nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒11‒01
89 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal Macroprudential Policy By Junichi Fujimoto; Ko Munakata; Koji Nakamura; Yuki Teranishi
  2. The Great Mortgaging: Housing Finance, Crises, and Business Cycles By Oscar Jorda; Moritz Schularick; Alan M. Taylor
  3. Price level targeting with strategic fiscal policy and the value of fiscal leadership By Yuting Bai
  4. Interactions between Monetary Policy and Fiscal Policy By António Afonso; Raquel Balhote
  5. Does Inflation Targeting Outperform Alternative Policies during Global Downturns? By Renée A. Fry-McKibbin; Chen Wang
  6. Inflation Risk Premia, Yield Volatility and Macro Factors By Andrea Berardi
  7. UNITED STATES MONETARY POLICY IN THE POST-BRETTON WOODS ERA Did it cause the Crash of 2008? By Yanis Varoufakis
  8. A Comparative Analysis of Macroprudential Policies By Yaprak Tavman
  9. Targeting Long Rates in a Model with Segmented Markets By Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthius
  10. Common Macroeconomic Shocks and Business Cycle Fluctuations in Euro Area Countries By Antonella Cavallo; Antonio Ribba
  11. Adaptive Learning, Heterogeneous Expectations and Forward Guidance By Eric Gaus
  12. Analyzing data revisions with a dynamic stochastic general equilibrium model By Croushore, Dean; Sill, Keith
  13. Financial Crisis, Unconventional Monetary Policy and International Spillovers By Qianying Chen; Andrew Filardo; Dong He; Feng Zhu
  14. Dynamic Prediction Pools: An Investigation of Financial Frictions and Forecasting Performance By Marco Del Negro; Raiden B. Hasegawa; Frank Schorfheide
  15. So far apart and yet so close: Should the ECB care about inflation differentials? By Zsolt Darvas; Guntram B. Wolff
  16. A tale of two gaps – A Comment on the European Solidarity Manifesto By Piergiorgio Gawronski
  17. Real-time forecasting us GDP from small-scale factor models By Máximo Camacho; Jaime Martínez-Martín
  18. Secular Stagnation: Evidence and Implications for Economic Policy By Łukasz Rawdanowicz; Romain Bouis; Kei-Ichiro Inaba; Ane Kathrine Christensen
  19. Rethinking Pro-Growth Monetary Policy in Africa: Monetarist versus Keynesian Approach By Christian Lambert Nguena
  20. Money Cycles. By Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
  21. Decaying expectations: what inflation forecasts tell us about the anchoring of inflation expectations By Aaron Mehrotra; James Yetman
  22. The Macroeconomics and Financial System Requirements for a Sustainable Future. By Giuseppe Fontana; Malcolm Sawyer
  23. The Responses of the Prime Rate to a Change in Policies of the Federal Reserve By Joseph Friedman; Yochanan Shachmurove
  24. QE and the bank lending channel in the United Kingdom By Butt, Nick; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  25. Former Yugoslav Republic of Macedonia: 2014 Article IV Consultation and Third Post-Program Monitoring Discussions - Staff Report; Press Release; and Statement by the Executive Director for the Former Yugoslav Republic of Macedonia By International Monetary Fund. European Dept.
  26. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: Empirical Analysis Using Data on Bank Loans and Investment Flows By Masashi Saito; Yoshihiko Hogen
  27. Inspecting the Mechanism Leverage and the Great Recession in the Eurozone By Philippe Martin; Thomas Philippon
  28. Republic of Kazakhstan: Selected Issues By International Monetary Fund. Middle East and Central Asia Dept.
  29. "Non-Legal-Tender Paper Money: The Structure and Performance of Maryland’s Bills of Credit, 1767-1775" By Jim Celia; Farley Grubb
  30. Delayed Overshooting: It’s an 80s Puzzle. By Seong-Hoon Kim; Seongman Moon; Carlos Velasco
  31. The Inflation Tax, Variable Time Preference, and the Business Cycle Creation Date: 1998 By R. Lahiri
  32. Optimal Contracts, Aggregate Risk, and the Financial Accelerator By Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthius
  33. People's Republic of China–Macao Special Administrative Region: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Macao SAR By International Monetary Fund. Asia and Pacific Dept
  34. Can interest rate spreads stabilize the euro area? By Michał Brzoza-Brzezina; Jacek Kotłowski; Kamil Wierus
  35. Sudan: First Review Under the Staff Monitored Program; and Statement by the Executive Director for Sudan By International Monetary Fund. Middle East and Central Asia Dept.
  36. The Determinants of Growth Rate Volatility in European Regions By Davide fiaschi; Lisa Gianmoena; Angela Parenti
  37. Finance and Crisis; Marxian, Institutionalist and Circuitist approaches By Georgios Argitis; Trevor Evans; Jo Michell; Jan Toporowski
  38. Japan: 2014 Article IV Consultation-Staff Report; and Press Release By International Monetary Fund. Asia and Pacific Dept
  39. Home Production and Small Open Economy Business Cycles By Kuan-Jen Chen; Angus C. Chu; Ching-Chong Lai
  40. Private Shareholding and Public Interest: An Analysis of an Eclectic Group of Central Banks By Jannie Rossouw
  41. On the changes in the sustainability of European external debt: what have we learned By Juan Carlos Cuestas; Luis A. Gil-Alana; Paolo Jose Regis
  42. Why does the Euro fail? The DCCA approach By Paulo Ferreira; Andreia Dionisio; Gilney Zebende
  43. Toward a New Understanding of Monetary Policy By Friedman, Benjamin Morton
  44. Business Cycle Synchronization and Volatility Shifts By Pedro André Cerqueira
  45. Analysing and forecasting price dynamics across euro area countries and sectors: A panel VAR approach By Stéphane Dées; Jochen Güntner
  46. Optimal taxation and labour wedge in models with equilibrium unemployment By Wei Jiang
  47. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Jonas E. Arias; Dario Caldara; Juan F. Rubio-Ramírez
  48. The Bank of France and the Open-Market instrument: an impossible wedding? By Nicolas Barbaroux
  49. The Price of Stability. The balance sheet policy of the Banque de France and the Gold Standard (1880-1914). By G. Bazot; M. D. Bordo; E. Monnet
  50. What Drives and Limits Financial Deepening Dynamics? Fresh Empirical-based Policy Lessons for African Sub-Regions By Christian Lambert Nguena; Roger Tsafack Nanfosso
  51. Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries By Ramiz Rahmanov
  52. An Index of Growth Rate Volatility: Methodology and an Application to European Regions By Irene Brunetti; Davide fiaschi; Lisa Gianmoena
  53. Slovak Republic: 2014 Article IV Consultation - Staff Report; and Press Release By International Monetary Fund. European Dept.
  54. Exchange Rate Movements and the Australian Economy By Josef Manalo; Dilhan Perera; Daniel Rees
  55. Inflation Forecasts and Forecaster Herding: Evidence from South African Survey Data By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  56. The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach By Benjamin Eden
  57. Disagreement in households' inflation expectations and its evolution By Shusaku Nishiguchi; Jouchi Nakajima; Kei Imakubo
  58. Can Financial Stability be Maintained in Developing Countries after the Global Crisis: The Role of External Financial Shocks? By Hasan Comert; Mehmet Selman Colak
  59. Capital Inflows, Exchange Rate Regimes and Credit Dynamics in Emerging Market Economies By Robin Boudias
  60. The Paradox of Fiscal Imbalances in India By M. Mahamallik; P. Sahu; S. Mahapatra
  61. Tax smoothing in a business cycle model with capital-skill complementarity By Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos
  62. Developing an underlying inflation gauge for China By Marlene Amstad; Ye Huan; Guonan Ma
  63. Public Goods, Redistribution, and Growth: A Classical Model By Daniele Tavani; Luca Zamparelli
  64. Factor substitution, factor-augmenting technical progress, and trending factor shares: the Canadian evidence By Kenneth G. Stewart; Jiang Li
  65. Academic performance and the Great Recession By Effrosyni Adamopoulou; Giulia Martina Tanzi
  66. Does E-Filing Reduce Tax Compliance Costs in Developing Countries? By Jacqueline Coolidge; Fatih Yilmaz
  67. The Euroization of Bank Deposits in Eastern Europe By Brown, Martin; Stix, Helmut
  68. Regime Switching Model of US Crude Oil and Stock Market Prices: 1859 to 2013 By Mehmet Balcilar; Rangan Gupta; Stephen M. Miller
  69. EMU sovereign debt market crisis: Fundamentals-based or pure contagion? By Marta Gómez-Puig; Simón Sosvilla-Rivero
  70. Remarks on "Government Debt Management at the Zero Lower Bound" : a speech at the Panel Discussion on "Debt Management in an Era of Quantitative Easing: What Should the Treasury and the Fed Do?", Washington, D.C., September 30, 2014 By Powell, Jerome H.
  71. Republic of Senegal Basic Agricultural Public Expenditure Diagnostic Review By World Bank
  72. 'Limited Re-Entry and Business Cycles' By Patrick Macnamara
  73. Customer-Centricity for Financial Inclusion By Tanaya Kilara; Elisabeth Rhyne
  74. Real Estate Returns Predictability Revisited: Novel Evidence from the US REITs Market By Kola Akinsomi; Goodness C. Aye; Vassilios Babalos; Fotini Economou; Rangan Gupta
  75. The Measurement of Inflation: A stochastic approach Creation Date: 1987 By K.W. Clements; H.Y. Izan
  76. The Measurement of Inflation: a Stochastic Approach Creation Date: 1984 By K.W. Clements; H.Y. Izan
  77. What Everyone Needs to Know About the Australian Business Cycle Creation Date: 1993 By C. O'Sullivan
  78. Global and European Imbalances:A critical review By Carlos A. Carrasco; Felipe Serrano
  79. Density forecasts with MIDAS models By Knut Are Aastveit; Claudia Foroni; Francesco Ravazzolo
  80. The Role of Money During the Recession in Australia in 1990-92 Creation Date: 1993 By E.J. Weber
  81. UQICD v2 User Guide By D.S. Prasada Rao; Alicia N. Rambaldi; K. Renuka Ganegodage; L. T. Huynh; Howard E. Doran
  82. Piloting Macroinsurance for Microenterprises in Post-Revolution Egypt By Matthew Groh; David McKenzie
  83. Macroeconomic Imbalances and Structural Change in the EMU By Stefan Ederer; Peter Reschenhofer
  84. Chaos in a Model of Credit Cycles with Good and Bad Projects. By Iryna Sushko; Laura Gardini; Kiminori Matsuyama
  85. Bagging Constrained Equity Premium Predictors By Tae-Hwy Lee; Eric Hillebrand; Marcelo Medeiros
  86. On Central Bank Interventions in the Mexican Peso/Dollar Foreign Exchange Market By Santiago García-Verdú; Miguel Zerecero
  87. Regional labor markets in Brazil: the role of skills and agglomeration economies By Ana Maria Bonomi Barufi
  88. Variations in liquidity provision in real-time payment systems By Denbee, Edward; Garratt, Rodney; Zimmerman, Peter
  89. Family Structure and the Education Gender Gap: Evidence from Italian Provinces By Graziella Bertocchi; Monica Bozzano

  1. By: Junichi Fujimoto (National Graduate Institute for Policy Studies); Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Keio University and CAMA, ANU)
    Abstract: This paper introduces financial market frictions into a standard New Keynesian model through search and matching in the credit market. Under such financial mar- ket frictions, a second-order approximation of social welfare includes a term involv- ing credit, in addition to terms for inflation and consumption. As a consequence, the optimal monetary and macroprudential policies must contribute to both finan- cial and price stability. This result holds for various approximated welfares that can change corresponding to macroprudential policy variables. The key features of opti- mal policies are as follows. The optimal monetary policy requires keeping the credit market countercyclical against the real economy. Commitment in monetary and macro- prudential policy, rather than approximated welfare, justifies history dependence and pre-emptiveness. Appropriate combinations of macroprudential and monetary policy achieve perfect financial and price stability.
