nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒11‒12
93 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Financial shocks, loan loss provisions and macroeconomic stability By Roy Zilberman; William Tayler
  2. Teaching business cycles with the IS-TR model By Tervala, Juha
  3. Financial shocks and optimal monetary policy rules By Verona, Fabio; Martins, Manuel M. F.; Drumond , Inês
  4. Eurozone cycles: an analysis of phase synchronization By Brigitte Granville; Sana Hussain
  5. Monetary policy under inflation targeting: lessons from industrial and emerging countries By Aliqoriev, Olimkhon; Khamidov, Khalilillo
  6. Fiscal and Monetary Policy Interactions in New Zealand By Wesselbaum, Dennis
  7. Revisiting the greenbook's relative forecasting performance By Paul Hubert
  8. News-Driven Business Cycles in Small Open Economies By Güneş Kamber; Konstantinos Theodoridis; Christoph Thoenissen
  9. Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence By Giulia Ghiani; Max Gillman; Michal Kejak
  10. Fiscal targeting rules and economic stability under distortionary taxation By Claire Reicher
  11. Options Embedded in ECB Targeted Refinancing Operations. By J-P. Renne
  12. Credit and Business Cycles: An Empirical Analysis in the Frequency Domain By Juan Sebastián Amador; Celina Gaitán-Maldonado; José Eduardo Gómez-González; Mauricio Villamizar-Villegas
  13. Critique of IS-LM: fiscal deficits, loanable funds, Keynesian Cross and IS-LM By Kim, Minseong
  14. A State-space Approach to Australian GDP Measurement By Daniel Rees; David Lancaster; Richard Finlay
  15. About winners and losers: the Euro Area example By De Koning, Kees
  16. The Perils of Nominal Targets By Roc Armenter
  17. What Measures Chinese Monetary Policy? By Sun, Rongrong
  18. Guatemala: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Guatemala By International Monetary Fund. Western Hemisphere Dept.
  19. Sri Lanka: Selected Issues Paper By International Monetary Fund. Asia and Pacific Dept
  20. Analyzing the Taylor Rule with Wavelet Lenses By Luís Francisco Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  21. Communicating uncertainty - a fan chart for HICP projections By Gatt, William
  22. The Bank Lending Channel in a Simple Macro Model - How to Extend the Taylor Rule? By Peter Spahn
  23. Volatility transfers between cycles: A theory of why the "great moderation" was more mirage than moderation By Crowley , Patrick; Hughes Hallett , Andrew
  24. The effects of unconventional monetary policy: what do central banks not include in their models? / Skutki niekonwencjonalnej polityki pieniê¿nej: czego banki centralne nie uwzglêdniaj¹w swoich modelach? By Andrzej Rzoñca; Piotr Ci¿kowicz
  25. The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks By Gospodinov, Nikolay; Jamali, Ibrahim
  26. Cross-sectional evidence on the relation between monetary policy, macroeconomic conditions and low-frequency inflation uncertainty By Conrad, Christian; Hartmann, Matthias
  27. Exit Strategies and Their Impact on the Euro Area – A Model Based View By Ansgar Belke
  28. Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon? By Tomislav Globan; Vladimir Arčabić; Petar Sorić
  29. Endogenous borrowing constraints and wealth inequality By Bhattacharya, Joydeep; Qiao, Xue; Wang, Min
  30. Monetary Policy Shocks from the EU and US: Implications for Sub-Saharan Africa By Kronick, Jeremy
  31. The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model By Yasuo Hirose; Atsushi Inoue
  32. The Chicago Tradition and Commercial Bank Seigniorage By Soldatos, Gerasimos T.; Varelas, Erotokritos
  33. Death of a Reserve Currency By Quinn, Stephen F.; Roberds, William
  34. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Ben Cheikh, Nidhaleddine; Rault, Christophe
  35. One size does not fit all. A non-linear analysis of European monetary transmission By Giulio Cifarelli; Giovanna Paladino
  36. Human Capital Dynamics and the U.S. Labor Market By Fang, Lei; Nie, Jun
  37. A Tourism Financial Conditions Index By Chia-Lin Chang; Hui-Kuang Hsu; Michael McAleer
  38. Forecasting inflation in Poland using dynamic factor model By Pierzak, Agnieszka
  39. Fixed-Income Pricing in a Non-Linear Interest-Rate Model. By J-P. Renne
  40. Italy: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Italy By International Monetary Fund. European Dept.
  41. Fiscal Federalism in Four Federal Countries By Virkola, Tuomo
  42. How do Macroeconomic Changes Impact Islamic and Conventional Equity Prices? Evidence from Developed and Emerging Countries By Dewandaru, Ginanjar; Rizvi, Syed Aun; Sarkar, Kabir; Bacha, Obiyathulla; Masih, Mansur
  43. On the Directional Accuracy of Inflation Forecasts:Evidence from South African Survey Data By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  44. The economic outlook and monetary policy By Plosser, Charles I.
  45. Microeconomic uncertainty, international trade, and aggregate fluctuations By Alessandria, George; Choi, Horag; Kaboski, Joseph P.; Midrigan, Virgiliu
  46. Fiscal Policy Spillovers: Points of Employment to Places of Residence By Dupor, William D.; McCrory, Peter B.
  47. Singapore: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Singapore By International Monetary Fund. Asia and Pacific Dept
  48. Democratic Republic of the Congo: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Democratic Republic of the Congo By International Monetary Fund. African Dept.
  49. Capital goods, measured TFP and growth : the case of Spain By Antonia Díaz; Luis Franjo
  50. The Macro-Financial Implications of House Price-Indexed Mortgage Contracts By Hull, Isaiah
  51. Guyana: 2013 Article IV Consultation - Staff Report; Press Release By International Monetary Fund. Western Hemisphere Dept.
  52. The Effect of the Business Cycle on Apprenticeship Training: Evidence from Germany By Baldi, Guido; Brüggemann-Borck, Imke; Schlaak, Thore
  53. Modelling the Impact of New Capital Regulations on Bank Profitability By Swamy, Vighneswara
  54. Rising Skill Premium?: The Roles of Capital-Skill Complementarity and Sectoral Shifts in a Two-Sector Economy By Naoko Hara; Munechika Katayama; Ryo Kato
  55. Who is afraid of austerity? The redistributive impact of fiscal policy in a DSGE framework By Richard McManus; F. Gulcin Ozkan; Dawid Trzeciakiewicz
  56. Towards an integrated theory of value, capital and money By Cavalieri, Duccio
  57. Unveiling the House Price Movements and Financial Development By Akcay, Belgin; Yucel, Eray
  58. Resuming bank lending in the aftermath of the Capital Purchase Program. By Varvara Isyuk
  59. The Relationship between Consumer Price and Producer Price Indices in Turkey By Ãœlke, Volkan; Ergun, Ugur
  60. Why are real interest rates so low? Secular stagnation and the relative price of investment goods By Gregory Thwaites
  61. A note on the granular nature of imports in German manufacturing industries By Wagner, Joachim
  62. Guinea: Requests for Disbursement Under the Rapid Credit Facility and for Modification of Performance Criteria Under the Extended Credit Facility Arrangement—Staff Report; Press Release; and Statement by the Executive Director for Guinea By International Monetary Fund. African Dept.
  63. Causal Link between Oil Price and Uncertainty in India By Ghassen El Montasser; Kenza Aggad; Louise Clark; Rangan Gupta; Shannon Kemp
  64. With a Little Help from My Friends: Global Electioneering and World Bank Lending By Erasmus Kersting; Christopher Kilby
  65. Doctrinal Determinants, Domestic and International of Federal Reserve Policy, 1914-1933 By Eichengreen, Barry
  66. Sri Lanka: Ex-Post Evaluation of Exceptional Access Under the 2009 Stand-By Arrangement-Staff Report; Press Release; and Statement by the Executive Director for Sri Lanka By International Monetary Fund. Asia and Pacific Dept
  67. Interest rates and endogenous population growth: joint age-dependent dynamics By Brito, Paulo
  68. Perturbation methods for Markov-switching DSGE models By Foerster, Andrew T.; Rubio-Ramirez, Juan F.; Waggoner, Daniel F.; Zha, Tao
  69. Dynamic Analysis of Exchange Rate Regimes: Policy Implications for Emerging Countries in Asia By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  70. Too Much of a Good Thing: Attention Misallocation and Social Welfare in Coordination Games By Chen, Heng; Luo, Yulei; Pei, Guangyu
  71. Has the income share of the middle and upper-middle been stable over time, or is its current homogeneity across the world the outcome of a process of convergence? The 'Palma Ratio' revisited By José Gabriel Palma
  72. Does Indian Stock Market Provide Diversification Benefits Against Oil Price Shocks? A Sectoral Analysis By Ali, Mohsin; Masih, Mansur
  73. Public debt, fiscal decisions and political power By Waśniewski, Krzysztof
  74. Labour market regulation and fiscal parameters: A structural model for European régions. By Roberto Martino; Phu Nguyen-Van
  75. Interest Rate, Exchange Rate, and Stock Prices of Islamic Banks: A Panel Data Analysis By Ayub, Aishahton; Masih, Mansur
  76. Technology Shocks and Asset Pricing: The Role of Consumer Confidence By Vincenzo Merella; Stephen E. Satchell
  77. OPEC and non-OPEC oil production and the global economy By Ratti, Ronald A.; Vespignani, Joaquin L.
  78. ¿Está convergiendo el gasto gubernamental en las Universidades Públicas colombianas? By David Hincapié Vélez
  79. Investment Intensity in Canada and the United States, 1990 to 2011 By Liu, Huju; Gu, Wulong; Baldwin, John R.
  80. Euro-dollar polarization and heterogeneity in exchange rate pass-throughs within the euro zone By Comunale, Mariarosaria
  81. Does Religion Affect Economic Growth and Happiness? Evidence from Ramadan By Campante, Filipe; Yanagizawa-Drott, David
  82. La visión del desarrollo económico de Colombia durante el último siglo en perspectiva histórica By Alcides Gómez Jiménez
  83. Management of Interest Rate Risk in Indian Banking By Swamy, Vighneswara
  84. Carry Trade Activities: A Multivariate Threshold Model Analysis By Matthias Gubler
  85. Heterogeneous responses to heterogeneous food price shocks in Senegal: insights from a CGE By Séne, Ligane Massamba
  86. Optimal Public Investment, Growth, and Consumption: Fresh Evidence from African Countries By Augustin Kwasi Fosu, Yoseph Getachew, Thomas H.W. Ziesemer
  87. Comovement of Selected International Stock Market Indices:A Continuous Wavelet Transformation and Cross Wavelet Transformation Analysis By Masih, Mansur; Majid, Hamdan Abdul
  88. Análisis de la competitividad de la cadena algodón, fibras, textiles y confecciones By Felipe Castro
  89. Demand Model Simulation in R with Endogenous Prices and Unobservable Quality By Toro Gonzalez, Daniel
  90. Financial globalization or great financial expansion? The impact of capital flows on credit and banking crises By Jon Frost; Ruben van Tilburg
  91. Spillover Dynamics for Systemic Risk Measurement using Spatial Financial Time Series Models By Francisco Blasques; Siem Jan Koopman; Andre Lucas; Julia Schaumburg
  92. 20 años de políticas de competitividad en Colombia By Mauricio Reina; Felipe Castro
  93. Inference Based on SVARs Identified with Sign and Zero Restrictions: Theory and Applications By Arias, Jonas E.; Rubio-Ramirez, Juan F.; Waggoner, Daniel F.

  1. By: Roy Zilberman; William Tayler
    Abstract: This paper studies the interactions between loan loss provisioning rules, business cycle fluctuations and monetary policy in a model with nominal price rigidities, a borrowing cost channel and endogenous risk of default. We show that an empirically relevant backward-looking provisioning rule induces financial accelerator mechanisms and results in financial, price and macroeconomic instability. Forward-looking provisioning systems, set to cover for expected losses over the whole business cycle, reduce significantly procyclicality in prices and output, and in addition moderate the (otherwise optimal) anti-inflationary response in the monetary policy rule. The optimal policy response to financial shocks calls for a combination of forward-looking provisions and a mildly credit augmented monetary policy rule.
    Keywords: Loan loss provisions, procyclicality, borrowing cost channel, Basel III, forward-looking provisions, monetary policy
    JEL: E32 E44 E52 E58 G28
    Date: 2014
  2. By: Tervala, Juha
    Abstract: Business cycles are an essential part of macroeconomics. However, the study of macroeconomics often ignores the observed business cycles. During and after the global financial crisis, several economists have emphasized that macroeconomics courses will have to be changed. This paper presents a real world application of the IS-TR model, which helps to explain and teach business cycles. The simple Keynesian model clearly explains output fluctuations and the conduct of monetary policy. The main reason for strong business cycles in the euro area has been shocks in the goods market. The European Central Bank has changed its main interest rate mainly as a reaction to changes in the output gap.
