nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒12‒13
sixty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. On the Importance of Sales for Aggregate Price Flexibility By Oleksiy Kryvtsov; Nicolas Vincent
  2. Monetary Policy in Open Economies: Practical Perspectives for Pragmatic Central Bankers By Richard Clarida
  3. Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle By Mayer, Eric; Rüth, Sebastian; Scharler, Johann
  4. Lending standards, credit booms and monetary policy By Afanasyeva, Elena; Güntner, Jochen
  5. Response of Stock Markets to Monetary Policy : An Asian Stock Market Perspective By Naoyuki Yoshino; Farhad Taghizadeh-Hesary; Ali Hassanzadeh; Ahmad Danu Prasetyo
  6. Capital Flows, Financial Intermediation and Macroprudential Policies By Matteo Ghilardi; Shanaka J. Peiris
  7. A Model of Secular Stagnation By Gauti B. Eggertsson; Neil R. Mehrotra
  8. Financial regimes and uncertainty shocks By Piergiorgio Alessandri; Haroon Mumtaz
  9. A New Method of Estimating Potential Real GDP Growth: Implications for the Labor Market and the Debt/GDP Ratio By Robert J. Gordon
  10. Labor Market Reforms and Current Account Imbalances: Beggar-Thy-Neighbor Policies in a Currency Union? By Baas, Timo; Belke, Ansgar
  11. Investor borrowing heterogeneity in a Kiyotaki-Moore style macro model By Maria Teresa Punzi; Katrin Rabitsch
  12. Does the clarity of inflation reports affect volatility in financial markets? By Aleš Bulíř; Martin Číhak; David-Jan Jansen
  13. Mismatch Shocks and Unemployment During the Great Recession By Nicolas Groshenny
  14. Fiscal rules and unemployment By Gehrke, Britta
  15. Food Inflation in India: The Role for Monetary Policy By Rahul Anand; Ding Ding; Volodymyr Tulin
  16. Optimal Government Debt Maturity By Davide Debortoli; Ricardo Nunes; Pierre Yared
  17. Bowling Alone or Bowling at All? The Effect of Unemployment on Social Participation By Lars Kunze; Nicolai Suppa
  18. Mitigating financial stress in a bank-financed economy: Equity injections into banks or purchases of assets? By Kühl, Michael
  19. Credit supply dynamics and economic activity in euro area countries: a time-varying parameter VAR analysis By Bijsterbosch, Martin; Falagiarda, Matteo
  20. Public Investment, Time to Build, and the Zero Lower Bound By Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
  21. Measuring External Risks for Peru: Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy By Fei Han
  22. Banks, Capital Flows and Financial Crises By Akinci, Ozge; Queraltó, Albert
  23. Logit price dynamics By Costain, James; Nakov, Anton
  24. Financial Frictions and Sources of Business Cycle By Marzie Taheri Sanjani
  25. Vector Autoregressions with Parsimoniously Time Varying Parameters and an Application to Monetary Policy By Laurent Callot; Johannes Tang Kristensen
  26. The Federal Reserve's Abandonment of its 1923 Principles By Julio J. Rotemberg
  27. Unemployment and labor reallocation in Europe By Hogrefe, Jan; Sachs, Andreas
  28. "The Distribution of Wealth and the Marginal Propensity to Consume" By Christopher Carroll; Jiri Slacalek; Kiichi Tokuoka; Matthew N. White
  29. Euro Area business cycles in turbulent times: convergence or decoupling? By F. Ferroni; B. Klaus
  30. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  31. Deflation and Economic Growth in Long-Term Perspective By Pavel Ryska
  32. Reconstruction multipliers By Trezzi, Riccardo; Porcelli, Francesco
  33. A Model-Based Analysis of Spillovers: The Case of Poland and the Euro Area By Michal Andrle; Roberto Garcia-Saltos; Giang Ho
  34. Unconventional Monetary Policy and Long-Term Interest Rates By Tao Wu
  35. Collateral monetary equilibrium with liquidity constraints in an infinite horizon economy By Ngoc-Sang Pham
  36. Credit Market Frictions and Sudden Stops By Yuko Imura
  37. Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds By Nikolaos Antonakakis
  38. Prices, Consumption, and Dividends Over the Business Cycle: A Tale of Two Regimes By Anisha Ghosh; George M. Constantinides
  39. Inflation Expectations, Learning and Supermarket Prices: Evidence from Field Experiments By Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
  40. Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News By Cosmin Ilut; Matthias Kehrig; Martin Schneider
  41. High marginal tax rates on the top 1%? By Kindermann, Fabian; Krueger, Dirk
  42. Does Money Matter in the Euro area? Evidence from a new Divisia Index By Zsolt Darvas
  43. Liquidity Premia and Interest Rate Parity By Ludger Linnemann; Andreas Schabert
  44. A Comparison of New Factor Models By Kewei Hou; Chen Xue; Lu Zhang
  45. Explaining Educational Attainment across Countries and over Time By Restuccia, Diego; Vandenbroucke, Guillaume
  46. Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio
  47. Trade Adjustment Dynamics and the Welfare Gains from Trade By George Alessandria; Horag Choi; Kim Ruhl
  48. Youth unemployment in the OECD: The role of institutions By Sachs, Andreas; Smolny, Werner
  49. House Price Expectations By Niu, Geng; van Soest, Arthur
  50. A Comprehensive Analysis of the Response of Private Consumption to Government Spending By Funashima, Yoshito
  51. The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets By Clouse, James A.; Ihrig, Jane E.; Klee, Elizabeth C.; Chen, Han
  52. Reestimación del grado de transmisión de la tasa de cambio del peso sobre la inflación de los bienes importados By Hernán Rincón; Norberto Rodríguez
  53. Towards deeper financial integration in Europe: What the Banking Union can contribute By Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
  54. The Impact of Food Crisis on Government Debt in the Arab Region By Ali, Hoda Abd El Hamid
  55. Can Uzbekistan Economy Retain Its High Growth Rates? Scenarios of Economic Development in 2015-30 By Popov, Vladimir
  56. Dealing with unobservable common trends in small samples: a panel cointegration approach By Francesca Di Iorio; Stefano Fachin
  57. A Distant Mirror of Debt, Default, and Relief By Carmen M. Reinhart; Christoph Trebesch
  58. Mandated versus Negotiated Severance Pay By Auray, Stéphane; Danthine, Samuel; Poschke, Markus
  59. Knowledge-based Hierarchies: Using Organizations to Understand the Economy By Luis Garicano; Esteban Rossi-Hansberg
  60. A Distant Mirror of Debt, Default, and Relief By Reinhart, Carmen M.; Trebesch, Christoph
  62. Pozarządowe agencje zatrudnienia osób niepełnosprawnych - szanse i wyzwania By Klimczuk, Andrzej
  63. A Bayesian Latent Variable Mixture Model for Filtering Firm Profit Rate By Gregor Semieniuk; Ellis Scharfenaker
  64. Happiness matters: the role of well-being in productivity By Charles Henri DiMaria; Chiara Peroni; Francesco Sarracino

  1. By: Oleksiy Kryvtsov; Nicolas Vincent
    Abstract: Macroeconomists have traditionally ignored the behavior of temporary price markdowns (“sales”) by retailers. Although sales are common in the micro price data, they are assumed to be unrelated to macroeconomic phenomena and generally filtered out. We challenge this view. First, using the 1996–2012 data set of the U.K. CPI monthly price quotes, we document a roughly twofold increase in the frequency of sales during the Great Recession. We also present evidence of countercyclical sales in the United States. Second, we build a New Keynesian macroeconomic model in which temporary sales arise as a pricing mechanism that allows retailers to price discriminate across consumers with different opportunity costs of time. In line with our empirical evidence, the model predicts that firms react to macroeconomic shocks by varying the frequency of sales. In response to a monetary contraction, firms facing costs of decreasing regular prices post more sales, and households spend more time looking for sales. The resulting fall in the aggregate price level can be significantly larger than if sales were ignored. When the model is calibrated to match the behavior of sales in the data, it implies that the sales margin leads to a much smaller response of real consumption to monetary shocks.