    Keywords: optimal macroprudential policy; optimal monetary policy; financial market friction
    JEL: E44 E52 E61
    Date: 2014–09
  2. By: Oscar Jorda (Federal Reserve Bank of San Francisco and University of California, Davis); Moritz Schularick (University of Bonn and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Alan M. Taylor (University of California, Davis and National Bureau of Economic Research and Centre for Economic Policy Research)
    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
  3. By: Yuting Bai
    Abstract: This paper investigate the stabilization bias that arises in a model of non-cooperative monetary and fiscal policy stabilisation of the economy, when monetary authority implements price level targeting but fiscal policy remains benevolent. We demonstrate the gain in welfare improvement depends on the level of steady state debt. If the steady state level of the government debt is low, then the monetary price level targeting unambiguously leads to social welfare gains, even if the fiscal authority acts strategically and faces different objectives and has incentives to pursue its own benefit and therefore offsets some or all of monetary policy actions. Moreover, if the fiscal policymaker is able to conduct itself as an intra-period leader, the social welfare gain of the monetary price level targeting regime can be further improved. However, if the economy has a high steady state debt level, the gain of the price level targeting is outweighed by the loss arising from the conflicts between the policy makers, and leads to a lower social welfare than under cooperative discretionary inflation targeting.
    Keywords: Monetary and fiscal policy interactions, distortionary taxes, discretionary policy, LQ RE models
    JEL: E31 E52 E58 E61 C61
    Date: 2014
  4. By: António Afonso; Raquel Balhote
    Abstract: Using a panel data set of 14 EU countries from 1970 to 2012, we study the type of monetary and fiscal policies of both authorities, and assess how they are influenced by certain economic variables and events (the Maastricht Treaty, the Stability and Growth Pact, the Euro and crises). Results show that inflation has a significant impact on monetary policy, and that governments raise their primary balances when facing increases in debt. Another goal is to characterise the type of interactions established between central banks and national governments, i.e. if their policies complement one another, or whether there is a more dominant one. Still, our results point to the lack of evidence concerning central banks’ response to fiscal policy.
    Keywords: interactions, monetary policy, fiscal policy, reaction functions.
    JEL: E52 E62 E63 H62
    Date: 2014–07
  5. By: Renée A. Fry-McKibbin; Chen Wang
    Abstract: This article examines the performance of inflation targeters during the 2007-2012 downturn compared to those without this policy. Propensity score matching methods are used to compare the policy regimes, where during a downturn the more successful policy results in higher inflation and output growth, lower unemployment, and a better fiscal position. The analysis is conducted separately for developed and emerging countries. Inflation targeting tends to insulate developed countries, but is much less conclusive for the emerging countries during downturns. These results are opposite to those found for normal economic periods which are inconclusive for developed countries, but beneficial for emerging countries. Most concerning for emerging countries is that inflation targeters experience lower GDP growth in downturns. Both developed and emerging countries need to evaluate their choice of monetary regime by taking into account the tradeoff between low and stable inflation during normal periods with growth during downturns.
    Keywords: Inflation, Inflation targeting, Financial crisis, Propensity score matching
    JEL: E31 E52 E58
    Date: 2014–10
  6. By: Andrea Berardi (Department of Economics (University of Verona))
    Abstract: This paper presents and estimates an innovative term structure model where inflation expectations and inflation risk premia are strictly interconnected with both the timevarying volatility of interest rates and investors’ expectations of future GDP growth. The estimation of the model is based on U.S. data over the 1999 to 2012 sample period. Distinct from previous studies, the empirical work explicitly considers data on both the implied volatility of Treasury bonds and survey forecasts of GDP growth, as well as data on nominal Treasury yields, TIPS yields and survey forecasts of CPI inflation. The estimated inflation risk premia, which are relatively low and less volatile with respect to earlier empirical evidence, are negatively related to the volatility of interest rates and have a strongly positive link with the stochastic conditional mean of GDP growth.
    Keywords: Keywords: Term Structure and Macroeconomy, Inflation Risk Premia, TIPS, Yield Volatility
    JEL: G12 E43 E44 C58
    Date: 2013–12
  7. By: Yanis Varoufakis (Department of Economics, National and Kapodistrian University of Athens, and Lyndon B. Johnson School of Public Affairs, University of Texas at Austin.)
    Abstract: The Crash of 2008 is often blamed on the Fed’s overly ‘loose’ monetary policy after 2001 (see Taylor, 2009, 2010). In short, the argument goes, American monetary policy was too ‘loose’ for four years between 2002 and 2006; and too ‘tight’ once the Fed realised that it was presiding over an unsustainable boom. This paper argues that the causes of 2008 and its aftermath (i.e. the stuttering ‘recovery’ once financial markets were successfully stabilised) run much deeper than ‘suboptimal’ monetary policy by the Fed. It argues that, by the end of the 1970s, the Bretton Woods system had been replaced with a ‘brave new’ global surplus recycling mechanism in which Wall Street and the rest of the West’s large private banks featured prominently. These developments engendered a new form of ‘private money’ over which the Federal Reserve had decreasing control. Thus, if the Fed did indeed lose control over the effective money supply it lost it not because of any ‘deviation’ from Taylor-rule-based central banking but, rather, because of a major shift in the global role of finance. To understand why the Fed lost much of its influence over the aggregate money supply we first need to understand how this new form of private money had become an indispensible aspect of the aforementioned recycling mechanism. Wall Street’s generation of private money was, in fact, functional to the recycling of global surpluses upon which the ‘Great Moderation’ was founded. This put the Fed in an impossible dilemma: Should it re-assert its control over the effective money supply at the expense of ending the illusion of the Great Moderation? Or should it stick to Taylor-rule like central banking? This paper argues that the Fed opted for the latter. The paper is structured as follows. Sections 1 and 2 offer a non-technical analysis of the arguments outlined above. Section 3 turns to the post-2008 period and asks; Given that the official sector stabilised financial markets, why has recovery proved so tepid? The answer Section 3 provides is an extension of the analysis in Sections 1&2 regarding the true causes of the Fed’s loss of control over the effective money supply well before the Crash of 2008. Along the same lines, it presents a particular critique of the Fed’s Quantitative Easing policy. Section 4 concludes. In addition to its four main sections, the paper offers three analytical appendices. Appendix 1 presents empirical evidence of the Fed’s loss of control over the effective money supply. Appendix 2 supports these observations with a fully dynamic game theoretical analysis of the Fed’s conundrum during the 1980-2008 period. Lastly, Appendix 3 focuses on the unrealistic assumptions under which Quantitative Easing might spearhead recovery
    Keywords: Federal Reserve, Central Bank Games, Financial Crisis, Taylor Rule, Monetary Policy, Quantitative Easing
    JEL: C72 E42 E44 E51 E52 E58 F02 F33
  8. By: Yaprak Tavman
    Abstract: The global financial crisis has clearly shown that macroeconomic stability is not sufficient to guarantee the stability of the financial system. Hence, the recent policy debate has focused on the effectiveness of macroprudential tools and their interaction with monetary policy. This paper aims to contribute to the macroprudential policy literature by presenting a formal comparative analysis of three macroprudential tools: (i) reserve requirements, (ii) capital requirements and (iii) a regulation premium. Utilizing a New Keynesian general equilibrium model with Önancial frictions, we find that capital requirements are the most effective macroprudential tool in mitigating the negative effects of the financial accelerator mechanism. Deriving welfare-maximizing monetary and macroprudential policy rules, we also conclude that irrespective of the type of the shock affecting the economy, use of capital requirements generates the highest welfare gains.
    Keywords: financial crises, monetary policy, macroprudential tools, financial system regulation
    JEL: E44 E58 G21 G28
    Date: 2014–06
  9. By: Carlstrom, Charles T. (Federal Reserve Bank of Cleveland); Fuerst, Timothy S. (University of Notre Dame); Paustian, Matthius (Bank of England)
    Abstract: This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to having the central bank respond to the term premium, eg., including the term premium in the Taylor rule. Third, a policy that directly targets the term premium sterilizes the real economy from shocks originating in the financial sector. A term premium peg can have signifi cant welfare effects.
    Keywords: Agency costs; CGE models; optimal contracting
    JEL: C68 E44 E61
    Date: 2014–10–15
  10. By: Antonella Cavallo; Antonio Ribba
    Abstract: This paper investigates the dynamic effects of common macroeconomic shocks in shaping business cycle fluctuations in a group of Euro-area countries. In particular, by using the structural (near)VAR methodology, we investigate the effect of area-wide shocks, with particular attention to monetary policy shocks. The main conclusion is that: (a) contractionary monetary policy shocks cause similar recessionary effects in all countries; (b) as far as business cycle fluctuations are concerned, there is a separation into two distinct groups of countries, with a first group including the biggest European economies in which business cycle fluctuations are mainly explained by common, area-wide shocks and a second one, including Greece, Ireland and Portugal, in which the national shocks play, instead, a much greater role
    Keywords: Business Cycle Fluctuations; Euro area; Common Shocks; Near-Structural VARs.
    JEL: E31 C32
    Date: 2014–09
  11. By: Eric Gaus (Ursinus College)
    Abstract: In a model of the New Keynesian Phillips Curve with two E-stable solutions we demonstrate through simulations that forward guidance can ensure the economy settles on the low persistence equilibrium. While market participants use sample autocorrelation learning, the Central Bank uses least squares learning of the MSV solution. Central bank policy is a simple inflation target that is enforced based on policy makers expectations. Monetary policy on its own is not enough to ensure that the low persistence equilibrium obtains.
