nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒01‒03
118 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetarism rides again? US monetary policy in a world of Quantitative Easing By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  3. Monetary Policy, Incomplete Asset Markets, and Welfare in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  4. Effectiveness and Transmission of the ECB’s Balance Sheet Policies By JEF BOECKX; MAARTEN DOSSCHE; GERT PEERSMAN
  5. Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka By Ghazanchyan, Manuk
  6. Homeownership, Informality and the Transmission of Monetary Policy By Uras, R.B.; Elgin, C.
  7. Implementing monetary policy in a fragmented monetary union. By M. Vari
  8. Endogenous Liquidity and the Business Cycle By Saki Bigio
  9. Monetary and macroprudential policy with multi-period loans By Michal Brzoza-Brzezina; Paolo Gelain; Marcin Kolasa
  10. Informational Effects of Monetary Policy By Giuseppe Ferrero; Marcello Miccoli; Sergio Santoro
  11. What are the Characteristics of Japan's Aggregate Wage Dynamics?: An Empirical Study on the New Keynesian Wage Phillips Curve for Japan and the US By Ichiro Muto; Kohei Shintani
  12. The Simple Analytics of Helicopter Money:Why It Works – Always By Buiter, Willem H.
  13. Employment protection in dual labor markets: Any amplification of macroeconomic shocks? By Lochner, Benjamin
  14. Noisy News in Business Cycles By Mario Forni; Luca Gambetti; Marco Lippi; Luca Sala
  15. Employment Adjustment and Part-time Jobs: The US and the UK in the Great Recession By Daniel Borowczyk-Martins; Etienne Lalé
  16. Interaction Between Monetary Policy and Regulatory Capital Requirements By Du, Chuan; Miles, David K
  17. The Joint Services of Money and Credit By William Barnett; Liting Su
  18. The 2015 economic outlook and the implications for monetary policy By Dudley, William
  19. When does a central bank’s balance sheet require fiscal support? By Del Negro, Marco; Sims, Christopher A.
  20. Estimating a DSGE model with Limited Asset Market Participation for the Euro Area By Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
  21. Monetary Policy and Real Borrowing Costs at the Zero Lower Bound By Gilchrist, Simon; López-Salido, J David; Zakrajsek, Egon
  22. How do oil price forecast errors impact inflation forecast errors? An empirical analysis from French and US inflation forecasts. By F. Bec; A. De Gaye
  23. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
  24. Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspective By Michael Bordo; Pierre Siklos
  25. The a/simmetrie annual macroeconometric model of the Italian economy: structure and properties By Alberto Bagnai; Christian Alexander Mongeau Ospina
  26. Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy By Makoto Nirei; Sanjib Sarker; Kazufumi Yamana
  27. The Effectiveness of Non-Standard Monetary Policy Measures: Evidence from Survey Data By Altavilla, Carlo; Giannone, Domenico
  28. Macroeconomics after the crisis – hedgehog or fox? By Miller, Marcus; Zhang, Lei
  29. Exchange-Rate Overshooting: An Analysis for Intermediate Macro By Fidelina B. Natividad-Carlos
  30. A compact open economy DSGE model for Switzerland By Barbara Rudolf; Mathias Zurlinden
  31. The Inflation Bias under Calvo and Rotemberg Pricing. By Leith, Campbell; Liu, Ding
  32. On the Structural Interpretation of the Smets-Wouters “Risk Premium” Shock By Fisher, Jonas D. M.
  33. The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates By Dixon, R.; Lim, G.C.; van Ours, J.C.
  34. East Asian Financial Cycles: Asian vs. Global Financial Crises By Akira Kohsaka; Jun-ichi Shinkai
  35. The Transmission Mechanism in Good and Bad Times By Mumtaz, Haroon; Surico, Paolo
  36. Does Inflation Slow Long-Run Growth in India? By Kamiar Mohaddes; Mehdi Raissi
  37. Heterogeneity in Macroeconomics and the Minimal Econometric Interpretation for Model Comparison By Marco Cozzi
  38. Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates By Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
  39. Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data By Valerie A. Ramey; Sarah Zubairy
  40. Growth-cycle phases in China’s provinces: A panel Markov-switching approach By Roberto Casarin; Komla Mawulom Agudze; Monica Billio; Eric Girardin
  41. Does Pro-cyclical Aid Lead to Pro-cyclical Fiscal Policy? An Empirical Analysis for Sub-Saharan Africa By Jean-Louis COMBES; Rasmané OUEDRAOGO
  42. Corporate Debt Structure and Economic Recoveries By Thomas Grjebine; Urszula Szczerbowicz; Fabien Tripier
  43. FISCO: Modelo Fiscal para Colombia By Hernán Rincón; Diego Rodríguez; Jorge Toro; Santiago Téllez
  44. The New Keynesian Framework for a Small Open Economy with Structural Breaks: Empirical Evidence from Peru By Walter Bazan-Palomino; Gabriel Rodriguez
  45. Bangladesh Development Update, October 2014 By Zahid Hussain; Nadeem Rizwan
  46. Inflation Forecasts and Forecaster Herding: Evidence from South African Survey Data By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  47. Time Preference Shocks By Harashima, Taiji
  48. Collaterals and Growth Cycles with Heterogeneous Agents By Stefano Bosi; Mohanad Ismaël; Alain Venditti
  49. Finance and crisis: Marxian, institutionalist and circuitist approaches By Argitis, Georgios; Evans, Trevor; Michell, Jo; Toporowski, Jan
  50. Spillover Effects in Government Bond Spreads: Evidence from a GVAR Model By Britta Niehof
  51. Monetary Policy and the State of the Economy By John B. Taylor
  52. Government Debt Management: The Long and the Short of It By Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
  53. Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans By Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
  54. Consumer Attitudes and the Epidemiology of Inflation Expectations By Ehrmann, M.; Pfajfar, D.; Santoro, E.
  55. The Ins and Arounds in the U.S. Housing Market By Bachmann, Rüdiger; Cooper, Daniel
  56. Structural change, de-industrialization and inflation inertia in Brazil By André Roncaglia de Carvalho
  57. Taxing Top Earners: A Human Capital Perspective By Alejandro Bladel; Mark Huggett
  58. Labor mobility and fi?scal policy in a currency union By Angelo Baglioni; Andrea Boitani; Massimo Bordignon
  59. The Impact of Uncertainty Shocks on the Job-Finding Rate and Separation Rate By Markus Riegler
  60. Embedding Liquidity Information in Estimating Potential Output By Stefano Scalone
  61. Optimal Life Cycle Unemployment Insurance By Michelacci, Claudio; Ruffo, Hernán
  62. Estimating overidentified, non-recursive, time varying coefficients structural VARs By Canova, Fabio; Pérez Forero, Fernando J.
  63. Banks Are Where The Liquidity Is By Hart, Oliver; Zingales, Luigi
  64. El capital en el siglo XXI de Thomas Piketty By Estrada, Fernando
  65. Gender Gaps and the Rise of the Service Economy By Ngai, Liwa Rachel; Petrongolo, Barbara
  66. Effects of Labor Taxes and Unemployment Compensation on Labor Supply in a Search Model with an Endogenous Labor Force By Been-Lon Chen; Chih-Fang Lai
  67. The Curse of Inflation By Erik Eyster; Kristof Madarasz; Pascal Michaillat
  68. Remarks on Monetary Policy Challenges By John B. Taylor
  69. Sovereign ratings and their asymmetric response to fundamentals By Carmen Broto; Luis Molina
  70. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  71. The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates By Dixon, Robert; Lim, Guay C.; van Ours, Jan C
  72. The effect of Credit Conditions on the Dutch Housing Market By Marc Francke; Alex van de Minne; Johan Verbruggen
  74. Why MENA Needs a Finance and Private Sector Marshall Plan By Stefanie Ridenour
  75. Yield curve and Recession Forecasting in a Machine Learning Framework By Theophilos Papadimitriou; Periklis Gogas; Maria Matthaiou; Efthymia Chrysanthidou
  76. Exceptional policies for exceptional times: The ECB's response to the rolling crises of the Euro Area, and how it has brought us towards a new grand bargain By Pill, Huw; Reichlin, Lucrezia
  77. What Happened in Cyprus? By Michaelides, Alexander
  78. Aid, political business cycles and growth in Africa By Chiripanhura, Blessing M.; Nino-Zarazua, Miguel
  79. Unemployment Transitions to Stable and Unstable Jobs Before and During the Crisis By Nagore Garcia, A.; van Soest, A.H.O.
  80. 'Optimal Fiscal Management of Commodity Price Shocks' By Pierre-Richard Agénor
  81. A Review of Recent Monetary Policy By John B. Taylor
  82. How Darwinian Should an Economy Be? By Saint-Paul, Gilles
  83. An international cohort comparison of size effects on job growth By Anyadike-Danes, Michael; Bjuggren, Carl-Magnus; Gottschalk, Sandra; Hölzl, Werner; Johansson, Dan; Maliranta, Mika; Myrann, Anja
  84. The macroeconomics of PAYG pension schemes in an aging society By artige, LIONEL; CAVENAILE, Laurent; PESTIEAU, Pierre
  85. Tax evasion and Prospect Theory in a OLG economy By Francesco Busato; Francesco Giuli; Enrico Marchetti
  86. Monetary Integration in SADC: Assessment of Policy Coordination and Real Effective Exchange Rate Stability By Mulatu F. Zehirun; Marthinus C. Breitenbach; Francis Kemegue
  87. Incidental Bequests: Bequest Motives and the Choice to Self-Insure Late-Life Risks By Lee M. Lockwood
  88. Optimal contracts, aggregate risk and the financial accelerator By Fuerst, Timothy; Carlstrom, Charles; Paustian, Matthias
  89. Job creation, firm creation, and de novo entry By Geurts, Karen; Van Biesebroeck, Johannes
  90. The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps By Karel Havik; Kieran Mc Morrow; Fabrice Orlandi; Christophe Planas; Rafal Raciborski; Werner Roeger; Alessandro Rossi; Anna Thum-Thysen; Valerie Vandermeulen
  91. Genuine Saving and Conspicuous Consumption By Aronsson, Thomas; Johansson-Stenman, Olof
  92. Heterogeneous Agents, the Financial Crisis and Exchange Rate Predictability By Buncic, Daniel; Piras, Gion Donat
  93. The Euro Area Crisis: Politics over Economics By Orphanides, Athanasios
  94. Technology Diffusion: Measurement, Causes and Consequences By Comin, Diego; Mestieri, Martí
  95. The Rise of the Machines: Automation, Horizontal Innovation and Income Inequality By Hemous, David; Olsen, Morten
  96. How to Measure Public Finance Consolidation By Viktor Novysedlák; Erik Bugyi
  97. Long-Term Asset Price Volatility and Macroeconomic Fluctuations By Manuel Santos; Miguel Iraola
  98. The Effects of Productivity Gains in Asian Emerging Economies: A Global Perspective By Taya Dumrongrittikul; Heather Anderson; Farshid Vahid
  99. Making Do With Less: Working Harder During Recessions By Edward P. Lazear; Kathryn L. Shaw; Christopher Stanton
  100. Public Spending Reviews: design, conduct, implementation By Caroline Vandierendonck
  101. Inside and Outside Collateral: Implications for Financial Market Instability By Russell Cooper; Frédéric Boissay
  102. How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  103. Response of the Arab Donors to the Global Financial Crisis and the Arab Spring By Mustapha Rouis
  104. Credit Booms, Banking Crises, and the Current Account By Scott Davis; Adrienne Mack; Wesley Phoa; Anne Vandenabeele
  105. Modeling dynamics of metal price series via state space approach with two common factors By Golosnoy, Vasyl; Rossen, Anja
  106. A Bayesian MIDAS Approach to Modeling First and Second Moment Dynamics By Pettenuzzo, Davide; Timmermann, Allan G; Valkanov, Rossen
  107. A one-off wealth levy? Assessing the pros, the cons and the importance of credibility By Kempkes, Gerhard; Stähler, Nikolai
  108. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  109. Higher moments of MSVARs and the business cycle By Alexander Karalis Isaac
  110. May the Soul of the IFS Financial System Definition RIP in Developing Countries By Asongu Simplice
  111. Operational Risk Governance: The Basel Approach By Afanasyeva, Olga; Riabichenko, Dmitry
  112. Impulse response matching estimators for DSGE models By Guerron-Quintana, Pablo; Inoue, Atsushi; Kilian, Lutz
  113. Sharing information on lending decisions: an empirical assessment By Ugo Albertazzi; Margherita Bottero; Gabriele Sene
  114. The role of sponsor and external management on the capital structure of Asian-Pacific REITs: the case of Australia, Japan, and Singapore By Chen, Dong; Gao, Yanmin; Kaul, Mayank; Leung, Charles Ka Yui; Tsang, Desmond
  116. Comparing Consumption-based Asset Pricing Models: The Case of an Asian City By Kwan, Yum K.; Leung, Charles Ka Yui; Dong, Jinyue
  117. Socio-economic and environmental impacts of Match 2011 earthquake, tsunami and Fukushima nuclear accident in Japan By Bachev, Hrabrin
  118. Fraktionale Kointegrationsbeziehungen zwischen Euribor-Zinssätzen By Dechert, Andreas

  1. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.
