nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒04‒05
sixty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macroprudential Regulation and the Role of Monetary Policy By Tayler, William; Zilberman, Roy
  2. Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy By Burgert, Matthias; Schmidt, Sebastian
  3. Fiscal activism and the zero nominal interest rate bound By Schmidt, Sebastian
  4. Spillovers, capital flows and prudential regulation in small open economies By Paul Castillo; Cesar Carrera; Marco Ortiz; Hugo Vega
  5. Inflation expectation dynamics:the role of past, present and forward looking information By Paul Hubert; Harun Mirza
  6. Keynesian inefficiency and optimal policy: a new monetarist approach By Williamson, Stephen D.
  7. Industrial Development, Polarisation, and Fiscal Policy in an Underemployment Economy By Nakajima, Tetsuya
  8. Scarce collateral, the term premium, and quantitative easing By Williamson, Stephen D.
  9. Inflation securities valuation with macroeconomic-based no-arbitrage dynamics By Gabriele Sarais; Damiano Brigo
  10. Discretionary fiscal policy and economic activity in Greece By Athanasios O. Tagkalakis
  11. Systematic policy and forward guidance By Plosser, Charles I.
  12. The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR By Arratibel, Olga; Michaelis, Henrike
  13. An Empirical Study of Trade Dynamics in the Fed Funds Market By Afonso, Gara M.; Lagos, Ricardo
  14. "A New Approach to Explaining the Value of Colonial Paper Money: Evidence from New Jersey, 1709-1775" By FARLEY GRUBB
  15. Search Frictions, Credit Market Liquidity, and Net Interest Margin Cyclicality By Beaubrun-Diant, Kevin; Tripier, Fabien
  16. Search-Based Endogenous Illiquidity and the Macroeconomy By Wei Cui; Sören Radde
  17. Independent within—not of—Government: The Emergence of the Federal Reserve as a Modern Central Bank By Humpage, Owen F.
  18. Diagnostic de la politique monétaire en Rép. Dém. Congo – Approche par l’Equilibre Général Dynamique Stochastique By Tsasa Vangu, Jean-Paul Kimbambu
  19. Credit markets, limited commitment, and government debt By Williamson, Stephen D.; Carapella, Francesca
  20. Financial conditions index and credit supply shocks for the euro area By Darracq Pariès, Matthieu; Maurin, Laurent; Moccero, Diego
  21. Cross-border production chains and business cycle co-movement between Central and Eastern European countries and euro area member states By Iossifov, Plamen
  22. External and macroeconomic adjustment in the larger euro area countries By Angelini, Elena; Ca' Zorzi, Michele; Forster, Katrin
  23. Changes in GDP’s measurement error volatility and response of the monetary policy rate: two approaches By Julian A. Parra-Polania; Carmiña O. Vargas
  24. Household risk management and actual mortgage choice in the euro area By Ehrmann, Michael; Ziegelmeyer, Michael
  25. Nonlinearities in sovereign risk pricing the role of cds index contracts By Anne Laure Delatte
  26. Optimal Capital Taxation and Consumer Uncertainty By Ryan Chahrour; Justin Svec
  27. Search-Based Models of Money and Finance: An Integrated Approach By Wright, Randall; Trejos, Alberto
  28. Assessing fiscal sustainability in some selected countries By Cruz-Rodríguez, Alexis
  29. Trade Dynamics in the Market for Federal Funds By Afonso, Gara M.; Lagos, Ricardo
  30. Micro and macro analysis on household income, wealth and saving in the euro area By Honkkila, Juha; Kavonius, Ilja Kristian
  31. Social Security and the Interactions Between Aggregate and Idiosyncratic Risk By Daniel Harenberg; Alexander Ludwig
  32. Market exposure and endogenous firm volatility over the business cycle By Decker, Ryan; D'Erasmo, Pablo; Moscoso Boedo, Herman J.
  33. Assessing the variability of indirect tax elasticity in Greece By Athanasios O. Tagkalakis
  34. Tax Reduction Policies of the Productive Sector and Its Impacts on Brazilian Economy By Costa Junior, Celso José; Sampaio, Armando Vaz
  35. Pricing of retail deposits in Croatia: including the premium for country default By Vidakovic, Neven
  36. Modelling a Latent Daily Tourism Financial Conditions Index By Chang, Chia-Lin
  37. Global corporate bond issuance: what role for US quantitative easing? By Lo Duca, Marco; Nicoletti, Giulio; Vidal Martinez, Ariadna
  38. Two views of international monetary policy coordination By Bullard, James B.
  39. The Foley Liquidity / Profit-Rate Cycle Model Reconsidered By Moreira, Helmar Nunes; Araujo, Ricardo Azevedo; Flaschel, Peter
  40. Transmission effects in the presence of structural breaks: evidence from south-eastern European countries By Minoas Koukouritakis; Athanasios P. Papadopoulos; Andreas Yannopoulos
  41. Noncausal Bayesian Vector Autoregression By Markku Lanne; Jani Luoto
  42. Anchoring the yield curve using survey expectations By Altavilla, Carlo; Giacomini, Raffaella; Ragusa, Giuseppe
  43. Does the federal reserve staff still beat private forecasters? By El-Shagi, Makram; Giesen, Sebastian; Jung, Alexander
  44. Stress Testing the Private Household Sector Using Microdata By Kamil Galuscak; Petr Hlavac; Petr Jakubik
  45. Déficit, croissance et bien-être intergénérationnel : Comment réformer les pensions au Luxembourg ? By Muriel Bouchet; Luca Marchiori; Olivier Pierrard
  46. Reduced-rank time-varying vector autoregressions By Joris de Wind; Luca Gambetti
  47. Misallocation, informality, and human capital: understanding the role of institutions By D'Erasmo, Pablo; Moscoso Boedo, Herman J.; Senkal, Asli
  48. A high frequency assessment of the ECB securities markets programme By Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
  49. Using Social Media to Measure Labor Market Flows By Dolan Antenucci; Michael Cafarella; Margaret C. Levenstein; Christopher Ré; Matthew D. Shapiro
  50. Time variation in the dynamic effects of unanticipated changes in tax policy By Joris de Wind
  51. How the Supply of Labor Responds to Changes in Fiscal Policy By Congressional Budget Office
  52. Evaluating the Links Between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic By Tomas Konecny; Oxana Babecka Kucharcukova
  53. 2007-2013: This is what the indicator told us ? Evaluating the performance of real-time nowcasts from a dynamic factor model By Muriel Nguiffo-Boyom
  54. Is the Slovak Economy Doing Well? A Twin Deficit Growth Approach By Elias Soukiazis; Eva Muchova; Pedro A. Cerqueira
  55. Intellectual Property Rights, the Pool of Knowledge, and Innovation By Joseph E. Stiglitz
  56. Debt, Taxes, and Liquidity By Patrick Bolton; Hui Chen; Neng Wang
  57. A note on risk sharing against idiosyncratic shocks and geographic mobility in Japan By Yamada, Tomoaki
  58. Productivity trends from 1890 to 2012 in advanced countries By Bergeaud, A.; Cette, G.; Lecat, R.
  59. Monitoring the European CDS Market through Networks: Implications for Contagion Risks. By Clerc, L.; Gabrieli, S.; Kern, S.; El Omari, Y.