    Keywords: Business cycles, IS-TR model, macroeconomics, teaching of economics
    JEL: A20 E40 E52
    Date: 2014–09–30
  3. By: Verona, Fabio (Bank of Finland Research); Martins, Manuel M. F. (University of Porto,); Drumond , Inês (Banco de Portugal)
    Abstract: We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.
    Keywords: financial shocks; optimal monetary policy; Taylor rules; DSGE models; bond market; loan market
    JEL: E32 E44 E52
    Date: 2014–07–25
  4. By: Brigitte Granville; Sana Hussain
    Abstract: This paper examines the synchronization in business and financial cycles both across and within a representative sample of Eurozone countries.
    Keywords: business cycles, concordance, European Union, financial cycles, time-frequency analysis.
    JEL: C14 E32 E44
    Date: 2014–10
  5. By: Aliqoriev, Olimkhon; Khamidov, Khalilillo
    Abstract: This article focuses on inflation targeting (hereafter IT) as a superior monetary policy strategy for attaining price stability, and its theoretical framework, prerequisites to introduce. The article analyses benefits and costs of adoption of inflation targeting and also examines the IT experiences of some industrial and emerging markets. The growing body of empirical researches indicates that the adoption of IT is useful for countries that must enhance their credibility for the management of monetary policy. Personally, the authors suggest that Uzbekistan should also take IT into account seriously and further consider. In the long run, without prejudice to the goal of price stability countries can achieve other objective: high employment, economic growth, financial markets stability, interest rate stability, and stability in foreign exchange markets.
    Keywords: inflation targeting, monetary policy, price stability, central bank.
    JEL: E31 E52 E58
    Date: 2014–05–05
  6. By: Wesselbaum, Dennis
    Abstract: This paper aims to characterize the interactions between fiscal and monetary and policy in New Zealand. We estimate a multivariate Markov-switching model and document frequent policy switches. We identify two regime: accommodative and non-accommodative monetary policy. In the non-accommodative regime, monetary policy does not respond to changes in government debt, while it does so in the accommodative regime. Further, we show that the underlying shocks are characterized by a fair amount of heteroscedasticity
    Keywords: Fiscal Theory of the Price Level, Markov-Switching, Monetaty and Fiscal Policy.
    JEL: C32 E43 E63
    Date: 2014–09–04
  7. By: Paul Hubert (OFCE)
    Abstract: Since Romer and Romer (2000), a large literature has dealt with the relative forecasting performance of Greenbook macroeconomic forecasts of the Federal Reserve. This paper empirically reviews the existing results by comparing the different methods, data and samples used previously. The sample period is extended compared to previous studies and both real-time and final data are considered. We confirm that the Fed has a superior forecasting performance on inflation but not on output. In addition, we show that the longer the horizon, the more pronounced the advantage of Fed on inflation and that this superi- ority seems to decrease but remains prominent in the more recent period. The second objective of this paper is to underline the potential sources of this supe- riority. It appears that it may stem from better information rather than from a better model of the economy.
    Keywords: Monetary Policy; Greenbook; Forecasts
    JEL: E52 E58 E37
    Date: 2014–10
  8. By: Güneş Kamber (Reserve Bank of New Zealand and CAMA.); Konstantinos Theodoridis (Bank of England); Christoph Thoenissen (Department of Economics, University of Sheffield)
    Abstract: The focus of this paper is on news-driven business cycles in small open economies. We make two significant contributions. First, we develop a small open economy model where the presence of financial frictions permits the replication of business cycle co-movements in response to news shocks. Second, we use VAR analysis to identify news shocks using data on four advanced small open economies. We find that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Our findings are robust across a number of alternative identification schemes.
    Keywords: News shocks, business cycles, open economy macroeconomics, financial frictions, VAR
    JEL: E32 F4
    Date: 2014–10
  9. By: Giulia Ghiani (Politecnico di Milano); Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak (CERGE-EI Prague)
    Abstract: The paper sets out theory and evidence for the equilibrium determination of the nominal interest rate. We test the cash-in-advance economy using US postwar data and find cointegration of the interest rate, inflation, unemployment and the money supply, using either M2 or M1 monetary aggregates, and the Federal Funds rate or the three month Treasury bill rate. Results are consistent both with a persistent monetary liquidity effect in the cointegrating vector coefficients and also a long run quantity theoretic relation. We identify three Markov-switching regimes similar to NBER contractions, expansions, and the "unconventional" period. Dropping money indicates model misspecification.
    Keywords: Euler equation, money supply, non-stationarity, cointegration, Markov-Switching VECM.
    JEL: C32 E40 E52
    Date: 2014–10
  10. By: Claire Reicher
    Abstract: While European countries have engaged in a debate about fiscal policy rules, little is known about the ability of these rules to ensure stable debt and output paths when taxes are distortionary, particularly in a small open economy. In this situation, it turns out that the interaction between a fiscal rule and output may affect whether or not fiscal policy is stabilizing, or "passive", in equilibrium. For instance, under moderate debt-multiplier combinations, a debt-GDP targeting rule can result in instability, while a debt-level targeting rule, irrespective of GDP, can result in stability. A primary deficit target may result in instability for the debt but stability for output, while a total deficit target can result in stability for both debt and output. A fiscal reaction function similar to those found in the macro literature may result in stability for certain parameter values, so long as the response of fiscal policy to the past debt level is strong enough to overcome the interactions among fiscal policy, output, and interest rates. Furthermore, under certain conditions, optimal policy mimics a fiscal reaction function with a moderate degree of business cycle stabilization policy
    Keywords: fiscal rule, fiscal reaction function, deficits, stability, instability
    JEL: E62 E63 H60
    Date: 2014–10
  11. By: J-P. Renne
    Abstract: In June 2014, the European Central Bank (ECB) announced the implementation of new refinancing operations aimed at supporting bank lending to the non-financial private sector. This paper exhibits and prices options embedded in these Targeted Longer-Term Refinancing Operations. In particular, it shows how these options participate to the incentive mechanisms at play in these operations. Quantitative results point to substantial gains –for participating banks– attached to the satisfaction of lending conditions defined by the scheme.
    Keywords: unconventional monetary policy, option pricing, TLTRO.
    JEL: E43 E52 E58
    Date: 2014
  12. By: Juan Sebastián Amador; Celina Gaitán-Maldonado; José Eduardo Gómez-González; Mauricio Villamizar-Villegas
    Abstract: The history of economic recessions has shown that every deep downturn has been accompanied by disruptions in the ?financial sector. Paradoxically, up until the ?financial world crisis of 2007-2009, little attention was given to macroeconomic and ?financial interdependence. And, in spite of a renewed interest on the matter, significant effort is still warranted in order to attain a comprehensive understanding of the causal links between the financial sector and the rest of the economy. In this paper we study the relationship between financial and real business cycles for a sample of thirty-three countries in the frequency domain. Specifically, we characterize the interdependence of credit and output cycles and conduct Granger-type causality tests in the frequency domain. We also perform cluster analysis to analyze groups of countries with similar cyclical dynamics. Our main findings indicate that: (i) on average, credit cycles are larger and longer-lasting than output cycles, (ii) the likelihood of cycle interdependence is highest when considering medium-term frequencies (we ?find that that Granger causality runs in both directions), and (iii) emerging markets tend to have cycles of shorter duration but are more profound than those exhibited in developed economies.
    Keywords: Frequency domain, Granger causality, hierarchical clustering, credit and out-put cycle interdependence.
    JEL: E32 E44 C38
    Date: 2014–09–04
  13. By: Kim, Minseong
    Abstract: This paper intends to discuss some problematic properties IS-LM and loanable funds together have when dealing with fiscal deficits. Many others have focused on its assumptions for criticism of IS-LM, but I will mainly focus on its fundamental modelling nature. To say more specifically, I will argue that ordinary IS-LM analysis is in contradictory nature to simultaneous equilibrium system, and therefore loanable funds.
    Keywords: IS-LM; loanable funds; budget deficits; fiscal policy; fiscal multiplier; simultaneous equilibrium
    JEL: B22 E12 E21 E22 E43
    Date: 2014–09–21
  14. By: Daniel Rees (Reserve Bank of Australia); David Lancaster (Reserve Bank of Australia); Richard Finlay (Reserve Bank of Australia)
    Abstract: We use state-space methods to construct new estimates of Australian gross domestic product (GDP) growth from the published national accounts estimates of expenditure, income and production. Across a range of specifications, our measures are substantially less volatile than headline GDP growth. We conclude that much of the quarter-to-quarter volatility in Australian GDP growth reflects measurement error rather than true shifts in the level of economic activity.
    Keywords: national income and product account; business cycle
    JEL: E01 E32
    Date: 2014–10
  15. By: De Koning, Kees
    Abstract: In economic life, like in all walks of life, there are always winners and losers. The losers are the unemployed, often the young, the low-income earners, the individual households who lose their home due to repossession for non-payment of debt, the households who have no or a low savings level and the many who see their wages grow slower than inflation levels. The losers in economic life, generally speaking, do not choose to be losers; they are willing to work but outside circumstances prevent them from (fully) participating in economic activities. To be a winner or loser in an economy is not just the result of some random events taking place; governments and central banks can create winners, but can equally create or become losers in the economic game themselves. The collective U.S. banking system caused the 2006-2008 economic and financial crises. The U.S. banking system sold U.S. home mortgages to individuals in the U.S. and subsequently to investors in the U.S and in Europe in an irresponsible manner. The U.S government became as much a loser as all the Euro area countries. In the Euro Area there are still far too many losers. All existing policy solutions, like a fiscal stimulus, an accelerated infrastructure plan, minimum wage increases and negative real interest rates all create losers apart from some winners. The Euro Area would really benefit from a policy that does only create winners without any losers. Such a policy could be the Economic Growth Incentive Method (EGIM). This method does not require more government debt; more individual household debt; a transfer of cash from one EA country to another; it will not increase the cost of labor; it does not require an income transfer from the rich to the poor; it does not require ultra-low interest rates and it will be a temporary measure only. Perhaps an idea worth considering?
    Keywords: Euro Area countries, ECB, Economic Growth Incentive Method( EGIM), economic losers and winners, unemployment
    JEL: E21 E24 E5 E58
    Date: 2014–09–29
  16. By: Roc Armenter (Federal Reserve Bank of Philadelphia)
    Abstract: A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goal. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray from the target in the first place. Low-inflation expectations become self-fullling, resulting in an additional Markov equilibrium in which both nominal and real variables are typically below target. Introducing a stabilization goal for long-term nominal rates anchors private-sector expectations on a unique Markov equilibrium without fully compromising the policy responses to shocks.
    Date: 2014
  17. By: Sun, Rongrong
    Abstract: This paper models the People’s Bank of China’s operating procedures in a two-stage vector autoregression model to search for a valid good policy indicator for Chinese monetary policy. The model disentangles endogenous components in changes in monetary policy that are driven either by demand for money or the liquidity management needs arising from foreign exchange purchases. There are four main findings. First, the PBC’s procedures appear to have changed over time, and hence no single indicator represents Chinese monetary policy well for the 2000-2013 time period. Second, its operating procedure is neither pure interest-rate targeting nor pure reserves targeting, but a mixture. Third, a set of indicators all contain information about the policy stance. It is hence preferred to use a composite measure to measure Chinese monetary policy. Finally, we construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with several existing measurement approaches suggests that the composite indices, rather than individual indicators, perform better in measuring Chinese monetary policy.
