nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒07‒13
134 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Modelo de ciclo de negocios real con dinero endógeno y pasivo By Guberman, Carlos; Cymbler, David
  2. The Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation By Olmos, Lorena; Sanso Frago, Marcos
  3. Fiscal shocks and the exchange rate By Giorgio Di Giorgio Author-Name-First Giorgio; Salvatore Nistico' Author-Name-First Salvatore; Guido Traficante Author-Name-First Guido
  4. Stability and Identification with Optimal Macroprudential Policy Rules. By Jean-Bernard Chatelain; Kirsten Ralf
  5. Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity? By Jess Benhabib; George W. Evans; Seppo Honkapohja
  6. Population Aging and the Aggregate Effects of Monetary Policy By Wong, Arlene
  7. The Macroeconomic Consequences of Asset Bubbles and Crashes By Lisi Shi; Richard M. H. Suen
  8. Monetary and Macroprudential Policies to Manage Capital Flows By Juan Pablo Medina Guzman; Jorge Roldos
  9. Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies By Juan Pablo Medina Guzman; Claudio Soto
  10. Extra Government Debt in the Great Recession: All Intentional? By Riccardo Fiorito
  11. Does one word fit all? The asymmetric effects of central banks' communication policy By Bennani, Hamza
  12. The Case for a Long-Run Inflation Target of Four Percent By Laurence M. Ball
  13. Was Anna Schwartz right? The role of government size and the exchange rate regime for macroeconomic stability By Philipp Wegmueller
  14. Time Varying Fiscal Multipliers in Germany By Berg, Tim Oliver
  15. Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions. By Eleni Iliopulos; François Langot; Thepthida Sopraseuth
  16. Estimating the expected duration of the zero lower bound in DSGE models with forward guidance By Mariano Kulish; James Morley; Tim Robinson
  17. A Fiscal-Monetary Policy Scheme Against Greek Indebtedness and Impoverishment By Soldatos, Gerasimos T.
  18. Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean By Magda E. Kandil
  19. Leaning Against the Wind: Macroprudential Policy in Asia By Longmei Zhang; Edda Zoli
  20. Inflation Dynamics in India: An Analysis By Nair, Manju S
  21. Learning, Monetary Policy and Asset Prices. By Marco Airaudo; Salvatore Nisticò; Luis-Felipe Zanna
  22. Inflation Persistence in Brazil - A Cross Country Comparison By Shaun K. Roache
  23. Interest rate pass-through in Poland. Evidence from individual bank data By Ewa Stanisławska
  24. Information acquisition and learning from prices over the business cycle By BjÖrn Ohl; Taneli Mäkinen
  25. Systematic fiscal policy and macroeconomic performance: A critical overview of the literature By Reicher, Claire
  26. A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-standard Monetary Policy in the Euro Area By Geert Mesters; Bernd Schwaab; Siem Jan Koopman
  27. Inflation expectations in Poland, 2001–2013. Measurement and macroeconomic testing By Tomasz Lyziak
  28. Stock Price, Real Riskless Interest Rate and Learning By Zhang, Tongbin
  29. The recent turmoil and monetary policy in a dual financial system with Islamic perspective By Hasan, Zubair Hasan
  30. Monetary Policy in Hybrid Regimes: The Case of Kazakhstan By Natan P. Epstein; Rafael Portillo
  31. Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter? By Jean-Louis Combes; Xavier Debrun; Alexandru Minea; Rene Tapsoba
  32. Price Level Changes and the Redistribution of Nominal Wealth Across the Euro Area By Adam, Klaus; Zhu, Junyi
  33. A Tourism Financial Conditions Index By Chia-Lin Chang; Hui-Kuang Hsu; and Michael McAleer
  34. Monetary Policy and Inequality in Mexico By Villarreal, Francisco G.
  35. Financial Plumbing and Monetary Policy By Manmohan Singh
  36. Central Bank Financial Strength in Central America and the Dominican Republic By Andrew Swiston; Florencia Frantischek; Przemek Gajdeczka; Alexander Herman
  37. Optimal taxation and debt with uninsurable risks to human capital accumulation By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  38. Financial Crises in DSGE Models: A Prototype Model By Jaromir Benes; Michael Kumhof; Douglas Laxton
  39. Investigating potential output using the Hodrick-Prescott filter: an application for Malta By Grech, Aaron George
  40. Time-Varying Neutral Interest Rate—The Case of Brazil By Roberto Perrelli; Shaun K. Roache
  41. Macroprudential Policy in the GCC Countries By Zsofia Arvai; Ananthakrishnan Prasad; Kentaro Katayama
  42. Credit rating agency downgrades and the Eurozone sovereign debt crises By Christopher F Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephen
  43. Monetary Policy in the New Normal By Tamim Bayoumi; Giovanni Dell'Ariccia; Karl Friedrich Habermeier; Tommaso Mancini Griffoli; Fabian Valencia
  44. The effectiveness of non-standard monetary policy measures: evidence from survey data By Carlo Altavilla; Domenico Giannone
  45. How Effective Is Central Bank Forward Guidance? By Clemens J. M. Kool Author-Name-First Clemens J. M.; Daniel L. Thornton Author-Name-First Daniel L.
  46. Inflation Reports and Models: How Well Do Central Banks Really Write? By Ales Bulir; Jaromír Hurník; Katerina Smidkova
  47. A Kaleckian Model with Intermediate Goods By Kemp-Benedict, Eric
  48. India’s Recent Macroeconomic Performance: An Assessment and Way Forward By Muneesh Kapur; Rakesh Mohan
  49. Forward guidance: A new challenge for central banks By Issing, Otmar
  50. Monetary Policy Coordination and the Role of Central Banks By Rakesh Mohan; Muneesh Kapur
  51. Capital inflows and euro area long-term interest rates By Daniel Carvalho; Michael Fidora
  52. On the use of Monetary and Macroprudential Policies for Small Open Economies By F. Gulcin Ozkan; D. Filiz Unsal
  53. Financial Crises in DSGE Models: Selected Applications of MAPMOD By Jaromir Benes; Michael Kumhof; Douglas Laxton
  54. Impacto de una reforma fiscal sobre el bienestar económico en un ambiente de incertidumbre By Venegas-Martínez, Francisco; Rodríguez-Nava, Abigail; Palafox-Roca, Alfredo Omar
  55. Monetary policy and balance sheet adjustment By Issing, Otmar
  56. "When Good Intentions Pave the Road to Hell: Monetization Fears and Europe's Narrowing Options" By Andrea Terzi
  57. Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime By Andrew Berg; Rafael A Portillo; Luis-Felipe Zanna
  58. Hysteresis in Unemployment and Jobless Recoveries By Dmitry Plotnikov
  59. Eductive Stability in Real Business Cycle Models By George W. Evans; Roger Guesnerie; Bruce McGough
  60. Structural Balance Targeting and Output Gap Uncertainty By Eugen Tereanu; Anita Tuladhar; Alejandro Simone
  61. Managing Credit Bubbles By Alberto Martin; Jaume Ventura
  62. An estimate of the possible impact of lower electricity and water tariffs on the Maltese economy By Grech, Aaron George
  63. Aggregate Stability and Balanced-Budget Rules By Matteo Ghilardi; Raffaele Rossi
  64. Islamic Republic of Iran: Selected Issues Paper By International Monetary Fund. Middle East and Central Asia Dept.
  65. Impact of Fed Tapering Announcements on Emerging Markets By Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
  66. Diaspora et comportement économique en incertitude By Jellal, Mohamed
  67. A Simple Method to Compute Fiscal Multipliers By Nicoletta Batini; Luc Eyraud; Anke Weber
  68. Estimating Sri Lanka’s Potential Output By Ding Ding; John Nelmes; Roshan Perera; Volodymyr Tulin
  69. Labour Market Policy and Environmental Fiscal Devaluation: A Cure for Spain in the Aftermath of the Great Recession? By Kurt Kratena; Mark Sommer
  70. Fiscal Policy in Latin America over the Cycle By Alexander Klemm
  71. Política tributaria y economía fiscal en los enfoques de Hayek y Brenann/Buchanan By Estrada, Fernando; González, Jorge Iván
  72. Islamic Republic of Iran: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Islamic Republic of Iran By International Monetary Fund. Middle East and Central Asia Dept.
  73. Financial Soundness Indicators and the Characteristics of Financial Cycles By Natasha Xingyuan Che; Yoko Shinagawa
  74. India: Selected Issues By International Monetary Fund. Asia and Pacific Dept
  75. Charting Ways Out of Europe’s Impasse – A Policy Memorandum By Francis Cripps; Michael Landesmann; Jacques Mazier; Robert McDowell; Terry McKinley; Pascal Petit; Terry Ward; Enrico Wolleb
  76. Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity By Lehmann, Etienne; Lucifora, Claudio; Moriconi, Simone; Van der Linden, Bruno
  77. Republic of Poland: Review under the Flexible Credit Line Arrangement By International Monetary Fund. European Dept.
  78. Potential Growth in Emerging Asia By Rahul Anand; Kevin C. Cheng; Sidra Rehman; Longmei Zhang
  79. Carry Trade, Uncovered Interest Parity and Monetary Policy By Dániel Felcser; Balázs Vonnák
  80. El ciclo económico del Uruguay, 1998-2012 By Luis Bértola; Fernando Isabella; Carola Saavedra
  81. Knowledge Spillovers, ICT and Productivity Growth By Corrado, Carol; Haskel, Jonathan; Jona-Lasinio, Cecilia
  82. Disentangling India’s Investment Slowdown By Rahul Anand; Volodymyr Tulin
  83. Determinants of Interest Rate Spreads in Solomon Islands By Nooman Rebei
  84. Why Was Asia Resilient? Lessons from the Past and for the Future By Phakawa Jeasakul; Cheng Hoon Lim; Erik J. Lundbäck
  85. Un external compact per rilanciare l'Europa By Alberto Bagnai
  86. Fiscal Limits, External Debt, and Fiscal Policy in Developing Countries By Huixin Bi; Wenyi Shen; Shu-Chun S. Yang
  87. Advances in Financial Risk Management andEconomic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer
  88. Seychelles: Staff Report for the Eight Review Under the Extended Arrangement By International Monetary Fund. African Dept.
  89. Comparison of the Tax System Progressivity Over Time: Theory and Application with Mexican Data By Abdelkrim Araar; Luis Huesca
  90. Official Demand for U.S. Debt: Implications for U.S. Real Interest Rates By Iryna Kaminska; Gabriele Zinna
  91. DOLS Cointegration Vector Estimation of the Effect of Inflation and Financial Deepening on Output Growth in Nigeria By Alimi, R. Santos
  92. Tunisia: First and Second Reviews Under the Stand-By Arrangement, Request for Waiver of Applicability and Nonobservance of Performance Criteria By International Monetary Fund. Middle East and Central Asia Dept.
  93. Strengthening Post-Crisis Fiscal Credibility: Fiscal Councils on the Rise — A New Dataset By Xavier Debrun; Tidiane Kinda
  94. Induced Uncertainty, Market Price of Risk, and the Dynamics of Consumption and Wealth By Luo, Yulei; Young, Eric
  95. Inflation and Public Debt Reversals in the G7 Countries By Bernardin Akitoby; Takuji Komatsuzaki; Ariel J Binder
  96. The common pool problem of intergovernmental interactions By Barra, Cristian; Bimonte, Giovanna; Spennati, Pietro
  97. Rising BRICs and Changes in Sub-Saharan Africa’s Business Cycle Patterns By Oumar Diallo; Sampawende J.-A. Tapsoba
  98. Barbados: Financial System Stability Assessment By International Monetary Fund. Monetary and Capital Markets Department
  99. Specifics of International Business Competitiveness in Visegrad Countries – Qualitative Analysis of Selected Case Studies By Bartha, Zoltán; S. Gubik, Andrea
  100. Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation By Kory Kroft; Fabian Lange; Matthew J. Notowidigdo; Lawrence F. Katz
  101. Efficient Energy Investment and Fiscal Adjustment in Senegal By Salifou Issoufou; Edward F. Buffie; Mouhamadou Bamba Diop; Kalidou Thiaw
  102. An industrial policy for Europe. By Mario Pianta
  103. Economía del desarrollo y calidad de vida: estudio regional para Santander, Colombia By Estrada, Fernando; Patiño, Gonzalo; Pulido, Antonio
  104. Republic of Armenia: Request for Arrangement Under the Extended Fund Facility; Staff Report; Press Release; and Statement by the Executive Director for the Republic of Armenia By International Monetary Fund. Middle East and Central Asia Dept.
  105. The Democratization of Credit and the Rise in Consumer Bankruptcies By Livshits, Igor; MacGee, James; Tertilt, Michèle
  106. The Shadow Economy and Shadow Labor Force: A Survey of Recent Developments By Schneider, Friedrich
  107. Yugoslav Republic of Macedonia: Second Post-Program Monitoring Discussions By International Monetary Fund. European Dept.
  108. SMEs’ Access to Finance in the Euro Area: What Helps or Hampers? By Bahar Öztürk; Mico Mrkaic
  109. Effectiveness of Capital Outflow Restrictions By Christian Saborowski; Sarah Sanya; Hans Weisfeld; Juan Yepez
  110. Republic of Mozambique: First Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria—Staff Report; Press Release By International Monetary Fund. African Dept.
  111. Republic of Estonia: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Estonia By International Monetary Fund. European Dept.
  112. Solomon Islands: Third Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria-Staff Report; Press Release and Statement by the Executive Director for Solomon Islands By International Monetary Fund. Asia and Pacific Dept
  113. A Flexible Non Linear Model to Test the Expectation Hypothesis of Interest Rates By Jean-Michel Sahut
  114. Wachstumsbeschleunigung dank Investitionswende in Mittel-, Ost- und Südosteuropa By Vladimir Gligorov; Mario Holzner; Sandor Richter
  115. Botswana: Technical Assistance Report-Introducing a Medium-Term Expenditure Framework By International Monetary Fund. Fiscal Affairs Dept.
  116. Colombia: Review Under the Flexible Credit Line Arrangement - Staff Report; Press Release; and Statement by the Executive Director for Colombia By International Monetary Fund. Western Hemisphere Dept.
  117. Republic of Belarus: Fifth Post-Program Monitoring Discussions By International Monetary Fund. European Dept.
  118. Nigeria: 2013 Article IV Consultation-Staff Report; Press Release and Statement by the Executive Director for Nigeria By International Monetary Fund. African Dept.
  119. Human Capital and the Size Distribution of Firms By Gomes, Pedro Maia; Kuehn, Zoë
  120. Guinea: Third Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review-Staff Report and Press Release By International Monetary Fund. African Dept.
  121. China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences By Wei Liao; Sampawende J.-A. Tapsoba
  122. West African Economic and Monetary Union: Staff Report on Common Policies for Member Countries; Press Release; Statement by the Executive Director By International Monetary Fund. African Dept.
  123. Price and Income Elasticities in LAC Countries: The Importance of Domestic Production. By Carla Canelas; François Gardes; Silvia Salazar
  124. Russian Federation: Fiscal Transparency Evaluation By International Monetary Fund. Fiscal Affairs Dept.
  125. Information Rigidities: Comparing Average and Individual Forecasts for a Large International Panel By Jonas Dovern; Ulrich Fritsche; Prakash Loungani; Natalia T. Tamirisa
  126. Islamic Republic of Afghanistan: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Islamic Republic of Afghanistan By International Monetary Fund. Middle East and Central Asia Dept.
  127. Deep Roots of Fiscal Behavior By Serhan Cevik; Katerina Teksoz
  128. Does Elderly Employment have an Impact on Youth Employment? A General Equilibrium Approach By Alfred Stiassny; Christina Uhl
  129. Burkina Faso: Seventh Review Under the Extended Credit Facility Arrangement and Request for a New Three-Year Extended Credit Facility Arrangement By International Monetary Fund. African Dept.
  130. Myanmar: Second Review Under the Staff-Monitored Program-Staff Report and Press Release By International Monetary Fund. Asia and Pacific Dept
  131. Morocco: Third Review Under the Two-Year Precautionary and Liquidity Line-Staff Report; Press Release; and Statement by the Executive Director for Morocco By International Monetary Fund. Middle East and Central Asia Dept.
  132. Peru: Selected Issues Paper By International Monetary Fund. Western Hemisphere Dept.
  133. Malaysia: Financial Sector Assessment Program Monetary Liquidity Frameworks-Technical Note By International Monetary Fund. Monetary and Capital Markets Department
  134. Spain: Financial Sector Reform—Final Progress Report By International Monetary Fund. European Dept.

  1. By: Guberman, Carlos; Cymbler, David
    Abstract: We built a real business cycle model with inside money and passive monetary policy that shows some interesting features regarding interest rate dynamics and credit market behavior. We find that the model is stable, a feature that was difficult to find in the literature on passive money. We think this would be a good starting point to analyze monetary policy before and after the international financial crisis that started at the market for secured loans.
    Keywords: Passive money, endogenous money, monetary policy, collateral constraint
    JEL: E10 E42 E43 E44 E52
    Date: 2014–07
  2. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate.
    Keywords: natural rate of interest, New Keynesian DSGE models, endogenous growth, �financial frictions, trend inflation
    JEL: E43 E44 E58 O40
    Date: 2014
  3. By: Giorgio Di Giorgio Author-Name-First Giorgio (LUISS University); Salvatore Nistico' Author-Name-First Salvatore (University of Rome Sapienza); Guido Traficante Author-Name-First Guido (European University of Rome)
    Abstract: This paper shows that the result implied by the Redux model of Obstfeld and Rogoff (1995) - that the exchange rate depreciates in response to balanced-budget fiscal expansions - is completely reversed once we account for two key features of modern New Open Economy Macroeconomics models: home bias in public consumption and endogenous monetary policy.
    Keywords: Redux Model, Exchange Rate, Fiscal Shocks, Endogenous Monetary and Fiscal Policy.
    JEL: E43 E44 E50 E52
    Date: 2014
  4. By: Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (ESCE - International Business School)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables.
    Keywords: Identification, financial stability, monetary policy, optimal policy under commitment, augmented Taylor rule.
