nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒06‒02
150 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Some Lessons from Six Years of Practical Inflation Targeting By Svensson, Lars E O
  2. Escaping the Great Recession By Bianchi, Francesco; Melosi, Leonardo
  3. Monetary/Fiscal Policy Mix and Agents' Beliefs By Bianchi, Francesco; Ilut, Cosmin
  4. Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics By Honkapohja, Seppo; Mitra, Kaushik
  5. Monetary Policy and Natural Disasters: An Extension and Simulation Analysis in the Framework of New Keynesian Macroeconomic Model By Mitsuhiro Okano
  6. Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting By Sheedy, Kevin D.
  7. Labor Force Participation and Monetary Policy in the Wake of the Great Recession By Erceg, Christopher; Levin, Andrew
  8. Monetary Policy Surprises, Credit Costs and Economic Activity By Gertler, Mark; Karadi, Peter
  9. Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy By Bachmann, Rüdiger; Born, Benjamin; Elstner, Steffen; Grimme, Christian
  10. Market Deregulation and Optimal Monetary Policy in a Monetary Union By Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
  11. Sovereign risk and belief-driven fluctuations in the euro area By Corsetti, Giancarlo; Kuester, Keith; Meier, André; Müller, Gernot
  12. State dependent monetary policy By Lippi, Francesco; Ragni, Stefania; Trachter, Nicholas
  13. Constrained Discretion and Central Bank Transparency By Bianchi, Francesco; Melosi, Leonardo
  14. Asset markets and monetary policy shocks at the zero lower bound By Edda Claus; Iris Claus; Leo Krippner
  15. Optimal Monetary Policy with State-Dependent Pricing By Nakov, Anton; Thomas, Carlos
  16. Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks By Ben Zeev, Nadav; Pappa, Evi
  17. International Capital Flows and the Boom-Bust Cycle in Spain By In 'T Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
  18. Policy Uncertainty and Aggregate Fluctuations By Mumtaz, Haroon; Surico, Paolo
  19. Managing Credit Bubbles By Martin, Alberto; Ventura, Jaume
  20. House Price Gains and U.S. Household Spending from 2002 to 2006 By Atif Mian; Amir Sufi
  21. Patterns of convergence and Divergence in the Euro Area By Estrada García, Ángel; Galí, Jordi; Lopez-Salido, David
  22. A note on the long-run neutrality of monetary policy: new empirics By Asongu Simplice
  23. Oil prices and the economy: A global perspective By Ronald A. Ratti; Joaquin L. Vespignani
  24. The Vanishing Procyclicality of Labor Productivity By Galí, Jordi; van Rens, Thijs
  25. Stabilization policy, rational expectations and price-level versus infl‡ation targeting: a survey By Hatcher, Michael; Minford, Patrick
  26. Predictive Power of Aggregate Short Interest By Yu, Eric Jinsan
  27. Inflation Announcements and Social Dynamics By Kinda Hachem; Jing Cynthia Wu
  28. Safe Assets, Liquidity and Monetary Policy By Benigno, Pierpaolo; Nisticò, Salvatore
  29. Surprising Similarities: Recent Monetary Regimes of Small Economies By Rose, Andrew K
  30. Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten By Reinhart, Carmen M.; Rogoff, Kenneth
  31. Exit strategies By Angeloni, Ignazio; Faia, Ester; Winkler, Roland
  32. Forward Guidance by Inflation-Targeting Central Banks By Woodford, Michael
  33. Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan By Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
  34. Understanding the Gains from Wage Flexibility: The Exchange Rate Connection By Galí, Jordi; Monacelli, Tommaso
  35. Safety Traps By Benhima, Kenza; Massenot, Baptiste
  36. The savings depreciation factor and economic growth By DE KONING, Kees
  37. The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy By Jordà, Òscar; Taylor, Alan M.
  38. Household Leveraging and Deleveraging By Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
  39. "The Political Economy of Shadow Banking: Debt, Finance, and Distributive Politics under a Kalecki-Goodwin-Minsky SFC Framework" By Eloy Fisher; Javier Lopez Bernardo
  40. The Stock Market Crash Really Did Cause the Great Recession By Farmer, Roger E A
  41. Never Say Never: Commentary on a Policymaker’s Reflections By Obstfeld, Maurice
  42. The Fiscal Theory of the Price Level - identification and testing for the UK in the 1970s By Fan, Jingwen; Minford, Patrick; Ou, Zhirong
  43. Discretion vs. Timeless Perspective under Model-consistent Stabilization Objectives By Petrella, Ivan; Rossi, Raffaele; Santoro, Emiliano
  44. Reconciling Hayek's and Keynes' views of recessions By Beaudry, Paul; Galizia, Dana; Portier, Franck
  45. International Liquidity and Exchange Rate Dynamics By Gabaix, Xavier; Maggiori, Matteo
  46. Exchange Rate Pass-Through to Consumer Prices in South Africa: Evidence from Micro-Data By Aron, Janine; Creamer, Kenneth; Muellbauer, John; Rankin, Neil
  47. Money, Interest Rates and Prices in Ireland, 1933-2012 By Gerlach, Stefan; Stuart, Rebecca
  48. Optimal Environmental Policy, Public Goods and Labor Markets over the Business Cycle By Anna Grodecka; Karlygash Kuralbayeva
  49. The One-Child Policy and Household Savings By Choukhmane, Taha; Coeurdacier, Nicolas; Jin, Keyu
  50. Euro area structural reforms in times of a global crisis By Sandra Gomes
  51. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Ippolito, Filippo; Ozdagli, Ali; Perez Orive, Ander
  52. Heterogeneous Consumers and Fiscal Policy Shocks By Anderson, Emily; Inoue, Atsushi; Rossi, Barbara
  53. What drives the German current account? And how does it affect other EU member states? By In 'T Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
  54. An Empirical Analysis of Excess Interbank Liquidity: A Case Study of Pakistan By Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
  55. Fluctuations in Uncertainty By Nicholas Bloom
  56. Modelling Long Bonds - The Case of Optimal Fiscal Policy By Faraglia, Elisa; Marcet, Albert; Scott, Andrew
  57. The ECB and the banks: the tale of two crises By Reichlin, Lucrezia
  58. "Shadow Banking: Policy Challenges for Central Banks" By Thorvald Grung-Moe
  59. Can the Euro Area Avoid a “Lost Decade”? By Benjamin Carton; Jérôme Héricourt; Fabien Tripier
  60. The risk-taking channel of monetary policy – exploring all avenues By Diana Bonfim; Carla Soares
  61. Precautionary price stickiness By Costain, James; Nakov, Anton
  62. Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries By Coutinho, Leonor; Georgiou, Dimitrios; Heracleous, Maria; Michaelides, Alexander; Tsani, Stella
  63. Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts By Delatte, Anne-Laure; Fouquau, Julien; Portes, Richard
  64. Household Debt and the Dynamic Effects of Income Tax Changes By Cloyne, James; Surico, Paolo
  65. Kapitalwertmethode bei nicht-flacher Zinsstrukturkurve By Kohn, Wolfgang
  66. Business Cycles, Monetary Policy, and Bank Lending: Identifying the bank balance sheet channel with firm-bank match-level loan data By HOSONO Kaoru; MIYAKAWA Daisuke
  67. Surprise, Surprise - Measuring Firm-level Investment Innovations By Bachmann, Rüdiger; Elstner, Steffen; Hristov, Atanas
  68. The Wealth Distribution in Bewley Economies with Investment Risk By Jess Benhabib; Alberto Bisin; Shenghao Zhu
  69. Effects of Transitory Shocks to Aggregate Output on Consumption in Poor Countries By Brückner, Markus; Gradstein, Mark
  70. Structure of labour market and unemployment in Sudan By Nour S.
  71. The Relevance or Otherwise of the Central Bank's Balance Sheet By Miles, David K; Schanz, Jochen
  72. A Comparison between Optimal Capital Controls under Fixed Exchange Rates and Optimal Monetary Policy under Flexible Rates By Shigeto Kitano; Kenya Takaku
  73. A Theory of Price Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  74. Anchoring the Yield Curve Using Survey Expectations By Altavilla, Carlo; Giacomini, Raffaella; Ragusa, Giuseppe
  75. Los efectos macroeconómicos de la política fiscal y del cambio técnico: predicciones de un modelo de equilibrio general dinámico By Carlos Esteban Posada P.
  76. Financial Integration and the Great Leveraging By Daniel Carvalho
  77. Small and large price changes and the propagation of monetary shocks By Alvarez, Fernando; Le Bihan, Hervé; Lippi, Francesco
  78. Continued Existence of Cows Disproves Central Tenets of Capitalism? By Anagol, Santosh; Etang, Alvin; Karlan, Dean S.
  79. Optimal Exchange Rate Policy in a Growing Semi-Open Economy By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  80. Methods for Measuring Expectations and Uncertainty in Markov-Switching Models By Bianchi, Francesco
  81. Sovereigns versus Banks: Credit, Crises, and Consequences By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  82. The Wealthy Hand-to-Mouth By Kaplan, Greg; Violante, Giovanni L; Weidner, Justin
  83. Currency Risk in Currency Unions By Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin
  84. Sovereign credit ratings in the European Union: a model-based fiscal analysis By Polito, Vito; Wickens, Michael R.
  85. Childcare Subsidies and Household Labor Supply By Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
  86. Trade and Uncertainty By Novy, Dennis; Taylor, Alan M.
  87. Optimal Prudential Regulation of Banks and the Political Economy of Supervision By Tressel, Thierry; Verdier, Thierry
  88. Monetary Policy Under Commodity Price Fluctuations By Roberto Chang
  89. Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy By Cosar, Kerem; Guner, Nezih; Tybout, James R
  90. Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R
  91. Gambling for resurrection in Iceland: the rise and fall of the banks By Baldursson, Fridrik Mar; Portes, Richard
  92. Crowding Out Redefined: The Role of Reserve Accumulation By Reinhart, Carmen M.; Tashiro, Takeshi
  93. Political Competition and the Limits of Political Compromise By Cunha, Alexandre B.; Ornelas, Emanuel
  94. Cyclical Patterns in Government Health Expenditures Between 1995 and 2010 By Edit V. Velenyi; Marc F. Smitz
  95. Trade linkages and the globalisation of inflation in Asia and the Pacific By Auer, Raphael; Mehrotra, Aaron
  96. Spillover Effects from Exiting Highly Expansionary Monetary Policies By Łukasz Rawdanowicz; Romain Bouis; Jérôme Brezillon; Ane Kathrine Christensen; Kei-Ichiro Inaba
  97. Understanding Money Demand in the Transition from a Centrally Planned to a Market Economy By Delatte, Anne-Laure; Fouquau, Julien; Holz, Carsten
  98. تأثير السياسة المالية على التنافسية السعرية لقطاع الصناعة التحويلية الأردني By alamro, Hassan
  99. A Time-Varying Approach of the US Welfare Cost of Inflation By Stephen M. Miller; Luis F. Martins; Rangan Gupta
  100. Integrating search in macroeconomics: the defining years By Samuel DANTHINE; Michel DE VROEY
  101. Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics By Paula Garda; Volker Ziemann
  102. Optimal fiscal policy in the neoclassical growth model revisited By Mennuni, Alessandro; Gervais, Martin
  103. The Effectiveness of Non-Standard Monetary Policy Measures: Evidence from Survey Data By Carlo Altavilla; Domenico Giannone
  104. The role of bank lending tightening on corporate bond issuance in the eurozone By Kaya, Orcun; Wang, Lulu
  105. Trade Dynamics with Sector-Specific Human Capital By Guren, Adam; Hemous, David; Olsen, Morten
  106. Is the Social Security Crisis Really as Bad as We Think? By Bagchi, Shantanu
  107. "What Do We Know About the Labor Share and the Profit Share? Part I: Theories" By Olivier Giovannoni
  108. Financial Literacy and Savings Account Returns By Deuflhard, Florian; Georgarakos, Dimitris; Inderst, Roman
  109. Relationship and Transaction Lending in a Crisis By Bolton, Patrick; Freixas, Xavier; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
  110. Was Stalin Necessary for Russia’s Economic Development? By Cheremukhin, Anton; Golosov, Mikhail; Guriev, Sergei; Tsyvinski, Aleh
  111. An experiment on retail payments systems By Camera, Gabriele; Casari, Marco; Bortolotti, Stefania
  112. No-Bubble Condition: Model-free Tests in Housing Markets By Stefano Giglio; Matteo Maggiori; Johannes Stroebel
  113. Markov-Switching Mixed-Frequency VAR Models By Foroni, Claudia; Guérin, Pierre; Marcellino, Massimiliano
  114. A DSGE Model of China By Dai, Li; Minford, Patrick; Zhou, Peng
  115. Do Oil Price Increases Cause Higher Food Prices? By Baumeister, Christiane; Kilian, Lutz
  116. Money Demand in Ireland, 1933-2012 By Gerlach, Stefan; Stuart, Rebecca
  117. هيكل الدين العام في الأردن وتأثيره على النمو الاقتصادي (1980 - 2012) By AL-Adayleh, Radi; AL-amro, Hassan; AL-Gralleh, Huthaifa
  118. Economic Conditions at Birth, Birth Weight, Ability, and the Causal Path to Cardiovascular Mortality By Modin, Bitte; van den Berg, Gerard J
  119. "What Do We Know About the Labor Share and the Profit Share? Part II: Empirical Studies" By Olivier Giovannoni
  120. The Effects of the Saving and Banking Glut on the U.S. Economy By Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
  121. New financial development indicators: with a critical contribution to inequality empirics By Asongu Simplice
  122. Essays in International Macroeconomics and Monetary Theory By Thomas Grjebine
  123. Participation Constraints in Pension Systems By Beetsma, Roel; Romp, Ward E
  124. The critique of capital in the twenty first century : in search of the macroeconomic foundations of inequality By Guillaume Allègre; Xavier Timbeau
  125. Optimal Tax Progressivity: An Analytical Framework By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
  126. Hidden Insurance in a Moral Hazard Economy By Bertola, Giuseppe; Koeniger, Winfried
  127. Aggregation and Labor Supply Elasticities By Gehrig-Merz, Monika; Kneip, Alois; Storjohann, Lidia
  128. Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation By Philippon, Thomas
  129. Capital controls and the resolution of failed cross-border banks: the case of Iceland By Baldursson, Fridrik Mar; Portes, Richard
  130. Dinero, trabajo asalariado e inseguridad alimentaria By Hernando Matallana
  131. Finance and the Preservation of Wealth By Gennaioli, Nicola; Shleifer, Andrei; Vishny, Robert
  132. Precios de viviendas en Lima By Orrego, Fabrizio
  133. Intergenerational altruism and house prices: evidence from bequest tax reforms in Italy By G. Bellettini; F. Taddei; G. Zanella
  134. Money as a Unit of Account By Doepke, Matthias; Schneider, Martin
  135. Exogenous Volatility and the Size of Government in Developing Countries By Brückner, Markus; Gradstein, Mark
  136. Firm Dynamics and Residual Inequality in Open Economies By Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
  137. Dynamic Production Theory under No-Arbitrage Constraints By Zhao, Guo
  138. The Impact of News and the SMP on Realized (Co)Variances in the Eurozone Sovereign Debt Market By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
  139. Carry By Koijen, Ralph; Moskowitz, Tobias J; Pedersen, Lasse Heje; Vrugt, Evert B.
  140. Attitudes Towards Risk in the Wake of a Rare Event: Evidence from Pakistan By Farah Said; Uzma Afzal; Ginger Turner
  141. Fiscal policy management: the experience of Chile By Eric Parrado; Andrés Velasco
  142. Risky Investments with Limited Commitment By Cooley, Thomas F; Marimon, Ramon; Quadrini, Vincenzo
  143. Pension design with a large informal labor market: Evidence from Chile By Clement Joubert
  144. Feeling the blues. Moral hazard and debt dilution in Eurobonds before 1914 By Esteves, Rui; Tuncer, Ali Coskun
  145. On the substitution of institutions and finance in investment By Asongu Simplice
  146. Appendix to "First Microsimulation Model of a LEDDA Community Currency--Dollar Economy" By John C. Boik
  147. Granger-Causal-Priority and Choice of Variables in Vector Autoregressions By Jarocinski, Marek; Mackowiak, Bartosz Adam
  148. Structural FECM: Cointegration in large-scale structural FAVAR models By Banerjee, Anindya; Marcellino, Massimiliano; Masten, Igor
  149. Home Away From Home? Safe Haven Effects and London House Prices By Badarinza, Cristian; Ramadorai, Tarun
  150. Culture, Beliefs and Economic Performance By Rafael Di Tella; Robert MacCulloch

  1. By: Svensson, Lars E O
    Abstract: My lessons from six years of practical policy-making include (1) being clear about and not deviating from the mandate of flexible inflation targeting (price stability and the highest sustainable employment), including keeping average inflation over a longer period on target; (2) not adding household debt as a new (intermediate) target variable, in addition to inflation and unemployment – not “leaning against the wind,” which is counterproductive, but leaving any problems with household debt to financial policy; (3) using a two-step algorithm to implement “forecast targeting”; (4) using four-panel graphs to evaluate monetary policy ex ante (in real time) and ex post (after the fact); (5) taking a credible inflation target and a resulting downward-sloping Phillips curve into account by keeping average inflation over a longer period on target; and (6) not confusing monetary and financial policy but using monetary policy to achieve the monetary-policy objectives and financial policy to maintain financial stability, with each policy taking into account the conduct of the other.
