nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒05‒09
85 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Labor Market Participation, Unemployment and Monetary Policy By Alessia Campolmi; Stefano Gnocchi
  2. Inflation Targeting in Colombia, 2002-2012 By Franz Hamann; Marc Hofstetter; Miguel Urrutia
  3. A Policy Model to Analyze Macroprudential Regulations and Monetary Policy By Sami Alpanda; Gino Cateau; Césaire Meh
  4. Estimating a Small Open Economy DSGE Model with Indeterminacy: Evidence By Tingguo Zheng; Huiming Guo
  5. Recent Macroeconomic Stability in China By Qing He; Haiqiang Chen
  6. Sovereign Debt in the U.S. and Growth Expectations By Juan Equiza Goni
  7. Assessing the Impacts of Non-Ricardian Households in an Estimated New Keynesian DSGE Model By Marto, Ricardo
  8. Fiscal and Monetary Policies in Complex Evolving Economies By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
  9. Why The House Sector Leads The Whole Economy: the Importance of Collateral Constraints and News Shocks By Yu Ren; Yufei Yuan
  10. Why The Housing Sector Leads The Whole Economy: the Importance of Collateral Constraints and News Shocks By Yu Ren; Yufei Yuan
  11. The Zero Lower Bound: Frequency, Duration, and Numerical Convergence By Alexander W. Richter; Nathaniel A. Throckmorton
  12. Credit Risk in the Euro area. By Gilchrist, S.; Mojon, B.
  13. Household Risk Management and Actual Mortgage Choice in the Euro Area By Michael Ehrmann; Michael Ziegelmeyer
  14. Technology Shocks, Labour Mobility and Aggregate Fluctuations By Daniela Hauser
  15. Stability pact and risk of pro-cyclical fiscal policy in Economic and Monetary Union countries: the case of UEMOA By Mamadou Diop
  16. Banks’ Financial Distress, Lending Supply and Consumption Expenditure By H. Evren Damar; Reint Group; Adi Mordel
  17. Animal spirits and the business cycle: Empirical evidence from moment matching By Jang, Tae-Seok; Sacht, Stephen
  18. Globalization and Monetary Policy Comovement: Evidence from G-7 Countries By Arpita Chatterjee
  19. Estimating NAIRU for the Turkish Economy Using Extended Kalman Filter Approach By Vuslat Us
  20. The reliability of South African real-time output gap estimates By Jessica Kramer and Greg Farrell
  21. How to measure the unsecured money market? The Eurosystem’s implementation and validation using TARGET2 data By Luca Arciero; Ronald Heijmans; Richard Heuver; Marco Massarenti; Cristina Picillo; Francesco Vacirca
  22. Search-for-Yield in Canadian Fixed-Income Mutual Funds and Monetary Policy By Sermin Gungor; Jesus Sierra
  23. A demand-driven search model with self-fulfilling expectations: The new `Farmerian' framework under scrutiny By Gelain, Paolo; Guerrazzi, Marco
  24. Youth and gender specific unemployment and Okun's law in Scandinavian countries By Hutengs, Oliver; Stadtmann, Georg
  25. A Type of HJM Based Affine Model: Theory and Empirical Evidence By Haitao Li; Xiaoxia Ye
  26. Labor Market Conditions, Skill Requirements and Education Mismatch By Summerfield, Fraser
  27. Marché du travail en revue - Avril 2014 By Tran, Vivian
  28. Dealing with the ECB's triple mandate ? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  29. Implications of EU Governance Reforms: Rationale and Practical Application By Alcidi, Cinzia; Gros, Daniel
  30. Public debt is always toxic to economic growth By Juhana Hukkinen; Matti Viren
  31. The Price of Euro: Evidence from Sovereign Debt Markets By Erik Makela
  32. Property Tax and Fiscal Discipline in OECD Countries By Andrea Filippo Presbitero; Agnese Sacchi; Alberto Zazzaro
  33. Redemption ? By Catherine Mathieu; Henri Sterdyniak
  34. Labour Market Matters - April 2014 By Tran, Vivian
  35. What does the Yield Curve imply about Investor Expectations? By Eric Gaus; Arunima Sinha
  36. Quantifying and Explaining Stickiness in Housing Rents : A Turkish Case Study with Micro-level Data By Cem Aysoy; Cevriye Aysoy; Semih Tumen
  37. Adaptive Dynamic Nelson-Siegel Term Structure Model with Applications By Ying Chen; Linlin Niu
  38. The Efficiency of Private E-Money-Like Systems: The U.S. Experience with State Bank Notes By Warren E. Weber
  39. E-Money: Efficiency, Stability and Optimal Policy By Jonathan Chiu; Tsz-Nga Wong
  40. A Theory of Vintage Capital Investment and Energy Use By Antonia Díaz,; Luis A. Puch
  41. An Affine Term Structure Model with Auxiliary Stochastic Volatility-Covolatility By Linlin Niu
  42. Optimization issues of sectoral outputs in economic output By Yondonjamts, Batsukh; Nyamdash, Batsaikhan
  43. Error Correction Dynamics of House Prices: an Equilibrium Benchmark By Leung, Charles Ka Yui
  44. The Impact of Public Spending on the Performance of Microfinance Institutions By Janda, Karel; Zetek, Pavel
  45. The Sooner The Better - The Welfare Effects of the Retirement Age Increase Under Various Pension Schemes By Marcin Bielecki; Karolina Goraus; Jan Hagemejer; Joanna Tyrowicz
  46. Determinants of saving in Poland: Are they different than in other OECD countries? By Aleksandra Kolasa; Barbara Liberda
  47. The structure of sub-natural public debt: Liquidity vs credit risk By Javier J. Pérez; Rocío Prieto
  48. Aggregate and Household Demand for Money: Evidence from Public Opinion Survey on Household Financial Assets and Liabilities By Hiroshi Fujiki; Cheng Hsiao
  49. In search of a better governance in the euro area By Catherine Mathieu; Henri Sterdyniak
  50. Term Structure Forecasting: No-arbitrage Restrictions Versus Large Information set By Carlo A. Favero; Linlin Niu; Luca Sala
  51. Do the drivers of loan dollarisation differ between cesee and Latin America? a meta-analysis By Mariya Hake; Fernando López-Vicente; Luis Molina
  52. Finding Yeti: More robust estimates of output gap in Slovakia By Ludovit Odor; Judita Jurasekova Kucserova
  53. Dealing with Financial Crises: How Much Help from Research? By Marco Pagano
  54. Banking Crises in the US: the Response of Top Income Shares in a Historical Perspective By Salvatore Morelli
  55. Fiscal consolidation in times of crisis: is the sooner really the better? By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau
  56. 新古典增长模型的稳态路径能否包括资本增进型技术进步? By Li, Defu; Huang, Jiuli
  57. Openness to International Trade and Economic Growth : A Cross-Country Empirical Investigation By Bulent Ulasan
  58. Business Cycle Asymmetry in China: Evidence from Friedman’s Plucking Model By Tingguo Zheng; Yujuan Teng; Tao Song
  59. Toward a better gorvernance in the EU ? Introduction By Catherine Mathieu; Henri Sterdyniak
  60. A Local Vector Autoregressive Framework and its Applications to Multivariate Time Series Monitoring and Forecasting By Ying Chen; Bo Li; Linlin Niu
  61. Endogenous Comparative Advantage, Gains From Trade and Symmetry-Breaking By Arpita Chatterjee
  62. Modeling the dynamics of Chinese spot interest rates By Yongmiao Hong; Hai Lin; Shouyang Wang
  63. The People’s Republic of China’s Financial Markets: Are They Deep and Liquid Enough for Renminbi Internationalization? By Cruz, Prince Christian; Gao, Yuning; Song, Lei Lei
  64. Price-cost mark-ups in the Spanish economy: a microeconomic perspective By José Manuel Montero; Alberto Urtasun
  65. Non-core Liabilities as an Indicator of Systemic Risk and a Liquidity Stress Test Application on Turkish Banking System By Kurmas Akdogan; Burcu Deniz Yildirim
  66. Specification Tests of Habit Formation By Peng Liu; Yu Ren
  67. Interrelationships Among Korean Outbound Tourism Demand:Granger Causality Analysis By Joo Hwan Seo; Sung Yong Park; Soyoung Boo
  68. Fiscal policy as an instrument of investment and growth By Basu, Kaushik
  69. Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China By Yoshino, Naoyuki; Kaji, Sahoko; Tamon, Asonuma
  70. An Optimal Consumption-Investment Model with Constraint on Consumption By Zuo Quan Xu; Fahuai Yi
  71. Modeling the Dynamics of Chinese Spot Interest Rates By Yongmiao Hong; Hai Lin; Shouyang Wang
  72. Fundamental and speculative shocks, what drives electricity prices? By Katarzyna Maciejowska
  73. Bond Risk Premia and Gaussian Term Structure Models By Bruno Feunou; Jean-Sébastien Fontaine
  74. Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs By Jasmina Arifovic; Janet Hua Jiang
  75. China's national production function since 1997: A reinvestigation By Zhu, Yanyuan; Feng, Xiao
  76. How do firms adjust production factors to the cycle? By Cette, G.; Lecat, R.; Jiddou, A-O-A
  77. Greenhouse Gas and Cyclical Growth By Lance Taylor; Duncan Foley
  78. Approximate aggregation in the neoclassical growth model with ideosyncratic shocks By Karsten Chipeniuk; Nets Hawk Katz; Todd Walker
  79. Money Demand in China and Time-varying Cointegration By Haomiao Zuo; Sung Y. Park
  80. House Price Bubbles in China By Yu Ren; Yufei Yuan; Cong Xiong
  81. CAN DREAMS COME TRUE? ELIMINATING EXTREME POVERTY IN AFRICA BY 2030 By Mthuli Ncube; Zuzana Brixiova; Zorobabel Bicaba
  82. Characteristic Function-Based Testing for Multifactor Continuous-Time Markov Models via Nonparametri By Bin Chen; Yongmiao Hong
  83. Venture Capital: Ein neuer Anlauf zur Erleichterung von Wagniskapitalfinanzierungen By Röhl, Klaus-Heiner
  84. House Price Bubbles in China By Yu Ren; Cong Xiong; Yufei Yuan
  85. Detecting for Smooth Structural Changes in GARCH Models By Bin Chen; Yongmiao Hong

  1. By: Alessia Campolmi; Stefano Gnocchi
    Abstract: We incorporate a participation decision in a standard New Keynesian model with matching frictions and show that treating the labor force as constant leads to incorrect evaluation of alternative policies. We also show that the presence of a participation margin mitigates the Shimer critique.