    JEL: C61 C62 E43 E44 E47 E52 E58
    Date: 2014–04
  5. By: Jess Benhabib (New York University); George W. Evans (University of Oregon, University of St. Andrews); Seppo Honkapohja (Bank of Finland)
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. The intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus, or in some cases a policy of fiscal austerity, will insulate the economy from deflation traps if the policy is appropriately tailored in magnitude and duration. A fiscal stimulus “switching rule,†which automatically kicks in without discretionary fine-tuning, can be equally effective.
    Keywords: Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound
    JEL: E63 E52 E58
    Date: 2014–04–28
  6. By: Wong, Arlene
    Abstract: This paper studies the effects of monetary policy on the expenditure of households of different ages using micro data from the U.S. Consumer Expenditure Survey. I find that contractionary monetary policy shocks reduce the expenditure of young households by significantly more than older households. Households react asymmetrically in part because young households tend to have lower savings and higher labor market risk. This implies that the age composition of the population affects the setting of optimal monetary policy in response to aggregate shocks. Counter-factual analysis suggests that the projected population aging in the U.S. will dampen the pass-through of monetary policy to the economy.
    Keywords: Monetary policy; expenditure; age structure
    JEL: E24 E52 J11
    Date: 2014–07–03
  7. By: Lisi Shi (University of Connecticut); Richard M. H. Suen (University of Connecticut)
    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
  8. By: Juan Pablo Medina Guzman; Jorge Roldos
    Abstract: We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind†or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
    Keywords: Monetary policy;Macroprudential Policy;Capital flows;Business cycles;Financial sector;Economic models;Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis.
    Date: 2014–02–12
  9. By: Juan Pablo Medina Guzman; Claudio Soto
    Abstract: In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.
    Keywords: Commodity prices;External shocks;Commodity price fluctuations;Monetary policy;Fiscal policy;Transparency;Economic models;Commodity prices, monetary policy, fiscal policy, imperfect credibility.
    Date: 2014–02–13
  10. By: Riccardo Fiorito (University of Siena)
    Abstract: Among the Great Recession costs there was the adoption of fiscal policies, generally bounded to increase government debt. In the Oecd area, however, the resulting debt jump was not simply due to counter-cyclical discretion, mostly because of two reasons: the first is that such policies were not always feasible, given the surveillance on the Eurozone countries. The second is the occurrence of an unusual nominal recession, increasing the debt-to-GDP ratio and affecting most Oecd economies in 2009 and the Euro periphery also later. Using a simple accounting scheme, the sources of the debt creation are evaluated during the 2008-13 crisis and the years immediately before (2000-07), comparing the US and the UK with the four biggest Eurozone countries. In general, deficits, inflation and real growth do not have the same role before or during the crisis. Differences are also found for countries pursuing, in special times, more counter-cyclical fiscal policies (US, UK but also Spain and France) and countries like Italy and, especially, Germany following more prudential lines: in one case, because of Italy’s limited fiscal space and, in the other, because of a predilection for stability that Germany maintained even during the most destabilizing, postwar, crisis
    Keywords: Government Debt, Recession, Nominal GDP
    JEL: E32 E62 E65
    Date: 2014
  11. By: Bennani, Hamza
    Abstract: This paper provides an extension of Morris and Shin's (2002) model (Morris, S., Shin, H. S. (2002). Social value of public information. The American Economic Review, 92(5), 1521-1534.). It considers an "interpretation bias" of the public signal sent by central banks such as the ECB or the FED. It is shown that such a bias is detrimental and should be considered when central banks implement their communication policy.
    Keywords: central bank communication, monetary policy, public information.
    JEL: C71 C78 E52 E58
    Date: 2014–07–07
  12. By: Laurence M. Ball
    Abstract: Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
    Keywords: Inflation targeting;Inflation rates;Monetary policy;Central banks;Inflation, Monetary Policy, Inflation Target
    Date: 2014–06–09
  13. By: Philipp Wegmueller
    Abstract: I contribute to the resurging debate on the reform of the international monetary system by asking: How does the size of the public sector under different exchange rate regimes affect macroeconomic stability and welfare? In response to a meeting of the Bretton Woods Commission in 1993, renowned economist Anna Schwartz (2000) claimed providently that the increasing size of the public sector impedes the viability of an exchange rate regime with a fixed rule for convertibility. I study her line of reasoning using a new Keynesian small open economy framework. One important feature of the paper is to bridge the literature on the choice of the exchange rate regime with the literature on the effects of government size for macroeconomic stability. The main findings are threefold: First, output is stabilized by the share of the public sector and destabilized by the tax rate, irrespective of the exchange rate regime in place. Second, inflation is destabilized by the level of income taxes under flexible prices but stabilized under sticky prices. Finally, irrespective of the model specification, an exchange rate peg exhibits the largest macroeconomic volatility and highest welfare losses.
    Keywords: Exchange Rate Regimes; Government Size; Welfare; Macroeconomic stability
    JEL: E32 E52 E63 F33
    Date: 2014–07
  14. By: Berg, Tim Oliver
    Abstract: This paper provides novel evidence on the time varying impact of government spending shocks on output in Germany over the years 1970 to 2013. In a first step, I use an expectations-augmented vector autoregressive model with time varying parameters (TVP-VAR) to show that fiscal multipliers are not stable over time but exhibit a u-shaped pattern. While multipliers fluctuate around 2 at the beginning and end of the sample, they are much smaller in between. In a second step, I discuss which factors determine the magnitude of German multipliers and hence explain the observed variation. It turns out that fiscal policy is more effective when business uncertainty is high but less in periods of financial market stress, while the state of the business cycle is minor important. Moreover, I find that fiscal sustainability is a crucial determinant of the multipliers and that these are about 1 euro higher since the loss of monetary policy autonomy due to the adoption of the euro. And finally, I conclude that policy recommendations based on average multipliers are misleading.
    Keywords: Fiscal Multipliers, State Dependence, Germany, Expectations-Augmented TVP-VAR
    JEL: C11 E32 E62
    Date: 2014–07–10
  15. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics and CEPREMAP); François Langot (GAINS-TEPP & IRA - University of Le Mans, Paris School of Economics, Banque de France and IZA); Thepthida Sopraseuth (THEMA - University of Cergy-Pontoise and CEPREMAP)
    Abstract: We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness.
    Keywords: Welfare, business cycle, financial friction, labor market search.
    JEL: E32 J64 G21
    Date: 2014–06
  16. By: Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: Motivated by the increasing use of forward guidance, we consider DSGE models in which the central bank holds the policy rate fixed for an extended period of time. Private agents' beliefs about how long the fixed-rate regime will last in uences current output and in ation. We estimate the structural parameters for US data and infer the expected duration of the zero lower bound regime. Our results suggest that the average expected duration is around 3 quarters and has varied significantly since the onset of the zero lower bound regime, with changes that can be related to the Federal Reserve's forward guidance.
    Keywords: forward guidance, dsge estimation, zero lower bound, unconventional monetary policy, shadow rate
    JEL: C32 E52 E58
    Date: 2014–06
  17. By: Soldatos, Gerasimos T.
    Abstract: Troika economics has brought Greece to a serious depression at a zero lower bound, with near unlimited supply of labor and near unlimited demand for money. In this paper, it is argued that these circumstances dictate to Greece the implementation individually of a long-term self-financing deficit-spending plan as a means of putting money into circulation in the country. Such a seigniorage-based self-financing deficit-spending, will boost demand and in response, output, tax base and tax revenue given the tax rate, with the increase in revenue being more than enough to be covering the deficit, and the excess revenue being channeled to paying out the accumulated debt. A k-percent monetary growth rule and constant inflation rate should be put forward, domestic credit expansion should be kept below OECD average, and potential output and tax Laffer curve assessments should be keeping track of the changing hysteresis effect. In view of the political instability plaguing modern Greece, the k-percent, balanced-budget, and no-open-market operations (unless under acts of God) rules should be constitutionalised (along with the tax system).
    Keywords: Quantity theory of money, Self-financing fiscal policy, Greek austerity
    JEL: E6 H1 I3
    Date: 2014
  18. By: Magda E. Kandil
    Abstract: The paper investigates asymmetry in the allocation of aggregate demand shocks between real output growth and price inflation over the business cycle in a sample of fifteen Caribbean countries. In most countries, the evidence indicates the existence of structural constraints, implying that positive demand shocks feed predominantly into prices while negative demand shocks mainly affect output. The high variability of aggregate demand in Caribbean countries, frequently exposed to shocks that are exacerbated by pro-cyclical policy stance, tends to create an upward bias on inflation and a downward bias on real output growth, on average, over time. The analysis highlights the benefits of eliminating structural rigidities responsible for asymmetric real and inflationary effects and points to the dangers of procyclical macroeconomic policies that exacerbate the adverse effects of demand variability.
    Keywords: Economic growth;Caribbean;Demand;External shocks;Inflation;Business cycles;Economic models;Demand Shocks, Asymmetric Effects, Contractionary and Inflationary Biases.
    Date: 2014–04–29
  19. By: Longmei Zhang; Edda Zoli
    Abstract: In recent years, macroprudential policy has become an increasingly active policy area. Many countries have adopted it as a tool to safeguard financial stability, in particular to deal with the credit and asset price cycles driven by global capital flows. This paper reviews the use of key macroprudential instruments and capital flow measures in 13 Asian economies and 33 economies in other regions since 2000, and constructs various macroprudential policy indices, aggregating sub-indices on key instruments. Asian economies appear to have made greater use of macroprudential tools, especially housing-related measures, than their counterparts in other regions. The effects of macroprudential policy are then assessed through an event study, cross-country macro panel regressions and bank-level micro panel regressions. The analysis suggests that macroprudential policy and capital flow measures have helped curb housing price growth, equity flows, credit growth, and bank leverage. The instruments that have been particularly effective in this regard include loan-to-value ratio caps, housing tax measures, and foreign currency-related measures.
    Keywords: Macroprudential Policy;Asia;Capital flows;Credit expansion;Asset prices;Inflation;Business cycles;Monetary policy;macroprudential policy; capital flow measures; credit growth; housing price
    Date: 2014–02–06
  20. By: Nair, Manju S
    Abstract: India has exhibited high variability in inflation during the last eight years owing to both internal and external factors. The Global Financial Meltdown, recurrent increase in global oil prices, wage employment programmes, widening current account deficits etc resulted in fluctuations in inflation. These factors have a direct influence on variables like output, money supply, exchange rate which in turn affect inflation. In this context, the study employs a Cointegrated Vector Auto Regression framework to analyse inflation dynamics in India. The determinants identified to affect inflation in India include broad money supply, exchange rate and output, which is substantiated by the existing theories of inflation. There exists a cointegrating relation between inflation and its determinants and in the short run inflation adjusts to past changes and policy fundamentals as inferred from the Error Correction Model. The Impulse Response Function traces out a stable relationship of inflation with its identified determinants.
    Keywords: Inflation dynamics, co-integration, impulse response
    JEL: E31
    Date: 2014–07–05
  21. By: Marco Airaudo (School of Economics, LeBow College of Business, Drexel University); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Luis-Felipe Zanna (Research Department, International Monetary Fund, Washington (DC))
    Abstract: We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary, and also mildly passive policy responses to in ation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets.
    Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy, Stock Prices
    JEL: E4 E5
    Date: 2014–07
  22. By: Shaun K. Roache
    Abstract: Inflation persistence is sometimes defined as the tendency for price shocks to push the inflation rate away from its steady state—including an inflation target—for a prolonged period. Persistence is important because it affects the output costs of lowering inflation back to the target, often described as the “sacrifice ratioâ€. In this paper I use inflation expectations to provide a comparison of inflation persistence in Brazil with a sample of inflation targeting (IT) countries. This approach suggests that inflation persistence increased in Brazil through early 2013, in contrast to many of its IT peers, mainly due to “upward†persistence. The 2013 rate hiking cycle may have contributed to some recent decline in persistence.
    Keywords: Inflation;Brazil;Inflation targeting;Monetary policy;Cross country analysis;Economic models;
    Date: 2014–04–04
  23. By: Ewa Stanisławska (Narodowy Bank Polski)
    Abstract: The paper employs on individual bank data with aim to analyse interest rate pass-through from money market rates to banks’ deposits and lending rates. In the first step, the speed and completeness of interest rate adjustment is assessed. As the sample covers period prior to and after the outburst of the financial crisis, some comparisons of interest rate transmission process in these periods are made. In the second step, the influence of individual banks characteristics, like size, strength of deposit base, quality of credit portfolio, etc., on the features of interest rate transmission is examined. It seems that t heir impact i s not strong, as they affect rather the speed of adjustment than its scale in the long term.
    Keywords: interest rates pass-through, monetary policy transmission mechanism, interest rate channel
    JEL: E52 E43 G21
    Date: 2014
  24. By: BjÖrn Ohl (Narodowy Bank Polski); Taneli Mäkinen (Banca d'Italia.)
    Abstract: We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a recession in the previous period, and firms enter the current period with a pessimistic belief, the incentive to acquire information is stronger than when the economy has been in a boom and firms share an optimistic belief. The cyclicality of the aggregate learning outcome is moderated by the price system, which transmits information from informed to uninformed firms, thus dampening information demand. Though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain.
    Keywords: information acquisition, rational expectations equilibrium, asymmetric information, strategic substitutability
    JEL: D51 D83 E32
    Date: 2014
  25. By: Reicher, Claire
    Abstract: The literature on systematic fiscal policy and macroeconomic performance in industrialized countries is large but fragmented. Based on a broad overview of that literature, several patterns emerge. The empirical literature points toward strongly anticyclical policy, which consists of procyclical tax revenues, acyclical tax rates and government purchases, and countercyclical transfer payments. Consolidation in response to the debt has come primarily through adjustments to taxes and possibly purchases. Furthermore, a large government is associated with reduced macroeconomic volatility. The theoretical literature on anticyclical fiscal policy, meanwhile, has gone from mostly focusing on government purchases and tax rates toward beginning to focus on transfer payments, although more quantitative work remains to be done in linking theory with empirics. At the same time, a policy literature has begun to develop, which has applied lessons from the theoretical literature in order to understand different consolidation scenarios and different proposed fiscal rules, particularly in Europe. --
    Keywords: fiscal policy,fiscal rule,fiscal response function,deficits,taxes,government purchases,transfer payments
    JEL: E62 E63 H30
    Date: 2014
  26. By: Geert Mesters (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands)
    Abstract: We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been affected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We find evidence that the bond market interventions had a direct and temporary effect on the yield curve lasting up to ten weeks, and find limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors.
    Keywords: dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank
    JEL: C32 C33 E52 E58
    Date: 2014–06–17
  27. By: Tomasz Lyziak (Narodowy Bank Polski)
    Abstract: This paper presents survey-based direct measures of inflation expectations of consumers, enterprises and financial sector analysts in Poland. It then goes on to provide the results of testing those features of inflation expectations that seem the most important from the point of view of monetary policy and its transmission mechanism. The study is the revised version of the NBP Working Paper no. 115 [ Lyziak (2012)]. It uses new measures of consumer inflation expectations and covers the updated sample (2001- 2013). Characteristics of inflation expectations in Poland are diversified across the analysed groups of economic agents. Inflation expectations of financial sector analysts and enterprises outperform those of consumers in terms of their accuracy and information content, although consumer inflation expectations are also to some extent forward-looking.
    Date: 2014
  28. By: Zhang, Tongbin
    Abstract: In this paper, I first discover how real riskless interest rate, the tool for conducting monetary policy, is empirically related to stock price. Then, consumption based asset pricing model with rational expectations has been shown to fail in generating the same relationship. However, allowing a small deviation from RE by introducing learning mechanism can quantitatively account for the weak relationship between stock price and the risk-free interest rate. Therefore, I claim that this model could be favorable workhorse for studying monetary policy and asset price.
    Keywords: Stock Price, Riskless Interest Rate, Correlation, Learning
    JEL: E44 G12
    Date: 2014–07–03
  29. By: Hasan, Zubair Hasan
    Abstract: The financial turmoil that the 2007 subprime debacle of the US set into motion has raised a welter of puzzling questions for the policy makers across the world. The position seems all the more confusing in the Muslim world where the fast expanding Islamic finance operates in competition with the conventional in a dual setting. The turmoil has led many to blaming the private lure for the colossal failure of financial institutions. In contrast, others counter argue to put public policy in the dock under the exalted banner of ‘regime uncertainty’. They blames the aggravation of the trouble on the uncalled for government intervention in financial markets. Interestingly, few draw attention to moral crimes committed on either side of the fence among the causative factors. This paper seeks to investigate if the monetary policies the Central Banks follow - now including the Basel capital adequacy norms as well - would suit or suffice Islamic banking institutions competing with the conventional in a dual financial framework? In this context, it questions the claim that risk-sharing is or can alone be the basis for Islamic finance.
    Keywords: Keywords: Monetary policy, Dual financial system, Profit sharing ratio, Regime uncertainty
    JEL: E3 E5 E51 E58
    Date: 2014–07–07
  30. By: Natan P. Epstein; Rafael Portillo
    Abstract: This paper analyzes the monetary policy framework in Kazakhstan. The authorities have been successful in containing inflation in the context of a managed exchange rate regime. Over the past two years, the central bank has taken steps to enhance its ability to regulate liquidity in the financial system. However, the current policy interest rate does not properly signal the stance of policy, reflected in a weak transmission from the policy rate to money market interest rates. With the use of a stylized model, the paper studies the macro determinants of money market interest rates under the current framework, and illustrates both the benefits and challenges of active interest rate policy. The model shows that limited use of instruments to steer short-term interest rates weakens the framework’s ability to counteract shocks. Finally, the paper explores the implications of varying degrees of exchange rate flexibility for interest rate policy and open market operations.
    Keywords: Monetary policy;Kazakhstan;Exchange rate regimes;Interest rates;Money markets;External shocks;Devaluation;Econometric models;Monetary Policy, Interest Rate, Money Market, Exchange Rate.
    Date: 2014–06–13
  31. By: Jean-Louis Combes; Xavier Debrun; Alexandru Minea; Rene Tapsoba
    Abstract: The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence.
    Keywords: Inflation targeting;Fiscal rules;Fiscal policy;Macroprudential Policy;Monetary policy;Economic models;Inflation targeting, fiscal rules, institutional reform sequencing.