  60. Reforming EU economic governance: is ‘more’ any better? By Renaud Thillaye; Ludek Kouba; Andreas Sachs
  61. Institutional Reform Design: А New Chapter of Economics By Polterovich, Victor
  62. Total Factor Productivity Estimation in Peru: Primal and Dual Approaches By Nikita Céspedes; Nelson Ramírez-Rondán
  63. Natural resources and the spread of HIV/AIDS: curse or blessing? By Olivier C. Sterck
  64. Does ICT remain a powerful engine of growth? By Cette, G.
  65. From Monetary Theory of Production to Culture-Nature Life Process:Feminist-Institutional Elaborations of Social Provisioning By Todorova, Zdravka

  1. By: Tayler, William; Zilberman, Roy
    Abstract: This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
    Keywords: Bank Capital Regulation; Macroprudential Policy; Basel III; Monetary Policy; Borrowing Cost Channel
    JEL: E32 E44 E52 E58 G28
    Date: 2014–04
  2. By: Burgert, Matthias; Schmidt, Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. JEL Classification: E31, E52, E62, E63, D11
    Keywords: deficit spending, discretion, monetary and fiscal policy, new Keynesian model, zero nominal interest rate bound
    Date: 2013–12
  3. By: Schmidt, Sebastian
    Abstract: I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policy-maker who cares less about the stabilisation of government spending relative to inflation and output gap stabilisation than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policy-maker uses government spending more aggressively to stabilise inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policy-maker corrects for discretionary authorities’ disregard of the expectations channel, thereby reducing the welfare costs associated with zero bound events. JEL Classification: E52, E62, E63
    Keywords: discretion, fiscal policy, monetary policy, zero nominal interest rate bound
    Date: 2014–03
  4. By: Paul Castillo (Banco Central de Reserva del Perú); Cesar Carrera (Banco Central de Reserva del Perú); Marco Ortiz (Banco Central de Reserva del Perú); Hugo Vega (Banco Central de Reserva del Perú)
    Abstract: This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. We study the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. Our results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending. Macro-prudential instruments are introduced under the form of cyclical loan-to-value ratios that limit the amount of capital that entrepreneurs can pledge as collateral. Cyclical taxes that respond to the movements in the price of non-tradable goods are analysed. Simulation results show that this type of instruments significantly lessen the amplifying effects of borrowing constraints on small open economies and consequently reduce output and asset price volatility.
    Keywords: Collateral, productivity, small open economy
    JEL: E21 E23 E32 E44 G01 O11 O16
    Date: 2014–03
  5. By: Paul Hubert (Ofce,Sciences-po); Harun Mirza (European Central Bank)
    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: 2014–07
  6. By: Williamson, Stephen D. (Washington University in St. Louis)
    Abstract: A simple model of monetary/labor search is constructed to study Keynesian indeterminacy and optimal policy. In the model, economic agents have trouble splitting the surplus from exchange appropriately, and we consider monetary and fiscal policies that correct this Keynesian inefficiency. A Taylor rule does not imply determinacy, nor does it support an efficient outcome, in general. Optimal policies yield an efficient and determinate allocation of resources, but equilibrium policy actions, wages, and prices are indeterminate at the optimum.
    JEL: E4 E5
    Date: 2013–06–19
  7. By: Nakajima, Tetsuya
    Abstract: Industrial development is often accompanied by massive migration from agricultural to industrial areas. This paper compares two steady states, the first and the second, which emerge before and after the termination of such migration, respectively. The paper shows that 1) the employment rate must be lower in the second steady state, and that 2) while every household increases individual assets in the first steady state, households may polarise into the poor and the rich in the second steady state. By examining the effects of fiscal policy, the paper also shows that the balanced budget multiplier exceeds unity, and accordingly, fiscal policy raises households’ disposable income and consumption.
    Keywords: industrial development, migration, underemployment, wealth distribution, polarisation
    JEL: E21 E24 E62 O11
    Date: 2013–10–12
  8. By: Williamson, Stephen D. (Washington University in St. Louis)
    Abstract: A model of money, credit, and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to a term premium — an upward-sloping nominal yield curve. Purchases of long-maturity government debt by the central bank are always a good idea, but for unconventional reasons. A floor system is preferred to a channel system, as a floor system permits welfare-improving asset purchases by the central bank.
    JEL: E4 E5
    Date: 2014–01–15
  9. By: Gabriele Sarais; Damiano Brigo
    Abstract: We develop a model to price inflation and interest rates derivatives using continuous-time dynamics that have some links with macroeconomic monetary DSGE models equipped with a Taylor rule: in particular, the reaction function of the central bank, the bond market liquidity, inflation and growth expectations play an important role. The model can explain the effects of non-standard monetary policies (like quantitative easing or its tapering) and shed light on how central bank policy can affect the value of inflation and interest rates derivatives. The model is built under standard no-arbitrage assumptions. Interestingly, the model yields short rate dynamics that are consistent with a time-varying Hull-White model, therefore making the calibration to the nominal interest curve and options straightforward. Further, we obtain closed forms for both zero-coupon and year-on-year inflation swap and options. The calibration strategy we propose is fully separable, which means that the calibration can be carried out in subsequent simple steps that do not require heavy computation. A market calibration example is provided. The advantages of such structural inflation modelling become apparent when one starts doing risk analysis on an inflation derivatives book: because the model explicitly takes into account economic variables, a trader can easily assess the impact of a change in central bank policy on a complex book of fixed income instruments, which is normally not straightforward if one is using standard inflation pricing models.
    Date: 2014–03
  10. By: Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper investigates the effects of discretionary fiscal policy changes on economic activity and its subcomponents in Greece in the period 2000-2011. Changes in government spending and net taxes have Keynesian effects. An increase in government consumption has the most pronounced positive effects on output growth, private consumption and non-residential investment, while it reduces residential investment. Cuts in the public investment programme crowd in private investment, but are associated negatively with the net exports ratio. Both indirect and direct tax hikes lower private consumption, private investment and output growth. Additionally, higher direct taxes, by lowering disposable income, reduce import demand, thus, improving the trade balance.
    Keywords: : Discretionary fiscal policy; economic growth; consumption; investment; net exports
    JEL: E62 O52 H30
    Date: 2013–12
  11. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Money Marketeers of New York University, Inc., Down Town Association, March 25, 2014, New York, NY President Charles Plosser discusses the relationship between systematic policy and forward guidance. He explains how understanding both practices can provide insights into effective monetary policy in normal and unusual times, or in extreme conditions when policy is constrained by the zero lower bound on nominal interest rates.
    Keywords: Monetary policy; Forward guidance; FOMC:
    Date: 2014–03–25
  12. By: Arratibel, Olga; Michaelis, Henrike
    Abstract: This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time. JEL Classification: C30, E44, E52, F41
    Keywords: Bayesian time-varying parameter VAR, exchange rate pass-through, monetary policy transmission
    Date: 2014–02
  13. By: Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of Minneapolis)
    Abstract: We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.