    Keywords: Business fluctuations and cycles, Labour markets, Transmission of monetary policy
    JEL: E24 E32 E52
    Date: 2014
  2. By: Franz Hamann; Marc Hofstetter; Miguel Urrutia
    Abstract: After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. We examine the experience of the Colombian Central Bank over the last decade, a period of consolidation and innovation of its IT strategy. We study the increasing number of instruments used by the CB, including systematic foreign exchange interventions, announcements, and, sporadically, macro-prudential policies, capital controls, and changes in reserve requirements, among others. The study also examines some political economy dimensions that help explain the behavior of the CB during this period. To guide the discussion, we estimate a small-scale open-economy-policy-model. Classification JEL: E02, E32, E42, E43, E52, E58, E61, F31, F33, F42.
    Date: 2014–05
  3. By: Sami Alpanda; Gino Cateau; Césaire Meh
    Abstract: We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
    Keywords: Economic models; Financial system regulation and policies
    JEL: E44 E32 E17
    Date: 2014
  4. By: Tingguo Zheng; Huiming Guo
    Abstract: Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output.
    Keywords: Small open economy, DSGE model, Indeterminacy, Monetary policy
    JEL: C5 E4 E5 F4
    Date: 2013–10–14
  5. By: Qing He; Haiqiang Chen
    Abstract: The volatility of Chinese GDP growth has been markedly lower since the mid-1990s. We utilize frequency domain and vector autoregression (VAR) methods to investigate the origin of the observed volatility reduction in the Chinese economy. Our estimation indicates that lower volatility of random shocks to the economy, or the good luck hypothesis, accounts for most of the decline in macroeconomic volatility. Although good policy and better business practices are also contributing factors, they play a marginal role in dampening China’s economic fluctuations.
    Keywords: Great Moderation; Output Volatility; China.
    JEL: C33 E31 E32 J00
    Date: 2013–10–14
  6. By: Juan Equiza Goni
    JEL: H63 H68 E21
    Date: 2014–04
  7. By: Marto, Ricardo
    Abstract: Using Bayesian maximum likelihood and data for Portugal, I estimate a New Keynesian DSGE model allowing for the presence of non-Ricardian households and test the stability of the model's prediction when the fraction of liquidity-constrained households changes. In particular, I assess the impacts on: (i) the model parameters posterior distributions; (ii) the impulse responses to six types of structural shocks; and (iii) the sources of fluctuations in output, inflation and the nominal interest rate. The first interesting result is the estimated share of non-Ricardian households in the Portuguese economy, which is found to be relatively high (58%). Even under a simplistic model economy, this result seems plausible and in line with Campbell and Mankiw (1989) for the US (50% of households estimated to be liquidity-constrained) but slightly higher than for other European countries and the euro area (between 25% and 37%). I also show that different-even if relatively close-shares of non-Ricardian households provide very distinct estimates of several parameters, and uneven results and interpretations. Impulse responses to consumption preference and productivity shocks are more amplified for lower shares of liquidity-constrained households; whereas for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share of rule-of-thumb consumers and by price markup shocks in the opposite scenario. Furthermore, the presence of a high proportion of non-Ricardian households and a high degree of price stickiness makes the Taylor-type interest rate rule solution locally indeterminate as in Galí et al. (2007).
    Keywords: DSGE, New Keynesian model, non-Ricardian households, Bayesian inference, Portugal.
    JEL: C11 E12 E37 E52 E62
    Date: 2013–12–01
  8. By: Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
    Abstract: In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning nancial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, "discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnied by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Date: 2014–02–14
  9. By: Yu Ren; Yufei Yuan
    Abstract: This paper establishes a dynamic stochastic partial equilibrium model for explaining residential investment dynamics in the United States, focusing on the distinctive cyclical features of residential investment in that it leads the whole economy. This paper is different from the existing literature in that it adds three new features to the model: news shocks, collateral constraints and agent heterogeneity. The partial equilibrium analysis where interest rates are exogenously fixed shows that these assumptions are essential to generating the dynamic pattern in which residential investment leads consumption and the Gross Domestic Product (GDP).
    Keywords: news shocks, heterogeneous agents, house sector, collateral constraints, aggregate uncertainty
    JEL: E25 E21 E32
    Date: 2013–10–14
  10. By: Yu Ren; Yufei Yuan
    Abstract: This paper establishes a dynamic stochastic partial equilibrium model for explaining residential investment dynamics in the United States, focusing on the distinctive cyclical features of residential investment in that it leads the whole economy. This paper is different from the existing literature by adding three new features to the model: news shocks, collateral constraints and agent heterogeneity. The partial equilibrium analysis where interest rates are exogenously fixed shows that these assumptions are essential to generating the dynamic pattern in which residential investment leads consumption and GDP.
    Keywords: News shocks, Heterogeneous agents, Housing sector, Collateral constraints, Aggregate uncertainty
    JEL: E21 E25 E32
    Date: 2013–10–14
  11. By: Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, a minimum state variable (MSV) solution may not exist even if the Taylor principle holds when the ZLB does not bind. This paper shows there is a clear tradeoff between the expected frequency and average duration of ZLB events along the boundary of the convergence region---the region of the parameter space where our policy function iteration algorithm converges to an MSV solution. We show this tradeoff with two alternative stochastic processes: one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events are endogenous due to discount factor or technology shocks. We also show that small changes in the parameters of the stochastic processes cause meaningful differences in the decision rules and where the ZLB binds in the state space.
    Keywords: Monetary policy; zero lower bound; convergence; minimum state variable solution; policy function iteration
    JEL: E31 E42 E58
    Date: 2014–05
  12. By: Gilchrist, S.; Mojon, B.
    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 sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area.
    Keywords: credit cycle, euro area, financial crisis.
    JEL: E32 E43 E44
    Date: 2014
  13. By: Michael Ehrmann; Michael Ziegelmeyer
    Abstract: Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
    Keywords: Credit and credit aggregates; Transmission of monetary policy
    JEL: D12 E43 E52 G21
    Date: 2014
  14. By: Daniela Hauser
    Abstract: We provide evidence regarding the dynamic behaviour of net labour flows across U.S. states in response to a positive technology shock. Technology shocks are identified as disturbances that increase relative state productivity in the long run for 226 state pairs, encompassing 80 per cent of labour flows across U.S. states in the 1976 - 2008 period. The data suggest heterogeneous responses of both employment and net labour flows across states, conditional on a positive technology shock. We build a two-region dynamic stochastic general equilibrium (DSGE) model with endogenous labour mobility and region-specific shocks to account for this evidence. We calibrate the model economy consistently with the observed differences in the degree of nominal rigidities across states, and show that we replicate the different patterns of the responses in employment and net labour flows across states following a technology shock.
    Keywords: Business fluctuations and cycles; Labour markets
    JEL: E24 E32 J61
    Date: 2014
  15. By: Mamadou Diop (CREM UMR CNRS 6211, University of Rennes 1, France)
    Abstract: In December 1999, the WAEMU countries have adopted the Pact of Convergence, Stability, Growth and Solidarity which states in its corrective arm, the basic fiscal balance, relative to nominal GDP, must be balanced. Implying that the presence of an unexpected adverse economic conditions, governments have a choice between respecting the fiscal criterion of the Covenant and not to support economic activity or stimulate economic activity through public spending and not meet the key criteria of the pact. This article's objective is to highlight the failures of the fiscal rule cannot be a lever action of public authorities and the consequences if it does not take into account the state of the economy. Two types of fiscal policies can be distinguished according to the economic situation: procyclical policy changing in the same direction as the business cycle and countercyclical fiscal policy that seeks to minimize fluctuations in economic conditions.
    Keywords: Politique budgétaire procyclique, UEMOA (WAEMU), Pacte de convergence et de stabilité, Solde budgétaire de base, Politique budgétaire contracyclique
    JEL: E6 C5
    Date: 2013–11
  16. By: H. Evren Damar; Reint Group; Adi Mordel
    Abstract: The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank-level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms’ investment, where even temporary adverse credit supply shocks are associated with significant real effects.
    Keywords: Credit and credit aggregates; Domestic demand and components; Financial Institutions
    JEL: E21 E44 G21 G01
    Date: 2014
  17. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: In this paper we empirically examine a hybrid New-Keynesian model with heterogeneous bounded rational agents who may adopt an optimistic or pessimistic attitude - so called animal spirits - towards future movements of the output and inflation gap. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. In addition, we compare its empirical performance to the standard model with rational expectations. Our empirical results show that the model-generated auto- and cross-covariances of the output gap, the inflation gap and the nominal interest gap can provide a good approximation of the empirical second moments. The result is mainly driven by a high degree of persistence in the output and inflation gap due to the impact of animal spirits on economic activity. Furthermore, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value. --
    Keywords: Animal Spirits,Bounded Rationality,New-Keynesian Model,Simulated Method of Moments
    JEL: C53 D83 E12 E32
    Date: 2014
  18. By: Arpita Chatterjee (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: This paper empirically characterizes comovement in monetary policy of G-7 countries during 1980-2009. I estimate a Taylor rule for each country and use residual from the Taylor rules to estimate a dynamic latent factor model with common and Europe speci…c factors. I quantify importance of the G-7 factor in explaining comovement in residual variation of monetary policy and show that the G-7 factor is particularly important during a period of globalization (1988-2003). I estimate dynamics of importance of the G-7 factor using rolling sub-samples and show that trade-openness increases comovement in monetary policy in Europe.
