nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒06‒14
68 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The zero lower bound and endogenous uncertainty By Plante, Michael D.; Richter, Alexander; Throckmorton, Nathaniel
  2. Is India Ready for Flexible Inflation-Targeting? By Sen Gupta, Abhijit; Sengupta, Rajeswari
  3. Monetary/Fiscal Policy Mix and Agents' Beliefs By Francesco Bianchi; Cosmin Ilut
  4. Monetary policy, long real yields and the financial crisis By Moretti, Laura
  5. Gasoline Prices, Transport Costs, and the U.S. Business Cycles By Hakan Yilmazkuday
  6. Monetary Policy Transmission during Financial Crises: An Empirical Analysis By Tatjana Dahlhaus
  7. News, Housing Boom-Bust Cycles, and Monetary Policy By Birol Kanik; Wei Xiao
  8. International capital flows and the boom-bust cycle in Spain By in 't Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
  9. Information Aggregation in a DSGE Model By Tarek A. Hassan; Thomas M. Mertens
  10. Monetary policy effects on bank risk taking By Abbate, Angela; Thaler, Dominik
  11. Inflation Expectations and How it Explains the Inflationary Impact of Oil Price Shocks: Evidence from the Michigan Survey By Benjamin Wong
  12. The changing dynamics of US inflation persistence: A quantile regression approach By Tillmann, Peter; Wolters, Maik H.
  13. Imperfect Financial Markets and the Cyclicality of Social Spending By Maren Froemel
  14. The Financial and Macroeconomic Effects of OMT Announcements By Carlo Altavilla; Domenico Giannone; Michèle Lenza
  15. The financial accelerator and market-based debt instruments: A role for maturities? By Kühl, Michael
  16. Crowding Out and Crowding in within Keynesian Framework. Do We Need Any New Empirical Research Concerning Them? By Adam P. Balcerzak, Elzbieta Rogalska
  17. Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies By Enrique G. Mendoza; Linda L. Tesar; Jing Zhang
  18. Fiscal policies in Spain: Main stylises facts revisited By Francisco de Castro; Francisco Martí; Antonio Montesinos; Javier J. Pérez; A. Jesús Sánchez-Fuentes
  19. Carrying the (paper) burden: A portfolio view of systemic risk and optimal bank size By Bos J.W.B.; Lamers M.A.J.; Purice V.
  20. The Relationship between Inflation Targeting and Exchange Rate Pass-Through in Turkey with a Model Averaging Approach By Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
  21. Inflation Targeting in Latin America By Adolfo Barajas; Roberto Steiner; Leonardo Villar; César Pabón
  22. Monetary rules: theory and practice By Plosser, Charles I.
  23. A Time-Varying Approach of the US Welfare Cost of Inflation By Stephen M. Miller; Luis F. Martins; Rangan Gupta
  24. Cross Sectional Facts on Bank Balance Sheets over the Business Cycle By Osman Furkan Abbasoglu; Serife Genc; Yasin Mimir
  25. Macroprudential Policy Implementation in a Heterogeneous Monetary Union By Margarita Rubio
  26. Macroprudential framework:key questions applied to the French case. By Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
  27. Safe Asset Shortages and Asset Price Bubbles By Kosuke Aoki; Tomoyuki Nakajima; Kalin Nikolov
  28. The determinants of capital intensity in Japan and the U.S. By Dario Simon Judzik; Hector Sala Lorda
  29. Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data By John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
  30. Monetary policy options for mitigating the impact of the global financial crisis on emerging market economies. By Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
  31. The Dynamics of Employment Growth: New Evidence from 18 Countries By Chiara Criscuolo; Peter N. Gal; Carlo Menon
  32. Directed Technical Change and Capital Deepening: A Reconsideration of Kaldor’s Technical Progress Function By Schlicht, Ekkehart
  33. The evaluation of recession magnitudes in EU countries during the global financial crisis 2008-2010 By Mazurek, Jiří
  34. Complex endogenous dynamics in a one-sector growth model with differential savings By Fabio Tramontana; Viktor Avrutin
  35. Understanding the Cash Demand Puzzle By Janet Hua Jiang; Enchuan Shao
  36. A multi-market approach to measuring the cycle By Kenneth W Clements; Grace Gao
  37. The impact of sovereign and credit risk on interest rate convergence in the euro area By Ivo Arnold; Saskia van Ewijk
  38. The maximum debt-GDP ratio and endogenous growth in the Diamond overlapping generations model: Three overlapping generations are better than two By Mark Roberts
  39. International Reserves: Facing Model Uncertainty By Sona Benecka; Lubos Komarek
  40. Math matters: education choices and wage inequality By Andrew Rendall; Michelle Rendall
  41. Equity Return Predictability, Time Varying Volatility and Learning About the Permanence of Shocks By Daniel L. Tortorice
  42. Financial stability and monetary policy: happy marriage or untenable union? By Williams, John C.
  43. Perspectivas fiscales 2014-2018 By Leonardo Villar; David Forero; Roberto Steiner; Juan Camilo Medillín
  44. Dynemp: A Stata® Routine for Distributed Micro-data Analysis of Business Dynamics By Chiara Criscuolo; Peter N. Gal; Carlo Menon
  45. Two Decades of Structural Shifts in the Brazilian Labor Market: assessing the unemployment rate changes through stylized facts on labor supply and labor demand By Andre de Queiroz Brunelli
  46. Sunk Costs and the Measurement of Commercial Property Depreciation By Diewert, Erwin
  47. Employment Effects of the EU Temporary and Agency Workers Directive in Sweden By Westéus, Morgan
  48. A Note on How and Why Growth and Unemployment Go Hand in Hand in Developing Economies By Mandal, Biswajit; Mandal, Arindam
  49. An Equilibrium Foundation of the Soros Chart By Kano, Takashi; Morita, Hiroshi
  50. The People’s Republic of China’s Financial Markets : Are They Deep and Liquid Enough for Renminbi Internationalization? By Prince Christian Cruz; Yuning Gao; Lei Lei Song
  51. Optimum and Adequate Level of International Reserves By Gerencia Técnica
  52. Capital goods trade and economic development By Mutreja, Piyusha; Ravikumar, B.; Sposi, Michael J.
  53. Consideration on the single currency seen from a competitiveness perspective By Iordan-Constantinescu, Nicolae; Dusa, Silvia
  54. Inequality and growth in the context of the Mexican economy: Does inequality matter for growth? By Jorge Alberto Charles Coll
  55. Financial liberalization, Foreign Direct investment (FDI) and Economic Growth: A Panel Dynamic Data Validation By SAIEF EDDINE, AYOUNI; FAKHRI, ISSAOUI; SALEM, BRAHIM
  56. The idea of a social cycle By Callahan, Gene; Hoffmann, Andreas
  57. How the macroeconomic context impacts on attitudes to immigration: evidence from parallel time series By Joakim Ruist
  58. Firm Dynamics and Assortative Matching By Leland D. Crane
  59. The Stock of External Sovereign Debt: Can We Take the Data at ‘Face Value’? By Dias, Daniel A.; Richmond, Christine; Wright, Mark L. J.
  60. Monetary Regimes and EU Accession: Comparing Bulgaria and Romania By Nikolay Nenovsky; Kiril Tochkov; Camélia Turcu
  61. Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions By Benjamin B. Lockwood; Matthew Weinzierl
  62. Riesgo Agropecuario: Incidencia Económica e Innovaciones para su mitigación. El caso de Argentina. By Miguel, Fusco; Dario, Bacchini; Esteban Otto, Thomasz
  63. From Rome to Lisbon and Beyond: Member States' Power, Efficiency, and Proportionality in the EU Council of Ministers By Nikolaos Antonakakis; Harald Badinger; Wolf Heinrich Reuter
  64. International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth By Yavuz Arslan; Temel Taskin
  65. Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China By Naoyuki Yoshino; Sahoko Kaji; Tamon Asonuma
  66. Aspectos regionales de la movilidad social y la igualdad de oportunidades en Colombia By Luis Armando Galvis; Adolfo Meisel Roca
  67. Forecasting US Real Private Residential Fixed Investment Using a Large Number of Predictors By Goodness C. Aye; Rangan Gupta; Stephen M. Miller; Mehmet Balcilar
  68. The effects of a low interest rate environment on life insurers By Berdin, Elia; Gründl, Helmut

  1. By: Plante, Michael D. (Federal Reserve Bank of Dallas); Richter, Alexander (Auburn University); Throckmorton, Nathaniel (Indiana University)
    Abstract: This paper documents a strong negative correlation between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event the correlation was weak, even when conditioning on recessions. At the same time, many central banks reduced their policy rate to its zero lower bound (ZLB), which we contend contributed to the strong correlation between macroeconomic uncertainty and real GDP growth. To test that theory, we use a model where the ZLB occasionally binds. The model roughly matches the correlation in the data—away from the ZLB the correlation is weak but strongly negative when the ZLB binds.