    Keywords: adaptive learning, forward guidance, heterogeneous expectations
    JEL: E52 D83
    Date: 2014–10–01
  12. By: Croushore, Dean (University of Richmond); Sill, Keith (Federal Reserve Bank of Philadelphia)
    Abstract: We use a structural dynamic stochastic general equilibrium model to investigate how initial data releases of key macroeconomic aggregates are related to final revised versions and how identified aggregate shocks influence data revisions. The analysis sheds light on how well preliminary data approximate final data and on how policy makers might condition their view of the preliminary data when formulating policy actions. The results suggest that monetary policy shocks and multifactor productivity shocks lead to predictable revisions to the initial release data on output growth and inflation.
    Keywords: Real-time data; DSGE models; Bayesian analysis; Data revisions;
    JEL: C11 C32 C53 E27 E47
    Date: 2014–09–23
  13. By: Qianying Chen (International Monetary Fund); Andrew Filardo (Bank for International Settlements); Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Feng Zhu (Bank for International Settlements)
    Abstract: This paper studies the effects of unconventional monetary policies in the major advanced economies. We first examine the cross-border financial market impact of central bank announcements of asset purchase programmes based on event studies. We find marked effects, as expansionary balance sheet policies influence the prices of a broad range of emerging market assets, raising equity prices, lowering government and corporate bond yields and compressing CDS spreads. We then study the economic impact of US quantitative easing on both emerging and advanced economies, based on an estimated global vector error-correcting macroeconomic (VECM) model, which takes into account trade and financial linkages. We focus on the effects of reductions in US term and corporate spreads, and in US market volatility. The estimated effects are sizeable and differ across economies. First, US QE measures which help to lower market volatility and reduce corporate spreads appear to have had far greater impact than lowering term spreads, as Blinder (2012) suggested. Second, such measures have prevented a prolonged recession and severe deflation in the advanced economies. Third, the impact on emerging economies has varied but is generally stronger than in the US and other advanced economies. US QE measures contributed to overheating in Brazil, China and other emerging economies in 2010 and 2011, but supported recovery in 2009 and 2012. The sign and size of QE effects differ across economies, implying that their costs and benefits are unevenly distributed.
    Keywords: Announcement Effects, Emerging Economies, Financial Markets, Global VECM, International Spillovers, Quantitative Easing, Unconventional Monetary Policy
    JEL: E43 E44 E52 E65 F42 F47
    Date: 2014–09
  14. By: Marco Del Negro (Federal Reserve Bank of New York); Raiden B. Hasegawa (Wharton School, University of Pennsylvania); Frank Schorfheide (Department of Economics, University of Pennsylvania)
    Abstract: We provide a novel methodology for estimating time-varying weights in linear prediction pools, which we call Dynamic Pools, and use it to investigate the relative forecasting performance of DSGE models with and without financial frictions for output growth and inflation from 1992 to 2011. We find strong evidence of time variation in the pool's weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but does not perform as well in tranquil periods. The dynamic pool's weights react in a timely fashion to changes in the environment, leading to real-time forecast improvements relative to other methods of density forecast combination, such as Bayesian Model Averaging, optimal (static) pools, and equal weights. We show how a policymaker dealing with model uncertainty could have used a dynamic pools to perform a counterfactual exercise (responding to the gap in labor market conditions) in the immediate aftermath of the Lehman crisis.
    Keywords: Bayesian estimation, DSGE Models, Financial Frictions, Forecasting, Great Recession, Linear Prediction Pools
    JEL: C53 E31 E32 E37
    Date: 2014–10–03
  15. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates. In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences. It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.
    Date: 2014–09
  16. By: Piergiorgio Gawronski (Scuola Nazionale dell'Amministrazione)
    Abstract: The paper by Kawalec and Pytlarczyk (2012) (henceforth, K-P), and the shorter “European Solidarity Manifesto” (; henceforth, ESMA), address two different set of questions. (1) Should the Euro be dismantled? What is the origin of the Eurozone (EZ) depression? Is it temporary or curable? In their view, the ‘key problem’ is the loss of international competitiveness of the weakest EZ countries; the competitiveness gap is “very difficult or even impossible to correct without a devaluation” (given the price/wage downward stickiness, and the limits to austerity posed by democracy); and if corrected, it may easily arise again in the future. Hence the Euro should be dismantled. (2) How should the Euro be dismantled? Their view is that it should start with a German exit, and should be managed in a cooperative way. K-P describe their preferred procedure. I will here discuss only the first, more fundamental set of issues. I will argue that in principle the Euro is curable, but won’t be cured. The economic problems of the EZ periphery – unemployment, public debt, banks weakness, etc. – all arise from a lack of economic growth. I will therefore start by asking what is, and is going to be in the next 10 years, the main constraint in the EZ on growth. I will also discuss the role of the ‘competitiveness gap’ in this respect. I will end with some thoughts on the optimal political strategy to solve the Euro conundrum. Italy will be used as a case study to illustrate some more general points.
    Keywords: Inflation, Policy coordination, Eurozone crisis, Fiscal policy, Economic integration
    JEL: E31 E61 E62 F15
    Date: 2014–10
  17. By: Máximo Camacho (Universidad de Murcia); Jaime Martínez-Martín (Banco de España)
    Abstract: We show that the single-index dynamic factor model developed by Aruoba and Diebold (Am Econ Rev, 100:20-24, 2010) to construct an index of US business cycle conditions is also very useful for forecasting US GDP growth in real time. In addition, we adapt the model to include survey data and financial indicators. We find that our extension is unequivocally the preferred alternative for computing backcasts. In nowcasting and forecasting, our model is able to forecast growth as well as AD and better than several baseline alternatives. Finally, we show that our extension could also be used to infer US business cycles with great accuracy.
    Keywords: real-time forecasting, economic indicators, business cycles.
    JEL: E32 C22 E27
    Date: 2014–10
  18. By: Łukasz Rawdanowicz; Romain Bouis; Kei-Ichiro Inaba; Ane Kathrine Christensen
    Abstract: This paper investigates whether OECD countries are facing secular stagnation. Secular stagnation is defined as a situation when policy interest rates bounded at zero fail to stimulate demand sufficiently, due to low or negative neutral real interest rates and low inflation, and when ensuing prolonged and subdued growth undermines potential growth via labour hysteresis and discouraged investment. Obtaining firm evidence is complicated by considerable uncertainties surrounding estimates of economic slack and its impact on inflation, crisis-related hit to potential output and neutral interest rates. However, signs of secular stagnation are most evident in the euro area, particularly in the vulnerable members, in contrast to the United States and the United Kingdom, where evidence is less firm. Japan is arguably in the advanced stage of secular stagnation that started almost two decades ago. In countries with symptoms of secular stagnation, more monetary and fiscal stimulus should be accompanied by structural reforms to boost potential growth and neutral rates. Evidence on hysteresis effects strengthens the case for accommodative policies. In general, the large uncertainty about the size and persistence of hysteresis and risks associated with certain measures pose policy dilemmas and call for a comprehensive policy response. Stagnation séculaire : Evidences et répercussions sur la politique économique Ce document cherche à déterminer si les pays de l’OCDE sont dans une stagnation séculaire. La stagnation séculaire désigne une situation dans laquelle les taux d’intérêt directeurs nuls ne parviennent pas à stimuler suffisamment la demande, en raison de taux d’intérêts réels neutres bas ou négatifs et d’une inflation faible, conjugués à une croissance durablement atone qui affaiblit la croissance potentielle via des effets d’hystérèse sur le marché du travail et un investissement découragé. Obtenir des évidences robustes est difficile du fait des incertitudes considérables entourant les estimations de la sous-utilisation des capacités de production et de son impact sur l’inflation, des effets négatifs de la crise sur la production potentielle et des taux d’intérêt neutres. Toutefois, les signes de stagnation séculaire sont les plus flagrants dans la zone euro, surtout dans les États membres vulnérables, contrairement aux États-Unis et au Royaume-Uni où les évidences sont moins tranchées. Le Japon se trouve probablement en phase avancée de stagnation séculaire, qui a débuté il y a près de vingt ans. Dans les pays montrant des signes de stagnation séculaire, de nouvelles mesures de relance monétaire et budgétaire devraient s’accompagner de réformes structurelles destinées à stimuler la croissance potentielle et les taux neutres. Les effets d’hystérèse plaident en faveur de politiques accommodantes. De manière générale, les incertitudes importantes entourant l’ampleur et la persistance des effets d’hystérèse et les risques associés à certaines mesures posent des dilemmes en termes de politique et nécessitent une réponse politique globale.
    Keywords: monetary policy, inflation, potential output, secular stagnation, neutral interest rates, taux d’intérêt neutres, stagnation séculaire, politique monétaire, production potentielle, inflation
    JEL: E3 E4 E5 E6 J21 O47
    Date: 2014–10–14
  19. 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
  20. By: Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
    Abstract: Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own. We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity. Agents spend their money too quickly – a “hot potato effect of inflation”. We show that inflation can stimulate inefficiently high aggregate output.
    Date: 2014–09–22
  21. By: Aaron Mehrotra; James Yetman
    Abstract: Well anchored inflation expectations are considered to be a reflection of credible monetary policy. In the past, anchoring has been assessed using either long-run inflation surveys or break-even inflation rates on financial assets with long maturities. But neither of these is ideal. Here we propose an alternative measure of inflation anchoring that makes full use of readily available, multiple-horizon, fixedevent forecasts. We show that a model where forecasts are assumed to diverge away from a long-run anchor towards actual inflation as the forecast horizon shortens fits the data well. It also provides simple estimates of the degree to which inflation expectations are anchored. Based on our estimation results we argue that inflation expectations have become more tightly anchored over time in both inflation targeting economies and in those following other regimes. However, inflation targeting regimes have seen a greater change along three dimensions: the level of the anchor has fallen further; the tightness of anchoring has increased more; and the relationship between the anchor and actual inflation outcomes has weakened to a greater degree.
    Keywords: Inflation expectations, decay function, inflation targeting
    Date: 2014–09
  22. By: Giuseppe Fontana (The University of Leeds); Malcolm Sawyer (The University of Leeds)
    Abstract: The paper develops a macro-economic analysis along broadly defined Post Keynesian and Kaleckian lines, which incorporates ecological constraints on the pace of economic growth. Since growth is viewed as demand-driven, this involves bringing demand into line with the sustainable ‘ecological footprint’. A simple model of demand- driven growth is constructed from which some basic conclusions are drawn of the consequences of slower growth and lower investment including those for the rate of interest and the rate of profit. The macroeconomic policy to deliver full employment is indicated. The growth of the effective labour force and the sustainable rate of growth of the ‘ecological footprint’ are introduced and the relationships between them and the demand-driven rate of growth explored. The macroeconomic analysis has to be embedded with analysis of the monetary and financial system. For this purpose a circuitist analysis is presented. The paper considers the ways in which the monetary and financial systems should be re-structured to be consistent with sustainable growth and low unemployment. The major aims of this re-structuring would be to underpin financial stability, and more importantly to focus the financial sector on the allocation of funds into environmentally friendly investment.
