nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒07‒05
sixty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The impact of national fiscal rules on the stabilisation function of fiscal policy By Sacchi, Agnese; Salotti, Simone
  2. Understanding the Great Recession By Christiano, Lawrence J.; Eichenbaum, Martin; Trabandt, Mathias
  3. The Determinants of Inflation in Egypt: An Empirical Study (1991-2012) By El Baz, Osama
  4. Government spending shocks, wealth effects and distortionary taxes By James Cloyne
  5. Forecasting inflation at the Central Bank of Malta� By Gatt, William
  6. Conflicting incentives for the public to support the EMU By Brigitte Granville; Dominik Nagly
  7. International Capital Flows and the Boom-Bust Cycle in Spain By Beatrice Pataracchia; Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld
  8. Reforming the Fiscal Framework. The Case of Sweden 1973-2013 By Jonung, Lars
  9. Exchange Rate Pass-through in Russia By Yuri Ponomarev; Pavel Trunin; Alexei Uluykaev
  10. The Role of the Taylor Principle in the neo-Kaleckian Model when applied to an Endogenous Market Structure By OHNO, Takashi
  11. Etimating NAIRU: the Morocco case By El Alaoui, Aicha; Ezzahidi, Elhadj; Eladnani, Mohamed Jellal
  12. Navigating Constraints: The Evolution of Federal Reserve Monetary Policy, 1935-59 By Carlson, Mark A.; Wheelock, David C.
  13. The Macroeconomic Consequences of Asset Bubbles and Crashes By Shi, Lisi; Suen, Richard M. H.
  14. The inflation bias under Calvo and Rotemberg pricing By Campbell Leith; Ding Liu
  15. Excess reserves, interbank markets and domestic money market intervention By Willmott, Bryony
  16. Dynamics of Business Cycles in Vietnam: A comparison with Indonesia and Philippines By Le, Ha
  17. On the Nominal Interest Rate Yield Response to Net Government Borrowing in the U.S.: An Empirical Analysis with Robustness Tests By Alexander, Gigi; Foley, Maggie
  18. Forecasting In a Non-Linear DSGE Model By Sergey Ivashchenko
  19. Unconventional Monetary Policy and Money Demand By Christian Dreger; Jürgen Wolters
  20. The art of central banks' forward guidance at the zero lower bound By Bennani, Hamza
  21. Inflation Targeters Do Not Care (Enough) about Financial Stability: A Myth? By Armand Fouejieu Azangue
  22. Coordination arrangements across government sub-sectors in EU Member States By Georges Tournemire
  23. U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies By Bowman, David; Londono, Juan M.; Sapriza, Horacio
  24. Can Europe recover without credit? By Darvas, Zsolt
  25. Causality between Stock Market Index and Macroeconomic Variables: A Case Study for Malaysia By Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
  26. Using Survey Data of Inflation Expectations in the Estimation of Learning and Rational Expectations Models. By Ormeno, Arturo; Molnar, Krisztina
  27. Optimal Monetary Policy in the Presence of Human Capital Depreciation during Unemployment By Lien Laureys
  28. Modelling the service sector By Philip King; Stephen Millard
  29. What drives heterogeneity of loan loss provisions’ procyclicality in the EU? By Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
  30. Long Memory in UK Real GDP, 1851-2013: An ARFIMA-FIGARCH Analysis By Guglielmo Maria Caporale; Marinko Skare
  31. Does Employment Protection Legislation Induce Structural Unemployment? Evidence from 15 OECD Countries By Afful, Efua Amoonua
  32. Partisan conflict By Azzimonti-Renzo, Marina
  33. The Liquidity Premium of Near-Money Assets By Stefan Nagel
  34. The Decline of Drudgery and the Paradox of Hard Work By Epstein, Brendan; Kimball, Miles S.
  35. Two views of international monetary policy coordination By Bullard, James B.
  36. Leverage Restrictions in a Business Cycle Model By Lawrence Christiano; Daisuke Ikeda
  37. Banks as Secret Keepers By Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
  38. Accommodative monetary policy: savior or saboteur? By Williams, John C.
  39. Endividamento antes e após a introdução do euro: análise ARDL do caso português By Gaspar, Catarina; Fuinhas, José Alberto; Marques, António Cardoso
  40. Flights to Safety By Baele, Lieven; Bekaert, Geert; Inghelbrecht, Koen; Wei, Min
  41. Forecasting with DSGE models with financial frictions By Kolasa, Marcin; Rubaszek, Michał
  42. Behavioral Economics and Macroeconomic Models By Driscoll, John C.; Holden, Steinar
  43. Learning About Commodity Cycles and Saving- Investment Dynamics in a Commodity-Exporting Economy By Jorge Fornero; Markus Kirchner
  44. Forecasting with a mismatch-enhanced labor market matching function By Hutter, Christian; Weber, Enzo
  45. Are There Bubbles in Stock Prices? Testing for Fundamental Shocks By Anton Velinov; Wenjuan Chen
  46. A Comparison of Programming Languages in Economics By S. Borağan Aruoba; Jesús Fernández-Villaverde
  47. Do Media Data Help to Predict German Industrial Production? By Konstantin A. Kholodilin; Tobias Thomas; Dirk Ulbricht
  48. Dynamic Integration of Domestic Equity Price, Foreign Equity Price and Macroeconomic Indicators: Evidence from Malaysia By Kabir, Sarkar Humayun; Masih, Mansur
  49. Does nominal rigidity mislead our perception of the exchange rate pass-through? By Olivier de Bandt; Tovonony Razafindrabe
  50. A Human Capital Theory of Economic Growth: New Evidence for an Old Idea By Theodore R. Breton
  51. Consumer default and optimal consumption decisions By Bechlioulis, Alexandros; Brissimis, Sophocles
  52. Bank Competition, Borrower Competition and Interest Rates By Carlos Bellón
  53. Latin American Growth in the 21st Century: The 'Commodities Boom' That Wasn't By David Rosnick; Mark Weisbrot
  54. Advances in Financial Risk Management and Economic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer
  55. A Regional Analysis of Markets Uncertainty Spillovers By Kamel Malik Bensafta
  56. ECB Policy and Eurozone Fragility: Was De Grauwe Right? By Fuertes, Ana-Maria; Kalotychou, Elena; Saka, Orkun
  57. Evaluating Treatment Effect and Causal Effect of Fiscal Rules on Procyclicality New assessments on old debate: rules vs. discretion By Pierre MANDON
  58. A Historical Sketch of Macroeconometrics By Rahmanov, Ramiz
  59. Modelização VAR da volatilidade dos preços do ouro e dos índices dos mercados financeiros By Antunes, João Marques; Fuinhas, José Alberto; Marques, António Cardoso
  60. Stock Market Predictability: Global Evidence and an Explanation By Cheolbeom Park; Dong-hun Shin
  61. Current Problems in the Development of the Banking System of the Russian Federation By Alexey Vedev; Sergey Drobyshevsky; Mikhail Khromov; Sergey Sinelnikov-Murylev

  1. By: Sacchi, Agnese; Salotti, Simone
    Abstract: We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985-2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of both output and inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, probably because of the higher importance of central banks in that respect.