    Keywords: Symmetry-breaking, Endogenous comparative advantage, Gains from trade, Education policy
    JEL: F11 E62
    Date: 2014–04
  19. By: Vuslat Us
    Abstract: This paper estimates NAIRU (Non-Accelerating Inflation Rate of Unemployment) for the Turkish economy as an unobserved stochastic variable. In doing so, the study adopts an empirical framework that is based on a systems approach. More specifically, the framework combines an Okun-type relationship between output gap and unemployment gap with a Phillips curve equation, and also imposes stochastic laws of motion for NAIRU and potential output, while assuming the parameters to be time-varying. However, the requirement to simultaneously estimate parameters and to solve the state-space problem introduces nonlinearity, which can be handled by employing Extended Kalman Filter (EKF), i.e. the use of standard Kalman filter equations to the first-order Taylor approximation of the nonlinear model about the last estimate. Estimation results suggest that NAIRU moves in tandem with the actual unemployment, but it follows a more volatile path than the latter. Accordingly, the estimated NAIRU series reacts more sharply to the crises than the actual unemployment. This observation is in line with the prior studies reporting the relatively persistent nature of actual unemployment compared to the non-accelerating inflation rate of unemployment. All of the derived series are plausible and capture the significant turning points of the economy. As for coefficients, the time-varying parameters indicate a stable, yet quite a weak link between unemployment and inflation. Meanwhile, the coefficient of exchange rate in the Phillips curve equation suggests a weakening, but significant pass-through to inflation. Moreover, estimation results also point to the presence of considerable inertia in inflation. To sum up, findings of this study provide guidance for future research on NAIRU, which is an important tool for monetary policy. The findings also lay the basis for further work that may adopt EKF. But most importantly, this study emphasizes the need for a more flexible and comprehensive framework for the conduct of monetary policy.
    Keywords: NAIRU, Systems approach, Phillips curve, Okun law, Time-varying parameter, Extended Kalman Filter, Inertia, Monetary policy
    JEL: C32 C63 E24 E31
    Date: 2014
  20. By: Jessica Kramer and Greg Farrell
    Abstract: Estimates of the output gap are an important component of policy-makers’ toolkits. Both the theory underlying monetary policy analysis and the empirical models employed by central banks suggest that the output gap is a key variable explaining inflation. In this view, the estimate of the output gap provides not only an indication of how well the economy is operating relative to its potential, it also signals whether inflation is likely to increase or decrease in the future. The reliability of estimates of the output gap is therefore extremely important for policy making. However, a large literature has highlighted both conceptual and practical problems in measuring the gap, including the difficulty of using real-time data that will be revised in the future. The contribution of this paper is to assess the reliability of real-time estimates of the South African output gap, by estimating output gaps using a range of univariate methods applied to real-time gross domestic product (GDP) data. Consistent with the results of similar studies conducted in other countries, it is found that the real-time South African output gap estimates are in fact quite unreliable and are significantly revised over time. Furthermore, the source of these revisions is largely attributed to new data points becoming available, indicating the unreliability of end-of-sample estimates, rather than data or parameter revisions.
    Keywords: Output gap, Real-time data, Monetary policy, South Africa
    JEL: C32 E32
    Date: 2014
  21. By: Luca Arciero (Bank of Italy); Ronald Heijmans (De Nederlandsche Bank); Richard Heuver (De Nederlandsche Bank); Marco Massarenti (European Central Bank); Cristina Picillo (Bank of Italy); Francesco Vacirca (Bank of Italy)
    Abstract: This paper develops a methodology, based on Furfine (1999), for identifying unsecured interbank money market loans from the transaction data of the most important euro payment processing system TARGET2, for maturities ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the e-MID Italian electronic trading platform and (ii) aggregated reporting by the EONIA panel banks. The Type2 (false negative) error for the best performing algorithm setup is 0.92%. We find aggregated interest rates very close to the EONIA but observe a high degree of heterogeneity across countries and market participants. The different stages of the global financial crisis and of the sovereign debt crises are clearly revealed in the interbank money market by significant drops in turnover. The results focus on three levels: euro-area, country group and country (Italy and the Netherlands).
    Keywords: euro interbank money market, Furfine, TARGET2, financial stability, EONIA
    JEL: E42 E44 E58 G01
    Date: 2014–04
  22. By: Sermin Gungor; Jesus Sierra
    Abstract: This paper investigates the effects of monetary policy on the risk-taking behavior of fixed-income mutual funds in Canada. We consider different measures of the stance of monetary policy and investigate active variation in mutual funds’ risk exposure in response to monetary policy. We find evidence in support of a systematic link between monetary conditions and intertemporal variation in the risk-taking behavior of mutual funds. Specifically, following an expansionary monetary shift, funds actively increase default-risk exposure (i.e., search-for-yield). This is particularly evident in the post-crisis period where interest rates were kept low for a prolonged period of time.
    Keywords: Financial Institutions; Transmission of monetary policy
    JEL: G23 E52
    Date: 2014
  23. By: Gelain, Paolo; Guerrazzi, Marco
    Abstract: In this paper, we implement Bayesian econometric techniques to analyze a theoretical framework built along the lines of Farmer's micro-foundation of the General Theory. Specifically, we test the ability of a demand-driven search model with self-fulfilling expectations to match the behaviour of the US economy over the last thirty years. The main findings of our empirical investigation are the following. First, all over the period, our model fits data very well. Second, demand shocks are the most relevant in explaining the variability of concerned variables. In addition, our estimates reveal that a large negative demand shock caused the Great Recession via a sudden drop of confidence. Overall, those results are consistent with the main features of the New 'Farmerian' Economics as well as to latest demand-side explanations of the finance-induced recession.
    Keywords: New Farmerian Economics; Competitive search; Dynamic models; Bayesian estimation.
    JEL: E24 E32 J64
    Date: 2014–05–06
  24. By: Hutengs, Oliver; Stadtmann, Georg
    Abstract: The paper investigates Scandinavian countries and its respective male and female youth unemployment rates. Okun's law is used to estimate age-cohort and gender specific Okun coefficients to make inference on the business-cycle dependence of young people across Scandinavian countries. --
    Keywords: Okun's law,labor market,youth unemployment,Scandinavia
    JEL: E24 F50 C23
    Date: 2014
  25. By: Haitao Li; Xiaoxia Ye
    Abstract: In this paper a type of Heath, Jarrow and Morton (1992) (HJM) based affine model is derived theoretically. This type of affine model is obtained by applying Linear Realization Theory to construct Finite Dimensional Realizations (FDRs) of the Gaussian HJM model. The algorithms of constructing Standard Observable Canonical Realization and Jordan Canonical Realization are introduced sequentially. And it is shown that the commonly adopted FDR is actually Jordan Canonical Realization. The empirical results show that a two-factor model of this type provides great fit to the term structure of interest rates data. The resulting state variables have clear economic interpretations. And it is found that the short end of the term structure can be precisely considered as a “medium-run factor†which uniformly shifts the yield curve. This finding has an important implication for bond portfolios management, and also helps us better understand the interactions between macro-economy and term structure dynamics.
    Keywords: Affine Term Structure Model; HJM; Finite Dimensional Realization; Linear Realization Theory; State Space Framework; Macro-economy
    JEL: C61 E43 E44 G12
    Date: 2013–10–14
  26. By: Summerfield, Fraser
    Abstract: This paper shows that changes in the skill requirements of jobs are one way by which economic downturns affect job match quality. In doing so this paper makes two contributions to the literature. The first contribution is to document a stylized fact about the cyclicality of skill requirements (tasks) for newly formed jobs. Relating local unemployment rates in Canadian data, to skill requirements generated from the Occupational Information Network (O*NET) database, I show that the demand for manual skill requirements is countercyclical. This stylized fact shown to be consistent with the predictions of a job search models with heterogeneous workers and vacancies. In this framework, firms increase the share manual job vacancies during downturns because they are less costly to post and fill. The second contribution is to show that the cyclicality of skill requirements, rather than economic conditions themselves, contribute to the incidence of overqualification. Estimates using various measures of overqualification confirm that changes in the skill requirements of newly formed jobs can account for much of the relationship between labor market conditions and job match quality. This empirical finding is also consistent with the model, where the share of overqualified workers varies with economic conditions partially because of corresponding changes in the type of job vacancies.
    Keywords: Mismatch, Job Search, Overeducation, Skill Demand, Business Cycles
    JEL: E24 E32 J24 J63 J64
    Date: 2014–04–28
  27. By: Tran, Vivian
    Abstract: Des exemples d’inégalité en éducation et de surqualification sur le marché du travail peuvent souvent se produire dans le même bâtiment administratif, comme par exemple un employé de bureau ayant un diplôme d’études supérieures et qui doit rendre compte à un supérieur n’ayant fait que des études secondaires. D’aucuns pensent qu’en général l’inégalité provient de mauvaises conditions économiques; cependant, une étude intitulée « Conditions du marché du travail, exigences professionnelles et inégalité en éducation » (Rapport de recherche du RCCMTC no 134) par le membre affilié du RCCMTC Fraser Summerfield (Université de Guelph) fournit des preuves que la tendance à la surqualification plus élevée lors des récessions est en partie due aux changements relatifs des types d’emplois proposés pendant ces périodes. L’assurance-emploi (a.-e.) aide les travailleurs à faire face à des situations économiques difficiles, telles que les périodes de chômage ou de sous-emploi. Bien que l’a.-e. fournisse une assurance aux ménages avec l’avantage du lissage de la consommation pendant une période de chômage, des chercheurs découvrent des preuves de risque moral, lorsque les prestations de l’a.-e. encouragent l’allongement de la période de chômage. Mais la documentation précédente ne faisait pas la différence dans les changements des prestations lorsque les conditions du marché du travail sont bonnes ou mauvaises. Si l’avantage du lissage de la consommation ou le coût du risque moral de l’a.-e. dépendent des conditions du marché du travail, ceci peut impliquer que les prestations optimales de l’a.-e. devraient suivre les changements de la demande en main-d’Å“uvre. Une étude intitulée « L’assurance-emploi doit-elle varier selon le taux de chômage ? Théorie et preuves » (Rapport de recherche du RCCMTC no 104) par les membres affiliés du RCCMTC Kory Kroft (Université de Toronto) et Matthew Notowidigdo (Booth School of Business, Université de Chicago) examine comment les prestations optimales de l’a.-e. varient selon le cycle économique en évaluant comment le coût du risque moral et l’avantage du lissage de la consommation de l’a.-e. varient avec le taux de chômage.