    Keywords: Business fluctuations and cycles; Economic models; Inflation and prices; Market structure and pricing; Transmission of monetary policy
    JEL: E31 E32 E52 L11 L25 L81 M31
    Date: 2014
  2. By: Richard Clarida
    Abstract: This paper reviews and interprets some of the key policy implications that flow from a class of DSGE models for optimal monetary policy in the open economy. The framework suggests that good macroeconomic outcomes in open economies are possible by focusing inflation targeting that is implemented by a Taylor type rule, a rule that in equilibrium is reflected in the exchange rate as an asset price. Optimal monetary policy will not be able deliver a stationary ('stable') nominal exchange rate - let alone a fixed exchange rate or one that remains inside a target zone ‐ because, absent a commitment device, optimal monetary can't deliver a stationary domestic price level. Another feature in the data for inflation targeting countries that is consistent with monetary policy via Taylor type rule is that it will tend push the nominal exchange rate in the opposite direction from PPP in response to an 'inflation' shock - the 'bad news god news' result of Clarida -Waldman (2008;2014). This is so even though in the long run of these models the nominal exchange rate must in expectation obey PPP.
    JEL: E52 E58 F3
    Date: 2014–10
  3. By: Mayer, Eric; Rüth, Sebastian; Scharler, Johann
    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
  4. By: Afanasyeva, Elena; Güntner, Jochen
    Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
    Keywords: Bank lending standards,Credit supply,Monetary policy,Risk channel
    JEL: E44 E52
    Date: 2014
  5. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary; Ali Hassanzadeh; Ahmad Danu Prasetyo
    Abstract: We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes : money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar–Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks.
    Keywords: Asian stock market, monetary policy shocks, Variance Decomposition
    JEL: E44 G10 G12
    Date: 2014–09
  6. By: Matteo Ghilardi; Shanaka J. Peiris
    Abstract: This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks.
    Keywords: Capital flows;Asia;Emerging markets;Business cycles;Macroprudential policies and financial stability;Financial intermediation;Monetary policy;Banking sector;Open economies;General equilibrium models;Financial Frictions, Capital Regulation, Monetary Policy
    Date: 2014–08–21
  7. By: Gauti B. Eggertsson; Neil R. Mehrotra
    Abstract: We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.
    JEL: E31 E32 E52
    Date: 2014–10
  8. By: Piergiorgio Alessandri (Banca d'Italia); Haroon Mumtaz (Queen Mary University of London)
    Abstract: Financial markets are central to the transmission of uncertainty shocks. This paper documents a new aspect of the interaction between the two by showing that uncertainty shocks have radically different macroeconomic implications depending on the state financial markets are in when they occur. Using monthly US data, we estimate a nonlinear VAR where economic uncertainty is proxied by the (unobserved) volatility of the structural shocks, and a regime change occurs whenever credit conditions cross a critical threshold. An exogenous increase in uncertainty has recessionary effects in both good and bad credit regimes, but its impact on output is estimated to be five times larger when the economy is experiencing financial distress. Accounting for this nonlinearity, uncertainty accounts for about 1% of the peak fall in industrial production observed in the 2007-2009 recession.
    Keywords: Uncertainty, Stochastic Volatility, Financial Markets, Threshold VAR.
    JEL: C32 E32 E44 G01
    Date: 2014–10
  9. By: Robert J. Gordon
    Abstract: Forecasts for the two or three years after mid-2014 have converged on growth rates of real GDP in the range of 3.0 to 3.5 percent, a major stepwise increase from realized growth of 2.1 percent between mid-2009 and mid-2014. However, these forecasts are based on the demand for goods and services. Less attention has been paid to how the accelerated growth of real GDP will be supplied. Will the unemployment rate, which has declined at roughly one percent per year, decline even faster from 6.1 percent in June, 2014 to 3.0 percent or below in 2017? Will the supply-side support for the demand-side optimism be provided instead by a major rebound of productivity growth from the average of 1.2 percent over the past decade and 0.6 percent for the last four years, or perhaps by a reversal of the minus 0.8 percent growth rate since 2007 of the labor-force participation rate? The paper develops a new and surprisingly simple method of calculating the growth rate of potential GDP over the next decade and concludes that projections of potential output growth for the same decade in the most recent reports of the Congressional Budget Office (CBO) are much too optimistic. If the projections in this paper are close to the mark, the level of potential GDP in 2024 will be almost 10 percent below the CBO's current forecast. Further, the new potential GDP series implies that the debt/GDP ratio in 2024 will be closer to 87 percent than the CBO's current forecast of 78 percent. This paper also has profound implications for the Federal Reserve. The unemployment rate has declined rapidly, particularly within the last year. Faster real GDP growth will accelerate the decline in the unemployment rate and soon reduce it beyond any estimate of the constant-inflation NAIRU, even if productivity growth experiences a rebound and the labor force participation rate stabilizes. The macro economy is on a collision course between demand-side optimism and supply-side pessimism.
    JEL: E00 E01 E24 E27 E32 J11 J64
    Date: 2014–08
  10. By: Baas, Timo (University of Duisburg-Essen); Belke, Ansgar (University of Duisburg-Essen)
    Abstract: Member countries of the European Monetary Union (EMU) initiated wide-ranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances.
    Keywords: current account deficit, labor market reforms, DSGE models, search and matching labor market
    JEL: E24 E32 J64 F32
    Date: 2014–09
  11. By: Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business)
    Abstract: We allow for heterogeneity in investors’ ability to borrow from collateral in a Kiyotaki- Moore style macro model. We calibrate the model to match the quintiles of the distribution of leverage ratios of US non-financial firms. We show that financial amplification of the model with heterogeneous investors can be orders of magnitude higher, because of more pronounced asset price reactions.
    Keywords: Collateral Constraints, Leverage, Heterogeneity, Financial Amplification
    JEL: E32 E44
    Date: 2014–11
  12. By: Aleš Bulíř; Martin Číhak; David-Jan Jansen
    Abstract: We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.
