nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒07‒28
79 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macroeconomic Regimes By L. BAELE; G. BEKAERT; S. CHO; K. INGHELBRECHT; A. MORENO
  2. Endogenous Wage Indexation and Aggregate Shocks By JULIO CARRILLO; GERT PEERSMAN; JORIS WAUTERS
  3. Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations By G. PEERSMAN; W. WAGNER
  4. Fiscal Policy Uncertainty and Its Macroeconomic Consequences By Murray, James
  5. Economic Science: From the Ideal Gas Law Economy to Piketty and Beyond By Song, Edward
  6. The Nominal Interest Rate Yield Response to Net Government Borrowing: GLM Estimates, 1972-2012 By Cebula, Richard
  7. Monetary and Fiscal Policy with Sovereign Default By Joost Röttger
  8. Asset markets and monetary policy shocks at the zero lower bound By Edda Claus; Iris Claus; Leo Krippner
  9. Are there Differences in the Effectiveness of Quantitative Easing in Japan over Time? By Michaelis, Henrike; Watzka, Sebastian
  10. The Impact of Monetary Policy and Exchange Rate Shocks in Poland: Evidence from a Time-Varying VAR By Arratibel, Olga; Michaelis, Henrike
  11. Recessions and Recoveries in New Zealand's Post-Second World War Business Cycles By Viv B. Hall; John McDermott
  12. Changes in the Response of Fiscal Policy to Monetary Policy in the EMU By Sanchit Arora; Claire Reicher
  13. The Business Cycle with Nominal Contracts and Search Frictions By Moon, Weh-Sol
  14. The cost of business cycles with heterogeneous trading technologies By Chien, YiLi
  15. Risk and Ambiguity in Models of Business Cycles By David Backus; Axelle Ferriere; Stanley Zin
  16. Default Risk Premia on Government Bonds in a Quantitative Macroeconomic Model By Falko Juessen; Ludger Linnemann; Andreas Schabert
  17. Public Debt, Economic Growth, and Inflation in African Economies By Lopes da Veiga, José; Ferreira-Lopes, Alexandra; Sequeira, Tiago
  18. Inflation,Inflation Variability, and Output Performance. Venezuela 1951-2002 By Olivo, Victor
  19. Reputation and Liquidity Traps By Taisuke Nakata
  20. Measuring Macroeconomic Uncertainty: US Inflation and Output Growth By Michael P. Clements; Ana Beatriz Galvão
  21. The aggregate effects of long run sectoral reallocation By Claire Reicher
  22. Inflation Targeting and Public Deficit in Emerging Countries: A Time Varying Treatment Effect Approach By Kadria, Mohamed; Ben Aissa, Mohamed Safouane
  23. Household Risk Management and Actual Mortgage Choice in the Euro Area By Ehrmann, Michael; Ziegelmeyer, Michael
  24. Improving the Reliability of Real-time Hodrick-Prescott Filtering Using Survey Forecasts By Jaqueson K. Galimberti; Marcelo L. Moura
  25. Endogenous Fluctuations in an Endogenous Growth Model with Infl ation Targeting By Rangan Gupta; Lardo Stander
  26. Sticky Leverage By Urban Jermann; Lukas Schmid; Joao Gomes
  27. Policy-oriented macroeconomic forecasting with hybrid DGSE and time-varying parameter VAR models By Stelios D. Bekiros; Alessia Paccagnini
  28. How Much Do Official Price Indexes Tell Us About Inflation? By Tsutomu Watanabe; David Weinstein; Jessie Handbury
  29. Adaptive Models and Heavy Tails By Davide Delle Monache; Ivan Petrella
  30. Implications of heterogeneity in preferences, beliefs and asset trading technologies for the macroeconomy By Chien, YiLi; Cole, Harold L.; Lustig, Hanno
  31. Costs and Benefits to Phasing Out Paper Currency By Rogoff, Kenneth S.
  32. Households credits and financial stability By Cécile Bastidon
  33. "If Deficits Are Not the Culprit, What Determines Indian Interest Rates? An Evaluation Using the Maximum Entropy Bootstrap Method" By Hrishikesh Vinod; Lekha S. Chakraborty; Honey Karun
  34. The Effectiveness of Unconventional Monetary Policies By G. PEERSMAN
  35. Hot Money Flows, Cycles in Primary Commodity Prices, and Financial Control in Developing Countries By Ronald McKINNON
  36. Identifying Long-Run Risks: A Bayesian Mixed-Frequency Approach By Frank Schorfheide; Dongho Song; Amir Yaron
  37. Childcare Subsidies and Household Labor Supply By Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
  38. Probabilidad Clásica de Sobreajuste con Criterios de Información: Estimaciones con Series Macroeconómicas Chilenas By Medel, Carlos A.
  39. Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do By Joseph E. Gagnon
  40. United Arab Emirates: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the United Arab Emirates By International Monetary Fund. Middle East and Central Asia Dept.
  41. Re-evaluating Okun's law in South Africa: A nonlinear co-integration approach By Phiri, Andrew
  42. A Model of the Twin Ds: Optimal Default and Devaluation By Seunghoon Na; Stephanie Schmitt-Grohé; Martin Uribe; Vivian Z. Yue
  43. Deflation und Konsumstau: Mikroökonomische Evidenz By Henning Klodt ,; Anna Hartmann
  44. Republic of Moldova: 2014 Article IV Consultation and First Post-Program Monitoring Discussions-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Moldova By International Monetary Fund. European Dept.
  45. A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem? By Barry Eichengreen; Ugo Panizza
  46. Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy By Emanuele Campiglio
  47. The absorption of EU Structural and Cohesion Funds in Romania: international comparisons and macroeconomic impact By Zaman, Gheorghe; Georgescu, George
  48. OccBin: A Toolkit for Solving Dynamic Models With Occasionally Binding Constraints Easily By Guerrieri, Luca; Iacoviello, Matteo
  49. Recovery Performance of Primary Agriculture Credit Societies in India: An Assessment By Mazumder, Rabin; Chakravarty, Chandrasekhar; Bhandari, Amit Kumar
  50. Seychelles: Request for An Arrangement Under the Extended Fund Facility-Staff Report; Press Release; and Statement by the Executive Director for Seychelles By International Monetary Fund. African Dept.
  51. Forecasting Chinese GDP Growth with Mixed Frequency Data: Which Indicators to Look at? By Heiner Mikosch; Ying Zhang
  52. International yield curve comovements: impact of the recent financial crisis By Simeon Coleman; Kavita Sirichand
  53. Does The Keynesian Absolute Income Hypothesis Exist in Pakistan? By Muhammad Shahbaz; Kishwar Nawaz; Mohamed Arouri; Frédéric Teulon; Gazi Salah Uddin
  54. When arm's length is too far. Relationship banking over the business cycle By Thorsten Beck; Hans Degryse; Ralph de Haas; Neeltje van Horen
  55. Oskar Lange or how IS-LM came to be interpreted as a Walrasian model By Goulven Rubin
  56. Does the Calculation Hold? The Fiscal Balance of Migration to Denmark and Germany By Hinte, Holger; Zimmermann, Klaus F.
  57. Bhutan: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Bhutan By International Monetary Fund. Asia and Pacific Dept
  58. Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone By Frankel, Jeffrey A.; Schreger, Jesse M
  59. Hard Times By Campbell, John Y.; Giglio, Stefano; Polk, Christopher
  60. FLOATING A “LIFEBOAT”: THE BANQUE DE FRANCE AND THE CRISIS OF 1889 By Eugene White; Pierre-Cyrille Hautcoeur; Angelo Riva
  61. Field Theory of Macroeconomics By Heribert Genreith
  62. Is Business Saving Really None of Our Business? By Ricardo N. Bebczuk; Eduardo A. Cavallo
  63. Trade Integration and Business Cycle Synchronization in the EMU: The Negative Effect of New Trade Flows By Jean-Sébastien Pentecôte; Jean-Christophe Poutineau; Fabien Rondeau
  64. The role of Institutions in explaining wage determination in the Euro Area: a panel cointegration approach By Mariam Camarero; Gaetano D’Adamo; Cecilio Tamarit
  65. The Micro and Macro of Disappearing Routine Jobs: A Flows Approach By Guido Matias Cortes; Nir Jaimovich; Christopher J. Nekarda; Henry E. Siu
  66. Labor Tax Cuts and Employment: A General Equilibrium Approach for France By Raphael A. Espinoza; Esther Pérez Ruiz
  67. Milton Friedmans economics and political economy: an old Keynesian critique By Thomas I. Palley
  68. Do competitive disadvantages really arise from „over complying“?: proposed Basel III Leverage and Supplementary Leverage Ratios re-visited By Ojo, Marianne
  69. Stimulus and Fiscal Consolidation: The Evidence and Implications By Dean Baker; David Rosnick
  70. The dynamics of the leverage cycle By Christoph Aymanns; J. Doyne Farmer
  71. Senegal: Seventh Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria-Staff Report; and Press Release By International Monetary Fund. African Dept.
  72. Оценка догоняющего развития на уровне стран и регионов: методический комментарий By Zaytsev, Alexander
  73. Republic of Madagascar: Request for Disbursement Under the Rapid Credit Facility; Staff Report; Press Release; and Statement by the Executive Director for the Republic of Madagascar By International Monetary Fund. African Dept.
  74. Reputation and Aggregate Shocks By Julien Prat; Boyan Jovanovic
  75. Long-Run Restrictions and Survey Forecasts of Output, Consumption and Investment By Michael P. Clements;
  76. The impact of bank capital on profitability and risk in GCC countries: Islamic vs. Conventional By Ibrahim Fatnassi; Habib Hasnaoui; Zied Ftiti
  77. Bosnia and Herzegovina: Sixth and Seventh Reviews Under the Stand-By Arrangement and Requests for Augmentation of Access and Modification of Performance Criteria-Staff Report; Press Release; and Statement by the Executive Director for Bosnia and Herzegovina By International Monetary Fund. European Dept.
  78. Nominal Rigidities and Asset Pricing By Michael Weber
  79. The Global Distribution of Income By Sudhir Anand; Paul Segal

    Abstract: We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. Output and inflation shocks shift to the low volatility regime around 1985 and 1990, respectively. However, we also identify multiple shifts between accommodating and active monetary policy regimes, which play an as important role as shock volatility in driving the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and quantify the relative role played by macro-shocks and monetary policy. The estimated rational expectations model exhibits indeterminacy in the mean-square stability sense, mainly because monetary policy is excessively passive.
