nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒06‒07
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Quantitative Easing and the Loan to Collateral Value Ratio By Tatiana Damjanovic; Šar?nas Gird?nas
  2. Consumption Dynamics During Recessions By David Berger; Joseph Vavra
  3. The Macroeconomic Determinants of the US Term-Structure during the Great Moderation By Alessia Paccagnini
  4. Instruments, rules and household debt: the effects of fiscal policy By Javier Andrés; J.E. Boscá; Javier Ferri
  5. A wedge in the dual mandate: monetary policy and long-term unemployment By Rudebusch, Glenn D.; Williams, John C.
  6. State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area By Daniel Gros; Cinzia Alcidi; Ansgar Belke; Leonor Coutinho; Alessandro Giovannini
  7. Unemployment, capital accumulation and labour market institutions in the Great Recession By Engelbert Stockhammer; Alexander Guschanski; Karsten Köhler
  8. Fiscal Stimuli in the Form of Job Creation Subsidies By Chun-Hung Kuo; Hiroaki Miyamoto
  9. The Predictive Performance of Fundamental Inflation Concepts: An Application to the Euro Area and the United States By Stephen McKnight; Alexander Mihailov; Kerry Patterson; Fabio Rumler
  10. Forecasting German Key Macroeconomic Variables Using Large Dataset Methods By Inske Pirschel; Maik Wolters
  11. The Misspecification of Expectations in New Keynesian Models: A DSGE-VAR Approach By Stephen Cole; Fabio Milani
  12. "Income Distribution Macroeconomics" By Olivier Giovannoni
  13. Issues in the Design of Fiscal Policy Rules By Jonathan Portes
  14. A Theory of Factor Shares By Sephorah Mangin
  15. NAIRU estimates in transitional economy with extremely high unemployment rate: the case of the Republic of Macedonia By Trpeski, Predrag; Tevdovski, Dragan
  16. Defense Government Spending Is Contractionary, Civilian Government Spending Is Expansionary By Roberto Perotti
  17. Corporate Saving in Global Rebalancing By Philippe Bacchetta; Kenza Benhima
  18. Pension Design with a Large Informal Labor Market: Evidence from Chile By Joubert, Clement
  19. Everybody Hurts: Banking Crises and Individual Wellbeing By Alberto Montagnoli; Mirko Moro
  20. The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates By Dixon, Robert; Lim, Guay C.; van Ours, Jan C.
  21. Long-Term Damage from the Great Recession in OECD Countries By Laurence M. Ball
  22. Macro Micro Model with a Post-Keynesian Perspective in the banking industry By Hyejin Cho
  23. How does macroprudential regulation change bank credit supply? By Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
  24. Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis By Robert E. Hall
  25. "What Do We Know About the Labor Share and the Profit Share? Part III: Measures and Structural Factors" By Olivier Giovannoni
  26. The Crisis of 1866 By Marc Flandreau; Stefano Ugolini
  27. Export and the Labor Market: a Dynamic Model with on-the-job Search By Suverato, Davide
  28. The economic recovery and monetary policy: the road back to ordinary By Williams, John C.
  29. Mortgage Default during the U.S. Mortgage Crisis By Thomas Schelkle
  30. Macroeconomic variables in financial distress: A non parametric method By Ben Jabeur Sami
  31. Inclusive Growth: What Future for the European Social Model? By Schmid, Günther
  33. Does Innovation Affect Credit Access? New Empirical Evidence from Italian Small Business Lending By Andrea Bellucci; Ilario Favaretto; Germana Giombini
  34. Stabilisation Policy -- Phillips before the `Phillips Curve' By Katherine Moos; K. Vela Velupillai
  35. The Changing Way We Pay: Trends in Consumer Payments By Crystal Ossolinski; Tai Lam; David Emery
  36. Institutional quality, macroeconomic stabilization and economic growth: a case study of IMF programme countries By Javed, Omer
  37. The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy By Lorenzo Caliendo; Fernando Parro; Esteban Rossi-Hansberg; Pierre-Daniel Sarte

  1. By: Tatiana Damjanovic (Exeter); Šar?nas Gird?nas (Exeter)
    Abstract: We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, zero lower bound, quantitative easing, money multiplier, loan to value ratio, collateral constraint, house prices
    JEL: E44 E51 E52 E58
    Date: 2014–05–17
  2. By: David Berger; Joseph Vavra
    Abstract: Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional patterns in PSID data as well as time-series patterns from aggregate durable spending.