    Keywords: monetary policy; uncertainty; economic activity; zero lower bound
    JEL: E32 E47 E58
    Date: 2014–05–21
  2. By: Sen Gupta, Abhijit; Sengupta, Rajeswari
    Abstract: In this paper we analyze whether the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards flexible inflation targeting. However we also find factors, which are traditionally outside the control of monetary policy do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.
    Keywords: Reserve Bank of India, Monetary Policy, Taylor Rule, Financial trilemma, Inflation, Nominal anchor, Fiscal deficit
    JEL: E43 E52 E58
    Date: 2014–06–04
  3. By: Francesco Bianchi; Cosmin Ilut
    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.
    JEL: C11 E31 E58
    Date: 2014–06
  4. By: Moretti, Laura
    Abstract: This paper investigates the role of monetary policy in the collapse in the long-term real interest rates in the decade before the onset of the financial crisis using a sample of five advanced economies (United States, United Kingdom, the euro area, Sweden and Canada). The results from an estimated panel VAR with monthly data show that, while monetary policy shocks had negligible effects on long-term real interest rates, shocks to the long-term real interest rates had a one-to-one effect on the short nominal rate. --
    Keywords: monetary policy,long-term real interest rates,panel VAR
    JEL: E43 E52 E58
    Date: 2014
  5. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: The e¡èects of gasoline prices on the U.S. business cycles are investigated. In order to distinguish between gasoline supply and gasoline demand shocks, the price of gasoline is endogenously determined through a transportation sector that uses gasoline as an input of production. The model is estimated for the U.S. economy using ?ve macroeconomic time series, including data on transport costs and gasoline prices. The results show that although standard shocks in the literature (e.g., technology shocks, monetary policy shocks) have significant effects on the U.S. business cycles in the long run, gasoline supply and demand shocks play an important role in the short run.
    Keywords: Business Cycles, Transport Costs, Gasoline Prices
    JEL: E32 E52 F41
    Date: 2014–06
  6. By: Tatjana Dahlhaus
    Abstract: This paper studies the effects of a monetary policy expansion in the United States during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (“normal” and high financial stress) depends on a financial conditions index. Employing a quarterly data set over the period 1970Q1 to 2009Q2 containing 108 U.S. macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption, and investment than it has during “normal” times. Differences in effects among the regimes seem to originate from non-linearities in the credit channel.
    Keywords: Econometric and statistical methods, Financial markets, Transmission of monetary policy
    JEL: C11 C32 E32 E44 G01
    Date: 2014
  7. By: Birol Kanik; Wei Xiao
    Abstract: We explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive accumulation of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and we consider how monetary policies should respond to it.
    Keywords: Business cycle; News; Monetary policy.
    JEL: E3 E4 E5
    Date: 2014
  8. By: in 't Veld, Jan (DG-ECFIN, EU Commission); Kollmann, Robert (ECARES, Université Libre de Bruxelles and CEPR); Pataracchia, Beatrice (JRC, EU Commission); Ratto, Marco (JRC, EU Commission); Roeger, Werner (DG-ECFIN, EU Commission)
    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: capital flows; boom-bust cycle; global financial crisis
    JEL: C11 E21 E32 E62
    Date: 2014–05–01
  9. By: Tarek A. Hassan; Thomas M. Mertens
    Abstract: We introduce the information microstructure of a canonical noisy rational expectations model (Hellwig, 1980) into the framework of a conventional real business cycle model. Each household receives a private signal about future productivity. In equilibrium, the stock price serves to aggregate and transmit this information. We find that dispersed information about future productivity affects the quantitative properties of our real business cycle model in three dimensions. First, households' ability to learn about the future affects their consumption-savings decision. The equity premium falls and the risk-free interest rate rises when the stock price perfectly reveals innovations to future productivity. Second, when noise trader demand shocks limit the stock market's capacity to aggregate information, households hold heterogeneous expectations in equilibrium. However, for a reasonable size of noise trader demand shocks the model cannot generate the kind of disagreement observed in the data. Third, even moderate heterogeneity in the equilibrium expectations held by households has a sizable effect on the level of all economic aggregates and on the correlations and standard deviations produced by the model. For example, the correlation between consumption and investment growth is 0.29 when households have no information about the future, but 0.41 when information is dispersed.
    JEL: C63 D83 E2 E3 E44 G11
    Date: 2014–06
  10. By: Abbate, Angela; Thaler, Dominik
    Abstract: The contribution of this paper is twofold. First, we provide empirical evidence on the existence of a risk-taking channel in the US economy. By identifying a Bayesian VAR through sign restrictions, we find that an expansionary monetary policy shock causes a persistent increase in proxies for bank risk-taking behaviour. We then develop a New Keynesian model with a risk-taking channel, where low levels of the risk free rates induce banks to extend credit to riskier borrowers. Conditional on calibration values, the simulated responses of key banking sector variables is compatible with the transmission mechanism observed in the data.
    Keywords: Bank Risk; Monetary policy; DSGE Models; Bayesian Analysis
    JEL: E12 E44 E58 C11
    Date: 2014
  11. By: Benjamin Wong
    Abstract: Analysis of the Michigan Survey data confirms U.S. inflation expectations are not perfectly anchored in the event of an oil price shock. Two key results emerge through counterfactual analysis. First, better anchoring of inflation expectations can ameliorate the mild inflation impact which occurs 10 to 12 months after an oil price shock. Second, an initial large burst of inflation from an oil price shock always occurs regardless whether inflation expectations are anchored or not. Therefore, while better anchoring of inflation expectations can lead to better inflation outcomes, these gains can be limited.
    Keywords: Oil price shocks, Michigan Survey, Inflation expectations
    JEL: C32 D84 E31
    Date: 2014–06
  12. By: Tillmann, Peter; Wolters, Maik H.
    Abstract: We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution. --
    Keywords: inflation persistence,quantile regressions,structural breaks,unit root test,monetary policy,Federal Reserve
    JEL: E31 E37 E58 C22
    Date: 2014
  13. By: Maren Froemel (Department of Economics, University of Konstanz, Germany)
    Abstract: I develop a novel link between frictions in international financial markets and fiscal procyclicality.Complementing existing evidence, A decomposition of government expenditure into social spending and public good spending reveals that the cyclical correlation of social spending exhibits the biggest differences across countries. I build a small open economy model with income inequality, endogenous fiscal policy and sovereign default risk to rationalize this spending procyclicality. Government spending, divided into a public good and social spending, is financed by taxation and external debt. External debt is subject to endogenous risk premia because the government cannot commit to repay its debt. The government conducts a procyclical tax and social spending policy when debt is in or close to the risky zone. Social spending then only redistributes income, failing to smooth private consumption over time. Far away from the crisis zone, fiscal policy is countercyclical, only public goods spending is always procyclical. Social spending is cut most when the government faces positive risk premia, because it is better a substitute of private income than public good spending. It also accounts for the largest part in fiscal adjustment: because taxes are distortionary and cannot be targeted well. Fiscal procyclicality becomes stronger with higher economic inequality as revenue raising through taxation becomes more costly.
    Keywords: Procyclical fiscal policy, default risk, income inequality, redistribution, emerging markets, social spending.
