nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒11‒22
99 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Credit, bankruptcy, and aggregate fluctuations By Nakajima, Makoto; Rios-Rull, Jose-Victor
  2. Optimal Monetary Policy in a Currency Union: Implications of a Country-specific Cost Channel By Jochen Michaelis; Jakob Palek
  3. Examining the Success of the Central Banks in Inflation Targeting Countries: The Dynamics of Inflation Gap and the Institutional Characteristics By Ardakani, Omid; Kishor, N. Kundan
  4. Inflation Dynamics During the Financial Crisis By Simon Gilchrist; Raphael Schoenle; Jae W. Sim; Egon Zakrajsek
  5. Total Factor Productivity and the Propagation of Shocks; Empirical Evidence and Implications for the Business Cycle By Eric Mayer; Sebastian Rüth; Johann Scharler
  6. Ressursrikdom og Rikardiansk ekvivalens By Mohn, Klaus
  7. Review over Empirical Evidence on Real Effects of Monetary Policy By Sun, Rongrong
  8. Uncertainty shocks: it's a matter of habit By Bonciani, Dario
  9. Real-Time Measures of the Output Gap and Fiscal Policy Stance By Virkola, Tuomo
  10. The Role of Economic Policy Uncertainty in Forecasting US Inflation Using a VARFIMA Model By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  11. Solving forward-looking models of cross-country adjustment within the euro area By Torój, Andrzej
  12. The Reaction of Government Spending to the Business Cycle: Some International Evidence By Juan F. Guerra-Salas
  13. Low real rates as driver of secular stagnation: empirical assessment By Jan Willem van den End; Marco Hoeberichts
  14. Costly information, planning complementarities and the Phillips Curve By Acharya, Sushant
  15. Analyzing the Taylor Rule with Wavelet Lenses By Luís Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  16. Kiss me deadly: From Finnish great depression to great recession By Gulan, Adam; Haavio, Markus; Kilponen, Juha
  17. Sri Lanka: First Post-Program Monitoring Discussion-Staff Report; Press Release; and Statement by the Executive Director for Sri Lanka By International Monetary Fund. Asia and Pacific Dept
  18. Government Spending Shocks in Open Economy VARs By Mario Forni; Luca Gambetti
  19. Structural Stability of the Generalized Taylor Rule By Barnett, William A.; Duzhak, Evgeniya A.
  20. Dual regime fiscal multipliers in converging economies - a simplified STVAR approach By Michal Bencik
  21. Sri Lanka: 2014 Article IV Consultation and Second Post-Program Monitoring Discussion-Staff Report; Press Release By International Monetary Fund. Asia and Pacific Dept
  22. Cause and cure of the crisis By Colignatus, Thomas
  23. Current account imbalances in the Euro area: Competitiveness or financial cycle? By Mariarosaria Comunale; Jeroen Hessel
  24. Working Less and Bargain Hunting More: Macro Implications of Sales during Japan's Lost Decades By Sudo, Nao; Ueda, Kozo; Watanabe, Kota; Watanabe, Tsutomu
  25. Saudi Arabia: 2014 Article IV Consultation-Staff Report; Press Release By International Monetary Fund. Middle East and Central Asia Dept.
  26. Towards the end of deflation in Japan ? : Monetary policy under abenomics and the role of the central bank By Mahito Uchida
  27. The Federal Democratic Republic of Ethiopia: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia By International Monetary Fund. African Dept.
  28. Home Production and Small Open Economy Business Cycles By Chen, Kuan-Jen; Chu, Angus C.; Lai, Ching-Chong
  29. A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics By Wayne, James J.
  30. State Fiscal Policies and Regional Economic Activity By Matthias Uhl
  31. Stabilising expenditure rule in Poland – stochastic simulations for 2014-2040 By Korniluk, Dominik
  32. Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle By Meyer, Brent; Venkatu, Guhan
  33. Time-consistent consumption taxation By Sarolta Laczo; Raffaele Rossi
  34. Myanmar: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Myanmar By International Monetary Fund. Asia and Pacific Dept
  35. Nowcasting global economic growth: A factor-augmented mixed-frequency approach. By L. Ferrara; C. Marsilli
  36. The Federal Reserve in a Globalized World Economy By Taylor, John B.
  37. Cabo Verde: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Cabo Verde By International Monetary Fund. African Dept.
  38. Overlending and Macroprudential Tools By Natalie Tiernan; Pedro Gete
  39. A Theory of Price Adjustment under Loss Aversion By Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
  40. Sacrifice Ratios for Euro Area Countries: New Evidence on the Costs of Price Stability By Ansgar Belke; Tobias Böing
  41. Estimating fluctuations in oil and gas investment By Dahl, Roy A; Osmundsen, Petter
  42. L’impact de la politique monétaire unique sur l’économie de la zone CEMAC: une approche par la modélisation VAR structurelle et bayésienne By Kuikeu, Oscar
  43. Cyprus: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Cyprus By International Monetary Fund. European Dept.
  44. Evaluating a Structural Model Forecast: Decomposition Approach By Frantisek Brazdik; Zuzana Humplova; Frantisek Kopriva
  45. Modelling the Impact of New Capital Regulations on Bank Profitability By Swamy, Vighneswara
  46. Communicating a systematic monetary policy By Plosser, Charles I.
  47. The Relevance of International Spillovers and Asymmetric Effects in the Taylor Rule By Joscha Beckmann; Ansgar Belke; Christian Dreger
  48. The surprisingly low importance of income uncertainty for precaution By Scott Fulford
  49. Real-time nowcasting the US output gap: Singular spectrum analysis at work By Miguel de Carvalho; António Rua
  50. GDPNow: A Model for GDP "Nowcasting" By Higgins, Patrick C.
  51. Understanding Food Inflation in India By Sen Gupta, Abhijit; Bhattacharya, Rudrani; Rao, Narhari
  52. Why can sectoral shocks lead to sizable macroeconomic fluctuations? Assessing alternative theories by means of stochastic simulation with a general equilibrium model By Roberto Roson; Martina Sartori
  53. Uncertainty and the geography of the Great Recession By Stan Veuger; Daniel Shoag
  54. What We Don't Know Doesn't Hurt Us: Rational Inattention and the Permanent Income Hypothesis in General Equilibrium By Luo, Yulei; Nie, Jun; Wang, Gaowang; Young, Eric
  55. Elasticity of substitution and the slowdown of the Italian productivity By Saltari, Enrico; Federici, Daniela
  56. Labor Unions, Directed Technical Change and Cross-Country Income Inequality By Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
  57. Re-Coinage in Medieval Sweden By Svensson, Roger
  58. Portfolio Choice with Information-Processing Limits By Batchuluun, Altantsetseg; Luo, Yulei; Young, Eric
  59. Democratic Republic of the Congo: Financial System Stability Assessment By International Monetary Fund. Monetary and Capital Markets Department
  60. Genuine Savings and Sustainability By Nick Hanley; Louis Dupuy; Eoin McLaughlin
  61. Effects of Agricultural Productivity Shocks on Female Labor Supply: Evidence from the Boll Weevil Plague in the US South By Ager, Philipp; Brückner, Markus; Herz, Benedikt
  62. Gold, Stock Price, Interest Rate and Exchange Rate Dynamics: An MS VAR Approach By Kal, Süleyman Hilmi; Arslaner, Ferhat; Arslaner, Nuran
  63. Logit Price Dynamics By Anton Nakov; James Costain
  64. A Critical Marxist Simple Approach to Capital Theory By Cavalieri, Duccio
  65. A Life-Cycel Model with Ambiguous Survival Beliefs By Max Groneck; Alexander Ludwig
  66. Are government interventions effective in regulating Chinafs house prices? By Nannan Yuan; Shigeyuki Hamori
  67. Selection Effects in Producer-Price Setting By Carlsson, Mikael
  68. La transitoriedad histórica del capital: La tendencia descendente de la tasa de ganancia desde el siglo XIX By Maito, Esteban Ezequiel
  69. Burundi: 2014 Article IV Consultation, Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility; and Request for Modification of Performance Criteria-Staff Report; Press Release; and Statement by the Executive Director for Burundi By International Monetary Fund. African Dept.
  70. Rethinking the Twin Deficits By Constantine, Collin
  71. Bounding the productivity default shock : Evidence from the The European Sovereign Debt Crisis By Alonso-Ortiz, Jorge; Colla, Esteban; Da-Rocha, Jose-Maria
  72. What Bitcoin Looks Like? By Bouoiyour, Jamal; Selmi, Refk
  73. Estabilidad política y poder fiscal By Estrada, Fernando
  74. Characteristics of Bitcoin Users: An Analysis of Google Search Data By Wilson, Matthew; Yelowitz, Aaron
  75. The Relationship between Exchange Rates and Islamic Indices in Malaysia FTSE Market: A Wavelet Based Approach By Ayub, Aishaton; Masih, Mansur
  76. Spotting the Danger Zone - Forecasting Financial Crises with Classification Tree Ensembles and Many Predictors By Felix Ward
  77. Legitimacy and the Cost of Government By Berggren, Niclas; Bjørnskov, Christian; Lipka, David
  78. What Drives Housing Dynamics in China? A Sign Restrictions VAR Approach By Bian, Timothy Yang; Gete, Pedro
  79. AbsorbÅ£ia fondurilor structurale ÅŸi de coeziune în Romania: bilanÅ£ul perioadei 2007-2013 ÅŸi lecÅ£ii pentru exerciÅ£iul financiar curent By Zaman, Gheorghe; Georgescu, George
  80. Fiscal policy and TFP in the OECD : Measuring direct and indirect effects By Gerdie Everaert; Freddy Heylen; Ruben Schoonackers
  81. Separations, Sorting and Cyclical Unemployment By Andreas Mueller
  82. La macroéconomie à l'épreuve des faits By Jean-Luc Gaffard
  83. The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? By Kakarot-Handtke, Egmont
  84. A case for redistribution? Income inequality and wealth concentration in the recent crisis By Thomas Goda; Özlem Onaran; Engelbert Stockhammer
  85. Decomposition of welfare distribution in Iran By Mazyaki, Ali; Davodi, Pedram
  86. Bank Size, Risk Diversification and Money Markets By Hugo Rodríguez Mendizábal
  87. The real exchange rate as a target of macroeconomic policy By Frenkel, Roberto; Rapetti, Martin
  88. Bank regulation, supervision and efficiency during the global financial crisis By Swamy, Vighneswara
  89. Low Frequency and Weighted Likelihood Solutions for Mixed Frequency Dynamic Factor Models By Francisco Blasques; Siem Jan Koopman; Max Mallee
  90. On International Consumption Risk Sharing, Financial Integration and Financial Development By Yasin Mimir
  91. Domestic Credit in Times of Supervision: An Empirical Investigation of European Countries By Thomas Jobert; Alexandru Monahov; Anna Tykhonenko
  92. The Synthesis of Economic Law, Evolution, and History By Kakarot-Handtke, Egmont
  93. Modeling Systematic Risk and Point-in-Time Probability of Default under the Vasicek Asymptotic Single Risk Factor Model Framework By Yang, Bill Huajian
  94. From Micro to Macro via Production Networks By Vasco M. Carvalho
  95. O Brasil na contramão: a redução da desigualdade durante a crise mundial By Ana Paula Fregnani Colombi; Laura Carla Moisa Elicabide; Rita Petra Kallabis
  96. Elaboración de proyecciones de mediano plazo de actividad económica regional 2013 – 2017 By Martha Delgado; Leonardo Villar; Jonathan Malagón
  97. Credit risk measurement, leverage ratios and Basel III: proposed Basel III leverage and supplementary leverage ratios By Ojo, Marianne
  98. Productivity and welfare: an application to the Spanish banking industry By Alfredo Martín Oliver; Sonia Ruano Pardo; Vicente Salas Fumás
  99. Are banks’ below-par own debt repurchases a cause for prudential concern? By Lubberink, Martien

  1. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Rios-Rull, Jose-Victor (Federal Reserve Bank of Philadelphia)
    Abstract: We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption.
    Keywords: Consumer credit; Default; Bankruptcy; Debt; Business cycle; Heterogeneous agents; Incomplete markets
    JEL: D91 E21 E32 E44 K35
    Date: 2014–10–20
  2. By: Jochen Michaelis (University of Kassel); Jakob Palek (University of Kassel)
    Abstract: There is growing empirical evidence that the strength of the cost channel of monetary policy differs across countries. Using a New Keynesian model of a two-country monetary union, we show how the introduction of a cost channel (differential) alters the optimal monetary responses to union-wide and national shocks. The cost channel makes monetary policy less effective in combating inflation, but it is shown that the optimal response to the decline in effectiveness is a stronger use of the instrument. On the other hand, the larger the cost channel differential, the less aggressive will the optimal monetary policy be. For almost all parameter constellations, our welfare analysis suggests a clear-cut ranking of policy regimes: commitment outperforms the Taylor rule, the Taylor rule outperforms strict inflation targeting, and strict inflation targeting outperforms discretion.