    Keywords: financial stabiilty; household debt; inflation targeting; Monetary policy
    JEL: E42 E43 E44 E47 E52 E58
    Date: 2013–11
  2. By: Bianchi, Francesco; Melosi, Leonardo
    Abstract: While high uncertainty is an inherent implication of entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policy makers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a standard new-Keynesian model in which policy makers' behavior can move between a Monetary and a Fiscally led regime and zero lower bound episodes are recurrent. Given that policy makers' behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning fiscal discipline, but this results into a sharp increase in macroeconomic instability once out of the recession. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. However, the policy makers' dilemma can be resolved by committing to inflate away only the portion of debt resulting from an unusually large recession.
    Keywords: Markov-switching DSGE; Monetary and fiscal policy interaction; shock-specific policy rules; Uncertainty; zero lower bound
    JEL: D83 E31 E52 E62 E63
    Date: 2013–09
  3. By: Bianchi, Francesco; Ilut, Cosmin
    Abstract: We reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the '60s and the '70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the '70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early '80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the '60s and the '70s and for the break in the persistence and volatility of inflation.
    Keywords: Bayesian estimation; DSGE; Fiscal policy; general equilbrium.; Great Inflation; Markov-switching
    JEL: E31 E52 E58 E62
    Date: 2013–09
  4. By: Honkapohja, Seppo; Mitra, Kaushik
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either price-level or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents' learning.
    Keywords: Adaptive Learning; Inflation Targeting; Monetary Policy; Zero Interest Rate Lower Bound
    JEL: E52 E58 E63
    Date: 2014–03
  5. By: Mitsuhiro Okano (Asia Pacific Institute of Research)
    Abstract: In this paper, we show that how monetary policy should respond in the aftermath of a rare but large scale natural disaster such as typhoons and earthquakes, using simulation analysis from the view of New Keynesian perspective. Since the conditions for the simulation is different from previous studies, monetary tightening for inflation stabilization does not necessarily have better performance in the aftermath of a disaster shock.
    Keywords: monetary policynatural disaster
    JEL: E31 E32 E52 Q54
    Date: 2013–07
  6. By: Sheedy, Kevin D.
    Abstract: Financial markets are incomplete, thus for many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating households' nominal incomes from aggregate real shocks, this policy effectively completes financial markets by stabilizing the ratio of debt to income. The paper argues the objective of replicating complete financial markets should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.
    Keywords: heterogeneous agents; incomplete markets; nominal GDP targeting; risk sharing
    JEL: E21 E31 E44 E52
    Date: 2014–02
  7. By: Erceg, Christopher; Levin, Andrew
    Abstract: In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during "normal times" (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.
    Keywords: labor force; policy tradeoffs; simple rules; unemployment rate
    JEL: E24 E32 E52 J21
    Date: 2013–09
  8. By: Gertler, Mark; Karadi, Peter
    Abstract: We provide evidence on the nature of the monetary policy transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with those obtained in the standard monetary VAR analysis. We also find, however, that monetary policy responses typically produce “modest” movements in short rates that lead to “large” movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the baseline model of monetary transmission. Finally, we show that forward guidance is important to the overall strength of policy transmission.
    Keywords: Credit Spread; External Instrument; Forward Guidance; High-Frequency Identification; Monetary Policy Transmission; Structural VAR; Term Premium
    JEL: E43 E44 E52
    Date: 2014–02
  9. By: Bachmann, Rüdiger; Born, Benjamin; Elstner, Steffen; Grimme, Christian
    Abstract: Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.
    Keywords: monetary; New Keynesian model; price setting; survey data; time-varying volatility
    JEL: E30 E31 E32 E50
    Date: 2013–10
  10. By: Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.
    Keywords: Market deregulation; Monetary union; Optimal monetary policy
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2013–11
  11. By: Corsetti, Giancarlo; Kuester, Keith; Meier, André; Müller, Gernot
    Abstract: Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this "sovereign risk channel." The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent self-fulfilling debt crises.
    Keywords: euro area; monetary union; pooling of sovereign risk; risk premium; sovereign risk channel; zero lower bound
    JEL: E62 F41 F42
    Date: 2013–11
  12. By: Lippi, Francesco; Ragni, Stefania; Trachter, Nicholas
    Abstract: We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash- poor unproductive agents. To minimize the inflationary effect of these expansions the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy “echoes” Friedman’s principle in the sense that the expected real return of money approaches the rate of time preference.
    Keywords: distributional effects; heterogenous agents; incomplete markets; liquidity; precautionary savings
    JEL: E50
    Date: 2014–01
  13. By: Bianchi, Francesco; Melosi, Leonardo
    Abstract: We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank engages in only short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents become pessimistic about future monetary policy and uncertainty gradually rises. Reputation determines the speed with which agents' pessimism accelerates once the central bank starts deviating. When the model is fitted to U.S. data, the Federal Reserve is found to benefit from strong reputation and large flexibility in responding to inflationary shocks. Increasing transparency would improve welfare by anchoring agents' expectations.
    Keywords: Bayesian learning; inflation expectations; Markov-switching models; reputation; uncertainty
    JEL: C11 D83 E52
    Date: 2014–04
  14. By: Edda Claus; Iris Claus; Leo Krippner
    Abstract: This paper quantifies the impact of monetary policy shocks on asset markets in the United States and gauges the usefulness of a shadow short rate as a measure of conventional and unconventional monetary policy shocks. Monetary policy surprises are found to have had a larger impact on asset markets since short term interest rates reached the zero lower bound. Our results indicate that much of the increased reaction is due to changes in the transmission of shocks and only partly due to larger monetary policy surprises.
    Keywords: Monetary policy shocks, zero lower bound, shadow short rate, asset prices, latent factor model.
    JEL: E43 E52 E65
    Date: 2014–05
  15. By: Nakov, Anton; Thomas, Carlos
    Abstract: This paper studies optimal monetary policy from the timeless perspective in a general model of state-dependent pricing. Firms are modeled as monopolistic competitors subject to idiosyncratic menu cost shocks. We find that, under certain conditions, a policy of zero inflation is optimal both in the long run and in response to aggregate shocks. Key to this finding is an "envelope" property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms' profits and hence on their probability of repricing. We offer an analytic solution that does not require local approximation or e¢ ciency of the steady state. Under more general conditions, we show numerically that the optimal commitment policy remains very close to strict inflation targeting.
    Keywords: monetary policy; monopolistic competition; state-dependent pricing
    JEL: E31
    Date: 2014–02
  16. By: Ben Zeev, Nadav; Pappa, Evi
    Abstract: We identify US defense news shocks as shocks that best explain future movements in defense spending over a five-year horizon and are orthogonal to current defense spending. Our identified shocks are strongly correlated with the Ramey (2011) news shocks, but explain a larger share of macroeconomic fluctuations and have significant demand effects. Fiscal news induces significant and persistent increases in output, consumption, investment, hours and the interest rate. Standard DSGE models fail to produce such a pattern. We propose a sticky price model with distortionary taxation, variable capital utilization, capital adjustment costs and rule-of-thumb consumers that replicates the empirical findings.
    Keywords: defense spending news; DSGE model; maximum forecast error variance; SVAR
    JEL: E62 E65 H30
    Date: 2014–04
  17. By: In 'T Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
    Abstract: We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump.
    Keywords: boom-bust cycle; European Monetary Union; financial frictions; housing market; international capital flows; Spain; sudden stop
    JEL: C11 E21 E32 E62
    Date: 2014–05
  18. By: Mumtaz, Haroon; Surico, Paolo
    Abstract: This paper estimates the impact on the US economy of four types of uncertainty about (i) government spending, (ii) tax changes, (iii) public debt sustainability and (iv) monetary policy. Following a one standard deviation shock, uncertainty about debt sustainability has the largest and most significant impact on real activity, with negative effects on output, consumption and investment after two years around 0.5%, 0.3% and 1.5% respectively. Uncertainty on the other economic policies has also detrimental consequences but these tend to be smaller and short-lived, especially for taxes and monetary policy. About 30% of output fluctuations are explained by policy uncertainty at most frequencies, with the lion’s share accounted for by debt sustainability. Our results are based on a new empirical framework that allows the volatility of identified shocks to have a direct impact on the endogenous variables of an otherwise standard structural VAR.
    Keywords: debt sustainability; economic policy uncertainty; long-run effects.
    JEL: D80 E32 E63
    Date: 2013–10
  19. By: Martin, Alberto; Ventura, Jaume
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades of these two effects and maximizes long-run output and consumption. The "equilibrium" bubble size depends on investor sentiment, however, and it typically does not coincide with the "optimal" bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the "optimal" bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the "equilibrium" bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it.
    Keywords: bubbles; business cycles; credit; economic growth; financial frictions; pyramid schemes
    JEL: E32 E44 O40
    Date: 2014–03
  20. By: Atif Mian; Amir Sufi
    Abstract: We examine the effect of rising U.S. house prices on borrowing and spending from 2002 to 2006. There is strong heterogeneity in the marginal propensity to borrow and spend. Households in low income zip codes aggressively liquefy home equity when house prices rise, and they increase spending substantially. In contrast, for the same rise in house prices, households living in high income zip codes are unresponsive, both in their borrowing and spending behavior. The entire effect of housing wealth on spending is through borrowing, and, under certain assumptions, this spending represents 0.8% of GDP in 2004 and 1.3% of GDP in 2005 and 2006. Households that borrow and spend out of housing gains between 2002 and 2006 experience significantly lower income and spending growth after 2006.
    JEL: E2 E21 E3 E32 E44 E5 G02 G21
    Date: 2014–05
  21. By: Estrada García, Ángel; Galí, Jordi; Lopez-Salido, David
    Abstract: We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples.
    Keywords: competitiveness; current account imbalances; inflation differentials; labor markets; macroeconomic convergence; relative prices
    JEL: E24 F31 O47
    Date: 2013–10
  22. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Economic theory traditionally suggests that monetary policy can influence the business cycle, but not the long-run potential output. Despite well documented theoretical and empirical consensus on money neutrality in the literature, the role of money as an informational variable for monetary policy decision has remained opened to debate with empirical works providing mixed outcomes. This paper addresses two substantial challenges to this debate: the neglect of developing countries in the literature and the use of new financial dynamic fundamentals that broadly reflect monetary policy. The empirics are based on annual data from 34 African countries for the period 1980 to 2010. Using a battery of tests for integration and long-run equilibrium properties, results offer overall support for the traditional economic theory.
    Keywords: Monetary policy; Credit; Empirics; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–09
  23. By: Ronald A. Ratti; Joaquin L. Vespignani
    Abstract: In this paper we introduce a global factor-augmented error correction model to quantify the interaction of oil price with the global economy. Global factors are constructed for global oil price and global interest rate, money, real output and inflation over 1999-2012. The global factors are constructed to capture developments in the largest developing and developed economies. At global level the quantity theory of money operates in the sense that global money, output and prices are cointegrated. Positive innovation in global oil price is connected with global interest rate tightening. Positive innovation in global money, CPI and outputs is connected with increase in oil prices while positive innovations in global interest rate are associated with decline in oil prices. The US, Euro area and China variables are the main drivers of global factors. Granger causality test shows that US and China variables Granger cause global interest rate, money, output and prices.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVEC
    JEL: E44 E50 Q43
    Date: 2014–05
  24. By: Galí, Jordi; van Rens, Thijs
    Abstract: We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity vanished, (ii) the relative volatility of employment rose, and (iii) the relative (and absolute) volatility of the real wage rose. We propose an explanation for all three changes that is based on a common source: the decline in labor market turnover, which reduced hiring frictions. We develop a simple model with hiring frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the decline in turnover may also have contributed to the observed decline in output volatility.
    Keywords: effort choice; hiring frictions; labor hoarding; labor market turnover; wage rigidities
    JEL: E24 E32
    Date: 2014–03
  25. By: Hatcher, Michael; Minford, Patrick
    Abstract: We survey recent literature comparing inflation targeting (IT) and price-level targeting (PT) as macroeconomic stabilization policies. Our focus is on New Keynesian models and areas which have seen significant developments since Ambler’s (2009) survey: the zero lower bound on nominal interest rates; financial frictions; and optimal monetary policy. Ambler’s main conclusion that PT improves the inflation-output volatility trade-off in New Keynesian models is reasonably robust to these extensions, several of which are attempts to address issues raised by the recent financial crisis. The beneficial effects of PT therefore appear to hang on the joint assumption that agents are rational and the economy New Keynesian. Accordingly, we discuss recent experimental and survey evidence on whether expectations are rational, as well as the applied macro literature on the empirical performance of New Keynesian models. In addition, we discuss a more recent strand of applied literature that has formally tested New Keynesian models with rational expectations. Overall the evidence is not conclusive, but we note that New Keynesian models are able to match a number of dynamic features in the data and that behavioral models of the macroeconomy are outperformed by those with rational expectations in formal statistical tests. Accordingly, we argue that policymakers should continue to pay attention to PT.
    Keywords: inflation targeting; price level targeting; Rational Expectations
    JEL: E31
    Date: 2014–02
  26. By: Yu, Eric Jinsan
    Abstract: The short sale of a stock is motivated by financial profits an investor expects to gain from declining stock prices. Short interest, defined as the proportion of shares shorted to all outstanding shares for a given stock, represents the collective expectations of short sellers. While the variation in short interest at the firm level may be dominated by firm-specific expectations, the variation in an aggregate measure of short interest across a broad sample of stocks most likely reflects changing expectations of macroeconomic conditions. With this motivation, this paper examines the relationship between lagged aggregate short interest and cyclical changes in GDP using quarterly US data from 1973 to 2013. The results strongly suggest that lagged aggregate short interest is a statistically significant regressor in explaining cyclical changes in GDP at up to a 4 quarter lag. Moreover, these results do not change with the addition of control variables and are robust to the use of different filters to decompose the growth trend from the cyclical component of GDP.
    Keywords: Short Interest, Business Cycle Forecasting, Trend-Cycle Decomposition
    JEL: E32 E37 G17
    Date: 2014–05–09
  27. By: Kinda Hachem; Jing Cynthia Wu
    Abstract: We investigate the effectiveness of central bank communication when firms have heterogeneous inflation expectations that are updated through social dynamics. The bank's credibility evolves with these dynamics and determines how well its announcements anchor expectations. We find that trying to eliminate high inflation by abruptly introducing low inflation targets generates short-term overshooting. Gradual targets, in contrast, achieve a smoother disinflation. We present empirical evidence to support these predictions. Gradualism is not equally effective in other situations though: our model predicts aggressive announcements are more powerful when combating deflation.
