nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒12‒19
83 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetarism rides again? US monetary policy in a world of Quantitative Easing By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  2. Dynamic Debt Deleveraging and Optimal Monetary Policy By Pierpaolo Benigno; Gauti B. Eggertsson; Federica Romei
  3. The Great Mortgaging: Housing Finance, Crises, and Business Cycles By Òscar Jordà; Moritz Schularick; Alan M. Taylor
  4. Land Collateral and Labor Market Dynamics in France By Leo Kaas; Patrick A. Pintus; Simon Ray
  5. Flight to liquidity and the Great Recession By Radde, Sören
  6. Interest Rate Uncertainty and Economic Fluctuations By Drew D. Creal; Jing Cynthia Wu
  7. Effectiveness of the Easing of Monetary Policy in the Japanese Economy, Incorporating Energy Prices By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad
  8. Financial Frictions and Optimal Monetary Policy in a Small Open Economy By Jesús A. Bejarano; Luisa F. Charry
  9. Monetary Policy Effects on Financial Intermediation via the Regulated and the Shadow Banking Systems By Falk Mazelis; ; ;
  10. Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination By Hess Chung; Edward Herbst; Michael T. Kiley
  11. Reconstructing Macroeconomic Theory to Manage Economic Policy By Joseph E. Stiglitz
  12. Towards a consumer sentiment channel of monetary policy By Debes, Sebastian; Gareis, Johannes; Mayer, Eric; Rüth, Sebastian
  13. Optimal Stabilization Policy with Search Externalities By Berentsen, Aleksander; Waller, Christopher
  14. Adverse Selection and Self-fulfilling Business Cycles By Jess Benhabib; Feng Dong; Pengfei Wang
  15. Bringing Financial Stability into Monetary Policy By Eric M. Leeper; James M. Nason
  16. House Prices, Capital Inflows and Macroprudential Policy By Mendicino, Caterina; Punzi, Maria Teresa
  17. Bernanke/Blinder revisited - The New Keynesian model with credit channel By Offick, Sven; Wohltmann, Hans-Werner
  18. Monetary Policy Effectiveness in China: Evidence from a FAVAR Model By John Fernald; Mark M. Spiegel; Eric T. Swanson
  19. Sovereign spreads and financial market behavior before and during the crisis By Pawel Gajewski; ; ;
  20. Understanding Uncertainty Shocks and the Role of Black Swans By Anna Orlik; Laura Veldkamp
  21. The effects of government spending in a small open economy within a monetary union By Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
  22. Financial stress and economic dynamics: the transmission of crises By Hubrich, Kirstin; Tetlow, Robert J.
  23. Labour Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing By Serdar Kabaca
  24. Financial Sector and Output Dynamics in the Euro Area: Non-linearities Reconsidered By Frauke Schleer; Willi Semmler
  25. Aggregate Issuance and Savings Waves By Andrea L. Eisfeldt; Tyler Muir
  26. Endogenous Borrowing Constraints and Stagnation in Latin America By Restrepo-Echavarria, Paulina
  27. Pricing decisions in an experimental dynamic stochastic general equilibrium economy By Noussair, Charles N.; Pfajfar, Damjan; Zsiros, Janos
  28. International Trade and Intertemporal Substitution By Fernando Leibovici; Michael E. Waugh
  29. Signalling fiscal stress in the euro area - a country-specific early warning system By Hernández de Cos, Pablo; Koester, Gerrit B.; Moral-Benito, Enrique; Nickel, Christiane
  30. Jointly optimal regulation of bank capital and maturity structure By Ansgar Walther
  31. Current Account Deficit in Turkey: Cyclical or Structural? By Hakan Kara; Cagri Sarikaya
  32. The U.S. economic outlook and monetary policy By Plosser, Charles I.
  33. Varieties of Keynesianism By Duncan Foley
  34. General Theory of Money: A New Approach By Rezaie, Mohsen
  35. The Cyclicality of Labor Market Flows: A Multiple-Shock Approach By Hairault, Jean-Olivier; Zhutova, Anastasia
  36. Fiscal policy and the real exchange rate: Some evidence from Spain By Oscar Bajo-Rubio; Burcu Berke
  37. How does tax progressivity and household heterogeneity affect Laffer curves? By Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
  38. Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies By Marc Pourroy
  39. Policy-making of the European Central Bank during the crisis: Do personalities matter? By Basham, James; Roland, Aanor
  40. Globalization and international business cycle dynamics: A conditional GVAR approach By Binder, Michael; Offermanns, Christian J.
  41. Is there a threat of self-reinforcing deflation in the Euro area? A view through the lens of the Phillips curve By Wieland, Volker; Wolters, Maik
  42. The Italian wage curve reloaded: Does occupation matter? By Gucciardi, Gianluca
  43. Working Paper 04-14 - Analyse macro-sectorielle des effets d’une hausse de la TVA By Luc Masure
  44. Emerging Market Volatility: Lessons from The Taper Tantrum By Ratna Sahay; Vivek B. Arora; Athanasios V Arvanitis; Hamid Faruqee; Papa N'Diaye; Tommaso Mancini Griffoli
  45. Improving Public Equity Markets? No Pain, No Gain By Katya Kartashova
  46. News and Monetary Shocks at a High Frequency: A Simple Approach By Troy Matheson; Emil Stavrev
  47. The Effects of Unconventional Monetary Policies on Bank Soundness By Frederic Lambert; Kenichi Ueda
  48. Hechos Estilizados de la Inversión en Colombia y el Mundo: 2000-2012 By Jurany Beccie RAMÍREZ GALLEGO
  49. Micro Data and Macro Technology By Ezra Oberfield; Devesh Raval
  50. Social security in an analytically tractable overlapping generations model with aggregate and idiosyncratic risk By Harenberg, Daniel; Ludwig, Alexander
  51. Labor Market Fluidity and Economic Performance By Steven J. Davis; John Haltiwanger
  52. Public Employment Policies and Regional Unemployment Differences By Caponi, Vincenzo
  53. Sorting Between and Within Industries: A Testable Model of Assortative Matching By John M. Abowd; Francis Kramarz; Sébastien Pérez-Duarte; Ian M. Schmutte
  54. This is what's in your wallet... and how you use it By Briglevics, Tamás; Schuh, Scott
  55. Dynamic Analysis of Exchange Rate Regimes : Policy Implications for Emerging Countries in Asia By Naoyuki Yoshino; Sahoko Kaji; Tamon Asonuma
  56. Commodity Price Cycles and Financial Stability By Carola Moreno; Carlos Saavedra; Bárbara Ulloa
  57. Putting Macroprudential Policy to Work By Aerdt Houben; Rob Nijskens; Mark Teunissen
  58. Price Dynamics, financial fragility and aggregate volatility By Antoine Mandel; Simone Landini; Mauro Gallegati; Herbert Gintis
  59. "Improving Economic Statistics in order to Improve Economic Policy and Research: (2) IO Tables, SNA (GDP) Estimates, GDP Deflators, and Productivity Indexes" (in Japanese) By Yoshiro Miwa
  60. Can Active Labor Market Policy Be Counter-Productive? By Saint-Paul, Gilles
  61. Universal Basic Income versus Unemployment Insurance By Fabre, Alice; Pallage, Stéphane; Zimmermann, Christian
  62. Effects of taxation by economic functions on economic growth in the European Union By Szarowska, Irena
  63. The Evolution of Bank Supervision: Evidence from U.S. States By Kris James Mitchener; Matthew Jaremski
  64. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  65. A Two-Period Model with Portfolio Choice: Understanding Results from Different Solution Methods By Rabitsch, Katrin; Stepanchuk, Serhiy
  66. Variable Selection in Predictive MIDAS Models By C. Marsilli
  67. Fiscal Devaluation in a Monetary Union By Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
  68. Are intangibles more productive in ICT-intensive industries? Evidence from EU countries By Chen, Wen; Niebel, Thomas; Saam, Marianne
  69. Gender Gaps across Countries and Skills: Demand, Supply and the Industry Structure By Claudia Olivetti; Barbara Petrongolo
  70. Nowcasting and Forecasting the Monthly Food Stamps Data in the US using Online Search Data By Fantazziini, Dean
  71. Has House Price Growth in Canadian Cities been Excessive? By Allen Head; Huw Lloyd-Ellis
  72. The Gender Wealth Gap in Europe By Alyssa Schneebaum; Miriam Rehm; Katharina Mader; Patricia Klopf; Katarina Hollan
  73. The return to college: Selection and dropout risk By Hendricks, Lutz; Leukhina, Oksana
  74. Fitting parsimonious household- portfolio models to data By Hubar, Sylwia; Koulovatianos, Christos; Li, Jian
  75. Forecasting Global Equity Indices using Large Bayesian VARs By Florian Huber; Tamas Krisztin; Philipp Piribauer
  76. Wellbeing at work and the Great Recession: The effect of others' unemployment By Cristina Borra Marcos; Francisco Gómez-García
  77. Mogućnosti i ograničenja fiskalne politike u Hrvatskoj By Hrvoje Šimović; Tomislav Ćorić; Milan Deskar-Škrbić
  78. Fiscal Decentralization - a Survey of the Empirical Literature By Reingewertz, Yaniv
  79. Asiaphoria Meets Regression to the Mean By Lant Pritchett; Lawrence H. Summers
  80. Investment Under Uncertainty and the Value of Real and Financial Flexibility By Patrick Bolton; Neng Wang; Jinqiang Yang
  81. Úvěry v selhání a makroekonomika: Modelování systémového kreditního rizika v České republice By Melecky, Ales; Melecky, Martin; Sulganova, Monika
  82. A Schumpeterian Model of Top Income Inequality By Charles I. Jones; Jihee Kim
  83. Do unemployment benefits and employment protection influence suicide mortality? An international panel data analysis By Rottmann, Horst

  1. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: This paper gives money a role in providing cheap collateral in a model of banking; besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0, so at the zero bound monetary policy is effective; fiscal policy crowds out investment via the risk-premium. A rule for making M0 respond to credit conditions can enhance the economy’s stability. Both price-level and nominal GDP targeting rules for interest rates combined with this stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks’ balance sheets becomes redundant.