    Keywords: cost channel; optimal monetary policy; monetary union; open economy macroeconomics
    JEL: E31 E52 F41
    Date: 2014
  3. By: Ardakani, Omid; Kishor, N. Kundan
    Abstract: This paper analyzes the performance of central banks in 27 inflation targeting countries by examining their success in achieving their explicit inflation targets. For this purpose, we decompose the inflation gap, the difference between actual inflation and inflation target, into predictable and unpredictable components. We argue that the central banks are successful if the predictable component in the inflation gap diminishes over time. The predictable component of inflation gap is measured by the conditional mean of a time-varying autoregressive model. Our results find considerable heterogeneity in the success of these IT countries in achieving their targets at the start of this policy regime. Our findings also suggest that the central banks of the IT adopting countries started targeting inflation implicitly before becoming an explicit inflation targeter. The panel data analysis suggests that the relative success of these countries in reducing the gap is influenced by their institutional characteristics particularly by fiscal discipline and macroeconomic performance.
    Keywords: Inflation targeting, inflation gap, predictability, time-varying autoregressive model, institutional characteristics
    JEL: C32 C53 E31 E37 E52 E58
    Date: 2014–09–07
  4. By: Simon Gilchrist (Boston University and NBER); Raphael Schoenle (Brandeis University); Jae W. Sim (Federal Reserve Board); Egon Zakrajsek (Federal Reserve Board)
    Abstract: Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms’ financial conditions on their price-setting behavior during the “Great Recession.” The evidence indicates that during the height of the crisis in late 2008, firms with “weak” balance sheets increased prices significantly, whereas firms with “strong” balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeco- nomic shocks. We explore the implications of these empirical findings within the New Keynesian general equilibrium framework that allows for customer markets and departures from the fric- tionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment oppor- tunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks.
    Keywords: Producer Price Inflation; Customer Markets; Financial Frictions
    JEL: E31 E32 E44
    Date: 2013–09
  5. By: Eric Mayer; Sebastian Rüth; Johann Scharler
    Abstract: Using a sign restrictions approach, we document that total factor productivity (TFP) moves counter-cyclically in the aftermath of supply and demand side shocks. To interpret our empirical results, we conduct counter-factual simulations, based on a New Keynesian DSGE model in which TFP fluctuates endogenously due to time-varying labor effort. The simulations show that the decline in the output gap, following an adverse shock, is dampened by the endogenously improving TFP as long as the nominal interest rate remains strictly positive during the downturn. If the economy hits the zero lower bound, the decline in the output gap is amplified when TFP improves endogenously.
    Keywords: TFP, labor effort, zero lower bound
    JEL: E24 E30 E32 E40
    Date: 2014–10
  6. By: Mohn, Klaus (UiS)
    Abstract: .
    Keywords: Ressursrikdom; sparing; finanspolitikk
    JEL: D91 E21 E61 Q33
    Date: 2014–11–05
  7. By: Sun, Rongrong
    Abstract: This paper reviews and discusses the empirical literature on the impact of monetary policy on output. We focus on the evolution of methods that these studies have applied and demonstrate the established fact that monetary policy has significant impact on output. Throughout the review, we particularly highlight two problems in estimating the effects of monetary policy: the problem of how to measure monetary policy and the identification problem.
    Keywords: monetary policy, non-neutrality, systematic monetary policy reactions, vector autoregression
    JEL: E42 E52 E58
    Date: 2014–08
  8. By: Bonciani, Dario
    Abstract: This paper provides empirical and theoretical evidence that uncertainty shocks have strong asymmetric effects on economic activity. Specifically, in the empirical analysis I find that uncertainty shocks dampen investment and consumption twice as much during recessions than in "normal" times. In the theoretical analysis I employ a sticky-prices general equilibrium model featuring external habit formation to show that the asymmetric effects of uncertainty shocks can be explained by countercyclical fluctuations in precautionary savings.
    Keywords: Uncertainty Shocks, STVAR, External habits, Precautionary savings.
    JEL: E21 E32
    Date: 2014–10–19
  9. By: Virkola, Tuomo
    Abstract: This paper studies real-time measures of the output gap and fiscal policy stance estimates for EU countries. We construct a comprehensive real-time data set on fiscal forecasts and study whether there are systematic differences between the European Commission and IMF estimates of the output gap and structural budget balance. We argue that differences in the EC and the IMF estimates should provide a lower bound for the potential heterogeneity that is likely to emerge when national governments begin to release their estimates of the output gap and structural budget balance as required by the new fiscal rules in the EU. We find evidence that while the two institutions are likely to agree on cyclical conditions and fiscal policy measures in EU countries after the fact, there are statistically significant differences in their real-time estimates of the output gap and structural budget balance.
    Keywords: business cycles, fiscal policy, forecasting
    JEL: E32 E62 H68
    Date: 2014–10–31
  10. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We compare inflation forecasts of a vector fractionally integrated autoregressive moving average (VARFIMA) model against standard forecasting models. U.S. inflation forecasts improve when controlling for persistence and economic policy uncertainty (EPU). Importantly, the VARFIMA model, comprising of inflation and EPU, outperforms commonly used inflation forecast models.
    Keywords: Inflation, long-range dependency, economic policy uncertainty
    JEL: C53 E37
    Date: 2014–10
  11. By: Torój, Andrzej (Ministry of Finance in Poland)
    Abstract: This paper generalizes the standard methods of solving rational expectations models to the case of time-varying nonstochastic parameters, recurring in a finite cycle. Such a specification occurs in a simple stylized New Keynesian model of the euro area when we combine the rotation in the ECB Governing Council (as constituted by the Treaty of Nice) and home bias in the interest rate decisions taken by its members. In small and mid-size economies, this combination slightly increases output and inflation volatility, as compared to a monetary policy setup without rotation. The method of Christiano (2002) has also been applied to solve the model when we assume a lagged perception of foreign macroeconomic shocks by domestic agents. When the cross-country synchronization of shocks is low or moderate and when these shocks are relatively persistent, the exclusion of contemporaneous foreign shocks from domestic agents' information sets may raise the volatility of output. There is also some tentative evidence that this effect could particularly affect mid-size economies.
    Keywords: EMU; monetary policy; solving rational expectations models; generalized Schur decomposition; heterogeneity
    JEL: C32 C61 E52 F15
    Date: 2009–09–04
  12. By: Juan F. Guerra-Salas (Fordham University)
    Abstract: This paper studies how the spending side of fiscal policy reacts to the business cycle. I find that between 2000 and 2012, government spending is forward-looking in a number of countries—it reacts to forecasts of economic activity rather than to past economic realizations. I also study whether the response of government spending is countercyclical or procyclical. Spending responds countercyclically in countries such as the United States, Belgium, and Finland—when governments in these countries expect GDP to be below trend, they increase spending, and vice versa. In contrast, spending responds procyclically in places such as the United Kingdon, Argentina, and Ecuador—when governments in these countries expect GDP to be below trend, they decrease spending, and vice versa. The methodology I use exploits the fact that the government cannot forecast economic activity perfectly. The presence of shocks that cannot be forecast allows me to estimate reaction parameters under the framework of the Generalized Method of Moments.
    Keywords: Government spending, business cycle, forward-looking fiscal policy, GMM.
    JEL: E32 E62
    Date: 2014
  13. By: Jan Willem van den End; Marco Hoeberichts
    Abstract: We empirically test whether there is a causal link between the real interest rate and the natural rate of interest, which could be a harbinger of secular stagnation if the real rate declines. Outcomes of VAR models for Japan, Germany and the US show that a fall in the real rate indeed affects the natural rate. This causality is significant for Japan, borderline significant for Germany and not significant for the US. The outcomes for Japan confirm that a prolonged period of low real rates can affect potential economic growth. The policy implication is that implementing measures that raise the natural rate will be more effective in avoiding secular stagnation than reducing the real rate through higher inflation expectations.
    Keywords: interest rates; financial markets and the macroeconomy; monetary policy
    JEL: E43 E44 E52
    Date: 2014–10
  14. By: Acharya, Sushant (Federal Reserve Bank of New York)
    Abstract: Standard sticky information pricing models successfully capture the sluggish movement of aggregate prices in response to monetary policy shocks but fail at matching the magnitude and frequency of price changes at the micro level. This paper shows that in a setting where firms choose when to acquire costly information about different types of shocks, strategic complementarities in pricing generate planning complementarities. This results in firms optimally updating their information about monetary policy shocks less frequently than about idiosyncratic shocks. When calibrated to match frequent and large price changes observed in micro pricing data, the model is still capable of producing substantial non-neutralities. In addition, I use the model consistent Phillips curve and data from the Survey of Professional Forecasters to estimate the frequency at which firms update their information about monetary policy shocks. I find that the frequency of updating was higher in the 1970s compared to subsequent decades and hence conclude that monetary policy in the U.S. was relatively less effective prior to the 1980s.
    Keywords: sticky information; price rigidity; information choice; monetary non-neutrality; policy effectiveness
    JEL: D8 E3 E5
    Date: 2014–11–01
  15. By: Luís Aguiar-Conraria (NIPE and Department of Economics, University of Minho); Manuel M. F. Martins (cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (NIPE and Department of Mathematics and Applications, University of Minho)
    Abstract: This paper analyses the Taylor Rule in the U.S. 1960-2014 with new lenses: continuous time partial wavelets tools. These allow us to 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 findings, we conclude that monetary policy has been forward-looking and aimed at stabilizing inflation throughout the whole sample, although with varying effectiveness both across 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, were 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: 2014–10
  16. By: Gulan, Adam (Bank of Finland Research); Haavio, Markus (Bank of Finland Research); Kilponen, Juha (Bank of Finland Research)
    Abstract: We investigate the causes of the Finnish Great Depression, 1990-1993. We find that the collapse of the overheated financial and banking sectors starting in 1989 was the trigger of the economic crisis. Foreign shocks, which include the collapse of trade with USSR in 1991, can account for at most about half of the slump, and these shocks occurred only when the economy was already in free fall. Also, the deleveraging and restructuring process of the financial system substantially prolonged the subsequent recovery. Our methodology involves estimating a structural VAR model with sign and exogeneity restrictions. Importantly, we are able to distinguish between financial shocks affecting the demand for intermediated loans and those shifting the loan supply curve. Hence we also contribute to the discussion on which financial shocks actually matter.
    Keywords: business cycles; great depressions; financial shocks; sign restrictions; Finland
    JEL: E32 E44 O52
    Date: 2014–10–15
  17. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: EXECUTIVE SUMMARY Context. Sri Lanka’s economy has navigated recent market turbulence relatively well. Growth has remained solid, inflation is in mid-single digits, and the current account deficit has narrowed. From mid-May, the exchange rate came under pressure as market expectations of U.S. Federal Reserve tapering shifted, but Sri Lanka’s experience was in line with that of other emerging markets. Since September, market pressures have eased. By some metrics, reserves remain on the low side, but were boosted in late-September by an external debt issue of a large state-owned bank. Monetary policy. Monetary policy has eased progressively since end-2012 as growth slowed, inflation fell, and private sector credit weakened. At the time of the mission, staff recommended keeping monetary policy on hold for the near term. However, policy rates were subsequently reduced, with the central bank citing continued low inflation and the opportunity to stimulate growth to a higher level in 2014. Fiscal policy. The authorities remain committed to fiscal consolidation and intend to meet their 2013 deficit target. However, the steady real decline in government revenue collection poses risks to needed medium-term fiscal consolidation. The 2014 budget offers an opportunity to address the steady slide in revenues, including by further expanding the tax base. External debt. Alongside Sri Lanka’s graduation to middle-income status has come a shift away from concessional, bilateral debt and towards external debt issuance on commercial terms by state owned and commercial banks. While this is a natural progression of financial development, it also raises risks. It is essential that the proceeds of such external borrowing are invested so as to enhance productivity, add to economic resilience, and generate the foreign exchange needed to service future obligations.
    Keywords: Post-program monitoring;Economic growth;Monetary policy;Exchange rate depreciation;Foreign exchange reserves;Financial sector;Fiscal policy;Fiscal consolidation;Economic indicators;Staff Reports;Press releases;Sri Lanka;
    Date: 2014–09–22
  18. By: Mario Forni; Luca Gambetti
    Abstract: We identify government spending news and surprise shocks using a novel identification based on the Survey of Professional Forecasters. News shocks lead, through an increase of the interest rate, to a real appreciation of US dollar and a worsening of the trade balance. The opposite is found for the standard surprise shock which raises government spending on impact: the currency depreciates and net exports improve. We reconcile the two conflicting results showing the dierent timing of the spending reversals associated with the two shocks. The eects of the news shock on government spending are much more persistent and the reversal occurs much later.