    Keywords: discretionary fiscal policy, macroeconomic volatility, fiscal rules, stabilisation function
    JEL: E32 E62 H60
    Date: 2014–06
  2. By: Christiano, Lawrence J. (Northwestern University); Eichenbaum, Martin (Northwestern University); Trabandt, Mathias (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which firms face moderate degrees of price rigidities and no nominal rigidities in the wage setting process. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small size of the drop in inflation that occurred during the Great Recession.
    Keywords: Inflation; unemployment; labor force; zero lower bound
    JEL: E24 E32
    Date: 2014–04–02
  3. By: El Baz, Osama
    Abstract: This paper investigated the determinants of inflation in the Egyptian economy. Using annual data, covering the period (1991-2012), a Vector Auto Regression Model (VAR) was estimated. The results of the empirical model confirmed that inflation rate responds positively in the first period following shocks to itself, domestic liquidity growth rate, output gap, exchange rate depreciation, and world food prices. Also, expectations seemed to play an important role as inflation rate responds positively to a shock in itself in the first year following the shock, which reinforces the idea that inflationary expectations will generate more inflation. In the short run inflation is explained mostly by its own fluctuations followed by output gap, domestic liquidity growth rate, and nominal depreciation of the Egyptian pound against the US dollar, while in a 5-year horizon about 56% of inflation dynamics can be attributed to factors other than inflation expectations "itself".
    Keywords: Inflation,Phillips Curve, VAR, IRFs
    JEL: E5 E52 E58
    Date: 2014–05–12
  4. By: James Cloyne (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: The size and sign of the government spending multiplier crucially depends on how the spending is financed and how consumers respond to implied future tax increases. I investigate this issue in an estimated New Keynesian DSGE model with distortionary labor and capital taxes and, importantly, with preferences that allow the wealth effect on labor supply to vary. Specifically I assess whether the model can explain the empirical evidence for the United States and examine the transmission mechanism, for realistic policy rules. I show that the model can match the positive empirical response of key variables including output, consumption and the real wage. I find that the role of the wealth effect on labor supply is small and that while tax rates rise following a spending shock these increases are modest, with debt rising. Deficit financed spending increases are therefore expansionary, but this is due to sticky prices rather than the wealth effect channel.
    Keywords: Fiscal policy, government spending shocks, spending multiplier, business cycles
    JEL: E20 E32 E62 H20
    Date: 2014–05
  5. By: Gatt, William
    Abstract: A short, non-technical description of how inflation forecasts are conducted at the Central Bank of Malta
    Keywords: HICP inflation, ARIMA, judgement
    JEL: C32 E37 E58
    Date: 2013–03
  6. By: Brigitte Granville; Dominik Nagly
    Abstract: This paper studies the how government policy can influence positively public attitudes towards the Economic and Monetary Union (EMU).
    Keywords: Monetary Regime, Monetary System, Real Activity, EMU, Exchange Rates, Currency Area
    JEL: E42 E44 F33 F36
    Date: 2014–06
  7. By: Beatrice Pataracchia; Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld
    Abstract: We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as the fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households.
    JEL: C11 E21 E32 E62
    Date: 2014–06
  8. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper explores the evolution of Swedish fiscal policy from one extreme approach to another one in less than four decades. After the demise of the Bretton Woods-system in the early 1970s, Swedish fiscal policy was based on a Keynesian approach with the goal to stabilize the business cycle and maintain full employment using a large set of instruments in a discretionary manner. In the wake of the deep financial crisis in the early 1990s, this policy paradigm was eventually replaced by a rule-bound scheme. A fiscal framework was set-up as an instrument to rein in public finances. The present goal of fiscal policy is to maintain sustainable public finances while avoiding discretionary measures.
    Keywords: Fiscal rules; fiscal policy council; fiscal policy; policy learning; Sweden
    JEL: E52 E62 E63 E65 F44 H62 O52
    Date: 2014–06–30
  9. By: Yuri Ponomarev (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy); Alexei Uluykaev (Ministry of Economic Development)
    Abstract: In The article provides estimates of short-run and medium-run exchange rate pass-through into domestic prices in Russia during the period of 2000–2012 using vector error correction model. Exchange rate pass-through asymmetry estimates, its assessments on different sub-periods and exchange rate volatility effect on pass-through are also provided.
    Keywords: exchange rate pass-through, asymmetry of exchange rate pass-through, exchange rate volatility, inflation, monetary policy, vector error correction model. exchange rate pass-through, asymmetry of exchange rate pass-through, exchange rate volatility, inflation, monetary policy, vector error correction model.
    JEL: C32 E31 E52 F31 F41
    Date: 2014
  10. By: OHNO, Takashi
    Abstract: This study examines the effect of using the neo-Kaleckian model to target inflation. Here, we assume the following: a model with monopolistic competition, a symmetric economy, the inflation conflict theory, the target profit share of firms depends on the number of firms, and free entry. Using the neo-Kaleckian model, we find the Taylor principle destabilizes the system, which means that an inelastic nominal interest monetary policy is a plausible way to ensure stability. In addition, we find that the Taylor principle is not compatible with the standard neo-Kaleckian results, including the effects of independent demand and income distribution in favour of workers.
    Keywords: neo-Kaleckian model, Taylor principle, free entry
    JEL: E24 E31
    Date: 2014–07
  11. By: El Alaoui, Aicha; Ezzahidi, Elhadj; Eladnani, Mohamed Jellal
    Abstract: The concept of NAIRU summarized the observed negative correlation between the unemployment rate and the inflation rate for a number of countries. This correlation persuaded some analysts of the impossibility for governments to simultaneously target both low unemployment and price stability. Therefore, it was government's role to seek a point on the trade-off between the two objectives which matched a domestic social consensus. In this paper, we intend to estimate the Moroccan’s NAIRU for 1998Q1-2012Q4 period by applying the Kalman filter.
    Keywords: NAIRU, Kalman filter, HP filter, Cointegration, Unemployment rate, Inflation rate, Phillips curve, Morocco.
