nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒06‒22
ninety-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macrodynamics of debt-financed investment-led growth with interest rate rules By Datta, Soumya
  2. Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads By Hännikäinen, Jari
  3. Inflation Dynamics and Business Cycles By Suleyman Hilmi Kal; Nuran Arslaner; Ferhat Arslaner
  4. The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases By Vincent Sterk; Silvana Tenreyro
  5. Optimal fiscal policy of a monetary union member By Orjasniemi, Seppo
  6. Mortgages and Monetary Policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  7. Inventories and the Role of Goods-Market Frictions for Business Cycles By Den Haan, Wouter
  8. Pushing on a string: US monetary policy is less powerful in recessions By Silvana Tenreyro; Gregory Thwaites
  9. Costly Financial Intermediation and Excess Consumption Volatility By Sapci, Ayse
  10. The Determinants of Inflation in Vietnam: VAR and SVAR Approaches By Tuan Anh Phan
  11. Inflación en Uruguay en 140 años de historia (1870-2010). Un enfoque monetario By Conrado Brum; Carolina Roman; Henry Willebald
  12. Evaluating Labor Market Targeted Fiscal Policies in High Unemployment EZ Countries By Elton Beqiraj; Massimiliano Tancioni
  13. Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59 By Carlson, Mark A.; Wheelock, David C.
  14. Monetary Policy Surprises, Credit Costs and Economic Activity By Mark Gertler; Peter Karadi
  15. When are the Effects of Fiscal Policy Uncertainty Large? By Johannsen, Benjamin K.
  16. External Equity Financing Shocks, Financial Flows, and Asset Prices By Frederico Belo; Xiaoji Lin; Fan Yang
  17. Networks in labor markets and welfare costs of inflation By Marcelo Arbex; Dennis O'Dea
  18. Monetary Policy and Real Borrowing Costs at the Zero Lower Bound By Gilchrist, Simon; Lopez-Salido, J. David; Zakrajsek, Egon
  19. Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different? By Tuan Anh Phan
  20. Assessing the Effects of the Zero-Interest-Rate Policy through the Lens of a Regime-Switching DSGE Model By Chen, Han
  21. Money, interest and prices in Ireland, 1933-2012 By Gerlach, Stefan.; Stuart, Rebecca
  22. Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico? By De Pooter, Michiel; Robitaille, Patrice; Walker, Ian; Zdinak, Michael
  23. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jerome Creel; Paul Hubert; Mathilde Viennot
  24. Changes in Bank Leverage: Evidence from US Bank Holding Companies By O'Brien, Martin; Whelan, Karl
  25. Pollution effects on labor supply and growth By Stefano Bosi; David Desmarchelier; Lionel Ragot
  26. Productivity and potential output before, during, and after the Great Recession By Fernald, John G.
  27. Issues In The Design of Fiscal Policy Rules By Jonathan Portes; Simon Wren-Lewis
  28. The elasticity of Informality to Taxes and tranfers By Jorge Alonso-Ortiz; Julio Leal
  29. Nowcasting U.S. Headline and Core Inflation By Knotek, Edward S.; Zaman, Saeed
  30. Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area By Saleem Bahaj
  31. Policy Paradoxes in the New Keynesian Model By Kiley, Michael T.
  32. Was the Gibson Paradox for Real? A Wicksellian study of the Relationship between Interest Rates and Prices By Jagjit S. Chadha; Morris Perlman
  33. Demand for M2 at the Zero Lower Bound: The Recent U.S. Experience By Judson, Ruth; Schlusche, Bernd; Wong, Vivian
  34. The Risk Channel of Monetary Policy By DeGroot, Oliver
  35. Business cycle asymmetries: Loss aversion, sticky prices, and wages By Wilman Gomez
  36. Leading indicators of systemic banking crises: Finland in a panel of EU countries By Lainà, Patrizio; Nyholm, Juho; Sarlin, Peter
  37. Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior By Kakarot-Handtke, Egmont
  38. Revisiting the Role of Inflation Environment in the Exchange Rate Pass-Through: A Panel Threshold Approach By Nidhaleddine Ben Cheikh; Waël Louhichi
  39. Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison By Rogers, John H.; Scotti, Chiara; Wright, Jonathan H.
  40. Medium and long run prospects for UK growth in the aftermath of the financial crisis By Nicholas Oulton
  41. The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates By Robert Dixon; Guay C. Lim; Jan C. van Ours
  42. Trend Mis-specifications and Estimated Policy Implications in DSGE Models By Varang Wiriyawit
  43. Debt Deflation Effects of Monetary Policy By Lin, Li; Tsomocos, Dimitrios P.; Vardoulakis, Alexandros
  44. The impact of foreign banks on monetary policy transmission during the global financial crisis of 2008-2009: Evidence from Korea By Jeon, Bang Nam; Lim, Hosung; Wu, Ji
  45. Transparency and deliberation within the FOMC: A computational linguistics approach By Stephen Eliot Hansen; Michael McMahon; Andrea Prat
  46. The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries By Donatella Baiardi; Matteo Manera; Mario Menegatti
  47. Did the Job Ladder Fail After the Great Recession? By Giuseppe Moscariniy; Fabien Postel-Vinay
  48. Banks Are Where The Liquidity Is By Oliver Hart; Luigi Zingales
  49. Optimal Unemployment Insurance over the Business Cycle By Camille Landais; Pascal Michaillat; Emmanuel Saez
  50. The Growth Potential of Startups over the Business Cycle By Petr Sedlacek; Vincent Sterk
  51. Money demand in Ireland, 1933-2012 By Gerlach, Stefan.; Stuart, Rebecca
  52. Productivity Dynamics in the Great Stagnation: Evidence from British businesses By Rebecca Riley; Chiara Rosazza Bondibene; Garry Young
  53. The Good, the Bad and the Ugly By Ludovit Odor
  54. Gender Gaps and the Rise of the Service Economy By L. Rachel Ngai; Barbara Petrongolo
  55. Attenuation bias, recall error and the housing wealth effect By McCarthy, Yvonne; McQuinn, Kieran
  56. Capital Controls and Recovery from the Financial Crisis of the 1930s By Kris James Mitchener; Kirsten Wandschneider
  57. Scotland’s Currency Options By Angus Armstrong; Monique Ebell
  58. The impact of the Euro area macroeconomy on energy and non-energy global commodity prices By Papież, Monika; Śmiech, Sławomir; Dąbrowski, Marek A.
  59. Idiosyncratic investment risk and business cycles By Goldberg, Jonathan E.
  60. Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices By D'Amico, Stefania; Kim, Don H.; Wei, Min
  61. How the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates By Hancock, Diana; Passmore, Wayne
  62. Fiscal Stimulus and HouseholdsÕ Non-Durable Consumption Expenditures: Evidence from the 2009 Australian Nation Building and Jobs Plan By Emma Aisbett; Markus Brueckner; Ralf Steinhauser; Rhett Wilcox
  63. Money and Foreign Trade in Ricardo (1809-1811) and in Ricardo (1817) By de Boyer des Roches, Jérôme
  64. Instabilities in large economies: aggregate volatility without idiosyncratic shocks By Julius Bonart; Jean-Philippe Bouchaud; Augustin Landier; David Thesmar
  65. Economic Size and Debt Sustainability against Piketty's Capital Inequality By cho, hyejin
  66. Bank Ownership, Lending, and Local Economic Performance During the 2008-2010 Financial Crisis By Coleman, Nicholas; Feler, Leo
  67. Small Price Responses to Large Demand Shocks By Gagnon, Etienne; Lopez-Salido, J. David
  68. Role and impact of different types of financial institutions on economic performance and stability of the real sector in selected EU member states By Michal Jurek
  69. Identification of Asset Price Misalignments on Financial Markets With Extreme Value Theory By Narcisa Kadlcakova; Lubos Komarek; Zlatuse Komarkova; Michal Hlavacek
  70. Deleveraging in a highly indebted property market: Who does it and are there implications for household consumption? By McCarthy, Yvonne; McQuinn, Kieran
  71. Technical change and the elasticity of factor substitution By Antony, Jürgen
  72. Breaking the Kareken and Wallace Indeterminacy Result By Timothy Kam; Pere Gomis-Porqueras; Christopher J. Waller
  73. Why Don't Remittances Appear to Affect Growth? - Working Paper 366 By Michael Clemens and David McKenzie
  74. The Interplay Between Student Loans and Credit Card Debt: Implications for Default in the Great Recession By Ionescu, Felicia; Ionescu, Marius
  75. An Evaluation of the Inflationary Pressure Associated with Short- and Long-term Unemployment By Kiley, Michael T.
  76. Gamma discounters are short-termist By Gollier, Christian
  77. Crisis inmobiliaria, recesión y endeudamiento masivo, 2002-2011 By Miguel Ángel Rivera Ríos
  78. Structural VARs, Deterministic and Stochastic Trends: Does Detrending Matter? By Varang Wiriyawit; Benjamin Wong
  79. Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs By Li, Canlin; Wei, Min
  80. Catching up with the Joneses and Borrowing Constraints: An Agent-based Analysis of Household Debt By Nadja König; Ingrid Größl
  81. The Mechanics of Real Undervaluation and Growth By Wlasiuk, Juan Marcos
  82. The Price Impact of Joining a Currency Union: Evidence from Latvia By Alberto Cavallo; Brent Neiman; Roberto Rigobon
  83. The Price of Development By Fadi Hassan
  84. Investment, growth and employment: VECM for Uruguay By Lucia Ramirez; Gabriela Mordecki
  85. Consumption, Risk and Prioritarianism By Adler, Matthew; Treich, Nicolas
  86. The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures? By Hryckiewicz, Aneta
  87. Impacts of Immigration on Aging Welfare-State An Applied General Equilibrium Model for France By Xavier Chojnicki; Lionel Ragot
  88. Does Democracy Impact Economic Growth? Exploring the Case of Bangladesh – A Cointegrated VAR Approach By Dasgupta, Shouro; Bhattacharya, Debapriya; Neethi, Dwitiya Jawher
  89. Migration as a Strategy for Household Finance: A Research Agenda on Remittances, Payments, and Development- Working Paper 354 By Michael Clemens and Timothy N. Ogden
  90. A procedure for combining zero and sign restrictions in a VAR-identification scheme By Alex Haberis; Andrej Sokol
  91. Colonial Origins of the Informal Economy on the Gazelle Peninsula By John D. Conroy

  1. By: Datta, Soumya
    Abstract: This paper demonstrates the diverse dynamical possibilities arising out of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, growth cycles around it as well as various complex dynamics. We investigate whether, given this framework, the financial sector can provide endogenous bounds to an otherwise unstable system. The effectiveness of monetary policy in the form of a Taylor-type interest rate rule targeting capacity utilization is examined under this context.