    JEL: E62 F34 F41
    Date: 2014–06–10
  14. By: Carlo Altavilla; Domenico Giannone; Michèle Lenza
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT)announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMTannouncements decreased the Italian and Spanish 2-year government bond yields by about 2percentage points, while leaving unchanged the bond yields of the same maturity in Germany andFrance. These results are used to calibrate a scenario in a multi-country model describing the macrofinanciallinkages in France, Germany, Italy, and Spain. The scenario analysis suggests that thereduction in bond yields due to OMT announcements is associated with a significant increase in realactivity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany.
    Keywords: outright monetary transactions; event study; news; multi-country vector autoregressive model
    JEL: E47 E58
    Date: 2014–06
  15. By: Kühl, Michael
    Abstract: This paper shows how the average maturity of corporate bonds can affect the transmission of shocks if financial frictions prevail. We modify a standard financial accelerator model à la Bernanke, Gertler, and Gilchrist (1999) and allow for market-based debt which has a market-determined price. Our results show that the average maturity of bonds is essential for the transmission of shocks. The dynamics are largely identical to the standard BGG model for shorter maturities, while the model behaves differently for longer maturities. In this case a prolongation channel becomes apparent which attenuates the original amplification mechanism. --
    Keywords: DSGE Model,Financial Frictions,Maturites,Financial Accelerator,Capital Market
    JEL: E3 E44 G3
    Date: 2014
  16. By: Adam P. Balcerzak, Elzbieta Rogalska (Nicolaus Copernicus University, University of Warmia and Mazury, Poland)
    Abstract: Last global financial crisis resulted in common among developed countries implementation of expansionary fiscal policy as an anti-recession tool. This led to the renewal of academic discussion on stabilization effectiveness of fiscal policy. In this context, the main research goal of this paper is to give theoretical analysis of the determinants of counter-cyclical effectiveness of fiscal policy with special concentration on crowding out and crowding in effects. Methodologically the analysis is done within Keynesian IS-LM framework within the assumption of expectations of economic actors. The theoretical analysis is confronted with the review of empirical papers based on the experiences of developed countries.
    Keywords: fiscal policy, crowding out, crowding in, stabilization policy
    JEL: E62 H31 H32
    Date: 2014–02
  17. By: Enrique G. Mendoza; Linda L. Tesar; Jing Zhang
    Abstract: What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.
    JEL: E6 E62 F34 F42 H6
    Date: 2014–06
  18. By: Francisco de Castro (European Comiission); Francisco Martí (Banco de España); Antonio Montesinos (Banco de España); Javier J. Pérez (Banco de España); A. Jesús Sánchez-Fuentes (Universidad Complutense de Madrid)
    Abstract: We provide key stylised facts on fiscal policy developments in Spain over the past three decades using quarterly data (1986Q1-2012Q2). First, we compute stylised facts on the cyclical properties of fiscal policies over that period. Next, we report updated evidence on the macroeconomic effects of non-systematic fiscal policies, including updated estimates of their macroeconomic impact (fiscal multipliers) for alternative datasets. To perform the analysis in the paper we built up a comprehensive database of seasonally adjusted quarterly fiscal variables for the period of interest.
    Keywords: fi scal policies, stylised facts, fiscal multipliers, mixed-frequencies, time-series models.
    JEL: E62 E65 H6 C3 C82
    Date: 2014–05
  19. By: Bos J.W.B.; Lamers M.A.J.; Purice V. (GSBE)
    Abstract: We examine the relationship between bank size and financial stability by viewing the supervisor of a banking system as an investor holding a portfolio of banks. Based on this view, we investigate the role of large banks in determining the systemic risk in this portfolio. Our results, based on book data of U.S. banks and Bank Holding Companies, indicate that the largest banks are consistently overrepresented in the current portfolio compared with the minimum variance portfolio. Moreover, the risk level of the portfolio can be reduced by limiting concentration without sacrificing returns.
    Keywords: Optimization Techniques; Programming Models; Dynamic Analysis; Financial Markets and the Macroeconomy; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
    JEL: C61 E44 E63 G21
    Date: 2014
  20. By: Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
    Abstract: Turkey, as an emerging economy, has a unique experience regarding to the relationship between the rate of inflation and the exchange rate. As opposed to developed countries, the effects of exchange rate fluctuations are felt significantly on inflation dynamics and these fluctuations also influence many other macroeconomic variables via different channels with different magnitudes in developing countries. Therefore, the main concern of the paper, which is to evaluate the exchange rate pass-through (ERPT), has an important role in the success of inflation targeting regime. Using correlation coefficients between exchange rates and inflation differentials, single equation regressions, vector auto-regressions (VAR) and Markov switching regression methods; the determinants of ERPT to producer and consumer prices are quantitatively analyzed between January 1986 and August 2013. Error correction models are used to estimate the exchange rate pass-through. According to the estimation results, it is found that, similar to other developing countries, there is a substantial degree of ERPT for Turkey the greater part of which is realized almost instantaneously. Comparing to the studies on industrial countries, it is found that ERPT is higher but there are additional transmission channels just like the other emerging economies. The higher degree of ERPT in Turkey is found in those studies conducted for industrialized countries implies that there are additional transmission channels for Turkey. ERPT for producer price-index-based inflation is found to be higher than for consumer-price-index-based inflation. We also found that the degree of ERPT increases as the data frequency falls. We also determined an asymmetry in pricing behavior : while exchange rates increase, this increase is passed on to prices, yet decreases in exchange rates. Estimation results also indicate that the main factors contributing to high pass-through are past currency crises and the high degree of openness of the economy. These factors are the basis for the indexation behavior of agents. Although, the aforementioned factors are the main determinants of the degree of exchange rate pass-through, the persistency and the volatility of exchange rates can significantly affect the short run dynamics of the pass-through. The results also imply that, even if the pass-through slows down due to changing pattern of exchange rates, in order to achieve a low and stable inflation in the long run, fundamental factors that exacerbate the link between exchange rates and prices should change. Another crucial point is that according to Markov switching regression results of ERPT coefficients of domestic prices, the exchange rate pass-through coefficients vary significantly between different states.
    Keywords: Monetary Policy, Inflation Targeting, Exchange Rate Pass-Through, Vector Autogression, Markov Switching Regression
    JEL: C22 C87 E30 E31 E59
    Date: 2014
  21. By: Adolfo Barajas; Roberto Steiner; Leonardo Villar; César Pabón
    Abstract: Examinamos cómo se ha llevado a cabo la política monetaria en los cuatro primeros países en adoptar inflación objetiva: Brasil, Chile, Colombia y Perú. En primer lugar, un enfoque de Markov Switching muestra que si bien los cuatro países presentan una gran estabilidad en sus respuestas a las brechas de inflación y producto, la mayoría han salido de esta regla en tiempos de crisis extrema. También encontramos evidencia de un enfoque de IO "extendida" o "integrado" en dos países, la tasa de política en respuesta a un tipo de cambio real o una brecha de crédito privado, este último posiblemente indicando problemas de estabilidad financiera. No encontramos evidencia de cambios en la credibilidad a través del tiempo. En segundo lugar, la intervención de la divisa es impulsada principalmente por desajustes de los tipos de cambio, en lugar de por la volatilidad del tipo de cambio o por un objetivo de reservas internacionales. Tal intervención generalmente responde con más fuerza a las apreciaciones que las depreciaciones, y no responde a la inflación. Por lo tanto, la IO en estos países hasta el momento se puede caracterizar como flexibles, coexistiendo con un grado de temor a la flotación y un objetivo de estabilidad financiera, ya sea integrado directamente en la regla política o complementarse con medidas macroprudenciales.
    Keywords: Inflation targeting; Markov Switching; Taylor rules; intervention in foreign exchange markets.Inflación objetivo, Markov switching, regla de Taylor, intervención en mercados de cambio extranjeros.
    JEL: E31 E52 E61
    Date: 2014–01–30
  22. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Frameworks for Central Banking in the Next Century Policy Conference, Hoover Institution, Stanford, CA President Plosser discusses his views on the benefits of a systematic, rule-like approach to monetary policy. He gave related remarks on May 28, 2014, at the 2014 Bank of Japan–Institute for Monetary and Economic Studies Conference.
