nep-mac New Economics Papers
on Macroeconomics
Issue of 2014‒12‒24
114 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. When the Taylor principle is insufficient - A benchmark for the fiscal theory of the price level in a monetary union By Maren Brede; ; ;
  2. Fiscal Theory of Price Level By Daly, Hounaida; Smida, Mounir
  3. Optimal monetary policy rules and house prices: the role of financial frictions By Alessandro Notarpietro; Stefano Siviero
  4. Lending Standards, Credit Booms and Monetary Policy By Elena Afanasyeva; Jochen Güntner
  5. Assessing the macroeconomic effects of LTROS. By C. Cahn; J. Matheron; J-G. Sahuc
  6. Demand expectations and the timing of stimulus policies By Guimarães, Bernardo; Machado, Caio
  7. Macroeconomic linkages between monetary policy and the term structure of interest rates By Howard Kung
  8. Does money matter in the euro area? Evidence from a new Divisia index By Zsolt Darvas
  9. Macro coordination: Forward Guidance as ‘cheap talk’? By Miller, Marcus; Zhang, Lei
  10. Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov-switching Estimation Exploiting Monetary-Fiscal Policy Interdependence By Gonzalez-Astudillo, Manuel
  11. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Galí, Jordi; Gambetti, Luca
  12. Cyclical behavior of real wages in Japan By Hiroaki Miyamoto
  13. A Phillips Curve with Anchored Expectations and Short-Term Unemployment By Laurence Ball; Sandeep Mazumder
  14. Funding Liquidity and Market Liquidity By Yuan Yuan
  15. Is Government Spending at the Zero Lower Bound Desirable? By Florin O. Bilbiie; Tommaso Monacelli; Roberto Perotti
  16. Fiscal Policy in an Unemployment Crisis By Rendahl, Pontus
  17. The Brazilian Economy in Transition: Macroeconomic Policy, Labor and Inequality By Mark Weisbrot; Jake Johnston; Stephan Lefebvre
  18. Business Cycle Synchronization in Asia: The Role of Financial and Trade Linkages By Dai, Yuwen
  19. Government Spending Shocks in Open Economy VARs By Forni, Mario; Gambetti, Luca
  20. Inefficiency in fiscal policy: A political economy of the Laffer curve By Yutaro Hatta
  21. Is Government Spending at the Zero Lower Bound Desirable? By Bilbiie, Florin Ovidiu; Monacelli, Tommaso; Perotti, Roberto
  22. Capital Controls and Recovery from the Financial Crisis of the 1930s By Mitchener, Kris; Wandschneider, Kirsten
  23. Public Debt and Total Factor Productivity By Leo Kaas
  24. Financialisation and the financial and economic crises: The case of Germany By Detzer, Daniel; Hein, Eckhard
  25. "Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies" By Srinivas Yanamandra
  26. Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints By Araujo, Aloisio; Schommer, Susan; Woodford, Michael
  27. When does it pay to tax? Evidence from state-dependent fiscal multipliers in the euro area By George Hondroyiannis; Dimitrios Papaoikonomou
  28. In search of the transmission mechanism of fiscal policy in the Euro area By Fève, Patrick; Sahuc, Jean-Guillaume
  29. Has the Euro-Mediterranean partnership affected Mediterranean business cycles? By Canova, Fabio; Schlaepfer, Alan
  30. Inflating Away the Public Debt? An Empirical Assessment By Hilscher, Jens; Raviv, Alon; Reis, Ricardo
  31. A longer-term view of the U.S. economy and monetary policy By Plosser, Charles I.
  32. Should central banks provide reserves via repos or outright bond purchases? By Miles, David; Schanz, Jochen
  33. Collateralisation bubbles when investors disagree about risk By Broer, Tobias; Kero, Afroditi
  34. Afghanistan Economic Update, October 2014 By World Bank
  35. Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation By Sugata Ghosh; Ronald Wendner
  36. The Role of Oil Price Shocks in Causing U.S. Recessions By Kilian, Lutz; Vigfusson, Robert J.
  37. Transparency and Deliberation within the FOMC: a Computational Linguistics Approach By Hansen, Stephen; McMahon, Michael; Prat, Andrea
  38. Price Level Changes and the Redistribution of Nominal Wealth Across the Euro Area By Adam, Klaus; Zhu, Junyi
  39. Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan By Rahooja, Sabbah; Ali, Asif; Ahmed, Jameel; Hussain, Fayyaz; Rifat, Rizwana
  40. Emergence of Sovereign Wealth Funds By Jean-François Carpantier; Wessel N. Vermeulen
  41. How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? By Hans A. Holter; Dirk Krueger; Serhiy Stepanchuk
  42. Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates By Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
  43. The use of tax expenditures in times of fiscal consolidation By Lovise Bauger
  44. Assessing The Effects of Public Expenditure Shocks on the Labor Market in the Euro-Area. By Thierry Betti
  45. Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation By Ghosh, Sugata; Wendner, Ronald
  46. Forecasting the South African Inflation Rate: On Asymmetric Loss and Forecast Rationality By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  47. Financiamento da Economia Portuguesa: um Obstáculo ao Crescimento? By João Leão; Ana Martins; João Gonçalves
  48. After Unconventional Monetary Policy By John B. Taylor
  49. Does Low Inflation Justify a Zero Policy Rate? By Bullard, James B.
  50. The Two Greatest. Great Recession vs. Great Moderation By Gadea Rivas, Maria Dolores; Gómez Loscos, Ana; Pérez-Quirós, Gabriel
  51. Classical Theory of Investment. Panel Cointegration Evidence from Thirteen EU Countries By Alexiou, Constantinos; Tsaliki, Persefoni; Tsoulfidis, Lefteris
  52. The Emperor Has New Clothes: Empirical Tests of Mainstream Theories of Economic Growth By David Greasley; Nick Hanley; Eoin McLaughlin; Les Oxley
  53. The net worth trap: investment and output dynamics in the presence of financing constraints By Isohätälä , Jukka; Milne, Alistair; Robertson, Donald
  54. A DSGE Model of China By Dai, Li; Minford, Patrick; Zhou, Peng
  55. Rethinking Macro: Reassessing Micro-Foundations By Kevin Warsh
  56. Financial frictions, the housing market, and unemployment By Branch, William A.; Petrosky-Nadeau, Nicolas; Rocheteau, Guillaume
  57. More Jobs, Better Jobs : A Priority for Egypt By World Bank
  58. Debt, jobs, or housing: what's keeping millennials at home? By Bleemer, Zachary; Brown, Meta; Lee, Donghoon; Van der Klaauw, Wilbert
  59. Investment-Cash Flow Sensitivity and the Cost of External Finance By KLAAS MULIER; KOEN SCHOORS; BRUNO MERLEVEDE
  60. Reexamining the Cyclical Behavior of the Relative Price of Investment By Beaudry, Paul; Moura, Alban; Portier, Franck
  61. Reservation Wages and the Wage Flexibility Puzzle By Felix Koenig; Alan Manning; Barbara Petrongolo
  62. European Business Cycle Synchronization: a Complex Network Perspective By Theophilos Papadimitriou; Periklis Gogas; Georgios-Antonios Sarantitis
  63. Heterogeneity and Government Revenues: Higher Taxes at the Top? By Guner, Nezih; Lopez-Daneri, Martin; Ventura, Gustavo
  64. FISCO: Modelo Fiscal para Colombia By Hernán Rincón; Diego Rodríguez; Jorge Toro; Santiago Téllez
  65. Economic crisis in the European periphery: An Assessment of EMU Membership and home Policy Effects Based on the Greek Experience By Bitros, George C.; Batavia, Bala; Nandakumar, Parameswar
  66. The Short- and Long-Run Damages of Fiscal Austerity: Keynes beyond Schumpeter By Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich
  67. Employment Cyclicality and Firm Quality By Kahn, Lisa B.; McEntarfer, Erika
  68. Front-loading the Payment of Unemployment Benefits By Etienne Lalé
  69. Monetary and macroprudential policy with multi-period loans By Paolo Gelain; Marcin Kolasa; Michał Brzoza-Brzezina
  70. The Long-run Relationship among World Oil Price, Exchange Rate and Inflation in the Philippines By Deluna, Roperto Jr
  71. On the origin of European imbalances in the context of European integration By Carlos A. Carrasco; Patricia Peinado
  72. Shrinking Goods By Levy, Daniel; Snir, Avichai
  73. The Effect of Public Pension Eligibility Age on Household Saving: Evidence from a New Zealand Natural Experiment By Talosaga Talosaga; Mark Vink
  74. Unemployment and Health Behaviors Over the Business Cycle: a Longitudinal View By Gregory Colman; Dhaval Dave
  75. EU regional policy and its theoretical foundations revisited By Peter Schmidt
  76. On the influence of institutional design on monetary policy making By Raes, L.B.D.
  77. Natural disasters and macroeconomic performance: The role of residential investment By Strulik, Holger; Trimborn, Timo
  78. Financial conditions, macroeconomic factors and (un)expected bond excess returns By Fricke, Christoph; Menkhoff, Lukas
  79. Investment as the key to recovery in the euro area? By Gros, Daniel
  80. The Global Financial Crisis—What Drove The Build-Up? By Merrouche, Ouarda; Nier, Erlend
  81. Just the Facts: Demographic and Cross-Country Dimensions of the Employment Slump By Clemens, Jeffrey; Wither, Michael
  82. Money is More than a Memory By Maria Bigoni; Gabriele Camera; Marco Casari
  83. Macroeconomic Determinants of Workers’ Remittances and Compensation of Employees in Sub-Saharan Africa By Adenutsi, Deodat E.
  84. The Palestinian Information Technology Association of Companies : Moving Forward on Information and Communications Technology and Innovation By Ali H. Abukumail
  85. Intertemporal discoordination in the 100 percent reserve banking system By Romain Baeriswyl
  86. Universal Basic Income versus Unemployment Insurance By Alice Fabre; Stéphane Pallage; Christian Zimmermann
  87. The ‘new golden age of accumulation’, the new depression and the greek economy By Tsoulfidis, Lefteris
  88. Optimal asymmetric taxation in a two-sector model with population ageing By Igor Fedotenkov
  89. Heterogeneity, Selection and Labor Market Disparities By Bonfiglioli, Alessandra; Gancia, Gino A
  90. On the Selection of Common Factors for Macroeconomic Forecasting By Giovannelli, Alessandro; Proietti, Tommaso
  91. Labor Demand and Unequal Payment: Does Wage Inequality matter? Analyzing the Influence of Intra-firm Wage Dispersion on Labor Demand with German Employer-Employee Data By Arnd Kölling
  92. Macro-Prudential Assessment of Colombian Financial Institutions’ Systemic Importance By León, C.; Machado, C.; Murcia, A.
  93. Mismeasuring Long Run Growth. The Bias from Spliced National Accounts By Leandro Prados de la Escosura
  94. On the substitution of institutions and finance in investment By Simplice Anutechia Asongu
  95. The Sraffian Multiplier for the Greek Economy: Evidence from the Supply and Use Table for the Year 2010 By Mariolis, Theodore; Soklis, George
  96. A Golden Rule of Health Care By Marias H. Gestsson; Henrique Gylfi Zoega
  97. Capital Share Risk and Shareholder Heterogeneity in U.S. Stock Pricing By Martin Lettau; Sydney C. Ludvigson; Sai Ma
  98. Accounting for Sustainable Development over the Long-Run:Lessons from Germany By Matthias Blum; Eoin McLaughlin; Nick Hanley
  99. Inclusive human development in pre-crisis times of globalisation-driven debts By Simplice Asongu; Uchenna EFOBI; Ibukun BEECROFT
  100. The Great Depression, the New Deal, their Evaluation by Mainstream Economists and the Present Crisis of Europe By Stephan Schulmeister
  101. What are metal prices like? Co-movement, price cycles and long-run trends By Rossen, Anja
  102. Why Rating Agencies Disagree on Sovereign Ratings By Bernd Bartels
  103. Experimental evidence on inflation expectation formation By Pfajfar, D.; Zakelj, B.
  104. Financial fragility and over-the-counter markets By Bruno Sultanum
  105. The relation between overreaction in forecasts and uncertainty: A nonlinear approachvon By Leppin, Julian Sebastian
  106. Trends and Cycles in Small Open Economies: Making The Case For A General Equilibrium Approach By Kan Chen; Mario J. Crucini
  107. Great opportunities or poor alternatives: self-employment, unemployment and paid employment over the business cycle By Ludo Visschers; Ana Millan; Matthias Kredler
  108. The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy By Caliendo, Lorenzo; Parro, Fernando; Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel
  109. New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance By Robert W.R. Price; Thai-Thanh Dang; Yvan Guillemette
  110. KiwiSaver and the Accumulation of Net Wealth By David Law; Grant M Scobie
  111. Deglobalization of Banking: The World is Getting Smaller By Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
  112. Income taxation and equity: new dominance criteria and an application to Romania By Paolo Brunori; Flaviana Palmisano; Vito Peragine
  113. Le piège de la déflation : Perspectives 2014-2015 By Xavier Timbeau
  114. A Speedier and More Efficient Payments System for Canada By Matthias Mati Dubrovinsky

  1. By: Maren Brede; ; ;
    Abstract: This paper derives restrictions on monetary and fiscal policies for determinate equilibria in a two-country monetary union with autarkic members. It finds that a central bank following the Taylor principle may not be sufficient for determinacy unless accompanied by one 'active' fiscal authority in the sense of Leeper (1991). Alternatively, both fiscal authorities can be 'active' while the central bank abandons the Taylor principle. The two determinate equilibria have significantly different implications for the transmission of fiscal and monetary shocks and for the fiscal theory of the price level in a monetary union.