    Keywords: monetary policy, VAR, operating procedures, exogenous (endogenous) components
    JEL: E52 E58
    Date: 2014–08
  18. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: KEY ISSUES Context. Guatemala’s economy has performed solidly since the 2008–09 crisis. Output has converged to potential, inflation is under control, and macroeconomic policies remain prudent. However, risks to the outlook are tilted downwards, while buffers are modest and space for counter-cyclical policies is thin. Long-term inclusive growth is constrained by low investment in physical and human capital, institutional weaknesses, and lack of security. Near-term policies are broadly appropriate. With the output gap closed, the broadly neutral fiscal stance is adequate. The monetary stance is slightly expansionary, but inflation is at the bottom of the target range. The authorities should stand ready to tighten monetary policy if inflationary pressures re-emerge. Fiscal sustainability should be enhanced over the medium term. Though the debt-to- GDP ratio remains moderate, the ability to implement counter-cyclical fiscal policies is limited, not least by Guatemala’s high government debt-to-revenue ratio. Debt stabilization requires moderate tightening of the budgetary stance over the medium term. The emphasis should be on revenue mobilization, given the overall low level of spending. Consolidating gains from the 2012 tax reform, which has so far proved disappointing, will be critical. Efforts to upgrade the monetary and exchange policy framework should continue. Anchoring low and stable inflation will require measures to bolster monetary policy transmission, including by expanding exchange rate flexibility. This should provide an additional shock absorber and reduce incentives for dollarization. It would also establish the inflation target as the undisputed primary objective of the central bank. Further strengthening of the financial system is necessary. The 2014 FSAP update found that Guatemala has made significant progress in financial regulation and that the banking system appears to be generally sound. However, efforts are still needed to improve consolidated supervision and the regulation of off-shore banks. The time is also ripe for a phased move to Basel III standards. Structural reforms are vital to achieving long-term inclusive growth. Paving the way towards high, inclusive growth will depend upon raising the low tax-to-GDP ratio to support priority public spending, thereby addressing critical social and developmental needs.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Government expenditures;Revenue mobilization;Tax reforms;Monetary policy;Economic indicators;Staff Reports;Press releases;Guatemala;
    Date: 2014–09–18
  19. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: EXECUTIVE SUMMARY The first chapter on monetary policy transmission examines the channels through which innovations to policy variables—policy rate or monetary aggregates—affect such macroeconomic variables as output and inflation in Sri Lanka. The effectiveness of monetary policy instruments is judged through the prism of conventional policy channels (money/interest rate, bank lending, exchange rate, asset price channels) in VAR models, and the timing and magnitude of these effects are assessed using impulse response functions, and through the pass-through coefficients from policy to money market and lending rates. Our results show that (i) interest rate channel (money view) has the strongest Granger effect on output with 0.6 percent decrease in output after the second quarter and a cumulative 0.5 percent decline within a 3 year period in response to innovations in the policy rate; (ii) the contribution from the bank lending channel is statistically significant (adding another 0.2 percentage points to the baseline effect of policy rates) in affecting both output and prices but with a lag of about 5 quarters for output and longer for prices; (iii) the exchange rate and asset price channels are ineffective and do not have Granger effects on either output or prices. The second chapter takes a fresh look at the public debt reduction strategy. It asks two questions: (i) what has been driving the increase and subsequent decline in Sri Lanka’s public debt? (ii) Is Sri Lanka’s public debt too high, and if yes, how much, how fast and how should it be reduced? The chapter finds that, until recently, favorable interest rate-growth differential reflecting the combination of relatively high real GDP growth and low real interest rates on public debt has worked to reduce the debt ratio, even as primary deficits and occasional currency depreciation pushed the ratio in the opposite direction. More recently, however, the average borrowing costs began to increase, reflecting the reduced role of concessional financing and increased resort to market borrowing. Thus, debt reduction became more dependent on real growth and stronger primary balance, and this trend is likely to continue. The chapter documents that Sri Lanka’s public debt is one of the highest among the emerging economies, particularly when measured against the relatively low revenues, and suggests that the authorities target its gradual reduction to 50 percent of GDP, relying mainly on revenue measures. This target is more ambitious than the authorities’ medium-term objective of reducing the debt ratio to 60 percent of GDP, but it is considered by staff as prudent.
    Keywords: Monetary policy;Monetary transmission mechanism;Public debt;Debt reduction;Debt strategy;Selected Issues Papers;Sri Lanka;
    Date: 2014–09–18
  20. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Manuel M. F. Martins (Cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (Universidade do Minho)
    Abstract: This paper analyses the Taylor Rule in the U.S. 1960-2014 with new lenses: continuous time partial wavelets tools. We assess the co-movement between the policy interest rate and the macroeconomic variables in the Rule, inflation and the output gap, both jointly and independently, for each frequency and at each moment of time. Our results uncover some new stylized facts about U.S. monetary policy and add new insights to the record of U.S. monetary history since the early 1960s. Among other things we conclude that monetary policy has been successful in stabilizing inflation. However, its effectiveness varies both in time and frequencies. Monetary policy has lagged the output gap across most of the sample, but in recent times became more reactive. Volcker’s disinflation, and the conquest of credibility in 1979-1986, was achieved with no extra costs in terms of output.
    Keywords: Monetary Policy, Taylor Rule, Continuous Wavelet Transform, Partial Wavelet Coherency, Partial Phase-difference
    JEL: C49 E43 E52
    Date: 2014
  21. By: Gatt, William
    Abstract: A short article which motivates the use of a fan chart in the communication of forecasts, with special emphasis on inflation forecasts. A fan chart for Maltese HICP inflation projections is built, using the history of forecast errors.
    Keywords: Inflation, forecasts, fan chart
    JEL: C53 E31 E37
    Date: 2014–09
  22. By: Peter Spahn
    Abstract: The growth and deepening of financial markets entailed the expectation that the bank lending channel of monetary policy transmission would lose its importance. The paper explains why, on the contrary, the banking sector has become a major locus of origination and amplification of macro-financial shocks. Mutual feedback mechanisms between the financial and the real sector are analysed and simulated by using a simple standard macro model with an integrated banking system. A comparison of the efficiency of various Taylor Rule extensions explores whether monetary stabilisation can be improved by additional interest rate reactions to asset prices, bank lending, bank leverage or the spread between the loan and the policy rate.
    Keywords: Monetary policy transmission, credit market, leverage targeting, risk-taking channel, asset market shocks
    JEL: E1 E5 G2
    Date: 2014–09
  23. By: Crowley , Patrick (College of Business, Texas A&M University); Hughes Hallett , Andrew (George Mason University)
    Abstract: In this paper we use a New Keynesian model to explain why volatility transfer from high frequency to low frequency cycles can and did occur during the period commonly referred to as the "great moderation". The model suggests that an increase in inflation aversion and/or a reduction to a commitment to output stabilization could have caused this volatility transfer. Together, the empirical and theoretical sections of the paper show that the "great moderation" may have been mostly an illusion, in that lower frequency cycles can be expected to be more volatile, given that there has been no apparent reversal in any of the policy parameters and hence in the volatility found in the low frequency cycles identifi…ed by use of time-frequency empirical techniques. In fact, those cycles appear to have increased in power and volatility in both relative and absolute terms.
    Keywords: New Keynesian model; business cycles; growth cycles; time-frequency domain; discrete wavelet analysis; Empirical Mode Decomposition
    JEL: C14 E23 E32 E37
    Date: 2014–07–15
  24. By: Andrzej Rzoñca; Piotr Ci¿kowicz
    Abstract: In 2009, for the first time since the end of World War II, the world economy shrank. This resulted from the economic downturn in highly developed countries and surprised most economists. According to the IMF forecast published in spring 2008, GDP growth in these countries was expected to accelerate from 1.3% in 2008 to 3.8%. In fact, the growth rate was 0.1% in 2008 and minus 3.7% in 2009 (White, 2012). Another surprise was the subsequent poor performance rates reported by the major economies, i.e. the United States and the Eurozone. Five years after the acute phase of the global financial crisis their growth rates have not returned to pre-crisis levels. In a response to the outbreak of the global crisis, the main central banks, namely the Fed and the European Central Bank (ECB), resolved to take some unconventional actions: (i) reducing interest rates to close to zero, (ii) committing to keep interest rates that low for a long time, (iii) introducing quantitative easing on a large scale. In this paper, the authors attempt to aswer what were the costs of the unconventional monetary policy adopted by Fed and EBC, as well as what effects it had on restructuring process, uncertainty, and the use of credit.
    Keywords: Central Banks and Their Policies, Money Supply, Credit, Money multipliers, Mergers, Acquisitions, Restructuring, Corporate governance
    JEL: E51 E58 G34
    Date: 2014–09
  25. By: Gospodinov, Nikolay (Federal Reserve Bank of Atlanta); Jamali, Ibrahim (American University of Beirut)
    Abstract: In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility.
    Keywords: stock market volatility; federal funds futures; monetary policy; variance risk premium; vector autoregression; bivariate GARCH; leverage effect; volatility feedback effect
    JEL: C32 C58 E52 E58 G10 G12
    Date: 2014–08–01
  26. By: Conrad, Christian; Hartmann, Matthias
    Abstract: We examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. The unobservable inflation uncertainty is quantified by means of the slowly evolving long-term variance component of inflation in the framework of the Spline-GARCH model (Engle and Rangel, 2008). For a cross-section of 13 developed economies, we find that long-term inflation uncertainty is high if central bank governors are perceived as less inflation-averse and if the conduct of monetary policy is ad-hoc rather than rule-based.
    Keywords: Inflation uncertainty; Central banking; Spline-GARCH.
    Date: 2014–10–21
  27. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which, appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyse exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: federal funds rate, exit strategies, global spillovers, international policy coordination, sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–04
  28. By: Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Petar Sorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper analyzes the domestic and external inflation determinants for eight non-eurozone new EU member states (NMS). The empirical literature has been rather silent on the comparison of the relative importance of domestic vs. foreign inflation determinants. This paper aims to fill this gap and add to the literature by several methodological and empirical contributions. Empirical analysis is based on the structural vector autoregression (SVAR) model. It enables the authors to decompose inflation into its domestic and foreign component via historical decomposition analysis. Results indicate that foreign shocks are a major factor in explaining inflation dynamics in the medium run, while the short run inflation dynamics is mainly influenced by domestic shocks. Moreover, the importance of the foreign inflation component has had a rising trend in the pre-crisis period in all NMS, while the start of that trend mostly coincided with their accession to the EU. The global financial crisis seems to have decreased the importance of the foreign inflation component, although the results vary across countries. Since foreign shocks proved to be a very important determinant of inflation in NMS, the main policy implication of this study is the need to augment the classical Taylor rule with foreign factors in case of small open economies.
    Keywords: domestic and external inflation determinants, historical decomposition, inflation, new EU member states, consumer surveys
    JEL: C22 E31 E52 F41
    Date: 2014–10–23
  29. By: Bhattacharya, Joydeep; Qiao, Xue; Wang, Min
    Abstract: This paper studies the evolution of wealth inequality in an economy with endogenousborrowing constraints. In the model economy, agents need to borrow to finance humancapital investments but cannot commit to repaying their loans. Creditors can punishdefaulters by banishing them permanently from the credit market. In equilibrium, loandefault is prevented by imposing a borrowing limit tied to the borrower’s inheritance.The heterogeneity in inheritances translates into heterogeneity in the borrowing limits:endogenously, some young borrowers face a zero borrowing limit, some are partlyconstrained, while others are unconstrained. Depending on the initial distribution ofinheritances, it is possible all lineages are attracted to either the zero-borrowing-limitsteady state or to the unconstrained-borrowing steady state — long-run equality. It isalso possible some lineages end up at one steady state and the rest at the other — completepolarization. Interestingly, the wealth dynamics in the model closely resemblethat in the seminal work of Galor and Zeira (1993).
    Keywords: wealth inequality; endogenous borrowing constraints; exclusion
    JEL: E25 E44 E62 O23 O41
    Date: 2014–10–22
  30. By: Kronick, Jeremy
    Abstract: This paper addresses the debate in the literature on how developing countries are affected by foreign monetary policy shocks. I analyze how contractionary monetary policy shocks originating in different regions, specifically the Euro Area (“EUâ€) and United States (“USâ€), affect a set of rarely investigated sub-Saharan African (“SSAâ€) countries. Foreign monetary policy shocks are identified using changes in central bank futures rates, and are inserted into a domestic structural vector autoregression (“SVARâ€). Results differ depending on which of the EU or US shocks monetary policy and whether or not the recipient SSA country has a floating or fixed exchange rate regime. Specifically, floating exchange rate countries have a mostly negative GDP response following either shock due to a reliance on capital flows and external debt, and the implications these have for domestic interest rate responses. Fixed exchange rate countries have mixed GDP responses following the EU shock, as both trade and the effect of capital control usage on interest rates play an important role, while US shocks produce positive GDP responses as aid from the US dominates both trade and interest rates. The implications of these results for floating exchange rate countries is that diversification of foreign external debt and a reduction in reliance on international capital may be beneficial. For fixed exchange rate countries the implication is that capital controls can be a positive tool in the development process.
    Keywords: Monetary policy, international transmission of shocks, economic growth, sub-Saharan Africa
    JEL: E5 E6 F4 O1 O5
    Date: 2014–10–21
  31. By: Yasuo Hirose (Faculty of Economics, Keio University and Institute for Monetary and Economic Studies, Bank of Japan (; Atsushi Inoue (Department of Economics, Vanderbilt University (E-mail:
    Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the probability of hitting the ZLB increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.
    Keywords: Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2014–10
  32. By: Soldatos, Gerasimos T.; Varelas, Erotokritos
    Abstract: Chicago rule is shown to be the unique optimal monetary policy rule from the viewpoint of an intergenerational welfare-maximizing social planner. But, in the absence of commercial banking, it really mandates the elimination of the public sector, because it involves the elimination of central bank seigniorage and hence, of the government spending based on this seigniorage, rendering subsequently tax finance incapable of sustaining alone such spending. In the presence of commercial banking, the government does have the option of benefiting from commercial bank seigniorage by borrowing it countercyclically as implied by Chicago rule, which is found to operate like a full-reserve requirement.