    Keywords: Markov-Switching (MS) DSGE models, Survey Expectations, Great Moderation, Monetary Policy, Determinacy in MS DSGE models
    JEL: E31 E32 E52 E58 C42 C53
    Date: 2013–12
    Abstract: wage indexation to past in ation, a nding that is at odds with the assumption of constant indexation parameters in most New-Keynesian DSGE models. We build a DSGE model with endogenous wage indexation in which utility maximizing workers select a wage indexation rule in response to aggregate shocks and monetary policy. We show that workers index wages to past in ation when output uctuations are primarily explained by technology and permanent in ation-target shocks, whereas they index to trend in ation when aggregate demand shocks dominate output uctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data.
    Keywords: Wage indexation, Welfare costs, Nominal rigidities
    JEL: E24 E32 E58
    Date: 2014–05
  3. By: G. PEERSMAN; W. WAGNER (-)
    Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending, risk-taking, securitization, SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014–02
  4. By: Murray, James
    Abstract: I examine fiscal policy uncertainty in a context where market participants learn about the conduct of fiscal policy with regression rules for dependent variables including tax revenue, net transfers, government spending, and government debt. The explanatory variables include lagged fiscal policy, lagged government debt, and macroeconomic outcomes including real GDP, consumption, investment, and the unemployment rate. They re-run these regressions each quarter as a new observation becomes available, updating their understanding of the conduct of fiscal policy. I use the root mean squared errors as measures for fiscal policy uncertainty. I use autoregressive distributed lag (ARDL) models to estimate the effect fiscal uncertainty has on macroeconomic outcomes including real GDP, consumption, investment and unemployment. I find that the common component for fiscal policy uncertainty has adverse effects on real GDP, consumption, and investment. I find the buildup of fiscal policy uncertainty from 2005 through 2009 leads to a decline in real GDP growth by about 2 percentage points. I demonstrate that these finding are robust to lag specifications for the ARDL models and parameter specifications for the learning process.
    Keywords: Fiscal policy, uncertainty, adaptive expectations, learning, autoregressive distributed lag model
    JEL: E32 E62
    Date: 2014–07–18
  5. By: Song, Edward
    Abstract: I start with income and wealth inequality data from the Congressional Budget Office (CBO) and Thomas Piketty, and propose approaches taken from science (for example, behavioral evolution theory,) that might be useful in explaining the data and forecasting future economic events. Using a modified production function developed by Robert Solow, I also explore redistributive effects of income when biological restrictions lead to minimum expenditure requirements and satiation conditions. I conclude that redistributing income from the wealthy to the poor can have counter-cyclical effects in recessions. Moreover, redistribution in the form of human capital can have particularly large positive economic growth effects. Finally, I explain how financial crisis may lead to large economic downturns by proposing a model where productive capital formation is dependent on debt financing.
    Keywords: Macroeconomics, Behavioral Macroeconomics, Econophysics.
    JEL: E21 E22 E23 E27 E3 E32 Y90
    Date: 2014–07–16
  6. By: Cebula, Richard
    Abstract: This study provides current empirical evidence on the impact of net U.S. government borrowing (budget deficits) on the nominal interest rate yield on ten-year Treasury notes. The model includes an ex ante real short-term real interest rate yield, an ex ante real long-term interest rate yield, the monetary base as a percent of GDP, expected future inflation, the percentage growth rate of real GDP, net financial capital inflows, and other variables. This study uses annual data for the period 1972-2012. GLM (Generalized Linear Model) estimates imply, among other things, that the federal budget deficit, expressed as a percent of GDP, exercised a positive and statistically significant impact on the nominal interest rate yield on ten-year Treasury notes over the study period.
    Keywords: nominal interest rate yield; budget deficits; GLM estimates
    JEL: E43 E52 E62 H62
    Date: 2014–07–18
  7. By: Joost Röttger
    Abstract: How does the option to default on debt payments affect the conduct of public policy? To answer this question, this paper studies optimal monetary and fiscal policy without commitment in a model with nominal debt and endogenous sovereign default. When the government can default on its debt, public policy changes in the short and the long run relative to a setting without default option. The risk of default increases the volatility of interest rates, impeding the government's ability to smooth tax distortions across states. It also limits public debt accumulation and reduces the government's incentive to implement high inflation in the long run. The welfare costs associated with the short-run effects of sovereign default are found to be outweighed by the welfare gains due to lower average debt and inflation.
    Keywords: Monetary and Fiscal Policy, Lack of Commitment, Sovereign Default, Domestic Debt, Markov-Perfect Equilibrium
    JEL: E31 E63 H63
    Date: 2014–06–02
  8. By: Edda Claus; Iris Claus; Leo Krippner (Reserve Bank of New Zealand)
    Abstract: This paper quantifies the impact of monetary policy shocks on asset markets in the United States and gauges the usefulness of a shadow short rate as a measure of conventional and unconventional monetary policy shocks. Monetary policy surprises are found to have had a larger impact on asset markets since short term interest rates reached the zero lower bound. Our results indicate that much of the increased reaction is due to changes in the transmission of shocks and only partly due to larger monetary policy surprises.
    JEL: E43 E52 E65
    Date: 2014–07
  9. By: Michaelis, Henrike; Watzka, Sebastian
    Abstract: Using a time-varying parameter vector autoregression (TVP-VAR) with a new sign restriction framework, we study the changing effectiveness of the Bank of Japan's Quantitative Easing policies over time. We analyse the Zero-Interest Rate Policy from 1999 to 2000, the Quantitative Easing Policy from 2001 to 2006, and most recently the ‘Abenomics' monetary policy easing strategy. Our results indicate that there are important differences concerning the effects of Quantitative Easing over time. We find a stronger and longer lasting positive influence of QE shocks on real GDP and CPI especially since 2013. This might reflect the influence of the ‘Abenomics' program.
    Keywords: Bayesian time-varying parameter VAR; monetary policy; quantitative easing; zero lower bound
    JEL: C30 E44 E52 F41
    Date: 2014–06
  10. By: Arratibel, Olga; Michaelis, Henrike
    Abstract: This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time.
    Keywords: Bayesian time-varying parameter VAR; monetary policy transmission; exchange rate passthrough
    JEL: C30 E44 E52 F41
    Date: 2013–12
  11. By: Viv B. Hall; John McDermott (Reserve Bank of New Zealand)
    Abstract: We compute classical real GDP business cycles and growth cycles, contrast classical recessions with 'technical' recessions, and assess the sensitivity of our peaks and troughs to data revisions. Calling a technical recession after two successive quarters of negative growth can provide conditionally useful information. However, it can also signal beginning and end points for a recession that are somewhat different from those computed by our Bry and Boschan algorithm. Expansion and contraction phases of classical real GDP and employment cycles have, on average, had an 89% association, but individual cycle circumstances should additionally be assessed. New Zealand's average pattern of recovery has differed from that for U.S. NBER cycles, but their most recent recession and recovery paths have been unusually similar. We also assess whether strength of recovery can be explained by length, depth or severity of previous recessions. From our classical real GDP turning points, New Zealand's most recent recession commenced with the March 2008 quarter and ended with the June 2009 quarter. The duration of this six-quarter recession has been somewhat longer than the average recession of 4.3 quarters; but its 4.0 percentage depth has been considerably less than those for the 1951/52 and 1948 recessions, somewhat below that for the 1976/78 episode, and marginally less than the average depth of 4.1 per cent. In terms of overall severity, a measure which reflects duration and depth, this recession has been New Zealand’s fourth most severe. Its cumulated GDP loss of 11.5 per cent has been greater than the average loss of 10.4 per cent, but less severe than the losses for 1951/52 (37.2 per cent), 1948 (15.6 per cent) and 1976/78 (12.8 per cent). The recovery path from New Zealand’s most recent recession has differed from those of previous recoveries.
    JEL: E01 E24 E32
    Date: 2014–06
  12. By: Sanchit Arora; Claire Reicher
    Abstract: We study the evolution of the response of scal policy to monetary policy shocks in the EMU in the light of two important events: the signing of the Maastricht treaty in 1992 and the introduction of the EMU in 1999. Based on impulse responses from a panel VAR, we nd that scal and monetary policy acted neutrally toward each other before the Maastricht Treaty; scal and monetary policy acted as substitutes immediately after the Maastricht Treaty; and scal and monetary policy acted as complements after the introduction of the EMU. These results holds for a set of 11 non-EMU countries as well, which indicates that the evolution of the scal response to monetary shocks within the EMU has broadly mirrored global developments. One example of such a global development is the global shift toward lower interest rates and tighter scal policy during the 1990s
    Keywords: monetary policy, scal policy, panel VAR, Maastricht Treaty, EMU
    JEL: E52 E62 E65
    Date: 2014–06
  13. By: Moon, Weh-Sol
    Abstract: I construct a dynamic stochastic general equilibrium (DSGE) model characterized by flexible prices, search frictions, and nominal wage contracts, and examine to what extent the model can explain the quantitative business cycle properties of real macroeconomic variables in the U.S. economy. I consider efficient bargaining that the firm and the worker enter into bargaining over the future nominal hourly wage rate and future hours worked under the generalized Nash bargaining framework. The Nash product is assumed to consist of the discounted present value of the expected match surplus. Under efficient bargaining, the model hardly produces unrealistically high volatility of real variables or countercyclical productivity because hours per worker are fixed ahead of time and employment is a slow-moving variable with search frictions. Moreover, efficient bargaining requires firms to rely on job creation heavily to adjust the wedge between the marginal product of labor and the real wage rate in response to shocks. As contract length increases, the volatilities of the unemployment rate and vacancy rate increase significantly, but those of output and total hours worked do not appreciably change. I also investigate the model under different assumptions such as the right-to-manage approach, the Nash product with the current value of match surplus, and instantaneous hiring. Efficient and forward-looking bargaining are important in accounting for the U.S. business cycle properties.
    Keywords: Business Cycles, Search Frictions, Nominal Wage Contracts, Efficient Bargaining
    JEL: E24 E32
    Date: 2011–06–10
  14. By: Chien, YiLi (Federal Reserve Bank of St. Louis)
    Abstract: This paper investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies. In an economy with aggregate risk, the different portfolio choices induced by heterogeneous trading technologies lead to a larger consumption inequality in equilibrium, while this source of inequality vanishes in an economy without business cycles. Put simply, the heterogeneity in trading technologies amplifies the effect of aggregate output fluctuation on consumption inequality. The welfare cost of business cycles is, therefore, larger in such an economy. In the benchmark economy with a reasonable low risk aversion rate, the business cycle costs 6.49% per period consumption for an average household when I calibrate this model to match the risk premium.