    Date: 2014–05–28
  32. By: Adam, Klaus; Zhu, Junyi
    Abstract: We document the presence of sizable distributional effects from unexpected price level movements in the Euro Area (EA) using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA as a whole is a net winner of unexpected price level increases, with Italy, Greece, Portugal and Spain being the biggest beneficiaries, and Belgium and Malta being the largest losers. Governments are net winners of inflation, while the household (HH) sector is a net loser in the EA as a whole. HHs in Belgium, Ireland, Malta and Germany incur the biggest per capita losses, while HHs in Finland and Spain turn out to be net winners of inflation. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net winners of inflation, while older and richer HHs are losers. As a result, wealth inequality in the EA decreases with unexpected inflation, although in some countries (Austria, Germany and Malta) inequality increases due to presence of relatively few young borrowing HHs. We document that HHs inflation exposure varies systematically across countries, with HHs in high inflation EA countries holding systematically lower nominal exposures.
    Keywords: inflation , redistribution , Euro Area , household survey
    JEL: E31 D31 D14
    Date: 2014
  33. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Hui-Kuang Hsu (National Pingtung Institute of Commerce, Taiwan); and Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain)
    Abstract: The paper uses monthly data on financial stock index returns, tourism stock sub-index returns, effective exchange rate returns and interest rate differences from April 2005 – August 2013 for Taiwan that applies Chang’s (2014) novel approach for constructing a tourism financial indicator, namely the Tourism Financial Conditions Index (TFCI). The TFCI is an adaptation and extension of the widely-used Monetary Conditions Index (MCI) and Financial Conditions Index (FCI) to tourism stock data. However, the method of calculation of the TFCI is different from existing methods of constructing the MCI and FCI in that the weights are estimated empirically. The empirical findings show that TFCI is estimated quite accurately using the estimated conditional mean of the tourism stock index returns. The new TFCI is straightforward to use and interpret, and provides interesting insights in predicting the current economic and financial environment for tourism stock index returns that are based on publicly available information. In particular, the use of market returns on the tourism stock index as the sole indicator of the tourism sector, as compared with the general activity of economic variables on tourism stocks, is shown to provide an exaggerated and excessively volatile explanation of tourism financial conditions.
    Keywords: Monetary Conditions Index, Financial Conditions Index, Model-based Tourism Financial Conditions Index, Unbiased Estimation
    JEL: B41 E44 E47 G32
    Date: 2014–05–13
  34. By: Villarreal, Francisco G.
    Abstract: Despite growing interest regarding the distributive impact of macroeconomic policies, the relationship between monetary policy and inequality has received relatively little attention in the literature. This is partly explained by the fact that the workhorse model used for monetary policy analysis summarises the demand-side of the economy by means of a representative agent, whose welfare is the normative criterion of optimal policy. However, alternative formulations using incomplete market models which feature heterogeneous agents, indicate that monetary policy does have an effect on the distribution of income, consumption and wealth, which potentially has implications for the design and conduct of optimal policy. The document empirically investigates the nature of the relationship between monetary policy and household income inequality in Mexico. The ultimate purpose is to uncover certain regularities which characterise the relationship, which can eventually serve as stylised facts for the design of theoretical models. The response of household's income inequality, and its components, to monetary policy shocks indicate that unanticipated increases in the nominal interest rate are correlated with a reduction of household income inequality in the short run, and that the effect dissipates over a two-year horizon. The results are robust to the particular measure of inequality used, as well as the procedure used to identify the policy shocks.
    Keywords: Monetary Policy, Income Distribution, Small Open Economy
    JEL: C1 D3 E5
    Date: 2014–06–30
  35. By: Manmohan Singh
    Abstract: This paper focuses on how changes in financial plumbing of the markets may impact the monetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space†for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.
    Keywords: Central banks;Repurchase agreements;Securities markets;Balance sheets;Reserves;Financial intermediation;United States;Monetary policy;Financial stability;quantitative easing; collateral velocity; Federal Reserve; monetary policy; repo rate
    Date: 2014–06–20
  36. By: Andrew Swiston; Florencia Frantischek; Przemek Gajdeczka; Alexander Herman
    Abstract: This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.
    Keywords: Central banks;Dominican Republic;Central America;Capital;Demand for money;Accounting;Asset management;central bank, central bank financial strength, money demand, recapitalization, Central America, Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua
    Date: 2014–05–13
  37. By: Piero Gottardi (European University); Atsushi Kajii (Kyoto University); Tomoyuki Nakajima (Kyoto University and CIGS)
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation, and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    Keywords: incomplete markets; Ramsey equilibrium; optimal taxation; optimal public debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–06
  38. By: Jaromir Benes; Michael Kumhof; Douglas Laxton
    Abstract: This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.
    Keywords: Financial crisis;Credit expansion;Bank credit;Credit risk;Banks;Loans;Macroprudential Policy;Monetary policy;Economic models;lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy
    Date: 2014–04–04
  39. By: Grech, Aaron George
    Abstract: Modern economics assumes that in the long run an economy develops in a balanced way, with full employment of resources and a constant inflation rate. The output level thereby achieved is called „potential output‟. Knowing the extent of the output gap, or the deviation from this equilibrium, is crucial both to guide discretionary policy and to help set an environment conducive to higher long-term growth. Consequently substantial research has been carried out to devise methods to determine the equilibrium output of an economy. This paper, after reviewing the most used method from the two main branches of empirical investigation, namely the Hodrick-Prescott (HP) filter and the production function, argues that they both suffer from significant failings when applied to very small and open economies like Malta. The latter tend to have series that exhibit a number of pronounced trends, large fluctuations and recurrent structural breaks. Lack of data seriously constrains the production function approach in such a setting. However, non-structural methods like the HP filter tend to exhibit very pronounced changes in the output gap that are out of line with the theoretical idea of equilibrium, with results also affected significantly by shocks to data. In turn, these reflect the small size of the economy rather than actual changes in potential output. Two suggestions are put forward. The first one involves an innovative application of the standard filter, whereby the upper and lower bounds of a series are defined and equilibrium is determined as a weighted average of the HP filter applied separately on these bounds. This can result in a smoother output gap series with the possibility of long-term deviations from equilibrium. The second suggestion involves an integration of structural features into the standard HP filter. The modified or generalised HP filter would allow researchers to set limits on the impact exerted by structural or temporary shocks and to allow for the possibility of having lengthy periods of disequilibria.
    Keywords: Potential output, output gap, HP filter, detrending, business cycles, small open economies
    JEL: B41 C1 E32 F41
    Date: 2014–07
  40. By: Roberto Perrelli; Shaun K. Roache
    Abstract: Emerging markets have experienced a sizeable decline in their neutral real interest rates until recently. In this paper we try to identify the main factors that contributed to it, with a focus on Brazil. We estimate an interval for Brazil’s time-varying neutral rate based on a range of structural and econometric models. We assess the implications of incorrectly estimating a time-varying neutral rate using a small structural model with a simple monetary policy instrument rule. We find that policy prescriptions are very different when facing uncertainty of neutral rate and of output gap. Our result contrasts sharply with Orphanides (2002), suggesting that the best response to neutral rate uncertainty is to ensure policy remains highly sensitive to inflation and output variations.
    Keywords: Interest rates;Brazil;Inflation targeting;Monetary policy;Economic models;Natural rate of interest; small monetary model; inflation targeting regime.
    Date: 2014–05–12
  41. By: Zsofia Arvai; Ananthakrishnan Prasad; Kentaro Katayama
    Abstract: As undiversified commodity exporters, GCC economies are prone to pro-cyclical systemic risk in the financial system. During periods of high hydrocarbon prices, favorable economic prospects make the financial sector keen to lend, leading to higher domestic credit growth and easier access to external financing. Fiscal policy is a very important tool for macroeconomic management, but due to the significant time lags and expenditure rigidities, it has not been a flexible enough tool to prevent credit booms and the build-up of systemic risk in the GCC. This, together with limited monetary policy independence because of the pegged exchange rate, means that macro-prudential policy has a particularly important role in limiting systemic risk in the financial system. This importance is reinforced by the underdeveloped financial markets in the region that provide limited risk management tools and shortcomings in crisis resolution frameworks. This paper will discuss the importance of macro-prudential policy in the GCC countries, look at the experience with macro-prudential policies in the boom/bust cycle in the second half of the 2000s, and use the broad frameworks being developed in the Fund and elsewhere to discuss ways existing frameworks and policy toolkits in the region can be strengthened given the characteristics of the GCC economies.
    Keywords: Macroprudential Policy;Cooperation Council for the Arab States of the Gulf;Financial sector;Financial risk;Risk management;Fiscal policy;
    Date: 2014–03–19
  42. By: Christopher F Baum (Boston College; DIW Berlin); Margarita Karpava (MediaCom London); Dorothea Schäfer (DIW Berlin; JIBS); Andreas Stephen (JIBS; DIW Berlin; Ratio Institute Stockholm)
    Abstract: This paper studies of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased the volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond’s yields, although Germany’s rating status was never touched by CRA. There is no evidence for Gander causality from bond yields to rating announcement. We infer from these findings that CRA announcements increasingly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolio across member countries, out of ailing states’ debt into more stable borrowers’ securities.
    Keywords: Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate
    JEL: G24 G01 G12 G14 E42 E43 E44 F31 F42
    Date: 2014
  43. By: Tamim Bayoumi; Giovanni Dell'Ariccia; Karl Friedrich Habermeier; Tommaso Mancini Griffoli; Fabian Valencia
    Abstract: The proposed SDN would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.
    Keywords: Monetary policy;Central banks;Central bank autonomy;Macroprudential Policy;Financial stability;Cross country analysis;Monetary Policy, Financial Stability, Central Bank Independence
    Date: 2014–04–04
  44. By: Carlo Altavilla (European Central Bank); Domenico Giannone (LUISS University of Rome, EIEF, ECARES and CEPR)
    Abstract: We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures undertaken by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using individual survey data, we analyse the changes in forecasting of bond yields around the announcement and implementation dates of non-standard monetary policies. The results indicate that bond yields are expected to drop significantly for at least one year after the announcement and the implementation of accommodative policies.
    Keywords: Survey of Professional Forecasters, Large Scale Asset Purchases, Quantitative Easing, Operation Twist, Forward Guidance, Tapering.
    JEL: E58 E65
    Date: 2014
  45. By: Clemens J. M. Kool Author-Name-First Clemens J. M. (Utrecht University); Daniel L. Thornton Author-Name-First Daniel L. (Federal Reserve Bank of St. Louis)
    Abstract: This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participantsÕ ability to forecast future short-term and long-term rates. We find some evidence that forward guidance improved market participantsÕ ability to forecast short-term rates over relatively short forecast horizons in New Zealand, Norway and Sweden, but not so for the United States. Most effects are small, often insignificant, and vary across benchmarks. In addition, forward guidance induces convergence of survey forecasts for New Zealand, but less so for the other countries, in particular the United States.
    Keywords: monetary policy, central bank transparency, interest rates, term structure, forecasting.
    JEL: E52 E43 E47
    Date: 2014
  46. By: Ales Bulir; Jaromír Hurník; Katerina Smidkova
    Abstract: We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.
    Keywords: Central banks;Inflation targeting;Monetary policy;Transparency;Keynesian economics;Economic models;Inflation targeting, Kalman filter, monetary policy communication.
    Date: 2014–05–29
  47. By: Kemp-Benedict, Eric
    Abstract: Kaleckian models are widely used for macroeconomic analysis due to their flexibility and simplicity. Sraffians counter that the Kaleckian model fails to capture a central fact of modern economies, the existence and importance of intermediate consumption. The critique is correct, but as the remedy appears to be a detailed analysis with multi-sectoral input-output tables, Sraffian models have not displaced their more tractable Kaleckian counterparts. This paper presents a model with intermediate consumption that is Kaleckian in spirit, although prompted by the Sraffian critique. It is shown that the profit share of GDP can be decomposed into two factors, an average profit share at firm level and a factor capturing intermediate goods consumption. The corresponding firm-level markups for a sample of fourteen OECD countries cluster closely around a common value that remains steady when averaged over business cycles. Taking this as evidence that the factorization is empirically meaningful, the paper then constructs a modified Kaleckian model. Using the modified model it is shown that economies are always profit-led with respect to a change in intermediate consumption, but may be either profit-led or wage-led with respect to a change in the firm-level markup, opening the possibility for diverse trajectories over business cycles. The model is applied to France, which has a particularly long data series, and is shown to perform well in explaining changes in utilization rates.
    Keywords: Kaleckian; Sraffian; intermediate consumption; business cycles
    JEL: E11 E12 E32
    Date: 2014–05–30
  48. By: Muneesh Kapur; Rakesh Mohan
    Abstract: The macroeconomic policy response in India after the North Atlantic financial crisis (NAFC) was rapid. The overshooting of the stimulus and its gradual withdrawal sowed seeds for inflationary and BoP pressures and growth slowdown, then exacerbated by domestic policy bottlenecks and volatility in international financial markets during mid-2013. Appropriate domestic oil prices and fiscal consolidation will contribute to the recovery of private sector investment. Fiscal consolidation would also facilitate a reduction in inflation, which would moderate gold imports and favorably impact real exchange rate and current account deficit.
    Keywords: Economic growth;India;Monetary policy;Exchange rates;Exports;Imports;Fiscal policy;Current account deficits;Fiscal consolidation;Current Account, Capital Flows, Exchange Rate, Exports, Fiscal Policy, Gold, Growth, India, Monetary Policy, Oil Demand, Savings.
    Date: 2014–04–29
  49. By: Issing, Otmar
    Abstract: In a contribution prepared for the Athens Symposium on 'Banking Union, Monetary Policy and Economic Growth', Otmar Issing describes forward guidance by central banks as the culmination of the idea of guiding expectations by pure communication. In practice, he argues, forward guidance has proved a misguided idea. What is presented as state of the art monetary policy is an example of pretence of knowledge. Forward guidance tries to give the impression of a kind of rule-based monetary policy. De facto, however, it is an overambitious discretionary approach which, to be successful, would need much more (or rather better) information than is currently available. In Issing's view, communication must be clear and honest about the limits of monetary policy in a world of uncertainty. --
    Keywords: central bank communication,monetary policy,forward guidance
    Date: 2014
  50. By: Rakesh Mohan; Muneesh Kapur
    Abstract: The unconventional monetary policies (UMPs) pursued by the advanced economies (AEs) have posed macroeconomic challenges for the emerging market economies (EMEs) through volatile capital flows and exchange rates. AE central banks need to acknowledge and appreciate the spillovers resulting from such UMPs. Central banks of the AEs, who have set up standing mutual swap facilities, should explore similar arrangements with other significant EMEs with appropriate risk mitigation measures. These initiatives could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for defensive policy actions on the part of EMEs.
    Keywords: Monetary policy;Spillovers;Developed countries;Emerging markets;Capital flows;Central banks;Central bank role;Capital flows, central banks, coordination, emerging markets, unconventional monetary policy, spillovers
    Date: 2014–04–29
  51. By: Daniel Carvalho; Michael Fidora
    Abstract: Capital flows into the euro area were particularly large in the mid-2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis. We show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, which is in line with previous studies that document a similar impact of foreign bond buying on US Treasury yields. These results are relevant for understanding developments both in the euro area and abroad, as lower levels of long-term interest rates resulting from foreign accumulation of euro area debt securities may have added to increased risk appetite and hunt for yield at the global level.
    JEL: E43 E44 F21 F41 G15
    Date: 2014
  52. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
    Keywords: Macroprudential Policy;Monetary policy;Small open economies;Emerging markets;Entrepreneurship;External borrowing;Financial stability;Econometric models;Financial instability; monetary policy; macroprudential measures; emerging
    Date: 2014–06–24
  53. By: Jaromir Benes; Michael Kumhof; Douglas Laxton
    Abstract: This paper, together with a technical companion paper, presents MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of both the pre-crisis and crisis phases of financial cycles.
    Keywords: Financial crisis;Credit expansion;Banks;Loans;Credit risk;Macroprudential Policy;Economic models;lending boom, credit crunch, financial crisis, financial cycle, asset price bubble, macroprudential policy
    Date: 2014–04–04
  54. By: Venegas-Martínez, Francisco; Rodríguez-Nava, Abigail; Palafox-Roca, Alfredo Omar
    Abstract: This research is aimed at examining the impact of tax reform on economic welfare in an environment of uncertainty in a small open economy with a regime of flexible exchange rate. It is assumed that the economy is populated by identical rational risk-averse individuals. Unlike the typical assumption of infinitely-lived agents, it is assumed in this paper that with some (positive) probability agents are living in a given finite time. It also assumed that individuals are subject to tax rates on wealth, income and consumption. The distinctive feature of the proposed model is that macroeconomic fundamentals have a random dynamics that is modeled with diffusion processes or diffusion processes combined with Poisson jump processes.
    Keywords: Fiscal policy, tax reform, income tax, consumption tax, stochastic modeling.
    JEL: E62
    Date: 2014–07–04
  55. By: Issing, Otmar
    Abstract: In the wake of the Global Financial Crisis that started in 2007, policymakers were forced to respond quickly and forcefully to a recession caused not by short-term factors, but rather by an over-accumulation of debt by sovereigns, banks, and households: a so-called balance sheet recession. Though the nature of the crisis was understood relatively early on, policy prescriptions for how to deal with its consequences have continued to diverge. This paper gives a short overview of the prescriptions, the remaining challenges and key lessons for monetary policy. --
    Keywords: recession,monetary policy,balance sheet adjustment
    Date: 2014
  56. By: Andrea Terzi
    Abstract: With the creation of the Economic and Monetary Union and the euro, the national government debt of eurozone member-states became credit sensitive. While the potentially destabilizing impact of adverse cyclical conditions on credit-sensitive debt was seriously underestimated, the design was intentional, framed within a Friedman-Fischer-Buchanan view that "no monetization" rules provide a powerful means to discipline government behavior. While most countries follow some kind of "no monetization" rule, the one embraced by the eurozone was special, as it also prevented monetization on the secondary market for debt. This made all eurozone public debt defaultable--at least until the European Central Bank (ECB) announced the Outright Monetary Transactions program, which can be seen as an enhanced rule-based approach that makes governments solvent on the condition that they balance their budgets. This has further narrowed Europe's options for policy solutions that are conducive to job creation. An approach that would require no immediate changes in the European Union's (EU) political structure would be for the EU to fund "net government spending in the interest of Europe" through the issue of a eurobond backed by the ECB.