    JEL: D91 E21 E32
    Date: 2014–05
  3. By: Alessia Paccagnini
    Abstract: The aim of this paper is to study how the macroeconomic impulses can affect the term structure during the Great Moderation. As novelty in the research strategy, we create a term-structure using three latent factors of the yield curve. A Nelson-Siegel Model is implemented to estimate the latent factors which correspond to the level, the slope, and the curvature of the yield curve. As policy implication, the interpolated term structure suggests us how all the macro shocks impact on the overall yield curve, even if the impact has a different magnitude across maturities.
    Keywords: Term structure of interest rates, yield curve, VAR, Factor Model
    JEL: G12 E43 E44 E58
    Date: 2014–06
  4. By: Javier Andrés (University of Valencia); J.E. Boscá (University of Valencia); Javier Ferri (University of Valencia)
    Abstract: In this paper, we look at the interplay between the level of household leverage in the economy and fiscal policy, the latter characterised by different combinations of instruments and rules. When the fiscal rule is defined on lump-sum transfers, government spending or consumption taxes, the impact multipliers of transitory fiscal shocks become substantially amplified in an environment of easy access to credit by impatient consumers, regardless of the primary instruments used. However, when the government reacts to debt deviations by raising distortionary taxes on income, labour or capital, the effects of household debt on the size of the impact output multipliers vanish or even reverse, no matter the primary fiscal instrument used. We also find that differences in multipliers between high and low indebtedness regimes belong basically to the short run, whereas the long-run multipliers associated with fiscal shocks are barely affected by the level of household debt in the economy. Finally, we find that fiscal shocks exert an unequal welfare effect on impatient and patient households that can even be of opposite signs. This points to non-negligible distributional impacts of alternative fiscal strategies, especially in economies with highly indebted households.
    Keywords: fiscal multipliers, household debt, distortionary taxes
    JEL: E24 E44 E62
    Date: 2014–10
  5. By: Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: In standard macroeconomic models, the two objectives in the Federal Reserve’s dual mandate—full employment and price stability—are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.
    Date: 2014–05
  6. By: Daniel Gros; Cinzia Alcidi; Ansgar Belke; Leonor Coutinho; Alessandro Giovannini
    Abstract: Two of the four macroeconomic adjustment programmes, Portugal and Ireland’s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    Keywords: Current account imbalance; Euro area; fiscal multiplier; investment; macroeconomic adjustment programme
    JEL: E22 E62 F32
    Date: 2014–04
  7. By: Engelbert Stockhammer (Kingston University); Alexander Guschanski; Karsten Köhler
    Abstract: The paper restates the post-Keynesian view of unemployment within a NAIRU framework. In the short run the private effective labour demand need not be downward sloping because of debt deflation and wage-led demand regimes. In the medium run the NAIRU will be endogenous because of the social norm character of wage setting and the supply-side effects of capital accumulation. Capital investment rather than labour market institutions is the crucial variable that explains changes in unemployment performance. We provide econometric evidence that the post-Keynesian view holds up well in the recession following the crisis 2008.
    Keywords: unemployment, NAIRU, Post Keynesian economics, panel analysis
    JEL: E12 E24 E25
    Date: 2014–05
  8. By: Chun-Hung Kuo (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: This paper examines the effects of fiscal stimuli in the form of job creation subsidies in a DSGE model with search frictions in the labor market. We consider two types of job creation subsidies: a subsidy to the cost of posting vacancies and a hiring subsidy. Our model demonstrates that qualitative effects of a vacancy cost subsidy are similar to those of a hiring subsidy. Quantitatively, however, the vacancy cost subsidy is more effective in lowering unemployment than the hiring subsidy. We also compute fiscal multipliers for both traditional increases in government spending and increases in job creation subsidies.