    Keywords: inégalité, recherche d’emploi, surqualification, compétences recherchées, cycles économiques, assurance-emploi, cycle économique, risque moral
    JEL: E24 E32 J24 J63 J64 H5 J65
    Date: 2014–04–29
  28. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert; Fabien Labondance (Atelier de recherche sur la politique économique et la gestion des entreprises (ARPEGE))
    Abstract: The prevailing consensus on the role of central banks has eroded. The pursuit of the goal of price stability only is now insufficient to ensure macroeconomic and financial stability. A new paradigm emerges in which central banks should ensure price stability, growth and financial stability. Recent institutional developments of the ECB go in this direction since it will be in charge of the micro-prudential supervision. In addition, the conduct of monetary policy in the euro area shows that the ECB also remained attentive to the evolution of economic growth. But if the ECB implements its triple mandate, the question of the proper relationship between these missions still arises. Coordination between the different actors in charge of monetary policy, financial regulation and fiscal policy is paramount and is lacking in the current architecture. Besides, certain practices should be clarified. The ECB has played a role as lender of last resort (towards banks and, to a lesser extent, towards governements) although this mission was not allocated to the ECB. Finally, in this new framework, the ECB suffers from a democratic illegitimacy, reinforced by the increasing role it plays in determining the macroeconomic and financial balance of the euro area. It seems important that the ECB is more explicit with regard to its different objectives and that it fulfils the conditions for close cooperation with the budgetary authorities and financial regulators. Finally, we call for the ex nihilo creation of a supervisory body of the ECB, which responsibility would be to discuss and analyze the relevance of the ECB monetary policy.
    Date: 2014–05
  29. By: Alcidi, Cinzia; Gros, Daniel
    Abstract: We consider the real life implementation of some key elements of the new economic governance framework for the euro area. The main findings are the following. The Country Specific Recommendations issued in the context of the European Semester seem to be too little ‘specific’ to constrain governments in general and even less creditor governments, who so far have been able to ignore them. We argue that the Excessive Imbalances Procedure should be based much more on forward looking variables and on deviations from the euro area average instead of absolute thresholds. The emphasis on cyclically adjusted balances in the reformed Stability and Growth Pact, as well as the Fiscal Compact (formally the TSCG) will face serious problems of implementation given the uncertainties surrounding the estimates of the cyclical component and the frequent revisions this component is subject to. Finally we show that the rationale for fiscal policy coordination, namely spill-over effects from national actions to the rest of the euro area, change nature in different economic circumstances. During a financial crisis much more coordination is desirable than during normal times. This implies that the set of ambitious rules for economic policy coordination created under the impression of the euro crisis might not be appropriate for different circumstances.
    Keywords: EU governance, policy coordination, macroeconomic imbalances, spillovers, structural balance
    JEL: E02 E60
    Date: 2014–05–06
  30. By: Juhana Hukkinen (Bank of Finland); Matti Viren (Bank of Finland and Department of Economics, University of Turku)
    Abstract: This paper deals with the debt-growth relationship using several time-series tools. The idea is to find out whether the inverse relationship between these variable can be detected without imposing any functional forms for the estimating relationship and whether the relationship does indeed reflect some nonlinear features. Thus recursive correlations with different orderings of the time-series are computed using the Reinhart & Rogoff panel data. After that, recursive correlations are re-estimated with data that are cyclically adjusted to reflect the structural features of these two variables. The nature of the relationship is also scrutinized by using various variable-parameter estimation techniques (Kalman Filter, Logistic functional form and recursive estimation). Finally, some analyses of causality are carried out using these (filtered) data. The analysis clearly shows that the inverse relationship is very robust indeed and it rather supports the “toxic debt” hypothesis than the cyclical debt accumulation hypothesis.
    Keywords: debt, government deficit, growth, causality
    JEL: E60 E62 E65
    Date: 2013–12
  31. By: Erik Makela (Department of Economics, University of Turku)
    Abstract: The objective of this paper is to figure out how the Economic and Monetary Union in Europe (EMU) has affected on its member’s sovereign risk-premiums and long-term government bond yields. In order to estimate the effect, this paper utilizes synthetic control method. Contrary to the popular belief, this paper finds that the majority of member countries did not receive economic gains from EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, France, Germany and Netherlands have paid positive and substantial euro-premium in their 10-year government bonds since the adoption of single currency. After the latest financial crisis, government bond yields have been higher in all member countries compared to the situation that would have been without monetary unification. This paper concludes that from the sovereign borrowing viewpoint, it would be beneficial for a country to maintain its own currency and monetary policy.
    Keywords: Synthetic Control Method, Monetary Union, Sovereign Risk, Government Bond Yield
    JEL: F34 E42 G15
    Date: 2014–04
  32. By: Andrea Filippo Presbitero (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR); Agnese Sacchi (Faculty of Economics - Universitas Mercatorum (Rome, Italy);, Governance and Economics Research Network, University of Vigo (Spain)); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: This paper investigates the effects of property taxation on fiscal discipline for a sample of OECD countries over the period 1973-2011. We find that aggregate property taxation in total tax revenues is not statistically correlated with the primary surplus-to-GDP ratio. In contrast, a greater reliance on property taxes pertaining to sub-national governments contributes to fiscal discipline, suggesting that fiscal decentralization should favor responsive tax base instruments.
    Keywords: Fiscal imbalance, Property tax, Sub-national governments, Tax decentralization
    JEL: E62 H62 H71 H77
    Date: 2014–05
  33. By: Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE)
    Abstract: The economic crisis which started in 2008 led to a strong rise in public debts. The sovereign debt crisis in euro area southern countries broke the unity of the euro area and weakened the “single currency” concept. The paper shows that this situation is not due to a lack of fiscal discipline in Europe, but to drifts in financial capitalism and to an inappropriately designed euro area economic policy framework. Public debts homogeneity needs to be resettled in Europe. European public debts should become safe assets again, and should not be subject to financial markets’ assessment. EU Member States should not be requested to pay for past sins through austerity measures, and should not strengthen fiscal discipline through rules lacking economic rationale. The paper deals with recent proposals made to improve euro area governance (redemption fund, European Treasury, eurobonds, public debt guarantee by the ECB). The paper advocates for a full guarantee of government bonds for the Member States who commit to an economic policy coordination process, which should target GDP growth and coordinated reduction of imbalances.
    Keywords: EU fiscal policy; EU Governance
    Date: 2014–04
  34. By: Tran, Vivian
    Abstract: Examples of educational mismatch and overqualifcation in the labour market can often be found in the same office building – the clerical worker with a bachelor’s degree reporting to a manager with a high school education – as an example. Some have argued that mismatch in general is a result of poor economic conditions; however, a paper entitled “Labor Market Conditions, Skill Requirements and Education Mismatch†(CLSRN Working Paper no.134) by CLSRN affiliate Fraser Summerfield (University of Guelph) provides evidence that the pattern of increased overqualification during economic downturns is partially due to relative changes in the type of jobs available at these times. Unemployment Insurance (UI) helps individuals transition through difficult economic situations such as periods of unemployment, and underemployment. While UI provides insurance to households by helping them “smooth consumption†during a period of unemployment, studies have found evidence of moral hazard– raising UI benefits encourages longer unemployment spells. However, the previous literature has not distinguished between changes in benefits when labour market conditions are good, and changes in benefits when labour market conditions are poor. If either the consumption smoothing benefit or the moral hazard cost of UI depends on labour market conditions, this may imply that optimal UI benefits should respond to shifts in labour demand. A study entitled “Should Unemployment Insurance vary with the Unemployment Rate? Theory and Evidence†(CLSRN Working Paper no. 104) by CLSRN affiliates Kory Kroft (University of Toronto) and Matthew Notowidigdo (Booth School of Business, University of Chicago) examines how optimal UI benefits vary over the course of the business cycle by estimating how the moral hazard cost and the consumption smoothing benefit of UI vary with the unemployment rate.
    Keywords: Mismatch, Job Search, Overeducation, Skill Demand, Business Cycles, Unemployment Insurance, Business Cycle, Moral Hazard, Consumption Smoothing
    JEL: E24 E32 J24 J63 J64 H5 J65
    Date: 2014–04–29
  35. By: Eric Gaus (Ursinus College); Arunima Sinha (Santa Clara Univerisity)
    Abstract: We find that investors' expectations of U.S. nominal yields, at different maturities and forecast horizons, exhibit significant time-variation during the Great Moderation. Nominal zero-coupon bond yields for the U.S. are used to fit the yield curve using a latent factor model. In the benchmark model, the VAR process used to characterize the conditional forecasts of yields has constant coefficients. The alternative class of models assume that investors use adaptive learning, in the form of a constant gain algorithm and different endogenous gain algorithms, which we propose here. Our results indicate that incorporating time-varying coefficients in the conditional forecasts of yields lead to large improvements in forecasting performance, at different maturities and horizons. These improvements are even more substantial during the Great Recession. We conclude that our results provide strong empirical motivation to use the class of adaptive learning models considered here, for modeling potential investor expectation formation in periods of low and high volatility, and the endogenous learning model leads to significant improvements over the benchmark in periods of high volatility. A policy experiment, which simulates a surprise shock to the level of the yield curve, illustrates that the conditional forecasts of yields implied by the learning models do significantly better at capturing the response observed in the realized yield curve, relative to the constant-coefficients model. Furthermore, the endogenous learning algorithm does well at matching the time-series patterns observed in expected excess returns implied by the Survey of Professional Forecasters.
    Keywords: Adaptive learning, Investor beliefs, Monetary policy, Excess returns
    JEL: E52 D83
    Date: 2014–04–10
  36. By: Cem Aysoy; Cevriye Aysoy; Semih Tumen
    Abstract: Using a national panel of housing units, this paper documents that the rate of nominal rigidities 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 responsible for more than half of the observed nominal rigidities in housing rents. The household- and individual-level determinants of the nominal rigidities in rents, turnover status, and tenure in the same unit are also investigated using the micro-level details available in our dataset. Implications of these results for monetary policy, in ation accounting, welfare, asset prices, and other redistributional issues are discussed.
