nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒10‒22
sixty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The great mortgaging: housing finance, crises, and business cycles By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  2. Reducing Macroeconomic Imbalances in Turkey By Oliver Röhn; Rauf Gönenç; Vincent Koen; Evren Erdoğan Coşar
  3. Monetary and macroprudential policy with foreign currency loans By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  4. Los desafíos para la política monetaria en las economías avanzadas tras la Gran Recesión By Juan Carlos Berganza; Ignacio Hernando; Javier Vallés
  5. Inflation Targeting in New Zealand: The 1987 Reserve Bank Questionnaire and Related Documents By Brian Silverstone
  6. A policy model to analyze macroprudential regulations and monetary policy By Sami Alpanda; Gino Cateau; Cesaire Meh
  7. The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach By Hyeongwoo Kim; Wen Shi
  8. Financial Frictions in a DSGE Model for Latvia By Ginters Buss
  9. Sweden: 2014 Article IV Consultation-Staff Report;Press Release; and Statement by the Executive Director for Sweden By International Monetary Fund. European Dept.
  10. Money Market Operations in Fiscal 2013 By Financial Markets Department
  11. Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation By Gliksberg, Baruch
  12. Filtering German Economic Conditions from a Large Dataset: The New DIW Economic Barometer By Paul Viefers; Ferdinand Fichtner; Simon Junker; Maximilian Podstawski
  13. Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence By Max Gillman; Michal Kejak; Giulia Ghiani
  14. Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability By Jang-Ting Guo; Shu-Hua Chen
  15. Rethinking Pro-Growth Monetary Policy in Africa: Monetarist versus Keynesian Approach By Christian Lambert Nguena
  16. Fiscal multipliers in a small euro area economy: How big can they get in crisis times? By Gabriela Castro; Ricardo M. Felix; Paulo Julio; Jose R. Maria
  17. Wage Stagnation? Fact Disclosure and Cross-Country Comparison By Chang-Ching Lin; Juin-Jen Chang; Shu-Shiuan Lu
  18. Republic of Kazakhstan: 2014 Article IV Consultation-Staff Report; Press Release By International Monetary Fund. Middle East and Central Asia Dept.
  19. Monetary analysis and the global financial cycle: an Asian central bank perspective By Andrew Filardo; Hans Genberg; Boris Hofmann
  20. Georgia: Request for a Stand-By Arrangement; Press Release; and Statement for the Executive Director for Georgia By International Monetary Fund. Middle East and Central Asia Dept.
  21. The macroprudential measures adopted in Europe for the real estate sector By Daniele Ciani; Wanda Cornacchia; Paolo Garofalo
  22. Financial disruption as a cost of soverign default: a quantative assessment By Andre Diniz; Bernardo Guimaraes
  23. Republic of Congo: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Congo By International Monetary Fund. African Dept.
  24. The Effect of the Global Financial Crisis on OECD Potential Output By Patrice Ollivaud; David Turner
  25. Alternative Approaches to Commercial Property Price Indexes for Tokyo By Diewert, Erwin; Shimizu, Chihiro
  26. Regional Impacts of High Speed Rail in China : Spatial Proximity and Productivity in an Emerging Economy By Ying Jin; Richard Bullock; Wanli Fang
  27. Republic of Belarus: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Belarus By International Monetary Fund. European Dept.
  28. The Euro Changeover in Estonia: implications for inflation By Tairi Rõõm; Katri Urke
  29. International Transmission of Credit Shocks: Evidence from Global Vector Autoregression Model By Ludmila Fadejeva; Martin Feldkircher; Thomas Reininger
  30. Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk By Daniel Harenberg; Alexander Ludwig
  31. Water Taxation and the Double Dividend Hypothesis By Nicholas Kilimani
  32. Guinea: Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review-Staff Report; Press Release; and Statement by the Executive Director for Guinea By International Monetary Fund. African Dept.
  33. Trinidad and Tobago: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Trinidad and Tobago By International Monetary Fund. Western Hemisphere Dept.
  34. The Relevance of International Spillovers and Asymmetric Effects in the Taylor Rule By Joscha Beckmann; Ansgar Belke; Christian Dreger
  35. Does U.S. Monetary Policy Affect Crude Oil Future Price Volatility? An Empirical Investigation By Alessandra Amendola; Vincenzo Candila; Antonio Scognamillo
  36. Monetary Policy in Advanced Economies: Some Challenges for Emerging Economies By Rodrigo Vergara
  37. Lebanon: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Lebanon By International Monetary Fund. Middle East and Central Asia Dept.
  38. How the Credit Cycle Affects Growth: The Role of Bank Balance Sheets By Bezemer, Dirk J.; Zhang, Lu
  39. Optimal Bail-out and Bail-in policy mix: Lessons from the Banco Espírito Santo (BES) failure By Miguel Rocha de Sousa
  40. Predicting Business Cycle Phases by Professional Forecasters- Are They Useful ? By IIZUKA Nobuo
  41. The great (De)leveraging in the GIIPS countries. Domestic credit and net foreign liabilities 1998–2013 By Juan Carlos Cuestas; Karsten Staehr
  42. Reverse mortgage loans: a quantitative analysis By Nakajima, Makoto; Telyukova, Irina A.
  43. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: A Fact Finding Analysis Using the Flow of Funds Accounts Statistics By Masashi Saito; Yoshihiko Hogen; Shusaku Nishiguchi
  44. United Kingdom: Selected Issues By International Monetary Fund. European Dept.
  45. People’s Republic of China: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the People’s Republic of China By International Monetary Fund. Asia and Pacific Dept
  46. Belarus Public Expenditure and Financial Accountability : Public Financial Management Performance Report By World Bank
  47. The Real Effects of Bank Capital Requirements By M. Brun; H. Fraisse; D. Thesmar
  48. A Fixed-Point Theory of Price Level Determination in General Equilibrium By Gliksberg, Baruch
  49. Sequential Coordination, Higher-Order Belief Dynamics and E-Stability Principle. By G. Gaballo
  50. Estimating Brazilian Monthly GDP:a State-Space Approach* By Issler, João Victor; Notini, Hilton Hostalacio
  51. The Political Economy of Growth, Inequality, the Size and Composition of Government Spending By Klaus Schmidt-Hebbel; José Carlos Tello
  52. Pacific Private Sector Development Initiative: Progress Report 2013 By Asian Development Bank (ADB); ; ;
  53. Morocco: Request for An Arrangement Under the Precautionary and Liquidity Line and Cancellation of the Current Arrangement-Staff Report; Press Release and Statement by the Executive Director for Morocco By International Monetary Fund. Middle East and Central Asia Dept.
  54. Rare Disasters and Exchange Rates By Emmanuel Farhi; Xavier Gabaix
  55. Kingdom of the Netherlands—Curaçao and Sint Maarten: 2014 Article IV Consultation-Staff Report; and Press Release By International Monetary Fund. European Dept.
  56. Stress-testing banks’ corporate credit portfolio By O. de Bandt; N. Dumontaux; V. Martin; D. Médée
  57. A dinâmica da Inflação no Brasil By Alexis Maka; Fernando de Holanda Barbosa
  58. Tax-adjusted Q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives By Estelle P. Dauchy; Sophia Chen
  59. The Effect of Climate Change and Adaptation Policy on Agricultural Production in Eastern Africa By Goytom Abraha Kahsay; Lars Gårn Hansen
  60. Ukraine: First Review Under the Stand-By Arrangement, Requests for Waivers of Nonobservance and Applicability of Performance Criteria, and a Request for Rephasing of the Arrangement; staff Statement; Press Release; and Statement by the Executive Director for Ukraine By International Monetary Fund. European Dept.
  61. Tuvalu: 2014 Article IV Consultation - Staff Report; Press Release; and Statement by the Executive Director for Tuvalu By International Monetary Fund. Asia and Pacific Dept
  62. Price-setting behaviour in New Zealand By Miles Parker
  63. Republic of Congo: Selected Issues By International Monetary Fund. African Dept.
  64. Can Macroeconomists Get Rich Forecasting Exchange Rates? By Costantini, Mauro; Cuaresma, Jesus Crespo; Hlouskova, Jaroslava

  1. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (Wirtschaftswissenschaftlicher Fachbereich Rheinische Friedrich-Wilhelms-Universität Bonn); Taylor, Alan M. (University of California-Davis, Economics Dept.)
    Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
    Keywords: leverage; recessions; mortgage lending; financial crises; business cycles; local projections.