    Keywords: Monetary policy; Federal funds market; Federal funds rates
    JEL: E42 E44 G21
    Date: 2014–03–17
  14. By: FARLEY GRUBB (Department of Economics,University of Delaware)
    Abstract: A new approach to explaining the value of colonial paper money that relies on their distinctive character as bills of credit is presented. The market value of these bills is decomposed into their real asset present value and their liquidity premium value. This approach is applied to the newly reconstructed monetary data for colonial New Jersey. The real asset present value of New Jersey bills accounted for at least 80 percent, whereas the value of these bills as “money” accounted for at most 10 to 20 percent, of their market value. Colonial paper money was not primarily a fiat currency.
    Keywords: commodity money, currency depreciation, exchange rates, fiat currency, fiscal backing theory of money, land banks, money supply, present value, price inflation, purchasing power parity, quantity theory of money, Seven Year’s War, value of money, zero-interest bearer bonds
    JEL: E31 E42 E51 N11 N21 N41
    Date: 2014
  15. By: Beaubrun-Diant, Kevin; Tripier, Fabien
    Abstract: The present paper contributes to the body of knowledge on search frictions in credit markets by demonstrating their ability to explain why the net interest margins of banks behave countercyclically. During periods of expansion, a fall in the net interest margin proceeds from two mechanisms: (i) lenders accept that they must finance entrepreneurs that have lower productivity and (ii) the liquidity of the credit market rises, which simplifies access to loans for entrepreneurs and thereby reinforces their threat point when bargaining the interest rate of the loan.
    Keywords: Search Friction; Matching Model; Nash Bargaining; Bank Interest Margin;
    JEL: C78 E32 E44 G21
    Date: 2013–12
  16. By: Wei Cui; Sören Radde
    Abstract: We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited resaleability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, the hedging value of liquid assets increases. Our model is thus able to match the flight to liquidity observed during recessions. Finally, we show that investors' search market participation is more intense in a constrained efficient economy.
    Keywords: endogenous asset liquidity, search frictions
    JEL: E22 E44 E58
    Date: 2014
  17. By: Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: Independence is the hallmark of modern central banks, but independence is a mutable and fragile concept, because the governments to whom central banks are ultimately responsible can have objectives that take precedence over price stability. This paper traces the Federal Reserve’s emergence as a modern central bank beginning with its abandonment of monetary policy for debt-management operations during the Second World War and through the controversies that led to the Treasury-Federal Reserve accord in 1951. The accord, however, did not end the Federal Reserve’s search for independence. After the accord, the Federal Reserve’s view of responsibilities "within" government led it to policies—even keel and foreign exchange operations—that complicated the System’s ability to conduct monetary policy.
    Keywords: Second World War; U.S. Treasury-Federal Reserve Accord; Even Keel
    JEL: E4 E5 E6 N1
    Date: 2014–03–27
  18. By: Tsasa Vangu, Jean-Paul Kimbambu
    Abstract: Ce papier se propose d’analyse la dynamique de la politique monétaire en République démocratique du Congo (RDC), en adoptant une approche de modélisation par l’équilibre général dynamique stochastique (DSGE). Le modèle DSGE construit à cet effet considère trois relations macroéconomiques standards ; six catégories d’agents économiques ; trois types de rigidités nominales en plus des rigidités réelles introduites via les habitudes de consommation. Les résultats obtenus à l’issue de nos investigations révèle notamment, que l’écart de production est moins sensible aux variations du taux d’intérêt, ce qui réduit l’impact des effets réels des chocs de la politique monétaire sur la demande globale, et que par ailleurs, l’inflation courante pendant la décennie 2000 a été plus sensible à l’inflation future anticipée qu’à son niveau passé.
    Keywords: DSGE; SVAR; Monetary policy
    JEL: C61 E27 E32 E5
    Date: 2014–04
  19. By: Williamson, Stephen D. (Washington University in St. Louis); Carapella, Francesca (Board of Governors of the Federal Reserve System)
    Abstract: A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.
    JEL: E4 E5 E6
    Date: 2014–02–24
  20. By: Darracq Pariès, Matthieu; Maurin, Laurent; Moccero, Diego
    Abstract: We implement a two-step approach to construct a financing conditions index (FCI) for the euro area and its four larger member states (Germany, France, Italy and Spain). The method, which follows Hatzius et al. (2010), is based on factor analysis and enables to summarise information on financing conditions from a large set of financial indicators, controlling for the level of policy interest rates, changes in output and inflation. We find that the FCI tracks successfully both worldwide and euro area specific financial events. Moreover, while the national FCIs are constructed independently, they display a similar pattern across the larger euro area economies over most of the sample period and varied more widely since the start of the sovereign debt crisis in 2010. Focusing on the euro area, we then incorporate the FCI in a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads. The credit supply shock extracted with sign restrictions is estimated to have caused around one fifth of the decline in euro area manufacturing production at the trough of the financial crisis and a rise in bank lending spreads of around 30 basis points. We also find that adding the FCI to the VAR enables an earlier detection of credit supply shocks. JEL Classification: E17, E44, E50
    Keywords: credit supply shocks, euro area, factor models, financial conditions index, large dataset, sign restrictions, structural VAR
    Date: 2014–03
  21. By: Iossifov, Plamen
    Abstract: In this paper, we highlight the role of global value chains in the synchronization of economic activity between countries in Central and Eastern Europe (CEE) and the euro area. We start off by demonstrating that the degree of synchronization of the business cycles of CEE countries and their main trade partners from the euro area has increased in recent years. We next show that the cyclical fluctuations of GDP in CEE countries are strongly influenced by pro-cyclical movements of changes in inventories. We then present evidence of the importance of cross border production chains for the economies of CEE countries. We build on these findings to show that the propagation of changes in demand for imports along global supply chains—linked to technological requirements and inventory stock adjustments—contributes to the synchronization of economic activity across Europe. We also show evidence that CEE exporters have started to set up their own value chains in the CEE region. JEL Classification: E32, F44, F62, O52
    Keywords: business cycle, CEE, Central and Eastern European countries, cross-border production chains, global value chains, inventories
    Date: 2014–01
  22. By: Angelini, Elena; Ca' Zorzi, Michele; Forster, Katrin
    Abstract: A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence. JEL Classification: C5, F32, F41, O52
    Keywords: current account, euro area countries, modeling, net lending
    Date: 2014–03
  23. By: Julian A. Parra-Polania; Carmiña O. Vargas
    Abstract: Using a stylized model in which output is measured with error, we derive the optimal policy response to the demand shock signal and to changes in the measurement error volatility from two different perspectives: the minimization of the expected loss (from which we derive the ‘standard’ policy) and the minimization of the maximum possible loss across all potential scenarios (from which we derive the ‘prudent’ or ‘robust’ policy). We find that: 1. the prudent policymaker reacts more aggressively to the shock signal than the standard one and 2. while the standard policymaker always mitigates her reaction if the measurement error volatility rises, the prudent one may even increase her response if her risk aversion is very high. When we incorporate forward-looking expectations, the second result is preserved but, in this case, the prudent policymaker is less aggressive than the standard one in responding to the shock signal. Classification JEL: D81, E52, E58
    Date: 2014–03
  24. By: Ehrmann, Michael; Ziegelmeyer, Michael
    Abstract: Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analysed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income. JEL Classification: D12, E43, E52, G21
    Keywords: adjustable-rate mortgage, fixed-rate mortgage, household finance, monetary policy, mortgage choice
    Date: 2014–01
  25. By: Anne Laure Delatte (Ofce sciences-po, Cnrs,Cepr; Neoma Business school, CGEMP LEDa Author-Name : Richard Portes; London Business School, CEPR)
    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) he 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.
