nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒04‒29
thirty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The role of monetary policy in the New Keynesian Model: Evidence from Vietnam By Van Hoang
  2. Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices By Max Gillman; Michal Kejak; Michal Pakos
  3. Optimized Taylor Rules for Disinflation When Agents are Learning By Cogley, Timothy; Matthes, Christian; Sbordone, Argia M.
  4. Does Redistribution Increase Output? The Centrality of Labor Supply By Artheya, Kartik; Owens, Andrew; Schwartzman, Felipe
  5. Securitization under Asymmetric Information over the Business Cycle By Martin Kuncl
  6. Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation By Lubik, Thomas A.; Matthes, Christian
  7. Institutional Quality and Inflation By Salahodjaev, Raufhon; Chepel, Sergey
  8. What Inventory Behavior Tells Us About How Business Cycles Have Changed By Lubik, Thomas A.; Sarte, Pierre-Daniel G.; Schwartzman, Felipe
  9. Drifts, Volatilities, and Impulse Responses Over the Last Century By Amir-Ahmadi, Pooyan; Matthes, Christian; Wang, Mu-Chun
  10. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data By Coibion, Olivier; Gorodnichenko, Yuriy; Kudlyak, Marianna; Mondragon, John
  11. Countercyclical capital buffers and real-time credit-to-GDP gap estimates: A South African perspective By Farrell, Greg
  12. Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions By Wang, Zhu; Wolman, Alexander L.
  13. Is There a Cooperative Bank Difference? By Leonardo Becchetti; Rocco Ciciretti; Adriana Paolantonio
  14. Revisiting wage, earnings, and hours profiles By P. Rupert; G. Zanella
  15. The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries By Donatella Baiardi; Matteo Manera; Mario Menegatti
  16. A theory of price adjustment under loss aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  17. The Risks of Fiscal Policy in Countries Rich in Natural Resource By Alexander Knobel
  18. Bank Leverage, Financial Fragility and Prudential Regulation By Olivier Bruno; André Cartapanis; Eric Nasica
  19. On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version By Rong Hai; Andrew Postlewaite; Dirk Krueger
  20. Inflation Differentials among Czech Households By Pavel Hait; Petr Jansky
  21. Incorporating Geospatial Data in House Price Indexes: A Hedonic Imputation Approach with Splines By Robert J. Hill; Michael Scholz
  22. Household Saving in Australia By Richard Finlay; Fiona Price
  23. Global Implications of the Renminbi’s Ascendance By Eswar Prasad
  24. Dollarization and the relationship between EMBI and fundamentals in Latin American countries By Lorena Mari del Cristo; Marta Gómez-Puig
  25. Mortality Decline, Impatience and Aggregate Wealth Accumulation with Risk-Sensitive Preferences By Antoine Bommier
  26. Quantifying and Explaining Stickiness in Housing Rents: A Turkish Case Study with Micro-Level Data By Aysoy, Cem; Aysoy, Cevriye; Tumen, Semih
  27. Sunspots and Inflation-indexed Bonds By Minwook KANG
  28. TA Big Data Approach to Optimal Sales Taxation By Christian Baker; Jeremy Bejarano; Richard W. Evans; Kenneth L. Judd; Kerk L. Phillips
  29. A Micro Level Perspective of Euroization in Albania By Edlira Narazani
  30. Sovereign credit ratings, market volatility, and financial gains By António Afonso; João Tovar Jalles
  31. Understanding Long-run Price Dispersion By Hakan Yilmazkuday; Mario J. Crucini
  32. Are active labour market policies effective in activating and integrating low-skilled individuals? An international comparison By Escudero, Veronica

  1. By: Van Hoang
    Abstract: This paper reproduces a version of the New Keynesian model developed by Ireland (2004) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model’s parameters. The empirical results show that before August 2000 when the Taylor rule was adopted more firmly, the monetary policy shock made considerable contributions to the fluctuations in key macroeconomic variables such as the short-term nominal interest rate, the output gap, inflation, and especially output growth. By contrast, the loose adoption of the Taylor rule in the period of post-August 2000 leads to a fact that the contributions of the monetary policy shock to the variations in such key macroeconomic variables become less substantial. Thus, one policy implication is that adopting firmly the Taylor rule could strengthen the role of the monetary policy in driving movements in the key macroeconomic variables, for instance, enhancing economic growth and stabilizing inflation.