    Keywords: Monetary policy; Forecasts; John Taylor;
    Date: 2014–06–02
  23. By: Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Luis F. Martins (ISCTE-IUL); Rangan Gupta (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. When we plug in the actual inflation rate series over the sample period, we find that the welfare cost of inflation lies in the range of 0.009 to 0.33 percent of GDP. 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
  24. By: Osman Furkan Abbasoglu; Serife Genc; Yasin Mimir
    Abstract: We investigate the cyclical behavior of banks' balance sheet variables for different size groups using bank-level Turkish data. We first rank banks based on the size of their assets, and then systematically document business cycle facts of various balance sheet items and profitability measures of different bank groups. We find that the cyclical behavior of these variables is quite heterogeneous at the cross-sectional level : (i) Bottom 25 percent banks finance 73 percent of their asset growth with equity while larger banks fund 55 percent of it with deposits, (ii) bank assets and bank credit are highly procyclical and the level of procyclicality is lower for larger banks, (iii) total deposits are procyclical except for top 25 percent and equity issuance is acyclical to countercyclical at best, (iv) loan spread is strongly countercyclical except for small banks while return on assets and equity are acyclical, and (v) switching between debt and equity financing is more pronounced for the top 25 percent and the aggregate banking sector compared to the bottom 25 percent and top 5 percent. The rich set of cross-sectional empirical facts about the cyclicality of bank balance sheets presented in this paper should be helpful for researchers to build and evaluate theoretical heterogeneous models about financing sources of banks.
    Keywords: Debt finance, Equity finance, Banking sector, Business cycle
    JEL: E44 E51 G21 G28
    Date: 2014
  25. By: Margarita Rubio
    Abstract: I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider four types of cross-country heterogeneity: asymmetric shocks, di¤erent loan-to-value ratios (LTV), different proportion of borrowers, and mortgage contract heterogeneity (…xed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the LTV which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers di¤erences in economic and …nancial volatilities. A centralized macroprudential policy is preferred if there is an asymmetric shock, to balance out the cross-country di¤erent …nancial volatilities. For the mortgage contract heterogeneity, the economy is better o¤ with a decentralized policy that compensates the lack of effectiveness of monetary policy in the …xed-rate country. For the LTV asymmetry and the di¤erent proportion of borrowers, conducting the macroprudential policy at a national or union level produces similar welfare gains.
    Keywords: Macroprudential, Housing market, LTV, monetary union, Â…nancial stability
    Date: 2014
  26. By: Bennani, T.; Després, M.; Dujardin, M.; Duprey, T.; Kelber, A.
    Abstract: This paper presents the main features of macroprudential policy with a focus on the French case. We first recall the ultimate objective of this policy, which is to prevent and to mitigate systemic risk, i.e. the risk of “widespread disruptions to the provision of financial services that have serious consequences for the real economy” (CGFS, 2012). We put forward two goals to achieve this ultimate objective, namely (i) increasing the resilience of the financial sector and (ii) leaning against the financial cycle. Then, in the context of the ongoing reflections on the organisation of macroprudential policy at the national and European level, we analyse the macroprudential institutional framework recently adopted in France. We discuss the instruments available to macroprudential authorities in light of the two main goals of macroprudential policy. Drawing on theoretical considerations and past experience, we favour a macroprudential toolkit broadly consistent with the European CRD IV/CRR package. Finally, we emphasise the need for macroprudential authorities to be able to monitor and detect systemic risk. To this end, several indicators and their reliability are analysed.
    Keywords: macroprudential policy, central bank, systemic risk, financial crisis
    JEL: E58 G28 G18 G01 C50
    Date: 2014
  27. By: Kosuke Aoki; Tomoyuki Nakajima; Kalin Nikolov
    Abstract: We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless safebubble assets to circulate at a positive price. Our environment features in…nitely lived individu-als who are not subject to credit constraints but who face uninsurable idiosyncratic production risk. Bubbly equilibria exist when safe assets offer real returns below the growth rate of the economy. Bubble assets circulate at a positive price only if they o¤er returns which are safe rel-ative to production returns. These safebubbles reduce consumption volatility but exert a contractionary e¤ect on the economy.
    Date: 2014–05
  28. By: Dario Simon Judzik (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Hector Sala Lorda (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: We estimate the determinants of capital intensity in Japan and the US, characterized by striking different paths. We augment an otherwise standard Constant Elasticity of Substitution (CES) model with demand-side considerations, which we find especially relevant in the US. In this augmented setting, the elasticity of substitution between capital and labor is placed around 0.85 in Japan, and 0.30 in the US. We also find evidence of biased technical change, which is capital-saving in Japan but labor-saving in the US. These differences help us explain the diverse experience in the capital deepening process of these economies, and lead us to conclude that demand-side drivers may also be relevant to account for different growth experiences. A close look at the nature of technological change is also needed before designing one-size-fits-all industrial, economic growth, and/or labor market policies.
    Keywords: Capital intensity, Biased technological change, Elasticity of substitution, Capacity utilization rate, Employment
    JEL: E22 E24 O33
    Date: 2014–05
  29. By: John Bagnall; David Bounie; Kim Huynh; Anneke Kosse; Tobias Schmidt; Scott Schuh; Helmut Stix
    Abstract: We measure consumers’ use of cash by harmonizing payment diary surveys from seven countries. The seven diary surveys were conducted in 2009 (Canada), 2010 (Australia), 2011 (Austria, France, Germany and the Netherlands), and 2012 (the United States). Our paper finds cross-country differences - for example, the level of cash usage differs across countries. Cash has not disappeared as a payment instrument, especially for low-value transactions. We also find that the use of cash is strongly correlated with transaction size, demographics, and point-of-sale characteristics such as merchant card acceptance and venue.
    Keywords: Bank notes, E-Money, Econometric and statistical methods, Financial services
    JEL: E41 D12 E58
    Date: 2014
  30. By: Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
    Abstract: Though the hypothesis that exchange rate regimes fully predetermine monetary policy in the face of external shocks hardly finds any advocates on theoretical ground it has crept in the most of empirical research. This study adopts a more discerning empirical approach that looks at monetary policy tools used in order to accommodate the recent financial crisis. We investigated the GDP growth in 45 emerging market economies in the most intense phase of the crisis and found out that there is no clear difference in the growth performance between countries at the opposite poles of the exchange rate regime spectrum. Depreciation cum international reserve depletion outperforms the other policy options, especially the rise in the interest rate spread. We discovered certain complementarities between the information on the policy option and on exchange rate regime. Taking into account non-Gaussian settings, we decided to use quantile regression, which provide in addition, more complete picture of relationship between the covariates and the distribution of the GDP growth.
    Keywords: Global financial crisis, Emerging market economies, Monetary policy, Exchange rate regime, Quantile regressions
    JEL: C21 E52 F31 F41
    Date: 2013–02–24
  31. By: Chiara Criscuolo; Peter N. Gal; Carlo Menon
    Abstract: Motivated by the on-going interest of policy makers in the sources of job creation, this paper presents results from a new OECD project on the dynamics of employment (DynEmp) based on an innovative methodology using firm-level data (i.e. national business registers or similar sources). It demonstrates that among small and medium sized enterprises (SMEs), young firms play a central role in creating jobs, whereas old SMEs tend to destroy jobs. This pattern holds robustly across 17 OECD countries and Brazil, extending recent evidence found in the United States. The paper also shows that young firms are always net job creators throughout the business cycle, even during the financial crisis. During the crisis, entry and post-entry growth by young firms were affected most heavily, although downsizing by old firms was responsible for most job losses. The results also highlight large cross-country differences in the growth potential of young firms, pointing to the role played by national policies in enabling successful firms to create jobs.
    Keywords: Business dynamics, employment growth, small businesses, business demography, startups, great recession, job creation and destruction
    JEL: D22 L26 E24 L25
    Date: 2014–06
  32. By: Schlicht, Ekkehart
    Abstract: This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor’s technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizsäcker (1966, 1966b). The hybrid model so obtained accounts for balanced growth in a way that appears less arbitrary than the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions.
