nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒08‒09
sixty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. An Estimated DSGE Model with a Deflation Steady State By Yasuo Hirose
  2. Fairness and the disinflation puzzle By Lunardelli, Andre
  3. How to stabilize inflation without damaging employment: Strenghtening the power of unions. By Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
  4. Non-linear effects of the U.S. Monetary Policy in the Long Run By Olmos, Lorena; Sanso Frago, Marcos
  5. How Monetary Policy is made: Two Canadian Tales By Pierre L. Siklos; Matthias Neuenkirch
  6. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  7. Swiss unconventional monetary policy: lessons for the transmission of quantitative easing By Christensen, Jens H.E.; Krogstrup, Signe
  8. Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach By Mustafa Kilinc; Cengiz Tunc
  9. The Impact of Monetary Policy on Financing of Czech Firms By Ruslan Aliyev; Dana Hajkova; Ivana Kubicova
  10. Inflation Dynamics in Turkey : In Pursuit of a Domestic Cost Measure By Selen Baser Andic; Hande Kucuk; Fethi Ogunc
  11. Fiscal consolidation, public debt and output dynamics in the euro area : lessons from a simple model with time-varying fiscal multipliers By Christophe Blot; Marion Cochard; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau; Jérôme Creel
  12. Financial crises and exchange rate policy By Luca Fornaro
  13. Job Vacancies in Colombia: 1976-2012 By Andrés Álvarez; Marc Hofstetter
  14. Towards a Micro-Founded Theory of Aggregate Labor Supply By Andres Erosa; Luisa Fuster; Gueorgui Kambourov
  15. ICT and Non-ICT investments: short and long run macro dynamics By F. Bacchini; M. E. Bontempi; R. Golinelli; C. Jona Lasinio
  16. A shadow policy rate to calibrate US monetary policy at the zero lower bound By Marco Jacopo Lombardi; Feng Zhu
  17. Aggregate Demand, Idle Time, and Unemployment By Pascal Michaillat; Emmanuel Saez
  18. Public Investment, Time to Buid, and the Zero Lower Bound By Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
  19. Reserve Requirements, Liquidity Risk and Credit Growth By Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pinar Ozlu
  20. The determinants of household saving behaviour in Malta By Gatt, William
  21. Counter Cyclical Financial Regulation: Potential for Engendering Greater Stability in the Financial System By Devika Dutt
  22. Can Europe recover without credit? By Darvas, Zsolt
  23. Political Booms, Financial Crises By Helios Herrera; Guillermo Ordoñez; Christoph Trebesch
  24. The exit from non-conventional monetary policy: what challenges? By Philip Turner
  25. Geldpolitik und Behavioural Finance By Seitz, Franz
  26. Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments By Luba Petersen
  27. Inflating Away the Public Debt? An Empirical Assessment By Jens Hilscher; Alon Raviv; Ricardo Reis
  28. Social security and the interactions between aggregate and idiosyncratic risk By Harenberg, Daniel; Ludwig, Alexander
  29. Credit Growth, Monetary Policy, and Economic Activity in a Three-Regime TVAR Model By Stefan Avdjiev; Zheng Zeng
  30. The impact of the 2008 crisis on UK prices: what we can learn from the CPI microdata By Dixon, Huw David; Luintel, Kul B; Tian, Kun
  31. Forecasting Financial Stress and Economic Sensitivity in CEE countries By Maciej Krzak; Grzegorz Poniatowski; Katarzyna W¹sik
  32. Incorporating Financial Stability Considerations into a Monetary Policy Framework : a speech at the International Research Forum on Monetary Policy, Washington, D.C., March 21, 2014 By Stein, Jeremy C.
  33. Comments on "Market Tantrums and Monetary Policy": a speech at the 2014 U.S. Monetary Policy Forum, New York, New York, February 28, 2014 By Stein, Jeremy C.
  34. Measuring Economic Slack: A Forecast-Based Approach with Applications to Economies in Asia and the Pacific By James Morley
  35. A Dynamic Analysis of Sectoral Mobility, Worker Mismatc and the Wage-Tenure Profiles By Stéphane Auray; David Fuller; Damba lkhagvasuren; Antoine Terracol
  36. Das Scheitern historischer Währungsräume: Kann sich die Geschichte auch für die Eurozone wiederholen? By Berthold, Norbert; Braun, Stella; Coban, Mustafa
  37. National Saving in Canada and the United States, 1926 to 2011 By Lafrance, Amelie; Macdonald, Ryan
  38. Challenges for Monetary Policy Communication : a speech at the Money Marketeers of New York University, New York, New York, May 6, 2014 By Stein, Jeremy C.
  39. The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning By Y. Hossein Farzin; Ronald Wendner
  40. Austerita' espansiva, precarieta' espansiva ed il Jobs Act By Paolo Pini
  41. Evaluating Forecasts of a Vector of Variables: a German Forecasting Competition By Hans Christian Müller-Dröge; Tara M. Sinclair; H.O. Stekler
  42. Credit ratings and bond spreads of the GIIPS By Tim de Vries; Jakob de Haan
  43. THE financial determinants of private investment in ghana By Eshun, Maame Esi; Adu, George; Buabeng, Emmanuel
  44. Insurance and the Macroeconomic Environment By Casper Christophersen; Petr Jakubik
  45. Shake me the money! By Riccardo Trezzi; Francesco Porcelli
  46. Literature review and model development By Tim Jackson; Ben Drake; Peter Victor; Kurt Kratena; Mark Sommer
  47. Alternative Approaches to Commercial Property Price Indexes for Tokyo By Diewert, Erwin; Shimizu, Chihiro
  48. Do media data help to predict German industrial production? By Kholodilin, Konstantin A.; Thomas, Tobias; Ulbricht, Dirk
  49. Leverage versus volatility: Evidence from the Capital Structure of European Firms By el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet
  50. A Human Capital Theory of Growth: New Evidence for an Old Idea By Theodore R. Breton
  51. Latin America's socail imagination since 1950. From one type of ‘absolute certainties’ to another — with no (far more creative)‘uncomfortable uncertainties’ in sight, By José Gabriel Palma
  52. How good are out of sample forecasting Tests on DSGE models? By Minford, Patrick; Xu, Yongden; Zhou, Peng
  53. Accounting for Job Growth: Disentangling Size and Age Effects in an International Cohort Comparison By Michael Anyadike-Danes; Carl-Magnus Bjuggren; Sandra Gottschalk; Werner Hölzl; Dan Johansson; Mika Maliranta; Anja Myrann
  54. A comparison of different wind power forecasting models to the Mycielski approach By Croonenboreck, Carsten; Ambach, Daniel
  55. The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries By Hubert Gabrisch; Karsten Staehr
  56. Cash versus debit card: the role of budget control By Lola Hernandez; Nicole Jonker; Anneke Kosse
  57. A finite set of equilibria for the indeterminacy of linear rational expectations models By Chatelain, Jean-Bernard; Ralf, Kirsten
  58. Preferential regulatory treatment and banks' demand for government bonds By Clemens Bonner
  59. Wie entsteht Stagflation? By Berthold, Norbert; Gründler, Klaus
  60. Leverage, Sensitivity to Market Risk and Contagion: A Multi-Country Analysis for Shari’ah(Islamic) Stock Screening By el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet
  61. Education and Cross-Country Productivity Differences By Alok Kumar; Brianne Kober
  62. The Inequality Deflator: Interpersonal Comparisons without a Social Welfare Function By Nathaniel Hendren

  1. By: Yasuo Hirose
    Abstract: Benhabib, Schmitt-Grohé, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to households’ preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japan’s business cycles is marginal and that macroeconomic stability during the period was a result of good luck.
