nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒04‒18
83 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Stability and Identification with Optimal Macroprudential Policy Rules By Chatelain, Jean-Bernard; Ralf, Kirsten
  2. Inflation expectations and the news By Bauer, Michael D.
  3. The macroeconomic effects of monetary policy: a new measure for the United Kingdom By Cloyne, James; Hürtgen, Patrick
  4. Current and Future ECB Monetary Policy. By Philip Arestis
  5. Shadow banks and macroeconomic instability By Meeks, Roland; Nelson, Benjamin; Alessandri, Piergiorgio
  6. Early warning indicators: financial and macroeconomic imbalances in Central and Eastern European countries By Orsolya Csortos; Zoltán Szalai
  7. The Role of Money in Explaining Business Cycles for a Developing Economy: The Case of Pakistan By Ahmed, Shahzad; Pasha, Farooq
  8. The Financial Crisis and Macroeconomic Activity: 2008-2013 By Ray C. Fair
  9. Understanding the Great Recession By Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
  10. The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  11. Uncertainty, Financial Frictions, and Investment Dynamics By Simon Gilchrist; Jae W. Sim; Egon Zakrajšek
  12. U.S. monetary policy and emerging market economies By Dudley, William
  13. Tax smoothing in a business cycle model with capital-skill complementarity By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  14. Financial Conditions and Density Forecasts for US Output and Inflation By Piergiorgio Alessandri; Haroon Mumtaz
  15. Financialisation in the circuit By Marco Veronese Passarella; Malcolm Sawyer
  16. Business Cycle Properties of Job Polarization Using Consistent Occupational Data By Myungkyu Shim; Hee-Seung Yang
  17. Financialisation, distribution, growth and crises – long-run tendencies By Eckhard Hein; Nina Dodig
  18. In old Chicago: Simons, Friedman and the development of monetary-policy rules By George S. Tavlas
  19. Monetary Dialogue 2009-2014 – Looking Backward, Looking Forward By Ansgar Belke
  20. A money-based indicator for deflation risk By Gianni Amisano; Roberta Colavecchio; Gabriel Fagan
  21. The Flight from Maturity By Gary B. Gorton; Andrew Metrick; Lei Xie
  22. The Uncertainty Multiplier and Business Cycles By Hikaru Saijo
  23. Fiscal Consolidation in Japan By FUKAO Mitsuhiro
  24. An empirical analysis of remittance – inflation relationship in Bangladesh: post-floating exchange rate scenario By Roy, Ripon; Rahman, Md. Mokhlesur
  25. Working Paper 13-13 - A new version of the HERMES model - HERMES III By Delphine Bassilière; Didier Baudewyns; Francis Bossier; Ingrid Bracke; Igor Lebrun; Peter Stockman; Peter Willemé
  26. Credit Risk in the Euro Area By Simon Gilchrist; Benoît Mojon
  27. Does the Great Recession imply the end of the Great Moderation? International evidence By Amélie Charles; Olivier Darné; Laurent Ferrara
  28. Banking and Sovereign Debt Crises in Monetary Union Without Central Bank Intervention. By Jin Cheng; Meixing Dai; Frédéric Dufourt
  29. Household debt and the dynamic effects of income tax changes By Cloyne, James; Surico, Paolo
  30. Fiscal Devaluation Scenarios: A Quantitative Assessment for the Italian Economy By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
  31. Net flows to emerging markets’ funds and the U.S. monetary policy after the subprime crisis By Henri Audigé
  32. The possible trinity: Optimal interest rate, exchange rate, and taxes on capital flows in a DSGE model for a small open economy By Escudé, Guillermo J.
  33. Relationship Between Interest Rate and Corporate Bond Yield By Magomet Yandiev
  34. Testing the Asymmetric Effects of Financial Conditions in South Africa: A Nonlinear Vector Autoregression Approach By Mehmet Balcilar; Kirsten Thompson; Rangan Gupta; Renee van Eyden
  35. News and labour market dynamics in the data and in matching models By Theodoridis, Konstantinos; Zanetti, Francesco
  36. Okun’s Law, Employment Paradox and Impact of Unemployment on the Economy of the USSR and Russia By BLINOV, Sergey
  37. Probability and Severity of Recessions By Rachidi Kotchoni; Dalibor Stevanovic
  38. The Monetary Profit Paradox and a Sustainable Economy - A Fundamental Approach By de la Fonteijne, Marcel
  39. Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Ryan, April 2014 By Congressional Budget Office
  40. Inheritance, Search Friction and International Trade: A General Equilibrium Model By Mazumder, Debojyoti
  41. What Drives the German Current Account ?And How Does It Affect Other EU Member States ? By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld; Lukas Vogel
  42. Appraisal of Priority Sector Lending by Commercial Banks in India By C Bhujanga Rao
  43. On the impact of macroeconomic news surprises on Treasury-bond yields By Imane El Ouadghiri; Valerie Mignon; Nicolas Boitout
  44. Impact of Federal Government Budget Deficits on the Longer-term Real Interest Rate in the U.S.: Evidence Using Annual and Quarterly Data, 1960-2013 By Cebula, Richard
  45. An Empirical Investigation into the Impact of U.S. Federal Government Budget Deficits on the Real Interest Rate Yield on Intermediate-term Treasury Debt Issues, 1972-2012 By Cebula, Richard
  46. How Might a Central Bank Report Uncertainty? By Ray C. Fair
  47. Economic Growth and the Politics of Intergenerational Redistribution By Tetsuo Ono
  48. An Analysis of Regional Business Cycles using Prefectural Composite Indexes in Japan By Asako, Kazumi; Onodera, Takashi; Ueda, Atsuko
  49. Identifying Banking Crises Using Money Market Pressure: New Evidence For A Large Set of Countries By Zhongbo Jing; Jakob de Haan; Jan P. A. M. Jacobs; Haizhen Yang
  50. The "Second Dividend" and the Demographic Structure By Frédéric Gonand; Pierre-André Jouvet
  51. Growth Experience in Ukraine during Twenty Years of Independence: Business Cycle Accounting Perspective By Dubovyk Tetyana
  52. Ending over-lending: Assessing systemic risk with debt to cash flow By Ramsay, Bruce A.; Sarlin, Peter
  53. Theories of Financial Crises By Daniel Detzer; Hansjorg Herr
  54. The housing wealth effect on consumption reconsidered By Lindner, Fabian
  55. Sovereign defaults, external debt and real exchange rate dynamics By Asonuma, Tamon
  56. Disasters and the Networked Economy. A Book Summary By Jose-Miguel Albala-Bertrand
  57. Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification By Hossein Asgharian; Charlotte Christiansen; Ai Jun Hou
  58. ISA vs. TARGET2 - Ein Vergleich der Voraussetzungen für den effektiven Ausgleich von Zahlungsüberweisungssalden By Sebastian Voll
  59. Interindustry Wage Differentials, Technology Adoption, and Job Polarization By Myungkyu Shim; Hee-Seung Yang
  60. Credit in the Structure of the Market Quotation of Financial Assets in Relation to the Islamic Financial Laws By Magomet Yandiev; Renat Bekkin
  61. Who Gets Money First? Monetary Expansion, Ownership Structure and Wage Inequality in China By Peiwen Bai; Wenli Cheng
  62. Business Fluctuations in Imperial Austria's Regions, 1867-1913: New Evidence By Carlo Ciccarelli; Anna Missiaia
  63. Why is Old Workers' Labor Market more Volatile? Unemployment Fluctuations over the Life-Cycle By Jean-Olivier Hairault; François Langot; Thepthida Sopraseuth
  64. Uncertainty and the geography of the Great Recession By Stan Veuger; Daniel Shoag
  65. Liquidity, Trends and the Great Recession By Pablo A. Guerron-Quintana; Ryo Jinnai
  66. Towards an economic architecture of the rings of Saturn: On the Political Economy Wave, Kaluza’s fifth dimension and an alternative derivation of the Roche Limit By Albers, Scott
  67. Implementation of the Macroeconomic Adjustment Programmes in the Euro Area: State-of-Play By Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
  68. Capital Taxation under Political Constraints By Florian Scheuer; Alexander Wolitzky
  69. Financial, economic and social systems: French Regulation School, Social Structures of Accumulation and Post-Keynesian approaches compared. By Eckhard Hein; Nina Dodig; Natalia Budyldina
  70. Fiscal consolidation: Dr Pangloss meets Mr Keynes By Miller, Marcus; Zhang, Lei
  71. Previous financial crises leading to stagnation – selected case studies By Nina Dodig; Hansjorg Herr
  72. Bankruptcy, Investment, and Financial Constraints: Evidence from a Post-Transition Economy By Martin Pospisil; Jiri Schwarz
  73. Expectations, risk premia and information spanning in dynamic term structure model estimation By Guimarães, Rodrigo
  74. The Role of Education and Household Composition for Transitory and Permanent Income Inequality. Evidence from PSID Data By Johannes Ludwig
  75. A Note on Leverage and the Macroeconomy By Khandokar Istiak; Apostolos Serletis
  76. Nowcasting GDP: Electronic Payments, Data Vintages and the Timing of Data Releases By John Galbraith; Greg Tkacz
  77. Working Paper 15-13 - La soutenabilité de la protection sociale By Raphael Desmet; Nicole Fasquelle; Christophe Joyeux; Saskia Weemaes
  78. Peruvian Miracle: Good Luck or Good Policies? By Waldo Mendoza
  79. What do VARs Tell Us about the Impact of a Credit Supply Shock? An Empirical Analysis By Haroon Mumtaz; Gabor Pinter; Konstantinos Theodoridis
  80. Is Bitcoin the Only Cryptocurrency in the Town? Economics of Cryptocurrency and Friedrich A.Hayek By Iwamura, Mitsuru; Kitamura, Yukinobu; Matsumoto, Tsutomu
  81. The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning By Y. Hossein Farzin; Ronald Wendner
  82. Modelo VEC para la estimación de inflación bursátil: Evidencia empírica en mercados norteamericanos By Juan José Jordán Sánchez
  83. The Impact of the Great East Japan Earthquake on Commodity Prices: New Evidence from High-Frequency Scanner Data By Abe, Naohito; Moriguchi, Chiaki; Inakura, Noriko

  1. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non- predetermined variables. --
    Keywords: Identification,Financial Stability,Monetary Policy,Optimal Policy under Commitment,Augmented Taylor rule
    JEL: C61 C62 E43 E44 E47 E52 E58
    Date: 2014–04–14
  2. By: Bauer, Michael D. (Federal Reserve Bank of San Francisco)
    Abstract: This paper provides new evidence on the importance of inflation expectations for variation in nominal interest rates, based on both market-based and survey-based measures of inflation expectations. Using the information in TIPS breakeven rates and inflation swap rates, I document that movements in inflation compensation are important for explaining variation in long-term nominal interest rates, both unconditionally as well as conditionally on macroeconomic data surprises. Daily changes in inflation compensation and changes in long-term nominal rates generally display a close statistical relationship. The sensitivity of inflation compensation to macroeconomic data surprises is substantial, and it explains a sizable share of the macro response of nominal rates. The paper also documents that survey expectations of inflation exhibit significant comovement with variation in nominal interest rates, as well as significant responses to macroeconomic news.