    Keywords: Fiscal Policy, Hiring Subsidy, Unemployment, Search and matching
    JEL: E24 E62 J64
    Date: 2014–05
  9. By: Stephen McKnight (Centro de Estudios Económicos, El Colegio de México); Alexander Mihailov (Department of Economics, University of Reading); Kerry Patterson (Department of Economics, University of Reading); Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: Does theory aid inflation forecasting? To date, the evidence suggests that there is no systematic advantage of theory-based models of inflation dynamics over their astructural counterparts. This study reconsiders the issue by developing a “semi-structural” forecasting procedure comprised of two key ingredients. First, a prediction for the cyclical component of inflation is obtained employing the concept of “fundamental inflation”. The latter is computed from a canonical two-country monetary model, either via estimation of the reduced-form parameters of the New Keynesian Phillips Curve by the generalized methods of moments, or via calibration of its structural parameters. The computation of fundamental inflation requires multistep forecasts for the model-implied cyclical inflation drivers, which we generate via respective auxiliary vector autoregressions. Second, a driftless random walk prediction is employed for the trend component of inflation, on which theory has little to say. Using quarterly data for both the United States and the Euro Area for the period 1970-2010, and rolling window re-estimation to accommodate gradual structural change, we find that such semi-structural inflation forecasts outperform conventional univariate forecasts at all examined horizons. Our results thus suggest that theory can indeed play an important role in forecasting inflation, when appropriately combined with relevant data-driven features.
    Keywords: fundamental inflation, New Keynesian Phillips Curve, inflation dynamics, predictive accuracy, money in the open economy, semi-structural forecasting
    JEL: C52 C53 E31 E37 F41 F47
    Date: 2014–05–29
  10. By: Inske Pirschel; Maik Wolters
    Abstract: We study the forecasting performance of three alternative large scale approaches using a dataset for Germany that consists of 123 variables in quarterly frequency. These three approaches handle the dimensionality problem evoked by such a large dataset by aggregating information, yet on different levels. We consider different factor models, a large Bayesian vector autoregression and model averaging techniques, where aggregation takes place before, during and after the estimation of the different models, respectively. We find that overall the large Bayesian VAR and the Bayesian factor augmented VAR provide the most precise forecasts for a set of eleven core macroeconomic variables, including GDP growth and CPI inflation, and that the performance of these two models is relatively robust to model misspecification. However, our results also indicate that in many cases the gains in forecasting accuracy relative to a simple univariate autoregression are only moderate and none of the models would have been able to predict the Great Recession
    Keywords: Large Bayesian VAR, Model averaging, Factor models, Great Recession
    JEL: C53 E31 E32 E37 E47
    Date: 2014–05
  11. By: Stephen Cole (Department of Economics, University of California-Irvine); Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper tests the ability of popular New Keynesian models, which are traditionally used to study monetary policy and business cycles, to match the data regarding a key channel for monetary transmission: the dynamic interactions between macroeconomic variables and their corresponding expectations. In the empirical analysis, we exploit direct data on expectations from surveys. To explain the joint evolution of realized variables and expectations, we adopt a DSGE-VAR approach, which allows us to estimate all models in the continuum between the extremes of an unrestricted VAR, on one side, and a DSGE model in which the cross-equation restrictions are dogmatically imposed, on the other side. Moreover, the DSGE-VAR approach allows us to assess the extent, as well as the main sources, of misspecification in the model. The paper's results illustrate the failure of New Keynesian models under the rational expectations hypothesis to account for the dynamic interactions between observed macroeconomic expectations and macroeconomic realizations. Confirming previous studies, DSGE restrictions prove valuable when the New Keynesian model is exempted from matching observed expectations. But when the model is required to match data on expectations, it can do so only by moving away, and hence substantially rejecting, DSGE restrictions. Finally, we investigate alternative models of expectations formation, including examples of extrapolative and heterogeneous expectations, and show that they can go some way toward reconciling the New Keynesian model with the data. Intermediate DSGE-VAR models, which avail themselves of DSGE prior restrictions, return to fit the data better than the unrestricted VAR. Hence, the results overall point to misspecification in the expectations formation side of the DSGE model, more than in the structural microfounded equations.