    Keywords: Deflation, Zero interest rate, Japanese economy, Indeterminacy, Bayesian Estimation
    JEL: E31 E32 E52
    Date: 2014–07
  2. By: Lunardelli, Andre
    Abstract: Following Driscoll and Holden (2004), I model forward-looking workers who consider it unfair if a wage adjustment fails to match past inflation. However, the present paper proposes a much larger effect by using the job finding rate as the measure of workers' opportunities outside the firm rather than the unemployment rate, develops a dynamic model with imperfect monitoring, and simulates a credible gradual disinflation with a large sacrifice ratio. It also uses the model to discuss real adverse shocks, the manner in which indexation is used in New Keynesian models, and the use of sticky information to explain disinflation costs. --
    Keywords: inflation persistence,reciprocity,indexation,Phillips curve,coordination failure,asymmetric effects of monetary policy
    JEL: D03 E31 E32 E42 E50 J64
    Date: 2014
  3. By: Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
    Abstract: The aim of this paper is to assess the impact of union bargaining power on inflation and employment in a case of efficiency bargaining, in a context of a strategic game between Central Bank and social partners.
    Keywords: monetary policy, employment, inflation, union bargaining power, efficiency bargaining.
    JEL: E24 E52 E58 J52
    Date: 2014
  4. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: We find non-linearities in the U.S. long-run relationships among trend inflation, growth rate and financial frictions. Moreover, our results show that mismeasurements of the natural rate of interest deviate the trend inflation from its target, which is especially clear when monetary policy reacts preventively against inflation deviations. The long-run growth rate, the trend inflation and the natural rate of interest, specified as time-varying, are jointly estimated over the period 1960:Q1-2013:Q2 by applying the Kalman filter, following mainly Laubach and Williams (2003).
    Keywords: Kalman Filter; Trend Inflation; Financial frictions; Growth
    JEL: C32 E31 E52
    Date: 2014
  5. By: Pierre L. Siklos; Matthias Neuenkirch
    Abstract: We examine policy rate recommendations of the Bank of Canada’s Governing Council (GC) and its shadow, the C.D. Howe Institute’s Monetary Policy Council (MPC). Individual recommendations of the MPC are observed but not those of the GC. Differences in the two committee’s recommendations are small but persistent. The MPC is more responsive to the output gap than its GC counterpart. Both committees respond similarly to inflation. Disagreement within the MPC and with the GC is more likely when rates are rising. Finally, the Bank’s forward guidance had a significant influence on the MPC’s views about the future inflation path.
    JEL: E43 E52 E58 E61 E69
    Date: 2014–07
  6. By: Stéphane Auray (CREST-ENSAI, ULCO and CIRPEE); Aurélien Eyquem (Université Lumière Lyon 2); Xiaofei Ma (CREST-ENSAI et Université Lumière Lyon 2)
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the Euro Area, the model performs satisfactorily in matching key business cycle facts on real, financial and fiscal time series. We then use the model to assess the effects of a large crisis and quantify the potential effects of alternative unconventional policies on the dynamics of GDP, sovereign default risk and public indebtedness. We show that quantitative monetary easing is more efficient in stimulating GDP, while qualitative monetary easing relieves financial tensions and sovereign risk more efficiently. In terms of welfare, in the short run, unconventional monetary policies bring sizable welfare gains for households, while the long term effects are much smaller
    Keywords: Recession, Interbank Market, Sovereign Default, Monetary Policy
    JEL: E44 F34 G15
    Date: 2014–03
  7. By: Christensen, Jens H.E. (Federal Reserve Bank of San Francisco); Krogstrup, Signe (Swiss National Bank)
    Abstract: In August 2011, the Swiss National Bank engaged in unconventional monetary policy through an unprecedented expansion of bank reserves. As these actions did not involve any outright long-term asset purchases, this unique episode allows for novel insights on the transmission mechanism of central bank balance sheet expansions to interest rates. Analysis of the response of Swiss bond yields to announcements regarding this program suggests that expansion of reserves by itself can lower long-term yields through a portfolio balance effect.
    JEL: E43 E52 E58 G12
    Date: 2014–08–06
  8. By: Mustafa Kilinc; Cengiz Tunc
    Abstract: This paper tries to identify the monetary policy shocks in Turkey during the explicit inflation targeting period starting from 2006 using a structural VAR approach. We model Turkey as a small open economy where domestic variables are affected by external factors like commodity prices and global demand but domestic variables do not affect external variables. We analyze the effects of four shocks on Turkish economy: two domestic shocks of interest rates and risk premium, and two external shocks of commodity prices and global demand. All shocks are found to have significant effects on main economic variables. Positive interest rate shocks appreciate the domestic currency and decrease the inflation whereas positive risk premium shocks cause a depreciation and an increase in inflation. Both of these shocks also cause a decrease in the domestic activity. Being an open and internationally integrated economy, Turkey is significantly affected by global shocks. A positive global demand innovation leads to an increase in global commodity prices, which together increase both the level of prices and economic activity in Turkey. Positive commodity price shocks also increase the inflation in Turkey.
    Keywords: Monetary Policy, Interest Rates, Risk Premium, Small Open Economy
    JEL: E43 E52 E58 F41
    Date: 2014
  9. By: Ruslan Aliyev; Dana Hajkova; Ivana Kubicova
    Abstract: This paper uses firm-level financial data for Czech firms and tests for the role of companies’ financial structure in the transmission of monetary policy. Our results indicate that higher short-term interest rates coincide with lower shares of total debt, short-term bank loans, and long-term debt. We find that firm-specific characteristics, such as size, age, collateral, and profit, affect the way in which monetary policy changes are reflected in the external financing decisions of firms. These findings indicate the presence of informational frictions in credit markets and hence provide some empirical evidence of the existence of broad credit and relationship lending channels in the Czech Republic.
    Keywords: Credit channel, Czech Republic, external finance, monetary policy transmission
    JEL: E44 E51 E52 G21 G32
    Date: 2014–06
  10. By: Selen Baser Andic; Hande Kucuk; Fethi Ogunc
    Abstract: We provide Bayesian estimates of an empirical model of consumer price inflation for Turkey based on the hybrid New Keynesian Phillips Curve. We decompose real marginal costs into domestic and foreign components and focus particularly on identifying the effect of the domestic component. We find that the baseline model which uses output gap as a measure of domestic real marginal costs does a better job in explaining consumer price inflation compared to alternative models which incorporate real unit labor costs. On the other hand, estimations for services inflation point to the importance of real unit labor costs for this sector.
    Keywords: Inflation, Real marginal costs, Phillips Curve, Turkey
    JEL: E12 E31 E37
    Date: 2014
  11. By: Christophe Blot (OFCE); Marion Cochard (OFCE); Bruno Ducoudre (OFCE); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE); Jérôme Creel (OFCE)
    Abstract: EMU countries have engaged in a consolidation of fiscal policies since 2011. This paper deals with the public debt and output dynamic consequences of this strategy. To this end, we develop a simple macroeconomic model of the Euro area, where fiscal multiplier is time-varying. Recent empirical evidence has indeed shown that fiscal multipliers were higher in time of crisis. We then analyze the ability of EMU countries to comply with the new fiscal rules on public debt. The path of public debt and output gap is simulated according to different hypothesis related to fiscal multiplier, monetary policy and hysteresis effects. Not all EMU countries would be able to reach a 60% debt-to-GDP ratio in 2032. An alternative strategy may be to spread austerity in order to report part of consolidation to periods where the fiscal multiplier will be weaker. The gain of spreading austerity may yet be partly offset by higher risk premium. There is then a need to find institutional arrangements to avoid panics in the sovereign debt markets. Finally, it is shown that it would not be very efficient to implement an expansionary fiscal policy in Germany in order to balance austerity in the Euro area. Since output gap is nearly closed in Germany, the multiplier effect of a positive fiscal stance would be low and spillover effects would not be significant.