    Keywords: inflation expectations; macroeconomic news; inflation compensation; TIPS; inflation swaps; survey expectations
    JEL: E43 E44 E52
    Date: 2014–03–27
  3. By: Cloyne, James (Bank of England); Hürtgen, Patrick (Department of Economics, University of Bonn)
    Abstract: This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer–Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the United Kingdom and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider vector autoregression literature and between our United Kingdom results and the larger narrative estimates for the United States.
    Keywords: monetary policy; narrative identification; real-time forecasts; business cycles
    JEL: E31 E32 E52 E58
    Date: 2014–03–28
  4. By: Philip Arestis (Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridg and University of the Basque Country UPV/EHU)
    Abstract: This paper examines the operations of the European Central Bank (ECB) with respect to monetary policy, along with its effects on inflation, exchange rate and financial stability. It also discusses how the regulatory role of the ECB should be improved in the future. In this way, the paper discusses the involvement of the ECB in regulatory policy towards the financial sector, and the responses of the ECB to the financial crisis, instability and banks’ illiquidity and insolvency, as well as to sovereign insolvency. It begins with the current set up of the European Monetary Union (EMU) along with the theoretical principles of the EMU model, and the extent to which it conforms with the theoretical framework of the New Consensus Macroeconomics and its policy implications, namely inflation targeting. Problems with the current EMU arrangements are then discussed, followed by changes in view of the August 2007 financial crisis and the ‘great recession’. Required ECB changes, and of course changes in monetary policies are discussed before we finally summarize and conclude.
    Keywords: European Central Bank, Monetary Policy, European Monetary Union, Current and Future Developments.
    JEL: E31 E52 E58
    Date: 2014–03–06
  5. By: Meeks, Roland (Bank of England); Nelson, Benjamin (Bank of England); Alessandri, Piergiorgio (Bank of England)
    Abstract: We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitised assets. We analyse the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics; high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances; and following a financial shock, stabilisation policy aimed solely at the securitisation markets is relatively ineffective.
    Keywords: Business fluctuations; shadow banks; credit; securitisation
    JEL: E32 E50 G20
    Date: 2014–03–28
  6. By: Orsolya Csortos (Magyar Nemzeti Bank (the central bank of Hungary)); Zoltán Szalai (Magyar Nemzeti Bank (the central bank of Hungary))
    Abstract: In this paper we apply the Early Warning System methodology to ten Central and Eastern European Countries to find useful sets of indicators which could predict macroeconomic and financial imbalances. We argue that finding such indicators is crucial in the current monetary policy framework because significant imbalances could build up without any sign of risk to price stability. We examine the stylised behaviour of the most important macroeconomic variables over the business cycle and select the most preferred indicator variables. Our methodology consists of choosing the most useful combination of variables in terms of false alarms and misses, taken as given the preferences of the decision maker in terms of committng various types of errors. We find, that a certain combination of the global financial variable, the real exchange rate, capital flows and credit is a plausible signal macroeconomic imbalances. The results suggest that although the above indicators should not be used mechanically, they could usefully complement analytical tools available to modern central banks.
    Keywords: early warning indicators, signalling approach, macroeconomic stability, financial stability, monetary policy strategy
    JEL: E32 E37 E44 E58
    Date: 2014
  7. By: Ahmed, Shahzad; Pasha, Farooq
    Abstract: In this paper, we establish the empirical linkages between nominal and real variables of Pakistani economy using both annual and quarterly data. The focus of our empirical analysis has been limited to the post financial liberalization period starting in early 1990s. Furthermore, this paper theoretically evaluates the role of money and monetary policy in propagating business cycle fluctuations of Pakistani economy using different ways of introducing the role of money via money in utility (MIU) and cash in advance constraint (CIA) as well as with different formulation of monetary policy either through a money growth rule or Taylor type interest rate rule.
    Keywords: General Equilibrium Models, Modeling and Simulations, Monetary Policy
    JEL: D58 E27 E52
    Date: 2014–04–11
  8. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper provides estimates of the effects of the fall in financial and housing wealth in 2008-2009 on overall macroeconomic activity. These effects are large and account for a large fraction of the slowdown in activity. Much of the 2008-2009 recession is estimated to be simply standard wealth effects at work.
    Keywords: Financial crisis, Wealth effects
    JEL: E32 E37
    Date: 2014–03
  9. By: Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
    Abstract: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which firms face moderate degrees of price rigidities and no nominal rigidities in the wage setting process. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small size of the drop in inflation that occurred during the Great Recession.
    JEL: E1 E2 E3
    Date: 2014–04
  10. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Connection, financial sector, real economy, monetary policy transmission mechanism,
    JEL: G20 E44 E52
    Date: 2013–08–01
  11. By: Simon Gilchrist; Jae W. Sim; Egon Zakrajšek
    Abstract: Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional “wait-and-see” effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes. The relative importance of these two mechanisms is analyzed within a quantitative general equilibrium model, featuring heterogeneous firms that face time-varying idiosyncratic uncertainty, irreversibility, nonconvex capital adjustment costs, and financial frictions. The model successfully replicates the stylized facts concerning the macroeconomic implications of uncertainty and financial shocks. By influencing the effective supply of credit, both types of shocks exert a powerful effect on investment and generate countercyclical credit spreads and procyclical leverage, dynamics consistent with the data and counter to those implied by the technology-driven real business cycle models.
    JEL: E22 E32 G31
    Date: 2014–04
  12. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Roundtable Discussion in Honor of Terrence Checki: Three Decades of Crises: What Have We Learned?, Federal Reserve Bank of New York, New York City
    Keywords: asset purchase program; unconventional monetary policy; Terrence Checki
    JEL: E52 F15
    Date: 2014–03–27
  13. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper undertakes a normative investigation of the quantita- tive properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main …nding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi…cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government …nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under exible skill supply.
    Keywords: skill premium, tax smoothing, optimal …scal policy
    JEL: E13 E32 E62
    Date: 2014–03
  14. By: Piergiorgio Alessandri (Bank of Italy); Haroon Mumtaz (Queen Mary University of London)
    Abstract: When do financial markets help in predicting economic activity? With incomplete markets, the link between financial and real economy is state-dependent and financial indicators may turn out to be useful particularly in forecasting "tail" macroeconomic events. We examine this conjecture by studying Bayesian predictive distributions for output growth and inflation in the US between 1983 and 2012, comparing linear and nonlinear VAR models. We find that financial indicators significantly improve the accuracy of the distributions. Regime-switching models perform better than linear models thanks to their ability to capture changes in the transmission mechanism of financial shocks between good and bad times. Such models could have sent a credible advance warning ahead of the Great Recession. Furthermore, the discrepancies between models are themselves predictable, which allows the forecaster to formulate reasonable real-time guesses on which model is likely to be more accurate in the next future.
    Keywords: Financial frictions, Predictive densities, Great Recession, Threshold VAR
    JEL: C53 E32 E44 G01
    Date: 2014–04
  15. By: Marco Veronese Passarella (University of Leeds); Malcolm Sawyer (University of Leeds)
    Abstract: The relationships between financial systems and the macroeconomy with emphasis on the saving—investment relationships and the nature of money are set out. A ‘circuitist’ framework is extended to reflect some major features of the era of financialisation since circa 1980
    Keywords: monetary circuit, financialisation, saving, investment
    JEL: E44 G20
    Date: 2014–01–20
  16. By: Myungkyu Shim; Hee-Seung Yang
    Abstract: A significant obstacle to studying business cycle properties of job polarization has been the presence of inconsistencies in aggregate employment data for different occupation groups. In order to overcome this problem, we construct aggregate hours series using the method of ‘conversion factors’, which was originally developed by the Bureau of Labor Statistics. After showing that our data outperform previously available data in terms of consistency, we analyze two business cycle properties of job polarization that have not yet been studied before: (1) the changes in volatility of employment of each occupation group since the mid-1980s and (2) the asymmetric effects of recessions on employment of different occupation groups. We find that employment volatility of middle-skill occupations has decreased by 40% since the mid-1980s due to jobless recoveries observed in the last three recessions.