    Keywords: central bank communication; clarity; financial markets; inflation reports; volatility
    JEL: E44 E52 E58
    Date: 2014–09
  13. By: Nicolas Groshenny (School of Economics, University of Adelaide)
    Abstract: We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve.
    Keywords: Search and matching frictions; Unemployment; Natural rates.
    JEL: E32 C51 C52
    Date: 2014–08
  14. By: Gehrke, Britta
    Abstract: This paper analyzes fiscal policy under fiscal rules in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated with US data including detailed information on fiscal instruments. Several findings stand out. First, fiscal rules enhance the positive effects of discretionary fiscal policy on output and unemployment if they influence the expected future path of interest rates. However, effects are smaller as suggested in the existing literature. Second, spending and consumption tax cuts have the largest multipliers. Third, multipliers for labor tax cuts are small. These results originate from the labor market friction and persist in an economy where the friction is more severe. Demand side disturbances explain the majority of labor market dynamics.
    Keywords: Fiscal policy,Fiscal rules,Unemployment,Search and matching
    JEL: E62 J20 H30 C11
    Date: 2014
  15. By: Rahul Anand; Ding Ding; Volodymyr Tulin
    Abstract: Indian food and fuel inflation has remained high for several years, and second-round effects on core inflation are estimated to be large. This paper estimates the size of second-round effects using an estimated reduced-form general equilibrium model of the Indian economy, which incorporates pass-through from headline inflation to core inflation. The results indicate that India's inflation is highly inertial and persistent. Due to second-round effects, the gap between headline inflation and core inflation decreases by about three fourths within one year as core inflation catches up with headline inflation. Large second-round effects stem from several factors, such as the high share of food in household expenditure and the role of food inflation in informing inflation expectations and wage setting. Analysis suggests that in order to durably reduce the current high inflation, the monetary policy stance needs to remain tight for a considerable length of time. In addition, progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy.
    Keywords: Food prices;India;Inflation;Monetary policy;Econometric models;Monetary policy, forecasting, food inflation, India.
    Date: 2014–09–24
  16. By: Davide Debortoli; Ricardo Nunes; Pierre Yared
    Abstract: This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.
    JEL: E62 H21 H63
    Date: 2014–10
  17. By: Lars Kunze; Nicolai Suppa
    Abstract: This article examines the impact of unemployment on social participation for Germany using the German Socio-Economic Panel. We find significant negative, robust and, for some activities, lasting effects of unemployment on social participation. Causality is established by focussing on plant closures as exogenous entries into unemployment. Social norms, labor market prospects and the perception of individual failure are shown to be relevant for explaining these findings. Furthermore, our results not only (i) provide novel insights into the determinants of the unemployed’s unhappiness but also (ii) highlight an hitherto unexplored channel through which unemployment influences economic outcomes, namely by altering the long-run level of social capital, and (iii) point to an alternative explanation of unemployment hysteresis based on access to information.
    Keywords: Income redistribution; consumer credit; relative consumption motive; business cycles
    JEL: E21 E32 E44
    Date: 2014–10
  18. By: Kühl, Michael
    Abstract: This paper compares the consequences of equity injections into banks with purchases of corporate and government bonds in a financial crisis situation using a New Keynesian model in which non-financial firms predominantly take non-market-based debt from banks instead of issuing securities. Our results show that equity injections into banks are more welfare enhancing than asset purchases following a financial shock located in the banking sector. Equity injections remove the frictions that have initiated the stress and, at the same time, relax borrowing conditions. Outright purchases also increase welfare but lower returns with negative effects on banks' profits, while the effect on asset prices to stabilize banks' balance sheets is of minor importance due to the dominance of non-market-based debt. Furthermore, we demonstrate that the origin of the financial shock matters crucially for the efficacy of measures.
    Keywords: DSGE Model,Financial Frictions,Financial Accelerator,Unconventional Policy Measures,Asset Purchase Programs,Capital Injections into Banks
    JEL: E44 E58 E61
    Date: 2014
  19. By: Bijsterbosch, Martin; Falagiarda, Matteo
    Abstract: This paper aims to shed light on the role of credit supply shocks in euro area countries during the recent pre-crisis, bust, and post-crisis periods. A time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility à la Primiceri (2005) is estimated for each country, and the structural shocks are identified by imposing sign restrictions on impulse response functions based on the theoretical model by Gerali et al. (2010). The results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries, and that their effects on the economy have generally increased since the recent crisis. Moreover, we report evidence that credit supply shocks contributed positively to output growth during the pre-crisis period and negatively during the downturn in economic activity in 2008-2009 in all the countries considered. In the post-crisis period, by contrast, we observe a strong rise in cross-country heterogeneity, reflecting financial fragmentation in the euro area. Although this heterogeneity across euro area countries seems to have declined since around 2012, the contribution of credit supply shocks to GDP growth and credit growth remains negative in most euro area countries, suggesting that constraints in the supply of credit continue to weaken economic activity. JEL Classification: C11, C32, E32, E51
    Keywords: credit supply shocks, euro area, sign restrictions, TVP-VAR
    Date: 2014–08
  20. By: Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
    Abstract: We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. We do so in the context of a tractable new-Keynesian economy in which a fraction of government spending increases the stock of public capital subject to a time-to-build constraint. Public investment projects typically entail significant time-to-build delays, which often span several years from approval to completion. We show that this feature implies that the spending multiplier associated with public investment can be substantially large-nearly twice as large as the multiplier associated with public consumption-in a liquidity trap. Intuitively, when the time to build is sufficiently long, and to the extent that public capital raises the marginal productivity of private inputs, the resulting deflationary effect will occur after the economy has escaped from the liquidity trap. At the same time, the increase in households's expected wealth amplifies aggregate demand while the economy is still in the liquidity trap. Using a mediumscale model extended to allow for the accumulation of public capital, we quantify the multiplier associated with the spending component of the 2009's ARRA, which allocated roughly 40% of the authorized funds to public investment. We find a peak multiplier of 2.31. Our results also indicate that failing to account for the composition of the stimulus by overlooking its investment component would lead one to underestimate the spending multiplier by about 50%.
    Keywords: Public spending; Public investment; Time to build; Multiplier; Zero lower bound
    JEL: E4 E52 E62 H54
    Date: 2014–01
  21. By: Fei Han
    Abstract: This paper quantifies the effects of external risks for Peru, with particular attention to two major external risks, China’s investment slowdown and the U.S. monetary policy tightening. In particular, a macroeconomic model for a small open and partially dollarized economy is developed and estimated for Peru to measure the risk spillovers, and simulate domestic macroeconomic responses in different scenarios with these two external risks. The simulation results suggest that Peru’s output is vulnerable to both risks, particularly the U.S. monetary policy tightening. Simulations also highlight the importance of higher exchange rate flexiblity and a lower degree of dollarization, which could help mitigate the negative spillover effects of these external risks.