    Keywords: Growth cycles, Hopf bifurcation, complex dynamics, Taylor rule.
    JEL: C62 C69 E12 E32 E44 G01
    Date: 2014–06
  2. By: Hännikäinen, Jari
    Abstract: This paper re-examines the out-of-sample predictive power of interest rate spreads when the short-term nominal rates have been stuck at the zero lower bound and the Fed has used unconventional monetary policy. Our results suggest that the predictive power of some interest rate spreads have changed since the beginning of this period. In particular, the term spread has been a useful leading indicator since December 2008, but not before that. Credit spreads generally perform poorly in the zero lower bound and unconventional monetary policy period. However, the mortgage spread has been a robust predictor of economic activity over the 2003–2014 period.
    Keywords: business fluctuations; forecasting; interest rate spreads; monetary policy; zero lower bound; real-time data
    JEL: C53 E32 E44 E52 E58
    Date: 2014–06–18
  3. By: Suleyman Hilmi Kal; Nuran Arslaner; Ferhat Arslaner
    Abstract: This paper aims to investigate whether the effect of inflation expectations, exchange rate, money supply, industrial production and import prices on inflation depends on business cycle. For this purpose, a two states Markov Switching Auto Regression model with time varying transition probabilities to a generic inflation model is implemented for the period 2003-2013. In the model the states are assigned whether output gap is positive or negative. The inflation forecasting in-sample and out-of-sample is also utilized by adopting mean squared error and Diebold Mariano test to measure explanatory and forecasting power of our model. Our main finding provides that the determinants of inflation have different dynamics during boom periods as compared to recessions.
    Keywords: Inflation; Output Gap; Markov Switching Autoregressions; Business Cycles
    JEL: C32 E30 E31 E37 E58
    Date: 2014–03
  4. By: Vincent Sterk (University College London (UCL), Department of Economics; Centre for Macroeconomics (CFM)); Silvana Tenreyro (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM))
    Abstract: A large literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    JEL: E1 E31 E32 E52 E58
    Date: 2013–12
  5. By: Orjasniemi, Seppo (University of Oulu and Bank of Finland)
    Abstract: In this essay we study the optimal non-coordinated fiscal policy in a monetary union, where a common and independent monetary authority commits to optimally set the union-wide nominal interest rate. The national governments in the monetary union implement independent fiscal policies by choosing the level of government expenditures. We show that under a non-coordinated optimal fiscal policy rule government spending should react counter cyclically to the local output gap and inflation, while the union-wide aggregate fluctuations are stabilized by the common monetary policy. We also show that the spillovers caused by asymmetric shocks depend on the relative size of the country subject to these shocks.
    Keywords: monetary union; monetary policy; fiscal policy
    JEL: E52 E62 F41
    Date: 2014–06–10
  6. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara (UCSB)); Roman Šustek (Queen Mary, School of Economics and Finance)
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: Mortgages, debt servicing costs, monetary policy, transmission mechanism, housing investment
    JEL: E32 E52 G21 R21
    Date: 2013–12
  7. By: Den Haan, Wouter
    Abstract: Changes in the stock of inventories are important for fluctuations in aggregate output. However, the possibility that firms do not sell all produced goods and inventory accumulation are typically ignored in business cycle models. This paper captures this with a goods-market friction. Using US data, "goods-market efficiency" is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed can substantially magnify and propagate shocks. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline parameter values, then goods-market frictions are quantitatively not very important.
    Keywords: matching models, search frictions, magnification, propagation
    JEL: E12 E24 E32
    Date: 2014–01
  8. By: Silvana Tenreyro (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM)); Gregory Thwaites (Centre for Macroeconomics (CFM))
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend exibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to diferences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: asymmetric effects of monetary policy, transmission mechanism, recession, durable goods, local projection methods
    JEL: E32 E52
    Date: 2013–10
  9. By: Sapci, Ayse (Department of Economics, Colgate University)
    Abstract: This paper documents the cyclical properties of financial intermediation costs and uses their dynamics to explain excess consumption volatility differences across countries in a dynamic stochastic general equilibrium (DSGE) framework. I find that financial development levels have no role in explaining excess consumption volatilities. Instead, the volatility of the financial sector plays the determinative role. The model matches the data, finding excess consumption volatility to be four times higher in an average emerging country compared to the US. This paper also shows that if the US had the same intermediation cost structure as the average emerging country, deteriorations in the production, consumption, labor market, business investment, and real estate market following a financial shock would increase sixfold, on average.
    Keywords: Financial intermediation costs; Excess consumption volatility; Housing market; Financial development; Financial shocks
    JEL: E21 E32 E44 G01 G21 O16
    Date: 2014–04–01
  10. By: Tuan Anh Phan (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper employs Vector Autoregressive (VAR) and Structural VAR (SVAR) models to analyse VietnamÕs inflation determinants using quarterly data from 1996 to 2012. The results suggest that: (i) the inflation responses to monetary policy shocks are plausible and similar to standard monetary transmission in advanced economies; (ii) the policy interest rate plays an important role to inflation variation, which differs with what have been found in previous studies for Vietnam; and (iii) shocks to output and prices in trading partners have strong effects on inflation in Vietnam, while international oil and rice prices seem not to systematically affect VietnamÕs inflation. Moreover, the State Bank of Vietnam does use monetary policy tools to ease down the inflationary pressure caused by foreign factors.
    JEL: E52 E2
    Date: 2014–05
  11. By: Conrado Brum (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración); Carolina Roman (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Henry Willebald (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: This paper aims at explaining the long-run inflation of Uruguay (1870-2010). A monetary inflation model is used based on the assumption that the long-run inflation results from the equilibrium conditions in the money market. A forward-looking Phillips curve is estimated where the inflation rate depends positively on the inflation expectations, the output gap and the international inflation. Following the Neumann and Greiber (2004) approach, the inflation expectations is explained by the core money growth, which is defined as the growth of long-lasting component of nominal money supply that exceeds the long-run increase of the real money demand, this last one determined by the change of the potential output (output adjusted core money, OACM). In addition, we compare the OACM with effective inflation and we construct a monetization index which enables us to identify processes of "demonetization" and "monetization" that the Uruguayan economy experienced along the last 140 years. The results of the Phillips curve estimation show a positive and significant effect of the core money growth on the inflation rate. In addition, a unit elasticity of the real money demand is found.
    Keywords: inflation, core money, Uruguay
    JEL: E31 E51 N16
    Date: 2014–03
  12. By: Elton Beqiraj; Massimiliano Tancioni
    Abstract: Two labor market targeted …scal policies, a hiring subsidy and a wage subsidy for new hires of labor, are evaluated, and their macroeconomic e¤ects compared with those of standard …scal instruments. The analyses are based on an extension of a monetary, open economy, search and matching model in which a distinction between the wage negotiated by newly hired workers and incumbents is introduced. The model is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). Posterior simulations show that, the labor market policies are not superior to standard fi…scal expansions in stimulating a timely response of economic activity, and their output and employment-enhanching effects are dominant only in the long term and at the Greece and Portugal estimates. The consideration of a liquidity trap environment marginally reinforces these results, showing that expansionary policy actions triggering a defl‡ation can be procyclical when the interest rate zero-lower-bound binds.
    Keywords: wage and hiring subsidies, newly hired workers, search and matching, fiÂ…scal multiplier, zero lower bound, Bayesian estimation.
    JEL: E62 H25 H30 J20 C11
  13. By: Carlson, Mark A. (Federal Reserve Bank of St. Louis); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: The 1950s are often pointed to as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed’s ability to conduct an independent monetary policy. The Fed was forced to cooperate with the Treasury in the 1930s, and fully ceded monetary policy to Treasury financing requirements during World War II. Nonetheless, the Fed retained a policy tool in the form of reserve requirements, and from the mid-1930s to 1951, changes in required reserve ratios were the primary means by which the Fed responded to expected inflation. The inability of the Fed to maintain a credible commitment to low interest rates in the face of increased government spending and rising inflation led to the Fed-Treasury Accord of March 1951. Following the Accord, the external pressures on the Fed diminished significantly, which enabled the Fed to focus primarily on macroeconomic objectives. We conclude that a successful outcome requires not only a good understanding of how to conduct policy, but also a conducive environment in which to operate.
    Keywords: Federal Reserve; monetary policy; reserve requirements; Fed-Treasury Accord; inflation
    JEL: E52 E58 N12
    Date: 2014–06–01
  14. By: Mark Gertler; Peter Karadi
    Abstract: We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism.
    JEL: E3 E4 E5
    Date: 2014–06
  15. By: Johannsen, Benjamin K. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty are largest when the nominal interest rate is on the cusp of the ZLB and also that delaying fiscal policy uncertainty diminishes its effects only if the resolution of uncertainty occurs after ZLB no longer binds.
    Keywords: Fiscal policy; zero lower bound; uncertainty
    Date: 2014–05–22
  16. By: Frederico Belo; Xiaoji Lin; Fan Yang
    Abstract: The ability of corporations to finance its operations by issuing new equity varies with macroeconomic conditions, because the time varying macroeconomic conditions affect investors’ (or workers’) willingness to pay for new equity. We document that an empirical proxy of the shocks to the cost of equity issuance captures systematic risk in the economy, even controlling for the impact of aggregate productivity (or stock market) shocks. Exposure to this shock helps price the cross section of stock returns including book-to-market, size, investment, debt growth, and issuance portfolios. We then propose a dynamic investment-based model that features an aggregate shock to the firms’ cost of external equity issuance, and a collateral constraint. Our central finding is that time- varying external financing costs are important for the model to quantitatively capture the joint dynamics of firms’ real quantities, financing flows, and asset prices. Furthermore, the model also replicates the failure of the unconditional CAPM in pricing the cross-sectional expected returns.