    Keywords: Business cycle; Job polarization; Consistency; Occupation; Conversion factor
    JEL: C82 E24 E32
    Date: 2014–04
  17. By: Eckhard Hein (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Nina Dodig (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: In this paper we review the empirical and theoretical literature on the effects of changes in the relationship between the financial sector and the non-financial sectors of the economy associated with ‘financialisation’ on distribution, growth, instability and crises. We take a macroeconomic perspective and examine four channels of transmission of financialisation to the macroeconomy: first, the effect on income distribution, second, the effects on investment in capital stock, third, the effects on household debt and consumption, and fourth, the effects on net exports and current account balances. For each of these channels we briefly review some empirical and econometric literature supporting the presumed channels, some theoretical and modelling literature examining the macroeconomic effects via these channels, and finally, we present small models generating the most important macroeconomic effects. We show that, against the background of redistribution of income at the expense of the labour income share and depressed investment in capital stock, each a major feature of financialisation, short- to medium-run dynamic ‘profits without investment’ regimes may emerge, which can be driven by flourishing consumption demand or by rising export surpluses, compensating for low or falling investment in capital stock. However, each type of these regimes, the ‘debt- led consumption boom’ type and the ‘export-led mercantilist’ type, contains internal contradictions, with respect to household debt in the first regime and with respect to foreign debt of the counterpart current account deficit countries in the second regime, which finally undermine the sustainability of these regimes and lead to financial and economic crises.
    Keywords: financialisation, distribution, growth, instability, financial and economic crises, Kaleckian models, current account imbalances.
    JEL: E12 E22 E24 E44 F41 G01
    Date: 2014–02–15
  18. By: George S. Tavlas (Bank of Greece)
    Abstract: This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid-1930s, advocated a price-level stabilization rule, and by Milton Friedman, who, beginning in the late-1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons' rule relates to modern rules which emphasize the pursuit of price stability as representing optimal monetary policy.
    Keywords: Milton Friedman; Henry Simons; monetary-policy rules
    JEL: B22 E52
    Date: 2014–03
  19. By: Ansgar Belke
    Abstract: This Paper comments on the role of the Monetary Dialogue in the context of an evolving monetary policy. The discussion is conducted in terms of the adoption of forward guidance on interest rates by the European Central Bank (ECB), the ECB’s model choice and data revision policies in inflation forecasts, its membership in the Troika, its activities as a financial supervisor, as well as regards its bond purchasing activities and the implication for ECB monetary policy stemming from Fed’s envisaged exit from unconventional monetary policies. This paper also assesses on a case-by-case basis the actual exchange of information between the European Parliament (EP) and the ECB. We argue that the new ECB supervisory role has made the Monetary Dialogue exercise even more important “now” than in “normal” times. Still, we suggest changes, both procedural as well as regarding its focus range, to make it even more effective. In our view, the transparency/accountability issue represented by a Supervisory Board ‘hosted’ by ECB needs to be addressed. A crucial challenge for the Monetary Dialogue is also to assess the optimal degree of ECB transparency and accountability towards the EP, the key democratic institution.
    Keywords: Accountability; European Parliament; forward guidance; monetary dialogue; transparency
    JEL: E52 E58
    Date: 2014–03
  20. By: Gianni Amisano (European Central Bank, DG Research); Roberta Colavecchio (Universität Hamburg (University of Hamburg)); Gabriel Fagan (European Central Bank, DG Research)
    Abstract: We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the euro area, Japan and the US. The model specification allows for three different inflation regimes: Low, Medium and High inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the early 1970s up to the present. Our analysis suggests that the risks of a Low inflation regime in the euro area have been increasing in the course of the last six quarters of the sample; moreover, money growth appears to play a significant role in the assessment of such risks. Evidence for Japan and the US, on the other hand, shows that the inclusion of a monetary indicator variable does not substantially change the assessment of the risk of a Low inflation regime in either of the two countries.
    Keywords: Money growth, deflation, inflation regimes, Markov Switching models, Bayesian inference
    JEL: C11 C53 E31
    Date: 2014–04
  21. By: Gary B. Gorton; Andrew Metrick; Lei Xie
    Abstract: Why did the failure of Lehman Brothers make the financial crisis dramatically worse? The financial crisis was a process of a build-up of risk during the crisis prior to the Lehman failure. Market participants tried to preserve an option or exit by shortening maturities – the “flight from maturity”. With increasingly short maturities, lenders created the possibility of fast exit. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility. We produce a chronology of the crisis which formalizes the dynamics of the crisis. A crisis is a dynamic process in which “tail risk” is endogenous.
    JEL: E32 E42 E44 G01
    Date: 2014–04
  22. By: Hikaru Saijo
    Abstract: I study a business cycle model where agents learn about the state of the economy by accumulating captal. During recessions, agents invest less, abd this generates noisier estimates of macroeconomic conditions and an increase in uncertainty. The endogenous increase in aggregate uncertainty further reduces economic activity, which in turn leads to more uncertainty, and so on. Thus, through changes in uncertainty, learning gives rise to a multiplier effect that amplifies business cycles. I use the calibrated model to measure the size of this uncertainty multiplier.
    Date: 2013–11
  23. By: FUKAO Mitsuhiro
    Abstract: In order to maintain the stability of its financial system, Japan must control its budget deficit by continuing with a contractionary fiscal policy. Ideally, the negative effects of a tight fiscal policy should be countered with an expansionary monetary policy. However, the effectiveness of the conventional interest-rate policy has been diluted by the zero lower bound of interest rates. Prime Minister Shinzo Abe asked the Bank of Japan to set a 2% inflation target to be achieved in two years through a massive quantitative easing of the monetary base. In this paper, we first review Japan's macroeconomic performance since the collapse of the asset-price bubble in the late 1980s. Next, we make a long-term projection of Japan's fiscal balance by estimating the macro production function for Japan. We also estimate the required increase in the government's tax revenues under a few scenarios. After presenting a possible fiscal crisis scenario, we evaluate the effectiveness of quantitative easing and highlight its limitations. Thereafter, we propose some measures to consolidate budget deficits under a deflationary environment in order to avoid such a crisis. Some policy options include a combination of a gradual increase in indirect taxes and a reduction in payroll tax. In order to overcome the zero lower bound of nominal interest rates, the introduction of the Gesell tax has also been proposed. By levying a tax on the outstanding amount of government-guaranteed financial assets including cash, it is possible to set a negative nominal return on safe assets.
    Date: 2014–04
  24. By: Roy, Ripon; Rahman, Md. Mokhlesur
    Abstract: Workers’ remittance inflows have been rising significantly over the past decade for Bangladesh. They have become one of the most stable sources of foreign exchange earnings and emerged as a crucial issue for monetary and fiscal policy. In 2012, remittances contributed to 12.3% of GDP of Bangladesh while the contribution was 6.4% in 2003. Besides lowering poverty and stimulating economic growth through different microeconomic and macroeconomics channels, remittances like other massive capital inflows can induce inflation and appreciate the real exchange rate and thereby hurt the competitiveness of the tradable sector along the lines of the Dutch Disease phenomenon. In this paper, we have empirically tested whether growing remittances cause an inflation (Model 1) as well as food inflation (Model 2) in Bangladesh using monthly data over the time period July 2003- July 2013 (post - floating exchange rate scenario). We have considered two models as the pattern of expenditure varies by consumption categories suggesting that the effect of remittances may also vary across them. Monthly data is used to better represent the changes in inflation as it is well known that inflation changes occur very quickly in response to shocks. The reason for specifically concentrating on the post-floating exchange rate scenario comes from the fact that the impact of remittances on a economy depends on the exchange rate regimes and studies not controlling for regimes may be biased as suggested by Ball, Lopez & Reyes (2013). Johansen (1988) and Johansen & Juselius (1990) cointegration technique is used to determine the long run relationship between remittances and inflation. Then, a Vector Error Correction Model (VECM) approach is applied for estimating the direction, extent and significance of the relationship. The results of both the models show that remittance inflows cause an inflationary pressure in Bangladesh while the responsiveness of food inflation is almost two and half times higher than general inflation.
    Keywords: Remittances, Inflation, Dutch Disease, Cointegration, VECM, Connectedness Analysis
    JEL: E31 F24
    Date: 2014–04–07
  25. By: Delphine Bassilière; Didier Baudewyns; Francis Bossier; Ingrid Bracke; Igor Lebrun; Peter Stockman; Peter Willemé
    Abstract: This Working Paper is aimed at describing the current version of Federal Planning Bureau's medium-term macrosectoral model, named HERMES. This model is used to produce on a regular basis medium-term outlooks for the Belgian economy. In addition to the main macroeconomic aggregates (GDP, private consumption, external trade, investments,…), those outlooks also concern labour market aggregates, detailed public finances, energy  consumption and greenhouse gas emissions. The HERMES model is also used to compute the impact of policy measures and external shocks on the Belgian economy.
    JEL: C5 E1 E2 E6 H2 H5 J3
    Date: 2013–11–08
  26. By: Simon Gilchrist; Benoît Mojon
    Abstract: We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizable contractions in output, increases in unemployment, and declines in inflation across the euro area.
    JEL: E32 E44 G12
    Date: 2014–04
  27. By: Amélie Charles; Olivier Darné; Laurent Ferrara
    Abstract: After years of low macroeconomic volatility since the early eighties, well documented and referred to as the Great Moderation period in the literature, the 2008-2009 worldwide recession adversely impacted output levels in most of advanced countries. This Great Recession period was characterized by a sharp apparent increase in output volatility. In this paper we evaluate whether this sudden event is likely to be temporary. Whether or not this new volatility regime is likely to persist would have strong macroeconomic effects, especially on business cycles. Based on break detection methods applied to a set of advanced countries, our empirical results do not give evidence to the end of the Great Moderation period but rather that the Great Recession is characterized by a dramatic temporary effect on the output growth but not on its volatility. In addition, we show that neglecting those breaks both in mean and in variance can have large effects on output volatility modelling. Last we empirically show that observed breaks during the Great Recession are to some extent related to uncertainty measures.