    JEL: C1 C13 C22 C3 E24 E3 E31
    Date: 2013–11
  12. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); 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: 2014–06–09
  13. By: Shi, Lisi; Suen, Richard M. H.
    Abstract: This paper examines the macroeconomic effects of asset price bubbles and crashes in an overlapping generations economy. The model highlights the effects of asset price fluctuations on labor supply decisions, and demonstrates how labor market adjustment can help propagate the effects of these fluctuations to the aggregate economy. It is shown that, under certain conditions, asset bubbles can crowd in productive investment and lead to an expansion in total employment, and the bursting of these bubbles can have an immediate negative impact on these variables.
    Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor
    JEL: E22 E44
    Date: 2014–06
  14. By: Campbell Leith; Ding Liu
    Abstract: New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorhpic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench- mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the in ation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the for- mer typically exhibits far greater welfare costs of inflation. The rates of in inflation observed under this policy are non-trivial and suggest that the model can comfort- ably generate the rates of in ation at which the problematic issues highlighted in the trend in inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous.
    Keywords: New Keynesian Model; Monetary Policy; Rotemberg Pricing; Calvo Pricing; In ation Bias; Time-Consistent Policy.
    JEL: E52 E63
    Date: 2014–06
  15. By: Willmott, Bryony
    Abstract: This paper considers whether relationships exist between the daily weighted average 7-day interbank rate, the change in the daily 7-day interbank rate, the daily level of commercial banks excess reserves and the change in the daily level of excess reserves, which may guide domestic money market intervention. Monetary survey data for the period 1st June 2011 – 13th September 2013 (i.e. inflation targeting lite period) is used. Results show no correlation between excess reserves and interbank rate movements, even though a Granger causality test shows that in the absence of money market intervention, the level of excess reserves may determine both the level of and changes in the interbank rate. There is also highly significant causality from Central Bank intervention to the target interbank rate, but no correlation between the two. Furthermore, there is no evidence of correlation or causation between excess reserves and interbank rates when the interbank rate falls outside of the target. In conclusion, the relatively shallow nature of the Ugandan financial system prevents a distinct relationship between the interbank money market interest rate and commercial banks excess reserves, as a result a rules-based intervention policy is not suitable to Uganda.
    Keywords: Monetary policy, Intervention, Excess reserves, interbank interest rate
    JEL: E4 E42 E44 E5 G1
    Date: 2014–01
  16. By: Le, Ha
    Abstract: Abstract: The objective of this paper is to analyze the dynamics of business cycle features and investigate the main source of macroeconomic fluctuations in Vietnam, and then make comparison to Indonesia and the Philippines. In the first task, the business cycle features are evaluated by properties of data, including volatility, persistence and co-movement after taking Hodrick-Prescott (HP) filter in 2 periods: before and after the global financial crisis in 2008. Results indicate that these properties mostly concentrate on second period (2008-2013) in Vietnam, whereas the Asian Financial Crisis leads to a high volatility and persistence in Philippines and Indonesia. In order to identify the sources of macroeconomic fluctuations, the study adopts the Structural Vector Autoregression (SVAR) with data covered from 1996 to 2013. The evidence for countries suggests that (i) the main source of output variance is domestic supply shocks but there is a significant decrease in long-run; (ii) The fluctuations of trade balance are mostly due to external shocks, especially term of trade shocks in Vietnam, as opposed to Philippines and Indonesia where IS shocks play an important role; (iii) The fluctuations of real exchange rate are mainly driven by the domestic shocks but internal causes of each country are different; (iv) the most two important sources of price’s movements are domestic shocks, especially IS and nominal shocks in Vietnam.
    Keywords: Structure Shocks, Business Cycles, SVAR
    JEL: E6 E61
    Date: 2014–06–18
  17. By: Alexander, Gigi; Foley, Maggie
    Abstract: This study provides current empirical evidence on the impact of net U.S. government borrowing (budget deficits) on the nominal interest rate yield on ten-year Treasury notes. The model includes an ex ante real short-term real interest rate yield, an ex ante real long-term interest rate yield, the monetary base as a percent of GDP, expected future inflation, the percentage growth rate of real GDP, net financial capital inflows, and other variables. This study uses annual data and then uses quarterly data for the periods 1971-2008 and 1971-2012. Autoregressive two-stage least squares estimates imply that the federal budget deficit, expressed as a percent of GDP, exercises a positive and statistically significant impact on the nominal interest rate yield on ten-year Treasury notes. Robustness tests are provided in an Appendix.
    Keywords: nominal interest; net government borrowing
    JEL: E43 E52 H62 O41
    Date: 2014–06–11
  18. By: Sergey Ivashchenko
    Abstract: A medium-scale nonlinear dynamic stochastic general equilibrium (DSGE) model is estimated (54 variables, 29 state variables, 7 observed variables). The model includes a observed variable for stock market returns. The root-mean square error (RMSE) of the in-sample and out-of-sample forecasts is calculated. The nonlinear DSGE model with measurement errors outperforms AR (1), VAR (1) and the linearized DSGE in terms of the quality of the out-of-sample forecasts. The nonlinear DSGE model without measurement errors is actually of a quality equal to that of the linearized DSGE model.
    Keywords: nonlinear DSGE, Quadratic Kalman Filter, QKF, out-of-sample forecasts
    JEL: E32 E37 E44 E47
    Date: 2014–05–17
  19. By: Christian Dreger; Jürgen Wolters
    Abstract: This paper investigates the usefulness of the money demand relationship in times of unconventional monetary policies by cointegration methods. In contrast to the bulk of the literature, evidence in favour of a stable long run money demand function is presented both for the US and the euro area. Results are based on standard monetary aggregates, i.e. MZM for the US and M3 in case of the euro area. The recent monetary policy shifts towards unconventional measures did not introduce instability in the relationships. The results suggest that money balances are still useful instruments to conduct monetary policy especially in periods where the nominal interest rates are at the zero lower bounds.
    Keywords: Unconventional monetary policy, money demand, stability
    JEL: C22 C52 E41
    Date: 2014
  20. By: Bennani, Hamza
    Abstract: This paper proposes to assess the usefulness of central banks forward guidance since the start of the global economic crisis. Using a novel approach, the Wordscores methodology, we reveal that since 2009, central banks do provide a temporal guidance of their accommodative policy that can be relied on and expected. Central banks communication thus gives important insights to financial markets about the persistence of their unconventional measures and in particular about the occurrence of an exit strategy.
    Keywords: central bank communication, monetary policy, forward guidance
    JEL: E52 E58
    Date: 2014–05–29
  21. By: Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The 2008/2009 financial crisis raised issues related to the monetary policy doctrine of the last two decades. Inflation targeting has been criticized as its main objective of inflation stabilisation might have diverted central banks from other concerns such as financial stability. As a first attempt in the literature on emerging countries, this study aims at investigating (i) whether inflation targeting is associated to higher financial instability, and (ii) whether inflation targeting central banks are less responsive to financial imbalances relative to non-targeters. To this end, we build a composite index in order to get a more complete and comprehensive view of the financial conditions in emerging countries. The paper concludes that, in spite of a stronger central banks' response to financial imbalances, inflation targeters are facing more financial instability than others. These findings suggest that, even if inflation targeting might be associated to higher financial fragility, this can hardly be attributed to the central banks 'carelessness' about developments in the financial sector. For emerging market economies, especially those implementing inflation targeting, this highlights the need for a broader and more integrated framework such as macro-prudential policies to tackle the issue of financial stability.