    Keywords: Asset Pricing; Cost of Business Cycles; Heterogeneous Agents
    JEL: E32 G11 G12
    Date: 2014–06–10
  15. By: David Backus; Axelle Ferriere; Stanley Zin
    Abstract: We inject aggregate uncertainty – risk and ambiguity – into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions.
    JEL: D81 E32 G12
    Date: 2014–07
  16. By: Falko Juessen; Ludger Linnemann; Andreas Schabert
    Abstract: We develop a macroeconomic model where the government does not guarantee to repay debt. We ask whether movements in the price of government bonds can be rationalized by lenders' unwillingness to fully roll over debt when the outstanding level of debt exceeds the government's repayment capacity. Investors do not support a Ponzi game and ration credit supply in this case, thus forcing default at an endogenously determined fractional repayment rate. Interest rates on government bonds re.ect expectations of this event. Numerical results show that default premia can emerge at moderately high debt-to-GDP ratios where even small changes in fundamentals lead to steeply rising interest rates. The behavior of risk premia broadly accords to recent observations for several European countries that experienced a worsening of fundamental fiscal conditions.
    Keywords: Sovereign default, fiscal policy, government debt
    JEL: E62 G12 H6
    Date: 2014–06–01
  17. By: Lopes da Veiga, José; Ferreira-Lopes, Alexandra; Sequeira, Tiago
    Abstract: We analyse the implications of public debt on economic growth and inflation in a group of 52 African economies between 1950 and 2012. The results indicate that the limits of public debt affect economic growth and exhibit negatively, from a given level of debt, an inverted U behaviour regarding the relationship between economic growth and public debt. The highest average rates of real and per capita growth are achieved when public debt reaches 60% of the real GDP and an average inflation rate of 8.2%. When this ratio falls between 60-90%, the average rate of economic growth drops by up to 1.32 p.p. and continues dropping by up to 1.64 p.p. when the ratio exceeds 90%. Briefly, the high levels of public debt are reflected in reduced rates of economic growth and rising levels of inflation. Our results for three specific geographical areas resemble those of the overall analysis, despite some differences. In North African countries, the growth rates of the GDP and inflation also show an inverted U behaviour as the ratio of public debt/GDP increases. The highest rate of economic growth is recorded when the ratio public debt/GDP is below 30% of GDP and corresponds to an average inflation rate of 5.33%. Identical behaviour of the GDP growth rates and inflation also appears in Sub-Saharan countries until the third interval (60-90%). However, the highest growth rate of the GDP and GDP per capita is registered when the public debt/GDP ratio is in the second interval (30-60%). For SADC countries, the highest average rate of economic growth (6.8%) is similar to North African countries, when the ratio public debt/GDP is below 30% of GDP, with an average inflation rate of 11%. The high level of public debt is reflected in reduced rates of economic Growth and increasing inflation rates.
    Keywords: Public Debt; Economic Growth; Inflation; African Countries
    JEL: E31 E62 H63 O40
    Date: 2014–07–17
  18. By: Olivo, Victor
    Abstract: This paper explores the relationship between the level of inflation, inflation variability, and output performance in the Venezuelan economy for the period 1951-2002. The paper examines the mechanism through which higher inflation translates into lower non-oil real GDP growth. We find empirical evidence that supports Friedman's (1977) contention that higher inflation produces more inflation volatility /uncertainty that leads to relative price variability that in turn, is harmful for the proper functioning of the market as the best system for allocating resources.
    Keywords: Inflation, inflation variability,inflation uncertainty, output growth, trend inflation, trend money growth, relative prices
    JEL: E59
    Date: 2014–04–09
  19. By: Taisuke Nakata (Federal Reserve Board)
    Abstract: This paper studies credible policies in a New Keynesian economy in which the nominal interest rate is subject to the ZLB constraint and contractionary shocks hit the economy occasionally. The Ramsey policy involves keeping the policy rate low even after the shock disappears, but the central bank would be tempted to raise the rate to close consumption and inflation gaps if it could re-optimize. I find that the Ramsey policy is credible if the contractionary shock occurs sufficiently frequently. In the best credible plan, if the central bank reneges on the promise of low policy rates, it will lose reputation and the private sector will not believe such promises in future recessions. When the shock hits the economy sufficiently frequently, the incentive to maintain reputation outweighs the short-run incentive to close consumption and inflation gaps, and keeps the central bank on the originally announced path of low nominal interest rates.
    Date: 2014
  20. By: Michael P. Clements (ICMA Centre, Henley Business School, University of Reading); Ana Beatriz Galvão (University of Warwick)
    Abstract: We find that model estimates of the term structure of ex ante or perceived macro uncertainty are more in line with realized uncertainty than survey respondents’ perceptions for both inflation and output growth. Survey estimates contain short-term vari- ation in short-horizon uncertainty which is less evident in the model-based estimates. We consider the extent to which these short-term variations coincide with short-term movements in stock market uncertainty.
    Keywords: Ex ante and ex post uncertainty, Macro and stock market uncertainty, MIDAS models
    JEL: C53
    Date: 2014–06
  21. By: Claire Reicher
    Abstract: The construction bust which accompanied the Great Recession, and the accompanying need to shift workers across sectors, have provoked a discussion about mismatch and the Beveridge Curve, alongside a discussion about firm-level dispersion. These discussions echo an ongoing discussion about the effects of long run sectoral reallocation. Based on estimates from a large state space model over a long sample for the United States, long run sectoral reallocation does not appear to be systematically related to movements in the Beveridge Curve, although reallocation does appear to be countercyclical and related to falls in the trend employment-population ratio. The recent shift in the Beveridge Curve during the Great Recession is unusual in this respect. An analysis of historical patterns reveals a handful of additional reallocative episodes, with large episodes occurring during the mid-1970s and early 2000s recessions, in addition to during the Great Recession. In addition, these episodes appear to be related to other dispersion shocks which have been increasingly discussed in the literature
    Keywords: sectoral shifts, reallocation, Beveridge Curve, employment, unemployment, vacancies, dispersion
    JEL: C32 E24 E32
    Date: 2014–05
  22. By: Kadria, Mohamed; Ben Aissa, Mohamed Safouane
    Abstract: Several studies including Minea,Tapsoba and Villieu(2012) and Lucotte (2012) claim that in emerging countries, the adoption of inflation targeting(IT) monetary policy and its discipline character allow intensifying their efforts to collect tax revenue and/or expenditure rationalization, and allows the reduction of their budget deficits (Kadria and Ben Aissa, 2014). But, the lag in the effect of monetary policy contains vital information for the policy evaluation (Fang and Miller, 2011). Hence, our contribution to the previous literature is then to evaluate the time varying treatment effect of the IT's adoption by emerging countries on their budgetary discipline in terms of reducing or mastering the public deficit. To do this, we used the propensity score matching approach in order to take account of this "lag effect" or from this effect throughout time. Our empirical analysis, conducted on a sample of 41 economies (20 IT and 21 non-IT economies) for the period from 1990 to 2010, shows that the lag in effect of IT on public deficit performance proves to be shorter and gradual for emerging countries that have adopted this monetary policy framework and our conclusions corroborate the literature disciplining effect of IT on fiscal policy.
    Keywords: Time lag, inflation targeting, public deficit, time varying treatment effect evaluation, propensity score matching, emerging countries.
    JEL: C5 E5 E6 H6
    Date: 2014–05
  23. By: Ehrmann, Michael; Ziegelmeyer, Michael (Munich Center for the Economics of Aging (MEA))
    Abstract: Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as one of household risk management: income volatlity reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
    JEL: D12 E43 E52 G21
    Date: 2014–04–14
  24. By: Jaqueson K. Galimberti (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Marcelo L. Moura (Insper, Sao Paolo, Brazil)
    Abstract: Measuring economic activity in real-time is a crucial issue in applied research and in the decision-making process of policy makers; however, it also poses intricate challenges to statistical filtering methods that are built to operate optimally under the auspices of an infinite number of observations. In this paper, we propose and evaluate the use of survey forecasts to augment one of those methods, namely the largely used Hodrick-Prescott filter so as to attenuate the end-of-sample uncertainty observed in the resulting gap estimates. We find that this approach achieves powerful improvements to the real-time reliability of these economic activity measures, and we argue that the use of surveys is preferable relative to model-based forecasts due to both an usually superior accuracy in predicting current and future states of the economy and its parsimony.
    Keywords: business cycle measurement, end-of-sample uncertainty, gap and trend
    JEL: E32 E37
    Date: 2014–07
  25. By: Rangan Gupta (Department of Economics, University of Pretoria); Lardo Stander (Department of Economics, University of Pretoria)
    Abstract: This paper develops a monetary endogenous growth overlapping generations model characterized by production lags - specifically lagged capital inputs - and an infl ation targeting monetary authority, and analyses the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government expenditure on infrastructure, complementing the lagged private capital input. Following the extant literature, money is introduced by imposing a cash reserve requirement on an otherwise competitive banking sector. Given this framework, we show that multiple equilibria emerge along different growth paths, with the low-growth (high-growth) equilibrium being unstable (stable) and locally determinate (locally indeterminate). In addition, we show that convergent or divergent endogenous fl uctuations and even topological chaos could emerge around the high-growth equilibrium in the growth path where the monetary authority follows a high infl ation targeting regime. Conversely, when the monetary authority follows a low infl ation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium.
    Keywords: Endogenous fl uctuations, in flation targeting, chaos, production lags, indeterminacy
    JEL: C62 E32 O42
    Date: 2014–06
  26. By: Urban Jermann (University of Pennsylvania); Lukas Schmid (UCLA); Joao Gomes (University of Pennsylvania)
    Abstract: We examine the effects of long-lived nominal debt contracts in a quantitative business cycle model with financial frictions. In our setting, as in reality, firms fund themselves with a mix of nominal defaultable debt and equity securities to issue in every period. Debt is priced fairly taking into account default and inflation risk, but is attractive because of the tax-deductibility of interest payments. Unanticipated inflation changes the real burden of corporate debt and, more significantly, distorts corporate investment and production decisions. These effects are large and very persistent. Interest rates rules stabilize the economy, supporting their popularity with policy makers.