    Keywords: Great Recession; Great Moderation; breaks; volatility; uncertainty.
    JEL: E32 C22
    Date: 2014
  28. By: Jin Cheng; Meixing Dai; Frédéric Dufourt
    Abstract: We propose a model to analyze the conditions of emergence of a twin banking and sovereign debt crisis in a monetary union with an institutional framework which is broadly similar to the Eurozone at the onset of the financial crisis. We show that when the responsibility of rescuing the banking system is entirely ascribed to domestic governments - in particular because the central bank is not allowed to intervene as a lender of last resort on sovereign bond markets - the main tool to fight against a systemic banking crisis (the financial safety net) may aggravate, instead of mitigate, the solvency problems of banks and of the government. Depending on investors' expectations, the banking system and the government may either survive a negative financial shock or fail together. In this context of negative self-fulfilling expectations, we also analyze the role of credit rating agencies as potential catalysts to the crisis, we emphasize possible contagion effects to "healthy" member states through the banking system, and we discuss proposed policy options like the creation of "Eurobonds" to avoid the resurgence of such crises.
    Keywords: banking crisis, sovereign debt crisis, bank runs, financial safety net, liquidity regulation, government deposit guaranteen self fulfilling propheties.
    JEL: E43 F31 F34 F4 G2
    Date: 2014
  29. By: Cloyne, James (Bank of England); Surico, Paolo (London Business School)
    Abstract: Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.
    Keywords: mortgage debt; narrative tax changes; liquidity constraints
    JEL: E21 E62 H31
    Date: 2014–03–28
  30. By: Barbara Annicchiarico (CEIS, University of Rome "Tor Vergata"); Fabio Di Dio (Sogei S.p.A., IT Economia); Francesco Felici (Ministero dell’Economia e delle Finanze, Dipartimento del Tesoro)
    Abstract: We study the potential impact of fiscal devaluation policies on the Italian economy using IGEM, a dynamic general equilibrium model for the Italian economy developed at the Department of Treasury of the Italian Ministry of the Economy and Finance. The simulations show that fiscal devaluation policies are likely to produce short-run slight improvements on the external position of the economy, while the output gains seem to persist in the long run. Non-negligible distributional effects across households are also observed, since taxation on consumption tends to be regressive.
    Keywords: Fiscal Devaluation, DGE, Structural Reforms, Italy
    JEL: E10 C50 E60
    Date: 2014–04–09
  31. By: Henri Audigé
    Abstract: In this paper, we examine the determinants of global investors’ net flows to investment bond funds dedicated to emerging economies and analyze the effects of the U.S. expansionary monetary policy on these flows from 2010 to 2013. We particularly focus on investors’ behavior vis-à-vis emerging markets local and foreign currency bond funds. Our main findings confirm the significant external impact of U.S. monetary policy decisions – and especially tapering announcements – on net flows to foreign currency bond funds. Our results highlight the higher sensitivity of EMEs foreign currency bond markets to U.S monetary shocks and suggest possible transmission effects from developed to emerging bond markets.
    Keywords: Emerging market economies, capital flows, bond markets, shocks transmission, institutional investors, unconventional U.S. monetary policy.
    JEL: E44 G23 F32
    Date: 2014
  32. By: Escudé, Guillermo J.
    Abstract: A traditional way of thinking about the exchange rate regime and capital account openness has been framed in terms of the 'impossible trinity' or 'trilemma', according to which policymakers can only have two of three possible outcomes: open capital markets, monetary independence and pegged exchange rates. The present paper is a natural extension of Escude (A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes, 2013), which focuses on interest rate and exchange rate policies, since it introduces the third vertex of the 'trinity' in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE's international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of an isosceles triangle. Each of three possible government intervention policies taken individually (in the domestic currency bond market, in the foreign currency market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the three possible pairs of intervention policies corresponds to one of the three edges of the triangle, and the three simultaneous intervention policies taken jointly correspond to the triangle's interior. This paper shows that this interior, or 'possible trinity' is quite generally not only possible but optimal, since the central bank obtains a lower loss when it implements a policy with all three interventions. --
    Keywords: DSGE models,small open economy,monetary and exchange rate policy,capital controls,optimal policy
    JEL: E58 O24
    Date: 2014
  33. By: Magomet Yandiev (Department of Economics, Lomonosov Moscow State University)
    Abstract: The author created a model that describes the relationship between the current bank interest rate (rate on loans extended to business entities) and future corporate bond yield (in the text this is formula # 17): Cbank = (k+Cbond)/(1-r). Where: CBank is interest rate on bank loans; CBond is bond yield; r is yield anticipated by shareholders; k is special ratio calculated from the formula # 22 which depends on authorized capital, EBIT, depreciation and income tax rate. Use of the model applied to Russia (calculations of early 2010) has shown that to the beginning of 2011, the financial situation in raw material industries will improve, while in other industries it will aggravate.
    Keywords: Bank interest rate, bond yield, yield anticipated by shareholders
    JEL: E44 F47 G12 G21
    Date: 2014–01
  34. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus, via Mersin 10, Turkey); Kirsten Thompson (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: The negative consequences of financial instability for the world economy during the recent financial crisis have highlighted the need for a better understanding of financial conditions. We use a financial conditions index (FCI) for South Africa previously constructed from 16 financial variables to test whether the South African economy responds in a nonlinear and asymmetric way to unexpected changes in financial conditions. To this end, we make use of a nonlinear logistic smooth transition vector autoregressive model (LSTVAR), which allows for a smooth evolution of the economy, governed by a chosen switching variable between periods of high and low financial volatility. We find that the South African economy responds nonlinearly to financial shocks, and that manufacturing output growth and Treasury Bill rates are more affected by financial shocks during upswings. Inflation responds significantly more to financial changes during recessions.
    Keywords: Financial conditions index, nonlinear vector autoregression, LSTVAR, asymmetry
    JEL: C32 G01 E44 E32
    Date: 2014–04
  35. By: Theodoridis, Konstantinos (Bank of England); Zanetti, Francesco (Bank of England)
    Abstract: This paper uses a vector autoregression model estimated with Bayesian methods to identify the effect of productivity news shocks on labour market variables by imposing that they are orthogonal to current technology but they explain future observed technology. In the aftermath of a positive news shock, unemployment falls, whereas wages and the job finding rate increase. The analysis establishes that news shocks are important in explaining the historical developments in labour market variables, whereas they play a minor role for movements in real activity. We show that the empirical responses to news shocks are in line with those of a baseline search and matching model of the labour market and that the job destruction rate and real wage rigidities are critical for the variables’ responses to the news shock.
    Keywords: Anticipated productivity shocks; Bayesian SVAR methods; labour market search frictions
    JEL: C32 C52 E32
    Date: 2014–03–28
  36. By: BLINOV, Sergey
    Abstract: For effective economic growth, intentional “creation” of unemployment is required to be followed up by its «elimination». From Okun’s law one can infer an interesting corollary: growing unemployment without reducing GDP increases the economy’s potential. This corollary can be proved theoretically (unlike Okun’s law which is an empirical law). There were two causes of the USSR’s economic slowdown on the eve of its breakup. One of them was a shortage of labor which is identical to lack of unemployment. However strange it may seem, but the economic problems of modern Russia have the same root cause.
    Keywords: employment; Okun’s law; economic growth; productivity
    JEL: E24 J01 J08 N14
    Date: 2014–04–10
  37. By: Rachidi Kotchoni; Dalibor Stevanovic
    Abstract: This paper advances beyond the prediction of the probability of a recession by also considering its severity in terms of output loss and duration. First, Probit models are used to estimate the probability of a recession at period t + h from the information available at period t. Next, a Vector Autoregression (VAR) augmented with diffusion indices and an inverse Mills ratio (IMR) is fitted to selected measures of real economic activity. The latter model is used to generate two forecasts: an average forecast, and a forecast under the pessimistic assumption that a recession occurs at the forecast horizon. The severity of recessions is then predicted as the gap between these two forecasts. Finally, a zero-inated Poisson model is fitted to historical durations of recessions. Our empirical results suggest that U.S. recessions are fairly predictable, both in terms of occurrence and severity. Out-of-sample experiments suggest that the inclusion of the IMR in the VAR model significantly improves its forecasting performance.
    Keywords: Duration of recessions, Forecasting Real Activity, Probability of Recessions, Probit, Vector Autoregression, Zero Inated Poisson.,
    JEL: C3 C5 C35 E27 E37
    Date: 2013–11–01
  38. By: de la Fonteijne, Marcel
    Abstract: Main goal of this paper is to clarify the paradox of monetary profit. The definitions and formulas introduced will make it simple and straight forward to understand the paradox. In order to understand from where the profits or monetary profits of capitalists and firms emerge I examined the phrase of Marx, ‘Die Gesamtklasse der Kapitalisten kann nichts aus der Zirkulation herausziehen, was nicht vorher hineingeworfen war.’ and classified it as very confusing. I will show where this confusion comes from and show how to cope with problems alike in a systematic way by using definitions and formulas. As a bonus these formulas give us insight under which conditions the economy can be sustainable and that the relation between monetary profit for firms and savings for household defines a very limited solution space in which the economy can operate in a sustainable way and yet only considering the boundary condition for firm profit and household savings. It will also give us a clue where the motivation for participating in the economy comes from.
    Keywords: monetary profit, paradox, Marx, Keynes, Capitalists
    JEL: E11 E12 E20 E25
    Date: 2013–10–08
  39. By: Congressional Budget Office
    Abstract: Under budgetary paths specified by Chairman Ryan, total deficits and debt would be smaller in future years than they would be under CBO's extended baseline. Economic output would be lower in the next few years but higher thereafter. Those projections do not represent an analysis of any specific policies, and CBO has not considered whether the specified paths are consistent with the policies or budget numbers in Chairman Ryan's proposed budget resolution.