    Keywords: European sovereign crisis, Panel Smooth Threshold regression models, CDS indices
    JEL: E44 F34 G12 H63 C23
    Date: 2014–03
  26. By: Ryan Chahrour (Boston College); Justin Svec (College of the Holy Cross)
    Abstract: This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent.
    Keywords: Model uncertainty, capital income tax, public debt
    JEL: E62 H21
    Date: 2014–04–01
  27. By: Wright, Randall (Federal Reserve Bank of Minneapolis); Trejos, Alberto (University of Michigan)
    Abstract: Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Gârleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments.
    Keywords: Search; Bargaining; Money; Finance
    JEL: E40 E44
    Date: 2014–03–19
  28. By: Cruz-Rodríguez, Alexis
    Abstract: The aim of this article is to assess the sustainability of fiscal policy in 18 developing and emerging countries, using the recursive algorithm developed by Croce and Juan-Ramón (2003). In general, the results suggest that most countries were identified as presenting large unsustainable fiscal positions in the period considered, explained basically by primary fiscal deficits. Interestingly, results for Panama suggest no evidence that officially dollarized countries run more prudent fiscal policies than non-officially dollarized countries.
    Keywords: Debt, deficit, fiscal sustainability
    JEL: E62 E63 H62
    Date: 2014–03–18
  29. By: Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of Minneapolis)
    Abstract: We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.
    Keywords: Fed funds market; Search; Bargaining; Over-the-counter market
    JEL: C78 D83 E44 G10
    Date: 2014–03–27
  30. By: Honkkila, Juha; Kavonius, Ilja Kristian
    Abstract: The report on the Measurement of Economic Performance and Social Progress by Stiglitz, Sen and Fitoussi concludes that in the measurement of household welfare all material components should be covered, i.e. consumption, income and wealth, from both the micro as well as the macro perspective. Additionally, several other initiatives like the G20 finance ministers’ and central bank governors’ data gap initiative have emphasised to have an integrated micro-macro framework where consumption, income and wealth can be analysed. Current researches linking macro and micro information for the households have focused on income and consumption as these are the areas where most data sources are available. This paper extends the focus to household wealth using both survey data and financial accounts. It builds a link between wealth survey and national accounts’ income concepts. This paper aims to create a first set of macroeconomic accounts that include wealth broken down by household groups. JEL Classification: D30, D31, E01, E21
    Keywords: balance sheets, financial accounts, households, wealth, wealth survey
    Date: 2013–11
  31. By: Daniel Harenberg (ETH Zurich, Switzerland); Alexander Ludwig (CMR & FiFo, University of Cologne)
    Abstract: We ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks.
    Keywords: Social security; idiosyncratic risk; aggregate risk; welfare
    JEL: C68 E27 E62 G12 H55
    Date: 2014–03
  32. By: Decker, Ryan (University of Maryland); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Moscoso Boedo, Herman J. (University of Virginia)
    Abstract: First Draft: November 1, 2011 We propose a theory of endogenous firm-level volatility over the business cycle based on endogenous market exposure. Firms that reach a larger number of markets diversify market-specific demand risk at a cost. The model is driven only by total factor productivity shocks and captures the business cycle properties of firm-level volatility. Using a panel of U.S. firms (Compustat), we empirically document the countercyclical nature of firm-level volatility. We then match this panel to Compustat’s Segment data and the U.S. Census’s Longitudinal Business Database (LBD) to show that, consistent with our model, measures of market reach are procyclical, and the countercyclicality of firm-level volatility is driven mostly by those firms that adjust the number of markets to which they are exposed. This finding is explained by the negative elasticity between various measures of market exposure and firm-level idiosyncratic volatility we uncover using Compustat, the LBD, and the Kauffman Firm Survey.
    Keywords: Endogenous idiosyncratic risk; Business cycles; Market exposure;
    JEL: D21 D22 E32 L11 L25
    Date: 2014–03–24
  33. By: Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper shows that the variability of indirect tax elasticity relative to GDP has increased significantly in recent years in Greece. Based on this finding we show that the budgetary sensitivity of indirect taxes following a 1% change in real GDP has increased dramatically since 2010. This finding has substantial policy implications; failure to account for these higher elasticities will lead to recurrent revenue shortfalls requiring new policy measure to meet previously set fiscal targets. This could lead to a downward spiral of continuously declining economic activity, new revenue shortfalls and additional fiscal measures and so on.
    Keywords: indirect taxes; elasticity; GDP; Greece
    JEL: C32 E32 H20 O52
    Date: 2014–01
  34. By: Costa Junior, Celso José; Sampaio, Armando Vaz
    Abstract: There is a widespread feeling in Brazilian society that tax reform has become necessary. Analysts seek to mitigate the perverse impact of taxation on economic efficiency and competitiveness of the productive sector. In view of this, the objective of this work is to contribute to the discussion about tax reduction in the productive sector through a dynamic stochastic general equilibrium (DSGE) model. To achieve this purpose, two stochastic shocks will be analyzed in the tax rates changes on labor income and capital income. The results suggest that the tax reduction in the first tax is greater than the same effect in the second. In this first shock, there were increases in output, consumption and investment and decreases in public debt and government spending. In the second shock, the poor performance was related to low growth in the capital stock. The results of the tax revenues were similar for the two tax reductions. They showed alignment with the major tax reform proposals for Brazil, a decrease in direct taxes and an increase in indirect taxes.
    Keywords: DSGE Models; Tax Reduction; Simulation
    JEL: C63 E37 E62
    Date: 2014–04
  35. By: Vidakovic, Neven
    Abstract: The pricing of interest rates on retail deposits in Croatia does not follow standard term structure or quantity premium for pricing deposits. Banks often pay no premium on time or on quantity of deposits. On one hand this is not surprising since the banking sector has been very liquid for last several years and the banks see deposits as a cost, but what is interesting is that the banks do not price in forward looking expectation regarding the state of economy or country rating. This paper uses a simple Black – Sholes model and incorporates forward looking expectations regarding the state of the economy into the existing deposit pricing structure for largest banks in Croatia.
    Keywords: deposit interest rate, probability of default, banks
    JEL: E43 G21 G32
    Date: 2014–03–28
  36. By: Chang, Chia-Lin
    Abstract: The paper uses daily data on financial stock index returns, tourism stock sub-index returns, exchange rate returns and interest rate differences from 1 June 2001 – 28 February 2014 for Taiwan to construct a novel latent daily tourism financial indicator, namely the Tourism Financial Conditions Index (TFCI). The TFCI is an adaptation and extension of the widely-used Monetary Conditions Index (MCI) and Financial Conditions Index (FCI) to tourism stock data. However, the method of calculation of the daily TFCI is different from existing methods of constructing the MCI and FCI in that the weights are estimated empirically. Alternative versions of the TFCI are constructed, depending on the appropriate model and method of estimation, namely Ordinary Least Squares (OLS) or Quasi-Maximum Likelihood Estimation (QMLE) of alternative conditional volatility models. Three univariate conditional volatility models are considered, namely GARCH, GJR and EGARCH, in an attempt to capture the inherent volatility in the daily tourism stock index returns. The empirical findings show that TFCI is estimated quite accurately using the estimated conditional mean of the tourism stock index returns, especially when conditional volatility is incorporated in the overall specification. The new daily TFCI is straightforward to use and interpret, and provides interesting insights in predicting the current economic and financial environment for tourism stock index returns, especially as it is based on straightforward calculations and interpretations of publicly available information.