    Keywords: Chicago rule, Chicago plan, Seigniorage, Intergenerational modeling
    JEL: D9 E4 E5 H1 H6
    Date: 2014
  33. By: Quinn, Stephen F. (Texas Christian University); Roberds, William (Federal Reserve Bank of Atlanta)
    Abstract: The Dutch bank florin was the dominant currency in Europe during much of the 17th and 18th centuries. The florin, a fiat money, was managed by an early central bank, the Bank of Amsterdam. Using a new reconstruction of the Bank of Amsterdam's balance sheet, we analyze the florin's loss of reserve currency status during the period 1781–92. The reconstruction shows that by 1784, accommodative policies rendered the Bank of Amsterdam "policy insolvent," meaning that its net worth would have been negative under continuation of its policy objectives. Policy insolvency coincided with the Bank of Amsterdam's loss of control over the value of its money.
    Keywords: central banks; reserve currency; policy insolvency
    JEL: E58 F33 N13
    Date: 2014–09–01
  34. By: Ben Cheikh, Nidhaleddine; Rault, Christophe
    Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.
    Keywords: Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–05
  35. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: This paper investigates the interest rate pass-through in eight European countries analyzing their short-run and long-run monetary transmission mechanisms. We investigate the relationship between the Euribor and the long-run interest rate on loans to non-financial corporations and allow for a mark-up which can be affected by country specific funding conditions and/or stochastic structural breaks. We detect significant differences across countries. Cointegration between the Euribor and the long-term bank loan interest rates holds for Germany, France, and the Netherlands, where banks seem to apply a constant mark-up. In the remaining countries of the sample the long-run pass-through is directly affected by changes in banks’ cost of funding, due to shifts in the spread between domestic and German long-term government bond interest rates. The selection of the country specific ESTAR/LSTAR parameterization of the short-run dynamics detects a high degree of heterogeneity. The transition variables vary from the government bond spreads, in countries which were involved in the European debt crisis via sovereign bond market contagion, to the VXO index and to the Euribor monthly volatility.
    Keywords: Interest rate pass-through, Cointegration, ESTAR/LSTAR parameterization, EMU.
    JEL: E43 E52 F36 C32
    Date: 2014
  36. By: Fang, Lei (Federal Reserve Bank of Atlanta); Nie, Jun (Federal Reserve Bank of Kansas City)
    Abstract: The high U.S. unemployment rate after the Great Recession is usually considered to be a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers' and firms' decisions. Therefore, it is important to take into account workers' endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style of labor-market matching model with endogenous separation decisions and stochastic changes in workers' human capital. We study how agents' endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. We reach four main findings. First, once workers have accounted for and are able to optimally respond to possible human capital loss, the unemployment rate in an economy with human capital loss during unemployment will not be higher than in an economy with no human capital loss. The reason is that the increase in the unemployment rate led by human capital loss is more than offset by workers' endogenous responses to prevent them from being unemployed. Second, human capital accumulation on the job is more important than human capital loss during unemployment for both the unemployment rate and output. Third, workers' endogenous separation rates will decline when job-finding rates fall. Fourth, taking into account the endogenous responses, unemployment insurance extensions contributed 0.5 percentage point to the increase in the aggregate unemployment rate in the 2008–12 period.
    Keywords: unemployment; unemployment insurance benefits; matching model; human capital; labor market
    JEL: E24 J08 J24 J45
    Date: 2014–02–01
  37. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Hui-Kuang Hsu (National Pingtung Institute of Commerce, Taiwan); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain)
    Abstract: The paper uses monthly data on financial stock index returns, tourism stock sub-index returns, effective exchange rate returns and interest rate differences from April 2005 – August 2013 for Taiwan that applies Chang’s (2014) novel approach for constructing a tourism financial indicator, namely the Tourism Financial Conditions Index (TFCI). The TFCI is an adaptation and extension of the widely-used Monetary Conditions Index (MCI) and Financial Conditions Index (FCI) to tourism stock data. However, the method of calculation of the TFCI is different from existing methods of constructing the MCI and FCI in that the weights are estimated empirically. The empirical findings show that TFCI is estimated quite accurately using the estimated conditional mean of the tourism stock index returns. The new TFCI is straightforward to use and interpret, and provides interesting insights in predicting the current economic and financial environment for tourism stock index returns that are based on publicly available information. In particular, the use of market returns on the tourism stock index as the sole indicator of the tourism sector, as compared with the general activity of economic variables on tourism stocks, is shown to provide an exaggerated and excessively volatile explanation of tourism financial conditions.
    Keywords: Monetary Conditions Index, Financial Conditions Index, Model-based Tourism Financial Conditions Index, Unbiased Estimation
    JEL: B41 E44 E47 G32
    Date: 2014–05–13
  38. By: Pierzak, Agnieszka (Ministry of Finance in Poland)
    Abstract: This paper investigates the use of dynamic factor model for forecasting headline and core inflation as well as food price index in Poland. Method applied in the study extend conventional approaches by using bayesian techniques to dynamic factors' estimation, way of handling "ragged edge" data structure and allowing for the model to change over time. Forecasting results confirm that including current information extracted from data-rich environment improves inflation forecast precision and consequently DFMs perform better than the best autoregressive models. The analysis suggest also that applying dynamic model selection procedure can additionally reduce out-of-sample prediction errors.
    Keywords: dynamic factor model; forecasting; inflation; CPI
    JEL: C35 C38 E31 E37
    Date: 2013–08
  39. By: J-P. Renne
    Abstract: This paper introduces a novel kind of interest-rate model offering simple analytical pricing formulas for swaps, futures, swaptions, caps and floors. The model is based on an original use of regime-switching features that makes it consistent with the non-linear behavior of interest rates. In particular, it accommodates the fact that short-term rate fluctuations are mainly driven by discrete changes in the central-bank policy rates. An application on euro-area data shows how the model can be exploited to infer risk-neutral probabilities of central-bank rate decisions.
    Keywords: yield curve, option pricing, regime switching, market expectations.
    JEL: E43 E47 G12 C53
    Date: 2014
  40. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Unleashing Italy’s Potential The economy is struggling to emerge from a prolonged balance-sheet recession… Tight credit conditions, weak corporate balance sheets, and deeply-rooted structural rigidities continue to weigh on domestic demand. The high level of public debt and membership in a currency union highlight the importance of tackling these structural weaknesses. …and the risks are tilted to the downside. External risks arise from geopolitical tensions, while Italy’s high public debt, large public financing needs, and elevated NPLs leave the economy vulnerable to financial contagion and/or low growth and inflation. Without meaningful reforms, potential growth is projected to remain low. Deep structural changes are urgently needed to secure a recovery and unleash Italy’s growth potential. Moving to a single labor contract with gradually increasing protection would reduce duality. Judicial efficiency could be improved by promoting mediation and enhancing monitoring of court performance. Greater efforts to combat corruption would strengthen the business environment. Implementing reforms simultaneously could be self- reinforcing and generate significant growth synergies. A greater push to clean up banks’ bad loans is needed to support lending in the recovery. More provisioning and write-offs; a private distressed debt market; and enhanced insolvency regime would accelerate the reduction of NPLs. Improved corporate governance and deeper capital markets would support growth and financial stability. A broad strategy to revive the SME sector would complement efforts to strengthen bank balance sheets. This strategy should promote restructuring support for viable, but distressed firms and a quick exit for those that are non-viable. A new fiduciary loan contract and greater sharing of credit information could support alternative financing for new endeavors. Fiscal policy needs to strike a delicate balance between setting the debt ratio on a downward path while helping the economy recover. To support growth, the priority should be to lower marginal tax rates through spending savings and lower tax expenditures. But given the low growth and high interest rate environment, stronger fiscal balances are needed to bring down debt faster. Conditional on the recovery taking hold, a modest structural surplus next year would be appropriate. Policies at the European level could also support growth by easing further monetary conditions should inflation remain too low, and reducing financial fragmentation.
    Keywords: Article IV consultation reports;Economic recovery;Economic growth;Fiscal policy;Labor markets;Fiscal reforms;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Italy;
    Date: 2014–09–18
  41. By: Virkola, Tuomo
    Abstract: This paper provides a characterization of the fiscal policy framework in four established federal countries with heterogeneous intergovernmental relations and demographic characteristics: Canada, Germany, Switzerland and the United States. We consider the implications of fiscal federalism from three different perspectives. First, we study the allocation of expenditure responsibilities and revenue generating instruments to different levels of government (federal, state and local) and discuss the role of intergovernmental transfers schemes and fiscal rules in each country. Second, we study the implementation of macroeconomic stabilization policy across different levels of government. Third, we discuss the evidence on the degree of inter-state risk sharing and the role of federal transfers in smoothing regional income shocks in federal countries. We conclude with the main implications to the euro area and to the debate on common fiscal instruments.
    Keywords: fiscal federalism, fiscal union, risk sharing
    JEL: E62 H60 H70
    Date: 2014–10–31
  42. By: Dewandaru, Ginanjar; Rizvi, Syed Aun; Sarkar, Kabir; Bacha, Obiyathulla; Masih, Mansur
    Abstract: In theory, the price of equity is determined by the dividend yields and growth potentials of the firms. There exists established empirical proof of the impact of macroeconomic changes to the equity markets. With the advent of Islamic equities, and the recent surge of interest in them have raised the question of whether the same theoretical framework and relationship be considered for Shariah compliant equities or not. This study explores the impact of macroeconomic changes on Islamic and conventional indices for a large set of 37 countries, classifying them according to developed and emerging countries. The study finds a higher impact of Industrial production on the Islamic equities, while the interest rate and money supply have a lesser impact as compared to the impact on conventional counterparts. This lends support to the argument that Shariah screening methodology provides a set of Islamic equities which are more founded on the real sector of the economy. In addition the adjustment process during the crisis is faster for the Islamic equities in both regions. These results provide initial empirical proof for further research on the impact of specific economic variables on the changes in Islamic equity prices.
    Keywords: Islamic finance, Stock Market, Equity, Emerging Countries
    JEL: C22 C58 E44 G15
    Date: 2014–05–24
  43. By: Christian Pierdzioch (Helmut-Schmidt-University, Department of Economics, Holstenhofweg 85,P.O.B. 700822, 22008 Hamburg, Germany); Monique B. Reid (Stellenbosch University, Department of Economics, Private Bag X1, Matieland, South Africa, 7602.); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: We study the directional accuracy of South African survey data of short-term and longer-term inflation forecasts. Upon applying techniques developed for the study of relative operating characteristic (ROC) curves, we find evidence that forecasts contain information with respect to the subsequent direction of change of the inflation rate.
    Keywords: Inflation rate; Forecasting; Directional Accuracy
    JEL: C53 D82 E37
    Date: 2014–10
  44. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Lehigh Valley Partnership and Lehigh Valley Economic Development Corporation. Allentown, PA. President Charles Plosser gives his views on the regional and national economy and discusses why he remains optimistic about the economic outlook. He also shares his thoughts about monetary policy and explains why he departed from the majority view at the July and September FOMC meetings.
    Keywords: Regional economy; Monetary policy; FOMC;
    Date: 2014–10–16
  45. By: Alessandria, George (Federal Reserve Bank of Philadelphia); Choi, Horag (Monash University); Kaboski, Joseph P. (University of Notre Dame and NBER); Midrigan, Virgiliu (New York University and NBER)
    Abstract: The extent and direction of causation between micro volatility and business cycles are debated. We examine, empirically and theoretically, the source and effects of fluctuations in the dispersion of producer-level sales and production over the business cycle. On the theoretical side, we study the expect of exogenous first- and second-moment shocks to producer-level productivity in a two-country DSGE model with heterogeneous producers and an endogenous dynamic export participation decision. First-moment shocks cause endogenous fluctuations in producer-level dispersion by reallocating production internationally, while second-moment shocks lead to increases in trade relative to GDP in recessions. Empirically, using detailed product-level data in the motor vehicle industry and industry-level data of U.S. manufacturers, we find evidence that international reallocation is indeed important for understanding cross-industry variation in cyclical patterns of measured dispersion.
    Keywords: Sunk cost; Establishment heterogeneity; Exporting; Uncertainty;
    JEL: E31 F12
    Date: 2014–09–30
  46. By: Dupor, William D. (Federal Reserve Bank of St. Louis); McCrory, Peter B. (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, we study the effects of interregional spillovers from the government spending component of the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county Census Journey to Work commuting data, we cluster U.S. counties into local labor markets, each of which we further partition into two subregions. We then compare differential labor market outcomes and Recovery Act spending at the regional and subregional levels using instrumental variables. Among pairs of subregions, we find evidence of fiscal policy spillovers. For example, $1 of Recovery Act spending in a large subregion increases its own wage bill by $0.79 and increases the wage bill in its neighboring subregion by $0.59. We find similar spillover effects when we replace the wage bill with employment as our measure of economic activity. Next, we build a dynamic equilibrium trade model with interregional commuting capable of propagating these spillovers across regions.
    Keywords: fiscal policy; spillovers; the American Recovery and Reinvestment Act.