    JEL: E62 H68
    Date: 2014–04–01
  40. By: Mazumder, Debojyoti
    Abstract: In a general equilibrium framework, an economy, with one non-traded final good and two traded intermediate goods, is modeled in this paper. It is shown that even if the economy consists of one frictionless labor market and a labor market with the search-friction, a status-conscious preference can yield unemployment in equilibrium. If such an economy opens up to trade then comparative advantage can be generated through the difference in the degree of the labor market imperfection even between two otherwise very similar countries. This setup rejects the possibility of complete specialization. Wage inequality persists within the country, for both home and foreign, in spite of free trade and, free trade does not guarantee the reduction of unemployment.
    Keywords: Trade; Search Unemployment; Inheritance Distribution
    JEL: E24 F10 F11 F16 J64
    Date: 2013–12–28
  41. By: Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld; Lukas Vogel
    Abstract: We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
    Keywords: current account; intra-european imbalances; monetary union; eurozone crisis; estimated DSGE model
    JEL: F40 F30 F21 E30
    Date: 2014–04
  42. By: C Bhujanga Rao (Faculty, National Institute of Public Finance and Policy)
    Abstract: This report provides an overview of the performance of priority sector lending by commercial banks in India. The review captures the changing contours of Reserve Bank of India policy on priority sector advances. The paper analyses the trends in priority sector lending for the period 1995-2011, the burden of non-performing assets of commercial bank in priority sector lending and the extent to which priority sector targets are achieved by individual banks. It is observed that the scheduled commercial banks credit to GDP ratio and the priority sector advances to GDP have been increasing over the years. The composition of the priority sector advances in the non-food credit of scheduled commercial banks shows that non-food advances account for more than 90 percent of the gross bank credit while food advances account for less than 10 percent. Bulk of the non-food advances is accounted for by priority sector and industry (medium and large). The non-performing assets of the commercial banks used to gauge their profitability and financial health shows vast improvement in the gross and net performing assets of banks and the asset quality of banks has been improving over the years. The performance of banks in priority sector lending has improved in recent years, although substantial variations have been observed in the performance of various bank groups as also in meeting the sub-targets within the priority sector.
    Keywords: Central Banking, Priority Sector Lending
    JEL: E5 E58
    Date: 2014–02
  43. By: Imane El Ouadghiri; Valerie Mignon; Nicolas Boitout
    Abstract: This paper investigates the impact of surprises associated with monthly macroeconomic news releases on Treasury-bond yields, by paying particular attention to the moment at which the information is published in the month. Implementing an event study on intraday data, we show that (i) the main bond market movers are based on economic activity and in ation indicators, (ii) long-maturity bonds are slightly more impacted by surprises than short-maturity ones, and (iii) the bond market is more sensitive to bad news than to good announcements. Finally, we evidence an empirical monotonic relationship between the surprises' impact and their corresponding news' publication date and/or their sign.
    Keywords: bond market, event study, macroeconomic news.
    JEL: G14 G12 E44 C22
    Date: 2014
  44. By: Cebula, Richard
    Abstract: Using over a half century of data, this empirical study adopts a simple loanable funds model to investigate the impact of federal budget deficits in the U.S. on the ex post real interest rate yield on ten year U.S. Treasury notes. Three estimates using annual data for three different time periods (1960-2013, 1971-2013, 1980-2013) are provided; in addition, as a de facto modest test of robustness, one additional estimate using quarterly data for the period 1960.1 through 2013.4 is also provided. In each of the four empirical analyses, an autoregressive 2SLS estimate finds that the ex post real interest rate yield on ten year U.S. Treasury notes is an increasing function of the ex post real interest rate yield on Moody’s Baa-rated corporate bonds, the ex post real interest rate yield on three year Treasury notes, and the ex post real interest rate yield on high grade municipal bonds. This exploratory analysis also finds consistent evidence that federal budget deficit (relative to the GDP level) exercised a positive and statistically significant impact on the ex post real interest rate yield on ten year Treasury notes
    Keywords: real longer-term interest rate; government budget deficit
    JEL: E41 E43 E44 H62
    Date: 2014–03–24
  45. By: Cebula, Richard
    Abstract: The existence of large federal budget deficits in the U.S., especially in recent years, raises the specter of concern regarding their potential effects on real interest rates (as well as economic growth and capital formation). This study provides current and new empirical evidence on the impact of the federal budget deficit on the real interest rate yields on intermediate-term debt issues of the U.S. Treasury, represented herein by the ex post real interest rate yields on three-year Treasury notes and seven-year Treasury notes, two interest rate measures that have received essentially no attention in the economics and finance literature in recent years. The study is couched within a loanable funds model that includes two ex post real interest rate yields, the monetary base as a percent of GDP, the change in per capita real GDP, net financial capital inflows as a percent of GDP, and the budget deficit as a percent of GDP. This study uses annual data for the study period 1972-2012, a time period that includes “quantitative easing” monetary policies by the Federal Reserve. Two-stage least squares estimations reveal that the federal budget deficit, expressed as a percent of GDP, has exercised a positive and statistically significant impact on the ex post real interest rate yields on both three-year and seven-year Treasury notes, even after allowing for quantitative easing and other factors. The study also considers the 1980-2012 time period and offers simple robustness testing.
    Keywords: budget deficits; real three-year Treasury yield; real seven-year Treasury yield; quantitative easing
    JEL: E42 E43 F31 F34 H62
    Date: 2014–04–10
  46. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: An important question for central banks is how they should report the uncertainty of their forecasts. This paper discusses a way in which a central bank could report the uncertainty of its forecasts in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for a central bank to report given that it is unlikely to be willing to commit to a single model. A particular model is used as an illustration.
    Keywords: Central Bank, Uncertainty, Stochastic Simulation
    JEL: E50
  47. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper presents an overlapping-generation model featuring probabilistic vot- ing over two policy issues, namely, pension and public goods. To capture the forward-looking behavior of voters, we characterize a Markov-perfect political equi- librium in which the two policy variables are conditioned on a payoff-relevant state variable, that is, capital. It is shown that (i) as the population ages, the pension- to-GDP ratio and the growth rate of capital increase, but the public goods-to-GDP ratio decreases and (ii) the pension-to-GDP and public goods-to-GDP ratios are too high and the growth rate too low from the standpoint of social welfare.
    Keywords: Economic Growth; Population Aging; Probabilistic Voting; Public Pension; Public Goods Provision
    JEL: D70 E24 H55
    Date: 2014–04
  48. By: Asako, Kazumi; Onodera, Takashi; Ueda, Atsuko
    Abstract: The purpose of this paper is to analyze regional business cycle movements in Japan. We construct regional monthly composite indexes by 47 prefectures over the period 1985-2010. In order to characterize the deviation of regional economies from the nationwide economy, we propose a method to match each prefectural composite index sequence to the national composite index sequence. High performance of the matching analysis indicates that regional deviations involve leads and lags in both the timing of the business cycle and time trends, although certain disparities remain for some prefectures. The analysis also suggests that there is a structural change between the post-bubble era of the 1990s and the long expansion phase of 2002-2008. Only a limited number of prefectures show better performance than the national average, while the majority tend to fall behind during the expansion phase. Also, we investigate the factors that exert influence on prefectural economies, and find that fiscal and monetary measures possibly help stimulate regional economies.
    Keywords: regional business cycle, composite index, structural change, public investment
    JEL: E32 R11
    Date: 2014–03
  49. By: Zhongbo Jing; Jakob de Haan; Jan P. A. M. Jacobs; Haizhen Yang
    Abstract: We construct a money market pressure index based on central bank reserves and the short-term nominal interest rate to identify banking crises, thereby extending the index proposed by Von Hagen and Ho (2007). We compare the crises identified by both indices with banking crises according to the benchmark of Laeven and Valencia (2010). Both indices identify more crises than these benchmarks. The crises identified by our index are more in line with the benchmark than the crises identified by the Von Hagen and Ho index, while our index also gives fewer false signals.
    Keywords: banking crises, money market pressure index,
    JEL: C43 E44 G21
    Date: 2013–10–01
  50. By: Frédéric Gonand; Pierre-André Jouvet
    Abstract: The demographic structure of a country influences economic activity. The "second dividend" modifies growth. Accordingly, in general equilibrium, the second dividend and the demographic structure are interrelated. This paper aims at assessing empirically the "second dividend" in a dynamic, empirical and intertemporal setting that allows for measuring its impact on growth, its intergenerational redistributive effects, and its interaction with the demographic structure. The article uses a general equilibrium model with overlapping generations, an energy module and a public finance module. Policy scenarios compare the consequences of recycling a carbon tax through lower proportional income tax rather than higher public lumpsum expenditures. They are computed for two countries with different demographics (France and Germany). Results suggest that the magnitude of the "second dividend" is significantly related with the demographic structure. The more concentrated the demographic structure on cohorts with higher income and saving rate, the stronger the effect on capital supply of the second dividend. The second dividend weighs on the welfare of relatively aged working cohorts. It fosters the wellbeing of young working cohorts and of future generations. The more concentrated the demographic structure on aged working cohorts, the higher the intergenerational redistributive effects of the second dividend.