    Keywords: Inflation targeting ; financial stabiity ; central banks' reaction function
    Date: 2014–06–25
  22. By: Georges Tournemire
    Abstract: Coordination arrangements should ensure that fiscal policy is conducted in a consistent manner across the various public entities and sub-sectors of general government. This dimension has gained in relevance as recent fiscal governance reforms in the European Union have put a premium on sound coordination. Using information from the Commission Fiscal Governance database, the note identifies hard and soft coordination instruments and discusses their respective design and merits. Overall, it is found that subnational government is being equipped with specific fiscal rules in a growing number of Member States. Soft coordination mechanisms for their part are becoming more structured and results-oriented with in particular improved monitoring procedures. The note finally suggests a number of avenues to improve existing coordination mechanisms to integrate further domestic budgetary timelines and ensure a genuine involvement of subnational government within the annual budget cycle.
    JEL: E02 E61 E62 E63 H77
    Date: 2014–06
  23. By: Bowman, David (Board of Governors of the Federal Reserve System (U.S.)); Londono, Juan M. (Board of Governors of the Federal Reserve System (U.S.)); Sapriza, Horacio (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We investigate the effects of U.S. unconventional monetary policies on sovereign yields, foreign exchange rates, and stock prices in emerging market economies (EMEs), and we analyze how these effects depend on country-specifc characteristics. We find that, although EME asset prices, mainly those of sovereign bonds, responded strongly to unconventional monetary policy announcements, these responses were not outsized with respect to a model that takes into account each country's time-varying vulnerability to U.S. interest rates affected by monetary policy shocks.
    Keywords: Unconventional monetary policy; emerging markets; large-scale asset purchase program; quantitative easing; Federal Reserve
    JEL: E58 F42 G15
    Date: 2014–06–23
  24. By: Darvas, Zsolt
    Abstract: Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. However, the implications of these historical episodes for the current European situation are limited, for two main reasons. First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities. Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.
    Keywords: creditless recovery, credit growth financial structure, real exchange rate adjustment
    JEL: E32 E44 E51 F31 G21
    Date: 2014
  25. By: Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
    Abstract: The causal relations and dynamic interactions among macroeconomic variables and stock market index are important in the formulation of a country’s macroeconomic policy. In this study, to investigate the lead-lag relationship between stock market index and macroeconomic variables, we employ several conventional time-series techniques and a recently introduced method – wavelet analysis - to economics and finance. The data used in this paper is the monthly data of the selected macroeconomic variables such as (1) Kuala Lumpur Composite Index, (2) exchange rate, (3) inflation, (4) government bond yield, (5) short-term interest rate and (6) export over the period of January 1996 to September 2013. Our findings tend to suggest that a cointegrating relationship does exist between KLCI and selected macroeconomic variables. The results of the error correction model, the generalized variance decompositions as well as the wavelet cross-correlation analysis suggest that the short-term interest rate, KLCI and government bond yields are exogenous variables; especially, the short-term interest rate is the most leading variable. Policy makers may concentrate on the adjustment and control of the short-term interest rate in order to achieve the desired results for the target economic variables.
    Keywords: Stock Market, Causality, Macroeconomic variables, Time-series techniques, Wavelet Analysis
    JEL: C22 C58 E44
    Date: 2014–06–29
  26. By: Ormeno, Arturo (Credit Suisse AG); Molnar, Krisztina (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Does survey data contain useful information for estimating macroeconomic models? We address this question by using survey data of inflation expectations to estimate the New Keynesian model by Smets and Wouters (2007) and compare its performance under rational expectations and adaptive learning. The survey information serves as an additional moment restriction and helps us to determine the learning agents' forecasting model for in ation. Adaptive learning fares similarly to rational expectations in fitting macro data, but clearly outperforms rational expectations in fitting macro and survey data simultaneously. In other words survey data contains additional information that is not present in the macro data alone.
    Keywords: Survey data; learning; rational expectations; inflation expectations; Bayesian econometrics.
    JEL: C61 D84 E30 E52
    Date: 2014–06–30
  27. By: Lien Laureys (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy.
    Date: 2014–06
  28. By: Philip King (Bank of England); Stephen Millard (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: In the wake of the financial crisis output fell dramatically while inflation remained above its target and productivity collapsed relative to its previous trend. The fall in productivity relative to trend was particularly pronounced within the service sector, and then most particularly in certain subsectors such as ‘Professional, Scientific and Technical Activities’. Given the weight of services in the economy – 75% in GDP and 50% in the CPI – it would seem that understanding how this sector works is crucial if we are to understand how the economy as a whole responds to shocks. But our standard macroeconomic models are not well suited to analysing this sector. In this paper, we try to address these deficiencies by modelling better the service sector and then examine the implications of trying to take certain features of the service sector into account. In order to do this, we first embarked on a series of structured visits to a set of firms that span the service sector. The motivation for doing this was that we could use our findings from these visits to get a better feel for how service-sector firms operate and, so, to be able to construct a model of a ‘typical’ service-sector firm. We then build a model taking into account what we learned from the visits and examined the effects of demand shocks within the model. We find that the model can explain some of the qualitative movements in productivity seen in response to the financial crisis.
    Keywords: service sector, intangible investment
    JEL: D21 D24 E22 E23
    Date: 2014–01
  29. By: Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
    Abstract: This paper documents a large cross-bank and cross-country variation in the relationship between loan loss provisions and the business cycle and explores bank management specific, bank-activity specific and country specific (institutional and regulatory) features that explain this diversity in the European Union. Our results indicate that LLP in large, publicly traded and commercial banks, as well as in banks reporting in consolidated statements’ format, are more procyclical. Better investor protection and more restrictive bank regulations reduce the procyclicality of LLP. Additional evidence shows that moral hazard resulting from deposit insurance renders LLP more procyclical. We do not find support for the view that better quality of market monitoring mitigates the risk-taking behavior of banks. Our findings clearly indicate the empirical importance of earnings management for LLP procyclicality. Sensitivity of LLP to the business cycle seems to be limited in the case of banks which engage in more income smoothing and which apply prudent credit risk management.