    Keywords: Business Cycle Fluctuations; Euro area; Common Shocks; Near-Structural VARs.
    JEL: C32 E32 E62
    Date: 2014–10
  19. By: Barnett, William A.; Duzhak, Evgeniya A.
    Abstract: This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the existence of a period doubling bifurcation. As a result, a small change in the parameters (e.g., a more active policy response) can lead to a drastic change in the path of inflation. We demonstrate that while the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations, a hybrid rule exhibits the same pattern of period doubling bifurcations as the basic setup.
    Keywords: New Keynesian, Taylor Rule, regime switching, bifurcation analysis, structural stability.
    JEL: C14 C22 E32 E37
    Date: 2014
  20. By: Michal Bencik (National Bank of Slovakia, Research Department)
    Abstract: This paper assesses fiscal policy effects over the business cycle in V4 countries using a simplified smooth transition VAR (STVAR) model. The estimated parameters imply a presence of two different regimes associated with recessions and expansions, leading to different impulse-response functions. Transformation of these functions to fiscal multipliers confirms a different nature of long run effects. In expansions, the fiscal multipliers peak below unity and diminish to zero. In recession, the multipliers grow faster than in expansion and stay well above unity.
    Keywords: V4 countries, fiscal multiplier, STVAR
    JEL: E62 H62
    Date: 2014–10
  21. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Context. Macroeconomic performance has generally exceeded expectations. Real GDP grew 7.3 percent for 2013, up from 6.3 percent in 2012. Inflation declined to below 5 percent, and the external current account balance has improved. Private credit growth has been slow, however, a number of financial sector indicators have deteriorated. Outlook and Risks. Growth is expected to remain robust at 7 percent and inflation to remain in the mid-single digits. The external current account should improve marginally, allowing for further accumulation of foreign exchange reserves. Near-term risks appear moderate, although there may be some bumps in the road from market turbulence and climatic events. Medium-term risks relate to the potential for tighter external liquidity, the challenge of further fiscal and debt consolidation while maintaining high levels of investment in infrastructure and human capital, maintaining a balanced monetary policy, and staying competitive in a shifting economic landscape. Key Policy Recommendations. • Fiscal consolidation and debt reduction need to continue, but the burden of adjustment needs to shift decisively to revenue generation. Debt targets could potentially be recast to achieve deeper reduction over a longer period. • Monetary policy needs to maintain a balance between supporting growth and containing inflation. A continued forward-looking approach is needed given long lags in monetary transmission. • Financial sector consolidation could lead to economies of scale, greater resilience, and more effective supervision, but corporate governance needs to continue to improve, and careful supervision in the post-consolidation period will be key. • Maintaining competitiveness and achieving a more sustainable external position will require a mix of continued innovation, sustained investment in infrastructure and human capital, a predictable business environment, and ideally a heavier emphasis on direct investment and equity portfolio flows than debt.
    Keywords: Article IV consultation reports;Fiscal policy;Government expenditures;Fiscal consolidation;Monetary policy;Flexible exchange rates;Economic indicators;Debt sustainability analysis;Staff Reports;Post-program monitoring;Press releases;Sri Lanka;
    Date: 2014–09–18
  22. By: Colignatus, Thomas
    Abstract: The welfare state was created after 1950 with counterproductive mechanisms and this caused high inflation and high unemployment and stagnating growth by 1970, called stagflation. Since 1970 governments redressed the welfare state but did not succeed in finding workable mechanisms. They rather fought stagflation with the ideology of the day, shifting from vulgar Keynesianism first to monetarism and then to neoliberalism, and now ‘muddling through’. The deregulation of financial markets seemed to solve stagflation but only repressed it and resulted into the crisis since 2007. The return of regulation also causes the return of stagflation: what was repressed before now is into the open again. Re-regulation is required indeed but the fundamental cure lies in focussing on workable mechanisms for the welfare state. Return to the 19th century laissez-faire will generally be rejected. If economic management had made better use of the available information then these policy errors could have prevented. A mixed economy requires a constitutional Economic Supreme Court to monitor the quality of information for policy making.
    Keywords: Great Depression; Great Stagflation; Great Moderation; stagflation; inflation; unemployment; Phillipscurve; poverty; subsistence; minimum wage; labour market; welfare state; mixed economy; social security; productivity; tax; insurance; tax void; regime switch; Keynes; vulgar keynesiansim; fiscal policy; monetarism; monetary policy; neoliberalism; regulation; deregulation; financial crisis; economic crisis; muddling through; repressed stagflation; Economic Supreme Court; Trias Politica; Tessera Politica; National Investment Bank; economic cycle; counter-cyclical; economic structure; Eurozone; euro; gold standard; fiat money; European Central Bank; ECB; no bail-out; national debt; bank balance sheet; global warming
    JEL: A1 E60 P16
    Date: 2014–09–14
  23. By: Mariarosaria Comunale; Jeroen Hessel
    Abstract: The current account imbalances that are at the heart of the European sovereign debt crisis are often attributed to differences in price competitiveness. However, recent research suggests that domestic demand booms related to the financial cycle may have been more important. As this would have very different policy implications, this paper aims to investigate the relative role of price competitiveness and domestic demand as drivers of the current account imbalances in the euro area. We estimate panel error-correction models for exports, imports and the trade balance. We specifically look at fluctuations in domestic demand at the frequency of the financial cycle. We conclude that although differences in price competitiveness have an influence, differences in domestic demand are more important than is often realized. Fluctuations at the frequency of the financial cycle are more suitable to explain the trade balance than fluctuations at the frequency of the normal business cycle. Our results call for more emphasis on credit growth and macro prudential policy, in addition to the current attention for competitiveness and structural reforms.
    Keywords: Current account deficits; Economic and Monetary Union; competitiveness; domestic boom; financial cycle
    JEL: E32 F32 F41 F44
    Date: 2014–10
  24. By: Sudo, Nao (Bank of Japan); Ueda, Kozo (Waseda University); Watanabe, Kota (Meiji University); Watanabe, Tsutomu (University of Tokyo)
    Abstract: Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the paper, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation between the two. We then construct a dynamic stochastic general equilibrium model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan's lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.
    JEL: E3 E5
    Date: 2014–09–01
  25. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context. Saudi Arabia’s economy has grown very strongly in recent years, benefitting from high oil prices and output, strong private sector activity, and government spending. It has played a systemic and stabilizing role in the global oil market. The economy has not been affected by the recent global financial market volatility. The Saudi population is young, growing, and increasingly well educated. Outlook and risks. The near term economic outlook is positive. Oil production is expected to be little changed from 2013, while non-oil growth will be underpinned by strong private sector activity and government spending on large projects in transportation infrastructure and housing. Inflation is expected to remain subdued. The main source of risk is the global oil market. Macroeconomic policies. Fiscal buffers are strong at present, providing macroeconomic policies with scope to respond to shocks. The current path of fiscal policy would, however, lead to a substantial erosion of these buffers over the medium-term. Fiscal adjustment needs to start to preserve these buffers and increase saving for intergenerational equity purposes. Monetary and macro-prudential policy settings are appropriate at present. Reforms to the macroeconomic policy framework can help strengthen macroeconomic management and create an environment conducive to private investment and job creation. Managing demographic pressures. A multi-pronged labor market reform program is increasing the employment of nationals in the private sector and improving the functioning of the labor market. An ambitious program to boost the supply of housing is also underway. Energy consumption is high, and price increases are needed to support efforts to increase energy efficiency and develop public transportation networks. Economic diversification. Creating a more diversified economy is a challenge given Saudi Arabia’s vast oil resources. The government is making considerable efforts to lay the groundwork for further diversification by upgrading infrastructure, strengthening education and skills, boosting access to finance for SMEs, and improving the business environment. However, more needs to be done to realign incentives to encourage firms to export and workers to seek jobs in the private sector.
    Keywords: Article IV consultation reports;Fiscal policy;Government expenditures;Debt sustainability;Fiscal reforms;Labor market reforms;Monetary policy;Bank supervision;Exchange rate assessments;Economic indicators;Staff Reports;Press releases;Saudi Arabia;
    Date: 2014–09–23
  26. By: Mahito Uchida
    Abstract: In this paper, I investigate the Bank of Japan's monetary policy effects under Abenomics at the initial stage. First, I describe briefly what is “Abenomics” and “New monetary policy under Abenomics” since April 2013. I also examine the causes of the sharp response of the yen and Japanese stock prices, the increase of consumer price index and the change of the public's expectations for economic activity and prices on surveys. In the second part I explain why the new monetary policy was effective in 2013, comparing the previous policy until 2012. Although there is not so big difference between monetary policies before and after 2012 theoretically, I point out the importance of the strong commitment by central bank, the cooperation with the government and “psychological impact” on public. The third part discusses the durability of the new monetary policy. The policy effects will be sustainable if a price becomes lastingly positive, which needs a durably positive output gap. Therefore, growth strategy by Abenomics plays an important role. I also point out that the BOJ has to perform the policy over side effects such as the impact on the government bond markets, the impact on other financial market and an outflow of money to overseas.
    Keywords: Abenomics; Monetary policy; Interest rates; Inflation target
    Date: 2014–04
  27. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context: Ethiopia’s investment-led development strategy has delivered robust growth and progress toward Millennium Development Goals (MDGs). Restrained fiscal and monetary policies have helped maintain macroeconomic stability, although the financing mode of the continuing large-scale investment through public enterprises could risk undermining macroeconomic stability. A cautious policy stance will be critical in preserving the recent gains. Focus of the consultation: The discussions centered on policies to sustain strong economic growth and promote structural transformation. Issues covered included: (i) the policy mix to preserve macroeconomic stability and debt sustainability; (ii) the public sector investment program and its financing; and (iii) financial deepening, export competitiveness and the business climate. Outlook and Risks: Growth is expected to remain strong, driven mainly by agriculture and services. Inflation should continue to remain in single digits, in line with a tight monetary policy. Key downside risks include insufficient financing for infrastructure investment in the Growth and Transformation Plan (GTP), lower prices of main export commodities, and weather-related shocks, particularly a drought. Policy mix: Staff recommendations focused on sustaining a cautious policy stance, prioritization of public investments and closer monitoring of state-owned enterprises to ensure prudent borrowing in the context of a medium-term debt management strategy, enhancing export competitiveness, greater resource mobilization and development of the financial sector, and a more prominent role for the private sector. Structural improvements in the functioning of the money and foreign exchange market and building foreign reserves to at least three months of imports were suggested to enhance resiliency. The need for greater interest rate and exchange rate flexibility and improved competitiveness of the traded goods sector, including through exchange rate adjustment, was underscored.
    Keywords: Article IV consultation reports;Fiscal policy;Public enterprises;Private sector;Monetary policy;Exchange rate assessments;Reserves adequacy;Economic indicators;Millennium Development Goals;Debt sustainability analysis;Staff Reports;Press releases;Ethiopia;
    Date: 2014–10–03
  28. By: Chen, Kuan-Jen; Chu, Angus C.; Lai, Ching-Chong
    Abstract: This paper incorporates home production into a real business cycle (RBC) model of a small open economy to provide a parsimonious explanation of the empirical pattern of international business cycles in developed economies and emerging markets. It is well known in the literature that in order for the RBC model to replicate quantitatively plausible empirical moments of small open economies, the model needs to feature counterfactually a small income effect on labor supply. This paper provides a plausible solution to this puzzle by considering home production that introduces substitutability between market consumption and home consumption, which in turn generates a high volatility in market consumption in accordance with the data, even in the presence of a sizable income effect on labor supply. Furthermore, the model with estimated parameter values based on the simulated method of moments is able to match other empirical moments, such as the standard deviations of output, investment and the trade balance and the correlations between output and other standard macroeconomic variables. Given that home production is more prevalent in emerging markets than in developed economies, the model is also able to replicate empirical differences between emerging markets and developed economies in the volatility of market consumption and the volatility/countercyclicality of the trade balance.