    Keywords: Euro; Eurozone; Debt Monetization; Sovereign Debt Crisis; Government Budget Constraint
    JEL: E63 H63
    Date: 2014–06
  57. By: Andrew Berg; Rafael A Portillo; Luis-Felipe Zanna
    Abstract: We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.
    Keywords: Exchange rate regimes;Aid flows;Africa;Foreign exchange;Reserves accumulation;Central banks;Monetary policy;Fiscal policy;Economic models;Reserve Accumulation Policies, Sterilization Policies, Transfer Problem., fixed exchange rate, fixed exchange rate regime, flexible exchange rate, flexible exchange rate regime, real exchange rate, exchange rate appreciation, exchange rates, real exchange rate appreciation, fixed exchange rate regimes, nominal exchange rate, flexible exchange rates, flexible exchange rate regimes, exchange sales, exchange rate commitment, foreign exchange sales, exchange rate policies, currency substitution, exchange rate peg, exchange reserves, fixed exchange rates, foreign exchange reserves, exchange rate policy, exchange rate target
    Date: 2014–01–30
  58. By: Dmitry Plotnikov
    Abstract: This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
    Keywords: Unemployment;Economic recession;Economic recovery;Employment;Business cycles;Economic models;Unemployment, hysteresis, business cycles, sunspots
    Date: 2014–05–06
  59. By: George W. Evans (University of Oregon; University of St Andrews); Roger Guesnerie (Paris School of Economics, College de France); Bruce McGough (University of Oregon)
    Abstract: Within the standard RBC model, we examine issues of expectational coordination on the unique rational expectations equilibrium. Our study first provides a comprehensive assessment of the sensitivity of agents’ ?plans and decisions to their short-run and long-run expectations. We show this sensitivity is much too great to trigger eductive coordination in a world of hyper-rational agents, who are endowed with Common Knowledge and contemplate the possibility of small deviations from equilibrium: eductive stability never obtains. This impossibility theorem has a counterpart when adaptive learning is incorporated and real-time paths are required to satisfy a collective initial view of the future.
    Keywords: learning, expectational coordination, stability
    JEL: D84 D83 E32
    Date: 2014–03–24
  60. By: Eugen Tereanu; Anita Tuladhar; Alejandro Simone
    Abstract: Potential output estimation plays a crucial role in conducting fiscal policy based on structural balances. Difficulties in estimating potential output could lead to an erroneous policy stance with a consequent impact on growth. This paper analyzes historical data on revisions of actual and potential growth in the European Union and the implication of these revisions for the measurement of fiscal effort using the cyclically-adjusted primary balance (CAPB). It finds that revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average. Revisions in potential GDP also contributed significantly to revisions in the estimated CAPB, especially during the crisis years. Given these findings and historical correlations, it proposes an indicative rule of thumb for reducing errors in the measurement of fiscal effort by factoring in that about 30 percent of revisions in actual growth capture changes in potential growth. In other words, the standard advice of “letting automatic stabilizers operate fully†in response to a positive/negative growth shocks likely implies a strengthening/weakening of the structural position.
    Keywords: Structural fiscal balance;European Economic and Monetary Union;Fiscal policy;Economic growth;structural balance, cyclically adjusted balance, fiscal policy
    Date: 2014–06–13
  61. By: Alberto Martin; Jaume Ventura
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The “equilibrium†bubble size depends on investor sentiment, however, and it typically does not coincide with the “optimal†bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the “optimal†bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the “equilibrium†bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it.
    Keywords: Credit expansion;Credit booms;Business cycles;Lender of last resort;Borrowing;Econometric models;sovereign debt, rollover crises, secondary markets, economic growth
    Date: 2014–06–09
  62. By: Grech, Aaron George
    Abstract: This paper presents estimates of the possible impact on the Maltese economy of the reduction in electricity and water tariffs to residential customers that took place on 31 March 2014 and the subsequent lowering of tariffs to commercial customers, which is expected to take place in March 2015. These estimates are calculated using the structural macro-econometric model described in Grech et al (2013). Assuming a full and immediate pass-through of these measures, this paper suggests that Malta’s real GDP could be boosted by 0.65 percentage points by 2020, with the bulk of the impact being felt during 2015 and 2016. The measures should also lead to lower consumer price inflation and contribute towards an improvement in the international competitiveness of the Maltese economy.
    Keywords: Macro-econometric modelling, Malta, utility tariffs.
    JEL: C3 C5 E1 E2
    Date: 2014–06
  63. By: Matteo Ghilardi; Raffaele Rossi
    Abstract: It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Then we calibrate the model consistently with the empirical evidence, i.e. we set the elasticity of substitution between labour and capital below unity. We show that compared to the Cobb-Douglas case, the likelihood of indeterminacy under a balanced-budget rule is greatly reduced in the United States, the European Union and the United Kingdom.
    Keywords: Budgets;United States;United Kingdom;European Union;Business cycles;Capital;Labor markets;Production;Economic models;Constant Elasticity of Substitution; Fiscal Policy; Indeterminacy; Business Cycles.
    Date: 2014–02–10
  64. By: International Monetary Fund. Middle East and Central Asia Dept.
    Keywords: Fiscal policy;Subsidies;Fiscal reforms;Monetary policy;Inflation;Sovereign wealth funds;Selected issues;Iran;
    Date: 2014–04–04
  65. By: Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
    Abstract: This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.
    Keywords: Monetary policy;United States;Unconventional monetary policy instruments;Announcements;Emerging markets;Financial markets;Bond yields;Stock prices;Emerging markets, tapering, Fed policy announcements, vulnerability.
    Date: 2014–06–17
  66. By: Jellal, Mohamed
    Abstract: The main purpose of this paper is to study the economic behavior of migrants under uncertainty . We show , in particular, that the impact of the probability of return remains ambiguous regarding both the savings and labor participation of the migrants , this theoritical finding seems to relativize those in the literature on this topic
    Keywords: Diaspora, Uncertainty, Saving, Labor participation
    JEL: D8 E2 E21 F22 J22
    Date: 2014–06–14
  67. By: Nicoletta Batini; Luc Eyraud; Anke Weber
    Abstract: Fiscal multipliers are important tools for macroeconomic projections and policy design. In many countries, little is known about the size of multipliers, as data availability limits the scope for empirical research. For these countries, we propose a simple method—dubbed the “bucket approachâ€â€”to come up with reasonable multiplier estimates. The approach bunches countries into groups (or “bucketsâ€) with similar multiplier values, based on their characteristics. It also takes into account the effect of some temporary factors, such as the state of the business cycle.
    Keywords: Fiscal stimulus and multipliers;Business cycles;Fiscal consolidation;Fiscal policy;Monetary policy;Fiscal policy, fiscal multipliers
    Date: 2014–06–09
  68. By: Ding Ding; John Nelmes; Roshan Perera; Volodymyr Tulin
    Abstract: In this paper we present various techniques to estimate Sri Lanka’s potential output and output gap, including statistical and model-based approaches. Compared to conventional statistical filters that rely exclusively on information in a single series, the model-based approaches allow potential output estimates to incorporate information contained in observable data series including inflation, actual output, unemployment and capacity utilization. The estimation results suggest that Sri Lanka’s potential output has risen slightly in the last few years.
    Keywords: Economic growth;Sri Lanka;Production;Business cycles;Economic models;Potential Output, Output Gap, Multivariate Filter, Inflation Expectations, Capacity Utilization, Unemployment
    Date: 2014–03–11
  69. By: Kurt Kratena (WIFO); Mark Sommer (WIFO)
    Abstract: This paper evaluates different options of labour market policy and tax reform with payroll tax reductions for the Spanish economy in the current situation of high unemployment and debt constraints for public and private households. The Spanish economy in the aftermath of the Great Recession is characterised by household debt de-leveraging, continuous public spending cuts and stagnation in output and employment. A disaggregated dynamic New Keynesian (DYNK) model covering 59 industries and five income groups of households is used to evaluate the macroeconomic and labour market impact of the following policy options: 1. subsidising "green jobs" and reduction of hours worked as an active labour market policy measure, 2. environmental fiscal devaluation (reductions in social security contributions balanced by an environmental consumption tax). The results show a significant output and employment multiplier effect of these policies, given the public budget constraint.
    Keywords: New Keynesian model, labour market policy, fiscal devaluation
    Date: 2014–07–07
  70. By: Alexander Klemm
    Abstract: This paper provides an analysis of the cyclical stance of fiscal policy in Latin America. Its contributions include developing a new measure of the cyclicality of fiscal policy, careful analysis of the statistical significance of results, and accounting for the effect of commodity prices on fiscal balances. The new cyclicality measure takes into account both discretionary policy action and automatic stabilizers, but excludes additional revenues that are due to applying an unchanged average tax rate to nominal GDP in excess of potential. The paper finds that fiscal policy has been procyclical on average in Latin America, but counter or acyclical in advanced economies. Country-specific results are mostly insignificant, except in a few cases where policy is clearly procyclical. For some countries (Brazil, Chile, Colombia, El Salvador, and Mexico), there is evidence of a recent move toward more countercyclical policies.
    Keywords: Fiscal policy;Latin America;Business cycles;Cross country analysis;Fiscal policy, business cycle, Latin America.
    Date: 2014–04–16
  71. By: Estrada, Fernando; González, Jorge Iván
    Abstract: We describe Hayek's position on taxation and its subsequent developments. Hayek defends the proportional tax system. If a majority rule corrects deviations from political power must also restrict the conditions of progressive taxation. According to Hayek the progressive tax system (SFP) violates a principle of constitutional law obligations to generate more work for those looking for the growth of the economy. In this sense, the progressive tax system operates counter to principles of democratic justice.
    Keywords: Tax power, Hayek, Buchanan, Tributación, Regla fiscal, Impuestos
    JEL: A10 A12 B22 B31 E01 E4 H2 H21 H23 H3 H32 H42 H43 K2 N0 N2
    Date: 2014–07
  72. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context. Iran had achieved considerable progress in raising per capita income and living standards in previous decades. But in recent years, such progress stalled as both domestic policies and the external environment deteriorated. Inflation has increased sharply and non-oil growth is well below potential. Corporate and financial-sector vulnerabilities have emerged, and unemployment rates are high. A difficult external environment and domestic vulnerabilities raise the risk of entrenching the economy in a low-growth high-inflation scenario. The authorities are well aware of the challenges and the reforms needed, but face a highly-complex institutional set-up and socio- political context. Advancing reforms will require broad political commitment and needs to be supported by strong coordination and cooperation among key policymakers. A highly uncertain outlook. Facing continued constraints on oil revenues and to carry out international transactions, the economy is expected to continue to contract in 2013/14. With some positive tailwinds from the external side and modest incipient signs that the pace of contraction in domestic demand is slowing, economic activity would begin to stabilize in 2014/15. While the current outlook is subject to downside risks, the interim agreement with the P5+1 also brings upside risks. Were this progress to derail, the economy could be subject to new adverse shocks. Dealing with stagflation. The policy mix should support the economy while also gradually reducing inflation. Fiscal deficits should be contained at around 2–3 percent of GDP, by broadening the revenue base away from oil and by keeping a tight lid on spending. This should be complemented by reforms that boost the supply side (product, labor, and credit markets) as well as the demand side (to restore monetary policy credibility, reduce uncertainty, and better coordinate fiscal management). Subsidy Reform. Iran’s design of the subsidy reform has been exemplary and the reform remains a priority. Plans to increase domestic energy prices gradually are prudent but should be underpinned by an automatic price adjustment mechanism to ensure full implementation, by consistent macroeconomic policies, and by reforms to foster the adoption of new technologies and tighter budget constraints, particularly in energy- intensive sectors. Strengthening the Policy Framework. Fiscal reforms should empower the scope for countercyclical fiscal policy, better support macroeconomic stability, and be framed within a medium-term expenditure planning to limit fiscal risks. Priority needs to be given to price stability, by improving the mandate and operational autonomy of the Central Bank of Iran and by reviewing government-mandated credit policies. Work to unify the exchange rate should be initiated, while preserving flexibility ahead to ensure competitiveness. Reforms to Promote Growth and Jobs. There is a need to improve business regulations, advance effective privatizations, and reduce nonwage labor costs. Addressing weaknesses in the banking system is important, including by improving the supervisory and crisis preparedness frameworks.
    Keywords: Article IV consultation reports;Economic growth;External shocks;Disinflation;Monetary policy;Fiscal consolidation;Fiscal reforms;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Iran;
    Date: 2014–04–04
  73. By: Natasha Xingyuan Che; Yoko Shinagawa
    Abstract: Better “financial soundness†of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure. But trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit. Consistent with this notion, the paper found that better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns; and improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle. In this context, our results suggest that policy makers should be mindful about the timing of regulating changes in banks’ FSIs.
    Keywords: Financial soundness indicators;Banks;Risk management;Business cycles;Economic models;financial cycle, bank supervision, capital ratio, banking, banking system, capital adequacy, subsidiaries, inflation rate, foreign exchange exposure, capital base, liquid – asset, banking crises, var model, bank capital, capital requirement, capital position, banking systems, credit expansion, capital – asset, bank balance sheets, return on equity, foreign asset, domestic credit, capital flow, credit market, capital – asset ratio, return on assets, bank credit, banking supervisors, bank of canada, bank provisioning, government securities
    Date: 2014–01–27
  74. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: EXECUTIVE SUMMARY The background papers for the 2014 Article IV explore key issues affecting the Indian economy, and implications for fiscal, monetary, structural, and financial sector policies. The first chapter uncovers the factors behind the unprecedented widening of India’s current account deficit in terms of the sectoral savings-investment balance. Persistently-high inflation is found to have depressed real returns, prompting a surge in gold imports and a marked deterioration in household financial savings. The second chapter investigates inward and outward spillovers to and from India. The results show that output shocks emanating in globally-systemic countries have important global effects, but their impact on India is limited. Shocks originating in India have relatively small global implications, but are very important for several South Asian economies. The third chapter investigates the role of monetary policy in the context of high and persistent food and fuel inflation. As the second-round effects on core inflation are large, in order to durably reduce inflation, monetary policy will need to maintain a tight stance for a prolonged period of time. In addition, progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy. The fourth chapter explores progress in poverty reduction and inclusive growth. Robust economic growth has been a major driver of poverty reduction and inclusiveness. Social expenditures, spending on education, and educational attainment rates are important for fostering inclusive growth; while macro-financial stability, with particular attention to inflation risks, is critical for sustaining inclusive growth. The fifth chapter explores the change in vulnerabilities of India’s non-financial corporates which has taken place since the global financial crisis (GFC). Based on four commonly-used indicators of financial strength, vulnerabilities of India’s corporate sector are found to be higher than at the trough of the GFC, and at their highest since the early 2000s. The sixth chapter examines the factors behind the recent investment slowdown in India. The results suggest that in addition to standard macro-financial variables, heightened uncertainty and deteriorating business confidence have played an important role. In contrast, the contribution of interest rates has been minor. The seventh chapter explores the likely impacts of product and labor market reforms. Analysis suggests that these reforms can increase employment, boost exports, and raise potential growth, thereby helping to harness India’s demographic dividend. A package of reforms would reinforce the gains, minimize short-term costs, and increase the acceptability of these politically-difficult reforms.
    Keywords: Spillovers;Current account deficits;Public investment;Public sector savings;Corporate sector;Economic growth;Poverty reduction;Monetary policy;Inflation;Selected issues;India;
    Date: 2014–02–20
  75. By: Francis Cripps; Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Jacques Mazier; Robert McDowell; Terry McKinley; Pascal Petit; Terry Ward; Enrico Wolleb
    Abstract: Summary The European Union has reached a critical juncture in dealing with the fallout from the 2008 financial meltdown that started in the USA and spread to engulf banks and the financial markets of Europe. The ensuing recession or stagnation in many member countries was compounded by austerity programs undertaken by national governments, in some cases as a pre-condition for rescue from potential bankruptcy. Europe’s leaders took initiatives to strengthen financial systems but have been unable to secure a significant recovery of the European economy or avert growing divergences between member states in GDP per capita, unemployment rates and external-account balances. This memorandum written by participants of a 3-year research project on Europe and the world’s socio-economic future to 2030 (the AUGUR project) discusses possible ways out of prolonged stagnation and low growth. The current trajectory can trigger renewed crises of political-economic sclerosis in Europe and progressively undermine social standards and well-being. Such an outcome would strengthen the forces that aim to dismantle European integration. An overriding priority must be given to rebalancing the distribution of growth between different parts of Europe. Policies in R&D, competition and external trade must be reassessed with these objectives in view. EU finance for social programmes in lower-income countries is needed to support improvements in education, health and other public services that benefit social cohesion thereby securing the foundation for higher productivity and competitiveness.
    Keywords: policy memorandum, Europe, European integration, location policies
    JEL: E02 E17 E27 E61 E63 E65 F01 F43 H12 I38
    Date: 2014–06
  76. By: Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2); Lucifora, Claudio (Università Cattolica del Sacro Cuore); Moriconi, Simone (Università Cattolica del Sacro Cuore); Van der Linden, Bruno (IRES, Université catholique de Louvain)
    Abstract: In this paper we argue that, for a given overall level of labour income taxation, a more progressive tax schedule increases employment. From a theoretical point of view, higher progressivity increases overall employment through a wage moderating effect and also because employment of low-paid workers is more elastic to wages. We test these theoretical predictions on a panel of 21 OECD countries over 1998-2008. Controlling for the burden of taxation at the average wage, our estimates suggest that a more progressive tax schedule reduces the unemployment rate and increases the employment rate. These findings are confirmed when we account for the potential endogeneity of both average taxation and progressivity. Overall, our results suggest that policy-makers should not only focus on the detrimental effects of tax progressivity on in-work effort, but also consider the employment-enhancing effects.