    JEL: C14 C38 C52 E32 E37 E44 E51 G01 G21 N10 N20
    Date: 2014–09
  2. By: Oliver Röhn; Rauf Gönenç; Vincent Koen; Evren Erdoğan Coşar
    Abstract: Turkey recovered swiftly from the global financial crisis but sizeable macroeconomic imbalances arose in the process. High consumer price inflation and a wide current account deficit are sources of vulnerability. Even though below-potential growth helps rebalancing and disinflation, these imbalances endure. The financial sector still looks resilient thanks to buffers built up mainly prior to the financial crisis. However, private sector balance sheet risks have gained prominence as leverage increased. Macroeconomic and structural policy levers need to steer a passage between robust but externally unsustainable growth and externally viable but low growth. Monetary policy needs to bring inflation and inflation expectations closer to target. Macroprudential policies could more systematically lean against capital inflows and credit cycles to reduce private sector balance sheet vulnerabilities. The fiscal stance is broadly appropriate, but compliance with a multi-year general government spending ceiling would help avoid pro-cyclical loosening in case of revenue surprises and help boost domestic saving. Overall, policies should help reduce the risk of disruptions in capital flows as monetary policy stimulus is being withdrawn in the United States. Réduire les déséquilibres macroéconomiques en Turquie La Turquie s’est remise rapidement de la crise financière mondiale, qui a toutefois laissé dans son sillage des déséquilibres macroéconomiques importants. Le niveau élevé de l’inflation des prix à la consommation et l’ampleur du déficit de la balance courante sont des points de vulnérabilité. Même si une croissance inférieure à son potentiel contribue au rééquilibrage de l’économie et à la désinflation, les déséquilibres perdurent. Le secteur financier paraît encore résilient, grâce aux volants de sécurité constitués pour l’essentiel avant la crise financière, mais les risques entourant les bilans se sont accrus dans le secteur privé à mesure que l’endettement se développait. Les autorités devraient faire jouer les leviers macroéconomiques et structurels pour trouver une voie entre les deux écueils que constituent une croissance robuste mais non tenable extérieurement et une croissance extérieurement viable mais faible. La politique monétaire devrait permettre de rapprocher l’inflation et les anticipations d’inflation de l’objectif. Les politiques macroprudentielles pourraient être plus systématiquement orientées à contre-courant des entrées de capitaux et des cycles du crédit, pour réduire les vulnérabilités des bilans dans le secteur privé. L’orientation budgétaire est globalement appropriée, mais un plafonnement pluriannuel des dépenses des administrations publiques contribuerait, s’il était respecté, à éviter un assouplissement procyclique en cas de surprise au niveau des recettes ainsi qu’à doper l’épargne intérieure. Globalement, l’action des pouvoirs publics devrait aider à réduire le risque de ruptures dans les flux de capitaux, dans le contexte de l’abandon progressif de la politique de relance monétaire des États-Unis.
    Keywords: monetary policy, competitiveness, current account, Turkey, fiscal policy, saving, financial market policy, politique des marchés financiers, politique budgétaire, épargne, politique monétaire, balance courante, Turquie, compétitivité
    JEL: E2 E3 E44 E52 E62 F32 F41 G18 O52
    Date: 2014–09–16
  3. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions where housing loans can be denominated in domestic or foreign currency. We calibrate the model for Poland - a typical small open economy with a large share of foreign currency loans (FCL) - and use it to conduct a series of simulations. They show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.
    Keywords: foreign currency loans, monetary and macroprudential policy, DSGE models with banking sector
    JEL: E32 E44 E58
    Date: 2014
  4. By: Juan Carlos Berganza (Banco de España); Ignacio Hernando (Banco de España); Javier Vallés (Banco de España)
    Abstract: After almost six years with official interest rates at close to zero and with numerous unconventional measures still in place, 2014 is witnessing the beginning of the process of monetary normalisation in those economies, such as the United States and the United Kingdom, in which the recovery seems to have taken hold. However, the Bank of Japan is still implementing an ambitious programme of monetary expansion and the ECB has recently adopted new expansionary measures. This paper first assesses the various extraordinary monetary policy programmes conducted by the major central banks in advanced economies in response to the global financial crisis. Second, it sets out the risks associated with keeping the existing measures in place and raises questions in relation to the gradual withdrawal of these stimuli. Finally, it offers some lessons for the conduct of monetary policy in the future.
    Keywords: monetary policy, unconventional measures, risks, exit strategies
    JEL: E44 E52 E58
    Date: 2014–09
  5. By: Brian Silverstone (University of Waikato)
    Abstract: New Zealand is acknowledged widely as the first country to implement a formal monetary policy agreement specifying an explicit inflation target. This agreement, signed in March 1990 between the Minister of Finance and the Governor of the Bank, was implemented under Section 9 of the Reserve Bank of New Zealand Act 1989. By 2014, inflation targeting agreements had been established, in several forms, in more than 25 countries. During the evolving 1984-1989 price stability and inflation targeting deliberations in New Zealand, a survey of Reserve Bank economists in early 1987 included the question 'Should the Bank have an explicitly-stated desired inflation time path?' This paper is primarily a record of the background and responses to this question. It also includes the original documents and related material.
    Keywords: inflation targeting; monetary policy; New Zealand; Reserve Bank of New Zealand
    JEL: E31 E52 E58
    Date: 2014–09–30
  6. By: Sami Alpanda; Gino Cateau; Cesaire Meh
    Abstract: We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
    Keywords: macroprudential policy, DSGE, real-fi?nancial linkages
    Date: 2014–09
  7. By: Hyeongwoo Kim; Wen Shi
    Abstract: This paper empirically investigates the determinants of key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models their decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. These tests show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.
    Keywords: Monetary Policy; People's Bank of China; Ordered Probit Model; Deposit Rate; Lending Rate; In-Sample Fit; Out-of-Sample Forecast
    JEL: E52 E58
    Date: 2014–09
  8. By: Ginters Buss
    Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model for Latvia that would be suitable for policy analysis and forecasting purposes at Latvijas Banka. For that purpose, the DSGE model with financial frictions of Christiano, Trabandt and Walentin (2011) is adapted to Latvia's data, estimated, and studied as to whether adding the financial frictions block to an otherwise identical (baseline) model is an improvement with respect to several dimensions. The main findings are: 1) adding of financial frictions block provides a more appealing interpretation for the drivers of economic activity and allows reinterpreting their role; 2) financial frictions played an important part in Latvia's 2008 recession; 3) the financial frictions model beats both the baseline model and the random walk model in forecasting CPI inflation and GDP, and performs roughly the same as a Bayesian structural vector autoregression.
    Keywords: DSGE model, financial frictions, small open economy, Bayesian estimation, currency union
    JEL: E0 E3 F0 F4 G0 G1
    Date: 2014–08–12
  9. By: International Monetary Fund. European Dept.
    Abstract: Sweden’s economy has re-gained speed, following supportive macroeconomic policies and strong household demand. Employment has been rising, but the labor force expanded even more, resulting in higher unemployment mostly among vulnerable groups. Inflation remains very low, driven by external and domestic factors. At the same time, financial stability risks are an increasing concern, reflecting high and rising household debt, accelerating house prices, and Sweden’s very large banking system.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal consolidation;Unemployment;Fiscal reforms;Monetary policy;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Sweden;
    Date: 2014–08–29
  10. By: Financial Markets Department (Bank of Japan)
    Abstract: During fiscal 2013 (April 1, 2013 to March 31, 2014), the Bank of Japan pursued extremely powerful monetary easing under quantitative and qualitative monetary easing and significantly increased the amount outstanding of the monetary base through purchases of a wide range of assets, including large-scale purchases of Japanese government bonds (JGBs).
    Date: 2014–08–12
  11. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi�nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive �fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self �financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive �fiscal-passive monetary regime. In this regime, �scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money.
    Keywords: Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy;
    JEL: C60 E60 H60
  12. By: Paul Viefers; Ferdinand Fichtner; Simon Junker; Maximilian Podstawski
    Abstract: This paper presents a revised version of the DIW Economic Barometer, the business cycle index of the German Institute for Economic Research (DIW Berlin). As in earlier versions, we put forward a factor model on a monthly frequency to filter the latent state of the aggregate economy. In the new version, the resulting business cycle factor is based on more than 300 variables. The main methodological changes relate to (i) the estimation procedure, (ii) treatment of publication lags and missings, and (iii) the decomposition of the index into contributions from different sectors of the economy. Alongside several practical advantages, we also document a better historical nowcasting performance of the new index.
    Keywords: Business Cycles, Nowcasting, Dynamic Factor Models, Principal Components
    JEL: E32 E37
    Date: 2014
  13. By: Max Gillman; Michal Kejak; Giulia Ghiani
    Abstract: The paper sets out theory and evidence for the equilibrium determination of the nominal interest rate. We test the cash-in-advance economy using US postwar data and find cointegration of the interest rate, inflation, unemployment and the money supply, using either M2 or M1 monetary aggregates, and the Federal Funds rate or the three month Treasury bill rate. Results are consistent both with a persistent monetary liquidity effect in the cointegrating vector coefficients and also a long run quantity theoretic relation. We identify three Markov-switching regimes similar to NBER contractions, expansions, and the "unconventional" period. Dropping money indicates model misspecification.
    Date: 2014–10–02
  14. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.
    Keywords: Progressive Income Taxation, Endogenous Growth, Equilibrium (In)determinacy.