    Keywords: Energy transition, intergenerational redistribution, overlapping generations, double dividend, general equilibrium
    JEL: D58 D63 E62 L7 Q28 Q43
    Date: 2014
  51. By: Dubovyk Tetyana
    Abstract: This paper studies the macroeconomic performance of Ukraine since 1991. During last twenty years, Ukraine experienced three episodes of prolonged recessions. The project uses business cycle accounting methodology developed by Chari et al. (2007) to identify driving forces behind economic downturns and growth episodes experienced in recent years. Ukrainian government needs to develop policies for sustainable growth. The research project studies this issue in two dimensions. First, the analysis within a general equilibrium framework identifies distortions which are the most harmful to the economic growth and will help to design future policies. Secondly, the wedges estimated from the data take into account not only legislatively declared taxes, for example, labor income taxes, but also incorporate institutional distortions in the labor market such as hiring and firing costs, expenditures associated with regulations’ compliance. We also estimate the contribution of each wedge to each crisis episode and to subsequent recovery.
    JEL: E3 O4 O5 P2
    Date: 2014–04–09
  52. By: Ramsay, Bruce A. (Cascadia Monetary Research, Alberta, Canada; and RiskLab Finland at IAMSR, Åbo Akademi University and Arcada University of Applied Sciences, Finland); Sarlin, Peter (Center of Excellence SAFE at Goethe University Frankfurt, Germany, and RiskLab Finland at IAMSR, Åbo Akademi University and Arcada University of Applied Sciences, Finland)
    Abstract: This paper operationalizes early theoretical contributions of Hyman Minsky and applies these in the context of economic sectors and nations. Following the view of boom-bust asset cycles, depicted by the endogenous build-up of risks and their abrupt unraveling, Minsky highlighted the relationship between debt obligations and cash flows. While leverage is oftentimes linked to the vulnerability of a nation, and hence systemic risk, one less explored measure of leverage is the debt-to-cash flow ratio (Debt/CF). Cash flows certainly have a well-known, academically verified connection to the ability of corporations to service and repay corporate debt. This paper investigates whether the relationship between the flow of a nation's savings to its stock of total debt provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic Debt/CF trends, as well as apply the same procedure to individual economic sectors. This assessment of systemic risk is arranged for presentation within a four-zone framework. In terms of an early-warning indicator, we show that the Debt/CF ratio effectively stratifies systemic risks, and offers a useful platform toward macro-financial sustainability.
    Keywords: debt-to-cash flow; debt-to-gross saving; systemic risk; four-zone framework
    JEL: E21 F34 G01 H63
    Date: 2014–04–03
  53. By: Daniel Detzer (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Hansjorg Herr (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: This paper analyses financial crises from a theoretical point of view. For this it reviews what different schools of economic thought have to say about financial crises. It examines first the approaches that regard financial crises as a disturbing factor of a generally stable real economy (Wicksell, Hayek, Schumpeter, Fisher, and the early Keynes). Thereafter, approaches, where the dichotomy between the monetary and the real sphere is lifted are reviewed. Here in particular the later works of Keynes and the contributions of Minsky are of importance. Lastly, it is looked at the behavioural finance approaches. After having reviewed the different approaches it is examined, where those approaches have similarities and where they fruitfully can be combined. Based on this, we develop an own theoretical framework methodologically based on a Wicksellian cumulative process, however, overcoming the neoclassical dichotomy. The paper ends with some policy recommendations based on the developed theoretical framework.
    Keywords: Financial crisis, crisis theory, behavioral finance, Hayek, Keynes, Minsky, Schumpeter, Wicksell
    JEL: E12 E13 G01
    Date: 2014–02–15
  54. By: Lindner, Fabian
    Abstract: Much of the literature on the effect of housing wealth on consumption has been embedded in a simple life-cycle model in which housing price changes work as a wealth effect. In such models, windfall gains in housing always lead to positive changes in consumption. However, this might constitute a fallacy of composition. Such models ignore that changes in housing wealth have distributional consequences between those planning to sell their house and those planning to buy a house. Further, since most housing is not simply financed out of current cash holdings but by mortgages, the institutions on mortgage markets have to be considered when looking at the wealth effect of housing. In this paper, a model is presented from which the classic Ando-Modigliani consumption function augmented by housing wealth can be deduced. It is shown that the deeper structural model from which this equation is deduced implies that changes in housing wealth are not necessarily positively correlated with consumption. It will be argued that changes both in demographics (the composition of the age groups in the population) as well as in mortgage markets have led to a structural break in the effect of housing wealth on consumption in the mid-1980s in the US. In the empirical part of the paper, two VAR models are estimated and impulse-response functions are computed. The results show that housing wealth changes did affect consumption differently before the mid-1980s and afterward. While both models show that consumption was positively related to housing wealth shocks after the mid-1980s, there was no or even a negative relation before. --
    Keywords: housing,consumption,wealth effect,demographics,mortgage markets
    JEL: C32 E21 E44 R31
    Date: 2014
  55. By: Asonuma, Tamon
    Abstract: Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina�s default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign�s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.
    Keywords: Sovereign defaults; External debt; Real exchange rate; Currency composition of debt;
    JEL: E43 F32 F34 G12
    Date: 2014–03–23
  56. By: Jose-Miguel Albala-Bertrand (Queen Mary University of London)
    Abstract: This document summarizes the thrust of my monograph book Disasters and the Networked Economy (2003, NY: Routledge. 228 pp. ISBN: 978-0-415-66629-9). It is no substitution for the book, but it attempts to make salient the main concepts, explanations and conclusions of it. It does so by first presenting a short general summary and then a summary of the main points of each chapter as well as the main conclusions of the book. It also includes the full list of references used by the book.
    Keywords: Functionality, Localization, Network shifting, Substitution potential, Endogenous reactions, Development
    JEL: C18 E20 F43 F47 O11 O16 O19 P48 Q54
    Date: 2014–04
  57. By: Hossein Asgharian (Lund University); Charlotte Christiansen (Aarhus University and CREATES); Ai Jun Hou (Stockholm University)
    Abstract: We investigate the long-run stock-bond correlation using a novel model that combines the dynamic conditional correlation model with the mixed-data sampling approach. The long-run correlation is affected by both macro-finance variables (historical and forecasts) and the lagged realized correlation itself. Macro-finance variables and the lagged realized correlation are simultaneously significant in forecasting the long-run stock-bond correlation. The behavior of the long-run stock-bond correlation is very different when estimated taking the macro-finance variables into account. Supporting the flight-to-quality phenomenon for the total stock-bond correlation, the long-run correlation tends to be small/negative when the economy is weak.
    Keywords: DCC-MIDAS model, Long-run correlation, Macro-finance variables, Stock-bond correlation
    JEL: C32 C58 E32 E44 G11 G12
    Date: 2014–04–10
  58. By: Sebastian Voll (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: Dazu werden die relevanten institutionellen Aspekte des Federal Reserve Systems der USA und ihre Wirkung auf die ISA-Salden erläutert und mit den Verhältnissen in der Eurozone abgeglichen. Dabei stellt sich heraus, dass die Strukturen in den USA grundsätzlich geeignet sind, den Aufbau hoher Überweisungssalden zu verhindern ohne die Verantwortung einzelnen Federal Reserve Banken zuzuweisen. Der Vergleich mit dem Eurosystem zeigt dagegen, dass ein weitreichender Umbau der geldpolitischen Konzeption notwendig wäre, um ein ebenso effektives Funktionieren wie in den USA zu gewährleisten.
    Keywords: TARGET2, payment systems, currency area, ECB, Fed
    JEL: E51 F33
    Date: 2014–04–07
  59. By: Myungkyu Shim; Hee-Seung Yang
    Abstract: This paper explores the relationship between job polarization and interindustry wage differentials. Using the U.S. Census and EU KLEMS data, we find that the progress of job polarization between 1980 and 2009 was more evident in industries that initially paid a high wage premium to workers than in industries that did not. With a two-sector neoclassical growth model to highlight the key mechanism, we argue that this phenomenon can be explained as a dynamic response of firms to interindustry wage differentials: firms with a high wage premium seek alternative ways to cut production costs by replacing workers who perform routine tasks with Information, Communication, and Technology (ICT) capital. The replacement of routine workers with ICT capital has become more pronounced as the price of ICT capital has fallen over the past 30 years. As a result, firms that are constrained to pay a relatively high wage premium have experienced slower growth of employmentof routine workers than firms in low-wage industries, which led to heterogeneity in job polarization across industries.
    Keywords: Job Polarization, Interindustry Wage Differentials, Two Sector Growth Model, Endogenous Technology Adoption
    JEL: E24 J24 J31 O33 O41
    Date: 2014–04
  60. By: Magomet Yandiev (Department of Economics, Lomonosov Moscow State University); Renat Bekkin (Mardjani Foundation, Moscow State Institute of International Relations (University))
    Abstract: The authors analyze the structure of the market quotation of financial assets and come to the conclusion that one of its components is a financial asset identical with a commercial credit. Hence, in terms of the Islamic financial system any financial asset is inappropriate for investment because its quotation contains elements of danism. The authors demonstrate a new approach to the structure of the Islamic infrastructure of exchange trading by financial assets, which would allow excluding elements unacceptable from the point of view of Sharia.
    Keywords: Islamic finance, Islamic banking, riba, gharar, maisir
    JEL: G12 G14 F29 F30 E44
    Date: 2013–12
  61. By: Peiwen Bai; Wenli Cheng
    Abstract: With the help of a simple model this paper formulates a hypothesis that a monetary expansion in the Chinese context of a segmented labor market has the effect of widening the wage gap between state and non-state workers. We argue that the reason for the increase in wage differential is that SOEs are in a privileged position to receive new money first which means the wage rate of SOE workers are raised first. It is only after the new money reaches the non-state sector via spending, does the wage rate of non-state workers rise with a delay and probably to a lesser extent. Our empirical analysis based on 10 sectors in China over the period 1990 to 2011 supports our hypothesis.