    Keywords: New Keynesian model, Monetary Policy, Technology Shock, Cost-Push Shock, Preference Shock.
    JEL: E12 E32
    Date: 2014–02–01
  2. By: Max Gillman; Michal Kejak; Michal Pakos
    Abstract: Rietz (1988) and Barro (2006) subject consumption and dividends to rare disasters in the growth rate. We extend their framework and subject consumption and dividends to rare disasters in the growth persistence. Wemodel growth persistence by means of two hidden types of economic slowdowns: recessions and lost decades. We estimate the model based on the post-war U.S. data using maximum likelihood and find that it can simultaneously match a wide array of dynamic pricing phenomena in the equity and bond markets. The key intuition for our results stems from the inability to discriminate between the short and the long recessions ex ante.
    Keywords: asset pricing; rare events; learning; stagnation; long-run risk; Peso problem;
    JEL: E13 E21 E32 E43 E44 G12
    Date: 2014–02
  3. By: Cogley, Timothy (New York University); Matthes, Christian (Federal Reserve Bank of Richmond); Sbordone, Argia M. (Federal Reserve Bank of New York)
    Abstract: Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.
    Keywords: Inflation; Monetary policy; Learning; Policy reforms; Transitions
    JEL: E31 E52
    Date: 2014–03–15
  4. By: Artheya, Kartik (Federal Reserve Bank of Richmond); Owens, Andrew (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Federal Reserve Bank of Richmond)
    Abstract: The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003), wealth redistribution leads to a boom in consumption, but not in output.
    Keywords: Multipliers; Redistribution; Labor supply; Idiosyncratic Risk
    JEL: D90 E21 E25 E63
    Date: 2014–02–28
  5. By: Martin Kuncl
    Abstract: This paper studies the effciency of financial intermediation through securitization with asymmetric information about the quality of securitized loans. In this theoretical model, I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper will be the fall of output in a subsequent recession. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized loans. These are especially severe after a prolonged boom period and when securitized loans of high quality are no longer traded. Finally, the model suggests that excessive regulation that requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy.
    Keywords: securitization; financial crisis; asymmetric information; reputation; implicit recourse; market shutdowns; macro-prudential policy;
    JEL: E32 E44 G01 G20
    Date: 2014–02
  6. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Matthes, Christian (Federal Reserve Bank of Richmond)
    Abstract: We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the true state of the economy, as large subsequent revisions showed. It is the combination of learning about the economy and, more importantly, the use of data riddled with measurement error that resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy in the economy.
    Keywords: Federal Reserve; Great Moderation; Bayesian Estimation; Least Squares Learning
    JEL: C11 C32 E52
    Date: 2014–01–31
  7. By: Salahodjaev, Raufhon; Chepel, Sergey
    Abstract: The purpose of this paper is to empirically analyze the effects of the quality of institutions on inflation. Using panel data from 1991 to 2007, we find that increase in institutional development which is measured by the ratio of domestic credit to private sector to GDP has significant and sizeable effect on inflation. This paper finds that in countries with high inflation rates, financial sectors cannot resist current levels of inflation and banking system does not decrease inflation in the environment where private banks and financial companies have adapted to existing monetary environment.
    Keywords: Inflation; Credit; Institutions; Quality
    JEL: E51 E52
    Date: 2014–03–25
  8. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Sarte, Pierre-Daniel G. (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Federal Reserve Bank of Richmond)
    Abstract: Beginning in the mid-1980s, the nature of U.S. business cycles changed in important ways, as made evident by distinctive shifts in the comovement and relative volatilities of key economic aggregates. These include labor productivity, hours, output, and inventories. Unlike the widely documented change in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact that inventory data are informative about sources of business cycles. Specifically, they provide additional information relative to aggregate investment regarding firms' intertemporal decisions. In this paper, we show that the "investment wedge" estimated with inventories, unlike previous measures, correlates well with established independent measures of credit market frictions. Furthermore, contrary to previous findings, our generalized investment wedge informed by inventory behavior plays a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s.