    Keywords: External shocks;Peru;Foreign investment;China;United States;Monetary policy;Dollarization;Small open economies;Economic models;Macroeconomic Model, Partial Dollarization, External Risk, Monetary Policy, Spillovers, Macroeconomic Forecast
    Date: 2014–09–02
  22. By: Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.)); Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with "regular" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks' balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare.
    Keywords: Financial intermediation; sudden stops; leverage constraints; occasionally binding constraints.
    JEL: E32 F41 F44 G15
    Date: 2014–11–07
  23. By: Costain, James; Nakov, Anton
    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. JEL Classification: E31, D81, C73
    Keywords: information-constrained pricing, logit equilibrium, near rationality, nominal rigidity, state-dependent pricing
    Date: 2014–07
  24. By: Marzie Taheri Sanjani
    Abstract: This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.
    Keywords: Business cycles;Financial intermediaries;General equilibrium models;DSGE, Bayesian Estimation, Financial Frictions, Sources of Business Cycle
    Date: 2014–10–23
  25. By: Laurent Callot (VU University Amsterdam); Johannes Tang Kristensen (University of Southern Denmark, Denmark)
    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 √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: 2014–11–07
  26. By: Julio J. Rotemberg
    Abstract: This paper studies the persistence and some of the consequences of the eventual abandonment by the FOMC of the principles embedded in the Federal Reserve's Tenth Annual Report of 1923. The three principles I focus on are 1) the discouraging of speculative lending by commercial banks, 2) the desire to meet the credit needs of business and 3) the preference of a focus on credit over a focus on monetary aggregates. I show that the first two principles remained important in FOMC deliberations until the mid-1960's. After this, the FOMC also spent less time discussing the composition of bank loans.
    JEL: E42 E58 N1
    Date: 2014–09
  27. By: Hogrefe, Jan; Sachs, Andreas
    Abstract: We ask whether sectoral shocks and the subsequent labor reallocation are responsible for unemployment within selected European economies. Our measure of sectoral labor reallocation is adjusted for aggregate influences and the remaining variation is linked to unemployment in country specific dynamic models. For Spain, the ADL-model estimation reveals a significant impact of sectoral reallocation on unemployment that goes beyond usual business cycle patterns. In Italy, there is weaker yet detectable evidence for this mechanism. In Ireland, Portugal and France, no significant influence of sector level shocks on unemployment is found. The results emphasize the potential structural supply side policies have for reducing unemployment in Spain.
    Keywords: unemployment,sectoral shocks,labor reallocation,Europe
    JEL: E24 J62 J64
    Date: 2014
  28. By: Christopher Carroll (Johns Hopkins University); Jiri Slacalek (European Central Bank); Kiichi Tokuoka (Japanese Ministry of Finance); Matthew N. White (Department of Economics, University of Delaware)
    Abstract: We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is modified in a way that permits it to match empirical measures of wealth inequality in the U.S., we show that its predictions (unlike those of competing models) are consistent with the substantial body of microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the 0.02-0.04 range implied by commonly-used macroeconomic models. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across categories of households (e.g., low-wealth versus high-wealth households).
    Keywords: Microfoundations, Wealth Inequality, Marginal Propensity to Consume
    JEL: D12 D31 D91 E21
    Date: 2014
  29. By: F. Ferroni; B. Klaus
    Abstract: We study the business cycles properties of the four largest European economies in the wake of the recent recession episodes. The analysis is based on the factors estimated from a multi-country and multi-sector data rich environment. We measure alikeness of business cycles by studying the synchronization of up and down phases, the convergence properties of country fluctuations towards the Euro Area cycles and the contribution of the Euro Area factor to national GDPs volatilities. While the economic fluctuations of the four Euro Area member states were similar before the global financial turmoil, we gather compelling evidence of an asymmetric behavior of Spanish fluctuations relative to the Euro Area one.
    Keywords: Hierarchical factor models; International business cycles; Synchronization and Convergence.
    JEL: C51 E32 O52
    Date: 2014
  30. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables.
    Keywords: Identification; financial stability; monetary policy; optimal policy under Commitment; augmented Taylor rule
    Date: 2014–04
  31. By: Pavel Ryska (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: This paper deals with the relationship between deflation and economic growth. Although there are numerous theories on the potential effects of deflation on real output, empirical evidence in this field is still scarce and partial. In order to explore the relationship between prices and output in a more comprehensive way, I use a large panel data set of 19 countries over roughly 150 years, which contains frequent deflationary episodes. I employ the fixed effects model to look at both contemporaneous and lagged correlation between prices and output, and I include control variables to remove potential bias. There are several important results. First, there is no general relationship between prices and output. The lagged negative effect of deflation on output growth, alleged by some authors, disappears after adding a control variable. Second, monetary regimes seem to affect the relationship. Deflation appears to become associated with output slightly negatively with the advent of the fiat money system, while it was benign under the classical gold standard. Third, well-known episodes of deflation differ a lot. The Great Depression is the only period where deflation seems to be strongly associated with recession. By contrast, Japan in the 1990s and 2000s bears no resemblence to it. Here, both empirically and theoretically, deflation is highly unlikely to have caused economic stagnation.
    Keywords: deflation; price level; economic growth; monetary systems; panel data; economic history
    JEL: E31 E42 C33 N10
    Date: 2014–05
  32. By: Trezzi, Riccardo (Board of Governors of the Federal Reserve System (U.S.)); Porcelli, Francesco (University of Exeter)
    Abstract: A law issued to allocate reconstruction grants following the 2009 "Aquilano" earthquake has resulted in a large and unanticipated discontinuity across municipalities with comparable damages. Using diff-in-diff analysis we estimate the "local spending" and the "local tax" multipliers--according to the composition of the stimulus--controlling for the negative supply shock generated by the event. The stimulus prevented a fall in economic activity and the multiplicative effects of tax cuts are estimated much higher than those of spending. Our results underline the importance of countercyclical fiscal interventions and suggest the most effective composition of such a stimulus.
    Keywords: Natural disasters; fiscal multipliers; Mercalli scale
    JEL: C36 E62 H70
    Date: 2014–10–01
  33. By: Michal Andrle; Roberto Garcia-Saltos; Giang Ho
    Abstract: This paper studies economic and financial spillovers from the euro area to Poland in a two-country semi-structural model. The model incorporates various channels of macrofinancial linkages and cross-border spillovers. We parameterize the model through an extensive calibration process, and provide a wide range of model properties and evaluation exercises. Simulation results suggest a prominent role of foreign demand shocks (euro area and global) in driving Poland’s output, inflation and interest rate dynamics, particularly in recent years. Our model also has the capability for medium-term conditional forecasting and policy analysis.