    Keywords: Modeling of expectations; DSGE models; Rational expectations; Observed survey expectations; Model misspecification; DSGE-VAR; Heterogeneous expectations
    JEL: C52 D84 E32 E50 E60
    Date: 2014–04
  12. By: Olivier Giovannoni
    Abstract: Recent research stresses the macroeconomic dimension of income distribution, but no theory has yet emerged. In this note, we introduce factor shares into popular growth models to gain insights into the macroeconomic effects of income distribution. The cost of modifying existing models is low compared to the benefits. We find, analytically, that (1) the multiplier is equal to the inverse of the labor share and is about 1.4; (2) income distribution matters mostly in the medium run; (3) output is wage led in the short run, i.e., as long as unemployment persists; (4) capacity expansion is profit led in the full-employment long run, but this is temporary and unstable.
    Keywords: Economic Growth; Income Distribution; Multiplier; Factor Share; Output Capacity; Instability
    JEL: D33 E25
    Date: 2014–06
  13. By: Jonathan Portes
    Abstract: Theory suggests that government should as far as possible smooth taxes and its recurrent consumption spending, which means that government debt should act as a shock absorber, and any planned adjustments in debt should be gradual. This suggests that operational targets for governments (e.g. for 5 years ahead) should involve deficits rather than debt, because such rules will be more robust to shocks. Beyond that, fiscal rules need to reflect the constraints on monetary policy, and the extent to which governments are subject to deficit bias. Fiscal rules for countries in a monetary union or fixed exchange rate regime need to include a strong countercyclical element. Fiscal rules should also contain a ‘knock out’ if interest rates hit the zero lower bound: in that case the fiscal and monetary authorities should cooperate to formulate a fiscal expansion package that allows interest rates to rise above this bound. In more normal times, the design of fiscal policy rules is likely to depend on the extent to which governments are subject to deficit bias, and the effectiveness of any national fiscal council. For example, governments that had not shown a history of deficit bias could aim to target deficits five years ahead (rolling targets), and these would not require cyclical adjustment. In contrast, governments that were more prone to bias could target a cyclically adjusted deficit at the end of their expected period of office. In both cases fiscal councils would have an important role to play, in ensuring plans were implemented in the first case and allowing for departures from target when external shocks occurred in the second. 
    Date: 2014–05
  14. By: Sephorah Mangin
    Abstract: This paper presents a theory of how factor income shares are determined in an environment with labor market frictions and heterogeneous firms. I assume neither a specific aggregate production function nor competitive factor markets. Instead, I first develop microfoundations for an aggregate production function that incorporates a frictional process of matching workers and firms. Wages are determined by Bertrand style competition between firms whose productivity levels are assumed to be Pareto-distributed. In the limiting case where the unemployment rate goes to zero, the aggregate production function is Cobb-Douglas and factor shares are constant. In general, however, the behavior of factor shares is driven by labor market conditions such as unemployment and workers’ reservation wage. I simulate the model and examine its predictions for factor shares in the U.S. during the period 1951-2010. The theory can explain much of the variation in factor shares from 1951 to 2003 but the sharp fall in labor’s share in around 2004-2005 remains puzzling.
    Keywords: Labor share, factor shares, aggregate production function, matching, unemployment, reservation wage, Cobb-Douglas, Pareto distribution, labor market frictions
    JEL: E23 E24 E25 D33 J64
    Date: 2014–04
  15. By: Trpeski, Predrag; Tevdovski, Dragan
    Abstract: The paper provides time-varying NAIRU estimates for Macedonian economy for the period 1998-2012, which were obtained using Ball and Mankiw (2002) approach and additionally supplemented with iterative procedure proposed by Ball (2009). The results revealed that the Macedonian NAIRU has the hump-shaped path: the estimated NAIRU is 23.5 percent in the second quarter of 1998, peaks at 28.3 percent in the last quarter of 2005 and falls to 23.6 percent in the last quarter of 2012. The estimation is based on the corrected LFS unemployment rate for the employment in the grey economy.