    JEL: E23 E44 G12
    Date: 2014–06
  17. By: Marcelo Arbex (Department of Economics, University of Windsor); Dennis O'Dea (Department of Economics, University of Washington)
    Abstract: We study the welfare costs of inflation in a monetary general equilibrium model with networks in the labor market. Unemployment results when individuals are unsuccessful in hearing about job opportunities, either directly or through their peers. Inflation affects the consumption-leisure choice differently depending on job network structure; inflation hits harder in more connected networks. In these networks, people consume more and enjoy more leisure, leading to higher welfare. Inflation reduces consumption and hurts households more, when labor markets are more effective.
    Keywords: Social networks, Labor market frictions, Inflation, Welfare costs of inflation
    JEL: D85 E31 E40 J64
    Date: 2014–06
  18. By: Gilchrist, Simon (Department of Economics, Boston University and NBER); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.)); Zakrajsek, Egon (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
    Keywords: Unconventional monetary policy; LSAPs; forward guidance; term premia; corporate bond yields; mortgage interest rates
    Date: 2013–12–19
  19. By: Tuan Anh Phan (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper compares the output composition of the monetary policy transmission mechanism in Australia to those for the Euro area and the United States. Four Vector Autoregressive (VAR) models are used to estimate the contributions of private consumption and investment to output reactions resulting from nominal interest rate shocks for the period 1982Q3-2007Q4. The results suggest that the investment channel plays a more important role than the consumption channel in Australia, while the contributions of the two channels are indistinguishable in the Euro area and the U.S. The difference between Australia and the Euro area comes from differences in housing investment responses, whereas Australia is different to the U.S. mainly because it has a lower share of household consumption in total demand.
    JEL: E52 E2
    Date: 2014–05
  20. By: Chen, Han (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Standard dynamic stochastic general equilibrium (DSGE) models assume a Taylor rule and forecast an increase in interest rates immediately after the 2007-2009 economic recession given the predicted output and inflation, contradictory to the extended period of near-zero interest rate policy (ZIRP) conducted by the Federal Reserve. In this paper, I study two methods of modeling the ZIRP in DSGE models: the perfect foresight rational expectations model and the Markov regime-switching model, which I develop in this paper. In this regime-switching model, I assume that, in one regime, the policy follows a Taylor rule, while, in the other regime, it involves a zero interest rate. I also construct the optimal filter to estimate this regime-switching DSGE model with Bayesian methods. I fit those modified DSGE models to the U.S. data from the third quarter of 1987 to the third quarter of 2010, and then, starting from the fourth quarter of 2010, I simulate the U.S. economy forward with and without the ZIRP intervention. I compare the predicted paths of the macro variables, and I find that the ZIRP intervention has a significant effect. The estimated regime-switching model I develop implies a substantial stimulative effect (on average a 0.12% increase in output growth rate and a 0.9% increase in inflation accumulatively over 20 quarters if ZIRP is kept for 6 quarters). The actual path from the fourth quarter of 2010 onward is closer to the predicted path derived from the regime-switching model than that generated by the perfect foresight model. The perfect foresight model generates an explosive and spurious rise in inflation. Therefore, the regime-switching model I propose is more appropriate to assess the effectiveness of the ZIRP, which is effective in stimulating the economy.
    Keywords: Regime switching; zero interest rate policy; unconventional monetary policy
    Date: 2014–05–21
  21. By: Gerlach, Stefan. (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: In this paper we assemble an annual data set on broad and narrow money, prices, real economic activity and interest rates in Ireland from a variety of sources for the period 1933-2012. We discuss in detail how the data set is constructed and what assumptions we have made in doing so. Furthermore, we perform a VAR analysis to provide some simple empirical evidence on the behaviour of these time series. The results suggest that aggregate supply and inflation shocks play a dominant role in Irish business cycles.
    Keywords: Ireland, historical statistics, long time series, business cycles, VAR.
    JEL: E3 E4 N14
    Date: 2014–03
  22. By: De Pooter, Michiel (Board of Governors of the Federal Reserve System (U.S.)); Robitaille, Patrice (Board of Governors of the Federal Reserve System (U.S.)); Walker, Ian (Board of Governors of the Federal Reserve System (U.S.)); Zdinak, Michael (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financial market-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better anchored over the past decade in all three countries, as a testament to the improved credibility of the central banks in these countries when it comes to keeping inflation low. That said, one-year inflation compensation in the far future displays some sensitivity to at least one macroeconomic data release per country. However, the impact of these releases is small and it does not appear that investors systematically alter their expectations for inflation as a result of surprises in monetary policy, consumer prices, or real activity variables. Finally, long-run inflation expectations in Brazil appear to have been less well anchored than in Chile and Mexico.
    Keywords: Inflation targeting; survey expectations; inflation compensation; Nelson-Siegel model; macro news suprises; Brazil; Chile; Mexico
    Date: 2014–03–19
  23. By: Jerome Creel (OFCE - Sciences Po, and ESCP Europe); Paul Hubert (OFCE - Sciences Po); Mathilde Viennot (ENS Cachan)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR.The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes
    Keywords: Transmission Channels, Unconventional Monetary Policy, Pass-through
    JEL: E51 E58
    Date: 2013–12–01
  24. By: O'Brien, Martin (Central Bank of Ireland); Whelan, Karl (University College Dublin)
    Abstract: This paper examines how banks respond to shocks to their equity. If banks react to equity shocks by more than proportionately adjusting liabilities, then this will tend to generate a positive correlation between asset growth and leverage growth. However, we show that in the presence of changes in liabilities that are uncorrelated with shocks to equity, a positive correlation of this sort can occur without banks adjusting to equity shocks by more than proportionately adjusting liabilities. The paper uses data from US bank holding companies to estimate an empirical model of bank balance sheet adjustment. We identify shocks to equity as well as orthogonal shocks to bank liabilities and show that both equity and liabilities tend to adjust to move leverage towards target ratios. We also show that banks allow leverage ratios to fall in response to positive equity shocks, though this pattern is weaker for large banks, which are more active in adjusting liabilities after these shocks. We show how this explains why large banks have lower correlations between asset growth and leverage growth.
    Keywords: Bank Leveraging, Bank Holding Companies, Equity Shocks.
    JEL: E32 E44 E51 G21
    Date: 2014–02
  25. By: Stefano Bosi; David Desmarchelier; Lionel Ragot
    Abstract: Some recent empirical contributions have pointed out a significant negative impact of pollution on labor supply. These impacts have been largely ignored in the theoretical literature, which, instead, focused on the case of pollution effects on consumption demand. In this paper, we study the short and long-run effects of pollution in a Ramsey model where pollution and labor supply are nonseparable arguments in households’ preferences. We determine sufficient conditions for existence and uniqueness of a longterm equilibrium and we show how large (negative) effects of pollution on labor supply may promotes macroeconomic volatility (deterministic cycles near the steady state) through a flip bifurcation.
    Keywords: pollution, endogenous labor supply, Ramsey model.
    JEL: E32 O44
    Date: 2014
  26. By: Fernald, John G. (Federal Reserve Bank of San Francisco)
    Abstract: U.S. labor and total-factor productivity growth slowed prior to the Great Recession. The timing rules explanations that focus on disruptions during or since the recession, and industry and state data rule out “bubble economy” stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.
    Keywords: Potential output; productivity; information technology; business cycles; multi-sector growth models
    JEL: E23 E32 O41 O47
    Date: 2014–06–13
  27. By: Jonathan Portes (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Simon Wren-Lewis (Merton College, Oxford)
    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: 2014–06
  28. By: Jorge Alonso-Ortiz (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM)); Julio Leal (Banco de México)
    Abstract: We study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mexico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a signicant impact on the size of the informal sector. We nd that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.
    Keywords: Informal Sector, Search, Tax and Transfer Programs, Seguro Popular
    JEL: E24 E26 E62 J64 J65
    Date: 2013
  29. By: Knotek, Edward S. (Federal Reserve Bank of Cleveland); Zaman, Saeed (Federal Reserve Bank of Cleveland)
    Abstract: Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). The model relies on relatively few variables and is tested using real-time data. The model’s nowcasting accuracy improves as information accumulates over the course of a month or quarter, and it easily outperforms a variety of statistical benchmarks. In head-to-head comparisons, the model’s nowcasts of CPI infl ation outperform those from the Blue Chip consensus, with especially significant outperformance as the quarter goes on. The model’s nowcasts for CPI and PCE inflation also significantly outperform those from the Survey of Professional Forecasters, with similar nowcasting accuracy for core inflation measures. Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.
    Keywords: inflation; nowcasting; forecasting; real-time data; professional forecasters; Greenbook.
    JEL: C53 E3 E37
    Date: 2014–05–01
  30. By: Saleem Bahaj (University of Cambridge, Faculty of Economics; Centre for Macroeconomics (CFM))
    Abstract: What are the macroeconomic implications of changes in sovereign risk premia? In this paper, I use a novel identication strategy coupled with a new dataset for the Euro Area to answer this question. I show that exogenous innovations in sovereign risk premia were an important driver of the economic dynamics of crisis-hit countries, explaining 30-50% of the forecast error of unemployment. I also shed light on the mechanisms through which this occurs. Fluctuations in sovereign risk premia explain 20-40% of the variance of private borrowing costs. Increases in sovereign risk result in substantial capital ight, external adjustment and import compression. In contrast, governments appear not to increase their primary balances in response to increases in sovereign risk. Identifying these causal effects involves isolating a source of uctuations in sovereign borrowing costs exogenous to the economy in question. I address this problem by relying upon the transmission of country-specic events during the crisis in Europe to the sovereign risk premia in the remainder of the union. I construct a new dataset of critical events in foreign crisis-hit countries and I measure the impact of these events on yields in the economy of interest at an intraday frequency. An aggregation of foreign events serves as a proxy variable for structural innovations to the yield to identify shocks in a proxy SVAR. I extend this methodology into a Bayesian setting to allow for exible panel assumptions. A counterfactual analysis is used to remove the impact of foreign events from the bond yields of crisis hit countries: I find that 40-60% of the trough-to-peak moves in bond yields in crisis-hit countries are explained by foreign events, thereby suggesting that the crisis was not purely a function of weak local economic conditions.