    Keywords: Fiscal consolidation; Fiscal multiplier; Public Debt; Macroeconomic performance
    JEL: E61 E62 E47
    Date: 2014–07
  12. By: Luca Fornaro
    Abstract: This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stopprone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that the appropriate exchange rate policy sustains the value of collateral and access to international credit markets during financial crises.
    Keywords: Financial crises, Monetary Policy, Sudden Stops, Exchange Rate Regime, Nominal Wage Rigidities, Pecuniary Externalities.
    JEL: G01 E44 E52 F32 F34 F41
    Date: 2014–07
  13. By: Andrés Álvarez; Marc Hofstetter
    Abstract: Based on the counting of Help-wanted advertisements in print newspapers, we present national vacancy indexes and vacancy rates for Colombia. These series will allow tackling a myriad of questions related to the functioning of the labor markets in emerging economies, where such datasets were not available.
    Keywords: Vacancies, Help-wanted index, unemployment, Beveridge curve, labor market, Colombia.
    JEL: E24 E32 J63 J64
    Date: 2013–12–04
  14. By: Andres Erosa; Luisa Fuster; Gueorgui Kambourov
    Abstract: We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply over the life cycle, by education, both along the intensive and extensive margins. The model provides an aggregation theory of individual labor supply, firmly grounded on individual-level micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.75, with the extensive margin accounting for 62% of the response. Furthermore, we find that the aggregate labor supply elasticity to a permanent-compensated wage change is 0.44.
    Keywords: Aggregate labor supply, intensive margin, extensive margin, life cycle, fixed cost of work, non-linear earnings, precautionary savings, preference heterogeneity
    JEL: D9 E2 E13 E62 J22
    Date: 2014–07–14
  15. By: F. Bacchini; M. E. Bontempi; R. Golinelli; C. Jona Lasinio
    Abstract: In this paper, we model business investment distinguishing between ICT (communication equipment, hardware and software) and Non-ICT (machinery and equipment, and nonresidential buildings) components and taking into account asset specific characteristics potentially affecting the reactivity of capital accumulation over the business cycle. Business investment and ICT and Non-ICT assets are estimated within a VECM model to test, in a unique framework, the assumptions of the flexible accelerator model (Clark, 1944, and Koyck, 1954) and of the neoclassical model of Hall and Jorgenson (1967), as well as how financial constraints and uncertainty influence investment behaviour (Hall and Lerner, 2010, and Bloom, 2007). Our findings suggest that the long-run relationship with standard macro determinants (output and user cost) is verified for aggregate business capital stock as well as for individual Non-ICT assets but not for ICT. In the short run, liquidity is a key determinant of investment behaviour independently of the asset type. In the long-run, uncertainty significantly affects ICT. Finally, the results of the counterfactual exercises over the latest Italian recession support the idea that ICT is a key policy variable to foster the economic recovery.
    JEL: C52 C53 E22 E50
    Date: 2014–07
  16. By: Marco Jacopo Lombardi; Feng Zhu
    Abstract: The recent global financial crisis, the Great Recession and the subsequent implementation of a variety of unconventional policy measures have raised the issue of how to correctly measure the stance of monetary policy when policy interest rates reach the zero lower bound (ZLB). In this paper, we propose a new "shadow policy rate" for the US economy, using a large set of data representing the various facets of the US Federal Reserve's policy stance. Changes in term premia at various maturities and asset purchases by the Fed are key drivers of this shadow rate. We document that our shadow policy rate tracks the effective federal funds rate very closely before the recent crisis. More importantly, it provides a reasonable gauge of US monetary policy stance when the ZLB becomes binding. This facilitates the assessment of the policy stance against familiar Taylor rule benchmarks. Finally, we show that in structural vector autoregressive (VAR) models, the shadow policy rate helps identify monetary policy shocks that better reflect the Federal Reserve's unconventional policy measures.
    Keywords: unconventional monetary policy, zero lower bound, shadow policy rate, federal funds rate, dynamic factor model, monetary VAR
    Date: 2014–06
  17. By: Pascal Michaillat (London School of Economics); Emmanuel Saez (University of California, Berkeley)
    Abstract: This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman (1971) general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms’ employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statistics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.
    Keywords: aggregate demand, unemployment, matching frictions, business cycles
    JEL: E10 E24 E30 J2 J64
    Date: 2014–07
  18. By: Hafedh Bouakez (Institute of Applied Economics, CIRPEE, HEC Montréal); Michel Guillard (Université d'Evry Val d'essonne); Jordan Roulleau-Pasdeloup (CREST, PSE)
    Abstract: Public investment represents a non-negligible fraction of total public expenditures. Yet, theoretical studies of the effects of public spending when the economy is stuck in a liquidity trap invariably assume that government expenditures are entirely wasteful. In this paper, we consider a new-Keynesian economy in which a fraction of government spending increases the stock of public capital–which is an external input in the production technology–subject to a time-to-build constraint. In this environment, an increase in public spending has two conflicting effects on current and expected inflation: a positive effect due to higher aggregate demand and a negative effect reflecting future declines in real marginal cost. We solve the model analytically both in normal times and when the zero lower bound (ZLB) on nominal interest rates binds. We show that under relatively short time-to-build delays, the spending multiplier at the ZLB decreases with the fraction of public investment in a stimulus plan. Conversely, when several quarters are required to build new public capital, this relationship is reversed. In the limiting case where a fiscal stimulus is entirely allocated to investment in public infrastructure, the spending multiplier at the ZLB is 4 to 5 times larger than in normal times when the time to build is 12 quarters
    Keywords: Public spending, Public investment, Time to build, Multiplier, Zero lower bound
    JEL: E4 E52 E62 H54
    Date: 2014–01
  19. By: Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pinar Ozlu
    Abstract: Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.
    Keywords: Monetary Transmission Mechanism; Liquidity Risk; Bank Lending Channel; Turkey
    JEL: E44 E51 E52
    Date: 2014
  20. By: Gatt, William
    Abstract: This study analyses the determinants of the aggregate household saving rate in Malta; an important macroeconomic variable which in standard short-term analysis is considered as a ‘residual’. The aggregate household saving rate, fluctuated significantly over the past thirteen years, rising from 6.4% in 2000 to 10.3% by 2002, falling significantly to 4.1% by 2006, doubling to 8.4% during 2007 and stabilising between 5% and 7% in the years 2008 to 2012. Such sharp swings warrant an investigation to uncover the underlying drivers, and this paper finds evidence that the estimate of the saving rate correlates with a set of macroeconomic variables The results of an estimated equation are in line with the theory and robust to different estimation techniques. One should keep in mind that there are no official statistics on disposable income and therefore this paper uses an in-house estimate of disposable income, which may be subject to measurement errors. It results that developments in bank deposit rates played a major role in driving the saving rate over the period of interest. In addition it appears that households tended to be somewhat ‘Ricardian’ by increasing their saving following a deterioration in the government budget deficit, although only around a third of changes in public savings were offset with a corresponding change in household saving. The absence of complete Ricardian equivalence is in line with other studies on the Maltese economy. An element of precautionary saving, a feature at the heart of the literature surveyed, was also observed. Faced with uncertainty, households attempt to keep a buffer stock of wealth proportional to their income as a means of ‘saving for a rainy day’. In the context of a falling fertility rate over the past forty years and an ageing population, demographic factors do not seem to have had an influence on saving decisions over the period covered in this study, even though they are bound to have some impact in the coming years through a lower household saving rate, unless corrective actions are taken.