    JEL: E62 O41
    Date: 2014–09
  15. By: Christian Lambert Nguena (Association of African Young Economists)
    Abstract: The relative positive economic growth experienced by most African countries in the recent decade has come with insufficient demand stimulation. The concern of poverty at the forefront of economic policy, the need for inclusive growth and sustainable development, inter alia, brings forward the inevitable question of the monetary policy responsibility. Accordingly, the monetarist theory that focuses on price stability inherently neglects the demand stimulation aspect of economic prosperity. Since the mid 1980s, the monetarist school driven by its central aim of fighting inflation and maintaining credibility in markets and economic agents has been priority for monetary authorities (especially in Africa). To this effect, while good results in terms of inflation targeting has been achieved in many African countries; economic growth has sometimes been low. Hence, in light of the above, using a statistical and theoretical debate method, the Credible Monetary Policy (CMP)1 paradox is traceable to Africa. Accordingly, with the promising economic environment in Africa, we recommend the promotion of a monetary policy oriented toward improving economic growth under the constraint of price stability. In light of the above view, there are some note worthy signs such the recent decision by the two CFA zone central banks to either maintain interest rates at a low level or reduce it despite tightening measures of monetary policy taken by the European Central Bank (ECB) earlier in the year. In the same vein, the central bank of South Africa has maintained its policy of low interest rates with an objective of economic expansion. Since, the 2008 financial crisis, the consolidation of the Federal Reserve’s declared final objective of lowering interest rates and making emergency loans is an eloquent example to reassure African central banks in the choice of the pro-growth monetary policy option.
    Keywords: Pro growth monetary policy, CMP paradox, Financing enterprises, African central bank
    JEL: C23 C33 E52 E58
    Date: 2013–05
  16. By: Gabriela Castro (Economics and Research Department, Banco de Portugal); Ricardo M. Felix (Economics and Research Department, Banco de Portugal); Paulo Julio (Economics and Research Department, Banco de Portugal; and CEFAGE); Jose R. Maria (Economics and Research Department, Banco de Portugal)
    Abstract: Using PESSOA, a DSGE model for a small euro area economy, we analyze the size of fiscal multipliers associated with a large fiscal consolidation in "normal times" and in "crisis times." The crisis times scenario embodies a temporary increase in nominal rigidities and in financial frictions, purportedly better reflecting the underlying economic environment during the "Great Recession." Results show that impact multipliers are around 50-70 percent larger in crisis times for expenditure-based fiscal consolidations. A government consumption-based adjustment yields the highest impact multiplier (1.8 in crisis times vis-à-vis 1.2 in normal times). Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced. Length: 37 pages
    Keywords: Fiscal multipliers; crisis; DSGE model; euro area; monetary union; small open economy.
    JEL: E62 F41 H62
    Date: 2014
  17. By: Chang-Ching Lin (Institute of Economics, Academia Sinica, Taipei, Taiwan); Juin-Jen Chang (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shu-Shiuan Lu (Department of Economics National Tsing Hua University)
    Abstract: This paper sheds light on three important issues in the macroeconomics literature, which comes to a better understanding of Taiwan’s wage stagnation. First, we explore the trend of labor income shares, namely the labor income-output ratios, in Taiwan. This enables us to understand the distribution or tradeoff between labor and capital shares. Second, we calculate the correlation coefficients between real wages and gross domestic product (GDP) per capita, showing that whether Taiwan’s real wages and national incomes move in the opposite direction. Third, we calculate the gap between the marginal product of labor and real wage. This focus shows whether workers’ salary is consistent with their productivity in Taiwan. Of particular importance, in all issues we compare the Taiwan case with other neighboring countries of Asia. By these cross-country comparisons, we would like to examine whether the wage stagnation in Taiwan is unique or common in Asian countries. Finally, we briefly discuss Taiwan’s wage differences by sector and by education.
    Keywords: Labor share, Comovement of real wage and GDP per capita, Wages and productivity
    JEL: E24 E25 E32 O47
    Date: 2014–09
  18. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context: Solid growth in recent years, supported by high oil prices and output, has boosted living standards. This year, the economy is slowing down, in large part because of weaker domestic and external demand, and regional tensions. Inflation is expected to accelerate temporarily due to the devaluation of the tenge (February 2014). Enhancing the policy architecture and promoting a business environment unencumbered by the state remain key challenges for Kazakhstan to become a dynamic emerging market economy and ensure durable and balanced long-term growth. The recent reappointment of Prime Minister Massimov was accompanied by the authorities’ commitment to speeding up structural reforms. In this context, the government is strengthening its links with the multilateral development banks (MDBs). The May 29 signing of the Eurasian Economic Union (EEU), with Russia and Belarus, is not expected to have near-term economic effects; medium-term effects will depend on how the Union’s rules and regulations will be implemented. Focus of consultation and key recommendations: Amid uncertain external and domestic environments, the consultation focused on policy measures to mitigate shocks and achieve the authorities’ short- and medium-term objectives, in particular: (i) restoring confidence and stability in the post-devaluation environment; (ii) resolving the nonperforming loans (NPL) problem, in line with the recent FSAP recommendations; (iii) bolstering the monetary and fiscal policy frameworks, as recommended last year; and (iv) accelerating structural reforms, including the implementation of industrialization and diversification policies carefully and transparently. Previous consultation: During the 2013 Article IV Consultation, Directors encouraged the authorities to take advantage of the positive outlook to strengthen the macroeconomic policy architecture, including by (i) showing greater determination to addressing the high level of NPLs; (ii) following through on the planned introduction of a new policy interest rate to enhance the transmission mechanism of monetary policy; and (iii) revamping the medium-term fiscal framework through improved coverage and transparency. Since then, the authorities have been more resolute in dealing with the NPL problem. However, progress in strengthening the monetary and fiscal policy frameworks has been slow.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal reforms;Monetary policy;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Kazakhstan;
    Date: 2014–08–05
  19. By: Andrew Filardo; Hans Genberg; Boris Hofmann
    Abstract: EM Asia has seen a transformation of its monetary policy environment over the past 2 decades. By far, the most relevant change has been the maturing of its financial systems and the growing relevance of the global financial cycle: financial inclusion has spread, financial markets have deepened and financial globalisation has linked domestic markets closer to international markets. One consequence of the maturing of the financial systems has been the weakening of the traditional case for the monetarist view of the roles of monetary and credit aggregates in the conduct of monetary policy: velocity has been unstable in ways similar to that in the advanced economies decades earlier; yet, longer-term monetary growth correlations with inflation are evident. In addition, the maturing of the financial systems has elevated concerns of financial stability, as both a source of shocks and as something central banks have a responsibility for. These developments have been further complicated by monetary policy spillovers from the advanced economies. The challenge now is how best to integrate mandates for financial stability into monetary policy frameworks, both conceptually and practically. Moreover, the exchange rate choice is particularly relevant in EM Asia. While managed exchange rate regimes in EM Asia have been implemented with mixed success, the risks associated with the choice can be seen through the lens of aggregates based on central bank balance sheets. The size and growth of central bank balance sheets suggest an ongoing build-up in risks. All this points to the need to consider alternatives to conventional inflation targeting frameworks. This paper lays out a policy framework based on a multi-pillar monetary policy approach as a potentially attractive alternative for EM Asia. The three pillars are based on economic, financial and exchange rate stability, respectively. This framework not only offers an alternative conceptual framework but also implies institutional reforms to ensure central banks take a longer term perspective when setting policy.
    Keywords: central bank mandates, financial cycle, financial inclusion, globalisation, managed exchange rates, monetary analysis, monetary policy frameworks, emerging Asia
    Date: 2014–09
  20. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context. Georgia’s previous Fund-supported program, which expired in April 2014, met most of its objectives, in particular by reducing Georgia’s external and fiscal imbalances. The program also helped preserve the central bank’s independence after the 2012–13 political transition and strengthened its inflation-targeting framework. However, over time it proved increasingly difficult to reconcile the program’s fiscal objectives with the new government’s policies of increasing social spending, especially after the economy slowed and revenues fell short in 2013. Also, despite the progress achieved under the program, macroeconomic challenges remain. The current account deficit and external debt are high, leaving the economy susceptible to shocks. Strong and inclusive growth is needed to reduce widespread poverty and high unemployment. More recently, the external outlook has worsened, opening up a balance of payments need in 2014. Program and its objectives. To address these challenges, the authorities request a new three-year SDR 100 million (67 percent of quota) Stand-by Arrangement to address an external financing need in 2014 related in part to the realignment of fiscal policies to more social spending. The program will facilitate Georgia’s external adjustment, reduce key macroeconomic vulnerabilities, rebuild policy buffers, and support growth. Program policies. In 2014, the program balances supporting domestic demand with the need to safeguard external stability. To reduce the output gap, fiscal policy provides a measured stimulus, while monetary policy remains accommodative. However, the authorities will tighten policies and allow the exchange rate to adjust if balance of payments pressures were to intensify. From 2015, the fiscal deficit will be reduced to keep public debt low and to create space for countercyclical policies. This consolidation will rely on raising revenue by broadening the tax base and containing current expenditure, while protecting pro-poor spending and public investment. Monetary policy will aim at price stability through improved inflation targeting. The program will seek to rebuild international reserves while encouraging greater exchange rate flexibility. Strengthening of the financial sector will continue, helped by the recommendations of the recent FSAP mission. The program also aims to contain risks from quasi-fiscal activities and support improvements in tax administration, and will complement the authorities’ reforms to strengthen the business environment, improve education and training, create jobs and reduce poverty and inequality.