    Keywords: small open economy; home production; emerging markets; business cycles
    JEL: D13 E32 F41 O16
    Date: 2014–09
  29. By: Wayne, James J.
    Abstract: The poor performance of macroeconomic models during the great recession of 2008 has forced many economists to re-examine macroeconomic theories, and search for creditable alternatives to the popular dynamic stochastic general equilibrium (DSGE) models. This paper derives a new macroeconomic model from recently published Fundamental Equation of Economics (FEOE) and applies the new model to answer a general question what causes economic crises. The macro model known as the indeterministic balance sheet plus (IBS+) model proposed in this paper for the first time turns out to be a special breed of accounting models. Different accounting models are more or less same in the way of handling empirical accounting data and flow of funds, and different in the way of forecasting the future. The IBS+ macroeconomic model takes the indeterministic view of the future balance sheets with the emphasis on probabilistic causalities, tail risks, economic reality described by balance sheet accounting, truthfully capturing the sectorial flow of funds and dynamics of economics, universally applicability, and a rock solid scientific theoretical foundation. The IBS+ model is very different from the popular dynamic stochastic general equilibrium (DSGE) models and agent-based computational economic (ACE) models. Through a side by side comparison, we prove that IBS+ model is superior to DSGE or ACE models in many ways. This paper concludes that DSGE models are probably intellectual dead ends, and economists should stop investing heavily with DSGE models and instead should replace DSGE models with IBS+ models. Economic crises have plagued humanity since the dawn of capitalism. Despite intense studies over last several hundred years, the questions about causes, forecasting, and prevention of economic crises remains unsolved. This paper proposes a classification of causes of economic crises using IBS+ models to analyze balance sheets of key economic sectors. Applying this classification to examine recent economic crises, we conclude that most economic crises are caused by mismanagement of balance sheets by key economic players. This paper suggests that economic crises are largely caused by inevitable misbehavior of humanity and not caused by any fundamental flaw of capitalism. Just like improving the individual health and personal hygiene is the key to prevent epidemic diseases in societies, the key to prevent future economic crises is to promoting financial disciplines and strengthening risk management of key players in economics. Because some economic crises can be caused by natural and man-made factors beyond the scope of economics like earthquakes and wars, the frequency of economic crises can be minimized by proper risk management practices but economic crises can never be completely eliminated. Historically, treating mismanagement of balance sheets as main causes of economic crises is a generalization of Austrian business cycle theory, Fisher’s debt deflation theory, and Minsky’s financial instability hypothesis.
    Keywords: macroeconomics, macroeconomic model, econophysics, quantum economics, dynamic stochastic general equilibrium model, DSGE, modeling, fundamental equation of economics, physics laws of social science
    JEL: B4 C0 C10 E1 E17
    Date: 2014–10–23
  30. By: Matthias Uhl (University of Marburg)
    Abstract: In this paper, I estimate a structural panel vector autoregression to study the consequences of changes in U.S. state government fiscal policies for local economic activity in the short-term. My main result is that the state-level spending multiplier is relatively small and the tax multiplier relatively large. After four years, the government spending multiplier is 0.6 and the tax multiplier -2.62. This conclusion is found to be robust across different model specifications. I also find that both state spending and state revenue shocks increase out of state output.
    Keywords: Spending multiplier, Tax multiplier, Subnational government
    JEL: E62 H30 R50
    Date: 2014
  31. By: Korniluk, Dominik (Ministry of Finance in Poland)
    Abstract: The stabilising expenditure rule (SER) imposed on general government (GG) sector in Poland has been binding since 2014. According to this rule, about 90% of GG expenditure will grow in line with the real medium-term GDP, or slower if there is excessive debt or deficit, or balance does not meet the medium-term objective. It was shown in this paper how the SER affects the most important public finance indicators in the period 2014-2040. The consequences of the lowered debt thresholds in the SER's correction mechanism due to the pension reform were also presented. Finally, future fiscal policy conducted under the new rule was simulated and assessed.
    Keywords: stabilising expenditure rule; stochastic simulations; debt thresholds; fiscal policy cyclica lity
    JEL: C53 E62
    Date: 2014–09–01
  32. By: Meyer, Brent (Federal Reserve Bank of Atlanta); Venkatu, Guhan (Federal Reserve Bank of Cleveland)
    Abstract: This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median consumer price index (CPI). Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed means using a well known equality of prediction test. We find that there is a large swath of trimmed means that have statistically indistinguishable performance. Also, although the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI - an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI (and trimmed-mean estimators in general) relative to other standard measures in forecasting headline inflation.
    Keywords: inflation; inflation forecasting; trimmed-mean estimators
    JEL: E31 E37
    Date: 2014–03–01
  33. By: Sarolta Laczo; Raffaele Rossi
    Abstract: We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.
    Keywords: fiscal policy, Markov-perfect policies, consumption taxation, variable capital utilisation, endogenous government spending
    JEL: E62 H21
    Date: 2014
  34. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Context: The authorities continue to make progress on their far-reaching political and economic reform program. Key economic reform priorities are being realized. However, macroeconomic and financial risks are building, and capacity constraints are slowing institutional reform. Constitutional amendments are being considered ahead of the 2015 elections, and peace negotiations are continuing despite religious and ethnic tensions. Macroeconomic situation and outlook: Growth is accelerating, with average growth projected around 8¼ percent in the next few years, and inflation should remain broadly stable. After depreciating in 2013, the exchange rate has stabilized. The external current account has widened despite improved export performance but rising capital account inflows should enable Central Bank of Myanmar (CBM)’s international reserves to grow rapidly from their current low levels. Monetary aggregates are growing at double-digit rates. The underlying fiscal deficit in 2013/14 is estimated at 3 percent of GDP and is forecast to widen to around 5½ percent of GDP in 2014/15, but should decline below 5 percent of GDP in the medium term. However, off budget operations could increase the deficit. Risks also arise from capacity constraints and thin fiscal and external buffers. Medium- and long-term prospects: Economic prospects remain strong. Myanmar’s long-run growth potential is estimated at around 7 percent, in line with peer countries’ experience, but sound institutional and policy frameworks need to be built to realize this. Key policy recommendations: Macroeconomic policy challenges are likely to intensify in the short term. Monetary policy tools need to be more aggressively deployed, and mechanisms established to transfer public sector foreign exchange earnings automatically to the CBM. The regulatory framework for the banking sector needs to be urgently upgraded and supervision strengthened, particularly as foreign banks will soon enter. Tax policy and administration should aim at simplifying the system and preparing for the introduction of a value-added tax (VAT). Technical assistance (TA): Capacity building will be crucial to achieve policy objectives. The IMF continues to provide intensive TA in key areas, including in a wide range of CBM operations, tax policy and administration, public financial management and statistics.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Budget deficits;Financial sector;Bank supervision;Multiple currency practices;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Myanmar;
    Date: 2014–10–06
  35. By: L. Ferrara; C. Marsilli
    Abstract: Facing several economic and financial uncertainties, assessing accurately global economic conditions is a great challenge for economists. The International Monetary Fund proposes within its periodic World Economic Outlook report a measure of the global GDP annual growth, that is often considered as the benchmark nowcast by macroeconomists. In this paper, we put forward an alternative approach to provide monthly nowcasts of the annual global growth rate. Our approach builds on a Factor-Augmented MIxed DAta Sampling (FA-MIDAS) model that enables (i) to account for a large monthly database including various countries and sectors of the global economy and (ii) to nowcast a low-frequency macroeconomic variable using higher-frequency information. Pseudo real-time results show that this approach provides reliable and timely nowcasts of the world GDP annual growth on a monthly basis.
    Keywords: Global growth, Nowcasting, Factor-Augmented MIDAS.
    JEL: C53 E37
    Date: 2014
  36. By: Taylor, John B. (Stanford University)
    Abstract: This paper starts from the theoretical observation that simple rules-based monetary policy will result in good economic performance in a globalized world economy and the historical observation that this occurred during the Great Moderation period of the 1980s and 1990s. It tries to answer a question posed by Paul Volcker in 2014 about the global repercussions of monetary policies pursued by advanced economy central banks in recent years. I start by explaining the basic theoretical framework, its policy implications, and its historical relevance. I then review the empirical evidence on the size of the international spillovers caused by deviations from rules-based monetary policy, and explore the many ways in which these spillovers affect and interfere with policy decisions globally. Finally, I consider ways in which individual monetary authorities and the world monetary system as a whole could adhere better to rules-based policies in the future and whether this would be enough to achieve the goal of stability in the globalized world economy.
    JEL: E5 F4 F5
    Date: 2014–10–01
  37. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context: Over the last two decades, good governance and sound macroeconomic management have delivered remarkable economic and social progress to Cabo Verde. More recently, however, growth has slowed due to the prolonged downturn in Europe and a sharp deterioration in domestic confidence. A longer-term decline in the contribution of total factor productivity to growth may also have played a role. Financial stability risks have increased with the rise in non-performing loans and fall in bank profitability. The country remains vulnerable to external shocks, given its dependence on tourism, remittances, and concessional financing. Over the longer term, Cabo Verde’s challenge as a new middle-income country is to bolster productivity and diversify the sources of growth. Fiscal consolidation remains critical to safeguard macroeconomic and debt sustainability. Budgetary plans for 2014 and the medium term entail rising public debt, and are subject to downside risks to revenue. The authorities have already decided on a package of expenditure containment measures for 2014–17. However, given the high albeit sustainable level of public debt, further measures are needed to put public debt on a more robust downward path. Bolstering domestic revenue mobilization, increasing the efficiency of public investment, and managing existing infrastructure better are also central to sound public finances. International reserves have recovered, which provided room to ease monetary policy in support of the recovery. In the absence of imminent pressures on the balance of payments or on prices, and with private sector credit growth having stalled, the central bank has cut the policy rate. At the same time, given pressures on the banking system, continued vigilance regarding risks to financial stability is warranted. Structural reforms hold the key to bolstering competitiveness, creating jobs, and delivering inclusive growth. Increasing labor market efficiency and reducing skill mismatches would be particularly beneficial in this regard. Enhancing the efficiency of state-owned enterprises is also essential to improve delivery of infrastructure services. Data are adequate for surveillance purposes, though some key shortcomings remain. In particular, national accounts data are released with a long delay. This complicates the formulation of macroeconomic policies.
    Keywords: Article IV consultation reports;Economic growth;Tourism;Fiscal consolidation;Fiscal policy;Monetary policy;Reserves;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Cabo Verde;
    Date: 2014–09–25
  38. By: Natalie Tiernan (Office of the Comptroller of the Currency); Pedro Gete (Georgetown University)
    Abstract: This paper is a quantitative study of two frictions that generate banks' underinvestment in screening borrowers and, thus, overlending: 1) Limited liability, and 2) Banks failing to internalize that their credit decisions alter the pool of borrowers faced by other banks. The resulting lax lending standards overexpose banks to negative economic shocks and amplify the effects of economic fluctuations. They generate excessive volatility in credit, banks' capital and output. We study a calibrated model whose predictions concerning the quantity and quality of credit are in line with recent U.S. business cycles. Quantitatively, limited liability is the friction that generates laxer lending standards. It induces 27% excess volatility in output relative to 8% from the other friction. Then we study three policy tools: capital requirements and taxes on banks' lending and borrowings. The three tools encourage banks to screen more and should be state-contingent because the frictions vary with macroeconomic conditions. In quantitative terms, we find that taxes are better tools than capital requirements because they do not reduce credit going to the more productive agents.
    Date: 2014
  39. By: Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers’ perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers’ rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: price sluggishness, loss aversion, state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–11
  40. By: Ansgar Belke; Tobias Böing
    Abstract: The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a Structural Vector Autoregressive (SVAR) technique following Cecchetti and Rich and, secondly, an episode-based procedure proposed by Ball based on historical disinflationary episodes. The estimation results do generally not support empirical evidence of overly high sacrifice ratios and hence, on average, indicate relatively modest costs of structural adjustments in the Euro area.
    Keywords: Sacrifice ratio, structural adjustment, Euro Area, VAR, episode method, Phillips curve
    JEL: E31 F49
    Date: 2014–09
  41. By: Dahl, Roy A (UiS); Osmundsen, Petter (UiS)
    Abstract: Governments in extraction countries are anxious to estimate expected investment in development projects, since they represent an essential element of the macro economy. The overall level of activity is also crucial to oil companies, since the macro picture affects cost levels, the supplies market and recruitment opportunities. The paper outlines factors that explain fluctuations in investment in petroleum projects on the Norwegian continental shelf.
    Keywords: oil industry; cost overruns; megaprojects; business cycles
    JEL: E32 F21 L71 M21
    Date: 2014–10–09
  42. By: Kuikeu, Oscar
    Abstract: Are the cfa franc zone member’s much closed by their currency or by their economic structure? This is the main question of this paper. In other words, the difficulty to have a common monetary policy and idiosyncratic national fiscal policies, for a monetary area, can be feasible in cfa franc zone? In fact, just after the cfa franc devaluation of January 1994, the cfa franc zone member’s committed themselves to preserve the monetary stability into the area. Globally speaking, the results are significant testimony on the robustness of VAR methodology as an engine for the analysis of monetary policy effects, in fact, these results help to draw some lessons about the monetary transmission mechanism into the zone but also there are one of an unique proofs with sub-Saharan African’s data of the neo-keynesian school’s consistency.