    JEL: E17 E3 E58
    Date: 2014–05
  28. By: Benigno, Pierpaolo; Nisticò, Salvatore
    Abstract: This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest-rate spreads and can cause a deep recession cum deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.
    Keywords: liquidity crisis; unconventional policies; zero lower bound
    JEL: E30 E40 E50
    Date: 2013–12
  29. By: Rose, Andrew K
    Abstract: In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath.
    Keywords: crisis; data; empirical; exchange rate; financial; float; hard fix; inflation; panel; recession; target
    JEL: E58 F33
    Date: 2013–10
  30. By: Reinhart, Carmen M.; Rogoff, Kenneth
    Abstract: Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.
    JEL: E44 E6 F3 F34 G1 H6 N10
    Date: 2013–11
  31. By: Angeloni, Ignazio; Faia, Ester; Winkler, Roland
    Abstract: We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate - based on output and inflation performance and bank stability - alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist, but are more nuanced. --
    Keywords: exit strategies,debt consolidation,fiscal policy,fiscal multipliers,monetary policy,bank runs
    JEL: G01 E63 H12
    Date: 2014
  32. By: Woodford, Michael
    Abstract: This paper assesses the value of central-bank communication about likely future policy, with particular reference to the regular publication of projections for the future path of the policy rate, as with the Riksbank's publication of the repo rate path. It first discusses why publication of a projected interest-rate path represents a natural and desirable evolution of inflation-forecast targeting procedures, and the conditions under which the assumptions about future policy underlying such projections will be intertemporally consistent. It then discusses evidence on the extent to which central-bank statements influence private-sector interest-rate expectations. Particular attention is given to the potential use of forward guidance as an additional tool of policy when an executive lower bound for the policy rate is reached, and alternative approaches to forward guidance in this context are compared, including the recent adoption of quantitative "thresholds" for unemployment and inflation expectations by the U.S. Federal Reserve. The potential role of a nominal GDP level target within an inflation-targeting regime is also considered.
    Date: 2013–11
  33. By: Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
    Abstract: We investigate the transmission mechanism of policy-induced changes in the discount rate and required reserves in Pakistan. Our results suggest that the pass through to the lending rate is complete for the discount rate but incomplete for required reserves. However, only shocks to required reserves have an effect on the deposit rate and the exchange rate in the long run. The observation that the discount rate is not a very effective monetary policy tool is attributed to excess liquidity present in the interbank market of Pakistan. Finally, our findings suggest a structural shift in the interbank money market in Pakistan.
    Keywords: Monetary transmission mechanism, Pakistan, excess liquidity, VAR
    JEL: E51 E52 E58 E61
    Date: 2014–05–23
  34. By: Galí, Jordi; Monacelli, Tommaso
    Abstract: We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.
    Keywords: currency unions; exchange rate policy; exchange rate regime; monetary policy rules.; New Keynesian model; nominal rigidities; stabilization policies; stabilization policy; sticky wages
    JEL: E32 E52 F41
    Date: 2014–02
  35. By: Benhima, Kenza; Massenot, Baptiste
    Abstract: Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a ``safe'' one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.
    Keywords: Business cycles; Japan's lost decade; Risk aversion
    JEL: E22 E32
    Date: 2013–09
  36. By: DE KONING, Kees
    Abstract: Cars and also equipment used in production processes depreciate in value through their use. Other assets like homes, share and bonds do not depreciate in the same manner. The latter asset values go up and down not as a consequence of the remaining life period, but because of their links with income, savings and interest rate developments in a country. It is a well accepted fact that when average incomes grow slower than the CPI index, individual households cannot continue to buy the same package of goods and services as in previous years. The purchasing power of the income level is reduced. This can be called the “income depreciation” factor. The depreciation does not take place on the goods side, but on the money side. Savings –the act of postponing consumption to a future date- can show the same type of “depreciation”. Savings are used to buy assets like homes, shares and bonds. Most individual households who want to buy a home need a mortgage to get onto the property ladder. They need outside equity –other people’s savings. Outside equity is usually provided by the banking sector. Mortgage lending by the banks can help to build more homes – the economic use of funds - but it can simultaneously cause a rise in house prices above the CPI index, provided that incomes keep pace with the latter – the financial or non-economic use of funds. These are non-economic because such price changes neither create output nor employment. Existing homeowners become richer on paper as their own equity in their home increases. However prospective homeowners see the value of their savings reduced. This phenomenon can be called “savings depreciation” and can be measured by the “savings depreciation factor”. In this paper the U.S. was chosen to demonstrate the impact of the savings depreciation factor and its relationship to economic growth levels.
    Keywords: U.S housing markets, savings depreciation, economic and non-economic use of savings, economic growth, central bank policies
    JEL: E21 E3 E32 E5 E58
    Date: 2014–05–29
  37. By: Jordà, Òscar; Taylor, Alan M.
    Abstract: Elevated government debt levels in advanced economies have risen rapidly as sovereigns absorbed private-sector losses and cyclical deficits blew up in the Global Financial Crisis and subsequent slump. A rush to fiscal austerity followed but its justifications and impacts have been heavily debated. Research on the effects of austerity on macroeconomic aggregates remains unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified framework. We do this by first evaluating the validity of common identification assumptions used by the literature and find that they are largely violated in the data. Next, we use new propensity score methods for time-series data with local projections to quantify how contractionary austerity really is, especially in economies operating below potential. We find that the adverse effects of austerity may have been understated.
    Keywords: allocation bias; austerity; average treatment effect; booms; fiscal policy; identification; inverse probability weighting; matching; multipliers; output fluctuations; slumps
    JEL: C54 C99 E32 E62 H20 H5 N10
    Date: 2013–09
  38. By: Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: Abstract. U.S. households' debt skyrocketed between 2000 and 2007, and has been falling since. This leveraging (and deleveraging) cycle cannot be accounted for by the liberalization, and subsequent tightening, of credit standards in mortgage markets observed during the same period. We base this conclusion on a quantitative dynamic general equilibrium model calibrated using macroeconomic aggregates and microeconomic data from the Survey of Consumer Finances. From the perspective of the model, the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor, because the responses of borrowers and lenders roughly wash out in the aggregate.
    Keywords: Collateral constraints; Financial liberalization; House prices; Household debt
    JEL: E20 E21
    Date: 2013–10
  39. By: Eloy Fisher; Javier Lopez Bernardo
    Abstract: This paper describes the political economy of shadow banking and how it relates to the dramatic institutional changes experienced by global capitalism over past 100 years. We suggest that the dynamics of shadow banking rest on the distributive tension between workers and firms. Politics wedge the operation of the shadow financial system as government policy internalizes, guides, and participates in dealings mediated by financial intermediaries. We propose a broad theoretical overview to formalize a stock-flow consistent (SFC) political economy model of shadow banking (stylized around the operation of money market mutual funds, or MMMFs). Preliminary simulations suggest that distributive dynamics indeed drive and provide a nest for the dynamics of shadow banking.
    Keywords: Political Cycles; Debt and Public Finance; Shadow Banking; Political Economy of Finance; Kaleckian Macrodynamics; Stock-Flow Consistent (SFC) Modeling; Political Macroeconomic Models
    JEL: E12 E62 E63 H5 H6 P16
    Date: 2014–05
  40. By: Farmer, Roger E A
    Abstract: This note shows that a big stock market crash, in the absence of central bank intervention, will be followed by a major recession one to four quarters later. I establish this fact by studying the forecasting ability of three models of the unemployment rate. I show that the connection between changes in the stock market and changes in the unemployment rate has remained structurally stable for seventy years. My findings demonstrate that the stock market contains significant information about future unemployment.
    Keywords: stock market; unemployment
    JEL: E24 E27 E32
    Date: 2013–09
  41. By: Obstfeld, Maurice
    Abstract: Stanley Fischer is a rarity among economic policymakers. He came to the policy world as an internationally recognized intellectual leader on macroeconomic theory and policy. He confronted numerous emerging market crises, including the globally systemic Asian crisis, as the IMF’s First Deputy Managing Director from September 1994 to August 2001. And then, as governor of an emerging economy’s central bank starting in May 2005, he decided the monetary responses to the worldwide crisis of 2008-09 and its aftershocks. Fischer’s unpublished Robbins Lectures, delivered at the LSE late in 2001, drew lessons from his service at the IMF. Did emerging markets follow up on those lessons, and did their preparations help them weather the storm of 2008-09? How have economists’ views, and Fischer’s, changed as a result of the global financial crisis? In this paper I propose answers to these questions, focusing on the experiences of three Asian crisis countries, Indonesia, Korea, and Thailand.
    Keywords: Asian crisis; capital controls; exchange rate regime; financial crises; foreign exchange intervention; macro-prudential regulation; Stanley Fischer; transparency
    JEL: E44 E63 F32 F34 F36 G01 G15
    Date: 2014–02
  42. By: Fan, Jingwen; Minford, Patrick; Ou, Zhirong
    Abstract: We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.
    Keywords: fiscal theory of the price level; identification; indirect interference; testing; UK inflation
    JEL: E31 E37 E62 E65
    Date: 2013–11
  43. By: Petrella, Ivan; Rossi, Raffaele; Santoro, Emiliano
    Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretion may be superior to timeless perspective. We show this is unlikely when the policy maker relies on a welfare-theoretic loss function obtained as a second-order approximation of households’ utility, even in the presence of features that should enhance the relative performance of discretionary policy-making in the baseline New Keynesian model. This result stands in contrast to the existing studies, whose analysis has typically relied on ad hoc welfare criteria that reflect neither households’ preferences, nor the degree of rigidity in price-setting.
    Keywords: Discretion; Loss of Social Welfare; Monetary Policy; Timeless Perspective
    JEL: E23 E32 E52
    Date: 2013–11
  44. By: Beaudry, Paul; Galizia, Dana; Portier, Franck
    Abstract: Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.
    Keywords: business cycle; liquidations; unemployment
    JEL: E32
    Date: 2014–05
  45. By: Gabaix, Xavier; Maggiori, Matteo
    Abstract: We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.
    Keywords: Capital Flows; Exchange Rate Disconnect; Foreign Exchange Intervention; Limits of Arbitrage
    JEL: E42 E44 F31 F32 F41 F42 G11 G15 G20
    Date: 2014–02
  46. By: Aron, Janine; Creamer, Kenneth; Muellbauer, John; Rankin, Neil
    Abstract: A sizeable literature examines exchange rate pass-through to disaggregated import prices but very few micro-studies focus on consumer prices. This paper explores exchange rate pass-through to consumer prices in South Africa during 2002-2007, using a unique data set of highly disaggregated data at the product and outlet level. The paper adopts an empirical approach that allows pass-through to be calculated over various horizons, including controls for domestic and foreign costs. It studies how pass-through differs across types of consumption goods and services and draws some aggregate implications about pass-through, using actual weights from the CPI basket. The heterogeneity of pass-through for different food sub-components and the role of switches between import and export parity pricing of maize is investigated and found significant for five out of ten food sub-components. Overall pass-through to the almost 63 percent of the CPI covered is estimated at about 30 percent after two years, but is higher for food.
    Keywords: consumer prices; CPI; exchange rate pass-through; exchange rate volatility; food prices; goods prices; monetary policy; services prices
    JEL: C23 C51 C52 E3 E31 E52 E58 F31 F39
    Date: 2013–11
  47. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: In this paper we assemble an annual data set on broad and narrow money, prices, real economic activity and interest rates in Ireland from a variety of sources for the period 1933-2012. We discuss in detail how the data set is constructed and what assumptions we have made in doing so. Furthermore, we perform a VAR analysis to provide some simple empirical evidence on the behaviour of these time series. The results suggest that aggregate supply and inflation shocks play a dominant role in Irish business cycles.
    Keywords: business cycles; historical statistics; Ireland; long time series; VAR
    JEL: E3 E4 N14
    Date: 2014–05
  48. By: Anna Grodecka; Karlygash Kuralbayeva
    Abstract: This paper studies the design of optimal fiscal policy in a real business cycle model with distortionary taxes and a climate change externality. Governments face the dual task of internalizing environmental externalities and raising revenues to finance the provision of public goods, including public capital. At their disposal governments have access to two tax instruments: tax on emissions and labor tax. We find that a tax on labor is an efficient instrument to finance public spending and facilitate the adjustment of the economy to the temporary improvement in productivity. Therefore, labor tax is cut in the model. Tax on emissions follows a distinct pattern depending on whether the potential economic expansion in response to a positive productivity shock is strong or weak: it is procyclical in the model that features public capital and is countercyclical in the models with public consumption only. The model implies that by restraining or boosting expansion in the short-run, the optimal carbon tax policy can help policy makers reconcile short-term concerns over economic growth with longer-term risks from climate change. The welfare gains from such short-run policies are non-negligible and can amount to USD 121.9bn or 0.7% of the US GDB.
    Keywords: public finance, public goods, business cycles, distortionary taxes, environmental policy
    JEL: E32 H23 Q54 Q58
    Date: 2014
  49. By: Choukhmane, Taha; Coeurdacier, Nicolas; Jin, Keyu
    Abstract: We ask how much the advent of the `one child policy' can explain the sharp rise in China's household saving rate. In a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show a macroeconomic and a microeconomic channel through which restrictions in fertility raise aggregate saving. The macro-channel operates through a shift in the composition of demographics and income across generations. The micro-channel alters saving behaviour and education decisions at the individual level. A main objective is to quantify these various channels in the data. Exploiting the birth of twins as an identification strategy, we provide direct empirical evidence on the micro-channel and show its quantitative relevance in accounting for the rise in the household saving rate since the inception of the policy in 1980. Our quantitative OLG model can explain from a third to at most 60% of the rise in aggregate saving rate; equally important is its implied shift in the level and shape of the age-saving profile consistent with micro-level estimates from the data.
    Keywords: Fertility; Intergenerational transfers; Life Cycle Consumption/Savings
    JEL: D10 D91 E21
    Date: 2013–10
  50. By: Sandra Gomes
    Abstract: The global financial crisis that started in mid-2007 brought back to the monetary policy debate the issue of the zero lower bound on nominal interest rates and the policy options available when this is a binding constraint. Given the significative macroeconomic impact of the crisis it has also brought to the forefront of the discussion ways to revive economic growth. This paper looks at structural reforms as a policy option of economic stimulus for an economy where the zero lower bound binds. We focus in the euro area economy. Our main results show that structural reforms may have positive short run effects that reduce the size of a recession and if coordinated they can drive the euro area out of the zero lower bound. We also show that the short to medium run impact of structural reforms is also crucially dependent on the design of such reforms, namely if the reforms are implemented gradually or not and if the reforms are announced (or perceived) as temporary or permanent. Finally, we show that the zero lower bound does not change significantly the impact of the reforms if the reform is permanent but it does have an important effect if the reform is transitory.
    JEL: E52 F42 F47
    Date: 2014
  51. By: Ippolito, Filippo; Ozdagli, Ali; Perez Orive, Ander
    Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.
    Keywords: bank financial health; bank lending channel; firm financial constraints; floating interest rates; monetary policy transmission
    JEL: E52 G21 G32
    Date: 2013–10
  52. By: Anderson, Emily; Inoue, Atsushi; Rossi, Barbara
    Abstract: This paper studies stylized empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that are allowed to differ depending on their individual characteristics. We use data from the Consumption Expenditure Survey (CEX) to estimate individual-level impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively affect the lives of the poor, more so than the rich, thus increasing consumption inequality.