    Keywords: Fiscal theory, monetary union, policy coordination, indeterminacy
    JEL: E31 E52 E62 E63
    Date: 2014–11
  2. By: Daly, Hounaida; Smida, Mounir
    Abstract: Lack of coordination between the monetary and fiscal authorities will result in inferior overall economic performance. This paper studies the interactions between monetary and fiscal policies and its effect on the economic performance by using al cointegration tests in the case of Euro Area. This paper examines the causal relationship between output gap, public debt, budget deficit, interest rate and inflation rate, and the impact of monetary policy on public debt management, in Euro Area from 1999Q1 to 2013Q4. The evidence supports the idea that the monetary policy is more stabilizing in its influence on the economic activity than the budget policy. The particular stance of monetary policy affects the capacity of the government to finance the budget deficit by changing the cost of debt service and limiting or expanding the available sources of financing. The result does not let hear strong political coordination in Euro Area, a weak policy stance in one policy area burdens the other area and is unsustainable in the long term.
    Keywords: Monetary policy, Fiscal policy, Euro Area, Policy mix, Public debt, budget deficit.
    JEL: E5 E58 E6 E62 H3
    Date: 2014–11–18
  3. By: Alessandro Notarpietro (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: We probe the scope for reacting to house prices in simple and implementable monetary policy rules, using a New Keynesian model with a housing sector and financial frictions on the household side. We show that the social welfare maximizing monetary policy rule features a reaction to house price variations, when the latter are generated by housing demand or financial shocks. The sign and size of the reaction crucially depend on the degree of financial frictions in the economy. When the share of constrained agents is relatively small, the optimal reaction is negative, implying that the central bank must move the policy rate in the opposite direction with respect to house prices. However, when the economy is characterized by a sufficiently high average loan-to-value ratio, then it becomes optimal to counter house price increases by raising the policy rate.
    Keywords: Optimal simple interest rate rules; Housing; Credit frictions.
    JEL: E20 E44 E52
    Date: 2014–10
  4. By: Elena Afanasyeva; Jochen Güntner
    Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
    Keywords: Bank lending standards, Credit supply, Monetary policy, Risk channel
    JEL: E44 E52
    Date: 2014–10
  5. By: C. Cahn; J. Matheron; J-G. Sahuc
    Abstract: In response to the 2008-2009 crisis, faced with distressed financial intermediaries, the ECB embarked in long-term refinancing operations (LTROs). Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections can have large macroeconomic effects, with multipliers up to 0.5. However, the latter depend in an important way on how standard monetary policy is adjusted in conjunction with these non-standard measures. We find that the effects are larger when the separation principle is breached, that is to say when we force monetary policy not to react to the stimulative effects of LTROs.
    Keywords: Financial frictions, unconventional monetary policy, long-term refinancing operations, DSGE model.
    JEL: E32 E58
    Date: 2014
  6. By: Guimarães, Bernardo; Machado, Caio
    Abstract: This paper proposes a simple macroeconomic model with staggered investment decisions. The expected return from investing depends on demand expectations, which are pinned down by fundamentals and history. Owing to an aggregate demand externality, investment subsidies can improve welfare in this economy. The model can be used to address questions concerning the timing of stimulus policies: should the government spend more on preventing the economy from falling into a recession or on rescuing the economy when productivity picks up? Results show the government should strike a balance between both objectives.
    Keywords: Coordination; Demand expectations; Fiscal stimulus; Timing frictions
    JEL: D84 E32 E62
    Date: 2014–05
  7. By: Howard Kung (University of British Columbia)
    Abstract: This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.
    Date: 2014
  8. By: Zsolt Darvas
    Abstract: Standard simple-sum monetary aggregates, like M3, sum up monetary assets that are imperfect substitutes and provide different transaction and investment services. Divisia monetary aggregates, originated from Barnett (1980), are derived from economic aggregation and index number theory and aim to aggregate the money components by considering their transaction service. No Divisia monetary aggregates are published for the euro area, in contrast to the United Kingdom and United States. We derive and make available a dataset on euro-area Divisia money aggregates for January 2001 – September 2014 using monthly data. We plan to update the dataset in the future. Using structural vector-autoregressions (SVAR), we find that Divisia aggregates have a significant impact on output about 1.5 years after a shock and tend also to have an impact on prices and interest rates. The latter result suggests that the European Central Bank reacted to developments in monetary aggregates. Divisia aggregates reacted negatively to unexpected increases in the interest rates. None of these results are significant when we use simple-sum measures of money. Our findings for the euro area complement the evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work better in SVAR models than simple-sum measures of money.
    Keywords: Divisia index, financial crisis, monetary aggregation, monetary policy, structural VAR
    JEL: C32 C43 C82 E51 E58
    Date: 2014–11–15
  9. By: Miller, Marcus; Zhang, Lei
    Abstract: In the context of revived output growth and business confidence in the UK, we analyse forward guidance as a ‘coordination device’, indicating that monetary accommodation will be available for a welcome and long-awaited shift out of prolonged recession. As David Miles has emphasised, however, the existence of multiple equilibria is a necessary condition for costless and non-binding messages – so-called “cheap talk” – to act in this way. By way of microfoundations, we appeal to Peter Diamond’s classic model of search, where the positive externalities offered by ‘thick’ markets can generate different equilibrium levels of production. What of the objection that “cheap talk” by the MPC may be used deliberately to mislead the Private Sector in order to assist the MPC achieve its objectives? We show that this is not true for symmetric inflation targeting, where ‘cheap talk’ selects the Pareto dominant equilibrium. (This contrasts with the case where high inflation is penalised, but not below target inflation).
    Keywords: cheap-talk; coordination problems; equilibrium selection; monetary policy; multiple equilibria
    JEL: C72 E31 E52 E58
    Date: 2014–05
  10. By: Gonzalez-Astudillo, Manuel (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, I propose an econometric technique to estimate a Markov-switching Taylor rule subject to the zero lower bound of interest rates. I show that incorporating a Tobit-like specification allows to obtain consistent estimators. More importantly, I show that linking the switching of the Taylor rule coefficients to the switching of the coefficients of an auxiliary uncensored Markov-switching regression improves the identification of an otherwise unidentifiable prevalent monetary regime. To illustrate the proposed estimation technique, I use U.S. quarterly data spanning 1960:1-2013:4. The chosen auxiliary Markov-switching regression is a fiscal policy rule where federal revenues react to debt and the output gap. Results show that there is evidence of policy co-movements with debt-stabilizing fiscal policy more likely accompanying active monetary policy, and vice versa.
    Keywords: Markov-switching coefficients; zero lower bound; monetary-fiscal policy interactions
    JEL: C34 E52 E63
    Date: 2014–09–19
  11. By: Galí, Jordi; Gambetti, Luca
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary policy, even though they experience a small decline in the short run. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    Keywords: asset price booms; financial stability; inflation targeting; leaning against the wind policies
    JEL: E52 G12
    Date: 2014–07
  12. By: Hiroaki Miyamoto (University of Tokyo)
    Abstract: This paper studies the cyclicality of aggregate real wages in Japan. By using both static and dynamic approaches, I measure comovements between real wages and business cycle indicators. This paper finds that while real wages constructed using the consumer price index and the GDP deflator are procyclical, the real wage constructed using the producer price index is countercyclical. This result is robust to the data and methods used to compute the comovements.
    Keywords: Real wages, business cycle, correlation
    JEL: E32 J30 C10
    Date: 2014–11
  13. By: Laurence Ball; Sandeep Mazumder
    Abstract: This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of short-term unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.
    JEL: E31
    Date: 2014–11
  14. By: Yuan Yuan (Department of Economics, Temple University)
    Abstract: Recent empirical studies have shown an increasing co-movement between fund and market liquidity, which is driven by common factors such as monetary shocks. Modeling this co-movement becomes desirable to evaluate policies relating to liquidity and financial instability. This paper establishes a monetary model with capital to explain the dynamic interactions between funding and market liquidity in a search framework featured by Kiyotaki and Wright [1989]. Capital and money are two important elements here. As the collateral and production input, capital affects both fund and goods trading market. As medium of exchange, money is essential to trade; meanwhile the opportunity cost of carrying it affects the fund market imbalance as well. As a result, monetary policy can change traders' expectations and negotiations, and have non-trivial impact on fund markets and liquidity risks. Calibrated the model, simulated liquidity moments respond to monetary shocks, moving together across time and presenting business cycle properties.
    Keywords: Liquidity, Monetary Policy, Search and Matching
    JEL: E5 E51 E52 G12
    Date: 2014–12
  15. By: Florin O. Bilbiie; Tommaso Monacelli; Roberto Perotti
    Abstract: Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. We illustrate this point in the context of a standard New Keynesian model. In that model, when government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.
    JEL: D91 E21 E62
    Date: 2014–11
  16. By: Rendahl, Pontus
    Abstract: This paper shows that large fiscal multipliers arise naturally from equilibrium unemployment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation.
    Keywords: Fiscal multiplier; Liquidity trap; Unemployment inertia
    JEL: E62 J64
    Date: 2014–05
  17. By: Mark Weisbrot; Jake Johnston; Stephan Lefebvre
    Abstract: The Brazilian economy has gone through a significant transformation during the past decade. Following nearly a quarter-century with very little growth in per capita GDP, there was a major change beginning in 2004. GDP per person (adjusted for inflation) grew at a rate of 2.5 percent annually from 2003-2014, more than three times faster than the 0.8 percent annual growth of the prior government (1995-2002). This growth rate was achieved in spite of the 2008-09 global financial crisis and recession, which pushed Brazil into recession in 2009; and this comparison includes the slowdown of the past few years. Over the past decade there have also been sharp declines in unemployment, poverty, and extreme poverty, as well as a large shift towards less inequality in the distribution of income gains. This paper looks at these changes as well as government policy changes that have contributed to them. It also looks at the economic slowdown over the past few years, and the role of macroeconomic policy since 2011.
    Keywords: brazil, economic growth, macroeconomic policy
    JEL: E E0 F F1 F13 F17
    Date: 2014–09
  18. By: Dai, Yuwen (Asia–Pacific Economic Cooperation)
    Abstract: In this research project, we attempt to examine the behavior of business cycles in Asia in order to deepen our understanding of and expand research on this topic. Given the importance of the People’s Republic of China, Japan, and the United States in the region economy, we use these three economies as our “reference countries” to study the synchronization of their business cycles with other Asian economies of interest. In particular, we investigate the potential determinants underlying the synchronization of their business cycles, including trade linkages, financial linkages, and policy similarities. From our panel data analysis, we find empirical evidence of the impacts of trade channels, financial channels, and policy channels in determining the degree of their business cycle synchronization.
    Keywords: business cycle synchronization; macro interdependence; trade integration; financial integration; interest rate; fiscal balance; policy coordination; Asia; NIE-4; ASEAN-4; PRC; Japan; US; panel data analysis
    JEL: E30 E32 F00 F15 F36 F42 F44
    Date: 2014–10–01
  19. By: Forni, Mario; Gambetti, Luca
    Abstract: We identify government spending news and surprise shocks using a novel identification based on the Survey of Professional Forecasters. News shocks lead to an increase of the interest rate, a real appreciation of US dollar and a worsening of the trade balance. The opposite is found for the standard surprise shock which raises government spending on impact: the currency depreciates and net exports improve. We reconcile the two conflicting results showing the different timing of the spending reversals associated with the two shocks. The effects of the news shock on government spending are much more persistent and the reversal occurs much later.