    Keywords: crises; DSGE model; financial frictions; fiscal multiplier; indirect inference; monetary policy; money supply; QE; zero bound
    JEL: C1 E3 E44 E52
    Date: 2014–11
  2. By: Milan Marković
    Abstract: The aim of this research is understanding role of the National bank of Serbia in maintaining monetary stability. Monetary stability means the achievement of low and stable inflation rate. Through the instruments of monetary policy, the central bank seeks to achieve the inflation target, in order to save macroeconomic stability. The National bank of Serbia works proceeding from the fundamental determinants of the increase in the general price level in Serbia. Due to the highest inflation rates in the region, it is necessary to constantly review the role of the National bank of Serbia in regulating this disorder.
    Keywords: National Bank of Serbia, monetary policy, inflation
    JEL: E31 E52 E58
    Date: 2014–04
  3. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University)
    Abstract: We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.
    Keywords: Small open economy, DSGE, Welfare comparison, Incomplete financial market, Ramsey policy, Exchange rate regime
    JEL: E42 E44 E52 F31 F41 G15
    Date: 2014–12
    Abstract: We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output are smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized.
    Keywords: unconventional monetary policy, ECB balance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–07
  5. By: Ghazanchyan, Manuk
    Abstract: In this paper we examine the channels through which innovations to policy variables— policy rates or monetary aggregates—affect such macroeconomic variables as output and inflation in Sri Lanka. The effectiveness of monetary policy instruments is judged through the prism of conventional policy channels (money/interest rate, bank lending, exchange rate and asset price channels) in VAR models. The timing and magnitude of these effects are assessed using impulse response functions, and through the pass-through coefficients from policy to money market and lending rates. Our results show that (i) the interest rate channel (money view) has the strongest Granger effect (helps predict) on output with a 0.6 percent decrease in output after the second quarter and a cumulative 0.5 percent decline within a three-year period in response to innovations in the policy rate; (ii) the contribution from the bank lending channel is statistically significant (adding 0.2 percentage point to the baseline effect of policy rates) in affecting both output and prices but with a lag of about five quarters for output and longer for prices; and (iii) the exchange rate and asset price channels are ineffective and do not have Granger effects on either output or prices.
    Keywords: Keywords: Monetary Policy, Central Bank Policies, Financial Markets, Sri Lanka
    JEL: D53 E52 E58 F41
    Date: 2014–10–22
  6. By: Uras, R.B. (Tilburg University, Center For Economic Research); Elgin, C.
    Abstract: Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.
    Keywords: Cash-In-Advance,; Informality; Cross-Country Data;; Monetary Transmission.
    JEL: E26 E41 E44
    Date: 2014
  7. By: M. Vari
    Abstract: This paper shows how interbank market fragmentation disrupts monetary policy implementation. Fragmentation is defined as the situation where some banks are cut from the interbank loan market. The paper incorporates fragmentation in an otherwise standard theoretical model of monetary policy implementation, where profit maximizing banks, subject to reserve requirements, borrow and deposit funds at a central bank. It shows that in the presence of fragmentation, excess liquidity arises endogenously and the interbank rate declines below the central bank main rate. The interbank rate is then unstable. The paper documents that this is what happened in the Euro-Area since 2008. The model is also well suited to analyze unconventional monetary policy measures.
    Keywords: Fragmentation, Excess liquidity, interbank market, TARGET2 imbalances.
    JEL: E42 E43 E52 E58 F32
    Date: 2014
  8. By: Saki Bigio (Columbia Business School)
    Abstract: I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession.
    Keywords: Liquidity, Asymmetric Information, Business Cycles
    JEL: D82 E32 E44 G01 G21
    Date: 2014–11
  9. By: Michal Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Paolo Gelain (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    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 possibility for the collateral constraint to become slack - to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multiperiod contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities.
    Keywords: Multi-period contracts, Monetary policy, Macroprudential policy
    JEL: E44 E51 E52
    Date: 2014–11–27
  10. By: Giuseppe Ferrero (Bank of Italy); Marcello Miccoli (Bank of Italy); Sergio Santoro (Bank of Italy)
    Abstract: We analyse a simplified New-Keynesian model with an unobserved aggregate cost-push shock in which firms and the central bank have different information about the shock. We consider a linear policy rule where a pure inflation targeting central bank decides how much to react to the shock given its information. In this framework we show that monetary policy performs both an allocational and an informational role, the latter due to firms extracting information on the aggregate shock from the monetary policy tool. When the informational role is present, optimal monetary policy is more cautious, that is, it responds less to the shock than the perfect information benchmark. A more cautious reaction to the shock implies that firms make more effective use of their private information and the endogenous information coming from the aggregate price in order to make inferences about the shock.
    Keywords: imperfect information, endogenous information, learning, monetary policy
    JEL: D83 E52 E58
    Date: 2014–10
  11. By: Ichiro Muto (Bank of Japan); Kohei Shintani (Bank of Japan)
    Abstract: We present an empirical analysis on the New Keynesian Wage Phillips Curve (NKWPC) as derived by Gali (2011) using data for Japan and the US. NKWPC provides some theoretical insights on the relationship between wage inflation and the unemployment rate. We find that the empirical performance of Japan's NKWPC is generally superior, and that the slope of Japan's NKWPC is still much steeper than that of the US, although it has flattened in recent years. These results suggest that wages are less sticky in Japan. Taking into account the impact of price inflation on wage dynamics, we find that inflation indexation plays a key role in the US, but is less important in Japan. Analysis of recent data indicates that in both countries the role of inflation indexation is smaller than before. This result might be influenced by low and stable inflation over the past few decades.
    Keywords: Wage; Unemployment rate; New Keynesian theory; Phillips curve
    JEL: E24 E31 E32
    Date: 2014–12–01
  12. By: Buiter, Willem H.
    Abstract: This paper aims to provide a rigorous analysis of Milton Friedman’s famous parable of the ‘helicopter’ drop of money. A helicopter drop of money is a permanent/irreversible increase in the nominal stock of fiat base money with a zero nominal interest rate, which respects the intertemporal budget constraint of the consolidated Central Bank and fiscal authority/Treasury – the State. An example would be a temporary fiscal stimulus (say a one-off transfer payment to households, as in Friedman’s example), funded permanently through an increase in the stock of base money. It could also be a permanent increase in the stock of base money through an irreversible open market purchase by the Central Bank of non-monetary sovereign debt held by the public – that is, QE. The reason is that QE, viewed as an irreversible or permanent purchase of non-monetary financial assets by the Central Bank funded through an irreversible or permanent increase in the stock of base money, relaxes the intertemporal budget constraint of the State. Future taxes will have to be cut or public spending increased. There are three conditions that must be satisfied for helicopter money as defined here to always boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will fiat base money be willingly held despite being dominated as a store of value by non-monetary assets with a positive risk-free nominal interest rate. Second, fiat base money is irredeemable: it is view as an asset by the holder but not as a liability by the issuer. This is necessary for helicopter money to work even in a pure liquidity trap, with risk-free nominal interest rates at zero for all maturities. Third, the price of money is positive. The paper shows that, when the State can issue unbacked, irredeemable fiat base money with a zero nominal interest rate, which can be produced at zero marginal cost and is held in positive amounts by households and other private agents despite the availability of risk-free securities carrying a positive nominal interest rate, there always exists a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, inflation below target, ‘lowflation’, ‘subflation’, liquidity traps and the deficient demand-driven version of secular stagnation are therefore unnecessary. They are policy choices.
    Keywords: central bank; helicopter money; liquidity trap; quantitative easing; seigniorage
    JEL: E2 E4 E5 E6 H6
    Date: 2014–06
  13. By: Lochner, Benjamin
    Abstract: Although labor market duality is a widespread phenomenon in many OECD countries, there is yet no research consent on the effects of duality on labor market dynamics and performance. Against this background, using a New Keynesian model with unemployment, this paper theoretically investigates the importance of labor market duality on labor market volatilities. The new insight is that duality leads to a non-linear reaction of unemployment volatility for both supply and demand shocks. A subsequent empirical panel data analysis confirms the model predictions. Uncovering the non-linearity in unemployment volatility helps reconciling previous divergent research results.
    Keywords: Dual Labor Market,Employment Protection,Firing Costs,Unemployment
    JEL: E24 E32 E52 J23 J41 J63
    Date: 2014
  14. By: Mario Forni; Luca Gambetti; Marco Lippi; Luca Sala
    Abstract: We investigate the role of "noise" shocks as a source of business cycle fl uctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for quite a sizable fraction of their prediction error variance at business cycle horizons. JEL classification: C32, E32, E62. Keywords: Nonfundamentalness, SVAR, Imperfect Information, News, Noise, Business cycles.
    Date: 2014
  15. By: Daniel Borowczyk-Martins (Departement d'Economie de Sciences Po); Etienne Lalé (École Nationale de la Statistique et de l'Administration Économique (ENSAE))
    Abstract: We document a new fact about the cyclical behavior of aggregate hours. Using microdata for the US and the UK, we show that changes in hours per worker are driven by fluctuations in part-time employment, which are in turn explained by the cyclical behavior of transitions between full-time and part-time jobs. This reallocation occurs almost exclusively within firms and entails large changes in employees’ schedules of working hours. These patterns are consistent with the view that employers adjust the hours of their employees in response to shocks, and they partly account for the poor recovery that followed the Great Recession.
    Keywords: Employment; Hours; Part-time Work; Great Recession.
    JEL: E24 E32 J21
    Date: 2014–11
  16. By: Du, Chuan; Miles, David K
    Abstract: Banks’ behaviour can be influenced by both monetary policy and regulatory capital requirements. This paper explores the interaction between these two policy tools in promoting better lending decisions by banks. We develop and calibrate a model of bank lending to examine what an optimal combination of monetary policy and regulatory capital requirements might look like. We find that as prudential standards strengthen globally in the aftermath of the financial crises, it is likely that the that equilibrium level of central bank policy rates should be lower than they had been prior to the crisis.
    Keywords: capital requirements; macro prudential policy; monetary policy
    JEL: E52 E58 G21 G28
    Date: 2014–10
  17. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas)
    Abstract: While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. The underlying assumption is that credit card services are not weakly separable from the services of monetary assets. Carried forward rotating balances are not included, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. In the transmission mechanism of central bank policy, our results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit. We do not explore those deeper issues in this paper, which focuses on measurement..
    Keywords: credit cards, money, credit, aggregation theory, index number theory, Divisia index, risk, asset pricing.
    JEL: C43 E01 E3 E40 E41 E51 E52 E58
    Date: 2014–12
  18. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at Bernard M. Baruch College, New York City.
    Keywords: energy prices; monetary policy normalization; lift-off; interest rate paid on excess reserves (IOER); overnight reverse repo repurchase facility (ON RRP); Taylor Rule; Fed put
    JEL: E20 G10 G18
    Date: 2014–12–01
  19. By: Del Negro, Marco (Federal Reserve Bank of New York); Sims, Christopher A.
    Abstract: Using a simple general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support—a within-government transaction—is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank’s balance sheet is merged with that of the rest of the government.
    Keywords: central bank’s balance sheet; solvency; monetary policy
    JEL: E58 E59
    Date: 2014–11–01
  20. By: Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
    Abstract: We estimate a medium scale DSGE model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent financial crisis. In comparison with the representative households counterpart, the LAMP model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also find that the LAMP model leads to conclusions about the main determinants of EMU business cycle that are substantially different from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE models of the Euro area.
    Keywords: DSGE, Limited Asset Market Participation, Bayesian Estimation, Euro Area, Business Cycle
    JEL: C11 C13 C32 E21 E32 E37
    Date: 2014–11
  21. By: Gilchrist, Simon; López-Salido, J David; Zakrajsek, Egon
    Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
    Keywords: corporate bond yields; forward guidance; LSPAs; mortgage interest rates; term premia; Unconventional monetary policy
    JEL: E43 E52
    Date: 2014–05
  22. By: F. Bec; A. De Gaye
    Abstract: This paper proposes an empirical investigation of the impact of oil price forecast errors on inflation forecast errors for two different sets of recent forecasts data: the median of SPF inflation forecasts for the U.S. and the Central Bank inflation forecasts for France. Mainly two salient points emerge from our results. First, there is a significant contribution of oil price forecast errors to the explanation of inflation forecast errors, whatever the country or the period considered. Second, the pass-through of oil price forecast errors to inflation forecast errors is multiplied by around 2 when the oil price volatility is large.
