|
on Macroeconomics |
|
Issue of 2014‒12‒08
seventy papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Groneck, Max; Ludwig, Alexander; Zimper, Alexander |
| 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 embedded 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:73&r=mac |
| By: | Dimitris P. Sotiropoulos; John Milios; Spyros Lapatsioras |
| Abstract: | The present study puts forward a plan for solving the sovereign debt crisis in the euro area (EA) in line with the interests of the working classes and the social majority. Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favors social justice and coherence, having as its priority the social needs and the interests of the working majority. |
| Keywords: | Euro Area; Sovereign Debt; European Central Bank; Unconventional Monetary Policies |
| JEL: | E58 E61 H12 H63 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_819&r=mac |
| By: | Ronald Wolthoff |
| Abstract: | I develop a directed search model of the labor market in which firms choose a recruiting intensity, determining the number of applicants they will interview. Interviewing applicants is costly but reveals their productivity, allowing the firm to hire better workers. I characterize the equilibrium and find that the uniqueness and cyclicality of recruiting intensity crucially depend on parameter values. Calibration of the model to the US labor market indicates a multiplicity of the equilibrium. An increase in aggregate productivity---given selection of a particular equilibrium---causes recruiting intensity to move counter to unemployment, while a shock to the equilibrium selection rule predicts the opposite pattern. |
| Keywords: | labor market, search, frictions, recruiting, efficiency |
| JEL: | J64 E24 |
| Date: | 2014–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-522&r=mac |
| By: | Jonathan B. Berk; Jules H. van Binsbergen |
| Abstract: | We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the true risk model. Using this methodology, we find that of the models most commonly used in the literature, the Capital Asset Pricing Model is the closest. Given our current state of knowledge, the Capital Asset Pricing Model is thus the appropriate method to use to calculate the cost of capital of an investment opportunity. Despite the Capital Asset Pricing Model's success, we also document that a large fraction of mutual fund flows remain unexplained by existing asset pricing models. |
| JEL: | D14 D24 E2 E22 E44 G0 G00 G1 G10 G11 G12 G2 G20 G23 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20435&r=mac |
| By: | BEN ROMDHANE, Ikram; MENSI, Sami |
| Abstract: | With the numerous monetary policy reforms undertaken during the 1990s, inflation targeting emerged as one of the possible solutions. The macroeconomic performance of this regime has attracted the attention of recent research, yet no final consensus on its role is reached. The aim of this paper is to contribute to this debate through a panoply of mixed results proven by the recent literature. Empirically, the purpose of this study is to assess the impact of inflation targeting on inflation and output based on a panel of 30 OECD countries over the period 1980_2012, using the “differences-in- differences” approach of Ball and Sheridan (2005). Our results indicate that inflation targeting helps to improve macroeconomic performance of targeters OECD countries more than non- targeters in terms of average inflation and volatility. Our findings corroborate previous studies like those of Wu (2004), Ball and Sheridan (2005) and Manai,O (2014). However, our results point to an insignificant impact of this regime on output consistent with Gonçalves- Salles (2008) and Ftiti & Essadi (2013). However, our results contrast those of S-Hebbel (2007) and Ftiti J. Goux (2011) which assume that there is no difference between targeters and non-targeters OECD countries. |
| Keywords: | Inflation targeting, Performance, Macroeconomic Dimensions, Monetary Policy, Panel Analysis. |
| JEL: | E52 E58 G21 |
| Date: | 2014–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:60108&r=mac |
| By: | Kühl, Michael |
| Abstract: | The role of bank capital as a propagation channel of shocks is strongly pronounced in recent macroeconomic models. In this paper, we show how the evolution of bank capital depends on the share of non-state-contingent assets in banks' balance sheets and present the consequences for macroeconomic dynamics. State-contingent securities impact on banks' balance sheets through changes in their returns (and their prices), both of which depend on the current state of the economy. Nonstate-contingent assets are signed before shocks are realized and their repayment is guaranteed. For this reason they insulate banks' balance sheets from recent economic activity in the absence of defaults. Our results show that non-state-contingent assets in banks' balance sheets attenuate the amplification of shocks resulting from financial frictions in the banking sector. |
| Keywords: | bank capital,state-contingent assets,non-state-contingent assets,monetary policy,financial frictions |
| JEL: | E44 E58 E61 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:252014&r=mac |
| By: | Martin Pospíšil (CERGE-EI, Charles University, Prague); Jiøí Schwarz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | In this paper we use balance-sheet data and information on bankruptcy to study the relationship between investment, financial constraints, and bankruptcy in a posttransition country. Our data constitute a dynamic panel and cover the period 2006–2011, which also allows us to study the impact of the 2008 crisis on Czech companies. Using investment–cash flow sensitivity to analyze financial constraints we find there is robust evidence that cash flow and the level of debt have a positive and significant impact on the investment rate. By taking a closer look at individual subsamples we reveal that the existence of financial constraints, proxied by investment–cash flow sensitivity, is evident mainly after 2008 and in small and medium-sized enterprises. At the same time, we do not uncover any evidence that firms going bankrupt during our observed period faced more severe financial constraints. Moreover, companies going bankrupt had significantly higher levels of external debt and bank loans, which indicates that they may have been, in fact, less constrained than others. |
| Keywords: | bankruptcy, cash flow, credit rationing, financial constraints, investment, post-transition economy |
| JEL: | D22 D92 E22 G32 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_12&r=mac |
| By: | Javier Bianchi; Saki Bigio |
| Abstract: | We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock. |
| JEL: | E0 E4 E51 E52 G01 G1 G11 G18 G20 G21 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20490&r=mac |
| By: | Loukas Karabarbounis; Brent Neiman |
| Abstract: | The labor share is typically measured as compensation to labor relative to gross value added ("gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share") may be more important in some settings, however, because depreciation is not consumed. In this paper we make three contributions. First, we document that gross and net labor shares generally declined together in most countries around the world over the past four decades. Second, we use a simple economic environment to show that declines in the price of capital necessarily cause gross and net labor shares to move in the same direction, whereas other shocks such as a decline in the real interest rate may cause the net labor share to rise when the gross labor share falls. Third, we illustrate that whether the gross or the net labor share is a more useful proxy for inequality during an economy's transition depends sensitively on the nature of the underlying shocks that hit the economy. |
| JEL: | E21 E22 E23 E25 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20606&r=mac |
| By: | Beirne, John; Friedrich, Christian |
| Abstract: | This paper assesses the effectiveness and associated externalities that arise when macro- prudential policies (MPPs) are used to manage international capital flows. Using a sample of up to 139 countries, we examine the impact of eight different MPP measures on cross-border bank flows over the period 1999-2009. Our panel analysis takes into account the structure of the banking system as well as the presence of potential cross-country and cross-asset class spillover effects. Our results indicate that the structure of the domestic banking system matters for the effectiveness of MPPs. We specifically find that a high share of non-resident bank loans in the MPP-implementing country reduces the domestic effectiveness of most MPPs, while a high return on assets in the domestic banking system has the opposite effect. Our results on the spillover analysis indicate that both types of spillover can occur. First, we find that a high return on assets in the banking system of countries other than the MPP-implementing one leads to a reduction, and a greater degree of trade integration leads to an increase in spillovers across countries. However, the economic significance of the results suggests that only a limited number of countries will tend to experience substantial geographical spillover effects. Second, we also find some evidence of spillover effects across asset classes within countries. JEL Classification: F3, F5, G01, G11 |
| Keywords: | banking system, international capital flows, macroprudential policies |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141721&r=mac |
| By: | Alessi, Lucia; Ghysels, Eric; Onorante, Luca; Peach, Richard; Potter, Simon |