    Keywords: ecological macroeconomics, sustainability, financial systems, ecological footprint
    JEL: E00 G20 O11 O44
    Date: 2014–08–01
  23. By: Joseph Friedman (Department of Economics, Temple University); Yochanan Shachmurove (City College of New York)
    Abstract: This paper studies the reactions of commercial banks to the changes in monetary policy tools in mid-1994, when the Federal Reserve Bank altered its policy implicitly targeting the Federal Funds Rate (FFR). Prior to 1994, the FFR had affected, with a considerable lag, the Prime Rate. However, after the move by the Fed in 1994, commercial banks responded immediately by changing their Prime lending rate to the Federal Funds Rate plus a three-percent spread. Based on the response of commercial banks, it is evident that a more transparent monetary policy can, in fact, more effectively achieve its underlying objectives.
    Keywords: Federal Fund Rate, Prime Rate, Federal Reserve Bank, Monetary Policy, Commercial Banks, Vector Auto Regression (VAR), Vector Error Correction (VEC), Interest Rate Targeting, Unit Root Tests, Granger Causality, Variance Decomposition
    JEL: C15 C32 C58 E00 E4 E5 G00 G2 G38
    Date: 2014–09
  24. By: Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE) provided a boost to bank lending in the United Kingdom, in addition to the effects on asset prices, demand and inflation focused on in most other studies. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks' balance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty’ deposits), then the traditional BLC is diminished. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies which suggest that QE boosted aggregate demand and inflation via portfolio rebalancing channels.
    Keywords: Monetary policy; bank lending channel; quantitative easing
    JEL: E51 E52 G20
    Date: 2014–09–19
  25. By: International Monetary Fund. European Dept.
    Abstract: Growth accelerated to 3.1 percent in 2013, driven by a positive net exports contribution. The broad policy direction is supportive of near term macroeconomic stability. The key challenge is to transition from stability into an acceleration of medium term growth. Uncertainty with respect to EU accession remains, and weighs on longer term prospects.
    Keywords: Article IV consultation reports;Fiscal policy;Debt management;Monetary policy;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Post-program monitoring;former Yugoslav Republic of Macedonia (FYR Macedonia);
    Date: 2014–07–25
  26. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan)
    Abstract: This paper organizes facts and conducts an empirical analysis related to the portfolio rebalancing effect of government bond purchases by the Bank of Japan (BOJ). Our analysis uses data on bank loans and investment flows that are classified by type of entity, primarily taken from the Flow of Funds Accounts Statistics. Following the introduction of Quantitative and Qualitative Monetary Easing (QQE) by the BOJ in April 2013, entities other than the BOJ, as a group, have increased loans and investment in equities, mutual funds, and corporate bonds in Japan, while reducing their holdings of Japanese government bonds. Such portfolio rebalancing is mainly led by domestic banks and nonresidents. Meanwhile, so far, insurance companies, corporate pension funds, and public pensions have not reduced government bond holdings when the BOJ purchased government bonds. In addition to changes in financial and economic conditions, such as 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 have played a role in the increase in bank loans observed during the QQE period.
    Keywords: portfolio rebalancing; government bond purchases; Quantitative and Qualitative Monetary Easing (QQE); Flow of Funds Accounts Statistics
    JEL: E52 E58 G11 G2 H63
    Date: 2014–06–19
  27. By: Philippe Martin (Département d'économie); Thomas Philippon (Department of Mechanical Engineering, Massachusetts Institute of Technology)
    Abstract: We provide a first comprehensive account of the dynamics of Eurozone countries from the creation of the Euro to the Great recession. We model each country as an open economy within a monetary union and analyze the dynamics of private leverage, fiscal policy and spreads. Our parsimonious model can replicate the time-series for nominal GDP, employment, and net exports of Eurozone countries between 2000 and 2012. We then ask how periphery countries would have fared with: (i) more conservative fiscal policies; macro-prudential tools to control private leverage; (iii) a central bank acting earlier to limit sovereign spreads; and (iv) the possibility to recoup the competitiveness they lost in the boom. To perform these counterfactual experiments, we use U.S. states as a control group that did not suffer from a sudden stop. We find that periphery countries could have stabilized their employment if they had followed more conservative fiscal policies during the boom. This is especially true in Greece. For Ireland, however, given the size of the private leverage boom, such a policy would have required buying back almost all of the public debt. Macro-prudential policy would have been helpful, especially in Ireland and Spain. However, in presence of a spending bias in fiscal rules, macro-prudential policies would have led to less prudent fiscal policies in the boom. Central bank actions would have stabilized employment during the bust but not public debt. Finally, if these countries had been able to regain in the bust the competitiveness they lost in the boom, they would have experienced a shorter and milder recession.
    Date: 2014–10
  28. By: International Monetary Fund. Middle East and Central Asia Dept.
    Keywords: Economic growth;Reserves adequacy;External debt;Debt sustainability;Monetary policy;Inflation targeting;Exchange rate policy;Selected Issues Papers;Kazakhstan;
    Date: 2014–08–05
  29. By: Jim Celia; Farley Grubb (Department of Economics,University of Delaware)
    Abstract: Maryland’s non-legal-tender paper money emissions between 1765 and 1775 are reconstructed to determine the quantities outstanding and their redemption dates, providing a substantial correction to the literature. Over 80 percent of this paper money’s current market value was expected real asset present value and under 20 percent was liquidity premium. It was primarily a real barter asset and not a fiat currency. The liquidity premium was positively related to the amount of paper money per capita in circulation. This paper money traded below face value only due to time-discounting and not depreciation. Past scholars have simply confused time-discounting with depreciation.
    Keywords: asset money, bills of credit, commodity money, fiat money, land banks, legal tender, liquidity premium, paper money, zero-coupon bonds, 1764 Currency Act
    JEL: E31 E42 E51 N11 N21 N41
    Date: 2014
  30. By: Seong-Hoon Kim (University of St Andrews); Seongman Moon (Universidad Carlos III de Madrid); Carlos Velasco (Universidad Carlos III de Madrid)
    Abstract: We re-investigate the delayed overshooting puzzle. We find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold in the other periods considered. (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch’s overshooting hypothesis.
    Keywords: delayed overshooting, UIP, Dornbusch overshooting hypothesis, Volcker, monetary policy regime
    JEL: F31 E52 E65
    Date: 2014–05–01
  31. By: R. Lahiri
  32. By: Carlstrom, Charles T. (Federal Reserve Bank of Cleveland); Fuerst, Timothy S. (University of Notre Dame); Paustian, Matthius (Bank of England)
    Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999), hereafter BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
    Keywords: Agency costs; CGE models; optimal contracting
    JEL: C68 E44 E61
    Date: 2014–10–16
  33. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY MESSAGES Setting. Discussions took place for the first time since the handover of Macao SAR from Portugal to China in 1999. Prudent macroeconomic management has underpinned rapid development in the territory, which is now the world’s largest gaming center. As a small, open and tourism-dependent economy, Macao SAR is currently also benefiting from loose global monetary conditions and a Mainland-related boom. Outlook and risks. Growth should stay strong over the next few years at 8–10 percent buoyed by gaming exports and investment, with inflation remaining around 5–5½ percent. However, the economy is vulnerable to external shocks, in particular a slowdown in tourism, due to shocks in the Mainland or Hong Kong SAR or other setbacks to the global recovery. The buoyant property market could also correct if demand fundamentals shift or interest rates rise abruptly with the withdrawal of unconventional monetary policy abroad. Macroeconomic policies. The policy stance is appropriate, with scope for further tightening of macroprudential policies should property prices continue to rise sharply. If downside risks materialize, targeted fiscal stimulus should be used to buttress growth. In the event of a severe property downturn, some countervailing measures could be cautiously unwound. The currency board is the best arrangement for Macao SAR. Financial stability. Important progress has been made in strengthening financial stability in line with the 2011 FSAP recommendations. Prudential measures should focus on managing potential credit and liquidity risks from a gaming slowdown and the property sector, as well as spillovers from shocks in the Mainland and Hong Kong SAR. Longer term challenges. Looking further ahead, Macao SAR’s public finances face a moderation in gaming revenues juxtaposed against spending needs from population aging. A sovereign wealth fund to manage part of the territory’s fiscal reserves and medium-term budgeting could therefore be useful. As the gaming sector matures, economic diversification toward other services will be key for stable growth.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Banking sector;Currency boards;Economic indicators;Staff Reports;Press releases;Macao SAR;
    Date: 2014–07–24
  34. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski; Warsaw School of Economics); Kamil Wierus (Narodowy Bank Polski)
    Abstract: Since the creation of the euro area significant interest rate spreads have arisen between euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future. We find that spreads on real interest rates of 0.6 to 5.5 percentage points would have been necessary to stabilize external positions of the four peripheral euro area member countries.
    Keywords: Euro area, imbalances, current account, panel estimation
    JEL: E32 E43 E52
    Date: 2014
  35. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Political Context: Sudan is embarking on a difficult national dialogue with the opposition and some armed groups in the Blue Nile and South Kordofan regions. The objective is to break the current destructive cycle of instability and prepare for the upcoming presidential election in 2015. This dialogue, if successful, could help create the conditions needed to address the challenges that emerged after the secession of South Sudan, including sustaining a much-needed broad economic recovery and adjusting the economy to its new potential. The current staff monitored program (SMP) is providing an adequate policy framework and a path in this direction. Macroeconomic situation and outlook: Tight monetary conditions and improved fiscal performance, together with lower food prices, contributed to lower inflation at end-March. However, the curb market exchange rate further depreciated against the U.S. dollar on account of the uncertainties in the oil market triggered by the South Sudan conflict, further widening the gap between the official and curb market rates to more than 50 percent. The outlook for 2014 remains broadly favorable, with growth expected to reach 2.5 percent, and inflation to continue its downward trend to about 18 percent. Program performance: Performance under the SMP through end-March 2014 was affected by adverse shocks and security spillovers. All end-March quantitative benchmarks were met, except for the ones on net international reserves and net domestic assets of the Central Bank of Sudan (CBOS). The indicative targets on social spending and the non-oil primary deficit were also missed by a slight margin. Corrective actions have been taken to ensure that these targets will be met in the second quarter. Urgent measures are needed to address the gap between the official and curb market exchange rates. The authorities have also made good progress toward meeting their end-June structural benchmarks. Risks remain large and tilted to the downside. The uncertain political transition, the volatile domestic oil market, and the fragile security environment may slow down the reform momentum. The recent peace agreement between the warring factions in South Sudan, if implemented, would improve the risk outlook.