    Keywords: Forecast errors, Inflation rate, Oil price, Threshold model.
    JEL: C22 E31 E37
    Date: 2014
  23. By: Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
    Abstract: We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck' and ‘good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.
    Keywords: Great Recession; Financial Crisis; Zero Lower Bound; Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation
    Date: 2014–11
  24. By: Michael Bordo; Pierre Siklos
    Abstract: This paper examines the historical evolution of central bank credibility using both historical narrative and empirics for a group of 16 countries, both advanced and emerging. It shows how the evolution of credibility has gone through a pendulum where credibility was high under the classical gold standard before 1914 before being lost and not fully regained until the 1980s. This characterization does not, however, seem to apply to the monetary history in the emerging markets examined in the paper. Nevertheless, credibility in all the economies examined has been enhanced in recent decades thanks to the adoption of inflation targeting. However, the recent financial crisis and the call for central banks to focus more on financial stability relying on macro prudential regulation may pose significant challenges for central bank credibility.
    JEL: C32 C36 E31 E58 N10
    Date: 2014–11
  25. By: Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University); Christian Alexander Mongeau Ospina (Italian Association for the Study of Economic Asymmetries)
    Abstract: We develop a medium-sized annual macroeconometric model of the Italian economy. The theoretical framework is the usual AS/AD model, where the demand side is specified along Keynesian lines, and the supply side adopts a standard neoclassical technology, with Harrod neutral technological progress. The empirical specification consists of 140 equations, of which 29 stochastic, with 55 exogenous variables. The model structure presents some distinct features, among which the disaggregation of the foreign trade block in seven trade partner regions (thus representing the bilateral imports and exports flows in function of the regional GDP and of the bilateral real exchange rates), and the explicit modelling of the impact of labour market reforms on the wage setting mechanism (which explains the shift in the Phillips curve observed over the last two decades). The model is conceived for the analysis of the medium- to long-run developments of the Italian economy, and as such it adopts econometric methods that allow the researcher to quantify the structural long-run parameters. The equation are estimated over a large sample of annual data (1960-2013), using cointegration techniques that take into account the possible presence of structural breaks in the model parameters. The model overall tracking performance is good. We perform some standard policy experiments in order to show the model’s response to usual shocks: an increase in public expenditure, an exchange rate devaluation, a slowdown in world demand, and an increase in oil prices. The shocks are evaluated by ex post simulation and their impact tracked over a five-year span. The dynamic multipliers appear to be consistent with the economic intuition.
    Keywords: Model construction and estimation, Simulation methods, Quantitative policy modeling, Keynesian model, Fiscal policy, Empirical studies of trade, Open economy macroeconomics, Macroeconomic issues of monetary unions, Forecasting and simulation.
    JEL: C51 C53 C54 E12 E62 F14 F41 F47
    Date: 2014–11
  26. By: Makoto Nirei (Institute of Innovation Research, Hitotsubashi University); Sanjib Sarker (Department of Economics, Utah State University); Kazufumi Yamana (Graduate School of Economics, Hitotsubashi University)
    Abstract: This study examines the response of aggregate consumption to active labor market policies that reduce unemployment. We develop a dynamic general equilibrium model with heterogeneous agents and uninsurable unemployment as well as policy regime shocks to quantify the consumption effects of policy. By implementing numerical experiments using the model, we demonstrate a positive effect on aggregate consumption even when the policy serves as a pure transfer from the employed to the unemployed. The positive effect on consumption results from the reduced precautionary savings of the households who indirectly benefit from the policy by a decreased unemployment hazard in future.
    Keywords: Time-varying idiosyncratic risk; unemployment risk; precautionary saving; regimeswitching fiscal policy; transfers
    JEL: E21 H53 J08
    Date: 2014–12
  27. By: Altavilla, Carlo; Giannone, Domenico
    Abstract: We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures undertaken by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using individual survey data, we analyse the changes in forecasting of bond yields around the announcement and implementation dates of non-standard monetary policies. The results indicate that bond yields are expected to drop significantly for at least one year after the announcement and the implementation of accommodative policies.
    Keywords: Forward Guidance; Large Scale Asset Purchases; Operation Twist; Quantitative Easing; Survey of Professional Forecasters; Tapering
    JEL: E58 E65
    Date: 2014–06
  28. By: Miller, Marcus; Zhang, Lei
    Abstract: Following the financial crisis of 2008/9, there has been renewed interest in what Greenwald and Stiglitz dubbed ‘pecuniary externalities’. Two that affect borrowers and lenders balance sheets in pro-cyclical fashion are described, along with measures that might help curb their destabilising effects. These ‘pecuniary externalities’ can be thought of as the unintended macroeconomic consequences of market conventions designed to check moral hazard. The issue of moral hazard is explicitly discussed in the context of a simple model of insurance, where there is no Arrow Debreu equilibrium to allocate risk efficiently; but there is a ‘noisy’ mixed-strategy Nash equilibrium. Our simple example is designed to reinforce the point made by Greenwald and Stiglitz (1986) – that when externalities are present, leaving things to the market may not be ‘constrained Pareto efficient’. While Central Bank policy may have shifted radically now that stability is an explicit objective of policy, the same cannot be said of the econometric models being used for macroeconomic forecasting – even those in Central Banks!
    Keywords: adverse selection; externalities; financial regulation; macro-prudential regulation; moral hazard
    JEL: E44 E58 G20 G21 G22 G28
    Date: 2014–05
  29. By: Fidelina B. Natividad-Carlos (School of Economics, University of the Philippines Diliman)
    Abstract: While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a background on dynamic macroeconomic analysis. This paper attempts to provide a graphical device – a panel IS*-LM* diagram – which can be used to teach intermediate macroeconomics students about Dornbusch’s idea of exchange rate dynamics. In addition, it also attempts to bridge the gap between undergraduate teaching and graduate teaching of exchange rate dynamics by showing the correspondence between the economy’s adjustment path in the IS*-LM* diagram and that in the phase diagram.
    Keywords: undergraduate teaching, graduate teaching, exchange rates, exchange rate dynamics, sticky prices, interest parity, open economy macroeconomics, fiscal policy, monetary policy
    JEL: A23 F31 F41
    Date: 2014–10
  30. By: Barbara Rudolf; Mathias Zurlinden
    Abstract: This study describes a compact dynamic stochastic general equilibrium (DSGE) model fitted for the Swiss economy with Bayesian techniques. The model features two economies (small home economy, large foreign economy), five types of agents (households, producers of tradables, producers of non-tradables, retailers, monetary authority), nominal and real frictions, and a number of shocks. The study gives details on the specification and the estimation of the model. The evaluation is based on impulse responses and variance decompositions, a DSGE-VAR to assess misspecifications, and results of forecasting experiments. The model is one of the tools used for policy analysis and forecasting at the Swiss National Bank.
    Keywords: DSGE model, open economy, Bayesian estimation, forecasting, monetary policy
    JEL: E30 E40 E50
    Date: 2014
  31. By: Leith, Campbell; Liu, Ding
    Abstract: New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorphic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench-mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically significant exhibits far greater welfare costs of inflation. The rates of inflation observed under this policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous.
    Keywords: New Keynesian Model, Monetary Policy, Rotemberg Pricing, Calvo Pricing, In ation Bias, Time-Consistent Policy,
    Date: 2014
  32. By: Fisher, Jonas D. M. (Federal Reserve Bank of Chicago)
    Abstract: This article shows that the "risk premium" shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term US Treasury securities. Several implications of this interpretation are discussed.
    Keywords: Smets-Wouters model; safe and liquid assets; money demand; risk premium; shock; New Keynesian model; DSGE; flight-to-quality; liquidity preference
    JEL: E00 E1 E3 E4 E5 G1
    Date: 2014–10–22
  33. By: Dixon, R.; Lim, G.C.; van Ours, J.C. (Tilburg University, Center For Economic Research)
    Keywords: net labour market flows; unemployment rate; participation rate
    JEL: E17 E24 J21 J64
    Date: 2014
  34. By: Akira Kohsaka (Professor, School of International Studies, Kwansei Gakuin University); Jun-ichi Shinkai (Specially Appointed Researcher, Osaka School of International Public Policy, Osaka University)
    Abstract: We examine the role of financial shocks in business cycles in general and in financial crises in particular in East Asia (Indonesia, Korea, Malaysia and Thailand) since the 1990s. Estimating a Financial Conditions Index, we found that financial shocks explain most of business downturns in all the economies in the Asian Financial Crisis (AFC) in 1997-98, but that the effects of financial shocks are diverse across economies in the Global Financial Crisis (GFC) in 2008-09. In the GFC, the financial shocks played a relatively minor role in Indonesia, Malaysia and Thailand, while it played a similarly dominant role in Korea. Among individual financial channels, risk factors related to volatile external financial inflows were most significant in all the economies in the AFC and in Korea in the GFC.
    Keywords: Business cycles, Financial Conditions Index (FCI), Asian Financial Crisis, Global Financial Crisis, East Asia
    JEL: E32 E42 E44
    Date: 2014–11
  35. By: Mumtaz, Haroon; Surico, Paolo
    Abstract: Does the transmission of economic policies and structural shocks vary with the state of the economy? We answer this question using a strategy based on quantile regressions, which account for both endogeneous regressors and state-dependent parameters. An application to U.S. real activity and interest rate reveals pervasive asymmetries in the propagation mechanism of economic disturbances across good and bad times. During periods in which real activity is above its conditional average, the estimates of the degree of forward-lookingness and interest rate semi-elasticity are significantly larger (in absolute value) than the estimates associated with below-average periods. Results are robust to alternative estimation strategies to model state-dependent parameters.
    Keywords: asymmetric transmission mechanism; consumption; state-dependence
    JEL: E21 E32 E52
    Date: 2014–07
  36. By: Kamiar Mohaddes; Mehdi Raissi
    Abstract: This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989-?2013, and use the cross-sectionally augmented distributed lag (CS-DL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation? to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggests the need for the Reserve Bank of India to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.
    Keywords: India, inflation, growth, threshold effects, cross-sectional heterogeneity and dependence.
    JEL: C23 E31 O40
    Date: 2014–11–28
  37. By: Marco Cozzi (Queen's University)
    Abstract: This paper formally compares the fit of various versions of the incomplete markets model with aggregate uncertainty, relying on a simple Bayesian empirical framework. The models differ in the degree of households' heterogeneity, with a focus on the role of preferences. For every specification, empirically motivated priors for the parameters are postulated to obtain the models' predictive distributions, which are interpreted as being the distributions of population moments. These are in turn contrasted with the posterior distributions of the same moments obtained from an atheoretical (Bayesian) econometric model. It is shown that aggregate data on consumption and income contain valuable information to determine which models are more likely to have generated the data. In particular, despite its generality, a model with both risk aversion and discount factor heterogeneity displays a very low marginal likelihood, and should not be employed for the design of macroeconomic policies and welfare analysis. It is also found that the other models display similar posterior odds, with the Bayes factors ranging between 1 and 3. Finally, it is shown that practitioners in the field should carefully calibrate the values of the unemployment rate in booms and expansions, as they heavily affect the autocorrelation of aggregate consumption and the correlation between consumption and income. This finding suggests that the magnitude of welfare effects computations is likely to be influenced considerably by these two parameters.
    Keywords: Incomplete Markets, Heterogeneous Agents, Unemployment Risk, Business Cycles, Calibration, Bayesian Methods, Minimal Econometric Intepretation, Model Comparison
    JEL: E21 C68 C63 E32 D52 D58
    Date: 2014–11
  38. By: Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
    Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies
    Keywords: bank lending; monetary policy; structural panel VAR
    JEL: E5 O11 O16
    Date: 2014–11
  39. By: Valerie A. Ramey; Sarah Zubairy
    Abstract: This paper investigates whether U.S. government spending multipliers differ according to two potentially important features of the economy: (1) the amount of slack and (2) whether interest rates are near the zero lower bound. We shed light on these questions by analyzing new quarterly historical U.S. data covering multiple large wars and deep recessions. We estimate a state-dependent model in which impulse responses and multipliers depend on the average dynamics of the economy in each state. We find no evidence that multipliers differ by the amount of slack in the economy. These results are robust to many alternative specifications. The results are less clear for the zero lower bound. For the entire sample, there is no evidence of elevated multipliers near the zero lower bound. When World War II is excluded, some point estimates suggest higher multipliers during the zero lower bound state, but they are not statistically different from the normal state. Our results imply that, contrary to recent conjecture, government spending multipliers were not necessarily higher than average during the Great Recession.