    JEL: E52 E62
    Date: 2014–10–22
  47. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Outlook and risks. Following an upturn in 2013, growth is expected to moderate somewhat during 2014-2015, narrowing the positive output gap. The impact of recovering demand in advanced economies is likely to be offset by the ongoing real appreciation of the currency and the gradual tightening in global monetary conditions. Transitional costs related to the economic restructuring (see next paragraph) are also expected to dampen growth in the near term. As a very open economy, Singapore is particularly exposed to external risks related to a protracted period of slower growth in advanced and emerging economies, a continued buildup and eventual unwinding of excess capacity in China, an abrupt surge in financial market volatility as investors reassess underlying risks, and geopolitical risks. Medium- and long-term challenges. The authorities focus squarely on the implementation of their medium-term economic restructuring plan. With the aim to boost the productivity of labor and land, the plan could set the stage for a new era of sustainable growth. However, productivity improvements may take some time to materialize. For example, the slowing inflow of foreign workers, a key part of the reform agenda, could moderate potential growth and lower competitiveness in light of the tight labor market. The social safety net is being strengthened in the context of a rapidly aging population. Policy assessment. Singapore continues to implement a strong set of macroeconomic and financial sector policies. The moderately tight monetary policy remains appropriate but the fiscal stance is looser than would be warranted by cyclical considerations. The 2014 budget focuses on noncyclical considerations, including support for companies’ efforts to raise productivity and additional social spending on healthcare for the elderly. The authorities’ plan to raise social and infrastructure spending by 1-2 percent of GDP over the medium term should help reduce the large current account surplus. Financial regulation and supervision is among the best globally and Singapore is a frontrunner in implementing global regulatory reforms. Macroprudential policies have contributed to cool the housing and car permit markets and good progress has been made in implementing key short•term FSAP recommendations.
    Keywords: Article IV consultation reports;Monetary policy;Real effective exchange rates;Macroprudential Policy;Financial sector;Fiscal policy;Fiscal reforms;Economic indicators;Staff Reports;Press releases;Singapore;
    Date: 2014–10–17
  48. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context and outlook: Despite strong macroeconomic performance under the Fund- supported program (2009–12) with economic activity steadily accelerating and inflation declining sharply, poverty remains pervasive and the economy vulnerable, exposing this progress to reversal. Limited fiscal space and shocks to revenues often offset by expenditure adjustments have not supported pro-poor and critical investment spending necessary for inclusive growth, giving rise to mounting social demands to share in the benefits of the accelerating growth. Focus of consultation: The discussions focused on medium-term policy measures to preserve macroeconomic stability while promoting inclusive growth, improve transparency and good governance in the natural resources sector; and foster financial stability and development. Key policy recommendations: • Maintain the fiscal anchor of no (net) central bank financing of the budget while creating fiscal space through enhanced domestic revenue mobilization, and improving the quality of public spending through public financial management (PFM) reforms, and building more robust buffers against external shocks. • Implement measures included in the updated governance matrix agreed with the World Bank and the recommendations of the Extractive Industries Transparency Initiative (EITI) and the National Conference on Mineral Resources Management (NCMRM) to enhance transparency and good governance in the management of natural resources. • Accelerate reforms of the Central Bank of the Congo (BCC) and the financial sector by (i) passing the central bank law to strengthen its independence and governance, (ii) completing its recapitalization, and (iii) strengthening its analytical capacity, (iv) disengaging from non-core activities, and (v) implement FSAP recommendations to promote financial sector stability and development.
    Keywords: Article IV consultation reports;Economic growth;Mining sector;Fiscal policy;Natural resources;Fiscal transparency;Fiscal reforms;Financial stability;Banking sector;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Democratic Republic of the Congo;
    Date: 2014–09–30
  49. By: Antonia Díaz; Luis Franjo
    Abstract: This paper reconciles two, apparently, contradictory facts about the Spanish economy: real GDP per working age person has grown at 2.4 percent during the period 1996-2007, on average, whereas Total Factor Productivity has been stagnant during that period. Here we argue that the Spanish economy has grown, in spite of stagnant TFP, because investment in structures has been heavily subsidized. This inefficiently high rate of investment in structures is the main reason for the increase in hours worked observed during that period. We use a three sector model economy where we distinguish between equipment and structures to quantify the sources of changes in measured TFP in Spain. We find that measured TFP is low because Investment- Specific Technical Change in Spain is very low. A calibrated version of this model is able to reproduce very well the growth experience of Spain for the period 1970-2007. We use the model economy to quantify the cost of direct and indirect subsidies to structures and the gains of eliminating them in terms of TFP and income growth. Our three sector model economy also allows us to quantify the cost in measured TFP of the housing price boom experienced during the 2000s.
    Keywords: Spain , TFP , growth accounting , ISTC , applied general equilibrium
    JEL: E01 E13 E32
    Date: 2014–10
  50. By: Hull, Isaiah (Research Department, Central Bank of Sweden)
    Abstract: A standard, no-recourse mortgage contract does not adjust when the value of the underlying collateral falls. Consequently, shocks that lower house prices may trigger one of the necessary conditions for default: negative equity. A common alternative contract attempts to prevent default by imposing full-recourse. This may cause individuals who believe they are likely to default to rent; however, it does not prevent those who buy from experiencing negative equity. I consider a contract that instead precludes negative equity by tying outstanding debt to an index of house prices. This is done in an incomplete markets model that is calibrated to match U.S. micro and macro data. I find that switching to the house price indexed contract reduces the default rate from .72% to .11% and expands homeownership rates among the young and the poor, but pushes up the equilibrium minimum mortgage rate by 90 basis points. The volatility of net cash flows to financial intermediaries also increases slightly under the new contract.
    Keywords: Default; Mortgages; Interest Rates; Heterogeneous Agents; Incomplete Markets
    JEL: E21 E43 G21
    Date: 2014–09–01
  51. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: The economy has experienced seven consecutive years of robust growth, buoyed by high commodity prices, foreign direct investment and expansion of private sector credit. As part of a strategy to sustain growth, reduce poverty and curtail dependence on imported oil, the authorities are pursuing the Amaila Falls Hydro-electric Project (AFHP), entailing investment of about 30 percent of GDP. However, steps by Parliament that delayed important approvals led the private sector partner to withdraw, which could delay the project while additional financing is sought. Meanwhile, public debt remains high—around 60 percent of GDP—limiting the room to finance inclusive growth.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal consolidation;Monetary policy;Flexible exchange rate policy;Economic indicators;Bank supervision;Debt sustainability analysis;Staff Reports;Press releases;Guyana;
    Date: 2014–09–25
  52. By: Baldi, Guido; Brüggemann-Borck, Imke; Schlaak, Thore
    Abstract: The benefits of dual apprenticeship programs are usually discussed in the context of reducing structural unemployment rates, especially among the young. Related to this, the long-run benefits of dual apprenticeship programs are extensively analyzed in the literature. However, empirical evidence regarding the short-run effects of the business cycle on the number of apprenticeships is scarce. In this paper, we use panel-data at the German federal states level ranging from 1999 through 2012 to analyze the effects of the business cycle on the number of new apprenticeship contracts. Using different sample periods and model specifications, we do not find a robust and significant effect of the business cycle on apprenticeships. Hence, the apprenticeship system seems to dampen the volatility of youth unemployment.
    Keywords: Economic Fluctuations, Education, Hiring, Unemployment
    JEL: E32 I21 J63
    Date: 2014
  53. By: Swamy, Vighneswara
    Abstract: This study models the impact of new capital regulations proposed under Basel III on bank profitability by constructing a stylized representative bank’s financial statements. We show that the higher cost associated with a one-percentage increase in the capital ratio can be recovered by increasing lending spreads. The results indicate that in the case of scheduled commercial banks, one-percentage point increase in capital ratio can be recovered by increasing the bank lending spread by 31 basis points and would go upto an extent of 100 basis points for six-percentage point increase assuming that the risk weighted assets are unchanged. We also provide the estimations for the scenarios of changes in risk weighted assets, changes in return on equity (ROE) and the cost of debt.
    Keywords: Banks, Regulation, Basel III, Capital, Interest Income
    JEL: E44 E51 E61 G2 G21 G28
    Date: 2014
  54. By: Naoko Hara (Bank of Japan); Munechika Katayama (Kyoto University); Ryo Kato (Bank of Japan)
    Abstract: Empirical studies report a marked dispersion in skill-premium changes across economies over the past few decades. Structural models in early studies successfully replicate the increases in skill premiums in many economies, while some other cases with a decline in the skill premium are yet to be explained. To this end, we develop a two-sector (i.e., manufacturing and non-manufacturing) general equilibrium model with skilled and unskilled labor, in which degrees of capital-skill complementarity differ across sectors. Based on the estimated structural parameters, we show that a decline in capital-skill complementarity in the non-manufacturing sector can provide a consistent explanation for the following aspects of the Japanese data at both the aggregate and industry levels: (i) a decline in the skill premium, (ii) widening of the sectoral wage gap due to a rise in manufacturing wages and decline in non-manufacturing wages, and (iii) an increase in the unskilled labor share in the non-manufacturing sector. We interpret that this change reflects compositional effects and uneven technology adoption of firms within non-manufacturing.
    Keywords: Capital-skill Complementarity; Skill Premium; Two-sector DSGE Model; Bayesian Estimation
    JEL: E22 E24 J31
    Date: 2014–10–28
  55. By: Richard McManus; F. Gulcin Ozkan; Dawid Trzeciakiewicz
    Abstract: This paper presents a comprehensive assessment of fiscal austerity, with special emphasis on its distributional consequences, which are surprisingly ignored in the existing literature. Using amedium scale DSGE model we find that both the aggregate and distributional consequences of fiscal consolidation are shaped by its composition much more than by its speed. A trade-off emerges between effciency and equality; spending-based austerity leads to smaller net movements in output, incomes and welfare, but also to larger inequality between agents who vary by their access and use of credit markets. Given the severity of the recent downturn in most advanced economies that had adopted austerity, this trade-off between growth and distributional consequences of fiscalconsolidation is likely to pose serious challenges to policymakers in many countries.
    Keywords: fiscal austerity; welfare; redistribution
    JEL: E65 H2 H3
    Date: 2014–07
  56. By: Cavalieri, Duccio
    Abstract: This is an analysis of the present state of the theory of capital. The paper contains a proposal to reformulate this theory in an ‘late-Marxian’ up-to-dated perspective. The central problem discussed is the integration of the theories of value and capital with those of money and finance. An augmented cost-of-production theory of value is advocated. Special attention is focused on the role of Marx’s ‘monetary expression of labour value’ (MEV), rediscovered and unduly modified by neo-Marxists with the purpose to make it compatible with Marx’s labour theory of value. JEL Codes: B12, D46, E11.
    Keywords: value; labour; capital; money; critical Marxism; MEV; MELT.; value;
    JEL: B12 D46 E11
    Date: 2014–08
  57. By: Akcay, Belgin; Yucel, Eray
    Abstract: Today, it is widely recognized that housing price boom-bust cycles lay at the heart of the latest global financial crisis. A housing boom is commonly defined as a period in which a housing price exceeds its fundamental value. Like most of the European Union member countries, many economies experienced the housing boom during the period of 2000–2006. Moreover, housing booms turned into busts in many countries at about the same period, causing a deep crisis. Our aim in this paper is to look for the determinants of housing price cycles and to investigate the relationship between housing boom-bust cycles and indicators of housing development. For this, we first detect the turning points of housing prices and identify housing price boom-bust cycles for 27 European countries and the US from 1995 to 2013 using quarterly data and a judgmentally augmented version of the dating procedure due to Ball (1994). Having obtained a categorization of boom versus boom-bust countries, in the second step, we reveal the relationships between housing cycles, macroeconomic factors and financial development by means of panel probit analysis.
    Keywords: European Union; House prices; Boom-bust cycles; Financial development
    JEL: C51 C58 E44 G01
    Date: 2014–08–04
  58. By: Varvara Isyuk (Centre d'Economie de la Sorbonne et National Bank of Belgium)
    Abstract: In the second half of 2008, after a series of bankruptcies of large financial institutions, the U.S. Treasury poured capital infusions into domestic financial institutions under the Capital Purchase Program (CPP), thus helping to avert a complete collapse of the U.S. banking sector. In this article the effectiveness of the Capital Purchase Program is analysed in terms of restoring banks' loan provisions. The relative impacts of liquidity shortages (which negatively affected banks' willingness to lend) and the contraction in aggregate demand for bank loans are examined. The empirical evidence on the effects of capital shortages supports the theory. Banks that have a higher level of capitalisation tend to lend more both during the crisis and in normal times. Moreover, it is found that bailed-out banks displayed higher growth rates of loans during the crisis than in normal times (before 2008) as well as higher rates compared with non-bailed banks during the crisis, with a one percentage point increase in the capital ratio. In addition, bailed-out banks that repurchased their shares from the U.S. Treasury provided more loans during the crisis than those banks that did not.
    Keywords: Capital Purchase Program, bank lending, credit growth, liquidity provisions.