    Keywords: wage moderation, employment, taxation
    JEL: E24 H22 J68
    Date: 2014–06
  77. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Background: After its resilience during the global financial crisis, the Polish economy slowed substantially in 2012–13 as headwinds from the euro area and waning confidence added to the drag from fiscal consolidation. But economic activity is starting to recover, helped by strong fundamentals, able policy management, and the insurance provided by the Flexible Credit Line (FCL) arrangement. Outlook: Economic growth is expected to recover gradually on the back of improving domestic demand and higher growth in core euro countries. But the economy is still subject to substantial external risks as Poland is highly integrated with Europe through trade and financial channels, as well as with global financial markets. Policies: In response to the economic downturn, policy interest rates were cut substantially, while automatic fiscal stabilizers were allowed to operate to support the economy. Going forward, the fiscal deficit is expected to decline in 2014 and a new, permanent, fiscal rule should help anchor public finances. The authorities have continued to take steps to strengthen the financial sector, including through work to establish macroprudential and bank resolution frameworks. Flexible Credit Line (FCL): On January 18, 2013, the Executive Board approved a 24-month arrangement with Poland under the FCL in the amount of SDR 22 billion (equivalent to 1303 percent of quota). The authorities continue to treat the arrangement as precautionary. Qualification: In staff’s view, Poland continues to meet the qualification criteria for access to FCL resources specified under the Board decision on FCL arrangements (Decision No. 14283-(09/29), adopted on March 24, 2009). Staff therefore recommends completion of the review under this FCL arrangement.
    Keywords: Flexible Credit Line;Economic recovery;Economic growth;Fiscal policy;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Poland;public debt, external debt, current account, current account deficit, short-term debt, balance of payments, external financing, total external debt, external shocks, external debt sustainability, current account balance, debt dynamics, debt ratio, public sector debt, public finances, debt stock, currency debt, domestic currency, foreign currency debt, public debt management, government debt, treasury bonds, long-term debt, central bank, external debt service, reserve assets, debt ratios, net external liabilities, official creditors, currency risks, currency composition, domestic debt market, public debt service, debt burden, debt management strategy, sovereign debt, private credit
    Date: 2014–01–13
  78. By: Rahul Anand; Kevin C. Cheng; Sidra Rehman; Longmei Zhang
    Abstract: Using three distinct approaches—statistical filtering, production function, and multivariate model— this paper estimates potential growth for China, India, and five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) during 1993–2013. The main findings include: (i) both China and India have recently exhibited a slowdown in potential growth, largely reflecting a decline of total factor productivity (TFP) growth; (ii) by contrast, trend growth for the five ASEAN countries has been rather stable and might even have increased marginally, with the notable exception of Vietnam;(iii) over the longer term, demographic factors will be much more supportive in India and some ASEAN economies than in China, where working-age population should start shrinking, with the overall dependency ratio climbing by the end of this decade. Improving or sustaining potential growth calls for broad structural reforms.
    Keywords: Economic growth;China;India;Asia;Emerging markets;Productivity;Fiscal reforms;unemployment, growth rate, growth accounting, nairu, gdp growth, labor force, unemployment rate, labor force participation, growth rates, labor participation, labor force participation rate, rate of unemployment, business cycle, rate of growth, natural rate of unemployment, real gdp, business cycles, growth model, non-accelerating inflation rate of unemployment, gdp per capita, labor participation rate, gdp growth rate
    Date: 2014–01–13
  79. By: Dániel Felcser (Magyar Nemzeti Bank (the central bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (the central bank of Hungary))
    Abstract: It is well documented in the literature that identified vector autoregression (VAR) models often produce puzzling results when the effect of unexpected monetary policy movements is estimated. Many authors find that raising interest rate generates protracted appreciation of the exchange rate (the so-called delayed overshooting puzzle) which is in contradiction with traditional theory of exchange rate dynamics based on uncovered interest parity. Since the dynamics of exchange rate is determined to a substantial extent by carry traders, we investigate the behaviour of the exchange rate and carry trade activity within the same VAR for a panel of small open economies. We identify structural shocks by allowing the interest rate and exchange rate to react simultaneously to monetary policy and changes in expected risk premium. Our results show that the delayed overshooting is not a robust finding. Exchange rate appreciation and carry trade movements take place almost on impact after an unexpected interest rate hike. Roughly half of the variation in carry trade positions can be explained by domestic interest rate changes and risk premium shocks.
    Keywords: delayed overshooting, vector autoregressions, carry trade, monetary policy
    JEL: E52 F31
    Date: 2014
  80. By: Luis Bértola (Programa de Historia Económica y Social, Facultad de Ciencias Sociales, Universidad de la República); Fernando Isabella (Instituto de Economía, Facultad de Ciencias Económicas y Administración, Universidad de la República); Carola Saavedra (Cámara de Industria del Uruguay)
    Abstract: The paper studies the main features of the economic cycle 1998-2012 in Uruguay. It states that, in spite of very positive and promising results, there still persists a set of structural problems that inhibits us to conclude that Uruguay had broken with the long-run trends of low economic dynamics. The paper also studies changes in the productive structure and the structure of exports, concluding that no significant structural changes took place., which is in line with the idea of the persistence of historical structural features. Finally, the papers tackles the applied productive policies and its relation with the discussed results, concluding that significant progress was made in the policy development and capability building, but that there still exist important weaknesses necessary to be over won in order to improve the prospects for development.
    Keywords: Crecimiento, cambio estructural, políticas productivas, exportaciones, déficit de cuenta corriente
    JEL: E32 F14 H32 N16
    Date: 2014–06
  81. By: Corrado, Carol (The Conference Board); Haskel, Jonathan (Imperial College London); Jona-Lasinio, Cecilia (ISTAT, Rome)
    Abstract: This paper looks at the channels through which intangible assets affect productivity. The econometric analysis exploits a new dataset on intangible investment (INTAN-Invest) in conjunction with EUKLEMS productivity estimates for 10 EU member states from 1998 to 2007. We find that (a) the marginal impact of ICT capital is higher when it is complemented with intangible capital, and (b) non-R&D intangible capital has a higher estimated output elasticity than its conventionally-calculated factor share. These findings suggest investments in knowledge-based capital, i.e., intangible capital, produce productivity growth spillovers via mechanisms beyond those previously established for R&D.
    Keywords: productivity growth, economic growth, intangible capital, intangible assets, ICT, spillovers
    JEL: O47 E22 E01
    Date: 2014–06
  82. By: Rahul Anand; Volodymyr Tulin
    Abstract: This paper documents the recent slowdown in investment in India and explores its underlying causes. The sharp investment deceleration has sparked an intense debate about the role of interest rates, as well as business confidence and economic policy uncertainty. Our results suggest that while explaining aggregate investment activity better than nominal interest rates, real interest rates account for only one quarter of the explained investment downturn. In addition, standard macro-financial variables do not fully explain the recent investment slump. Using a new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.
    Keywords: Investment;India;Interest rates;Economic policy;Economic models;Investments; India; Policy Uncertainty.
    Date: 2014–03–24
  83. By: Nooman Rebei
    Abstract: Bank interest rate spreads in Solomon Islands are high by regional standards. This paper examines the determinants of bank interest rates including bank specific, banking sector, macroeconomic, and legal indicators. The results show that the scale of operation, overhead costs, concentration index, and some macroeconomic variables (i.e., monetary policy rates and real growth) significantly influence interest rate margins. The paper particularly focus on the influence of the banking sector structure and finds strong evidence of bank collusion.
    Keywords: Bank rates;Solomon Islands;Pacific Island Countries;Commercial banks;Financial intermediation;Cross-country analysis;Solomon Islands, banking spreads, financial intermediation.
    Date: 2014–06–12
  84. By: Phakawa Jeasakul; Cheng Hoon Lim; Erik J. Lundbäck
    Abstract: Asia proved to be remarkably resilient in the face of the global financial crisis, but why was its output performance stronger than that of other regions? The paper shows that better initial conditions—in the form of lower external and financial vulnerabilities—contributed significantly to Asia’s resilience. Key pre-crisis factors included moderate credit expansion, reliance on deposit funding, enhanced bank asset quality, reduced external financing, and improved current accounts. These improvements reflected the lessons from the Asian financial crisis in the late 1990s, which helped reshape both public policies and private sector behavior. For example, several countries stepped up their use of macroprudential policies, well before they were recognized as an essential component of the financial stability toolkit. They also overhauled financial regulations and strengthened oversight of financial institutions, which helped reduce risk-taking by households and firms before the global financial crisis. Looking ahead, Asia is in the process of adjusting to more volatile external conditions and higher risk premiums. By drawing the right lessons from its pre-crisis experiences, Asia’s economies will be better equipped to address new risks associated with increased cross-border capital flows and greater integration with the rest of the world.
    Keywords: Economic growth;Asia;Global Financial Crisis 2008-2009;Credit expansion;Debt reduction;Macroprudential Policy;Monetary policy;Fiscal policy;Financial systems;Financial crisis;Global financial crisis, resilience, financial and external vulnerabilities
    Date: 2014–02–26
  85. By: Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University)
    Abstract: La crisi dell’Eurozona è ormai certificata dalla sua performance estremamente deludente in seguito allo shock esterno provocato dalla crisi dei subprime. La richiesta di un ridisegno delle regole è unanime, e in parte già accolta dalle stesse istituzioni europee. La diagnosi sulle cause della crisi è largamente condivisa dalla letteratura scientifica e dalle istituzioni multilaterali, e vede la causa nell’eccesso di indebitamento privato estero intra-Eurozona. In questo articolo sosteniamo che se questa diagnosi è corretta, allora il ridisegno delle regole europee deve partire da un cambio radicale di prospettiva, che parta dalla tutela della domanda interna nel Mercato Unico, anziché dalla rincorsa della domanda estera fra i mercati nazionali dei paesi membri, e riconosca il ruolo ineludibile della flessibilità del cambio come strumento di enforcement degli accordi economici intrapresi, e come strumento di signaling, essenziale ai mercati per assicurare una corretta allocazione delle risorse finanziarie.
    Keywords: Eurozone, Financial crisis, Exchange rate regimes,
    JEL: E42 E61 F15 F42 G01
    Date: 2014–04
  86. By: Huixin Bi; Wenyi Shen; Shu-Chun S. Yang
    Abstract: This paper studies fiscal policy effects in developing countries with external debt and sovereign default risks. State-dependent distributions of fiscal limits are simulated based on macroeconomic uncertainty and fiscal policy specifications. The analysis shows that expected future revenue plays an important role in the low fiscal limits of developing countries, relative to those of developed countries. External debt carries additional risks since large devaluation of the real exchange rate can suddenly raise default probabilities. Consistent with majority views, fiscal consolidations are counterproductive in the short and medium runs. When an economy approaches its fiscal limits, government spending can be less expansionary than in a low-debt state. As more revenue is required to service debt in a high-debt state, higher tax rates raise the economic cost of increasing consumption, reducing the fiscal multiplier.
    Keywords: External debt;Fiscal policy;Fiscal consolidation;Government expenditures;Developing countries;Economic models;
    Date: 2014–03–31
  87. By: Shawkat Hammoudeh (Lebow College of Business Drexel University.); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic uncertainty and financial crises. 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 uncertainty, especiallythe power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy: the role of micro and macroeconomic factors, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices: a regime switching approach, 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: dynamic features and predictive variables, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk: an application of CoVaR, model-free volatility indexes in the financial literature: a review, robust hedging performance and volatility risk in option markets: application to Standard and Poor’s 500 and Taiwan index options, price cointegration between sovereign CDS and currency option markets in the global financial crisis, 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 global financial crisis, managing financial risk in Chinese stock markets: option pricing and modeling under a multivariate threshold autoregression, 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
  88. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. Economic growth and macroeconomic stability improved in 2013. A robust rise in tourism earnings supported growth, as well as a reduction in the current account deficit as a share of GDP. The exchange rate has strengthened slightly, at the same time as the central bank accumulated more international reserves than expected. Inflation has decelerated and the government is on track to achieve its 5 percent of GDP primary surplus target. Focus. Discussions centered on the 2013 fiscal performance, the 2014 budget framework, monetary policy challenges (particularly responses to excess liquidity), and reforms in public enterprises, utility tariffs, and public financial management to reduce fiscal risks, strengthen the business environment, and improve the quality of public service provision. Program performance. All performance criteria for end-June 2013, the program’s last test date, were met. All the third quarter indicative targets were also met. The measures in the structural benchmarks were all completed, although there were short delays compared to initial plans for technical reasons. Staff recommends completion of the eighth review under the Extended Arrangement. Policies in the period ahead. The authorities remain resolute in their objective of reducing public debt below 50 percent of GDP by 2018, which leaves little scope to relax fiscal policy. Policies in 2014 aim to continue debt reduction while responding to some social pressures. Monetary policy will continue to stabilize inflation at low levels and aim for international reserves accumulation. Structural reforms aim to extend improvements in financial discipline to the broader public sector, including through utility price adjustments that reduce implicit subsidies and through better oversight of parastatals. The authorities indicated their intention to request a successor arrangement with the IMF to consolidate and extend the progress made during this EFF. Risks. The largest risks to the economic outlook and program performance are external, including most notably a downturn in Europe or global financial turbulence, which could lead declines in tourism receipts, drops in FDI and/or bank retrenchment. Homegrown risks to the program center on additional losses of key public enterprises that could jeopardize the government’s debt reduction objectives.
    Keywords: Extended arrangement reviews;Economic growth;Tourism;Fiscal policy;Debt restructuring;Fiscal reforms;Monetary policy;Reserves accumulation;Economic indicators;Staff Reports;Press releases;Seychelles;central bank, public debt, external debt, debt reduction, balance of payments, current account, current account deficit, external borrowing, debt service payments, external debt service, foreign debt, reserve accumulation, public external debt, debt forgiveness, public finance, debt strategy, payment arrears, debt burden, domestic financing, domestic debt, treasury bills, public finances, domestic currency, debt crisis, external payments arrears, public and publicly guaranteed, commercial debt, commercial borrowing, debt outstanding, current account balance, current account deficits, debt exchange, general resources account, debt dynamics, debt sustainability, domestic borrowing
    Date: 2014–01–31
  89. By: Abdelkrim Araar; Luis Huesca
    Abstract: Assessing the progressivity of a fiscal system is relevant to develop a global idea on the extent of redistribution. In this paper we assess the evolution of progressivity over time and how economic shocks and government fiscal policy affects its design. The social performance of fiscal redistributive mechanisms in Mexico has been receiving a growing interest from politicians and researchers. The aim of this paper is to assess the dynamics of progressivity of the fiscal system in Mexico and its effect on inequality and on polarization, and this during the period of 2002-2012. What distinguishes this work is the relevance of the adopted comparison approach of progressivity and where the common support of comparison is imposed. The results of this study confirm the effectiveness of the governmental redistributive mechanisms to decrease after-tax income inequality. Based on our estimates, we find a significant increase in the progressivity of the fiscal system over time, despite the high persistent levels of polarization and inequality in the country. Finally, we find that imposing the common support of comparison has a non-negligible impact on the level of progressivity.
    Keywords: Fiscal Policy, Progressivity, Inequality, Polarization
    JEL: E62 D63 I32 O12
    Date: 2014
  90. By: Iryna Kaminska; Gabriele Zinna
    Abstract: By constructing and estimating a structural arbitrage-free model of demand pressures on US real rates, we find that recent purchases of US government debt securities by the Fed and foreign officials have significantly affected the level and the dynamics of US real rates. In particular, by 2008, foreign purchases of US Treasuries are estimated to have had cumulatively reduced long term real yields by around 80 basis points. The subsequent total impact of Fed purchases in 2008-2012 has been even larger: the quantitative easing (QE) has depressed real 10-year yields by around 140 basis points. Our findings also reveal that the Fed policy interventions and foreign official purchases affect longer term real bonds mostly through a reduction in the bond premium.
    Keywords: Bonds;United States;Demand;Interest rates;Foreign investment;Bond markets;Economic models;Term structure of interest rates, Large Scale Asset Purchases (LSAP), real yield curve, Bayesian estimation, international reserves
    Date: 2014–04–18
  91. By: Alimi, R. Santos
    Abstract: This study aimed at empirically exploring the triangle of relationships – finance-inflation-growth – with the broader data sets (1970 - 2012) to see whether a direct effect of inflation on growth can be identified as well as an indirect effect through financial sector development. It also seeks to explore the relative strength of the variables in affecting economic growth using the variance decompositions (VDCs) and the impulse-response functions (IRFs) based on the structural vector autoregression (VAR) framework. We found that both Engel - Granger and Johansen cointegration test suggest that the variables are cointegrated. Based on the existence of cointegration relationship among the variables, we therefore estimate the long-run relationships using the Stock-Watson’s dynamic ordinary least squares (DOLS) model. The results of DOLS model give an indication that inflation effect on growth is independent of financial development while the financial development effect on growth is dependent of inflation. Furthermore, we also found no evidence of short run causality between RGDP and INF; and there is existence of short run interaction between RGDP and FD that is a bi-directional causality between the variables. Variance decompositions (VDCs) results revealed the variations in the economic growth in Nigeria respond more to shocks in trade openness and next government spending, however, the variations in the economic growth rely more on its own innovations. The policy implication of this finding is for policy makers to develop strategy that will holistic reforms in the financial system and enhance stock market development along side with banking financial institutions. Finally, since financial development effect on growth is dependent of inflation, policy that will ensure price stability will promote output further.
    Keywords: Inflation, Financial Development, Output Growth, VECM
    JEL: D53 E31 G29
    Date: 2014–01
  92. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: EXECUTIVE SUMMARY Background. The political transition is moving forward again following another period of political upheaval and security tensions. However, the protracted political crisis of the past few months has taken a toll on the economy, resulting in a weaker economic recovery than envisaged and further erosion of external and fiscal buffers. Program performance has been mixed. End-June and end-September NIR and NDA quantitative performance criteria have been met, but are estimated to have been missed by end-December because of lower external financing and the high liquidity needs of the banking sector. A weak budget composition, lower budget commitments, and deferred cash payments to 2014 resulted in an overperformance of the end-December fiscal target for the central government primary balance. The implementation of structural reforms has been progressing, but with some delays linked to building a consensus during the political crisis, and to technical difficulties. Looking ahead, the program will continue to focus on ensuring short-term macroeconomic stabilization while laying the foundations for sustained reforms that will reduce economic vulnerabilities and generate higher and more inclusive growth. A more growth-oriented budget composition—including revenue reforms and the reform of regressive energy subsidies—and the build-up of a targeted household support program will lay the foundations for higher and more inclusive growth. A prudent monetary policy and greater exchange rate flexibility will continue to underpin macroeconomic stabilization. Structural reforms should be accelerated to enhance private sector development and make a dent in unemployment. Risks to program implementation are important. Main risks relate to setbacks in the political transition. Commitment to program objectives will be tested by resistance to some necessary but not always popular reforms, which will need to be managed through further consultations and proactive communication with stakeholders. The completion of the combined first and second reviews will make SDR 329.12 million (about USD 500 million) available.