    JEL: E52 E62 N12
    Date: 2014–11
  40. By: Roberto Casarin (Department of Economics, University of Venice Cà Foscari); Komla Mawulom Agudze (Department of Economics, University of Venice Cà Foscari); Monica Billio (Department of Economics, University of Venice Cà Foscari); Eric Girardin (Aix-Marseille University, CNRS & EHESS)
    Abstract: This paper analyses features of 28 provincial growth-cycles in China’s economy from March 1989 to July 2009. We study the multivariate synchronization of provincial cycles and the selection of the number of cycles phases’ by means of panel Markov-switching models. We obtain evidence that growth cycles in China and its provinces’ are characterized by distinct episodes of ‘growth-recession’, ‘normal-growth’ and ‘rapid-growth’. We find a demarcation between coastal and interior provinces in term of level of ‘normal-growth’ and ‘rapid-growth’ rates. The results, also, show evidence supporting interior provinces catching up on coastal provinces proving efficient economic policy coordination to reduce the gap between the Chinese coastal and interior. However, in terms of concordance, coastal provinces have cycles that are more synchronized with the national cycle than the interior provinces. Thus, China’s national and subnational officials have to take further effective measures to achieve high degree of concordance between national and interior provinces. The geographic pattern of the national growth-recessions and rapid-growth periods have substantially changed over time. The number of provinces experiencing growth-recession at the middle of the nation’s growth-recession has reduced over time while the number of provinces in rapid-growth at the middle of the nation’s rapid-growth has increased over time.
    Keywords: Bayesian inference, China’s provinces, growth-cycles, multivariate-synchronization, panel Markov-switching.
    JEL: C1 C11 C15 C32 E32 E37
    Date: 2014
  41. By: Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Rasmané OUEDRAOGO
    Abstract: This paper examines the so-popular anecdote according to which pro-cyclical fiscal policies are due to pro-cyclical behavior of financing. We address the question of whether or not pro-cyclical aid leads to pro-cyclical fiscal policies in SSA recipient countries. We employed panel data techniques covering 39 SSA countries over the period 1985- 2012. We found that results depend on the type of aid: pro-cyclical bilateral aid is negatively associated to pro-cyclical fiscal policy, while pro-cyclical ODA from multilateral agencies leads to more pro-cyclical fiscal policy. This finding is robust to potential error bias, alternative specifications, additional controls and different estimation methods.
    Keywords: pro-cyclicality, fiscal policy, official development assistance, Sub-Saharan Africa
    JEL: O19 F41 F42 F35 E62 E32
    Date: 2014–11
  42. By: Thomas Grjebine; Urszula Szczerbowicz; Fabien Tripier
    Abstract: This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of twenty five economies over the period 1989-2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. The relation between the corporate debt structure and the economic recovery is maintained when controls for the developments of financial markets are introduced. A theoretical model is developed to explain this relation as the outcome of financial constraints on bank credit supply.
    Keywords: Corporate Debt;Bonds Markets;Banking;Business Cycles;Recovery;Financial Frictions
    JEL: E3 E4 G1 G2
    Date: 2014–11
  43. 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.
    Keywords: Modelo fiscal neokeynesiano DSGE, política fiscal y monetaria, canales y mecanismos de transmisión, regla fiscal estructural, estimación bayesiana, impactos macroeconómicos.
    JEL: D58 E2 E62 E63 C11 C13
    Date: 2014–12–03
  44. By: Walter Bazan-Palomino (Departamento de Economía - Pontificia Universidad Católica del Perú); Gabriel Rodriguez (Departamento de Economía - Pontificia Universidad Católica del Perú)
    Abstract: We present evidence from Peru that The New Keynesian Phillips Curve, Dynamic IS and Taylor Rule derived by GalÌ and Monacelli (2005) are unstable. The results from methodology of Bai and Perron (2003) suggest that the change of the policy rule (January-2006 and May-2009) induces a break in the ináation process (January-2008) and in the market equation (October-2008); the latter due to the existence of nominal frictions and incomplete information in the Peruvian economy. Moreover, Qu and Perron (2007) estimation rea¢ rms that there are breaks in the entire reduced system (May-2008 and May-2010). In both cases, the channel of expectations is strengthened since 2008 and it is related to changes in the monetary policy during those years. JEL Classification-JEL: C32, C51, E31
    Keywords: Structural Breaks, New Keynesian Phillips Curve, Dynamic IS, Taylor Rule
    Date: 2014
  45. By: Zahid Hussain; Nadeem Rizwan
    Keywords: Banks and Banking Reform Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth
    Date: 2014–10
  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: We use South African survey data to study whether short-term inflation forecasts are unbiased. Depending on how we model a forecaster’s information set, we find that forecasts are biased due to forecaster herding. Evidence of forecaster herding is strong when we assume that the information set contains no information on the contemporaneous forecasts of others. When we randomly allocate forecasters into a group of early forecasters who can only observe the past forecasts of others and late forecasters who can observe the contemporaneous forecasters of their predecessors, then evidence of forecaster herding weakens. Further, evidence of forecaster herding is strong and significant in times of high inflation volatility. In time of low inflation volatility, in contrast, forecaster anti-herding seems to dominate
    Keywords: inflation rate, forecasting, forecaster herding
    JEL: C53 D82 E37
    Date: 2014
  47. By: Harashima, Taiji
    Abstract: The rate of time preference (RTP) has traditionally not been regarded as an important source of economic fluctuations. In this paper, I show that it is an important factor influencing economic fluctuations because households must have an expected RTP for the representative household (RTP RH) to behave optimally. Because it is impossible for a household to know the intrinsic RTP RH, it cannot know the parameters of the structural model of the RTP RH. Without a structural model, a household must use its beliefs to generate an expected RTP RH. As a result, the expected value can change more frequently than the intrinsic RTP RH. Because households often change their beliefs about their expected future paths, economic fluctuations caused by time preference shocks also can occur more frequently in an economy than previously thought.
    Keywords: Time preference; Economic fluctuations; Business cycles; The representative household; Sustainable heterogeneity
    JEL: D90 E13 E32
    Date: 2014–11–26
  48. By: Stefano Bosi (EPEE, University of Evry); Mohanad Ismaël (University of Birzeit); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We investigate the effects of collaterals and monetary policy on growth rate dynamics in a Ramsey economy where agents have heterogeneous discount factors. We focus on the existence of business-cycle fluctuations based on self-fulfilling prophecies and on the occurrence of deterministic cycles through bifurcations. We introduce liquidity constraints in segmented markets where impatient (poor) agents without collaterals have limited access to credit. We find that an expansionary monetary policy may promote economic growth while making endogenous fluctuations more likely. Conversely, a regulation reinforcing the role of collaterals and reducing the financial market imperfections may enhance the economic growth and stabilize the economy.
    Keywords: Collaterals, heterogeneous agents, balanced growth, Endogenous fluctuations, stabilization policies
    Date: 2014–02–17
  49. By: Argitis, Georgios; Evans, Trevor; Michell, Jo; Toporowski, Jan
    Abstract: Most mainstream neoclassical economists completely failed to anticipate the crisis which broke in 2007 and 2008. There is however a long tradition of economic analysis which emphasises how growth in a capitalist economy leads to an accumulation of tensions and results in periodic crises. This paper first reviews the work of Karl Marx who was one of the first writers to incorporate an analysis of periodic crisis in his analysis of capitalist accumulation. The paper then considers the approach of various subsequent Marxian writers, most of whom locate periodic cyclical crises within the framework of longer-term phases of capitalist development, the most recent of which is generally seen as having begun in the 1980s. The paper also looks at the analyses of Thorstein Veblen and Wesley Claire Mitchell, two US institutionalist economists who stressed the role of finance and its contribution to generating periodic crises, and the Italian Circuitist writers who stress the problematic challenge of ensuring that bank advances to productive enterprises can successfully be repaid.
    Keywords: capitalism,finance,crisis
    JEL: B14 B15 B24 B25 E11 E32
    Date: 2014
  50. By: Britta Niehof (University of Marburg)
    Abstract: This paper analyses the main drivers of sovereign bond spreads in a globalised world. Specifically, we account for international spillovers of bond spreads by adding an additional driver, namely, financial markets, and allowing interactions across countries and markets. We contribute to the VAR literature by taking a global VAR approach, which encompasses international linkages and spillovers and also deals with the issue of identifcation and the large dimensionality. We find significant spillovers across countries and across markets. Moreover, we reveal that bond spreads are driven by stock markets. Furthermore, highly indebted countries react more strongely to foreign shocks than do stable economies. European bond markets are primarily driven by European shocks, whereas U.S. shocks have a higher impact on European countries that are in crisis and other non-European OECD countries. Our results demonstrate that financial market participants, central bankers, and fiscal policymakers need to be aware of global interdependencies, as bond spread volatility is driven by different factors for each country.
    Keywords: New Keynesian Model, Philipps Curve, Taylor Rule, Stochastic Differential Equations
    JEL: C02 C63 E44 E47 E52 F41
    Date: 2014
  51. By: John B. Taylor
    Abstract: This testimony before the Committee on Financial Services before the United States House of Representatives discusses the effect unconventional and more discretionary monetary policy has had on the slow economic recovery following the 2007-2009 recession.
    Date: 2014–02
  52. By: Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
    Abstract: Our aim is to provide insights into some basic facts of US government debt management by introducing simple financial frictions in a Ramsey model of fiscal policy. We find that the share of short bonds in total U.S. debt is large, persistent, and highly correlated with total debt. A well known literature argues that optimal debt management should behave very differently: long term debt provides fiscal insurance, hence short bonds should not be issued and the position on short debt is volatile and negatively correlated with total debt. We show that this result hinges on the assumption that governments buy back the entire stock of previously issued long bonds each year, which is very far from observed debt management. We document how the U.S. Treasury rarely has repurchased bonds before 10 years after issuance. When we impose in the model that the government does not buy back old bonds the puzzle disappears and the optimal bond portfolio matches the facts mentioned above. The reason is that issuing only long term debt under no buyback would lead to a lumpiness in debt service payments, short bonds help offset this by smoothing out interest payments and tax rates. The same reasoning helps explain why governments issue coupon-paying bonds. Solving dynamic stochastic models of optimal policy with a portfolio choice is computationally challenging. A separate contribution of this paper is to propose computational tools that enable this broad class of models to be solved. In particular we propose two significant extensions to the PEA class of computational methods which overcome problems due to the size of the model. These methods should be useful to many applications with portfolio problems and large state spaces.
    Keywords: Computational methods; Debt Management; Fiscal Policy; Incomplete Markets; Maturity Structure; Tax Smoothing
    JEL: C63 E43 E62 H63
    Date: 2014–12
  53. By: Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
    Abstract: This paper shows that the sovereign debt crisis and the resulting credit crunch in the periphery of the Eurozone lead to negative real effects for borrowing firms. Using a hand matched sample of loan information from Dealscan and accounting information from Amadeus, we show that firms with a higher exposure to banks affected by the sovereign debt crisis become financially constrained during the crisis. As a result, these firms have significantly lower employment growth, capital expenditures, and sales growth rates. We show that our results are not driven by country or industry-specific macroeconomic shocks or a change in the demand for credit of borrowing firms. Thus, the high interdependence of bank and sovereign health and the resulting credit crunch is one important contributor to the severe economic downturn in the southern European countries during the sovereign debt crisis.
    Keywords: credit contraction; European sovereign debt crisis; financing constraints; real effects
    JEL: E44 G21 G28
    Date: 2014–08
  54. By: Ehrmann, M.; Pfajfar, D. (Tilburg University, Center For Economic Research); Santoro, E.
    Abstract: This paper studies the formation of consumers’ infl‡ation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of infl‡ation expectations like gender, income or education also other characteristics like the household’s fi…nancial situation and its purchasing attitudes matter. Respondents with current or expected …financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger updward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about in‡flation.
    Keywords: Suvey inflation expectations; news on inflation; Information Stickiness; Consumer attitudes
    JEL: C53 D84 E31
    Date: 2014
  55. By: Bachmann, Rüdiger; Cooper, Daniel
    Abstract: In the U.S., 15 percent of households move in a given year. This result is based on data from the Panel Study of Income Dynamics on gross flows within and between the two segments of the housing market - renter-occupied properties and owner-occupied properties. The gross flows between these two segments are four times larger than the net flows. From a secular perspective, housing turnover exhibits a hump-shaped pattern between 1970 and 2000, which this paper attributes to changes in the age composition of the U.S. population. At higher frequencies, housing turnover is procyclical and tends to lead the business cycle and real house prices. By taking a two-segment view of the U.S. housing market and by documenting carefully the empirics of turnover within and between these segments, the paper provides important moments for and gives empirical guidance to the design, calibration, and evaluation of micro-founded, dynamic, and quantitative models of the U.S. housing market.