    Keywords: Staff-monitored programs;Fiscal policy;Fiscal reforms;Economic indicators;Letters of Intent;Staff Reports;Sudan;
    Date: 2014–08–28
  36. By: Davide fiaschi; Lisa Gianmoena; Angela Parenti
    Abstract: In this paper we analyze the determinants of growth rate volatility (GRV) of per capita GDP of 257 regions belongs to 25 EU coun- tries in the period 1992 − 2008. Among the determinants at regional level the growth rate of employment has a negative impact on GRV, while investment rate, the shares of agriculture, construction, finance and manufacturing, the share of household expenditure on GDP (the latter only for GRV due to positive shocks) have a positive impact; among the determinants at country level, government expenditure has a negative impact on GRV, while share of credit to private sector on GDP and inflation have a positive impact on GRV; finally, among the aggregate determinants, the volatility of the oil price has an asymmet- ric effect on GRV by increasing the volatility generated by negative shocks and reducing the volatility in case of negative shocks, while the participation to EMU only reduces the volatility due to positive shocks.
    Keywords: Asymmetric fluctuation, spatial panel model, generalized spatial two stage least squares, output composition, government ex- penditure.
    JEL: C23 E32 N14 O40
    Date: 2013–10–01
  37. By: Georgios Argitis (University of Athens); Trevor Evans (Berlin School of Economics and Law); Jo Michell (University of the West of England); Jan Toporowski (School of Oriental and African Studies, London University)
    Abstract: Most mainstream neoclassical economists completely failed to anticipate the crisis which broke in 2007 and 2008. There is however a long tradition of economic analysis which emphasises how growth in a capitalist economy leads to an accumulation of tensions and results in periodic crises. This paper first reviews the work of Karl Marx who was one of the first writers to incorporate an analysis of periodic crisis in his analysis of capitalist accumulation. The paper then considers the approach of various subsequent Marxian writers, most of whom locate periodic cyclical crises within the framework of longer-term phases of capitalist development, the most recent of which is generally seen as having begun in the 1980s. The paper also looks at the analyses of Thorstein Veblen and Wesley Claire Mitchell, two US institutionalist economists who stressed the role of finance and its contribution to generating periodic crises, and the Italian Circuitist writers who stress the problematic challenge of ensuring that bank advances to productive enterprises can successfully be repaid.
    Keywords: Capitalism, finance, crisis
    JEL: B14 B15 B24 B25 E11 E32
  38. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Abenomics is gaining traction, but progress across the three arrows has been uneven and medium-term risks remain substantial. Inflation has risen, a consumption tax increase has been implemented, and there are signs of a transition to private-led growth. However, structural reforms have progressed slowly and a medium-term fiscal plan beyond 2015 is still to be articulated. Uncertainty is therefore high whether the recovery and exit from deflation will become self sustained under current policies. More forceful growth reforms are needed to overcome structural headwinds to raising growth and ending deflation The next round of structural reforms should lift labor supply, reduce labor market duality, enhance risk capital provision, and accelerate agricultural and services sector deregulation. Corporate governance reforms already underway could help reduce firms’ preference for large cash holdings. A concrete medium-term fiscal reform plan is urgently needed. Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline. Adoption of a concrete medium-term fiscal consolidation plan beyond 2015 would build confidence in the sustainability of public finances and allow more flexibility to respond to downside risks. Plans to lower the corporate tax rate have growth benefits, but should proceed in combination with measures to offset revenue losses and be consistent with plans to restore fiscal sustainability. Monetary policy is appropriately accommodative. With inflation and inflation expectations increasing, no further easing is needed at this point. In case downside risks to the inflation outlook materialize, the Bank of Japan (BoJ) should act swiftly through further and/or longer- dated asset purchases. Communication should focus on achieving 2 percent inflation in a stable manner aided by a more transparent presentation of the BoJ’s forecast and underlying assumptions. The financial sector remains stable. Portfolio rebalancing by financial institutions and investors is desirable but also raises new risks, including from greater overseas engagement. In regional banks, limited growth opportunities and low net interest margins could further undermine core profitability and weaken capital buffers. Supervisors should continue to be proactive in monitoring these risks. Japan’s external position is assessed as broadly in balance—compared to moderately undervalued last year—because of structural changes in the external sector, including from the offshoring of production and sustained high energy imports, which have become more apparent. Launching all three arrows will create benefits for the region and the global economy. Spillovers via the trade channel and capital flows are expected to increase in coming years with uncertain net effects—higher exports and capital outflows—in the short term. As long as Japan continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will be positive for the global economy.
    Keywords: Article IV consultation reports;Economic growth;Demand;Fiscal reforms;Monetary policy;Spillovers;Financial sector;Banks;Debt sustainability analysis;Economic indicators;Staff Reports;Press releases;Japan;
    Date: 2014–07–31
  39. By: Kuan-Jen Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Angus C. Chu (University of Liverpool); Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper incorporates home production into a real business cycle (RBC) model of a small open economy to provide a parsimonious explanation of the empirical pattern of international business cycles in developed economies and emerging markets. It is well known in the literature that in order for the RBC model to replicate quantita- tively plausible empirical moments of small open economies, the model needs to feature counterfactually a small income effect on labor supply. This paper provides a plausible solution to this puzzle by considering home production that introduces substitutability between market consumption and home consumption, which in turn generates a high volatility in market consumption in accordance with the data, even in the presence of a sizable income effect on labor supply. Furthermore, the model with estimated parameter values based on the simulated method of moments is able to match other empirical moments, such as the standard deviations of output, investment and the trade balance and the correlations between output and other standard macroeconomic variables. Given that home production is more prevalent in emerging markets than in developed economies, the model is also able to replicate empirical differences between emerging markets and developed economies in the volatility of market consumption and the volatility/countercyclicality of the trade balance. JEL Classification-JEL: D13, E32, F41, O16
    Keywords: small open economy, home production, emerging markets, business cycles
    Date: 2014–09
  40. By: Jannie Rossouw
    Abstract: Although the title seems to be a contradictio in terminis, this paper shows that there are a small eclectic number of central banks with private shareholders. This paper reviews this selected group of central banks on which surprisingly little has been published. The first challenge is to identify these central banks, as no “generally accepted†or standardised list of such central banks exists, and very little has been published that identifies or compares them.
    Keywords: central banks, central bank shareholding, institutional structure of central banks, recapitalisation of the Bank of Italy, shareholders
    JEL: E02 E40 E49 E50 E58
    Date: 2014
  41. By: Juan Carlos Cuestas; Luis A. Gil-Alana; Paolo Jose Regis
    Abstract: In this paper we aim to analyse the level of sustainability of external debt and, more importantly, how it has changed for a number of European economies. Given the severity of the crisis since 2008, we argue that the path of external debt burdens may have changed since the start of the crisis, given the concerns about debt accumulation in most countries. We follow the advice of Bohn (2007) and analyse the reaction of present debt accumulation to past debt stock, incorporating the possibility of endogenously determined structural breaks in this reaction function. We find that structural breaks happen in most cases after 2008, highlighting the importance of the policy measures taken by most governments.
    Keywords: external debt, sustainability, crisis
    JEL: E31 E32 C22
    Date: 2014–10–10
  42. By: Paulo Ferreira (CEFAGE-UE, IIFA, Inst. Sup. de Línguas e Administração de Leiria, Dep. de Ciência e Tecnologia Animal - ESAE, Instituto Politécnico de Portalegre, Portugal); Andreia Dionisio (CEFAGE-UE, IIFA and Departamento de Gestão, Universidade de Évora, Portugal); Gilney Zebende (Computational Modeling Program – SENAI CIMATEC, Bahia, Brazil and Department of Physics – UEFS , Bahia, Brazil)
    Abstract: The present crisis in the Euro is one of the most serious crises reported in history. The fact that different countries that adopted the Euro have different conditions to support asymmetric shocks in their economies could explain some of the consequences currently affecting the Eurozone. In this paper we apply detrended cross-correlation analysis and its correlation coefficient to evaluate the degree of financial integration of the first set of countries to adopt the common currency. Detrended cross correlation analysis is a methodology which has some advantages, namely the fact it can also be used in non-stationary series. It is the first time this methodology has been applied to study financial integration. We conclude that the degree of financial integration is unequal in several countries using the common currency. The fact that countries like Greece, Ireland or Portugal are the ones facing most problems in verification of the parity used in this paper could help to explain the present instability in the Eurozone.
    Keywords: Financial integration; Long-range correlation; Detrended cross-correlation analysis.
    JEL: G15 E43 E44 F36
    Date: 2014
  43. By: Friedman, Benjamin Morton
    Date: 2013
  44. By: Pedro André Cerqueira (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: This paper evaluates the impact of volatility shifts on different time varying period-by-period indexes which are used in the literature to study cross-country synchronization. Using GDP data for 22 OECD countries from 1970 to 2013 we show that when we take into account the volatility shifts the global synchronization evolution and the effect of the main determinants (trade and financial integration) differ from those obtained when we do not control for these shifts. Also, in terms of synchronization evolution over time, we unveil that the period from 1970-2013 can be split into three sub-periods. These periods are identified either by the evolution of cross-country synchronization or by the global level of economic volatility. Furthermore, the role of the main determinants also changes between the identified periods.
    Keywords: Business Cycles Synchronization; Time varying indexes, Volatility Shifts.
    JEL: C33 E32
    Date: 2014–09
  45. By: Stéphane Dées; Jochen Güntner
    Abstract: This paper uses a panel VAR (PVAR) approach to estimating, analysing and forecasting price dynamics in four different sectors - industry, services, construction, and agriculture - across the four largest euro area economies - Germany, France, Italy and Spain - and the euro area as a whole. By modelling prices together with real activity, employment and wages, we can disentangle the role of unit labour costs and profit margins as the factors affecting price pressures on the supply side. In out-of-sample forecast exercises, the PVAR model fares comparatively well against common alternatives, although short-horizon forecast errors tend to be large when we consider only the period of the recent financial crisis. The second part of the paper focuses on Spain, for which prediction errors during the crisis are particularly large. Given that its economy faced dramatic sectoral changes due to the burst of a housing bubble, we use the PVAR model for studying the transmission of shocks originating from the Spanish construction sector to other sectors. In a multi-country extension of the model, we also allow for spillovers to the other euro area countries in our sample.
    Keywords: Cost pressures, forecasting, impulse response analysis, panel VAR models
    JEL: C33 C53 E31 E37
    Date: 2014–09
  46. By: Wei Jiang
    Abstract: In this paper, we develop heterogeneous agent models with equilibrium unemployment to study the optimal taxation and labour wedge. We find that the the presence of profits plays an important role in the determination of both optimal tax policy and labour wedge. Judd-Chamley optimal zero capital tax result can still hold in the model without profits. The optimal labour wedge is zero in the long run. This results in welfare gains of all agents and there is no conflict of interests between agents. But the Benthamite government chooses to subsidise the capital income in the long run in the model with profits due to the presence of productive public investment. The resulting labour wedge is non-zero which generates welfare losses of workers despite welfare gains of capitalists. The government also faces a trade-off between efficiency and equity in this model.