    Keywords: CEMAC, monetary policy, VAR models
    JEL: C32 E52
    Date: 2014–10–13
  43. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Background: The large imbalances that accumulated prior to the global financial crisis culminated in a collapse of the banking sector in early 2013. In response, the authorities took unprecedented measures and adopted an economic adjustment program, supported by official financing, aimed at securing financial stability and fiscal sustainability. Recent developments and outlook: GDP contracted sharply in 2013. Wages and prices also declined, and unemployment increased. While bank deposit outflows have slowed, non-performing loans have risen sharply, and credit remains impaired. The outlook is difficult, with the recession expected to continue this year, followed by a modest recovery starting next year. Risks remain tilted to the downside. Reform agenda: The authorities need to overcome recent delays in the implementation of their adjustment program. A key priority is addressing high non-performing loans, which requires putting in place a strong private-sector debt-restructuring framework, including legislation to facilitate foreclosures, complemented by a modernized insolvency regime. Banks should continue to restructure and build strong capital buffers. Removal of external-payment restrictions must proceed prudently. Continued fiscal consolidation is required to ensure long-run sustainability, complemented by firm implementation of structural reforms.
    Keywords: Article IV consultation reports;Fiscal policy;Public debt;Fiscal reforms;Bank restructuring;Bank supervision;Economic indicators;Debt sustainability analysis;Exchange rate assessments;Staff Reports;Press releases;Cyprus;
    Date: 2014–10–22
  44. By: Frantisek Brazdik; Zuzana Humplova; Frantisek Kopriva
    Abstract: Macroeconomic forecasters are often criticized for a lack of transparency when presenting their forecasts. To deter such criticism, the transparency of the forecasting process should be enhanced by tracing and explaining the effects of data revisions and expert judgment updates on variations in the forecasts. This paper presents a forecast decomposition analysis framework designed to examine the differences between two forecasts generated by a linear structural model. The differences between the forecasts considered can be decomposed into the contributions of various forecast elements, such as the effect of new data or expert judgment. The framework allows us to evaluate the contributions of forecast assumptions in the presence of expert judgment applied in the expected way. The simplest application of this framework examines alternative forecast scenarios with different forecast assumptions. Next, a one-period difference between the forecasts’ initial periods is added to the examination. Finally, a replication of the Inflation Forecast Evaluation presented in Inflation Report III/2013 is created to illustrate the full capabilities of the decomposition framework.
    Keywords: Data revisions, DSGE models, forecasting, forecast revisions
    JEL: C53 E01 E47
    Date: 2014–08
  45. 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 G21 G28
    Date: 2014
  46. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Society of American Business Editors and Writers Fall Conference, City University of New York (CUNY) Graduate School of Journalism. New York, NY. 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: FOMC; Data; Monetary policy;
    Date: 2014–10–10
  47. By: Joscha Beckmann; Ansgar Belke; Christian Dreger
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, for instance international dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule in the main industrial countries. The inclusion of international spillovers and, even more, nonlinear dynamics improves the explanatory power of standard Taylor reaction functions. Deviations from Taylor rates tend to be smaller and their negative trend can be eliminated.
    Keywords: Taylor rule, international spillovers, monetary policy interaction, smooth transition models
    JEL: E43 F36 C22
    Date: 2014–09
  48. By: Scott Fulford (Boston College)
    Abstract: While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks.
    Keywords: Income uncertainty; precaution; buffer-stock model; household saving; consumption
    JEL: D14 D91 E21
    Date: 2014–08–01
  49. By: Miguel de Carvalho; António Rua
    Abstract: We explore a new approach for nowcasting the output gap based on singular spectrum analysis. Resorting to real-time vintages, a recursive exercise is conducted so to assess the real-time reliability of our approach for nowcasting the US output gap, in comparison with some well-known benchmark models. For our applied setting of interest, the preferred version of our approach consists of a two-channel singular spectrum analysis, where we use a Fisher g test to infer which components, within the standard business cycle range, should be included in the grouping step. We find that singular spectrum analysis provides a reliable assessment of the cyclical position of the economy in real-time, with the two-channel approach outperforming substantially the univariate counterpart.
    JEL: C50 E32
    Date: 2014
  50. By: Higgins, Patrick C. (Federal Reserve Bank of Atlanta)
    Abstract: This paper documents GDPNow, a "nowcasting" model for gross domestic product (GDP) growth that synthesizes the "bridge equation" approach relating GDP subcomponents to monthly source data with the factor model approach used by Giannone, Reichlin, and Small (2008). The GDPNow model forecasts GDP growth by aggregating 13 subcomponents that make up GDP with the chain-weighting methodology used by the U.S. Bureau of Economic Analysis. Using current vintage data, out-of-sample GDPNow model forecasts are found to be more accurate than a number of statistical benchmarks since 2000. Using real-time data since the second-half of 2011, GDPNow model forecasts are found to be only slightly inferior to consensus near-term GDP forecasts from Blue Chip Economic Indicators. The forecast error variance of GDP growth for each of the GDPNow model, Blue Chip, and the Federal Reserve staff's Green Book is decomposed as the sum of the forecast error covariances for the contributions to growth of the subcomponents of GDP. The decompositions show that "net exports" and "change in private inventories" are particularly difficult subcomponents to nowcast.
    Keywords: nowcasting; forecasting; macroeconometric forecasting
    JEL: C53 E37
    Date: 2014–07–01
  51. By: Sen Gupta, Abhijit; Bhattacharya, Rudrani; Rao, Narhari
    Abstract: Persistently high food inflation has been one of the major concerns facing India over the last few years. With nearly a quarter of the population living below the poverty line, the persistence of food inflation at high levels is extremely undesirable. In this paper, we analyse the behaviour and determinants of food inflation over the recent past. We introduce structural breaks to identify the different phases of food inflation during the last three decades, and evaluate the persistence of food and core inflation across these phases. There is increase in persistence in food inflation over the periods implying it has become more persistent, and any positive shock will have a longer impact on it. Various components of food inflation including cereals, pulses, fruits, vegetables, meat and fish, have been significant contributors to food inflation at different points in time, indicating a broad nature of the problem. In analysing the key drivers of food inflation, we find limited role of international prices, with the co-movements between domestic and international prices being lower for cereals and dairy products, and higher for tradables like edible oils and meat. Using household consumer expenditure data we empirically estimate aggregate demand for key food products, and find demand has consistently outstripped supply in the case of cereals, pulses, meat and fish, and the extent of mismatch has widened in recent years. The rise in food prices is also a reaction of the rise in price of various inputs, including price of fuel and agricultural wages. We also find certain policy decisions such as large increases in minimum support prices have been associated with much higher increase in wholesale prices of these commodities in the corresponding period. Finally, we find significant evidence of transmission of food inflation to non-food inflation and aggregate inflation.
    Keywords: Food Inflation, Engel Curves, QUAIDS Model, SVEC Model, FEVD Analysis
    JEL: E31 E37 Q11
    Date: 2014–05
  52. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari); Martina Sartori (Department of Economics, University Of Milan, Bicocca)
    Abstract: Relatively small sectoral productivity shocks could lead to sizable macroeconomic variability. Whereas most contributions in the literature analyze the issue of aggregate sensitivity using simple general equilibrium models, a novel approach is proposed in this paper, based on stochastic simulations with a global CGE model. We estimate the statistical distribution of the real GDP in 109 countries, assuming that the productivities of the industrial value added composites are identically and independently distributed random variables. We subsequently undertake a series of regressions in which the standard error of the GDP is expressed as a function of variables measuring the “granularity” of the economy, the distribution of input-output trade flows, and the degree of foreign trade openness. We find that the variability of the GDP, induced by sectoral shocks, is basically determined by the degree of industrial concentration as counted by the Herfindhal index of industrial value added. The degree of centrality in inter-industrial connectivity, measured by the standard deviation of second order degrees, is mildly significant, but it is also correlated with the industrial concentration index. After controlling for the correlation effect, we find that connectivity turns out to be statistically significant, although less so than granularity.
    Keywords: Aggregate volatility, input-output linkages, intersectoral network, sectoral shocks, granularity, stochastic simulation, computable general equilibrium models.
    JEL: C15 D58 E32 O57
  53. By: Stan Veuger (American Enterprise Institute); Daniel Shoag (American Enterprise Institute)
    Abstract: We document the tight link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession.
    Keywords: unemployment, Great Recession, economic uncertainty, geography
    JEL: A
    Date: 2013–09
  54. By: Luo, Yulei; Nie, Jun; Wang, Gaowang; Young, Eric
    Abstract: This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003, 2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that, under the assumption of CARA utility with Gaussian shocks, the Permanent Income Hypothesis (PIH) arises in equilibrium, as in models with full information-rational expectations, due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete information are even smaller due to general equilibrium adjustments in interest rates.
    Keywords: Rational Inattention; Permanent Income Hypothesis; General Equilibrium; Consumption and Income Volatility.
    JEL: C61 D83 E21
    Date: 2014
  55. By: Saltari, Enrico; Federici, Daniela
    Abstract: The aim of this paper is to investigate the roots of the Italian total factor productivity slowdown. The analysis focusses on the specific pattern of technical progress in determining the TFP dynamics. This analysis can not be done with the Cobb-Douglas technology but requires the employ of a CES function which allows to distinguish between the direction and the bias of technical progress. We employ a CES specification embodying both labor- and capital-augmenting technical change, with a σ less than 1. We obtain three main results. 1) There seems to have been a structural break around the mid-nineties in the direction and bias of technological change; 2) The first half of the sample features a labor-augmenting technical change and a capital bias; 3) In the second part of the sample both these characteristics seem to disappear, and factor endowments evolution assumes a key role. This fact may be view as one of the potential causes of the Italian productivity stagnation.
    Keywords: CES production function; Elasticity of substitution; Factor-augmenting technical progress; ICT technical change.
    JEL: C30 E22 E23 O33
    Date: 2014–09–08
  56. By: Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
    Abstract: This study explores the macroeconomics effects of labor unions in a two-country model of directed technical change in which the market size of each country determines the incentives for innovation. We find that an increase in the bargaining power of a wage-oriented union leads to a decrease in employment in the domestic economy. This result has two important implications on innovation. First, it reduces the rates of innovation and economic growth. Second, it causes innovation to be directed to the foreign economy, which in turn causes a negative effect on domestic wages relative to foreign wages in the long run. We also calibrate our model to data in the US and the UK. We find that the degree of unions' wage preference must be stronger in the UK than in the US in order for the calibrated economies to replicate the simultaneous decrease in labor income share and unemployment in the two countries. We also explore the quantitative implications of labor unions on social welfare and relative wage across countries. In summary, our calibrated model is able to explain about half of the decrease in relative wage between the US and the UK from 1980 to 2007.
    Keywords: economic growth, R&D, labor unions, income inequality
    JEL: E24 J51 O30 O43
    Date: 2014–09
  57. By: Svensson, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: In medieval Europe, old coins were frequently declared invalid and exchanged for new ones at fixed rates and dates. Here, the question of whether and when such re-coinage was applied in medieval Sweden is analyzed against the historical record. A theory of how short-lived coinage systems work is applied to Swedish coinage. It is shown that Sweden adopted similar coin types as those minted in Continental Europe in the Middle Ages, and also adopted the corresponding continental coinage and monetary taxation policies linked to these coin types. Swedish experience is extraordinarily well in line with what one would expect from the theory of short-lived coins. Economic backwardness, limited monetization of society and separate currency areas facilitated re-coinage. Re-coinage with varying frequency was applied in 1180–1290 when only bracteates were minted. This is evidenced by many different coin types per reign, coin hoards which are dominated by a few types and dating of types to specific periods of the kings' reigns. However, monetization increased in the late 13th century, making re-coinage more difficult, and bracteates were replaced by long-lived two-faced coins in 1290. With an end to re-coinage, the Swedish kings then accelerated the debasement of the long-lived coins. The disappearing re-coinage fees were compensated for by debasing the silver content. Such debasements –interrupted by several coinage reforms – were applied until the beginning of the 16th century.