    Keywords: housing market; housing turnover; net and gross flows; PSID
    JEL: E30 E32 R21
    Date: 2014–06
  56. By: André Roncaglia de Carvalho
    Abstract: The paper focuses some of the non-monetary structural causes of inflationary persistence in Brazil in the post-Real plan period. A connection is made between the de-industrializing trend and the emergence of primary pressures that set a floor to inflation levels. The framework is set up in terms of inter-sector dynamics in a widely indexed economic setting. Two primary pressures are taken into account, namely: (i) the increase in the services sector´s share of total value added in aggregate output combined with (ii) the change in the behavior of Statesupervised prices. Departing from a simple inflation accounting exercise and the structuralist assumption of price rigidity, a connection is made between relative price changes and the inflation rate. Volatility of the exchange rate affects the composition of aggregate supply and the ratio between prices of tradable and non-tradable goods; if prices display some degree of downward inflexibility, such volatility yields price increases in some sectors not offset by proportional price decreases in other sectors. A self-sustaining trend of cost-shift inflation is thus explained on the basis of exchange-rate-fueled structural changes with a bias towards labor-intensive sectors. The sluggish innovating thrust in these sectors sets limits to increases in labor productivity, while labor market regulations and widespread indexation render prices inflexible downwards. Empirical evidence is then garnered to support the analytical claim that de-industrialization engenders a floor to inflation rates.
    Keywords: de-industrialization, inflation inertia, structural change, downward rigidity, Brazil
    JEL: O54
    Date: 2014–12–03
  57. By: Alejandro Bladel (Federal Reserve Bank of St. Louis); Mark Huggett (Georgetown University)
    Abstract: We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. We nd that (1) the peak of the model Laer curve occurs at a 52 percent top tax rate, (2) if human capital were exogenous, then the top of the Laer curve would occur at a 66 percent top tax rate and (3) applying the theory and methods that Diamond and Saez (2011) use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent.
    Keywords: human capital, marginal tax rate, Inequality, Laffer curve
    JEL: D91 E21 H20 J24
    Date: 2014–11
  58. By: Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Massimo Bordignon (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Labor mobility is commonly taken as a property of an optimal currency area. But how does that property a¤ect the outcome of ?scal poli- cies? We address this issue with a two country ?two period model, where both asymmetric and symmetric productivity shocks may hit the countries. We show that perfect (costless) labour mobility is not necessarily welfare improv- ing, since it prevents the national ?scal authorities from pursuing indepen- dent policies, opening the way to a coordination problem between them, which is particularly relevant when the two countries di¤er for their intertemporal preferences. With symmetric shocks, the federal ?scal policy can improve welfare over national policies by playing a coordinating role. With asymmet- ric shocks, the federal ?scal policy allows both countries to reach a higher productive e¢ ciency; to do that, the federal government must be endowed with a federal budget, playing a stronger role than plain coordination between countries.
    Keywords: currency union, labor mobility, ?scal policy, federation
    JEL: E62 H77
    Date: 2014–11
  59. By: Markus Riegler
    Abstract: Increases in uncertainty lead to increases in the unemployment rate. Using US data, I show empirically that this is due to both an increase in the separation rate and a decrease in the job-finding rate. By contrast, standard search and matching models predict an increase in the job finding rate in response to an increase in the cross-sectional dispersion of firmsâ productivity levels. To explain observed responses in labour market transition rates, I develop a search and matching model in which heterogeneous firms face a decreasing returns to scale technology, firms can hire multiple workers, and job flows (job creation and job destruction) do not necessarily coincide with worker flows (hires and separations). Costly job creation (in addition to the usual hiring cost) is key to obtaining a decrease in the job-finding rate after an increase in uncertainty. Standard numerical solution techniques cannot be used to obtain an accurate solution efficiently and I propose an alternative algorithm to overcome this problem.
    JEL: C63 E24 E32 J63 J64
    Date: 2014–11–21
  60. By: Stefano Scalone (Department of Economics (University of Verona))
    Abstract: This paper analyzes and extends the original study by Borio (2013), which includes proxies for the nancial cycle in the process for estimating potential output. We extend the estimation to more countries (USA, UK, Spain, Italy, France, Austria, Netherlands and Switzerland) to check the robustness of the original method, and propose short-term debt as a new proxy for liquidity. We conrm that "nance neutral" measures of potential output are more reliable even though the original proxies are not particularly robust across countries, and that including liquidity information in the estimation process (whose analysis is conducted for United States, Australia and Canada) leads to better estimates, that are signicant in all of the countries we analyze.
    Keywords: Potential output, output gap, financial cycle, liquidity, monetary policy.
    JEL: C11 C32 E10 E60
    Date: 2014–12
  61. By: Michelacci, Claudio; Ruffo, Hernán
    Abstract: We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.
    Keywords: insurance; search; unemployment
    JEL: E24 H21 J64 J65
    Date: 2014–09
  62. By: Canova, Fabio; Pérez Forero, Fernando J.
    Abstract: This paper provides a general procedure to estimate structural VARs. The algorithm can be used in constant or time varying coefficient models, and in the latter case, the law of motion of the coefficients can be linear or non-linear. It can deal in a unified way with just-identified (recursive or non-recursive) or overidentified systems where identification restrictions are of linear or of non-linear form. We study the transmission of monetary policy shocks in models with time varying and time invariant parameters.
    Keywords: Identification restrictions; Metropolis algorithm; Monetary transmission mechanism.; Time-varying coefficient structural VAR models
    JEL: C11 E51 E52
    Date: 2014–06
  63. By: Hart, Oliver; Zingales, Luigi
    Abstract: What is so special about banks that their demise often triggers government intervention? In this paper we show that, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in need of liquidity tend to concentrate their holdings in banks. Thus, a shock to banks disproportionately affects the agents who need liquidity the most, reducing aggregate demand and the level of economic activity. The optimal fiscal response to such a shock is to help people, not banks, and the size of this response should be larger if a bank, rather than a similarly-sized nonfinancial firm, fails.
    Keywords: bailout; banking; Liquidity
    JEL: E41 E51 G21
    Date: 2014–06
  64. By: Estrada, Fernando
    Abstract: This review of the book by Thomas Piketty, the capital in the XXI century, presents the central themes of the work and exposes its scope on the relationship between inequality and wealth. In particular a positive reflections on the progressive tax is added.
    Keywords: Piketty, Capital in the 21st century, Capitalism, Distribution, Theory of economics.
    JEL: B13 B15 B16 B22 B23 B25 B41 B52 C21 C22 C82 E62 E64 H23 H26 N10 O11 O4 O5
    Date: 2014
  65. By: Ngai, Liwa Rachel; Petrongolo, Barbara
    Abstract: This paper investigates the role of the rise of services in the narrowing of gender gaps in hours and wages in recent decades. We document the between-industry component of the rise in female work for the U.S., and propose a model economy with goods, services and home production, in which women have a comparative advantage in producing market and home services. The rise of services, driven by structural transformation and marketization of home production, acts as a gender-biased demand shift raising women’s relative wages and market hours. Quantitatively, the model accounts for an important share of the observed trends.
    Keywords: gender gaps; marketization; structural transformation
    JEL: E24 J16 J22
    Date: 2014–05
  66. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Fang Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Labor taxes and unemployment compensation were blamed for causing relative declines in labor supply in the EU to the US in the past decades. We propose a model with an endogenous labor force and compare with the model with an exogenous labor force. Because of discouraging the labor force, labor taxes decrease employment in our model less than the model with an exogenous labor force, have ambiguous effects on hours, and decrease less labor supply in our model. Due to boosting the labor force, unemployment compensation increases employment in our model and decreases in the model with an exogenous labor force, but with opposite effects on hours, labor supply is ambiguous in both models. To understand the net effect on labor supply, we feed in the data of increases in labor taxes and unemployment compensation in the EU relative to the US. We find that the model with an exogenous labor force explain excessively of decreases in employment and labor supply, with increases in hours against the data. In contrast, our model explains reasonable decreases in labor supply, with sensible decreases in employment and in hours. Thus, with an endogenous labor force, our model explains relative declines in labor supply better than the model with an exogenous labor force.
    Keywords: search and matching, labor force participation, unemployment, hours worked, labor taxes, and unemployment benefits
    JEL: E24 H20 J22
    Date: 2014–11
  67. By: Erik Eyster (London School of Economics (LSE)); Kristof Madarasz (London School of Economics (LSE)); Pascal Michaillat (Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: This paper proposes a model that explains the nonneutrality of money from two well-documented psychological assumptions. The model incorporates into the general-equilibrium monopolistic-competition framework of Blanchard and Kiyotaki [1987] the psychological assumptions that (1) consumers dislike paying a price that exceeds some “fair” markup on firms’ marginal costs, and (2) consumers do not know firms’ marginal costs and fail to infer them from prices. The first assumption in isolation renders the economy more competitive without changing any of its qualitative properties; in particular, money remains neutral. The two assumptions together cause money to be nonneutral: greater money supply induces lower monopolistic markups, higher hours worked, and higher output. Whereas an increase in money supply is expansionary, it decreases the fairness of transactions perceived by consumers to such an extent that it reduces overall welfare. The cost of inflation is a psychological one that derives from a mistaken belief by consumers that transactions have become less fair. In fact, it is this misperception that makes an increase in money supply expansionary: consumers misattribute the higher prices arising from higher money supply to higher markups; the misperception of higher markups angers them and makes their demand for goods more elastic; in response, monopolists reduce their markups, thus stimulating economic activity. Through a similar mechanism, an increase in technology induces higher output but higher monopolistic markups and lower hours worked.
    Date: 2014–11
  68. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: This talk is the written version of remarks, given at a conference marking the retirement of Mervyn King from the Bank of England. It argues that economic performance deteriorated in recent years because of a change in policy rather than because of a shift in the tradeoff between inflation stability and output stability.
    Date: 2013–03
  69. By: Carmen Broto (Banco de España); Luis Molina (Banco de España)
    Abstract: Changes in sovereign ratings are strongly asymmetric, as downgrades tend to be deeper and faster than upgrades. In other words, once a country loses its initial status it takes a long time to recover it. Using S&P data, we characterise “rating cycles” in terms of their duration and amplitude. We then study whether the agency reaction to new economic and financial domestic information also differs during upgrade and downgrade phases. Our results indicate that favourable fundamentals could be helpful for smoothing and slowing down the path of downgrades, whereas favourable fundamentals do not seem to accelerate the rating recovery.
    Keywords: sovereign credit ratings, rating cycle, emerging countries, panel data model.
    JEL: G24 C33
    Date: 2014–12
  70. By: Paciello, Luigi (Einaudi Institute for Economics and Finance); Pozzi, Andrea (Einaudi Institute for Economics and Finance); Trachter, Nicholas (Federal Reserve Bank of Richmond)
    Abstract: We study a tractable model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price, describes the behavior of optimal prices in the presence of customer acquisition and retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit novel micro data on purchases from a panel of households from a large U.S. retailer to quantify the model and compare it to the counterfactual benchmark of the standard monopolistic competition setting. We show that a model with customer markets has markedly different implications in terms of the equilibrium price distribution, which better fit the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to shocks that affects price dispersion is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of demand to these shocks.
    JEL: E12 E30 L16
    Date: 2014–12–04
  71. By: Dixon, Robert; Lim, Guay C.; van Ours, Jan C
    Abstract: This paper presents an analysis of labour market dynamics, in particular of flows in the labour market and how they interact and affect the evolution of unemployment rates and participation rates, the two main indicators of labour market performance. Our analysis has two special features. First, apart from the two labour market states - employment and unemployment - we consider a third state - out of the labour force. Second, we study net rather than gross flows, where net refers to the balance of flows between any two labour market states. Distinguishing a third state is important because the labour market flows to and from that state are quantitatively important. Focussing on net flows simplifies the complexity of interactions between the flows and allows us to perform a dynamic analysis in a structural vector-autoregression framework. We find that a shock to the net flow from unemployment to employment drive the unemployment rate and the participation rate in opposite directions while a shock to the net flow from not in the labour force to unemployment drives the rates in the same direction.