    Keywords: Spillovers;Poland;Euro Area;Demand;External shocks;Business cycles;Cross country analysis;Econometric models;Poland, Euro area, semi-structural model, spillovers
    Date: 2014–10–17
  34. By: Tao Wu
    Abstract: This paper examines the transmission mechanism through which unconventional monetary policy affects long-term interest rates. I construct a real-time measure summarizing market projections of the magnitude and duration of the Federal Reserve's Large Scale Asset Purchases (LSAP) program, and analyze the determination of term premiums and expectations of future short-term interest rates in a sample spanning more than two decades. Empirical findings suggest that the LSAP has effectively lowered the long-term Treasury bond yields, through both "signaling" and "portfolio balance" channels. On the other hand, the Fed's "forward guidance" also leads to gradual extension of market projections for the duration of the LSAP program, thereby enhancing the LSAP's effect to keep term premiums low. Estimation results also reveal a diminished effectiveness of the LSAP during QE III. Finally, model simulations underscore the importance of policy transparency in minimizing unnecessary market turbulence and ensuring a timely and smooth exit of the unconventional monetary policy stimulus.
    Keywords: Monetary policy;Interest rates;Central bank policy;United States;Monetary transmission mechanism;Econometric models;Unconventional monetary policy, Quantitative easing, Large-scale asset purchases, Long-term interest rates, Signaling effect, Portfolio balance, Tapering, Exit strategy
    Date: 2014–10–22
  35. By: Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap.
    Keywords: Monetary economy; liquidity constraint; collateralized asset; infinite horizon; liquidity trap
    Date: 2013–07
  36. By: Yuko Imura
    Abstract: Financial crises in emerging economies in the 1980s and 1990s often entailed abrupt declines in foreign capital inflows, improvements in trade balance, and large declines in output and total factor productivity (TFP). This paper develops a two-sector small open economy model wherein heterogeneous firms face collateralized credit constraints for investment loans. The model is calibrated using Mexican data, and explains the economic downturn and subsequent recoveries following financial crises. In response to a sudden tightening of credit availability, the model generates a large decline in external debt, an improvement in trade balance, and declines in output and TFP, consistent with the stylized facts of sudden stop episodes. Tighter borrowing constraints lead firms to reduce investment and production, which in turn results in some firms holding capital stock disproportionate to their productivity levels. This disrupts the optimal allocation of capital across firms, and generates an endogenous fall in measured TFP. Furthermore, the subsequent recovery is driven by the traded sector, since the credit crunch is more persistent among domestic financing sources relative to foreign financing sources. This is consistent with the experience of Mexico, where the relatively fast recovery from the 1994-95 crisis was driven mainly by the traded sector, which had access to international financial markets.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Financial markets; International topics
    JEL: E22 E32 F41 G01
    Date: 2014
  37. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business)
    Abstract: Contributing to the contentious debate on the relationship between sovereign debt and economic growth, I examine the role of theory-driven (non-)sustainable debt-ratios in combination with debt-ratio thresholds on economic growth. Based on both dynamic and non-dynamic panel data analyses in the euro area (EA) 12 countries over the period 1970-2013, I find that non-sustainable debt-ratios above and below the 60% threshold, have a detrimental effect on short-run economic growth, while sustainable debt-ratios below the 90% threshold exert a positive influence on short-run economic growth. In the long-run, both non-sustainable and sustainable debt-ratios above the 90% threshold, as well as non-sustainable debt-ratios below the 60% compromise economic growth. Robustness analysis supports these findings, and provides additional evidence of a positive effect of sustainable debt-ratios below the 60% threshold, as predicated by the Maastricht Treaty criterion, on (short- and long-run) economic growth. Overall, these results suggest that debt sustainability in addition to debt non-linearities should be considered simultaneously in the debt-growth nexus. In addition, the results indicate the importance of a timely reaction of fiscal policy in countries with non-sustainable debts, as implied by fiscal rules, in an attempt to ensure fiscal sustainability and, ultimately, promote long-run economic growth.
    Keywords: Government debt, growth, sustainability, threshold, government budget constraint
    JEL: C23 E62 F43 H63 O40
    Date: 2014–10
  38. By: Anisha Ghosh; George M. Constantinides
    Abstract: An economy in which investors know the true model and its parameters and filter the regime probability from aggregate consumption history has been empirically rejected. Hypothesizing that prices partly reflect investorsʼ belief about the regime, we infer beliefs from prices. The model fits well the moments of the market return, risk free rate, and price-dividend ratio. Consistent with the data, it implies higher mean and lower volatility of consumption and dividend growth rates, lower mean and volatility of the market return and equity premium, and higher mean of the price-dividend ratio in the first regime compared with the second one. The probability of recession in a year is 62:5% (23:7%) if the probability of being in the first regime at the beginning of the year is lower (higher) than 50%. The results support the hypothesis that investors employ a broader information set than just aggregate consumption history in forming their beliefs.
    JEL: D03 E44 G12 G14 G3
    Date: 2014–11
  39. By: Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
    Abstract: Inflation expectations in household surveys tend to be vastly heterogeneous. The literature has been unable to distinguish empirically between alternative explanations, such as the existence of rational inattention (according to which individuals will not continuously gather costly information) and the use of information from personal shopping experiences (which can be diverse and inaccurate). To better understand the importance of these mechanisms, we use evidence from field experiments with nearly 10,000 subjects conducted in both a low-inflation country (the United States) and a high-inflation country (Argentina). We introduce a novel experimental design which, when combined with unique data sources, allows us to quantify how much weight individuals assign to each source of information about inflation. Our novel experimental framework addresses one of the most important concerns with survey experiments by separating genuine from spurious learning. We find that individuals are highly influenced by information on both inflation statistics and price changes of specific products. The results are consistent with rational inattention, since there is greater learning in a low-inflation setting where the stakes are lower (the United States), and also from information that is less costly to understand (individual supermarket prices). To further assess the importance of personal experiences, we conducted field experiments which combined data from actual products purchased by the subjects with their historical prices. We find that individuals form inflation expectations using their own memories about the price changes of supermarket products they buy, but those memories are nearly orthogonal to the actual price changes.
    JEL: C93 D83 E31 E58
    Date: 2014–10
  40. By: Cosmin Ilut; Matthias Kehrig; Martin Schneider
    Abstract: This paper studies the distribution of employment growth when firms adjust asymmetrically to dispersed but correlated signals. If hiring decisions respond more to bad news than to good news, both aggregate conditional volatility ("macro-volatility") and the cross sectional dispersion of employment growth ("micro-volatility") are countercyclical, as in the data. Fluctuations in both macro and micro volatility emerge endogenously in response to news shocks and do not require exogenous changes in volatility. Establishment level Census data confirm other implications of the mechanism: in particular, employment growth (contrary to TFP shocks) is negatively skewed in both the cross section and the time series, and employment responds more to bad than to good TFP shocks.
    JEL: D2 D8 E20 J2
    Date: 2014–09
  41. By: Kindermann, Fabian; Krueger, Dirk
    Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
    Keywords: Progressive Taxation,Top 1%,Social Insurance,Income Inequality
    JEL: E62 H21 H24
    Date: 2014
  42. By: Zsolt Darvas
    Abstract: The purpose of this paper is to examine the possible role of money shocks on output and prices in the euro area. Since no Divisia monetary aggregates are available for the euro area, we first create and make available a database on euro-area Divisia monetary aggregates. We plan to update the dataset in the future and keep it publicly available. Using different SVAR models, we find sensible and statistically significant responses to Divisia money shocks, while the responses to simple-sum measures of money and interest rates are not statistically significant, and sometimes even the point estimates are not sensible.