    Date: 2014
  27. By: Stelios D. Bekiros; Alessia Paccagnini
    Abstract: Micro-founded dynamic stochastic general equilibrium (DSGE) models appear to be particularly suited for evaluating the consequences of alternative macroeconomic policies. Recently, increasing efforts have been undertaken by policymakers to use these models for forecasting, although this proved to be problem- atic due to estimation and identification issues. Hybrid DSGE models have become popular for dealing with some of model misspecifications and the trade-off between theoretical coherence and empirical fit, thus allowing them to compete in terms of predictability with VAR models. However, DSGE and VAR models are still linear and they do not consider time-variation in parameters that could account for inher- ent nonlinearities and capture the adaptive underlying structure of the economy in a robust manner. This study conducts a comparative evaluation of the out-of-sample predictive performance of many different specifications of DSGE models and various classes of VAR models, using datasets for the real GDP, the harmonized CPI and the nominal short-term interest rate series in the Euro area. Simple and hybrid DSGE models were implemented including DSGE-VAR and Factor Augmented DGSE, and tested against standard, Bayesian and Factor Augmented VARs. Moreover, a new state-space time-varying VAR model is presented. The total period spanned from 1970:1 to 2010:4 with an out-of-sample testing period of 2006:1-2010:4, which covers the global financial crisis and the EU debt crisis. The results of this study can be useful in conducting monetary policy analysis and macro-forecasting in the Euro area.
    Keywords: Model validation, Forecasting, Factor Augmented DSGE, Time-varying parameter VAR, DGSE-VAR, Bayesian analysis
    JEL: C11 C15 C32
    Date: 2014–07–15
  28. By: Tsutomu Watanabe (Hitotsubashi University); David Weinstein (Columbia University); Jessie Handbury (University of Pennsylvania)
    Abstract: Official price indexes, such as the CPI, are imperfect indicators of inflation calculated using ad hoc price formulae different from the theoretically well-founded inflation indexes favored by economists. This paper provides the first estimate of how accurately the CPI informs us about “true†inflation. We use the largest price and quantity dataset ever employed in economics to build a Törnqvist inflation index for Japan between 1989 and 2010. Our comparison of this true inflation index with the CPI indicates that the CPI bias is not constant but depends on the level of inflation. We show the informativeness of the CPI rises with inflation. When measured inflation is low (less than 2.4% per year) the CPI is a poor predictor of true inflation even over 12-month periods. Outside this range, the CPI is a much better measure of inflation. We find that the U.S. PCE Deflator methodology is superior to the Japanese CPI methodology but still exhibits substantial measurement error and biases rendering it a problematic predictor of inflation in low inflation regimes as well.
    Date: 2014
  29. By: Davide Delle Monache (Queen Mary University of London); Ivan Petrella (Birkbeck, University of London and CEPR)
    Abstract: This paper proposes a novel and flexible framework to estimate autoregressive models with time-varying parameters. Our setup nests various adaptive algorithms that are commonly used in the macroeconometric literature, such as learning-expectations and forgetting-factor algorithms. These are generalized along several directions: specifically, we allow for both Student-t distributed innovations as well as time-varying volatility. Meaningful restrictions are imposed to the model parameters, so as to attain local stationarity and bounded mean values. The model is applied to the analysis of inflation dynamics. Allowing for heavy-tails leads to a significant improvement in terms of fit and forecast. Moreover, it proves to be crucial in order to obtain well-calibrated density forecasts.
    Keywords: Time-varying parameters, Score-driven models, Heavy-tails, Adaptive algorithms, Inflation
    JEL: C22 C51 C53 E31
    Date: 2014–07
  30. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Cole, Harold L. (University of Pennsylvania.); Lustig, Hanno (UCLA Anderson School of Management,)
    Abstract: This paper analyzes and computes the equilibria of economies with large numbers of heterogeneous agents who have different asset trading technologies, preferences, and beliefs. We illustrate the value of our method by using it to evaluate the implications of these heterogeneities through several quantitative exercises.
    Keywords: asset pricing; equilibrium survival; heterogeneous beliefs; heterogeneous preferences.
    JEL: D51 D84 E21 G1
    Date: 2014–07–14
  31. By: Rogoff, Kenneth S.
    Abstract: Despite advances in transactions technologies, paper currency still constitutes a notable percentage of the money supply in most countries. For example, it constitutes roughly 10% of the US Federal Reserve’s main monetary aggregate, M2. Yet, it has important drawbacks. First, it can help facilitate activity in the underground (tax-evading) and illegal economy. Second, its existence creates the artifact of the zero bound on the nominal interest rate. On the other hand, the enduring popularity of paper currency generates many benefits, including substantial seigniorage revenue. This paper explores some of the issues associated with phasing out paper currency, especially large-denomination notes.
    Date: 2014
  32. By: Cécile Bastidon (LEAD - Laboratoire d'Économie Appliquée au Développement - Université de Toulon : EA3163)
    Abstract: This paper develops a theoretical model of financial intermediation with three original features: first, consideration of all sectors within total outstanding credits, including households; second, the possibility of a non monotic relationship between prices and funding supply volumes in periods of high financial strains; last, the link between interbank credit rationing and other sectors funding rationing. The central bank conducts an unconventional type monetary policy. We show that the intermediation chain characteristics then determine the conditions of transmission of a shock on financing costs and the modalities for the resulting monetary policy.
    Keywords: Financial intermediation model, households credits, Central Banks
    Date: 2014–06–04
  33. By: Hrishikesh Vinod; Lekha S. Chakraborty; Honey Karun
    Abstract: This paper challenges two cliches that have dominated the macroeconometric debates in India. One relates to the neoclassical view that deficits are detrimental to growth, as they increase the rate of interest, and in turn displace the interest-rate-sensitive components of private investment. The second relates to the assumption of "stationarity"--which has dominated the statistical inference in time-series econometrics for a long time--as well as the emphasis on unit root–type testing, which involves detrending, or differencing, of the series to achieve stationarity in time-series econometric models. The paper examines the determinants of rates of interest in India for the periods 1980-81 and 2011-12, using the maximum entropy bootstrap (Meboot) methodology proposed in Vinod 1985 and 2004 (and developed extensively in Vinod 2006, Vinod and Lopez-de-Lacalle 2009, and Vinod 2010 and 2013). The practical appeal of Meboot is that it does not necessitate all pretests, such as structural change and unit root–type testing, which involve detrending the series to achieve stationarity, which in turn is problematic for evolutionary short time series. It also solves problems related to situations where stationarity assumptions are difficult to verify--for instance, in mixtures of I(0) and nonstationary I(d) series, where the order of integration can be different for different series. What makes Meboot compelling for Indian data on interest rates? Prior to interest rate deregulation in 1992, studies to analyze the determinants of interest rates were rare in India. Analytical and econometric limitations to dealing with the nonvarying administered rates for a meaningful time-series analysis have been the oft-cited reason. Using high-frequency data, the existing attempts have focused on the recent financially deregulated interest rate regime to establish possible links between interest rates and macroeconomic variables (Chakraborty 2002 and 2012, Dua and Pandit 2002, and Goyal 2004). The results from the Meboot analysis revealed that, contrary to popular belief, the fiscal deficit is not significant for interest rate determination in India. This is in alignment with the existing empirical findings, where it was established that the interest rate is affected by changes in the reserve currency, expected inflation, and volatility in capital flows, but not by the fiscal deficit. This result has significant policy implications for interest rate determination in India, especially since the central bank has cited the high fiscal deficit as one of the prime constraints for flexibility in fixing the rates.
    Keywords: Bootstrapping; Fiscal Deficit; Interest Rates; Maximum Entropy; Term Structure
    JEL: E63 H62
    Date: 2014–07
  34. By: G. PEERSMAN (-)
    Abstract: Monetary authorities throughout the world have been responding to the global financial crisis by cutting interest rates to historically low levels and by embarking on a series of unconventional monetary policies, including operations that change the size and composition of their balance sheets and actions that try to guide longer-term interest rate expectations. In this white paper, I review the most important unconventional monetary policies adopted by the Federal Reserve and the European Central Bank, how the transmission mechanism of such policies to the real economy differs from that of conventional interest rate changes, and the relevant macroeconomic consequences. I highlight the uncertain long-term effects of unconventional policies and concerns about potential undesired consequences of these policies.
    Date: 2014–02
  35. By: Ronald McKINNON (Université de Stanford)
    Abstract: Because the U.S. Federal Reserve’s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets (EM) with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States (and to other industrial countries) as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, African countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and—being less industrialized—they are more vulnerable to fluctuations in prices of their commodity exports. Supply-side shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity.  But joint fluctuations in the prices of all primary products— minerals, energy, cereals, and so on—reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.
    Date: 2014–07
  36. By: Frank Schorfheide; Dongho Song; Amir Yaron
    Abstract: We develop a nonlinear state-space model that captures the joint dynamics of consumption, dividend growth, and asset returns. Our model consists of an economy containing a common predictable component for consumption and dividend growth and multiple stochastic volatility processes. The estimation is based on annual consumption data from 1929 to 1959, monthly consumption data after 1959, and monthly asset return data throughout. We maximize the span of the sample to recover the predictable component and use high-frequency data, whenever available, to efficiently identify the volatility processes. Our Bayesian estimation provides strong evidence for a small predictable component in consumption growth (even if asset return data are omitted from the estimation). Three independent volatility processes capture different frequency dynamics; our measurement error specification implies that consumption is measured much more precisely at an annual than monthly frequency; and the estimated model is able to capture key asset-pricing facts of the data.
    JEL: C11 C32 C58 E44 G12
    Date: 2014–07
  37. By: Guner, Nezih (MOVE, Barcelona); Kaygusuz, Remzi (Sabanci University); Ventura, Gustavo (Arizona State University)
    Abstract: What would be the aggregate effects of adopting a more generous and universal childcare subsidy program in the U.S.? We answer this question in a life-cycle equilibrium model with joint labor-supply decisions of married households along extensive and intensive margins, heterogeneity in terms of the presence of children across households and skill losses of females associated to non-participation. We find that subsidies have substantial effects on female labor supply, which are largest at the bottom of the skill distribution. Fully subsidized childcare available to all households leads to long-run increases in the participation of married females and total hours worked by about 10.1% and 1.0%, respectively. There are large differences across households in welfare gains, as a small number of households – poorer households with children – gain significantly while others lose. Welfare gains of newborn households amount to 1.9%. Our findings are robust to differences among households in fertility and childcare expenditures.