    Keywords: crowding-out; fiscal foresight; fiscal policy; forecast revisions; government spending; government spending news; structual VARs; survey of professional forecasters
    JEL: C32 E32 E62
    Date: 2014–08
  20. By: Yutaro Hatta (Graduate School of Economics, Osaka University)
    Abstract: This paper studies investment decisions by economic agents in cases where the tax rate is decided through voting. It will be shown that, in some cases, only a Pareto-dominated tax policy on the wrong side of the Laffer curve is supported under rational expectations. Thus, the governments may collect revenue in an inefficient way. To that end, a quite plausible assumption, the endogeneity of the return on investment, is essential. Therefore this paper warns about the danger of inefficiency in a wide variety of policies. Further, the model predicts that when the inequality in an economy is low, the tax policy on the wrong side is likely to arise.
    Keywords: Political economy; The Laffer curve; Inefficiency in fiscal policies
    JEL: E22 E62 H21
    Date: 2014–12
  21. By: Bilbiie, Florin Ovidiu; Monacelli, Tommaso; Perotti, Roberto
    Abstract: Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. When government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.
    Keywords: government spending multiplier; welfare; zero lower bound
    JEL: D91 E21 E62
    Date: 2014–10
  22. By: Mitchener, Kris; Wandschneider, Kirsten
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in-differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    Keywords: capital controls; financial crises; Great Depression; interwar gold standard
    JEL: E44 E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  23. By: Leo Kaas (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which one is an unstable bubble and the other one is stable. The stable equilibrium features higher levels of credit and capital, but also a lower interest rate, lower total factor productivity and output. The model is calibrated to the US economy to derive the maximum sustain- able deficit ratio and to examine the dynamic responses to changes in debt policy. A reduction of the primary deficit triggers an expansion of credit and capital, but it also leads to a deterioration of total factor productivity since more low-productivity firms prefer to remain active at the lower equilibrium interest rate.
    Keywords: Credit constraints; Unbacked public debt; Dynamic inefficiency; Sustainable deficits
    JEL: D92 E62 H62
    Date: 2014–12–15
  24. By: Detzer, Daniel; Hein, Eckhard
    Abstract: This study on Germany examines the long-run changes between the financial and the non-financial sectors of the economy, and in particular the effects of these changes on the macroeconomic developments that have led or contributed to the financial crisis starting in 2007 and the Great Recession in 2008/09. The first part provides some descriptive statistics on real GDP growth, on the growth contributions of the main demand aggregates, and the financial balances of the macroeconomic sectors since the early 1980s, and it classifies the German type of development as 'export-led mercantilist'. The second part examines the effects of an increasing dominance of finance since the early/mid 1990s on income distribution, investment in capital stock, consumption and the current account in more detail. The third part links the longrun developments with the financial and economic crisis and examines the causes of the quick recovery in Germany.
    Keywords: current account imbalances,distribution of income,finance-dominated capitalism,financialisation,financial and economic crisis,Germany,Kaleckian distribution theory,trade balance
    JEL: D31 D33 D43 E25 E61 E63 E64 E65 F40 F43
    Date: 2014
  25. By: Srinivas Yanamandra
    Abstract: This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003-04 to 2013-14). The paper uses Hyman P. Minsky's financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky. It further reviews the extensions to the Minskyan hypothesis in the areas of setting fiscal policy, managing cross-border capital flows, and developing financial institutional infrastructure. The lessons learned from the interplay of policy choices in these areas and their impact on monetary policymaking at the RBI are presented.
    Keywords: Financial Crisis; Central Bank; Monetary Policy; Bank Regulation; Fiscal Policy; Exchange Rate Policy; Financial Institution Infrastructure
    JEL: E58 G01 G28
    Date: 2014–11
  26. By: Araujo, Aloisio; Schommer, Susan; Woodford, Michael
    Abstract: We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside “conventional” monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). When sufficient collateral exists for collateral constraints not to bind for any agents, we show that central-bank asset purchases have no effects on either real or nominal variables, despite the differing risk characteristics of the assets purchased and the ones issued to finance these purchases. At the same time, the existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to effect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.
    JEL: D53 E52 E58
    Date: 2014–05
  27. By: George Hondroyiannis (Bank of Greece); Dimitrios Papaoikonomou (Bank of Greece)
    Abstract: The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.
    Keywords: Fiscal multipliers; state-dependence; euro area
    JEL: E62 H22 H50
    Date: 2014–10
  28. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.
    Keywords: Fiscal multipliers, DSGE Models, Hand-to-Mouth, Edgeworth Complementarity, Euro Area, Bayesian Econometrics.
    JEL: C32 E32 E62
    Date: 2014–11–07
  29. By: Canova, Fabio; Schlaepfer, Alan
    Abstract: We date turning points of the reference cycle for 19 Mediterranean countries and analyze their structure and interdependencies. Fluctuations are volatile and not highly correlated across countries; recessions are deep but asynchronous, the distribution of output losses in recessions spread out. Heterogeneities across countries and regions are substantial. Cyclical fluctuations are poorly related to trade and financial linkages. Mediterranean cycles are time varying but their evolution is not linked with the Euro-Mediterranean partnership process.
    Keywords: Euro-Mediterranean partnership; financial interdependences; reference cycles; trade; turning points
    JEL: C32 E32
    Date: 2014–06
  30. By: Hilscher, Jens; Raviv, Alon; Reis, Ricardo
    Abstract: We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
    Keywords: copulas; inflation options; maturity of government debt; required reserves
    JEL: E31 E64 G18
    Date: 2014–07
  31. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Charlotte Economics Club, Charlotte, NC President Charles Plosser gives his views on the U.S. economy and discusses why it is important to take a longer-term view of economic data. He also discusses why he is advocating for the Fed to publish a Monetary Policy Report with an assessment of the likely near-term path of policy rates, in conjunction with its economic forecast.
    Keywords: Economic conditions; Monetary policy; Manufacturing activity; Recovery
    Date: 2014–12–03
  32. By: Miles, David; Schanz, Jochen
    Abstract: In the wake of the financial crisis banks are likely to wish to hold far more highly liquid assets than before. Some of those liquid assets are likely to be held in the form of reserves at the central bank. We ask whether the central bank should provide these reserves by purchasing nominal, fixed-rate government bonds outright, or by repo-ing them in for a limited period. The key difference between these options is that with repos, the private sector retains the price risk associated with bonds, whereas this risk rests with the central bank if it purchases these bonds outright. There is a significant, practical policy issue for central banks here: should those central banks (most notably the Fed and the Bank of England) who built up a large stock of bonds during the QE operations, which were financed by creating reserves for commercial banks, expect to sell those bonds in due course or continue to hold a high proportion of them for a long period since the demand for reserves will be permanently higher? We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. We find that the composition of the central bank's assets should depend on how fiscal policy is conducted; but in general it has only a small impact on welfare.
    Keywords: Central bank balance sheet; Liquidity provision
    JEL: E52 E58
    Date: 2014–11
  33. By: Broer, Tobias; Kero, Afroditi
    Abstract: Survey respondents strongly disagree about return risks and, increasingly, macroeconomic uncertainty. This may have contributed to higher asset prices through increased use of collateralisation, which allows risk-neutral investors to realise perceived gains from trade. Investors with lower risk perceptions buy collateralised loans, whose downside-risk they perceive as small. Investors with higher risk perceptions buy upside-risk through asset purchase and collateralised loan issuance, raising prices. More complex collateralised contracts, like CDOs, can increase prices further. In contrast, with disagreement about mean payoffs, price bubbles arise without collateralisation, which may discipline prices as pessimists demand higher returns on risky loans.
    Keywords: asset prices; bubbles; disagreement; heterogeneous beliefs; volatility
    JEL: D82 D83 E32 E44 G12 G14
    Date: 2014–09
  34. By: World Bank
    Keywords: Finance and Financial Sector Development - Access to Finance Banks and Banking Reform Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth
    Date: 2014–10
  35. By: Sugata Ghosh (Brunel University, London); Ronald Wendner (University of Graz)
    Abstract: This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption- and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth. Consequently, optimal consumption- and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics.
    Keywords: Saving rate dynamics; non-monotonic transition path; hyperbolic discounting; short-term planning; neoclassical growth model
    JEL: D91 E21 O40
    Date: 2014–11
  36. By: Kilian, Lutz; Vigfusson, Robert J.
    Abstract: Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.
    Keywords: asymmetry; conditional response; nonlinearity; oil price; real GDP; recession; time variation
    JEL: E32 E37 E51 Q43
    Date: 2014–06
  37. By: Hansen, Stephen; McMahon, Michael; Prat, Andrea
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: career concerns; deliberation; FOMC; monetary policy; transparency
    JEL: D78 E52 E58
    Date: 2014–05
  38. By: Adam, Klaus; Zhu, Junyi
    Abstract: We document the presence of sizable distributional effects from unexpected price level movements in the Euro Area (EA) using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA as a whole is a net winner of unexpected price level increases, with Italy, Greece, Portugal and Spain being the biggest beneficiaries, and Belgium and Malta being the largest losers. Governments are net winners of inflation, while the household (HH) sector is a net loser in the EA as a whole. HHs in Belgium, Ireland, Malta and Germany incur the biggest per capita losses, while HHs in Finland and Spain turn out to be net winners of inflation. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net winners of inflation, while older and richer HHs are losers. As a result, wealth inequality in the EA decreases with unexpected inflation, although in some countries (Austria, Germany and Malta) inequality increases due to presence of relatively few young borrowing HHs. We document that HHs inflation exposure varies systematically across countries, with HHs in high inflation EA countries holding systematically lower nominal exposures.
    Keywords: Euro Area; household survey; inflation; redistribution
    JEL: D14 D31 E31
    Date: 2014–05
  39. By: Rahooja, Sabbah; Ali, Asif; Ahmed, Jameel; Hussain, Fayyaz; Rifat, Rizwana
    Abstract: We investigate, using vector autoregressions (VAR) and Panel Data Analysis, the role of banks in monetary policy transmission in Pakistan. Empirical evidence suggests that the 'bank lending channel' is at work at the aggregate level. Loans, deposits and government securities all reduce after a shock to the monetary policy. When we examine bank heterogeneity in terms of size, liquidity and capitalization, the results are mixed. Size is found to be a relevant characteristic. Capitalization, measured by excess capital, is also somewhat effective. Thus, small sized and capital constrained banks respond more to monetary policy signals. Liquidity and the traditional measure of capital, on the other hand, are found to be weaker characteristics. Moreover, the results suggest that the market for loans has a stationary size distribution (no monopolistic tendencies) in Pakistan.
    Keywords: Monetary Policy Transmission, Bank Lending
    JEL: C32 C33 E52 G21
    Date: 2014–12–09
  40. By: Jean-François Carpantier (CREA, Université du Luxembourg); Wessel N. Vermeulen (OxCarre, University of Oxford)
    Abstract: This paper tests the theoretically founded hypothesis that the surge of SWF establishments is determined by three main factors: 1) the existence of natural resources profits, 2) the government structure and 3) the ability to invest usefully in the domestic economy. We test this hypothesis on a sample of 20 countries that established an SWF in the period 1998-2008 by comparing them to the roughly 100 countries that did not set up a fund in the same period. We find evidence for all three factors. The results suggest that SWFs tend to be established in countries that run an autocratic regime and have difficulties finding suitable opportunities for domestic investments. We do not find the net foreign asset position of a country to be similarly related to the explanatory variables, indicating that the establishment of an SWF is distinct from a national accounting result. We argue that our results indicate that it is relevant to study how an SWF interacts with the domestic economy and government policy.
    Keywords: Sovereign Wealth Funds, Institutions, natural resources,
    JEL: E21 E62 F39 G23 H52
    Date: 2014
  41. By: Hans A. Holter (Department of Economics, University of Oslo); Dirk Krueger (Department of Economics, University of Pennsylvania); Serhiy Stepanchuk (Ecole Polytechnique Fédérale de Lausanne, Switzerland)
    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: 2014–03–01
  42. By: Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
    Abstract: Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon. Classification JEL: C22, C53, C11, E31.
    Date: 2014–11
  43. By: Lovise Bauger
    Abstract: Against the background of recovering growth and remaining fiscal consolidation needs, reforming tax expenditures may offer a promising avenue to raise revenue and, at the same time, improve efficiency of the tax systems. The workshop, held by DG ECFIN on 23 October 2013, addressed the economic and budgetary aspects of tax expenditures, including reporting practices, and discussed the rationale for business tax incentives and the distributional effects of tax reliefs in personal income taxation. The workshop was organised in two sessions: "Tax expenditures: measurement and macroeconomic implications" and "Tax expenditures in direct taxation". The proceedings gather together the views on these various dimensions of tax expenditures expressed by academics, national policy-makers and international institutions during the workshop.