| Abstract: | This paper documents macroeconomic forecasting during the global financial crisis by two key central banks: the European Central Bank and the Federal Reserve Bank of New York. The paper is the result of a collaborative effort between staff at the two institutions, allowing us to study the time-stamped forecasts as they were made throughout the crisis. The analysis does not exclusively focuses on point forecast performance. It also examines methodological contributions, including how financial market data could have been incorporated into the forecasting process. JEL Classification: C53, E37 |
| Keywords: | forecast evaluation, mixed frequency data sampling |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141688&r=mac |
| By: | Simeon Alder; David Lagakos; Lee Ohanian |
| Abstract: | No region of the United States fared worse over the postwar period than the "Rust Belt," the heavy manufacturing region bordering the Great Lakes. This paper hypothesizes that the Rust Belt declined in large part due to a lack of competitive pressure in its labor and output markets. We formalize this thesis in a two-region dynamic general equilibrium model, in which productivity growth and regional employment shares are determined by the extent of competition. Quantitatively, the model accounts for much of the large secular decline in the Rust Belt's employment share before the 1980s, and the relative stabilization of the Rust Belt since then, as competitive pressure increased. |
| JEL: | E0 O3 O4 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20538&r=mac |
| By: | Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic. Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodárenskou veží 4, 182 08 Prague 8, Czech Republic); Tomáš Olešòaník (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | Should we blame the euro for widening of current account deficits in the EMU? In this paper, we employ time-specific fixed effect estimator to study determinants of the current account deficits of the EU countries before and after adoption of the euro. Our aim is to assess to what extent the increased current account deficits could be attributed to the single currency and to the role of other variables, especially fiscal policy and developments of financial sector. We show that euro had negative effect on current account balances of southern countries. Moreover, we provide evidence that the role of fiscal policy in current account dynamics changed with euro adoption and twin deficits emerged in many countries. Finally, we document significant role of growing credits to private sector for built-up of persistent current account deficits, hence the negative effects of excessive lending on external balance should be addressed by the regulators and policy makers in the future. |
| Keywords: | current account, euro, fiscal balance, financial system |
| JEL: | E42 E62 F14 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_27&r=mac |
| By: | Dunne, Peter G. (Central Bank of Ireland); Fleming, Michael J. (Reserve Bank of New York); Zholos, Andrey (Barclays Capital) |
| Abstract: | We examine the relationship between monetary policy operations and interbank trading of funds using sovereign bonds as collateral. We first establish that, in the pre-crisis period, there are important but rather weak relations between these funding sources and that this relationship varies within maintenance periods and at the end of the year. Oficial funding conditions did not meaningfully constrain repo market activity in the 2003-05 period but, in the immediate pre-crisis period, rate increases led to a sharp contraction in repo activity. Focusing on the crisis period, we identify potentially benign substitution effects between official auctions and repo market activity but our empirical analysis shows that positive innovations in the cost of official funding, due to aggressive bidding, and a limited allotment response, encouraged increased use of the interbank repo market. The analysis informs a discussion of the merits of returning to variable rate operations. |
| Keywords: | Repo, Funding, Liquidity, Monetary Policy, Reserve Management. |
| JEL: | E43 E44 E52 E53 G12 G14 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:09/rt/14&r=mac |
| By: | Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary |
| Abstract: | Japan has reached the limits of conventional macroeconomic policy. In order to overcome deflation and achieve sustainable economic growth, the Bank of Japan (BOJ) recently set an inflation target of 2% and implemented an aggressive monetary policy so this target could be achieved as soon as possible. Although prices started to rise after the BOJ implemented monetary easing, this may have been for other reasons, such as higher oil prices. Oil became expensive as a result of the depreciated Japanese yen and this was one of the main causes of the rise in inflation. This paper shows that quantitative easing may not have stimulated the Japanese economy either. Aggregate demand, which includes private investment, did not increase significantly in Japan with lower interest rates. Private investment displays this unconventional behavior because of uncertainty about the future and because Japan’s population is aging. We believe that the remedy for Japan’s economic policy is not to be found in monetary policy. The government needs to implement serious structural changes and growth strategies. |
| Keywords: | Easing of Monetary Policy, the Japanese economy, energy price, Bank of Japan, aging population |
| JEL: | E47 E52 Q41 Q43 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:24520&r=mac |
| By: | Dedecca, Claudio Salvadori |
| Abstract: | The paper discusses the NEPs implementation mechanism in Brazil. |
| Keywords: | employment policy, promotion of employment, labour market, evaluation, Brazil, politique de l'emploi, promotion de l'emploi, marché du travail, évaluation, Brésil, política de empleo, fomento del empleo, mercado de trabajo, evaluación, Brasil |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:485639&r=mac |
| By: | Zimmermann, Katharina; Fuertes, Venesa |
| Abstract: | This paper discusses the employment policy mechanisms in the EU and the United Kingdom and Germany. |
| Keywords: | employment policy, governance, EU countries, Germany, UK, politique de l'emploi, gouvernance, pays de l'UE, Allemagne, Royaume-Uni, política de empleo, gobernabilidad, países de la UE, Alemania, Reino Unido |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:485644&r=mac |
| By: | Dossche, Maarten; Lewis, Vivien; Poilly, Céline |
| Abstract: | We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex ‘wage curve’ linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as an instrument to dampen inefficient hours fluctuations. JEL Classification: E30, E50, E60 |
| Keywords: | employment, hours, optimal monetary policy, wage curve |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141713&r=mac |
| By: | Ludwig, Alexander; Schön, Matthias |
| Abstract: | This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1.4 to 1.7 times faster than HYBGM in the finite horizon version and 2.4 to 2.5 times faster in the infinite horizon version of the model. |
| Keywords: | Dynamic Models,Numerical Solution,Endogenous gridpoints Method,Delaunay Interpolation |
| JEL: | C63 E21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:72&r=mac |
| By: | Jesús A. Bejarano; Luisa F. Charry |
| Abstract: | In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing. |
| Keywords: | Financial frictions, optimal interest rate rules, interest rate spreads, welfare, small open economy, second order approximation |
| JEL: | E44 E50 E52 E58 F41 |
| Date: | 2014–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012316&r=mac |
| By: | Fuentes-Albero, Cristina (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | I revisit the Great Inflation and the Great Moderation. I document an immoderation in corporate balance sheet variables so that the Great Moderation is best described as a period of divergent patterns in volatilities for real, nominal and financial variables. A model with time-varying financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that (i) while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better institutions; (ii) the slowdown in credit spreads is driven by an easier access to credit, while a higher exposure to financial risk determines the immoderation of balance sheet variables; and (iii) financial shocks arise as relevant drivers of U.S. business cycle uctuations. |
| Keywords: | Great Inflation; Great Moderation; immoderation; financial frictions; financial shocks; structural breaks; Bayesian methods |
| JEL: | C11 C13 E32 E44 |
| Date: | 2014–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-84&r=mac |
| By: | Juan Pablo Durán Ortiz |
| Abstract: | Resumen: Epistemológicamente, el sistema económico puede ser entendido a través de dos enfoques: biología y física. En este trabajo, se utiliza el enfoque biológico para ilustrar la financialización, que es el proceso por el cual se reorientan todos los recursos económicos hacia el mercado especulativo. En este trabajo se compara el sistema económico con el cuerpo humano con el fin de estudiar la financiarización y sus efectos en el sistema económico. En particular, se explica cómo la financiarización se desarrolla en la economía de una manera similar a la forma como el SIDA se propaga dentro del cuerpo humano, tanto en la forma como crece dentro del sistema, como también por las consecuencias que genera dentro del mismo. Finalmente se proponen algunas acciones que pueden minimizar los riesgos de las crisis dentro de la economía partiendo de sus verdaderas causas. |
| Keywords: | La financiarización; El SIDA; El sistema económico; Crisis, AIDS economic system |