    Keywords: loan loss provisions, procyclicality, earnings management, investor protection, bank regulation, bank supervision
    JEL: E32 E44 G21
    Date: 2014–06–20
  30. By: Guglielmo Maria Caporale; Marinko Skare
    Abstract: This paper analyses the long-memory properties of both the conditional mean and variance of UK real GDP over the period 1851-2013 by estimating a multivariate ARFIMA-FIGARCH model (with the unemployment rate and inflation as explanatory variables). The results suggest that this series is non-stationary and non-mean-reverting, the null hypotheses of I(0), I(1) and I(2) being rejected in favour of fractional integration - shocks appear to have permanent effects, and therefore policy actions are required to restore equilibrium. The estimate of the long-memory parameter (1.37) is similar to that reported by Candelon and Gil-Alana (2004), implying that aggregate output is not an I(1) process. The presence of long memory in output volatility (d = 0.80) is also confirmed.
    Keywords: ARFIMA-(FI)GARCH, Dual long memory, Volatility, Fractional impulse-response, Unemployment, Inflation
    JEL: B23 C14 C32 C53 C54
    Date: 2014
  31. By: Afful, Efua Amoonua
    Abstract: This paper estimates the Non-Accelerating Inflation Rate of Unemployment (NAIRU) for 15 OECD economies from 1990 to 2012 using an iterative Phillips curve process and tests the relationship between strictness of employment protection and the NAIRU. A possible negative externality of employment protection legislation is a higher level of structural unemployment. Using Prais-winsten estimation correcting for panel-level heteroscedasticity a panel-specific first-order autoregressive process, results indicate that there is no relationship between strictness of protection for individual and collective dismissals for regular contracts and the NAIRU. The effect of strictness of employment protection for regular contracts is sensitive to model specification; the coefficient loses its significance when full controls are used in estimation. An implication is that deregulation is not a necessary policy tool in addressing the problem of structural unemployment.
    Keywords: NAIRU, natural rate, structural unemployment, employment protection legislation
    JEL: E24 J48 K31
    Date: 2014–06–25
  32. By: Azzimonti-Renzo, Marina (Federal Reserve Bank of Philadelphia)
    Abstract: American politics have become extremely polarized in recent decades. This deep political divide has caused significant government dysfunction. Political divisions make the timing, size, and composition of government policy less predictable. According to existing theories, an increase in the degree of economic policy uncertainty or in the volatility of fiscal shocks results in a decline in economic activity. This occurs because businesses and households may be induced to delay decisions that involve high reversibility costs. In addition, disagreement between policymakers may result in stalemate, or, in extreme cases, a government shutdown. This adversely affects the optimal implementation of policy reforms and may result in excessive debt accumulation or inefficient public-sector responses to adverse shocks. Testing these theories has been challenging given the low frequency at which existing measures of partisan conflict have been computed. In this paper, I provide a novel high-frequency indicator of the degree of partisan conflict. The index, constructed for the period 1891 to 2013, uses a search-based approach that measures the frequency of newspaper articles that report lawmakers' disagreement about policy. I show that the long-run trend of partisan conflict behaves similarly to political polarization and income inequality, especially since the Great Depression. Its short-run fluctuations are highly related to elections, but unrelated to recessions. The lower-than-average values observed during wars suggest a “rally around the flag" effect. I use the index to study the effect of an increase in partisan conflict, equivalent to the one observed since the Great Recession, on business cycles. Using a simple VAR, I find that an innovation to partisan conflict increases government deficits and significantly discourages investment, output, and employment. Moreover, these declines are persistent, which may help explain the slow recovery observed since the 2007 recession ended.
    Keywords: Economic policy; Partisan conflic; Politics; Polarization; Business cycles;
    Date: 2014–06–01
  33. By: Stefan Nagel
    Abstract: Treasury bills and other near-money assets provide owners with liquidity service benefits that are reflected in prices in the form of a liquidity premium. I relate time variation in this liquidity premium to changes in the opportunity cost of money: The liquidity service benefits of near-money assets are more valuable when short-term interest rates are high and hence the opportunity cost of holding money is high. Consistent with this prediction, the liquidity premium of T-bills and other near-money assets is strongly positively correlated with the level of short-term interest rates. Once short-term interest rates are controlled for, Treasury security supply variables lose their explanatory power for the liquidity premium. I argue that an analysis of scarcity and price of near-money assets is incomplete without taking into account the substitution relationship with money and its supply by the central bank. Payment of interest on reserves (IOR) could potentially reduce liquidity premia because IOR reduces the opportunity cost of at least one type of money (reserves). In the UK and Canada, however, the introduction of IOR did not shrink liquidity premia. Apparently, the reduction in banks' opportunity cost of money did not result in a broader fall in the opportunity costs of money for non-bank market participants.
    JEL: E41 E43 G12
    Date: 2014–06
  34. By: Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Kimball, Miles S. (University of Michigan)
    Abstract: We develop a theory that focuses on the general equilibrium and long-run macroeconomic consequences of trends in job utility. Given secular increases in job utility, work hours per capita can remain approximately constant over time even if the income effect of higher wages on labor supply exceeds the substitution effect. In addition, secular improvements in job utility can be substantial relative to welfare gains from ordinary technological progress. These two implications are connected by an equation flowing from optimal hours choices: improvements in job utility that have a significant effect on labor supply tend to have large welfare effects.
    Keywords: Labor supply; work hours; drudgery; income effect; substitution effect; job utility
    JEL: E24 J22 O40
    Date: 2014–06–06
  35. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: April 7, 2014. Presentation. "Two Views of International Monetary Policy Coordination." 27th Asia/Pacific Business Outlook Conference, USC Marshall School of Business–CIBER, Los Angeles, California.
    Date: 2014–04–07
  36. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries (`bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.
    Date: 2014–03
  37. By: Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
    Abstract: Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets – loans – not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.
    JEL: D82 E44 G11 G14 G21
    Date: 2014–06
  38. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Utah and Montana Bankers Association, Sun Valley, Idaho, June 30, 2014
    Date: 2014–06–30
  39. By: Gaspar, Catarina; Fuinhas, José Alberto; Marques, António Cardoso
    Abstract: As a result of the transition to monetary stability, we analyzed the real effort rate with the debt service for Portugal in a context of a decrease in nominal interest rates. Monthly time series data from January 1991 to September 2013 were used. The UECM of the ARDL model was applied which allowed capturing the long-run and short-run effects. The results suggest that the Portuguese reality has two distinct behaviors, one before and one after effecting monetary union. We detected the presence of different variables in explaining the level of indebtedness in both periods. In the first period (1991M1- 1998M12), only financial effort is relevant when explaining the level of indebtedness of the economic agents. In the second period (1999M1-2013M9) the financial depth, German balance of payments and current balance and capital account are also statistically significant in the increase of the indebtedness level. The research supports that in the first period, the increase of financial effort reduces the level of indebtedness of the economic agents. In the second period, we have the presence of a structural break, resulting from the regime change that occurred in the economy. In this period, for a decrease of financial effort there is a reduction of the indebtedness level, in the long-run. The results support that there is a regime shift around 1999, whose economic nature produced an economic impact that caused indebtedness change, before and after euro introduction. For the second period (1999M1-2013M9) we obtained a cointegration relationship between financial effort and indebtedness.