    Keywords: Saving rate, precautionary savings, real deposit rate, incomplete Ricardian offset
    JEL: E01 E21 E62
    Date: 2014–07
  21. By: Devika Dutt (Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University)
    Abstract: Financial Crises can be shown to be related to the pro-cyclical nature of finance. In fact, the bigger financial crises are almost always preceded by a credit market or an asset market boom. And the recurrence of crises time and again suggests that financial regulation as it exists today has been ineffectual in preventing them. This paper explores the role that Counter-cyclical Financial Regulation could potentially play in the bringing about greater stability in the financial system by moderating the boom, so as to mitigate the bust. It considers the anatomy of a typical crisis using Minsky's Financial Instability Hypothesis, and tries to identify the general factors that trigger crises that regulation could address. Counter-cyclical regulation leans against the build-up of a credit bubble, and makes provisions when times are good for when the bubble burst and things turn awry. The paper builds a heuristic model to demonstrate how such regulation can impede the growth of a bubble. The paper also discusses the political economy associated with counter-cyclical regulation. Despite the limited experience with such regulation and the potentially adverse impact on output growth, counter-cyclical financial regulation has great potential for preventing financial crises.
    Keywords: Counter-cyclical financial regulation, credit cycles, endogenous instability, financial crisis.
    JEL: G01 G18 E32 E44
    Date: 2013
  22. By: Darvas, Zsolt
    Abstract: Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. However, the implications of these historical episodes for the current European situation are limited, for two main reasons. First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities. Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.
    Keywords: creditless recovery, credit growth financial structure, real exchange rate adjustment
    JEL: E32 E44 E51 F31 G21
    Date: 2014
  23. By: Helios Herrera; Guillermo Ordoñez; Christoph Trebesch
    Abstract: We show that political booms, measured by the rise in governments' popularity, predict financial crises above and beyond other better-known early warning indicators, such as credit booms. This predictive power, however, only holds in emerging economies. We show that governments in emerging economies are more concerned about their reputation and tend to ride the short-term popularity benefits of weak credit booms rather than implementing politically costly corrective policies that would help prevent potential crises. We provide evidence of the relevance of this reputation mechanism.
    JEL: D82 E44 E51 E58 G01 H12 N10 N20
    Date: 2014–07
  24. By: Philip Turner
    Abstract: Monetary policies pursued in response to the financial crisis have shown that changes in central bank balance sheets have major macroeconomic consequences. The New Classical Macroeconomics, which gained increasing sway from the late-1980s, had led to an exclusive focus on the policy rate and a neglect of balance sheet effects. Key financial market imperfections that had been demonstrated by earlier (or contemporaneous) advances in microeconomic theory were assumed away under the guise of Ricardian equivalence. Getting their balance sheets back to normal levels is important in order to preserve policy flexibility for the future, but will present central banks with formidable challenges. This task will require cooperation with Treasuries without surrendering monetary policy independence.As central banks pragmatically monitor market resilience, the financial dominance trap is to be avoided.
    Keywords: Central bank balance sheet, fiscal dominance, financial dominance, exit strategy
    Date: 2014–05
  25. By: Seitz, Franz
    Abstract: Das vorliegende Papier behandelt die Rückwirkungen der Erkenntnisse der Behavioural Finance auf die Geldpolitik. Nach einer Begriffsdefinition und abgeleiteten generellen Implikationen werden speziell die Indikatorebene und der Transmissionsprozess der Geldpolitik dahingehend analysiert. Als Grundlage dienen ausgewählte Phänomene der verhaltenswissenschaftlichen Literatur. Im Ergebnis führen diese Phänomene zu einer Erhöhung des geldpolitischen Unsicherheitsbereiches, komplexeren Modellen und einem verstärkten Bedarf nach robusten geldpolitischen Verfahren. -- The present paper analyses the implications of the findings of Behavioral Finance for monetary policy. After a definition of terms and general implications, we turn our attention to indicator variables and the transmission process of monetary policy. The starting point in each case are selected phenomena of the behavioral economics literature. As a result, these phenomena lead to an increase of monetary policy uncertainty, more complex models and an increased demand for robust monetary policy strategies.
    Keywords: Geldpolitik,Behavioural Finance,Transmissionsmechanismus
    JEL: E52 E58 G14
    Date: 2014
  26. By: Luba Petersen (Simon Fraser University)
    Abstract: This paper explores the importance of accessible and focal information in influencing beliefs and attention in a learning-to-forecast laboratory experiment where subjects are incentivized to form accurate expectations about inflation and the output gap. We consider the effects of salient and accessible forecast error information and learning on subjects' forecasting accuracy and heuristics, and on aggregate stability. Experimental evidence indicates that, while there is considerable heterogeneity in heuristics used, subjects' forecasts can be best described by a constant-gain learning model where subjects respond to forecast errors. Salient forecast error information reduces subjects' overreaction to their errors and leads to greater forecast accuracy, coordination of expectations and macroeconomic stability. The benefits of this focal information are short-lived and diminish with learning.
    Keywords: experimental macroeconomics, laboratory experiment, monetary policy, expectations, learning to forecast, availability heuristic, focal points, communication, rational inattention
    JEL: C92 E2 E52 D50 D91
    Date: 2014–07
  27. By: Jens Hilscher (International Business School, Brandeis University); Alon Raviv (Brandeis University); Ricardo Reis (Columbia University)
    Abstract: We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected infl ation can lower the real value of outstand- ing government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for infl ation at differ- ent horizons. The estimates suggest that it is unlikely that infl ation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead in flation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
    Keywords: inflation options, maturity of government debt, copulas, required reserves.
    JEL: E31 E64 G18
    Date: 2014–07
  28. By: Harenberg, Daniel; Ludwig, Alexander
    Abstract: We ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks. --
    Keywords: social security,idiosyncratic risk,aggregate risk,welfare
    JEL: C68 E27 E62 G12 H55
    Date: 2014
  29. By: Stefan Avdjiev; Zheng Zeng
    Abstract: We employ a threshold vector autoregression (TVAR) methodology in order to examine the nonlinear nature of the interactions among credit market conditions, monetary policy, and economic activity. We depart from the existing literature on the subject along two dimensions. First, we focus on a model in which the relevant threshold variable describes the state of economic activity rather than credit market conditions. Second, in contrast to the existing TVAR literature, which concentrates exclusively on single-threshold models, we allow for the presence of a second threshold, which is overwhelmingly supported by all relevant statistical tests. Our results indicate that the dynamics of the interactions among credit market conditions, monetary policy and economic activity change considerably as the economy moves from one phase of the business cycle to another and that single-threshold TVAR models are too restrictive to fully capture the nonlinear nature of those interactions. The impact of most shocks tends to be largest during periods of sub-par economic growth and smallest during times of moderate economic activity. By contrast, credit risk shocks have the largest impact when output growth is considerably above it long-term trend.
    Keywords: Threshold vector autoregression, regime switching, nonlinearity, business-cycle asymmetry, credit shock
    Date: 2014–06
  30. By: Dixon, Huw David (Cardiff Business School); Luintel, Kul B (Cardiff Business School); Tian, Kun (Cardiff Business School)
    Abstract: This paper takes the locally collected price-quotes used to construct the CPI index in the UK for the period 1996-2013 to explore the impact of the crisis on the pricing behavior of firms. We develop a time-series framework which is able to capture the link between macro- economic variables (in?ation and output) and the behavior of prices in terms of the frequency of price change, the dispersion of price levels and the dispersion of price-growth. Whilst these effects are present, they are small and do not have significant effects for monetary policy.