    Keywords: Business Cycles; Inventories; Investment Wedge; Financial Frictions
    JEL: E32 E44
    Date: 2014–03–01
  9. By: Amir-Ahmadi, Pooyan (Goethe University Frankfurt); Matthes, Christian (Federal Reserve Bank of Richmond); Wang, Mu-Chun (University of Hamburg)
    Abstract: How much have the dynamics of U.S. time series and in particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "a lot" and "probably less than you think," respectively. We use vector autoregressions with time-varying parameters and stochastic volatility to tackle these questions. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term nominal interest rates) and the growth rate of money.
    Keywords: Bayesian VAR; Time variation; U.S. monetary policy
    JEL: C50 E31 N12
    Date: 2014–04–07
  10. By: Coibion, Olivier (UT Austin and NBER); Gorodnichenko, Yuriy (UC Berkeley and NBER); Kudlyak, Marianna (Federal Reserve Bank of Richmond); Mondragon, John (UC Berkley)
    Abstract: One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higher-income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.
    Keywords: inequality; household debt; Great Recession
    JEL: D14 E21 E51 G21
    Date: 2014–01–10
  11. By: Farrell, Greg
    Abstract: Countercyclical capital buffers are intended to protect the banking sector and the broader economy from episodes of excessive credit growth, which have been associated with financial sector procyclicality and the build-up of systemic risk. The Basel Committee on Banking Supervision has suggested in its guidance to national authorities that the credit-to-GDP gap be used as a guide to taking decisions regarding the countercyclical capital buffer. This paper provides a South African perspective on the implementation of this guidance. Credit-to-GDP gaps are estimated by applying a range of Hodrick-Prescott filters to real-time South African data, specifically constructed for this study, and these gaps are mapped to countercyclical buffers. The properties of these estimates are compared, and the calibration of the lower and upper thresholds of the buffer in the South African case is also investigated. The study confirms that the mechanical application of the credit-to-GDP guide is not advisable, and raises a number of issues that policymakers will have to consider when implementing the countercyclical buffer guidance. The analysis also suggests that the calibration of the lower and upper thresholds for the gaps may need to be adjusted in the South African case if the Basel Committee’s expectation that the buffers be employed only every 10-20 years is to be met.
    Keywords: Countercyclical capital buffers, financial stability, real- time data, credit-to-GDP gaps.
    JEL: E44 E61 G21
    Date: 2014–04–16
  12. By: Wang, Zhu (Federal Reserve Bank of Richmond); Wolman, Alexander L. (Federal Reserve Bank of Richmond)
    Abstract: This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast future demand for currency. Our estimates based on this large retailer, together with forecasts for the explanatory variables, lead to a benchmark prediction that the cash share of retail sales will decline by 2.54 percentage points per year over the next several years.
    Keywords: Payment choice; Money demand; Consumer behavior
    JEL: D12 E41 G2
    Date: 2014–04–14
  13. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Rocco Ciciretti (University of Rome "Tor Vergata"); Adriana Paolantonio (Food and Agriculture Organization of the United Nations (FAO))
    Abstract: We compare characteristics of cooperative and non cooperative banks at world level in a time spell including the global financial crisis. Cooperative banks have higher net loans/total assets ratio, lower income from non traditional activites and lower shares of derivatives over total assets than non cooperative banks. From an econometric point of view, we find that the cooperative bank specialization has a positive and significant effect on the net loans/total assets ratio in the overall sample period and in the post financial crisis subperiod. Derivatives (both in terms of assets and revenues) have a quantitatively strong and significant negative effect on the same dependent variable during both time spells. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with the value added growth of the manufacturing sector with the exception of the two extremes of self-financing sectors and sectors in high need of external finance.
    Keywords: cooperative banking; finance and investment; global financial crisis.