    Keywords: NAIRU, unemployment, inflation, Macedonia
    JEL: E24 J64
    Date: 2014–03–21
  16. By: Roberto Perotti
    Abstract: Impulse responses to government spending shocks in Standard Vector Autoregressions (SVARs) typically display "expansionary" features. However, SVARs can be subject to a "non-fundamentalness" problem. "Expectations - Augmented" VARs (EVARs), which use direct measures of forecasts of defense spending, typically display "contractionary" responses to a defense news shock. I show that, when properly specified, SVARs and EVARs give virtually identical results. The reason for the widespread, opposite view is that defense shocks have "contractionary" effects while civilian government spending shocks have "expansionary" effects. Existing EVARs and SVARs, however, include only total government spending. In addition, the former are typically estimated on samples that include WWII and the Korean war, when defense shocks prevailed, while the latter are estimated mostly on post-1953 samples, when civilian shocks prevailed.
    JEL: E62 H30 H60
    Date: 2014–05
  17. By: Philippe Bacchetta; Kenza Benhima
    Abstract: In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country.
    Keywords: Capital Flows; Credit Constraints; Global Imbalances; Financial Crisis
    JEL: E22 F21 F41 F44
    Date: 2014–05
  18. By: Joubert, Clement (University of North Carolina, 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 guaranteeing the same level of income in retirement, by increasing the rate at which the benefits taper off.
    Keywords: informality, pensions
    JEL: J24 J26 E21 E26 O17
    Date: 2014–05
  19. By: Alberto Montagnoli (Department of Economics, University of Sheffield, UK); Mirko Moro (Division of Economics, Stirling Management School, University of Stirling, UK)
    Abstract: We investigate whether banking crises affect individuals' subjective wellbeing (SWB) in eighteen European countries between 1980-2011. We address the potential endogeneity between banking crises and SWB by exploiting spatial and temporal differences in banking crises episodes. We find negative, robust, pronounced and highly persistent effects for events prior to 2007. The 2007-2008 crash lowered SWB in countries that had previously experienced a credit boom. Individuals living in regions hosting financial centres suffer bigger losses. Yet, the impact is similar across socio-demographic groups. These effects extend beyond changes in macroeconomic factors, wealth and fiscal policies: they are hidden psychological costs.
    Keywords: well-being; happiness; financial crises; banking crises; difference-in-differences; uncertainty
    JEL: D1 E44 G21 H0
    Date: 2014–05
  20. By: Dixon, Robert (University of Melbourne); Lim, Guay C. (University of Melbourne); van Ours, Jan C. (Tilburg University)
    Abstract: This paper presents an analysis of labour market dynamics, in particular of flows in the labour market and how they interact and affect the evolution of unemployment rates and participation rates, the two main indicators of labour market performance. Our analysis has two special features. First, apart from the two labour market states - employment and unemployment - we consider a third state - out of the labour force. Second, we study net rather than gross flows, where net refers to the balance of flows between any two labour market states. Distinguishing a third state is important because the labour market flows to and from that state are quantitatively important. Focussing on net flows simplifies the complexity of interactions between the flows and allows us to perform a dynamic analysis in a structural vector-autoregression framework. We find that a shock to the net flow from unemployment to employment drive the unemployment rate and the participation rate in opposite directions while a shock to the net flow from not in the labour force to unemployment drives the rates in the same direction.
    Keywords: net labour market flows, unemployment rate, participation rate
    JEL: E17 E24 J21 J64
    Date: 2014–05
  21. By: Laurence M. Ball
    Abstract: This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.