    Keywords: DSGE model; Financial Frictions; Crises; Indirect Inference; money supply; QE; monetary policy; fiscal multiplier; zero bound
    JEL: E3 E44 E52 C1
    Date: 2014–10
  2. By: Pierpaolo Benigno; Gauti B. Eggertsson; Federica Romei
    Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
    JEL: E31 E32 E52
    Date: 2014–10
  3. By: Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks' balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
    JEL: C14 C38 C52 E32 E37 E44 E51 G01 G21 N10 N20
    Date: 2014–09
  4. By: Leo Kaas (Department of Economics, University of Konstanz, Germany); Patrick A. Pintus (Aix-Marseille School of Economics, University of Marseille, France); Simon Ray (Aix-Marseille School of Economics, University of Marseille, France)
    Abstract: The value of land in the balance sheet of French firms correlates positively with their hiring and investment flows. To explore the relationship between these variables, we develop a macroeconomic model with firms that are subject to both credit and labor market frictions. The value of collateral is driven by the forward-looking dynamics of the land price, which reacts endogenously to fundamental and non-fundamental (sunspot) shocks. We calibrate the model to French data and find that land price shocks give rise to significant amplification and hump-shaped responses of investment, vacancies and unemployment that are in line with the data.
    Keywords: Financial shocks; Labor market frictions
    JEL: E24 E32 E44
    Date: 2014–09–09
  5. By: Radde, Sören
    Abstract: This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their inter- mediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. A financial crisis, simulated as an abrupt decline in the collateral value of bank assets, triggers a flight to liquidity, which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks' asset portfolios. JEL Classification: E22, E32, E44
    Keywords: bank capital channel, credit crunch, funding liquidity risk, liquidity hoarding, macro-finance
    Date: 2014–09
  6. By: Drew D. Creal; Jing Cynthia Wu
    Abstract: Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors that capture short-term and long-term interest rate uncertainty. Increases in either of them lead higher unemployment rates, but they interact with inflation in opposite directions.
    JEL: C5 E4
    Date: 2014–10
  7. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    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: monetary policy; energy; oil prices; japanese economy
    JEL: E47 E52 Q41 Q43
    Date: 2014–11–10
  8. 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. Classification JEL: E44, E50, E52, E58, F41.
    Date: 2014–11
  9. By: Falk Mazelis; ; ;
    Abstract: We extend the monetary DSGE model by Gertler and Karadi (2011) with a non-bank financial intermediary to investigate the impact of monetary policy shocks on aggregate loan supply. We distinguish between bank and non-bank intermediaries based on the liquidity of their credit claims. While banks can endogenously create deposits to fund firm loans, non-banks have to raise deposits on the funding market to function as intermediaries. The funding market is modeled via search and matching by non-banks for available deposits of households. Because deposit creation responds to economy-wide productivity automatically, bank reaction to shocks corresponds to the balance sheet channel. Non-banks are constrained by the available deposits and their behavior is better explained by the lending channel. The two credit channels are affected differently following a monetary policy shock. As a result of these counteracting effects, an increasing non-bank sector leads to a reduced reaction of aggregate loan supply following a monetary policy shock, which is consistent with the data. An extension to deposit like-issuance by the non-bank sector will allow further studies of re-regulating the non-bank sector.
    Keywords: Shadow Banking, Monetary Transmission Mechanism, Credit Channel
    JEL: E32 E44 E51 G20
    Date: 2014–10
  10. By: Hess Chung; Edward Herbst; Michael T. Kiley
    Abstract: We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes - to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.
    JEL: E31 E37 E52
    Date: 2014–10
  11. By: Joseph E. Stiglitz
    Abstract: Macroeconomics has not done well in recent years: The standard models didn't predict the Great Recession; and even said it couldn't happen. After the bubble burst, the models did not predict the full consequences. The paper traces the failures to the attempts, beginning in the 1970s, to reconcile macro and microeconomics, by making the former adopt the standard competitive micro-models that were under attack even then, from theories of imperfect and asymmetric information, game theory, and behavioral economics. The paper argues that any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis? The paper presents a variety of hypotheses which provide answers to these questions, and argues that models based on these alternative assumptions have markedly different policy implications, including large multipliers. It explains why the apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment.
    JEL: E00 E12 E24 E5 G01
    Date: 2014–09
  12. By: Debes, Sebastian; Gareis, Johannes; Mayer, Eric; Rüth, Sebastian
    Abstract: We investigate the role of consumer confidence in the transmission of monetary policy shocks from an empirical and theoretical perspective. Standard VAR based analysis suggests that an empirical measure of consumer confidence drops significantly after a monetary tightening and amplifies the impact of monetary policy on aggregate consumption. Using a behavioral DSGE model, we show that a consumer sentiment channel can account for the empirical findings. In an environment of heterogeneous expectations, which gives rise to the notion of consumer sentiment, innovations to the Federal Funds rate impact on consumer confidence and thereby the broader economy.
    Keywords: monetary policy,monetary transmission,consumer sentiment
    JEL: E32 E52 D83
    Date: 2014
  13. By: Berentsen, Aleksander; Waller, Christopher
    Abstract: We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates ‘congestion’ which causes aggregate output to be inefficient. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves against aggregate shocks. This gives rise to a welfare improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium.
    Keywords: monetary policy, optimal stabilization policy, search equilibrium, microfoundation of money
    JEL: E00 E40
    Date: 2013–09
  14. By: Jess Benhabib; Feng Dong; Pengfei Wang
    Abstract: We develop a macroeconomic model with adverse selection. A continuum of households purchase goods from a continuum of anonymous producers. The quality of products can only be learned after trade. Adverse selection arises as low-quality goods deliver higher profits for producers but are less desirable for households. Higher aggregate demand induces more high-quality goods, raises average quality, and drives up household demand. We show that this demand externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible. Indeterminacy arising from adverse selection in credit markets is also constructed.
    JEL: E32 E44 G01
    Date: 2014–10
  15. By: Eric M. Leeper; James M. Nason
    Abstract: This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role that monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt aggregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control both the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’ Monetary Policy Reports.
    Keywords: Financial frictions, incomplete markets, crises, new Keynesian, natural rate, monetary transmission mechanism.
    JEL: E3 E4 E5 E6 G2 N12
    Date: 2014–11
  16. By: Mendicino, Caterina; Punzi, Maria Teresa
    Abstract: This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkage4s between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household dept. In this context, optimal policy features an interestrate response to credit and a LTV ration that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.