    Keywords: Monetary Conditions Index, Financial Conditions Index, Daily Model-based Tourism Financial Conditions Index, Univariate Conditional Volatility Models, Consistent Estimation.
    JEL: B41 C51 C58 E44 E47 G32
    Date: 2014–03–20
  37. By: Lo Duca, Marco; Nicoletti, Giulio; Vidal Martinez, Ariadna
    Abstract: The paper investigates the impact of US quantitative easing (QE) on global non-financial corporate bond issuance. It distinguishes between two QE instruments, MBS/GSE debt and Treasury bonds, and disentangles between two channels of transmission of QE to global bond markets, namely flow effects (purchases) and stock effects (holdings). We control for a number of domestic and global macro-financial factors. In particular, we control for weaknesses in crossborder and domestic banking which might have induced the corporate sector to issue more bonds. The results indicate that US QE had a large impact on corporate bond issuance, especially in emerging markets, and that flow effects (i.e. portfolio rebalancing) were the main transmission channel of QE. A counterfactual analysis shows that bond issuance in emerging markets since 2009 would have been halved without QE. JEL Classification: E52, E58, F42, G15
    Keywords: bond issuance, crisis management, emerging markets, Federal Reserve, monetary policy, quantitative easing, spill-overs, United States
    Date: 2014–03
  38. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: March 27, 2014. Presentation. 17th Annual Asian Investment Conference, Hong Kong, China.
    Date: 2014–03–27
  39. By: Moreira, Helmar Nunes; Araujo, Ricardo Azevedo; Flaschel, Peter
    Abstract: In this paper, we reconsider the Foley model of Liquidity / Profit-Rate Cycles where such cycles are generated as bifurcations from initially attracting steady states if a parameter of the model crosses a critical value, for example the growth rate of money supply as in the Foley paper. We employ a slightly modified version of the Foley model and provide sufficient conditions for the local asymptotic stability of its balanced growth path. A second theorem then shows the existence of a Hopf-bifurcation derived from such a stable situation by decreasing the growth rate of liquidity to a sufficient degree. The generated cycles are studied from the numerical point of view in addition.
    Keywords: Liquidity / Profit-Rate Cycle, Stability Conditions, Hopf-bifurcation.
    JEL: E41 E64
    Date: 2014–03
  40. By: Minoas Koukouritakis (University of Crete); Athanasios P. Papadopoulos (University of Crete); Andreas Yannopoulos (University of Crete)
    Abstract: In this paper, we investigate the monetary transmission mechanism through interest rate and real effective exchange rate channels, for five South-Eastern European countries, namely Bulgaria, Croatia, Greece, Romania and Turkey. Recent unit root and cointegration techniques in the presence of structural breaks in the data are used in the analysis. The empirical results validate the existence of a valid long-run relationship, with parameter constancy, for each of the five sample countries. Additionally, the estimated impulse response functions regarding the monetary variables and the real effective exchange rate converge and follow a reasonable pattern in all cases.
    Keywords: Monetary Transmission Mechanism; Structural Breaks; LM Unit Root Tests; Cointegration Tests; Impulse Responses.
    JEL: E43 F15 F42
    Date: 2014–01
  41. By: Markku Lanne (University of Helsinki and CREATES); Jani Luoto (University of Helsinki)
    Abstract: We propose a Bayesian inferential procedure for the noncausal vector autoregressive (VAR) model that is capable of capturing nonlinearities and incorporating effects of missing variables. In particular, we devise a fast and reliable posterior simulator that yields the predictive distribution as a by-product. We apply the methods to postwar quarterly U.S. inflation and GDP growth series. The noncausal VAR model turns out to be superior in terms of both in-sample fit and out-of-sample forecasting performance over its conventional causal counterpart. In addition, we find GDP growth to have predictive power for the future distribution of inflation over and above the own history of inflation, but not vice versa. This may be interpreted as evidence against the new Keynesian model that implies Granger causality from inflation to GDP growth, provided GDP growth is a reasonable proxy of the marginal cost.
    Keywords: Noncausal time series, non-Gaussian time series, Bayesian analysis, New Keynesian model
    JEL: C11 C32 E31
    Date: 2014–05–24
  42. By: Altavilla, Carlo; Giacomini, Raffaella; Ragusa, Giuseppe
    Abstract: The dynamic behaviour of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates. JEL Classification: G1, E4, C5
    Keywords: blue chip analysts survey, exponential tilting, forecast performance, macroeconomic factors, monetary policy forward guidance, term structure models
    Date: 2014–02
  43. By: El-Shagi, Makram; Giesen, Sebastian; Jung, Alexander
    Abstract: The aim of this paper is to assess whether the findings of Romer and Romer (2000) on the superiority of staff forecasts are still valid today. The paper uses both latest available econometric techniques as well as conventional tests. Several tests for forecast rationality show that a necessary condition for good forecast performance is satisfied both for Greenbook and private forecasts, as measured by the Survey of Professional Forecasters (SPF). Tests for forecast accuracy and the encompassing test confirm the superiority of Greenbook forecasts for inflation and output using an extended sample (1968 to 2006). The relative forecast performance is, however, not robust in the presence of large macroeconomic shocks such as the Great Moderation and oil price shocks. Other econometric tests show that a relative better forecast performance by staff is observed when there is increased uncertainty. Staff’s better knowledge about the Fed’s future interest rate path also plays an important role in this respect. JEL Classification: C53, E37, E52, E58
    Keywords: forecast performance, forecast rationality, forecast stability, greenbook forecasts, of professional forecasters, survey
    Date: 2014–02
  44. By: Kamil Galuscak; Petr Hlavac; Petr Jakubik
    Abstract: We develop a methodology for identifying financially distressed households and use it for testing the responses to shocks to the unemployment rate, the interest rate and prices of essential expenditure in the Czech Republic. We extend the approach of Johansson and Persson (2006) for Sweden and Albacete and Fessler (2010) for Austria to allow for full labour market transitions between employment and unemployment, and, due to data availability, to account for heads and spouses within households. This improvement may lead to a higher response of household distress incidence due to the unemployment rate shock than in both Sweden and Austria, while the effects due to the interest rate shock are of similar size as in Austria. We illustrate the use of our approach for stress testing households’ ability to pay their debts using macroeconomic scenarios from the CNB’s official forecast and from the CNB’s Financial Stability Report. The results highlight the importance of using micro-level datasets in the analysis of household distress incidence, as the impact of shocks is more pronounced among lower-income households.