    JEL: E32 E65 E66
    Date: 2014–05
  22. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This article introduces the cascaded individual model of Post-keynesian economics. This differs from the representative agent model of the old-keynesian model mathematically and methodologically. The model builds from five assumptions containing original concepts: cascaded individuals, a social planner vs a regulator, aggregate deposits (stock) vs pyroclastic deposits (flow). Mainly, this Macro-Micro approach of Post-keynesian concepts suggests the regulation of the money flow. Then, this paper articulates fundamental concepts to solve problems of a sudden "micro" financial shock in the short run with the long run "macro" stabilization with a balanced perspective between macroeconomics and microeconomics.
    Keywords: macro micro model; Post-keynesian; banking industry; general equilibrium; endogenous money creation; representative agents; cascaded individuals; aggregate deposits; pyroclastic deposits; social planner; regulator; moral hazard problem
    Date: 2014–05–22
  23. By: Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
    Abstract: We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.
    JEL: E44 G01 G21 G28
    Date: 2014–05
  24. By: Robert E. Hall
    Abstract: The financial crisis and ensuing Great Recession left the U.S. economy in an injured state. In 2013, output was 13 percent below its trend path from 1990 through 2007. Part of this shortfall—2.2 percentage points out of the 13—was the result of lingering slackness in the labor market in the form of abnormal unemployment and substandard weekly hours of work. The single biggest contributor was a shortfall in business capital, which accounted for 3.9 percentage points. The second largest was a shortfall of 3.5 percentage points in total factor productivity. The fourth was a shortfall of 2.4 percentage points in labor-force participation. I discuss these four sources of the injury in detail, focusing on identifying state variables that may or may not return to earlier growth paths. The conclusion is optimistic about the capital stock and slackness in the labor market and pessimistic about reversing the declines in total factor productivity and the part of the participation shortfall not associated with the weak labor market.
    JEL: E22 E32 J21 J60 O4
    Date: 2014–05
  25. By: Olivier Giovannoni
    Abstract: Economic theory frequently assumes constant factor shares and often treats the topic as secondary. We will show that this is a mistake by deriving the first high-frequency measure of the US labor share for the whole economy. We find that the labor share has held remarkably steady indeed, but that the quasi-stability masks a sizable composition effect that is detrimental to labor. The wage component is falling fast and the stability is achieved by an increasing share of benefits and top incomes. Using NIPA and Piketty-Saez top-income data, we estimate that the US bottom 99 percent labor share has fallen 15 points since 1980. This amounts to a transfer of $1.8 trillion from labor to capital in 2012 alone and brings the US labor share to its 1920s level. The trend is similar in Europe and Japan. The decrease is even larger when the CPI is used instead of the GDP deflator in the calculation of the labor share.
    Keywords: Labor Share; Composition Effect; Income Inequality; Top Incomes; Purchasing Power
    JEL: D33 E24 E25
    Date: 2014–05
  26. By: Marc Flandreau; Stefano Ugolini (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The collapse of Overend Gurney and the ensuing Crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. We suggest that the Bank bolstered the resilience of the money market by monitoring leverage-building by money market participants and threatening exclusion from the discount window. When the Bank refused to bailout Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising the Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency.
    Keywords: Bagehot, Bank of England, Lending of last resort, Supervision, Moral hazard, Discount, Overend Gurney Panic, Baring.
    JEL: E58 G01 N13
    Date: 2014–05–26
  27. By: Suverato, Davide
    Abstract: This paper develops a two-sector, two-factor trade model with labor market frictions in which workers search for a job also when they are employed. On the job search (OJS) is a key ingredient to explain the response to trade liberalization of sectoral employment, unemployment and wage inequality. OJS generates wage dispersion and it leads to a reallocation of workers from less productive firms that pay lower wages to more productive ones. Following a trade liberalization the traditional selection effects are more severe than without OJS and the tradable sector experiences a loss of employment, while the opposite is true for the non tradable sector. Starting from autarky, the opening to trade has a positive effect on employment but it increases wage inequality. For an already open economy, a further increase of trade openness can, however, lead to an increase of unemployment. The dynamics of labor market variables is obtained in closed form. The model predicts overshooting at the time of implementation of a trade liberalization, then the paths of adjustment follow a stable transitional dynamics.