    Keywords: Re-coinage; Bracteates; Medieval Sweden; Coinage policies; Monetization; Debasements
    JEL: E31 E42 E52 N13
    Date: 2014–09–03
  58. By: Batchuluun, Altantsetseg; Luo, Yulei; Young, Eric
    Abstract: In this paper, we examine the joint consumption-portfolio decision of an agent with limited information-processing capacity (rational inattention or RI) in the sense of Sims (2003) within a non-linear-quadratic (non-LQ) setting. Our model predicts that, as processing capacity falls, agents choose to hold less of their savings in the form of risky assets on average; however, they still choose to hold substantial risky assets with some positive probability. Low capacity causes households to act as if they are more risk averse and more willing to substitute consumption intertemporally.
    Keywords: Rational Inattention, Optimal Consumption-Saving, Portfolio Choice.
    JEL: C6 C61 E21 G11
    Date: 2014
  59. By: International Monetary Fund. Monetary and Capital Markets Department
    Keywords: Financial system stability assessment;Financial sector;Banks;Nonbank financial sector;Bank supervision;Basel Core Principles;Bank resolution;Stress testing;Monetary policy;Central bank autonomy;Anti-money laundering;Economic indicators;Democratic Republic of the Congo;
    Date: 2014–10–22
  60. By: Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Louis Dupuy (Université de Bordeaux); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews)
    Abstract: Genuine Savings has emerged as the leading economic indicator of sustainable economic development at the country level. It derives from the literatures on weak sustainability, wealth accounting and national income accounting. The paper is structured as follows: section 1 introduces the basic measure and the idea of weak sustainability. Section two provides an overview of the intellectual history of Genuine Savings (GS). This is followed by an outline of the basic theoretical structure underlying GS as well as extensions to this model. Section 4 provides an overview of empirical estimates of GS and section 5 looks at tests of the predictive power of GS. Section 6 concludes by assessing whether GS is in fact a sustainable and useful concept.
    Keywords: Sustainable development, Genuine Savings, ComprehensiveWealth, future wellbeing.
    JEL: E21 E22 Q00 Q01 Q20 Q30 Q50
    Date: 2014–11
  61. By: Ager, Philipp; Brückner, Markus; Herz, Benedikt
    Abstract: In the beginning of the 1890s, counties located in the Cotton Belt of the American South were hit by an agricultural plague, the boll weevil, that adversely affected cotton production and hence the demand for labor. We use variation in the incidence of the boll weevil multiplied with counties’ initial cotton share to construct instrumental variables estimates of the labor supply curve. Controlling for county and state-by-time fixed effects, we find a significant positive response of labor supply to changes in labor income. The effect is particularly large for females, consistent with evidence that females had a comparative advantage in picking cotton.
    Keywords: Labor Supply, Female Labor Force Participation, Agricultural Productivity Shocks, US South, Boll Weevil
    JEL: E24 J16 J21 N3 N31
    Date: 2014–10
  62. By: Kal, Süleyman Hilmi; Arslaner, Ferhat; Arslaner, Nuran
    Abstract: Holding on gold as an asset has been considered a traditional safe haven for risk averse investors even though holding gold has no yield other than capital asset, especially during the volatile economic periods. Under the Breton Woods agreement the exchange rate is fixed by agreement and the price of gold has become volatile and steadily has been increasing against all of the major currencies. In this study, it is investigated that whether the relationship between gold, interest rates, exchange rates and stock market yields vary depending gold oil ratio. A two state time varying transition probability Markov switching (MS) process to the vector auto regression (VAR) estimation of macro financial variables. The switching between the states of the Markov process is linked to the volatility of gold and the macro financial variables to understand the transition dynamics between states. Results indicate that the interrelationships between the macro financial variables and gold prices are state dependent and volatilities of the variables have a statistically significant effect on the transitional dynamics of gold prices between the states.
    Keywords: Gold Price; Gold Oil Ratio; Stock Price; Interest Rates; Exchange Rates; Time Series Analysis; Markov Switching Regimes
    JEL: C22 E44 G12
    Date: 2013–03
  63. By: Anton Nakov (ECB and CEPR); James Costain (Bank of Spain)
    Abstract: We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro "puzzles" relating to the sizes of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the "selection effect". Allowing for both types of errors also helps explain how trend inflation affects price adjustment.
    Date: 2014
  64. By: Cavalieri, Duccio
    Abstract: This essay provides a simple, non-technical reformulation of Marx’s theoretical treatment of value and capital. It implies the abandonment of the ‘pure’ labour theory of value and of the ‘new value’ equality between the net product of the economy and the living labour employed in production of gross output, and a development of the different theoretical perspective outlined by the mature Marx. A correct method for converting quantities of labour-time in terms of money, which accounts for both explicit and implicit costs, is proposed.
    Keywords: value forms; labour; capital; money; capital theory; critical Marxism; MEV; MELT.
    JEL: B12 B14 B51 D46 E11
    Date: 2014
  65. By: Max Groneck (CMR, University of Cologne; Netspar; Albertus-Magnus-Platz; 50923 Köln; Germany); Alexander Ludwig (SAFE, Goethe University Frankfurt; MEA; Netspar; House of Finance; Grüneburgplatz 1; 60323 Frankfurt am Main; Germany; Department of Economics; University of Pretoria; Private Bag X20; Hatfield 0028; South Africa)
    Abstract: On average, ``young" people underestimate whereas ``old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is em- bedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.
    Keywords: Cumulative prospect theory; Choquet expected utility; Dynamic inconsistency; Life-cycle hypothesis; Saving puzzles
    JEL: D91 D83 E21
    Date: 2014–10
  66. By: Nannan Yuan (Graduate School of Economics, Kobe University); Shigeyuki Hamori (Graduate School of Economics, Kobe University)
    Abstract: This study investigates whether government interventions are effective in regulating Chinafs house prices. To do so, we also consider other control variables such as real land price, per capita real disposable income, and newly started floor spaces. Using panel data of 30 provinces and cities for the period 2002:Q2 to 2012:Q4, we provide empirical evidence by applying both static and dynamic models to examine the effectiveness of Chinafs government interventions on house prices. The main empirical results show that after enacting interventional policies, the growth rate of house prices decreased, indicating that government interventions are effective. In addition, a greater supply of land and houses also help to regulate house prices.
    Keywords: government intervention, house prices, effectivenesst
    JEL: E44 R21 R31
    Date: 2014–10
  67. By: Carlsson, Mikael (Department of Economics)
    Abstract: We use micro data on product prices linked to information on the firms that set them to test for selection effects (state dependence) in micro-level producer pricing. In contrast to using synthetic data from a canonical menu-cost model, we fi…nd very weak, if any, micro-level selection effects when running price change probability regressions on actual data. Moreover, when fi…tting a model that nests both time- and state-dependent elements (the CalvoPlus model of Nakamura and Steinsson,2010) to the data, the resulting parameters mimic the standard Calvo (1983) model. Thus, upstream in the supply chain, price-setting is best characterized as time- dependent.
    Keywords: Price-setting; Business Cycles; Micro Data
    JEL: D40 E30 L16
    Date: 2014–08–19
  68. By: Maito, Esteban Ezequiel
    Abstract: This paper presents estimates of the rate of profit on fourteen countries in the long run. The performance shows a clear downward trend, although there are periods of partial recovery in both core and peripheral countries. The behavior of the profit rate confirms the predictions made by Marx, about the historical trend of the mode of production. Finally, an estimate of the global rate of profit for the last six decades is done, also highlighting the particular role of China in systemic profitability.
    Keywords: Tasa de ganancia - Capital - Karl Marx - Modo de producción capitalista - Centro/Periferia
    JEL: B14 E0 E22 F21 O5 P10 Y10
    Date: 2013–12
  69. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context: Since the last Article IV Consultation in 2012, notable progress has been achieved to enhance macroeconomic stability, underpinned by the Fund-supported program. However, continued progress could be tested as the country faces a more challenging environment, due to increasing social and political tensions and frequent strikes in the run-up to the 2015 elections. Moreover, recent political developments reinforce uncertainties surrounding external budget support. Program: The Executive Board approved the three-year arrangement under the Extended Credit Facility (ECF) on January 27, 2012, with a total access of SDR 30 million. The first, second, third, and fourth reviews were completed on July 27, 2012, February 14, 2013, September 6, 2013, and February 28, 2014, respectively. For the fifth review, all end-March performance criteria were observed, but fiscal revenues underperformed in the first quarter of 2014 requiring corrective fiscal measures (about 1 percent of GDP on an annual basis). Satisfactory progress has been made on structural reforms, albeit with some delays. Outlook and risks: The medium-term macroeconomic outlook is challenging. The principal near-term risk is an intensification of election-related uncertainty, economic disruptions and violence, which would affect investment and growth. Governance issues or delays in making measurable progress in public financial management (PFM) reforms, and heightening of political tensions could curtail donor support. Reintegrating repatriated refugees is likely to add to unemployment pressures, increase demand for public services, and exacerbate social conflict over access to land. Staff Views: The staff recommends the completion of the fifth review under the ECF arrangement, setting of revised performance criteria and indicative targets for September–December 2014, and disbursement of SDR 5 million. The authorities have consented to the publication of this report following the completion of the review.
    Keywords: Article IV consultation reports;Fiscal policy;Fiscal reforms;Monetary policy;Economic indicators;Extended Credit Facility;Staff Reports;Letters of Intent;Press releases;Performance criteria modifications;Burundi;
    Date: 2014–09–23
  70. By: Constantine, Collin
    Abstract: This article reexamines the thesis that fiscal deficits cause trade deficits and challenges this explanation of the twin deficits with the following propositions. Differences in competitiveness among nations do not lead to balanced trade. Using a Eurozone case study, the article discusses the nexus between competitiveness and the trade balance. Secondly, the author proposes that causality runs from trade deficits to fiscal deficits when the free trade-balanced trade theory is overthrown, and finally, the article overturns the argument that austerity works.
    Keywords: twin deficits, competitiveness, free trade, Eurozone, austerity
    JEL: E62 F15 F32 F34 F41
    Date: 2014
  71. By: Alonso-Ortiz, Jorge; Colla, Esteban; Da-Rocha, Jose-Maria
    Abstract: Interest rate spreads on sovereign debt were negatively correlated with the evolution of stock prices during The European Sovereign Debt Crisis. In particular, for a sample of 9 european countries there was a year (between 2009 and 2012) in which the correlation between stock prices and spreads was almost -1. We use this fact to estimate the upper bound of productivity default shocks using a continuous time structural model of default. At every instant the government maximizes expected tax revenues, where the only source of uncertainty is TFP, which follows a regime switching brownian motion. By estimating TFP regimes, to match interest rate spreads on sovereign debt and stock prices, we compute the ratio of the productivity if there was a default relative to the no default benchmark. This is a measure on how much productivity could countries loose at default. We found a robust negative relation between the costs of default and the probability of default. That is, financial markets incorporate into prices the risk of default immediately.
    Keywords: Default, Sovereign Debt, Financial Markets, Productivity
    JEL: E30 E44 G15
    Date: 2014–04–01
  72. By: Bouoiyour, Jamal; Selmi, Refk
    Abstract: The present paper seeks to effectively address the following question: What Bitcoin looks like? To do so, we regress Bitcoin price on different variables (potential Bitcoin fundamentals recorded in the literature) by applying an ARDL Bounds Testing approach for daily data covering the period from December 2010 to June 2014. Our findings highlight the speculative behavior of Bitcoin. This virtual currency may be also used for economic reasons. However, there is any sign of being a safe haven. By considering the Chinese trading bankruptcy, the contribution of speculation (proxied by investors’ attractiveness to Bitcoin) remains dominant, indicating the robustness of our results.
    Keywords: Bitcoin; ARDL Bounds Testing method; innovative accounting approach; VEC Granger causality test.
    JEL: E44 G15
    Date: 2014–09–30
  73. By: Estrada, Fernando
    Abstract: The present study is, in particular, an attempt to test the relationship between tax level and political stability by using some economic control variables and to see the relationship among government effectiveness, corruption, and GDP. For the purpose, we used the Vector Autoregression (VAR) approach in the panel framework, using a country-level panel data from 59 countries for the period 2002 to 2008. The salient features of this model are: (a) simplicity is based on a limited number of variables (five) are categorical or continuous and not dependent on complex interactions or nonlinear effects. (b) accuracy: a low level of errors, the model achieves a high percentage of accuracy in distinguishing countries with inclination to political instability, compared to countries with political stability, (c) generality: the model allows to distinguish types of political instability, both resulting from acts of violence and failure of democracies to show, and (d) novelty: the model incorporates a tool that helps evaluate and exclude many variables used by the conventional literature. This approach is mainly based on the recognition of state structures and the relations between elites and parties
    Keywords: Taxation, Political Stability, Connection, Effects, Panel VAR analysis
    JEL: E62 E63 H2 H23 H3 H30 H71
    Date: 2013
  74. By: Wilson, Matthew; Yelowitz, Aaron
    Abstract: The anonymity of Bitcoin prevents analysis of its users. We collect Google Trends data to examine determinants of interest in Bitcoin. Based on anecdotal evidence regarding Bitcoin users, we construct proxies for four possible clientele: computer programming enthusiasts, speculative investors, Libertarians, and criminals. Computer programming and illegal activity search terms are positively correlated with Bitcoin interest, while Libertarian and investment terms are not.