    JEL: E62 H23 H24 H25
    Date: 2014–07
  44. By: Thierry Betti
    Abstract: The core of the paper is a medium-scale DSGE model calibrated for the Euro-Area with a detailed fiscal sector including both public consumption and public investment. The financing of the spending can be tax-based or debt-based. In the case of a debt-funded expenditure expansion, I find strong negative multipliers on the unemployment rate for the public consumption shock, around -0.6% at the peak, and more ambiguous results for a public investment shock. In both cases, the effects on the unemployment rate are short-lasting. With a sensitivity analysis exercice, it is shown than the parameters included in households’ preferences do not drammatically change the results in the case of the public consumption shock but the results are very sensitive to these parameters for the public investment shock. Finally, with the introduction of some distortive taxes and assuming that they fund the half of the deficit engendered by public spending expansion, I show that the multipliers little vary little even if the cumulated unemployment fiscal multiplier can become significantly positive with a raise of public investment.
    Keywords: Fiscal multipliers, labor market, DSGE models, preferences, unemployment.
    JEL: E32
    Date: 2014
  45. By: Ghosh, Sugata; Wendner, Ronald
    Abstract: This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption- and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth. Consequently, optimal consumption- and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics.
    Keywords: Conspicuous consumption, conspicuous wealth, endogenous growth, public capital, optimal consumption tax
    JEL: D62 D91 E21 H21 O41
    Date: 2014–11–24
  46. By: Christian Pierdzioch (Department of Economics, Helmut-Schmidt-University); Monique B. Reid (Department of Economics, University of Stellenbosch); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Using forecasts of the inflation rate in South Africa, we study the rationality of forecasts and the shape of forecasters’ loss function. When we study micro-level data of individual forecasts, we find mixed evidence of an asymmetric loss function, suggesting that inflation forecasters are heterogeneous with respect to the shape of their loss function. We also find strong evidence that inflation forecasts are in line with forecast rationality. When we pool the data, and study sectoral inflation forecasts of financial analysts, trade unions, and the business sector, we find evidence for asymmetry in the loss function, and against forecast rationality. Upon comparing the micro-level results with those for pooled and sectoral data, we conclude that forecast rationality should be assessed based on micro-level data, and that freer access to this data would allow more rigorous analysis and discussion of the information content of the surveys.
    Keywords: inflation rate, forecasting, loss function, rationality
    JEL: C53 D82 E37
    Date: 2014
  47. By: João Leão (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy; ISCTE- University Institute of Lisbon); Ana Martins (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy); João Gonçalves
    Abstract: Esta análise propõe-se aferir a importância das restrições de financiamento das empresas portuguesas no crescimento da economia, concluindo que a dificuldade de acesso ao financiamento, no período 2010-2014, foi um dos principais entraves à competitividade das empresas. O principal problema foi a contração da oferta de crédito por parte do sistema financeiro português. Isto implica que empresas saudáveis, incluindo PMEs, não têm acesso ao crédito necessário e não podem financiar (por exemplo) o crescimento das exportações, o que afeta negativamente a sua viabilidade económica e também as perspetivas de crescimento da economia portuguesa. A fragmentação financeira da Zona Euro encontra-se no cerne da questão na medida em que dificulta o processo de transmissão monetária. O BCE tem multiplicado medidas para contornar este problema e fazer chegar a política monetária às economias da periferia por forma a relançar o crescimento económico da Zona Euro.
    Keywords: Financiamento Economia, Fragmentação Financeira Zona Euro
    JEL: E44 E58 F34 F36
    Date: 2014–11
  48. By: John B. Taylor
    Abstract: This testimony before the Joint Economic Committee of the United States Congress shows the unintended consequence of the Federal Reserve's unconventional monetary policy. It suggests returning to a rules-based policy in order to promote stable prices, economic growth, and job creation.
    Date: 2014–03
  49. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: November 14, 2014. Presentation. "Does Low Inflation Justify a Zero Policy Rate?" St. Louis Regional Chamber Financial Forum, St. Louis.
    Date: 2014–11–26
  50. By: Gadea Rivas, Maria Dolores; Gómez Loscos, Ana; Pérez-Quirós, Gabriel
    Abstract: The collapse of the global economy in 2008, following the outbreak of the financial crisis, and the ensuing economic developments of the so-called Great Recession (GR) led many economists to suggest that the Great Moderation (GM) had, indeed, come to an end. This paper offers evidence that the decrease in output volatility still remains in force despite the GR and would do so even if the GR continues to extended horizons. This finding has important implications not only for academics, concerning the implementation of theoretical and empirical techniques, but also for policymakers, regarding the understanding of the pattern of recovery from the current and future recessions
    Keywords: business cycle; Markov Switching models; recoveries; volatility
    JEL: C22 E32
    Date: 2014–08
  51. By: Alexiou, Constantinos; Tsaliki, Persefoni; Tsoulfidis, Lefteris
    Abstract: In the realm of macroeconomic theory, is well established that investment decisions play an instrumental role in the determination of the level of output and employment; nevertheless, little progress has been made in relation to the theoretical aspects of these decisions. This paper, inspired by the classical approach to capital accumulation as well as the Keynesian theory of effective demand, attempts to enhance our empirical understanding of what determines investment decisions by exploring profitability, financial as well as demand factors. In so doing, a Fully Modified OLS panel cointegration framework, for a cluster of two distinct groups of EU countries classified as core and the peripheral economies, provides the platform upon which our econometric investigation takes place. The respective evidence generated from the estimation process is in line with the theoretical framework proposed in this study.
    Keywords: Investment demand, incremental rate of profit, panel data, European economies
    JEL: B51 C5 C51 C52 E20 E22
    Date: 2014–12–09
  52. By: David Greasley (School of History, Classics and Archaeology, University of Edinburgh); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews); Les Oxley (Department of Economics, University of Waikato)
    Abstract: Modern macroeconomic theory utilises optimal control techniques to model the maximisation of individual well-being using a lifetime utility function. Agents face choices over current and future consumption (with resultant implied savings decisions) seeking to maximise the present value of current plus future well-being. However, such inter-temporal welfare- maximising assumptions remain empirically untested. In the work presented here we test whether welfare was in (historical) fact maximised in the US between 1870 -2000 and find empirical support for the optimising basis of growth theory, but only once a comprehensive view of what constitutes a country’s wealth or capital is taken into account.
    Keywords: inter-temporal utility maximisation;modern growth theory; US; comprehensive wealth
    JEL: E21 E22 C61
    Date: 2014–08
  53. By: Isohätälä , Jukka (Department of Physics, Loughborough University); Milne, Alistair (School of Business and Economics, Loughborough University); Robertson, Donald (Faculty of Economics, University of Cambridge)
    Abstract: We study the impact of financing constraints on investment and output dynamics, in a continuous time setting with output a linear function of capital. Decline of net worth reduces investment and, if firms can rent capital to unconstrained outside investors, can create a 'net worth trap' with both investment and output falling below normal levels for long time periods. We provide a detailed account of our model solution and discuss both the economic intuition underpinning our results and the implications for macroeconomic modeling.
    Keywords: cash flow management; corporate prudential risk; the financial accelerator; financial distress; induced risk aversion; liquidity constraints; liquidity risk
    JEL: E44
    Date: 2014–11–06
  54. By: Dai, Li; Minford, Patrick; Zhou, Peng
    Abstract: We use available methods for testing macro models to evaluate a model of China over the period from Deng Xiaoping's reforms up until the crisis period. Bayesian ranking methods are heavily influenced by controversial priors on the degree of price/wage rigidity. When the overall models are tested by Likelihood or Indirect Inference methods, the New Keynesian model is rejected in favour of one with a fair-sized competitive product market sector. This model behaves quite a lot more 'flexibly' than the New Keynesian.
    Keywords: Bayesian Inference; China; DSGE; Indirect Inference
    JEL: C11 C15 C18 E27
    Date: 2014–06
  55. By: Kevin Warsh
    Abstract: This paper examines the policies that led to the financial crisis of 2008 and the suggested policies aimed at preventing such a crisis from ever happening again. It warns that top-down changes to macroeconomic policy may be altering the underlying micro-foundations of the economy, leading to uncertain effects in the future.
    Date: 2014–01
  56. By: Branch, William A. (University of California, Irvine); Petrosky-Nadeau, Nicolas (Federal Reserve Bank of San Francisco); Rocheteau, Guillaume (University of California, Irvine)
    Abstract: We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms’ market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996-2010.
    Keywords: credit; unemployment; limited commitment; liquidity
    JEL: D82 D83 E40 E50
    Date: 2014–11
  57. By: World Bank
    Keywords: Finance and Financial Sector Development - Access to Finance Health, Nutrition and Population - Population Policies Economic Theory and Research Social Protections and Labor - Labor Policies Social Protections and Labor - Labor Markets Macroeconomics and Economic Growth
    Date: 2014–06
  58. By: Bleemer, Zachary; Brown, Meta (Federal Reserve Bank of New York); Lee, Donghoon (Federal Reserve Bank of New York); Van der Klaauw, Wilbert (Federal Reserve Bank of New York)
    Abstract: Young Americans’ residence choices have changed markedly over the past fifteen years, with recent cohorts entering the housing market at lower rates, and lingering much longer in parents’ households. This paper begins with descriptive evidence on the residence choices of 1 percent of young Americans with credit reports, observed quarterly for fifteen years in the Federal Reserve Bank of New York’s Equifax-sourced Consumer Credit Panel (CCP). Steep increases in the rate of living with parents or other substantially older household members have emerged as youth increasingly forsake living alone or with groups of roommates. Coupledom, however, appears stable. Homeownership at age thirty shows a precipitous drop following the recession, particularly for student borrowers. In an effort to decompose the contributions of housing market, labor market, and student debt changes to the observed changes in young Americans’ living arrangements, we model flows into and out of co-residence with parents. Estimates suggest countervailing influences of local economic growth on co-residence: strengthening youth labor markets support moves away from home, but rising local house prices send independent youth back to parents. Finally, we find that student loans deter independence: state-cohort groups who were more heavily reliant on student debt while in school are significantly and substantially more likely to move home to parents when living independently, and are significantly and substantially less likely to move away from parents when living at home.
    Keywords: student loans; household information
    JEL: D14 E24 R21
    Date: 2014–11–01
    Abstract: We contribute to the investment-cash ow sensitivity debate by creating a new index to identify the supply of finance to firms. We find that firms that are considered constrained according to our index pay a higher interest rate on their debt, and display the highest investment-cash fl ow sensitivities. Moreover, these findings are not driven by the possible information content of cash fl ow regarding investment opportunities as we control for oppor- tunities by augmenting our empirical model with firm-level employment growth. We thus provide new evidence consistent with Campbell et al. (2012) that the cost of capital is the driving force behind investment-cash fl ow sensitivity.
    Keywords: Investment-cash flow sensitivity, cost of finance
    JEL: D92 E22 G31
    Date: 2014–11
  60. By: Beaudry, Paul; Moura, Alban; Portier, Franck
    Abstract: We document the cyclical behavior of several measures of the relative price of investment goods for the U.S. economy over the last fifty years. Our main result is that there is no robust evidence that this relative price is countercyclical in the data. Furthermore, for the recent (post-Volcker) period, the relative price of investment appears predominantly procyclical. When looking at more disaggregated series, most measures are procyclical, a few acyclical, and only the price of equipment is countercyclical for some periods and measures. The procyclical behavior of the relative price of aggregate investment is also found for the six other countries of the G7.
    Keywords: business cycles; relative price of investment
    JEL: E3
    Date: 2014–09
  61. By: Felix Koenig; Alan Manning; Barbara Petrongolo
    Abstract: Wages are only mildly cyclical, implying that shocks to labour demand have a larger short-run impact on unemployment rather than wages, at odds with the quantitative predictions of the canonical search and matching model. This paper provides an alternative perspective on the wage flexibility puzzle, explaining why the canonical model can only match the observed cyclicality of wages if the replacement ratio is implausibly high. We show that this failure remains even if wages are only occasionally renegotiated, unless the persistence in unemployment is implausibly low. We then provide some evidence that part of the problem comes from the implicit model for the determination of reservation wages. Estimates for the UK and West Germany provide evidence that reservation wages are much less cyclical than predicted even conditional on the observed level of wage cyclicality. We present evidence that elements of perceived "fairness" or "reference points" in reservation wages may address this model failure.