    Keywords: Housing rents; nominal rigidities; turnover; grid pricing
    JEL: E31 R21 R31
    Date: 2014
  37. By: Ying Chen; Linlin Niu
    Abstract: We propose an Adaptive Dynamic Nelson-Siegel (ADNS) model to adaptively forecast the yield curve. The model has a simple yet flexible structure and can be safely applied to both stationary and nonstationary situations with different sources of change. For the 3- to 12-months ahead out-of-sample forecasts of the US yield curve from 1998:1 to 2010:9, the ADNS model dominates both the dynamic Nelson-Siegel (DNS) and random walk models, reducing the forecast error measurements by between 30 and 60 percent. The locally estimated coefficients and the identified stable subsamples over time align with policy changes and the timing of the recent financial crisis.
    Keywords: Yield curve, term structure of interest rates, local parametric models, forecasting
    JEL: C32 C53 E43 E47
    Date: 2013–10–14
  38. By: Warren E. Weber
    Abstract: In the United States prior to 1863 each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was widespread, bank notes were not perfectly safe, and notes of different banks did not exchange at par and rates of exchange were volatile. The paper also examines how bank notes were regulated and supervised and how that regulation and supervision affected the functioning of the system. The U.S. experience with state bank notes suggests that a privately-issued e-money system can operate efficiently but only with appropriate government intervention, regulation, and supervision to minimize counterfeiting and to promote safety and par exchange.
    Keywords: Bank notes, E-money, Financial services
    JEL: E E4 E41 E42 E5 E58
    Date: 2014
  39. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: What makes e-money more special than cash? Is the introduction of e-money necessarily welfare enhancing? Is an e-money system necessarily stable? What is the optimal way to design an efficient and stable e-money scheme? This paper provides a first attempt to develop a micro-founded, dynamic, general-equilibrium model of e-money for investigating these policy issues. We first identify some superior features of e-money which help mitigate informational frictions and enhance social welfare in a cash economy. A model that features both trading frictions and two-sided platforms is then built and used to compare two potential e-money schemes: (i) public provision of e-money with decentralized adoption, and (ii) private monopolistic provision of e-money. We show that, in general, both public and private provision of e-money are inefficient, and we characterize the optimal incentive scheme by addressing four potential sources of inefficiency – market powers in goods trading, network externality, liquidity constraint and monopoly distortion in e-money issuance. We show that the welfare impact of e-money depends critically on whether cash is a viable alternative to e-money as a means of payment. When it is not (e.g., for online payments where usage of money is prohibitively costly), the adoption of e-money is always welfare enhancing, albeit not welfare maximizing. However, when cash is a viable alternative (e.g., in a coffee shop), introducing e-money can sometimes reduce social welfare. Moreover, a system with public provision and decentralized adoption is inherently unstable, while a planner or a private issuer can design a pricing scheme to restore stability. Lastly, we examine an alternative e-money scheme – a hypothetical set-up with public provision through a private platform. We also compare the impact of various provision schemes on central bank seigniorage income. While this scheme may or may not improve efficiency, it can always increase seigniorage income, even though there may exist better policy options such as imposing a cash reserve requirement or collecting a charter fee.
    Keywords: Bank notes, E-money, Payment clearing and settlement systems
    JEL: E E4 E42 E5 E58 L L5 L51
    Date: 2014
  40. By: Antonia Díaz, (Department of Economics, Universidad Carlos III de Madrid, 28093 Madrid, Spain); Luis A. Puch (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa) (Department of Foundations of Economic Analysis II (Quantitative Economics)), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid))
    Abstract: In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energy-saving technical change and, therefore, a substitute of energy eficiency: it rises the productivity of capital without rising energy use, which increases effective energy eficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average eficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock.
    Keywords: Energy use, vintage capital, energy price shocks, investment-specific technology shocks.
    JEL: E22 E23
    Date: 2013–10
  41. By: Linlin Niu
    Abstract: This paper proposes an affine term structure model in a stochastic volatility setting. It provides a useful modeling tool to bridge the two strands of macroeconomic and finance research: the DSGE-VAR with stochastic volatility and the macro-finance model of term structure. In the model, the state vector follows a VAR; its innovations are conditional normal with a time-varying variance-covariance following a Wishart Autoregression process, which directly drives the risk price in the stochastic discount factor. In this setting, the yield curve under no-arbitrage is determined both by the state vector and its stochastic volatility-covolatility matrix. A DSGE-VAR with stochastic volatility can readily be cast into the state of this term structure model. Simulation of the baseline model shows that: 1) two factors are sufficient to fully reproduce all typical shapes of the yield curve; 2) Volatility and Covolatility has sizable effect on medium to long maturity yields; 3) volatility is a curvature factor of the yield curve, and the net effect of a multivariate variance-covariance matrix is also a curvature factor; 4) expected excess returns are explicitly linked to the volatility-covolatility of state innovations; 5) the model can well explain the bond yield "conundrum" in 2004-2005, where the long term interest rate remains low while short term rate keeps rising continuously.
    Keywords: Term structure, Stochastic volatility, Wishart Autoregressive process
    JEL: G12 E43
    Date: 2013–10–14
  42. By: Yondonjamts, Batsukh; Nyamdash, Batsaikhan
    Abstract: The traditional methodology uses the real GDP growth as a proxy for the economic growth. Unfortunately this way of calculating economic growth is not taking into account of the sector inequality in the economy (especially in the economy with high degree of natural resource dependency). Therefore, this paper proposes the new approach to optimize the share of sector outputs in the economy which take into account of the inequality.
    Keywords: economic output, elasticity, sector output
    JEL: E40 E47 O1 O11 O2 O21
    Date: 2014–04–30
  43. By: Leung, Charles Ka Yui
    Abstract: Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market.
    Keywords: fundamental house price, error-correction model, cointegration, house price-to-income ratio, endogenous house price and income.
    JEL: E30 O40 R30
    Date: 2014–04
  44. By: Janda, Karel; Zetek, Pavel
    Abstract: This paper investigates the role of public expenditures and general government debt in microfinance performance. Our panel regression applied to the data of microfinance institutions (MFIs) in Latin America and the Caribbean confirms the high significance of public finance for the growth of MFIs, especially for the size of their total assets and for their yield on gross loan portfolio. Moreover, the results indicate that MFIs, operating in the country with higher growth of GDP, are characterized by higher rate of social efficiency. The positive influence on microfinance is besides public finance also associated with a growth of rural population or an economy openness of the given country.
    Keywords: public finance, government expenditure, microfinance, microcredit, poverty
    JEL: E62 G21 O11
    Date: 2014–05–03
  45. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw); Karolina Goraus (Faculty of Economic Sciences, University of Warsaw); Jan Hagemejer (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)
    Abstract: We evaluate the welfare and macroeconomic effects of increasing the retirement age in the context of population aging. In an overlapping generations framework we simulate the increase of the retirement age by seven years under different pension systems (defined benefit, notionally defined contribution and fully funded). We show that raising the retirement wage is universally welfare enhancing for all living and future cohorts, regardless of the pension system. Quantitatively, this policy intervention is able to counterweight the adverse macroeconomic consequences of aging. We test the validity of our findings in a population with lower pace of aging due to higher fertility. Finally, we show scope for further welfare gains if productivity is relatively high at old ages.
    Keywords: pension system, defined benefit, NDC, retirement age, pension system reform, welfare
    JEL: C68 E17 E25 J11 J24 H55 D72
    Date: 2014
  46. By: Aleksandra Kolasa (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Barbara Liberda (Faculty of Economic Sciences, University of Warsaw)
    Abstract: This paper studies the drivers of total private and household savings in Poland and compares them to those in developed countries. To this end, the two types of saving regressions are estimated: one based on an annual panel of OECD countries and the other using Polish quarterly time series. Compared to an “average” OECD country, the Polish private and household saving rates are more affected by the process of financial deepening. Moreover, they are also more sensitive to changes in government and corporate savings.
    Keywords: private savings, household savings, Poland, panel study, saving determinants
    JEL: E21 O16 O57
    Date: 2014
  47. By: Javier J. Pérez (Banco de España); Rocío Prieto (Banco de España)
    Abstract: We analyse the determinants of the structure of public debt in the case of Spain, from a sub-national perspective. The endogenous shift in the composition of debt (among shortvs long-term instruments, and loans vs securities) depends on observable measures of credit and liquidity risks. To discriminate among competing potential determinants, we set out empirical models that incorporate financial, economic and institutional variables. We estimate the models by GMM and make use of a new quarterly dataset of Spanish regional governments’ debt structure for the period 1995Q1-2012Q4. Our results show that the most robust determinants of regional public financial management decisions, as reflected by the structure of debt, are rollover risks and the expectation of central government support (as measured by the dynamics of transfers).
    Keywords: sub-sovereign public debt, public financial management, public debt structure, financial vulnerability indicators
    JEL: H6 E62 C53
    Date: 2014–02
  48. By: Hiroshi Fujiki; Cheng Hsiao
    Abstract: We use data from Public Opinion Surveys on Household Financial Assets and Liabilities from 1991 to 2002 to investigate the issues of unobserved heterogeneity among cross-sectional units and stability of Japanese aggregate money demand function. Conditions that permit individual data and aggregate data to be modeled under one consistent format are given. Alternative definitions of money are explored through year-by-year cross-sectional estimates of Fujiki-Mulligan (1996) household money demand model. We find that using M3 appears to be broadly consistent with time series estimates using the aggregates constructed from the micro data. The results appear to support the existence of a stable money demand function for Japan. The estimated income elasticity for M3 is about 0.68 and five year bond interest rate elasticity is about -0.124.
    Keywords: Demand for Money; Aggregation; Heterogeneity
    JEL: E41 C43
    Date: 2013–10–14
  49. By: Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE)
    Abstract: The 2007 crisis highlighted the drawbacks of the euro area framework which were already there from the launch of the single currency. There cannot be a single currency between countries with different economic situations and independent economic policies. Euro area governance (no public debts guarantee by the ECB, arbitrary rules focusing on public finances only), was not satisfactory. EU institutions tried to impose a strategy (domestic policies constraints, public deficits cuts, liberal structural reforms) which failed. Before the crisis, imbalances had risen between Northern Member States (MS) and Southern MS, and became unsustainable with the crisis. The Fiscal pact strengthened rules lacking economic rationale. Blind austerity policies led the euro area to fall in depression and undermined euro area cohesion. The procedures implemented strengthen economic policy surveillance between MS, without organising real domestic economic policy coordination. They allow for limited solidarity, at a very high price. Fiscal federalism projects cannot offset the loss of independence for domestic economic policies. MS Public debts should become safe assets again, thanks to the ECB’s guarantee. This requires implementing real economic coordination, which should target growth, full-employment and orderly reduction in imbalances between MS. Europe should reaffirm its specificity: a social model, a will to prepare for ecological transition. These are prerequisites for Europe to make progress.