    Keywords: Ability to pay, financial surplus, household indebtedness, microdata, stress testing
    JEL: D12 D31 E17
    Date: 2014–01
  45. By: Muriel Bouchet; Luca Marchiori; Olivier Pierrard
    Abstract: Outre au problème de vieillissement de la population, le Luxembourg devra faire face au départ à la retraite de larges contingents de travailleurs non-résidents ainsi qu?à l?essoufflement attendu de l?immigration et de l?arrivée de futurs frontaliers. Le financement des systèmes de pensions par répartition devrait s?avérer plus difficile que dans d?autres pays. Nos précédentes études, basées sur le modèle macroéconomique LOLA, montrent que les changements démographiques vont sérieusement hypothéquer la santé des finances publiques et que la récente réforme des pensions - même si elle va dans la bonne direction - n?est pas suffisante pour régler le problème des pensions et maintenir des finances publiques saines. Dans cette étude, nous proposons et évaluons une réforme globale, appelée LOLA. Cinq conclusions majeures ressortent de notre analyse. Premièrement, la ?réforme LOLA? permet de contenir le problème des finances publiques à moyen terme (jusqu?en 2060) en maintenant le déficit public hors soins de santé aux alentours de 3%du PIB. Deuxièmement, elle préserve la croissance économique et limite la perte de bien-être des générations actuelles. Troisièmement, elle assure une plus grande équité intergénérationnelle que la récente réforme des pensions. Quatrièmement, ces conclusions se vérifient pour différents cas de figure - optimistes et pessimists - d?évolution de la démographie et du travail frontalier. Finalement, nous montrons comment mettre en oeuvre la ?réforme LOLA? en pratique et de façon complémentaire à la récente réforme.
    Keywords: Générations imbriquées, Projections de long-terme, Pensions, Luxembourg
    JEL: D91 E24 E62 F41 J11
    Date: 2014–03
  46. By: Joris de Wind; Luca Gambetti
    Abstract: The standard time-varying VAR workhorse suffers from overparameterization, which is a serious problem as it limits the number of variables and lags that can be incorporated in the model. Read also: CPB Discussion Paper 271 ' Time variation in the dynamic effects of unanticipated changes in tax policy '. As a solution for the overparameterization problem, we propose a new, more parsimonious time-varying VAR model setup with which we can reliably estimate larger models including more variables and/or more lags than was possible until now. The new model setup implies cross-equation restrictions on the time variation that are empirically supported, theoretically appealing, and make the Bayesian estimation procedure much faster.
    JEL: C52 C53 E37
    Date: 2014–03
  47. By: D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Moscoso Boedo, Herman J. (University of Virginia); Senkal, Asli (University of Virginia)
    Abstract: Accepted for publication, Journal of Economic Dynamics and Control The aim of this paper is to quantify the role of formal-sector institutions in shaping the demand for human capital and the level of informality. We propose a firm dynamics model where firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by relatively lower stocks of skilled workers, larger informal sectors, low allocative efficiency, and measured TFP. Moreover, we find that the interaction between entry costs and financial frictions (as opposed to the sum of their individual effects) is the main driver of these differences. This complementarity effect derives from the introduction of skilled workers, which prevents firms from substituting labor for capital and in turn moves them closer to the financial constraint.
    Keywords: Financial Structure; Informal Sector; Productivity; Policy Distortions; Human Capital;
    JEL: D24 E26 J24 L11 O16 O17
    Date: 2014–03–24
  48. By: Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
    Abstract: Policy impact studies often suffer from endogeneity problems. Consider the case of the ECB Securities Markets Programme: If Eurosystem interventions were triggered by sudden and strong price deteriorations, looking at daily price changes may bias downwards the correlation between yields and the amounts of bonds purchased. Simple regression of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that SMP interventions have been ineffective, or worse counterproductive. We use high frequency data on purchases of the ECB Securities Markets Programme and sovereign bond quotes to address the endogeneity issues. We propose an econometric model that considers, simultaneously, first and second conditional moments of market price returns at daily and intradaily frequency. We find that SMP interventions succeeded in reducing yields and volatility of government bond segments of the countries under the programme. Finally, the new econometric model is broadly applicable to market intervention studies. JEL Classification: E52, E44, G12, C58
    Keywords: component models, euro area crisis, high frequency data, SMP, unconventional monetary policy
    Date: 2014–02
  49. By: Dolan Antenucci; Michael Cafarella; Margaret C. Levenstein; Christopher Ré; Matthew D. Shapiro
    Abstract: Social media enable promising new approaches to measuring economic activity and analyzing economic behavior at high frequency and in real time using information independent from standard survey and administrative sources. This paper uses data from Twitter to create indexes of job loss, job search, and job posting. Signals are derived by counting job-related phrases in Tweets such as “lost my job.” The social media indexes are constructed from the principal components of these signals. The University of Michigan Social Media Job Loss Index tracks initial claims for unemployment insurance at medium and high frequencies and predicts 15 to 20 percent of the variance of the prediction error of the consensus forecast for initial claims. The social media indexes provide real-time indicators of events such as Hurricane Sandy and the 2013 government shutdown. Comparing the job loss index with the search and posting indexes indicates that the Beveridge Curve has been shifting inward since 2011. The University of Michigan Social Media Job Loss index is update weekly and is available at
    JEL: C81 C82 E24 J60
    Date: 2014–03
  50. By: Joris de Wind
    Abstract: Using a structural vector autoregression with time-varying parameters, I analyze to what extent the dynamic effects of unanticipated changes in tax policy have changed structurally over the post World War II period in the United States. Read also: CPB Discussion Paper 270 ' Reduced-rank time-varying vector autoregressions '. The estimated time variation points to a permanent decline in the tax multiplier as well as a faster response of the economy. Despite the permanent decline, the estimated tax multiplier is still at the higher end of the range of existing empirical estimates, which is consistent with Mertens and Ravn (2013b), whose identification strategy I follow. Furthermore, the estimated time variation also suggests that fiscal policy has become more countercyclical over time. In particular, spending policy used to be procyclical and has become countercyclical after the beginning of the 1990s, whereas tax policy already used to be countercyclical and has become even more countercyclical over time.
    JEL: C52 C53 E37
    Date: 2014–03
  51. By: Congressional Budget Office
    Date: 2012–10–25
  52. By: Tomas Konecny; Oxana Babecka Kucharcukova
    Abstract: Various approaches have been employed to study the possibility of non-linear feedback between the real and financial sector. We employ the threshold Bayesian VAR with block restrictions to evaluate the non-linear dynamics in a small open economy using the example of the Czech Republic. The study combines information on aggregate credit and non-performing loans (NPLs) to find that procyclicality of the financial sector matters for the real economy. A positive shock to credit and a negative shock to NPLs support industrial production over the entire time horizon, yet the responses do not differ substantially across credit spread regimes. Our results also suggest that the responses of the financial sector to real shocks differ depending on the credit market conditions. Finally, the direct impact of foreign factors on lending seems to be rather limited given that the financial sector in the Czech Republic is largely bank-based and funded predominantly by domestic deposits.