    Keywords: High frequency identication, Narrative identication, Contagion, Bayesian VARs, Proxy SVARs, Panel VARs
    JEL: E44 E65 F42
    Date: 2014–05
  31. By: Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: The most common New-Keynesian model--with sticky-prices--has potentially implausible implications in a zero-lower bound environment. Fiscal and forward guidance multipliers can be implausibly large. Moreover, the sticky-price model implies that positive supply shocks, such as an increase in productivity, will lower production, and that increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices--sticky information: Fiscal and monetary multipliers are smaller, positive supply shocks raise output, and greater price flexibility, in the sense of more frequent updating of information, moves the economy's response toward the neoclassical benchmark. These results suggest caution in drawing policy lessons from a single, sticky-price framework. Finally, we highlight how strategies akin to nominal-income targeting can enhance the ability of policymakers to affect demand in sticky-price and sticky-information models.
    Keywords: Forward guidance; fiscal multiplier; sticky prices; sticky information
    Date: 2014–02–11
  32. By: Jagjit S. Chadha; Morris Perlman
    Abstract: We examine the relationship between prices and interest rates for seven advanced economies in the period up to 1913, emphasizing the UK. There is a significant long-run positive relationship between prices and interest rates for the core commodity standard countries. Keynes (1930) labelled this positive relationship the 'Gibson Paradox'. A number of theories have been put forward as possible explanations of the Paradox but they do not fit the long-run pattern of the relationship. We find that a formal model in the spirit of Wicksell (1907) and Keynes (1930) offers an explanation for the paradox: where the need to stabilise the banking sector's reserve ratio, in the presence of an uncertain 'natural' rate, can lead to persistent deviations of the market rate of interest from its 'natural' level and consequently long run swings in the price level.
    Keywords: disability; Gibson's Paradox; Keynes-Wicksell; Prices; Interest Rates
    JEL: B22 E12 E31 E42
    Date: 2014–04
  33. By: Judson, Ruth (Board of Governors of the Federal Reserve System (U.S.)); Schlusche, Bernd (Board of Governors of the Federal Reserve System (U.S.)); Wong, Vivian (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, we re-examine the relationship between money and interest rates with a focus on the past few years, when the opportunity cost of M2 has dropped below zero. Until the late 1980s, a stable relationship between monetary aggregates and the opportunity cost of holding money--measured as the spread between the three-month Treasury bill yield and the deposit-weighted average return on M2 assets--existed, and played an integral role in the conduct of monetary policy (e.g., Moore et al.(1990)). This relationship broke down in the early 1990s, when M2 velocity increased beyond the range that could be explained by movements in M2 opportunity cost. As of the mid-2000s, a new relationship was emerging, but was still statistically unstable. In late 2008, the opportunity cost of holding money dropped precipitously and has remained at its zero lower bound. Standard money-demand theory indicates that in such cases the interest elasticity of money demand should rise sharply. Reviewing the evidence to date, we fail to find support for such a rise through 2011, but we observe a notable change in the relationship over the most recent quarters. We conjecture that the more recent shifts, however, could be due to the effects of regulatory and monetary policy changes rather than a fundamental shift in the relationship between money and opportunity cost. Further work is needed to determine the contribution of these regulatory and monetary policy factors.
    Keywords: Money demand; M2; zero lower bound; opportunity cost
    Date: 2014–01–24
  34. By: DeGroot, Oliver (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines how monetary policy affects the riskiness of the financial sector's aggregate balance sheet, a mechanism referred to as the risk channel of monetary policy. I study the risk channel in a DSGE model with nominal frictions and a banking sector that can issue both outside equity and debt, making banks' exposure to risk an endogenous choice, and dependent on the (monetary) policy environment. Banks' equilibrium portfolio choice is determined by solving the model around a risk-adjusted steady state. I find that banks reduce their reliance on debt finance and decrease leverage when monetary policy shocks are prevalent. A monetary policy reaction function that responds to movements in bank leverage or to movements in credit spreads can incentivize banks to increase their use of debt finance and increase leverage, ceteris paribus, increasing the riskiness of the financial sector for the real economy.
    Keywords: Financial intermediation; portfolio choice; debt and equity; monetary policy; risk-adjusted steady state
    Date: 2014–04–09
  35. By: Wilman Gomez
    Abstract: Abstract: In this chapter, the Smets-Wouters (2003) New Kenesian model is reformulated by introducing the loss aversion utility function developed in chapter two. The purpose of this is to understand how asymmetric real business cycles are linked to asymmetric behavior of agents in a price and wage rigidities set up. The simulations of the model reveal not only that the loss aversion in consumption and leisure is a good mechanism channel for explaining business cycle asymmetries, but also is a good mechanism channel for explaining asymmetric adjustment of prices and wages. Therefore the existence of asymmetries in Phillips Curve. Moreover, loss aversion makes downward rigidities in prices and wages stronger and also reproduces a more severe and persistent fall of the employment. All in all, this model generates asymmetrical real business cycles, asymmetric price and wage adjustment as well as hysteresis.
    Date: 2014–06–02
  36. By: Lainà, Patrizio (Department of Political and Economic Studies, University of Helsinki, Finland); Nyholm, Juho (Department of Political and Economic Studies, University of Helsinki, Finland); Sarlin, Peter (Center of Excellence SAFE at Goethe University Frankfurt, Germany, and RiskLab Finland at IAMSR, Abo Akademi University and Arcada University of Applied Sciences, Finland)
    Abstract: This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities.
    Keywords: leading indicators; macro-financial indicators; banking crisis; signal extraction; logit analysis
    JEL: C43 E44 F30 G01 G15
    Date: 2014–06–13
  37. By: Kakarot-Handtke, Egmont
    Abstract: It is common knowledge that neither Walrasians nor Keynesians nor Marxians nor Institutionialists nor Austrians nor Sraffaians came to grips with profit. The reason is a defective formal basis. In the present paper the formal foundations are first renewed. When the profit theory is false the rest of an approach is questionable. What is reexamined next because of its vital practical implications is the theory of employment. One remarkable result is that the popular recipe to eliminate unemployment, viz. downward wage rate flexibility, is self-defeating because it does not take the objective systemic properties of the monetary economy into account.
    Keywords: new framework of concepts; structure-centric; axiom set; Path Core; algebraic market clearing; indifference of employment
    JEL: B49 B59 E24
    Date: 2014–06–18
  38. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper sheds new light on the role of inflation regime in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify his sample of 24 developing countries by regimes of inflation, Barhoumi [(2006), “Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation”, Economic Modeling, 23 (6), 926-951.] chose an arbitrary threshold of 10% to split sample between high and low inflation regimes. For more accuracy, our study proposes to use a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the period 1992-2012, we find that there are two thresholds points that are well identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.
    Keywords: Exchange Rate Pass - Through, Import Prices, Panel Threshold
    JEL: C23 E31 F31 F40
    Date: 2014–06
  39. By: Rogers, John H. (Board of Governors of the Federal Reserve System (U.S.)); Scotti, Chiara (Board of Governors of the Federal Reserve System (U.S.)); Wright, Jonathan H. (Johns Hopkins University)
    Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
    Keywords: Large scale asset purchases; quantitative easing; zero bound; term premium
    Date: 2014–03–07
  40. By: Nicholas Oulton (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM))
    Abstract: In this paper I argue that the financial crisis is likely to have a long term impact on the level of labour productivity in the UK while leaving the long run growth rate unaffected. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. Based on a cross-country panel analysis of 61 countries over 1950-2010, the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The cross-country evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%.
    Keywords: productivity, potential output, growth, financial, banking crisis, recession
    JEL: J24 E32 O41 G01 H63
    Date: 2013–12
  41. By: Robert Dixon (Department of Economics, The University of Melbourne); Guay C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Jan C. van Ours (Department of Economics and CentER, Tilburg University; Department of Economics, The University of Melbourne; CEPR, United Kingdom; CESifo, Germany; and IZA, Germany)
    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 drives 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: 2014–06
  42. By: Varang Wiriyawit
    Abstract: Extracting a trend component from nonstationary data is one of the first challenges in estimating a DSGE model. The misspecification of the component can distort structural parameter estimates and translate into a bias in policy-relevant statistic estimates. This paper investigates how important this bias is to estimated policy implications within a DSGE framework. The quantitative results suggest the bias in parameter estimates due to trend misspecification can result in significant inaccuracies in estimating statistics of interest. This then misleads policy conclusions. Particularly, a misspecified model is estimated using a deterministic-trend specification when the true process is a random-walk with drift.
    JEL: C51 C52 E37
    Date: 2014–04
  43. By: Lin, Li (International Monetary Fund); Tsomocos, Dimitrios P. (University of Oxford); Vardoulakis, Alexandros (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation dynamics and can increase the probability that a crisis occurs.
    Keywords: Default; collateral; debt deflation
    Date: 2014–05–07
  44. By: Jeon, Bang Nam (School of Economics); Lim, Hosung (Economic Research Institute); Wu, Ji (Department of Economics)
    Abstract: This paper examines the impact of foreign banks on the monetary policy transmission mechanism in the Korean economy during the period from 2000 to 2012, with a specific focus on the lending behavior of banks with different types of ownership. Using the bank-level panel data of the banking system in Korea, we present consistent evidence on the buffering impact of foreign banks, especially foreign bank branches including U.S. bank branches, on the effectiveness of the monetary policy transmission mechanism in Korea from the bank-lending channel perspective during the period of the global financial crisis of 2008-2009. One of the underlying reasons for the buffering effect of foreign bank branches is the existence of internal capital markets operated by multinational banks to overcome capital market frictions faced when the foreign banks finance their loans.