    Keywords: house prices,financial frictions,global imbalances,saving glut,dynamic loan-to value ratios,monetary policy,optimized simple rules
    JEL: C33 E51 F32 G21
    Date: 2014
  17. By: Offick, Sven; Wohltmann, Hans-Werner
    Abstract: This paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household's utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank's instrument variables are the monetary base and the refinancing rate, i.e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to Bernanke and Blinder (1988) - the credit channel may also dampen the output effects of monetary disturbances.
    Keywords: Money,Loan,Money-and-credit-in-the-utility,Credit channel,New Keynesian model,Monetary policy
    JEL: A20 E51 E52
    Date: 2014
  18. By: John Fernald; Mark M. Spiegel; Eric T. Swanson
    Abstract: We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that central-bank-determined changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
    JEL: C38 E43 E52
    Date: 2014–09
  19. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology); ; ;
    Abstract: This paper aims at shedding some light on the mechanisms of pricing the EMU countries’ sovereign bonds in financial markets. Employing the Augmented Mean Group (AMG) estimator, we find that major changes have occurred in terms of variables underlying sovereign risk. Since 2009, macroeconomic and fiscal fundamentals has started to play a more important role, but only those that capture domestic demand evolution. In contrast, price competitiveness seems less important. The second conclusion lies in reversed attitude towards banking sector imbalances, as compared to the earlier period. One of the problems addressed concerns the horizon of projected macroeconomic and fiscal variables taken into account. The paper presents some evidence that financial markets have become more myopic and started to rely on short-term forecasts, whilst they had tended to encompass longer-term forecast horizon before the crisis.
    Keywords: financial crisis, fiscal policy, EMU, panel estimation
    JEL: C23 E43 E62 F34 G01 G12 H60
    Date: 2014–09
  20. By: Anna Orlik; Laura Veldkamp
    Abstract: A fruitful emerging literature reveals that shocks to uncertainty can explain asset returns, business cycles and financial crises. The literature equates uncertainty shocks with changes in the variance of an innovation whose distribution is common knowledge. But how do such shocks arise? This paper argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Using real-time GDP data, we measure uncertainty as the conditional standard deviation of GDP growth, which captures uncertainty about the distributions estimated parameters. When the forecasting model admits only normally-distributed outcomes, we find small, acyclical changes in uncertainty. But when agents can also estimate parameters that regulate skewness, uncertainty fluctuations become large and counter-cyclical. The reason is that small changes in estimated skewness whip around probabilities of unobserved tail events (black swans). The resulting forecasts resemble those of professional forecasters. Our uncertainty estimates reveal that revisions in parameter estimates, especially those that affect the risk of a black swan, explain most of the shocks to uncertainty.
    JEL: C53 E17 E44 G01 G14
    Date: 2014–08
  21. By: Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
    Abstract: Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable. JEL Classification: E22, E62, H54
    Keywords: fiscal policy, imbalances, public capital, trade
    Date: 2014–08
  22. By: Hubrich, Kirstin; Tetlow, Robert J.
    Abstract: A financial stress index for the United States is introduced – an index that was used in real time by the staff of the Federal Reserve Board to monitor the financial crisis of 2008-9 – and the interaction with real activity, inflation and monetary policy is demonstrated using a richly parameterized Markov-switching VAR model, estimated using Bayesian methods. A "stress event" is defined as a period where the latent Markov states for both shock variances and model coefficients are adverse. Results show that allowing for time variation is economically and statistically important, with solid (quasi) real-time properties. Stress events line up well with financial events in history. A shift to a stress event is highly detrimental to the outlook for the real economy, and conventional monetary policy is relatively weak during such periods. JEL Classification: E44, C11, C32
    Keywords: financial crises, Markov switching, monetary policy, nonlinearity
    Date: 2014–09
  23. By: Serdar Kabaca
    Abstract: This paper contributes to the literature by documenting labour income share fluctuations in emerging-market economies and proposing an explanation for them. Time-series data indicate that emerging markets differ from developed markets in terms of changes in the labour share over the business cycle. Labour share is more volatile in emerging markets and is procyclical, especially in countries facing countercyclical interest rates. In contrast, labour share in developed markets is more stable and slightly countercyclical. A frictionless small open-economy real business cycle model cannot account for these facts. I introduce working capital into this model, which generates liquidity need for labour payments. The main result is that the behaviour of the cost of borrowing can predict the right sign of the co-movement between labour share and output in both country groups, and can partly be responsible for the volatility of labour share. I also show that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labour share but also help better explain some of the striking business cycle regularities in emerging markets, such as highly volatile consumption, strongly procyclical investment and countercyclical net exports.
    Keywords: Business fluctuations and cycles, Development economics, Interest rates, International topics, Labour markets
    JEL: E25 F41 E44
    Date: 2014
  24. By: Frauke Schleer; Willi Semmler (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specifc amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops.
    Keywords: Vector STAR, financial stress, financial cycle, real economy, regime switching, euro area
    JEL: E2 E44 G01
    Date: 2014–03
  25. By: Andrea L. Eisfeldt; Tyler Muir
    Abstract: We use firms' decisions in the cross-section about their sources and uses of funds in order to make inferences about the aggregate cost of external finance. The basic intuition is as follows: Firms which raise costly external finance can invest the issuance proceeds in productive capital assets, or in liquid financial assets with a low physical rate of return. If firms raise costly external finance and allocate some of the funds to liquid assets, either the cost of external finance is relatively low, or the total return to liquidity accumulation, including its value as a hedging asset, is particularly high. We construct and estimate a quantitative, dynamic model of firms' financing and savings decisions. We then use the model's predictions for variation in firm policies and implied cross sectional moments, along with empirical moments from Compustat, to infer the average cost of external finance per dollar raised in the US time series 1980-2010.
    JEL: E23 E32 E44 G01 G3 G32
    Date: 2014–09
  26. By: Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis)
    Abstract: Latin America has had striking changes in economic performance over time. Following the recession and debt crises of the early 1980’s, consumption declined for about ten years and consumption per-capita in the year 2004 was roughly the same as it was in 1980. This paper studies consumption stagnation in Latin America using a small open economy real business cycle model with endogenous borrowing limits, capitalistic production and domestic productivity and international interest rate shocks. I find that the model does an excellent job matching the observed behavior of per-capita consumption, and that the interaction of both productivity and international interest rate shocks with the borrowing limit is key.
    Keywords: Limited Commitment; per-capita consumption; total factor productivity; interest rate.
    JEL: C61 E21 F41 F43
    Date: 2013–02–15
  27. By: Noussair, Charles N. (University of Tilburg); Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.)); Zsiros, Janos (Cornell University)
    Abstract: We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.
    Keywords: Experimental economics; DSGE economy; pricing behavior; menu costs
    JEL: C91 C92 E31 E32
    Date: 2014–10–24
  28. By: Fernando Leibovici; Michael E. Waugh
    Abstract: This paper studies the dynamics of international trade flows at business cycle frequencies. We show that introducing dynamic considerations into an otherwise standard model of trade can account for several puzzling features of trade flows at business cycle frequencies. Our insight is that because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We formalize this idea and calibrate our model to match key features of U.S. data. We find that, in contrast to standard static models of international trade, our model is quantitatively consistent with salient features of U.S. cyclical import fluctuations. We also find that our model accounts for two-thirds of the peak-to-trough decline in imports during the 2008-2009 recession.
    JEL: E0 F0 F1 F4
    Date: 2014–09
  29. By: Hernández de Cos, Pablo; Koester, Gerrit B.; Moral-Benito, Enrique; Nickel, Christiane
    Abstract: The sovereign debt crisis in the euro area has increased the interest in early warning indicators, with the aim to indicate the build?up of fiscal stress early on and to facilitate crisis prevention by a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country?specific approach could strongly increase the signalling power of early warning systems. Finally we draw policy conclusions for the setting?up and application of a system of early warning indicators for fiscal stress. JEL Classification: E62, E65, E66, H62, H63, F34
    Keywords: debt management, deficit surplus, fiscal policy, general outlook and conditions, international lending and debt problems, sovereign debt, studies of particular policy episodes
    Date: 2014–08
  30. By: Ansgar Walther
    Abstract: Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities.  Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes.  These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III.  When bank failures are socially costly, microprudential regulation of leverage is also required.  Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk.