    Keywords: Nominal interest rates, debt service, monetary stability, indebtedness; ARDL.
    JEL: C22 E43 F15
    Date: 2014–06–30
  40. By: Baele, Lieven (Tilburg University); Bekaert, Geert (Columbia University); Inghelbrecht, Koen (Ghent University); Wei, Min (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using only daily data on bond and stock returns, we identify and characterize flight to safety (FTS) episodes for 23 countries. On average, FTS days comprise less than 3% of the sample, and bond returns exceed equity returns by 2.5 to 4%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX and the Ted spread, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money market instruments, corporate bonds, and commodity prices (with the exception of metals, including gold) face abnormal negative returns in FTS episodes. Hedge funds, especially those belonging to the "event-driven" styles, display negative FTS betas, after controlling for standard risk factors. Liquidity deteriorates on FTS days both in the bond and equity markets. Both economic growth and inflation decline right after and up to a year following a FTS spell.
    Keywords: Flight-to-safety; flight-to-quality; stock-bond return correlation; liquidity; hedge funds
    JEL: E43 E44 G11 G12
    Date: 2014–06–05
  41. By: Kolasa, Marcin; Rubaszek, Michał
    Abstract: This paper compares the quality of forecasts from DSGE models with and without financial frictions. We find that accounting for financial market imperfections does not result in a uniform improvement in the accuracy of point forecasts during non-crisis times while the average quality of density forecast even deteriorates. In contrast, adding frictions in the housing market proves very helpful during the times of financial turmoil, overperforming both the frictionless benchmark and the alternative that incorporates financial frictions in the corporate sector. Moreover, we detect complementarities among the analyzed setups that can be exploited in the forecasting process.
    Keywords: DSGE models; Financial frictions; Housing market
    JEL: C11 C53 E44
    Date: 2014–06
  42. By: Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.)); Holden, Steinar (University of Oslo)
    Abstract: Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy--for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model--specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioral economics features in macroeconomic models.
    Keywords: Behavioral macroeconomics; New Keynesian model
    Date: 2014–06–04
  43. By: Jorge Fornero; Markus Kirchner
    Abstract: Despite sustained high levels of commodity prices, the current account balances of several commodity-exporting countries have deteriorated in recent years. This phenomenon is examined quantitatively using a small open economy model with a commodity-producing sector and the assumption that agents have imperfect information and learn about the persistence of commodity price shocks. A central prediction of the model is that during a persistent commodity price increase, agents believe at first that this increase is temporary but eventually revise their expectations upward as they are surprised by higher than forecasted commodity price levels. Domestic investment therefore expands in a gradual way driven by investment in the commodity sector, while domestic savings decrease such that the current account declines over time. The model is estimated with data for Chile, and the results show that through the above mechanism the model explains several stylized facts regarding the recent evolution of the Chilean economy, including part of its step-wise current account reversal since the mid-2000s. Additionally, we use the model to analyze the effects of a persistent commodity price shock under alternative monetary and fiscal policies.
    Date: 2014–05
  44. By: Hutter, Christian (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weber, Enzo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper investigates the role of mismatch between job seekers and job openings for the forecasting performance of a labor market matching function. In theory, higher mismatch lowers matching efficiency which increases the risk that the vacancies cannot be filled within the usual period of time. We investigate whether and to what extent forecasts of German job findings can be improved by a mismatch-enhanced labor market matching function. For this purpose, we construct so-called mismatch indicators that reflect regional, occupational and qualification-related mismatch on a monthly basis. In pseudo out-of-sample tests that account for the nested model environment, we find that forecasting models enhanced by the mismatch indicator significantly outperform their benchmark counterparts for all forecast horizons ranging between one month and a year. This is especially pronounced in the aftermath of the Great Recession where a low level of mismatch improved the possibility of unemployed to find a job again." (Author's abstract, IAB-Doku) ((en))
    Keywords: mismatch, offene Stellen, Arbeitslose, Qualifikationsanforderungen, Qualifikationsmerkmale, Prognoseverfahren, Stellenbesetzung - Dauer, Indikatorenbildung
    JEL: C22 C52 C53 C78 E24 E27
    Date: 2014–06–25
  45. By: Anton Velinov; Wenjuan Chen
    Abstract: This paper investigates whether there are bubbles in stock prices. We do this using a previously studied structural vector autoregressive (SVAR) model claiming to distinguish fundamental and non-fundamental shocks to real stock prices. TheSVAR model relies on an identification restriction in order to correctly label the shocks. We test this restriction by means of a Markov switching-SVAR (MS-SVAR) model in heteroskedasticity. Using data from France, Germany, Italy, Japan, the UK and the US we find that the restriction is rejected for Italy, supported at the 1% level for Japan and supported at least at the 5% level for the remaining countries. Several alternative specifications confirm the robustness of these findings. Using SVAR impulse responses and forecast error variance decompositions we further examine the structural shocks and confirm the shock labeling for Japan. Through historical decompositions we observe that stock prices tended to be undervalued throughout the 1970s and 1980s. This undervaluation corrects itself by the mid 1990s, after which stock prices tend to move in tandem with their fundamentals. We therefore find no evidence in favor of stock price bubbles in all the countries invested.
    Keywords: Markov switching model, structural vector autoregression, heteroskedasticity, stock price fundamentals
    JEL: C32 C34 E44 G12
    Date: 2014
  46. By: S. Borağan Aruoba; Jesús Fernández-Villaverde
    Abstract: We solve the stochastic neoclassical growth model, the workhorse of modern macroeconomics, using C++11, Fortran 2008, Java, Julia, Python, Matlab, Mathematica, and R. We implement the same algorithm, value function iteration with grid search, in each of the languages. We report the execution times of the codes in a Mac and in a Windows computer and comment on the strength and weakness of each language.
    JEL: C0 E0
    Date: 2014–06
  47. By: Konstantin A. Kholodilin; Tobias Thomas; Dirk Ulbricht
    Abstract: Expectations form the basis of economic decisions of market participants in an uncertain world. Sentiment indicators reflect those expectations and thus have a proven track record for predicting economic variables. However, respondents of surveys perceive the world to a large extent with the help of media. So far, mainly very crude media information, such as word-count indices, has been used in the prediction of macroeconomic and financial variables. In this paper, we employ a rich data set provided by Media Tenor International, based on the sentiment analysis of all relevant media information in Germany from 2001 to 2014, whose results are transformed into several monthly indices. German industrial production is predicted in a real-time out-of-sample forecasting experiment using more than 17,000 models formed of all possible combinations with a maximum of 3 out of 48 macroeconomic, survey, and media indicators. It is demonstrated that media data are indispensable when it comes to the prediction of German industrial production both for individual models and as a part of combined forecasts. They increase reliability by improving accuracy and reducing instability of the forecasts, particularly during the recent global financial crisis.