    Keywords: directed technical change; directed technological change; bias in innovation; technical progress function; neoclassical production function; Harrod neutrality; Hicks neutrality; Cambridge theory of distribution; marginal productivity theory; Kaldor; Kennedy; von Weizsäcker; Solow model
    JEL: O30 O40 E12 E13 E25 B31 B59
    Date: 2014–03–17
  33. By: Mazurek, Jiří
    Abstract: The aim of the article is to compare 2008-2010 recessions in individual EU countries. For the comparison a new quantitative measure – recession magnitude scale – is used. The scale is derived from (negative) quarterly GDP growth rates during a recession and its duration. Moreover, recessions are classified on the basis of their magnitudes into one of four categories: minor, major, severe and ultra. The strongest recession (of severe category) took place in Latvia, Estonia, Lithuania and Ireland, while the majority of EU countries experienced recessions of major category. Magnitude of Greek recession will be evaluated after the end of the ongoing event. The weakest recessions in EU occurred in France, Malta and Cyprus (the only recession of minor category). A comparison of EU’s recession with the US Great Depression in the 1930s revealed that the recent crisis was more than eight times smaller than that of 1930s. Furthermore, it was found out that recession magnitudes in EU countries were positively correlated to the countries’ economic growth prior to the recession and this relationship was statistically significant at 0.01 level.
    Keywords: European Union, global financial crisis, recession, recession classification, recession magnitude.
    JEL: C23 E32 O52
    Date: 2014–07–05
  34. By: Fabio Tramontana (Department of Economics and Management, University of Pavia); Viktor Avrutin (DESP, University of Urbino and IST, University of Stuttgart, Germany)
    Abstract: We show that cyclic and chaotic dynamics may emerge in a Kaldor-Pasinetti growth model with different saving propensities, Leontief technology and logistic labor force growth rate.
    Keywords: One-sector growth model; logistic population growth; growth cycles
    JEL: O4
    Date: 2014–05
  35. By: Janet Hua Jiang; Enchuan Shao
    Abstract: We develop a model to explain a puzzling trend in cash demand in recent years: the value of bank notes in circulation as a percentage of GDP has remained stable despite decreasing cash usage at points of sale owing to competition from alternative means of payment such as credit cards. The main feature of the model is that cash circulates between economic activities where the substitutability between cash and other means of payment is uneven. Our model predicts that, once credit expands beyond a certain level, agents adjust their cash management practices in response to further credit expansions, causing the velocity of cash to slow down, so that the demand for cash can remain flat despite diminishing cash transactions.
    Keywords: Bank notes, Credit and credit aggregates, E-Money
    JEL: E41 E51
    Date: 2014
  36. By: Kenneth W Clements (Business School, University of Western Australia); Grace Gao (Bankwest Curtin Economics Centre, Curtin Business School)
    Abstract: At any given instance there are many indicators of the state of the economy, or the state of a sector, and frequently the signals are mixed – some may point to an expansion, others to a contraction, for example. We consider how best to combine this conflicting information into an overall index of economic conditions. This index plays the role of the “underlying cycle” that has the property of minimizing the distortionary impact of noise in the n individual signals. This is essentially the panel regression approach of Stock and Watson (2010). We elaborate and evaluate this rich approach, note its links to stochastic-index-number theory and suggest new interpretations, modifications and extensions. The approach is illustrated with the world prices of six important metals.
    Keywords: business cycles, Index numbers and aggregation, panel data models.
    JEL: C23 C43 E32
    Date: 2014–06
  37. By: Ivo Arnold; Saskia van Ewijk
    Abstract: This paper employs a time-varying parameter state space model to explore the impact of the crisis on bank retail rates in the euro area. We show that σ-convergence in interest rates has been adversely affected by the crisis and quantify the role of sovereign and credit risk as two alternative explanations for the increase in financial fragmentation. A key finding is that the heterogeneity in sovereign risk across member states accounts for a sizable part of the increase in the cross-sectional dispersion of various lending and deposit rates. In contrast, the impact of the increased heterogeneity in credit risk on bank retail rates is negligible. Our results suggest that efforts to reduce sovereign tensions - as exemplified by the ECB's OMT program - may help to reduce financial fragmentation.
    Keywords: bank retail rates; σ-convergence; sovereign risk; credit risk; state space model
    JEL: E43 G21 H63
    Date: 2014–06
  38. By: Mark Roberts
    Abstract: While the public debt has an interior maximum in the Diamond OLG model, due to an inherent nonlinearity [Rankin and Roffia (2003)], this feature also extends to a linear, AK model when it is conjoined with a backward-looking adjustment process for public debt [Braeuninger (2005)]. We show that if the debt dynamics are forward-looking, the maximum will instead be at a degeneracy – another possibility considered by Rankin and Roffia. However, the main point of the present paper is to show that any debt maximum in a finite-horizon model will be of an implausibly low order of magnitude, unless households save over at least two periods. This is because it is the debt flow that crowds-out investment flows, while this is synonymous with the debt stock in a model with only two, non-altruistic, overlapping generations, thus leading to a low maximum stock by default. Removing this restriction produces plausible results, and causes a low rate of economic growth to be a cause as well as a consequence of a high public debt.
    Keywords: Public debt, endogenous growth, primary deficit/surplus, dynamics, bifurcation, degeneracy, backward-looking, forward-looking
    Date: 2014
  39. By: Sona Benecka; Lubos Komarek
    Abstract: The abundant literature on the competing motives for holding international reserves stresses different factors, giving rise to a problem called model uncertainty. In this paper we search for the most important determinants of reserve holdings using data for 104 countries in 1999–2010 and evaluate their importance using Bayesian model averaging (BMA). We enrich the ongoing empirical discussion by examining the role of financial globalization and monetary policy and by introducing new variables and searching for alternatives to the traditional ones. The results confirm that trade openness and the broad-money-to-GDP ratio are the key determinants with a positive link to the level of reserves. On the other hand, financial development seems to lower the need for reserves.
    Keywords: Bayesian model averaging, determinants, international reserves
    JEL: C23 E58 F41
    Date: 2014–03
  40. By: Andrew Rendall; Michelle Rendall
    Abstract: SBTC is a powerful mechanism in explaining the increasing gap between educated and uneducated wages. However, SBTC cannot mimic the US within-group wage inequality. This paper provides an explanation for the observed intra-college group inequality by showing that the top decile earners' significant wage growth is underpinned by the link between ex ante ability, math-heavy college majors and highly quantitative occupations. We develop a general equilibrium model with multiple education outcomes, where wages are driven by individuals' ex ante abilities and acquired math skills. A large portion of within-group and general wage inequality is explained by math-biased technical change (MBTC).
    Keywords: Wage inequality, SBTC, college majors, occupations, mathematics abilities
    JEL: E20 E24 E25 I20 I24 J24 J31
    Date: 2014–05
  41. By: Daniel L. Tortorice (International Business School, Brandeis University)
    Abstract: I consider a consumption based asset pricing model where the consumer does not know if shocks to dividends are stationary (temporary) or non-stationary (permanent). The agent uses a Bayesian learning algorithm with a bias towards recent observations to assign probability to each process. While the true process is stationary, the consumer's beliefs change as he misinterprets a drift in dividends from their steady state value as an increased likelihood that the dividend process is non-stationary. Belief changes result in large swings in asset prices which are subsequently reversed. The model then is consistent with a broad array of asset pricing puzzles. It predicts the negative correlation between current returns and future returns and the PE ratio and future returns. Consistent with the data, I also find that consumption growth negatively correlates with future returns and the PE ratio and consumption growth forecast future consumption growth. The model amplifies return volatility over the benchmark rational expectations case and exactly matches the standard deviation of consumption. Finally, the model generates time varying volatility consistent with the data on quarterly equity returns.