    Keywords: Systemic risk, leverage, maturity mismatch, macroprudential regulation, liquidiity, capital requirements, fire sales
    JEL: G18 G21 G28 E44
    Date: 2014–09–25
  31. By: Hakan Kara (Central Bank of Turkey); Cagri Sarikaya (Central Bank of Turkey)
    Abstract: Turkey’s high current account deficit has been at the core of macroeconomic policy discussions in recent years. Quantifying the role of cyclical factors in driving the current account fluctuations is essential for designing an appropriate policy response and evaluating the impact of policy measures. Using a simple methodology, this study extracts the cyclical component of the current account in Turkey, with special reference to its three main drivers; namely foreign demand, domestic demand and foreign trade prices. We argue that the underlying (cyclically-adjusted) current account deficit has displayed a persistent deteriorating trend during 1998-2007 period before stabilizing around 6 percent of GDP in recent years. Decomposing the current account deficit into cyclical and non-cyclical factors allows us to assess the impact of recent policy actions. Our computations suggest that, although the policies pursued by the central bank and other authorities since 2011 have removed the cyclical part to a great extent, there remains a sizeable component of the deficit to be dealt with more structural policies.
    Keywords: Current Account Balance, Foreign Trade, Business Cycle, Cyclical Adjustment, Filtering.
    JEL: E32 F14 F32
    Date: 2014–11
  32. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: UBS European Conference 2014, London, England November 12, 2014 President Charles Plosser gives his views on the economy and discusses why he remains positive about our country's economic prospects. He also shares his thoughts about the stance of monetary policy and the advantages of raising rates gradually and starting sooner instead of being forced to raise them abruptly later.
    Keywords: Economic outlook; Manufacturing Business Outlook Survey; Nonmanufacturing Business Outlook Survey; FOMC
    Date: 2014–11–12
  33. By: Duncan Foley (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Recent claims, particularly in Paul Krugman’s column and blog, on the superiority of the Hicks-Modigliani version of Keynesian economics calls for a re-thinking of the issues raised in the early controversies over what Joan Robinson called ”bastard Keynesianism”. ”Good, old-fashioned, Keynesian economics” (GOKE) substitutes the general and unmotivated assumption of downward money wage rigidity for the detailed examination of the varied social coordination problems that characterize modern capitalist economies. This underrates Keynes’ role as a precursor of modern information economics, and risks losing significant policy insights. The political economy background of the New Classical counter-revolution in economic theory, stemming from the unravelling of the ”capital-labor accord” of the SecondWorldWar, provides some important lessons for the development of a macroeconomic analysis that is relevant to the real problems of modern capitalist economies.
    Keywords: Keynes, macroeconomics, sticky wages, information economics, multiple equilibria
    JEL: B22 D83 E41
    Date: 2014–03
  34. By: Rezaie, Mohsen
    Abstract: Money, credit and monetary markets are interlinked with each other and linked to real sector of the economy. There is clearly no single market called money market, but there are two money markets, asset-money and credit-money markets, that money is created by the interactions between them. This created money would, then, enter into economic activities and to facilitate producing and transacting in the real sector. In other words, money is a heavenly creature that is created through interactions between money markets in the sky of monetary markets that returns to the land of real markets. In other words, monetary intermediaries, like firms, produce money within credit and savings process. In addition, monetary integration takes place by interaction of money markets.
    Keywords: Asset-money, Credit-money, Saving, Monetary Theory, Monetary Variables, Monetary Integration
    JEL: E40
    Date: 2014–01–01
  35. By: Hairault, Jean-Olivier (University of Paris 1 Panthéon-Sorbonne); Zhutova, Anastasia (University of Paris 1 Panthéon-Sorbonne, PSE)
    Abstract: In this paper, we aim to provide a comprehensive view of the unemployment dynamics generated by different structural shocks. We show that the relative contribution of the job finding and separation rates to the unemployment dynamics depends on a type of structural shocks. Identified using a sign restrictions approach, the shocks of our Bayesian Structural VAR model capture the possible shifts in the three conditions determining labor market equilibrium in any matching models, namely: the Beveridge curve, the job creation condition, and the job destruction condition. Using US data we then identify a shock to the profitability of a match (the aggregate shock), a shock specific to the existing jobs (job-specific shock) and a shock to the efficiency of the matching process (search shock). The two former shocks generate a quite balanced contribution of the two transition rates to the volatility of unemployment, whereas the search shock implies a disproportionate importance of the job finding rate. We find the same result for French data, which assesses the robustness of the pattern generated by these structural shocks. The difference between the two countries lies more in the relative importance of the shocks. The search shock appears more significant in France, which in the end reinforces the predominant role of the job finding rate in this country.
    Keywords: unemployment variability, job separation, job finding, Bayesian Var
    JEL: E24 J6
    Date: 2014–10
  36. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Burcu Berke (Nigde University, Nigde, Turkey)
    Abstract: The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be crucial for the results.
    Keywords: Real exchange rate, Government consumption, Government investment
    JEL: E62 F31 F41
    Date: 2014–11
  37. By: Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
    Abstract: How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
    Keywords: Progressive Taxation,Fiscal Policy,Laffer Curve,Government Debt
    JEL: E62 H20 H60
    Date: 2014
  38. By: Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of "indicator countries", providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies.
    Keywords: Inflation-targeting; foreign exchange interventions; Gaussian mixture model
    Date: 2013–10
  39. By: Basham, James; Roland, Aanor
    Abstract: The European sovereign debt crisis represents an interesting opportunity to investigate the reaction of the European Central Bank as a crisis fighting institution and the importance of central bank personalities in policy execution. Accordingly, this paper aims at investigating to what extent the policy-making of the ECB during the crisis has been influenced by Trichet's and Draghi's different personalities. Based on Friedman's hypothesis that "accidents of personality" have a great impact on the functioning of a rulebased institution, we find that the clear differences in policy-making between Trichet and Draghi can be explained by specific features of their respective personalities. Institutions matter, but so do personalities.
    Keywords: European Central Bank,Central Bankers,Personality Theory,European Sovereign Debt Crisis,Monetary Policy
    JEL: E5 E6
    Date: 2014
  40. By: Binder, Michael; Offermanns, Christian J.
    Abstract: We examine the effects of increased international integration of both goods and financial markets on business cycle dynamics. To do so, we develop a new econometric framework for modelling cross-country spillovers in which the magnitude of these spillovers is an empirically determined function of the degree of a country's integration with international goods and financial markets. Our results suggest that the magnitude of cross-country spillovers for most country pairs has been increasing with strengthened goods and financial markets integration.
    Keywords: business cycle dynamics,international goods and financial market integration,dynamic panel data models,global VAR model
    JEL: E32 F41 C33
    Date: 2014
  41. By: Wieland, Volker; Wolters, Maik
    Abstract: The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self-reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the outputinflation nexus at low trend inflation. The note concludes from this evidence that the risk of a selfreinforcing deflation remains very small. Thus, the ECB best await the impact of the long-term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
    Date: 2014
  42. By: Gucciardi, Gianluca
    Abstract: This paper provides some evidence on the existence of the wage curve - the negative relationship between individual wages and the local unemployment rate - within a number of occupations. It exploits the Bank of Italy's Household Survey and draws data from 1977 to 2008. An occupation-level wage curve exists for all the employees, while it holds only for a sub-set of the self-employed. In particular, the wage curve has an elasticity of approximately -0.05 for the blue-collars, an elasticity of -0.1 for the employees and of approximately -0.2 for the executives. This suggests that professional labor markets may have different levels of flexibility, also within the same country. In particular, the professional categories with higher (lower) levels of negative elasticity belong to more (less) flexible labor markets.
    Keywords: wage curve,occupation,unemployment,Italian regions
    JEL: J31 J64 E24
    Date: 2014
  43. By: Luc Masure
    Abstract: This study was commissioned by the Central Economic Council (CEC), and more particularly by the Special Advisory Commission ‘Construction'. It presents the sectoral results of a report that was produced in 2011 by the National Bank of Belgium and the Federal Planning Bureau. The federal government had asked both institutions to conduct a comprehensive study of a fiscal reform aiming at encouraging employment and supporting business competitiveness. As requested by the CEC, we comment here in detail the impact of a VAT increase without additional measures, on the one hand, and the impact of a VAT increase with transitional neutralization of the effect of that increase on the indexation. As regards the other measures examined, tables of results are annexed.