    Keywords: Fiscal policy; Government spending shocks; Heterogeneity; Tax shocks
    JEL: D1 E21 E4 E52 H31 I3
    Date: 2013–09
  53. By: In 'T Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
    Abstract: We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
    Keywords: Current Account; estimated DSGE model; Eurozone crisis; intra-European imbalances; monetary union
    JEL: E3 F21 F3 F4
    Date: 2014–04
  54. By: Muhammad, Omer; de Haan, Jakob; Scholtens, Bert
    Abstract: We investigate the drivers of excess interbank liquidity in Pakistan, using the Autoregressive Distributed Lag approach on weekly data for December 2005 to July 2011. We find that the financing of the government budget deficit by the central bank and non-banks leads to persistence in excess liquidity. Moreover, we identify a structural shift in the interbank market in June 2008. Before June 2008, low credit demand was driving the excess liquidity holdings by banks. After June 2008, banks’ precautionary investments in risk-free securities drive excess liquidity holdings. Monetary policy is less effective if banks hold excess liquidity for precautionary reasons.
    Keywords: Excess liquidity, interbank money market, Pakistan, structural breaks, bound test, Autoregressive Distributed Lag approach
    JEL: E44 E61 E63
    Date: 2014–05–22
  55. By: Nicholas Bloom (Stanford)
    Abstract: Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
    Keywords: Uncertainty, risk, volatility, investment
    JEL: E2 E3 O3 O4
    Date: 2014–05
  56. By: Faraglia, Elisa; Marcet, Albert; Scott, Andrew
    Abstract: We show how to model portfolio models in the presence of long bonds. Specifically we study optimal fiscal policy under incomplete markets where the government issues bonds of maturity N > 1. Assuming the existence of long bonds introduces an additional intertemporal mechanism that makes taxes more volatile in order to achieve lower debt management costs. In other words, fiscal policy is secondary to debt management. Modelling optimal policy with long term bonds is computationally demanding because of the promises made to cut future taxes. The longer the maturity of bonds the more promises need to be monitored and the larger the state space. We consider three means of overcoming this problem - a computational method using the “condensed PEA”, an approximation whereby long bonds are modelled as a sequence of geometrically declining coupons and a model of independent powers where the fiscal authority and interest rate setting authority are separate. We compare the accuracy and properties of solutions across these three approaches and examine how the properties of optimal fiscal policy differ in the case of long bonds compared to one period debt.
    Keywords: Debt Management; Fiscal Policy; Government Debt; Maturity Structure; Tax Smoothing; Yield Curve
    JEL: E43 E62 H63
    Date: 2014–05
  57. By: Reichlin, Lucrezia
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.
    Keywords: banks; monetary policy; recession
    JEL: E5
    Date: 2013–09
  58. By: Thorvald Grung-Moe
    Abstract: Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to nonbanks and key financial markets. Many want central banks to embrace this expanded role as "market maker of last resort" going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrained part of our advanced financial system. We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets. Central banks should be especially concerned about providing liquidity support to financial markets without any form of structural reform. It would indeed be ironic if central banks were to declare victory in the fight against too-big-to-fail institutions, just to end up bankrolling too-big-to-fail financial markets.
    Keywords: Financial Regulation; Financial Stability; Monetary Policy; Central Bank Policy
    JEL: E44 E52 E58 G28
    Date: 2014–05
  59. By: Benjamin Carton; Jérôme Héricourt; Fabien Tripier
    Abstract: A “lost decade” refers to an extended period of low or negative growth triggered by an economic crisis and that could have been avoided by the use of efficient crisis policies. The risk to the world’s developed economies of a lost decade was highlighted early on in the 2007-2008 crisis. Now, five years on from the severe recession of 2009, the risk appears much more of a concern for the Euro Area. We find that there is currently a moderate to high risk of production capacities in the Euro Area being permanently impaired. The risk relates mostly to the prolonged period of stalled investment and persistent unemployment, with its detrimental effect on human capital. In addition, paying off past debt will be painful to both the public and private sectors, in particular in the context of a low inflation environment. The policy response in the Euro Area has been hesitant. It emphasised structural reforms over cyclical policies. While structural reforms are a good lever for growth in the long term, they need to be accompanied by much stronger cyclical policies, especially given the recessionary environment. In short, there is a danger the decade could be lost because of an excess of confidence in the ability to fight a major economic crisis with structural reforms only.
    Keywords: Lost decade;Crisis;Growth;Investment; R&D;Unemployment;Debt
    JEL: E2 E3 E5 E6 J2
    Date: 2014–04
  60. By: Diana Bonfim; Carla Soares
    Abstract: It is well established that when monetary policy is accommodative, banks tend to grant more credit. However, only recently attention was given to the quality of credit granted and, naturally, the risk assumed during those periods. This article makes an empirical contribution to the analysis of the so-called risk-taking channel of monetary policy. We use bank loan level data and different methodologies to test whether banks assume more credit risk when monetary policy interest rates are lower. Our results provide evidence in favor of this channel through different angles. We show that banks, most notably smaller banks, grant more loans to non-financial corporations with recent defaults or without credit history when policy interest rates are lower. We also find that loans granted when interest rates are low are more likely to default in the hiking phase of the interest rate cycle. However, the level of policy interest rates at the moment of loan concession does not seem to be relevant for the ex-post probability of default of the overall loan portfolio.
    JEL: E44 E5 G21
    Date: 2014
  61. By: Costain, James; Nakov, Anton
    Abstract: This paper proposes a model in which retail prices are sticky even though firms can always change their prices at zero cost. Instead of imposing a "menu cost", we assume that more precise decisions are more costly. In equilibrium, firms optimally make some errors in price-setting, thus economizing on managerial time. Both the time cost of choice, and the resulting risk of errors, give firms an incentive to leave their prices unchanged until they perceive a sufficiently large deviation from the optimal price. We show that pricing errors help explain several "puzzles" from microdata: (1) small and large price changes coexist; (2) the probability of price adjustment is largely independent of the time since last adjustment; (3) the size of the adjustment is largely independent of the time since last adjustment; (4) extreme prices are younger than prices near the center of the distribution; (5) the coefficient of variation of prices is greater than that of costs; (6) the standard deviation of price adjustments is largely independent of the inflation rate, and the fraction of price increases converges slowly towards 100% as inflation rises. However, on the macroeconomic side, pricing errors do little to explain the real effects of monetary shocks. Since firms making sufficiently large errors always choose to adjust, a nominal shock generates a strong, inflationary "selection effect". Thus, like Golosov and Lucas (2007), we find that money shocks are almost neutral, but our model fits microdata better than their specification does.
    Keywords: (S,s); adjustment; logit equilibrium; near-rational behavior; Nominal rigidity; state-dependent pricing
    JEL: C72 D81 E31
    Date: 2014–03
  62. By: Coutinho, Leonor; Georgiou, Dimitrios; Heracleous, Maria; Michaelides, Alexander; Tsani, Stella
    Abstract: We provide evidence that fiscal policy in resource-rich countries is strongly procyclical. The empirical analysis reveals that on average real government consumption in these countries tends to significantly rise (fall) in good (bad) times. To control for endogeneity we use an instrumental variable for GDP growth that arises naturally, namely the growth in commodity prices of the main natural resource export. We also find that fiscal policy procyclicality is lower in more democratic regimes, and that operating a sovereign wealth fund is more successful in limiting fiscal policy procyclicality than introducing fiscal rules.
    Keywords: commodity prices; fiscal procyclicality; fiscal rules; natural resources; sovereign wealth funds
    JEL: E62 H30
    Date: 2013–10
  63. By: Delatte, Anne-Laure; Fouquau, Julien; Portes, Richard
    Abstract: Is the pricing of sovereign risk linear during bearish episodes? Or can initial shocks on economic fundamentals be exacerbated by endogenous factors that create nonlinearities? We test for nonlinearities in the sovereign bond market of European peripheral countries during the debt crisis and explain them. Our estimates based on a panel smooth threshold regression model during January 2006 to September 2012 show four main findings: 1) Peripheral sovereign spreads are subject to significant nonlinear dynamics. 2) The deterioration of market conditions for financial names changes the way investors price risk of the sovereigns. 3) The spreads of European peripheral countries have been priced above their historical values, given fundamentals, because of amplification effects. 4) Two CDS indices on financial names unambiguously stand out as leading drivers of these amplification effects.
    Keywords: CDS indices; European sovereign crisis; Panel Smooth Threshold Regression Models
    JEL: C23 E44 F34 G12 H63
    Date: 2014–03
  64. By: Cloyne, James; Surico, Paolo
    Abstract: Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to tax changes. Home-owners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields only limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the real economy.
    Keywords: liquidity constraints; mortgage debt; narrative tax changes
    JEL: E21 E62 H31
    Date: 2013–09
  65. By: Kohn, Wolfgang
    Abstract: In der einfachen finanzmathematischen Welt herrscht ein konstanter Zinssatz. Wird die Modellwelt hinsichtlich einer nicht flachen Zinssatzstruktur abgeändert, so sollten die Barwertfaktoren um zwischenzeitliche Zinszahlungen (Zinseszinsen) neutralisiert werden. Die Berechnung der Barwertfaktoren mittels der Duplizierung von Zahlungsströmen (Bootstrapping) führt zu Kapitalwerten, die steigende bzw. fallende Finanzierungskosten der Investition besser im Kapitalwert berücksichtigen. Die Kapitalwerte der Investitionen fallen bzw. steigen gegenüber der herkömmlichen Berechnung und berücksichtigen damit besser die Markterwartungen aus der Zinsstrukturkurve. Die Unternehmensentscheidungen wirken damit stabilisierender auf die konjunkturelle Entwicklung. Ferner wird gezeigt, dass eine Barwertmarge bzw. Rentabilitätsmarge berechnet werden kann, die die Differenz zur gegebenen Zinssatzstruktur angibt, bei der der Kapitalwert Null wird. Alle Ergebnisse entsprechen dem traditionellen Ansatz, wenn die Zinssatzstruktur flach ist. -- The simple financial world assumes a constant interest rate over time (flat yield curve). If this restriction is released for a non constant interest rate (non-flat yield curve) the compounded interest should be neutralized for this interest payments. The net present value with neutralized interest payments (bootstraping method) leads towards net present values which takes better increasing and decreasing interest terms structures into account which results in lower or higher net present values. Therefore the investment decisions are more in line with the interest term structure. Further on a net present value margin is introduced, which shows for a given interest term structure the margin when the net present value is zero. It is an extension of the internal return of investment. All calculations are in line with a flat interest term structure.
    Keywords: Kapitalwertmethode,Zinsstrukturkurve,Marktzinsmodell,Finanzmathematik
    JEL: E43 E44 G11 G31
    Date: 2013–10–14
  66. By: HOSONO Kaoru; MIYAKAWA Daisuke
    Abstract: This paper examines the impact of business cycles and monetary policy on bank loan supply. To this end, we use a unique firm-bank match-level dataset covering listed firms in Japan that allows us to control for firms' time-varying unobservable loan demand and endogenous bank-firm matching, so that we can identify the effects of business cycles and monetary policy on loan supply through the bank balance sheet channel. The estimation results indicate that banks with more liquidity or capital tend to lend more to their client firms. The quantitative impact of bank liquidity and capital on loan supply was economically sizable and larger when economic growth was lower. Furthermore, the quantitative impact of bank liquidity on the growth rate of loans more than doubled when quantitative easing was terminated. Overall, these results imply that changes in economic growth and monetary policy significantly affected loan supply through the bank balance sheet channel. We also find evidence that fluctuations in economic growth and monetary policy are transmitted to capital investment through the bank balance sheet channel in the case of firms with high investment opportunities.
    Date: 2014–05
  67. By: Bachmann, Rüdiger; Elstner, Steffen; Hristov, Atanas
    Abstract: Firms expect certain investment expenditures. Firms realize certain investment expenditures. The difference is an investment surprise. With the help of the IFO Investment Survey for the German manufacturing sector we measure firms’ (quantitative) investment expectations and firms’ (quantitative) investment realizations on a yearly basis and construct a panel of firm-level investment innovations. This paper documents its cross-sectional and time-series properties and thus provides direct, econometrics-free quantitative discipline on the idiosyncratic shock processes used in structural heterogeneous-firm models. We find: 1) there is excess kurtosis in investment innovations, but no significant skewness; 2) the cross-sectional average of investment innovations is procyclical; 3) the cross-sectional dispersion of investment innovations is countercyclical; 4) the cross-sectional skewness and kurtosis of investment innovations is largely acyclical; 5) the cross-sectional average of the firm-individual time series volatility of investment innovations is countercyclical and highly positively correlated with the cross-sectional dispersion of investment innovations; 6) measures of firm-idiosyncratic risk have sizeable fluctuations, in the range of aggregate investment fluctuations.
    Keywords: expectation errors; firm data; higher moments; idiosyncratic shocks; investment; survey data
    JEL: E20 E22 E30 E32
    Date: 2014–03
  68. By: Jess Benhabib; Alberto Bisin; Shenghao Zhu
    Abstract: We study the wealth distribution in Bewley economies with idiosyncratic capital income risk (investment risk). We find, under rather general conditions, a unique ergodic distribution of wealth which displays fat tails (a Pareto distribution in the right tail).
    JEL: E13 E21
    Date: 2014–05
  69. By: Brückner, Markus; Gradstein, Mark
    Abstract: This paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries. To identify exogenous, unanticipated, idiosyncratic and transitory variations in national output we use year-to-year variations in rainfall as an instrumental variable in a panel of 39 sub-Saharan African countries during the period 1980-2009. Our estimates yield a marginal propensity to consume out of transitory output of around 0.2. To explain this result we show, using instrumental variables techniques, that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance. An important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries.
    Keywords: Consumption; International Capital Flows; Net Current Transfers; Permanent Income Hypothesis; Risk Sharing; Transitory Output Shocks
    JEL: E21 F32 F35 F41 O55
    Date: 2013–09
  70. By: Nour S. (UNU-MERIT)
    Abstract: This paper examines the structure of the labour market and unemployment in Sudan. One advantage of our analysis is that we explain several stylized facts on the labour market using new secondary data on population, employment and unemployment based on Sudan Central Bureau of Statistics 2010 the Fifth Sudan Population and Housing Census 2008. We explain several stylized facts on the relation between the structure of the labour market and demographic structure, labour force, participation rates, economic activities, low skill level and high unemployment rate defined by gender and mode of living in Sudan. Different from the findings in the empirical literature in support of the Phillips curve on the negative correlation between inflation and unemployment rates, we find a positive and significant correlation between unemployment and inflation rates in Sudan during the period 2000-2008. Moreover, different from the analysis in Sudanese literature, we present a more comprehensive analysis of four stylized facts on the unemployment problem in Sudan, including identifying several types of unemployment; interpretation of unemployment problems from due to endogenous and exogenous causes; analysis of the high incidence of unemployment among youth population and a high mismatch between educational qualifications supply and labour market requirements demand. The major policy implication from our findings is that the unemployment problem is related to endogenous and exogenous causes; therefore policy interventions for reducing unemployment should deal with these endogenous and exogenous causes. Notably, improvement of job creation and quality of educational policies and consistency between educational qualifications output and labour market requirements. Another major policy implication from our results on the significant positive correlation between increase in unemployment and inflation rates 2000-2008, implies that macroeconomic policies aimed at or targeting reducing inflation rates would also help to reduce unemployment rates in Sudan. Keywords Labour market; employment; unemployment; Sudan.
    Keywords: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Demographic Economics: General; Demographic Trends, Macroeconomic Effects, and Forecasts; Demand and Supply of Labor: General; Labor Force and Employment, Size, and Structure; Labor Demand; Human Capital; Skills; Occupational Choice; Labor Productivity; Unemployment: Models, Duration, Incidence, and Job Search;
    JEL: E24 J10 J11 J20 J21 J23 J24 J64
    Date: 2014
  71. By: Miles, David K; Schanz, Jochen
    Abstract: This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households' choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
    Keywords: Quantitative Easing; Unconventional Monetary Policy
    JEL: E51 E52
    Date: 2014–02
  72. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University)
    Abstract: We apply a Ramsey-type analysis to a standard sticky price, small open economy model, examining the welfare implications of optimal capital controls under fixed exchange rates and optimal monetary policy under flexible exchange rates. We show that capital controls can significantly reduce the gap between the welfare levels under fixed and flexible exchange rates.