    Keywords: Reservation wages, wage cyclicality, reference points
    JEL: J31 J64 E24
    Date: 2014–12
  62. By: Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Centre for Economic Analysis, Italy); Georgios-Antonios Sarantitis (Department of Economics, Democritus University of Thrace, Greece)
    Abstract: In this paper we attempt to provide empirical evidence on the issue of business cycle synchronization within Europe. The issue of business cycle convergence is important and very topical as it is a prerequisite for the implementation of an effective and successful monetary policy within a monetary union. We employ for the first time in this context (to the best of our knowledge) Complex Network metrics and we identify the corresponding Minimum Dominating Set of countries in terms of their GDP growth. An obvious focal point for our comparison of business cycle convergence is the adoption of a common currency (the euro) in 1999. By doing so, we reveal the evolution of GDP growth co-movement patterns of European economies before and after the introduction of the euro. The main findings from our empirical analysis provide evidence in favor of macroeconomic convergence after the introduction of the common currency.
    Date: 2014–11
  63. By: Guner, Nezih; Lopez-Daneri, Martin; Ventura, Gustavo
    Abstract: We evaluate the effectiveness of a more progressive tax scheme in raising government revenues. We develop a life-cycle economy with heterogeneity and endogenous labor supply. Households face a progressive income tax schedule, mimicking the Federal Income tax, and flat-rate taxes that capture payroll, state and local taxes and the corporate income tax. We parameterize this model to reproduce aggregate and cross-sectional observations for the U.S. economy, including the shares of labor income for top earners. We find that a tilt of the Federal income tax schedule towards high earners leads to small increases in revenues which are maximized at an effective marginal tax rate of about 36.9% for the richest 5% of households -- in contrast to a 21.7% marginal rate in the benchmark economy. Maximized revenue from Federal income taxes is only 8.4% higher than it is in the benchmark economy, while revenues from all sources increase only by about 1.6%. The room for higher revenues from more progressive taxes is even lower when average taxes are higher to start with. We conclude that these policy recommendations are misguided if the aim is to exclusively raise government revenue.
    Keywords: labor supply; progressivity; taxation
    JEL: E6 H2
    Date: 2014–07
  64. By: Hernán Rincón; Diego Rodríguez; Jorge Toro; Santiago Téllez
    Abstract: El gobierno es un agente que influye sobre la actividad económica a lo largo del ciclo y afecta las variables reales y nominales de un país por medio de sus políticas de ingreso y de gasto. También es un determinante importante de la estabilidad macroeconómica, en cuanto que esta depende, entre otros, de la sostenibilidad de sus finanzas y de la contraciclicidad de sus políticas. El objetivo de este documento es construir un modelo fiscalmicrofundamentado de equilibrio general dinámico y estocástico DSGE-neokeynesiano para Colombia (FISCO), en donde el gobierno juega un papel preponderante en la economía. El modelo se construye, calibra, estima y evalúa teniendo en cuenta sus particularidades económicas e institucionales. El propósito es que sirva como herramienta de análisis de la política fiscal y su nexo con la economía y la política monetaria. Con el propósito de evaluar las predicciones del modelo FISCO se presentan algunas simulaciones y se estudian las dinámicas de las principales variables macroeconómicas ante choques positivos y transitorios a las tasas de tributación, al gasto de funcionamiento, al gasto de inversión, a la tasa de interés de política monetaria y a la renta petrolera del gobierno. Las cinco conclusiones principales de política económica que emergen del modelo y de sus simulaciones son las siguientes. Primera, la inflación es un asunto que compete a la política monetaria, como se sabe, pero también a la política fiscal. Segunda, los choques positivos a la política fiscal son contrarrestados en cierto grado por la política monetaria; por el contrario, choques a esta última son refrendados por la política fiscal. Tercera, el choque al gasto de funcionamiento del gobierno desplaza a la inversión privada. Lo contario sucede con el choque a la inversión. En este mismo sentido, el recorte al gasto de inversión impacta en mayor medida a la economía que el ajuste al de funcionamiento. Cuarta, el balance estructural del gobierno depende del tipo de choque de política que enfrenta la economía. Quinta, la regla fiscal cumple un rol estabilizador de las finanzas del gobierno y de la economía, como es su objetivo; sin embargo, puede convertirse a la vez en un agravante de la situación macroeconómica ante ciertos choques. Classification JEL: D58, E2, E62, E63, C11, C13
    Date: 2014–12
  65. By: Bitros, George C.; Batavia, Bala; Nandakumar, Parameswar
    Abstract: Our objective in this paper is threefold. First, to identify the major common shocks that hit these countries upon entry into the EMU. Second, taking Greece as our case study, to construct a simple macroeconomic model of the policies Greek governments pursued in the presence of these shocks, and to employ its solution so as to highlight the outcomes that were expected to result. From this endeavor, we find that the policies which were put in place led unavoidably to a severe economic crisis and eventual bankruptcy. Finally, in view of these findings and what happened in 2009,we raise and attempt to answer questions like, for example: How can we explain the policies that were adopted in the advent of monetary union shocks? Could they have been anticipated? And if so, why did they escape the attention of the designers of the Maastricht Treaty? The answer to which we are led by the analysis is that the shocks in all these countries were perceived by their governments as opportunities to hold on to their entrenched positions. That this happened, we conclude, reflects a failure in the mechanisms of economic convergence that were embedded in the Maastricht Treaty as well as in the effectiveness of European Union (EU) institutions that were empowered with their enforcement.
    Keywords: Economic crises, economic integration, balance-of payments deficits, budget deficits and indebtedness, structural imbalances
    JEL: E3 F15 F16 F32 F36 H62 H63 L16
    Date: 2014–12–15
  66. By: Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich
    Abstract: In this work we analyze the short- and long-run effects of fiscal austerity policies, employing an agent-based model populated by heterogeneous, boundedly-rational firms and banks. The model, in line with the family of "Keynes+Schumpeter" formalism, is able to account for a wide array of macro and micro empirical regularities. In particular, it endogenously generates self-sustained growth patterns together with persistent economic fluctuations punctuated by deep downturns. On the policy side, we find that austerity policies considerably harm the economy, by increasing output volatility, unemployment, and the incidence of crises. In addition, they depress innovation and the diffusion of new technologies, thus reducing long-run productivity and GDP growth. Finally, we show that "discipline-guided" fiscal rules are self-defeating, as they do not stabilize public finances, but, on the contrary, they disrupt them.
    Keywords: agent-based model, fiscal policy, economic crises, austerity policies, disequilibrium dynamics
    Date: 2014–11–25
  67. By: Kahn, Lisa B. (Yale University); McEntarfer, Erika (U.S. Census Bureau)
    Abstract: Who fares worse in an economic downturn, low- or high-paying firms? Different answers to this question imply very different consequences for the costs of recessions. Using U.S. employer-employee data, we find that employment growth at low-paying firms is less cyclically sensitive. High-paying firms grow more quickly in booms and shrink more quickly in busts. We show that while during recessions separations fall in both high-paying and low-paying firms, the decline is stronger among low-paying firms. This is particularly true for separations that are likely voluntary. Our findings thus suggest that downturns hinder upward progression of workers toward higher paying firms – the job ladder partially collapses. Workers at the lowest paying firms are 20% less likely to advance in firm quality (as measured by average pay in a firm) in a bust compared to a boom. Furthermore, workers that join firms in busts compared to booms will on average advance only half as far up the job ladder within the first year, due to both an increased likelihood of matching to a lower paying firm and a reduced probability of moving up once matched. Thus our findings can account for some of the lasting negative impacts on workers forced to search for a job in a downturn, such as displaced workers and recent college graduates.
    Keywords: firm quality, wages, recessions
    JEL: E24 E32 J23 J3 J63
    Date: 2014–11
  68. By: Etienne Lalé
    Abstract: We study the effects of front-loading the payment of unemployment benefits in general equilibrium economies with imperfect labor and insurance markets, focusing on the trade-off between improved re-employment rates and the potential welfare losses accruing from consumption-smoothing problems. The calibration to U.S. data shows that these losses are large, enough to offset most gains from front-loading the benefit system. The nature of labor market frictions – i.e. stemming from workers’ search efforts or firms’ vacancy posting – changes the underlying mechanisms, but not the overall welfare figures. We discuss robustness to changing the generosity, duration and eligibility of unemployment insurance.
    Keywords: Unemployment Insurance, Precautionary Savings, Labor-Market Frictions, Welfare Effect.
    JEL: E21 I38 J63 J65
    Date: 2014–12
  69. By: Paolo Gelain (Norges Bank); Marcin Kolasa (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications -- variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and occasionally binding collateral constraint -- to an otherwise standard DSGE model with housing and financial intermediaries. In line with the literature, we find that monetary policy is less effective when contracts are multi-period, but only under fixed rate mortgages or when borrowers cannot be forced to accelerate repayment of their loans. Moreover, the probability that the collateral constraint becomes slack depends on loan maturity only for fixed rate mortgages while the probability that the non-negativity constraint becomes binding grows with loan maturity regardless of the contract type. As a result, muti-period loans not only weaken monetary and macroprudential policy, but also introduce asymmetry into their transmission.
    Date: 2014
  70. By: Deluna, Roperto Jr
    Abstract: This study was conducted to determine the long-run relationship among world oil price (WOP), Philippine inflation rate (IR) and exchange rate (ER). Results of the Augmented Dickey Fuller (ADF) tests of the variables revealed that all three series are not stationary in the process and were subjected to first differencing. ADF further revealed that the three series are integrated of order 1 or I(1). Therefore, vector error correction model (VECM) was used to examine the relationship of the three variables. VECM revealed a positive long-run relationship between IR and WOP, and IR and ER. A unit increase of the world oil price will increase Philippine inflation by 0.31%. While, a unit increase in exchange rate (PhP: USD) will increase inflation rate by 0.42%. In terms of ER, results revealed that an increase in the past values of WOP will increase ER. However, ER is not affected by the past values of IR. Result of the granger causality shows that all of the other variables jointly granger cause and individually granger cause inflation rate. Changes in ER cannot be predicted by joint and individual changes in the previous periods of WOP and IR.
    Keywords: VECM, inflation, world oil price, exchange rate
    JEL: C3 C32 E1 E10 E31
    Date: 2014–08–01
  71. By: Carlos A. Carrasco; Patricia Peinado (University of the Basque Country (UPV/EHU))
    Abstract: We study the origin of European imbalances in the context of European integration. As a whole, the European Union and Eurozone have had nearly balanced external accounts. However, member countries have presented divergent positions. We analyse the factors underlying the presence of European external imbalances. Our results reveal the existence of a structural component of the current account. This compononent could be related to the economic structure and the non-price competitive advantages of each country.
    Keywords: current account, Eurpoean imbalances, European integration, competitiveness, catching-up
    JEL: E44 E65 F15 F32 H63
    Date: 2014–10–01
  72. By: Levy, Daniel; Snir, Avichai
    Abstract: If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information.
    Keywords: Quantity Adjustment,Cognitive Costs of Attention,Information Processing
    JEL: L11 L15 L16 M21 M31 M37 M38 K20 E31 D21 D22 D40 D83
    Date: 2013–01–22
  73. By: Talosaga Talosaga; Mark Vink (The Treasury)
    Abstract: This paper examines the effect of the last increase in the eligibility age for New Zealand’s public pension, New Zealand Superannuation, on household saving rates. The age of eligibility was increased progressively from 60 to 65 years old between 1992 and 2001, with little forewarning. Drawing on Household Economic Survey data, the paper uses difference-in-difference regression analysis to compare the last cohorts to receive New Zealand Superannuation at the age of 60 years old with the first to face higher eligibility ages. The policy change is found to have increased average saving rates of affected households, particularly among middle-income and older households. The increase in saving rates is associated with higher household labour supply and income, and lower expenditure. The results suggest the policy change initially lifted the aggregate household saving rate by around 2.5 percentage points with the effect declining slightly over time.
    Keywords: Household Saving; Retirement Income; New Zealand Superannuation
    JEL: D14 D91 E21 H55 J26
    Date: 2014–11
  74. By: Gregory Colman; Dhaval Dave
    Abstract: We examine the first-order internal effects of unemployment on a range of health behaviors during the most recent recession using longitudinal data from the Panel Study of Income Dynamics (PSID) and the National Longitudinal Survey of Youth 1979 (NLSY79). Consistent with prior studies based on cross-sectional data, we find that becoming unemployed is associated with a small increase in leisure-time exercise and in body weight, a moderate decrease in smoking, and a substantial decline in total physical activity. We also find that unemployment is associated with a decline in purchases of fast food. Together, these results imply that both energy consumption and expenditure decline in the U.S. during recessions, the net result being a slight increase in body weight. There is generally considerable heterogeneity in these effects across specific health behaviors, across the intensive and extensive margins, across the outcome distribution, and across gender.