    Keywords: Price-spell; steady state; duration
    JEL: E50
    Date: 2014–06
  31. By: Maciej Krzak; Grzegorz Poniatowski; Katarzyna W¹sik
    Abstract: This paper presents forecasts for the Financial Stress Index (FSI) and the Economic Sensitivity Index (ESI) for the period 2014-2015 for six countries in the region, namely the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland. It is a continuation of the endeavor to construct synthetic indices measuring financial stress and economic sensitivity for twelve Central and East European countries using the Principal Component Analysis. In order to obtain forecasts of the FSI, we estimated Vector Autoregression (VAR) models on monthly data for the period 2001-2012 separately for all the countries. Using quarterly historical values of ESI and FSI, we estimated Dynamic Panel Data Model for the complete sample of countries. Parameters of the model were later used for forecasting the ESI. Obtained results suggest that the FSI will start to rise in 2014 in the Czech Republic, Lithuania, and Estonia. For Latvia and Hungary, we observed a conversion in the trend, i.e. at the beginning of 2015, when the index should start to fall. According to our forecasts, the ESI will be rising in the next two years, except for Hungary, where we predict a continuous decrease in economic sensitivity.
    Keywords: financial stress, economic sensitivity, economic indicators, Central and Eastern Europe
    JEL: G01 E32 C43
    Date: 2014–07
  32. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–03–21
  33. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–02–28
  34. By: James Morley
    Abstract: The presence of "economic slack" directly implies that an economy can grow quickly without any necessary offsetting slow growth or retrenchment in the future. Based on this link between economic slack and future economic growth, I argue for a forecastbased estimate of the output gap as a measure of economic slack. This approach has the advantage of being robust to different assumptions about the underlying structure of the economy and allows for empirical analysis of a Phillips Curve relationship between the output gap and inflation. I apply this approach to investigate economic slack and its relationship with inflation for selected economies in Asia and the Pacific, taking into account structural breaks in long-run growth and uncertainty about the appropriate forecasting model. The estimated output gap is highly asymmetric for most the economies and implies a convex Phillips Curve in many of the cases.
    Keywords: output gap; model averaging; business cycle asymmetry; convex Phillips Curve
    Date: 2014–06
  35. By: Stéphane Auray (CREST-ENSAI, ULCO and CIRPEE); David Fuller (Concordia University, CIREQ); Damba lkhagvasuren (Concordia University, CIREQ); Antoine Terracol (CES-Université Paris 1)
    Abstract: A dynamic multi-sector model with net and excess mobility is developed to quantify the determinants of the canonical increasing wage-tenure profile. The model distinguishes between three factors: sector specific skill accumulation, sectoral-level shocks, and dynamic worker sector mismatch shocks. The sector-specific skill premium drives the observed negative correlation between lifetime earnings and mobility. Excess mobility driven by worker-sector mismatch shocks explains nearly 20 percent of the observed wage growth for recent movers. A model featuring only dynamic worker-sector mismatch shocks still captures the salient features of the wage-tenure profile. Sectoral-level shocks have a negligible impact on the wage-tenure profile and excess mobility
    Keywords: Labor Mobility, Wage Structure, Excess and Net Mobility, Industry-Specific Experience, Dynamic Sectoral Mismatch, Labor Income Shocks, Returns to Tenure
    JEL: E24 J31 J24 J62
    Date: 2014–03
  36. By: Berthold, Norbert; Braun, Stella; Coban, Mustafa
    Abstract: In den letzten drei Jahrhunderten wurde mehrmals der Versuch gestartet, eine stabile Währungsunion aus souveränen Staaten zu bilden. Vier historische Beispiele sollen durch ihre Entstehungsgeschichte und ihren Zerfall Aufschluss darüber geben, welche Gründe und Ursachen die Instabilität von Währungsräumen vorantreibt. Die Geschichte zeigt in bestimmten Punkten Parallelen zur heutigen Situation der Europäischen Währungsunion. Austrittsgründe der historischen Unionsmitglieder und die Stärke der Austrittsbemühungen lassen sich zum Teil auf die heutige Eurozone projizieren. -- In the last three centuries it has been attempted to constitute a stable monetary union of souvereign states. The history and the collapse of four historical examples shed light on the reasons and causes that drive the instability of currency areas. The history shows parallels to the current situation of the European Monetary Union. Reasons for the exit of historical Union members as well as the strength of their efforts to pot out, can partly be transferred to the current euro zone.
    Keywords: Lateinische Münzunion,Skandinavische Münzunion,Kronenzone,Rubelzone,Historische Währungsräume,Latin Monetary Union,Scandinavian Monetary Union,Crown Zone,Ruble Zone,Historical Currency Areas
    JEL: E42 E52 N13 N14
    Date: 2014
  37. By: Lafrance, Amelie; Macdonald, Ryan
    Abstract: This paper examines the composition of Canadian and United States gross national saving for a period spanning more than 80 years, using time series from the Bureau of Economic Analysis in the United States and a newly created dataset for Canada. The paper tracks short-term, year-to-year fluctuations, cyclical fluctuations and long-term compositional changes. It illustrates a substantial degree of national saving reallocation across sectors, annually and across business cycles. The national saving rate is more stable than sector saving rates, implying that sectoral changes have been largely offsetting.
    Keywords: Economic accounts, Intercity and international price comparisons, Prices and price indexes, Statistical methods
    Date: 2014–06–26
  38. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–05–06
  39. By: Y. Hossein Farzin (Department of Agricultural and Resource Economics, UC Davis, U.S.A. and Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), Department of Economics, University of Oxford, UK); Ronald Wendner (Department of Economics, University of Graz, Austria)
    Abstract: The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition paths of most countries’ saving rates exhibit a statistically significant hump-shaped pattern. Prior literature shows that CES production may imply a hump-shaped pattern of the saving rate (Goméz, 2008). However, the implied magnitude of the hump falls short of what is seen in empirical data. We introduce two non-standard features of preferences into a neoclassical growth model with CES production: hyperbolic discounting and short planning horizons. We show that, in contrast to the commonly accepted argument, in general (except for the special case of logarithmic utility) a model with hyperbolic discounting is not observationally equivalent to one with exponential discounting. We also show that our framework implies a hump-shaped saving rate dynamics that is consistent with empirical evidence. Hyperbolic discounting turns out to be a major factor explaining the magnitude of the hump of the saving rate path. Numerical simulations employing a generalized class of hyperbolic discount functions, which we term regular discount functions, support the results.
    Keywords: Saving Rate Dynamics, Non-Monotonic Transition Path, Hyperbolic Discounting, Regular Discounting, Short-Term Planning, Neoclassical Growth Model
    JEL: D91 E21 O40
    Date: 2014–07
  40. By: Paolo Pini
    Abstract: Sommario Negli ultimi anni durante la crisi, la politica di svalutazione caricata sul lavoro non ha fatto altro che aggravare gli effetti negativi dell'austerita' sulla domanda interna. Eppure la Commissione Europea, anche nelle ultime Raccomandazioni, continua a prescrivere continuita' nelle politiche di flessibilita' del mercato del lavoro, contrattuali e retributive. Il recente risultato elettorale europeo non appare aver modificato l'equilibrio politico nel Parlamento Europeo, e la politica economica sembra rimanere saldamente sotto il controllo di chi ha gestito la crisi e l'ha aggravata applicando le regole del rigore senza crescita. In Italia, il governo Renzi pensa di contrastare il record di disoccupazione con un "Jobs Act" che solo nel nome richiama quello americano. Ma le sue riforme del lavoro, con le modifiche ai contratti a termine estesi a tre anni senza causale, sono la stessa cura applicata dalla fine degli anni novanta che hanno cosi' negativamente colpito l'economia italiana ed il mondo del lavoro.
    Abstract: Expansionary Austerity, Expansionary Precariousness and the Jobs Act In the last years of the crisis, the devaluation policy on labour has exacerbated the negative effects of austerity on domestic demand. Nevertheless, the European Commission, also in the recent countries recommendations, keeps prescribing continuity in labour policy for more market flexibility, in contracts and wages. The recent European election outcomes did not modify the political equilibrium in the European Parliament, and the economic policy seems to remain under full control of the same parties which have managed the crisis and worsen its economic consequences applying the rigor-without-growth rule. In Italy, PM Matteo Renzi has pledged to slash the country’s record unemployment with his American-branded “Jobs Actâ€. But his labour reforms, which will see short term job contracts extended for up to 3 years, are more of the same medicine applied since the turn of the 1990s that have been such bad news for the Italian economy and workers.