| JEL: | B5 E5 G1 A2 |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000418:012299&r=mac |
| By: | Casal, Sandro; Ploner, Matteo; Sproten, Alec N. |
| Abstract: | Asset management often involves a conflict of interests between investors and fund managers. A main goal of financial regulators is to identify and mitigate this conflict. This article focuses on measures that may foster protection of investors' interests. In an experiment capturing the essential elements of asset management, we find that managers' accountability does not prevent their opportunistic behavior if not backed by a threat of punishment. Further, investors inefficiently sanction managers if not completely aware of managers' choices. To effectively protect investors in financial intermediations, financial regulators should ensure both managers' accountability and a credible sanctioning system. |
| Keywords: | Delegated risky decisions,Monetary conflict of interest,Asset management,Experiment |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwqwdp:132014&r=mac |
| By: | Aronsson, Thomas (Dept of Economics, Umeå School of Business and Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | Much evidence suggests that people are concerned with their relative consumption, i.e., their consumption in relation to the consumption of others. Yet, the social costs of conspicuous consumption have so far played little (or no) role in savings-based indicators of sustainable development. The present paper examines the implications of such behavior for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the resource allocation is a social optimum, an indicator of positional externalities must be added to genuine saving to arrive at the proper measure of intertemporal welfare change. A numerical example based on U.S. and Swedish data suggests that conventional measures of genuine saving (which do not reflect conspicuous consumption) are likely to largely overestimate this welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving. |
| Keywords: | welfare change; investment; saving; relative consumption |
| JEL: | D03 D60 D62 E21 H21 I31 Q56 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0605&r=mac |
| By: | Jonathan Zinman |
| Abstract: | Borrowing decisions affect most households, with large stakes and implications for subfields as varied as macroeconomics and industrial organization. I review theoretical and empirical work on household debt: its prevalence, level, growth, and composition, as well as various measures of consumer choice and market (in)efficiency, elasticities, and prices, including new evidence on how borrowing heterogeneity affects the distribution of the opportunity cost of consumption. I also discuss opportunities and challenges in policy evaluation. A key takeaway is that puzzles outstrip stylized facts, and I highlight numerous avenues for further research. |
| JEL: | D03 D14 D18 D83 D91 E21 E32 G01 G02 G11 G21 G23 G28 R31 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20496&r=mac |
| By: | Russell Cooper; Guozhong Zhu |
| Abstract: | This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life-cycle model is constructed to understand a rich set of facts about decisions of households with different levels of educational attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and the wealth-income ratio. Model parameters, including preferences, the cost of stock market participation and portfolio adjustment costs, are estimated to match the financial decisions of different education groups. Based on the estimated model, education affects household finance mainly through increased average income. The estimation also finds evidence that higher educational attainment is associated with a lower stock market entry cost and a larger discount factor. Education specific differences in income risks, medical expenses, mortality risks and the life-cycle pattern of income explain relatively little of the observed differences in household financial choices. |
| JEL: | E21 G11 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20684&r=mac |
| By: | Rachel Ong (Bankwest Curtin Economics Centre, Curtin University); Gavin Wood (Centre for Urban Research, RMIT University); Siobhan Austen (School of Economics and Finance, Curtin University); Therese Jefferson (Graduate School of Business, Curtin University); Marietta E.A. Haffner (Faculty of Architecture and the Built Environment, Delft University of Technology) |
| Abstract: | resource that can perform a pension role in retirement. This paper assesses the extent to which Australians aged over 45 utilise housing equity withdrawal (HEW) through the three methods of in situ mortgage equity withdrawal, downsizing and selling up. We find that the incidence of HEW has increased over the last decade despite a global financial crisis. Mortgage equity withdrawal is the dominant form of equity release among those under pension age, while downsizing or selling up is relatively more frequent among those above pension age. Different motivations are associated with the decision to invoke alternative styles of equity withdrawal. Mortgage equity withdrawal is linked with financial and employment factors while downsizing and selling up seems to be prompted by adverse life events. Selling up to access equity is typically an option of last resort. Our findings offer insights into important debates around home ownership societies and the welfare role performed by owner-occupied housing in mid-to-late life. |
| Keywords: | housing equity withdrawal, mortgage equity withdrawal, downsizing, selling up, mid-to-late life |
| JEL: | E21 J14 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:ozl:bcecwp:wp1406&r=mac |
| By: | Ongena, Steven; Schindele, Ibolya; Vonnák, Dzsamila |
| Abstract: | We analyze the differential impact of domestic and foreign monetary policy on the local supply of bank credit in domestic and foreign currencies. We analyze a novel, supervisory dataset from Hungary that records all bank lending to firms including its currency denomination. Accounting for time-varying firm-specific heterogeneity in loan demand, we find that a lower domestic interest rate expands the supply of credit in the domestic but not in the foreign currency. A lower foreign interest rate on the other hand expands lending by lowly versus highly capitalized banks relatively more in the foreign than in the domestic currency. |
| Keywords: | Bank balance-sheet channel,monetary policy,foreign currency lending |
| JEL: | E51 F3 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:474&r=mac |
| By: | Philippe Martin; Thomas Philippon |
| Abstract: | We provide a first comprehensive account of the dynamics of Eurozone countries from the creation of the Euro to the Great recession. We model each country as an open economy within a monetary union and analyze the dynamics of private leverage, fiscal policy and spreads. Our parsimonious model can replicate the time-series for nominal GDP, employment, and net exports of Eurozone countries between 2000 and 2012. We then ask how periphery countries would have fared with: (i) more conservative fiscal policies; (ii) macro-prudential tools to control private leverage; (iii) a central bank acting earlier to limit sovereign spreads; and (iv) the possibility to recoup the competitiveness they lost in the boom. To perform these counterfactual experiments, we use U.S. states as a control group that did not suffer from a sudden stop. We find that periphery countries could have stabilized their employment if they had followed more conservative fiscal policies during the boom. This is especially true in Greece. For Ireland, however, given the size of the private leverage boom, such a policy would have required buying back almost all of the public debt. Macro-prudential policy would have been helpful, especially in Ireland and Spain. However, in presence of a spending bias in fiscal rules, macro-prudential policies would have led to less prudent fiscal policies in the boom. Central bank actions would have stabilized employment during the bust but not public debt. Finally, if these countries had been able to regain in the bust the competitiveness they lost in the boom, they would have experienced a shorter and milder recession. |
| JEL: | E2 E3 E4 E6 F3 F4 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20572&r=mac |
| By: | Francesco Zanetti; Haroon Mumtaz |
| Abstract: | This paper studies how key labor market stylized facts and the responses of labor market variables to technology shocks vary over the US postwar period. It uses a benchmark DSGE model enriched with labor market frictions and investment specific technological progress that enables a novel identification scheme based on sign restrictions on a SVAR with time-varying coefficients and stochastic volatility. Key findings are: i) the volatility in job finding and separation rates has declined over time, while their correlation varies across time; ii) the job finding rate plays an important role for unemployment, and the two series are strongly negatively correlated over the sample period; iii) the magnitude of the response of labor market variables to technology shocks varies across the sample period. |
| Keywords: | Technology shocks, labor market frictions, Bayesian SVAR methods, sign restrictions |
| JEL: | E32 C32 |
| Date: | 2014–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:728&r=mac |
| By: | Gilberto Tadeu Lima; Jaylson Jair Silveira |