    Keywords: Optimal capital controls, Optimal monetary policy, Ramsey policy, Exchange rate regimes, Small open economy, Sticky prices, Welfare comparison, Incomplete markets
    JEL: E5 F4
    Date: 2014–05
  73. By: Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: loss aversion; price sluggishness; state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–05
  74. By: Altavilla, Carlo; Giacomini, Raffaella; Ragusa, Giuseppe
    Abstract: The dynamic behavior of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates.
    Keywords: blue chip analysts survey; exponential tilting; forecast performance; macroeconomic factors; monetary policy forward guidance; term structure models
    JEL: C5 E4 G1
    Date: 2013–11
  75. By: Carlos Esteban Posada P.
    Abstract: Los efectos macroeconómicos de modificaciones de la política de gasto e impuestos y los derivados del cambio técnico dependen de las previsiones de los agentes y de la velocidad de los agentes y los mercados para reaccionar ante tales previsiones. El modelo que da sustento al presente documento predice efectos que podrían juzgarse, a primera vista, como sorpresivos o inusuales. Los supuestos del modelo sobre la naturaleza de las previsiones y la flexibilidad de las reacciones, y su característica de equilibrio general dinámico, son fundamentales para generar sus predicciones.
    Keywords: cambio técnico, optimización inter-temporal, multiplicadores de gasto público, impuesto a la renta, impuesto al consumo, crecimiento económico.
    JEL: D58 E13 E20 E62 O40
    Date: 2013–07–18
  76. By: Daniel Carvalho
    Abstract: This paper studies how international capital flows affect domestic credit and money holdings. While previous studies have focused on credit growth and highlighted the importance of the equity/debt mix of flows, this paper shows that there are also important implications of flows going to different domestic recipient sectors, especially concerning money dynamics. In particular, cross-border banking flows display a strong comovement with credit but none with broad money; in turn, flows of domestic non-banks display comovement with both credit and money. For this reason, banking flows correlate with the decoupling of these two variables – the Great Leveraging –, a stylised fact documented for several economies in the past decades and associated to the rapid expansion of banks non-monetary liabilities. These results thus shed light on the mechanisms through which the international banking activity might have consequences for the composition of the domestic bank balance sheet.
    JEL: E44 F30 G15
    Date: 2014
  77. By: Alvarez, Fernando; Le Bihan, Hervé; Lippi, Francesco
    Abstract: We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity we find that the size distribution of price changes has a positive excess kurtosis, with a shape that lies between a Normal and a Laplace distribution. We propose a model, featuring random menu-costs and multi product firms, that is capable to reproduce the observed empirical patterns. We characterize analytically the response of the aggregate economy to a monetary shock. Different propagation mechanism, spanning the models of Taylor (1980), Calvo (1983) and Golosov and Lucas (2007), are nested under different combination of 4 fundamental parameters. We dis- cuss the identification of these parameters using data on the size-distribution of price changes and the actual cost of price adjustments borne by firms. The output effect is proportional to the ratio of kurtosis to the frequency of price changes.
    Keywords: Calvo pricing rule; distribution of price changes; menu cost; micro evidence; monetary shocks; rice setting
    JEL: E3 E5
    Date: 2013–12
  78. By: Anagol, Santosh; Etang, Alvin; Karlan, Dean S.
    Abstract: We examine the returns from owning cows and buffaloes in rural India. We estimate that when valuing labor at market wages, households earn large, negative average returns from holding cows and buffaloes, at negative 64% and negative 39% respectively. This puzzle is mostly explained if we value the household’s own labor at zero (a stark assumption), in which case estimated average returns for cows is negative 6% and positive 13% for buffaloes. Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong? We discuss potential explanations, including labor market failures, for why livestock investments may persist.
    Keywords: Investment; Labor markets; Livestock; Profits; Savings
    JEL: E21 M4 O12 Q1
    Date: 2013–09
  79. By: Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
    Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.
    Keywords: China; Exchange rate policy; International reserves
    JEL: E58 F31 F41
    Date: 2013–09
  80. By: Bianchi, Francesco
    Abstract: I develop a toolbox to analyze the properties of multivariate Markov-switching models. I first derive analytical formulas for the evolution of first and second moments, taking into account the possibility of regime changes. The formulas are then used to characterize the evolution of expectations and uncertainty, the propagation of the shocks, the contribution of the shocks to the overall volatility, and the welfare implications of regime changes in general equilibrium models. Then, I show how the methods can be used to capture the link between uncertainty and the state of the economy. Finally, I generalize Campbell's VAR implementation of Campbell and Shiller's present value decomposition to allow for parameter instability. The applications reveal the importance of taking into account the effects of regime changes on agents' expectations, welfare, and uncertainty. All results are derived analytically, do not require numerical integration, and are therefore suitable for structural estimation.
    Keywords: Bayesian Methods; DSGE; Impulse responses; Markov-switching; Uncertainty; VAR; Welfare
    JEL: C11 C32 E31 E52 G12
    Date: 2013–10
  81. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sec- tor deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    Keywords: booms; business cycles; financial crises; leverage; local projections; recessions
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013–10
  82. By: Kaplan, Greg; Violante, Giovanni L; Weidner, Justin
    Abstract: The wealthy hand-to-mouth are households who hold little or no liquid wealth (cash, checking, and savings accounts), despite owning sizable amounts of illiquid assets (assets that carry a transaction cost, such as housing or retirement accounts). We use survey data on household portfolios for the U.S., Canada, Australia, the U.K., Germany, France, Italy, and Spain to document the share of such households across countries, their demographic characteristics, the composition of their balance sheets, and the persistence of hand-to-mouth status over the life cycle. The portfolio configuration of the wealthy hand-to-mouth suggests that these households may have a high marginal propensity to consume out of transitory income changes, a prediction for which we find empirical support in PSID data. We explain the implications of this group of consumers for macroeconomic modeling and fiscal policy analysis.
    Keywords: Consumption; Fiscal Policy; Hand-to-Mouth; Household Portfolio; Liquidity
    JEL: D31 D91 E21 H31
    Date: 2014–04
  83. By: Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin
    Abstract: Sovereign yield spreads within currency unions may reflect the risk of outright default. Yet, if exit from the currency union is possible, spreads may also reflect currency risk. In this paper, we develop a New Keynesian model of a small member country of a currency union, allowing both for default within and exit from the union. Initially, the government runs excessive deficits as a result of which it lacks the resources to service the outstanding debt at given prices. We establish two results. First, the initial policy regime is feasible only if market participants expect a regime change to take place at some point, giving rise to default and currency risk. Second, the macroeconomic implications of both sources of risk differ fundamentally. We also analyze the 2009--2012 Greek crisis, using the model to identify the beliefs of market participants regarding regime change. We find that currency risk accounts for about a quarter of Greek yield spreads.
    Keywords: currency risk; Currency union; default; euro; exit; fiscal deficits; Greek crisis; irreversibility; spreads
    JEL: E62 F41
    Date: 2013–09
  84. By: Polito, Vito; Wickens, Michael R.
    Abstract: We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.
    Keywords: credit risk; default probability; fiscal policy; sovereign risk
    JEL: E62 H30 H60
    Date: 2013–09
  85. By: Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
    Abstract: What would be the aggregate effects of adopting a more generous and universal childcare subsidy program in the U.S.? We answer this question in a life-cycle equilibrium model with heterogeneous married and single households with three key features: (i) joint labor-supply of married households along extensive and intensive margins; (ii) heterogeneity in terms of the presence of children across households; (iii) skill losses of females associated to non participation. We find that subsidies have substantial effects on female labor supply and lead to a large reallocation of hours worked from males to females. Fully subsidized childcare available to all households leads to longrun increases in the participation of married females and total hours worked by about 10.1% and 1.0%, respectively, and to a decline of male hours by 1.5%. There are large differences across households in welfare gains, as a small number of households–poorer households with children– gain significantly while others lose. Welfare gains of newborn households amount to 1.9%.
    Keywords: Childcare; Household Labor Supply
    JEL: E62 H24 H31
    Date: 2013–12
  86. By: Novy, Dennis; Taylor, Alan M.
    Abstract: We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of international trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. We show that in response to an uncertainty shock firms optimally adjust their inventory policy by cutting their orders of foreign intermediates disproportionately strongly. In the aggregate, this response leads to a bigger contraction in international trade flows than in domestic economic activity. We confront the model with newly-compiled monthly aggregate U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and the cyclical behavior of international trade.
    Keywords: Imports; Intermediates; Inventory; Real options; Trade collapse; Uncertainty shock
    JEL: E3 F1
    Date: 2014–03
  87. By: Tressel, Thierry; Verdier, Thierry
    Abstract: We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened.
    Keywords: banking regulation; political economy; regulatory forbearance
    JEL: D8 E44 G2
    Date: 2014–03
  88. By: Roberto Chang
    Date: 2013–12–09
  89. By: Cosar, Kerem; Guner, Nezih; Tybout, James R
    Abstract: This paper explores the combined effects of reductions in trade frictions, tariffs, and firing costs on firm dynamics, job turnover, and wage distributions. It uses establishment-level data from Colombia to estimate an open economy dynamic model that links trade to job flows in a new way. The fitted model captures key features of Colombian firm dynamics and labor market outcomes, as well changes in these features during the past 25 years. Counterfactual experiments imply that integration with global product markets has increased both average income and job turnover in Colombia. In contrast, the experiments find little role for this country's labor market reforms in driving these variables. The results speak more generally to the effects of globalization on labor markets in Latin America and elsewhere.
    Keywords: firm dynamics; inequality; International trade; labor market frictions; size distribution
    JEL: E24 F12 F16 J64 L11
    Date: 2013–11
  90. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R
    Abstract: In response to the global financial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit flows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in a context in which pecuniary externality justifies policy interventions. Within the same theoretical framework adopted in this literature, we show that the optimal design of crisis prevention (ex-ante) policies depends on the effectivness of crisis management (ex-post) policies. This interaction between ex-ante and ex-post policies gives rise to a new rationale for the use of capital controls. Specifically, we show that when ex-post policies are effective in containing crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail efficiency costs and hence lose effectiveness, then the optimal policy mix consists of both ex-ante and ex-post interventions so that crises prevention policies become desirable. In our model, the optimal policy mix combines capital controls in tranquil times with real exchange rate support to limit its depreciation during crises times and yields welfare gains of more than 1% in consumption equivalence terms.
    Keywords: Capital Controls; Financial Crises; Financial Frictions; Macro-prudential policies; Pecuniary Externality; Real Exchange Rate
    JEL: E52 F37 F41
    Date: 2014–04
  91. By: Baldursson, Fridrik Mar; Portes, Richard
    Abstract: We examine the evolution of the Icelandic banking sector in its macroeconomic environment. The story culminates in the crisis of October 2008, when all three major banks in Iceland collapsed in three successive days. The country is still struggling to cope with the consequences. The paper follows on our report of autumn 2007. The macroeconomic boom that peaked in 2007 led to severe imbalances. The banks had expanded at a rapid pace and reported healthy profits, capital ratios and liquidity until their collapse. An official report (SIC, 2010) has, however, exposed severe weaknesses in the banks’ assets and governance. The Icelandic Financial Services Authority (FSA) clearly knew little of the magnitude of large, single exposures and lending to the banks’ owners, although they strongly maintained otherwise in autumn 2007. Neither the FSA nor the Central Bank of Iceland (CBI) saw the systemic risks created by lending to owners and related parties, which increased greatly from September 2007. With the financial turmoil that began in August 2007, the banks’ access to capital markets was curtailed. They then gambled on resurrection, expanding their balance sheets and refinancing the investments of their owners and other big borrowers, while they should have been deleveraging and securing their liquidity positions in foreign currency. The banks also prevented their share prices from collapsing by purchases of their own shares in the stock market, offloading accumulated shares in private deals, usually financed by themselves. All this went on apparently unnoticed by regulators. The Icelandic banks did not buy toxic securities – but together, they administered their own potent mix of systemic poison.Only a month before the collapse of October 2008 the banks all reported strong liquidity positions. These reports were misleading, but we also show how financing unravelled over the course of a few days, and collapse became inevitable. The rapid evaporation of liquidity and market funding is one of the key lessons of the story. Whereas the United States, the United Kingdom and other countries had the resources to bail out their irresponsible and illiquid banks, Iceland did not, and it received little foreign help or even sympathy. Iceland’s response to the crisis, with its heterodox policies and aid from the IMF, has been relatively successful.
    Keywords: banking crisis; carry trade; currency crisis; financial crisis of 2008; Icelandic banks; liquidity
    JEL: E44 E52 E63 F31 F32 G01 G15 G21
    Date: 2013–09
  92. By: Reinhart, Carmen M.; Tashiro, Takeshi
    Abstract: It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased “liability” home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.
    JEL: E2 E5 F30 F4 G01 G15 H6
    Date: 2013–11
  93. By: Cunha, Alexandre B.; Ornelas, Emanuel
    Abstract: We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if they expect future governments to do the same. We find that, if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative tradeoff between restricting political competition and constraining the ability of governments to issue debt.
    Keywords: efficient policies; political turnover; public debt
    JEL: E61 E62 H30 H63
    Date: 2014–03
  94. By: Edit V. Velenyi; Marc F. Smitz
    Abstract: The 2008-09 global economic crises have shown that no country is immune to external challenges. When policy controls are missing or not used efficiently, crises can reverse progress even in advanced economies. This unexpected outcome has increased concerns about the ability of governments in developing countries to manage downturns. The question is whether current and future crises will reinforce the procyclical responses or whether these governments will be able to escape the procyclical trap. In the fiscal domain, countercyclical trends in developing countries are promising. Over the last decade, about a third of the developing world has been able to escape the procyclicality trap. Yet, little is known about the evidence on the cyclical patterns of government health spending. This descriptive analysis, which covers 183 countries between 1995 and 2010, provides empirical evidence on the cyclicality of government health expenditures, using panel data from a global macro database, the fiscal health database. The objective is to propose user-friendly diagnostic approaches in this area that can be easily replicated and updated to inform technical discussions and policy making
    Keywords: allocation of resources, analytical capacity, Article, automatic stabilizer, automatic stabilizers, balance of payment, banking crises, Burns, BUSINESS CYCLE, business ... See More + cycles, capital flows, capital formation, capital investment, capital spending, Central Bank, central government, central government spending, checks, Country Risk, credit markets, creditworthiness, crisis countries, currency crises, data analysis, DATA AVAILABILITY, data quality, debt, debt crises, debt payments, demand for health, demand for health care, demand for services, developing countries, diagnostic tool, economic cycle, economic development, economic downturn, economic downturns, economic fluctuations, economic growth, ECONOMIC POLICIES, economic policy, ECONOMIC RISK, economic shocks, education spending, efficiency gains, exchange rate, exchange rates, expenditure growth, EXPENDITURES ON HEALTH, exporters, external borrowings, external debt, family planning, financial crises, Financial Crisis, financial flows, financial markets, financial protection, financial resources, financial risk, financial sustainability, financial variables, financing policies, fiscal adjustment, fiscal austerity, fiscal behavior, fiscal constraints, fiscal deficits, Fiscal Health, fiscal impact, fiscal institutions, fiscal policies, fiscal policy, fiscal rules, fiscal stabilization, Fiscal Statistics, fiscal targets, foreign direct investment, government budgets, government consumption, government expenditure, GOVERNMENT EXPENDITURES, government revenue, government revenues, government spending, gross domestic product, growth potential, growth rate, health budgets, health care, health care financing, health coverage, Health Database, health expenditure, HEALTH EXPENDITURES, health financing, health insurance, health insurance funds, health needs, Health Organization, health outcomes, health policies, Health Policy, health sector, health sector reform, health service, health services, health share, health spending, health status, health system, Health Systems, Health Systems Research, health targets, household income, human capital, Human Development, illness, income countries, income effects, income elasticity, income groups, income growth, interest payments, International Bank, intervention, Keynesian theories, liquidity, loan, loan repayment, local currency, local governments, low-income countries, macroeconomic environment, Monetary Fund, National Health, national income, nongovernmental organizations, Nutrition, pensions, personal income, policy formulation, policy responses, political economy, Political Risk, poverty reduction, price volatility, private sector, provision of health services, provision of water, public education, public expenditure, public expenditures, public health, public health spending, public investment, public investments, public sector, public spending, purchasing power, remittances, reserves, returns, Risk Groups, risk management, safety net, sanitation, sector budget, sector policies, sector policy, sectoral allocation, sectoral policies, SOCIAL EXPENDITURES, social insurance, social policies, social policy, social programs, social protection, social safety nets, social services, solvency, sovereign debt, tax, total spending, transparency, Trust Fund, unemployment, voluntary sector
    Date: 2014–01
  95. By: Auer, Raphael; Mehrotra, Aaron
    Abstract: Some observers argue that increased real integration has led to greater co-movement of prices internationally. We examine the evidence for cross-border price spillovers among economies participating in the pan-Asian cross-border production networks. Starting with country-level data, we find that both producer price and consumer price inflation rates move more closely together between those Asian economies that trade more with one another, ie that share a higher degree of trade intensity. Next, using a novel data set based on the World Input-Output Database (WIOD), we examine the importance of the supply chain for cross-border price spillovers at the sectoral level. We document the increasing importance of imported intermediate inputs for economies in the Asia-Pacific region and examine the impact on domestic producer prices of changes in costs of imported intermediate inputs. Our results suggest that real integration through the supply chain matters for domestic price dynamics in the Asia-Pacific region.