    Keywords: Econometric model
    JEL: C3 C54 E62 J3
    Date: 2014–05–28
  44. By: Ratna Sahay; Vivek B. Arora; Athanasios V Arvanitis; Hamid Faruqee; Papa N'Diaye; Tommaso Mancini Griffoli
    Abstract: Accommodative monetary policies in advanced economies have spurred increased capital inflows into emerging markets since the global financial crisis. Starting in May 2013, when the Federal Reserve publicly discussed its plans for tapering unconventional monetary policies, these emerging markets have experienced financial turbulence at the same that their domestic economic activity has slowed. This paper examines their experiences and policy responses and draws broad policy lessons. For emerging markets, good macroeconomic fundamentals matter, and early and decisive measures to strengthen macroeconomic policies and reduce vulnerabilities help dampen market reactions to external shocks. For advanced economies, clear and effective communication about the exit from unconventional monetary policy can and did help later to reduce the risk of excessive market volatility. And for the global community, enhanced global cooperation, including a strong global financial safety net, offers emerging markets effective protection against excessive volatility.
    Keywords: Emerging markets;International capital market volatility;Capital flows;Monetary policy;Macroprudential Policy;United States;Developed countries;Tapering, unconventional monetary policy, volatility, macroprudential, capital flow measures, foreign exchange intervention
    Date: 2014–10–02
  45. By: Katya Kartashova
    Abstract: This paper quantifies the effects of improving public equity markets on macroeconomic aggregates and welfare. I use an open-economy extension of Angeletos (2007), where entrepreneurs face idiosyncratic productivity risk in privately held firms. They can diversify by investing in publicly traded firms, but their operation is costly. These costs can vary across different economies. To quantify the effect of the differences and impose discipline, I parameterize the model using Ecuadorian and Chilean firm-level and aggregate data. Lower equity costs result in improvement of economic aggregates, but have differential welfare effects. Entrepreneurs suffer a loss, while workers gain.
    Keywords: Development economics, Financial Institutions, Financial markets
    JEL: E44 G11 O11 O16
    Date: 2014
  46. By: Troy Matheson; Emil Stavrev
    Abstract: We develop a simple approach to identify economic news and monetary shocks at a high frequency. The approach is used to examine financial market developments in the United States following the Federal Reserve’s May 22, 2013 taper talk suggesting that it would begin winding down its quantitative easing program. Our findings show that the sharp rise in 10-year Treasury bond yields immediately after the taper talk was largely due to monetary shocks, with positive economic news becoming increasingly important in subsequent months.
    Keywords: Monetary policy;United States;External shocks;Financial markets;Treasury bills and bonds;Bond yields;Econometric models;Monetary Policy, Economic News
    Date: 2014–09–12
  47. By: Frederic Lambert; Kenichi Ueda
    Abstract: Unconventional monetary policy is often assumed to benefit banks. However, we find little supporting evidence. Rather, we find some evidence for heightened medium-term risks. First, in an event study using a novel instrument for monetary policy surprises, we do not detect clear effects of monetary easing on bank stock valuation but find a deterioration of medium-term bank credit risk in the United States, the euro area, and the United Kingdom. Second, in panel regressions using U.S. banks’ balance sheet information, we show that bank profitability and risk taking are ambiguously affected, while balance sheet repair is delayed.
    Keywords: Monetary policy;Interest rate policy;United States;Euro Area;United Kingdom;Banks;Credit risk;Bank soundness;Balance sheets;Regression analysis;Monetary Policy, Bank Profitability, Bank Risk, Balance Sheet Repair
    Date: 2014–08–13
  48. By: Jurany Beccie RAMÍREZ GALLEGO
    Abstract: En este documento, se describe el comportamiento de la inversión, así como su composición de acuerdo al tipo de activos y a los sectores institucionales; encontrando que efectivamente, se puede establecer una relación, no necesariamente causal, entre la inversión y el crecimiento económico, y también una agrupación entre el grado desarrollo de las economías y la composición de sus inversiones. Para esto se revisaron las cuentas nacionales de Colombia, Panamá, Perú, Ecuador, Chile, Brasil, México, Estados unidos, Alemania, Japón y La unión Europea en el periodo comprendido entre 2002 y 2012
    Keywords: inversión, formación bruta de capital fijo, crecimiento económico
    JEL: E22 E62 O57
    Date: 2014–11–07
  49. By: Ezra Oberfield; Devesh Raval
    Abstract: We develop a framework to estimate the aggregate capital-labor elasticity of substitution by aggregating the actions of individual plants, and use it to assess the decline in labor's share of income in the US manufacturing sector. The aggregate elasticity reflects substitution within plants and reallocation across plants; the extent of heterogeneity in capital intensities determines their relative importance. We use micro data on the cross-section of plants to build up to the aggregate elasticity at a point in time. Our approach places no assumptions on the evolution of technology, so we can separately identify shifts in technology and changes in response to factor prices. We find that the aggregate elasticity for the US manufacturing sector has been stable since 1970 at about 0.7. Mechanisms that work solely through factor prices cannot account for the labor share's decline. Finally, the aggregate elasticity is substantially higher in less-developed countries.
    JEL: E10 E23 E25
    Date: 2014–09
  50. By: Harenberg, Daniel; Ludwig, Alexander
    Abstract: When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.
    Keywords: social security,idiosyncratic risk,aggregate risk,welfare,insurance,crowding out
    JEL: C68 E27 E62 G12 H55
    Date: 2014
  51. By: Steven J. Davis; John Haltiwanger
    Abstract: U.S. labor markets became much less fluid in recent decades. Job reallocation rates fell more than a quarter after 1990, and worker reallocation rates fell more than a quarter after 2000. The declines cut across states, industries and demographic groups defined by age, gender and education. Younger and less educated workers had especially large declines, as did the retail sector. A shift to older businesses, an aging workforce, and policy developments that suppress reallocation all contributed to fluidity declines. Drawing on previous work, we argue that reduced fluidity has harmful consequences for productivity, real wages and employment. To quantify the effects of reallocation intensity on employment, we estimate regression models that exploit low frequency variation over time within states, using state-level changes in population composition and other variables as instruments. We find large positive effects of worker reallocation rates on employment, especially for men, young workers, and the less educated. Similar estimates obtain when dropping data from the Great Recession and its aftermath. These results suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.
    JEL: E24 J63 L23
    Date: 2014–09
  52. By: Caponi, Vincenzo (Ryerson University)
    Abstract: This paper contributes to the existing literature on public employment showing that the wage setting policy of the public sector can be an important determinant of private employment and unemployment. I look at the case of geographically homogeneous wages across regions with different private sector productivity, and show that public employment generates a crowding out effect against private employment. This effect is larger the larger is the public sector share of total employment. I present a two region two sector model based on Pissarides (2000) heterogeneous search and matching model where vacancies are posted by the private and the public sector as in Quadrini and Trigari (2007) and Gomes (2014). I calibrate the model to the Italian labor market and show that the uniform wage setting policy adopted by the central government, in the presence of productivity unbalance across regions, is responsible for up to 40% of the unemployment gap between the North and South. Policy experiments suggest that reducing the size of public employment reduces unemployment in lower productive regions while allowing for regional wage setting in the public sector almost eliminates the unemployment differential.
    Keywords: Italy, European unemployment, regional unemployment, public employment
    JEL: E24 J60
    Date: 2014–09
  53. By: John M. Abowd; Francis Kramarz; Sébastien Pérez-Duarte; Ian M. Schmutte
    Abstract: We test for sorting of workers between and within industrial sectors in a directed search model with coordination frictions. We fit the model to sector-specific vacancy and output data along with publicly-available statistics that characterize the distribution of worker and employer wage heterogeneity across sectors. Our empirical method is general and can be applied to a broad class of assignment models. The results indicate that industries are the loci of sorting-more productive workers are employed in more productive industries. The evidence confirms assortative matching can be present even when worker and employer components of wage heterogeneity are weakly correlated.
    JEL: C1 E24 J24 J31
    Date: 2014–09
  54. By: Briglevics, Tamás; Schuh, Scott
    Abstract: Data from the 2012 Diary of Consumer Payment Choice (DCPC) shows substantial changes in payment instrument use of U.S. households compared to the results in Klee (2008) (which were based on data from 2001): Checks have virtually disappeared from purchase transactions, while still play a role in bill payments. Cash, on the other hand, still plays a large role for low-value transactions. The diary data is used to jointly analyse payment instrument use and consumers' demand for liquid assets. Preliminary results indicate that payment instrument choice is an integral part of consumers' cash management practices and hence cash demand; therefore, contrary to simple Baumol (1952)|Tobin (1956) models, they should be analysed together. JEL Classification: E41, E42
    Keywords: cash withdrawals, Diary of Consumer Payment Choice, money demand, payment cards, payment instrument choice
    Date: 2014–06
  55. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Sahoko Kaji; Tamon Asonuma
    Abstract: This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large.