    Keywords: household heterogeneity; equilibrium unemployment; optimal taxation; labour wedge
    JEL: E13 E22 E62
    Date: 2014–09
  47. By: Jonas E. Arias; Dario Caldara; Juan F. Rubio-Ramírez
    Abstract: In this paper, we identify monetary policy shocks in structural vector autoregressions (SVARs) by imposing sign and zero restrictions on the systematic component of monetary policy while leaving the remaining equations in the system unrestricted. As in Uhlig (2005), no restrictions are imposed on the response of output to a monetary policy shock. We find that an exogenous increase in the federal funds rate leads to a persistent decline in output and prices. Our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions, but are instead consistent with agnostic identification schemes. The analysis is robust to various specifications of the systematic component of monetary policy widely used in the literature.
    Date: 2014–10
  48. By: Nicolas Barbaroux (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,Université Jean Monnet, Saint-Etienne, F-42000, France)
    Abstract: In the aftermath of the sovereign debt criss, open-market interventions prevailed within the central bank’s policy answers known under the label unconventional monetary policy measures. During interwar period, France was an isolated case, among the leading countries, by everlastingly rejecting open-market operations in its monetary policy toolset. The present study analyzes the French monetary policy history by explaining why Bank of France had been so old-fashioned in monetary policymaking for too long time. Moreover, the article provides an explanation of the latter point by raising five major arguments of explanation : (1) the irrelevancy of the French interwar monetary reforms which enabled the Bank of France to conduct open-market operations per se; (2) the French conservatism throughout the insiders’ view from the Bank of France leaders (not only governors and deputy governors, but also the General Council’s members at the head of the French central bank); (3) the legacy of a metallist vision, embodied by Charles Rist, within the French economists of that time (4) the negative public opinion regarding open-market operations which were seen as being an inflationist public debt financing instrument and lastly (5) the unfair competition that occurred between the discounting operations and the open-market operations in the Bank of France’s balance sheet.
    Keywords: Open-market, Monetary policy, Central banking
    JEL: N B22
    Date: 2014
  49. By: G. Bazot; M. D. Bordo; E. Monnet
    Abstract: Under the classical gold standard (1880-1914), the Bank of France maintained a stable discount rate while the Bank of England changed its rate very frequently. Why did the policies of these central banks, the two pillars of the gold standard, differ so much? How did the Bank of France manage to keep a stable rate and continuously violate the “rules of the game”? This paper tackles these questions and shows that the domestic asset portfolio of the Bank of France played a crucial role in smoothing international shocks and in maintaining the stability of the discount rate. This policy provides a striking example of a central bank that uses its balance sheet to block the interest rate channel and protect the domestic economy from international constraints (Mundell’s trilemma).
    Keywords: gold standard, Bank of France, discount rate, central banking, money market.
    JEL: D41 E30 B41
    Date: 2014
  50. By: Christian Lambert Nguena (Association of African Young Economists); Roger Tsafack Nanfosso (Economic Policy Management Program)
    Abstract: By using fresh macroeconomic data and several empirical approaches, this paper provides new evidence about the leading macroeconomic determinants and dynamics of financial deepening in the CEMAC sub-region. For this purpose, we have undertaken consecutively a theoretical model building, an explanatory analysis and an empirical estimation of a microfounded model. Practically, it consisted to use several complementary econometrical techniques - both static and dynamic panel data econometrics accounting for endogeneity, instrumental variables and principle components analysis- to better isolate and identify the determinants of financial deepening. Our main results, which are robust to multiple estimation approach and consistent with prediction of the Neo Keynesian economics, has led to the following global recommendations: firstly, the CEMAC sub-region authorities should implement expansionary policies of GDP growth rate, population density, savings rate and exchange rate. Secondly, they should review their policy of trade liberalization since it appears to be negatively related to financial deepening. Concerning the dynamics aspect, a convergent dynamics and the feasibility of common monetary policy targeting depth in CEMAC sub-region have been highlighted. This paper is original and actual since it highlighted the leading determinants of financial deepening and thus better financial policy recommendations in a context of a less developed financial system and wrong performance in terms of shared prosperity and inclusive economic growth.
    Keywords: Financial deepening, Financial policy, Panel data econometrics, CEMAC, Principal component analysis, Economic growth
    Date: 2013–04
  51. By: Ramiz Rahmanov
    Abstract: This paper adopts the asymmetric error correction technique to investigate the dynamics of household consumption in Central and Eastern European (CEE) countries. The asymmetric co-integration testing shows that households in all CEE countries but Bulgaria respond asymmetrically to negative and positive shocks. Further, the estimates of the asymmetric error correction equations show that despite underdeveloped banking sectors, households in all CEE countries asymmetrically responding to deviations but Slovakia exhibit loss aversion. As an explanation for this finding, we suggest that to smooth consumption, households in these countries deplete their savings.
    Keywords: loss aversion, liquidity constraints, consumption, asymmetric error correction model, Central and Eastern Europe.
    JEL: C22 D11 D12 E21
    Date: 2014–08–01
  52. By: Irene Brunetti; Davide fiaschi; Lisa Gianmoena
    Abstract: A novel methodology, inspired by the literature on mobility, based on Markov matrices, to measure growth rate volatility by a synthetic in- dex is proposed. An asymmetric version of the index allows to identify how much volatility can be ascribe to negative or positive fluctuations around trend. The application of the proposed methodology to a sample of 257 European regions shows that the economic size, their output compositions, their investment rates, the inflation rate and the domestic credit of countries to which they belong to are explanatory variables of growth rate volatility. On the contrary, no role for the participation to EMU is found. Construction sector and high flows of foreign direct investment favour large negative fluctuations
    Keywords: Markov Matrix, Asymmetric Fluctuations, Output Com- position, Size Effect, Foreign Direct Investments.
    JEL: C20 E32 O40
    Date: 2013–10–01
  53. By: International Monetary Fund. European Dept.
    Abstract: After slowing in 2013, the Slovak economy is gathering momentum as the euro area and domestic demand recover, the latter complementing the strong export sector that has made Slovakia one of Europe’s more dynamic economies. Reducing still very high unemployment remains a key challenge, as does sustaining fiscal adjustment. Manageable public and private debt as well as a sound banking system limit vulnerabilities, but Slovakia’s fortunes remain closely tied to external developments, especially in the euro area, and there are risks from regional tensions since Russia provides much of Slovakia’s energy and is a reasonably important export market, including for Slovakia’s trading partners.
    Keywords: Article IV consultation reports;Economic growth;Fiscal consolidation;Fiscal policy;Unemployment;Banking sector;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Slovak Republic;
    Date: 2014–09–02
  54. By: Josef Manalo (Reserve Bank of Australia); Dilhan Perera (Reserve Bank of Australia); Daniel Rees (Reserve Bank of Australia)
    Abstract: We use a structural vector autoregression model to characterise the aggregate and industry effects of exchange rate movements on the Australian economy. We find that a temporary 10 per cent appreciation of the real exchange rate that is unrelated to the terms of trade or interest rate differentials lowers the level of real GDP over the subsequent one-to-two years by 0.3 per cent and year-ended inflation by 0.3 percentage points. The mining, manufacturing, personal services, construction and business services industries are the most exchange rate sensitive sectors of the economy. In the context of the boom in the terms of trade over the past decade, we use our model to explore how the Australian economy might have evolved under alternative scenarios. These suggest that real exchange rate movements over the past decade have had a broadly stabilising effect on the domestic economy and can largely be explained by economic fundamentals.
    Keywords: structural vector autoregression; exchange rates
    JEL: C32 F31 F41
    Date: 2014–09
  55. By: Christian Pierdzioch (Department of Economics, Helmut-Schmidt-University); Monique B. Reid (Department of Economics, Stellenbosch University); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: We use South African survey data to study whether short-term inflation forecasts are unbiased. Depending on how we model a forecaster’s information set, we find that forecasts are biased due to forecaster herding. Evidence of forecaster herding is strong when we assume that the information set contains no information on the contemporaneous forecasts of others. When we randomly allocate forecasters into a group of early forecasters who can only observe the past forecasts of others and late forecasters who can observe the contemporaneous forecasters of their predecessors, then evidence of forecaster herding weakens. Further, evidence of forecaster herding is strong and significant in times of high inflation volatility. In time of low inflation volatility, in contrast, forecaster anti-herding seems to dominate.
    Keywords: Inflation rate, Forecasting, Forecaster Herding
    JEL: C53 D82 E37
    Date: 2014–10
  56. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare.
    JEL: E0 E5
    Date: 2014–01–10
  57. By: Shusaku Nishiguchi (Bank of Japan); Jouchi Nakajima (Bank of Japan); Kei Imakubo (Bank of Japan)
    Abstract: One of the aspects characterizing inflation expectations is the degree of disagreement or dispersion in such expectations, and dispersion in households' inflation expectations is quite substantial. In phases in which inflation expectations alter, the shape of the distribution of inflation expectations, which reflects the dispersion, may change even when other measures of inflation expectations such as the mean and the median remain unchanged. This article examines how the distribution of households' medium-horizon inflation expectations in Japan evolves over time using the Opinion Survey on the General Public's Views and Behavior. The analysis shows that during the episode of rising prices since 2013 the expectations distribution has displayed notable changes that were not observed in the phase of rising prices in 2008.
    Date: 2014–03–27
  58. By: Hasan Comert (Department of Economics, METU); Mehmet Selman Colak (Central Bank of Republic of Turkey)
    Abstract: In the recent global turmoil, even though some developing economies were severely affected, in general, developing countries survived the crisis with less damage than advanced countries. The majority of developing countries did not experience a financial system collapse. What are the main factors behind the solid performance of many developing countries in the recent crisis? This paper argues that the main reason is the fact that developing countries did not face a strong financial account shock, especially in the form of capital reversals, during this period. In comparison to past developing country crises of the 80s and 90s, the financial account shocks in the global crisis were much more moderate. To a great extent, the fact that advanced countries could not fully serve their roles as safe havens in the global crisis explains why developing economies were not tested by destructive financial shocks in the recent crisis. Furthermore, developing countries enjoyed greater autonomy and legitimacy in implementing expansionary monetary and fiscal policies without much fear of the bigger financial shocks in an environment in which international cooperation partially meet the need for an international lender of last resort through swap operations and credit lines. If the developed countries, essentially European Union (EU) and the US, start serving fully their safe haven roles and the returns in the developed countries become much more attractive, developing countries may face larger external financial shocks. Even large reserves, flexible exchange rate regimes, healthy balance sheets on the papers and some so-called other strong fundamentals would not be enough to avoid financial collapses.
    Keywords: Developing Countries, Recent Global Crisis, Financial Flows and Financial Markets.