    Keywords: Asian manufacturing supply chain; globalisation; inflation; price spillovers; supply chain
    JEL: E31 F14 F15 F4
    Date: 2014–04
  96. By: Łukasz Rawdanowicz; Romain Bouis; Jérôme Brezillon; Ane Kathrine Christensen; Kei-Ichiro Inaba
    Abstract: The prospective normalisation of monetary policies in the main OECD areas will be challenging given that current policy rates are likely to be significantly below neutral levels and that central bank balance sheets will be above the pre-crisis levels by a wide margin. Monetary policy normalisation is likely to start in the United States before other main OECD areas, with potential global spillovers, as was already experienced in mid-2013 when the mere discussion of tapering unsettled global financial markets. A gradual increase in interest rates, in the context of strong growth and rising equity values, would contribute to a balanced US recovery and have a benign impact on the rest of the world. However, a rapid rise in bond yields would risk generating instability in the US shadow banking sector, and the financial system more generally, even if banks seem increasingly resilient to such a shock. Although model simulations suggest that a large and protracted government bond yield shock would not have large trade spillovers in the absence of crisis events in the United States or abroad, an induced increase in bond yields in other countries, together with an induced large decline in equity prices, would have a sizeable effect on the OECD and largest emerging market economies. The latter countries are particularly vulnerable to such spillovers given their generally less liquid financial markets and, in some cases, weak fundamentals related to the banking system and external financing. In the United States, the authorities should aim at managing smoothly the exit and at strengthening the resilience of shadow banking institutions so that the risk of liquidity-induced fire sales is reduced. This should be accompanied in other countries by measures to increase the resilience to interest rate shocks, and when the shock occurs, allowing exchange rates to adjust flexibly and implementing offsetting fiscal measures if scope is available. Les retombées de la sortie des politiques monétaires hautement expansionnistes La normalisation à venir des politiques monétaires dans les principales régions de l’OCDE sera difficile étant donné que les taux actuels de politique monétaire sont probablement significativement en deçà des niveaux neutres et que les bilans des banques centrales demeureront largement supérieurs aux niveaux d’avant la crise. La normalisation de la politique monétaire va probablement commencer aux États-Unis avant les autres régions de l’OCDE, avec de possibles retombées mondiales, comme il a déjà été observé à la mi-2013 lorsque la simple évocation de la réduction progressive des politiques accommodantes a déstabilisé les marchés financiers mondiaux. Une hausse graduelle des taux d’intérêt, dans un contexte de croissance soutenue et de valorisations boursières à la hausse, contribuerait à une reprise équilibrée aux États-Unis et aurait un effet bénin sur le reste du monde. Toutefois, une remontée rapide des rendements obligataires pourrait générer une instabilité dans le secteur bancaire parallèle aux États-Unis, et plus généralement dans le système financier, même si les banques semblent davantage résilientes à un tel choc. Bien que les simulations de modèles suggèrent qu’un choc de rendement obligataire important et prolongé n’aurait pas de retombées significatives en termes de commerce international en l’absence de crises aux États-Unis ou ailleurs, une augmentation induite des rendements obligataire dans d’autres pays, ainsi qu’une importante baisse induite des prix des actions, auraient un effet important sur les économies de l’OCDE et des plus grands pays émergents. Ces derniers pays sont particulièrement vulnérables à de telles retombées étant donné, en général, la faible liquidité de leurs marchés financiers et, dans certains cas, les faibles fondamentaux associés au système bancaire et au financement externe. Aux États-Unis, les autorités devraient s’appliquer à gérer la sortie en douceur et à renforcer la résilience des institutions du système bancaire parallèle de sorte que le risque de ventes précipitées liées à la liquidité soit réduit. Ceci devrait s’accompagner dans les autres pays par des mesures pour accroître la résilience aux chocs de taux d’intérêt, et lorsque le choc se produit, en permettant aux taux de change de d’ajuster de façon flexible et en mettant en oeuvre des mesures budgétaires de compensation si une marge de manoeuvre est disponible.
    Keywords: financial markets, monetary policy, spillovers, financial crisis, crise financière, politique monétaire, retombées, marchés financiers
    JEL: E44 E5 F4 G01 G15
    Date: 2014–05–19
  97. By: Delatte, Anne-Laure; Fouquau, Julien; Holz, Carsten
    Abstract: Fundamental changes in institutions during the transition from a centrally planned to a market economy present a formidable challenge to monetary policy decision makers. For the case of China, we examine the institutional changes in the monetary system during the process of transition and develop money demand functions that reflect these institutional changes. We consider seasonal unit roots and estimate long run, equilibrium money demand functions, explicitly taking into consideration the changes in the institutional characteristics of China's financial system. Using a newly compiled dataset that covers an unprecedented long time period of 1984-2010 at the quarterly frequency, we are able to draw conclusions on the transitions in households', firms', and aggregate money demand, on the role of the credit plan and interest rates, on the mechanisms of macroeconomic control during economic transition, and on theoretical questions in the development and money literature.
    Keywords: Chinese economy; cointegration; complementary hyopthesis; money demand; seasonal unit root
    JEL: C51 E41 O11 P24 P52
    Date: 2013–11
  98. By: alamro, Hassan
    Abstract: تهدف هذه الدراسة إلى بيان مدى تأثير السياسة المالية على المقدرة التنافسية السعرية في قطاع الصناعة التحويلية الأردني، حيث تم استخدام مؤشر نسبة هامش الربح كمؤشر ممثل للمقدرة التنافسية السعرية. ولتحقيق هذا الهدف استخدمت الدراسة أسلوب التحليل القياسي من خلال استخدام طريقة المربعات الصغرى المعدلة (Fully Modified Ordinary Least Square) (FMOLS)، وذلك للفترة (1980-2011). وقد أظهرت النتائج تأثيرا معنويا وسالبا للضرائب غير المباشرة، وتأثيرا معنويا وموجبا للإنفاق الرأسمالي على التنافسية السعرية في قطاع الصناعة التحويلية، كما أظهرت النتائج أيضا عدم معنوية تأثير كل من الضرائب المباشرة والإنفاق الجاري على التنافسية السعرية في قطاع الصناعة التحويلية الأردني.
    Keywords: الكلمات الدالة: السياسة المالية، نسبة هامش الربح، السياسة المالية، الصناعة التحويلية.
    JEL: E6 E61 E62
    Date: 2014–05–25
  99. By: Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas, Las Vegas, Nevada, 89154-6005 USA); Luis F. Martins (ISCTE-IUL Business School, Lisbon, Portugal); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Money demand specifications exhibits instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible time-varying cointegration methodology to estimate the money demand function. We find evidence that the time-varying cointegration estimation provides a better fit of the actual data than a time-invariant estimation and that the throughout unitary income elasticity only exists for the log-log form over the entire sample period. Our estimate of the welfare cost of inflation for a 10-percent inflation rate lies in the range of 0.025 to 0.75 percent of GDP and averages 0.27 percent. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. Finally, the interest elasticity of money demand shows substantial variability over our sample period.
    Keywords: Money Demand Function, Welfare cost of inflation, Time-varying cointegration
    JEL: C32 E52 G10
    Date: 2014–05
  100. By: Samuel DANTHINE (CREST - ENSAI); Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Our paper studies two attempts at integrating unemployment in macroeconomics. The first, due to Diamond, consists in a search model exhibiting multiple equilibria. The second is due to Andolfatto and Merz who, more or less simultaneously, were able to integrate the matching function in RBC modeling. As a common thread of these two attempts is to be based on the search approach as developed in labor economics, we recount the birth and further development of the search paradigm in a first section. We then analyze Diamond’s, Andolfatto’s and Merz’s contributions. Our interest lies specifically in how they made their way in the development of the field. We show that Diamond’s model, which ambitioned to rival Lucas’s Expectations and the Neutrality of Money model, did not live up to its author’s expectations. We propose an interpretation as to the reason this was so. As to Andolfatto and Merz, while their project was less ambitious, we show that they were able to establish what they were striving at, namely an harmonious integration of one particular search model within the RBC paradigm. The price to be paid, however, was to abandon several constitutive traits of the search approach.
    Keywords: Search and Matching models, Diamond, Lucas, Real Business Cycle models, Unemployme
    JEL: B21 B40 D83 E24 J64
    Date: 2014–04–24
  101. By: Paula Garda; Volker Ziemann
    Abstract: The decline in macroeconomic volatility from the 1980s to the onset of the Great Recession did not, in general, translate into more microeconomic stability. While microeconomic volatility can reflect growth-generating processes, such as creative destruction and re-allocation of resources, consumption growth volatility weighs on households’ welfare. This study reviews the existing literature on the link between economic policies and economic stability at the firm and household level. Based on firm-level and household-level data for a wide range of OECD countries, it also provides preliminary results on sources and patterns of microeconomic volatility. Politiques économiques et stabilité microéconomique : Une revue de la littérature et quelques éléments empiriques La baisse de la volatilité macroéconomique dès les années 1980 jusqu’au début de la Grande Récession ne s’est pas, en général, traduite par une plus grande stabilité microéconomique. Si la volatilité microéconomique peut traduire des processus générateurs de croissance tels que la destruction créatrice et la réallocation des ressources, la volatilité de la croissance de la consommation pèse sur le bien-être des ménages. Cette étude dresse un panorama de la littérature existante sur les liens entre les politiques économiques et la stabilité économique au niveau des entreprises et des ménages. En s’appuyant sur des données d'entreprises et de ménages couvrant un large éventail de pays de l'OCDE, elle fournit également des résultats préliminaires sur les caractéristiques de la volatilité microéconomique et ses origines.
    Keywords: micro data, volatility, growth, economic policy, croissance, micro-données, volatilité, politique économique
    JEL: D12 D22 E32 O43
    Date: 2014–05–15
  102. By: Mennuni, Alessandro; Gervais, Martin
    Abstract: This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government's ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.
    Date: 2014–02–01
  103. By: Carlo Altavilla; Domenico Giannone
    Abstract: We assess the perception of professional forecasters regarding the effectiveness of unconventionalmonetary policy measures undertaken by the U.S. Federal Reserve after the collapse of LehmanBrothers. Using individual survey data, we analyse the changes in forecasting of bond yields aroundthe announcement and implementation dates of non-standard monetary policies. The resultsindicate that bond yields are expected to drop significantly for at least one year after theannouncement and the implementation of accommodative policies.
    Keywords: survey of professional forecasters; large scale asset purchases; quantitative easing; operation twist; forward guidance; tapering
    JEL: E58 E65
    Date: 2014–05
  104. By: Kaya, Orcun; Wang, Lulu
    Abstract: This paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the pure credit supply effect on corporate external financing. We find that tightened credit standards positively affect the NFC bond issuance: A 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms' bond issuance in the eurozone. Focusing on a spectrum of aspects contributing to bank credit tightening, we document that banks' balance sheet constraints, as well as the perception of risk lead to significantly higher NFC bond issuance. In addition, we show that stricter lending conditions, such as wider margins, higher collateral requirements and covenants significantly increase NFC bond issuance volumes too. Furthermore, the impact of bank credit tightening on firms' bond issuance is particularly observable in core eurozone countries and not in peripheral countries. This is partially due to the underdeveloped debt capital markets in the peripheral countries. --
    Keywords: Debt Securities,Corporate Financing,Euro Area,Structural Change
    JEL: E44 G23 G32
    Date: 2014
  105. By: Guren, Adam; Hemous, David; Olsen, Morten
    Abstract: This paper develops a dynamic Heckscher Ohlin Samuelson model with sector-specific human capital and overlapping generations to characterize the dynamics and welfare implications of gradual labor market adjustment to trade. Our model is tractable enough to yield sharp analytic results, that complement and clarify an emerging empirical literature on labor market adjustment to trade. Existing generations that have accumulated specific human capital in one sector can switch sectors when the economy is hit by a trade shock. Nonetheless, the shock induces few workers to switch, generating a protracted adjustment that operates largely through the entry of new generations. This results in wages being tied to the sector of employment in the short-run but to the skill type in the long-run. Relative to a world with general human capital, welfare is improved for the skill group whose type-intensive sector shrinks. We extend the model to include physical capital and show that the transition is longer when capital is mobile. We also introduce nonpecuniary sector preferences and show that larger gross flows are associated with a longer transition.
    Keywords: sector-specific human capital; trade shock; transitional dynamics; worker mobility
    JEL: E24 F11 F16 J24
    Date: 2014–02
  106. By: Bagchi, Shantanu
    Abstract: Because they ignore the household-level and macroeconomic adjustments associated with longevity improvements, the actuarial projections of the Social Security Administration overestimate the Social Security crisis. Using a general-equilibrium model with heterogeneous agents and incomplete markets, I show that accounting for these adjustments, a significantly smaller decline in benefits is needed to balance the Social Security budget. Households respond to the longevity improvements by delaying retirement and Social Security benefit collection, working more hours, and by also saving more. In general equilibrium, these effects lead to a natural expansion of Social Security's tax base and generate significant delayed retirement credits, which the actuarial estimates completely overlook.
    Keywords: Social Security; longevity improvement; general equilibrium; delayed retirement; delayed retirement credit
    JEL: E21 H55 J22
    Date: 2013–08
  107. By: Olivier Giovannoni
    Abstract: This series of working papers explores a theme enjoying a tremendous resurgence: the functional distribution of income--the division of aggregate income by factor share. This first installment surveys some landmark theories of income distribution. Some provide a technology-based account of the relative shares while others provide a demand-driven explanation (Keynes, Kalecki, Kaldor, Goodwin). Two questions lead to a better understanding of the literature: is income distribution assumed constant?, and is income distribution endogenous or exogenous? However, and despite their insights, these theories alone fail to fully explain the current deterioration of income distribution. Subsequent installments are dedicated to analyzing the empirical literature (part II), to the measurement and composition of the relative shares (part III), and to a study of the role of economic policy (part IV).