    Date: 2014–05
  50. By: Carlo A. Favero; Linlin Niu; Luca Sala
    Abstract: This paper addresses the issue of forecasting the term structure. We provide a unified state-space modelling framework that encompasses different existing discrete-time yield curve models. Within such framework we analyze the impact of two modelling choices, namely the imposition of no-arbitrage restrictions and the size of the information set used to extract factors, on the forecasting performance. Using US yield curve data, we find that both no-arbitrage and large info help in forecasting but no model uniformly dominates the other. No-arbitrage models are more useful at shorter horizon for shorter maturities. Large information sets are more useful at longer horizons and longer maturities. We also find evidence for a significant feedback from yield curve models to macroeconomic variables that could be exploited for macroeconomic forecasting.
    Keywords: Yield curve, term structure of interest rates, forecasting, large data set, factor models
    JEL: C33 C53 E43 E44
    Date: 2013–10–14
  51. By: Mariya Hake (Oesterreichische National Bank); Fernando López-Vicente (Banco de España); Luis Molina (Banco de España)
    Abstract: In this paper we compare the determinants of loan dollarisation in two emerging market regions, namely Central, Eastern and Southeastern Europe (CESEE) and Latin America, by means of a meta-analysis of 32 studies that provide around 1,200 estimated coefficients for six drivers of foreign currency lending. One common pattern we identify is that macroeconomic instability (as expressed by inflation volatility) and banks’ funding in foreign currency play a significant role in explaining loan dollarisation in both regions. By contrast, the interest rate differential appears to be a key determinant only in Latin America, while the positive impact of exchange rate volatility on dollarisation implies a more prominent role for supply factors in the CESEE region. While the robustness of the results has been verified, our meta-analysis shows that estimates reported in the literature tend to be influenced by study characteristics such as the methodology applied and the data used.
    Keywords: foreign currency loans, CESEE, Latin America, meta-regression, random effects maximum likelihood
    JEL: C5 E52 F31 O57 P20
    Date: 2014–04
  52. By: Ludovit Odor (Council for Budget Responsibility); Judita Jurasekova Kucserova (National Bank of Slovakia, Research Department)
    Abstract: Estimates of potential output and the output gap are essential elements in the toolkit of policy makers. Latest changes in the European fiscal framework have strengthened significantly the role of structural budget balances, which rest on output gap calculations. With the adoption of the Fiscal Compact new procedures are entering into force. Independent fiscal institutions are going to play an important role in triggering correction mechanisms. In our view, the new framework will be credible only if meaningful estimates of output gaps and structural budget balances are available in real time. This is a huge problem especially for small countries with short history and many structural breaks, where the estimation of output gap is more an art than a science. Very volatile estimates of output gap with weak information content can quickly undermine the credibility of independent fiscal institutions. In this working paper we critically review the current estimation techniques in Slovakia and propose a new framework to calculate more robust output gap figures. In a companion paper we deal with possible improvements in the estimation of structural budget balances.
    Keywords: output gap, real-time evaluation, fiscal policy, principal component analysis, multivariate Kalman filter
    JEL: E23 C22 C32
    Date: 2014–03
  53. By: Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR.; Università di Napoli "Federico II" and CSEF)
    Abstract: Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.
    Keywords: financial crisis, risk taking, systemic risk, financial regulation, monetary policy, politics
    JEL: G01 G18 G21 G28 H81 O16
    Date: 2014–05–03
  54. By: Salvatore Morelli (CSEF, University of Naples and INET Oxford, University of Oxford)
    Abstract: This paper examines the response of the national income shares accruing to different groups within the richest decile in the US to the occurrence of major systemic banking crises since the beginning of the twentieth century. The findings suggest that the impact of banking crises on the US top income shares is mostly small in magnitude. Indeed, the estimated total effect of crises is never bigger than one standard deviation of a specific top shares under investigation. Results are robust to a variety of checks and the analysis also highlights interesting heterogeneity across different income groups. Additional results also point out that the short-term impact of crises may be also temporary in nature as top shares recover faster in the aftermath of a shock. These findings lend indirect support to the idea that only substantial changes in government policies and institutional frameworks can bring about radical changes in income distribution.
    JEL: D31 D39 E32 E37
    Date: 2014–04–29
  55. By: Christophe Blot (OFCE); Marion Cochard (OFCE); Jérôme Creel (OFCE); Bruno Ducoudre (OFCE); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE)
    Abstract: Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.
    Keywords: public debt; fiscal multipliers; debt
    Date: 2014–04
  56. By: Li, Defu; Huang, Jiuli
    Abstract: The celebrated Uzawa(1961) theorem holds that,on the steady-growth path of neoclassical growth model,technological progress must be purely labor-augmenting rather than capital-augmenting,except the special case where the production function takes the form of Cobb-Douglas. With an augmented Ramsey model,however,we prove in this paper that,when investment has adjustment cost which correlates positively with capital-augmenting technology,the steady state growth path can also embrace capital-augmenting technological progress,even if the production function is not Cobb-Douglas. Our conclusions contribute to the study of steady-state condition of neoclassical growth model,and the understanding of the roles of capital and capital-augmenting technology progress in economic growth.
    Keywords: Uzawa Steady-state Theorem; Capital-Augmenting Technology; Adjustment Cost; Neoclassical Growth Model
    JEL: E13 O33 O41
    Date: 2012–10
  57. By: Bulent Ulasan
    Abstract: This paper examines the long-run relationship between trade open-ness and economic growth across countries over the period 1960-2000. Two strategies are followed in empirical investigation. First, we extend the augmented neo-classical growth model with an openness variable and estimate it by using a battery of openness measures suggested in the literature. We also construct three composite trade policy indexes consisting of weighted averages of tari® rates, non-tari® barriers and black market premium for foreign exchange rate. Second, we implement Bayesian model averaging technique to deal with the model uncertainty, a fundamental problem which has been plaguing the previous works on the topic. Our ¯ndings show that there is no robust link between trade openness and long-run economic growth.
    Keywords: Economic Growth, Trade Openness, Cross-Country Growth Regression, Model Uncertainty, Bayesian Model Averaging
    JEL: F43 O47 C11 C21 C52
    Date: 2014
  58. By: Tingguo Zheng; Yujuan Teng; Tao Song
    Abstract: Friedman’s plucking model of business fluctuations suggests that output cannot exceed an upper limit, or ceiling level, but it is occasionally plucked downward, with depth and steepness, due to recessions. This paper investigates China’s business fluctuations using the quarterly real GDP data over the period 1978-2009. Our results provide some support for the plucking model. We find that there exists the ceiling effect of real output, and the negative asymmetric� shocks affect the transitory component significantly, which therefore captures the plucking downward behavior during the recession from the idea of Friedman. In addition, it is also suggested by the results that the basic asymmetric UC model is not appropriate for�directly modeling China’s real output since the business cycle is inaccurately measured, but it works quite well when considering a structural break at 1992:Q2.
    Keywords: �business cycle; plucking model; asymmetry; regime switching; structural break
    Date: 2013–10–14
  59. By: Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE)
    Abstract: The 10th EUROFRAME1 Conference on economic policy issues in the European Union was held in Warsaw on 24 May 2013. The Conference topic was: “Towards a better governance in the EU?”. Twelve of the papers given at the Conference are released in this issue of the Revue de l’OFCE/Debates and Policies. The euro is a unique experience in modern economic history. Can a single currency be shared between countries with different cyclical situations, structural problems and economic strategies? Is a single currency consistent with independent domestic fiscal policies? In 1992, EU countries answered ‘yes’ to these questions by signing the Maastricht Treaty. Starting from then, euro area governance was characterized by independent domestic fiscal policies however constrained to fulfil several criteria (public deficit below 3% of GDP, public debt below 60% of GDP), a single monetary policy entrusted to an independent central bank, the absence of public debt guarantee and fiscal solidarity between member states (...).
    Date: 2014–04
  60. By: Ying Chen; Bo Li; Linlin Niu
    Abstract: Our proposed local vector autoregressive (LVAR) model has time-varying parameters that allow it to be safely used in both stationary and non-stationary situations. The estimation is conducted over an interval of local homogeneity where the parameters are approximately constant. The local interval is identified in a sequential testing procedure. Numerical analysis and real data application are conducted to illustrate the monitoring function and forecast performance of the proposed model.
    Keywords: Adaptive estimation; Multivariate time series; Non-stationarity; Yield curve
    JEL: C32 C53 E43 E47
  61. By: Arpita Chatterjee (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: Similar countries often choose very di¤erent policies and specialize in very distinct industries. This paper proposes a mechanism to explain policy diversity among similar countries from an open economy perspective. I study optimal policies in a two country model when policies affect determinants of trade patterns. I show that welfare gains from trade can provide sufficient incentive for asymmetric equilibrium policies, even if the two countries have identical economic fundamentals. Any asymmetric equilibrium exhibits greater production specialization than the autarky optimum; this is the source of welfare gains. For this same reason, a more asymmetric Nash equilibrium Pareto dominates a less asymmetric one. All equilibria are asymmetric if aggregate income is sufficiently convex in policy, under suitable restrictions on technology and preferences. As an application, I consider a model where skill distribution is the determinant of trade patterns and the policy in question is education policy. When heterogeneous agents choose their skill level optimally, optimal skill function is convex in government policy. In this application, symmetry-breaking in optimal education policy requires that the education cost of agents is relatively inelastic with respect to skill.
    Keywords: Symmetry-breaking, Endogenous comparative advantage, Gains from trade, Education policy
    JEL: F11 E62
    Date: 2014–04
  62. By: Yongmiao Hong; Hai Lin; Shouyang Wang
    Abstract: Using the daily data of Chinese 7-day repo rates from January 1, 1997 to December 31, 2008, this paper tests a variety of popular spot rate models, including single-factor diffusion, GARCH, Markov regime-switching and jump-diffusion models. We document that Chinese spot rates are subject to both market forces and administrative forces. GARCH, regime-switching and jump-diffusion models capture some important features of the dynamics of Chinese spot rates, but all models under study are overwhelmingly rejected. We further explore possible sources of model misspecification using diagnostic tests.