    Keywords: Economic Growth; European Economic Policy; Jobs Act; Labour Deregulations
    JEL: E61 J08 J38 O47
    Date: 2014–07–11
  41. By: Hans Christian Müller-Dröge; Tara M. Sinclair; H.O. Stekler
    Abstract: In this paper we present an evaluation of forecasts of a vector of variables of the German economy made by different institutions. Our method permits one to evaluate the forecasts for each year and then if one is interested to combine the years. We use our method to determine an overall winner for a forecasting competition across twenty-five different institutions for a single time period using a vector of eight key economic variables. Typically forecasting competitions are judged on a variable-by-variable basis, but our methodology allows us to determine how each competitor performed overall. We find that the Bundesbank was the overall winner for 2013.
    Keywords: Mahalanobis Distance, forecasting competition, GDP components, German macroeconomic data
    JEL: C5 E2 E3
    Date: 2014–07
  42. By: Tim de Vries; Jakob de Haan
    Abstract: We examine the relationship between credit ratings and bond yield spreads of peripheral countries in the euro area (Greece, Ireland, Italy, Portugal and Spain) for the period 1995-2014. Since 2012, bond spreads of those countries have come down very fast, whereas credit ratings have hardly changed. Our results suggest that credit rating agencies have become more cautious and have changed their approach to assess credit risk of sovereigns, and that the impact of sovereign credit risk ratings on sovereign bond spreads has changed.
    Keywords: Credit ratings; bond yield spreads; euro crisis; GIIPS
    JEL: E44 E47 G15 G24
    Date: 2014–07
  43. By: Eshun, Maame Esi; Adu, George; Buabeng, Emmanuel
    Abstract: This paper examines the financial determinants of private investment in Ghana using annual time series data from 1970 to 2010. Based on the autoregressive distributed lag (ARDL) bounds testing procedure to cointegration, the paper finds existence of cointegration among the variables. The empirical results support the view that private investment declines in both the short run and long run if the real interest rate is high and investors face severe financing constraints when credit is made scarce to the sector. Recommended were policies that would eliminate the financing constraints to make credit easily accessible to private investors.
    Keywords: private investment, bounds test, cointegration, Ghana
    JEL: E2 E22
    Date: 2014–07–21
  44. By: Casper Christophersen; Petr Jakubik (EIOPA)
    Abstract: Insurance companies play an important role in the financial sector and the availability of insurance products is an essential element of sustainable economic growth. This article analyses the relationship between growth in the insurance sector and key macroeconomic determinants using a European panel data set published by EIOPA. We focus on gross written premiums (GWP) to capture insurance market growth. Our empirical analysis reveals a high GWP persistence as well as a strong link between GWP and economic growth and unemployment. Moreover, the estimated model suggests a higher sensitivity to the macroeconomic environment for life compared to non-life insurance. Finally, there is also empirical evidence that insurers expand their international activities in periods when domestic growth opportunities are low. These findings can be used to underpin a quantitative financial stability framework to assess the potential impact of different macroeconomic scenarios on insurance market growth.
    Keywords: Gross written premiums, insurance, macroeconomic environment, quantitative financial stability framework
    JEL: G22 G28 E27
    Date: 2014–06
  45. By: Riccardo Trezzi; Francesco Porcelli
    Abstract: During a natural disaster, the negative supply shock due to the destruction of productive capacity is counteracted by a positive demand shock due to public grants for assistance and reconstruction positing an identification issue in empirical work. Focusing on the 2009 ’Aquilano’ earthquake in Italy as a case study, we take advantage of quantified measure of damages for 75,424 buildings to estimate the negative supply shock and of a law issued to allocate reconstruction grants, which resulted in a sharp, exogenous discontinuity in transfers and output behavior across neighboring municipalities to estimate the positive demand shock. Diff-in-diff analysis suggests that local output multipliers of reconstruction grants (net of marginal tax rebates) are below unity. Yet the size of the grants act as a public insurance scheme, preventing a fall in output.
    Keywords: Natural disasters, Fiscal multipliers, Mercalli scale.
    JEL: C36 E62 H70
    Date: 2014–07–23
  46. By: Tim Jackson; Ben Drake; Peter Victor; Kurt Kratena; Mark Sommer
    Abstract: This milestone provides a broad overview of model development under Work Package 205 of the WWWforEurope project. It describes briefly the challenge of modelling combined economic, ecological and financial systems and sets out a series of objectives for modelling the socio-economic transition towards sustainability. It highlights modelling needs in relation to full employment, financial stability, and social equity under conditions of constrained resource consumption and ecological limits. The paper also provides a broad overview of the literatures relevant to the task in hand. It then describes two separate modelling approaches, developed by two different teams within WWWforEurope. One of these approaches, led by WIFO, uses a Dynamic New Keynesian (DYNK) model to explore the implications of different long-run equilibrium paths for energy consumption. The other approach, led by Surrey in collaboration with York University, is motivated primarily by the desire to integrate a comprehensive model of the financial economy into a model of a (resource and emission-constrained) real economy. This paper sets out the overarching structure of each of these approaches. It discusses the similarities and differences between the two approaches and makes some proposals for the management of subsequent milestones in relation to WP 205.
    Keywords: Beyond GDP, Ecological innovation, Economic strategy, Full employment growth path, Green jobs, Labour markets, Macroeconomic disequilibria, Market economy with adjectives, New technologies, Policy options, Social innovation, Socio-ecological transition, Sustainable growth, Wealth
    JEL: C D E O P Q
    Date: 2014–08
  47. By: Diewert, Erwin; Shimizu, Chihiro
    Abstract: The paper studies the problems associated with the construction of price indexes for commercial properties that could be used in the System of National Accounts. Property price indexes are required for the stocks of commercial properties in the Balance Sheets of the country and related price indexes for the land and structure components of a commercial property are required in the Balance Sheet accounts of the country for the calculation of the Multifactor Productivity of the Commercial Property Industry. The paper uses a variant of the builder’s model that has been used to construct Residential Property Price Indexes. Geometric depreciation rates are estimated for commercial offices in Tokyo using assessment data for REITs. The problems associated with the decomposition of asset value into land and structure components are addressed. The problems associated with depreciating capital expenditures on buildings and with measuring the loss of asset value due to early retirement of the structure are also addressed.