    JEL: G21 O40 E44
    Date: 2014–04–17
  14. By: P. Rupert; G. Zanella
    Abstract: We document empirical life cycle profiles of wages, earnings, and hours of work for pay from the Panel Study of Income Dynamics, following the same workers for up to four decades. For six of the eight cohorts we analyze the wage profile does not decline with age (not before 65, at least), while the earnings profile always does. The discrepancy is explained by a sharp drop in the hours of work for pay profile beginning shortly after age 50, when many workers start a smooth transition into retirement by working progressively fewer hours. This pattern is not an artifact of staggered abrupt retirement, and is robust to attrition and selection-correction (i.e., taking into account that the composition of our sample, for a given cohort, changes over time). We explore the nontrivial restrictions on dynamic models of the aggregate economy that this evidence suggests, and we provide numerical profiles that can be readily used in quantitative macroeconomic analysis.
    JEL: E24 J13 J22 J24 J26
    Date: 2014–04
  15. By: Donatella Baiardi; Matteo Manera; Mario Menegatti
    Abstract: This paper empirically estimates a micro-founded model which studies the macroeconomic impact of environmental and financial risks on consumption choices in the Mediterranean Region. The analysis is carried out using time series aggregate data for fourteen Mediterranean countries over the period 1965-2008. Our results indicate that both risks and their interaction significantly influence consumption dynamics. Our estimates of the indexes of relative risk aversion and relative prudence, as well as the relative preference for the quality of environment suggest marked cross-country heterogeneity.
    Keywords: Consumption, environmental risk, financial risk, prudence, relative risk aversion, relative preference for the quality of environment
    JEL: Q50 D81 E21
    Date: 2014–04
  16. By: Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks. --
    Keywords: price sluggishness,loss aversion,state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014
  17. By: Alexander Knobel (Gaidar Institute for Economic Policy)
    Abstract: The article addresses the issue of fiscal policy risks in countries with an abundance of natural resources, including Russia. It is demonstrated which consequences Russia’s federal budget may be faced with as a result of declining oil prices. In the context of phenomena typical of resource-dependent economies, it is shown that they have a tendency toward a lower rate of long-term economic growth. The macroeconomic and institutional aspects of the resource curse and the role of sovereign funds in shaping up the budget policy are discussed, with a special emphasis being made on their institutional importance.
    Keywords: resource curse, budget policy, institutions, economic growth, sovereign funds.
    JEL: H61 O11 Q32
    Date: 2014
  18. By: Olivier Bruno (GREDEG CNRS; University of Nice Sophia Antipolis, France; SKEMA Business School; OFCE-DRIC); André Cartapanis (Sciences Po Aix-en-Provence; GREDEG CNRS; CHERPA-Sciences Po Aix-en-Provence); Eric Nasica (GREDEG CNRS; University of Nice Sophia Antipolis, France)
    Abstract: We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
    Keywords: Bank leverage, Leverage ratio, Financial instability, Prudential regulation
    JEL: E44 G28
    Date: 2014–04
  19. By: Rong Hai (Department of Economics, University of Chicago); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Dirk Krueger (Department of Economics, University of Pennsylvania)
    Abstract: We propose a new category of consumption goods, memorable goods, that generate a flow of utility after consumption. We analyze an otherwise standard consumption model that distinguishes memorable goods from other nondurable goods. Consumers optimally choose lumpy consumption of memorable goods. We then empirically document significant differences between levels and volatilities of memorable and other nondurable good expenditures. In two applications we find that the welfare cost of consumption fluctuations driven by income shocks are significantly overstated if memorable goods are not accounted for and that estimates of excess sensitivity of consumption might be entirely due to memorable goods.
    Keywords: Memorable Goods, Consumption Volatility, Welfare Cost
    JEL: D91 E21
    Date: 2013–08–23
  20. By: Pavel Hait; Petr Jansky
    Abstract: Inflation rates have traditionally been measured by the annualized percentage change in the price level of a market basket of consumer goods and services purchased by households. The market basket represents the spending patterns of average household. However, households differ in their spending patterns and there are differences in the price changes of various goods and services. Therefore, different households experience different inflation rates. This paper finds that these differences have been significant in the Czech Republic during the period 1995-2010. Only around 60 % of households actually experienced an inflation rate that was similar to the national average. Furthermore, the higher the average inflation rate over time, the lower the percentage of households whose inflation rate was similar to that average. The main determiners of inflation were expenditures for housing and energy and, especially for low-income households and pensioners, expenditures on food and non-alcoholic drinks. In most years, pensioners and low-income households faced significantly higher inflation rates than the average rate for the whole population.
