating social welfare. This gives support to the idea that we should not wait to give less importance and attention to GDP (per capita) information in public decision-making until a perfect alternative indicator is available.
    Keywords: Composite indicators; economic growth; externalities; genuine savings; green GDP; happiness; informal sector; information failure; ISEW; status goods; sustainable income
    JEL: D60 E01 O11
    Date: 2014–03
  57. By: Bardt, Hubertus
    Abstract: Im Rahmen der aktuellen deutschen und europäischen Diskussionen um die Reform der Förderung erneuerbarer Energien wird vor allem auch die Besondere Ausgleichsregelung infrage gestellt, mit der bisher stark stromintensive Unternehmen weitgehend von der EEG-Umlage entlastet werden. Dies wird in der deutschen Politik diskutiert, aber auch von der Europäischen Kommission im Rahmen eines Beihilfeverfahrens sowie im Rahmen des Entwurfs für neue Beihilferegeln bedroht. Eine Abschaffung oder weitgehende Einschränkung der Besonderen Ausgleichsregelung oder vergleichbare Mehrbelastungen würde die Investitionsbereitschaft stromintensiver Unternehmen in Deutschland erheblich einschränken. Schon heute sind eine Desinvestition energieintensiver Unternehmen in Deutschland und ein Ausbau der Investitionen im Ausland zu beobachten. Die aktuelle Energiepolitik führt zu Investitionsattentismus und droht weiter Verlagerungen nach sich zu ziehen. Dies hätte negative Folgen für ganze Wertschöpfungsketten und die Innovationsfähigkeit nachgelagerter Branchen. --
    Keywords: Erneuerbare Energien,Industrie,Strommarkt
    JEL: E29 Q48 Q52
    Date: 2013
  58. By: Daniel Farhat (Department of Economics, University of Otago, New Zealand)
    Abstract: This study explores the value of information transmission in training heterogeneous Artificial Neural Network (ANN) models to identify patterns in the growth rate of aggregate per-capita consumption spending in New Zealand. A tier structure is used to model how information passes from one ANN to another. A group of 'tier 1' ANNs are first trained to identify consumption patterns using economic data. ANNs in subsequent tiers are also trained to identify consumption patterns, but they use the patterns constructed by ANNs trained in the preceding tier (secondary information) as inputs. The model's results suggest that it is possible for ANNs downstream to outperform ANNs trained using empirical data directly on average. This result, however, varies from time period to time period. Increasing access to secondary information is shown to increase the similarity of heterogeneous predictions by ANNs in lower tiers, but not substantially affect average accuracy.
    Keywords: Artificial neural networks, aggregate consumption patterns, information transmission
    JEL: C45 C63 E27
    Date: 2014–03
  59. By: d'Albis, Hippolyte; Augeraud-Véron, Emmanuelle; Hupkes, Herman Jan
    Abstract: This paper proposes conditions for the existence and uniqueness of solutions to systems of linear differential or algebraic equations with delays or advances, in which some variables may be non-predetermined. These conditions represent the counterpart to the Blanchard and Kahn conditions for the functional equations under consideration. To illustrate the mathematical results, applications to an overlapping generations model and a time-to-build model are developed.
    Keywords: Delay Differential Equations, Advance Differential Equations, Existence, Indeterminacy
    JEL: C61 C62 E13
    Date: 2014–03–25
  60. By: Kakarot-Handtke, Egmont
    Abstract: Marxian economics and standard economics are widely different yet they share a central weakness: the respective profit theories are demonstrably false – each one in its own characteristic way. Roughly speaking, Marx tried to explain profit by objective factors while standard economics cites subjective factors. For different reasons, neither route led to satisfactory results. The conclusion is straightforward: one has to do better. The conceptual consequence is to first reconstruct the profit theory from a solid basis with no regard to either Marxian or standard premises. In order to succeed, objective-structural axioms have to be taken as formal point of departure.
    Keywords: new framework of concepts; structure-centric; axiom set; profit theory; surplus value; distribution; real shares
    JEL: B59 E11 E25
    Date: 2014–03–26
  61. By: Lukianenko, Dmytro; Chuzhykov, Viktor; Woźniak, Michał Gabriel; Antoniuk, Larysa; Bal-Woźniak, Teresa; Bolonek, Ryszarda; Dobija, Mieczysław; Fedirko, Natalia; Fedirko, Oleksandr; Firszt, Dariusz; Honcharuk, Andrii; Ilnytskyi, Denys; Jabłoński, Łukasz; Kaleniuk, Iryna; Kaliszuk, Ewa; Kleer, Jerzy; Olefir, Anna; Panchenko, Yevhen; Poruchnyk, Anatolii; Satsyk, Volodymyr; Savchuk, Volodymyr; Stępień, Kinga; Stolyarchuk, Yaroslava; Tatarenko, Nataliya; Tokarski, Tomasz; Tsyhankova, Tetiana
    Abstract: The all-round aspects of bilateral relations are considered in the common Ukrainian-Polish monograph. Authors uncover important features of social-andeconomic systems convergence under conditions of globalization and European integration, as well as the further transformation of Central- and East European countries. The focus of the monograph is to analyze the characteristic features of the evolution of Polish and Ukrainian economic models. The research interest of the authors of the monograph has been concentrated on the diversification of bilateral economic relations and subject to the fundamental objective – the co-integration of Ukraine and the EU, as well as the possibility of adapting the Polish experience of systemic transformation of the national social and economic model. The monograph is addressed to scientists, politicians, public activists, diplomats, international experts, and to all those, who are not indifferent to the European prospect of Ukraine.
    Keywords: Ukraine, Poland, EU, integration, economic systems, economic models, convergence, globalization, policies, information resourses, systemic transformation
    JEL: B0 E0 F0 F59 O10 P20
    Date: 2013–04–29
  62. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. In a F-test of the pooling assumptions suggests that Greece, Ireland and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
    Keywords: euro area financial crisis, sovereign spreads, panel data tests
    JEL: C33 G12 E63
    Date: 2014–03
  63. By: Baptiste Françon (Centre d'Economie de la Sorbonne)
    Abstract: This paper proposes an empirical analysis of the declining support for the German Social Democratic Party (SPD) during Schröder government's second term of office, which was marked by major reforms in the fields of unemployment insurance and labour market policy (Hartz reforms). Drawing on a panel of West Germans, we provide evidence that this disaffection was strongly related to a worker's occupation and that it involved electoral backlash from core blue-collar constituencies of the SPD. In comparison, the impact of other socio-economic characteristics such as the labour market status or the income was less pronounced. We further show that discontent grew stronger among occupations where the risk of unemployment was more prevalent. This suggests that opposition to specific measures that weakened status-securing principles of the unemployment insurance substantially drove electoral disaffection with the SPD during this period.
    Keywords: Political economy, economics of voting, social policy preferences, unemployment insurance, social-democracy, Germany.
    JEL: D01 D12 E26 C81
    Date: 2013–03

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