    Keywords: Southeast Asia, East Asia, exchange rate regime, Emerging Countries, basket-peg regime, floating regime
    JEL: E42 F33 F41 F42
    Date: 2014–10
  56. By: Carola Moreno; Carlos Saavedra; Bárbara Ulloa
    Abstract: Commodity exporter economies usually suffer when a boom in commodity prices ends, especially if the cycle ends abruptly. Furthermore, recent literature has highlighted the role of financial instability as either causing or aggravating financial and real crises. In this paper we look at these two aspects, and study the relationship between commodity prices, output growth and financial stability, the latter proxied by domestic credit growth. Given the asymmetry we observe in boom and bust cycles, we estimate the output cost of commodity price shocks on separate samples, with a special emphasis in emerging economies. In particular, we focus on the output cost of a commodity price reversal given the credit increase observed during a boom event. We find that, in line with previous literature, the correlation between commodity shocks and output growth decreases as economies are more open to financial markets. The novelty is that we also find that this correlation is higher when countries experience very rapid credit growth during the Upturn phase of a boom. That is, rapid credit growth –regardless of its initial level—exacerbates the cost of a commodity price reversal.
    Date: 2014–08
  57. By: Aerdt Houben; Rob Nijskens; Mark Teunissen
    Abstract: The great financial crisis of 2007-2009 again illustrated the enormous costs of financial imbalances. Since the crisis, advanced economies have suffered a cumulative output loss of 33% relative to its pre-crisis, an increase in public debt amounting to 21% of GDP and direct fiscal costs totalling around 4% of GDP. These losses demonstrate the need for macroprudential measures that reduce the incidence and impact of systemic crises. This need has been acknowledged by economists and policymakers alike, and much has been written on the theory of macroprudential policy. Now the time has come to put these insights to work. To bring together key players in this new policy arena, DNB organized a high-level seminar on 10 june 2014; the speakers' contributions are bundled in this Occasional Study.
    Date: 2014–10
  58. By: Antoine Mandel (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); Simone Landini (Socioeconomic Research Institute of Piedmont - Socioeconomic Research Institute of Piedmont); Mauro Gallegati (Università Politecnica delle Marche - UNIVPM); Herbert Gintis (Santa Fe Institute - Santa Fe Institute, Central European University - CEU - Central European University)
    Abstract: Within a standard framework à la Arrow-Debreu, we investigate the dynamics emerging from the interactions of heterogeneous households and firms that are adaptive price setters and financially constrained. We show that depending on the stringency of the financial constraints the model can settle in two very different regimes: one characterized by equilibrium, the other by disequilibrium and financial fragility. We then investigate how the structure of the production network affects the emergence of aggregate volatility from micro-level price and financial shocks, hence providing a dynamical counterpart to recent results of Acemoglu and al (2012).
    Keywords: Agent-based modeling; financial fragility; price dynamics; general equilibrium; production networks
    Date: 2013–11
  59. By: Yoshiro Miwa (Faculty of Economics, Osaka Gakuin University and Faculty of Economics, University of Tokyo)
    Abstract: This is the second article of my series, “Improving Economic Statistics in order to Improve Economic Policy and Research.†It fleshes out some of the issues presented in the first article, Miwa [2014]. Focusing on SNA (GDP) estimates, this study investigates the availability and usefulness of several major series of economic indices: e.g., input-output (IO) tables, GDP deflators, CSPI (and CGPI), and productivity (growth) indexes. In particular, it examines IO tables and SNA base-year annual estimates. It concludes that the nominal GDP, GDP deflator and real GDP, real GDP growth rate, inflation rate, and real productivity growth rate (both for the overall economy and the individual sectors) depend on fatally unclear generation methods (both statistical information based on and estimation methods). Relevant information simply is not disclosed. Two points are important. First, the government has failed to disclose the information necessary to understand the quality of the data on the service sector. With its steady growth, the service sector now constitutes an overwhelming share in the economy. Yet statistical information about this sector has long been insufficient. Unfortunately, this makes the IO tables and SNA estimation problematic, yet the government has failed to provide information necessary for understanding the consequences posed. Second, the government has provided only badly flawed deflators. IO tables and SNA estimation and various statistical materials such as production values are all in nominal values. We need deflators in order to estimate from nominal values real GDP, its growth rate, and the level and growth rate of productivity in individual sectors. Unfortunately, the basic information for estimating appropriate deflators remains unavailable. Relevant information on the estimation methods (therefore, the specific nature and substance) of deflators are unclear and little disclosed, so that it is not easy even to understand the reality of the situation. As a consequence, there remains serious ambiguity in the published real statistical estimates, including real GDP and its growth rates.
    Date: 2014–08
  60. By: Saint-Paul, Gilles (University of Toulouse I)
    Abstract: We study active labor market policies (ALMP) in a matching model. ALMPs are modelled as a subsidy to job search. Workers differ in their productivity, and search takes place along an extensive margin. An additional job seeker affects the quality of unemployed workers. As a result, the Hosios conditions are no longer valid. To replicate the optimum the worker share in bargaining must exceed the Hosios level, and one must impose a tax on job search activity. The coalition in favor of ALMP is also studied.
    Keywords: active labor market policy, matching models
    JEL: E24 J6
    Date: 2014–10
  61. By: Fabre, Alice; Pallage, Stéphane; Zimmermann, Christian (Federal Reserve Bank of St. Louis)
    Abstract: In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.
    Keywords: Universal basic income; Idiosyncratic shocks; Unemployment insurance; Heterogeneous agents; Moral hazard
    JEL: D7 E24 J65
    Date: 2014–11–14
  62. By: Szarowska, Irena
    Abstract: The complexity of today’s global economic environment increases importance of identifying and understanding the key factors affecting economic growth. This paper deals with effect of changes in tax burden on economic growth and provides direct empirical evidence in the European Union as financial and economic crisis has impacted also on tax systems. It is used the Eurostat´s definition to categorize tax burden by economic functions and implicit tax rates of consumption, labour and capital are investigated. The analysis is based on annual panel data of 24 EU member states in a period 1995-2010. Panel regression and Pairwise Granger Causality Tests are used as the main method of research. Results confirm, in line with the theory, statistically significant positive effect of consumption taxes and negative effect of labour taxes on GDP growth. In short-term, there is two-way causality between change of implicit tax rate of consumption and GDP growth and one-way causality between GDP growth and change of implicit tax rate of capital and implicit tax rate of labour.
    Keywords: tax burden, implicit tax rates, economic functions, economic growth, competitiveness
    JEL: E62 H21 H30
    Date: 2013
  63. By: Kris James Mitchener; Matthew Jaremski
    Abstract: We use a novel data set spanning 1820-1910 to examine the origins of bank supervision and assess factors leading to the creation of formal bank supervision across U.S. states. We show that it took more than a century for the widespread adoption of independent supervisory institutions tasked with maintaining the safety and soundness of banks. State legislatures initially pursued cheaper regulatory alternatives, such as double liability laws; however, banking distress at the state level as well as the structural shift from note-issuing to deposit-taking commercial banks and competition with national banks propelled policymakers to adopt costly and permanent supervisory institutions.
    JEL: E44 G28 N11
    Date: 2014–10
  64. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of governing by panic and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal Brussels-Frankfurt consensus, the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro; European Central Bank; European Central Bank; fiscal policy
    Date: 2014–10–24
  65. By: Rabitsch, Katrin; Stepanchuk, Serhiy
    Abstract: Using a stylized two-period model we compare portfolio solutions from two local solution approaches - the approach of Judd and Guu (2001) and the approach of Devereux and Sutherland (2010, 2011) - with the true nonlinear portfolio solution.