    Keywords: Stand-by arrangement requests;Fiscal policy;Budget deficits;Fiscal risk;Fiscal reforms;Monetary policy;Inflation targeting;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Press releases;Georgia;
    Date: 2014–08–20
  21. By: Daniele Ciani (Banca d'Italia); Wanda Cornacchia (Banca d'Italia); Paolo Garofalo (Banca d'Italia)
    Abstract: Risks are emerging in the real estate sector in Europe and the authorities have taken macroprudential measures to contain them. This paper reviews the main measures that have been or are being adopted in a number of European countries, and analyzes the main issues concerning the choice and the effectiveness of the different instruments. In the countries examined, the macroprudential instruments are just beginning to be phased and clear evidence of their effectiveness is not yet available. In some countries several measures have been introduced: given the uncertainty surrounding the functioning of these tools, the use of multiple instruments appears to offer greater potential, including in terms of the ability to reduce avoidance. The initial experiences show that macroprudential measures are more effective if they are put in place promptly when the indicators of risk in the real estate market and finance start to worsen. Calibration issues also appear to be crucial for their effectiveness.
    Keywords: macroprudential policy, macroprudential measures, real estate market
    JEL: E44 E58 E61
    Date: 2014–09
  22. By: Andre Diniz (Escola de Economia de São Paulo (EESP) Fundação Getulio Vargas); Bernardo Guimaraes (Escola de Economia de São Paulo (EESP) Fundação Getulio Vargas)
    Abstract: The recent European debt crisis has sparked a heated debate on the merits of fiscal austerity. Since the main objective of the proposed fiscal tightenings is to reduce sovereign default risk, the solution to this debate depends on the costs of a sovereign debt restructuring. One important cost is its negative effect on the banking system. This paper extends an off-the-shelf macroeconomic model with financial frictions in order to quantitatively assess the costs of financial disruption ensuing from a sovereign debt restructuring. Results show that the losses from financial disruption are offset by the benefits of a less contractionary fiscal policy. Government size is crucial for the relative effects of financial disruption as austerity becomes substantially more costly when tax rates are large.
    Keywords: Financial disruption, sovereign debt, sovereign default, Deleveraging
    JEL: E32 F34 G01 H63
    Date: 2014–08
  23. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Economic context. Growth has been strong, inflation low, and fiscal buffers and international reserves adequate. However, poverty and unemployment remain high, despite large government spending financed from oil revenue. The business climate is among the most challenging and the private credit-to-GDP ratio among the lowest in sub-Saharan Africa (SSA). Outlook and Risks. The economy is projected to expand by about 6 percent per annum between 2014 and 2019, as new oil fields come on stream and an ambitious public investment program is implemented to diversify the economy and make growth more inclusive. Oil production is expected to peak in 2017. The medium-term outlook for non-oil growth and poverty reduction hinges on progress addressing deep-seated structural weaknesses and fiscal adjustment. Risks to the outlook relate to oil price volatility and political instability. Policies. Macroeconomic policies should focus on meeting the economy’s social and development needs while mitigating risks to macroeconomic stability in the longer term. • The growth of government spending should be arrested and the 2014 budget should not be exceeded. Amid spending pressures related to the 2015 Africa Games and the 2016 presidential elections, new fiscal developments should be reflected in a supplementary budget in 2014 to enhance transparency. • In view of the limited remaining lifetime of oil reserves, a gradual fiscal consolidation should be targeted over the medium-term to safeguard fiscal and debt sustainability. Ongoing efforts to address implementation and absorptive capacity constraints need to be stepped up to maximize the benefits from public investments. • Consideration should be given to adopt the non-oil primary balance as the fiscal anchor. • The private sector’s supply response to public infrastructure spending should be maximized through implementation of reforms to improve the business climate, support private investment, and develop the financial sector. • The pilot project for cash transfers should be well-targeted and monitored to reduce poverty. • Compliance with reserves pooling requirements would insure the continued smooth operation of the BEAC and the exchange rate peg, which both continue to serve the Republic of Congo well.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Government expenditures;External borrowing;Financial management;Fiscal reforms;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Republic of Congo;
    Date: 2014–09–04
  24. By: Patrice Ollivaud; David Turner
    Abstract: This paper estimates potential output losses from the global financial crisis by comparing recent OECD published projections with a counter-factual assuming a continuation of pre-crisis productivity trends and a trend employment rate which is sensitive to demographic trends. Among the 19 OECD countries which experienced a banking crisis over the period 2007-11, the median loss in potential output in 2014 is estimated to be 3¾ per cent, compared to 2¾ per cent among all OECD countries. The crisis hit does, however, vary widely across countries, being more than 10% for several smaller European, mainly euro area, countries. The largest adverse effects come from lower trend productivity, which is a combination of both lower total factor productivity and lower capital per worker. Despite large increases in structural unemployment in some countries, the contribution of lower potential employment to the crisis hit is limited because the adverse effect on labour force participation is generally much less than might have been expected on the basis of previous severe downturns. This may partly reflect pension reforms and a tightening up of early retirement pathways. Pre-crisis conditions relating to over-heating and financial excesses, including high inflation, high investment, large current account deficits, low real interest rates, high total economy indebtedness and more rapid growth in capital-per-worker are all correlated with larger post-crisis potential output losses. This suggests that underlying the potential output losses was a substantial misallocation of resources, especially of capital, in the pre-crisis boom period. On the other hand, more competition-friendly product market regulation is associated with smaller crisis-related losses of potential output, suggesting it facilitates a reallocation of resources across firms and sectors in the aftermath of an adverse shock and so helps to mitigate its consequences. Les conséquences de la crise financière mondiale sur la production potentielle de l'OCDE Cette étude propose une estimation des pertes de production potentielle liées à la crise financière mondiale en comparant les projections de l’OCDE publiées récemment avec une situation hypothétique où les tendances de la productivité observées avant la crise sont maintenues et où le taux d’emploi tendanciel dépend des tendances démographiques. Parmi les 19 pays de l’OCDE qui ont connu une crise bancaire durant la période 2007-2011, l’estimation de la perte médiane de potentiel de production atteint 3,75 pour cent en 2014, à comparer avec 2,75 pour cent pour tous les pays de l’OCDE. L’impact de la crise, cependant, varie beaucoup selon les pays, et dépasse 10% pour plusieurs petits pays européens, notamment dans la zone euro. L’effet négatif vient principalement d’une plus faible productivité tendancielle, combinaison d’une plus faible productivité totale des facteurs et d’un capital productif par travailleur inférieur. En dépit d’une augmentation conséquente du taux de chômage structurel dans plusieurs pays, la contribution de l’emploi potentiel à l’impact total de la crise est faible, notamment parce que l’effet négatif sur les taux d’activité a été en général beaucoup moins important que ce qui était attendu au vu des récessions précédentes. Cela traduit en partie les réformes passées sur les retraites et un resserrement des conditions de départ anticipé à la retraite. La surchauffe économique et les excès financiers, y compris une forte inflation, un investissement élevé, un déficit important de balance courante, un taux d’intérêt réel bas, un endettement important de l’ensemble de l’économie et enfin une croissance plus rapide du capital par travailleur, sont des conditions préalables corrélées à la perte de potentiel de production. Cela suggère que la source de ces pertes de potentiel réside dans une mauvaise répartition des ressources, et notamment de capital, dans la période de boom précédant la crise. Par ailleurs, une réglementation plus souple des marchés des produits est associée à des pertes moins importantes de potentiel de production liées à la crise, suggérant ainsi qu’elles améliorent la redistribution des ressources entre les firmes et les secteurs quand survient un choc négatif, et par conséquent, participent à limiter ses conséquences.
    Keywords: banking crisis, global financial crisis, financial crisis, potential output, production potentielle, crise bancaire, crise financière, potentiel de production, crise financière mondiale
    JEL: E32 E44
    Date: 2014–09–25
  25. 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 depreciation
    JEL: C2 C23 C43 D12 E31 R21
    Date: 2014–09
  26. By: Ying Jin; Richard Bullock; Wanli Fang
    Keywords: Banks and Banking Reform Transport Economics Policy and Planning Social Protections and Labor - Labor Policies Economic Theory and Research Private Sector Development - E-Business Finance and Financial Sector Development Transport Macroeconomics and Economic Growth
    Date: 2013–06
  27. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Context: Attempts to boost activity with policy stimulus, in lieu of much-needed structural reform, have failed to raise growth and contributed to large external imbalances. Adverse developments in the region further cloud the outlook. High financing needs and low buffers leave Belarus highly dependent on external financial support. The risk of disorderly adjustment remains high. Challenges: Mitigating immediate risks and facilitating external adjustment through a sharp change in macroeconomic policies. Advancing the transition to a market-based economy to raise sustainable growth. Policy recommendations: • Halt wage increases and reduce subsidized lending to slow demand growth; • Reduce foreign exchange interventions and tighten monetary policy to facilitate external adjustment; • Enhance market orientation of the economy through a rapid phase-out of price controls and mandatory targets and by privatization of state-owned enterprises.