    Keywords: Spot rate models; Term structure of interest rates; Market segmentation; Nonparametric specification tests
    JEL: E4 C5 G1
    Date: 2013–10–14
  63. By: Cruz, Prince Christian (Asian Development Bank Institute); Gao, Yuning (Asian Development Bank Institute); Song, Lei Lei (Asian Development Bank Institute)
    Abstract: Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions. The paper also compares the PRC’s financial markets with those in developed and emerging economies, contemporaneously and historically. The paper finds that the PRC’s financial markets are not as deep and liquid as those in developed economies, and are much less so than those with international currencies. To support the internationalization of the renminbi, the PRC needs to remove several major obstacles to deepen its financial markets and improve their liquidity conditions.
    Keywords: RMB internationalization; financial depth; bond markets; stock market; money markets
    JEL: E40 E50
    Date: 2014–05–01
  64. By: José Manuel Montero (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: This paper explores the dynamics of price-cost mark-ups using firm-level data, paying particular attention to the crisis period 2008-2011. To this end, we apply the econometric framework developed by Klette (1999) to a comprehensive sample of Spanish non-financial corporations in order to estimate price-cost mark-ups for the period 1995-2011 at the aggregate and sectoral levels. The results reveal a widespread pattern of increasing pricecost mark-ups since 2008, both by industry and firm size. Moreover, with the aim of interpreting the pattern identified in our findings, we also relate the changes in our industrylevel estimates of price-cost margins between 2007 and 2011 to some relevant industry characteristics suggested by the literature, with an emphasis on the extent of market power and of financial pressure. We find a positive and statistically significant association between the growth rate of estimated mark-ups and both our direct measure of market power and our proxy of financial pressure
    Keywords: mark-ups, returns to scale, production function, market power, financial pressure, GMM estimator, rolling regression
    JEL: C23 C26 D24 E31 L11 L16
    Date: 2014–05
  65. By: Kurmas Akdogan; Burcu Deniz Yildirim
    Abstract: We provide a detailed classification of core and non-core liabilities for the Turkish banking system à la Shin and Shin (2010). We further carry out a two-stage liquidity stress test similar to Van Den End (2010) where we simulate inflow and outflow factors as well as the network topology of mutual liabilities between financial institutions. Our results indicate that Turkish banking system with relatively low level of non-core liabilities is to a great extent robust to liquidity shocks. Nevertheless, the level of non-core liabilities should be monitored closely considering its pro-cyclical behaviour over the business cycle and its strong correlation with credit growth
    Keywords: Financial stability, non-core liabilities, liquidity stress test, network topology
    JEL: C15 E44 G21 G28 G32
    Date: 2014
  66. By: Peng Liu; Yu Ren
    Abstract: Campbell and Cochrane (1999) propose the habit formation model to explain the equity premium puzzle. They assume that an agent's consumption is affected by habit and describe how habit adjusts to the history of consumption. We use the simulated moment method to test these two speci cations. Empirically, we find that habit plays an important role in an agent's consumption choice, however not in the way Campbell and Cochrane (1999) specify.
    JEL: C13 G12 E21
    Date: 2013–10–14
  67. By: Joo Hwan Seo; Sung Yong Park; Soyoung Boo
    Abstract: This study investigated Korean outbound tourism demand and its determinants using the Granger causality (GC) analysis. In contrast to previous studies, which dealt only with internal factors, such as exchange rate and income, this study examined the effects of interactions among countries and, therefore, more complete and relevant results were found. Korean outbound tourism to the USA is causally related to Korean outbound tourism to the other six countries in this present study. These results can be applicable for the purpose of tourism marketing and strategies for industries and governments to allocate tourism resources more efficiently.
    Keywords: Korean outbound tourism demand, causality relationship, vector autoregressive model, interrelationship
    JEL: C32 E62
    Date: 2013–10–14
  68. By: Basu, Kaushik
    Abstract: This paper investigates the role of fiscal guarantees in promoting infrastructure investment. Infrastructure is a critical driver of economic growth, but infrastructure entails significant up-front costs that yield benefits after a time lag. Investors hesitate to put their money down on private infrastructure ventures because of the long lag and governments do not give guarantees for reasons of fiscal prudence. The paper argues that governments and large investment guarantee agencies can in many situations give suitably-calibrated guarantees to private projects by exploiting the fact that a guarantee on one project can reduce the risk of another one failing. The paper works out the architecture of such guarantees, which can be fiscally prudent and yet boost investment, especially in infrastructure, and thereby promote growth.
    Keywords: Debt Markets,Access to Finance,Emerging Markets,Bankruptcy and Resolution of Financial Distress,Non Bank Financial Institutions
    Date: 2014–05–01
  69. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Tamon, Asonuma (Asian Development Bank Institute)
    Abstract: This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime—whether a basket peg or floating regime—from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.
    Keywords: exchange rate regime; exchange rate adjustment; Chinese exchange rate regime; dynamic adjustment; transition path
    JEL: E42 F33 F41 F42
    Date: 2014–04–29
  70. By: Zuo Quan Xu; Fahuai Yi
    Abstract: A continuous-time consumption-investment model with constraint is considered for a small investor whose decisions are the consumption rate and the allocation of wealth to a risk-free and a risky asset with logarithmic Brownian motion fluctuations. The consumption rate is subject to an upper bound constraint which linearly depends on the investor's wealth and bankruptcy is prohibited. The investor's objective is to maximize total expected discounted utility of consumption over an infinite trading horizon. It is shown that the value function is (second order) smooth everywhere but a unique possibility of (known) exception point and the optimal consumption-investment strategy is provided in a closed feedback form of wealth, which in contrast to the existing work does not involve the value function. According to this model, an investor should take the same optimal investment strategy as in Merton's model regardless his financial situation. By contrast, the optimal consumption strategy does depend on the investor's financial situation: he should use a similar consumption strategy as in Merton's model when he is in a bad situation, and consume as much as possible when he is in a good situation.
    Date: 2014–04
  71. By: Yongmiao Hong; Hai Lin; Shouyang Wang
    Abstract: Understanding the dynamics of spot interest rates is important for derivatives pricing, risk management, interest rate liberalization, and macroeconomic control. Based on a daily data of Chinese 7-day repo rates from July 22, 1996 to August 26, 2004, we estimate and test a variety of popular spot rate models, including single factor diffusion, GARCH, Markov regime switching and jump diffusion models, to examine how well they can capture the dynamics of the Chinese spot rates and whether the dynamics of the Chinese spot rates has similar features to that of the U.S. spot rates. A robust M-estimation method and a robust Hellinger metric-based specification test are used to alleviate the impact of frequent extreme observations in the Chinese interest rate data, which are mainly due to IPO. We document that GARCH, regime switching and jump diffusion models can capture some important features of the dynamics of the Chinese spot rates, but all models under study are overwhelmingly rejected. We further explore possible sources of�model misspecification using some diagnostic tests. This provides useful information for future improvement on modeling the dynamics of the Chinese spot rates.
    Keywords: Generalized residuals, Robust specification tests, Robust M-estimation, Spot rate
    JEL: E4 C5 G1
    Date: 2013–10–14
  72. By: Katarzyna Maciejowska
    Abstract: In the paper, Structural Vector Autoregressive models (SVAR) are used to identify fundamental and speculative shocks, in the UK electricity market. The structural shocks are identified via short run restrictions, which are imposed on the matrix of instantaneous effects. In the research, two main types of shocks are considered: fundamental shocks, which result from unexpected changes of demand, supply and generation costs and speculative shocks, which are associated solely with electricity prices. The results indicate that speculative shocks play an important role in the price setting process. Although they account for a significant part (from 30% to 95%) of the price volatility, I do not find evidence that the influence differs between peak and off-peak hours. When fundamental shocks are considered, some dependence between their effects on electricity prices and periods of the day is confirmed. For example, the impact of wind supply shocks on electricity prices is significantly stronger during the peak hours than during the off-peak hours. Moreover, they become a major source of electricity price volatility during the peak hours. Finally, it is confirmed that shocks associated with generation costs (prices of fuels) don’t have any instantaneous effect on the electricity prices.
    Keywords: Electricity spot prices; Structural analysis; Vector autoregression;
    JEL: C32 C51 E31 Q41 Q47
    Date: 2014–04–30
  73. By: Bruno Feunou; Jean-Sébastien Fontaine
    Abstract: Cochrane and Piazzesi (2005) show that (i) lagged forward rates improve the predictability of annual bond returns, adding to current forward rates, and that (ii) a Markovian model for monthly forward rates cannot generate the pattern of predictability in annual returns. These results stand as a challenge to modern Markovian dynamic term structure models (DTSMs). We develop the family of conditional mean DTSMs where the yield dynamics depend on current yields and their history. Empirically, we find that (i) current and past yields generate cyclical risk-premium variations, (ii) the model risk premia offer better returns forecasts, and (iii) the model coefficients are close to Cochrane-Piazzesi regressions of long-horizon returns. Yield decompositions differ significantly from what a standard model suggests - the expectation component decreases less in a recession and increases less in the recovery. A small Markovian factor “hidden” in measurement error (Duffee, 2011) explains some of the differences but is not sufficient to match the evidence.
    Keywords: Asset Pricing, Interest rates
    JEL: E43 E47 G12
    Date: 2014
  74. By: Jasmina Arifovic; Janet Hua Jiang
    Abstract: A "sunspot" is a variable that has no direct impact on the economy’s fundamental condition, such as preferences, endowments or technologies, but may nonetheless affect economic outcomes through the expectations channel as a coordination device. This paper investigates how people react to sunspots in the context of a bank-run game in a controlled laboratory environment. The sunspot variable is a series of random public announcements predicting withdrawal outcomes. The treatment variable is the coordination parameter, defined as the minimum fraction of depositors required to wait so that waiting entails a higher payoff than withdrawing. We conduct treatments with a high, low and intermediate value of the coordination parameter. Although theory predicts that sunspot equilibria exist in all treatments, strong responses to sunspots only occur in the treatment featuring the intermediate value of the coordination parameter where strategic uncertainty is high. The policy implication is that people tend to respond strongly to public announcements during times of uncertainty. In those situations, communication to the public must be treated with extra care.