    Keywords: Wage Share; Labor Share; Profit Share; Ergodicity; Technology
    JEL: D33 E24 E25
    Date: 2014–05
  108. By: Deuflhard, Florian; Georgarakos, Dimitris; Inderst, Roman
    Abstract: Savings accounts are owned by most households, but little is known about the performance of households’ investments. We create a unique dataset by matching information on individual savings accounts from the DNB Household Survey with market data on account-specific interest rates and characteristics. We document considerable heterogeneity in returns across households, which can be partly explained by financial sophistication. A one-standard deviation increase in financial literacy is associated with a 13% increase compared to the median interest rate. We isolate the usage of modern technology (online accounts) as one channel through which financial literacy has a positive association with returns.
    Keywords: Financial literacy; Household finance; Interest rates; Savings accounts
    JEL: D12 E21 G11 G21
    Date: 2014–03
  109. By: Bolton, Patrick; Freixas, Xavier; Gambacorta, Leonardo; Mistrulli, Paolo Emilio
    Abstract: We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.
    Keywords: crisis; relationship banking; transaction banking
    JEL: E44 G21
    Date: 2013–09
  110. By: Cheremukhin, Anton; Golosov, Mikhail; Guriev, Sergei; Tsyvinski, Aleh
    Abstract: This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin’s economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin’s policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios.
    Keywords: industrialization; Japan; Russia; Stalin; unbalanced growth
    JEL: E6 N23 N24 O4 O41
    Date: 2013–09
  111. By: Camera, Gabriele; Casari, Marco; Bortolotti, Stefania
    Abstract: We study the behavioral underpinnings of adopting cash versus electronic payments in retail transactions. A novel theoretical and experimental framework is developed to primarily assess the impact of sellers' service fees and buyers' rewards from using electronic payments. Buyers and sellers face a coordination problem, independently choosing a payment method before trading. In the experiment, sellers readily adopt electronic payments but buyers do not. Eliminating service fees or introducing rewards significantly boosts the adoption of electronic payments. Hence, buyers' incentives play a pivotal role in the diffusion of electronic payments but monetary incentives cannot fully explain their adoption choices. Findings from this experiment complement empirical findings based on surveys and field data. --
    Keywords: money,coordination,pricing,transactions
    JEL: E1 E4 E5
    Date: 2014
  112. By: Stefano Giglio; Matteo Maggiori; Johannes Stroebel
    Abstract: We test for the existence of infinitely-lived bubbles in housing markets by directly measuring failures of the pricing condition requiring the present value of infinite-maturity payments to be zero. This condition is central to workhorse models of bubbles. In the U.K. and Singapore, property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite-maturity ownership contracts with maturities often exceeding 700 years; freeholds are perpetual contracts. The price difference between long-maturity leaseholds and freeholds reflects the present value of the freehold after leasehold expiry, thus directly measuring the no-bubble condition. We find no evidence of infinitely-lived bubbles.
    JEL: E44 G02 G11 G12 R30 R31
    Date: 2014–05
  113. By: Foroni, Claudia; Guérin, Pierre; Marcellino, Massimiliano
    Abstract: This paper introduces regime switching parameters in the Mixed-Frequency VAR model. We first discuss estimation and inference for Markov-switching Mixed-Frequency VAR (MSMF-VAR) models. Next, we assess the finite sample performance of the technique in Monte-Carlo experiments. Finally, the MSMF-VAR model is applied to predict GDP growth and business cycle turning points in the euro area. Its performance is compared with that of a number of competing models, including linear and regime switching mixed data sampling (MIDAS) models. The results suggest that MSMF-VAR models are particularly useful to estimate the status of economic activity.
    Keywords: Fore-; Markov-switching; MIDAS; Mixed-frequency VAR; Nowcasting
    JEL: C53 E32 E37
    Date: 2014–02
  114. By: Dai, Li; Minford, Patrick (Cardiff Business School); Zhou, Peng (Cardiff Business School)
    Abstract: We use available methods for testing macro models to evaluate a model of China over the period from Deng Xiaoping’s reforms up until the crisis period. Bayesian ranking methods are heavily influenced by controversial priors on the degree of price/wage rigidity. When the overall models are tested by Likelihood or Indirect Inference methods, the New Keynesian model is rejected in favour of one with a fair-sized competitive product market sector. This model behaves quite a lot more ‘flexibly’ than the New Keynesian.
    Keywords: China; DSGE; Bayesian Inference; Indirect Inference
    JEL: C11 C15 C18 E27
    Date: 2014–05
  115. By: Baumeister, Christiane; Kilian, Lutz
    Abstract: U.S. retail food price increases in recent years may seem large in nominal terms, but after adjusting for inflation have been quite modest even after the change in U.S. biofuel policies in 2006. In contrast, increases in the real prices of corn, soybeans, wheat and rice received by U.S. farmers have been more substantial and can be linked in part to increases in the real price of oil. That link, however, appears largely driven by common macroeconomic determinants of the prices of oil and agricultural commodities rather than the pass-through from higher oil prices. We show that there is no evidence that corn ethanol mandates have created a tight link between oil and agricultural markets. Rather increases in food commodity prices not associated with changes in global real activity appear to reflect a wide range of idiosyncratic shocks ranging from changes in biofuel policies to poor harvests. Increases in agricultural commodity prices in turn contribute little to U.S. retail food price increases, because of the small cost share of agricultural products in food prices. There is no evidence that oil price shocks have caused more than a negligible increase in retail food prices in recent years. Nor is there evidence for the prevailing wisdom that oil-price driven increases in the cost of food processing, packaging, transportation and distribution are responsible for higher retail food prices. Finally, there is no evidence that oil-market specific events or for that matter U.S. biofuel policies help explain the evolution of the real price of rice, which is perhaps the single most important food commodity for many developing countries.
    Keywords: agriculture; biofuel; consumer prices; corn; crop prices; ethanol; food crisis; food price volatility; globalization; inflation; pass-through
    JEL: E31 Q11 Q42 Q43
    Date: 2013–10
  116. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: Using annual data from several sources, we study the evolution of M1, M2, income, prices and long and short interest rates in Ireland over the period 1933-2012. We find cointegration and that prices, income and interest rates are weakly exogenous. While the estimates for M2 are stable and close to our priors, for M1 we obtain very low price elasticities, and a relatively high income elasticity, and detect parameter instability. We estimate a short-run M2 demand function that passes a number of diagnostic tests, although the standard errors of the regressions is large.
    Keywords: historical statistics; income; Ireland; long time series; money; prices
    JEL: E3 E4 N14
    Date: 2014–05
  117. By: AL-Adayleh, Radi; AL-amro, Hassan; AL-Gralleh, Huthaifa
    Abstract: The intention of this study was to investigate the structure of public debt in Jordan and its impact on economic growth, over the period 1980-2012. The statistical techniques which were employed in this study include Johanson co-integration test, Vector Error Correction Model (VECM) to explore the association between domestic debt and external debt ratio of GDP as independent variables and the total debt relative to GDP as the dependent variable, Also Fully modified least squares (FMOLS) approach is employed in order to describe the impact of internal and external debt on economic growth. The co-integration test procedure reveals that there is one relationship, consequently an (VECM) was estimated revealing that 9 % of the departure from equilibrium is cleared annually, and the results of Causality test showed that independent variables have uni-directional relationship with the total debt as the dependent variable . Based on regression coefficient, it was found that external debt has a negative influence, and domestic debt has positive influence on economic growth . The study recommended that the external debt must be re-oriented toward invested in productive projects in order to the burden of debt service
    Keywords: Public Debt , GDP , Fully modified least squares
    JEL: E6 E62
    Date: 2014–04–28
  118. By: Modin, Bitte; van den Berg, Gerard J
    Abstract: We analyze interaction effects of birth weight and the business cycle at birth on individual cardiovascular (CV) mortality later in life. In addition, we examine to what extent these long-run effects run by way of cognitive ability and education and to what extent those mitigate the long-run effects. We use individual records of Swedish birth cohorts from 1915--1929 covering birth weight, family characteristics, school grades, sibling identifiers, and outcomes later in life including the death cause. The birth weight distribution does not vary over the business cycle. The association between birth weight (across the full range) and CV mortality rate later in life is significantly stronger if the individual is born in a recession. This is not explained by differential fertility by social class over the cycle. Ability itself, as measured at age 10, varies with birth weight and the cycle at birth. But the long-run effects of early-life conditions appear to mostly reflect direct biological mechanisms. We do not find evidence of indirect pathways through ability or education, and the long-run effects are not mitigated by education.
    Keywords: business cycle; cardiovascular disease; cause of death; cognitive ability; developmental origins; education; fetal programming; genetic determinants; health; life course; life expectancy; longevity; nature and nurture; school grades; siblings; stratified partial likelihood.
    JEL: C41 E32 I10 I12 I21 I31 J10 J13 N34
    Date: 2013–09
  119. By: Olivier Giovannoni
    Abstract: In this second part of our study we survey the rapidly expanding empirical literature on the determinants of the functional distribution of income. Three major strands emerge: technological change, international trade, and financialization. All contribute to the fluctuations of the labor share, and there is a significant amount of self-reinforcement among these factors. For the case of the United States, it seems that the factors listed above are by order of increasing importance. We conclude by noting that the falling US wage shares cointegrates with rising inequality and a rising top 1 percent income share. Thus, all measures of income distribution provide the same picture. Liberalization and financialization worsen economic inequality by raising top incomes, unless institutions are strongly redistributive. The labor share has also fallen, for structural reasons and for reasons related to economic policy. Such explanations are left to parts III and IV of our study, respectively. Part I investigated the theories of income distribution.
    Keywords: Wage Share; Labor Share; Profit Share; Technology; International Trade; Finance; Bargaining Power
    JEL: D33 E24 E25
    Date: 2014–05
  120. By: Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: Abstract. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
    Keywords: Capital flows; Collateral constraints; Global imbalances; House prices; Household debt
    JEL: E21 F32 G21
    Date: 2013–11
  121. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: The employment of financial development indicators without due consideration to country/regional specific financial development realities remains an issue of substantial policy relevance. Financial depth in the perspective of money supply is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD). Dynamic panel system GMM estimations are applied. Different specifications, non-overlapping intervals and control variables are used to check the consistency of estimated coefficients. Our results suggest that from an absolute standpoint (GDP base measures), all financial sectors are pro-poor. However, three interesting findings are drawn from measures of sector importance. (1) The expansion of the formal financial sector to the detriment of other financial sectors has a disequalizing income effect. (2) Growth of informal and semi-formal financial sectors at the expense of the formal financial sector has an income equalizing effect. (3) The positive income redistributive effect of semi-formal finance in financial sector competition is higher than the corresponding impact of informal finance. It unites two streams of research by contributing at the same time to the macroeconomic literature on measuring financial development and responding to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic development. The equation of financial depth in the perspective of money supply to liquid liabilities has put on the margin the burgeoning informal financial sector in developing countries. The phenomenon of mobile banking is such an example.
    Keywords: Financial Development; Shadow Economy; Poverty; Inequality; Africa
    JEL: E00 G20 I30 O17 O55
    Date: 2013–09
  122. By: Thomas Grjebine
    Abstract: Cette thèse comprend quatre essais en macroéconomie internationale et théorie monétaire. Elle est constituée de deux parties. Les deux premiers chapitres, coécrits avec François Geerolf, étudient les conséquences macroéconomiques des cycles immobiliers sur les comptes courants (chapitre 1) et sur les dynamiques de l'emploi (chapitre 2). La seconde partie de cette thèse s'intéresse aux conséquences des récentes transformations intervenues dans les systèmes bancaires sur les mécanismes de la création monétaire. Ces transformations semblent en effet conduire à une privatisation de la monnaie. Le chapitre 3 étudie empiriquement la réalité d'une telle privatisation. Je développe dans le chapitre 4 un modèle pour analyser les conséquences de ces transformations sur la création monétaire et sur les mécanismes de propagation du risque.
    Keywords: Current accounts, unemployment, House prices, Money; Comptes courants, chômage, Prix de l'immobilier, monnaie
    Date: 2013–12
  123. By: Beetsma, Roel; Romp, Ward E
    Abstract: We explore voluntary participation in pension arrangements. Individuals only participate when participation is more attractive than autarky. The benefit of participation is that risks can be shared with future generations. We apply our analysis to a pay-as-you-go system, a funded system without buffers and a funded system with buffers. Buffers play a particularly interesting role, because they raise the sensitivity of the contributions to the asset returns. In particular, compared to a system without buffer requirements, they require higher contributions when asset returns are low. Moreover, individual contributions may be increasing or decreasing in the size of the young cohort, depending on whether the fund has more or less reserves than required. We confine ourselves to recursive settings and study equilibria characterised by thresholds on the contribution that young generations are prepared to make assuming that the future young apply the same threshold. For standard parameter settings two such equilibria exist, of which only the one with the higher threshold is consistent with the initial young being prepared to start the system. Finally, we explore the social welfare maximising policy parameter settings for various levels of uncertainty and risk aversion.
    Keywords: buffers; Participation constraints; pay-as-you-go; pension funds; risk-sharing
    JEL: E62 H55
    Date: 2013–09
  124. By: Guillaume Allègre (Ofce,Sciences-po); Xavier Timbeau (Ofce, Sciences-po)
    Abstract: Thomas Piketty’s Capital in the Twenty-First Century proposes a critical analysis of the dynamics of capital accumulation. The book has several objectives: to present the historical dynamics of capital and its distribution up to the early twenty-first century; to offer a prospective analysis of these dynamics up to the end of this century; and, finally, to discuss policy measures that would make it possible to avoid the future it lays out. This book is undoubtedly the key treatise on political economy from the first part of this century. The author revives an obsolete format, as academic economists generally prefer publications in scholarly journals while reserving the book format for popularization. He reveals the mechanisms pushing towards convergence or divergence in the distribution of wealth, and emphasizes the widely underestimated power of divergence: if the return on capital (??) exceeds economic growth (??), which has almost always been the case historically, then it is virtually inevitable that inherited wealth will dominate built-up wealth and the concentration of capital will reach extremely high levels. Thomas Piketty thus seeks the foundations of inequality (??>??) in macroeconomics, whereas the usual suspects are found at the micro-economic level. As we shall see, this macro-foundation of the micro-economy is not entirely convincing, and the facts described by Thomas Piketty can be interpreted with a different causality in which it is extra-economic constraints and scarcity rent that explain the dynamics of inequality, and hence the relationship ??>??. This different interpretation of the same phenomena has consequences for public policy. According to our interpretation, an ex post capital tax, if necessary, can only be a second-order choice: first the constraints of scarcity have to be removed and property rights and the respective rights of owners and non-owners must be redefined.
    Date: 2014–04
  125. By: Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    Keywords: income distribution; labor supply; partial insurance; progressivity; skill investment; valued government expenditures; welfare
    JEL: D30 E20 H20 H40 J22 J24
    Date: 2014–03
  126. By: Bertola, Giuseppe; Koeniger, Winfried
    Abstract: We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of non-exclusive financial contracts.
    Keywords: Constrained efficiency; First-order approach; Hidden action; Principal agent
    JEL: D81 D82 E21
    Date: 2014–03
  127. By: Gehrig-Merz, Monika; Kneip, Alois; Storjohann, Lidia
    Abstract: This paper develops a statistical aggregation procedure for the Frisch elasticity of labor supply. It allows for worker heterogeneity and is applicable to an individual labor supply function with non-employment as a possible outcome. Subjecting all offered or paid wages to an unanticipated temporary change we analytically derive the aggregate elasticity and its main components. We quantify each component using individual-specific data from the German SOEP for males at working-age. We measure the hours' adjustment along the intensive and the extensive margin with the help of observed wages and reservation wages, respectively. The estimated aggegate Frisch elasticity varies over time.