    Date: 2014–11
  43. By: Ludger Linnemann; Andreas Schabert
    Abstract: Due to the US dollar's dominant role for international trade and finance, risk-free assets denominated in US currency not only offer a pecuniary return, but also provide transactions services, both nationally and internationally. Accordingly, the responses of bilateral US dollar exchange rates to interest rate shocks should differ substantially with respect to the (US or foreign) origin of the shock. We demonstrate this empirically and apply a model of liquidity premia on US treasuries originating from monetary policy implementation. The liquidity premium leads to a modification of uncovered interest rate parity (UIP), which enables the model to explain an appreciation of the dollar subsequent to an increase in US interest rates if foreign interest rates follow the US monetary policy rate.
    Keywords: Exchange rate dynamics, uncovered interest rate parity, monetary policy shocks, liquidity premia
    JEL: E4 F31 F41
    Date: 2014–10–28
  44. By: Kewei Hou; Chen Xue; Lu Zhang
    Abstract: This paper compares the Hou, Xue, and Zhang (2014) q-factor model and the Fama and French (2014a) five-factor model on both conceptual and empirical grounds. It raises four concerns with the motivation of the five-factor model: The internal rate of return often correlates negatively with the one-period-ahead expected return; the value factor seems redundant in the data; the expected investment tends to correlate positively with the one-period-ahead expected return; and past investment is a poor proxy for the expected investment. Empirically, the four-factor q-model outperforms the five-factor model, especially in capturing price and earnings momentum.
    JEL: E22 E44 G11 G12 G14
    Date: 2014–11
  45. By: Restuccia, Diego (University of Toronto); Vandenbroucke, Guillaume (Federal Reserve Bank of St. Louis)
    Abstract: Consider the following facts. In 1950, the richest countries attained an average of 8 years of schooling whereas the poorest countries 1.3 years, a large 6-fold difference. By 2005, the difference in schooling declined to 2-fold because schooling increased faster in poor than in rich countries. What explains educational attainment differences across countries and their evolution over time? We consider an otherwise standard model of schooling featuring non- homothetic preferences and a labor supply margin to assess the quantitative contribution of productivity and life expectancy in explaining educational attainment. A calibrated version of the model accounts for 90 percent of the difference in schooling levels in 1950 between rich and poor countries and 71 percent of the faster increase in schooling over time in poor relative to rich countries. These results suggest an alternative view of the determinants of low education in developing countries that is based on low productivity.
    Keywords: Schooling; productivity; life expectancy; labor supply.
    JEL: E24 J22 J24 O1 O4
    Date: 2014–11–01
  46. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio
    Abstract: We use data from the 2009 Internet Survey of the Health and Retirement Study to examine the consumption impact of wealth shocks and unemployment during the Great Recession in the US. We find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents have lost their job. As a consequence of these shocks, many households reduced substantially their expenditures. We estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year's time, and those who do not. In line with the predictions of standard models of intertemporal choice, we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks.
    Keywords: Wealth Shocks,Unemployment,Consumption,Great Recession
    JEL: E21 D91
    Date: 2014
  47. By: George Alessandria; Horag Choi; Kim Ruhl
    Abstract: We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows.
    JEL: E22 F12
    Date: 2014–11
  48. By: Sachs, Andreas; Smolny, Werner
    Abstract: This paper analyzes the role of labor market institutions for youth unemployment, as contrasted to total unemployment. The empirical results are basically consistent with an insider view of labor market institutions. Labor market institutions tend to protect (older) employees but might harm (young) entrants. Remarkable is especially the significant and very high effect of employment protection for regular jobs on youth unemployment. In addition, the combined effects of powerful unions and a coordinated wage bargaining system are beneficial for older people and detrimental to youth. Finally, the paper establishes significant labor supply effects and effects of the education system on youth and total unemployment.
    Keywords: Youth unemployment,labor market institutions,age-specific unemployment
    JEL: E02 E24 J21 J68
    Date: 2014
  49. By: Niu, Geng (Southwestern University of Finance and Economics); van Soest, Arthur (Tilburg University)
    Abstract: Utilizing new survey data collected between 2009 and 2014, this paper analyzes American households' subjective expectations on future home values. We explore the relationship between house price expectations, local economic conditions, and households' individual characteristics. We examine the heterogeneity in expectations based on panel data models. In particular, we estimate the individual- and time-specific subjective probability distributions for five-year-ahead home values. House price expectations vary significantly over time, and are positively related to past housing returns and perceived economic conditions. There is large variation in both the central tendency and the uncertainty of expectations on future home values across individuals, which is associated with several socio-economic and demographic factors. Comparing expectations and realizations shows that households only partially anticipated the large downward changes in home values in the time period 2009-2011.
    Keywords: subjective expectations, house price, survey data
    JEL: D84 R31 E31
    Date: 2014–10
  50. By: Funashima, Yoshito
    Abstract: This paper considers a simple model in which government spending is productive and has a complementary relationship with private consumption to study the response of the latter to government spending. We discuss how these two characteristics can yield empirical observations that indicate a positive response of private consumption to government spending. By assuming some plausible parameter settings, we use empirical evidence to demonstrate that these dual aspects of government spending, which are normally treated separately in the literature, are inseparably linked. Moreover, our findings reveal that in addition to the presence of complementarity, productivity---even if minimal---increases the likelihood of generating a positive consumption response. These results suggest that policymakers need to recognize the importance of quality of government spending rather than quantity when stimulating an economy without a decline in consumption.
    Keywords: Private consumption; Government spending; Productivity; Complementarity
    JEL: E62 H31 H32
    Date: 2014–11–17
  51. By: Clouse, James A. (Board of Governors of the Federal Reserve System (U.S.)); Ihrig, Jane E. (Board of Governors of the Federal Reserve System (U.S.)); Klee, Elizabeth C. (Board of Governors of the Federal Reserve System (U.S.)); Chen, Han (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve any given desired level of interest rates. The choices among alternative combinations of tools, of course, have implications for patterns of financial intermediation. Specifically, the quantity of Federal Reserve liabilities held outside of the banking system is shown to depend importantly on the spread between various policy rates.
    Keywords: Policy normalization; preferred habitat; financial markets; Federal Reserve liabilities; interest on excess reserves (IOER); overnight and term reverse repurchase agreements (ON and term RRP); term deposits (TDF)
    Date: 2014–10–02
  52. By: Hernán Rincón; Norberto Rodríguez
    Abstract: Conocer el grado de transmisión de los cambios en la tasa de cambio sobre la inflación interna es un interrogante constante de las autoridades monetarias de cualquier país. En este documento se reestima el grado de transmisión de corto y mediano plazo de las variaciones de la tasa de cambio del peso colombiano sobre la inflación de los bienes importados, estimados en González et al. (2010). Se utilizan datos trimestrales de Colombia para el período 1985-2014 y un modelo VAR no lineal de transición suave logística. Los resultados muestran que los grados de transmisión en general se mantienen, a pesar de la ampliación del período de estudio, que cubre la crisis financiera internacional 2007-2009, y de ajustes a la metodología econométrica implementada. Se concluye que el grado transmisión es incompleto, endógeno y asimétrico, tanto en el corto como en el mediano plazo. Además, que un choque a la variación de la tasa de cambio se transmite a la inflación de los bienes importados en grados que varían entre 12% y 88%. Classification JEL: F31, E31, E52, C51.