    Keywords: Forecast combination, media data, German industrial production, reliability index, R-word
    JEL: C10 C52 C53 E32
    Date: 2014
  48. By: Kabir, Sarkar Humayun; Masih, Mansur
    Abstract: How does the extent of integration of the Malaysian equity market with the equity markets of Japan and USA vary at different time scales? How dynamic is the extent of co-movement of equity price with the major macroeconomic indicators of Malaysia? In order to answer these two major issues, this study attempts to investigate the dynamic integration of the Malaysian equity market with the equity markets of Japan and USA, along with the three major macroeconomic control variables: exchange rate, consumer’s price index (CPI) and industrial production (IP) of Malaysia. The methodology applied initially used the standard time series techniques such as, Johansen cointegration technique, vector error correction model (VECM), variance decompositions (VDCs), followed by the application of the recent dynamic rolling cointegration, Beveridge-Nelson (BN) time series decompositions and finally, wavelet coherence of time-scale decompositions on monthly data starting from February,1990. The study finds one significant cointegrating relationship, which could be an indication of incomplete integration process as evidenced in the dynamic rolling cointegration approach. VECM and VDC indicate that the Malaysian equity market appears to be more influenced by the Japanese equity market and CPI of Malaysia. BN decompositions evidence almost simultaneous co-movement of permanent and transitory components of all variables and the co-movement appears to be closer during the financial crises. Finally, the wavelet coherence suggests closer co-movement of the Malaysian equity market with the Japanese equity market, which tends to vary according to different time scales. The findings of wavelet coherence on co-movement of the equity prices at different time scales tend to be different from those of the standard time series techniques such as, VECM and VDCs. The results of the study have strong policy implications.
    Keywords: Domestic stock price, foreign stock price, exchange rate, consumer’s price index, industrial production, dynamic cointegration, Beveridge-Nelson time series decompositions, wavelet coherence
    JEL: C22 C58 E44 F36 G15
    Date: 2014–06–29
  49. By: Olivier de Bandt; Tovonony Razafindrabe
    Abstract: Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we …nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that …rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.
    Keywords: Exchange rate pass-through, nominal rigidity, import price
    JEL: F31 E31 C23
    Date: 2014
  50. By: Theodore R. Breton
    Abstract: In 1960 Theodore Schultz expounded a human capital theory of economic growth that includes three elements: 1) Countries without much human capital cannot manage physical capital effectively, 2) Economic growth can only proceed if physical capital and human capital rise together, and 3) Human capital is the factor most likely to limit growth. I specify Schultz’s theory mathematically and test it in periods when global financial capital was highly mobile. I find that in 1870, 1910, and 2000, the average schooling attainment of the adult population largely determined the stock of physical capital/capita and GDP/capita in 42 market economies.
    Keywords: Human Capital, Schooling, Capital Investment, Economic Growth, Solow Model, Market Economies
    JEL: E13 I21 O11 O15 O41
    Date: 2014–01–01
  51. By: Bechlioulis, Alexandros; Brissimis, Sophocles
    Abstract: We examine the optimal consumption decisions of households in a micro-founded framework that assumes two financial frictions: heterogeneity between borrowing and saving households, and endogenous default. We study default in the context of two-period overlapping processes of consumer behavior, assuming that penalty costs are imposed on borrowers if they are delinquent in the first period and are subsequently refinanced by banks. The utility function of borrowing households is specified to include a term reflecting strategic decisions as regards non-payment of debt. From the solution of the household optimization problem, we derive an augmented Euler equation for consumption, which is a function inter alia of an expected default factor. We use this equation to calculate in a static equilibrium the optimal value of the percentage of debt repaid. We finally provide an ordering by size of the household discount factor: borrowers who do not repay all of their loans have the lowest discount factor, followed in turn by borrowers who fully repay them and by savers.
    Keywords: borrowing household; saving household; household behavior; consumer default; optimal consumption
    JEL: C61 E21
    Date: 2014–06–25
  52. By: Carlos Bellón
    Abstract: The effect bank competition has on interest rates should depend on the fact that borrowers compete against each other. The borrowing rate of a firm affects its ability to compete in the industrial marketplace, and ultimately, its ability to repay its loans. Thus, competition amongst borrowers acts as a limit to the amount of rents financial oligopolists can extract. I find evidence that firms that operate within areas of limited bank competition face higher rates than their peers. I also identify an innovative control group that can be used in tests of bank market structure.
    Keywords: Bank competition, Small business lending
    JEL: D43 E43 G21
    Date: 2014–06
  53. By: David Rosnick; Mark Weisbrot
    Abstract: Latin America's economic growth rebound in the 2000s is often attributed to a “commodities boom,” which implies that the region’s growth was stimulated by sizable increases in the price of commodity exports. This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.
    Keywords: latin america, terms of trade, commodities boom
    JEL: E E0 F F1 F13 F17
    Date: 2014–05
  54. By: Shawkat Hammoudeh; Michael McAleer (University of Canterbury)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic policy uncertainty. The purpose of this special issue on “Advances in Financial Risk Management and Economic Policy Uncertainty” is to highlight some areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of financial risk management when there is economic policy uncertainty, specifically the power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices, a regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates, a practical approach to constructing price-based funding liquidity factors, realized range volatility forecasting, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk, model-free volatility indexes in the financial literature, robust hedging performance and volatility risk in option markets, price cointegration between sovereign CDS and currency option markets in the GFC, whether zombie lending should always be prevented, preferences of risk-averse and risk-seeking investors for oil spot and futures before, during and after the GFC, managing financial risk in Chinese stock markets, managing systemic risk in The Netherlands, mean-variance portfolio methods for energy policy risk management, on robust properties of the SIML estimation of volatility under micro-market noise and random sampling, asymmetric large-scale (I)GARCH with hetero-tails, the economic fundamentals and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong, prediction and simulation using simple models characterized by nonstationarity and seasonality, and volatility forecast of stock indexes by model averaging using high frequency data.