    Keywords: foreign banks; monetary policy transmission; financial crisis
    JEL: E52 G01 G21
    Date: 2014–05–01
  45. By: Stephen Eliot Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: Monetary policy, deliberation, FOMC, transparency, career concerns
    JEL: E52 E58 D78
    Date: 2014–05
  46. By: Donatella Baiardi (Department of Economics, Management and Statistics, University of Milano-Bicocca, Italy); Matteo Manera (Department of Economics, Management and Statistics, University of Milano-Bicocca and Fondazione Eni Enrico Mattei, Italy); Mario Menegatti (Department of Economics, University of Parma, Italy)
    Abstract: This paper empirically estimates a micro-founded model which studies the macroeconomic impact of environmental and financial risks on consumption choices in the Mediterranean Region. The analysis is carried out using time series aggregate data for fourteen Mediterranean countries over the period 1965-2008. Our results indicate that both risks and their interaction significantly influence consumption dynamics. Our estimates of the indexes of relative risk aversion and relative prudence, as well as the relative preference for the quality of environment suggest marked cross-country heterogeneity.
    Keywords: Consumption, Environmental Risk, Financial Risk, Prudence, Relative Risk Aversion, Relative Preference for the Quality of Environment
    JEL: Q50 D81 E21
    Date: 2014–04
  47. By: Giuseppe Moscariniy (Yale University, Economics Department); Fabien Postel-Vinay (University College London (UCL), Department of Economics; Centre for Macroeconomics (CFM))
    Abstract: We study employment reallocation across heterogeneous employers through the lens of a dynamic job-ladder model, where more productive employers spend more hiring effort and are more likely to succeed in hiring because they offer more. As a consequence, an employer's size is a relevant proxy for productivity. We exploit newly available U.S. data from JOLTS on employment ows by size of the establishment. Our parsimonious job ladder model fits the facts quite well, and implies `true' vacancy postings by size that are more in line with gross fl ows and intuition than JOLTS' actual measures of job openings, previously criticized by other authors. Focusing on the U.S. experience in and around the Great Recession, our main finding is that the job ladder stopped working in the GR and has not yet fully resumed.
    Keywords: employment reallocation, job ladder
    JEL: E24 E27
    Date: 2013–11
  48. By: Oliver Hart; Luigi Zingales
    Abstract: What is so special about banks that their demise often triggers government intervention? In this paper we develop a simple model where, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in need of liquidity tend to concentrate their holdings in banks. Thus, a shock to banks disproportionately affects the agents who need liquidity the most, reducing aggregate demand and the level of economic activity. In the context of our model, the optimal fiscal response to such a shock is to help people, not banks, and the size of this response should be larger if a bank, rather than a similarly-sized nonfinancial firm, fails.
    JEL: E41 E51 G21
    Date: 2014–06
  49. By: Camille Landais (London School of Economics (LSE), Economics Department); Pascal Michaillat (London School of Economics (LSE), Economics Department; Centre for Macroeconomics (CFM)); Emmanuel Saez (University of California-Berkeley, Department of Economics)
    Abstract: This paper analyzes optimal unemployment insurance (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters.
    Keywords: business cycle, unemployment insurance
    JEL: E24 E27
    Date: 2013–10
  50. By: Petr Sedlacek (Rheinische Friedrich-Wilhelms-Universität Bonn (University of Bonn), Wirtschaftswissenschaftlicher Fachbereich (Economics Department), Bonn Graduate School of Economics); Vincent Sterk (Centre for Macroeconomics (CFM))
    Abstract: This paper shows that job creation of cohorts of U.S. firms is strongly infl uenced by aggregate conditions at the time of their entry. Using data from the Business Dynamics Statistics (BDS) we follow cohorts of young firms and document that their employment levels are very persistent and largely driven by the intensive margin (average firm size) rather than the extensive margin (number of firms). To differentiate changes in the composition of startup cohorts from post-entry choices and to evaluate aggregate effects, we estimate a general equilibrium firm dynamics model using BDS data. We find that even for older firms, the aggregate state at birth drives the vast majority of variations in employment across cohorts of the same age. The key force behind this result are fl uctuations in the composition of startup cohorts with respect to firms' potential to grow large. At the aggregate level, factors determined at the startup phase account for the large low-frequency fl uctuations observed in the employment rate.
    Keywords: Firm Dynamics, Heterogeneous Agents, Maximum Likelihood, DSGE
    JEL: E32 D22 L11 M13
    Date: 2014–02
  51. By: Gerlach, Stefan. (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: Using annual data from several sources, we study the evolution of M1, M2, income, prices and long and short interest rates in Ireland over the period 1933-2012. We find cointegration and that prices, income and interest rates are weakly exogenous. While the estimates for M2 are stable and close to our priors, for M1 we obtain very low price elasticities, and a relatively high income elasticity, and detect parameter instability. We estimate a short-run M2 demand function that passes a number of diagnostic tests, although the standard errors of the regressions is large.
    Keywords: Ireland, historical statistics, long time series, money, income, prices.
    JEL: E3 E4 N14
    Date: 2014–03
  52. By: Rebecca Riley (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Chiara Rosazza Bondibene (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Garry Young (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: We investigate labor productivity dynamics amongst British businesses in the wake of the credit crisis of 2007/8. The external restructuring of firms (i.e. changes in market share, firm entry and exit) contributed to a fall in productivity growth relative to trend amongst small businesses in bank dependent industries, consistent with the idea that an adverse credit supply shock caused inefficiencies in resource allocation across firms. But, the major part of the decline in UK productivity growth following the credit crisis was accounted for by a widespread productivity shock within firms, pointing to the importance of other factors in explaining the Great Stagnation.
    Keywords: productivity growth, reallocation, Great Recession and Stagnation, credit shock
    JEL: L11 O47 E32
    Date: 2013–08
  53. By: Ludovit Odor (Council for Budget Responsibility)
    Abstract: Under substantial market pressure, policymakers have proposed a diverse set of far-reaching changes to the basic European fiscal architecture. The adoption of the so called “Six-pack”, “Two-pack” and the agreement on the Fiscal Compact made the fiscal framework more complex, but the proponents highlighted their main benefits in higher transparency at national level, more local ownership and stricter enforcement mechanisms. This paper´s objective is to critically assess the new framework, its initial implementation and to identify potential shortcomings. The well-known Kopits-Symansky criteria represent the basis for the review. We also formulate fifteen recommendations, which aim at a simpler, more internally consistent system where flexible interpretation is not necessary to eliminate tensions between various elements of the framework.
    Keywords: fiscal rules, Kopits-Symansky criteria, structural budget balances
    JEL: E61 E62 H60 H62
    Date: 2014–03
  54. By: L. Rachel Ngai (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM)); Barbara Petrongolo (Queen Mary, School of Economics and Finance; London School of Economics (LSE), Centre for Economic Performance (CEP))
    Abstract: This paper investigates the role of the rise of services in the narrowing of gender gaps in hours and wages in recent decades. We document the between-industry component of the rise in female work for the U.S., and propose a model economy with goods, services and home production, in which women have a comparative advantage in producing market and home services. The rise of services, driven by structural transformation and marketization of home production, acts as a gender-biased demand shift raising women?s relative wages and market hours. Quantitatively, the model accounts for an important share of the observed trends.
    Keywords: gender gaps, structural transformation, marketization
    JEL: E24 J22 J16
    Date: 2014–05
  55. By: McCarthy, Yvonne (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland)
    Abstract: The greater use of microeconomic and survey based data in addressing key financial stability related questions is a natural outcome of the recent financial crisis. Amongst other benefits, the use of such data enables a more precise understanding of the differing attitudes and responses of individual agents such as households to financial shocks. However, some difficulties can arise with the use, in particular, of survey data in this regard. In this paper we calculate measurement error in the house prices “recalled” by a representative sample of mortgaged Irish households and illustrate the degree of attenuation bias consequently introduced into estimates of housing wealth effects, when recall as opposed to actual house prices are used.
    Keywords: Attenuation Bias, Recall Error, Consumption, House Prices.
    JEL: E21 C81 D12
    Date: 2014–03
  56. By: Kris James Mitchener; Kirsten Wandschneider
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in- differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    JEL: E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  57. By: Angus Armstrong (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Monique Ebell (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM))
    Abstract: The objective of this paper is to consider which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency union, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important.
    Keywords: monetary policy
    JEL: E52
    Date: 2013–10
  58. By: Papież, Monika; Śmiech, Sławomir; Dąbrowski, Marek A.
    Abstract: The aim of the paper is the analysis of the links between the real and financial processes in the euro area and energy and non-energy commodity prices. Monthly data spanning from 1997:1 to 2013:12 and the structural VAR model are used to analyse the relations between global commodity prices and the euro area economy. The analysis is performed for three sub-periods in order to capture potential changes in these relations in time. The main finding of the study reveals that commodity prices in the euro area do not respond to impulses from production (the economic activity), while commodity prices strongly react to impulses from financial processes, that is, the interest rates in the euro area and the dollar exchange rate to the euro (especially in the period before the global financial crisis). The study also indicates tightening the relations between energy and non-energy commodity prices.
    Keywords: commodity prices, real economy, financial market, SVAR
    JEL: C3 E3 E4 Q1 Q4
    Date: 2014–06–14
  59. By: Goldberg, Jonathan E. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: I show that, due to imperfect risk sharing, aggregate shocks to uncertainty about idiosyncratic return on investment generate economic contractions with elevated risk premia and a decrease in the risk-free rate. I present a tractable real business cycle model in which firms experience idiosyncratic shocks, to which managers are at least partially exposed; the distribution of these shocks is time-varying and stochastic. I show that the path for aggregate quantities, the price of physical capital, and the equity premium are the same as in a model without idiosyncratic risk, but with time-preference shocks. That is, in response to an increase in idiosyncratic uncertainty, the response of these variables is the same as if there were no idiosyncratic uncertainty but managers were suddenly reluctant to invest. However, time-preference and idiosyncratic uncertainty shocks are not isomorphic: an increase in idiosyncratic uncertainty leads to greater demand for precautionary saving and hence a decrease in the risk-free rate; in contrast, an increase in impatience has the opposite effect. In addition, with an idiosyncratic uncertainty shock, investment in physical capital can remain low even after the stock market and firm profitability recover, because managers cannot fully transfer idiosyncratic risk to diversified investors. Thus, shocks to idiosyncratic investment risk can explain, qualitatively, the aftermath of financial panics--elevated risk premia, a sharp and persistent decrease in investment, and a decrease in the risk-free rate. In a calibration, an increase in idiosyncratic investment risk similar to that experienced during the Great Recession leads firms to invest as if their cost of capital were 10 percentage points higher than the cost of capital implied by financial markets, and to a large decrease in the real risk-free rate.