    Date: 2014–11
  53. By: Buch, Claudia M.; Körner, Tobias; Weigert, Benjamin
    Abstract: The European Banking Union is a major step forward in fixing major deficiencies in the institutional framework of the Euro area. The absence of effective banking supervision and resolution powers at the European level promoted excessive private risk-taking in the up-run to the Euro crisis. Effective private risk sharing once risks materialized has been hampered. A properly designed Banking Union facilitates and improves private risk sharing, and it is thus a necessary institutional complement to a monetary union. Yet, the institutional framework of the Banking Union needs further strengthening in three regards. First, the supervisory framework needs to ensure uniform supervisory standards for all banks, including those located in non-Euro area countries. Also, conflicts of interest between monetary policy and banking supervision need to be mitigated. Second, bank resolution suffers from a highly complex governance structure. Restructuring and bail-in rules allow for a high degree of discretion at the level of the resolution authority. We propose to introduce a statutory systemic risk exception, by which the exercise of discretion would be reduced, thereby strengthening the credibility of the bail-in. Third, in order to enhance the credibility of creditor involvement, fiscal backstops and ex-ante specified cross-border burden-sharing agreements are needed.
    Keywords: European Banking Union,Single Supervisory Mechanism,Single Resolution Mechanism,Risk Sharing
    JEL: E02 E42 G18
    Date: 2014
  54. By: Ali, Hoda Abd El Hamid
    Abstract: This study explores the Impact of Food Prices Crisis on budget deficits in the Arab region. Panel data is used for the period of 2000 to 2012 in sixteen countries in the region. We run multi regression models which are used to estimate the Impact of food crisis on government debt in high, middle and low income countries before and after the food crisis period in 2006. The analysis reveals that the changes in food prices have a negative and significant impact only on the low and middle income countries' government debt before the crisis. We also found that the slow growth in GDP after the global economic and food crisis period, political instability, lagged deficits, real interest rates, and unemployment were also important determinants of government debt in most of the models estimated.
    Keywords: Food Crisis, Government Debts, Arab region, Social and Economic development, Poverty.
    JEL: E6 H6 H63 O1 O11 Q1 Q11 Q18
    Date: 2014
  55. By: Popov, Vladimir
    Abstract: Uzbekistan in recent 10 years is an extremely successful economy – high growth (8%), low domestic and international debt, undervalued exchange rate, relatively even distribution of income, creation from scratch competitive export oriented auto industry. It is important though to avoid “dizziness from success” and to envisage possible growth traps in the future. This paper discusses two unfavourable scenarios – negative terms of trade shock due to the decline in cotton, gas and gold prices (a deterioration of the current account balance by 10 p.p. of GDP) and a decline in growth rates of total factor productivity (TFP), as well as possible government responses to these shocks, in particular, changes in industrial policy. In recent years Uzbekistan promotes heavy chemistry industries (production of synthetic fuel and polypropylene goods from natural gas). This is the next stage of industrial policy after reaching food and energy self-sufficiency and successful auto industry development. There are reservations, however, against this strategy. First, gas production is about to decline due to depletion of reserves. Second, the level and growth rates of TFP in heavy chemistry are by far not the highest (they are the highest in light and food industry and in machine building). The increased share of heavy chemistry in total industrial output will cause the decline in the level and the growth rates of TFP. Third, auto industry is already a success, it may be reasonable to continue to support machine building industries of medium level of technology sophistication, like auto industry. For the country of the average size, export specialization in two major areas (autos and heavy chemistry) may be excessive.
    Keywords: Uzbekistan, scenarios of economic development in 2015-30,industrial policy, reaction to shocks, terms of trade, total factor productivity
    JEL: E60 F43 O40 O47 O53
    Date: 2014–05–05
  56. By: Francesca Di Iorio (Universita' di Napoli Federico II); Stefano Fachin (Universita' di Roma "La Sapienza")
    Abstract: Non stationary panel models allowing for unobservable common trends have recently become very popular. However, standard methods, which are based on factor extraction or models augmented with cross-section averages, require large sample sizes, not always available in practice. In these cases we propose the simple and robust alternative of augmenting the panel regres- sion with common time dummies. The underlying assumption of additive e¤ects can be tested by means of a panel cointegration test, with no need of estimating a general interactive e¤ects model. An application to modelling labour productivity growth in the four major European economies (France, Germany, Italy and UK) illustrates the method.
    Keywords: Common trends, Panel cointegration, TFP.
    JEL: C23 C15 E2
    Date: 2014–11
  57. By: Carmen M. Reinhart; Christoph Trebesch
    Abstract: We take a first pass at quantifying the magnitudes of debt relief achieved through default and restructuring in two distinct samples: 1979-2010, focusing on credit events in emerging markets, and 1920-1939, documenting the official debt hangover in advanced economies that was created by World War I and its aftermath. We examine the economic performance of debtor countries during and after these overhang episodes, by tracing the evolution of real per capita GDP (levels and growth rates); sovereign credit ratings; debt servicing burdens relative to GDP, fiscal revenues, and exports; as well as the level of government debt (external and total). Across 45 crisis episodes for which data is available we find that debt relief averaged 21 percent of GDP for advanced economies (1932-1939) and 16 percent of GDP for emerging markets (1979-2010), respectively. The economic landscape after a final debt reduction is characterized by higher income levels and growth, lower debt servicing burdens and lower government debt. Also ratings recover markedly, albeit only in the modern period.
    JEL: E6 F3 H6 N0
    Date: 2014–10
  58. By: Auray, Stéphane (CREST); Danthine, Samuel (University of Québec at Montréal); Poschke, Markus (McGill University)
    Abstract: While most of the literature on employment protection has focused on government-mandated severance pay, it has recently been documented that a substantial share of severance payments derives from private contracts or collective agreements. This paper studies the determination of these payments. We analyze the problem of joint bargaining over wages and severance payments and examine the impact of unions on these choices. To do so, we use a search and matching model with risk averse workers, in which we assume that workers may be unionized and that bargaining is over wages and severance pay. Bargaining results in levels of severance pay providing full insurance, which depend on the generosity of unemployment benefits and on the job finding rate. Unions opt for higher levels of severance pay given that their higher wage demands imply reduced job creation. Calibrated to 8 European economies, the model predicts bargained levels of severance pay which are close to those found in reality.
    Keywords: severance pay, unions, bargaining, Diamond-Mortensen-Pissarides models
    JEL: E24 J32 J33 J64 J65
    Date: 2014–08
  59. By: Luis Garicano; Esteban Rossi-Hansberg
    Abstract: We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.