    Keywords: Net labour market flows; Participation rate; Unemployment rate
    JEL: E17 E24 J21 J64
    Date: 2014–06
  72. By: Marc Francke; Alex van de Minne; Johan Verbruggen
    Abstract: It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market since the 1980s, has had implications for the Dutch housing market. In this paper we introduce a new method to estimate a credit condition index (CCI). The credit conditions index represents changes in the supply of credit over time, apart from changes in interest rates and income. Examples of these changes include (1) the development of markets for financial futures, options, swaps, securitized loans and synthetic securities which allowed for easy access to credit for financial intermediaries, (2) more sophisticated risk management, for example improved initial credit scoring, (3) changes in risk-perception by financial intermediaries due to changes in the macro-economic environment, like rate of unemployment, (4) introduction of new mortgage products, (5) reduced transaction costs and asymmetric information with innovations of IT, telephony and data management and (6) financial liberation. Financial liberation is the relaxation or tightening of credit controls like liquidity ratios on banks, down-payment requirements, maximum repayment periods, allowed types of mortgages, loan-to-value and loan-to-income ratios, etc. The credit conditions index is estimated as an unobserved component in an error-correction model in which the average amount of mortgage is explained by the borrowing capacity and additional control variables. The model is estimated on data representing first time buyers. For first time buyers we can assume that the housing and non-housing wealth is essentially zero. The credit condition index is subsequently used in an error-correction model for house prices representing not only first time buyers, but all households. The models are estimated using quarterly data from 1995 to 2012. The estimated credit condition index has a high correlation with the Bank Lending Survey, a quarterly survey in which banks are asked whether there is a tightening or relaxation of (mortgage) lending standards compared to the preceding period. The credit condition index has explanatory power in the error-correction model for housing prices. In real terms house prices declined about 25% from 2009 to 2012. The estimation results show that 12% point of this decline can be attributed to a decline in the credit conditions index.
    Keywords: Lending Standards; Financial Liberation; Housing Prices;
    JEL: C32 E44 E51 G21
    Date: 2014–11
  73. By: LONZO LUBU, Gastonfils; AVOM, Desiré
    Abstract: The objective of this study is to evaluate the effect of public spending on economic growth in DR Congo. This is to highlight the non-linear effects of public expenditure on economic growth in the DRC. In view of the results of the econometric regression, there are non-linearities in the relationship between public spending and economic activity in the DRC. It was observed an optimal threshold of public expenditure in the DRC is 24% between 1961 and 2013 through the logic modeling endogenous thresholds, originally developed by Hansen (2000), it also appears to an external debt ratio 112% with a lower or equal to 2.3% budget balance, the state influences Keynesian economic activity in the DRC beyond these thresholds, the effect of public expenditure is not Keynesian or anti Keynesian.
    Keywords: government spending, economic growth, governance, Threshold Regression Models
    JEL: C22 D73 E12 F4 F43 H11 H50
    Date: 2014–12–17
  74. By: Stefanie Ridenour
    Keywords: Finance and Financial Sector Development - Access to Finance Finance and Financial Sector Development - Debt Markets Social Protections and Labor - Labor Markets Macroeconomics and Economic Growth - Regional Economic Development Private Sector Development - Emerging Markets
    Date: 2014–03
  75. 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); Maria Matthaiou (Department of Economics, Democritus University of Thrace, Greece); Efthymia Chrysanthidou (Department of Economics, Democritus University of Thrace, Greece)
    Abstract: In this paper, we investigate the forecasting ability of the yield curve in terms of the U.S. real GDP cycle. More specifically, within a Machine Learning (ML) framework, we use data from a variety of short (treasury bills) and long term interest rates (bonds) for the period from 1976:Q3 to 2011:Q4 in conjunction with the real GDP for the same period, to create a model that can successfully forecast output fluctuations (inflation and output gaps) around its long-run trend. We focus our attention in correctly forecasting the instances of output gaps referred for the purposes of our analysis here as recessions. In this effort, we applied a Support Vector Machines (SVM) technique for classification. The results show that we can achieve an overall forecasting accuracy of 66,7% and a 100% accuracy in forecasting recessions.
    Date: 2014–11
  76. By: Pill, Huw; Reichlin, Lucrezia
    Abstract: This paper provides an appraisal of European Central Bank (ECB) policy from the beginning of the financial crisis to the summer of 2014. It argues that, as the crisis unfolded, ECB policy can be characterized as an attempt at finding a middle way between “monetary dominance” embedded in the Treaty and “fiscal dominance”. This middle course was pragmatic response to the challenges being faced but it failed to offer a stable solution to the underlying solvency issues, while permitting (or even creating) a damaging set of dislocations, notably a fragmentation of Euro financial markets, with damaging consequences on the real economy. We argue that since Draghi’s pledge to do “whatever it takes” to sustain the euro in July 2012, the ECB has attempted to construct a new institutional framework. We conclude that, although there are promising developments in some areas such as banking union, without a “new bargain” on how to deal with the debt overhang which is the legacy of the crisis, the euro area is under threat.
    JEL: E5
    Date: 2014–10
  77. By: Michaelides, Alexander
    Abstract: This is a case study of how a country nearly reached bankruptcy in March 2013, within five years from entering the Eurozone. The magnitude of the requested assistance is extremely large relative to GDP (100%) and studying this event provides useful lessons for avoiding such crises in the future. The crisis resulted from a worsening European economic environment (especially in Greece), bad choices with regards to public finances, weak corporate governance within the local banking sector, inadequate and/or difficult regulation of cross-border banking, worsening competitiveness, and bad political decisions at the European and, especially, the local (Cypriot) level. Local politics, reflected in short term political calculations and/or inadequate understanding of the magnitude of the crisis, delayed corrective action for 18 months until election time, making a bad situation almost impossible to deal with. Overconfidence can be one behavioural explanation for why local politicians ignored the dramatic costs of inaction.
    Keywords: bail-in; banking crisis; cost of inaction; Cyprus; European sovereign debt crisis; fiscal imbalances; sovereign debt; stress tests
    JEL: E00 E62 G00 H63
    Date: 2014–05
  78. By: Chiripanhura, Blessing M.; Nino-Zarazua, Miguel
    Abstract: This paper develops a model of opportunistic behaviour in which an incumbent government resort to expansionary fiscal and/or monetary stimuli to foster economic growth and thus, maximize the probability of re-election. Using a panel dataset of 51 African
    Keywords: aid, growth, institutional quality, political business cycles, Africa
    Date: 2014
  79. By: Nagore Garcia, A.; van Soest, A.H.O. (Tilburg University, Center For Economic Research)
    Abstract: Using administrative records data from Spanish Social Security, we analyse the pattern and the determinants of individual unemployment benefit spell durations. We compare a period of expansion (2005-2007) and the recent recession (2009-2011), allowing us to determine the impact of the current crisis. In line with the duality that characterizes the Spanish labour market, we distinguish between exits to a stable job and exits to an unstable job. We estimate a Multivariate Mixed Proportional Hazard Model for each time period. We find similar effects of the crisis for stable and unstable jobs, which are particularly strong in the first year of the spell. Moreover, slight negative duration dependence is found, especially for stable jobs in the expansion period until the time of unemployment benefit expires. Individuals who are most affected by the financial crisis tend to be males, those aged 16-24 and 40-51 years, those living in regions with higher unemployment rates, individuals who are less qualified or work in manual occupations (particularly construction) and immigrants.
    Keywords: unemployment durations; Business cycle; dual labour markets; re-employment probability
    JEL: J64 C41 E32
    Date: 2014
  80. By: Pierre-Richard Agénor
    Abstract: A dynamic stochastic general equilibrium model is used to study the optimal fiscal response to commodity price shocks in a small open low-income country. The model accounts for imperfect access to world capital markets and a variety of externalities associated with public infrastructure, including utility benefits, a direct complementarity effect with private investment, and reduced distribution costs. However, public capital is also subject to congestion and absorption constraints, with the latter affecting the efficiency of infrastructure investment. The model is parameterized and used to examine the transmission process of a temporary resource price shock under a benchmark case (cash transfers) and alternative fiscal rules, involving either higher public spending or accumulation in a sovereign fund. The optimal allocation rule between spending today and asset accumulation is determined so as to minimize a social loss function defined in terms of the volatility, relative to the benchmark case, of private consumption and either the nonresource primary fiscal balance or a more general index of macroeconomic stability, which accounts for the volatility of the real exchange rate. Sensitivity analysis is conducted with respect to various structural parameters and model specification.
    Date: 2014
  81. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: This testimony before the Subcommittee on Monetary Policy and Trade of the United States House of Representatives reviews the conduct of the Federal Reserve before, during, and after the 2008 financial crisis.
    Date: 2013–03
  82. By: Saint-Paul, Gilles (University of Toulouse I)
    Abstract: This paper studies aggregate dynamics in a cobweb model where learning takes place through a selection mechanism, by which more successful firms are replicated at a higher rate. The structure of the model allows to characterize analytically the aggregate dynamics, and to compute the effect on welfare of alternative levels of selectivity. A central aspect is that greater selectivity, while bringing the distribution of firm types closer to the optimal one at a given date, tends to make the economy less stable at the aggregate level. As in Nelson and Winter (1982), firms differ in their labor/capital ratio. They do not choose it optimally, rather it is a characteristic of a firm. The distribution of firms evolves over time in a way that favors the most profitable firm types. Selection may be inadequate because firms are being selected on the basis of incorrect market signals. Selection itself may reinforce such mispricing, thus generating instability. I compare economies that differ in the volatility and persistence of their productivity shocks, as well as the elasticity of labor supply. The key findings are as follows. First, a trade-off arises since greater selection allows to better track shocks and limits mutational drift in firm types; on the other hand, selection may strengthen cobweb oscillatory dynamics. Second, there seems to be a value in maintaining a diverse "ecology of firms", in order to cope with future shocks. These observations explain the key results. Optimal selectivity is larger, the less "cobweb unstable" the economy, i.e. the more elastic the labor supply. Second, optimal selectivity is larger, the more persistent the aggregate productivity shocks. Finally, optimal selectivity is larger, the lower the variance of productivity innovations. The model can be extended to allow for firm entry and trend productivity growth, and a selection process with memory. Empirical evidence suggests that, in accordance to the model, countries with less regulated product markets exhibit lower aggregate inertia.
    Keywords: cobweb model, adaptive learning, selection, mutation, evolution
    JEL: P10 E32 J20
    Date: 2014–11
  83. By: Anyadike-Danes, Michael; Bjuggren, Carl-Magnus; Gottschalk, Sandra; Hölzl, Werner; Johansson, Dan; Maliranta, Mika; Myrann, Anja
    Abstract: The contribution of different-sized businesses to job creation continues to attract policymakers' attention, however, it has recently been recognized that conclusions about size were confounded with the effect of age. We probe the role of size, controlling for age, by comparing the cohorts of firms born in 1998 over their first decade of life, using variation across half a dozen northern European countries Austria, Finland, Germany, Norway, Sweden, and the UK to pin down size effects. We find that a very small proportion of the smallest firms play a crucial role in accounting for cross-country differences in job growth. A closer analysis reveals that the initial size distribution and survival rates do not seem to explain job growth differences between countries, rather it is a small number of rapidly growing firms that are driving this result.
    Keywords: birth cohort,firm age,firm size,firm survival,firm growth,distributed micro-data analysis
    JEL: L25 L26 E24 M13
    Date: 2014
  84. By: artige, LIONEL (HEC, University of Liège, B-4000 Liège, Belgium); CAVENAILE, Laurent (New York University); PESTIEAU, Pierre (HEC, University of Liège, B-4000 Liège, Belgium; Université catholique de Louvain, CORE, Belgium)
    Abstract: This paper analyzes and compares the macroeconomic performance of defined-benefit and defined-contribution pay-as-you-go pension systems when population ages. When the fertility rate decreases or longevity rises, it is shown that a shift from defined benefit (defined total benefit or defined annuities) to defined contribution always results in higher per-capita income and life-cycle welfare at the steady state. All results are derived with general production and utility functions.
    Keywords: aging, defined benefit, defined contribution, fertility, longevity, PAYG pension
    JEL: E13 H55 J13 J26
    Date: 2014–08–19
  85. By: Francesco Busato; Francesco Giuli; Enrico Marchetti
    Abstract: This paper presents a simple Overlapping Generation Model (OLG), aug-mented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). Themodel tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we ¯nd that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models.
    Keywords: Tax evasion, OLG models, Prospect theory
    JEL: E21 D03 D81
    Date: 2014–11
  86. By: Mulatu F. Zehirun (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.); Marthinus C. Breitenbach (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.); Francis Kemegue (Farmingham State University and University of Pretoria, Pretoria 0002)
    Abstract: This paper evaluates the strength of policy coordination in Southern African Development Community (SADC) as well as real effective exchange rate stability as indicative of sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting OCA conditions face more stable exchange rates. The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators, and real effective exchange rate (REER) equilibrium and misalignment analysis are carried out to arrive at the conclusions. The PMG model shows that there are common policy variables that influence REERs in the region. However, the REER equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further improvement of policy coordination in the region. The findings in this paper have important policy implications for economic stability and policy coordination as SADC proceeds with monetary integration.