    Keywords: Country Portfolios,Solution Methods
    JEL: E44 F41 G11 G15
    Date: 2014
  66. By: C. Marsilli
    Abstract: In short-term forecasting, it is essential to take into account all available information on the current state of the economic activity. Yet, the fact that various time series are sampled at different frequencies prevents an efficient use of available data. In this respect, the Mixed-Data Sampling (MIDAS) model has proved to outperform existing tools by combining data series of different frequencies. However, major issues remain regarding the choice of explanatory variables. The paper first addresses this point by developing MIDAS based dimension reduction techniques and by introducing two novel approaches based on either a method of penalized variable selection or Bayesian stochastic search variable selection. These features integrate a cross-validation procedure that allows automatic in-sample selection based on recent forecasting performances. Then the developed techniques are assessed with regards to their forecasting power of US economic growth during the period 2000-2013 using jointly daily and monthly data. Our model succeeds in identifying leading indicators and constructing an objective variable selection with broad applicability.
    Keywords: Forecasting, Mixed frequency data, MIDAS, Variable selection, GDP.
    JEL: C53 E37
    Date: 2014
  67. By: Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
    Abstract: Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
    Keywords: Fiscal devaluation;Monetary unions;Euro Area;Southern Europe;Fiscal policy;Fiscal reforms;Value added taxes;General equilibrium models;Fiscal devaluation, fiscal policy, euro area, currency union, current account
    Date: 2014–10–30
  68. By: Chen, Wen; Niebel, Thomas; Saam, Marianne
    Abstract: Using sectoral intangible investment data we confirm that intangible capital is a significant determinant of labour productivity growth. The sectoral setting further allows us to identify the differential impacts of intangible capital across industries with varying degrees of ICT intensity. Intangible capital appears to be significantly more productive in ICT-intensive sectors than in those that use little ICT. This finding remains robust across various alternative industry ICT intensity measures and aligns with the prior firm-level studies that place emphasis on the complementary role of intangible assets in ICT investment.
    Keywords: Intangible capital,ICT,economic growth,labour productivity
    JEL: E22 J24 O47
    Date: 2014
  69. By: Claudia Olivetti (Boston University and NBER); Barbara Petrongolo (Queen Mary University of London and CEP (LSE), CEPR)
    Abstract: The comovement between gender gaps in hours and wages across countries and skills reveals the presence of net demand forces shaping gender differences in labor market outcomes. This paper links the rich pattern of variation in gender gaps to the process of structural transformation. Based on a stylized, multi-sector equilibrium model, we illustrate that the gender bias in labor demand can be decomposed into measurable within- and between-industry components. Using comparable micro data across countries, we find that international differences in the industry structure explain more than eighty percent of the overall variation in labor demand between the U.S. and all other countries in our sample, and roughly one third of the overall cross-country variation in wage and hours gaps.
    Keywords: Gender gaps, Skills, Demand and supply, Industry structure
    JEL: E24 J16 J31
    Date: 2014–09
  70. By: Fantazziini, Dean
    Abstract: We propose the use of Google online search data for nowcasting and forecasting the number of food stamps recipients. We perform a large out-of-sample forecasting exercise with almost 3000 competing models with forecast horizons up to 2 years ahead, and we show that models including Google search data statistically outperform the competing models at all considered horizons. These results hold also with several robustness checks, considering alternative keywords, a falsification test, different out-of-samples, directional accuracy and forecasts at the state-level.
    Keywords: Food Stamps, Supplemental Nutrition Assistance Program, Google, Forecasting, Global Financial Crisis, Great Recession.
    JEL: C22 C53 E27 H53 I32 Q18 R23
    Date: 2014
  71. By: Allen Head (Queen's University); Huw Lloyd-Ellis (Queen's University)
    Abstract: The dramatic rise in Canada's average house price to average rent ratio has induced some commentators to argue that a speculative bubble is under way the collapse of which will have a calamitous effect on the economy. Others have argued, however, that the currently high level of house prices may be rationalized by the low cost of financing, given the decline in interest rates over the last two decades. In this article, we assess these arguments through the lens of a simple asset pricing model applied to city-level data. We quantify the etxent to which excess growth in Canadian house prices depends on the nature of the current regime governing real interest rates, expections of rent growth in different cities and variations in property taxes.
    Keywords: Price-rent ratio, Canadian cities, asset pricing
    JEL: E30 R31 R10
    Date: 2014–11
  72. By: Alyssa Schneebaum (Department of Economics, Vienna University of Economics and Business); Miriam Rehm (Vienna Chamber of Labour); Katharina Mader (Department of Economics, Vienna University of Economics and Business); Patricia Klopf (Department of Global Business and Trade, Vienna University of Economics and Business); Katarina Hollan (Austrian Institute of Economic Research)
    Abstract: This paper studies the gender wealth gap using 2010 Household Finance and Consumption Survey data for 15 European countries, and finds that households with only one male adult have more net wealth than households with one female adult, and that households with an adult couple have the highest net wealth. Using OLS regressions to predict net wealth and the inverse hyperbolic sine transformation of net wealth, as well as the nonparametric DiNardo-Fortin-Lemieux re-weighting technique, to study the relationship between household and personal characteristics with net wealth, the paper finds that differences in labor market characteristics between male and female households, most notably lifetime labor force participation and wages, explain much of the gender wealth gap.
    Keywords: Gender, Wealth, Wealth Gap, Distribution
    JEL: D31 J16 E21
    Date: 2014–10
  73. By: Hendricks, Lutz; Leukhina, Oksana
    Abstract: This paper studies the effect of graduating from college on lifetime earnings. We develop a quantitative model of college choice with uncertain graduation. Departing from much of the literature, we model in detail how students progress through college. This allows us to parameterize the model using transcript data. College transcripts reveal substantial and persistent heterogeneity in students' credit accumulation rates that are strongly related to graduation outcomes. From this data, the model infers a large ability gap between college graduates and high school graduates that accounts for 54% of the college lifetime earnings premium.
    Keywords: Education,College premium,College dropout risk
    JEL: E24 J24 I21
    Date: 2014
  74. By: Hubar, Sylwia; Koulovatianos, Christos; Li, Jian
    Abstract: US data and new stockholding data from fifteen European countries and China exhibit a common pattern: stockholding shares increase in household income and wealth. Yet, there is a multitude of numbers to match through models. Using a single utility function across households (parsimony), we suggest a strategy for fitting stockholding numbers, while replicating that saving rates increase in wealth, too. The key is introducing subsistence consumption to an Epstein-Zin-Weil utility function, creating endogenous risk-aversion differences across rich and poor. A closed-form solution for the model with insurable labor-income risk serves as calibration guide for numerical simulations with uninsurable labor-income risk.
    Keywords: Epstein-Zin-Weil recursive preferences,subsistence consumption,household-portfolio shares,business equity,wealth inequality
    JEL: G11 D91 D81 D14 D11 E21
    Date: 2014
  75. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Tamas Krisztin (Department of Socio-Economics, Vienna University of Economics and Business); Philipp Piribauer (Department of Socio-Economics, Vienna University of Economics and Business)
    Abstract: This paper proposes a large Bayesian Vector Autoregressive (BVAR) model with common stochastic volatility to forecast global equity indices. Using a dataset consisting of monthly data on global stock indices the BVAR model inherently incorporates co-movements in the stock markets. The time-varying specification of the covariance structure moreover accounts for sudden shifts in the level of volatility. In an out-of-sample forecasting application we show that the BVAR model with stochastic volatility significantly outperforms the random walk both in terms of root mean squared errors as well as Bayesian log predictive scores. The BVAR model without stochastic volatility, on the other hand, underperforms relative to the random walk. In a portfolio allocation exercise we moreover show that it is possible to use the forecasts obtained from our BVAR model with common stochastic volatility to set up simple investment strategies. Our results indicate that these simple investment schemes outperform a naive buy-and-hold strategy.
    Keywords: BVAR, stochastic volatility, log-scores, equity indices, forecasting
    JEL: C11 C22 C53 E17 G11
    Date: 2014–10
  76. By: Cristina Borra Marcos (Dpto. Economía e Historia Económica); Francisco Gómez-García (Dpto. Economía e Historia Económica)
    Abstract: The recent recession has generated a tremendous increase in unemployment rates in Spain. In this paper we use a very rich repeated cross-section dataset on workers’ job conditions, together with regional unemployment rates, to investigate whether peers’ unemployment affects individuals’ job satisfaction. We find that, once perceived job stability is controlled for, peers’ unemployment shows a positive effect on individuals’ wellbeing at work, larger and more precisely estimated for men and private-sector workers. The impact is highly non-linear and the largest effect is found for unemployment rates exceeding 10%. Interestingly, the results are robust to controlling for workforce selection. La recesión reciente ha generado un gran incremento de las tasas de desempleo en España. En este artículo se utiliza una fusión de cortes transversales sobre las condiciones de trabajo, lo que junto a las tasas de desempleo regionales nos permite investigar si el desempleo de los pares afecta a la satisfacción laboral de los individuos. Llegamos a que, una vez controlada la estabilidad en el empleo, el desempleo de los pares muestra un efecto positivo sobre la satisfacción laboral. Este efecto es mayor para los hombres y los trabajadores del sector privado. Además, el impacto es no lineal y el efecto mayor se encuentra para una tasa de desempleo mayor al 10%. Los resultados son robustos y no hay problemas de selección muestral.