    Keywords: Credit, non-linearities, small open economy
    JEL: C15 C32 E51
    Date: 2013–12
  53. By: Muriel Nguiffo-Boyom
    Abstract: In 2007, a new indicator of economic activity for Luxembourg was elaborated at the BcL. It was developed using a large dataset of about 100 economic and financial time series. The methodology was based on the generalized dynamic-factor models, and the model was estimated over the period from June 1995 to June 2007. Forecast performance was evaluated on several criteria (both in pseudo-real-time and using ex-post in-sample simulations) and results were satisfactory. They gave in particular clear evidence that the indicator provides better forecasts of GDP growth than a more standard approach that relies on past GDP values only. In this paper, we present results of the real-time use of the indicator from December 2007 onwards. Special attention is given to real-time forecasts of GDP growth and the real-time assessment of the economic situation that were made during the financial crisis. The root mean squared forecast error of the indicator-based GDP growth forecasts have decreased during the 2009-2011 ?revovery? period in comparison to the 2007-2009 period, which is an encouraging results. This paper also includes (real-time) forecasts that were produced until the end of April 2013. The mean squared errors appear to have on average decreased over the second half of this extended study period in comparison with the first half. Finally, the BcL indicator produced better forecasts on average than the benchmarks over this extended study.
    Keywords: Forecasting, factor model, large datasets, real time analysis
    JEL: C53 E17
    Date: 2014–03
  54. By: Elias Soukiazis (Faculty of Economics, University of Coimbra and GEMF, Portugal); Eva Muchova (Faculty of National Economy, University of Economics in Bratislava, Slovakia); Pedro A. Cerqueira (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: Recently, Soukiazis E., Cerqueira P., and Antunes M. (2013) developed a model – hereafter the SCA model - that takes into account the hypotheses that internal and external imbalances can affect economic growth and additionally relative prices are assumed to be not neutral in the pace of economic growth. Although the SCA model is in the spirit of the well known balance of payments constraint hypothesis which became known as Thirlwall´s Law (Thirlwall, 1979) it is more complete in the sense that it considers, along with external imbalances (trade deficits) that internal imbalances (budget deficits or public debt) are additional constraints to economic growth. The recent euro-zone public sovereign debt crisis that started in some peripheral countries shows that when internal imbalances are excessive they can constrain growth and domestic demand, causing severe effects on unemployment rates. The aim of this paper is to apply the more complete SCA model to the Slovak economy (a newly euro-zone member since 2009) and check its accuracy for explaining the growth path in this country. Our empirical analysis shows that Slovakia grew at a higher rate than that allowed by the balance of payments constraint rate and this is consistent with the accumulation of current deficits over the period considered. A scenarios analysis shows that improving trade competitiveness and changing the import and export shares toward current account equilibrium will be the most successful way to achieving higher growth in Slovakia. Financing the economy at a lower cost is also beneficial to growth.
    Keywords: internal and external imbalances, price and income elasticities of external trade, equilibrium growth rates, 3SLS system regressions, supply constraints.
    JEL: C32 E12 H6 O4
    Date: 2014–03
  55. By: Joseph E. Stiglitz
    Abstract: The pace of innovation is related both to the level of investment in innovation and the pool of knowledge from which innovators can draw. Both of these are endogenous: Investments in innovations are affected by the pool of knowledge and the ability of firms to appropriate the returns to their innovative activity, itself affected by the intellectual property rights (IPR) regime. But as each firm engages in research, it both contributes to the pool, and takes out from it. The strength and design of IPR affects the extent to which any innovation adds to or subtracts from the pool of ideas that are available to be commercially exploited, i.e. to the technological opportunities. We construct the simplest possible general model to explore the resulting dynamics, showing that, under plausible conditions, stronger intellectual property rights may lead to a lower pace of innovation, and more generally, that long run effects may be the opposite of the short run effects.
    JEL: E61 H41 O3 O31 O32 O33 O34 O38
    Date: 2014–03
  56. By: Patrick Bolton; Hui Chen; Neng Wang
    Abstract: We analyze a model of optimal capital structure and liquidity choice based on a dynamic tradeoff theory for financially constrained firms. In addition to the classical tradeoff between the expected tax advantages of debt and bankruptcy costs, we introduce a cost of external financing for the firm, which generates a precautionary demand for liquidity and an optimal liquidity management policy for the firm. An important new cost of debt financing in this context is an endogenous debt servicing cost: debt payments drain the firm's valuable liquidity reserves and thus impose higher expected external financing costs on the firm. The precautionary demand for liquidity also means that realized earnings are separated in time from payouts to shareholders, implying that the classical Miller-formula for the net tax benefits of debt no longer holds. Our model offers a novel perspective for the "debt conservatism puzzle" by showing that financially constrained firms choose to limit debt usages in order to preserve their liquidity. In some cases, they may not even exhaust their risk-free debt capacity.
    JEL: E22 G32 G35 H24 H25
    Date: 2014–03
  57. By: Yamada, Tomoaki
    Abstract: In this study, using Japanese household panel data, we analyze how well idiosyncratic income risks are shared by regions. We find that geographic mobility influences individual consumption growth rates, suggesting that complete asset markets fail to exist. We reject the full insurance hypothesis for both urban and rural areas and find that the extent of risk sharing differs significantly by region.
    Keywords: Risk sharing; Consumption insurance; Geographic mobility
    JEL: D12 D31 E21
    Date: 2014–03–28
  58. By: Bergeaud, A.; Cette, G.; Lecat, R.
    Abstract: In order to examine innovation diffusion and convergence processes, we study productivity trends, trend breaks and levels for 13 advanced countries over 1890-2012. We highlight two productivity waves, a big one following the second industrial revolution and a small one following the ICT revolution. The first big wave was staggered across countries, hitting the US first in the Interwar years and the rest of the world after World War II. It came long after the actual innovation could be implemented, emphasizing a long diffusion process. The productivity leader changed during the period under study, the Australian and UK leadership becoming a US one during the first part of the XXth century and, for very particular reasons, also a Norwegian, Dutch and French one at least for some years at the end of the XXth century. The convergence process has been erratic, halted by inappropriate institutions, technology shocks, financial crises but above all by wars, which led to major productivity level leaps, downwards for countries experiencing war on their soil, upwards for other countries. Productivity trend breaks are detected following wars, global financial crises, global supply shocks (such as the oil price shocks) and major policy changes (such as structural reforms in Canada or Sweden). The upward trend break for the US in the mid-1990s is confirmed, as well as the downward trend break for the Euro Area in the same period. The downward trend break observed as early as the mid-2000s for the US leads one to question the future contribution of the ICT revolution to productivity enhancement.
    Keywords: Productivity, convergence, technological change, global history.
    JEL: E22 N10 O47
    Date: 2014
  59. By: Clerc, L.; Gabrieli, S.; Kern, S.; El Omari, Y.
    Abstract: Based on a unique data set referencing exposures on single name credit default swaps (CDS) on European reference entities, we study the structure and the topology of the European CDS market and its evolution from 2008 to 2012, resorting to network analysis. The structural features revealed show bilateral CDS exposures describing growing scale-free networks whose highly interconnected hubs constitute both a strength and weakness for the stability of the system. The potential “super spreaders” of financial contagion, identified as the most interconnected participants, consist mostly of banks. For some of them net notional exposures may be particularly large relative to their total common equity. Our findings also point to the importance of some non-dealer/non-bank participants belonging to the shadow banking system.