    JEL: E32 I12 J22
    Date: 2014–12
  75. By: Peter Schmidt
    Abstract: This paper reconsiders the theoretical foundations of EU regional policy in economics. It begins with a discussion of the line of thought of its prevalent explanation in equilibrium economics which is focusing on market failures as its key underpinning and which is the major toolkit of economists for policy recommendations in this context. Subsequently, this view is contrasted with a non-equilibrium economics perspective on EU regional policy. Based on this, the existence of market failures and the relevance of equilibrium economics for a realistic understanding of and policy advice for EU regional policy are called into question. That is why, a more substantive politico-economic explanation and different policy conclusions for the regional policy of the EU are offered. The paper particularly focuses on the implications of the latter for the European Economic and Monetary Union in light of the persisting financial crisis and the vast economic disparities existing within it. Finally, the non-equilibrium economics perspective on EU regional policy is also animadverted, since market failure thinking still prevails in this branch of economics undermining its own criticism of equilibrium economics.
    Keywords: circular and cumulative causation; structural funds; non-equilibrium economics; increasing returns; EU regional policy; market failures
    JEL: B52 E62 F12 H53 O10 R00
    Date: 2014–11
  76. By: Raes, L.B.D. (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of a collection of essays on monetary policy making. These essays focus on institutional aspects which impact monetary policy making. Two chapters focus on analyzing voting records of central banks. A method is proposed to use the observed votes to infer the preferences of central bank committee members. These preferences characterize nearly fully the voting behavior. Subsequently these preferences are analyzed to learn about differences between certain groups of committee members. The practical relevance of this is that it allows us to think about how we should design these committees. For example, we show that some voters who are internally appointed tend to have preferences close to each other. If diversity of opinions in a board is deemed important, then this finding suggests that the number of internally appointed members should be limited. This methodology is applied to a variety of central bank committees. Each committee is a different case study and allows us to focus on another aspect. A third chapter presents an analysis of a phenomenon known as the bond yield conundrum. This term refers to the remarkable behavior of long-term U.S. interest rates in the period 2004-2005. To study this we set up a so-called macro-finance model which combines features of modern asset pricing models with empirical macroeconomic methods. Our results are somewhat disheartening in the sense that we are not fully able to explain the behavior. The final chapter gauges the impact of central bank communication on the stock market. Central bank communication is hot nowadays. The Federal Reserve as well as the European Central Bank organize press conferences on a regular basis. These press conferences are one form of communication which is followed closely by financial market participants. In this chapter we set up an event study to analyze the impact of the FOMC communication on the S&P 500. Our results suggest that central bank communication does move the stock market but does so in a nonlinear fashion. The impact depends on the business cycle as well as on the type of stock and industry. Combined, these essays allow the reader to understand some of the intricacies of central bank policy.
    Date: 2014
  77. By: Strulik, Holger; Trimborn, Timo
    Abstract: Recent empirical research has shown that income per capita in the aftermath of natural disasters is not necessarily lower than before the event. In many cases, income is not significantly affected and surprisingly, can even respond positively to natural disasters. Here, we propose a simple theory based on the neoclassical growth model that explains these observations. Specifically, we show that GDP is driven above its pre-shock level when natural disasters destroy predominantly residential housing (or other durable goods). Disasters destroying mainly productive capital, in contrast, are predicted to reduce GDP. Insignificant responses of GDP can be expected when disasters destroy about equally residential structures and productive capital. We also show that disasters, irrespective of whether their impact on GDP is positive, negative, or insignificant, entail considerable losses of aggregate welfare.
    Keywords: natural disasters,economic recovery,residential housing,economic growth
    JEL: E20 O40 Q54 R31
    Date: 2014
  78. By: Fricke, Christoph; Menkhoff, Lukas
    Abstract: Bond excess returns can be predicted by macro factors, however, large parts remain still unexplained. We apply a novel term structure model to decompose bond excess returns into expected excess returns (risk premia) and the unexpected part. In order to explore these risk premia and innovations, we complement macro variables by financial condition variables as possible determinants of bond excess returns. We find that the expected part of bond excess returns is driven by macro factors, whereas innovations seem to be mainly influenced by financial conditions, before and after the financial crisis. Thus financial conditions, such as financial stress, deserve attention when analyzing bond excess returns.
    Keywords: financial conditions,bond excess returns,term premia
    JEL: E43 G12
    Date: 2014
  79. By: Gros, Daniel
    Abstract: Investment has declined in the euro area since the start of the economic and financial crisis, but this does not mean that there is necessarily an ‘investment gap’, explains Daniel Gros in this CEPS Policy Brief. Investment was probably above a sustainable level due to the credit boom before 2007. Moreover, the fall in the euro area’s potential growth - due to a combination of a sharp demographic slowdown and lower total factor productivity (TFP) growth - should also lead to a permanently lower investment rate. Increasing the investment rate might thus be the wrong target for economic policy. The author advises that the aim of economic policy should be to increase consumption, rather than investment overall. Increasing infrastructure investment might be justified in some member countries, but it is not a ‘free lunch’ when efficiency levels are low, which seems to be the case in some of the financially stressed euro area countries.
    Date: 2014–11
  80. By: Merrouche, Ouarda; Nier, Erlend
    Abstract: This paper investigates empirically three potential drivers of financial imbalances ahead of the global financial crisis: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors, as well as the extent to which they might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of financial imbalances ahead of the crisis.
    Keywords: global imbalances; monetary policy; supervision and regulation
    JEL: E5 F3 G28
    Date: 2014–06
  81. By: Clemens, Jeffrey; Wither, Michael
    Abstract: We present data characterizing the U.S. labor market during the Great Recession and subsequent recovery. U.S. employment declines were dramatic among young adults, substantial among prime-aged adults, and modest among those near retirement. The decline in employment among working-age adults generally exceeded those that occurred in other advanced economies. We assess the potential explanatory power of population aging and increases in educational attainment as factors underlying these developments. Recent analyses suggest that population aging can explain nearly one half of the decline in the labor force participation rate and one third of the decline in the employment to population ratio from 2007 to 2013. Our comparisons of employment developments across age groups and countries provide reason to view this one third as an upper bound on aging's plausible contribution. We conduct a more detailed analysis of changes in employment and school attendance across demographic sub-groups of the young adult population. Across sub-groups defined by age, gender, and race/ethnicity, changes in school enrollment predict very little of the variation in this period's employment changes. Taken together, aging and enrollment trends thus appear to underlie a modest to moderate fraction of the aggregate employment decline. We conclude by discussing a range of non-demographic factors that may have contributed to the decline, but on which existing research has yet to arrive at a consensus.
    Keywords: Great Recession, Employment Rate, Unemployment, Labor Force Participation
    JEL: E32 J0 J11
    Date: 2014–11–26
  82. By: Maria Bigoni (University of Bologna); Gabriele Camera (Economic Science Institute, Chapman University and University of Basel); Marco Casari (University of Bologna and IZA)
    Abstract: Impersonal exchange is the hallmark of an advanced society. One key institution for impersonal exchange is money, which economic theory considers just a primitive arrangement for monitoring past conduct in society. If so, then a public record of past actions—or memory—supersedes the function performed by money. This intriguing theoretical postulate remains untested. In an experiment, we show that the suggested functional equality between money and memory does not translate into an empirical equivalence. Monetary systems perform a richer set of functions than just revealing past behaviors, which proves to be crucial in promoting large-scale cooperation.
    Keywords: Cooperation, intertemporal trade, experiments, social norms, social dilemmas
    JEL: C70 C90 D03 E02
    Date: 2014
  83. By: Adenutsi, Deodat E.
    Abstract: In this paper, an attempt has been made to identify the macroeconomic determinants of migrant remittances received in Sub-Saharan Africa (SSA) at the disaggregated level. The underlying motivation is that, given their unique characteristics, permanent and temporary migrants are likely to respond differently to macroeconomic conditions in migrant-host countries and their native or migrant-home countries. For the empirical analysis, the system Generalized Method of Moments (GMM) approach was used to estimate a dynamic panel-data model involving 36 SSA countries over the period, 1980-2009. It was found that the inflows of compensation of employees and workers’ remittances to SSA are influenced by host-country macroeconomic conditions in a similar way, whereas these two forms of remittances are driven by contrasting home-country macroeconomic conditions. Remittances from permanent migrants are less altruistic than remittances from temporary migrants. To attract higher remittances on a more permanent basis, the implementation of stable macroeconomic and pro-growth policies are inevitable in labor-exporting SSA countries.
    Keywords: Workers’ Remittances, Compensation of Employees, Money, Migrant, International Migration, sub-Saharan Africa
    JEL: C23 E42 F22 F24 J33
    Date: 2013–02–09
  84. By: Ali H. Abukumail
    Keywords: Macroeconomics and Economic Growth - Knowledge Economy Information and Communication Technologies - ICT Policy and Strategies Technology Industry Education - Education for the Knowledge Economy Private Sector Development - E-Business Industry
    Date: 2013–01
  85. By: Romain Baeriswyl (Swiss National Bank)
    Abstract: The 100%-Money Plan advocated by Fisher (1936) has a Misesian avor as it aims at mitigating intertemporal discoordination by reducing (i) the discrepancy between investment and voluntary savings, and (ii) the manipulation of interest rates by monetary injections. Recent proposals to adopt the 100 percent reserve banking system, such as the Chicago Plan Revisited by Benes and Kumhof (2013) or the Limited Purpose Banking by Kotlikoff (2010), take, however, a fundamentally different attitude towards the role of the central bank in the credit market and ignore that intertemporal discoordination arises independently from whether the credit expansion is financed by the creation of outside or inside money. These plans allow the central bank to inject outside money into the credit market and to effectively lower interest rates in negative territory in order to overcome the limit that the liquidity trap sets to credit expansion in the fractional reserve system. Although such an attempt may succeed in stimulating the economy in the short run, it exacerbates intertemporal discoordination and weakens economic stability in the long run.
    Date: 2014–12
  86. By: Alice Fabre (Aix Marseille University (Aix Marseille School of Economics, CNRS & EHESS)); Stéphane Pallage (ESG UQAM, CIRPEE and Département des Sciences Economiques, Université du Québec `a Montréal); Christian Zimmermann (Federal Reserve Bank of St-Louis, IZA, RCEA and CESifo)
    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: E24 D7 J65
    Date: 2014–11–14
  87. By: Tsoulfidis, Lefteris
    Abstract: The purpose of this paper is to delve into the deeper causes of the current crisis and its detailed manifestation in the case of the Greek economy. The major argument of the paper is that the root cause of the crisis is fundamentally identified in the declining profitability which past a point leads to a stagnant mass of real net profits thereby discouraging investment spending and leading to rising unemployment. In the case of the Greek economy, this crisis of profitability has been aggravated by the contraction of its major productive activities, that is, manufacturing and agriculture. The contraction of these activities not only worsened the crisis but furthermore paved the way for the development of different forms of its expression; that is, mounting debt and unprecedented high rates of unemployment bringing the whole society into a stalemate.
    Keywords: falling rate of profit, unproductive activities, non-tradables, crisis, debt, Greek economy
    JEL: A10 B1 B14 B24 E11 O52
    Date: 2013–06–01
  88. By: Igor Fedotenkov (Bank of Lithuania)
    Abstract: This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.
    Keywords: Two sectors, factor mobility, asymmetric taxation, optimality
    JEL: E62 H21 J10
    Date: 2014–10–21
  89. By: Bonfiglioli, Alessandra; Gancia, Gino A
    Abstract: We study the incentives to improve ability in a model where heterogeneous firms and workers interact in a labor market characterized by matching frictions and costly screening. When effort in improving ability raises both the mean and the variance of the resulting ability distribution, multiple equilibria may arise. In the high-effort equilibrium, heterogeneity in ability is sufficiently large to induce firms to select the best workers, thereby confirming the belief that effort is important for finding good jobs. In the low-effort equilibrium, ability is not sufficiently dispersed to justify screening, thereby confirming the belief that effort is not so important. The model has implications for wage inequality, the distribution of firm characteristics, sorting patterns between firms and workers, and unemployment rates that can help explaining observed cross-country variation in socio-economic and labor market outcomes.