    Keywords: Incomplete markets; idiosyncratic risk; business cycles; equity premium; risk-free rate
    Date: 2014–01–10
  60. By: D'Amico, Stefania (Federal Reserve Bank of Chicago); Kim, Don H. (Board of Governors of the Federal Reserve System (U.S.)); Wei, Min (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: TIPS are notes and bonds issued by the U.S. Treasury with coupons and principal payments indexed to inflation. Using no-arbitrage term structure models, we show that TIPS yields contained liquidity premiums as large as 100 basis points when TIPS were first issued, reflecting the newness of the instrument, and up to 350 basis points during the recent financial crisis, reflecting common funding constraints affecting a variety of financial markets. Applying our models to the U.K. data also reveals liquidity premiums in index-linked gilt yields that spiked to nearly 250 basis points at the height of the crisis. Ignoring TIPS liquidity premiums is shown to significantly distort the information content of TIPS yields and TIPS breakeven inflation rate, two widely-used empirical proxies for real rates and expected inflation.
    Keywords: TIPS; liquidity premium; no-arbitrage term structure model; TIPS breakeven inflation; expected inflation; inflation risk premium; survey forecasts
    Date: 2014–01–31
  61. By: Hancock, Diana (Board of Governors of the Federal Reserve System (U.S.)); Passmore, Wayne (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We conduct an empirical analysis of the Federal Reserve's large-scale asset purchases (LSAPs) on MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.
    Keywords: Monetary policy; QE1; QE2; QE3; LSAP; MBS; mortgages
    Date: 2014–02–06
  62. By: Emma Aisbett (Crawford School of Public Policy, The Australian National University; University of Hamburg); Markus Brueckner (National University of Singapore); Ralf Steinhauser (University of Hamburg); Rhett Wilcox (The Australian Treasury)
    Abstract: In 2009 the Australian government delivered approximately $8 billion in direct payments to households. These payments were pre- announced and randomly allocated to households based on postal codes over a 5-week period. We exploit this random allocation to estimate the causal response of households' non-durable consumption expenditures to a transitory, anticipated income increase. Our main findings are that: (i) non-durable consumption expenditures did not react significantly during or after the one-time, pre-announced transfer; (ii) there is a small, albeit statistically significant increase in non-durable consumption expenditures at the time of the announcement of the fiscal stimulus.
    JEL: E62 E21 H31 D91
    Date: 2014–01
  63. By: de Boyer des Roches, Jérôme
    Abstract: Over the past two centuries, the connection David Ricardo made between money and foreign trade was widely commented on the basis of the 1809-1811 writings, notably the High Price of Bullion, Proof of the Depreciation of Bank Notes, of the 1816 Proposals for an Economical and Secure Currency, proposals taken again in the chapter twenty seven “On Currency and Banks” of the 1817 Principles of Political economy an Taxation, and of the 1823 Plan for a National Bank. On the other hand, the chapter seven “On Foreign Trade” of the 1817 Principles was mostly ignored with the exception of J.W. Angell (1926), F.W. Taussig (1927), K. Kojima (1951), M. Blaug (1976), J. de Boyer (1992) et G. Faccarello (2013) who did pay attention to it. Yet, according to Ricardo, the concept of comparative advantage cannot be understood without studying the international distribution of precious metals, and the determination of the natural prices of wine and cloth. In other words, the determination of relative prices includes monetary mechanisms. However the chapter seven of the Principles did not simply resume the 1809-1811 Ricardo’s monetary ideas. Here, Ricardo used arguments he had criticized seven years before. Furthermore, he reconsidered the link between value of money and exchange rate. The aim of this paper is to present and compare Ricardo’s monetary and foreign exchange analysis in the writings of 1809-1811 on one side, and in the chapter seven of his 1817 book on the other side. By means of a numerical example, the second section recalls the main features of the 1809-1811 analysis. According to Ricardo, the value of money in two trading countries must be equal for the foreign exchange equilibrium to be reached. Several notions such as the price specie flow mechanism, the quantity theory and the criticism of Thornton’s gold point mechanism are emphasized in this section. The third section presents the theory of the comparative advantage developed in chapter seven of the Principles; more than half of this text is consecrated to monetary components. Emphasis is placed on the foreign exchange market, the price specie flow between countries, and also the dynamics of money prices and wages that led to international specialization. The fourth section studies first the disconnection established by Ricardo in chapter seven of the Principles between the values of currencies and exchange rates, and second then his comments relative to the bullionist controversy; these comments close the chapter. The fifth section provides some precisions on (1) the "magic numbers" – i.e. 80, 90, 120, 100 -, (2) on the assumptions made to obtain the money prices - i.e. £45, £50, £50, £45 -, so that the terms of trade/exchange are not indeterminate contrary to an opinion inherited from John Stuart Mill, (3) finally on the consequences of an “improvement in making” English wine. Our research provides the following conclusions. First, Ricardo’s statement of the comparative advantage theory involves the monetary theory, specifically it presupposes the validity of the quantity theory. The specie inflow (outflow) in one country drops (increases) the value of money in this country. Secondly, according to the comparative advantage theory, “England would give the produce of the labour of 100 (English) men, for the produce of the labour of 80 (Portuguese)” (Ricardo, 1817, p; 135). It entails that the money price of the produce of 80 Portuguese men is equal to the money price of the produce of 100 English. It means that the money price of the produce of a given quantity of labour is 25% higher in Portugal than in England; i.e. that the value of a given quantity of money is 20% lower in Portugal than in England. Third, the specie flow between countries is not described with Hume’s price specie flow mechanism, but with Thornton’s gold points mechanism. Fourth, fixed exchange rate under gold standard does not involve gold has the same value in various countries. The symmetrical changes, in two countries, in the quantities of money, that lead to symmetrical changes in the values of money, do not modify the market prices of gold in any of these countries. To conclude, the seventh chapter of the Principles does not support Ricardo’s monetary view at the time of the Bullion Committee.
    Keywords: Comparative advantage; Foreign Trade; Money; Specie flow mechanism; Gold points; Ricardo;
    JEL: B12 E4 F1
    Date: 2014–05
  64. By: Julius Bonart; Jean-Philippe Bouchaud; Augustin Landier; David Thesmar
    Abstract: We study a dynamical model of interconnected firms which allows for certain market imperfections and frictions, restricted here to be myopic price forecasts and slow adjustment of production. Whereas the standard rational equilibrium is still formally a stationary solution of the dynamics, we show that this equilibrium becomes linearly unstable in a whole region of parameter space. When agents attempt to reach the optimal production target too quickly, coordination breaks down and the dynamics becomes chaotic. In the unstable, "turbulent" phase, the aggregate volatility of the total output remains substantial even when the amplitude of idiosyncratic shocks goes to zero or when the size of the economy becomes large. In other words, crises become endogenous. This suggests an interesting resolution of the "small shocks, large business cycles" puzzle.
    Date: 2014–06
  65. By: cho, hyejin
    Abstract: This article presents a methodology designed to facilitate alternative variables measuring economic growth. A capital-labor split of Cobb-Douglas function is adapted for use in the context of economic growth. A capital/income ratio and two fundamental law of capitalism originated by Thomas Piketty illustrate capital inequality undervalued than labor inequality. In addition, the article includes export and external debt as strong alternatives. Empirical data of the World Bank are analyzed to demonstrate broad differences in economic sizes. The case analysis on Latin America as an example of different sized economy is also discussed.
    Keywords: Capital-labor split, factors of production, capital/income ratio, Thomas Piketty, Capitalism, Economic size, Debt sustainability, Latin America, Import substitution industrialization (ISI) model, Insolvent external debt, Openness, External debt to exports ratio
    JEL: C0 E22 O11 O54
    Date: 2014–06–17
  66. By: Coleman, Nicholas (Board of Governors of the Federal Reserve System (U.S.)); Feler, Leo (Johns Hopkins University SAIS)
    Abstract: While the finance literature often equates government banks with political capture and capital misallocation, these banks can help mitigate financial shocks. This paper examines the role of Brazil’s government banks in preventing a recession during the 2008-2010 financial crisis. Government banks in Brazil provided more credit, which offset declines in lending by private banks. Areas in Brazil with a high share of government banks experienced increases in lending, production, and employment during the crisis compared to areas with a low share of these banks. We find no evidence that lending was politically targeted or that it caused productivity to decline in the short-run.
    Keywords: Credit; financial crises; state-owned banks; local economic activity
    Date: 2014–03–05
  67. By: Gagnon, Etienne (Board of Governors of the Federal Reserve System (U.S.)); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.
    Keywords: Demand shocks; inflation; sales; labor conflicts; mass population displacement; severe weather events
    Date: 2014–02–11
  68. By: Michal Jurek (Poznan University of Economics)
    Abstract: The purpose of this report is to analyse the impact of the financial sector on the real sector of the economy in the selected old (France, Germany, Italy, Sweden, the United Kingdom) and new (the Czech Republic, Hungary, Poland) EU member states. The specific objectives are: 1. Analysis of the influence of financial institutions on financing the real economy. 2. Identification of sectoral and national differences in the financial sectors and consequences of these divergences for the real sectors in analysed countries. In order to accomplish this target, extensive research is undertaken. It encompasses the analysis of types of financial institutions functioning in the selected EU member states. Linkages between different types of financial institutions and the real sector of the economy are identified and described, and differences in impact of the financial sector on the real sector of the economy in the analysed EU member states are recognized. Finally, comparative analysis of evolution of structure of financial sector and driving forces in the process of its evolution in selected countries and group of countries is presented. Conducted analysis allowed formulating many remarks. Among them, the most important appears to be that the proper regulatory environment is crucial to prevent negative influence of financialisation on the real sector of the economy. Public authorities should be more proactive in creating a financial sector able to reconcile the private financial institutions striving for profit with interests of the real sector and of general public ones. To achieve this target public authorities should, on the one hand, effectively regulate and supervise all financial institutions, and, on the other, create favourable conditions for development of other than private-owned profit-oriented financial institutions. Policy goals should include promoting both competition and plurality. Competition is necessary for efficient functioning of financial institutions. Plurality, by protecting diversity of financial sectors, builds up systemic trust and helps maintaining the stability of this sector. Efficient, but less oligopolistic market structures within the framework of prudential regulation should enforce financial sectors’ stability in the analysed countries. Therefore, optimum regulatory structures should be aimed at the protection of the diversity within the framework of harmonization of financial sectors within the EU.