    Keywords: Credit default swaps; Financial networks; Centrality measures; Contagion; Shadow banking.
    JEL: E17 E44 E51 G21 G28
    Date: 2014
  60. By: Renaud Thillaye; Ludek Kouba; Andreas Sachs
    Abstract: Despite significant measures to reinforce the EMU’s institutional set-up, there is widespread consensus that more needs to be done in order to better deal with cyclical and structural heterogeneity in the EU. Market-based adjustment mechanisms are necessary but not sufficient to advance convergence along more sustainable growth patterns. In that context, institutional reforms advancing integration in the Eurozone are often said to be desirable from an economic point of view, albeit fraught with political difficulties. This paper seeks to provide a fresh outlook on this debate by bringing forward a third, overlooked dimension, namely the feasibility, or ‘implementability’, of governance reforms. Like national technocracies, the EU faces the risk of failure whereby the creation of institutions or the introduction of new policies do not always bring about the expected outcomes. The paper develops a multi-criteria analytical framework to assess three possible innovations of economic governance: rule-based wage coordination, contractual arrangements for reforms, and a stabilisation fund for the Euro area. The ‘robustness’ of any proposal seeking to increase the EU’s interference into national policy-making should start with a clear economic justification, while taking the dynamics of national preferences into account. However, the risks of moral hazard and institutional barriers should also be systematically internalised in the assessment. After outlining the analytical framework (section 1), the paper assesses the three tentative reforms by using a wide range of data and analyses from existing EU documentation, academic and policy literature, and opinion surveys (sections 2 to 4). Each section ends with some recommendations on the desirable scope and design of reforms. Overall, the three case studies stress the need for a careful and reasoned approach to reforming EU governance. Beyond the predictable clash of economic rationales and political hurdles, reform ideas tend to overlook the difficulties arising at the implementation stage. Diverse wage-setting systems, low administrative capacities, and statistical uncertainty for instance all warn against ‘more EU money’ or ‘EU interference’. The paper, therefore, makes the case for experimental and small-scale innovations and for a much greater engagement of the public in the politics of EU coordination.
    Keywords: EU integration, European economic policy, European governance, European Monetary Union, Good governance, Institutional reforms, Labour markets, Macroeconomic disequilibria, Multi-level governance, Welfare reform
    JEL: E02
    Date: 2014–03
  61. By: Polterovich, Victor
    Abstract: In this paper I argue that the Theory of Reform may be considered as a comparatively new but intensively forming chapter of Economics. In spite of great variety of concrete reforms, the problem of institutional reforming admits general formulation and general approaches of solving it. I discuss some important steps in the development of the Theory of Reform, and then describe its state-of-the art. Since the theory is new, its architecture is not set completely. In the final part of the paper, I will present my own visions of this architecture. It is a typical case in the practice of reforms, when a reformer, who seeks to build an institution with desired properties, discovers that its immediate implementation is impossible because of resource, technological, cultural, political or institutional constraints. In this case, one has to construct a sequence of interim institutions which, for each moment of time, satisfy the existing constraints, and, in the end, provide the implementation of the desired institution. I describe some methods and constructions that can be used to create sequences of interim institutions; illustrations are extracted from the reform experience of China, Russia, and other countries.
    Keywords: shock therapy and gradualism, institutional trajectories, interim institutions, dysfunctions, institutional trap, transaction and transformation costs, norm fixing mechanisms, promising trajectories, manual for reformers
    JEL: D02 E02 H75 L85 O1 P5
    Date: 2014–03–27
  62. By: Nikita Céspedes (Central Bank of Peru); Nelson Ramírez-Rondán (Central Bank of Peru)
    Abstract: In this paper we estimate total factor productivity (TFP) growth for the Peruvian economy using the primal and dual methods for the period 2003-2012. According to the primal method, a procedure that uses the Solow residual as an indicator of productivity, TFP grew at an average annual rate of 1.6%, adjusted for the quality and usage of the factors of production. According to the dual method, a procedure that considers estimations of the marginal productivities of the factors of production, TFP grew at an annual rate of 1.7%.
    Keywords: Productivity, Primal, Dual, Peru, Solow residual
    JEL: C23 E23 O47
    Date: 2014–03
  63. By: Olivier C. Sterck
    Abstract: This paper answers two questions: “What impact have natural resources had on the spread of the HIV/AIDS epidemic so far?” and “What role can natural resource rents play in order to finance the long-run response to HIV/AIDS?” Using a panel dataset, de Soysa and Gizelis (2013) provided evidence that oil-rich countries are more deeply affected by the HIV epidemic. They concluded that government of resource-rich countries failed to implement effective public policies for dealing with the HIV/AIDS epidemic. In this paper, I show that their results are not robust and are spurious because the dependent variables and explanatory variables considered in their analysis are non-stationary. After correcting for these issues, I find no specific relationship between resource rents and the spread of HIV/AIDS. I conclude by discussing the potential of resources rents for financing the long-term liability brought about by the HIV/AIDS epidemic in sub-Saharan Africa.
    Keywords: HIV/AIDS, natural resources, resource curse, epidemics, spurious regression, non-stationarity
    JEL: I1 I18 E6 Q32
    Date: 2014
  64. By: Cette, G.
    Abstract: ICT productive performances have slowed down since the beginning of the 2000s, before the current crisis. This diagnosis could be due, at least partly, to some statistical mis-measurements of ICT improvements. Nevertheless, improvements in ICT performances will probably be positively impacted, in some years, by large technological developments as for example the productive use, in computers, of the 3D chip. The lag of ICT diffusion in non-US developed countries, mainly Europe and Japan, compare to the US, is explained by institutional aspects: a lower education level, on average, of the working-age population and more regulations on labour and product markets. By implementing structural reforms, these countries could benefit from a productivity acceleration linked to a catch-up of the US ICT diffusion level. And they could benefit, without any delay with the US, from the possible ICT productivity growth second wave.
    Keywords: ICT, productivity, growth, innovation.
    JEL: O31 O33 J24 O47 E22
    Date: 2014
  65. By: Todorova, Zdravka
    Abstract: The article seeks to contribute to the literature on social provisioning as an organizing concept in heterodox economics. Particularly, the article details social provisioning as an amalgamation of processes and as a part of a system of culture-nature life process. First, the article delineates a categorization of social provisioning activities with respect to motivation in their organization – monetary and non-monetary, emphasizing the differences, as well as links between those. Second, the article discusses valuation of social activities, applying institutional theory. Third, the concept of a social process is delineated. It is argued that the concept captures agency and structure without reducing one to the other, and allows for theorizing open-endedness of social provisioning. The fourth section offers a categorization of processes and briefly explains each one of those, conceptualizing social provisioning within a historical culture-nature life process. Finally, the article concludes.
    Keywords: Social Provisioning; Social Process; Institutions; Heterodox Economics; Feminist-Institutional Economics; Post Keynesian Economics; Monetary Theory of Production; Social Economics; Political Economy
    JEL: B41 B52 B54 E02 Z1
    Date: 2014–03–21

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