    JEL: E58 G21 G28
    Date: 2014–07
  59. By: Ãœlke, Volkan; Ergun, Ugur
    Abstract: In this study we analyze the relationship between the Consumer Price Index (CPI) and the Producer Price Index (PPI) in Turkey. We test long run, short run and causality relationship of these series. Johansen’s cointegration tests present a long run relationship between these series. Vector error correction (VEC) model specification suggests these series move together. There is a unidirectional long run causality from CPI to PPI. On the other hand VEC Granger causality test indicates no causality in short run. Thus our results suggest demand pull inflation in long run.
    Keywords: Cointegration, Vector error correction model and Price indices
    JEL: C32 E31
    Date: 2013–09–22
  60. By: Gregory Thwaites (Centre for Macroeconomics (CFM))
    Abstract: Over the past four decades, real interest rates have risen then fallen across the industrialised world. Over the same period, nominal investment rates are down, while house prices and household debt are up. I explain these four trends with a fifth - the widespread fall in the relative price of investment goods. I present a simple closed-economy OLG model in which households finance retirement in part by selling claims on the corporate sector (capital goods) accumulated over their working lives. As capital goods prices fall, the interest rate must fall to re ect capital losses. And in the long run, a given quantity of saving buys more capital goods. This has ambiguous effects on interest rates in the long run: if the production function is inelastic, in line with most estimates in the literature, interest rates stay low even after relative prices have stopped falling. Lower interest rates reduce the user cost of housing, raising house prices and, given that housing is bought early in life, increasing household debt. I extend the model to allow for a heterogeneous bequest motive, and show that wealth inequality rises but consumption inequality falls.I test the model on cross-country data and find support for its assumptions and predictions. The analysis in this paper shows recent debates on macroeconomic imbalances and household and government indebtedness in a new light. In particular, low real interest rates may be the new normal. The debt of the young provides an alternative outlet for the retirement savings of the old; preventing the accumulation of debt, for example through macroprudential policy, leads to a bigger fall in interest rates.
    Date: 2014–08
  61. By: Wagner, Joachim (Leuphana University Lueneburg, Germany, and CESIS, KTH, Stockholm, Sweden)
    Abstract: This paper uses an approach recently suggested by Gabaix (Eonometrica 2011) to investigate for the first time the role of idiosyncratic shocks to the largest firms in the dynamics of imports by firms from manufacturing industries. For Germany we find evidence that imports are power-law distributed and that the distribution of imports in the industries can be characterised as fat-tailed. Results show that idiosyncratic shocks to very large firms are important for the import dynamics in 2010/2011 but not in 2009/2010.
    Keywords: Imports; power law; granular residual; Germany
    JEL: E32 F14 L60
    Date: 2014–10–14
  62. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Guinea is suffering from an outbreak of Ebola, which has become a humanitarian crisis with a significant economic impact. Preliminary estimates suggest a negative impact on 2014 growth, which will be markedly lower. Government revenue is showing a substantial shortfall and the response to the Ebola outbreak entails additional critical spending needs. The exchange rate has started to depreciate. The authorities intend to adopt a tighter monetary policy to address the transitory balance of payments shock. Performance under the ECF-supported program has remained satisfactory. Preliminary data indicate that all performance criteria (PCs) under the program for end-June 2014 were met. There has also been further progress with structural reform. The authorities have requested additional IMF financial assistance to meet urgent fiscal and balance of payments needs not anticipated at the time of the recent program review. Such assistance cannot be provided in the form of an augmentation of access under the ECF arrangement at this time since a review associated with the most recent availability date has not yet been completed because of delays in program implementation associated with the 2013 parliamentary elections. The authorities have requested a disbursement under the Rapid Credit Facility (RCF) because the urgent balance of payments need is characterized by a financing gap that, if not addressed, would result in an immediate and severe economic disruption. Moreover, Guinea’s balance of payments difficulties are caused primarily by a sudden exogenous shock and not by a withdrawal of financial support by donors, and its balance of payments need is expected to be resolved within one year with no major policy adjustments being necessary. As such polices remain guided by the objectives of the ECF-supported program. Staff supports the authorities’ request for a disbursement under the RCF of 25 percent of quota (SDR 26.775 million). It also supports the authorities’ request for a modification of the end-September indicative targets and end-December 2014 PCs under the ECF arrangement, including program adjustors.
    Keywords: Rapid Credit Facility;Current account deficits;Balance of payments need;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Extended Credit Facility;Performance criteria modifications;Guinea;
    Date: 2014–09–29
  63. By: Ghassen El Montasser (Ecolesuperieure de Commerce de Tunis, Campus Universitaire de la Manouba - 2010 La Manouba, Tunisia.); Kenza Aggad (Department of Economics, University of Pretoria, South Africa.); Louise Clark (Department of Economics, University of Pretoria, South Africa.); Rangan Gupta (Department of Economics, University of Pretoria, South Africa.); Shannon Kemp (Department of Economics, University of Pretoria, South Africa.)
    Abstract: This paper investigates the causality between oil price and economic uncertainty in India. In order to test for this relationship, we collect data on the Brent crude oil price as well as the crude oil ETF volatility index. We also use the policy-related economic uncertainty index as well as the stock market volatility index for India. Our results suggest that the standard Granger causality test rejects the hypothesis of causality between oil price changes and economic uncertainty in India. As a result of the shortcoming of the standard Granger test in the presence of parameter instability, we perform Rossi’s (2005) test. It shows that the Brent crude oil price does not have a causal impact on India’s economic uncertainty but the crude oil ETF volatility index does. Clearly, oil and India’s economic uncertainty go hand-in hand. These findings can thus be used in the context of policy recommendation.
    Keywords: Economic policy uncertainty, stock market uncertainty, oil price, time-varying causality, India
    JEL: C14 C32 D80 E20 E66 G18 Q43
    Date: 2014–11
  64. By: Erasmus Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University); Christopher Kilby (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: This paper uses monthly World Bank project-level data to assess the impact of upcoming elections in recipient countries on loan activity. We analyze the extent to which geopolitics influence both the timing and size of loan commitments and disbursements. While developing countries have better access to new World Bank loans when they vote with the U.S. in the United Nations General Assembly, we do not find that the political cycle plays a role in the timing or size of new loans. For already approved loans, disbursement is faster when countries are aligned with the U.S. in the UN. Furthermore, disbursement accelerates prior to elections if the country is geopolitically aligned with the U.S. but decelerates if the country is not. These disbursement patterns are consistent with global electioneering that serves U.S. foreign policy interests.
    Keywords: World Bank; Political Business Cycle; Elections
    JEL: E32 F34 F35 O19
    Date: 2014–10
  65. By: Eichengreen, Barry (University of California, Berkeley)
    Abstract: This paper describes the doctrinal foundations of Federal Reserve policy from the establishment of the institution through the early 1930s, focusing on the role of international factors in those doctrines and conceptions. International considerations were at most part of the constellation of factors shaping the Federal Reserve’s outlook and policies even in the high gold standard era that ended in 1933. However, neither was the influence of international factors absent, much less negligible. Nor were the Fed’s policies without consequences for the rest of the world. Having described the doctrinal foundations of Federal Reserve policy, I analyze how the doctrines in question influenced the central bank’s actions and shaped the impact of monetary policy on a number of key occasions, focusing in particular on episodes where the international economy and the rest of the world played an important role.
    JEL: E4 E5
    Date: 2014–10–01
  66. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: EXECUTIVE SUMMARY Sri Lanka’s 2009 Stand-By Arrangement was initiated at the onset of the global financial crisis. It also coincided with the ending of the country’s decades-old civil conflict. This unusual combination of circumstances made the program subject to very high economic uncertainty. The immediate imperative was to avert a balance of payments crisis— allowing for an orderly exchange rate adjustment and a rebuilding of external reserves— so as to forestall a shock with socially disruptive consequences. Recognizing the role of fiscal imbalances in the crisis, the program called for a fiscal consolidation that could restore debt sustainability. The program also aimed to put in place a framework to resolve problem banks and safeguard financial stability. Viewed through the immediacy of averting an acute external shock, Sri Lanka’s program was successful. On economic grounds, Sri Lanka’s need was evident. The program provided a catalytic effect to confidence at a crucial time. The balance of payments pressures not only ebbed, they reversed decisively within a few months of the program’s inception in recognition a potential “peace dividend†that the country might reap, as well as the Fund’s reassuring presence. In conjunction with these factors, the global environment also improved. As a result, the economy experienced strong growth and lower inflation relative to the preprogram years. Exceptional access, as approved at the program’s inception, was appropriate, as was the subsequent re-phasing of purchases to reflect improved conditions. The program concluded in 2012 (following two extensions), marking the completion of Sri Lanka’s longest engagement with the Fund. Viewed through the broader prism of achieving longer-term objectives, however, the program’s success was partial. Although international reserves were restored to a more comfortable level, exchange rate adjustment has not fully restored external competitiveness, and external vulnerabilities remain high. Thanks to a commendable level of expenditure control by the authorities through most of the program, headline and primary fiscal deficits declined after a large initial slippage. However, the fiscal adjustment was unbalanced—relying completely on expenditure cuts—while revenues continued their long-term decline, straining the future ability to sustain much-needed (and growth inducing) capital expenditure. Also, underlying fiscal and external debt-related vulnerabilities have not been significantly reduced despite improvement in headline numbers. Indeed, by some measures, they may have risen. The program had limited success in reining in the losses of state-owned enterprises. There have been improvements in the financial sector—notably in the area of risk-based supervision—but progress still needs to be made in other areas. To a certain extent, shortcomings with respect to longer-term objectives may reflect the fact that structural impediments were significant—in areas ranging from state owned enterprise reform to revenue administration, as well as the management of domestic liquidity conditions. This made some of the goals too ambitious for the time-frame of the program, despite two extensions. Difficulties encountered during previous attempts that were aimed at tackling these problems may have served to temper such optimism. Yet, in some areas—exchange rate flexibility, and revenue enhancements—policy choices also had a role to play in shaping weaker than envisaged program outcomes. By way of lessons, therefore, this report calls for more careful calibration of program goals. Targets need to be tethered by credible well specified bottom-up measures with attention to their sequencing, matching the degree of commitment. There may also be a case for keeping a sharper distinction between various kinds of Fund facilities for differing circumstances.
    Keywords: Ex post assessments;Economic conditions;Fiscal consolidation;Tax reforms;Stand-by arrangements;Conditionality;Economic indicators;Staff Reports;Press releases;Sri Lanka;
    Date: 2014–09–22
  67. By: Brito, Paulo
    Abstract: This paper presents a uncertain-lifetime overlapping-generations continuous time model for an Arrow-Debreu economy with endogenous fertility, in which age-dependent variables are explicitly introduced. The general equilibrium paths for the discount factor and newborns are derived from a system of two coupled forward-backward integral equations. The forward mechanism is related to aggregation between cohorts and the backward mechanism to life-cycle decisions. We study changes in the age-dependent profiles of age-dependent distributions for productivity and time use. We show that high maximum ages of productivity and child-rearing fitness increase the long run interest and growth rates, and low maximum ages can lead to asset pricing bubbles and negative population growth rates.
    Keywords: OLG, endogenous fertility, Arrow-Debreu, integral equations
    JEL: C6 E2 J1
    Date: 2014–03–27
  68. By: Foerster, Andrew T. (Federal Reserve Bank of Kansas City); Rubio-Ramirez, Juan F. (Duke University); Waggoner, Daniel F. (Federal Reserve Bank of Atlanta); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: Markov-switching DSGE (MSDSGE) modeling has become a growing body of literature on economic and policy issues related to structural shifts. This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of MSDSGE models. Our new method, called "the partition perturbation method," partitions the Markov-switching parameter space to keep a maximum number of time-varying parameters from perturbation. For this method to work in practice, we show how to reduce the potentially intractable problem of solving MSDSGE models to the manageable problem of solving a system of quadratic polynomial equations. We propose to use the theory of Gröbner bases for solving such a quadratic system. This approach allows us to first obtain all the solutions and then determine how many of them are stable. We illustrate the tractability of our methodology through two examples.
    Keywords: partition principle; naive perturbation; uncertainty; Taylor series; high-order expansion; time-varying coefficients; nonlinearity; Gröbner bases
    JEL: C6 E3 G1
    Date: 2014–08–01
  69. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large.