    Keywords: Satisfacción laboral, tasa de desempleo, posición relativa, inseguridad laboral, España, Gran Recesión Job satisfaction, unemployment rate, relative position, job insequrity, Spain, Great Recession
    JEL: I31 J28 E24
    Date: 2014–10
  77. By: Hrvoje Šimović (Faculty of Economics and Business, University of Zagreb); Tomislav Ćorić (Faculty of Economics and Business, University of Zagreb); Milan Deskar-Škrbić (Erste&Steiermarkische bank d.d. Croatia)
    Abstract: U radu se analiziraju mogućnosti i ograničenja fiskalne politike u Hrvatskoj. Prvo se analiziraju brojna ograničenja fiskalne politike u Hrvatskoj od (ne)koordinacije fiskalne s monetarnom politikom, lošeg proračunskog planiranja, trendova u kretanju javnih prihoda, problem postojeće visine i strukture javnih rashoda te problem financiranja deficita. U središnjem dijelu analize ispituju se mogućnosti stabilizacijske uloge fiskalne politike kroz analizu utjecaja prihoda i rashoda opće konsolidirane države na kretanje BDP-a. U tu svrhu razvijen je strukturni VAR model kojim se ispituje koje komponente javnih prihoda i rashoda najviše doprinose ekonomskom rastu u Hrvatskoj. Nadalje, mogućnosti fiskalne politike sintetiziraju se kroz prijedlog mjera tzv. pametne fiskalne konsolidacije kao temelja učinkovito stabilizacijsko djelovanje fiskalne politike.
    Keywords: fiskalna politika, multiplikatori javnih rashoda, porezni multiplikatori, ekonomski rast, pametna fiskalna konsolidacija, Hrvatska
    JEL: E62 H50 H20
    Date: 2014–11–11
  78. By: Reingewertz, Yaniv
    Abstract: We survey the empirical literature on fiscal decentralization (FD) and analyze the advantages and disadvantages of shifting fiscal responsibilities to sub national governments. We suggest several conclusions: First, there are large disagreements regarding the influence of FD on the size of government and the effect of FD on tax competition, economic growth and corruption. Probably the only unanimous conclusion is that intergovernmental grants are heavily influenced by political considerations. The empirical literature deals with several additional issues which are related to FD. While the literature on these topics is more scant and is not always econometrically rigorous, it is also more in agreement: there is no evidence for a "race to the bottom" in welfare transfers due to FD; FD seems to increase inequality in developing countries but to decrease inequality in developed economies and there seem to be economies of scale in the provision of several local public services. We conclude that there is no general answer regarding the net effect of FD. Fiscal decentralization reforms have to consider a wide array of factors and local contingencies before a successful implementation could be made.
    Keywords: Fiscal Decentralization, Federalism, Intergovernmental Grants, Sub National Governments.
    JEL: E62 H11 H73 H77
    Date: 2014–11–12
  79. By: Lant Pritchett; Lawrence H. Summers
    Abstract: Consensus forecasts for the global economy over the medium and long term predict the world's economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap. Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates. We suggest that salient characteristics of China--high levels of state control and corruption along with high measures of authoritarian rule--make a discontinuous decline in growth even more likely than general experience would suggest. China's growth record in the past 35 years has been remarkable, and nothing in our analysis suggests that a sharp slowdown is inevitable. Still, our analysis suggests that forecasters and planners looking at China would do well to contemplate a much wider range of outcomes than are typically considered.
    JEL: E0 E6 F01 O4 O53
    Date: 2014–10
  80. By: Patrick Bolton; Neng Wang; Jinqiang Yang
    Abstract: We develop a model of investment timing under uncertainty for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm's optimal investment policy and value depend on both its earnings fundamentals and liquidity holdings. We show that financial constraints significantly alter the standard real options results, with the financial flexibility conferred by internal funds acting as a complement, and at times as a substitute, to the real flexibility given by the optimal timing of investment. We show that: 1) the investment hurdle is highly nonlinear and non-monotonic in the firm's internal funds; 2) in contrast to predictions implied by standard corporate savings models, a financially constrained firm may behave in a risk seeking sense (and thus firm value may be convex in liquidity) due to the interaction between financial and real (growth/abandonment) flexibility; 3) with multiple rounds of growth options, a value-maximizing financially constrained firm may choose to over-invest via accelerated investment timing in earlier stages in order to mitigate under-investment problems in later stages.
    JEL: E22 G31 G32
    Date: 2014–10
  81. By: Melecky, Ales; Melecky, Martin; Sulganova, Monika
    Abstract: Agregátní úvěry v selhání jsou úvěry bankovního sektoru se zpožděnými splátkami. Tento článek zkoumá, jak agregátní úvěry v selhání, jakožto indikátor agregátního kreditního rizika, reagují na makroekonomický vývoj v České republice v letech 1993-2014. Naše studie využívá metodu bayesovského odhadu instrumentálních proměnných. Tato metoda používá apriorní informace získané z mezinárodních empirických studií a zohledňuje případnou endogenitu makroekonomického vývoje vzhledem k úvěrům v selhání. Získané výsledky ukazují, že úvěry v selhání vykazují silnou persistenci, že vliv ekonomického růstu a důchodového efektu měnového kurzu na finanční kondici dlužníků je signifikantně pozitivní a robustní, a že efekt výpůjčních sazeb je významně negativní a robustní. Efekt inflace a nezaměstnanosti je významný, avšak ne tak robustní, jak naznačuje zkušenost jiných zemí. Bilanční efekt měnového kurzu je pozitivní, ale jeho významnost se mění spolu se specifikací modelu. Z pohledu tvůrců hospodářské politiky se jeví včasné využití reálné depreciace koruny v případě narůstajícího kreditního rizika jako účinné opatření pro stabilizaci solventnosti bankovního sektoru.
    Keywords: systémové kreditní riziko, český bankovní systém, úvěry v selhání, bayesovský odhad instrumentálních proměnných, apriorní informace.
    JEL: E32 G21 G28
    Date: 2014–11
  82. By: Charles I. Jones; Jihee Kim
    Abstract: Top income inequality rose sharply in the United States over the last 35 years but increased only slightly in economies like France and Japan. Why? This paper explores a model in which heterogeneous entrepreneurs, broadly interpreted, exert effort to generate exponential growth in their incomes. On its own, this force leads to rising inequality. Creative destruction by outside innovators restrains this expansion and induces top incomes to obey a Pareto distribution. The development of the world wide web, a reduction in top tax rates, and a decline in misallocation are examples of changes that raise the growth rate of entrepreneurial incomes and therefore increase Pareto inequality. In contrast, policies that stimulate creative destruction reduce top inequality. Examples include research subsidies or a decline in the extent to which incumbent firms can block new innovation. Differences in these considerations across countries and over time, perhaps associated with globalization, may explain the varied patterns of top income inequality that we see in the data.
    JEL: E2 J3 O4
    Date: 2014–10
  83. By: Rottmann, Horst
    Abstract: We examine the economic and social determinants of suicide mortality in a panel of 25 OECD countries over the period 1970 - 2011 and explicitly analyze the effects of unemployment and labor market institutions on suicide rates. In line with a large body of literature, our results suggest that unemployment and social factors are important determinants of suicide mortality. The results also indicate that unemployment benefits decrease suicides of males, while relatively strict employment protection regulations increase suicide mortality. These findings indicate that labor market institutions may influence job satisfaction and the quality of life in industrial countries. We suggest taking into account the role of labor market institutions when analyzing the effects of institutional and economic determinants on health.
    Keywords: Panel Data,Suicide,Employment Protection,Unemployment Benefits
    JEL: C23 E24 I10 J65
    Date: 2014

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