    Keywords: monetary expansion, labor market segmentation, wage differential between state and non-state workers in China
    JEL: E51 J31
    Date: 2014–04
  62. By: Carlo Ciccarelli (CEIS, University of Rome "Tor Vergata"); Anna Missiaia (London School of Economics)
    Abstract: This paper presents annual estimates of total and per-capita GDP at 1910 prices for the regions of Imperial Austria from the origin of the Dual Monarchy (1867) to the eve of WWI (1913). The time paths of regional GDP are estimated from the yield of the tax on the transfer of real and financial property which is itself very highly correlated with the Schulze (2007) estimates of regional GDP for census years (1870, 1880, 1890, 1900, and 1910). The relative continuity or discontinuity of per-capita GDP growth partitions Austria's regions into two groups. Clear evidence of discontinuity (a "take-off") is present in Carniola, Carinthia, Salzburg, Styria, Littoral, Tyrol, and to some extent Moravia. In Lower and Upper Austria, Bohemia, Silesia, Galicia, Bukovina, and Dalmatia there is instead no evidence of structural break in their growth rates. Significant drops in the level of per-capita GDP do occur (as in Lower Austria and Bohemia after the 1873 financial crash) but have moderate effects on the growth of subsequent years. Regional (per-capita) inequality is also evaluated using standard measures. The coefficient of variation and Theil index follow a U-shaped curve: after a decline lasted about 15 years they both rise and point to, from ca. 1885, growing divergence.
    Keywords: Austria, Regions, GDP, Trend, Cycle, Convergence
    JEL: E32 N33 R11
    Date: 2014–04–11
  63. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Maine, CEPREMAP - Centre pour la recherche économique et ses applications); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: Since the last recession, it is usually argued that older workers are less affected by the economic downturn because their unemployment rate rose less than the one of prime-age workers. This view is a myth: older workers are more sensitive to the business cycle. We document volatilities of worker flows and hourly wage across age groups on CPS data. We find that old worker's job flows are characterized by a higher responsiveness to business cycles than their younger counterparts. In contrast, their wage cyclicality is lower than prime-age workers'. Beyond this empirical contribution, we show that a life-cycle Mortensen & Pissarides (1994) model is well suited to explain these facts: older workers' shorter work-life expectancy endogenously reduces their outside options and leads their wages to be less sensitive to the business cycle. Thus, in a market where wage adjustments are small, quantities vary a lot: this is the case for older workers, whereas the youngest behave like infinitively-lived agents. Our theoretical results point out that Shimer (2005)'s view on the MP model is consistent with prime-age workers' labor market while aging endogenously introduces real wage rigidities, allowing to match what we observe for old workers, without specific assumptions as in Hagendorn & Manovskii (2008).
    Keywords: search ; matching ; business cycle ; life-cycle
    Date: 2014–03
  64. By: Stan Veuger (American Enterprise Institute); Daniel Shoag
    Abstract: We document the tight link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession.
    Keywords: unemployment,Great Recession,geography,economic uncertainty
    JEL: A
    Date: 2013–09
  65. By: Pablo A. Guerron-Quintana; Ryo Jinnai (Texas A&M University)
    Abstract: We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy’s growth trend. To this end, we propose a model featuring endogenous growth á la Romer and a liquidity friction á la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011.
    Date: 2013–11
  66. By: Albers, Scott
    Abstract: This paper presents interesting correlations which exist between a model of long-wave economic activity and crisis in the United States – “the Political Economy wave” – and the structure of the rings of Saturn, one of the most confounding structures known to science. At the present time gaps appear between rings which are unexplained; dynamism within the rings which should disperse the rings does not do so; edges of the rings are not diffuse but well defined; satellites between rings appear to have an impact but this is uncertain. This paper explores the possibility that the mathematics of consciousness, taken as a fifth dimension and understood as incarnate in the study of economics, may assist in the understanding of physics, and possibly vice versa.
    Keywords: Rings of Saturn, Real GNP, Golden Mean, Phi, Kondratiev Wave, Global Financial Crisis, American Economic History, GNP Spiral, Okun’s Law, Revolution, Kaluza, Fifth Dimension, General Relativity, Astronomy
    JEL: B41 B5 C0 C02 C5 C50 C6 C63 E0 E01 E1 E19 E3 N0 N01 N1 N11 Z0 Z1 Z13
    Date: 2014–04–11
  67. By: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
    Abstract: Two of the four macroeconomic adjustment programmes – in Portugal and Ireland – can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    Date: 2014–03
  68. By: Florian Scheuer; Alexander Wolitzky
    Abstract: This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, credible policies are those that will continue to attract enough political support in the future. If the only credible reform threat is to fully equalize consumption, we find that optimal marginal capital taxes are U-shaped, so that savings are subsidized for the middle class but are taxed for the poor and rich. If ex post the government may strategically propose a reform other than full equalization in order to secure additional political support, then optimal capital taxes are instead progressive throughout the income distribution.
    JEL: D31 D82 E62 H21
    Date: 2014–04
  69. By: Eckhard Hein (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Nina Dodig (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Natalia Budyldina (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: This paper surveys some of the important literatures on financial, economic and social systems with an eye towards explaining the tendencies towards ‘financialisation’. We focus on important strands of this literature: the French Regulation School, the US-based Social Structures of Accumulation approach, the contributions by several Post-Keynesian authors, with a focus on the long-run views contained in Hyman Minsky’s work, in particular. In our comparative assessment of these approaches, we adopt the following four steps procedure: First, we sketch the basic structure of the approaches in order to single out how each of them views the interaction between social institutions and the economy and the related dynamics regarding the development of the institutional structure and the associated stages or regimes of economic development. Second, we describe how these approaches view the structural breaks or the regime shifts in the long-run development of modern capitalism, which has triggered or at least has contributed to the emergence of a type of capitalism dominated by finance (financialisation). Third, we outline how these different approaches view the main characteristics and features of financialisation. Fourth, we deal with the respective views on the consequences of financialisation for long-run economic and social development including the crisis of this stage of development.
    Keywords: French Regulation School, Social Structures of Accumulation, Post-Keynesian approach, Minsky, financialisation, stages of capitalist development, finance-led growth regime, global neoliberal SSA, finance-dominated capitalism, money manager capitalism, financial, economic and social systems.
    JEL: E02 E11 E12 G01 P10 P16 P51
    Date: 2014–02–15
  70. By: Miller, Marcus (University of Warwick); Zhang, Lei (University of Warwick)
    Abstract: A simple dynamic framework is used to show how consolidation plans that are robust and effective at capacity output can be undermined by demand failure. If the market panics and interest rates rise, the process can indeed become dynamically unstable. Tightening fiscal policy to reassure financial markets can lead to a low level “consolidation trap”, however. Better that the Central Bank acts to keep interest rates low; and that fiscal consolidation efforts be state contingent – allowing room for economic stabilisation. The pro-cyclicality of fiscal policy could also be reduced if, as Shiller has argued, debt amortization were state contingent, being indexed to GDP. Debt; Deficits; Fiscal Consolidation; Economic Stabilisation
    Date: 2013
  71. By: Nina Dodig (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE)); Hansjorg Herr (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))
    Abstract: This paper analyses several severe financial crises observed in the history of capitalism which led to a longer period of stagnation or low growth. Comparative case studies of the Great Depression, the Latin American debt crisis of the 1980s and the Japanese crisis of the 1990s and 2000s are presented. The following questions are asked: What triggered big financial crises? Which factors intensified financial crises? And most importantly, which factors prevented the return of prosperity for a long time? The main conclusion is that stagnation after big financial crises becomes likely when the balance sheets of economic units are not quickly cleaned, when the nominal wage anchor breaks, and when there is no big and longer growth stimulus by the state. Some tentative conclusions for the subprime financial crisis and the Great Recession are drawn.
    Keywords: financial crises, stagnation, deflation, lost decade, Great Depression, Latin American debt crisis, Japanese crisis, Great Recession
    JEL: E65 G01 N12 N15 N16
    Date: 2014–02–15
  72. By: Martin Pospisil; Jiri Schwarz
    Abstract: In this paper we use balance-sheet data and information on bankruptcy to study the relationship between investment, financial constraints, and bankruptcy in a post-transition country. Our data constitute a dynamic panel and cover the period 2006–2011, which also allows us to study the impact of the 2008 crisis on Czech companies. Using investment–cash flow sensitivity to analyze financial constraints we find there is robust evidence that cash flow and the level of debt have a positive and significant impact on the investment rate. By taking a closer look at individual subsamples we reveal that the existence of financial constraints, proxied by investment–cash flow sensitivity, is evident mainly after 2008 and in small and medium-sized enterprises. At the same time, we do not uncover any evidence that firms going bankrupt during our observed period faced more severe financial constraints. Moreover, companies going bankrupt had significantly higher levels of external debt and bank loans, which indicates that they may have been, in fact, less constrained than others.
    Keywords: Bankruptcy, cash flow, credit rationing, financial constraints, investment, post-transition economy
    JEL: D22 D92 E22 G32
    Date: 2014–01
  73. By: Guimarães, Rodrigo (Bank of England)
    Abstract: This article examines the nature of the empirical instability in dynamic term structure models. I show that using survey forecasts is an effective solution because it directly addresses the information imbalance at the heart of the instability: it increases the (cross-section) information on actual dynamics, bridging the gap with the large (cross-section) information on the risk-adjusted dynamics. I relate this to other information spanning problems, particularly spanning of macro factors, and discuss the desirability of anchoring models to surveys. I also show that restricting prices of risk is not effective in ensuring stable and sensible implied expectations.