    Keywords: childcare, household labor supply
    JEL: E62 H24 H31
    Date: 2014–07
  38. By: Medel, Carlos A.
    Abstract: This paper provides, via Monte Carlo simulations, estimates of the classical probability of overfitting under an autoregressive environment (AR), using the information criteria (IC) of Akaike, Schwarz and Hannan-Quinn (AIC, BIC and HQ), calibrated with Chilean data of total inflation, core inflation, Imacec, and monthly return of the nominal exchange rate Chilean peso-American dollar. This probability corresponds to the number of times when a candidate model has a strictly greater number of coefficients than the true model, divided by the total number of searches. The results indicate that the increased risk of overfitting is obtained with the AIC, followed by HQ and finally the BIC. The highest probability of overfitting is achieved with the AIC, reaching 32 and 30% with the exchange rate and Imacec, respectively, followed by 25 and 22% for total and core inflation. Considering the three IC, it is more likely to obtain an overfitted model by just one coefficient. Also, it is more likely that the overfitting does not exceed 10 coefficients. These results are important as quantifying the extent to which these variables are subject to overfitting risk when represented by AR models. The potential problems carried by overfitting includes: (i) the spurious regression, (ii) distort the estimation of impulse response function, and (iii) affect the predictive accuracy of the variable of interest. The latter problem is analyzed in detail.
    Keywords: Nonparametric modelling; information criteria; overfitting; out-of-sample analysis
    JEL: C22 C51 E23 E31 E37
    Date: 2014–07–18
  39. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: Economists have long decried the efforts of large, advanced economies to manipulate their currencies to boost net exports at their trading partners' expense. But the International Monetary Fund appears to have ignored the beggar-thy-neighbor exchange rate policies of countries with developed, highly open economies. This Policy Brief examines Switzerland, Singapore, and Hong Kong, which have actively kept the value of their currencies low since the 2008–09 global recession. In each case, greater fiscal and especially domestic monetary ease would have achieved similar macroeconomic outcomes with less currency intervention and declining current account surpluses. If such countries had adopted these strategies to increase domestic demand, the global economy would have rebounded faster.
    Date: 2014–05
  40. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Economic context. Economic growth has been solid, supported by tourism, hospitality, and a rebounding real estate sector. Rapid price increases in some segments of the real estate market have prompted concerns about possible excessive risk-taking. The pace of fiscal consolidation slowed in 2013. The economic recovery, combined with higher real estate prices and a liquid banking system, has further supported the rollover of the still- large debt maturities of government-related entities (GREs). Policy Focus. Economic and financial policies should continue to aim at mitigating the risk of a renewed cycle of exuberance, and at strengthening the fiscal position. Efforts in deleveraging and restructuring GREs should continue. Macroeconomic policy mix. Fiscal plans for this year and the medium term imply appropriate countercyclical fiscal policy amid economic strengthening. Monetary policy in coming years is expected to tighten under the U.S. dollar peg, helping the United Arab Emirates (UAE) mitigate the risk of potentially large private credit growth, and could be supported by macroprudential tightening should deposit and credit growth accelerate further. Real estate. Further measures, such as setting higher fees for reselling properties within a short time, and restrictions on reselling off-plan properties, are warranted, particularly if rapid price increases continue. These measures could be supported by targeted macroprudential tightening in case real estate lending picks up further. GREs. Strengthening the coordinating mechanisms for prioritizing and sequencing major projects will be important, as is continuing to avoid new large-scale risk-taking by highly indebted GREs. Building on recent progress, upcoming debt maturities should be managed proactively; this should include timely communication and improving GREs’ transparency and governance. Financial stability. The banking system maintains significant capital and liquidity buffers. Banking system soundness should be further strengthened by gradually reducing the exposure to emirate governments and GREs of those banks exceeding recently imposed loan concentration limits, by strengthening corporate governance in banks, and by continuing to enhance the financial integrity framework.
    Date: 2014–07–03
  41. By: Phiri, Andrew
    Abstract: This study undertakes an examination of asymmetric co-integration adjustment in Okun’s law for South Africa between the periods of 2000-2013. This objective is tackled through the use of momentum threshold autoregressive (MTAR) econometric framework. Contrary to conventional theory, the results show that unemployment granger causes economic growth in the long-run, a result which may account for the job-less growth experienced by South Africa over the last decade or so. The obtained results have important implications for policy conduct in South Africa. Firstly, they prove that increases of economic growth in the long run may not cause a decrease in the unemployment rate yet a decrease in the unemployment rate will lead to increases in output growth. Secondly, these results further highlight the importance of labour market policies in improving economic growth in South Africa as opposed to policy authorities depending on higher economic growth to be driving force behind reducing unemployment rates.
    Keywords: Okun’s law; South Africa; Nonlinear Unit Root Tests; Nonlinear Cointegration, Nonlinear granger tests
    JEL: C22 C51 E23 E24
    Date: 2014–07–18
  42. By: Seunghoon Na; Stephanie Schmitt-Grohé; Martin Uribe; Vivian Z. Yue
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy. The theoretical environment is a small open economy with downward nominal wage rigidity as in Schmitt-Grohé and Uribe (2013) and limited enforcement of international debt contracts as in Eaton and Gersovitz (1981). It is shown that under optimal policy default is accompanied by large devaluations. At the same time, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed- exchange-rate economies are found to be able to support less external debt than economies with optimally floating rates. In addition, the following three analytical results are presented: (1) Real economies with limited enforcement of international debt contracts in the tradition of Eaton and Gersovitz (1981) can be decentralized using capital controls. (2) Real economies in the tradition of Eaton and Gersovitz can be interpreted as the centralized version of models with downward nominal wage rigidity, optimal capital controls, and a full-employment exchange-rate policy. And (3) Full-employment is optimal in an economy with downward nominal wage rigidity, limited enforcement of debt contracts, and optimal capital controls.
    JEL: E52 F31 F34 F41
    Date: 2014–07
  43. By: Henning Klodt ,; Anna Hartmann
    Abstract: Deflation is said to dampen aggregate demand because consumers would defer purchases while waiting for prices to fall further in the future. We explore the validity of this reasoning at the level of individual goods. Our findings suggest that the widespread concerns about impaired aggregate consumption by deflation might lack a sound microeconomic foundation
    Keywords: Deflation, postponed consumption, consumer price statistics
    JEL: E31 D12
    Date: 2014–07
  44. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Context: Moldova largely achieved the main objectives of the combined ECF/EFF supported program that expired on April 30, 2013. The economy has strongly recovered from the drought-related contraction in 2012 but will slow down in 2014. Key risks to the near-term outlook relate to financial stability, fiscal policy slippages in the run up to the 2014 parliamentary elections, a further slowdown in activity in main trading partners, and intensification of geopolitical tensions. Financial sector policies: Corporate governance in the banking sector is a major concern. In line with FSAP recommendations, significant weaknesses in the legal and regulatory frameworks must be urgently addressed to ensure stability and soundness of the financial sector. Fiscal policy: Moldova has achieved a substantial degree of fiscal consolidation in recent years, but this trend is now reversing. Resisting pre-election pressures for selective spending increases and returning to the path of fiscal consolidation would reduce reliance on exceptionally-high donor support. Structural fiscal reforms would help safeguard sustainability. Monetary and exchange rate policy: Monetary policy has been successful in maintaining inflation within the NBM’s target range. Going forward, the NBM needs to remain ready to adopt a tightening bias if inflationary pressures start emerging. There is room to strengthen the inflation targeting regime. Structural reforms: The implementation of structural reforms outlined in the National Development Strategy (NDS) Moldova 2020—especially in the business environment, physical infrastructure, and human resources development areas—would help boost potential growth and reduce poverty.
  45. By: Barry Eichengreen; Ugo Panizza
    Abstract: IMF forecasts and the EU’s Fiscal Compact foresee Europe’s heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact’s 60 percent target. We show that primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just 3 (nonoverlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years. Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for 5 years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that a country like Italy will be able to run a primary budget surplus as large and persistent as officially projected.
    JEL: E0 E6 F0 F34
    Date: 2014–07
  46. By: Emanuele Campiglio
    Abstract: It is widely acknowledged that introducing a price on carbon represents a crucial precondition for filling the current gap in low-carbon investment. However, as this paper argues, carbon pricing in itself may not be sufficient. This is due to the existence of market failures in the process of creation and allocation of credit that may lead commercial banks – the most important source of external finance for firms willing to invest – not to respond as expected to price signals. Under certain economic conditions, banks would shy away from lending to low-carbon activities even in presence of a carbon price. This possibility calls for the implementation of additional policies not based on prices. In particular, the paper discusses the potential role of monetary policies and macroprudential financial regulation: modifying the incentives and constraints that banks face when deciding their lending strategy – through, for instance, a differentiation of reserve requirements according to the destination of lending – may fruitfully expand credit creation directed towards low-carbon sectors. This seems to be especially feasible in emerging economies, where the central banking framework usually allows for a stronger public control on credit allocation and a wider range of monetary policy instruments than the sole interest rate.
    Date: 2014–05
  47. By: Zaman, Gheorghe; Georgescu, George
    Abstract: The financial execution of EU allocations for the programming period 2007-2013 has shown a SCF absorption rate of only 27% in the case of Romania. The study reveals that, compared to selected EU Member States, most of them CEE countries, this represents the lowest level of absorption rate. The analysis of this last one position has highlighted causes related to the system of European funds management and accessing, common or specific to different stages and levels, but also a series of outer factors, mainly the legislative barriers and the global crisis persistent effects. Because of the lack of satisfactory assessments of the real SCF impact by using econometric models and simulations, the study suggests addressing this issue by studying the relationship between SCF and relevant macroeconomic indicators. Even Romania stands for a net beneficiary position relative to the EU budget, the macroeconomic impact of SCF has not been significant. The amount of 5.1 billion EUR reimbursed to Romania, cumulated during the period 2007-2013 represented only 2% of the GFCF and 0.6% of the GDP. It was found that the main macroeconomic indicators in terms of employment, foreign investments, external debt and public debt have deteriorated over the period, the absorption of SCF having not the strength to counterbalance these negative trends, due mainly to the persistence of the crisis effects. As concerns the exercise 2014-2020, the lessons learned from the previous programming period, along with addressing Romania’s economic vulnerabilities and under favorable circumstances of the international context, a significant improvement of SCF absorption rate is expected, increasing also their macroeconomic impact.