    Keywords: households; inflation; inflation differentials; relative prices;
    JEL: D12 H22 I31
    Date: 2014–02
  21. By: Robert J. Hill (University of Graz); Michael Scholz (University of Graz)
    Abstract: The increasing availability of geospatial data (i.e., exact longitudes and latitudes for each house) has the potential to improve the quality of house price indexes. It is not clear though how best to use this information. We show how geospatial data can be included as a nonparametric spline surface in a hedonic model. The hedonic model itself is estimated separately for each period. Price indexes are then computed by inserting the imputed prices of houses obtained from the hedonic model into the Fisher price index formula. Using a data set consisting of 454507 observations for Sydney, Australia over the period 2001-2011 we demonstrate the superiority of a geospatial spline over postcode dummies as a way of controlling for locational effects. While the difference in the resulting price indexes is not that large – since the postcodes in Sydney are quite narrowly defined – we nevertheless find evidence of a slight bias in the postcode based indexes. This can be attributed to systematic changes over time within each postcode in the locational quality of houses sold.
    Keywords: Housing market; Hedonic imputation; Price index; Geospatial spline; Quality adjustment
    JEL: C43 E01 E31 R31
    Date: 2014–04
  22. By: Richard Finlay (Reserve Bank of Australia); Fiona Price (Reserve Bank of Australia)
    Abstract: This paper investigates household saving behaviour in Australia, as well as the drivers behind the recent rise in the aggregate household saving ratio. Our results explaining differences in saving behaviour across households are consistent with theory and previous findings. As might be expected, households' saving ratios tend to increase with income, but decrease with wealth and gearing. Financially constrained and migrant households tend to save more than other households, all else equal. While saving differs substantially across age groups we find that, at least in part, this reflects differing circumstances. Our results suggest that the rise in household saving between 2003/04 and 2009/10 was driven by changes in the saving behaviour associated with certain household characteristics, rather than changes in characteristics: households with less secure income and/or those vulnerable to asset price shocks, higher-educated households, younger households with debt and older households with wealth increased their propensity to save. While our results inform which households changed their saving behaviour, we are unable to definitively conclude what caused this change in behaviour. Our interpretation of these results is that precautionary saving motives, a reduction in future income expectations for higher-educated households, an effort to rebuild wealth after the financial crisis and changing attitudes to debt contributed to the rise in the household saving ratio, although other interpretations of the data are possible.
    Keywords: household saving; micro data
    JEL: D14 E21
    Date: 2014–04
  23. By: Eswar Prasad (Asian Development Bank Institute (ADBI))
    Abstract: This paper evaluates the prospects for the renminbi’s role as an international currency and the implications for global financial markets. Although the People’s Republic of China (PRC) does not have either an open capital account or a flexible exchange rate, the renminbi has attained considerable traction as an international currency on account of the PRC’s rising shares of global trade and gross domestic product. Through bilateral swaps that the People’s Bank of China has established with other countries’ central banks, the renminbi is also becoming more prominent in international finance. However, the renminbi is unlikely to become a major reserve currency in the absence of capital account convertibility, a flexible exchange rate, and better-developed financial markets. The renminbi’s rising prominence—if it is accompanied by significant economic reforms within the PRC—could add to the stability of Asian and global financial systems.