| Abstract: | This paper explores implications for capacity utilization and economic growth driven by effective demand of income distribution featuring the possibility of profit sharing with workers. Firms choose to compensate workers with either a base wage or a share of profits on top of this base wage. In accordance with robust empirical evidence, workers in sharing firms have higher productivity than workers in non-sharing firms. Meanwhile, the joint frequency distribution of employee compensation strategies and labor productivity across firms is evolutionarily time-varying. Two major results carrying relevant theoretical and policy implications obtain from our exploration. First, heterogeneity in employee compensation strategies across firms may emerge as a permanent, long-run equilibrium outcome. Second, in the long run, a higher frequency of profit-sharing firms does not necessarily generate higher rates of capacity utilization and economic growth. |
| Keywords: | Profit sharing; evolutionary dynamics; income distribution; capacity utilization; economic growth. |
| JEL: | E12 E25 J33 O40 |
| Date: | 2014–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2014wpecon27&r=mac |
| By: | Funashima, Yoshito |
| Abstract: | It is commonly believed that public investments play a central role in Japan's discretionary fiscal policies, but the majority is implemented by local governments. After distinguishing between public investment by the central government and that by local governments, this paper utilizes wavelet techniques to examine macroeconomic policy coordination between Japanese central and local governments. We demonstrate that local government investments fail to coordinate with central government investments during the lost two decades, and such a coordination failure is a one-time phenomenon in nearly a half-century. In this period, local government investments exhibit no countercyclical behavior to business cycles, which is contributory to the ineffectiveness of fiscal stimulus that is pointed out by our predecessors. |
| Keywords: | Public investment; Wavelet; Central government; Local government |
| JEL: | E32 E62 |
| Date: | 2014–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59821&r=mac |
| By: | Bodenstein, Martin (National University of Singapore); Guerrieri, Luca (Board of Governors of the Federal Reserve System (U.S.)); LaBriola, Joe (University of California, Berkeley) |
| Abstract: | Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations. |
| Keywords: | Optimal policy; strategic interaction; welfare analysis; monetary policy cooperation; marcroprudential regulation |
| JEL: | E44 E61 F42 |
| Date: | 2014–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-87&r=mac |
| By: | Fernando López Vicente (Banco de España); José María Serena Garralda (Banco de España) |
| Abstract: | Macroeconomic policy in Latin America underwent significant changes in the late nineties. Brazil is an outstanding example: inflation targeting was introduced in 1999 and a new fiscal policy framework was set up in 2000 with the Fiscal Responsibility Law. However, two elements of the Brazilian economy constrained the apparently state-of-the-art macroeconomic policy framework: the composition of public debt and the structure of the banking system. This paper discusses why macroeconomic policies were restricted by those factors and how they have evolved differently. The structure of public debt, characterised by indexation, short-term maturities and short US dollar positions, imposed significant constraints on macroeconomic policies during the 2000s. Nevertheless, these vulnerabilities were gradually overcome and the composition of public debt has remained stable in the aftermath of the global financial crisis. At the same time, the structure of the banking system was characterised by credit segmentation and high interest spreads, and these characteristics are still present today. These features have become key elements in understanding current macroeconomic developments, credit dynamics and the economic policy stance. |
| Keywords: | public debt, central banking, credit policies, Brazil. |
| JEL: | H30 E58 E63 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1405&r=mac |
| By: | Warne, Anders; Coenen, Günter; Christoffel, Kai |
| Abstract: | The predictive likelihood is of particular relevance in a Bayesian setting when the purpose is to rank models in a forecast comparison exercise. This paper discusses how the predictive likelihood can be estimated for any subset of the observable variables in linear Gaussian state-space models with Bayesian methods, and proposes to utilize a missing observations consistent Kalman filter in the process of achieving this objective. As an empirical application, we analyze euro area data and compare the density forecast performance of a DSGE model to DSGE-VARs and reduced-form linear Gaussian models. |
| Keywords: | Bayesian inference,density forecasting,Kalman filter,missing data,Monte Carlo integration,predictive likelihood |
| JEL: | C11 C32 C52 C53 E37 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:478&r=mac |
| By: | Beja, Edsel |
| Abstract: | This paper uses the gap between the level of an economy’s well-being and that of a people’s well-being as a measure of the overall economic ill-being in a society. In particular, it argues that such disparity is measurable using objective measures of and subjective measures for inflation and joblessness. The inflation rate in this regard signifies the affordability of goods and services; its subjective counterpart then indicates the sense of whether the people can actually afford goods and services or not. The joblessness rate meanwhile shows the extent to which there is no gainful employment; its subjective counterpart then represents the sense of being jobless as understood by the people. The results indicate that the overall economic ill-being in the Philippines did not change much even with robust economic growth in recent years. This finding unveils a scene that is different from that painted by official statistics from the country. |
| Keywords: | Economic ill-being; well-being; misery index, Philippines |
| JEL: | C43 D60 E24 E31 E66 I31 |
| Date: | 2014–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59772&r=mac |
| By: | Eric T. Swanson; John C. Williams |
| Abstract: | The federal funds rate has been at the zero lower bound for over four years, since December 2008. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we measure the effects of the zero lower bound on interest rates of any maturity by comparing the sensitivity of those interest rates to macroeconomic news when short-term interest rates were very low to that during normal times. We find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to news throughout 2008-10, suggesting that monetary and fiscal policy were likely to have been about as effective as usual during this period. Only beginning in late 2011 does the sensitivity of these yields to news fall closer to zero. We offer two explanations for our findings: First, until late 2011, market participants expected the funds rate to lift off from zero within about four quarters, minimizing the effects of the zero bound on medium- and longer-term yields. Second, the Fed's unconventional policy actions seem to have helped offset the effects of the zero bound on medium- and longer-term rates. |
| JEL: | E43 E52 E62 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20486&r=mac |
| By: | Arias , Maria A. (Federal Reserve Bank of St. Louis); Gascon, Charles S. (Federal Reserve Bank of St. Louis); Rapach, David E. |
| Abstract: | We construct monthly economic-activity indices for 51 U.S. metropolitan statistical areas for 1990 to 2014. Each index is computed via a dynamic factor model that includes 14 variables measuring various aspects of economic activity in a metro area. We estimate the dynamic factor model using the recently developed maximum-likelihood approach of Bańbura and Modugno (2014), which allows for arbitrary patterns of missing data and enables us to accommodate mixed-frequency data and differences in data-publication lags. Our indices highlight important similarities and differences in business cycles across metro areas. During the national recessions of the early 1990s and early 2000s, a number of metro areas experience sizable recessions, while other areas escape recessions altogether during one or both of these periods. In contrast, all metro areas suffer severe recessions around the time of the recent Great Recession. Nevertheless, there are significant differences in the length and depth of recent recessions across metro areas, and we find that these differences are strongly related to local housing-market conditions. We also estimate each metro area’s “beta”—its sensitivity to national economic activity—and relate the betas to metro characteristics. |
| Keywords: | Metropolitan statistical area; Recession; Dynamic factor model; Latent variable; EM algorithm; Housing market. |
| JEL: | C38 E32 R11 R31 |
| Date: | 2014–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-046&r=mac |
| By: | Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich |
| Abstract: | This paper presents the family of the Keynes+Schumpeter (K+S, cf. Dosi et al, 2010, 2013, 2014) evolutionary agent-based models, which study the effects of a rich ensemble of innovation, industrial dynamics and macroeconomic policies on the long-term growth and short-run fluctuations of the economy. The K+S models embed the Schumpeterian growth paradigm into a complex system of imperfect coordination among heterogeneous interacting firms and banks, where Keynesian (demand-related) and Minskian (credit cycle) elements feed back into the meso and macro dynamics. The model is able to endogenously generate long-run growth together with business cycles and major crises. Moreover, it reproduces a long list of macroeconomic and microeconomic stylized facts. Here, we discuss a series of experiments on the role of policies affecting i) innovation, ii) industry dynamics, iii) demand and iv) income distribution. Our results suggest the presence of strong complementarities between Schumpeterian (technological) and Keynesian (demand-related) policies in ensuring that the economic system follows a path of sustained stable growth and employment. |