    Keywords: Article IV consultation reports;Fiscal policy;Fiscal reforms;Wage increases;Monetary policy;Intervention;Banking sector;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Belarus;
    Date: 2014–07–25
  28. By: Tairi Rõõm; Katri Urke
    Abstract: Estonia changed over from the kroon to the euro in January 2011. This paper analyses the inflationary effect of this event. The analysis is based on the Harmonised Indices of Consumer Prices. The difference-in-differences method is employed where the treated group is Estonia and the control group consists of the other EU member states. The estimation results imply that the inflationary impact of the euro changeover was either insignificant or small in magnitude, depending on which treatment period is considered. The acceleration in inflation mostly occurred in the second half of 2010, during the six-month period prior to the adoption of the euro. Although the actual effect of the euro changeover on inflation was modest, most Estonian citizens felt that the introduction of the new currency increased consumer prices considerably.
    Keywords: euro, currency changeover, consumer prices, inflation
    JEL: D49 P46 E58
    Date: 2014–10–10
  29. By: Ludmila Fadejeva; Martin Feldkircher; Thomas Reininger
    Abstract: In this paper, we examine international transmission of the negative credit supply shock, which originated in the euro area and the US. We use the multi-country global vector autoregression (GVAR) approach with trade and bilateral banking exposures as weights, and identify five structural shocks via sign restrictions. Special focus of this research is on CESEE – a region that shares strong financial linkages with the euro area. Our main results are as follows. First, US-specific shocks account for a significant share in explaining the deviations from growth trends in output and total credit in both the euro area and the US; second, compared to a domestic aggregate demand shock, the economic downturn caused by the credit supply shock in the US and the euro area can bring more harm in the long run, yet the international spillover of the former is stronger; third, the transmission of euro area shocks to emerging Europe is faster and more pronounced compared to US shocks; fourth, there is strong heterogeneity in responses of emerging Europe to shocks in the euro area and the US.
    Keywords: credit shock, global vector autoregressions, sign restrictions
    JEL: C32 F44 E32 O54
    Date: 2014–09–25
  30. By: Daniel Harenberg (ETH Zurich, Switzerland); Alexander Ludwig (CMR & FiFo, University of Cologne)
    Abstract: When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.
    Keywords: social security; idiosyncratic risk; aggregate risk; welfare; insurance; crowding out
    JEL: C68 E27 E62 G12 H55
    Date: 2014–09
  31. By: Nicholas Kilimani
    Abstract: The double dividend hypothesis contends that environmental taxes have the potential to yield multiple benefits for the economy. However, empirical evidence of the potential impacts of environmental taxation in developing countries is still limited. This paper seeks to contribute to the literature by exploring the impact of a water tax in a developing country context, with Uganda as a case study. Policy makers in Uganda are exploring ways of raising revenue by taxing environmental goods such as water. Whereas their primary focus is to raise revenue, we demonstrate how taxes on environmental goods can yield other benefits beyond addressing a country’s fiscal needs. This study employs a computable general equilibrium model to shed light on the impact of a water tax policy when a tax is accompanied by a recycling scheme of the same magnitude. We seek to establish whether taxation and recycling can induce more growth, employment and industry output. The results show that a mechanism which leaves a neutral fiscal balance yields dividends for the economy. In other words, whatever the degree of regressivity resulting from the environmental tax, it is possible to design a recycling scheme that renders the tax policy to be beneficial to the economy.
    Keywords: Environmental Taxation, Revenue recycling, Double dividend, Economic growth
    JEL: C68 H23 E62 Q52
    Date: 2014
  32. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Economic activity remained weak in early 2014. Activity was impacted by an outbreak of the Ebola virus since late 2013, but lagging structural reforms, energy shortages, and political uncertainty may also be at play. Economic growth is estimated to have been 2.3 percent in 2013, and is projected at 3.5 percent in 2014, supported by higher public investment and assuming a gradual start-up of new mining sector investment. Inflation fell to below 10 percent year-on-year in May 2014, international reserves covered 3.6 months of imports by end-2013, and the exchange rate has remained stable. Performance under the ECF-supported program remains broadly satisfactory, although progress with structural reform has been slow. All performance criteria for end-2013 were met as were all but one (the floor on priority sector spending) of the program’s indicative targets for March 2014. However, the structural benchmarks for the second half of 2013 and early-2014 could not be completed as planned. The policy discussions focused on (i) the growth outlook for 2014; (ii) a supplementary budget for 2014 in light of a shortfall in revenues and new spending needs; (iii) progress in implementing structural reforms; and (iv) debt management. Risks to the program largely stem from domestic factors. New cases of Ebola have surged and spread more widely in recent months, which could affect growth in the second half of the year. The recent approval of the investment framework for the large Simandou iron ore project augurs well for a gradual pick-up in mining activity. However, renewed political tensions and uncertainty in the run-up to presidential elections, due in the second half of 2015, could risk delaying new investment. Staff supports completing the fourth review under the ECF arrangement and the financing assurances review. Completion of the review will result in a disbursement of an amount equivalent to SDR 18.36 million under the ECF arrangement.
    Keywords: Extended Credit Facility;Economic growth;Fiscal policy;External debt;Debt management;Mining sector;Fiscal reforms;Monetary policy;Economic indicators;Staff Reports;Letters of Intent;Press releases;Guinea;
    Date: 2014–08–07
  33. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: KEY ISSUES The economy is embarking on sustainable growth, but the main challenge will be to boost long-run growth by structural reforms and reorienting fiscal policy. Supply-side slowdowns in the energy sector are ending, while available evidence suggests non-energy growth is robust and economic slack is being used up. Non-energy growth should settle around a long-term 2–2½ percent per annum rate, while new energy sector investment may begin to bear significant fruit over the medium term. Headline inflation is trending down (in part for statistical reasons), while core inflation remains moderate. Domestic risks are to the upside. The main medium-term external risk would be a sustained decline in energy prices. With excess capacity in the labor market significantly diminished, the time is drawing near for policy tightening. Although ad hoc measures will reduce the budget deficit this fiscal year, the underlying baseline suggests a growing overall imbalance and unsustainable debt accumulation on unchanged policies, although the authorities have announced their intention to pursue fiscal consolidation. The CBTT will have to carefully consider how to tighten the monetary stance given high excess bank liquidity. Sustainable growth requires re-configuring fiscal policy, although achieving this will be challenging for the time being in view of national elections due in 2015. Ad hoc measures should be replaced with policies that durably improve non energy-based revenues and spending. The proceeds from extracting non-renewable resources should be saved and invested as a stepping stone to lasting prosperity. Fuel subsidies need to be curtailed and social programs rationalized. Non-energy sector tax bases should be broadened and tax expenditures limited. Greater flexibility is needed in the foreign exchange market. Despite sizable reserves, foreign exchange shortages, which impose unnecessary economic costs, have recurred. There is no concrete evidence of either a parallel market or arrears on foreign exchange, and the CBTT has recently sold foreign exchange with the objective to clear the market, but a recurrence of the situation could indicate the existence of an exchange restriction. The CBTT can address the problem through increased flexibility in the foreign exchange system. Structural reforms are underway, but more are needed to foster a diversified economic base. Financial sector reform is advancing, including expanding the CBTT’s regulatory perimeter to systemically important non-bank financial institutions. Recent streamlining of regulations that have hampered business activity is welcomed, but needs to be further advanced. Government operations are increasingly hamstrung by a poorly functioning civil service. Perceptions of corruption can be reduced by adopting a transparent procurement process. Programs that mask underemployment should be replaced with more effective training. Growing statistical shortcomings have rendered the conduct of surveillance ever harder, and must be addressed.
    Keywords: Article IV consultation reports;Fiscal policy;Energy sector;Subsidies;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Trinidad and Tobago;
    Date: 2014–09–03
  34. By: Joscha Beckmann; Ansgar Belke; Christian Dreger
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, for instance international dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule in the main industrial countries. The inclusion of international spillovers and, even more, nonlinear dynamics improves the explanatory power of standard Taylor reaction functions. Deviations from Taylor rates tend to be smaller and their negative trend can be eliminated.
    Keywords: Taylor rule, international spillovers, monetary policy interaction, smooth transition models
    JEL: E43 F36 C22
    Date: 2014
  35. By: Alessandra Amendola; Vincenzo Candila; Antonio Scognamillo
    Abstract: Modeling crude oil volatility is of substantial interest for both energy researchers and policy makers. Many authors emphasize the link between this volatility and some exogenous economic variables. This paper aims to investigate the impact of the U.S. Federal Reserve monetary policy on crude oil future price (COFP) volatility. By means of the recently proposed generalized autoregressive conditional heteroskedasticity-mixed data sampling (GARCH-MIDAS) model, the Effective Federal Fund Rate (EFFR) - as a proxy of the monetary policy - is plugged into the mean-reverting unit GARCH(1,1) model. Strong evidence of an inverse relation between the EFFR and COFP volatility is found. This means that an expansionary monetary policy is associated with an increase of the COFP volatility. Conjecturing that the unusual behavior of the COFP in 2007-2008 was driven by a monetary policy shock, we test the presence of mildly explosive behavior in the prices. The sup Augmented Dickey-Fuller test (SADF) confirms the presence of a bubble in the COFP series that started in October 2007 and ended in October 2008. We expect that the COFP-EFFR association could be affected by such a bubble. Therefore, we apply the same experimental set-up to two sub-samples - before and after October 2007. Interestingly, the results show that EFFR influence on COFP volatility is greater in the aftermath of the bubble.