    Keywords: Beliefs; Effort; Firm Heterogeneity; Multiple Equilibria; Selection; Sorting; Unemployment; Wage Inequality
    JEL: E24 J24 J64
    Date: 2014–05
  90. By: Giovannelli, Alessandro; Proietti, Tommaso
    Abstract: We address the problem of selecting the common factors that are relevant for forecasting macroeconomic variables. In economic forecasting using diffusion indexes the factors are ordered, according to their importance, in terms of relative variability, and are the same for each variable to predict, i.e. the process of selecting the factors is not supervised by the predictand. We propose a simple and operational supervised method, based on selecting the factors on the basis of their significance in the regression of the predictand on the predictors. Given a potentially large number of predictors, we consider linear transformations obtained by principal components analysis. The orthogonality of the components implies that the standard t-statistics for the inclusion of a particular component are independent, and thus applying a selection procedure that takes into account the multiplicity of the hypotheses tests is both correct and computationally feasible. We focus on three main multiple testing procedures: Holm’s sequential method, controlling the family wise error rate, the Benjamini-Hochberg method, controlling the false discovery rate, and a procedure for incorporating prior information on the ordering of the components, based on weighting the p-values according to the eigenvalues associated to the components. We compare the empirical performances of these methods with the classical diffusion index (DI) approach proposed by Stock and Watson, conducting a pseudo-real time forecasting exercise, assessing the predictions of 8 macroeconomic variables using factors extracted from an U.S. dataset consisting of 121 quarterly time series. The overall conclusion is that nature is tricky, but essentially benign: the information that is relevant for prediction is effectively condensed by the first few factors. However, variable selection, leading to exclude some of the low order principal components, can lead to a sizable improvement in forecasting in specific cases. Only in one instance, real personal income, we were able to detect a significant contribution from high order components.
    Keywords: Variable selection; Multiple testing; p-value weighting.
    JEL: C22 C32 C38 C53 E3 E32
    Date: 2014–11–30
  91. By: Arnd Kölling (Berlin School of Business and Law)
    Abstract: This paper examines the relationship between intra-firm wage dispersion and establishments’ employment in a theoretical analysis and empirical regressions using German “Linked Employer-Employee Data from the IAB” (LIAB) for the years of 1996 through 2008. Therefore, fractional probit models for the panel data, recommended in Papke and Wooldridge (2008), and fixed effects regression with a log-odds transformation of the dependent variable are conducted to estimate share equations of a labor demand model. The results illustrate a negative influence of the residual wage inequality that takes into account the composition of the workforce in the establishment with employment. In addition, an increasing wage dispersion at the lower end of the wage distribution decreases labor demand of the establishment but the estimates of the overall wage dispersion becomes insignificant then.
    Keywords: Labor Demand, Wage Dispersion, Share Equation
    JEL: J23 J21 E24
    Date: 2014–11
  92. By: León, C.; Machado, C.; Murcia, A.
    Abstract: Three metrics are designed to assess Colombian financial institutions’ size, connectedness and non-­substitutability as the main drivers of systemic importance: (i) centrality as net borrower in the money market network; (ii) centrality as payments originator in the large-value payment system network, and (iii) asset value of core financial services. Two systemic importance indexes are calculated based on two different aggregation methods for the three metrics: fuzzy logic and principal component analysis. The resulting indexes are complementary and provide a comprehensive relative assessment of each financial institution’s systemic importance in the Colombian case, in which the choice of metrics pursues the macro-­prudential perspective of financial stability. They both (i) agree on the skewed (i.e. inhomogeneous) nature of systemic importance and its approximate scale-­free distribution; (ii) on the preeminence of credit institutions as the main contributors to systemic importance, and (iii) on the non-­‐trivial importance of a few non-­‐banking institutions.
    Keywords: systemic importance; systemic risk; fuzzy logic; principal component analysis; financial stability; macro-prudential
    JEL: D85 C63 E58 G28
    Date: 2014
  93. By: Leandro Prados de la Escosura (Universidad Carlos III and CEPR)
    Abstract: Comparisons of economic performance over space and time largely depend on how statistical evidence from national accounts and historical estimates are spliced. To allow for changes in relative prices, GDP benchmark years in national accounts are periodically replaced with new and more recent ones. Thus, a homogeneous long-run GDP series requires linking different temporal segments of national accounts. The choice of the splicing procedure may result in substantial differences in GDP levels and growth, particularly as an economy undergoes deep structural transformation. An inadequate splicing may result in a serious bias in the measurement of GDP levels and growth rates. Alternative splicing solutions are discussed in this paper for the particular case of Spain, a fast growing country in the second half of the twentieth century. It is concluded that the usual linking procedure, retropolation, has serious flows as it tends to bias GDP levels upwards and, consequently, to underestimate growth rates, especially for developing countries experiencing structural change. An alternative interpolation procedure is proposed.
    Keywords: growth measurement, splicing GDP, historical national accounts, Spain
    JEL: C82 E01 N13 O47
    Date: 2014–08
  94. By: Simplice Anutechia Asongu (Association of African Young Economists)
    Abstract: The Ali (2013, EB) findings on the nexuses among institutions, finance and investment could have an important influence on policy and academic debates. This paper relaxes his hypotheses on the conception, definition and measurement of finance and institutions because they are less realistic to developing countries to which the resulting policy implications are destined. We dissect with great acuteness the contextual underpinnings of financial development dynamics and elucidate why the Acemoglu & Johnson (2005) justification provided for the measurement of property rights institutions (PRI) is lacking in substance. Using updated data (1996-2010) from 53 African countries, we provide more robust evidence on the substitution of institutions and finance in investment. Results under many baseline and augmented scenarios are not consistent with the underlying paper. Justifications for the differences in findings are discussed. As a policy implication, the Ali (2013, EB) findings for countries with poor financial systems may not be relevant for Africa.
    Keywords: Finance, Institutions, Investment, Property Rights, Africa
    JEL: G20 G24 E02 P14 O55
    Date: 2014–07
  95. By: Mariolis, Theodore; Soklis, George
    Abstract: This paper estimates the ‘static Sraffian multiplier’ for the Greek economy using data from the Supply and Use Table for the year 2010. It is found that (i) an effective demand management policy could be mainly based on the service sector; and (ii) the whole economic system, and especially its industry sector, is heavily dependent on imports. The results seem to be in accordance with the observed deep recession of the Greek economy and, furthermore, suggest that a change in its intersectoral structure is necessary.
    Keywords: Greek economy; Joint production; Management of effective demand; Sraffian multiplier; Supply and Use Tables
    JEL: C67 D57 E11 E61
    Date: 2014–11–27
  96. By: Marias H. Gestsson (Department of Economics, University of Iceland); Henrique Gylfi Zoega (Department of Economics, University of Iceland; Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We derive a golden rule for the level of health care expenditures and find that the optimal level of life-extending health care expenditures should increase with rising productivity and retirement age, while the effects of improvement in medical technology are ambiguous.
    Keywords: Health care, golden rule, productivity.
    JEL: E62 I12
    Date: 2014–12
  97. By: Martin Lettau; Sydney C. Ludvigson; Sai Ma
    Abstract: Value and momentum portfolios exhibit strong opposite signed exposure to an aggregate risk factor based on low frequency fluctuations in the capital share. This strong opposite signed exposure helps explain why both strategies earn high average returns yet are negatively correlated. But the finding is puzzling from the perspective of canonical asset pricing theories. We show that opposite signed exposure to capital share risk coincides with opposite signed exposure of value and momentum to the income shares of households in the top 10 versus bottom 90 percent of the stock wealth distribution. We use a model of shareholder heterogeneity to explain why the capital share is likely to be an important cross-sectional risk factor, and show how the result can be explained if investors located in different percentiles of the wealth distribution exhibit a central tendency to pursue different investment strategies. Models with capital share risk explain up to 85% of the variation in average returns on size-book/market portfolios and up to 95% of momentum returns and the pricing errors on both sets of portfolios are lower than those of the Fama-French three- and four-factor models, the intermediary SDF model of Adrian, Etula, and Muir (2014), and models based on low frequency exposure to aggregate consumption risk. In a horse race where long-horizon capital share betas are included alongside betas for these other factors, the capital share beta remains strongly significant while the others are driven out.
    JEL: E25 G11 G12
    Date: 2014–12
  98. By: Matthias Blum (Queen's University Management School); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews)
    Abstract: For many years, the World Bank has reported estimates of the degree of sustainability of the world’s economies using a measure of adjusted net savings. We construct long-run sustainability indicators for Germany over the period 1850-2000 to test the relationship between these net savings-based indicators and a number of measures of well-being over the long-run. These are the present value of future changes in consumption and changes in average height and infant mortality rates. We find that German sustainability indicators are positive for the most part, although they are negative during and after the two World Wars and also the Great Depression. However, we do not observe similar trends in the path of future consumption. Overall, we find that Genuine Savings is positively related to the present value of changes in future consumption, with some evidence of a cointegrating relationship when the measure of changes in assets is made more comprehensive. Our main contribution is to demonstrate the importance of broader measures of capital, including measures of technological progress; and the limits of conventional measures of investment to understand why future German consumption did not collapse.
    Keywords: Sustainability, economic development, Genuine Savings, Adjusted Net Savings, investment, consumption, well-being, economic history.
    JEL: E01 E21 N10 O11 Q01
    Date: 2014–11
  99. By: Simplice Asongu (Yaoundé/Cameroun); Uchenna EFOBI (Covenant University, Nigeria); Ibukun BEECROFT (Covenant University, Nigeria)
    Abstract: The paper verifies the Azzimonti et al. (2014) conclusions on a sample of 53 African countries for the period 1996-2008. Authors of the underlying study have established theoretical underpinnings for a negative nexus between rising public debt and inequality in OECD nations. We assess the effects of four debt dynamics on inequality adjusted human development. Instrumental variable and interactive regressions were employed as empirical strategies. Two main findings were established which depend on whether debt is endogenous to or interactive with globalisation. First, when external debt is endogenous to globalisation, the effect on inclusive human development is negative, whereas when it is interactive with globalisation, the effect is positive. This may reflect the false economics of pre-conditions. The magnitudes of negative estimates from endogenous related effects were higher than the positive marginal interactive effects. Policy implications were discussed.
    Keywords: Debts; globalisation; inequality; inclusive development; Africa
    JEL: E60 F40 F59 D60 O55
    Date: 2014–12
  100. By: Stephan Schulmeister (WIFO)
    Abstract: Roosevelt's New Deal stays in sharp contrast to the course followed by European policy since 2009. At first, Roosevelt focussed on fighting the generally pessimistic mood of the public, on strictly regulating the financial sector and on setting up investment and employment programmes. After that, structural reforms were carried out in order to strengthen confidence and social coherence. The most important measures were the introduction of unemployment insurance and of a public pension scheme as well as regulations to ensure "fair" labour conditions. The New Deal policy was successful: GDP expanded in the USA between 1933 and 1937 by 43 percent, mainly due to a boom in investments (+140 percent). By fighting the social-psychological depression and "speculation with other people's money", Roosevelt anticipated those two main messages of Keynes' "General Theory" (1936) which were later forgotten: first, the importance of the "state of confidence" and, second, the necessity to radically restrict financial speculation. The most influential thesis of Friedman – Schwartz (1963) according to which the Great Depression was primarily caused by a too restrictive monetary policy, i.e., by the state, turns out to be more based on ideology than on empirical facts. This holds even more true for the thesis of Cole – Ohanian (1999) and of Prescott (1999) according to which the depression was prolongued by New Deal policies. At present, a re-orientation of economic policy in Europe along Roosevelt's guidelines and, hence, a "New Deal for Europe" might help to lead the economy out of the persistent crisis.
    Keywords: Makroökonomische Politik, Depressionen, New Deal
    Date: 2014–11–17
  101. By: Rossen, Anja
    Abstract: This study explores the dynamics of monthly metal prices during the past 100 years. On the basis of a unique data set, co-movement, price cycles and long-run trends are analyzed by means of common statistical methods and the results are compared to the findings in the literature. Due to its large number of monthly observations (1224) and high number of price series (20), this data set has a huge advantage. Findings suggest that some results in the literature are specific for non-ferrous and precious metals and do not necessarily carry over to other metals like steel alloys, electrical metals, light metals, steel or iron ore. However, other results in the literature can be confirmed by the analysis of this comprehensive data set.
    Keywords: metal prices,co-movement,price cycles,super cycles
    JEL: C41 E32 Q31
    Date: 2014
  102. By: Bernd Bartels (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: We empirically analyze why rating agencies disagree on countries' default risk. Specically, we explore the sovereign ratings of four agencies and their interaction. Our results indicate that the frequency of split ratings and their lopsidedness is not related to their home region. We nevertheless nd that rating agencies treat world regions differently. The Big Three rating agencies tend to follow each other predominantly in times of crises. The smaller European agency seems to b e more independent but also more volatile in its rating behaviour.