    Keywords: Cohesion Policy; EU allocations vs. EU reimbursements; pay rate; absorption rate; EU funds macroeconomic impact
    JEL: E22 F15 F36 F43 O19
    Date: 2014–05–28
  48. By: Guerrieri, Luca (Board of Governors of the Federal Reserve System (U.S.)); Iacoviello, Matteo (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We describe how to adapt a first-order perturbation approach and apply it in a piecewise fashion to handle occasionally binding constraints in dynamic models. Our examples include a real business cycle model with a constraint on the level of investment and a New Keynesian model subject to the zero lower bound on nominal interest rates. We compare the piecewise linear perturbation solution with a high-quality numerical solution that can be taken to be virtually exact. The piecewise linear perturbation method can adequately capture key properties of the models we consider. A key advantage of this method is its applicability to models with a large number of state variables.
    Keywords: Occasionally binding constraints; DSGE models; regime shifts; first-order perturbation
    Date: 2014–07–07
  49. By: Mazumder, Rabin (Army Institute of Management, Kolkata); Chakravarty, Chandrasekhar (Asia e University); Bhandari, Amit Kumar (Kalyani Institute of Applied Research, Training and Development)
    Abstract: Agricultural credit is one of the most crucial inputs in all agricultural development programmes. Access of rural credit has still remained scarce in India. Primary Agriculture Credit Societies (PACS) working at grass-root level, having direct contact with the rural people and meet their financial requirements. The problem of loan overdue is a serious concern in different regions of the country, as it affects the recycling of funds and loses its economic viability as a lending institution. The present study examines the recovery performance of rural credit given by PACS in six different regions of India namely Central, Northern, Southern, Eastern, North-East and Western. The result suggests that the performance of credit recovery has been low in north-eastern states and high in northern and southern states. Recovery performance of credit is directly proportional to non-agricultural loan to agricultural loan, trained-untrained staff ratio and average member per society and inversely related with proportion of government capital to working capital and real growth rates at constant price. To make all PACS viable and ensure adequate and timely flow of credit, appropriate policies are required from the Reserve Bank of India in collaboration with State Governments.
    Keywords: cooperative, credit, loan overdue, recovery, policy
    JEL: E61 F34 G21 Q13
    Date: 2014–06
  50. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. The 4-year EFF-supported program that expired in December 2013 attained its key goals of reducing public debt, building reserves and implementing structural reforms to raise growth potential, strengthen public finances, and enhance oversight of state-owned enterprises. Nevertheless, substantial policy challenges remain, including the need to further reduce the still-high debt level, ensure external sustainability in the face of balance of payments pressures, and entrench structural reforms to maintain growth and bolster economic resilience. To help address this remaining agenda, the authorities have requested a successor EFF arrangement. Main elements of the program. The program aims to bolster the foundations for sustained, inclusive growth, while addressing vulnerabilities: • Fiscal policy will be anchored by the authorities’ target of reducing public debt below 50 percent of GDP by 2018. • The monetary and exchange rate policy framework will be anchored by an average reserve money ceiling with a flexible exchange rate, permitting a gradual reserve accumulation to roughly maintain current coverage levels in the face of balance of payments pressures. The Central Bank of Seychelles will also move toward a more forward looking monetary policy regime. • The authorities are committed to an ambitious structural reform agenda aimed at: fostering sustained and inclusive growth; enhancing the quality and management of public finances; and strengthening the performance and oversight of state-owned enterprises. • Under the arrangement, Seychelles would be able to access up to SDR 11.445 million (about US$17.8 million, 105 percent of quota), subject to semi-annual reviews. On this basis staff supports the authorities’ request for an extended arrangement under the Extended Fund Facility. Risks. Risks to the program are considered moderate; they include exogenous shocks to the small and vulnerable economy, as well as a possible reversal of the pro-reform sentiment.
    Date: 2014–07–03
  51. By: Heiner Mikosch (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Ying Zhang (Partners Group AG, Baar, Switzerland)
    Abstract: Building on a mixed data sampling (MIDAS) model we evaluate the predictive power of a variety of monthly macroeconomic indicators for forecasting quarterly Chinese GDP growth. We iterate the evaluation over forecast horizons from 370 days to 1 day prior to GDP release and track the release days of the indicators so as to only use information which is actually available at the respective day of forecast. This procedure allows us to detect how useful a specific indicator is at a specific forecast horizon relative to other indicators. Despite being published with an (additional) lag of one month the OECD leading indicator outperforms the leading indicators published by the Conference Board and by Goldman Sachs. Albeit being smaller in terms of market volume, the Shenzhen Composite Stock Exchange Index outperforms the Shanghai Composite Stock Exchange Index and several Hong Kong Stock Exchange indices. Consumer price in flation is especially valuable at forecast horizons of 11 to 7 months. The reserve requirement ratio for small banks proves to be a robust predictor at forecast horizons of 9 to 5 months, whereas the big banks reserve requirement ratio and the prime lending rate have lost their leading properties since 2009. Industrial production can be quite valuable for now- or even forecasting, but only if it is released shortly after the end of a month. Neither monthly retail sales, investment, trade, electricity usage, freight traffic nor the manufacturing purchasing managers' index of the Chinese National Bureau of Statistics help much for now- or forecasting. Our results might be relevant for experts who need to know which indicator releases are really valuable for predicting quarterly Chinese GDP growth, and which indicator releases have less predictive content.
    Keywords: Forecasting, mixed frequency data, MIDAS, China, GDP growth
    JEL: C53 E27
    Date: 2014–07
  52. By: Simeon Coleman (School of Business and Economics, Loughborough University); Kavita Sirichand (School of Business and Economics, Loughborough University)
    Abstract: Empirical evidence on international yield comovement is sparse and lacks consensus. Employing a dynamic correlation approach, we show that during the recent global financial crisis euro area yields have ceased to comove with the yields of the other international markets - Canada, UK and US. Some implications of our results are discussed.
    Keywords: Interest rates, comovement
    JEL: E43 F21
    Date: 2014–07
  53. By: Muhammad Shahbaz; Kishwar Nawaz; Mohamed Arouri; Frédéric Teulon; Gazi Salah Uddin
    Abstract: The present paper contributes in existing economic literature by investigating the validation of the Keynesian Absolute Income hypothesis in Pakistan by applying the ARDL approach to cointegration. The findings of this paper indicate the validation of the Keynesian absolute income hypothesis in Pakistan, where public savings and financial development add in private savings. This study opens up new insights for government to improve the level of private savings.
    Keywords: Private savings, Co-integration, Pakistan
    JEL: E2 C4
    Date: 2014–07–15
  54. By: Thorsten Beck; Hans Degryse; Ralph de Haas; Neeltje van Horen
    Abstract: Using a novel way to identify relationship and transaction banks, we study how banks' lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms' credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
    Keywords: Relationship banking; credit constraints; business cycle
    JEL: F36 G21 L26 O12
    Date: 2014–07
  55. By: Goulven Rubin (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France)
    Abstract: A few years after the publication of The General Theory, a number of economists began to present Keynes's model, identified with IS-LM, as a particular case of the Walrasian model. This view of IS-LM has often been rationalized by a basic syllogism: IS-LM was invented by John Hicks, Hicks was a Walrasian, hence IS-LM was Walrasian. But as some historians of macroeconomics have shown, this syllogism is false. Considering this confusion as an established fact, this article studies how and why IS-LM came to be considered as Walrasian. It shows that the standard view took its roots in "The Rate of Interest and the Optimum Propensity to Consume", a paper published by Oskar Lange in 1938, and resulted from a need to clarify the foundations of Keynes's theory.
    Keywords: IS-LM; Oskar Lange; History of macroeconomics; John R. Hicks; Neoclassical Synthesis
    Date: 2014–06–30
  56. By: Hinte, Holger (IZA); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: Calculating the net fiscal effects of immigration not just for a fiscal year but over the lifespan of immigrant cohorts accentuates the assets and deficits in migration and integration policies and their long-term potential. The less national policies concentrate on a labor migrant selection process according to economic criteria, the higher the risk of generating economic losses or only a reduced surplus. A country comparison of net tax payments and generational accounts for migrants and natives reveals even more clearly that the right mix of migrants will give the best chance to maximize positive and sustainable net fiscal effects to the benefit of society. Similar socio-economic frameworks – as in the western welfare states of Denmark and Germany showcased in this paper – may still result in substantially different economic outcomes of migration. Traditional immigration countries with a long experience in selecting migrants are nonetheless confronted with the need to evaluate and adapt their policies. They may also learn from the results of net fiscal balancing.
    Keywords: socio-economic effects of migration, generational accounting, immigrant selection, integration
    JEL: F22 J61 E61 E62
    Date: 2014–07
  57. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Outlook and Risks: Growth in Bhutan was robust during the last Five-Year Plan (2008/09 to 2012/13), driven by the development of the hydropower sector. However, growth has slowed recently due to policy efforts to moderate aggregate demand to ameliorate overheating pressures. Downside risks remain due to high public debt, potential financial sector vulnerabilities, and the need to manage recurrent pressures on Indian rupee reserves. The main external vulnerability stems from a prolongation of the slowdown in India, Bhutan’s main trade and development partner. Main Policy Recommendations: The main near-term policy challenge is to revive growth while ensuring that external pressures do not reemerge. The key policy recommendations are: • Fiscal policy should be tightened while preserving social and productive expenditure. Revenue reforms, including broadening the tax base by reducing the number of zero- sales tax-rated goods and taxing domestic value added more extensively, would help in the near term. Over the medium term, consideration should be given to introducing a value-added tax. • On monetary policy, external flows should be fully sterilized and liquidity should be tightened to prevent credit growth from rebounding too strongly. Interest rate spreads need to be narrowed and better reflect market conditions. Over the medium-term, there is a need to further improve the monetary transmission mechanism and deepen the financial system. In particular, it is essential to further develop the government bond market by greater and more regular issuance. • Reserves have to be managed carefully to contain recurrent pressures on rupee reserves, including by aligning the currency composition of reserves with that of the structure of external liabilities and trade. • Further financial deepening should be balanced with maintaining financial stability. Risks to stability necessitate continued vigilance, given past rapid private credit growth. Supervision and regulation need to be strengthened to monitor and safeguard banks’ asset quality and limit systemic risk, including by use of macroprudential measures.