    Keywords: Volatility, GARCH-MIDAS, Bubbles, Futures, Crude Oil.
    JEL: C22 C58 E30 Q43
    Date: 2014
  36. By: Rodrigo Vergara
    Date: 2014–10
  37. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context: The economy is being severely tested by the Syria crisis. The refugee influx has reached one quarter of the population, fueling already high unemployment and poverty. The political impasse from the presidential elections—following months of negotiations over a new government—adds to the uncertainty. The economy is meanwhile suffering from a broad-based deterioration, with subdued growth and widening fiscal imbalances. Public debt is on the rise. Progress on structural reforms has been limited. On the positive side, deposit inflows have held up and foreign exchange reserves are sizeable; and security conditions have significantly improved, lifting tourism prospects. Key challenges: There is an urgent need for fiscal adjustment to achieve a sustainable debt reduction, and structural reforms to boost growth and address social inequities. Key policy recommendations: • Fiscal policy. The immediate priority is to stop the fiscal deterioration and return to primary surpluses, to avoid a possible loss of market confidence and put debt on a sustainable path. The consolidation strategy should minimize the impact of a planned salary increase for the public sector; include broad-based and non- distortionary revenue measures; and rebalance expenditure away from electricity transfers toward capital and social spending, to promote inclusive growth. Passing a budget for 2014 would help anchor confidence. Fiscal management should be strengthened and anchored in a medium-term perspective. • Monetary policy. The Banque du Liban (BdL) should continue to maintain high foreign exchange reserves as a buffer and signal of commitment to macro-financial stability. It should gradually withdraw from T-bill auctions, and adopt a strategy to improve its balance sheet over time. • Financial sector. Capital buffers should be strengthened, and the loan classification and restructuring rules and the AML/CFT regime further enhanced. • Structural reforms. Reforms in the electricity sector and the labor market are imperative to address current competitiveness pressures, lay the foundations for higher-productivity growth, and improve social conditions. • Refugee crisis. Lebanon cannot shoulder the costs of the massive inflow of Syrian refugees alone, and international budget support is needed. Strong government commitment to adjustment and reforms—along with a concerted policy framework to deal with the refugee crisis—would bolster credibility and help mobilize support.
    Keywords: Article IV consultation reports;Fiscal policy;Fiscal consolidation;Fiscal reforms;Monetary policy;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Lebanon;
    Date: 2014–07–31
  38. By: Bezemer, Dirk J.; Zhang, Lu (Groningen University)
    Abstract: Asset market conditions affect output growth through changes in bank lending. This paper is the first to analyze how this channel changes over the credit cycle. We use newly collected data for 37 countries over 1970-2012 to construct measures for the upswing (?credit boom?) and downswing (?credit bust?) phases of the credit cycle. We find that real income grows faster during a credit boom in countries where house prices rise more and where banks have a higher share of mortgage credit in total credit. In a second analysis, we find that industries which are more dependent on external finance experience growth in value added which is significantly higher in a credit boom and significantly lower in a credit bust, when banks in their economy have a higher share of mortgage credit in total credit. Since credit cycle upswings transform bank balance sheets such that economies are more vulnerable to the credit market downturn that follows, the policy implication is that macroprudential monitoring should take place over the entire credit cycle.
    Date: 2014
  39. By: Miguel Rocha de Sousa (Universidade de Évora, Departamento de Economia, NICPRI-UE e CEFAGE-UE)
    Abstract: This paper evaluates the optimal bail-out and bail-in mix in the case of bankruptcy of Banco Espírito Santo (BES), SA, the second largest Portuguese private bank. The solution after the crisis of the BES, was to partition the bank into a good bank (Novo Banco (New Bank)) and keep the toxic assets and problematic ones in a bad bank, the old BES bank, which would also receive those assets and bonds which were correlated with the ESFG (Espírito Santo Financial Group). We show, in general, that the optimal policy mix parameter for the regulator’s bail-out and bail-in is contingent on the correlations between the shocks of residuals to the deposits and the shocks to the assets (equity and bonds). We develop three cases: case A, regulation under perfect information and no shocks, a kind of benchmark; case B; with subcases B1 and B2, which reflect respectively perfect positive correlation between the deposit and assets shocks, and perfect negative correlation; and finally case C, which reflect a general correlation between the deposits and assets, between -1 and 1. The conclusions, based upon simulations, tend to show that the optimal regulator problem in A was to intervene with optimal bail-out policy mix correspondence between deposit rates (r ) and assets (ra); while at B1 and B2 the optimal mix bail-out case is around 50% with deviation being derived from the correlation between deposits and assets’ residuals. The main lesson that can be derived from the BES implosion, is that market value of the Novo Banco (New Bank) can be effectively assured if the market decouples for real the Novo Banco from BES, because if the correlation is a perfect fit (+1), new problems might arise in the near future.
    Keywords: Banco Espírito Santo(BES); Bank of Portugal (BdP); Bankruptcy; Bail-in; Bail-out; ECB; Novo Banco; Optimal mix bail-out; Portuguese Banking sector; Regulators.
    JEL: C15 E02 E44 E58 F36 G11 G18 G21 G28 G33
    Date: 2014
  40. By: IIZUKA Nobuo
    Abstract: Directional analysis is employed to evaluate the rationality and usefulness of a data set of monthly forecasts for the coincident index in ESRI's Indexes of Business Conditions by professional forecasters. Using Japanese ESP Forecast Survey data, our findings indicate that consensus forecasts with horizons of up to four months are valuable, whereas the Leading Index in ESRI's Indexes of Business Conditions is only valuable with horizons of up to two months. This finding suggests that the predictability of Leading DI can be improved with the aid of coincident DI forecasts.
    Date: 2013–10
  41. By: Juan Carlos Cuestas; Karsten Staehr
    Abstract: This paper considers the relationship between domestic credit and foreign capital flows in the GIIPS countries before and after the outbreak of the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a one-to-one relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs on data from the pre-crisis period shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Portugal and Spain. These results suggest that “push” from foreign capital inflows was an important factor in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows
    Keywords: leveraging, capital flows, financial crisis, cointegration
    JEL: F32 E51 E44 C32
    Date: 2014–10–10
  42. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Telyukova, Irina A. (University of California–San Diego)
    Abstract: Supersedes Working Paper 13-27. Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, the authors analyze reverse mortgages in a calibrated life-cycle model of retirement. The average welfare gain from RMLs is $885 per homeowner. The authors’ model implies that low-income, low-wealth, and poor-health households benefit the most, consistent with empirical evidence. Bequest motives, nursing-home-move risk, house price risk, and loan costs all contribute to the low take-up. The Great Recession may lead to increased RML demand, by up to 30% for the lowest-income and oldest households.
    Keywords: Reverse Mortgage; Mortgage; Housing; Retirement; Home Equity Conversion Mortgage; HECM
    JEL: D91 E21 G21 J14
    Date: 2014–09–08
  43. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Shusaku Nishiguchi (Bank of Japan)
    Abstract: After the Bank of Japan (BOJ) introduced Quantitative and Qualitative Monetary Easing in April 2013, the BOJ's government bond purchases increased by a large amount, and entities other than the BOJ, as a group, increased loans and investment in equities, mutual funds, and corporate bonds, while reducing their holdings of government bonds. The extent of portfolio rebalancing differs across entities: we observe rebalancing for domestic banks and the overseas sector; in contrast, so far no rebalancing for insurance companies, corporate pension funds, and public pensions can be observed. In addition to changes in the balance sheet conditions of domestic banks and loan demand faced by domestic banks, purchases of government bonds with a longer remaining maturity by the BOJ likely have played a role in the increase in bank loans by domestic banks.
    Date: 2014–06–19
  44. By: International Monetary Fund. European Dept.
    Keywords: Banking sector;Liquidity;Spillovers;Housing;Business cycles;Economic growth;Investment;Macroprudential Policy;Selected Issues Papers;United Kingdom;
    Date: 2014–07–28
  45. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Context. After three decades of remarkable growth, the economy has been slowing. Much of the slowdown has been structural, reflecting the natural convergence process and waning dividends from past reforms; weak global growth has also contributed. Moreover, since the global financial crisis, growth has relied too much on investment and credit, which is not sustainable and has created rising vulnerabilities. Growth was 7.7 percent in 2013, and is expected to slow to around 7½ percent this year and decline further over the medium term. Focus. The pattern of growth since the global financial crisis is not sustainable and has resulted in rising vulnerabilities. The discussions focused on assessing the risks posed by the continued build-up of vulnerabilities; reforms to unleash new, sustainable engines of growth and reduce vulnerabilities; and how to best manage aggregate demand in this context, as growth is slowing yet risks are still rising. A key takeaway is that to secure a safer development path, accommodative policies need to be carefully unwound, accompanied by decisive implementation of the announced reform agenda to promote rebalancing. The result will be somewhat slower but safer growth in the near term, with the significant long-run benefit of securing more inclusive, environment-friendly, and sustainable growth. Risks. Credit and ‘shadow banking,’ local government finances, and the corporate sector— particularly real estate—are the key, and interlinked, areas of rising vulnerability. In the near term, the risk of a hard landing is still considered low as the government has the capacity to combat potential shocks. However, without a change in the pattern of growth, the hard-landing risk continues to rise and is assessed to be medium-likely over the medium term. Reform agenda. The authorities have announced a comprehensive and ambitious blueprint of reforms. Successful implementation should achieve the desired transformation of the economy, but will also be challenging. Demand management. Reining in credit growth, local government borrowing, and investment will address the risks, but also slow growth. Macro support should be calibrated to allow needed adjustments to take place, while preventing growth from slowing too much. Scenarios and spillovers. With faster adjustment and reform implementation, growth will be somewhat lower in the near term, with moderate spillovers for trading partners. However, in the medium term, income and consumption will both be higher—a result that is good for China and good for the global economy.