    Keywords: renminbi, Capital account liberalization, the people's bank of China, global financial markets, International currency
    JEL: F3 F4 E5
    Date: 2014–03
  24. By: Lorena Mari del Cristo (Department of Economic Theory, Universitat de Barcelona); Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona)
    Abstract: This paper presents empirical evidence on the interrelationship that exists between the evolution of the Emerging Markets Bonds Index (EMBI) and some macroeconomic variables in seven Latin American countries; two of them (Ecuador and Panama), full dollarized. We make use of a Cointegrated Vector framework to analyze the short run effects from 2001 to 2009. The results suggest that EMBI is more stable in dollarized countries and that its evolution influences economic activity in non-dollarized economies; suggesting that investors confidence might be higher in dollarized countries where real and financial economic evolution are less tied than in non-dollarized ones.
    Keywords: Dollarization, emerging markets, Latin American countries, Cointegrated VAR, EMBI, exchange rate regime
    Date: 2014–02
  25. By: Antoine Bommier (ETH Zurich, Switzerland)
    Abstract: The paper discusses the impact of longevity extension on aggregate wealth accumulation, accounting for changes in individual behaviors as well as changes in population age structure. It departs from the stan- dard literature by adopting risk-sensitive preferences. Human impatience is then closely related to mortality rates and aggregate wealth accumula- tion appears to be much more sensitive to demographic factors than usually found. Illustrations are provided using historical mortality data from dif- ferent countries.
    Keywords: longevity; life-cycle savings; wealth accumulation; risk-sensitive pref- erences; risk aversion.
    JEL: J1 E21 D91
    Date: 2014–04
  26. By: Aysoy, Cem; Aysoy, Cevriye; Tumen, Semih
    Abstract: Using a national panel of housing units, this paper documents that the rate of nominal rigidity in housing rents is high in Turkey between 2008 and 2011. We find that, on average, 31.5 percent of the rents did not change from year to year in nominal terms. We then ask if the incidence of nominal rigidity depends on the turnover status of the housing unit. We show that 35.4 percent of the nonturnover units had rigid rents, while for only 17.1 percent of the turnover units rents did not change. We also present evidence that grid pricing is associated with more than half of the nominal rigidity in housing rents in our sample. The household- and individual-level determinants of the nominal rigidity in rents and turnover status are also investigated using the micro-level details available in our dataset. We document that, relative to the low-income tenants, high-income tenants are less likely to have rigid rents and they are also less likely to change units frequently. This finding suggests that search and moving costs impose frictions that amplify the opportunity costs of high-income tenants; thus, they are more likely to agree on reasonable rent increases for the purpose of saving time and reducing emotional stress.
    Keywords: Housing rents; nominal rigidities; turnover; grid pricing
    JEL: E31 R21 R31
    Date: 2014–04–07
  27. By: Minwook KANG (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)
    Abstract: An economy with incomplete ?nancial markets, as described by Cass (1989), typically has in?ation volatility driven by sunspots. The purpose of this paper is to investigate how the introduction of in?ation- indexed bonds to the ?Cass?economy in?uences a monetary market, an indexed bond market, and welfare. The introduction of indexed bonds is considered a sunspot-stabilizing policy. However, this introduction unrealistically causes the complete shutdown of monetary markets. This problem can be avoided in this paper as incorporating proportional transaction costs in the indexed bond market. Specifically, I show that the monetary market can never shut down even with a very high level of in?ation volatility if the indexed bonds have transaction costs. In contrast, the indexed bond market can be inactive with a high value of transaction costs or low levels of in?ation volatility. This paper shows that the introduction of indexed bonds does not necessarily induce the economy to be Pareto improving. However, by allowing lump-sum tax-transfer plans that are implemented in period-0 money, the market with indexed bonds can be Pareto superior to the market without them. The conclusions derived from a single-good economy can be applied to a multi-good economy if all agents have an identical homothetic utility function.