    Keywords: Financial risk management, Economic policy uncertainty, Financial econometrics, Empirical finance
    JEL: C58 D81 E60 G32
    Date: 2014–06–23
  55. By: Kamel Malik Bensafta (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: This study aims to describe the transmission of uncertainty between the stock markets of four aggregate regions: North America, Europe non Euro-zone, Asia and the euro area. We use a non-linear VAR model with innovations following a Multivariate GARCH with variance regime change. The interest of the model with regime change is to correct the estimation bias caused by the overestimation of the shocks persistence. We apply the non-linear VAR model with regime change in daily MSCI data aggregated from four regions over the period from June 2005 to October 2013. This period included the crisis episodes in 2007 and 2011. Our results indicate the importance of taking into account changes in variance in measuring the persistence of volatility shocks. They also show the high exposure of European and Asian markets to the uncertainties of North American markets. The transmission in time of crisis is higher compared to the quiet period. This result confirms the contagious nature of the crises of 2007 and 2011 and supports the thesis of the contingency theory to crisis.
    Keywords: MGARCH ; Structural breaks ; subprime crisis ; volatility transmission
    Date: 2014–06–26
  56. By: Fuertes, Ana-Maria; Kalotychou, Elena; Saka, Orkun
    Abstract: The authors test Paul De Grauwe’s eurozone fragility hypothesis using a time window around the announcement of the Outright Monetary Transactions (OMT) programme. The findings reveal significant contagion from Spain to other eurozone countries, but solely during the pre-announcement period. The authors conclude that in this case the OMT programme has succeeded in mitigating the self-fulfilling dynamics within the eurozone.
    Date: 2014–06
  57. By: Pierre MANDON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This article is the first to renews the old debate of "rules versus. discretion" by introducing propensity score matching methods in macro analysis, such as Tapsoba (2012), and by using instrumental methods, to consider the national stability culture. By taking into account, at the same time, the self-selection problem and the omitted unobserved factor bias, in a sample of 126 countries of all level of development over the period 1985-2010, we provide strong evidence about the positive causal effect of fiscal rules adoption on the reduction of fiscal policy procyclicality. We find an asymmetrical impact, since fiscal rules adoption contributed to upgrade budget balance in periods of expansion, while it doesn't increase budget deficit in periods of recession. Furthermore, we show that the budget balance rules and the debt rules are more effective to dampen procyclicality than expenditure rules. We also provide evidence that the coverage of fiscal rules is not a critical issue to strength against procyclicality. Empirical results also displays the positive impact of the adoption of flexible rules, but also the adoption of fiscal rules combined to improve policy responsiveness. Finally, we find that FRs are effective when taking into account the national stability culture. This positive impact of fiscal rules adoption on fiscal policy cyclicality comes from an improvement of fiscal policy disciplinary, by ensuring a sustainable path of deficit and debt, or by smoothing business cycles.
    Keywords: cerdi
    Date: 2014–06–27
  58. By: Rahmanov, Ramiz
    Abstract: The paper describes the evolutionary history of Macroeconometrics over the last one hundred years. Three main approaches are distinguished, their underlying principles are discussed and the weakness of each principle is considered. The paper also shows the current developments in the field and indicates the directions of the research currently undertaken.
    Keywords: Macroeconometrics, history, Cowles Commission, VAR, VECM, DSGE
    JEL: B41 C50 C6 C60
    Date: 2014
  59. By: Antunes, João Marques; Fuinhas, José Alberto; Marques, António Cardoso
    Abstract: The interaction of volatility between the financial markets and gold market is analyzed. The volatility of the price of gold in euros, the price of gold in dollars, the U.S. industrial production índex, the S&p500 index, the VIX índex and the PSI20 index for a time horizon between January 1993 to September 2013 using the model Generalized Autoregressive Conditional Heteroscedasticity. The transmission of volatilities is performed using the Vector Autoregressive model. All variables proved to be endogenous with exception of gold, wich was modeled as an exogenous. Granger causality was detected on variables IPI→S&P500; S&P500→VIX; VIX→PSI20. The analysis of the variance decomposition indicates the prevalence of the explanation of the variables itself. Through these models we proved there is a relationship between the volatility of gold prices and financial markets.
    Keywords: Volatility; PSI-20; S&P500; VIX; VAR; GARCH.
    JEL: C01 C22 E44
    Date: 2014–06–30
  60. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Dong-hun Shin (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: Using a comprehensive dataset covering 34 countries from Datastream, we find that dividend-price ratio has a broad spectrum of forecasting abilities internationally. In some countries, such as the US, the dividend-price ratio is a powerful predictor of exclusively stock returns, whereas in others it is a powerful predictor of exclusively dividend growth rates. For many countries, however, the dividend-price ratio has some predictive power for both stock returns and dividend growth rates, although the relative degree of predictive power differs. We have provided an explanation for these differences in stock market predictabilities between countries. When a firm with a dominant shareholder is publicly traded, then the dominant shareholder determines cash-flow policy but the stochastic discount factor contained in the stock price may reflect the minority shareholders¡¯ stochastic discount factor. For this reason, the correlation between cash-flow and stochastic discount factor approaches zero as the disparity between voting rights and cash-flow rights increases. As a result, the stock price becomes more dependent on expected dividends than expected stock returns, and, therefore, the dividend-price ratio has a stronger predictive power for dividend growth. Consistent with our explanation, we find a strong positive relation between dividend growth predictability and disparity, but a significantly negative one between stock return predictability and disparity. These relations are found to be consistent across various robust tests.
    Keywords: Dividend-price ratio, Stock returns, Dividend growth, Predictability, Disparity
    JEL: G12 G32 E44
    Date: 2014
  61. By: Alexey Vedev (Gaidar Institute for Economic Policy); Sergey Drobyshevsky (Gaidar Institute for Economic Policy); Mikhail Khromov (Gaidar Institute for Economic Policy); Sergey Sinelnikov-Murylev (Russian Foreign Trade Academy)
    Abstract: In 2013 the situation in the banking sector of the RF underwent major changes. On the one hand, the volume indicators of the banking sector continued to grow, although more slowly than before. However, this growth was mainly due to aggressive behaviour of the banks in the consumer lending market, despite actions by the Bank of Russia aimed at reducing the attractiveness to the banks of such loans. On the other hand, there was an increased imbalance in the banking sector related to the non-uniform distribution of liquid funds, the outflow of customers from small and medium-sized banks to larger ones (principally to banks with government participation in their capital). This last factor was strengthened by the Bank of Russia’s efforts to rehabilitate the banking sector by withdrawing the licences of a significant number of banks, including those working in the market of private deposits. Within the framework of this policy of the Bank of Russia, aimed at reducing the number of banks and terminating the activities of any banks violating prudential standards, one should note the necessity for a more integrated approach to the reform of the sector, including measures aimed at increasing capitalisation, and the formation of an institute of systemically important banks with a reduction in the proportion of banks with government participation.
    Keywords: Russian Economy, banking sector, central bank.
    JEL: E58 G21 G28
    Date: 2014

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