| Keywords: | agent-based model, fiscal policy, economic crises, austerity policies, disequilibrium dynamics |
| Date: | 2014–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2014/21&r=mac |
| By: | George Alessandria; Horag Choi; Joseph P. Kaboski; Virgiliu Midrigan |
| Abstract: | The extent and direction of causation between micro volatility and business cycles are debated. We examine, empirically and theoretically, the source and effects of fluctuations in the dispersion of producer- level sales and production over the business cycle. On the theoretical side, we study the effect of exogenous first- and second-moment shocks to producer-level productivity in a two-country DSGE model with heterogenous producers and an endogenous dynamic export participation decision. First-moment shocks cause endogenous fluctuations in producer-level dispersion by reallocating production internationally, while second-moment shocks lead to increases in trade relative to GDP in recessions. Empirically, using detailed product-level data in the motor vehicle industry and industry-level data of U.S. manufacturers, we find evidence that international reallocation is indeed important for understanding cross-industry variation in cyclical patterns of measured dispersion. |
| JEL: | E31 F12 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20616&r=mac |
| By: | Dominik Groll |
| Abstract: | Whether countries benefit from forming a monetary union depends critically on the way monetary policy is conducted. This is mainly because monetary policy determines whether and to what extent a flexible nominal exchange rate fosters or hampers macroeconomic stabilization, even if monetary policy does not target the nominal exchange rate explicitly |
| Keywords: | Monetary union, macroeconomic stabilization, welfare analysis, optimum currency area theory, trade openness |
| JEL: | F33 F41 E52 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1969&r=mac |
| By: | IIBOSHI Hirokuni |
| Abstract: | I extend a simple new Keynesian model with the Markov-switching-type Taylor rule introduced by Davig and Leeper (2007 ) by incorporating the constraint of the zero lower bound (ZLB), using the concept and algorithms of the stochastic rational expectations equilibrium proposed by Billi (2013). According to the calibration, when an economy does not face the ZLB constraint, there is no gap in the fluctuation of output and inflation between stochastic expectations and perfect foresight because of the linear policy functions. In contrast, once negative aggregate demand shocks make the nominal interest rate hit the ZLB under stochastic expectations, unlike perfect foresight, intensifying uncertainty plays an important role in further declines of the output and price level even in response to the same shock, regardless of the monetary policy regime adopted. The calibration also indicates the possibility that the steady states of a model, in the absence of the ZLB, are underestimated in periods of deflation, since the means often used as estimates of the steady states are biased downward from these. The analysis sheds light on an exit strategy from the zero interest rate policy, since a passive policy regime reduces the expected interest rate and induces both the expected output and the inflation to increase under the ZLB. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:esj:esridp:312&r=mac |
| By: | Tamim Bayoumi (International Monetary Fund); Joseph E. Gagnon (Peterson Institute for International Economics); Christian Saborowski (International Monetary Fund) |
| Abstract: | We use a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. We find that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared with 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows. We consistently find larger impacts of net official flows when international capital flows are restricted and smaller impacts when capital is highly mobile. A further result is that there is an important positive effect of lagged net official flows on current accounts that we believe operates through the portfolio balance channel. |
| Keywords: | reserve accumulation, intervention, capital mobility |
| JEL: | E5 F3 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp14-8&r=mac |
| By: | Berthold, Norbert; Gründler, Klaus |
| Abstract: | What are the causes of social mobility in a society? Whereas this question is of great interest for both researchers and policymakers, empirical studies concerning cross-country evidence usually suffer from small sample biases as intergenerational income elasticities are only available for a small number of countries. In this paper, we provide two measures based on widely available macro data enabling the estimation of social mobility for a large number of countries. Based on these measures we empirically explore the determinants of cross-country differences in mobility. It turns out that particularly less segregation, a good family environment, inspiring cognitive brain stimulation in early childhood education, high rates of employment, good opportunities to catch up to the average human capital endowment, low variations in school quality and a high amount of social capital foster social mobility. We further find that the "Great Gatsby Curve" is much less pronounced when analyzing the relationship between inequality and mobility in a large sample of countries. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wuewwb:128&r=mac |
| By: | Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro |
| Abstract: | We analyse the role of time-variation in coe¢ cients and other sources of un- certainty in exchange rate forecasting regressions. Our techniques incorporate the notion that the relevant set of predictors and their corresponding weights, change over time. We Önd that predictive models which allow for sudden, rather than smooth, changes in coe¢ cients signiÖcantly beat the random walk benchmark in out-of-sample forecasting exercise. Using an innovative variance decomposition scheme, we identify uncertainty in coe¢ cientsíestimation and uncertainty about the precise degree of coe¢ cientsívariability, as the main fac- tors hindering modelsíforecasting performance. The uncertainty regarding the choice of the predictor is small. |
| Keywords: | Instabilities; Exchange Rate Forecasting; Time-Varying Parameter Models; Bayesian Model Averaging; Forecast Combination; Financial Condi- tion Indexes; Bootstrap |
| JEL: | C53 E44 F37 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2014_16&r=mac |
| By: | Mendez-Guerra, Carlos |
| Abstract: | The post-World War II period has seen substantial changes in labor productivity around the world. Motivated by these changes, this article documents four facts about the world productivity distribution. First, there is a large and increasing disparity between the tails. Second, this disparity rapidly increased in the mid-1980s, slowed down in the next decade, and stabilized in the mid-2000s. Third, overtime, there has been substantial forward and backward mobility of countries and regions. Fourth, the upper tail of the distribution is more sensitive to improvements in human capital, while the lower tail is more sensitive to improvements in efficiency. |
| Keywords: | labor productivity, world productivity distribution, convergence |
| JEL: | E10 O40 O50 |
| Date: | 2014–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59811&r=mac |
| By: | Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Serkan Çiçek (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | Summary Despite near stagnation in the euro area and the negative impact of the Ukraine crisis, in most of the NMS economies and some of the Western Balkan countries growth prospects are viewed as positive. While the NMS economies will preserve their positive growth differential vis-à-vis the EU-28, Russia and Ukraine are facing a deterioration of their economic performance. External factors have had a major impact on growth performance in the CESEE region. Financial transfers from the EU have lent essential support to economic growth in the European Union’s new Member States (NMS). Investment and operational costs funded via those transfers have become an integral and increasingly important part of aggregate demand in the NMS economies. 2013 and 2014 have been among the strongest years in terms of transfers in the framework of the EU cohesion policy. Their impact is comparable to that of fiscal stimuli, albeit better inasmuch as they do not give rise to new debt. A possible disadvantage compared to classic fiscal stimuli is that transfers have no steerable relation to business cycles. In the eastern part of the CESEE region, the Ukraine conflict has had a pronounced negative impact on economic growth. 