    Keywords: Article IV consultation reports;Economic growth;Demand;Credit expansion;Fiscal reforms;Financial sector;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;China;
    Date: 2014–07–30
  46. By: World Bank
    Keywords: Public Sector Expenditure Policy Banks and Banking Reform Finance and Financial Sector Development - Debt Markets Public Sector Economics Macroeconomics and Economic Growth - Subnational Economic Development Public Sector Development
    Date: 2014–06
  47. By: M. Brun; H. Fraisse; D. Thesmar
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and business activity. We use loan-level data and take advantage of the transition from Basel 1 to Basel 2. While under Basel 1 the capital charge was the same for all firms, under Basel 2, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the semi-elasticity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: a one percentage point increase in capital requirements leads to a reduction in lending by approximately 10%. At the firm level, borrowing is reduced, as well as total assets (mostly working capital); we provide some evidence of the impact on employment and investment. Overall, however, because Basel 2 reduced the capital requirements for the average firm, our results suggest that the transition to Basel 2 supported firm activity during the crisis period.
    Keywords: Bank capital ratios, Bank regulation, Credit supply.
    JEL: E51 G21 G28
    Date: 2013
  48. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper offers a fi�xed-point approach to the issue of price level determination in general equilibrium. It arrives at a solution method for rational expectations models with missing initial conditions for financial wealth. The paper emphasizes the calculation of an equilibrium initial valuation for government debt via a Krasnoselski-Mann-Bailey theorem. The analysis is performed from a global analysis perspective. Abstracting from policies that bring about zero eigen-values permits us to draw conclusions about global dynamics. This approach builds on the Hartman-Grobman Theorem and implies no loss of generality.
    Keywords: Boundary Value Problems; Distorting Taxes; General Equilibrium; Global Determinacy; Krasnoselski-Mann-Bailey theorem;
    JEL: C62 C68 E60 H30 H60
  49. By: G. Gaballo
    Abstract: This paper explores convergence in higher-order beliefs - otherwise called eductive stability - when coordination is sequential, that is, when each agent of a given type fixes his own actions after observing the ones of earlier types in a given order. The presence of sequential types enhances expectational coordination in case of strategic substitutability, but not in case of strategic complementarity. In particular eductive stability can be obtained for any degree of substitutability, provided the number of sequential types is large enough. Therefore, sequential coordination opens up to the possibility that eductive convergence occurs at the same conditions of adaptive convergence, in accordance to the E-stability principle.
    Keywords: eductive learning, rational expectation equilibria, rationalizable set, learning in macroeconomics, coordination games.
    JEL: D41 E30 B41
    Date: 2014
  50. By: Issler, João Victor; Notini, Hilton Hostalacio
    Abstract: This paper has several original contributions. The rst is to employ a superiorinterpolation method that enables to estimate, nowcast and forecast monthly BrazilianGDP for 1980-2012 in an integrated way; see Bernanke, Gertler and Watson (1997,Brookings Papers on Economic Activity). Second, along the spirit of Mariano andMurasawa (2003, Journal of Applied Econometrics), we propose and test a myriad ofinterpolation models and interpolation auxiliary series all coincident with GDP froma business-cycle dating point of view. Based on these results, we nally choose the mostappropriate monthly indicator for Brazilian GDP. Third, this monthly GDP estimateis compared to an economic activity indicator widely used by practitioners in Brazil- the Brazilian Economic Activity Index - (IBC-Br). We found that the our monthlyGDP tracks economic activity better than IBC-Br. This happens by construction,since our state-space approach imposes the restriction (discipline) that our monthlyestimate must add up to the quarterly observed series in any given quarter, whichmay not hold regarding IBC-Br. Moreover, our method has the advantage to be easilyimplemented: it only requires conditioning on two observed series for estimation, whileestimating IBC-Br requires the availability of hundreds of monthly series. Third, ina nowcasting and forecasting exercise, we illustrate the advantages of our integratedapproach. Finally, we compare the chronology of recessions of our monthly estimatewith those done elsewhere.
    Date: 2014–09–18
  51. By: Klaus Schmidt-Hebbel (Universidad Catolica de Chile); José Carlos Tello (Departamento de Economía de la PUC del Perú)
    Abstract: This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is re ected by a discrete distribution of innitely-lived agents that dier by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result { that inequality and growth could be negatively or positively related { could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent. JEL Classification-JEL: D72, E62, H11, H31
    Keywords: Desigualdad, crecimiento endógeno, votación multidimensional, impuesto endógeno.
    Date: 2014
  52. By: Asian Development Bank (ADB); (Pacific Department, ADB); ;
    Abstract: The Pacific Private Sector Development Initiative (PSDI) is a regional technical assistance facility cofinanced by the Asian Development Bank (ADB), Australian Aid, and the New Zealand Aid Programme. PSDI works with ADB’s 14 Pacific developing member countries to improve the enabling environment for business and address constraints to private sector development in support of sustainable and inclusive economic growth. This publication describes PSDI’s progress on recent and ongoing initiatives and reviews the analytical basis for reform in the region.
    Keywords: pacific, private sector, state-owned enterprises, business law reform, financial services, annual report, cook islands, fiji, kiribati, marhsall islands, federated states of micronesia, papua new guinea, samoa, timor-leste, tuvalu, tonga, vanuatu, nauru, palau, solomon islands
    Date: 2014–02
  53. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: EXECUTIVE SUMMARY Morocco’s economic track record was challenged in recent years by a series of exogenous shocks, to which the authorities responded vigorously. Facing a difficult international environment, the authorities adopted, with the support of the Fund’s Precautionary and Liquidity Line (PLL), a policy program aimed at restoring fiscal and external buffers while strengthening competitiveness and promoting higher and more inclusive growth. The program remained broadly on track and the authorities did not draw on the PLL. The outlook is improving but remains subject to significant downside risks. Growth will slow in 2014, but it is expected to accelerate over the medium term owing to structural reforms and improved global conditions. However, this outlook remains subject to major external risks. A protracted period of slower growth in Europe, a surge in global financial market volatility linked to the exit from unconventional monetary policies in large advanced economies, and higher oil prices resulting from geopolitical tensions could significantly degrade the balance of payments. The authorities are requesting a two-year successor PLL arrangement with a lower access (550 percent of quota) than the first arrangement. The current PLL has provided useful insurance against external risks while anchoring the authorities’ reform agenda and sending positive signals to markets. Given significant global risks, a successor arrangement, which the authorities intend to treat as precautionary, would continue to support their policies. The lower access reflects the strengthening of the economy in the past two years as well as a balance of risks lower than two years ago. Staff considers that Morocco continues to qualify for a PLL arrangement and recommends the approval of the authorities’ request. The proposed arrangement carries low risks to the Fund and would have minimal impact on the Fund’s liquidity were the authorities to draw on the full amount available. The authorities’ policy package provides reasonable prospects of exit at the end of this arrangement if external circumstances warrant.
    Keywords: Precautionary and Liquidity Line;Fiscal policy;Fiscal reforms;Monetary policy;Reserves;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Extended arrangement cancellations;Press releases;Morocco;
    Date: 2014–08–05
  54. By: Emmanuel Farhi; Xavier Gabaix
    Abstract: We propose a new model of exchange rates, which yields a theory of the forward premium puzzle. Our model is frictionless, has complete markets, and works for an arbitrary number of countries. Each country's exposure to disaster risk varies over time according to a mean-reverting process. Risky countries command high risk premia: they feature a depreciated exchange rate and a high interest rate. As their risk premium mean reverts, their exchange rate appreciates. Therefore, currencies of high interest rate countries appreciate on average. We calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate, the forward premium puzzle regression coefficients, and near-random walk exchange rate dynamics. A signature prediction of the model is that when a country's riskiness increases, its currency depreciates and put premia on this currency increase. The implied negative correlation between exchange rate movements and put premia is borne out by the data.