    Keywords: Consumption, Savings, Asset Pricing, Learning, Expectations
    JEL: D83 D84 E21 G12
    Date: 2014–05
  42. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Deutsche Bundesbank Conference, Eltville am Rhein, Germany, June 5, 2014
    Date: 2014–06–05
  43. By: Leonardo Villar; David Forero; Roberto Steiner; Juan Camilo Medillín
    Abstract: Desde el año 2004 el Ministerio de Hacienda publica anualmente el Marco Fiscal de Mediano Plazo (MFMP) en el cual se presentan las proyecciones oficiales sobre ingresos y gastos del gobierno central para los siguientes diez años. Como es de esperar, dichas proyecciones están sujetas a altos grados de incertidumbre, razón por la cual resulta indispensable evaluar sus principales vulnerabilidades. La presente edición de Cuadernos de Fedesarrollo, elaborada con ocasión de los Debates Presidenciales de 2014, contiene dos documentos relacionados con las disyuntivas que deberá enfrentar la próxima administración ante escenarios alternativos desde el punto de vista fiscal. El propósito del primer documento, elaborado por Leonardo Villar y David Forero, es analizar la sensibilidad de las proyecciones fiscales de Colombia frente a posibles cambios en el ámbito internacional y a incrementos potenciales del gasto público provenientes de intervenciones necesarias, y deseables, de política pública. Esas sensibilidades permiten concluir que la brecha fiscal será del orden del 2,1% del PIB en un escenario externo benevolente. Dicha brecha podría ampliarse hasta cerca del 3% del PIB si las circunstancias internacionales implican precios más bajos del petróleo o tasas de interés externas mayores a las que se suponen en el MFMP. El segundo documento, elaborado por Roberto Steiner y Juan Camilo Medellín, plantea elementos para la reforma tributaria que será indispensable para cubrir los faltantes fiscales mencionados. La reforma propuesta avanza sobre los cambios introducidos en 2012, profundizando en sus aciertos y corrigiendo sus desaciertos. Los elementos planteados por los autores no se guían únicamente por afanes fiscalistas, sino por la búsqueda de un sistema tributario más equitativo, eficiente y lo menos distorsivo posible.
    Keywords: Política fiscal; Inversión pública; Infraestructura; Gasto público; Acuerdo de paz; Economía rural; Reforma tributaria; Impuestos
    JEL: H10 H20 H30 E62 H54
    Date: 2014–04–30
  44. By: Chiara Criscuolo; Peter N. Gal; Carlo Menon
    Abstract: This paper introduces a new Stata® command, dynemp, which implements a distributed micro-data analysis of business and employment dynamics and firm demographics. The data source it requires are business registers or comparable firm- or establishment- level longitudinal databases which cover the (near-) universe of companies in all business sectors. Access to such confidential data is usually restricted and the micro-level data cannot be brought together to a single platform for cross-country analysis. To solve this confidentiality problem while also maintaining a high level of harmonisation of the key economic concepts (gross job flows, growth rates of employment, definition of high-growth firms, etc.), dynemp can be distributed in a network of researchers who have access to the national confidential microdata. In such manner, the rich firm-level employment dynamics can be analysed from new angles (such as firm age and size), significantly expanding the scope of the analysis insofar possible using more aggregated data.
    Keywords: Employment dynamics, job flows, firm demographics
    JEL: D22 L26 E24 L25
    Date: 2014–06
  45. By: Andre de Queiroz Brunelli
    Abstract: This paper aims at dissecting how stylized facts of labor supply and labor demand may explain the aggregate unemployment rate developments from 1992 to 2012 using a household level data (PNAD/IBGE) for Brazil as a whole and for its six main metropolitan regions. The conclusions follow. The main stylized fact regarding labor supply is the aging process of the labor force. It lessened the aggregate unemployment rise during the 1990’s by about 20% both in the entire country and in the metropolitan regions and strengthened the unemployment fall by about 30% in Brazil as a whole and by around 20% in the metropolitan regions during the 2000’s. With respect to labor demand, the main stylized facts are that the relative prices have favored the non-tradable sectors, which in addition has shown the most significant rise of the marginal productivity of labor in the last two decades. We argue that it affected sectorial reallocation of employment, which in turn has a negative effect on aggregate unemployment rate conditional on GDP growth. It thus is consistent with the argument which states that employment migrated from tradable sectors towards non-tradable sectors, which are more labor intensive sectors. Besides conventional business cycle changes, which explain the bulk of the actual aggregate unemployment rate developments, the answer to why the aggregate unemployment rate has become so much lower in Brazil is that population has become older and also that the sectorial profile of employment has become increasingly non-tradable
    Date: 2014–02
  46. By: Diewert, Erwin
    Abstract: This paper develops a new framework for measuring prices and quantities of commercial properties. In particular, it addresses problems associated with obtaining separate estimates for the land and structure components of a property. A key contribution is to address the problem of estimating structure depreciation taking into account the fixity of the structure. We find that structure depreciation is determined primarily by the cash flows that the property generates rather than physical deterioration of the building.
    Keywords: Property price indexes, net operating income, discounted cash flow, System of National Accounts, Balance Sheets, land and structure prices, goodwill a
    JEL: C2 C23 C43 D12 E31 R21
    Date: 2014–06–04
  47. By: Westéus, Morgan (Department of Economics, Umeå School of Business and Economics)
    Abstract: This paper analyses possible effects on total employment, and the distribution between agency work and regular contracts as a consequence of the implementation of the EU Temporary and Agency Workers Directive in Sweden in a dual labour market Mortensen-Pissarides search model. The directive states that the agency worker compensation must be equal to the compensation for similar work at the client firm, and that all parties should actively facilitate the transition from agency employment to employment directly at the firm. The results suggest an overall negative net effect on total employment, but also that an increased transition into regular employment from the agency sector could help to offset this effect.
    Keywords: Labour law; EU directive implementation; temporary agency work; unemployment
    JEL: E24 J21 J42 J48 J64 K31
    Date: 2014–06–11
  48. By: Mandal, Biswajit; Mandal, Arindam
    Abstract: This paper develops a very simple model to explain the phenomenon of persistent unemployment even in an economy experiencing high output growth. Unemployment will also grow at a rate identical with other factors and sectors. The result is primarily triggered by pre-fixed minimum wage rate for unskilled workers. To corroborate our claim we have checked it for twelve developing countries and found empirical results quite consistent with theoretical apprehension. In deciding on desired rate of growth in different sectors to mitigate or reduce unemployment history becomes crucial.
    Keywords: Growth, Unemployment, General Equilibrium
    JEL: D5 E24 O40
    Date: 2014
  49. By: Kano, Takashi; Morita, Hiroshi
    Abstract: The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is its near random-walk behavior sharing a common stochastic trend with the monetary base differential, which is augmented by the excess reserves, between Japan and the United States. In this paper, we develop a simple two-country incomplete-market model equipped with a specification of domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent I(1) component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate.
    Keywords: Japanese yen/U.S. dollar exchange rate, Soros chart, Random walk, Bayesian analysis
    JEL: E31 E37 F41
    Date: 2014–05–29
  50. By: Prince Christian Cruz (Asian Development Bank Institute (ADBI)); Yuning Gao; Lei Lei Song
    Abstract: Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions. The paper also compares the PRC’s financial markets with those in developed and emerging economies, contemporaneously and historically. The paper finds that the PRC’s financial markets are not as deep and liquid as those in developed economies, and are much less so than those with international currencies. To support the internationalization of the renminbi, the PRC needs to remove several major obstacles to deepen its financial markets and improve their liquidity conditions.
    Keywords: financial market, financial development, financial depth, market liquidity, Currency Internationalization
    JEL: E4 E5
    Date: 2014–04
  51. By: Gerencia Técnica
    Abstract: When managing international reserves, central banks generally face the problem of determining what their optimum or adequate level is. A critical review of some methodologies for calculating the optimum amount of reserves is presented in this document. Also, a combination of international liquidity indicators is shown to shed light on the proper level of international reserves, based on a method recently proposed by the International Monetary Fund (IMF). Different exercises are used to illustrate the high sensitivity of the optimum level or reserves when feasible variations in the models’ parameters are considered. In addition, these models rely on the questionable assumption that the country has a level of short term external liabilities that is independent of the level of reserves. These factors significantly limit the practical usefulness of these models in assessing the adequate level of international reserves
    Keywords: International reserves, optimum level.