    Keywords: Bitcoin, Digital currency, Google search data, Libertarians, Illegal Activity
    JEL: E42 F33 K42 K49
    Date: 2014–11–03
  75. By: Ayub, Aishaton; Masih, Mansur
    Abstract: The issue of relationship between exchange rate and stock market is still not conclusive even though many studies have been done and the results are mixed. There is no theoretical consensus on the relationship between stock prices and exchange rates. Thus, this paper aims to examine the relationship between exchange rate and Islamic stock return in Malaysia FTSE market and identify the direction of causation between these two variables by using a time scale decomposition analysis based on the theory of wavelets. In particular, we apply the maximum overlap discrete wavelet transform (MODWT), wavelet variance, wavelet correlation and cross-correlations to analyze the association as well as the lead/lag relationship between the two series at different time scales. The findings based on the time-scale decomposition analysis indicate that the relationship between stock returns and exchange rate is not fixed over different time scales and, in particular, the stock returns are leading exchange rate at the shortest scales, i.e. at scales corresponding to periods of 2-4 days. However, in scales with 8-16 days and 64 days and longer, the stock returns and exchange rate mainly lead each other indicating a bidirectional relationship. Such a result accords quite well with the conventional wisdom which suggests that the investors with longer term horizons are likely to be linked with the macroeconomic fundamentals in their investment activity.
    Keywords: Multi-scale approach, interest rate, exchange rate, Islamic Indices in Malaysia FTSE market, wavelet transform (MODWT), wavelet variance, wavelet cross-correlation, Granger causality
    JEL: C22 C58 E44 G15
    Date: 2013–08–24
  76. By: Felix Ward
    Abstract: To improve the detection of the economic ”danger zones” from which severe banking crises emanate, this paper introduces classification tree ensembles to the banking crisis forecasting literature. I show that their out-of-sample performance in forecasting binary banking crisis indicators surpasses current best-practice early warning systems based on logit models by a substantial margin. I obtain this result on the basis of one long-run- (1870-2011), as well as two broad post-1970 macroeconomic panel datasets. I particularly show that two marked improvements in forecasting performance result from the combination of many classification trees into an ensemble, and the use of many predictors.
    JEL: G01 C53 E50 N10
    Date: 2014–10
  77. By: Berggren, Niclas (Research Institute of Industrial Economics (IFN)); Bjørnskov, Christian (Department of Economics and Business); Lipka, David (School of International Relations and Diplomacy)
    Abstract: While previous research documents a negative relationship between government size and economic growth, suggesting an economic cost of big government, a given government size generally affects growth differently in different countries. As a possible explanation of this differential effect, we explore whether perceived government legitimacy (measured by satisfaction with the way democracy works) influences how a certain government size affects growth. On the positive side, a legitimate government may “get away” with being big since legitimacy can affect people’s behavioral response to, and therefore the economic growth cost of, taxation and government expenditures. On the negative side, legitimacy may make voters less prone to acquire information, which in turn facilitates interest-group oriented or populist policies that harm growth. A panel-data analysis of up to 30 developed countries, in which two different measures of the size of government are interacted with government legitimacy, reveals that legitimacy exacerbates a negative growth effect of government size in the long run. This could be interpreted as governments taking advantage of legitimacy in order to secure short-term support at a long-term cost to the economy.
    Keywords: Legitimacy; Economic growth; Size of government; Confidence; Trust
    JEL: E62 H11 H20 O43 Z13
    Date: 2014–10–30
  78. By: Bian, Timothy Yang (University of International Business and Economics); Gete, Pedro (Georgetown University and IE Business School)
    Abstract: We study housing dynamics in China using vector autoregressions identified with theoryconsistent sign restrictions. We study five potential drivers: 1) Population increases; 2) a relaxation of credit standards, for example, due to the shadow banking system; 3) increasing preferences towards housing, for example, due to a housing bubble or housing being a status asset to be competitive in the marriage market; 4) an increase in the savings rate; and 5) expected productivity progress. Our results show that fundamental shocks (population, credit and productivity) play a major role in the dynamics of house prices and residential investment before 2009. Preference shocks seem especially relevant in the last several years, and when the estimation uses price indices not coming from China’s National Bureau of Statistics.
    JEL: E3 F44 R21 R31
    Date: 2014–09–01
  79. By: Zaman, Gheorghe; Georgescu, George
    Abstract: The balance of the financial exercise 2007-2013 revealed an absorption rate of 27% from the total EU Budget allocations for SCF in the case of Romania. This ratio, the lowest among CEE countries, has been under the influence of various causes, within the system of SCF accessing i.e. at the level of beneficiaries and MAs on different stages of absorption and also outer causes, mainly the legal framework weaknesses and the global crisis effects. The study highlighted the net beneficiary position of Romania relative to the EU budget, but the macroeconomic impact of SCF was found as having rather poor significance. The relevant macroeconomic indicators have registered unfavorable trends during post-crisis period, mainly in terms of foreign investments, external debt and public debt, which could not be mitigated by the SCF inflows. For the period 2014-2020, the new approach of the EU Cohesion Policy, more result-oriented, along with the lessons learned by Romania could address most of factors that are meant to improve the ESI funds absorption, a significant impact being also expected.
    Keywords: EU Cohesion Policy; Structural and Cohesion Funds; absorption rate; macroeconomic indicators; European funds impact
    JEL: E22 F15 F36 F43 O19
    Date: 2014–05–20
  80. By: Gerdie Everaert (Sherppa, Ghent University); Freddy Heylen (Sherppa, Ghent University); Ruben Schoonackers (Research Department, NBB)
    Abstract: This paper analyzes the direct and indirect effects of fiscal policy on total factor productivity (TFP) in a panel of OECD countries over the period 1970-2012. Our contribution is twofold. First, when estimating the impact of fiscal policy on TFP from a production function approach, we identify the worldwide available level of technology by exploiting the observed strong cross-sectional dependence between countries instead of using ad hoc proxies for technology. Second, next to direct effects, we allow for indirect effects of fiscal policy by modelling the access of countries to worldwide available technology as a function of fiscal policy and other variables. Empirically, we propose and implement a non-linear version of the Common Correlated Effects Pooled (CCEP) estimator of Pesaran (2006). The estimation results show that through the direct channel budget deficits harm TFP. A shift towards productive expenditures has a strong positive impact on TFP, whereas a shift towards social transfers reduces TFP. Through the indirect channel, significant positive effects on a country's access to global technology come from reducing the statutory corporate tax rate and from reducing barriers to trade.
    Keywords: Fiscal policy, TFP, Unobserved Common Factors, Panel Data
    JEL: C31 C33 E62 O38
    Date: 2014–11
  81. By: Andreas Mueller (Columbia University)
    Abstract: This paper establishes a new fact about the compositional changes in the pool of unemployed over the U.S. business cycle and evaluates a number of theories that can potentially explain it. Using micro-data from the Current Population Survey for the years 1962-2011, it documents that in recessions the pool of unemployed shifts towards workers with high wages in their previous job. Moreover, it shows that these changes in the composition of the unemployed are mainly due to the higher cyclicality of separations for high-wage workers, and not driven by differences in the cyclicality of job-finding rates. A search-matching model with endogenous separations and worker heterogeneity in terms of ability has difficulty in explaining these patterns, but an extension of the model with credit constraint shocks does much better in accounting for the new facts.
    Date: 2014
  82. By: Jean-Luc Gaffard (OFCE)
    Abstract: L’objet de cet article est de proposer une lecture de l’évolution des faits et des idées économiques dans la perspective de montrer que les vieilles idées resurgissent sous de nouveaux atours, au point d’en cacher les lacunes et de rendre les crises, non seulement difficiles à prévoir, mais même à imaginer. Vouloir incriminer la seule finance et l’incapacité des économistes à en cerner les véritables arcanes pour les expliquer ne saurait suffire, pas plus d’ailleurs que ne le saurait la tentative d’avoir une macroéconomie des temps de crise différente de celle des temps calmes. Les crises ne viennent pas de nulle part. Elles sont le fruit d’une longue maturation dont les clés sont difficilement perceptibles par temps calme, mais existent bel et bien. La principale leçon de cette courte histoire est, sans doute, qu'il faut aller vers une macroéconomie réunifiée, permettant d’articuler court et long terme et de mettre en scène des agents hétérogènes.
    Keywords: budget; chômage; croissance; emploi; inflation; monnaie
    Date: 2013–12
  83. By: Kakarot-Handtke, Egmont
    Abstract: All popular schools lack a consistent profit theory. Economists have no true conception of the most important phenomenon in their universe. This methodological defect persists since Adam Smith. Therefore, the theories of income and wealth distribution are wrong by logical implication. If the conclusions of a theory do not find any counterpart in reality the fault lies in the premises. In order to rectify distribution theory it is necessary to substitute the conventional subjective-behavioral axioms by objective-structural axioms. A major result of the present paper is that distribution is not governed by marginal productivity but by the distributed profit ratio.
    Keywords: new framework of concepts, structure-centric, axiom set, income distribution, wealth distribution, inequality
    JEL: B49 B59 D30 E25
    Date: 2014–10–21
  84. By: Thomas Goda; Özlem Onaran; Engelbert Stockhammer
    Abstract: Several Nobel laureates economists have called for redistributive policies. This paper shows that there is a strong case for redistributive policies because the global increase of income inequality and wealth concentration was an important driver for the financial and Eurozone crisis. The high levels of income inequality resulted in balance of payment imbalances and rising debt levels. Rising wealth concentration contributed to the crisis because the increasing asset demand from the rich played a key role in the rise of the structured credit market and enabled poor and middle-income households to accumulate increasing amounts of debt. To tame the inherent instability of the current mode of capitalism it is necessary to reduce inequality.
    Keywords: Financial crisis, Eurozone crisis, distribution, income inequality, wealth concentration, redistribution
    JEL: D31 G01 E25
    Date: 2014–08–31
  85. By: Mazyaki, Ali; Davodi, Pedram
    Abstract: After Hamilton (2001) and Costa (2001) many empirical and analytical studies (Gong and Meng (2007), Barrett and Brzozowski (2008), …) have manipulated and extended Engel's law to estimate CPI bias and regional price differences. However, there is not yet any study on Iran in which the biases in spatial prices or price indices are discriminated. In this study we suggest that bidimensional social welfare perspectives may contribute very well to policy implications intending to protect Iranian households. To do so, first, we use Hamilton's approach to estimate a Spatial Price Index (SPI) helping us to have a better household welfare criterion. Second, using a developed version of Gini bidimensional decomposition, we find the contribution of rural and urban areas to inequality. Our decomposition method is an improved version of Mussard (2004) bidimensional decomposition method. Our results indicate that while Iranian authorities repeatedly have claimed that income inequalities have improved after the targeted cutting of subsidies in 2011, the above improvement is due to a bias in regional price indices.
    Keywords: decomposition, welfare, distribution, Iran
    JEL: D12 D31 D33 D63 E25 E31 R12
    Date: 2014–07–18
  86. By: Hugo Rodríguez Mendizábal
    Abstract: This paper presents a theoretical model based on risk diversification to rationalize the observed dichotomy in the federal funds market by which small banks are net providers of funds while large banks become net purchasers. As larger banks are more diversified they can raise a larger proportion of funds as equity and provide more loans. To finance these loans, they will need to obtain funds in the wholesale money market. In contrast, smaller banks will be less diversified and will find it harder to raise equity which means producing a lower amount of loans and supplying the extra funds in the wholesale money market. The model also produces a set of testable predictions about the performance of large and small banks that are in line with data for the US.
    Keywords: bank size, diversification, money market, bank solvency
    JEL: E4 E5 G21
    Date: 2014–09
  87. By: Frenkel, Roberto; Rapetti, Martin
    Abstract: In recent years several authors have argued that developing countries should aim to target a stable and competitive real exchange rate (SCRER) to foster economic growth. A growing body of empirical research gives support to this claim. Although more theoretical work is needed, some ideas from development theory can help to explain the empirical findings. For instance, if modern tradable activities display some form of increasing returns to scale, market forces alone would deliver a set of relative prices that would make capital accumulation in these activities suboptimal. This paper supports the view that developing countries could target SCRER as a part of a development strategy that promotes the expansion of modern tradable activities. We review the empirical findings, discuss the channels through which a SCRER can stimulate economic growth, and describe the policies needed to pursue a strategy based on a SCRER.