    Date: 2014–07–01
  58. By: Frankel, Jeffrey A.; Schreger, Jesse M
    Abstract: Eurozone members are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro, members have postponed painful adjustment. Wishful thinking has played an important role in this failure. We find that governments’ forecasts are biased in the optimistic direction, especially during booms. Eurozone governments are especially over-optimistic when the budget deficit is over the 3 % of GDP ceiling at the time the forecasts are made. Those exceeding this cap systematically but falsely forecast a rapid future improvement. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But biased forecasts can defeat budget rules. What is the record in Europe with national rules? The bias is less among eurozone countries that have adopted certain rules at the national level, particularly creating an independent fiscal institution that provides independent forecasts.
    Date: 2013
  59. By: Campbell, John Y.; Giglio, Stefano; Polk, Christopher
    Abstract: We show that the stock market downturns of 2000–2002 and 2007–2009 have very different proximate causes. The early 2000s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000s saw a decrease in rational expectations of future profits. We reach these conclusions by using a VAR model of aggregate stock returns and valuations, estimated both without restrictions and imposing the cross-sectional restrictions of the intertemporal capital asset pricing model (ICAPM). Our findings imply that the 2007–2009 downturn was particularly serious for rational long-term investors, whose losses were not offset by improving stock return forecasts as in the previous recession. (JEL G12, N22)
    Date: 2013
  60. By: Eugene White (Rutgers University and NBER); Pierre-Cyrille Hautcoeur (Paris School of Economics and EHESS); Angelo Riva (European Business School)
    Abstract: When faced with a run on a “systemically important” but insolvent bank in 1889, the Banque de France pre-emptively organized a lifeboat to ensure that depositors were protected and an orderly liquidation could proceed. To protect the Banque from losses on its lifeboat loan, a guarantee syndicate was formed, penalizing those who had participated in the copper speculation that had caused the crisis bringing the bank down. Creation of the syndicate and other actions were consistent with mitigating the moral hazard from such an intervention. This episode contrasts the advice given by Bagehot to the Bank of England to counter a panic by lending freely at a high rate on good collateral, allowing insolvent institutions to fail.
    Keywords: crisis
    JEL: E58
    Date: 2014–05–25
  61. By: Heribert Genreith
    Abstract: In this article we will show that the Macro-Economy and its growth can be modelled and explained exactly in principle by commonly known Field Theory from theoretical physics. We will show the main concepts and calculations needed and show that calculation and prediction of economic growth then gets indeed possible in Dollars and Cents. As every field theory it is based on an equation of continuity, which in economic terms means the full balance of all sources and sinks of Capital (Assets) and real Goods (GDP) in the bulk. Uniqueness of field theory of macroeconomics then can be derived from adapting Noether's Theorems, which is based on the notion of invariants to derive unique field equations. We will show that the only assumption which is needed for a self-consistent non-linear macro-economic theory is that the well known Quantity Equation, used in corrected formulation, holds at least locally in time.
    Date: 2014–05
  62. By: Ricardo N. Bebczuk; Eduardo A. Cavallo
    Abstract: This paper investigates the relevance of business saving for private saving and investment around the world by constructing and exploiting a broad international, unbalanced panel of 64 countries over 1990-2012. The paper shows that businesses are the main contributors to private and national saving around the globe, contributing on average more than 50 percent of national saving. Using this unique dataset, evidence is found of partial piercing of the corporate veil: for the core estimation, it is found find that a $1 increase in business saving gives rise to a decrease of only $0. 28 in household saving. The non-neutrality of business saving is further confirmed by results showing that higher business saving is significantly associated with higher business investment. In conjuction with the empirical results, this paper sheds new light on the role of business saving in the economy by critically scrutinizing the existing macroeoconomic and corporate finance literatures.
    Keywords: Financial management, Investment, Financial Policy, Business saving, Corporate veil, Domestic saving, Corporate finance
    Date: 2014–07
  63. By: Jean-Sébastien Pentecôte (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Fabien Rondeau (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)
    Abstract: This paper questions the impact of trade integration on business cycle sychronization in the EMU by distinguishing increase of existing trade flows (the intensive margin) and creation of new trade flows (the extensive margin). Using a DSGE model, we find that synchronization is weakened when new firms are allowed to export as a response to productivity gains. Consistenly with our model and using disaggregated data over 1995-2007 for the 11 founding members of the EMU, we find that trade intensity has a positive direct effect while new trade flows have a negative effect on business cycle synchronization. Furthermore, new flows play essentially an indirect role by intensifying specialization and explain 60 % of the overall effect of trade intensity and specialization on synchronization.
    Keywords: Trade integration; business cycles; European Monetary Union
    Date: 2014
  64. By: Mariam Camarero (Department of Economics, University Jaume I, Castellón, Spain); Gaetano D’Adamo (Department of Applied Economics II, University of Valencia, Spain); Cecilio Tamarit (Department of Applied Economics II, University of Valencia, Spain)
    Abstract: Over the last 15 years, the evolution of labor costs has been very diverse across EMU countries. Since wages have important second-round effects on prices and competitiveness, and EMU countries do not have the tool of the nominal exchange rate to correct for such imbalances, understanding the determinants of the wage is a matter of increasing concern and debate. We estimate the equilibrium wage equation for the Euro Area over the period 1995-2011 using panel cointegration techniques that allow for cross-section dependence and structural breaks. The results show that the equilibrium wage has a positive relation with productivity and negative relation with unemployment, as expected. We also include institutional variables in our analysis, showing that a more flexible labor market is consistent with long-run wage moderation. Allowing for a regime break, we find that, since 2004, possibly due to increased international competition, wage determination was more strictly related to productivity, and real wage appreciation triggers a drop in the real wage. Furthermore, results point to a wage-moderating role of government intervention and concertation in wage bargaining.
    Keywords: panel cointegration, wage setting, labor market
    JEL: E24 J31 C23
    Date: 2014
  65. By: Guido Matias Cortes; Nir Jaimovich; Christopher J. Nekarda; Henry E. Siu
    Abstract: The U.S. labor market has become increasingly polarized since the 1980s, with the share of employment in middle-wage occupations shrinking over time. This job polarization process has been associated with the disappearance of per capita employment in occupations focused on routine tasks. We use matched individual-level data from the CPS to study labor market flows into and out of routine occupations and determine how this disappearance has played out at the “micro” and “macro” levels. At the macro level, we determine which changes in transition rates account for the disappearance of routine employment since the 1980s. We find that changes in three transition rate categories are of primary importance: (i) that from unemployment to employment in routine occupations, (ii) that from labor force non-participation to routine employment, and (iii) that from routine employment to non-participation. At the micro level, we study how these transition rates have changed since job polarization, and the extent to which these changes are accounted for by changes in demographic composition or changes in the behavior of individuals with particular demographic characteristics. We find that the preponderance of changes is due to the propensity of individuals to make such transitions, and relatively little due to demographics. Moreover, we find that changes in the transition propensities of the young are of primary importance in accounting for the fall in routine employment.
    JEL: E0 J0
    Date: 2014–07
  66. By: Raphael A. Espinoza; Esther Pérez Ruiz
    Abstract: The paper presents a simple supply side, general equilibrium model to estimate the macroeconomic effects of labor tax cuts. The model assumes that output is produced using capital, unskilled and skilled workers, and public servants. Wage formation for skilled workers features a Blanchflower-Oswald wage curve, while the labor supply for unskilled workers is very elastic around the minimum wage for small changes in employment. The model is calibrated for France and used to estimate the output and employment effects induced by two recent tax reforms: the Crédit d’Impôt pour la Compétitivité et l’Emploi (CICE) and the Pacte de Solidarité Responsabilité (RSP). We find that the tax cuts, if not offset by other fiscal measures, would contribute overall to creating around 200,000 jobs in the short run (600,000 jobs in the long run). Since the model abstracts from demand side effects, the results should be interpreted as providing estimates of the effect of tax measures on potential output and potential employment.
    Date: 2014–07–01
  67. By: Thomas I. Palley
    Abstract: Milton Friedman's influence on the economics profession has been enormous. In part, his success was due to political forces that have made neoliberalism the dominant global ideology, but Friedman also rode those forces and contributed to them. Friedman's professional triumph is testament to the weak intellectual foundations of the economics profession which accepted ideas that are conceptually and empirically flawed. His success has taken economics back in a pre-Keynesian direction and squeezed Keynesianism out of the academy. Friedman's thinking also frames so-called new Keynesian economics which is simply new classical macroeconomics with the addition of imperfect competition and nominal rigidities. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman's shadow.
    Keywords: Friedman, monetarism, new classical macroeconomics, new Keynesian, neoliberalism
    Date: 2014
  68. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the most recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and revisions introduced in the United States. Amongst these notable developments, the Final or rather nearly finalised Standard issued by the Basel Committee in January 2014, as well as the 2014 U.S Enhanced Supplementary Leverage Ratios are worth mentioning. Sometimes the competitive disadvantages resulting from over compliance or stringent measures may generate costs which are actually minimal when compared to those costs which could potential arise in a scenario where economic disruptions and crises do occur where such „over compliance“ measures are not implemented. So when do measures become over-compliant? What may be regarded as over-compliance for a particular jurisdiction may not necessarily be the case for another. Conversely what may be required for minimal compliance purposes in certain jurisdictions may prove inadequate for certain major economies.
    Keywords: credit risk; global systemically important banks (G-SIBs); leverage ratios; harmonisation; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: E3 E32 G2 G28 K2
    Date: 2014–07–21
  69. By: Dean Baker; David Rosnick
    Abstract: This paper examines the evidence on the impact of stimulus and fiscal consolidation in the context of a severe economic slump like the Great Recession. The first part reviews some of the major works on this topic in the last decade. It notes that the research clearly points in the direction of stimulus increasing growth during a prolonged slump. The second part examines the impact of changes in government consumption and investment on growth, using data from advanced countries since 1980. Consistent with most prior literature it finds that increases in government spending during downturns lead to increases in growth. It then constructs simulations for the period since the Great Recession showing multipliers in the neighborhood of 1.5. The third part notes new evidence suggesting that potential GDP appears to have fallensharply as a result of the downturn. A full model of the impact of stimulus would have to incorporate this effect which is likely to be large relative to the size of the stimulus.