    Keywords: exchange rate regimes; basket-peg; floating regime; interest rate rules
    JEL: E42 F33 F41 F42
    Date: 2014–10–30
  70. By: Chen, Heng; Luo, Yulei; Pei, Guangyu
    Abstract: This paper examines the welfare properties of “beauty contest†games with rationally inattentive agents. Agents allocate attention between private and public signals to reduce the uncertainty about observation noises. In this setting, social welfare may not necessarily increase with the capacity to process information, and can actually decrease as a result of attention misallocation. Strikingly, social welfare can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
    Keywords: Coordination game, social welfare, rational inattention
    JEL: C72 D60 E58
    Date: 2014
  71. By: José Gabriel Palma
    Abstract: In an article published in Development and Change in 2011, I suggested an alternative measure of inequality to the Gini - a "19th Century statistic" - which has subsequently become known as the ´Palma Ratio'. In this new article, I revisit the argument for such a measure. Using new data, I examine whether the current remarkable homogeneity in the income share of the middle and upper-middle around the world - the foundation of the so-called 'Palma Ratio' - is an historically stable stylised fact, or whether it is a new phenomenon, the outcome of a process of convergence towards the current '50/50 Rule' (a state of affairs in which half of the population in each country located within deciles 5 to 9 tends to appropriate about 50 per cent of the national income). Although partly written in response to a comment on my 2011 paper, this article has evolved to become a further attempt at contributing to the literature on inequality and the statistics to measure it. As in my 2011 paper, in this one I also conclude that if we want to understand why inequality is so unequal across the world we have little choice but to keep reminding ourselves of what I believe to be the most crucial of all distributional stylisedfacts (highlighted by the sub-title of that article): "The share of the rich is what it's all about." The logic of the 'Palma Ratio' is precisely to emphasise this fact - as well as to draw attention to the increasingly artificial (i.e., self-constructed) foundations of growing inequality (as opposed to Piketty, I believe that 'r' is currently so much greater than 'g' as a direct result of human agency, and not as a supposed inevitable outcome of the workings of the invisible hand…). And if one not only wants to understand why inequality is so unequal across the world, but also get closer to understanding why growth is also so diverse, what we should write in our noticeboards is: "It's all about the share of the rich, and what they do with it". This is particularly important to understand if we really want to do something about inequality (and growth), because as someone rightly said long ago, philosophers have only interpreted the world in various ways; the point now is to change it.
    Keywords: income distribution; inequality; 'Palma Ratio'; homogeneous middle and upper- middle; convergence; institutional persistence; ideology; neo-liberalism; 'new left'; Latin America; Africa; Brazil; Chile; South Africa; United States.
    JEL: D31 E11 E22 E24 E25 I32 J31 N16 N30 N36 O50 P16
    Date: 2014–10–15
  72. By: Ali, Mohsin; Masih, Mansur
    Abstract: This paper investigates the time-varying relationship between the oil price and disaggregated stock market of India using DCC-MGARCH and Continuous Wavelet Transformation methodologies. Our findings reveal the evolving relationship between the oil price and disaggregated stock market. The correlations are generally volatile before the 2007-08 crisis but since then the correlations are positive implying no diversification benefits for the investors during rising oil prices. Since, emerging markets in general, and India in particular, is expected to increase its share of oil consumption in the world’s energy market (due to rapid expansion), therefore for the stock market to grow, especially the oil-intensive industries, we recommend the government should increase its reliance on alternative energy resources such as coal and renewables. Furthermore, as rising oil prices can also have its adverse effect through exchange rate channel, we suggest the monetary policies should be time varying to manage the oil inflationary pressures arising out of extreme volatility in the oil prices.
    Keywords: DCC-GARCH, CWT, Disaggregated stock market, India, Oil price shocks, Diversification
    JEL: C22 C58 E44 G11
    Date: 2014–08–24
  73. By: Waśniewski, Krzysztof
    Abstract: The present paper treats the issue of economic foundations, on which political power rests, and the specific problem of public debt in the developed countries. Starting from the general question: “Why do rich governments borrow so much?†the paper develops a model of political power based on the possession of capital, and on the transformation of public possession into private property rights. Empirical investigation follows, in a sample of 21 countries, demonstrating that there is an objectively existing transfer of capital from public borrowing to private property rights; that transfer is connected mostly to the property of non-productive assets, and goes beyond the easily inferable relation to net exports. That the transfer from public borrowing to private property rights is strongly correlated with the relative dispersion or concentration of power in the political system. We are witnessing a progressive withdrawal of public finance and public borrowing as a means of transferring capital, with a simultaneously growing idiosyncrasy (cross-sectinal variance) of fiscality.
    Keywords: fiscal policy, public debt, political power, political systems, property rights, institutional economics, macroeconomics
    JEL: E6 G1 H0 K0
    Date: 2014–11–01
  74. By: Roberto Martino; Phu Nguyen-Van
    Abstract: Deregulation of the labour market and public budget balance are usually consid- ered a fundamental requirement for economic performance. This study analyses the long term relationship between these indicators and gross value added (GVA) for a panel of European regions from 1995 to 2008. Following Olley and Pakes (1996) and Levinsohn and Petrin (2003), a structural equation is estimated using a two stages semi-parametric procedure. Results suggest no univocal evidence of a detri- mental effect of labour protection on long term GVA, while public deficit spending is positively associated with higher output. A negative relationship with debt arises only for economies with very high debt/GDP ratios.
    Keywords: Labour protection; convergence criteria; production function; European Union.
    JEL: C20 E23 O47 R11
    Date: 2014
  75. By: Ayub, Aishahton; Masih, Mansur
    Abstract: Understanding the empirical relationship between the exchange rates, interest rates and stock prices are important and useful to the policy makers, professional investors and academics. Although the scholars and practitioners have studied the subject extensively, few empirical studies are available in the context of the Islamic banking stock prices. In this paper, we make an humble attempt to fill in this gap in the empirical literature of Islamic banking, in particular. We use panel cointegration and panel vector error-correction (VECM) model to examine the existence and direction of the causal relationship between exchange rate, interest rate and Islamic banking sector stock prices using monthly data over the last five years. The VECM is employed to discern the short-run and long-run Granger causality by applying the dynamic Generalized Method of Moments (dynamic GMM). For 40 Islamic banks, the empirical results tend to indicate that the Islamic bank stock prices have negative significant relationship with the exchange rates but no significant relationship with the interest rates. In addition, we found that there exists a bidirectional Granger-causal relationship between the Islamic bank stock prices and exchange rates. This finding tends to suggest that this significant relationship between the exchange rates and Islamic bank stock prices should be borne in mind by the policy makers while formulating their policies.
    Keywords: Exchange rate; Interest rate; Islamic bank stock prices; panel cointegration; panel vector error-correction (VECM); dynamic GMM, Granger-causality
    JEL: C22 C58 E44
    Date: 2013–08–26
  76. By: Vincenzo Merella; Stephen E. Satchell
    Abstract: We show that the introduction in a power utility function of a confidence index to sig- nal the state of the world allows for an otherwise standard asset pricing model to match the observed consumption growth volatility and excess returns with a reasonable level of relative risk aversion. Our results stem from two quantitative exercises: a calibration and a non-linear estimation. In both cases, our findings are robust to di¤erent data frequen- cies and various indicators of confidence. Our estimations are also robust to a number of instrument specifications. We rationalise this finding by developing a model where monopo- listically competitive firms are subject to idiosyncratic shocks, which a¤ect both the quantity and the quality of the goods produced. When households foresee good times, they expect firms to generate higher profits and produce higher quality goods. While greater expected excess returns provide a larger incentive to save, better expected quality of consumption discourages saving, as it lowers the expected marginal utility of any given level of physi- cal consumption. Compared to standard consumption-based frameworks, our model thus predicts a more stable consumption path. Building on the customary notion of confidence indicators as the household expectations on the future state of the economy, we argue that confidence provides a suitable proxy for the unobservable quality of consumption via the positive correlation between the latter and the overall performance of the economy.
    Keywords: Asset Pricing, Consumer Confidence, Technology Shocks
    JEL: G12 E21
    Date: 2014
  77. By: Ratti, Ronald A.; Vespignani, Joaquin L.
    Abstract: Hamilton identifies 1973 to 1996 as “the age of OPEC†and 1997 to the present as “a new industrial age.†During 1974-1996 growth in non-OPEC oil production Granger causes growth in OPEC oil production. OPEC oil production decreases significantly with positive shocks to non-OPEC oil production in the earlier period, but does not do so in the “new industrial ageâ€. In the “new industrial age†OPEC oil production rises significantly with an increase in oil prices, unlike during “the age of OPEC†period. OPEC oil production responds significantly to positive innovations in global GDP throughout. Over 1997:Q1-2012:Q4 the negative effect on real oil price of positive shocks to non-OPEC oil production is larger in absolute value than that of positive shocks to OPEC oil production. The cumulative effects of structural shocks to non-OPEC oil production and to real oil price on OPEC oil production are large. The cumulative effects of structural shocks to OPEC production and real oil price on non-OPEC production are small. Results are robust to changes in model specification. An econometric technique to predict OPEC oil production provides support for the results from the SVAR analysis. Results are consistent with important changes in the global oil market.
    Keywords: OPEC production, non-OPEC, oil Price, global oil market
    JEL: E0 E1 E10 Q4
    Date: 2014–10–01
  78. By: David Hincapié Vélez
    Abstract: Resumen: Este artículo pretende determinar si existió, para el periodo 2003-2010, un proceso de convergencia de las transferencias per cápita que el gobierno destina a las Instituciones de Educación Superior Públicas –IESP- y, así mismo, en los niveles de calidad de estas universidades. Mediante el uso de técnicas no paramétricas de estimación de Kernel Estocásticas se concluye que no hay evidencia de un proceso de convergencia en ambas variables y que, además, la forma en la que se ha dirigido el gasto público ha condicionado y determinado la distribución de la calidad de las IES públicas en el periodo, formando en el largo plazo un escenario de retrocesos en materia de calidad.
    Keywords: Convergencia; Kernel Estocástica; Calidad Educativa; Financiamiento Educativo; Gasto Público.
    JEL: C00 C02 C14 C40 E62
    Date: 2013–12–16
  79. By: Liu, Huju; Gu, Wulong; Baldwin, John R.
    Abstract: This paper examines the investment performance of Canada and the United States, exploring similarities and differences in investments in fixed assets over the 1990-to-2011 period. This is a period when the two countries experienced different shocks. The United States suffered from a major decline in its housing markets after 2007 that did not hit Canada. The world-resource boom in the post-2000 period had a greater impact on Canada than it did on the United States. The Canada?United States exchange rate appreciated dramatically after 2003 thereby making imported machinery and equipment relatively less expensive in Canada. The comparison is primarily based on investment intensity, measured as the ratio of nominal dollar investment to nominal gross domestic product (GDP), but rates of growth of the volume of investment relative to the volume of GDP are also compared.
    Keywords: Business cycles, Business performance and ownership, Economic accounts, Gross domestic product, Productivity accounts
    Date: 2014–10–21
  80. By: Comunale, Mariarosaria
    Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on inflation in the euro zone. We divide the euro zone members in two groups of countries: "core" (closely related to Germany) and "periphery", testing if the euro-US dollar exchange rate is still able to give a different impact on the groups ’ performance as in the past US dollar-deutschmark polarization phenomenon. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, testing for the asymmetry. Estimating the model with the first type of method, the exchange rate pass-through coefficient is always significant but the asymmetry between the groups is rejected. Using the common correlated effects mean group estimator we find that the coefficient is significantly negative only for core countries and the hypothesis of asymmetry is confirmed. Note that the significance disappears if we control for the first three years of EMU, but the coefficients for core and periphery have opposite sign in any case. Instead, other unobservable factors, representing global events or spillovers effects, play a relevant role in all the specifications. By using the nominal effective exchange rate instead, we found a significant coefficient in case of the whole EMU, while the elasticities for core and periphery are not statistically different from zero. Based on these results, we can conclude that the euro-US dollar is an important factor, but not the only key factor, in determining the asymmetry in inflation between core and periphery. The nominal effective exchange rate instead is a very important driver for the inflation only considering the whole euro zone. Therefore, the EMU seems to not have insulate enough some member countries from shocks coming from outside, as in the case of nominal exchange rate shocks.
    Keywords: Exchange Rate Pass-Through, Dynamic Panel Data, Inflation, Exchange Rates,European Monetary Union, Cross-sectional dependence
    JEL: C33 E31 F31 F36 F41
    Date: 2014–07
  81. By: Campante, Filipe (Harvard University); Yanagizawa-Drott, David (Harvard University)
    Abstract: We study the economic effects of religious practices in the context of the observance of Ramadan fasting, one of the central tenets of Islam. To establish causality, we exploit variation in the length of the fasting period due to the rotating Islamic calendar. We report two key, quantitatively meaningful results: 1) longer Ramadan fasting has a negative effect on output growth in Muslim countries, and 2) it increases subjective well-being among Muslims. We then examine labor market outcomes, and find that these results cannot be primarily explained by a direct reduction in labor productivity due to fasting. Instead, the evidence indicates that Ramadan affects Muslims' relative preferences regarding work and religiosity, suggesting that the mechanism operates at least partly by changing beliefs and values that influence labor supply and occupational choices beyond the month of Ramadan itself. Together, our results indicate that religious practices can affect labor supply choices in ways that have negative implications for economic performance, but that nevertheless increase subjective well-being among followers.