    Date: 2014–01
  55. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Context: The union’s current account deficit—the key economic vulnerability flagged in the previous (2011) consultation—has declined over the past few years, including thanks to fiscal adjustment in Curaçao. But it remains large. Curaçao’s growth and job creation remain lackluster, due to weak competitiveness, adverse sectoral trends (e.g., in the international financial center), red tape, and rigid labor laws. Sint Maarten’s tourism-based economy is recovering but remains vulnerable to shocks and suffers from weak administrative capacity—as underscored, for example, by weakening tax collection. Risks: Both Curaçao and, especially, Sint Maarten are exposed to shifts in tourism demand. Curaçao is vulnerable to the uncertain situation in Venezuela, its main trading partner. If long-discussed flexibility- and competitiveness-enhancing structural reforms are not implemented, both countries’ capacity to absorb shocks may prove limited, and pressures on FX reserves and, ultimately, the peg may intensify. Policy recommendations: Fiscal policies should entrench recent gains to facilitate continued external adjustment (especially in Curaçao) and build buffers against shocks. Curaçao should extend the reform of its pension system to public sector workers, further streamline its administrative apparatus, and address weak governance and finances in state companies. Sint Maarten needs to increase revenues to support an expanding administration, including through stronger tax collection and greater contribution from its profitable state companies. The common central bank must monitor closely the deterioration in banks’ loan portfolios and refrain from direct financing of non-financial companies. It should also use more standard sterilization tools to control banks’ excess liquidity. Urgent action is required to lower the cost of doing business and remove pervasive disincentives to both supply and demand of labor.
    Keywords: Article IV consultation reports;Fiscal policy;Fiscal reforms;Labor market reforms;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Curacao;Sint Maarten;Netherlands;
    Date: 2014–08–27
  56. By: O. de Bandt; N. Dumontaux; V. Martin; D. Médée
    Abstract: The paper describes the methods used by the French Banking Supervision Authority (ACP) to run stress tests for the corporate credit portfolio, through credit migration matrices (or transition matrices). This approach is currently used for “top-down” stress tests exercises. Developed for Basel II, it is still relevant under the Basel III framework. It includes sufficient flexibility to accommodate the severe crisis period observed recently. The paper introduces the basic model underlying the approach, largely based on Merton’s model; it then describes carefully the different steps for its practical implementation, providing hints on how it can be extended to other banking sectors. Finally the paper comments a few outputs of a stress testing exercise.
    Keywords: credit risk, corporate, stress tests, migration matrices.
    JEL: G21 G28 G32 E44
    Date: 2013
  57. By: Alexis Maka; Fernando de Holanda Barbosa
    Abstract: Este artigo testa curvas de Phillips usando uma especificação autorregressiva de defasagem distribuída (ADL) que abrange a curva de Phillips Aceleracionista (APC), a curva de Phillips Novo-Keynesiana (NKPC), a curva de Phillips Híbrida (HPC) e a curva de Phillips de Informação Rígida (SIPC). Utilizam-se dados do Brasil (1996T1-2012T2), usando o hiato do produto e, alternativamente, o custo marginal real como medida de pressão inflacionária. A evidência empírica rejeita as restrições decorrentes da NKPC, da HPC e da SIPC, mas não rejeita aquelas da APC. This paper tests Phillips curves using an autoregressive distributed lag (ADL) specification that encompasses the New Keynesian Phillips curve (NKPC), the Hybrid Phillips curve (HPC), the Sticky-Information Phillips curve (SIPC), and the accelerationist Phillips curve (APC). We use data from Brazil (1996Q1-2012Q2), using the output gap and alternatively the real marginal cost as measure of inflationary pressure. The empirical evidence rejects the restrictions implied by the NKPC, the HPC, and SIPC, but does not reject those implied by the APC.
    Date: 2014–09
  58. By: Estelle P. Dauchy (New Economic School); Sophia Chen (Research Department, International Monetary Fund)
    Abstract: We propose a tax-adjusted q model with physical and intangible assets and estimate the effect of bonus depreciation in the United States in the early 2000s. We find that investment responds moderately to tax incentives; however allowing for heterogeneity reveals that intangible-intensive firms are more responsive than physical-intensive firms and their differences increase with firm size. Accounting for intangible assets increases the estimated total investment response from 3.7 to 14.3 percent among the largest 500 firms. Our results imply that understanding the behavior of large and intangible-intensive firms has important implications for the design and evaluation of investment policy.
    Keywords: investment tax incentives, intangible assets, q model of investment, bonus depreciation
    JEL: H25 G31 E01
    Date: 2014–09
  59. By: Goytom Abraha Kahsay (Department of Food and Resource Economics, University of Copenhagen); Lars Gårn Hansen (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: We estimate the production function for agricultural output in Eastern Africa incorporating climate variables disaggregated into growing and non-growing seasons. We find a substantial negative effect of within growing season variance of precipitation. We simulate predicted climate change for the region and find a resulting output reduction of between 1.2% and 4.5%. We also find substantial potential for mitigating the effects of within growing season precipitation variability through conventional technologies such as flexible planting and rainwater harvesting that substantially exceeds the potential loss from predicted climate change.
    Keywords: Climate change, adaptation policy, Eastern Africa, agricultural production
    JEL: Q18 Q54 O55 E23 O13 R11
    Date: 2014–09
  60. By: International Monetary Fund. European Dept.
    Abstract: EXECUTIVE SUMMARY The first review discussions took place in a context of heightened geopolitical tensions and deepening economic crisis. Intensification of the conflict in the East and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the program request, have materialized. These developments have affected confidence, balance of payment flows, economic activity, and budget execution. The banking sector has had to cope with larger-than-anticipated deposit outflows, and the exchange rate has depreciated more than expected at the time of the program request. The authorities have implemented policies broadly as agreed, but significant pressures have emerged. All but one performance criteria for end-May were met and all structural benchmarks have been implemented, albeit some with a delay. However, the deterioration in the economic outlook, fiscal and quasi-fiscal pressures, and heightened balance of payment difficulties are putting the initial program targets in jeopardy. Two end-July PCs are estimated to have been missed; and the end-2014 targets are out of reach. All continuous PCs were met. Discussions focused on the appropriate policy response to these short-term pressures and on reforms to support sustained growth. There was agreement that the policy effort should focus on compensatory measures to meet key program objectives, while allowing some temporary deviations from the initial targets. In particular, the NBU will limit the decline in reserves through market purchases; the government will take additional fiscal measures to keep public finances sustainable; and Naftogaz will strengthen current and past gas bills collection. Discussions also focused on reforms aimed at modernizing the monetary policy framework, preserving financial stability, addressing governance issues and improving the business climate. Nonetheless, risks loom large. The program hinges crucially on the assumption that the conflict will begin to subside in the coming months. Should active fighting continue well beyond that, the small buffers under the revised baseline would be quickly exhausted, requiring a new strategy, including additional external financing. A further heightening of geopolitical tensions could also have significant economic consequences. Domestically, policymaking may become more difficult in case of early elections. Strong policy performance and adherence to the planned reforms is therefore critical. Staff supports the authorities’ request for completion of the first review and the waivers for nonobservance and applicability of performance criteria. The purchase released upon completion of the review would be in the amount of SDR 0.914 billion, of which SDR 0.650 billion will be used to finance the budget deficit.
    Keywords: Stand-by arrangement reviews;Fiscal policy;Energy policy;Governance;Transparency;Financial sector;Monetary policy;Staff Reports;Press releases;Phasing of purchases;Performance criteria waivers;Ukraine;
    Date: 2014–09–02
  61. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: Tuvalu is one of the smallest and most isolated countries in the world. With a population of some 11,000 people living on 26 square kilometers, Tuvalu is more than 3,000 kilometers away from its nearest major external market (New Zealand). The country faces tremendous challenges stemming from its remoteness, lack of scale economies, weak institutional capacity, and, above all, climate change and rising sea levels, which threaten the country’s very existence. (Appendix III)
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Climatic changes;Fiscal sustainability;Fiscal reforms;Public enterprises;Banking sector;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Tuvalu;
    Date: 2014–08–28
  62. By: Miles Parker (Reserve Bank of New Zealand)
    Abstract: New evidence from a large survey of over 5300 firms provides insight into price-setting behaviour in New Zealand. There is considerable heterogeneity in behaviour both between and within sectors, and marked asymmetry in the responses to shocks. The median number of prices reviews is twice per year, but the median number of changes is just once. Multi-product firms reset prices more frequently, even accounting for other firm characteristics. Explicit and implicit contracts and strategic complementarity are the most widely recognised causes of price stickness. Menu costs and sticky information are not widely recognised.
    JEL: E30 D40
    Date: 2014–07
  63. By: International Monetary Fund. African Dept.
    Keywords: Banking sector;Access to capital markets;Public investment;Natural resources;Debt sustainability;Fiscal consolidation;Government expenditures;Fiscal policy;Selected Issues Papers;Republic of Congo;
    Date: 2014–09–04
  64. By: Costantini, Mauro (Brunel University); Cuaresma, Jesus Crespo (Vienna University of Economics and Business); Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna)
    Abstract: We provide a systematic comparison of the out-of-sample forecasts based on multivariate macroeconomic models and forecast combinations for the euro against the US dollar, the British pound, the Swiss franc and the Japanese yen. We use profit maximization measures based on directional accuracy and trading strategies in addition to standard loss minimization measures. When comparing predictive accuracy and profit measures, data snooping bias free tests are used. The results indicate that forecast combinations help to improve over benchmark trading strategies for the exchange rate against the US dollar and the British pound, although the excess return per unit of deviation is limited. For the euro against the Swiss franc or the Japanese yen, no evidence of generalized improvement in profit measures over the benchmark is found.
    Keywords: Exchange rate forecasting, Forecast combination, Multivariate time series models, Profitability
    JEL: C53 F31 F37
    Date: 2014–09

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