    Date: 2014
  70. By: Christoph Aymanns; J. Doyne Farmer
    Abstract: We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high and vice versa, a phenomenon that has been dubbed pro-cyclical leverage. We show that this leads to endogenous irregular oscillations, in which gradual increases in stock prices and leverage are followed by drastic market collapses, i.e. a leverage cycle. This phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle. We introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro-cyclical to countercyclical leverage. When the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point. While there is always a leverage ceiling above which the dynamics are unstable, countercyclical leverage can be used to raise the ceiling. Finally, we investigate fixed limits on leverage and show how they can control the leverage cycle.
    Date: 2014–07
  71. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. GDP growth was lower than expected in 2013 (an estimated 3.5 percent) but would increase to 4.9 percent in 2014 with a rebound in agriculture, mining, and industry. Inflation stood at 0.7 percent on average in 2013 and would remain subdued in 2014. Political tensions have increased, with local elections scheduled for end-June 2014 and the recent return to Senegal of former President Wade. Plan Sénégal Emergent (PSE). Senegal’s new growth strategy offers a good diagnostic and a vision for Senegal. It is more focused than earlier strategies on key projects and reforms. Ownership of the plan at the highest level and strong support from the international community should also facilitate implementation. The authorities’ reiterated strong commitment to preserving fiscal sustainability is welcome. In light of the poor total productivity performance in recent years, the focus should be on raising economic efficiency more than increasing the volume of investment. Accelerating reforms to improve the business environment and a deep reform of the state are critical for this purpose. Reforming the state is also required to finance the public investment effort without jeopardizing fiscal sustainability. Program implementation. All quantitative assessment criteria and indicative targets for end-2013 were met, including on the budget deficit despite a significant revenue shortfall. Structural reform implementation has been slow, with many benchmarks met after their respective deadlines. This partly reflects the focus on designing the PSE since the last review. A significant risk to program performance is insufficient progress in reform implementation combined with strong expenditure pressures. Fiscal outlook and reforms. Despite challenging prospects for 2014, the authorities intend to continue reducing the deficit. Strong efforts will be needed on the revenue side to offset part of the 2013 revenue shortfalls. The recent review of current and capital expenditures, with a view to identifying less productive spending to be streamlined, is welcome and a step towards increasing the efficiency of public spending and aligning the budget with PSE priorities. Efforts should be made to improve fiscal transparency and make fiscal accounts more meaningful. Accelerating the implementation of the WAEMU directives on public financial management and of the agency reform plan is highly desirable. Transparency also requires being more explicit about the cost of certain transfers and subsidies, including those in favor of the energy sector, and reporting on the implementation of the reform of public agencies.
    Date: 2014–07–02
  72. By: Zaytsev, Alexander
    Abstract: The author shows that different approaches to income comparisons both on country and regional levels may lead to conflicting conclusions concerning the catching-up. It is argued that current PPPs (Instead of constant PPPs) give more reliable picture of per capita GDP convergence process on country level. Based on the case of Russian regions it is showed that different ways of converting incomes into spatially consistent prices also lead to significantly different results. The need of computing (current) regional PPPs is emphasized.
    Keywords: income convergence, catching-up, interregional inequality, regional income, PPP
    JEL: E31 N30 O47 O57 R11
    Date: 2014–05–08
  73. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Economic background and outlook. The Malagasy authorities managed to avert a macroeconomic crisis during a difficult period of political transition and economic uncertainty since 2009. However, these disruptions have constrained growth and fiscal revenue, leading to a sharp compression of public investment and social outlays, with serious social consequences. In addition to accumulating domestic payment arrears, budgetary subsidies for fuel, and energy more generally, have become costly and have been crowding out the room for other priority fiscal spending. About 90 percent of the population now lives below US$2 a day (adjusted for purchasing-power parity), making poverty a critical issue for Madagascar. Supported by large mining projects that are reaching commercial output, recovering rice production, and a less uncertain political environment, growth is projected to increase to 3 percent in 2014. However, the economy remains vulnerable with large balance of payments needs that could get in the way of a robust economic recovery if not addressed promptly. Key challenges. The government’s immediate objective for 2014 is to start to raise social and infrastructure spending back to more normal levels and create a solid foundation for faster and more inclusive growth and for poverty reduction. There are large balance of payments and fiscal gaps that need to be filled in order not to jeopardize an economic recovery. Key measures to be undertaken in 2014 include: • Improve tax and customs revenue collections. • Increase funding of priority public investment programs and social spending. • Stop the accumulation of new domestic arrears and clear existing arrears in a phased manner. • Address the issue of fuel price subsidies over time, while identifying mechanisms for supporting vulnerable groups. Against this background, the authorities are requesting a disbursement under the Rapid Credit Facility (RCF). They also see the RCF as a stepping stone for a possible future arrangement addressing Madagascar’s medium-term challenges and as a positive signal to development partners. Staff supports the authorities’ request for a disbursement under the RCF.
    Date: 2014–07–02
  74. By: Julien Prat (CREST); Boyan Jovanovic (New York University)
    Abstract: Investment in reputation responds positively to news shocks and to current aggregate shocks when they are autocorrelated. Idiosyncratic risk is contractionary and reduces the response to aggregate shocks. In this sense the rise in idiosyncratic risk can explain the great moderation -- the two have happened roughly at the same time. The greater cyclicality of durables can also be explained with this mechanism because durables have greater technological products and firms making them have more prove by exerting effort.
    Date: 2014
  75. By: Michael P. Clements (ICMA Centre, Henley Business School, University of Reading);
    Abstract: We consider whether imposing long-run restrictions on survey respondents’ long-horizon forecasts will enhance their accuracy. The restrictions are motivated by the belief that the macro-variables consumption, investment and output move together in the long run, and that this should be evident in long-horizon forecasts. The restrictions are imposed by exponential-tilting of simple auxiliary forecast densities. We find a modest overall improvement in forecast accuracy of around 7% on MSFE for the consumption-output ratio, but there are times when much larger gains were realizable. The transformation of the data/forecasts on which accuracy is assessed is shown to play an important role.
    Date: 2014–02
  76. By: Ibrahim Fatnassi; Habib Hasnaoui; Zied Ftiti
    Abstract: This paper analyzes the impact of capital on profitability and risk for Islamic and conventional Gulf Cooperation Council (GCC) banks, through the structure-conduct-performance, moral hazard, and regulatory hypotheses. We apply the generalized method of moments (GMM) technique for dynamic panels, using bank-level data for 113 banks over the period 2003–2011. First, we find that both highly capitalized Islamic banks and highly capitalized conventional banks generate low returns. Second, higher-capitalized GCC banks (Islamic and conventional) are found to be more risky. Third, all profitability and risk variables show persistence. Finally, we arrive at the same conclusions about the capital, profitability, and risk relationship during the subprime crisis and with the introduction of regulatory variables.
    Keywords: Bank capital; Profitability; Risk; Dynamic panel;
    JEL: G21 C23 E52
    Date: 2014–07–15
  77. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Stand-By Arrangement (SBA): The Board approved Bosnia and Herzegovina’s (BiH) request for a two-year SBA with access of SDR 338.2 million (200 percent of quota) in September 2012. The fifth review was completed on January 31, 2014 when the Board also approved a nine-month extension of the arrangement through end-June 2015 and an augmentation of access by SDR 135.28 million (80 percent of quota). So far, SDR 253.65 million (150 percent of quota) has been disbursed and SDR 84.55 million (50 percent of quota) would become available upon completion of these reviews. Outlook: BiH was on a good track in 2013: the economy returned to growth, expanding by nearly 2 percent despite some domestic demand weakness, while external imbalances narrowed. However, following torrential rains in May this year that caused substantial damage and hardship, growth is now projected to slow. The damage is estimated at 5–10 percent of GDP. Unemployment remains high, especially among the youth. Risks: The outlook is subject to a high degree of uncertainty as the impact of the natural disaster is unclear and the recovery will depend on the speed at which donor support can be mobilized and absorbed. The elections scheduled for October 2014 pose considerable risks to the timely and sustained implementation of policies envisaged under the program and, together with an uncertain external environment, also cloud the outlook. Program performance became more uneven in late 2013 and early 2014, reflecting both economic factors and delays in policy implementation. Fiscal policies were broadly on track, but two end-December 2013 fiscal performance criteria (PCs) were missed as the compression of government spending in the last months of the year was not enough to offset shortfalls in revenues, due to weak domestic demand but also delays in the implementation of measures to improve revenue collection. Securing parliamentary approval of economic measures has become more difficult in the run-up to the elections, while measures to enhance internal cooperation have also met with growing resistance, creating delays in the implementation of structural benchmarks. Thus, the sixth and seventh reviews had to be combined to allow time for the completion of four prior actions to demonstrate progress in reform implementation and improving revenue collection. As revenue collection steadily improved, all end-March 2014 PCs were met.
    Date: 2014–07–03
  78. By: Michael Weber (UC Berkeley)
    Abstract: This paper examines the asset-pricing implications of nominal rigidities. I find that firms that adjust their product prices infrequently earn a cross-sectional return premium of more than 4% per year. Merging confidential product price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and is not driven by other firm and industry characteristics. The consumption-wealth ratio is a strong predictor of the return differential in the time series, and differential exposure to systematic risk fully explains the premium in the cross section. The sticky-price portfolio has a conditional market beta of 1.3, which is 0.4 higher than the beta of the flexible-price portfolio. The frequency of price adjustment is therefore a strong determinant of the cross section of stock returns. To rationalize these facts, I develop a multi-sector production-based asset-pricing model with sectors differing in their frequency of price adjustment.
    Date: 2014
  79. By: Sudhir Anand; Paul Segal
    Abstract: This paper investigates recent advances in our understanding of the global distribution of income, and produces the first estimates of global inequality that take into account data on the incomes of the top one percent within countries.� We discuss conceptual and methodological issues - including alternative definitions of the global distribution, the use of household surveys and national accounts data, the use of purchasing power parity exchange rates, and the incorporation of recently available data on top incomes from income tax records.� We also review recent attempts to estimate the global distribution of income.� Our own estimates combine household survey data with top income data, and we analyze various aspects of this disribution, including its within- and between-country components, and changes in relative versus absolute global inequality.� Finally, we examine global poverty, which is identified through the lower end of the global distribution.
    Keywords: global inequality, purchasing power parity exchange rates, household surveys, national accounts, top incomes, global poverty
    JEL: D63 E01 I32
    Date: 2014–07–18

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