    Keywords: Interest rates; expectations; risk premium; dynamic term structure; robust; estimation
    JEL: C58 E43 G12
    Date: 2014–03–28
  74. By: Johannes Ludwig
    Abstract: Transitory and permanent shocks to income have been shown to be important determinants of household consumption. This paper shows that there are significant differences in the development of transitory and permanent inequality of household income between demographic groups since the 1980s. Using data from the Panel Study of Income Dynamics the educational attainment and the composition of a household are found to play a key role. While permanent inequality increases steadily for educated households, it is flat over large parts of the sample period for the less educated households. Transitory inequality increases for all households headed by couples whereas it is constant for single households. Taken together, permanent shocks explain on average a larger part of the income variance of educated households whereas transitory shocks are relatively more important for the less educated. These results that can be explained by changes to skill demand and an increased female labor force participation are potentially able to explain empirical findings on the transmission of changes in income inequality to consumption inequality.
    Keywords: Income inequality; transitory and permanent inequality; income dynamics
    JEL: D31 E24
    Date: 2014–04
  75. By: Khandokar Istiak (University of Calgary); Apostolos Serletis (University of Calgary)
    Abstract: In this paper we investigate the relationship between leverage and the level of economic activity in the United States, using quarterly data over the 1951 to 2012 period. We address the question for …five different measures of leverage - —household leverage, non…financial fi…rm leverage, commercial bank leverage, broker-dealer leverage, and shadow bank leverage -— making a distinction between traditional banks and shadow banks, the latter being a consequence of fi…nancial innovation and deregulation in the …financial services industry over the past 30 years. We investigate whether the relationship between leverage and the level of economic activity is nonlinear and asymmetric using slope-based tests as well as tests of the null hypothesis of symmetric impulse responses, recently introduced by Kilian and Vigfusson (2011). Our results inform policymakers about the important distinction between traditional banks and market-based fi…nancial intermediaries that have been at the center of the global fi…nancial crisis of 2007-2009. They also inform about the macroeconomic effects of the deleveraging process that began in 2008 as well as about the need for countercyclical macroprudential policies to reduce the procyclicality of the fi…nancial system.
    Date: 2014–04–01
  76. By: John Galbraith; Greg Tkacz
    Abstract: We describe and assess the usefulness of a newly-constructed database of electronic payments, comprised of debit and credit card transactions as well cheques that clear through the banking system, as indicators of current GDP growth. Apart from capturing a broad range of spending activity, these variables are available on a very timely basis, thereby making them suitable candidate indicators. Controlling both for the release dates of various variables and the vintage of GDP available to analysts at the time a nowcast is produced, we generate nowcasts of GDP growth for a given quarter over a span of five months, which is the period over which interest in nowcasts would exist. We find that nowcast errors fall by about 60 per cent between the first and final nowcast. Evidence on the value of the additional payments variables is mixed, however; the point estimates suggest reductions in forecast loss at some nowcast horizons, but with considerable variability.
    Keywords: GDP; nowcasting; electronic payments,
    JEL: E32 E37 C53
    Date: 2013–08–01
  77. By: Raphael Desmet; Nicole Fasquelle; Christophe Joyeux; Saskia Weemaes
    Abstract: This Working Paper studies the financial and social sustainability of the Belgian social protection system. The results of this publication were presented at the 20st Congrès des économistes belges de langue française and published in the conference proceedings. Assuming no policy changes and against the background of population ageing, the long-term public finance projections highlight an important budgetary challenge. In that framework, this paper examines a number of pathways based on the three pillars of the European strategy as determined during the 2001 Stockholm summit. The budgetary strategy (pillar 1) of the Belgian stability programme in itself does not guarantee the long-term sustainability of public finance and should, therefore, be completed by reforms in support of economic growth (through employment or productivity, pillar 2) or reforms of the pension schemes (as part of pillar 3). The social consequences of the reforms which alter the generosity of the pension schemes should not be overlooked.
    JEL: E6 H53 H55 H6 J1 J2
    Date: 2013–12–13
  78. By: Waldo Mendoza (Departamento de Economía de la PUC del Perú)
    Abstract: The Peruvian economy has had an extraordinary performance in the last 10 years. The 2012 per capita GDP is 66 percent over 2002 and more than double its 1992 level. In a long term perspective, the cumulative growth of GDP per capita recorded in the last 10 years has been the strongest since 1900. This is the "Peruvian miracle". This paper aims to find the determinants of Peruvian miracle. In theory, countries' macroeconomic performance can be determined by two factors: i) the “good (bad) luck effect” that is related to the international context, which can be favorable or unfavorable, and ii) the “good (bad) policies effects", associated with short-term macroeconomic policies or structural reforms, which are policies that alter the current development model. The hypothesis of this work is that the Peruvian miracle of the last 10 years has much to do with good luck and, in part, with good short-term macroeconomic policies. JEL Classification-JEL: F36, F41, F42 and F43
    Keywords: Macroeconomic performance, international context, Latin America and Peru.
    Date: 2013
  79. By: Haroon Mumtaz (Queen Mary University of London); Gabor Pinter (Bank of England); Konstantinos Theodoridis (Bank of England)
    Abstract: This paper evaluates the performance of structural VAR models in estimating the impact of credit supply shocks. In a simple Monte-Carlo experiment, we generate data from a DSGE model that features bank lending and credit supply shocks and use SVARs to try and recover the impulse responses to these shocks. The experiment suggests that a proxy VAR that uses an instrumental variable procedure to estimate the impact of the credit shock performs well and is relatively robust to measurement error in the instrument. A structural VAR with sign restrictions also performs well under some circumstances. In contrast, VARs of the narrative variety, i.e. VAR models that include measures of the credit shock as endogenous variables are highly sensitive to ordering and measurement error. An application of the proxy VAR model and the VAR with sign restrictions to US data suggests, however, that the credit supply shock is hard to identify in practice.
    Keywords: Credit supply shocks, Proxy SVAR, Sign restrictions, DSGE models
    JEL: C15 C32 E32
    Date: 2014–04
  80. By: Iwamura, Mitsuru; Kitamura, Yukinobu; Matsumoto, Tsutomu
    Abstract: This paper overviews the entire landscape of Bitcoin-like cryptocurrencies. Bitcoin has not emerged out of cryptocurrency competition, but rather became a dominant currency as the first broad market based cryptocurrency. But there are more than a hundred of cryptocurrencies in the market, and some are catching up to Bitcoin. This is a healthy sign of currency competition á la Hayek. Through this competition new technological and security innovations may emerge. In this paper, we point out potential problems with Bitcoin and propose some ideas for an alternative cryptocurrency.
    Keywords: Bitcoin, Cryptocurrency, Friedrich A. Hayek
    JEL: B31 E42 E51
    Date: 2014–02
  81. By: Y. Hossein Farzin (University of California at Davis); Ronald Wendner (Karl-Franzens University of Graz)
    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 (Gomz, 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, short-term planning, neoclassical growth model
    JEL: D91 E21 O40
    Date: 2014–04
  82. By: Juan José Jordán Sánchez (Universidad Privada Boliviana)
    Abstract: El presente trabajo estudia los efectos de cambios en la base monetaria y tasas de interés sobre los precios de las acciones en los mercados norteamericanos. La presente investigación considera cuatro series de tiempo: La primera variable a considerar se denomina como Índice Bursátil Ajustado, el cual se construyó a partir de datos de más de 5900 empresas pertenecientes a NYSE1, NASDAQ2 o AMEX3; para posteriormente identificar un proxy4 de inflación bursátil mediante la corrección de este índice por la cantidad de acciones disponibles del índice en cuestión en cada punto del tiempo analizado. Adicionalmente, se utilizaron los datos sobre capitalización de mercado para medir el crecimiento del valor de las empresas pertenecientes al índice, y datos sobre la emisión de base monetaria para establecer causalidad y las relaciones necesarias con el índice bursátil corregido. Finalmente, la última variable considerada es la tasa de interés real, la cual fue aproximada a través de los rendimientos de las Letras del Tesoro de USA con vencimiento a un año. Los resultados son congruentes con la hipótesis de Modigliani Cohn formulada en 1979, que sugiere que el mercado de valores extrapola incorrectamente los índices de crecimiento de precios pasado sin tomar en cuenta el impacto de la inflación en el tiempo [1]. Se logró verificar una correlación negativa entre incrementos de tasas de interés y el decremento de los precios de las acciones en diferentes rezagos temporales, lo que sugiere la existencia de inflación bursátil. Así mismo, se logró estimar un modelo VEC para la estimación del precio del índice bursátil a través de información histórica no contemporánea sobre la base monetaria y la capitalización de mercado
    Keywords: Inflación Bursátil, Capitalización de Mercado, Base Monetaria, Tasa de Interés
    JEL: P24 E43
    Date: 2014–01
  83. By: Abe, Naohito; Moriguchi, Chiaki; Inakura, Noriko
    Abstract: Using high-frequency point-of-sales data, we investigate the impact of the Great East Japan Earthquake on prices. In contrast to the official Consumer Price Index that shows little impact, our price index based on scanner data reveals a modest yet notable increase in within-store commodity prices following the disaster in eastern Japan. We find that the disaster had a large and lasting effect in reducing the frequency and magnitude of bargain sales at retail stores especially in Tokyo. However, under severe commodity shortages, the standard index based on within-store same-commodity price changes may not capture the actual changes in the cost of living. To overcome this problem, we propose two alternative price indices based on (1) commodity price without distinguishing stores and (2) unit price without distinguishing commodities (i.e., brands) within the same category. Focusing on the food categories for which the disaster induced large excess demand, we find that rise in the alternative price indices was considerably greater than that in the standard price index. We further show that observed price elasticity between stores (as well as between brands) declined significantly after the disaster, indicating that, in the face of commodity shortages, the same commodity sold at different stores (or even different brands within the same category) became closer substitutes for consumers.
    Keywords: natural disaster, commodity shortages, consumer price index, scanner data
    JEL: D22 D40 E31 Q54
    Date: 2014–03

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