25 years after the fall of the Iron Curtain, the current crisis in relations between Russia and the West is evolving into a dangerous geopolitical conflict. In Ukraine, the main victim of the conflict, the economy may decline by 8% over the current year. In Russia, the costs of the conflict are estimated to be to the tune of about 1% of GDP, primarily on account of increased investment risks and the financial sanctions. The impact on the individual EU countries differs according to their exposure to the Russian market. The Baltic States and some other NMS will be those most affected on account of their trade channels with estimated losses in the order of up to 0.4% of GDP. The global financial crisis has shattered the rapid expansion of financial intermediation in nearly all of the countries in the region; recovery of crediting activities is still fragmentary and weak. High levels of non-performing loans are a major concern throughout much of the region. There seems to be a justified concern over the region having entered a period of ‘creditless recovery’ which threatens to be much slower than a recovery with strong credit growth. The outlook for GDP growth in the CESEE region is again fairly diversified. Compared to 2013, the growth performance is expected to improve in twelve and deteriorate in nine of the twenty-one countries in the region in 2014. The general medium-term trend for the NMS as a whole is seen to be positive in most of these countries, we expect a gradual acceleration of GDP growth; exceptions are Hungary and Slovenia where a deceleration is forecast, and Poland where the relatively high GDP growth rate will remain practically unchanged. For the current year, the assumption is that the NMS will grow by 1.8 percentage points higher than expansion in the euro area and 1.3 pp above the EU-28 average. In 2015, the gap in favour of NMS growth performance will become somewhat narrower 1.5 pp relative to the euro area and 1.1 pp to the EU-28 average. For some of the countries in the Western Balkans, growth prospects will only improve over the period 2015-2016, closely related to the damage caused by the floods this summer. Turkey will continue to register remarkable economic growth. Growth performance in Kazakhstan, Russia and Ukraine will worsen in the current year compared to 2013; the medium-term outlook in Russia and Ukraine is, depending on the evolution of the political crisis, fairly uncertain with considerable downward risks. As for our forecasts for 2015 and 2016, a further weakening of performance in the euro area poses a downward risk, while a longer lasting drop in oil prices will represent an upward risk, except for energy exporters Russia and Kazakhstan. |
| Keywords: | Central and East European new EU Member States, Southeast Europe, Balkans, Russia, Ukraine, Kazakhstan, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, financial crisis, deleveraging, exchange rates, fiscal consolidation, Ukraine conflict |
| JEL: | C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wii:fpaper:fc:autumn2014&r=mac |
| By: | Ronald A. Ratti; Joaquin L. Vespignani |
| Abstract: | Hamilton identifies 1973 to 1996 as “the age of OPEC” and 1997 to the present as “a new industrial age.” During 1974-1996 growth in non-OPEC oil production Granger causes growth in OPEC oil production. OPEC oil production decreases significantly with positive shocks to non-OPEC oil production in the earlier period, but does not do so in the “new industrial age”. In the “new industrial age” OPEC oil production rises significantly with an increase in oil prices, unlike during “the age of OPEC” period. OPEC oil production responds significantly to positive innovations in global GDP throughout. Over 1997:Q1-2012:Q4 the negative effect on real oil price of positive shocks to non-OPEC oil production is larger in absolute value than that of positive shocks to OPEC oil production. The cumulative effects of structural shocks to non-OPEC oil production and to real oil price on OPEC oil production are large. The cumulative effects of structural shocks to OPEC production and real oil price on non-OPEC production are small. Results are robust to changes in model specification. An econometric technique to predict growth in OPEC oil production provides support for the results from the SVAR analysis. Results are consistent with important changes in the global oil market. |
| Keywords: | OPEC production, non-OPEC, oil Price, global oil market |
| JEL: | E31 E32 Q43 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-69&r=mac |
| By: | Gregor Semieniuk (Schwartz Center for Economic Policy Analysis (SCEPA)) |
| Abstract: | This note examines Thomas Piketty's (2014) explanation and prediction of simultaneously rising capital income ratio and profit share by an elasticity of substitution, sigma, greater than one between labor and capital in an aggregate production function. I review Piketty's elasticity argument, which relies on a non-standard capital definition. In light of the theory of land rent, I discuss why the non-standard capital definition is problematic for estimating elasticities. For lack of existing results, I make a simple estimate of sigma in the class of constant elasticity of substitution functions for Piketty's data as well as for a subset of his capital measure that comes closer to the standard capital definition. The estimation results cast doubt on Piketty's hypothesis of a sigma greater than one. |
| Keywords: | rent theory, wealth definition, capitalization of land, elasticity of substitution, Piketty |
| JEL: | B12 E01 E25 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:epa:cepawp:2014-9&r=mac |
| By: | Ian Christensen; Fuchun Li |
| Abstract: | The objective of this paper is to propose an early warning system that can predict the likelihood of the occurrence of financial stress events within a given period of time. To achieve this goal, the signal extraction approach proposed by Kaminsky, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit an unusual behaviour in the periods preceding a financial stress event. Based on the individual indicators, we propose three different composite indicators, the summed composite indicator, the extreme composite indicator and the weighted composite indicator. In-sample forecasting results indicate that the three composite indicators are useful tools for predicting financial stress events. The out-of-sample forecasting results suggest that for most countries, including Canada, the weighted composite indicator performs better than the two others across all criteria considered. |
| Keywords: | Econometric and statistical methods, Financial stability |
| JEL: | C14 C4 E37 E47 F36 F37 G01 G17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-37&r=mac |
| By: | Wayne, James J. |
| Abstract: | Why would social science need the help from quantum mechanics? First, there are many unanswerable questions in social science. Are financial markets predictable? How to predict the financial markets? These important questions are not answerable in the existing framework of finance or economics. One important paradox in social science is the psychohistory paradox proposed by Asimov. In his novels, Asimov highlighted a paradox of human society: if the future events of a human society are predictable using psychohistory, people could take the advantage of that prediction to prevent the future events from happening, and the original prediction would be proven wrong. The psychohistory paradox is very real and fundamental in the human society. Second, the existing framework of modern physics can neither explain nor predict the human behavior. It is ridiculous and totally unacceptable that the same modern physics, which often boasts about the accurate descriptions and predictions of the tinniest elementary particles to the largest structures of the universe with amazing accuracies, cannot handle the simple human behavior observed in our everyday life. The flaws of the existing framework of modern physics must be fixed. Third, it is the internal logic of science. If the human free will is a quantum phenomenon as many people believe and social science is all about human choices, social science must be a branch of quantum physics. Fourth and last, quantum social science, or psychohistory, brings powerful tools and new insights to social science. Quantum social science can answer all the previously unanswerable fundamental questions in social science, and re-frame every problem in politics, economics, and other social science to be a physics problem. This paper summarizes the logic flow from the creation of JJW interpretation of quantum mechanics and physics laws of social science (PLSS) to their impacts on economics, finance, politics, and other fields of social science, natural science, and theology. Since many applications of PLSS are still unknown, this paper serves as an introduction to quantum social science and its applications. The central ideas of PLSS are very simple, yet it has profound logic consequences on many corners of human knowledge. The primary goal of this paper is to convey the beauty and simplicity of the framework of quantum social science or psychohistory. |
| Keywords: | quantum social science, physics laws of social science, indetermancy, choice, probabilistic causality, information, uncertainty, equilibrium, and arrow of time |
| JEL: | A12 B1 B2 D0 D01 D5 D50 D8 E0 |
| Date: | 2014–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59858&r=mac |
| By: | Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg) |
| Abstract: | Employing data from a representative survey conducted in Germany, this paper examines public preferences for the size and composition of government expenditure. We focus on public attitudes toward taxes, public debt incurrence, and public spending in six different policy areas. Our findings suggest, first, that the current scope of government is supported by a majority of the German population. Second, we find that individual preferences for the composition of government spending differ along various dimensions. Specifically, personal economic well-being, economic literacy, confidence in politicians, political ideology, and time preference are significantly related to individual attitudes toward public spending, taxes, and debt. The magnitude of the effects is particularly large for time preference, economic knowledge, and party preference. Third, public preferences for public spending priorities are only marginally affected when considering a public budget constraint. |