    Keywords: Real exchange rate, development, macroeconomic policy
    JEL: E61 F41 F43
    Date: 2014
  88. By: Swamy, Vighneswara
    Abstract: In this study, using the World Bank’s Bank Regulation and Supervision Survey (BRSS) data, we draw insights about the bank regulatory/supervisory styles, illustrate the differences in regulation/supervision among crisis, non-crisis and BRICS countries, and highlight the ways in which bank regulation and supervision has changed during the crisis period. The study suggests that crisis-countries had weaker regulatory and supervisory frameworks compared to those in emerging countries during the crisis. BRICS countries as a distinct block has demonstrated uniqueness in the regulatory/supervisory styles which is neither similar to crisis-countries nor with the non-crisis countries.
    Keywords: Central Banks, Banking Regulation, Capital adequacy, Regulation, Risk, Supervision, Financial markets and governance, Crisis
    JEL: E58 G18 G20 G21 G32 G38 L51 O16
    Date: 2014
  89. By: Francisco Blasques; Siem Jan Koopman; Max Mallee (VU University Amsterdam, the Netherlands)
    Abstract: The multivariate analysis of a panel of economic and financial time series with mixed frequencies is a challenging problem. The standard solution is to analyze the mix of monthly and quarterly time series jointly by means of a multivariate dynamic model with a monthly time index: artificial missing values are inserted for the intermediate months of the quarterly time series. In this paper we explore an alternative solution for a class of dynamic factor models that is specified by means of a low frequency quarterly time index. We show that there is no need to introduce artificial missing values while the high frequency (monthly) information is preserved and can still be analyzed. We also provide evidence that the analysis based on a low frequency specification can be carried out in a computationally more efficient way. A comparison study with existing mixed frequency procedures is presented and discussed. Furthermore, we modify the method of maximum likelihood in the context of a dynamic factor model. We introduce variable-specific weights in the likelihood function to let some variable equations be of more importance during the estimation process. We derive the asymptotic properties of the weighted maximum likelihood estimator and we show that the estimator is consistent and asymptotically normal. We also verify the weighted estimation method in a Monte Carlo study to investigate the effect of differen t choices for the weights in different scenarios. Finally, we empirically illustrate the new developments for the extraction of a coincident economic indicator from a small panel of mixed frequency economic time series.
    Keywords: Asymptotic theory, Forecasting, Kalman filter, Nowcasting, State space
    JEL: C13 C32 C53 E17
    Date: 2014–08–11
  90. By: Yasin Mimir
    Abstract: This paper investigates the empirical link between international consumption risk sharing, financial integration, and financial development for a group of twenty-nine developed and developing countries in the G7, the Euro area and the OECD. We first compute the degree of consumption risk sharing of these countries using an average risk sharing measure. We then relate the average risk sharing measure of these countries to their level of financial integration and financial development. We find that (i) the average consumption risk sharing in the Euro area is higher than those in the G-7 and the OECD, and (ii) a higher degree of international consumption risk sharing is associated with a greater degree of financial integration and a lower level of financial development. Based on these results, we argue that more financially integrated countries with more developed financial markets are better able and less in need to insure themselves against idiosyncratic income shocks. Inclusion of per capita income, output risk and trade openness as additional control variables reduces the effects of financial integration and financial development on consumption risk sharing. Holding financial integration and financial development equal, countries in the Euro area engage in significantly more consumption risk sharing than the ones in the G7 and the OECD.
    Keywords: Consumption Risk Sharing, Financial Integration, Financial Development
    JEL: E21 F15 F36 G15 O1
    Date: 2014
  91. By: Thomas Jobert (University of Nice Sophia Antipolis, France; GREDEG CNRS); Alexandru Monahov (University of Nice Sophia Antipolis, France; GREDEG CNRS); Anna Tykhonenko (University of Nice Sophia Antipolis, France; GREDEG CNRS)
    Abstract: We study the impact of prudential supervision on domestic credit in 27 countries throughout 1999-2012. We use the Empirical Iterative Bayes’ estimator to account for country heterogeneity. We find: (i) the interest rate not to be a fundamental variable in explaining domestic credit, (ii) negative relations between credit sensitivity to past investment and to financial dependence, (iii) the effects of supervision on credit differ by country, but (iv) without systematic negative impact of increased supervisory stringency. Our results are coherent with two interpretations: one encouraging regulatory set-ups where increased supervision positively affects credit, and another cautioning about the associated risks.
    Keywords: Prudential supervision, Supervision in the EU, Banking system supervision, Financial institution regulation, Bayesian shrinkage estimator
    JEL: C51 E65 G28
    Date: 2014–10
  92. By: Kakarot-Handtke, Egmont
    Abstract: It has long been criticized that history is almost entirely absent from orthodox economics. This deficiency is due to the fact that equilibrium and time make an odd couple. Because equilibrium is one of the crucial hard-core propositions of the research program it cannot be abandoned. This impedes the treatment of time in a methodologically acceptable manner. The orthodox approach is based on indefensible axioms which are in this paper replaced by objective structural axioms. This enables the synthesis of timeless economic laws, randomness, and goal-oriented human action, which are the essential elements of a formally consistent historical account.
    Keywords: new framework of concepts; structure-centric; axiom set; cumulative causation; First Economic Law; Period Core; propensity function
    JEL: B49 B59 E17
    Date: 2014–09–24
  93. By: Yang, Bill Huajian
    Abstract: Systematic risk has been a focus for stress testing and risk capital assessment. Under the Vasicek asymptotic single risk factor model framework, entity default risk for a risk homogeneous portfolio divides into two parts: systematic and entity specific. While entity specific risk can be modelled by a probit or logistic model using a relatively short period of portfolio historical data, modeling of systematic risk is more challenging. In practice, most default risk models do not fully or dynamically capture systematic risk. In this paper, we propose an approach to modeling systematic and entity specific risks by parts and then aggregating together analytically. Systematic risk is quantified and modelled by a multifactor Vasicek model with a latent residual, a factor accounting for default contagion and feedback effects. The asymptotic maximum likelihood approach for parameter estimation for this model is equivalent to least squares linear regression. Conditional entity PDs for scenario tests and through-the-cycle entity PD all have analytical solutions. For validation, we model the point-in-time entity PD for a commercial portfolio, and stress the portfolio default risk by shocking the systematic risk factors. Rating migration and portfolio loss are assessed.
    Keywords: point-in-time PD, through-the-cycle PD, Vasicek model, systematic risk, entity specific risk, stress testing, rating migration, scenario loss
    JEL: B4 C1 C5 E6 G18 G3
    Date: 2014–03–18
  94. By: Vasco M. Carvalho
    Abstract: A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perspective on production linkages can offer novel insights on the sources of aggregate fluctuations. To do this, I show (i) how production networks can be mapped to a standard general equilibrium setup; (ii) how to approach input-output from this networked perspective and (iii) how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.
    Keywords: production networks, comovement, business cycles, input-output linkages
    Date: 2014–10
  95. By: Ana Paula Fregnani Colombi; Laura Carla Moisa Elicabide; Rita Petra Kallabis
    Abstract: Resumen: En Brasil, históricamente, un elevado crecimiento económico fue acompañado por aumento de la desigualdad, esta tendencia se revirtió durante el período 2004-2008, cuando se retoma el crecimiento económico y se presenta reducción de todos los indicadores de desigualdad de ingresos. Esta tendencia de caída de la desigualdad perduró incluso durante la crisis mundial y después, teniendo como causas explicativas el aprovechamiento político de la buena fase económica de la economía internacional, combinado con la adopción deliberada de políticas públicas por parte del gobierno brasilero. El cambio en la postura gubernamental, principalmente a partir de 2006, fue respaldada por la existencia de un diseño institucional creado en la Constitución de 1988. Sin embargo, esta disminución de la desigualdad de ingresos debe ser relativizada, teniendo en cuenta que aún no enfrenta los problemas histórico-estructurales del país: elevada concentración del ingreso, niveles generales de ingresos muy bajos y alta informalidad en el mercado de trabajo y en las actividades económicas. El enfrentamiento de estas cuestiones requiere avanzar en la consolidación de las instituciones centrales que permiten el desarrollo de la ciudadanía en la sociedad brasilera: la formalización en el mercado de trabajo y la institucionalización de las políticas sociales.
    Keywords: Brasil; Desigualdad de ingresos; Desigualdad social; Políticas sociales
    JEL: I38 E65 H40
    Date: 2013–12–16
  96. By: Martha Delgado; Leonardo Villar; Jonathan Malagón
    Abstract: Este informe presenta el trabajo de investigación realizado para elaborar las proyecciones de mediano plazo 2013 – 2017 por regiones. El documento se divide en tres partes. La primera parte muestra la evolución y composición de la economía nacional desde una perspectiva regional, entre los años 2000 y 2011. Se identifican los aportes de las diferentes regiones del país al Producto Interno Bruto Nacional, su ritmo de crecimiento durante el período, así como también la composición de su estructura productiva. Adicionalmente, se calcula un coeficiente de localización para las actividades productivas de cada región, con el fin de determinar posibles especializaciones en la estructura productiva regional. En la segunda parte se presentan algunos indicadores y variables que pueden aportar información adicional sobre la evolución actual y esperada del PIB regional. Se analizan indicadores recientes de actividad económica como la tasa de ocupación laboral, el consumo de energía y las licencias de construcción. Adicionalmente, se revisa el posible efecto de decisiones que tienen impacto en la inversión pública regional como son la regionalización del presupuesto de inversión de la nación y la reforma al sistema de regalías. Por último, se consideran los posibles impactos sobre las exportaciones y la producción regional del tratado de libre comercio con Estados Unidos, de la Alianza del Pacífico y del comercio con Venezuela.
    Keywords: Proyecciones económicas, Economía regional, Crecimiento económico, PIB, Economía Colombiana
    JEL: O47 R11 C53 E27
    Date: 2013–12–10
  97. By: Ojo, Marianne
    Abstract: The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. As well as highlighting and addressing gaps which exist in the literature relating to liquidity risks, corporate governance and information asymmetries, by way of reference to pre-dominant based dispersed ownership systems and structures, as well as concentrated ownership systems and structures, this paper will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood,indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.
    Keywords: credit risk; liquidity risks; global systemically important banks (G-SIBs); leverage ratios; harmonization; accounting rules; capital arbitrage; disclosure; stress testing techniques; U.S Basel III Final Rule
    JEL: D8 E3 G3 G32 K2
    Date: 2014–08
  98. By: Alfredo Martín Oliver (Universitat de les Illes Balears); Sonia Ruano Pardo (Banco de España); Vicente Salas Fumás (Universidad de Zaragoza)
    Abstract: This paper examines the links between productivity and social welfare, with an application to the banking industry. It models spatial price competition between bank branches jointly with banks’ decisions on the opening or closing of branches based on profit expectations. The model predicts that more productive banks set lower (higher) interest rates on loans (deposits) and increase their market share through both higher demand per branch and a larger network of branches. Specifically, the paper i) uses a new measure of bank productivity; ii) provides a productivity differences-based explanation of the distance between bank branches and bank customers; and iii) shows how the intensity of market competition may be unaffected when the number of banks decreases, provided that banks continue expanding their branch network. The empirical implementation of the model uses Spanish banks over the period 1993-2007 and it confirms the theoretical predictions of the paper
    Keywords: banking spatial competition, bank branch productivity, interest rates, branch dynamics, bank economic profits.
    JEL: E43 G21 L11 O30 R32
    Date: 2014–10
  99. By: Lubberink, Martien
    Abstract: In the lead-up to the implementation of Basel III, European banks bought back debt securities that traded at a discount. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that the accounting and prudential rules exclude from regulatory capital calculations, this to safeguard the safety and soundness of the banking system. For a sample of 720 European LMEs conducted from April 2009 to December 2013, I show that banks lost about 9.3 billion euros in premiums to compensate investors for parting from their debt securities. This amount would have been recognized as Core Tier 1 regulatory capital, if regulation would accept the recognition of fair value gains on debt. The premiums paid are particularly high for the most loss absorbing capital securities. More importantly, the premiums increase with leverage and in times of stress, right when conserving cash is paramount to preserve the safety and soundness of the banking system. These results weaken the case of the exclusion from regulatory capital of unrealized gains that originate from a weakened own credit standing.
    Keywords: Banking, repurchases, subordinated debt.
    JEL: E58 G21 G28 G32 G35 M41
    Date: 2014–10–20

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