    Keywords: Stand-by arrangement reviews;Transition economies;Fiscal policy;Fiscal consolidation;Fiscal reforms;Public enterprises;Monetary policy;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Performance criteria waivers;Tunisia;
    Date: 2014–02–12
  93. By: Xavier Debrun; Tidiane Kinda
    Abstract: Institutions aimed at constraining policy discretion to promote sound fiscal policies are once again at the forefront of the policy debate. Interest in “fiscal councils,†independent watchdogs active in the public debate, has grown rapidly in recent years. This paper presents the first cross-country dataset summarizing key characteristics of fiscal councils among IMF members. The data documents a surge in the number of fiscal councils since the crisis. It also illustrates that well-designed fiscal councils are associated with stronger fiscal performance and better macroeconomic and budgetary forecasts. Key features of effective fiscal councils include operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate, and the monitoring of compliance with fiscal policy rules.
    Keywords: Fiscal policy;Fiscal management;Cross country analysis;Economic models;Credibility of fiscal policy, fiscal councils, fiscal rules, fiscal performance, forecast errors
    Date: 2014–04–08
  94. By: Luo, Yulei; Young, Eric
    Abstract: In this paper we examine implications of model uncertainty due to robustness (RB) for consumption and saving and the market price of uncertainty under limited information-processing capacity (rational inattention or RI). We first solve the robust permanent income models with inattentive consumers and show that RI by itself creates an additional demand for robustness that leads to higher "induced uncertainty" facing consumers. Second, we explore how the induced uncertainty composed of (i) model uncertainty due to RB and (ii) state uncertainty due to RI, affects consumption-saving decisions and the market price of uncertainty. We find that induced uncertainty can better explain the observed market price of uncertainty -- low attention increases the effect of model mis-specification. We also show the observational equivalence between RB and risk-sensitivity (RS) in environment.
    Keywords: Robust Control and Filtering, Rational Inattention, Induced Uncertainty, Market Prices of Uncertainty.
    JEL: D8 D81 E21
    Date: 2014–07–05
  95. By: Bernardin Akitoby; Takuji Komatsuzaki; Ariel J Binder
    Abstract: This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.
    Keywords: Inflation;Public debt;Developed countries;Group of seven;Econometric models;Inflation, debt drisis, G7, public debt, soverign debt
    Date: 2014–06–10
  96. By: Barra, Cristian; Bimonte, Giovanna; Spennati, Pietro
    Abstract: The rationale for fiscal rules and institutions has been explained by the existence of deficit and spending biases that arise due to political fragmentation within government or between governments that alternate in office. In common pool models fiscal outcomes are determined by the decision-making rule that is used to aggregate conflicting interests into a single budget and they can affect spending bias. Several institutional responses are possible for internalizing the overall costs of budgetary programs. These costs could be internalized by giving a strong mandate to the minister of finance, whose role is to consider the overall effects of policies. This paper analyses a model in which the minister of finance internalizes the common pool budget's externality. First, we consider a model where all ministers play simultaneously, and MF acts as a spending minister. In order to capture the institutional framework, where MF takes in account the budget equilibrium, we have modelled the interaction in a sequential way. Under this assumption the minister of finance maximizes his utility function as a leader. In a sequential equilibrium, leader's expenditure choice is grater than in simultaneous result, while the deficit bias is lower due to agenda setting power over spending ministers.
    Keywords: Common pool, Deficit bias, Efficiency
    JEL: E62 H50 H62
    Date: 2014–06
  97. By: Oumar Diallo; Sampawende J.-A. Tapsoba
    Abstract: This paper assesses the extent to which Sub-Saharan Africa (SSA)’s business cycle is synchronized with that of the rest of the world (RoW). Findings suggest that SSA’s business cycle has not only moved in the same direction as that of the RoW, but has also gradually drifted away from the G7 in favour of the BRICs. Trade with the BRICs turns out to be the strongest driver of this shift. Much of this impact unfolds through aggregate demand impulse from trade. As fiscal policy stances in SSA and the BRICs are not synchronized, they have not caused cyclical output correlation between these two groups of countries. Also, financial openness, which is at a very early stage across most SSA countries, has acted as a neutral force.
    Keywords: Business cycles;Brazil;Russian Federation;India;China;Sub-Saharan Africa;Trade integration;Demand;Fiscal policy;Economic models;Business Cycle Synchronicity, Trade, Sub-Saharan Africa, and the BRICs.
    Date: 2014–02–14
  98. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: EXECUTIVE SUMMARY Barbados has a relatively well-developed financial system, including a large offshore sector.1 The onshore system is dominated by large, regionally active banks. Banking services to the population are also provided by the credit union sector. The system also includes a mature but concentrated insurance sector with extensive international affiliates, and other non-bank financial institutions provide credit and other instruments for savers. The offshore sector is financially segregated from the domestic economy and is dominated by international banks mainly conducting treasury and wealth management operations. The financial system has increasingly been funding the government and residential mortgages, reflecting fiscal pressures and the limits imposed by capital controls on investments abroad. Systemic risks With a deteriorating fiscal situation and weak growth prospects, Barbados faces considerable macroeconomic vulnerabilities. Sovereign risk is a concern, given a large public debt, high fiscal deficits, and slow growth, and policy options are limited by a fixed exchange rate regime. While long-standing capital controls provide some protection against disorderly scenarios, they are likely to become less effective over time unless fiscal vulnerabilities are addressed. The authorities are committed to the announced fiscal consolidation plan, but full efforts should be deployed to secure timely and successful implementation. While the financial system does not appear to be a source of immediate risk, its position appears to be deteriorating, with implications for systemic stability. Credit quality of domestic banks and credit unions has weakened considerably since the global crisis and, with growth expected to remain slow in the years ahead, is projected to deteriorate further. Weaker bank balance sheets could dampen credit supply, amplify the economic decline, and exacerbate broader macroeconomic vulnerabilities. Moreover, stress-tests illustrate that the financial system would be vulnerable in the face of severe shocks. Relatively large capital and liquidity buffers mean that onshore banks can generally withstand moderate shocks without breaching regulatory requirements. However, vulnerabilities emerge in the case of severe shocks, particularly in a branch of a strong foreign bank and in the credit union sector. The latter is also vulnerable to medium-sized liquidity shocks. The offshore financial sector does not appear to be a major source of risk given that it is prevented from carrying out financial transactions with domestic residents, but common ownership links and reputational risks should be monitored closely.
    Keywords: Financial system stability assessment;Financial sector;Banks;Bank supervision;Basel Core Principles;Insurance supervision;Reports on the Observance of Standards and Codes;Barbados;
    Date: 2014–02–12
  99. By: Bartha, Zoltán; S. Gubik, Andrea
    Abstract: The chapter offers an institutional approach to the issue of international business competitiveness. It is assumed that the micro-level, business-oriented factors of competitiveness are influenced by macro-level and institutional factors. These institutional factors can be analysed with the FOI model developed at the University of Miskolc by the Institute of Economic Theory.
    Keywords: FOI model, Visegrad countries, institutional factors
    JEL: E61 O21 P52
    Date: 2014–03–04
  100. By: Kory Kroft; Fabian Lange; Matthew J. Notowidigdo; Lawrence F. Katz
    Abstract: We explore the extent to which composition, duration dependence, and labor force non-participation can account for the sharp increase in the incidence of long-term unemployment (LTU) during the Great Recession. We first show that compositional shifts in demographics, occupation, industry, region, and the reason for unemployment jointly account for very little of the observed increase in LTU. Next, using panel data from the Current Population Survey for 2002-2007, we calibrate a matching model that allows for duration dependence in the exit rate from unemployment and for transitions between employment (E), unemployment (U), and non-participation (N). We model the job-finding rates for the unemployed and non-participants, and we use observed vacancy rates and the transition rates from E-to-U, E-to-N, N-to-U, and U-to-N as the exogenous "forcing variables'' of the model. The calibrated model can account for almost all of the increase in the incidence of LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013. Both negative duration dependence in the job-finding rate for the unemployed and transitions to and from non-participation contribute significantly to the ability of the model to match the data after 2008.
    JEL: E24 J64
    Date: 2014–06
  101. By: Salifou Issoufou; Edward F. Buffie; Mouhamadou Bamba Diop; Kalidou Thiaw
    Abstract: Senegal's fiscal deficit and public debt have been on the rise in recent years owing partly to an ailing and inefficient oil-based energy sector. In this paper we use a two-sector, open-economy, dynamic general equilibrium model to investigate the effects of varying fiscal policy instruments one at a time and of policy packages that increase public investment in energy and infrastructure in scenarios with varying degrees of debt finance and with different types of supporting fiscal adjustment. Lowering the fiscal deficit by raising taxes and cutting government expenditure has adverse effects on growth, real wages and the supply of public services. Senegal does not need, however, to undertake such difficult fiscal adjustment. A public investment program that coordinates new investment in low-cost hydroelectric, coal or gas-fired power with a phased contraction of the oil-based sector raises the total supply of energy by 70 percent, increases real wages and real GDP, stimulates private investment, and significantly reduces the fiscal deficit in the medium long term. More aggressive investment programs borrow against future fiscal gains to combine new energy investments with either delayed or frontloaded investments in non-energy infrastructure. These programs lead to much higher real wages and real GDP while keeping public debt sustainable and the fiscal deficit low in the medium and long term.
    Keywords: Energy sector;Senegal;Public investment;Fiscal policy;Budget deficits;Public debt;Economic models;Energy Reform, Public Investment, Growth, Debt Sustainability, Fiscal Policy, Infrastructure.
    Date: 2014–03–12
  102. By: Mario Pianta (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: After Europe’s long stagnation, a debate is emerging on how industrial capacity could be reconstructed. The paper reviews current EU policies and provides the rationale for a new industrial policy at the European level. Such public action could help address current macroeconomic, industrial, innovation, cohesion and environmental problems and would be crucial for the recovery of countries of the “periphery” that have been hit hardest by the crisis. A range of proposals for organising, implementing and funding a new industrial policy – focusing on selected economic activities - are presented, combining action at the European, national and local levels.
    Keywords: Industrial policy, Public policy, Europe.
    JEL: E6 L5 O4
    Date: 2014
  103. By: Estrada, Fernando; Patiño, Gonzalo; Pulido, Antonio
    Abstract: The urgent need for higher levels of productivity and competitiveness to meet the demands of the domestic and international market, poses serious challenges to productive and educational systems of the department of Santander, Colombia. It follows from the results obtained in the two sectors; so, the economic profile of the department shows that the first half of the nineties was marked by an increase of the order of 4.2% of GDP, which however was a reflection of the economic activity that took traditional economic sectors (leather, clothing, metallurgical, food timber, graphics); ie, there was the expected technical and technological change as a result of the opening of the country in advance, to enable the business sector santanderano properly inserted domestic and international capital markets. This trend continued during the second half of the decade, and only during the last three years (2000-2003), began to show results (stabilization of the financial system, decrease the deficit of the public sector and a more competitive exchange rate) , which raised hopes of entrepreneurs and regional institutions, although the pace of overall economic growth decreased at an average annual rate of around 2.3%.
    Keywords: Colombia, Economy, Development economic, Quality of life, Amartya Sen, PNUD, Santander
    JEL: A1 E2 E24 H4 H41 H75 O1 O24 R3
    Date: 2014
  104. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context and recent developments. Performance under the 2010–13 program, which was supported by arrangements under the Extended Fund Facility and Extended Credit Facility, was sound, with growth restored, large fiscal and external imbalances reduced, and buffers rebuilt. However, challenges remain, particularly in further reducing vulnerabilities and strengthening medium-term growth dynamics. Growth and inflation have remained volatile—in 2013, growth slowed significantly and inflation rose well above the CBA’s target range. The external current account deficit and dollarization continue to be high, keeping the economy vulnerable to shocks. Poverty and unemployment also remain high, and the transition to an alternative to the pre- crisis, construction-led growth model—involving a more open, competitive, and globally- and regionally-integrated economy—has been slow. Program objectives. In light of these challenges, the Armenian authorities have requested a new 38-month arrangement under the Extended Fund Facility, with access equivalent to SDR 82.21 million (89.4 percent of quota). Key objectives of the new program are to consolidate stability and buffers against possible external shocks and to support growth through further reforms in the transition towards a dynamic emerging market economy. Program policies. Fiscal policy will support the growth recovery in 2014 by providing a modest stimulus, before moving to a gradual consolidation stance in 2015–17. This will place public debt on a declining path during the program period. Revenue measures will support the consolidation and also create room for addressing social and investment needs. Monetary and exchange rate policies will be guided by the authorities’ framework of inflation targeting and exchange rate flexibility, with program policies focusing on continued improvements in monetary operations, communications, and modeling. Financial sector policies will target implementation of remaining recommendations of the 2012 FSAP Update, which aim to promote resilience to shocks and greater financial deepening. Structural reforms will support medium-term growth by targeting improvements in the business climate, strengthening institutions, improving connectivity and competition, creating a stronger environment for private and foreign direct investment, and tackling key risks, especially in the energy sector. Staff views. Staff supports the authorities’ request for an Fund-supported program. The LOI/MEFP provides a strong set of policies to pursue the objectives of the program. While the program is not without risks, staff assesses Armenia’s repayment capacity to be robust, with the fiscal consolidation and growth-supporting reforms embedded in the program reinforcing this assessment. If the program’s policies are implemented, and barring any major shocks, the program should be able to achieve exit from Fund support, with Armenia sustaining market access at the end of the program period.
    Keywords: Extended Fund Facility;Economic growth;Fiscal policy;Government expenditures;Poverty reduction strategy;Fiscal reforms;Monetary policy;Inflation targeting;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Armenia;
    Date: 2014–03–31
  105. By: Livshits, Igor; MacGee, James; Tertilt, Michèle
    Abstract: Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the “new” cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.
    Keywords: Credit Cards , Endogenous Financial Contracts , Bankruptcy
    JEL: E21 E49 G18 K35
    Date: 2014
  106. By: Schneider, Friedrich (University of Linz)
    Abstract: This survey presents the various methods to estimate the size of the shadow economy, their strengths and weaknesses and the estimation results. The purpose of the survey is threefold. Firstly, it demonstrates that no ideal method to estimate the size and development of the shadow economy exists. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy as well as on a comparison of the size of the shadow economy using different estimation methods. Thirdly, estimations of the size of the shadow economy and shadow labor force are presented and discussed.
    Keywords: shadow economy estimates, shadow labor force, MIMIC approach, methods to estimate the shadow economy, advantages and disadvantages of the measurement methods, shadow labor force and unemployment, micro studies on shadow labor force
    JEL: D78 E26 H2 H11 H26 K42 O5 O17
    Date: 2014–06
  107. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Context. Growth continues to strengthen, although the recovery is not yet broad-based. External and fiscal vulnerabilities have risen: private non-debt creating capital flows have slowed, and could leave the reserve path increasingly driven by an accumulation of external public debt; central government debt—although still moderate at a projected 36 percent of GDP—has increased by about 15 percentage points since the beginning of the global financial crisis, in the context of growing broader public sector operations. Fiscal Policy. The newly re-established medium-term strategy is welcome, as it highlights the government’s policy priorities and helps shape stakeholder expectations. The targets are consistent with a gradual withdrawal of stimulus, and would produce stable baseline debt dynamics. However, should private demand recover faster than expected, frontloading the consolidation would stave off the emergence of imbalances and would boost policy credibility. Ensuring adequate fiscal space for priority infrastructure remains key. Monetary and Financial Policies. Looser monetary policy in the second half of 2013 has not resulted in the hoped for pickup in private credit growth. Nonetheless, the strong recovery in H1 2013, high bank liquidity, and the decline in reserves (albeit not indicative of pressures on the peg) suggest an end to the easing cycle would be in order. External Position. Capacity to service outstanding external debt obligations, including to the IMF, remains adequate. Despite still weak net FDI flows, increased activity in large foreign-owned companies is contributing to stronger exports. However, backward linkages will likely develop only slowly. In the absence of domestic spillovers, the structural improvement in the trade deficit will be gradual and growth could be uneven.
    Keywords: Post-program monitoring;Fiscal policy;Monetary policy;Debt sustainability analysis;Staff Reports;Press releases;former Yugoslav Republic of Macedonia (FYR Macedonia);
    Date: 2014–02–26
  108. By: Bahar Öztürk; Mico Mrkaic
    Abstract: The monetary transmission mechanism in the euro area has been adversely affected by the recent crises. Using survey data on thousands of euro area firms, we study factors that affect the access to finance of SMEs. We find that changes in bank funding costs and borrower leverage matter for firms’ access to finance. Increases in bank funding costs and borrowers’ debt-to-asset ratios are significantly and negatively associated with firms’ access to finance. The use of subsidies significantly improve access to finance of SMEs. Finally, access to finance is found to be positively related to firm size and firm age.
    Keywords: Access to capital markets;Euro Area;Monetary transmission mechanism;Private sector;Credit;Borrowing;Banking sector;Monetary policy;access to finance; micro, small and medium sized enterprises; monetary policy
    Date: 2014–05–09
  109. By: Christian Saborowski; Sarah Sanya; Hans Weisfeld; Juan Yepez
    Abstract: This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.