| Keywords: | Public spending, public preferences, public debt, taxes, survey, Germany. |
| JEL: | E62 H11 H50 H63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201457&r=mac |
| By: | Jakob de Haan; Jeroen Hessel; Niels Gilbert |
| Abstract: | This paper analyses the reforms in the architecture of EMU since the eruption of the euro crisis in 2010. We describe major weaknesses in the original set-up of EMU, such as lack of fiscal discipline, diverging financial cycles and competitiveness positions, and a lack of crisis instruments. These weaknesses appeared against the background of a strong increase in financial integration and financial imbalances since the Maastricht treaty was signed. European policymakers have addressed all weaknesses in the EMU architecture in some way or the other, which is a major achievement. Yet, the effectiveness of the new framework will crucially depend on strict implementation. We discuss whether in the longer run the current balance between policy coordination and risk sharing can be improved upon. |
| Keywords: | Economic and Monetary Union; Financial Cycles; Financial crisis; European debt crisis |
| JEL: | E44 E58 F36 G15 G21 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:446&r=mac |
| By: | Szarowska, Irena |
| Abstract: | Economic and debt crisis has increased the attention paid to the development of government expenditure in problematic regions in the European Union. The goal of the article is to provide direct empirical evidence on cyclicality and the long-term and short-term relationship between government expenditure and output in the Portugal, Ireland, Italy, Greece and Spain in a period 1995-2011. We have applied Johansen cointegration test and the error correction model on adjusted annual data of GDP and government expenditure in compliance with the COFOG international standard. Research confirms procyclical development of government expenditure functions on GDP in the selected countries; this procyclicality is in line with development typical for developing countries. Moreover, output and government expenditure are cointegrated for at least six of the expenditure categories in every country and it implies a long-term relationship between government expenditure and output consistent with Wagner’s law. The values of the coefficients for the short-run relationship between expenditure and output confirm the voracity hypothesis, as they suggest that in response to a given shock to real GDP, government expenditure rises by even more in percentage points. |
| Keywords: | government expenditure, cyclicality, voracity effect, Wagner´s law, COFOG classification, long-run elasticity, short-run elasticity |
| JEL: | C32 E62 E63 H50 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59777&r=mac |
| By: | Gallo, Marcos Esteban |
| Abstract: | El presente trabajo busca analizar las principales características del régimen macroeconómico actual, haciendo hincapié en las limitaciones estructurales y en las contradicciones políticas que dificultan su continuidad. En tal sentido, se plantea que la crisis económica actual asume la forma de una modalidad particular de la restricción externa que se diferencia del estrangulamiento externo clásico, característico de la industrialización por sustitución de importaciones, debido a la incidencia que en el presente tienen la fuga de capitales y el pago de los servicios de la deuda pública nominada en moneda extranjera heredada de la última dictadura militar y del régimen de convertibilidad. La presente ponencia constituye un ensayo cuyo objetivo es analizar los problemas macroeconómicos actuales en relación a una problemática más amplia de orden sociopolítico, por la cual los distintos sectores de la sociedad argentina no logran consensuar un modelo de desarrollo económico a largo plazo, capaz de integrar en forma inclusiva al conjunto de la población. A fin de cumplimentar el objetivo propuesto, se analizan las principales variables de la economía argentina durante la etapa de posconvertibilidad, procurando establecer vínculos entre la evolución de las mismas y las estrategias de acumulación implementadas por los principales grupos de interés de la sociedad argentina. Se recurre para ello a información económica provista por organismos oficiales, así como a fuentes secundarias de diverso tipo vinculadas tanto a datos económicos como a información cuantitativa y cualitativa acerca de las características y estrategias de los principales grupos de interés. |
| Keywords: | Modelos Macroeconómicos; Modelos de Acumulación; Postconvertibilidad; Argentina; |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:2060&r=mac |
| By: | Mark Bils; Peter J. Klenow; Benjamin A. Malin |
| Abstract: | Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been labeled "the labor wedge" -- a cyclical wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed, intermediate inputs, and work-in-process inventories. Looking at the past quarter century in the U.S., we find that price markup movements are at least as important as wage markup movements -- including in the Great Recession and its aftermath. Thus sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions. |
| JEL: | E24 E32 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20555&r=mac |
| By: | Szarowska, Irena |
| Abstract: | This article deals with a tax burden in the European Union in as financial and economic crisis has impacted also on tax systems in the European Union. Governments´ tax measure aims to consolidate public finance and promote an economic growth. The article provides empirical evidence on a shift in a tax burden and its structure and analyzes the effects of shift in tax burden on economic growth in the EU. It is used the Eurostat definition to categorize tax burden by economic functions and implicit rates of consumption, labour and capital are investigated. The analysis is based on annual data of the EU member states in a period 1995-2010. Pairwise Granger Causality Test was used for examining relations between economic growth and tax burden by economic functions in short-term. Results confirm that there is two-way causality between change of implicit tax rate of consumption and GDP growth; and also GDP growth Granger-cause change of implicit tax rate of capital and implicit tax rate of labour through one-way causality. On average, labour taxes have decreased by 1.9 p.p., capital taxes have also decreased – by 2.1 p.p., but consumption taxes have mildly increased by 0.4 p.p. in the European Union in a period 1995-2010. |
| Keywords: | tax burden, tax shift, implicit tax rates, growth conductive system, economic functions, economic growth |
| JEL: | E62 H2 O11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59778&r=mac |
| By: | Lorenz Kueng |
| Abstract: | Although theoretical models of household behavior often emphasize fiscal foresight, most empirical studies neglect the role of news, thereby potentially underestimating the total effect of tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with consumption data from the Consumer Expenditure Survey, I find that consumption of high-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime income, consistent with the basic rational-expectations life-cycle theory. |
| JEL: | E21 E62 G12 H31 H74 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20437&r=mac |
| By: | Clancy, Daragh (Central Bank of Ireland); Cussen, Mary (Central Bank of Ireland); Lydon, Reamonn (Central Bank of Ireland) |
| Abstract: | This paper analyses how developments in the housing market affect consumer spending. Using aggregate data, we show that housing wealth exerts a positive influence on consumption. Whilst informative, the aggregate results not allow us to identify housing wealth effects separately from credit effects, income expectations and complementarity effects. Survey data is therefore used to assess whether behaviour at the household level can further explain consumption trends at the aggregate level. We observe a strong correlation between house price levels and consumption for young, middle- and older-aged cohorts. The strong house price effects for younger cohorts in particular, who are predominantly renters, suggests that house prices are also a proxy for changes in in permanent income. However, our analysis also suggests that significant housing wealth effects are present, particularly when it comes to spending on durable goods. Our research highlights not only the benefits of combining household and aggregate level data for understanding consumption, but also the importance of decomposing consumption into its constituent parts for understanding housing wealth effects in particular. |
| Keywords: | consumption, wealth effects, credit conditions, income expectations, business cycle, durable goods. |
| JEL: | D12 E21 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:13/rt/14&r=mac |
| By: | Altavilla, Carlo; Giannone, Domenico; Lenza, Michele |
| Abstract: | This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT) announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMT announcements decreased the Italian and Spanish 2-year government bond yields by about 2 percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. These results are used to calibrate a scenario in a multi-country model describing the macro-financial linkages in France, Germany, Italy, and Spain. The scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany. JEL Classification: E47, E58, C54 |