    JEL: E52 E58 F32 F31 G15
    Date: 2014–09
  59. By: Robin Boudias
    Abstract: This paper investigates the impact of the exchange rate regime (ERR) on the cycle of capital fl ows, the private credit growth rate and the level of dollarization in emerging market economies. We consider two different panels including 12 and 22 countries over the periods 1980-2010 and 1994-2008, respectively. We estimate a Panel Smooth Transition Regression (PSTR) model in order to assess whether the impact of ERR on credit dynamics is affected by the cyclical component of capital fl ows. Our fi ndings are threefold. First, the ERR has no impact on the cyclical component of capital fl ows. Second, credit expansion is procyclical in economies with pegged curencies. Third, during capital infl ows or low outfl ows periods, economies with fi xed exchange rate regimes show a higher level of dollarization. When outfl ows are sizeable, ERR no longer impacts the level of dollarization. These results suggest that ERR should be an important variable in conceiving the policy mix to cope with domestic credit expansions and liability dollarization.
    Keywords: Emerging market economies;capital flows;domestic credit;dollarization;PSTR
    JEL: C33 E42 F31 O16
    Date: 2014–09
  60. By: M. Mahamallik; P. Sahu; S. Mahapatra
    Abstract: An attempt has been made to examine the nature and extent of fiscal imbalances in India using the secondary data over a period of thirty years from 1980-81 to 2009-10 (BE). It has been established that there is persistence and growing vertical as well as horizontal fiscal imbalances even after a series of corrective fiscal measures. Efforts to reduce these imbalances found to be ineffective due to contradictions among different measures of fiscal orrection. Methodologies adopted to maintain equity contradict with methodologies used to increase efficiency. The 14th finance commission may take initiative to resolve this paradox through a ‘weight adjustment solution’ which can be helpful in reducing the imbalances. In addition to it, adequate generations of revenue through increasing tax efforts on the part of states and reform in the transfer system are essential for maintaining fiscal balances.
    JEL: E61 E62 E63
    Date: 2014–10
  61. By: Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos
    Abstract: This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity and endogenous skill acquisition under technology and public expenditure shocks. We fiÂ…nd that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition, as well as when the relative skill supply is exogenously determined. We further Â…nd that the government Â…nds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long-run and the standard deviation of this wedge over the business cycle. This is achieved by subsidising skill creation and taxing both types of labour income.
    Keywords: skill premium, tax smoothing, optimal Â…scal policy
    Date: 2014
  62. By: Marlene Amstad; Ye Huan; Guonan Ma
    Abstract: This paper develops a new underlying inflation gauge (UIG) for China which differentiates between trend and noise, is available daily and uses a broad set of variables that potentially influence inflation. Its construction follows the works at other major central banks, adopts the methodology of a dynamic factor model that extracts the lower frequency components as developed by Forni et al (2000) and draws on the experience of the Peopleâ??s Bank of China in modelling inflation.
    Date: 2014–10
  63. By: Daniele Tavani (Department of Economics, Colorado State University (USA).); Luca Zamparelli (Sapienza, University of Rome)
    Abstract: We extend the basic Classical growth model by introducing a productive and redistributive role for the public sector in an economy populated by two classes, workers (who supply labor, consume, and do not save) and capitalists (who own capital stock, consume and save). The government levies a tax on profits in order to: (i) finance the provision of a public good that augments the production possibilities of the economy, and (ii) integrate labor incomes through a transfer to workers. Following Michl (2009), we focus on two different model ‘closures’, which deliver an endogenous and an exogenous growth rate respectively. In both cases, the analysis of taxation and government spending composition between public goods and transfers requires to specify the government’s preferences. In the endogenous growth model, the government’s choice fixes long-run growth and income distribution. In the exogenous growth model, policy decisions determine income distribution and the employment rate.
    Keywords: Classical growth, functional distribution, redistributive policy.
    JEL: D33 E11 O38
    Date: 2014–10
  64. By: Kenneth G. Stewart (Department of Economics, University of Victoria); Jiang Li
    Abstract: Revised productivity accounts recently released by Statistics Canada are used to estimate a Klump-McAdam-Willman normalized CES supply-side system for the half-century 1961–2010. The model permits distinct rates of factor-augmenting technical change for capital and labour that distinguish between short-term versus long-term effects, as well as a non-unitary elasticity of substitution and timevarying factor shares. The advantage of the Canadian data for this purpose is that they provide a unified treatment of measurement issues that have had to be improvised in the US and European data used by previous researchers. In contrast to the previous US results, we find an elasticity of substitution not significantly less than unity, and an absence of capital-augmenting technical change in both the short and long run. Technical change is thus solely labour augmenting, consistent with Uzawa’s steady state growth theorem. The model also yields plausible TFP estimates, and successfully captures trends in factor shares that have been the subject of recent study in international data.
    Keywords: normalized CES system, aggregate elasticity of substitution, biased technical change
    JEL: C51 E23 E25 O30 O51
    Date: 2014–10–16
  65. By: Effrosyni Adamopoulou (Bank of Italy); Giulia Martina Tanzi (Bank of Italy)
    Abstract: In this paper we study how the Great Recession affected university students in terms of performance, with a focus on the drop-out probability. To do so, we use individual-level data on a representative sample of university students in Italy in 2007 and 2011. We measure the severity of the recession in terms of increases in the adult and youth unemployment rates and we exploit geographical variation to achieve identification. On the one hand, an increase in the adult male unemployment rate worsens the financial condition of the family, raising the drop-out probability. On the other hand, by reducing the opportunity cost of tertiary education, an increase in the youth unemployment rate reduces the drop-out probability. Focusing on students who were enrolled at university before the Recession we are able to study the effects of the crisis on performance net of any potential effect on enrolment. We find evidence that overall, university drop-out decreased as a result of the Recession and that the probability of graduating on time increased for more motivated students.
    Keywords: academic performance, drop-out, Great Recession, unemployment
    JEL: D12 E32 J24
    Date: 2014–09
  66. By: Jacqueline Coolidge; Fatih Yilmaz
    Keywords: Information Security and Privacy Taxation and Subsidies Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Tax Policy Public Sector Development Information and Communication Technologies Macroeconomics and Economic Growth
    Date: 2014–02
  67. By: Brown, Martin; Stix, Helmut
    Abstract: In Eastern Europe a substantial share of bank deposits are denominated in foreign currency. Deposit euroization poses key challenges for monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency induced credit risk. Policymakers disagree on whether Eastern European countries should tackle deposit euroization with “dedollarization” policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of “dedollarization” policies requires a clear understanding of which households hold foreign currency deposits and why they do so. Based on survey data covering 16,375 households in ten countries in 2011 and 2012, we provide the first household-level analysis of deposit euroization in Eastern Europe. We examine how households’ preferences for and holding of foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations, network effects and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Eastern Europe can be partly tackled by prudent monetary and economic decisions by today’s policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a “habit” in the region. Second, we find that deposit euroization is still strongly influenced by households’ experiences of financial crises in the 1990s.
  68. By: Mehmet Balcilar (Eastern Mediterranean University); Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper examines the relationship between US crude oil and stock market prices, using a Markov-Switching vector error-correction model and a monthly data set from 1859 to 2013. The sample covers the entire modern era of the petroleum industry, which typically begins with the first drilled oil well in Titusville, Pennsylvania in 1858. We estimate a two regime model that divides the sample into high- and low-volatility regimes based on the variance-covariance matrix of the oil and stock prices. We find that the high-volatility regime more frequently exists prior to the Great Depression and after the 1973 oil price shock caused by the Organization of Petroleum Exporting Countries. The low-volatility regime occurs more frequently when the oil markets fell largely under the control of the major international oil companies from the end of the Great Depression to the first oil price shock in 1973. Using the National Bureau of Economic research business cycle dates, we also find that the high-volatility regime more likely occurs when the economy experiences a recession.
    Keywords: Markov switching, vector error correction, oil and stock prices
    JEL: C32 E37
    Date: 2014–09
  69. By: Marta Gómez-Puig (Department of Economic Theory, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: We empirically investigate whether the transmission of the recent crisis in euro area sovereign debt markets was due to fundamentals-based or pure contagion. To do so, we examine the behaviour of EMU sovereign bond yield spreads with respect to the German bund for a sample of both central and peripheral countries from January 1999 to December 2012. First we apply a dynamic approach to analyse the evolution of the degree of Granger-causality within the 90 pairs of sovereign bond yield spreads in our sample, in order to detect episodes of significantly increased causality between them (which we associate with contagion) and episodes of significantly reduced interconnection (which we associate with immunisation). We then use an ordered logit model to assess the determinants of the occurrence of the episodes detected. Our results suggest the importance of variables proxying market sentiment and of variables proxying macrofundamentals in determining contagion and immunisation outcomes. Therefore, our findings underline the coexistence of “pure” and “fundamentals-based contagion” during the recent European debt crisis.
    Keywords: Sovereign bond spreads, contagion, Granger-causality, time-varying approach, euro area, ordered logit model
    JEL: C35 C53 E44 F36 G15
    Date: 2014–05
  70. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–09–30
  71. By: World Bank
    Keywords: Environmental Economics and Policies Public Sector Expenditure Policy Economic Theory and Research Macroeconomics and Economic Growth - Regional Economic Development Finance and Financial Sector Development - Debt Markets Public Sector Development Environment
    Date: 2013–05
  72. By: Patrick Macnamara
    Abstract: This paper builds a model of rm dynamics to study the consequences of "limited re-entry" for macroeconomic dynamics. Matched individual-level data from the Current Population Survey indicate that only 8% of unemployed chief executives, on average, find employment again as a chief executive after 12 months. Given the close link between entrepreneurs and chief executives, this suggests that it is very difficult for exiting entrepreneurs to "re-enter" in the future. The model, calibrated to match this observation, indicates that "limited re-entry" has made business cycles more volatile and persistent.
    Date: 2014
  73. By: Tanaya Kilara; Elisabeth Rhyne
    Keywords: Finance and Financial Sector Development - Access to Finance Private Sector Development - E-Business Private Sector Development - Competitiveness and Competition Policy Private Sector Development - Business in Development Private Sector Development - Emerging Markets
    Date: 2014–06
  74. By: Kola Akinsomi (School of Construction Economics and Management, University of Witwatersrand, Johannesburg, South Africa.); Goodness C. Aye (Department of Economics, University of Pretoria); Vassilios Babalos (Department of Accounting & Finance, Technological Educational Institute of Peloponnese, Greece; Department of Banking & Financial Management, University of Piraeus, Greece.); Fotini Economou (Centre of Planning and Economic Research, Greece & Open University of Cyprus, Cyprus.); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: In this paper we examine the real estate returns predictability employing US REITs and a set of possible predictors for the period January 1991 to September 2013. To this end we employ several forecasting models to test for REITs predictability under a flexible framework that captures parameter instability. Apart from the traditional factors examined in relevant studies, we also account for a series of sentiment and uncertainty indicators that may be significant predictors of REITs returns, especially during turbulent times when sentiment determines investment decisions to a greater extent. The empirical results indicate that the good predictors of REITs returns vary over time and over the forecast horizons. Our results suggest that economy-wide indicators, monetary policy instrument and sentiment indicators are among the most powerful predictors of REITs returns. The issue of the most suitable forecasting method is also discussed in detail. Our results might entail implications for investors and market authorities.