    Keywords: Real Effective Exchange Rate, Monetary Integration, Policy Coordination, SADC
    JEL: C23 E63 F15 F31
    Date: 2014–11
  87. By: Lee M. Lockwood
    Abstract: Despite facing significant uncertainty about how long they will live and how much costly health care they will require, few retirees buy life annuities or long-term care insurance. Low rates of long-term care insurance coverage are often interpreted as evidence against the importance of bequest motives since failing to buy insurance exposes bequests to significant risk. In this paper, however, I find that low rates of long-term care insurance coverage, especially in combination with the slow rate at which many retirees draw down their wealth, constitute evidence in favor of bequest motives. Retirees' saving and long-term care insurance choices are highly inconsistent with standard life cycle models in which people care only about their own consumption but match well models in which bequests are luxury goods. Such bequest motives reduce the value of insurance by reducing the opportunity cost of precautionary saving. Buying insurance reduces one's need to engage in precautionary saving, which is most valuable to individuals without bequest motives who wish to consume all of their wealth. The results suggest that bequest motives significantly increase saving and significantly decrease purchases of long-term care insurance and annuities.
    JEL: D91 E21 H55
    Date: 2014–12
  88. By: Fuerst, Timothy (University of Notre Dame and Federal Reserve Bank of Cleveland); Carlstrom, Charles (Federal Reserve Bank of Cleveland); Paustian, Matthias (Federal Reserve Board)
    Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (BGG). The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared to the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
    Keywords: financial accelerator; optimal contracts; aggregate risk
    JEL: C32 E32
    Date: 2014–11–28
  89. By: Geurts, Karen; Van Biesebroeck, Johannes
    Abstract: Firm turnover and growth recorded in administrative data sets differ from underlying firm dynamics. By tracing the employment history of the workforce of new and disappearing administrative firm identifiers, we can accurately identify de novo entrants and true economic exits, even when firms change identifier, merge, or split-up. For a well-defined group of new firms entering the Belgian economy between 2004 and 2011, we find highly regular post-entry employment dynamics in spite of the volatile macroeconomic environment. Exit rates decrease with age and size. Surviving entrants record high employment growth that is monotonically decreasing with age in every size class. Most remarkably, we find that Gibrat’s law is violated for very young firms. Conditional on age, the relationship between employment growth and current size is strongly and robustly positive. This pattern is obscured, or even reversed, when administrative entrants and exits are taken at face value. De novo entrants’ contribution to job creation is relatively small and not very persistent, in particular for (the large majority of) new firms that enter with fewer than five employees.
    Keywords: employment growth; firm dynamics; Gibrat's law
    JEL: E24 L16 L25
    Date: 2014–08
  90. By: Karel Havik; Kieran Mc Morrow; Fabrice Orlandi; Christophe Planas; Rafal Raciborski; Werner Roeger; Alessandro Rossi; Anna Thum-Thysen; Valerie Vandermeulen
    Abstract: This paper provides a detailed description of the current version of the Ecofin Council approved production function (PF) methodology which is used for assessing both the productive capacity (i.e. potential output) and cyclical position (i.e. output gaps) of EU economies. Compared with the previous 2010 paper on the same topic, there have been two significant changes to the PF methodology, namely an overhaul of the NAWRU methodology & the introduction of a new T+10 methodology.
    JEL: C10 E60 O10
    Date: 2014–11
  91. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law)
    Abstract: Much evidence suggests that people are concerned with their relative consumption, i.e., their consumption in relation to the consumption of others. Yet, the social costs of conspicuous consumption have so far played little (or no) role in savings-based indicators of sustainable development. The present paper examines the implications of such behavior for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the resource allocation is a social optimum, an indicator of positional externalities must be added to genuine saving to arrive at the proper measure of intertemporal welfare change. A numerical example based on U.S. and Swedish data suggests that conventional measures of genuine saving (which do not reflect conspicuous consumption) are likely to largely overestimate this welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving.
    Keywords: Welfare change; investment; saving; relative consumption
    JEL: D03 D60 D62 E21 H21 I31 Q56
    Date: 2014–11–20
  92. By: Buncic, Daniel; Piras, Gion Donat
    Abstract: We construct an empirical heterogeneous agent model which optimally combines forecasts from fundamentalist and chartists agents and evaluate its out-of-sample forecast performance using daily date covering the period from January 1999 to June 2014 for six of the most widely traded currencies. We use daily financial data such as level, slope and curvature yield curve factors, equity prices, as well as risk aversion and global trade activity measures in the fundamentalist agent's predictor set to obtain a proxy the market's view on the state of the macroeconomy. Chartist agents rely upon standard momentum, moving average and relative strength index indicators in their predictor set. The individual agent specific forecasts are computed using the recently proposed flexible dynamic model averaging framework and are then aggregated into a model combined forecast using a forecast combination regression. We show that our empirical heterogeneous agent model produces statistically significant and sizable forecast improvements over the standard random walk benchmark, reaching out-of-sample $R^2$ values of 1.41, 1.07, 0.99 and 0.74 percent at the daily one-step ahead horizon for 4 out of the 6 currencies that we consider. Forecast gains remain significant for horizons up to three-days ahead. We show further that for 5 out of the 6 currencies, a substantial part of the forecast gains are realised over the September 2008 to February 2009 period, that is, around the time of the Lehman Brothers collapse. The time series evolution of the dynamic model combination weights shows that for the first half of the out-of-sample evaluation period, fundamentalist agents dominated the combination forecasts, while the last third of the out-of-sample period was driven by chartist agents.
    Keywords: Empirical heterogeneous agent model, forecasting, time varying parameter model, state-space modelling, model combination, exchange rate predictability, financial crisis
    JEL: C22 C52 C53 E17 F31 G17
    Date: 2014–12
  93. By: Orphanides, Athanasios
    Abstract: This paper explores the dominant role of politics in decisions made by euro area governments during the crisis. Decisions that appear to have been driven by local political considerations to the detriment of the euro area as a whole are discussed. The domination of politics over economics has led to crisis mismanagement. The underlying cause of tension is identified as a misalignment of political incentives. Member state governments tend to defend their own interests in a noncooperative manner. This has magnified the costs of the crisis and has resulted in an unbalanced and divisive incidence of the costs across the euro area. The example of Cyprus is discussed, where political decisions resulted in a transfer of about half of 2013 GDP from the island to cover losses elsewhere. In the absence of a federal government, no institution can adequately defend the interests of the euro area as a whole. European institutions appear weak and incapable of defending European principles and the proper functioning of the euro. Political reform is needed to sustain the euro but this is unlikely to pass the political feasibility test with the current governments of Europe.
    Keywords: currency union; Cyprus; Deauville; euro; European integration; sovereign debt
    JEL: D72 E32 E65 F34 G01 H12 H63
    Date: 2014–06
  94. By: Comin, Diego; Mestieri, Martí
    Abstract: This chapter discusses different approaches pursued to explore three broad questions related to technology diffusion: what general patterns characterize the diffusion of technologies, and how have they changed over time; what are the key drivers of technology, and what are the macroeconomic consequences of technology. We prioritize in our discussion unified approaches to these three questions that are based on direct measures of technology.
    Keywords: business cycles; drivers of technology; technology diffusion
    JEL: E3 O3 O4
    Date: 2014–09
  95. By: Hemous, David; Olsen, Morten
    Abstract: We construct an endogenous growth model of directed technical change with automation (the introduction of machines which replace low-skill labor and complement high-skill labor) and horizontal innovation (the introduction of new products, which increases demand for both types of labor). Such an economy endogenously follows three phases. First, low-skill wages are low, which induces little automation, such that income inequality and labor's share of GDP are constant. Second, as low-skill wages increase, investment in automation is stimulated, which depresses the future growth rate of low-skill wages (potentially to negative), and reduces the total labor share. Finally, the share of automated products stabilizes and the economy moves toward an asymptotic steady state, where low-skill wages grow but at a lower rate than high-skill wages. This model therefore delivers persistently increasing wage inequality and stagnating real wages for low skill workers for an extended period of time, features of modern labor markets which have been difficult to reconcile with the theoretical literature on economic growth. We further include middle-skill workers, which allows the model to generate a phase of wage polarization after one where labor income inequality increases uniformly. Finally, we show that an endogenous labor supply response in this framework can quantitatively account for the evolution of the skill premium, the skill ratio and the labor share in the US since the 1960s.
    Keywords: automation; capital-skill complementarity; directed technical change; factor share; horizontal innovation; Income inequality; wage polarization
    JEL: E23 E25 O31 O33 O41
    Date: 2014–11
  96. By: Viktor Novysedlák (Council for Budget Responsibility); Erik Bugyi (Council for Budget Responsibility)
    Abstract: This discussion paper provides an overview of the analytical indicators used to evaluate fiscal policy in the short, medium and long term. It focuses on their clear definition and their advantages/disadvantages, and accentuates the importance of their clear interpretation. In addition to the commonly used indicators, such as the size of measures or change in the structural balance, the paper introduces a new indicator measuring the government’s contribution to the sustainable change in fiscal position (government consolidation effort) in a given year. Despite their numerous advantages, short-term indicators do not necessarily reflect the long-term impacts of various measures. These should primarily be assessed using long-term indicators, such as fiscal gap indicators, or through the net worth concept. Despite the existence of several indicators, each and every one of them has its own raison d’etre in fiscal analyses, because they all provide answers to important analytical questions. They should therefore be treated as mutually complementary. Some of the indicators assume the existence of a no-policy-change scenario, which is an essential element in the evaluation of measures implemented by the government. For this reason, such a scenario must have a detailed structure and all its underlying assumptions should be clearly spelled out.
    Keywords: fiscal indicators, no-policy-change scenario, consolidation effort, structural balance, net worth, fiscal gap indicators
    JEL: E62 H11 H62
    Date: 2014–05
  97. By: Manuel Santos (University of Miami); Miguel Iraola (University of Miami)
    Abstract: Price markups are highly correlated with stock market values, whereas other financial measures of profitability exhibit much less variability and are weakly correlated with stock values. We propose a variant of the neoclassical growth model to study the role of innovation, price markups, and leverage as main determinants of stock market volatility. The model confers a rather limited role to other macroeconomic forces such as TFP shocks, adjustment costs, interest rate policies, input costs, taxes, and labor and financial frictions. We develop some numerical methods to provide a variance decomposition of stock market values.
    Date: 2014
  98. By: Taya Dumrongrittikul; Heather Anderson; Farshid Vahid
    Abstract: This paper investigates international responses of key macroeconomic variables, particularly real exchange rates, to simultaneous shocks to productivity in the traded sector in eight Asian emerging and developing countries. We use panel estimation techniques to construct component submodels in a thirty country global vector autoregressive (GVAR) model. The GVAR approach can account for interaction among all countries and capture many potential international transmission channels. We identify the shocks by using sign restricted impulse responses. We find that increases in traded-sector productivity in Asian developing countries lead to a real appreciation of the domestic currencies, in line with the Balassa-Samuelson hypothesis. Inflation also increases in many Asian developing countries. After the shocks, nontraded sector productivity in the US and other developed countries increases, suggesting that there is a compositional shift in their production, away from the traded goods toward the nontraded goods. This allows productivity in the nontraded sector to increase. Further, the traded sector productivity shocks in Asia stimulate international trade in most countries.
    Keywords: Asian developing countries; Exchange rate fundamentals; Global vector autoregression; Panel vector error correction model; Real exchange rates; Sign restricted impulse response.
    JEL: C51 E52 F31
    Date: 2014
  99. By: Edward P. Lazear; Kathryn L. Shaw; Christopher Stanton
    Abstract: Why did productivity rise during recent recessions? One possibility is that average worker quality increased. A second is that each incumbent worker produced more. The second effect is termed "making do with less." Using data from 2006 to 2010 on individual worker productivity from a large firm, these effects can be measured and separated. For this firm, most of the gain in productivity during the recession was a result of increased effort. Additionally, the increase in effort is correlated with the increase in the local unemployment rate, presumably reflecting the costs of losing a job.
    Keywords: Recession, productivity, sorting
    JEL: M50 D20 E32 L22
    Date: 2014–12
  100. By: Caroline Vandierendonck
    Abstract: This paper proposes to highlight the main features and key success factors of the design, conduct and implementation of spending reviews, based on the experiences of EU Member States. Public expenditure accounts for almost half of the annual wealth created in the EU (49.0% of GDP in 2013). A major policy lesson stemming from the crisis is the need to enhance expenditure performance, which can be defined as the reinforced connection between funding decisions and policy priorities (shall this policy be funded with public money?) and subsequently between funding levels and results delivered to end-users (what is the value for public money?). Spending reviews appear as an adequate instrument of expenditure performance. They consist in seeking a 'smarter' expenditure allocation across national policy priorities based on a selective and sustainable expenditure-based consolidation.