    JEL: E58 F32
    Date: 2014–05–13
  52. By: Mutreja, Piyusha (Syracuse University); Ravikumar, B. (Federal Reserve Bank of St. Louis); Sposi, Michael J. (Federal Reserve Bank of Dallas)
    Abstract: Almost 80 percent of capital goods production in the world is concentrated in 10 countries. Poor countries import most of their capital goods. We argue that international trade in capital goods has quantitatively important effects on economic development through two channels: (i) capital formation and (ii) aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth model. Barriers to trade result in a misallocation of factors both within and across countries. We calibrate the model to bilateral trade flows, prices, and income per worker. Our model matches several trade and development facts within a unified framework. It is consistent with the world distribution of capital goods production, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods and marginal product of capital. The cross-country income differences decline by more than 50 percent when distortions to trade are eliminated, with 80 percent of the change in each country’s income attributable to change in capital. Autarky in capital goods results in an income loss of 17 percent for poor countries, with all of the loss stemming from decreased capital.
    Keywords: trade; capital; investment; economic development
    JEL: E22 F11 O11 O4
    Date: 2014–05–01
  53. By: Iordan-Constantinescu, Nicolae; Dusa, Silvia
    Abstract: Competitiveness is a concept referred to as a sine qua non condition of growth, at both micro and macroeconomic level. But there are few approaches looking at the single currency as an instrument of competitiveness measuring and promotion. The single currency represents a right step in the development of the integration process, contributing decisively to the accomplishment of the single market by enabling fluid and efficient financial relations among states, institutions and persons, but also by promoting and asserting the EU objectives of competitiveness and so acting as a binder for a sustainable and healthy development. The adoption of the single currency represents a step towards getting an increased level of competitiveness in national and international relations, as the conditions for joining the single currency imposed both to the member and candidate states to implement programs synergic with those included in their own strategies of competitiveness and subsequently they were presumed to accomplish objectives provided for by such strategies. Even if in the present and immediate periods euro and the euro zone will be subject to strong domestic and international pressure, we are convinced that the single currency will survive such trials and the necessary lessons will be learned, first of all by a more attentive consideration of competitiveness as the proper foundation for the existence and functioning of a healthy and strong single currency!
    Keywords: competitiveness, economic growth, euro, convergence , monetary policy, sustainability
    JEL: E52 F36 O52 P16
    Date: 2014–04
  54. By: Jorge Alberto Charles Coll (Universidad Autonoma de Tamaulipas)
    Abstract: This paper contributes to the debate over the relationship between inequality and inclusive growth by testing the proposition of a kinked-non linear relationship between income inequality and economic growth in a country specific context. The proposition is first confirmed with a wide panel dataset of 138 countries, using the Kuznets hypothesis as a vehicle of validation. Then, the non linearity is contrasted for the Mexican economy using a highly disaggregated dataset at the municipal level. An inverted ``U'' shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth, while high levels have a negative one. Additionally, and more importantly, it is demonstrated the existence of an optimal rate of inequality (ORI) that maximizes growth rates and releases the economy from any distortion generated by elevated inequality or taxation. It is confirmed that inequality does matter for growth, governments that wish to promote economic growth should incorporate redistributive policies not only as a part of the social agenda but as an important element of the growth strategy.
    Keywords: Inequality, Growth, Redistribution, Optimal Rate of Inequality.
    JEL: O15 D31 D33 E25
    Date: 2014–05
    Abstract: The aim of this study is to show that financial liberalization, as a determinant of financial development, can stimulate the relationship between foreign direct investment (FDI) and economic growth. Two distinct components have been analyzed. The first one is a theoretical component in which we tried to treat the relationship between financial development, internal financial liberalization, and FDI using an endogenous growth model. The second component consists of an empirical study which tried using a panel data to validate the previously stated theoretical relationship. The survey, covering a sample of sixty nine developed and developing countries enabled us to reach three fundamental results. First, when financial systems are non-liberalized, we have noted that FDIs had a negative effect on GDP growth per capita. Second, when FDIs are implemented in countries characterized by their developed financial sector they generate positive effects on growth. This implies that the key variable which determines FDI efficiency is the degree of financial systems liberalization. Consequently, in non-liberalized financial systems FDIs effects on growth are challenged. Third, we showed that financial development level is a strategic variable which positively affects growth
    Keywords: financial liberalization, Foreign Direct investment, GMM system
    JEL: E61 F3 F37 G1
    Date: 2014–06–01
  56. By: Callahan, Gene; Hoffmann, Andreas
    Abstract: The paper aims to explore what it means for something to be a social cycle, for a theory to be a social cycle theory, and to offer a suggestion for a simple, yet, we believe, fundamentally grounded schema for categorizing them. We show that a broad range of cycle theories can be described within the concept of disruption and adjustments. Further, many important cycle theories are true endogenous social cycle theories in which the theory provides a reason why the cycle should recur. We find that many social cycle theories fit with a two-population disruption and adjustment model similar to the well-known predator-prey model. This implies that a general modeling framework could be established for creating agent-based models of many social cycle theories. --
    Date: 2014
  57. By: Joakim Ruist (University of Gothenburg)
    Abstract: This study investigates the effects of the macroeconomic context on attitudes to immigration. Earlier studies do in most cases not provide significant empirical support for the existence of important such effects. In this article it is argued that this lack of consistent evidence is mainly due to the cross-national setup of these studies being vulnerable to estimation bias caused by country-specific factors. The present study instead analyzes attitude variation within countries over time, using parallel time series from 23 European countries that were observed biannually 2002-2012 in the European Social Survey. The results provide firm empirical support in favor of macroeconomic variation importantly affecting attitudes to immigration. As an illustration, the estimates indicate that the number of individuals in the average European country in 2012 who were against all immigration from poorer countries or of foreign ethnicities was 40% higher than it would have been if macroeconomic conditions in that year had been as good as they were in 2006.
    Keywords: attitudes, immigration, macroeconomics, time series
    JEL: F22 E32 J15
    Date: 2014–06
  58. By: Leland D. Crane
    Abstract: I study the relationship between firm growth and the characteristics of newly hired workers. Using Census microdata I obtain a novel empirical result: when a given firm grows faster it hires workers with higher past wages. These results suggest that productive, fast-growing firms tend to hire more productive workers, a form of positive assortative matching. This contrasts with prior research that has found negligible or negative sorting between workers and firms. I present evidence that this difference arises because previous studies have focused on cross-sectional comparisons across firms and industries, while my results condition on firm characteristics (e.g. size, industry, or firm fixed effects). Motivated by the empirical findings I develop a search model with heterogeneous workers and firms. The model is the first to study worker-firm sorting in an environment with worker heterogeneity, firm productivity shocks, multi-worker firms, and search frictions. Despite this richness the model is tractable, allowing me to characterize assortative matching, compositional dynamics and other properties analytically. I show that the model reproduces the positive firm growth-quality of hires correlation when worker and firm types are strong complements in production (i.e. the production function is strictly log-supermodular).
    Keywords: Assortative Matching, Firm Growth, Wages, Unemployment, Vacancies, Search Theory, Microdata
    JEL: E24 J31 J63 J64
    Date: 2014–05
  59. By: Dias, Daniel A. (University of Illinois at Urbana-Champaign); Richmond, Christine (University of Illinois at Urbana-Champaign); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum of future principal repayments, face values are misleading when debts are issued with different contractual forms or maturities. In this paper, we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity. We show that our alternative measures: (1) paint a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt; (2) often invert rankings of indebtedness across countries, which historically defined eligibility for debt forgiveness; (3) indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50% once model-consistent measures of debt are used; (4) show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts; and (5) illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values.