    Keywords: Real estate investment trusts, return predictability, dynamic model averaging, uncertainty indicator
    JEL: C22 C32 E52 R31
    Date: 2014–10
  75. By: K.W. Clements; H.Y. Izan
  76. By: K.W. Clements; H.Y. Izan
  77. By: C. O'Sullivan
  78. By: Carlos A. Carrasco (University of the Basque Country (EHU/UPV)); Felipe Serrano (University of the Basque Country (EHU/UPV))
    Abstract: In this paper, we survey and analyse the economic literature on global and European imbalances and their connection with the global financial crisis. In the years preceding the crisis, there was increased attention to the existence of large current account imbalances among large economies worldwide. Research and policy papers divided into two positions regarding these imbalances. Some authors viewed global imbalances as part of a new equilibrium in the international financial system. Others urged policy intervention to reduce these imbalances. The Great Recession revived the debate over global imbalances and their influence on the gestation of the crisis. However, more recent work has clarified the relationship between the crisis and global imbalances, emphasising the roots of the crisis in financial liberalisation and the fragility of the international financial system. From this perspective, we highlight the need for deeper analysis of gross capital flows and the need to monitor credit levels as measures to prevent future financial crises.
    Keywords: savings glut, current account, global imbalances, financial fragility
    JEL: E44 F32 F33 F44 G15
  79. By: Knut Are Aastveit; Claudia Foroni; Francesco Ravazzolo
    Abstract: In this paper we derive a general parametric bootstrapping approach to compute density forecasts for various types of mixed-data sampling (MIDAS) regressions. We consider both classical and unrestricted MIDAS regressions with and without an autoregressive component. First, we compare the forecasting performance of the different MIDAS models in Monte Carlo simulation experiments. We find that the results in terms of point and density forecasts are coherent. Moreover, the results do not clearly indicate a superior performance of one of the models under scrutiny when the persistence of the low frequency variable is low. Some differences are instead more evident when the persistence is high, for which the AR- MIDAS and the AR-U-MIDAS produce better forecasts. Second, in an empirical exercise we evaluate density forecasts for quarterly US output growth, exploiting information from typical monthly series. We find that MIDAS models provide accurate and timely density forecasts.
    Keywords: Mixed Data Sampling, Density Forecasts, Nowcasting
    JEL: C10 C53 E37
    Date: 2014–09
  80. By: E.J. Weber
  81. By: D.S. Prasada Rao (School of Economics, The University of Queensland); Alicia N. Rambaldi (School of Economics, The University of Queensland); K. Renuka Ganegodage (School of Economics, The University of Queensland); L. T. Huynh (School of Economics, The University of Queensland); Howard E. Doran (School of Economics, The University of Queensland)
    Abstract: The University of Queensland International Comparison Database (UQICD) has been created as a part of the research project on developing an econometric approach to the construction of consistent panels of purchasing power parities (PPPs), real gross domestic product (GDP) and real incomes. The database developed from the research is made available to users through the dedicated website for UQICD, An enhanced UQICD Version 2.0 is now available for users. This User Guide is designed to provide the users with information regarding the data series made available through UQICD. Technical details on the econometric methodology that underpins the series generated and disseminated through UCQICD are provided in a series of appendices.
    Keywords: Purchasing Power Parties, International Comparable Incomes and Expenditures, Domestic Absorption
    JEL: C18 C32 C33 C89 E01
    Date: 2014–10–14
  82. By: Matthew Groh; David McKenzie
    Keywords: Finance and Financial Sector Development - Microfinance Macroeconomics and Economic Growth - Climate Change Economics Private Sector Development - Emerging Markets Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress Finance and Financial Sector Development - Debt Markets
    Date: 2014–10
  83. By: Stefan Ederer; Peter Reschenhofer
    Abstract: Macroeconomic imbalances in the EMU are at the heart of the current crisis. A widely popular explanation for the high current account deficits in the Southern European countries is that they lack a large, competitive and export-oriented industrial sector. The paper tests the hypothesis that parts of the structural change which happened in the EU before 2008 were supported by the divergent unit labour cost developments in the EMU. We look into patterns of structural change and sectoral competitiveness in all EU member countries and assess their linkages by means of a descripitve analysis as well as through econometric estimations. Our results broadly support the hypothesis. Structural policies alone to foster new competitive export-oriented industries in Southern Europe in order to reduce macroeconomic imbalances in the EMU would not be efficient without accompanying adjustments in relative labour costs.
    Keywords: Macroeconomic imbalances, structural change, labour costs, dynamic panel regression
    JEL: C33 F41 J31 O40
    Date: 2014–10
  84. By: Iryna Sushko (Institute of Mathematics NASU and Kyiv School of Economics,Kyiv,Ukraine); Laura Gardini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Kiminori Matsuyama (Department of Economics, Northwestern University,Illinois,USA)
    Abstract: We consider a credit cycle model introduced by Matsuyama, which is defined by a one-dimensional piecewise smooth map with upward, downward and flat branches. We offer a detailed analysis of this model for the case where asymp- totic dynamics does not involve the flat branch, under the additional assumption that the production function is Cobb-Douglas. In particular, using skew tent map (which is a one-dimensional map defined by two linear functions) as a border collision normal form we obtain conditions of abrupt transition from an attracting fixed point to an attracting cycle or a chaotic attractor (cyclic chaotic intervals). These conditions allow us to describe the overall bifurcation structure of the parameter space of the map in a neighborhood of the boundary related to the border collision bifurcation of the fixed point. Such a structure confirms, in particular, that chaotic attractors of the considered map are robust, that is, they are persistent under parameter perturbations.
    Keywords: One-dimensional piecewise smooth map, Border collision bifurcation, Skew tent map, Borrower net worth, Composition of credit flows, Financial instability.
    Date: 2014
  85. By: Tae-Hwy Lee (Department of Economics, University of California Riverside); Eric Hillebrand (Aarhus University); Marcelo Medeiros (Pontifical Catholic University of Rio de Janeiro)
    Abstract: The literature on excess return prediction has considered a wide array of estimation schemes, among them unrestricted and restricted regression coefficients. We consider bootstrap aggregation (bagging) to smooth parameter restrictions. Two types of restrictions are considered: positivity of the regression coefficient and positivity of the forecast. Bagging constrained estimators can have smaller asymptotic mean-squared prediction errors than forecasts from a restricted model without bagging. Monte Carlo simulations show that forecast gains can be achieved in realistic sample sizes for the stock return problem. In an empirical application using the data set of Campbell, J., and S. Thompson (2008): "Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?", Review of Financial Studies 21, 1511-1531, we show that we can improve the forecast performance further by smoothing the restriction through bagging.
    Keywords: Constraints on predictive regression function; Bagging; Asymptotic MSE; Equity premium; Out-of-sample forecasting; Economic value functions.
    JEL: C5 E4 G1
    Date: 2014–09
  86. By: Santiago García-Verdú; Miguel Zerecero
    Abstract: In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions. These were the "Dollar auctions with minimum price", active between October 2008 and April 2010, and the "Dollar auctions without minimum price", implemented from March to September, 2009. Broadly speaking, the aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event study microstructure approach. We use the bid-ask spreads as a measure of liquidity and, also, of orderly conditions. In general, our results show no indication of an effect in the bid-ask spread for the first intervention, and are fairly conclusive regarding a significant reduction in it for the second intervention, yet, it is important to consider the limitations of our estimation methodology.
    Keywords: foreign exchange rate, central bank interventions, microstructure.
    JEL: E5 F31
    Date: 2014–08
  87. By: Ana Maria Bonomi Barufi
    Abstract: This paper aims to discuss how agglomerations economies are present in the equilibrium outcomes of the Brazilian formal labor market. There has been a wide discussion on how to correctly identify agglomeration economies given all the different types of endogeneity found in the labor market relationships, as well as taking into account all the relevant aspects that may affect the results. We make use of an individual-firm panel database from the Ministry of Labor (RAIS - Annual Report on Social Information) with information for six years (2003, 2004, 2005, 2008, 2009 and 2012). With the panel data setting, it is not only possible to account for individual unobserved characteristics constant in time, but also for sector and area effects. Moreover, by identifying skills according to the occupational position of the individuals in each firm, it is possible to control for the proximity to different skill levels (in the sector and municipality) to account for different levels of production knowledge externalities. Individual fixed effects control the potential endogeneity of the labor quality. In the case of labor quantity endogeneity, even if there is no consensus of how to best control for it, instruments based on long time lags are considered. The results show that there is a positive and significant effect of density over wages (Urban Economics literature), even when controlling for other relevant characteristics. Moreover, a measure of market potential, related to the New Economic Geography literature, does not capture this positive relationship with wages in the same way, changing sign in a specific setting. Finally, considering a quantile regression approach, there is an indication that agglomeration economies reinforce wage inequality, with a higher effect for the upper part of the wage distribution.
    Keywords: agglomeration economies; regional labor markets; wage equation
    JEL: R23 E24 R30
    Date: 2014–10–06
  88. By: Denbee, Edward (Bank of England); Garratt, Rodney (Federal Reserve Bank of New York); Zimmerman, Peter (Bank of England)
    Abstract: We describe methods for measuring liquidity provision that can be applied to real-time gross settlement payment systems. Using data from CHAPS, the UK large-value payment system, we find that smaller banks tend to provide more liquidity than larger banks, relative to their payment flows. We use a Gini coefficient to measure these variations in liquidity provision between banks, and observe that the variations increase following the collapse of Lehman Brothers. It can be difficult to tell whether the variations are intentional or whether they occur due to external factors that are beyond the control of the individual banks. We use a recombinant approach to detect instances where observed patterns of liquidity provision are unlikely to have occurred absent of some behavioural or structural factors, such as differences in banks’ business models. Our results suggest that the variations in liquidity provision are larger than would be expected from truly random payment flows.
    Keywords: Liquidity; payment systems; Gini coefficient
    JEL: E42
    Date: 2014–10–17
  89. By: Graziella Bertocchi; Monica Bozzano
    Abstract: We investigate the determinants of the education gender gap in Italy in historical perspective with a focus on the influence of family structure. We capture the latter with two indicators: residential habits (nuclear vs. complex families) and inheritance rules (partition vs. primogeniture). After controlling for economic, institutional, religious, and cultural factors, we find that over the 1861-1901 period family structure is a driver of the education gender gap, with a higher female to male enrollment rate ratio in upper primary schools being associated with nuclear residential habits and equal partition of inheritance. We also find that only the effect of inheritance rules persists over the 1971-2001 period.
    Keywords: Education gender gap, Italian Unification, family types, inheritance, institutions, religion, convergence
    JEL: E02 H75 I25 J16 N33 O15
    Date: 2014–07

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