    Keywords: financial institutions, financial sector, banking and finance, ownership structure, market concentration, mergers and acquisitions, privatization
    JEL: E44 E50 G21 G22 G32 G34 N24
  69. By: Narcisa Kadlcakova; Lubos Komarek; Zlatuse Komarkova; Michal Hlavacek
    Abstract: This paper examines the potential for concurrence of crises in the foreign exchange, stock, and government bond markets as well as identifying asset price misalignments from equilibrium for three Central European countries and the euro area. Concurrence is understood as the joint occurrence of extreme asset changes in different countries and is assessed with a measure of the asymptotic tail dependence among the distributions studied. However, the main aim of the paper is to examine the potential for concurrence of misalignments from equilibrium among financial markets. To this end, representative assets are linked to their fundamentals using a cointegration approach. Next, the extreme values of the differences between the actual daily exchange rates and their monthly equilibrium values determine the episodes associated with large departures from equilibrium. Using tools from Extreme Value Theory, we analyze the transmission of both standard crisis and misalignment-from-equilibrium formation events in the foreign exchange, stock, and government bond markets examined. The results reveal significant potential for co-alignment of extreme events in these markets in Central Europe. The evidence for co-movements is found to be very weak for the exchange rates, but is stronger for the stock markets and bond markets in some periods.
    Keywords: Cointegration, concurrence of extreme values, Extreme Value Theory, financial market
    JEL: C58 E44 G12 C38
    Date: 2013–12
  70. By: McCarthy, Yvonne (Central Bank of Ireland); McQuinn, Kieran (Central Bank of Ireland)
    Abstract: A distinguishing feature of the period preceding the 2007/08 financial crisis was the sizeable increase in private sector debt observed across many countries. A key component of household liabilities is mortgage debt and with many countries experiencing persistent increases in house prices from the mid-1990s onwards, a marked increase in this aspect of household leverage was observed. While aggregate statistics across countries confirm reductions in personal debt levels in recent years, relatively few sources of micro data are available to examine the nature of the deleveraging process at the household level. In this paper, using a unique combination of regulatory and survey data, we examine deleveraging amongst a representative sample of mortgaged Irish households. In particular, we examine the characteristics of households presently reducing their debt levels and empirically assess whether the subsequent balance sheet adjustments have implications for key economic decisions. Our analysis suggests that, typically, it is those households who can deleverage, who do, and furthermore the decision to deleverage has negative implications for household consumption.
    Keywords: Deleveraging, Debt, House Prices, Consumption.
    JEL: D12 D14 E21
    Date: 2014–03
  71. By: Antony, Jürgen
    Abstract: This paper addresses the relationship between technical change and the elasticity of substitution between factors of production. It is shown how the elasticity within a CES production setting can change due to technical change. Technical change is interpreted in the spirit of horizontal differentiation as in many growth models. Cases for positive and negative returns to differentiation are analyzed which can be understood as progress or complexity congestions. It is shown how the elasticity changes due to technical choices for each of them. --
    Keywords: Elasticity of substitution,CES production function,Inequality
    JEL: E23 O33 F41 J24
    Date: 2014
  72. By: Timothy Kam; Pere Gomis-Porqueras; Christopher J. Waller
    Abstract: In this paper we study the endogenous choice to accept fiat objects as media of exchange, the fundamentals that drive their acceptance, and their implications for their bilateral nominal exchange rate. To this end, we consider a small open economy where agents have no restrictions on what divisible fiat currency can be used to settle transactions (i.e. no currency control). We build on Li, Rocheteau and Weill (2013) and allow both fiat currencies to be counterfeited at some fixed costs. The two currencies can coexist, even if one of the currencies is dominated by the other in rate of return. This is driven by an equilibrium outcome in which private information and threats of counterfeiting imposes an equilibrium liquidity constraint on currencies in circulation. Thus, threats of counterfeiting help to pin down a determinate nominal exchange rate, and, to break the Kareken-Wallace indeterminacy result in an environment without ad-hoc currency controls. Finally, we show that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rate.
    Date: 2013–11
  73. By: Michael Clemens and David McKenzie
    Abstract: While measured remittances by migrant workers have soared in recent years, macroeconomic studies have difficulty detecting their effect on economic growth. We review existing explanations for this puzzle and propose three new ones. First, we offer evidence that a large majority of the recent rise in measured remittances may be illusory—arising from changes in measurement, not changes in real financial flows. Second, we show that even if these increases were correctly measured, cross-country regressions would have too little power to detect their effects on growth. Third, we point out that the greatest driver of rising remittances is rising migration, which has an opportunity cost to economic product at the origin. Net of that cost, there is little reason to expect large growth effects of remittances in the origin economy. Migration and remittances clearly have first-order effects on poverty at the origin, on the welfare of migrants and their families, and on global GDP; but detecting their effects on growth of the origin economy is likely to remain elusive.
    Keywords: remittances, growth, migration, measurement
    JEL: F24 F22 E01 O15
    Date: 2014–05
  74. By: Ionescu, Felicia (Board of Governors of the Federal Reserve System (U.S.)); Ionescu, Marius (Colgate University)
    Abstract: We analyze the interactions between two different forms of unsecured credit and their implications for default behavior of young U.S. households. One type of credit mimics credit cards in the United States and the default option resembles a bankruptcy filing under Chapter 7; the other type of credit mimics student loans in the United States and the default option resembles Chapter 13. In the credit card market a financial intermediary offers a menu of interest rates based on individual default risk, which account for borrowing and repayment behavior in both markets. In the student loan market, the government sets the interest rate and chooses a wage garnishment to pay for the cost associated with default. We prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on each of these loans. We demonstrate that the institutional differences between the two markets make borrowers prefer to default on student loans rather than on credit card debt. We find that the increase in student loan debt together with the expansion of the credit card market fully explains the increase in the default rate for student loans in recent normal years (2004-2007). Worse labor outcomes for young borrowers during the Great Recession (2008-2009) significantly amplified student loan default, whereas credit card market contraction during this period helped reduce this effect. At the same time, the accumulation of student loan debt did not affect much the default risk in the credit card market during normal times, but significantly increased it during the Great Recession. An income contingent repayment plan for student loans completely eliminates the default risk in the credit card market and induces important redistribution effects. This policy is beneficial (in a welfare improving sense) during the Great Recession but not during normal times.
    Keywords: Default; student loans; credit cards; Great Recession
    Date: 2014–02–03
  75. By: Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed. This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation. However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation. We present a model illustrating these issues and apply the model to data for U.S. metropolitan regions. We find that that short- and long-term unemployment exert equal downward pressure on price inflation.
    Keywords: Short-term unemployment; phillips curve
    Date: 2014–03–21
  76. By: Gollier, Christian
    Abstract: Weitzman (1998, 2001) proposed a simple “gamma discounting” method to characterize the term structure of discount rates today from the sole distribution of future spot interest rates. This rule which justifies using a smaller discount rate for longer maturities is now used for long-term policy evaluations in the UK, France, Norway, and potentially in the US. But we show that there is no social preference within the discounted expected utility framework that generically supports this pricing model and its underlying criterion, the expected net present value rule. Considering a standard Lucas tree economy, we characterize the term structure from the joint distribution of future spot interest rates and future consumption levels. When future growth rates are serially correlated, efficient discount rates today are decreasing with maturity, and the gamma discounting rule yields discount rates that are larger than the efficient ones.
    Keywords: decreasing discount rates, term structure, uncertain growth, Weitzman-Gollier puzzle.
    JEL: E43 G11 G12 Q54
    Date: 2014–06
  77. By: Miguel Ángel Rivera Ríos (Universidad Autónoma de México)
    Abstract: The global financial crisis of the first decade of the 21st century had its origin in the creation and diversification of financial instruments backed by mortgages that eventually returned on high risk derivatives. As part of the shocks of the crisis a temporary restriction of credit was one of the main causes of global recession in 2009. However, an over-indebtedness process was extended throughout the developed world, affecting the most vulnerable economies of the European Union with particular virulence. Iceland, Ireland, Portugal. Greece and Spain, are countries where the crisis followed a similar pattern: collapse of the real estate sector, bank failures, its rescue with public funds, over-indebtedness, reduction of the fiscal deficit, unemployment, increased taxes and devaluation of sovereign bonds.
    Keywords: Global crisis, financial markets, capitalism
    JEL: E42 P17
    Date: 2014–06–17
  78. By: Varang Wiriyawit; Benjamin Wong
    Abstract: We highlight how detrending within Structural Vector Autoregressions (SVAR) is directly linked to the shock identification. Consequences of trend misspecification are investigated using a prototypical Real Business Cycle model as the Data Generating Process. Decomposing the different sources of biases in the estimated impulse response functions, we find the biases arising directly from trend misspecification are not trivial when compared to other widely studied misspecifications. Our example also illustrates how misspecifying the trend can also distort impulse response functions of even the correctly detrended variable within the SVAR system.
    Keywords: Structural VAR, Identification, Detrending, Bias
    JEL: C15 C32 C51 E37
    Date: 2014–06
  79. By: Li, Canlin (Board of Governors of the Federal Reserve System (U.S.)); Wei, Min (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.
    Keywords: No-arbitrage term structure models; Yield curve; Preferred habitat; Supply effects; Factor models; Large-scale asset purchases (LSAP); Agency mortgage-backed securities (MBS)
    Date: 2014–03–24
  80. By: Nadja König (Universität Hamburg (University of Hamburg)); Ingrid Größl (Universität Hamburg (University of Hamburg))
    Abstract: We study an Agent-based model of household-bank relationships where households borrow for the purpose of consumption. Desired consumption is driven by households disposable income as well as a social norm of consumption. If households care about their relative position in the economy (i.e. want to catch up with the Joneses), they are willing to take a loan. We conduct several computational experiments, where the absence of the social consumption norm (Joneses effect) functions as control treatment. Varying the strength of the social orientation and prevailing credit constraints, we find that the time path of macroeconomic time series is largely affected by the Joneses effect, while credit constraints determine their volatility. More precisely, we find that a strong Joneses effect has severe consequences for GDP growth and that borrowing constraints can reduce macroeconomic volatility. Since by assumption high-income and low-income households react equally sensitive to the Joneses effect, income distribution is the decisive variable for households social development. That said, access to credit exposes already poor households to find themselves caught in a poverty trap.