    Keywords: Financial markets, Financial stability
    JEL: C91 C92 D80 E58 G20
    Date: 2014
  75. By: Zhu, Yanyuan; Feng, Xiao
    Abstract: We build China's national production function based on national accounting data since 1997, when China primarily transformed from the Planned economy to Market. By proxying and measuring stocks of human capital(HC), physical capital and the efficiency units, as well as government expenditure reflecting total factor productivity(TFP), we analyze CES production functions' explanation effects by numerical simulation, and then according to the findings, choose Cobb-Douglas form for further research. Our results include, first, Cobb-Douglas production function in the form of capital coefficients - capital relative density, appropriately reflects Chinaâs recent input-output relationship. Second, taking factor-augmenting technical progress into consideration, the proxy settings for two capitals are empirically plausible for future research on Chinaâs endogenous growth model. Third, expansionary government expenditure negatively affects Chinaâs TFP and output. --
    Keywords: national production function,factor-augmenting technical progress,physical capital efficiency units
    JEL: C52 E01 O47 O53
    Date: 2014
  76. By: Cette, G.; Lecat, R.; Jiddou, A-O-A
    Abstract: We study production factor adjustment taking into account factor utilisation in multiple dimensions (labour and capital working time, capital capacity utilisation) through a unique survey among French manufacturing firms. This survey also allows us to examine the impact of obstacles to increasing capital operating time on this adjustment path. This survey, merged with balanced sheet and profit and loss accounts from fiscal reports, yields an unbalanced panel of 6,066 observations over 1993-2010. Factor utilisation adjusts the most rapidly, first through capital capacity utilisation and the capital workweek and then labour working time. The adjustment is slow for the number of employees and even slower for the capital stock. In case of a change in factor volume targets, the three factor utilisation degrees adjust to offset the very slow reaction of factor volumes. Obstacles to increasing the capital operating time lead to a slower adjustment of capital operating time, offset by a stronger adjustment of capacity utilisation.
    Keywords: production function; factor utilisation; rigidities.
    JEL: D24 E22 O43
    Date: 2014
  77. By: Lance Taylor; Duncan Foley
    Abstract: A growth model incorporating dynamics of capital per capita, atmospheric CO2 concentration, and labor and energy productivity is described. In the “medium run” output and employment are determined by effective demand in contrast to most models of climate change. In a “long run” of several centuries the model converges to a stationary state with zero net emissions of CO2. Properties of dismal and non-dismal stationary states are explored, with a latter requiring a relatively high level of investment in mitigation of emissions. Without such investment under “business as usual” output dynamics are strongly cyclical in numerical simulations. There is strong output growth for about eight decades, then a climate crisis, and output crash.
    Date: 2014–02
  78. By: Karsten Chipeniuk; Nets Hawk Katz; Todd Walker
    Abstract: We provide an explicit aggregation in the neoclassical growth model with aggregate shocks and uninsurable employment risk. We show there are two restrictions on the unemployment shock for approximate aggregation to occur. First the probability of unemployment must be positive for each agent in each time period. That ensures a strong precautionary savings motive. Second, we must have like agents having similar future prospects. That is agents with similar employment status and wealth must have similar employment paths. The solution of the model must have distribution of wealth as a state variable and hence the curse of dimensionality must be confronted. We sidestep this thorny issue by introducing a Walrassian auctioneer that communicates the optimal amount of invested in every period for every outcome of the shocks to the agents.
    Date: 2014–04
  79. By: Haomiao Zuo; Sung Y. Park
    Abstract: Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.
    Keywords: Money demand; Time-varying coefficient ; Cointegration; Canonical cointegration regression; Chinese economy
    JEL: E41 C51
    Date: 2013–10–14
  80. By: Yu Ren; Yufei Yuan; Cong Xiong
    Abstract: In this paper, we apply the theory of rational expectation bubbles to the Chinese house market. Rational expectation bubbles imply that negative returns on house prices are, theoretically, less likely to occur if the bubbles exist and persist. Based on the data of 29 cities in China, we find no evidence to support the existence of bubbles in the housing market.
    Keywords: China house price; rational expectation bubble; hazard rate
    JEL: R31 E31
    Date: 2013–10–14
  81. By: Mthuli Ncube; Zuzana Brixiova; Zorobabel Bicaba
    Abstract: With the year 2015 – the MDG finishing line – approaching, post-2015 goals as they impact Africa need to be firmed. The goal of ending extreme poverty remains paramount. Globally, the World Bank set goals to end extreme poverty by 2030 and to promote shared prosperity in every society. We examine feasibility of these objectives for Sub-Saharan Africa, the world’s poorest but rapidly rising region. We find that under plausible assumptions on consumption growth and redistribution, eliminating poverty by 2030 is out of the region’s reach. Even under our ‘best case’ scenario of accelerated growth and redistribution from the richest 10 percent to the poorest 40 percent of the population, the poverty rate would still be around 10 percent in 2030. A more realistic goal for the region would be reducing poverty by a range from half to two thirds. At this rate, especially if in part achieved by lowering inequality, the Africa region would meaningfully contribute to the global agenda. Policies need to focus on mutually reinforcing objectives of making growth stronger, resilient to shocks, and inclusive.
    Keywords: Poverty reduction, inequality, inclusive growth, Africa, numerical simulations
    JEL: I32 E21 J11 C63
    Date: 2014–04–01
  82. By: Bin Chen; Yongmiao Hong
    Abstract: We develop a nonparametric regression-based goodness-of-fit test for multifactor continuous-time Markov models using the conditional characteristic function, which often has a convenient closed-form or can be approximated accurately for many popular continuous-time Markov models in economics andfinance. An omnibus test procedure fully utilizes the information in the joint conditional distribution of the underlying processes and hence has power against a vast class of continuous-time alternatives in the multifactor framework. A class of easy-to-interpret diagnostic procedures is also proposed to gauge possible sources of model misspecifications. All our test statistics have a convenient asymptotic N(0; 1) distribution under correct model specification. Simulations show that our tests have reasonable size, thanks to the dimension reduction in nonparametric regression, and good power against a variety of alternatives, including misspecifications in the joint dynamics even if the dynamics of each individual component is correctly specified. This feature is not attainable by some existing tests. A parametric bootstrap improves the finite sample performance of proposed tests, but with higher computational costs.
    Keywords: Conditional characteristic function, Goodness-of-fit, Multifactor continuous-time Markov model, Nonparametric regression
    JEL: C4 E4 G0
    Date: 2013–10–14
  83. By: Röhl, Klaus-Heiner
    Abstract: Wagniskapitalfinanzierungen - oft mit dem englischen Begriff Venture Capital bezeichnet - spielen eine wichtige Rolle für die Finanzierung innovativer Firmengründungen, die einen hohen Kapitalbedarf für Forschung und Entwicklung haben. Zudem benötigen sie Zeit bis zum Verkauf ihres neuen Produkts oder ihrer Dienstleistung, die finanziell überbrückt werden muss. Die USA sind das klassische Venture-Capital-Land, wobei sich die Aktivitäten auf das legendäre kalifornische Silicon Valley konzentrieren. Europa und vor allem Deutschland liegen weit zurück, was Wagniskapitalfinanzierungen betrifft - mit den entsprechenden negativen Folgen für innovationsstarke Firmen in neuen Branchen. Unternehmen wie Google, Yahoo oder Facebook entstehen nicht bei uns. Seit Jahren wird versucht, an diesem Zustand mit staatlichen Fonds und Änderungen der Rahmenbedingungen etwas zu ändern, doch Erfolge sind kaum zu verzeichnen. Der Anteil der Venture-Capital-Finanzierungen am Bruttoinlandsprodukt stagniert unterhalb von 0,1 Prozent. Auch wenn das Silicon Valley wegen der speziellen strukturellen Bedingungen auf dem US-Markt unerreichbar bleibt: Gründe, Venture Capital zu stärken, gibt es reichlich. Deutschland darf sich nicht auf den Erfolgen seiner Industrie ausruhen, sondern muss endlich die Bedingungen für Vorstöße in neue Branchen grundlegend verbessern. Ansatzpunkte sind die steuerliche Gleichbehandlung von Gewinnen und Verlusten sowie generell die Behandlung von VC-Gesellschaften im Steuerecht. Als Vorbild könnten die Regelungen im Vereinigten Königreich und Frankreich dienen. --
    Keywords: Existenzgründungen,Innovationsförderung,Internet
    JEL: E29 Q48 Q52
    Date: 2014
  84. By: Yu Ren; Cong Xiong; Yufei Yuan
    Abstract: In this paper, we apply the theory of rational expectation bubbles proposed by Blanchard and Watson (1983) to the Chinese housing market. The theory implies that negative returns on house prices are less likely to occur if the bubbles exist. Based on data from 35 cities in China, we nd no evidence to support the existence of such bubbles in the Chinese housing market.
    Keywords: China house price; Rational expectation bubble; Hazard rate.
    JEL: R31 E31
    Date: 2013–10–14
  85. By: Bin Chen; Yongmiao Hong
    Abstract: Detecting and modelling structural changes in GARCH processes have attracted increasing attention in time series econometrics. In this paper, we propose a new approach to testing structural changes in GARCH models. The idea is to compare the log likelihoods of a time-varying parameter GARCH model and a constant parameter GARCH model, where the time-varying GARCH parameters are estimated by a local quasi-maximum likelihood estimator (QMLE) and the constant GARCH parameters are estimated by a standard QMLE. The test does not require any prior information about the alternatives of structural changes. It has an asymptotic N(0,1) distribution under the null hypothesis of parameter constancy and is consistent against a vast class of smooth structural changes as well as abrupt structural breaks with possibly unknown break points. A consistent parametric bootstrap is employed to provide a reliable inference infinite samples and the simulation study highlights the merits of our approach.
    Keywords: GARCH, Local smoothing, Parameter constancy, QMLE, Smooth structural change
    JEL: C1 C4 E0
    Date: 2013–10–14

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