    Keywords: Aggregation; Extensive and Intensive Margin of Adjustment; Labor Supply; Reservation Wage Distribution; Time-varying Frisch Elasticities
    JEL: C51 E10 J22
    Date: 2013–11
  128. By: Philippon, Thomas
    Abstract: A quantitative investigation of financial intermediation in the U.S. over the past 130 years yields the following results : (i) the finance industry’s share of GDP is high in the 1920s, low in the 1950s and 1960s, and high again in the 1990s and 2000s; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, assets yielding liquidity services); (iii) intermediation is produced under constant returns to scale with an annual average cost comprised between 1.5% and 2% of outstanding assets; (iv) quality adjustments that take into account changes in the characteristics of firms and households are quantitatively important; and (v) the unit cost of intermediation has not decreased over the past 30 years.
    Keywords: economic growth; informativeness; investment; price efficiency
    JEL: E2 G2 N2
    Date: 2014–01
  129. By: Baldursson, Fridrik Mar; Portes, Richard
    Abstract: We examine Iceland’s capital controls, which were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls have not been lifted yet, primarily because of the risk of outflows of domestic holdings of the failed cross-border Icelandic banks. A substantial restructuring of domestic holdings of foreign creditors of the old banks is required before capital controls can be lifted. We argue that even if the controls are damaging, the gains from lifting them are likely to be much lower than the costs associated with a potential currency crisis following a premature liberalisation of capital outflows. The case of Iceland illustrates the difficulty of resolving large cross-border banks situated in a small currency area.
    Keywords: capital controls; cross-border banking; Icelandic banks; resolution of failed banks
    JEL: E58 F31 G21
    Date: 2013–10
  130. By: Hernando Matallana
    Abstract: El artículo discute la indigencia y la pobreza a la luz de la teoría de la economía monetaria de producción en el entendido de que la explicación científica de estas dos cuestiones exige un argumento teórico de economía liberal que dé razón del carácter específico de la relación social propia de la sociedad capitalista. En la medida en que la discusión se desarrolla en el marco de una teoría monetaria del valor y la distribución, el artículo se entiende como una aportación a una teoría keynesiano-monetaria de la distribución funcional del ingreso, la concentración de la propiedad privada de la riqueza económica de la sociedad y las diferentes formas (no competitivas) de mercado, pero también condicionada por dicha lógica, la lucha por el salario real agregado a través dela permanente renegociación del salario nominal por grupos particulares de trabajadores, constituyen los momentos claves de una explicación teórico-económica de la inseguridad alimentaria en la sociedad capitalista. El artículo advierte que la indigencia y la pobreza, al igual que el desempleo involuntario, son ‘males públicos’, endémicos ambos en el capitalismo.
    Keywords: capitalismo, distribución funcional del ingreso y la riqueza, economía monetaria de producción, indigencia, precios de producción, programación lineal
    JEL: C60 D30 E12 I32 J31
    Date: 2013–07–04
  131. By: Gennaioli, Nicola; Shleifer, Andrei; Vishny, Robert
    Abstract: We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (GSV, 2014) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the ratio of financial income to GDP increases with the ratio of aggregate wealth to GDP. Both rise along the convergence path to steady state growth. We examine several further implications of the model for management fees, unit costs of finance, and the consequences of shocks to trust and to the capital stock.
    Keywords: Finance Income Share; Wealth Preservation
    JEL: E00 G00
    Date: 2014–03
  132. By: Orrego, Fabrizio (Banco Central de Reserva del Perú; Universidad de Piura)
    Abstract: En este trabajo estimamos la relación de equilibrio entre el precio por m2 de las viviendas en Lima y sus fundamentos macroeconómicos desde 1998.I hasta 2013.IV. Los términos de intercambio, la cuenta corriente, el índice de imperio de la ley, la demografía y la capitalización bursátil resultan significativos y con los signos esperados. Luego, con el fin de evaluar si el precio de las viviendas se encuentra desalineado con respecto a sus fundamentos, construimos 10,000 secuencias de precios de equilibrio de las viviendas, a partir del remuestreo de la relación de equilibrio estimada. La evidencia muestra que el precio por m2 de las viviendas no se encontraría desalineado con respecto a sus fundamentos, a pesar del incremento observado durante los últimos años.
    Keywords: Precios de viviendas, hipotecas, desalineamiento
    JEL: C53 E44
    Date: 2014–05
  133. By: G. Bellettini; F. Taddei; G. Zanella
    Abstract: We identify the degree of intergenerational altruism in an OLG framework à la Barro exploiting the quasi-experimental variation generated by reforms of bequest taxation (estate or inheritance tax, in the U.S.) and taxes on inter vivos real estate donations (gift tax, in the U.S.) that were enacted in Italy between 2000 and 2001. Employing a unique data set containing information on the housing stock and house prices in 13 large Italian cities between 1993 and 2004, we identify the structural parameter of interest via the effect of changes in the tax rate on house prices. We find that the intergenerational altruism parameter is about 20%. Given the possible anticipation of the reform this estimate should be interpreted as a lower bound.
    JEL: E60 E65 H24
    Date: 2014–05
  134. By: Doepke, Matthias; Schneider, Martin
    Abstract: We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions.
    Keywords: balance-sheet risk; credit chains; optimal currency areas; unit of account
    JEL: E40 E50 F33
    Date: 2013–10
  135. By: Brückner, Markus; Gradstein, Mark
    Abstract: This paper presents instrumental variables estimates of the effects of GDP per capita volatility on the size of government. We show that for a panel of 157 countries spanning more than half a century rainfall volatility has a significant positive effect on GDP per capita volatility in countries with above median temperatures. In these countries rainfall volatility has also a significant positive reduced-form effect on the GDP share of government. There is no significant reduced-form effect in the sample of countries with below median temperatures where rainfall volatility has no significant effect on GDP per capita volatility. Using rainfall volatility as an instrumental variable in the sample of countries with above median temperatures yields that greater GDP per capita volatility leads to a significantly higher GDP share of government.
    Keywords: government size; Volatility
    JEL: E6 H1 O1
    Date: 2013–09
  136. By: Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
    Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic regulatory reform.
    Keywords: Directed Search; Firm Dynamics; International Trade; Product and Labor Market Regulation; Wage Inequality
    JEL: E24 F12 F16
    Date: 2014–03
  137. By: Zhao, Guo
    Abstract: I propose a dynamic production model under the joint constraints of technology, budget and no arbitrage. Comparative static and dynamic analysis indicate that this model is consistent with the behavior of firms in reality, and can explain a wide range of economic phenomena. Compared with classical production theory, this model confers some methodological advantages: (i) it turns out to be a natural generalization of classical production theory; (ii) it constitutes a marriage of production theory and finance; (iii) it constructs a bridge between microeconomics and macroeconomics; (iv) it successfully reconciles some long-standing contradictions arising from classical theory.
    Keywords: no arbitrage, Modigliani-Miller Theorem, money neutrality, Gibson paradox, Phillips curve, purchasing power parity, Balassa-Samuelson effect, Lucas critique
    JEL: D2 E2 G0
    Date: 2014–04–05
  138. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
    Abstract: We use realized variances and covariances based on intraday data from Eurozone sovereign bond market to measure the dependence structure of eurozone sovereign yields. Our analysis focuses on the impact of news, obtained from the Eurointelligence newsflash, on the dependence structure. More news raises the volatility of interest rates of financially distressed countries and decreases the covariance of distressed countries' yields with German bond yields, suggesting a flight-to-quality effect. Common news about the euro crisis and news about specific countries itself tend to raise the covariance of yields between distressed countries, indicating potential crisis spill-over effects. However, we do not detect spillover effects from news about third countries to the covariance between other country pairs. Bond purchases by the ECB under its Securities Markets Programme (SMP) mitigate the negative crisis spillovers among the distressed countries and reduce the flight-to-safety from the distressed countries to Germany.
    Keywords: crisis; Eurozone; realized covariances; SMP; sovereign debt; spillovers
    JEL: E62 G01 G12 G15 H63
    Date: 2014–02
  139. By: Koijen, Ralph; Moskowitz, Tobias J; Pedersen, Lasse Heje; Vrugt, Evert B.
    Abstract: Any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the cross section and time series for a variety of different asset classes including global equities, global bonds, commodities, US Treasuries, credit, and options. This predictability rejects a generalized version of the uncovered interest rate parity and expectations hypothesis in favor of models with varying risk premia. Our global carry factor across markets delivers strong average returns and, while it is exposed to recession, liquidity, and volatility risks, its performance presents a challenge to asset pricing models.
    Keywords: bonds; carry trade; commodities; corporate bonds; currencies; global recessions; liquidity risk; options; predictability stocks; volatility risk
    JEL: E44 F30 F31 G11 G12 G13 G14 G15
    Date: 2013–12
  140. By: Farah Said (Lahore School of Economics, Lahore, Pakistan.); Uzma Afzal (Lahore School of Economics, Lahore, Pakistan.); Ginger Turner
    Abstract: This paper investigates the impact of rare-event experiences and observations on risk taking. Matching detailed individual, household, and community-level surveys with behavioral games data, we explore the mechanisms that underlie individual risk-taking after a natural disaster. Unlike the existing literature, which focuses mostly on community-level economic and disaster data, our unique dataset allows us to match detailed interviews on individual risk perceptions and loss experiences with game choices.
    Keywords: North-South, growth model, innovation assimilation
    JEL: E32 R10
    Date: 2014
  141. By: Eric Parrado; Andrés Velasco
    Date: 2013–12–09
  142. By: Cooley, Thomas F; Marimon, Ramon; Quadrini, Vincenzo
    Abstract: Over the last three decades there has been a dramatic increase in the size of the financial sector and in the compensation of financial executives. This increase has been associated with greater risk-taking and the use of more complex financial instruments. Parallel to this trend, the organizational structure of the financial sector has changed with the traditional partnership replaced by public companies. The organizational change has increased the competition for managerial talent, which may have weakened the commitment between investors and managers. We show how increased competition and the weaker commitment can raise the managerial incentives to undertake risky investment. In the general equilibrium, this change results in higher risk-taking, a larger and more productive financial sector with greater income inequality (within and across sectors), and a lower market valuation of financial institutions.
    Keywords: financial corporate governance; Financial risk; income inequality; limited commitment; managerial incentives; parnerships
    JEL: E2 G1 G2 G3
    Date: 2013–11
  143. By: Clement Joubert (Department of Economics, University of North Carolina at Chapel Hill)
    Abstract: This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guarantying the same level of income in retirement, by increasing the rate at which the benefits taper off.
    Keywords: pension reform, informality, segmentation
    JEL: J24 J26 E26 O17
    Date: 2014–03–01
  144. By: Esteves, Rui; Tuncer, Ali Coskun
    Abstract: Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel—five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, whilst creditors' moral hazard may be as much of a problem as debtors'.
    Keywords: Debt dilution; Debt mutualisation; Eurobonds; Moral hazard; Pre-1913
    JEL: F34 H63 H77 N24 N44
    Date: 2014–03
  145. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: The Ali (2013, EB) findings on the nexuses among institutions, finance and investment could have an important influence on policy and academic debates. This paper relaxes his hypotheses on the conception, definition and measurement of finance and institutions because they are less realistic to developing countries to which the resulting policy implications are destined. We dissect with great acuteness the contextual underpinnings of financial development dynamics and elucidate why the Acemoglu & Johnson (2005) justification provided for the measurement of property rights institutions (PRI) is lacking in substance. Using updated data (1996-2010) from 53 African countries, we provide more robust evidence on the substitution of institutions and finance in investment. Results under many baseline and augmented scenarios are not consistent with the underlying paper. Justifications for the differences in findings are discussed. As a policy implication, the Ali (2013, EB) findings for countries with poor financial systems may not be relevant for Africa.
    Keywords: Finance; Institutions; Investment: Property Rights; Africa
    JEL: G20 G24 E02 P14 O55
    Date: 2014–01
  146. By: John C. Boik (Principled Societies Project)
    Abstract: This appendix contains graphs and other supplementary information for the paper "First Microsimulation Model of a LEDDA Community Currency--Dollar Economy," by John C. Boik.
    Keywords: LEDDA, sustainability, agent-based, stock-flow consistent, simulation, local currency, community currency, complementary currency, e-currency, token, economic democracy, economic direct democracy
    JEL: B59 C63 E51 I31 J31 O15 P48 Q56
    Date: 2014–05
  147. By: Jarocinski, Marek; Mackowiak, Bartosz Adam
    Abstract: A researcher is interested in a set of variables that he wants to model with a vector autoregression and he has a dataset with more variables. Which variables from the dataset to include in the VAR, in addition to the variables of interest? This question arises in many applications of VARs, in prediction and impulse response analysis. We develop a Bayesian methodology to answer this question. We rely on the idea of Granger-causal-priority, related to the well-known concept of Granger-noncausality. The methodology is simple to use, because we provide closed-form expressions for the relevant posterior probabilities. Applying the methodology to the case when the variables of interest are output, the price level, and the short-term interest rate, we find remarkably similar results for the United States and the euro area.
    Keywords: Bayesian model choice; Granger-causal-priority; Granger-noncausality; Structural vector autoregression; Vector autoregression
    JEL: C32 C52 E32
    Date: 2013–10
  148. By: Banerjee, Anindya; Marcellino, Massimiliano; Masten, Igor
    Abstract: Starting from the dynamic factor model for non-stationary data we derive the factor-augmented error correction model (FECM) and, by generalizing the Granger representation theorem, its moving-average representation. The latter is used for the identification of structural shocks and their propagation mechanism. Besides discussing contemporaneous restrictions along the lines of Bernanke et al. (2005), we show how to implement classical identification schemes based on long-run restrictions in the case of large panels. The importance of the error-correction mechanism for impulse response analysis is analysed by means of both empirical examples and simulation experiments. Our results show that the bias in estimated impulse responses in a FAVAR model is positively related to the strength of the error-correction mechanism and the cross-section dimension of the panel. We observe empirically in a large panel of US data that these features have a substantial effect on the responses of several variables to the identified real shock.
    Keywords: Cointegration; Dynamic Factor Models; Factor-augmented Error Correction Models; FAVAR; Structural Analysis
    JEL: C32 E17
    Date: 2014–03
  149. By: Badarinza, Cristian; Ramadorai, Tarun
    Abstract: Historical time-series data is short relative to the frequency of political and economic crises. This makes it difficult to use pure time-series methods to identify the impacts of safe haven demand on asset prices, in the face of confounding effects from a wide range of alternative drivers. We present a new method to identify safe-haven effects which relies on combining the cross-section of asset prices with time-series measures of economic and political risk. We employ this strategy on large databases of historical housing transactions in London, and show that economic and political risk in Southern Europe, China, the Middle East, Russia, and South Asia is an important factor in explaining the dynamics of London house prices over the past two decades.
    Keywords: economic risk; hedonic pricing; house prices; London; political risk; safe-haven
    JEL: C53 D80 E47 F21 G12 G15
    Date: 2013–12
  150. By: Rafael Di Tella (Harvard Business School); Robert MacCulloch (University of Auckland)
    Abstract: Beliefs are one component of culture. Data from the World Values Survey is available on a subset of beliefs concerning (broadly) meritocracy and poverty that appear relevant for economics. We document how they vary as well as their distribution across countries. We then correlate these measures of beliefs with economic growth and compare them with institutional and geographical determinants of income. A strong negative relationship is found between leftist economic beliefs and growth but little evidence is found of a relationship with respect to non-economic beliefs. Finally, we briefly discuss some causal effects on beliefs. The evidence suggests that higher country risk and more dependence on natural resources shifts nations to a more leftist set of economic beliefs. Overall the evidence supports the view that cultural specificities may explain why certain institutions cannot be transplanted between nations with different cultural histories and underlines the limit to policy activism.
    Keywords: Beliefs, institutions, causality
    JEL: P16 E62
    Date: 2014–05

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