    JEL: D2 E24 J3 L2 O4
    Date: 2014–10
  60. By: Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: We take a first pass at quantifying the magnitudes of debt relief achieved through default and restructuring in two distinct samples: 1979-2010, focusing on credit events in emerging markets, and 1920-1939, documenting the official debt hangover in advanced economies that was created by World War I and its aftermath. We examine the economic performance of debtor countries during and after these overhang episodes, by tracing the evolution of real per capita GDP (levels and growth rates); sovereign credit ratings; debt servicing burdens relative to GDP, fiscal revenues, and exports; as well as the level of government debt (external and total). Across 45 crisis episodes for which data is available we find that debt relief averaged 21 percent of GDP for advanced economies (1932-1939) and 16 percent of GDP for emerging markets (1979-2010), respectively. The economic landscape after a final debt reduction is characterized by higher income levels and growth, lower debt servicing burdens and lower government debt. Also ratings recover markedly, albeit only in the modern period.
    JEL: E6 F3 N0 H6
    Date: 2014
  61. By: Popov, Vladimir
    Abstract: В последние 10 лет Узбекистан развивался очень успешно – рост ВВП в среднем на 8%, низкий государственный и внешний долг, заниженный валютный курс, равномерное распределение доходов, создание с нуля конкурентоспособной автопромышленности, ориентированной на экспорт. Задача на будущее – не допустить «головокружения от успехов», предусмотреть возможные риски и быть готовым принять адекватные меры. Рассматриваются два неблагоприятных шока – снижение цен на главные экспортные товары (золото, хлопок, газ) и замедление темпов роста совокупной факторной производительности, а также возможные ответные меры правительства. Обсуждается текущая промышленная политика – поддержка наряду с автомобильной промышленностью отраслей тяжелой химии (производство синтетического топлива и полипропиленовых изделий из газа) с относительно низким уровнем совокупной факторной производительности и темпами ее роста. ============================================================ Uzbekistan in recent 10 years is an extremely successful economy – high growth (8%), low domestic and international debt, undervalued exchange rate, relatively even distribution of income, creation from scratch competitive export oriented auto industry. It is important though to avoid “dizziness from success” and to envisage possible growth traps in the future. This paper discusses two unfavourable scenarios – negative terms of trade shock due to the decline in cotton, gas and gold prices (a deterioration of the current account balance by 10 p.p. of GDP) and a decline in growth rates of total factor productivity (TFP), as well as possible government responses to these shocks, in particular, changes in industrial policy. In recent years Uzbekistan promotes heavy chemistry industries (production of synthetic fuel and polypropylene goods from natural gas). This is the next stage of industrial policy after reaching food and energy self-sufficiency and successful auto industry development. There are reservations, however, against this strategy. First, gas production is about to decline due to depletion of reserves. Second, the level and growth rates of TFP in heavy chemistry are by far not the highest (they are the highest in light and food industry and in machine building). The increased share of heavy chemistry in total industrial output will cause the decline in the level and the growth rates of TFP. Third, auto industry is already a success, it may be reasonable to continue to support machine building industries of medium level of technology sophistication, like auto industry. For the country of the average size, export specialization in two major areas (autos and heavy chemistry) may be excessive.
    Keywords: Uzbekistan, scenarios of economic development in 2015-30,industrial policy, reaction to shocks, terms of trade, total factor productivity
    JEL: E60 F43 O40 O47 O53
    Date: 2014–05–05
  62. By: Klimczuk, Andrzej
    Abstract: We współczesnej polityce rynku pracy udział biorą nie tylko takie podmioty publiczne, jak urzędy pracy, lecz także niepubliczne agencje zatrudnienia prowadzone przez podmioty komercyjne i organizacje pozarządowe. Agencje zatrudnienia, mając zróżnicowane cele, struktury i formy zarządzania, podejmują w znacznej mierze działalność aktywizacyjną, zaadresowaną do grup znajdujących się w szczególnej sytuacji na rynku pracy, w tym do osób niepełnosprawnych. Opracowanie ma na celu przybliżenie potencjału krajowych agencji zatrudnienia osób niepełnosprawnych, które są prowadzone przez organizacje pozarządowe. Artykuł zwraca uwagę na teoretyczne koncepcje współpracy publicznych i niepublicznych służb zatrudnienia na poziomie lokalnym i regionalnym. Przybliżono także wybrane wyniki badania własnego, w którym przeprowadzono analizę źródeł wtórnych i indywidualne telefoniczne wywiady kwestionariuszowe. W podsumowaniu przedstawiono rekomendacje praktyczne i potencjalne kierunki dalszych badań. ** Contemporary labor market policy involves not only the public sector as labour offices, but also private employment agencies run by commercial entities and non-governmental organizations. Employment agencies have different objectives, structures and forms of management. They take a large extent of activation services addressed to people in a specific situation on the labor market, including disabled persons. Article aims to introduce the capacity of national employment agencies for disabled people, which are run by non-governmental organizations. Article draws attention to theoretical concepts of cooperation between public and private employment services at local and regional. The chapter also shows selected results of research conducted on the basis of an analysis of secondary sources and individual questionnaire telephone interviews. Summary contains practical recommendations and possible directions for further research.
    Keywords: employment agencies, non-governmental organizations, disability, persons with disabilities, cross-sectoral cooperation, labor market policy, activation policy
    JEL: E24 J14 Z18
    Date: 2014
  63. By: Gregor Semieniuk; Ellis Scharfenaker (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: By using Bayesian Markov chain Monte Carlo methods we select the proper subset of competitive firms and find striking evidence for Laplace shaped firm profit rate distributions. Our approach enables us to extract more information from data than previous research. We filter US firm-level data into signal and noise distributions by Gibbs-sampling from a latent variable mixture distribution, extracting a sharply peaked, negatively skewed Laplace-type profit rate distribution. A Bayesian change point analysis yields the subset of large firms with symmetric and stationary Laplace distributed profit rates, adding to the evidence for statistical equilibrium at the economy wide and sectoral levels.
    Keywords: Firm competition, Laplace distribution, Gibbs sampler, Profit rate, Statistical equilibrium
    JEL: C15 D20 E10 L11
    Date: 2014–02
  64. By: Charles Henri DiMaria; Chiara Peroni; Francesco Sarracino
    Abstract: This article is about the link between people’s subjective well-being, defined as an evaluation of one’s own life, and productivity. Our aim is to test the hypothesis that subjective well-being contributes to productivity using a two step approach: first, we establish whether subjectivewell-being can be a candidate variable to study Total Factor Productivity; second, we assess how much subjective well-being contributes to productivity at aggregate level through efficiency gains. We adopt Data Envelopment Analysis to compute total factor productivity and efficiency indices using European Social Survey and AMECO data for 20 European countries. Results show that subjective well-being is an input and not an output to production.
    Keywords: productivity, subjective well-being, TFP, efficiency gains, life satisfaction, economic growth, DEA.
    JEL: E23 I31 O47
    Date: 2014–06

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