    Keywords: International Trade; Unemployment; Wage Inequality; Firm Dynamics
    JEL: F12 F16 E24
    Date: 2014–05–27
  28. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Association of Trade and Forfaiting in the Americas, San Francisco, May 22, 2014
    Keywords: Economic recovery;
    Date: 2014–05–22
  29. By: Thomas Schelkle
    Abstract: Which of the main competing theories of mortgage default can quantitatively explain the rise in default rates during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment is consistent with the evidence. In contrast a traditional frictionless default model predicts a too strong increase in default rates. The paper also provides micro-foundations for double-trigger behavior in a model where unemployment may cause liquidity problems for the borrower. Using this framework for policy analysis reveals that a mortgage crisis may be mitigated at a lower cost by relieving the liquidity problems of borrowers instead of bailing out lenders.
    Keywords: Mortgage default, mortgage crisis, house prices, negative equity
    JEL: E21 G21 D11
    Date: 2014–05–16
  30. By: Ben Jabeur Sami
    Abstract: A number of authors suggested that the impact of the macroeconomic factors on the incidence of the financial distress, and afterward in case of failure of companies. However, macroeconomic factors rarely, if ever, appear as variables in predictive models that seek to identify distress and failure; modellers generally suggest that the impact of macroeconomic factors has already been taken into account by financial ratio variables. This article presents a systematic study of this domain, by examining the link between the failure of companies and macroeconomic factors for the French companies to identify the most important variables and to estimate their utility in a predictive context. The results of the study suggest that several macroeconomic variables are strictly associated to the failure, and have a predictive value by specifying the relation between the financial distress and the failure.
    Keywords: financial distress, macroeconomic variable, partial least squares (PLS)
    JEL: E20 G33 C14
    Date: 2014–06–02
  31. By: Schmid, Günther (WZB - Social Science Research Center Berlin)
    Abstract: This essay starts, after a short introduction on the importance and dimensions of “inclusive growth”, with a brief empirical sketch on to what extent Europe has already succeeded with respect to this ambitious goal. The result is quite sobering and gives rise to the question: why is it so? The main part of this paper is devoted to answering this question by presenting a model based on the trade-off between comparable productive capacity (CPC) and flexibility. After the introduction of the monetary union, this trade-off sharpened for many EU member states whose CPC now falls below the fair level playing field. To compensate for the lack of comparable productive capacities, flexibility measures would be necessary (e.g. downward wage flexibility, regional mobility and cuts in social expenditures) to an extent which is unrealistic or would erode social cohesion and democracy. As alternative, the possible future role of the European Social Model could consist of the implementation of four strategies: First, investive social transfers, in particular by establishing a European Fund for Employment and Income Security (EIS) to strengthen the inclusive function and stabilisation impact of national unemployment insurance systems; second, protected flexibility, in particular the promotion of an internal functional flexibility through work sharing; third, investing in people, in particular by strengthening dual learning systems and by inducing mobility chains (making transitions pay); and fourth, efficient labour market regulation for better utilising existing capacities and restraining inefficient forms of flexibility. Examples for each strategy are presented to illustrate and stimulate the debate.
    Keywords: Europe, social policy, labour market policy, growth, inclusion, unemployment insurance
    JEL: E24 I31 J65 J83 O43 P16
    Date: 2014–05
  32. By: Ben Jabeur Sami
    Abstract: A number of authors suggested that the impact of the macroeconomic factors on the incidence of the financial distress, and afterward in case of failure of companies. However, macroeconomic factors rarely, if ever, appear as variables in predictive models that seek to identify distress and failure; modellers generally suggest that the impact of macroeconomic factors has already been taken into account by financial ratio variables. This article presents a systematic study of this domain, by examining the link between the failure of companies and macroeconomic factors for the French companies to identify the most important variables and to estimate their utility in a predictive context. The results of the study suggest that several macroeconomic variables are strictly associated to the failure, and have a predictive value by specifying the relation between the financial distress and the failure.