    Keywords: Stocks; Sovereign debts
    JEL: E01 F30 F34 H63
    Date: 2014–05–09
  60. By: Nikolay Nenovsky (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique; LE STUDIUM LE STUDIUM - 3D avenue de la Recherche scientifique 45071 Orléans Cedex 2 FR, Centre National de la Recherche Scientifique); Kiril Tochkov (TCU Texas Christian University - Department of Economics Texas Christian University TCU Box 298510 Fort Worth, TX 76129, USA FR, University of Texas Christian); Camélia Turcu (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique)
    Abstract: This paper traces the origins of the different monetary regimes adopted in Bulgaria and Romania in 1996-97 and examines their performance during the EU accession. The findings indicate that the constraints of the currency board in Bulgaria shifted economic activity towards the private sector, while the discretionary policies in Romania turned public finances into both a contributor and a response mechanism to economic imbalances. While the prospects of EU accession initially enhanced the performance of the monetary anchors, the implicit insurance of EU membership increased moral hazard and led to a rapid rise in private and public debt. The paper also explores the historical parallels between the monetary regimes of Bulgaria and Romania in 1996-97 and 1925-1940.
    Keywords: Post-communist transition, Monetary regimes, EU accession, Moral hazard, Interwar monetary history
    Date: 2013
  61. By: Benjamin B. Lockwood (Harvard University); Matthew Weinzierl (Harvard Business School, Business, Government and the International Economy)
    Abstract: We use official data and standard optimal tax conditions to infer the positive and normative judgments implicit in U.S. tax policy since 1979. We find that explanations within this framework for the time path of U.S. policy require central parameters of the model, namely the elasticity of taxable income or the marginal social welfare weights on top earners, to take unconventional values. We use inferred social preferences to provide novel estimates of the welfare costs of unequal growth and recessions and find that they are sensitive to the assumed distortionary costs of taxation and the year from which preferences are derived. We explore several possible explanations for our findings with available data.
    Date: 2014–06
  62. By: Miguel, Fusco; Dario, Bacchini; Esteban Otto, Thomasz
    Abstract: The aim of this paper is to summarise a variety of dimensions of agricultural risk in Argentina and to propose different lines of research related to an integrated risk management framework at the macro and micro levels. First, we analyse the incidence of the primary sector in the Argentinean economy, to have one first dimension of the exposure to external shocks. Then, we present some major risks that affect small agricultural producers at a micro level. Finally, we introduce some financial innovations that reduce climate and price risk exposure, such as weather derivatives and index-based insurances.
    Keywords: agricultural risk, macroeconomic vulnerability, financial innovations, index-based insurances
    JEL: E61 G22 Q12 Q14
    Date: 2014–06–03
  63. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business; Department of Economics and Finance, University of Portsmouth); Harald Badinger (Department of Economics, Vienna University of Economics and Business; Austrian Institute of Economic Research (WIFO)); Wolf Heinrich Reuter (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper provides a comprehensive assessment of the evolution of EU member states' power, the EU's capability to act (efficiency), and the proportionality of the voting system in the Council of Ministers from the treaties of Rome in 1958 till the Treaty of Lisbon in 2009 and beyond, using a wide range of alternative power indices. Moreover, it considers explicitly the relevance of additional legal provisions (such as the 'Luxembourg Compromise', the 'Demographic Clause', and the 'Ioannina Compromise') and the implications of novel, more recently introduced voting rules such as reverse qualified majority voting.
    Keywords: Council, Enlargement, Efficiency, EU, Member States, Power Index
    JEL: D72 K33 E61
    Date: 2014–05
  64. By: Yavuz Arslan; Temel Taskin
    Abstract: The extent of interaction between international capital flows and macro-financial stability is an important and unsettled topic of debate. We contribute to this discussion by providing empirical evidence on the relationship between capital flows and domestic credit growth using a large cross-country panel dataset which includes both developed and developing economies. In the benchmark regression, we use a fixed effect model, and find a statistically significant and positive co-movement between the two variables, which is consistent with common wisdom and recent theory a la Bruno and Shin (2014). This empirical regularity is more pronounced in upper-middle income countries in comparison with the lower-middle and high income countries. The main results are robust to other econometric specifications and a variety of alternative measures for credit growth and capital flows.
    Keywords: Cross-border capital flows, Domestic credit growth, Macro-financial stability, Cross-country evidence
    JEL: E51 F32 G15
    Date: 2014
  65. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Sahoko Kaji; Tamon Asonuma
    Abstract: This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime—whether a basket peg or floating regime—from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.
    Keywords: exchange rate regime, PRC, China, dollar-peg regime, basket-peg regime, floating regime, general equilibrium model
    JEL: E42 F33 F41 F42
    Date: 2014–04
  66. By: Luis Armando Galvis; Adolfo Meisel Roca
    Abstract: El objetivo de la presente investigación es estudiar la movilidad social en Colombia a nivel regional. Colombia tiene una de los más altos índices de concentración del ingreso en el mundo, y amplias disparidades económicas a nivel regional, que han sido persistentes a través del tiempo. En este trabajo se estudia uno de los factores determinantes de dicha persistencia: baja movilidad social a través de las generaciones. Los resultados confirman los bajos niveles de movilidad intergeneracional en la educación, aunque se reportan mejorías. Además se encuentra una fuerte asociación entre el ingreso de una región y el grado de movilidad social. También hay una correlación negativa y significativa entre el grado de desigualdad en los ingresos de una región y el grado de movilidad social. Esta investigación representa un primer esfuerzo por relacionar las condiciones de movilidad social con las de desigualdad, avanzando en el estudio de la transmisión intergeneracional de las desigualdades en Colombia.******ABSTRACT: This paper studies social mobility in Colombia at a regional level for 2003 and 2010. Colombia has one of the highest levels of income concentration in the world. It also has significant regional economic disparities. Both the high level of regional economic disparities and the income concentration have been highly persistent. In this paper we study one of the determinants of that persistence: low levels of social mobility across the generations. The results of this paper confirm those low levels of intergenerational mobility in education. However, comparing the years 2003 with 2010 we notice that there have been improvements in this regard. The results also reveal a strong association between the level of income of a region and the degree of social mobility it presents. There is also a negative and significant correlation between the degree of income inequality of a region and the extent of social mobility. This research represents a first attempt to study the relation between conditions of social mobility with inequalities, to advance in the study of the intergenerational transmission of inequality in Colombia.
    Keywords: Movilidad social, desigualdad de oportunidades
    JEL: D31 E24 I21 J62
    Date: 2014–01–22
  67. By: Goodness C. Aye (University of Pretoria); Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Mehmet Balcilar (Eastern Mediterranean University)
    Abstract: This paper employs classical bivariate, factor augmented (FA), slab-and-spike variable selection (SSVS)-based, and Bayesian semi-parametric shrinkage (BSS)-based predictive regression models to forecast US real private residential fixed investment over an out-of-sample period from 1983:Q1 to 2011:Q2, based on an in-sample estimates for 1963:Q1 to 1982:Q4. Both large-scale (188 macroeconomic series) and small-scale (20 macroeconomic series) FA, SSVS, and BSS predictive regressions, as well as 20 bivariate regression models, capture the influence of fundamentals in forecasting residential investment. We evaluate the ex-post out-of-sample forecast performance of the 26 models using the relative average Mean Square Error for one-, two-, four-, and eight-quarters-ahead forecasts and test their significance based on the McCracken (2004, 2007) MSE-F statistic. We find that, on average, the SSVS-Large model provides the best forecasts amongst all the models. We also find that one of the individual regression models, using house for sale (H4SALE) as a predictor, performs best at the four- and eight-quarters-ahead horizons. Finally, we use these two models to predict the relevant turning points of the residential investment, via an ex-ante forecast exercise from 2011:Q3 to 2012:Q4. The SSVS-Large model forecasts the turning points more accurately, although the H4SALE model does better toward the end of the sample. Our results suggest that economy-wide factors, in addition to specific housing market variables, prove important when forecasting in the real estate market.
    Keywords: Private residential investment, predictive regressions, factor-augmented models, Bayesian shrinkage, forecasting
    JEL: C32 E22 E27
    Date: 2014–05
  68. By: Berdin, Elia; Gründl, Helmut
    Abstract: Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers' balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, especially for less capitalized companies, leading to a relatively high probability of default for a subset of companies. --
    Keywords: Life Insurers,Interest Rate Guarantees,Duration Mismatch,Solvency II
    JEL: G22 G23 G17 E58
    Date: 2014

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