    JEL: E20 J20 O40 O43 Z12
    Date: 2013–12
  82. By: Alcides Gómez Jiménez
    Abstract: Resumen: Se confrontan las visiones sobre el desarrollo económico de Colombia en el lapso de unsiglo (1905-2008) en las obras representativas principalmente de Salomón Kalmanovitz y deJosé Antonio Ocampo respecto a la evolución del PIB por habitante en las distintas fases delcrecimiento económico del país, con una pérdida de dinamismo gradual al pasar del tiempo yse indaga particularmente el significado de la tendencia más pronunciada con la pérdida de vigordel crecimiento de la productividad del trabajo. En la comparación internacional (1900-2008) deOcampo, se cuestiona el punto de partida en 1900 y se señala, a partir de sus cifras, cómo seobtienen resultados de tendencia diametralmente opuestos con sus datos para el período 1913-2008. Finalmente se destaca que el gran obstáculo para el desarrollo radica en las desigualdadeshistóricamente crecientes respecto al acceso a recursos (tierra) y a los ingresos.
    Keywords: Transición demográfica, crecimiento y desarrollo económico, fases, PIB por habitante, productividad, desigualdad, economic growth, GDP per capita, inequality, demographic transition
    JEL: J11 E25 E3
    Date: 2013–06–27
  83. By: Swamy, Vighneswara
    Abstract: In a move towards effective management of interest rate risk in Indian banking, in addition to the existing return on Interest Rate Sensitivity under Traditional Gap Analysis, a new return is being introduced to monitor the interest rate risk using Duration Gap Analysis (DGA), called Interest Rate Sensitivity under Duration Gap Analysis (IRSD). The DGA involves bucketing of all Risk Sensitive Assets (RSA) and Risk Sensitive Liabilities (RSL) as per residual maturity/re-pricing dates in various time bands and computing the Modified Duration Gap (MDG). One of the important things to note is that the RSA and RSL include the rate-sensitive off-balance sheet assets and liabilities as well. MDG can be used to evaluate the impact on the Market Value of Equity (MVE) of the bank under different interest rate scenarios. The past few years have seen banks’ foray into financing long-term assets, such as home loans and infrastructure projects. Banks have been allowed to raise funds through long-term bonds with a minimum maturity of five years to the extent of their exposure of residual maturity of more than five years to the infrastructural sector. This article attempts to illustrate the significance of interest rate risk management and approaches towards its management in the Indian context.
    Keywords: Interest Rate Risk Management, Duration Gap Analysis, Maturity Gap Analysis, Risk Sensitivity, Modified Duration Gap, Banking Risk
    JEL: E40 E43 E44 G20
    Date: 2013
  84. By: Matthias Gubler
    Abstract: In this empirical study, we analyze the relationship between carry trade positions and some key financial as well as macroeconomic variables using a multivariate threshold model. It is often stated that the Swiss franc serves as a funding currency. We therefore focus on carry trades based on the USD/CHF and EUR/CHF currency pairs over the period from 1995 to mid-2008. We conclude that carry trades are driven to a large extent by changes in investors' risk sentiment, movements in stock market prices and exchange rate fluctuations. The adjustments of carry trade positions to unexpected movements in these variables vary between periods of high and low interest-rate differentials (IRD). While a positive shock to the IRD is followed by a rise in carry trade positions during a period of low IRD, it will trigger a decline in these positions during a period of high IRD. These results suggest that the shock to the IRD itself is not enough to compensate investors for the increased foreign exchange risk. Moreover, a positive stock market price shock is associated with a rise in carry trade positions, since investors may use stock portfolios as collateral for liquidity. A sudden unwinding of carry trades leads to significant Swiss franc appreciation. Furthermore, carry trade activities 'Granger-cause' the nominal exchange rate in periods of low IRD. The Granger causality test results further indicate feedback trading.
    Keywords: Carry Trades, Multivariate Threshold Model, Tsay Test, Generalized Impulse Response Functions, Bootstrap Method, Granger Causality
    JEL: C15 C32 E44
    Date: 2014
  85. By: Séne, Ligane Massamba
    Abstract: In the wake of the 2008 food crisis, prices of food staples in Senegal rose, with a new wave driven by international price shocks and a decline in productivity; these effects caused sub-optimal performance in the agricultural sector. This paper attempts to identify the implications of these recent price movements on the economy and on the welfare of general households. Our results show that non-agricultural households in rural areas are hurt the most by changes in the prices of staple foods; in urban areas, it appears that higher food prices may substantially affect agricultural households. The simulated low-magnitude changes in transaction costs in the agricultural sector have an impact on poverty.
    Keywords: food prices, food security, productivity, poverty reduction, agriculture, Computable General Equilibrium Model
    JEL: E31 I32 Q17 Q18
    Date: 2014–09–24
  86. By: Augustin Kwasi Fosu, Yoseph Getachew, Thomas H.W. Ziesemer
    Abstract: This paper develops a model positing a nonlinear relationship between public investment and growth. The model is then applied to a panel of African countries using nonlinear estimating procedures. The growth-maximizing level of public investment is estimated at about 10 percent of GDP based on System GMM estimation. The paper further runs simulations, obtaining the constant optimal public investment share that maximizes the sum of discounted consumption as between 8:1 percent and 9:6 percent of GDP. Compared with the observed end-of-panel mean value of no more than 7:26 percent, these estimates suggest that there has been significant public under-investment in Africa.
    Keywords: Public Investment and Growth, Africa
    JEL: D3 E1 O4
    Date: 2014
  87. By: Masih, Mansur; Majid, Hamdan Abdul
    Abstract: This study accounts for the time-varying pattern of price shock transmission, exploring stock market co-movements using continuous wavelet coherency methodology to find the correlation analysis between stock market indices of Malaysia, Thailand (Asian), Greece (Europe) and United States, in the time-frequency domain of time-series data. We employ the Wavelet Coherence method with the consideration of the financial crisis episodes of 1997 Asian Financial Crisis, 1998 Russian Sovereign Debt Default, 9/11 Attack on World Trade Centre US, 2008 US Sub-Prime Mortgage Crisis and the recent 2010-2011 Greece Debt Crisis. Results tend to indicate that the relations among indices are strong but not homogeneous across time scales, that local phenomena are more evident than others in these markets and that there seems to be no quick transmission through markets around the world, but a significant time delay. The relations among these indices have changed and evolved through time, mostly due to the financial crises that occurred at different time periods. Results also favour the view that regionally and economically closer markets exhibit higher correlation and more short run co-movements among them. The high correlation between the two regional indices of Malaysia and Thailand, indicates that for the international investors, it is little gain to include both in their portfolio diversification. Strong co-movement is mostly confined to long-run fluctuations favouring contagion analysis. This indicates that shocks in the high frequency but low period are short term but shocks in the low frequency but high period are long term with the trend elements affecting the co-movements of the indices. The study of market correlations on the frequency-time scale domain using continuous wavelet coherency is appealing and can be an important tool in decision making for different types of investors.
    Keywords: stock market comovement; continuous wavelet transform; cross-wavelet; wavelet coherency; frequency-time scale domain
    JEL: C22 C58 E44 G15
    Date: 2013–12–20
  88. By: Felipe Castro
    Abstract: Este estudio es una iniciativa de la Confederación Colombiana del Algodón (Conalgodón), del Fondo de Fomento Algodonero y del Ministerio de Agricultura y Desarrollo Rural, para adelantar un análisis de competitividad de la cadena algodón, fibras, textiles y confecciones. El estudio tiene como objetivo desarrollar un análisis del estado actual de la cadena y el grado de articulación de los diferentes eslabones de cara a los retos que enfrenta actualmente.
    Keywords: Cadena productiva, Competitividad, Industria del algodón, Industria textil, Industria de la confección, Costos de producción, Desarrollo productivo
    JEL: E23 L67 D24
    Date: 2013–11–29
  89. By: Toro Gonzalez, Daniel
    Abstract: The aim of the present routine is to simulate a demand equation with endogenous prices and unobservable product quality and to retrieve the original parameters using the Control Function (CF) approach. The CF approach is a very useful and simple method to obtain unbiased estimates. The present R code helps to understand the underlying structure of the endogeneity problem in demand estimations. Results support the important bias correction of the CF approach.
    Keywords: R, Control Function, Demand Analisis, Endogeneity
    JEL: C13 C15 D49 E27
    Date: 2014–09–18
  90. By: Jon Frost; Ruben van Tilburg
    Abstract: This paper empirically examines the impact of capital flows on credit growth, credit excesses and banking crises using quarterly panel data from 43 advanced (AEs) and emerging market economies (EMEs). Regressions show that gross capital inflows precede credit growth and credit excesses. Both gross inflows and high private domestic credit precede banking crises. Formalized hypotheses allow us to study whether domestic or international drivers more frequently precede banking crises, and thus to evaluate "financial globalization" and the "great financial expansion" as explanations for country vulnerability to banking crises. Our evidence provides support for both narratives as drivers of country vulnerability; financial globalization seems to matter particularly for EMEs. We also provide some ground for caution on the effectiveness of capital controls and the desirability of very high levels of private credit to GDP.
    Keywords: Gross capital flows; credit bubbles; financial globalization; banking crises
    JEL: E51 F32 G01 G15
    Date: 2014–10
  91. By: Francisco Blasques; Siem Jan Koopman; Andre Lucas; Julia Schaumburg (VU University Amsterdam)
    Abstract: We introduce a new model for time-varying spatial dependence. The model extends the well-known static spatial lag model. All parameters can be estimated conveniently by maximum likelihood. We establish the theoretical properties of the model and show that the maximum likelihood estimator for the static parameters is consistent and asymptotically normal. We also study the information theoretic optimality of the updating steps for the time-varying spatial dependence parameter. We adopt the model to empirically investigate the spatial dependence between eight European sovereign CDS spreads over the period 2009--2014, which includes the European sovereign debt crisis. We construct our spatial weight matrix using cross-border lending data and include country-specific and Europe-wide risk factors as controls. We find a high, time-varying degree of spatial spillovers in the sovereign CDS spread data. There is a downturn in spatial dependence after the first half of 2012, which is consistent with policy measures taken by the European Central Bank. The findings are robust to a wide range of alternative model specifications.
    Keywords: Spatial correlation, time-varying parameters, systemic risk, European debt crisis, generalized autoregressive score
    JEL: C13 C32 C53 E17
    Date: 2014–08–14
  92. By: Mauricio Reina; Felipe Castro
    Abstract: El documento se divide en cuatro secciones adicionales a esta introducción. En una primera sección se propone una mirada detallada a la evolución de la economía desde sus principales indicadores macroeconómicos y de productividad. El objetivo es comparar el desempeño económico del país a nivel mundial y regional, y evaluar los logros y los fracasos en perspectiva. La segunda sección realiza una recopilación por cuatrienios de las iniciativas que promovieron la competitividad o productividad desde diferentes estamentos gubernamentales. Estas incluyen políticas industriales y/o comerciales e iniciativas de ciencia e investigación. La tercera sección presenta un recuento del papel que ha jugado la empresa privada alrededor de los principales hitos de la competitividad nacional incluyendo su participación y percepción de los principales programas y políticas colectivas o particulares. Asimismo, esta sección se complementa con las conclusiones sobre los principales problemas y factores de éxito asociados a la experiencia exportadora fruto de una serie de entrevistas y encuestas realizadas por Fedesarrollo en el transcurso del proyecto. El cuarto y último aparte del documento se centra en la identificación de los elementos que hicieron algunos programas y políticas casos de éxito en los últimos 20 años, los cuales se comentan en las recomendaciones del estudio.
    Keywords: Competitividad, Productividad, Desarrollo Productivo, Política industrial, Política económica, Economía colombiana, Economía internacional
    JEL: E63 D24 O47 E65
    Date: 2013–12–19
  93. By: Arias, Jonas E. (Federal Reserve Board of Governors); Rubio-Ramirez, Juan F. (Duke University); Waggoner, Daniel F. (Federal Reserve Bank of Atlanta)
    Abstract: Are optimism shocks an important source of business cycle fluctuations? Are deficit-financed tax cuts better than deficit-financed spending to increase output? These questions have been previously studied using structural vector autoregressions (SVAR) identified with sign and zero restrictions and the answers have been positive and definite in both cases. Although the identification of SVARs with sign and zero restrictions is theoretically attractive because it allows the researcher to remain agnostic with respect to the responses of the key variables of interest, we show that current implementation of these techniques does not respect the agnosticism of the theory. These algorithms impose additional sign restrictions on variables that are seemingly unrestricted that bias the results and produce misleading confidence intervals. We provide an alternative and efficient algorithm that does not introduce any additional sign restriction, hence preserving the agnosticism of the theory. Without the additional restrictions, it is hard to support the claim that either optimism shocks are an important source of business cycle fluctuations or deficit-financed tax cuts work best at improving output. Our algorithm is not only correct but also faster than current ones.
    Keywords: identification; sign restrictions; simulation
    JEL: C11 C32 E50
    Date: 2014–02–01

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