    Keywords: D53, E21
    Date: 2014–06
  81. By: Wlasiuk, Juan Marcos
    Abstract: The media and policy makers often mention that China manipulates its real exchange rate (RER) in order to improve its exports and boost growth. This view, however, is not supported by the most prominent economic models, which do not predict a positive relationship between real undervaluation and economic growth. I propose a 3-sector model with labor market frictions that explains how a policy aimed at increasing domestic savings and depreciating the RER can, at the same time, generate real growth through a reallocation of workers from a low-productivity traditional sector into a high-productivity manufacturing sector. The policy is particularly effective in countries with relative abundance of labor, scarcity of agricultural resources, and high barriers for the entry of workers into the manufacturing sector. Empirically, I verify that higher real undervaluation (measured as deviations from PPP) is positively associated with GDP and manufacturing growth in countries with lower per capita agricultural land and higher rural population. The relationship vanishes and even becomes negative in the opposite cases. Finally, I propose a simple methodology for the identification of real depreciations exogenously induced (i.e. that are not related to changes in productivities or in terms of trade). I find that, during the last 20 years, such episodes have been mainly observed in East Asian developing countries.
    Keywords: Real Exchange Rate, Growth, Labor Market Frictions, Urban-Rural Migration, China
    JEL: E5 E58 F31 F43 J61 O11
    Date: 2013–06
  82. By: Alberto Cavallo; Brent Neiman; Roberto Rigobon
    Abstract: Does membership in a currency union matter for prices and for a country's real exchange rate? The answer to this question is critical for thinking about the implications of joining (or exiting) a common currency area. This paper is the first to use high-frequency good-level data to demonstrate that the answer is yes, at least for an important subset of consumption goods. We consider the case of Latvia, which recently dropped its pegged exchange rate and joined the euro zone. We analyze the prices of thousands of differentiated goods sold by Zara, the world's largest clothing retailer. Price dispersion between Latvia and euro zone countries collapsed swiftly following entry to the euro. The percentage of goods with nearly identical prices in Latvia and Germany increased from 6 percent to 89 percent. The median size of price differentials declined from 7 percent to zero.
    JEL: E3 F3 F4
    Date: 2014–06
  83. By: Fadi Hassan (Trinity College Dublin)
    Abstract: The Penn-Balassa-Samuelson e?ect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price-income relation is actually non-linearand turns negative in low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show thatbiases in PPP estimation and measurement error in low-income countries do not drive the result. The different stage of development between countriescan explain this new ?nding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data.
    Keywords: real exchange rate
    JEL: E31 F4 O1
    Date: 2014–04
  84. By: Lucia Ramirez (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriela Mordecki (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: Investment is a key to analyze an economy’s growth, as its increase the economy productive capacity, either expanding the capital stock as incorporating new technology that makes the production process more efficient. In Uruguay, investment has substantially increased in recent years, both overall and sectoral. This would have occurred as a result of strong growth in the period, as well as government policies on investment promotion. Growth and investment evolution, together with employment, has undergone a long history in economic theory. In that sense, there are empirical studies that support the theory that investment precedes growth, while there are others that provide evidence to the hypothesis that growth determines investment. Through a model with vector error correction (VECM) we found a long-term relationship between GDP without primary activity, investment and urban workers of Uruguay. In this model we observe a positive relationship between GDP and the other two variables, where GDP precedes both urban workers and investment.
    Keywords: investment, growth, employment, cointegration
    JEL: B23 E22 F43
    Date: 2014–06
  85. By: Adler, Matthew; Treich, Nicolas
    Abstract: Most economic problems combining risk and equity have been studied under utilitarianism. As an alternative, we study consumption decisions under risk assuming a prioritarian social welfare function. Under a standard assumption about the utility function (i.e., decreasing absolute risk aversion), there is always more current consumption under ex ante prioritarianism than under utilitarianism. Thus, a concern for equity (in the ex ante prioritarian sense) means less concern for the risky future. In contrast, under standard utility and social welfare functions, there is less current consumption under ex post prioritarianism than under utilitarianism.
    Keywords: Precautionary savings, utilitarianism, prioritarianism, discounting, climate change.
    JEL: D81 E21 I31
    Date: 2014–02
  86. By: Hryckiewicz, Aneta
    Abstract: The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process.
    Keywords: Bank risk, business models, bank regulation, financial crisis, banking stability
    JEL: E58 G15 G21 G32
    Date: 2014–06–18
  87. By: Xavier Chojnicki; Lionel Ragot
    Abstract: Immigration is often seen as an instrument of adaptation for aging countries. In this paper, we evaluate, using a dynamic general equilibrium model, the contribution of migration policy in reducing the tax burden associated with the aging population in France. Four variants, compared to a baseline scenario based on oficial projections, are simulated with the aim to quantify the immigration effects on the French social protection finances. The first variant assesses the economic effects of immigration in France as projected into official forecasts. The three other variants are built on the same more ambitious annual flows of immigrants (corresponding to net migration that have characterized the second great wave of immigration in France in the twentieth century). These three variants only distinguish in terms of the skill structure of new migrants. We show that the age and skill structure of immigrants are the key feature that mainly determine the effects on social protection finances. Overall, these effcts are all the more positive in the short-medium term that the migration policy is selective (in favor of more skilled workers). In the long term, beneficial effects of a selective policy may disappear. But the financial gains from more consequent migration flows are relatively moderated in comparison of demographic changes implied.
    Keywords: Migration, AGEM, Overlapping generations, Aging, Public finance, Social protection.
    JEL: C68 D58 E60 H55 H68 J61
    Date: 2014
  88. By: Dasgupta, Shouro; Bhattacharya, Debapriya; Neethi, Dwitiya Jawher
    Abstract: The key socioeconomic indicators of Bangladesh have apparently experienced improvement since the advent of a new phase of democracy in 1991. This paper examines the impact of democracy on economic growth in Bangladesh using a cointegrated Vector Autoregressive model. Results suggest that democracy as practiced in Bangladesh does not seem to have a significantly positive impact on economic growth, and at the same time authoritarian regimes tend to have a significantly negative impact on economic growth. Inadequate democratic decision making practices, ineffective policy designs and weak policy making institutions are some of the likely causes behind this relationship. The situation is aggravated by the fact that the institutions do not positively alter the decision making behaviour even under democratically elected regimes.
    Keywords: Democracy, Economic Growth. Cointegration, VAR, and Polity IV
    JEL: C10 C12 C51 E13 O43
    Date: 2013–09
  89. By: Michael Clemens and Timothy N. Ogden
    Abstract: It is time to fundamentally reframe the research agenda on remittances, payments, and development. We describe many of the research questions that now dominate the literature and why they lead us to uninformative answers. We propose reasons why these questions dominate, the most important of which is that researchers tend to view remittances as states do (as windfall income) rather than as families do (as returns on investment). Migration is, among other things, a strategy for financial management in poor households: location is an asset, migration an investment. This shift of perspective leads to much more fruitful research questions that have been relatively neglected. We suggest 12 such questions.
    Keywords: migration, finance, global development
    JEL: F24 F30 E42 O16
    Date: 2014–02
  90. By: Alex Haberis (Bank of England; Centre for Macroeconomics (CFM)); Andrej Sokol (Bank of England)
    Abstract: In this paper we describe a procedure for implementing zero restrictions within the context of a sign restrictions identification scheme for VARs. The procedure introduces an additional step into the algorithm outlined in Fry and Pagan (2011) and Rubio-Ramirez et al. (2006) for implementing sign restrictions. This extra step involves rotating a candidate identification matrix using Givens rotation matrices to introduce zero restrictions. We then check whether the elements of the candidate matrix satisfy the sign restrictions as usual. We illustrate how our procedure works by generating artificial data from the theoretical model of An and Schorfheide (2007), which implies certain restrictions on the impact of its structural shocks on the model's endogenous variables. We exploit our knowledge of that pattern to identify structural shocks from the reduced-form errors of a VAR estimated on the simulated data.
    JEL: C32 C51 E12
    Date: 2014–06
  91. By: John D. Conroy (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper is concerned with the accommodation to the market economy of Tolai people, indigenous to the Gazelle Peninsula in Papua New Guinea and regarded as one of the most prosperous and enterprising groups in the country. 'The market' was introduced to Tolai by German (and later, Australian) colonists from the late nineteenth century. Without pretension to novelty in the historical narrative it asserts the value of viewing these events through the lens of 'informal economy', as constructed by Keith Hart. The paper is a companion piece to another study, concerned with the economic history of Chinese immigrants to Rabaul (Conroy, forthcoming). Starting from the proposition that (unlike the Chinese) the Tolai had no tradition of 'trade as a self-sufficient profession', it considers how they adapted their livelihoods to the colonial economy. In German New Guinea, market economic activity was supposed to be conducted in conformity with the norms of a particular model of Weberian 'rational-legal' bureaucracy, introduced by the Reich. In turn, German bureaucratic norms were guided by an ideology of 'national-economic purpose', enunciated for the Wilhelmine state and its colonies. The paper argues that subsequent Australian administrators adopted the German bureaucratic framework, while employing it initially for somewhat different ends and eventually (after World War II) adapting it to the needs of a new ideology of 'economic development'. Across this long period Tolai engagement in the market economy proved to be 'informal', in the sense that it did not conform fully with prescribed bureaucratic norms. It displayed the hybridity found wherever Smithian trade (seen as activated by a natural human tendency to 'truck and barter') is confronted by Maussian exchange (seen as the product of socially regulated customs). The paper considers how tensions between German/Australian expectations of Tolai economic behaviour and the reality of that behaviour played out over the colonial period to 1975. At the end of that time, trade as 'a self-sufficient profession' appeared to be confined to some instances of petty specialized trade amid signs of more general emerging change in trading culture.
    JEL: E26 N37 N57 N97 O17 P52 Z13
    Date: 2014–05

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