    Keywords: Commercial property price indexes, System of National Accounts, Balance Sheets, methods of depreciation, land and structure price indexes, demolition
    JEL: C2 C23 C43 D12 E31 R21
    Date: 2014–07–14
  48. By: Kholodilin, Konstantin A.; Thomas, Tobias; Ulbricht, Dirk
    Abstract: In an uncertain world, decisions by market participants are based on expectations. Thus, sentiment indicators reflecting expectations are proven at predicting economic variables. However, survey respondents largely perceive the world through media reports. Typically, crude media information, like word-count indices, is used in the prediction of macroeconomic and financial variables. Here, we employ a rich data set provided by Media Tenor International, based on sentiment analysis of opinion-leading media in Germany from 2001 to 2014, transformed into several monthly indices. German industrial production is predicted in a real-time out-of-sample forecasting experiment using more than 17,000 models formed of all possible combinations with a maximum of 3 out of 48 macroeconomic, survey, and media indicators. Media data are indispensable for the prediction of German industrial production both for individual models and as a part of combined forecasts, particularly during the global financial crisis. --
    Keywords: forecast combination,media data,German industrial production,reliability index,R-word
    JEL: C10 C52 C53 E32
    Date: 2014
  49. By: el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet
    Abstract: The capital structure theory advocates a mix between debt and equity to optimize a firm‘s value (Modigliani & Miller, 1958). However, Islamic finance recognizes more conservative levels of debt for firms, based not on capital structure, but on debt to total assets or debt to market capitalization. This study is the first attempt to investigate the role of leverage in affecting the returns and the firm‘s share price volatility in relation to an Islamic finance perspective (IFP). The paper is based on a sample of 320 European companies distributed into different portfolios with high and low debt, high and low assets and focused on ten different countries. Comparative portfolio analysis was used to obtain a number of testable hypotheses, which specify the factors at the level of the firm and at the level of the market, in order to determine optimal financial risk. Specifically, we use the mean variance efficient frontier (MVEF) to confirm, in accordance with the theory, that a portfolio with a higher capital structure has higher volatility and lower returns compared to a portfolio with a lower capital structure. Then, the Shari‘ah screening method of improving the firm‘s stability in the market has been analyzed based on econometric analysis. Dynamic GMM is used in order to correlate the firm‘s leverage to total assets with its return and volatility in portfolios with high and low capital structure. To ensure the robustness of results, the business cycle effects have been considered after adding the firm and the country characteristics with a view to taking into account the heterogeneity across different firms and different markets. The preliminary results tend to indicate that there are significant correlations between capital structure and both returns and volatility, but not necessarily with high debt to assets given different sizes and growth of firms. The paper suggests that are three main factors which need to be considered by the firms in order to improve their stability in the market: firstly, the level of capital structure but not the debt to total assets as suggested by some scholars using the IFP; secondly, the capitalization or the firm size and finally, the level of the sovereign debt and country dynamics. Although the latter may be beyond the firm‘s control, it is up to the firm to consider its own market with implications on its leverage policy in relation to the frequency-dependent strategy.
    Keywords: Volatility, leverage, dynamic GMM, Wavelet Time–frequency analysis
    JEL: C22 C58 E44 G15
    Date: 2014–06–23
  50. By: Theodore R. Breton
    Abstract: In 1960 Theodore Schultz expounded a human capital theory of economic growth that includes three elements: 1) Countries without much human capital cannot manage physical capital effectively, 2) Economic growth can only proceed if physical capital and human capital rise together, and 3) Human capital is the factor most likely to limit growth. I specify Schultz’s theory mathematically and test it in periods when global financial capital was highly mobile. I find that in 1870, 1910, and 2000, the average schooling attainment of the adult population largely determined the stock of physical capital/capita and GDP/capita in 42 market economies.
    Keywords: Human Capital, Schooling, Capital Investment, Economic Growth, Solow Model, Market Economies
    JEL: E13 I21 O11 O15 O41
    Date: 2014–01–01
  51. By: José Gabriel Palma
    Abstract: Latin America is a region whose critical social imagination has stalled, changing from a uniquely prolific period during the 1950s and 1960s — revolving around structuralism, ‘dependency analyses’, Baran and Sweezy’s-type analysis of ‘monopoly capitalism’, French structuralism, the German Historical School, Keynesian and macroeconomics, and the ideas of endogenous intellectuals (such as Mariátegui) — to an intellectually barren one since the 1982 debt crisis and the fall of the Berlin Wall. Although this has happened in most of the world, in Latin America both the process of re-legitimisation of capital, and the downswing of the cycle of critical thinking have been particularly pronounced as neo-liberalism has conquered the region, including most of its progressive intelligentsia, just as completely (and just as fiercely) as the Holy Inquisition conquered Spain — transforming critical thinkers into an endangered species. As pre-1980 critical analytical work had been characterised by an unremitting critique of the economy, once the mainstream left conceded the economy as the fundamental hub of the struggle, there seemed to have been little else left in terms of basic ideological principles to hold onto in a thoughtful way — i.e., it was as if the mainstream left had lost not just some but all its ideological relevance, making it particularly difficult for them to move forward in an innovative way. As a result, in terms of development strategies and economic policies both the traditional and the ‘new-left’ are in one way or another still stuck in the past. While in some countries the former basically wants to recreate the past, in others the latter seems to be unable to do anything more imaginative than to attempt to create a future which is simply the exact opposite of that past — the main guiding economic policy principle being to transform practically anything that before was considered “virtue” into “vice”, and vice-versa. This narrow ‘reverse-gear’ attitude of the ‘new-left’ has delivered not only a disappointing economic performance (particularly in terms of productivity-growth), but also rather odd political settlements characterised by a combination of an insatiable capitalist elite, a captured and unimaginative progressive political élite (the dominant classes are quite happy to let them govern as long as they do not forget who they are), passive citizens, and a stalled social imagination — a dull mélange that from time to time is sparked off by spontaneous outbursts of students’ discontent. Meanwhile, the world (with its new technological and institutional paradigms) moves on, and Asia forges ahead.
    Keywords: Latin America, Ideology, Critical Thinking, Structuralism, Dependency,Neoliberalism,Fundamentalism, ‘New Left’, Top 1%, Keynes, Foucault, Prebisch, Hirschman.
    JEL: B5 D3 E2 F13 F59 J20 L52 N16 N36 O16 O4 P5
    Date: 2014–06–19
  52. By: Minford, Patrick (Cardiff Business School); Xu, Yongden; Zhou, Peng (Cardiff Business School)
    Abstract: Out-of-sample forecasting tests of DSGE models against time-series benchmarks such as an unrestricted VAR are increasingly used to check a) the specification b) the forecasting capacity of these models. We carry out a Monte Carlo experiment on a widely-used DSGE model to investigate the power of these tests. We find that in specification testing they have weak power relative to an in-sample indirect inference test; this implies that a DSGE model may be badly mis-specified and still improve forecasts from an unrestricted VAR. In testing forecasting capacity they also have quite weak power, particularly on the lefthand tail. By contrast a model that passes an indirect inference test of specification will almost definitely also improve on VAR forecasts.
    Keywords: Out of sample forecasts; DSGE; VAR; specification tests; indirect inference; forecast performance
    JEL: E10 E17
    Date: 2014–07
  53. By: Michael Anyadike-Danes (Aston Business School); Carl-Magnus Bjuggren (Linköping University, Sweden); Sandra Gottschalk (The Centre for European Economic Research (ZEW) in Mannheim); Werner Hölzl (WIFO, Austria); Dan Johansson (Hui Research); Mika Maliranta (The Research Institute of the Finnish Economy (ETLA)); Anja Myrann (Ragnar Frisch Centre for Economic Research, Norway)
    Abstract: The contribution of different-sized businesses to job creation continues to attract policymakers’ attention, however, it has recently been recognized that conclusions about size were confounded with the effect of age. We probe the role of size, controlling for age, by comparing the cohorts of firms born in 1998 over their first decade of life, using variation across half a dozen northern European countries Austria, Finland, Germany, Norway, Sweden, and the UK to pin down size effects. We find that a very small proportion of the smallest firms play a crucial role in accounting for cross-country differences in job growth. A closer analysis reveals that the initial size distribution and survival rates do not seem to explain job growth differences between countries, rather it is a small number of rapidly growing firms that are driving this result.