    Keywords: financial distress, macroeconomic variable, partial least squares (PLS)
    JEL: E20 G33 C14
    Date: 2014–06–02
  33. By: Andrea Bellucci; Ilario Favaretto; Germana Giombini
    Abstract: In this paper we analyze the access to credit of innovative firms on the price and non-price dimensions of bank lending. Using information from two datasets, we use a propensity score matching procedure to estimate the impact of the innovative nature of firms on: (a) loan interest rates; (b) the probability of having to post collateral; and (c) the probability of overdrawing. Our analysis reveals that banks trade off higher interest rates and lower collateral requirements for firms involved in innovative processes. Further, innovative firms have a lower probability of being credit rationed than their non-innovative peers.
    Keywords: innovative firms, interest rate, firm’s financing, relationship lending
    JEL: D82 E43 D40 G21
    Date: 2014–05
  34. By: Katherine Moos; K. Vela Velupillai
    Date: 2014
  35. By: Crystal Ossolinski (Reserve Bank of Australia); Tai Lam (Reserve Bank of Australia); David Emery (Reserve Bank of Australia)
    Abstract: The Reserve Bank of Australia's third Survey of Consumers' Use of Payment Methods was conducted in November 2013. The survey used a diary and end-of-survey questionnaire to collect data on the use of cash, cards and a range of other payment methods, both at the point of sale and via remote channels (online, mail and telephone). The 2013 data show that cash and cheque use has continued to fall. The use of cards has risen significantly, and there has also been an increase in the use of PayPal. The growth in the use of cards and the reduction in cash use are evident across households in all age and household income groups. The strong growth in remote payments is one contributor to the observed change in the use of cash and cards. However, the main contribution is from the increased use of cards at the point of sale, which is likely to reflect both growth in the availability of card terminals at merchants and changing consumer preferences as authentication methods have evolved. In particular, we find some indication that the adoption of contactless technology, which lowers the tender time of card payments at the point of sale, may have increased card use. The paper presents detailed information about the use of contactless card and smartphone payments by demographic group and payment type. It also provides an update on the payment of surcharges on card payments, including information about the value of card surcharges that were paid by consumers, and the payment of ATM fees.
    Keywords: method of payment; consumer payment choice; consumer survey; retail payment systems
    JEL: D12 D14 E42
    Date: 2014–06
  36. By: Javed, Omer
    Abstract: The current study is motivated by the overall lackluster performance of IMF programmes in recipient countries in terms of economic growth consequences, and tries to explore the relevance of institutional determinants (that have a positively significant role in improving institutional quality in IMF programme countries, in the first place) in enhancing real economic growth in IMF programme countries; as otherwise highlighted by New Institutional Economics literature for countries generally. Moreover, the study also investigates the impact of these determinants through the channel of macroeconomic stability. Based on a time period of 1980-2010 (coinciding with a duration of increasing number of IMF programmes), the results mainly validate that institutional determinants overall play a positive role in reducing macroeconomic instability, and through it, and also independently, enhance real economic growth.
    Keywords: Institutions; IMF programmes
    JEL: B52 F33
    Date: 2014–05–31
  37. By: Lorenzo Caliendo; Fernando Parro; Esteban Rossi-Hansberg; Pierre-Daniel Sarte
    Abstract: We study the impact of regional and sectoral productivity changes on the U.S. economy. To that end, we consider an environment that captures the effects of interregional and intersectoral trade in propagating disaggregated productivity changes at the level of a sector in a given U.S. state to the rest of the economy. The quantitative model we develop features pairwise interregional trade across all 50 U.S. states, 26 traded and non-traded industries, labor as a mobile factor, and structures and land as an immobile factor. We allow for sectoral linkages in the form of an intermediate input structure that matches the U.S. input-output matrix. Using data on trade flows by industry between states, as well as other regional and industry data, we obtain the aggregate, regional and sectoral elasticities of measured TFP, GDP, and employment to regional and sectoral productivity changes. We find that such elasticities can vary significantly depending on the sectors and regions affected and are importantly determined by the spatial structure of the US economy.
    JEL: E0 F1 F16 R12 R13
    Date: 2014–05

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