    Keywords: Capital outflows;Emerging markets;Capital controls;Economic models;Time series;Capital flows, Emerging economies, net capital, capital inflows, capital flow restrictions, net capital outflows, net capital flows, capital transactions, volatile capital flows, capital account restrictions, capital market, international capital, access to funds, inflation rate, stock market capitalization, speculative attacks, movement of capital, investor confidence, current account balance, stabilization policies
    Date: 2014–01–21
  110. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context and outlook. Mozambique’s macroeconomic outlook remains favorable and the PSI-supported program is broadly on track. All assessment criteria were met and most indicative targets, but there was some slippage on structural reforms. Economic growth is robust and inflation remains moderate. In spite of risks stemming from the uncertain global economy, growth is expected to be sustained in the medium term by the natural resource boom and infrastructure investment. A recent government guarantee for large-scale borrowing by a public enterprise has raised transparency and prioritization issues that point to the need to strengthen investment and macroeconomic planning. New risks associated with the political/security environment have emerged. Short-term policy framework. The main short-term challenge is to maintain the growth momentum and to contain the fiscal expansion envisaged in 2014, reflecting both election year pressures and the spending of one-off revenue windfalls and of external borrowing. Key fiscal priorities include improving VAT administration, using windfall revenue to build buffers and invest, strengthen investment implementation capacity, and ensure transparency and adherence to due process for investment selection and borrowing. Monetary policy will need to be vigilant and monitor inflation developments closely. Medium-term challenges. Structural reforms along a broad policy spectrum should be implemented vigorously to foster sustained and more inclusive growth. With foreign aid likely to decline over the medium term, increased nonconcessional borrowing can provide additional resources for improving physical infrastructure and human capital. Further strengthening debt management and investment planning and implementation are essential to ensure the efficiency of investment and borrowing. Completion of the new mining and hydrocarbon legislation, the related fiscal regimes, and implementation regulations would facilitate the economic development of Mozambique’s natural resources.
    Keywords: Policy Support Instrument;Fiscal policy;Public investment;External borrowing;Debt management;Tax administration;Fiscal reforms;Monetary policy;Economic indicators;Staff Reports;Press releases;Mozambique;external debt, public debt, current account, debt service payments, private credit, debt reduction, debt sustainability, external debt service, domestic financing, external financing, public debt management, budget law, external payments arrears, reserve assets, balance of payments, debt management strategy, central bank, nonconcessional debt, borrowing on debt sustainability, international debt, current account deficits, debt portfolio, current account balance, debt relief, domestic savings, debt sustainability analysis, private creditors, multilateral creditors, short term debt, foreign aid, domestic borrowing, debt report, external debt stock, bilateral creditors, external public debt, external loan, debt service obligations, external liability, domestic currency, government debt
    Date: 2014–01–28
  111. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Prudent fiscal policies with near-balanced budgets over the cycle have reduced gross public debt to about 10 percent of GDP. These policies have also led to a pro-cyclical fiscal stance, with unsustainable increases in spending during the boom and a sharp contraction during the crisis. However, the new budget framework with a target of a structural fiscal balance or surplus should prevent excess spending in upturns and allow full operation of automatic stabilizer in downturns. Legislation in parliament would establish the Eesti Pank (the central bank) as the macroprudential authority and provide it with a full toolkit of macroprudential instruments. However, Nordic banks dominate the system and membership in the Banking Union, limiting Estonia’s scope for unilateral action. In this context, the authorities need to strengthen the Nordic-Baltic cross-border supervisory collaboration and integrate the ECB into them. Labor costs have been rising since 2012, and recent large increases in minimum wages and wages in education and health may be putting additional upward pressure on economy-wide wages and competitiveness. The authorities should refrain from further large wage increases until it is clear that they aren’t undercutting competitiveness. Structural unemployment remains high, and the authorities should continue to implement education, training, and other initiatives to encourage foreign and domestic investment. Consideration should also be given to policies that reduce the tax wedge, particularly for lower-wage workers.
    Keywords: Article IV consultation reports;Fiscal policy;Budgets;Labor markets;Unemployment;Banking sector;Bank supervision;Economic indicators;Staff Reports;Press releases;Estonia;Housing prices;
    Date: 2014–05–08
  112. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Recent Developments. After four years of consecutive growth, the unprecedented floods that hit Honiara in early April 2014 have undermined economic activity. The flash floods caused loss of life and widespread damage to key infrastructure, water and sanitation systems, housing, and agricultural output. The only gold mine was closed and is still not operating. Outlook and Risks. As a result, economic growth prospects have worsened. Economic growth in 2014 is projected at near zero, despite reconstruction efforts, on account of the closure of the mine and other flood-related income losses. In 2015, activity is expected to increase by 3½ percent led by large foreign-financed infrastructure projects. With the continued decline in logging output, growth will need to be supported by increased productivity across a wide range of sectors, including agriculture, tuna processing, and tourism. Boosting the competitiveness of the economy is key to strengthening the medium-term growth outlook. Risks to the outlook are on the downside with the upcoming parliamentary legislative elections adding an element of uncertainty to the outlook. Program Performance. Program performance under the ECF arrangement has been broadly satisfactory. Reserve buffers have been rebuilt and are at a comfortable level, well above the average of other small states. All performance criteria (PCs) for end-December, the indicative targets (ITs) for March, and the continuous PCs were met with considerable margins, except for the IT on government-funded recurrent spending on health and education, which was narrowly missed. Despite delays, progress has been made in implementing an ambitious structural reform agenda. As in the past, reforms have taken longer than expected owing mainly to resource constraints and the need to consult more broadly with stakeholders. Policy Recommendations. • Support economic activity through fiscal policy in the short term using fiscal buffers rebuilt in recent years, but strictly re-prioritize toward capital spending. • Improve the quality of public spending by advancing PFM reform including by enhancing the transparency and accountability of scholarship and constituency funds. • Maintain the current monetary policy stance but stand ready to tighten monetary policy if credit growth surges together with inflationary pressures. • Follow the currency basket more closely.
    Keywords: Extended Credit Facility;Fiscal policy;Government expenditures;Infrastructure;Monetary policy;Bank supervision;Economic indicators;Staff Reports;Press releases;Performance criteria modifications;Solomon Islands;
    Date: 2014–06–23
  113. By: Jean-Michel Sahut
    Abstract: Conventional approaches to examining the expectation hypothesis of interest rates assume a parametric linear specification among variables. In contrast, this paper tests the hypothesis using a flexible nonlinear inference approach proposed by Hamilton (20
    Keywords: Term structure of interest rates, Non linearity, expectation hypothesis, flexible models
    JEL: E43 C22 G10
    Date: 2014–06–23
  114. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: (Reprint from WIFO-Monatsberichte, Vol. 87, No. 5, May 2014) Zusammenfassung Wachstumsbeschleunigung dank Investitionswende in Mittel-, Ost- und Südosteuropa Das Wirtschaftswachstum wird sich in den mittel-, ost- und südosteuropäischen Ländern 2014 bis 2016 verstärken und durchschnittlich 2% bis 3% erreichen. Wesentlicher Wachstumsimpuls ist eine Wende in den öffentlichen und privaten Investitionen. English Summary Investment-led growth in Central, East and Southeast Europe In Central, East and Southeast Europe GDP is to pick up speed and grow on average by 2 to 3 per cent over the forecast period 2014-2016 a major driving force rooted in an upward reversal of public and private investment.
    Keywords: macroeconomic analysis, labour market, international trade, competitiveness, foreign direct investment
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2014–06
  115. By: International Monetary Fund. Fiscal Affairs Dept.
    Abstract: EXECUTIVE SUMMARY The Government of Botswana has committed to introduce a Medium-Term Expenditure Framework (MTEF) by 2016. The MTEF will provide a more explicit linkage between National Development Plan (NDP) priorities and budget allocations by adopting a medium-term budgeting horizon. The design characteristics of the MTEF need to be chosen carefully to meet specific fiscal consolidation objectives of the government. The proposed model is aimed at maintaining expenditure discipline to meet the government’s objective of reducing spending to 30 percent of GDP from the current 36 percent of GDP and running budget surpluses in order to rebuild government reserves that had fallen significantly in recent years. An MTEF model based on a binding nominal expenditure ceiling covering 100 percent of government expenditure is appropriate. The key features would include: • Three-year aggregate expenditure ceilings - fixed for the budget year(BY) and the first out-year (BY+1), but which may be adjusted in the second out-year, in recognition of the volatility facing Botswana’s economy; and • Binding ministerial allocations for the budget year (BY); indicative allocations for first out-year (BY+1) and second out-year (BY+2)—constrained by the aggregate expenditure ceiling—to allow reallocation of spending from low- to high-priority areas. To support the commitment to the resource allocations approved under the MTEF, a number of prioritization, control, and accountability arrangements need to be put in place. These arrangements form a key part of the MTEF and are required to: (i) increase the legitimacy of expenditure allocations; (ii) ensure that once the allocations are decided upon, they can be executed effectively; and (iii) demonstrate that the government is meeting its previously stated commitments, and if not, state reasons for any deviations. Some of these elements are in place, but they will require strengthening and refinement. These include: (i) the need to undertake more frequent forecasting rounds that cover the full range of macroeconomic, revenue and expenditure areas; (ii) building a margin for contingencies in the outer years; and (iii) a greater degree of political involvement in the prioritization between different spending areas in order to give the allocation legitimacy. Successful MTEFs require credible macro-fiscal forecasts, which inform the setting of aggregate expenditure ceilings. Botswana is strengthening its macro-fiscal forecasting capability. The government now has a coherent medium-term framework that can provide aggregate revenue, expenditure, and fiscal balance projections. Further improvements would include: (i) broadening the coverage of the framework; (ii) incorporating balance sheet dynamics; and (iii) systemized assessment of past forecast errors to improve the credibility of the forecasts.
    Keywords: Government expenditures;Budgets;Budgeting;Technical Assistance;Botswana;
    Date: 2014–06–10
  116. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: Colombia has maintained a robust economic performance in recent years due in large part to its very strong policy framework. Well-anchored inflationary expectations, a flexible exchange rate, a structural fiscal balance rule, and effective financial supervision and regulation have contributed to the resilience of the Colombian economy to global uncertainty. The Flexible Credit Line (FCL) arrangement has also allowed Colombia to restore orderly financial market conditions despite increased volatility in financial markets over the past year by providing a buffer against tail risks.
    Keywords: Flexible Credit Line;Fiscal policy;Debt sustainability;Monetary policy;Economic indicators;Staff Reports;Press releases;Colombia;
    Date: 2014–06–25
  117. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Context: The current account is worsening, coinciding with peak debt service, limited market access, and low reserves. Although the authorities have taken ad hoc measures to curb acute exchange rate pressures during the summer, a stronger policy response is urgently needed to reduce external imbalances and mitigate risks. Challenges: Facilitating external adjustment through a consistent set of policies is the key short-term priority. The medium-term challenge remains to increase efficiency and competitiveness through deep structural reform, with strong measures taken up front to enhance credibility. Policy recommendations: No further wage increases in 2013–14, to curb demand and regain competitiveness; Sharply reduce directed lending, to limit credit growth and contingent liabilities, and reduce external imbalances; Substantially scale back foreign exchange market intervention and tighten monetary policy to facilitate exchange rate and balance of payments adjustment; Adopt comprehensive and ambitious structural reforms to raise sustainable growth
    Keywords: Post-program monitoring;Fiscal policy;Wage increases;Fiscal reforms;Monetary policy;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Belarus;external debt, current account, public debt, external financing, balance of payments, current account balance, debt ratio, central bank, short-term debt, domestic currency, debt dynamics, debt stock, government debt, current account deficit, debt ratios, total external debt, repayments, domestic debt, external debt sustainability, long-term debt, repurchases, public sector debt, external debt service, domestic financing, external borrowing, central banks, repayment capacity, foreign loans, currency composition, domestic borrowing, bilateral agreements, excessive volatility, debt burden, external payments, currency debt, debt servicing, budget balance, currency risk, balance sheet effects
    Date: 2014–01–24
  118. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. Despite recent strong non-oil growth, poverty and income inequality remain high and social and governance indicators are below averages for sub-Saharan Africa. Structural reforms under the Transformation Agenda are ongoing, but significant infrastructure gaps and weak institutional capacity still retard growth prospects. At the same time, vulnerabilities are rising in the buildup to general elections in 2015 and fiscal buffers have been reduced. Meanwhile, GDP is being rebased and structural shifts may suggest a refocus in some policy areas. Outlook and Risks. Growth is expected to remain strong, driven by agriculture, trade, and services. Inflation should continue to decline, in line with a tight monetary policy, and a lowering trend in food prices from higher rice and wheat production. Key downside risks are (i) persistently lower oil revenue from changing global dynamics and lower domestic production; (ii) less prudent fiscal policy through the ongoing political cycle; (iii) ongoing security problems in the North; (iv) uncertainty about the pace of global recovery; and (v) capital flow reversals from the expected unwinding of unconventional monetary policy (UMP) in the advanced economies or increased domestic political risk. Addressing oil theft/production losses. Transparency and governance in the oil sector should be enhanced, including by strengthening the regulatory framework through the passage of a sound Petroleum Industry Bill (PIB) featuring stringent enforcement clauses. A multicountry partner strategy could also improve oil sector oversight. Rebuilding fiscal buffers by insulating macrofinancial stability from the political cycle. The fiscal framework should continue to be improved, with an appropriately conservative 2014 budget. Monetary policy should remain supportively tight, given the potential for capital flow reversals and fiscal slippages. In the event of persistent pressures, the naira should be allowed to adjust and reserve adequacy maintained. Improving competitiveness and productivity to generate inclusive growth will require wide-ranging structural reforms. Three key areas could help promote inclusive growth—increasing the delivery of power, broadening the agricultural production base, and increasing access to finance for SMEs. Support for sectoral growth should be underpinned by improvements in competitiveness rather than by protectionist measures.
    Keywords: Article IV consultation reports;Economic growth;Agricultural sector;Fiscal policy;Oil sector;Spillovers;Global competitiveness;Fiscal reforms;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Nigeria;
    Date: 2014–04–22
  119. By: Gomes, Pedro Maia (Universidad Carlos III de Madrid); Kuehn, Zoë (Universidad Autónoma de Madrid)
    Abstract: Countries that have relatively fewer workers with a secondary education have smaller firms. The shortage of skilled workers limits the growth of more productive firms. Two factors influence the availability of skilled workers: i) the education level of the workforce and ii) large public sectors that predominantly hire individuals with a better education. We set up a model economy with a government and private firm formation where production requires unskilled and skilled jobs. Workers with a secondary education are pivotal as they can perform both types of jobs. We find that level of education and public sector employment account for 40-45% of the differences between the United States and Mexico in terms of average firm size, GDP per capita, and GDP per hour worked. We also show that the impact of public employment on skill premiums and productivity measures depends on the skill bias in public hiring.
    Keywords: firm size, educational attainment, skill complementarities, public employment, college premium, high school premium
    JEL: J24 J45 E24 H30 O11
    Date: 2014–06
  120. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY The political situation was difficult throughout most of 2013 but has stabilized in the last few months. Disputes between government and opposition on preparations for legislative elections at end-September resulted in serious civil unrest but the situation is improving since the elections. The new Parliament was inaugurated on January 13, 2014, formally ending the transition period following the 2009–10 military regime. On January 20, 2014, the President nominated a new government, with key economic ministers carrying over from the previous government, albeit in different posts. The macroeconomic environment in 2013 was difficult, reflecting the fragile socio-political situation and a sharp slowdown in mining sector projects. As a result, growth is estimated to have slowed to 2.5 percent, sharply below the projected 4.5 percent. Inflation continued to fall and at end-2013 was 10.5 percent year-on-year. International reserves were maintained at a satisfactory level and the exchange rate remained broadly stable. Performance under the ECF-supported program remains satisfactory. Notwithstanding a sizeable shortfall in revenues and an increase in subsidies to the energy sector, strong adjustment measures have kept the fiscal deficit on track. All performance criteria (PCs) for end-June 2013 and the indicative targets for end-September 2013 were met with significant margins, and those for end-2013 are also expected to be met. However, the structural reform agenda incurred delays. The program for 2014 focuses on further consolidating macroeconomic stability, while increasing public investment to rebuild the country’s infrastructure. Real GDP is projected to rebound to 4.5 percent, reflecting a return to political stability and an acceleration of investment in the mining sector. Inflation is projected to further decline to 8.5 percent, while gross official reserves should remain at around 3 months of imports. Fiscal targets incorporate an increase in public investment, a strong revenue effort, and an increase in external assistance. Structural reforms aim at completing the actions delayed from 2014 and focus on public financial management, civil service reform, the mining sector, the business climate, agriculture, and the electricity sector. Risks to the program stem from a possible renewal of political instability, delays in the rebound of investment in the mining sector, and failure to reach the revenue targets. Staff supports the completion of the third review under the ECF arrangement and completing the financing assurances review. Completion of the review will result in a disbursement of an amount equivalent to SDR 18.36 million under the ECF arrangement.
    Keywords: Extended Credit Facility;Economic growth;Fiscal risk;Mining sector;Fiscal policy;Fiscal reforms;Electric power;Monetary policy;Economic indicators;Staff Reports;Letters of Intent;Press releases;Guinea;
    Date: 2014–02–27
  121. By: Wei Liao; Sampawende J.-A. Tapsoba
    Abstract: China has been moving to a more market oriented financial system, which has implications for the monetary policy environment. The paper investigates the stability of the money demand function (MDF) in light of progress in financial sector reforms that, for example, have resulted in significant financial innovation (so-called shadow banking) and more liberalized interest rates. The analysis of international experience suggests that rapid development of the financial system often leads to structural shifts in the MDF. For example, financial innovation and liberalization alter the sensitivity of money balances to income and the interest rate. For China, we find that the stable long-run relationship between money demand, output, and interest rates that existed between 2002 and 2008 disappears after 2008. This coincides with the period of rapid financial innovation, especially the growth in off-balance sheet and nonbank financial intermediation. The results suggest that usefulness of M2 as an intermediate monetary target has declined with financial innovation and reform. A result that underscores the importance of moving toward increased reliance on more price-based targets such as interest rates.