    Keywords: In?ation-indexed bonds, Sunspots, In?ation volatility, Transaction costs, Consumer price index (CPI)
    Date: 2014–01
  28. By: Christian Baker (Department of Economics, Brigham Young University); Jeremy Bejarano (Department of Economics, University of Chicago); Richard W. Evans (Department of Economics, Brigham Young University); Kenneth L. Judd (Hoover Institution, Stanford University); Kerk L. Phillips (Department of Economics, Brigham Young University)
    Abstract: We characterize and demonstrate a solution method for an optimal commodity (sales) tax problem consisting of multiple goods, heterogeneous agents, and a nonconvex policy maker optimization problem. Our approach allows for more dimensions of heterogeneity than has been previously possible, incorporates potential model uncertainty and policy objective uncertainty, and relaxes some of the assumptions in the previous literature that were necessary to generate a convex optimization problem for the policy maker. Our solution technique involves creating a large database of optimal responses by different individuals for different policy parameters and using ``big data'' techniques to compute policy maker objective values over these individuals. We calibrate our model to the United States and test the effects of a differentiated optimal commodity tax versus a flat tax and the effect of exempting a broad class of goods (services) from commodity taxation. We find that only a potentially small amount of tax revenue is lost for a given societal welfare level by departing from an optimal differentiated sales tax schedule to a uniform flat tax and that there is only a small loss in revenue from exempting a class of goods such as services in the United States.
    Keywords: lOptimal tax, sales tax, commodity tax, big data, robustness
    JEL: C61 C63 D31 E62 H21
    Date: 2014–03
  29. By: Edlira Narazani
    Abstract: This research investigates what drives the euroization in Albania. By using survey data collected in one of the main Albanian cities, we find that factors like remittances, financial literacy, perception of high inflation and trust in financial system play an important role in the extent of euroization together with the experience of past events. Factors related to the future, such as the expectation on the exchange rate fluctuations, seem to not be correlated with the extent of euroization. As regards the current Eurozone crisis, its impact on euroization results to be mediated by the (mis)trust in EURO rather than local currency.
    Keywords: Euroization, currency substitution, survey data, eurozone crisis
    JEL: E41 E50 D14 C83
    Date: 2013–02
  30. By: António Afonso; João Tovar Jalles
    Abstract: We use a panel of 155 countries for 1970-2010 to study (two-way) causality between government spending, revenue and growth. Our results suggest the existence of weak evidence supporting causality from expenditures or revenues to GDP per capita and provide evidence supporting Wagner’s Law.
    Keywords: government expenditures, goverment revenues, panel causality, GMM.
    JEL: C23 E62 H50
    Date: 2014–01
  31. By: Hakan Yilmazkuday (Department of Economics, Florida International University); Mario J. Crucini (Department of Economics, Vanderbilt University)
    Abstract: A unique panel of retail prices spanning 123 cities in 79 countries from 1990 to 2005 is used to uncover the novel properties of long-run international price dispersion. At the PPP level, almost all of price dispersion is attributed to unskilled wage dispersion. At the level of individual goods and services, the average contribution of these wages is signi?cantly reduced, ref?ecting that good-speci?c sources of price dispersion, such as trade costs and good-specifi?c markups, tend to average out across goods. At the LOP level, borders and distance contribute about equally to price dispersion that is rising in the distribution share.
    Keywords: Real exchange rates; Purchasing Power Parity; Law of One Price; Dynamic panel
    JEL: E31 F31 D40
    Date: 2014–04
  32. By: Escudero, Veronica
    Abstract: This paper examines the effectiveness of active labour market policies (ALMP) in improving labour market outcomes, especially of low-skilled individuals. The empirical analysis consists of an aggregate impact approach based on a pooled cross country and time-series database for 31 advanced countries during the period 1985–2010. A novelty of the paper is that the analysis includes aspects of the delivery system to see how the performance of ALMP is affected by different implementation characteristics. Among the notable results, the paper finds that ALMP matters at the aggregate level. Training, employment incentives, supported employment and direct job creation measures show the most favourable results, both, in terms of reduced unemployment, but also in terms of increased employment and participation. Interestingly, start-up incentives are more effective in reducing unemployment than other ALMP policies. Moreover, the positive effects seem to be particularly beneficial for the low-skilled. In terms of implementation, the paper finds that the most favourable aspect is the allocation of resources to programme administration. Finally, a disruption of policy continuity is associated with negative effects for all labour market variables analysed.
    Keywords: unemployment, employment, participation rate, active labour market policies, implementation, public employment services, training, start-up incentives.
    JEL: E24 H53 J08 J6
    Date: 2014–03

This nep-mac issue is ©2014 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.