| Keywords: | event study, multi-country vector autoregressive model, news, Outright Monetary Transactions |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141707&r=mac |
| By: | Rhys R. Mendes |
| Abstract: | A measure of the neutral policy interest rate can be used to gauge the stance of monetary policy. We define the neutral rate as the real policy rate consistent with output at its potential level and inflation equal to target after the effects of all cyclical shocks have dissipated. This is a medium- to longer-run concept of the neutral rate. Under this definition, the neutral rate in Canada is determined by the longer-run forces that influence savings and investment in both the Canadian and global economies. Structural forces have likely reduced the neutral rate by more than a percentage point since the mid-2000s. The Bank’s estimates of the real neutral policy rate currently stand in the 1 to 2 per cent range, or 3 to 4 per cent in nominal terms. The current gap between the policy rate and the neutral rate reflects policy stimulus in response to significant excess supply and in the face of continuing headwinds. As long as these headwinds persist, a policy rate below neutral will be required to maintain inflation sustainably at target. |
| Keywords: | Interest rates, Transmission of monetary policy |
| JEL: | E40 E42 E43 E50 E52 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:14-5&r=mac |
| By: | Schleer, Frauke; Kappler, Marcus |
| Abstract: | The path of output prior to the financial and economic crisis turned out to be not sustainable and lower than previously estimated in some European crisis countries. Specifically, the output gaps have been underestimated (and inversely potential output overestimated) before the recent crisis. It is fair to say that the employed estimation techniques failed to provide valid real-time assessments of the state of the credit boom driven euro area economies. One reason for this may be the breakdown of the Phillips curve relationship during the last years. Against this backdrop, we comprehensively analyse the validity of the Phillips curve for five European countries with a focus on the recent crisis. We find that a mostly insignificant relation between inflation and the output gap or unemployment gap, which questions the adequacy of the Phillips curve to identify the sustainable level of output in an economy. The credit-driven boom in crisis countries has made clear that (disadvantageous) financial markets conditions may result in structural and long-term real economic distortions that are not yet taken into account in conventional methods for the estimation of potential output and the output gap. Since both, potential output and output gaps, are a key notion in policymaking, incorporating financial factors could improve the reliability of the estimates. Our results point in this direction. |
| Keywords: | Phillips curve,potential output,output gap,financial cycle,credit cycle,NAIRU |
| JEL: | E32 E44 E60 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14067&r=mac |
| By: | Maximo Camacho; Danilo Leiva-Leon |
| Abstract: | This paper examines the business cycle linkages that propagate industry-specific business cycle shocks throughout the economy in a way that (sometimes) generates aggregated cycles. The transmission of sectoral business cycles is modelled through a multivariate Markov-switching model, which is estimated by Gibbs sampling. Using nonparametric density estimation approaches, we find that the number and location of modes in the distribution of industrial dissimilarities change over the business cycle. There is a relatively stable trimodal pattern during expansionary and recessionary phases characterized by highly, moderately and lowly synchronized industries. However, during phase changes, the density mass spreads from moderately synchronized industries to lowly synchronized industries. This agrees with a sequential transmission of the industrial business cycle dynamics. |
| Keywords: | Business fluctuations and cycles, Domestic demand and components, Econometric and statistical methods |
| JEL: | C22 E27 E32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-48&r=mac |
| By: | Beckmann, Joscha; Belke, Ansgar; Dreger, Christian |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:euvwdp:359&r=mac |
| By: | Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | This paper analyzes the fiscal and monetary policy responses to crises in Latin America over the last 40 years. We argue that, on average, Latin American countries have "graduated" in terms of their policy responses in the sense that they have been able to switch from procyclical to counteryclical policy responses. This average response, however, masks a great deal of heterogeneity with some countries (such as Chile, Brazil, and Mexico) leading the graduation process and others (like Argentina and Venezuela) still showing procyclical policy responses. We further show that countercyclical policy responses have been effective in reducing the duration and intensity of crises. Finally, we relate our analysis to the current crisis in the Eurozone and argue that, like in many instances in Latin America, procyclical fiscal policy has increased the duration and intensity of the crisis. |
| JEL: | E52 E62 F41 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20675&r=mac |
| By: | Horváth, Roman; Maršál, Aleš |
| Abstract: | We lay out a small open economy dynamic stochastic general equilibrium (DSGE) model with Markov switching to study the term structure of interest rates. We extend the previous models by opening up the economy and adding a foreign demand channel. As a result, we explain the term structure of Czech interest rates and that the open economy version of the model fits reasonably well the period after the adoption of inflation targeting, which was characterized by two regimes: 1) a disinflation regime and 2) a price stability regime. |
| Keywords: | DSGE small open economy model,term structure of interest rates,regime switching |
| JEL: | G12 E17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:22&r=mac |
| By: | Santiago Chelala |
| Abstract: | Resumen: El trabajo presenta una curva de Phillips que considera un doble grado de traslación o pass through. Uno para apreciaciones y otro para depreciaciones cambiarias. Se analiza un posible origen endógeno de la asimetría para el caso de los inventarios y se obtienen conclusiones vinculadas al manejo de la política monetaria al considerar el desdoblamiento del grado de traslación. |
| Keywords: | Curva de Phillips; Pass through; Banco Central. |
| JEL: | E3 E5 E61 E10 |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000418:012301&r=mac |
| By: | Laurent Callot (VU University Amsterdam, the Tinbergen Institute and CREATES); Johannes Tang Kristensen (University of Southern Denmark and CREATES) |
| Abstract: | This paper proposes a parsimoniously time varying parameter vector autoregressive model (with exogenous variables, VARX) and studies the properties of the Lasso and adaptive Lasso as estimators of this model. The parameters of the model are assumed to follow parsimonious random walks, where parsimony stems from the assumption that increments to the parameters have a non-zero probability of being exactly equal to zero. By varying the degree of parsimony our model can accommodate constant parameters, an unknown number of structural breaks, or parameters with a high degree of variation. We characterize the finite sample properties of the Lasso by deriving upper bounds on the estimation and prediction errors that are valid with high probability; and asymptotically we show that these bounds tend to zero with probability tending to one if the number of non zero increments grows slower than squareroot T. By simulation experiments we investigate the properties of the Lasso and the adaptive Lasso in settings where the parameters are stable, experience structural breaks, or follow a parsimonious random walk.We use our model to investigate the monetary policy response to inflation and business cycle fluctuations in the US by estimating a parsimoniously time varying parameter Taylor rule.We document substantial changes in the policy response of the Fed in the 1980s and since 2008. |
| Keywords: | Parsimony, time varying parameters, VAR, structural break, Lasso |
| JEL: | C01 C13 C32 E52 |
| Date: | 2014–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2014-41&r=mac |
| By: | Martin Gervais; Nir Jaimovich; Henry E. Siu; Yaniv Yedid-Levi |
| Abstract: | Why is unemployment higher for younger individuals? We address this question in a frictional model of the labor market that features learning about occupational fit. In order to learn the occupation in which they are most productive, workers sample occupations over their careers. Because young workers are more likely to be in matches that represent a poor occupational fit, they spend more time in transition between occupations. Through this mechanism, our model can replicate the observed age differences in unemployment which, as in the data, are due to differences in job separation rates. |
| JEL: | E0 J0 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20628&r=mac |
| By: | Robert B. Barsky; Susanto Basu; Keyoung Lee |
| Abstract: | Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where “news” is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent – possibly lending some support to the hypothesis of news-driven business cycles – or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia. |
| JEL: | E32 E37 O40 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20666&r=mac |