    Keywords: Monetary policy;China;Interest rates;Demand for money;Financial sector;Banks;Cross country analysis;Financial Liberalization, Financial Innovation, and Money Demand Function
    Date: 2014–05–01
  122. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. The region continued to experience a strong upswing in 2013 and the immediate outlook is for further vigorous growth and moderate inflation. Sustaining this performance over the medium term, however, will require ambitious growth-enhancing reforms, high quality public investment, and consolidation of the recent improvements in the regional political and security situation. The outlook is subject to moderate downside risks. In the short term, political stability could be tested with the upcoming elections in a number of member states, particularly in a context of high demand for better governance and higher living standards. Security issues in the Sahel constitute another short-term risk. Delays in implementing reforms, at both the national and regional levels, are the principal medium-term risk. Policy recommendations: • Maintaining the current macroeconomic policy mix. The recent upswing is welcome. As growth is now better entrenched, more stimulus is not required at this juncture. With continued strong growth projected for the region, countries are encouraged to seek opportunities to strengthen fiscal sustainability while maintaining public investment efforts. The widening current account deficit and declining reserves?which remain adequate?should be monitored closely and warrant a pause in loosening monetary policy. • Increasing fiscal policy coordination. The ongoing review of the regional surveillance framework is welcome. Its ultimate goal should be to preserve fiscal and external sustainability. This will involve redesigning fiscal convergence criteria, improving regional surveillance, and strengthening the application of fiscal rules. • Accelerating financial sector reforms. Developing the financial sector while preserving its stability is essential to support sustainable economic development and improve the effectiveness of macroeconomic policies. Developing the interbank and government debt markets and strengthening substantially transparency, bank supervision, and the crisis management and resolution framework are priorities. Ongoing reforms go in the right direction but the pace of implementation needs to accelerate. • Moving toward a more dynamic and resilient union. The regional growth agenda should be reinforced by concrete and coordinated actions to improve structural competitiveness, accelerate regional integration, and strengthen economic resilience.
    Keywords: Staff Reports;West African Economic and Monetary Union;Economic growth;Economic conditions;Fiscal policy;Workers remittances;Monetary policy;Monetary transmission mechanism;Banking sector;Bank supervision;Economic indicators;Press releases;West Africa;
    Date: 2014–03–21
  123. By: Carla Canelas (Centre d'Economie de la Sorbonne - Paris School of Economics); François Gardes (Centre d'Economie de la Sorbonne - Paris School of Economics); Silvia Salazar (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: The inclusion of time in the household domestic production function allows to calculate full prices that are in turn used to estimate consistent monetary and time elasticities on micro cross-sectional data. This article provides elasticity estimates for different commodity groups in absence of observable price data, solving the persistent problem of price data availability in most developing countries. The estimated price elasticities perform well compared to other methods and can be computed for different sub-populations, which is important for policy design and the calibration of simulation models.
    Keywords: Demand elasticities, domestic production, time-use.
    JEL: D04 D11 D12 D13
    Date: 2014–05
  124. By: International Monetary Fund. Fiscal Affairs Dept.
    Abstract: EXECUTIVE SUMMARY Most aspects of Russia’s fiscal reporting and budgeting practices are in line with good or advanced practice under the July 2013 draft of the Fiscal Transparency Code, and the disclosure and management of fiscal risks has significantly improved in recent years (Table 0.1). Specifically, over the past decade and a half: * the 1998 Budget Code and subsequent amendments have established a comprehensive legal framework for fiscal management at all levels of government; * the government began publishing cash-based in-year and year-end fiscal reports and accrual-based annual financial statements as well as fiscal statistics which consolidate Federal, regional, and municipal governments in line with international standards; * detailed and credible medium-term macroeconomic forecasts have been prepared since early 2000, and a new oil price-based fiscal rule was introduced in 2013 to encourage sustainable and counter-cyclical fiscal policymaking; * the coverage of the Federal government budget has steadily expanded and the three main remaining extra-budgetary funds are presented and approved alongside it in a timely manner; * the policy-orientation of the budget has improved thanks to a comprehensive and detailed medium-term budget framework introduced in 2008, and a new program and performance budgeting system introduced in the 2014 Budget; and * firm central controls over key sources of fiscal risks have been established, including annual limits on the issuance of debt, credit, and guarantees by the Federal government, and on borrowing by sub-national governments.2 At the same time, this evaluation highlights a number of important areas where fiscal transparency practices could be further improved: * while fiscal reports provide a relatively comprehensive picture of the Federal and sub-national government finances, they exclude the financial activity of various classes of government-controlled enterprises with net expenditure of at least 29 percent of GDP and liabilities of at least 127 percent of GDP in 2012;3 2 As a result of these successive enhancements to fiscal disclosure, between 2006 and 2012 Russia’s rating under the International Budget Partnership’s Open Budget Index has risen from a score of 47 to 74 out of 100 and from a ranking of 28th out of 59 countries to 10th out of 100 countries. 3 Figures quoted here and in the remainder of this report are based on data from the 26 largest government-controlled enterprises by liability.
    Keywords: Fiscal transparency;Fiscal policy;Budgets;Budgeting;Economic forecasting;Fiscal risk;Risk management;Reports on the Observance of Standards and Codes;Russian Federation;
    Date: 2014–05–26
  125. By: Jonas Dovern; Ulrich Fritsche; Prakash Loungani; Natalia T. Tamirisa
    Abstract: We study forecasts for real GDP growth using a large panel of individual forecasts from 36 advanced and emerging economies during 1989–2010. We show that the degree of information rigidity in average forecasts is substantially higher than that in individual forecasts. Individual level forecasts are updated quite frequently, a behavior more in line “noisy†information models (Woodford, 2002; Sims, 2003) than with the assumptions of the sticky information model (Mankiw and Reis, 2002). While there are cross-country variations in information rigidity, there is no systematic difference between advanced and emerging economies.
    Keywords: Economic forecasting;Economic growth;Developed countries;Emerging markets;Forecasting models;Rational inattention; aggregation bias; growth forecasts; information rigidity; forecast behaviour
    Date: 2014–02–12
  126. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context. Over the past decade, Afghanistan has made enormous progress in reconstruction, development and lifting per capita income. Security and political uncertainties, and weak institutions have constrained growth and weighed on social outcomes. With significant reform efforts and donor support, Afghanistan has maintained macroeconomic stability, implemented important structural reforms, and built policy buffers, but significant vulnerabilities remain. The IMF has been supporting Afghanistan through technical assistance and a three-year Extended Credit Facility (ECF) arrangement. Reviews under the ECF arrangement have been delayed. Outlook and risks. 2014 is a crucial year in the political and security transitions and the run-up to the “transformation decade†(2015–24). Assuming smooth political and security transitions, continued reform and donor financing, the outlook should be positive. Large security and development expenditure needs and a limited domestic revenue capacity mean that Afghanistan will remain dependent on donor financing for an extended period. Macroeconomic stability, structural reforms, and political and security stability are needed to ensure inclusive growth. Risks, mostly on the downside, are related to adverse domestic or regional security developments, political instability, inadequate implementation of economic policies, and donor fatigue. Policy recommendations. The authorities’ economic strategy (maintaining macroeconomic stability, strengthening the financial sector, improving economic governance, and moving toward fiscal sustainability) remains appropriate and needs strengthened implementation. Sustained implementation of this strategy will safeguard growth and build buffers to help manage shocks. Policies should continue to aim at strengthening revenue collection, managing money growth to control inflation while preserving exchange rate flexibility, strengthening bank supervision, and quickly enacting anti-money laundering (AML), countering financing of terrorism (CFT), banking, central bank, and value-added tax legislation.
    Keywords: Article IV consultation reports;Economic conditions;Fiscal policy;Fiscal reforms;Corruption;Monetary policy;Inflation targeting;Economic indicators;Millennium Development Goals;Extended Credit Facility;Debt sustainability analysis;Staff Reports;Press releases;Afghanistan;
    Date: 2014–05–21
  127. By: Serhan Cevik; Katerina Teksoz
    Abstract: This paper investigates the determinants of fiscal policy behavior and its time-varying volatility, using panel data for a broad set of advanced and emerging market economies during the period 1990–2012. The empirical results show that discretionary fiscal policy is influenced by policy inertia, the level of public debt, and the output gap in both advanced and emerging market economies. In addition, the paper finds that macro-financial factors—such as real exchange rate, financial development, interest rates, asset prices, and natural resource rents—and demographic and institutional factors—such as the old-age dependency ratio, the quality of institutions, and policy anchors such as fiscal rules and IMF-supported stabilization programs—tend to have a significant effect on fiscal policy behavior. The results also indicate that higher government debt leads to more volatile fiscal behavior, while fiscal rules and higher institutional quality reduce the volatility of fiscal policy over time.
    Keywords: Fiscal policy;Developed countries;Emerging markets;Cross country analysis;Economic models;Fiscal policy, fiscal reaction functions, fiscal policy volatility
    Date: 2014–03–12
  128. By: Alfred Stiassny (Department of Economics, Vienna University of Economics and Business); Christina Uhl (Department of Economics, Vienna University of Economics and Business)
    Abstract: Does an increase of elderly employment cause a decline in youth employment? A simplified view of a demand driven economy would give a positive answer to this question. Econometric studies based on a single equation approach deliver little support for this belief. However, these studies typically suffer from identification problems to which no attention is paid in most cases. We therefore use a general equilibrium framework when trying to quantify these effects. Using yearly and quarterly Austrian labor and gdp data, we estimate two model variants by Bayesian methods: a) a standard equilibrium model where the degree of complementarity between old, young and primary labor is crucial for the sign and strength of the relevant effects and b) a simple, solely demand driven model which always leads to a crowding out of young through an increase in employment of the old. It turned out that the demand driven model is inferior in fitting the data compared to the standard model. Further, the degree of complementarity is estimated to be strong enough to lead to a small positive effect of elderly employment on youth employment.
    Keywords: Labor market, pension reform, equilibrium models, Bayesian estimation
    JEL: A10 C11 E10 J01 J26
    Date: 2014–07
  129. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Economic activity continued to grow at a brisk pace in 2013. Growth projections have been revised slightly downwards to 6.8 percent in 2013 and 2014, based on lower gold and cotton prices that are leading to somewhat lower output, and the impact of the high base of agricultural production in 2012 on growth in 2013. Inflation has continued to decline, reaching 2 percent, with notable reductions in the prices of food and staple goods. The current account is likely to deteriorate more than previously anticipated due to declining terms of trade, and higher volume imports of fuel and capital goods. Program performance remains strong. Revenue performance remains on target, but is no longer overshooting targets as in recent years, while spending execution is below target. Almost all program targets were met, including on net domestic financing and the fiscal balance. All structural benchmarks slated for completion in June and September were met. The authorities are requesting a successor 3-year ECF arrangement to meet projected balance of payments needs. Based on ad referendum agreements, the requested successor ECF-supported program aims to address long-term structural issues, while preserving stability in a potentially more challenging macroeconomic environment going forward. Structural reforms are articulated around four key themes: managing the use of natural resources revenues; improving the quality and pace of investment spending; supporting efforts to transform high growth into more inclusive growth; and, in the energy sector, improving supply while ensuring financial sustainability. The medium-term macroeconomic framework aims to contain the deficit at around 3 percent of GDP while providing space for higher social and investment spending. The program framework targets current spending adjustment, primarily through expiration of exceptional spending needed to address exogenous shocks, which will be complemented by modestly-growing domestic revenues and financing. There would be modest residual fiscal and balance of payments needs over the three-year program period; proposed access of 45 percent of quota would fill about one third of the identified needs.
    Keywords: Extended Credit Facility;Economic growth;Natural resources;Fiscal policy;Fiscal reforms;Commercial banks;Economic indicators;Extended arrangement requests;Staff Reports;Press releases;Burkina Faso;
    Date: 2014–02–10
  130. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: EXECUTIVE SUMMARY Context: The authorities are pursuing a wide-ranging economic reform program against a background of political liberalization. Challenges are formidable, however, as the authorities’ capacity to design and implement far-reaching reforms and absorb international assistance is being stretched. Macroeconomic situation and outlook: Growth has strengthened, led by services. However, international reserves remain low, and inflation pressures are significant. Notwithstanding these risks, the overall economic outlook is favorable. In 2013/14 and 2014/15, growth is projected to accelerate slightly, and inflation to remain elevated. The current account deficit is set to widen, but, from 2014/15 onward, be comfortably financed by FDI-related inflows and aid. Staff-monitored program: The SMP has been successful, with macroeconomic stability preserved and all quantitative and structural benchmarks met. Progress in building the institutions for economic management has also been made, though much remains to be done. IMF relations: The IMF’s engagement after the expiration of the SMP will remain intensive. Staff will continue to provide close support in updating the macroeconomic framework and formulating policy goals, and stand ready to discuss options for a more formalized cooperation. IMF capacity building will further intensify. Macroeconomic policies and further reforms: The Central Bank of Myanmar needs to focus on building international reserves and monetary policy tools, which will likely be needed in 2014/15 to sterilize significant foreign exchange inflows. Fiscal policy needs to continue balancing stability with development, while administrative reforms to boost revenue and public financial management need to be driven forward. Financial sector liberalization should proceed cautiously and in line with the development of supervisory capacity. Recently established policy banks should be supervised closely and managed transparently to minimize risks.
    Keywords: Staff-monitored programs;Fiscal policy;Fiscal reforms;Monetary policy;Reserves;Economic indicators;Letters of Intent;Debt sustainability analysis;Staff Reports;Press releases;Myanmar;
    Date: 2014–03–28
  131. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: EXECUTIVE SUMMARY The Executive Board approved in August 2012 a two-year precautionary and liquidity line (PLL) arrangement in the amount of SDR 4.1 billion (700 percent of quota). The PLL provides insurance against external risks while supporting the authorities’ program aimed at reducing fiscal and external vulnerabilities and fostering higher and more inclusive growth. The second review was completed on July 31, 2013. The authorities have treated the PLL as precautionary. Overall, macroeconomic performance improved in 2013, but the outlook hinges on the sustained delivery of reforms. After a difficult 2012, a return to a more favorable environment and policy action helped reduce fiscal and external imbalances in 2013, while growth picked up, boosted by a strong rebound in the primary sector. Growth in 2014 could reach about 4 percent, but the economy remains vulnerable to a fragile international environment. Continued improvement in economic conditions depends on the sustained implementation of reforms to further reduce vulnerabilities, strengthen competitiveness, and foster stronger and more inclusive growth. The program remains broadly on track, and Morocco continues to meet the PLL qualification criteria. Both the fiscal and external deficits were reduced from their 2012 highs. Although the fiscal deficit indicative target at end-October was missed, the authorities’ end-year objective was met. The NIR indicative target at end-October was met with a comfortable margin. Morocco continues to perform strongly in three out of the five areas in which PLL qualification is assessed (financial sector and supervision, monetary policy, and data adequacy) while not substantially underperforming in the two other areas (fiscal policy, and external position and market access). Staff therefore recommends the completion of the third review under the PLL.
    Keywords: Precautionary and Liquidity Line;Budgets;Fiscal policy;Monetary policy;Economic indicators;Staff Reports;Press releases;Morocco;
    Date: 2014–03–06
  132. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
    Keywords: Fiscal policy;Natural resources;China;Capital flows;Spillovers;Dollarization;Selected issues;Peru;fiscal framework, fiscal sustainability, fiscal rules, structural fiscal, fiscal balance, fiscal adjustment, fiscal targets, fiscal revenue, fiscally sustainable, expenditure growth, primary expenditure, fiscal accounts, taxation, fiscal balances, fiscal revenues, budget constraint, tax rates, fiscal pressures, fiscal objectives, budgetary implications, fiscal surpluses, public spending, tax system, fiscal responsibility, key fiscal indicators, fiscal management, fiscal stance, tax revenue, fiscal affairs, fiscal affairs department, fiscal spending, primary deficit, fiscal regime, fiscal regimes
    Date: 2014–01–29
  133. By: International Monetary Fund. Monetary and Capital Markets Department
    Keywords: Financial Sector Assessment Program;Monetary policy;Liquidity;Capital flows;Market interest rates;Malaysia;
    Date: 2014–04–15
  134. By: International Monetary Fund. European Dept.
    Abstract: EXECUTIVE SUMMARY Spain’s ESM-supported program of financial sector reform aimed to assist economic recovery by promoting financial stability. The program was adopted in mid-2012. At the time, Spain’s real-estate bust and the euro-area debt crisis had combined to fuel a vicious cycle of failing banks, unsustainable fiscal deficits, rising borrowing costs, contracting output, rapid job loss, and severe financial market turmoil. The program aimed to stem the financial sector’s contribution to these forces by requiring weak banks to more decisively clean their balance sheets and by reforming the sector’s policy framework. These efforts aimed in turn to support economic recovery by improving banks’ access to market funding and by avoiding a disruptive and disorderly unwinding of a significant part of the sector. The program’s strategy built on reforms that the authorities had already undertaken during the crisis (e.g., stronger provisioning requirements) and was developed in consultation with Spain’s European partners, was supported by ESM financing, and was consistent with the main recommendations from IMF staff’s June 2012 Financial Stability Assessment Program (FSAP) and Article IV consultation. The Spanish authorities’ implementation of the program has been steadfast. All of the program’s specific measures are now complete. These have included the following key actions: • identifying undercapitalized banks via a comprehensive asset quality review and independent stress test; • requiring banks to address their capital shortfalls, including if necessary through bail-ins of junior debt and injections of public capital; • reducing uncertainty regarding the strength of banks’ balance sheets and boosting liquidity by segregating state-aided banks’ most illiquid and difficult-to-value assets into a separate, newly created asset management company (SAREB); • adopting plans to restructure or resolve state-aided banks within a few years, with implementation now well underway; and • reforming Spain’s frameworks for bank resolution, regulation, and supervision to facilitate a more orderly clean-up and better promote financial stability and protect the taxpayer. These efforts have substantially reduced threats emanating from banks to the rest of the economy, as has important policy progress at the European level. • Actions under the program have significantly strengthened the system’s capital, liquidity, and loan-loss provisioning. The capitalization drive has also helped to contain losses to taxpayers and bank creditors by addressing undercapitalization problems before they expanded further, as inaction would likely have produced a deepening cycle of losses on deposits, accelerating deposit outflows, and more bank failures. • Financial market conditions have improved dramatically during the program, with risk premia on external borrowing by Spain’s banks and sovereign down more than 75 percent and equity prices up more than 50 percent during the program period. These improvements and similar trends in other stressed euro-area financial markets reflect, among other factors, the package of key crisis-fighting measures adopted in Europe during the last 18 months (e.g., OMT) and to which Spain’s financial-sector program was a contributing element. Spain’s real economy is now also starting to recover, with output now growing and the unemployment rate falling.
    Keywords: Financial sector;Banks;Capital;Liquidity;Housing prices;Bank resolution;Bank restructuring;Bank supervision;Fiscal reforms;Technical Assistance;Spain;
    Date: 2014–02–20

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