    Keywords: birth cohort, firm age, firm size, firm survival, firm growth
    JEL: L25 E24 M13
    Date: 2013–05–02
  54. By: Croonenboreck, Carsten; Ambach, Daniel
    Abstract: In the wind power industry, wind speed forecasts are obtained and transformed into wind power forecasts. The Mycielski algorithm has proven to be an accurate predictor for wind speed in short-term scenarios. Moreover, Mycielski has the capability of forecasting wind power directly, instead of wind speed. This article compares wind power forecasts calculated by the Mycielski algorithm to state-of-the-art forecasters. As such, we use the Wind Power Prediction Tool (WPPT) and the recently developed generalization of it, GWPPT (Generalized WPPT). Furthermore, we evaluate statistical time series models such as autoregressive and vector autoregressive models. As an additional benchmark we use the persistence model, which is often used to assess forecasting accuracy. Each model is evaluated and we give a recommendation for the best forecasting model. --
    Keywords: Mycielski algorithm,WPPT,GWPPT,Wind Power,Wind Energy,Forecasting,Prediction
    JEL: C35 E27 Q47
    Date: 2014
  55. By: Hubert Gabrisch; Karsten Staehr
    Abstract: The Euro Plus Pact was approved by 23 EU countries in March 2011 and came into force shortly afterwards. The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances. This paper uses Granger causality tests and vector autoregressive models to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012. The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernable effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term.
    Keywords: European integration, policy coordination, unit labour costs, current account im-balances, economic crisis
    JEL: E61 F36 F41
    Date: 2014–07
  56. By: Lola Hernandez; Nicole Jonker; Anneke Kosse
    Abstract: Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for the financial decision making within a household find the debit card more useful for monitoring their household finances than cash. Individuals differ in major respects, however. In particular, low earners and the liquidity-constrained prefer cash as a monitoring and budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behaviour. We suggest that the substitution of cash by cards may slow down because of the financial crisis. Also, we show that cash still brings benefits that electronic alternatives have been unable to match. This suggests that inclusion of enhanced budgeting and monitoring features in electronic payment instruments may encourage consumers to use them more frequently.
    Keywords: payment surveys; cash; debit card; consumer choice; budgeting; financial distress; self-control
    JEL: C81 D12 D14 E41 G21
    Date: 2014–07
  57. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This paper demonstrates the existence of a finite set of equilibria in the case of the indeterminacy of linear rational expectations models. The number of equilibria corresponds to the number of ways to select n eigenvectors among a larger set of eigenvectors related to stable eigenvalues. A finite set of equilibria is a substitute to continuous (uncountable) sets of sunspots equilibria, when the number of independent eigenvectors for each stable eigenvalue is equal to one. --
    Keywords: linear rational expectations models,sunspots,indeterminacy,multiple equilibria,matrix Riccati equation
    JEL: C60 C61 C62 E13 E60
    Date: 2014–07–25
  58. By: Clemens Bonner
    Abstract: Government bonds receive preferential treatment in financial regulation. The purpose of this paper is to analyze the impact of this preferential treatment on banks' demand for government bonds. Using unique transaction-level data, our analysis suggests that preferential treatment in liquidity and capital regulation increases banks' demand for government bonds beyond their own risk appetite. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. On top of that, we find evidence that regulation leads to a longer-term increase in government bond holdings. Finally, our results suggest that higher government bond holdings are associated with more lending and lower profits during normal times but not during stress.
    Keywords: Government bonds; financial markets; regulation; liquidity; capital
    JEL: G18 G21 E42
    Date: 2014–07
  59. By: Berthold, Norbert; Gründler, Klaus
    Abstract: Der Beitrag diskutiert die Ursachen von Stagflation. Hierfür werden zunächst drei Kennzahlen abgeleitet, welche das Auftreten und die Stärke der Stagflation in der Weltwirtschaft und auf Länderebene abbilden. Im Anschluss wird anhand einer Reihe empirischer Schätzungen überprüft, welche Größen die Stagflationsmaße beeinflussen. Es stellt sich heraus, dass der Ölpreis eine ambivalente Wirkung entfaltet und dass seine Bedeutung im Zeitverlauf abnimmt. Während die Arbeitsproduktivität die Wahrscheinlichkeit und die Stärke der Stagflation über die Zeit hinweg relativ robust reduziert, hat sich die Geldpolitik seit Beginn der 1990er Jahre mehr und mehr als Hauptquelle stagflationärer Perioden herauskristallisiert. Damit stellt Stagflation heute kein unüberwindbares Problem mehr für die Wirtschaftspolitik dar. Dies bestätigt auch die rückläufige Persistenz im Auftreten von Stagflation. Insgesamt ist die Wahrscheinlichkeit, dass Stagflation entsteht, in den letzten Jahrzehnten zurückgegangen. --
    Keywords: Stagflation,Geldpolitik,Arbeitsmarkt
    JEL: E30 O40
    Date: 2014
  60. By: el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet
    Abstract: This study is the first attempt to investigate the relationship between firm’s leverage and systematic risk for seven European countries in relation to Shari’ah (Islamic) stock screening. This paper also aims to examine the shock transmission through the systematic risk and whether less debt could bring more stability to the capital market. Using a dynamic panel technique based on VAR (Vector autoregressive) and dynamic GMM framework, we analyse the levered and the unlevered beta of the firm based on the firm characteristics before adding the country characteristic effects in order to take into account the heterogeneity across firms, which ensures the robustness of the results. We find that leverage is significantly and positively associated with systematic risk and that high leverage augments systematic risk, which is more affected by the nature of the European market rather than the firm characteristic effect. However, the existence of high leverage is indicative of having a big role in making worse the firm conditions under shocks. The presence of these effects is further explored through the responses of the model’s variables to market-wide volatility and shocks. Finally, the sensitivity to the market appears to be impacted by the financial crisis in terms of contagion in leverage with implications for portfolio diversification. Our findings have implications on the stability of firm’s risk exposure and the appropriate level of debt’s commitment to be made by managers.
    Keywords: sensitivity to the market or systematic risk, leverage, dynamic GMM panel technique, financial crisis, contagion, Shari’ah stock screening
    JEL: C22 C58 E44 G15
    Date: 2014–06–24
  61. By: Alok Kumar (Department of Economics, University of Victoria); Brianne Kober
    Abstract: In this paper, we study the effects of education on the total factor productivity (TFP) of a large number of countries. We estimate TFP using a variant of augmented Solow growth model in which health capital is one of the factors of production. We find that quantity of education significantly and positively affects TFP. This result is in contrast to the findings of the previous literature, that suggest that either the quantity of education does not matter for growth (e.g. Benhabib and Spiegel 1994, Caselli et al. 1996) or only the quality of education matters for growth (e.g. Hanushek and Kimko 2000). We also find that TFP differences explain about 1/3rd of per-capita real income differences across countries. This estimate is substantially lower than the existing estimates (e.g. Klenow and Rogriguez-Clare 1997, Hall and Jones 1999) which suggest that TFP differences are the dominant source of per-capita real income differences across countries.
    Keywords: Augmented Solow Growth Model, TFP, Quantity and Quality of Education, Health
    JEL: F43 E23 N10 N30 O47
    Date: 2014–07–25
  62. By: Nathaniel Hendren
    Abstract: This paper develops a tractable method for resolving the equity-efficiency tradeoff that modifies the Kaldor-Hicks compensation principle to account for the distortionary cost of redistribution. Weighting measures of individual surplus by the inequality deflator corresponds to searching for local Pareto improvements by making transfers through the income tax schedule. Empirical evidence consistently suggests redistribution from rich to poor is more costly than redistribution from poor to rich. As a result, the inequality deflator weights surplus accruing to the poor more so than to the rich. Regardless of one's own social preferences, surplus to the poor can hypothetically be turned into more surplus to everyone through reductions in distortionary taxation. I estimate the deflator using existing estimates of the response to taxation, combined with a new estimation of the joint distribution of taxable income and marginal tax rates. I show adjusting for increased income inequality lowers the rate of U.S. economic growth since 1980 by roughly 15-20%, implying a social cost of increased income inequality in the U.S. of roughly $400 billion. Adjusting for differences in income inequality across countries, the U.S. is poorer than countries like Austria and the Netherlands, despite having higher national income per capita. I conclude by providing an empirical framework for characterizing the existence of local Pareto improvements from government policy changes.
    JEL: D6 E01 H0
    Date: 2014–07

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