    Keywords: Sovereign Risk, European Rating Agency, Rating Agencies
    JEL: E62 F34
    Date: 2014–12–02
  103. By: Pfajfar, D. (Tilburg University, School of Economics and Management); Zakelj, B.
    Abstract: Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.
    Date: 2014
  104. By: Bruno Sultanum
    Abstract: I propose a model to study whether trade frictions in an over-the-counter market for financial assets exacerbate or attenuate financial fragility. I model the financial sector as a large number of financial institutions, which I label banks. Each bank is a coalition of depositors and depositors are subject to privately observed liquidity shocks. The banks' problem is to maximize the welfare of depositors by implementing the efficient allocation of financial assets among them. I show that when banks use the balanced team mechanism, proposed by Athey and Segal (2013), there is always a truth-telling equilibrium which supports the constrained Pareto efficient allocation. When the frictions in the over-the-counter market are small, this equilibrium is unique. However, I provide numerical examples in which these frictions are severe and the economy has other equilibria. In one equilibrium depositors claim high liquidity needs, asset price falls, the trade volume collapses and, consequently, the equilibrium allocation is not constrained Pareto efficient. I label this equilibrium a bank-run equilibrium and I interpret the existence of bank-runs as a financial fragility. I propose two policies to eliminate bank-run equilibria. The first is a suspension scheme and the second is an opening of trade facilities similar to the ones established by the Federal Reserve Bank during the 2007-08 financial crisis. Both policies can eliminate bank runs when contingent on announcements of liquidity needs in a large number of banks.
    JEL: E G
    Date: 2014–11–23
  105. By: Leppin, Julian Sebastian
    Abstract: This paper examines if overreaction of oil price forecasters is related to uncertainty. Furthermore, it takes into account impacts from oil price return and oil price volatility on forecast changes. The panel smooth transition regression model from González et al. (2005) is applied with different specifications of the transition functions to account for nonlinear relations. Data on oil price expectations for different time horizons are taken from the European Central Bank Survey of Professional Forecasters. The results show that forecast changes are governed by overreaction. However, overreaction is markedly reduced when high levels of uncertainty prevail. On the other hand, noisy signals and positive oil price returns tend to cause higher overreaction.
    Keywords: Overreaction,Uncertainty,Panel Smooth Transition Regression
    JEL: G14 C33 E37
    Date: 2014
  106. By: Kan Chen; Mario J. Crucini
    Abstract: Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modelling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.
    Date: 2014–12
  107. By: Ludo Visschers (Universidad Carlos III, Madrid and University of Edinburgh); Ana Millan (Universidad Carlos III de Madrid); Matthias Kredler (Universidad Carlos III Madrid)
    Abstract: In this paper, we study the flows between self-employment, unemployment and paid employment, and how these vary over the business cycle. First, we document these flows in the data, paying particular attention to previous labor market outcomes for workers entering self-employment, and subsequent labor market outcomes for those leaving self-employment, and how these are affected by cyclical conditions. Second, we construct a two-ladder equilibrium model of a frictional labor market capturing these flows: workers search both on and off the job, and receive business ideas while in any of the three states: self-, paid employment and unemployment. We study this model in an environment with aggregate shocks, which affect both the productivity of matches in the paid-employment sector, and the profitability of ideas for the self-employed. Third, we (plan to) calibrate to see how well it can quantitatively account for observed patterns over the business cycle. These allow us to have a notion of entry into self- employment by "opportunity" (highly profitable ideas), and "necessity" (lack of alternatives in paid employment), and how these vary over the business cycle, and to quantify "prosperity pull" of self-employment in good times, and "recession push" in bad times. Finally, we plan to study the impact of labor market policies on self-employment, and on unemployment, taking into account the option to enter self-employment.
    Date: 2014
  108. By: Caliendo, Lorenzo; Parro, Fernando; Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel
    Abstract: We study the impact of regional and sectoral productivity changes on the U.S. economy. To that end, we consider an environment that captures the effects of interregional and intersectoral trade in propagating disaggregated productivity changes at the level of a sector in a given U.S. state to the rest of the economy. The quantitative model we develop features pairwise interregional trade across all 50 U.S. states, 26 traded and non-traded industries, labor as a mobile factor, and structures and land as an immobile factor. We allow for sectoral linkages in the form of an intermediate input structure that matches the U.S. input-output matrix. Using data on trade flows by industry between states, as well as other regional and industry data, we obtain the aggregate, regional and sectoral elasticities of measured TFP, GDP, and employment to regional and sectoral productivity changes. We find that such elasticities can vary significantly depending on the sectors and regions affected and are importantly determined by the spatial structure of the US economy.
    Keywords: input-output; linkages; migration; propagation; trade
    JEL: E0 F1 F16 R12 R13
    Date: 2014–06
  109. By: Robert W.R. Price; Thai-Thanh Dang; Yvan Guillemette
    Abstract: This paper estimates the elasticities of government revenue and expenditure items with respect to the output gap for European Union (EU) countries. These elasticities are used by the European Commission, as part of the EU fiscal surveillance process, to calculate the semi-elasticity of the budget balance as a percentage of GDP with respect to the output gap. The study updates the earlier 2005 study of OECD economies using the most recent datasets and tax codes, the coverage being confined in this paper to the 28 EU member states, seven of which are not OECD members. The same basic two-step methodology is retained: revenue and expenditure elasticities with respect to the output gap being defined as the product of, first, the elasticities of individual revenue and expenditure items with respect to their bases and, second, the elasticities of these bases with respect to the output gap. A number of refinements and methodological improvements are made relative to the 2005 study. The revisions to individual elasticities relative to the 2005 vintage are significant in a number of cases but do not follow a clear pattern across countries, except for the elasticities of corporate income tax revenue which are revised up in most cases.<P>Nouvelles estimations de l'élasticité des taxes et dépenses pour la surveillance budgétaire de l'UE<BR>Cette étude estime les élasticités des composantes des revenus et des dépenses gouvernementales par rapport à l’écart de production pour les pays de l’Union Européenne (UE). Ces élasticités sont utilisées par la Commission Européenne, dans son processus de surveillance fiscale, pour calculer la semi-élasticité du solde budgétaire en pourcentage du PIB par rapport à l’écart de production. L’étude met à jour la précédente étude de 2005 couvrant les économies de l’OCDE en utilisant les données et les codes des impôts les plus récents, la couverture de l’étude étant confinée aux 28 pays membres de l’UE, dont sept ne sont pas membres de l’OCDE. La même méthodologie en deux temps est retenue : les élasticités des revenus et dépenses par rapport à l’écart de production étant définies comme le produit de, en premier, l’élasticité des composantes individuelles de dépense et de revenu par rapport à leurs bases et, en deuxième, l’élasticité de ces bases par rapport à l’écart de production. Un ensemble d’améliorations méthodologique sont apportés par rapport à l’étude de 2005. Les révisions des élasticités individuelles par rapport à celles de 2005 sont significatives dans nombre de cas, mais ne suivent pas de tendance particulière, exception faite des élasticités de l’impôt sur les bénéfices qui sont révisées à la hausse dans la plupart des cas.
    Keywords: automatic stabilisers, budget elasticity, fiscal surveillance, cyclically adjusted, ajustement cyclique, stabilisateurs automatiques, élasticité budgétaire, surveillance fiscale
    JEL: E62 H30 H60
    Date: 2014–12–11
  110. By: David Law; Grant M Scobie (The Treasury)
    Abstract: The objective of this paper is to analyse the extent to which membership of KiwiSaver has been associated with greater accumulations of net wealth. The paper utilises two linked sources of data which cover the period 2002 to 2010: Statistics New Zealand’s Survey of Family, Income and Employment and Inland Revenue Department administrative data on KiwiSaver membership. Two approaches are employed: difference-in-differences (where the outcomes of interest are changes in net wealth) and various panel regression techniques. Results appear consistent with earlier evaluations of KiwiSaver. Neither approach suggests KiwiSaver membership has been associated with any positive effect on net wealth accumulation.
    Keywords: KiwiSaver; Net wealth; New Zealand; Longitudinal data; Administrative data
    JEL: E21 J26
    Date: 2014–11
  111. By: Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
    Abstract: Banks have been running for home. We investigate the pattern of this increasing home bias in the wake of the financial crisis and explore possible explanations. We estimate the strength of the flight home effect as the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find evidence of flight home for almost all banking systems with the notable exception of the US and Japan. In periods of calm, reversals of the home bias are small. The result is cumulative renationalization, with domestic lending growing on average 25% more than foreign lending during 2008-12. Sales and acquisitions of banks contributed to the home bias and the flight home was strong at the intensive margin as well. Deterioration of bank soundness explains some but not all of the effect, e.g. Germany and Switzerland had a strong flight home notwithstanding improving bank soundness during the eurocrisis. We also find evidence of the vicious circle between banks and sovereign balance sheets: sovereign stress paired with banking stress contributed to the renationalization of banking.
    Keywords: deglobalization; financial protectionism; international banking system
    JEL: E52 F34 G21
    Date: 2014–09
  112. By: Paolo Brunori (University of Bari, Italy); Flaviana Palmisano (University of Luxembourg); Vito Peragine (University of Bari, Italy)
    Abstract: This paper addresses the problem of the normative evaluation of income tax systems and income tax reforms. While most of the existing criteria, framed in the utilitarian tradition, are uniquely based on information about individual incomes, this paper, building upon the opportunity egalitarian theory, proposes new equity criteria which take into account also the socio-economic characteristics of individuals. Suitable dominance conditions that can be used to rank alternative tax systems are derived by means of an axiomatic approach. Moreover, the theoretical results are used to assess the redistributive eects of an hypothetical tax reform in Romania through a microsimulation analysis.
    Keywords: income inequality, inequality of opportunity, tax reforms, microsimulation, progressivity, horizontal equity
    JEL: D63 E24 O15 O40
    Date: 2014–12
  113. By: Xavier Timbeau (OFCE)
    Abstract: La reprise en zone euro ne se produit pas. La croissance mondiale reste également à la peine, sous le coup de la faiblesse de la zone euro et en l’absence de moteur vigoureux. L’année 2015 serait marquée par une légère accélération, mais là encore à un rythme de croissance trop faible dans la plupart des pays de la zone euro pour induire une baisse significative du chômage. Pourtant, à la suite des interventions de la Banque centrale, de la mise en place d’un mécanisme européen de résolution des crises bancaires, de la modération dans la consolidation budgétaire ou même de la baisse de l’euro par rapport au dollar intervenue au cours de l’année 2014, une sortie de crise des dettes souveraines en zone euro était espérée. La dynamique de l’impact des plans de consolidation budgétaire peut expliquer en partie que ceux-ci jouent encore négativement. Mais le rôle joué par les taux d’intérêts réels anticipés par les agents privés (entreprises et ménages) indique que la dynamique de déflation est centrale. La résolution de la crise des dettes souveraines n’a pas produit la baisse attendue des taux pratiqués aux agents privés. Le ralentissement de l’inflation a conduit à une hausse des taux réels (en Espagne et en Italie principalement). Un passage, même temporaire, par la déflation accentuera le poids de la dette publique et appellera de nouvelles consolidations budgétaires. Un « désancrage » des anticipations refermerait sûrement le piège de la déflation. Les ajustements en cours sur les salaires et coûts unitaires sont un facteur supplémentaire contribuant à cette spirale déflationniste. Les pays en crise cherchent dans la compétitivité un substitut à une demande intérieure atone. Mais les gains des uns réduisent ceux attendus par les autres et maintiennent la pression à la baisse sur les salaires nominaux ou obligent aux dévaluations fiscales. L’ajustement interne de la zone euro passera par les coûts relatifs, mais la sortie de crise suppose une politique monétaire vigoureuse, une fragmentation réduite du financement de la zone euro mais aussi un stimulus de la demande que la baisse de l’euro ne suffira pas à produire.
    Date: 2014–10
  114. By: Matthias Mati Dubrovinsky
    Abstract: Canada needs a better and faster payments system, according to a report from the C.D. Howe Institute. In “A Speedier and More Efficient Payments System for Canada,” author Mati Dubrovinsky finds that the Canadian economy would benefit from an upgraded payments system that creates lower financial risk, lower payment-processing costs for businesses and, as a consequence, makes Canadian businesses more competitive globally.
    Keywords: Economic Growth and Innovation, Financial Services Research Initiative
    JEL: E42
    Date: 2014–11

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