    JEL: E6
    Date: 2014–07
  101. By: Russell Cooper; Frédéric Boissay
    Abstract: This paper studies the fragility of interbank markets. Due to moral hazard and asymmetric information problems, collateral along with borrowing constraints are needed to provide appropriate incentives for banks. A key element of the analysis is the distinction between collateral based upon assets created outside of the banking system (e.g. government debt) and assets created through the lending process (e.g. cash flows). While active interbank markets help reallocate deposits across heterogeneous banks, because of incentive problems these flows are constrained and the markets are fragile, i.e. there are multiple equilibria. This paper explores the mechanism for the multiplicity, emphasizing its dependence upon inside and outside collateral. It also relates a `crisis' in the model to recent financial events in the US economy.
    JEL: E44 E51 G21 G23
    Date: 2014–11
  102. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.
    Keywords: euro-area financial crisis, sovereign-bank linkages, banks’ performance, banking stability
    JEL: E3 G01 G14 G21
    Date: 2014–12
  103. By: Mustapha Rouis
    Keywords: Country Strategy and Performance Conflict and Development - Post Conflict Reconstruction Private Sector Development - Emerging Markets Development Economics and Aid Effectiveness Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth
    Date: 2013–12
  104. By: Scott Davis (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas); Adrienne Mack (Federal Reserve Bank of Dallas); Wesley Phoa (The Capital Group Companies); Anne Vandenabeele (The Capital Group Companies)
    Abstract: A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.
    Keywords: Banking Crises, Credit Booms, Current Account
    JEL: E51 F32 F40
    Date: 2014–11
  105. By: Golosnoy, Vasyl; Rossen, Anja
    Abstract: In this paper we model the dynamics of 100 years long monthly price series of eight non-ferrous and precious metals. Applying the state space framework we impose and identify two common factors related to non-ferrous and precious metals, respectively, which exhibit quite distinct autoregressive dynamics. The preferred two common factor specifications outperform single common factor approaches which are usually used in the current literature. Furthermore, we provide interpretation for the extracted common factors by investigating their exposure to the major macroeconomic fundamentals.
    Keywords: state space models,Kalman filter,non-ferrous metals,precious metals
    JEL: C32 C52 E30 F00
    Date: 2014
  106. By: Pettenuzzo, Davide; Timmermann, Allan G; Valkanov, Rossen
    Abstract: We propose a new approach to predictive density modeling that allows for MIDAS effects in both the first and second moments of the outcome and develop Gibbs sampling methods for Bayesian estimation in the presence of stochastic volatility dynamics. When applied to quarterly U.S. GDP growth data, we find strong evidence that models that feature MIDAS terms in the conditional volatility generate more accurate forecasts than conventional benchmarks. Finally, we find that forecast combination methods such as the optimal predictive pool of Geweke and Amisano (2011) produce consistent gains in out-of-sample predictive performance.
    Keywords: Bayesian estimation; GDP growth; MIDAS regressions; out-of-sample forecasts; stochastic volatility
    JEL: C11 C32 C53 E37
    Date: 2014–09
  107. By: Kempkes, Gerhard; Stähler, Nikolai
    Abstract: From an economic perspective, imposing a credible one-off net wealth levy in crisis times as a tool to ward off a national emergency appears to be advantageous as, in an ideal world, this would not distort market players' allocation decisions. However, in practice, charging such a levy may give rise to distortions and unwanted effects on the real economy. Credibility that the levy will be imposed as a once-only measure is key to ensuring that harmful distortions in the allocation of resources are kept to a minimum. This paper confirms this using an analysis based on a DSGE model. In practice, while a government cannot guarantee that such a measure will be taken once only, it can contribute to the credibility thereof in a number of ways. First, the country's future 'business model' must become apparent; second, there has to be a basic level of confidence in the government and a firm belief that the budgetary imbalances were not actively caused by the state - at least not by the government currently in power; third, a verifiable outlook of sustainable public finances must be in place; and fourth, the political costs of a repeat levy must be high. This paper also discusses the potential impact of alternative model setups as well as some practical implementation problems.
    Keywords: Wealth Levy,Credibility,Public Finances,DSGE Models
    JEL: E2 E6 D3
    Date: 2014
  108. By: Koeniger, Winfried; Prat, Julien
    Abstract: We characterize optimal redistribution in a dynastic family model with human capital. We show how a government can improve the trade-off between equality and incentives by changing the amount of observable human capital. We provide an intuitive decomposition for the wedge between human-capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because human capital carries risk: its returns depend on the non-diversifiable risk of children's ability. Thus, human capital investment is encouraged more than bequests in the social optimum if human capital is a bad hedge for consumption risk.
    Keywords: human capital; optimal taxation
    JEL: E24 H21 I22 J24
    Date: 2014–11
  109. By: Alexander Karalis Isaac (Birkbeck, University of London; University of Warwick)
    Abstract: I derive the first four moments of the Markov-switching VAR and use the results to reconsider the conflict between the Great Moderation and Financial Crisis literatures. In contrast to the linear model, a three-regime Markov-switching model captures the skewness and kurtosis of US GDP growth 1954-2011. However, a specification with four regimes splits the sample in 1984, a result familiar from the Great Moderation literature. The higher moments of the MSVAR, not previously studied in the literature, reveal the Great Moderation to be a trade off between variance and kurtosis. U.S. GDP growth shifts from an almost Gaussian structure 1954-84 into a pattern with low variance, negative skewness and high kurtosis. The Markov-switching model which splits the sample accurately captures the new moment structure.
    Date: 2014–10
  110. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: In this paper, we dissect with great acuteness contemporary insufficiencies of the IFS (2008) definition of the financial system and conclude from sound theoretical underpinnings and empirical justifications that the foundation, on which it is based, while solid for developed countries, holds less ground in developing countries. Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin (and skewed) burgeoning phenomena of mobile banking, knowledge economy (KE), inequality…etc. We conclude that the informal financial sector, a previously missing component in the IFS conception and definition of the financial system can only be marginalized at the cost of misunderstanding recent burgeoning trends in mobile phone penetration, KE and poverty. Hence, the IFS definition has incontrovertibly fought its final dead battle and lost in the face of soaring trends highlighted above. Despite the plethora of econometric and policy-making sins the definition has committed in developing countries through bias estimates and misleading inferences, may its soul RIP.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Poverty
    JEL: E00 G20 I30 O17 O33
    Date: 2014–01
  111. By: Afanasyeva, Olga; Riabichenko, Dmitry
    Abstract: This paper analyses key documents of Basel Committee which concern operational risk governance and identifies the interconnectedness between risk source, type of the event leading to losses, loss type and its distribution by business lines. The comparative characteristic of the main operational risk governance stages is provided and the relationships between governance bodies are overviewed.
    Keywords: operational risk, corporate governance, Basel Committee on Banking Supervision, board of directors, banking
    JEL: E5 E58 G2
    Date: 2014
  112. By: Guerron-Quintana, Pablo; Inoue, Atsushi; Kilian, Lutz
    Abstract: One of the leading methods of estimating the structural parameters of DSGE mod- els is the VAR-based impulse response matching estimator. The existing asympotic theory for this estimator does not cover situations in which the number of impulse response parameters exceeds the number of VAR model parameters. Situations in which this order condition is violated arise routinely in applied work. We establish the consistency of the impulse response matching estimator in this situation, we derive its asymptotic distribution, and we show how this distribution can be approximated by bootstrap methods. Our methods of inference remain asymptotically valid when the order condition is satisfied, regardless of whether the usual rank condition for the application of the delta method holds. Our analysis sheds new light on the choice of the weighting matrix and covers both weakly and strongly identified DSGE model parameters. We also show that under our assumptions special care is needed to en- sure the asymptotic validity of Bayesian methods of inference. A simulation study suggests that the frequentist and Bayesian point and interval estimators we propose are reasonably accurate in finite samples. We also show that using these methods may affect the substantive conclusions in empirical work.
    Keywords: structural estimation,DSGE,VAR,impulse response,nonstandard asymptotics,bootstrap,weak identification,robust inference
    JEL: C32 C52 E30 E50
    Date: 2014
  113. By: Ugo Albertazzi (European Central Bank, DG Economics); Margherita Bottero (Bank of Italy); Gabriele Sene (Bank of Italy)
    Abstract: We present the first empirical study of information spillover and signalling on loan search and its outcomes in a setting where a bank observes whether a loan applicant has already been rejected by other lenders. We do so by taking advantage of the fact that Italy�s Central Credit Register discloses such information. The results show that disclosing information on past rejections negatively affects the probability of continuing a loan search. At the same time, the information on former rejections is associated with a higher probability of being funded for borrowers who are not discouraged and continue the search, provided they are not opaque. With the aid of a theoretical model, we show that banks interpret the information on previous rejections as a signal of unobservable quality for the average borrower but not for more opaque borrowers, whose past rejections negatively affect the outcome of later applications. We also show that banks differ in the extent to which they rely on this information, in a way that at least partly reflects the different informational content that this signal carries for them.
    Keywords: sequential lending decisions, credit supply, winner�s curse, informational spillover.
    JEL: E51 G21 G28
    Date: 2014–10
  114. By: Chen, Dong; Gao, Yanmin; Kaul, Mayank; Leung, Charles Ka Yui; Tsang, Desmond
    Abstract: This paper studies how the presence of sponsor and external management affect leverage and debt maturity decisions in three major Asian-Pacific REIT markets: Australia, Japan and Singapore. Our empirical results indicate that sponsored REITs opt for higher levels of leverage and loans with longer maturity. On the contrary, externally managed REITs are associated with lower leverage and loans with shorter maturity. Our results are robust to the inclusion of other firm variables and to alternative specifications. Subsequent to the financial crisis, the impact of sponsorship on debt financing decisions has diminished, and borrowing of externally managed REITs is further constrained.
    Keywords: Asian-Pacific REIT markets, capital structure, debt maturity, simultaneous equation modelling, financial crisis
    JEL: E60 F30 G10
    Date: 2014–12
  115. By: Jelena Ilić Cvetković (Commercial Bank ad, Beograd)
    Abstract: In this dissertation, we aim to clarify the concept of calculating risk and return portfolio. Possible outcomes of the investment are usually distinguished from permanent investors' expectations, and it is very important to have a complete picture of the observed variables. The level of the average deviation from the expected yield potential is really important in making the decision on entry into a particular investment because it determines the amount of surprises that may arise from these investments. The yield of the company achieves or does not achieve, depending on the success of a combination of many factors. The starting idea of previous expenditure generated over at least return rate of time preference values for the abandonment of potentially favorable alternative uses in real life, manifests itself as a theoretical construct that accepts that there is the risk-free investment yield for which the risk is zero, and that the minimum return to the investor still counting. However, the problem is that all investors are the same. There are investors who still think of the risk-free rate and investors who do not think about the risk, but only to yield and the best yield alternatives. Of course, in any case the risk is an unavoidable component that expects investors. An investor who prefers high- risk class is always exposed to the danger that the result will not make any refund nominal investment, nor any yield..
    Keywords: Identification of yield, average yield, recovery, recovery time, return rate, the discount rate
    JEL: E22
    Date: 2014–04
  116. By: Kwan, Yum K.; Leung, Charles Ka Yui; Dong, Jinyue
    Abstract: Eight consumption-based asset pricing models are developed, estimated and compared their capacities in accounting for the asset markets in Hong Kong. Results based on conventional metrics or recently developed econometric techniques deliver similar results: introducing housing into the consumption-based models does not always improve the models’ performance; how it is introduced matters. Recursive utility model and its housing-augmented variant, which emphasize the importance of early resolution of uncertainty and long term risk, outperform alternative models in forecasting stock returns. Collateral constraint model outperforms in predicting housing return, suggesting the importance of imperfect capital market in the housing market.
    Keywords: Consumption-based asset pricing model; Recursive utility; Habit formation; Consumption growth risk; Composition risk; Labor income risk; Long-run risk; Collateral constraint; Hansen-Jagannathan distance; Model confidence sets.
    JEL: E20 G12 R30
    Date: 2014–12
  117. By: Bachev, Hrabrin
    Abstract: On March 11, 2011 the strongest recorded in Japan earthquake occurred which triggered a powerful tsunami and caused a nuclear accident in the Fukushima Daichi Nuclear Plant Station. The triple 2011 disaster has had immense impacts on people life, health and property, social infrastructure and economy, agri-food chains, natural and institutional environment, etc. in North-eastern Japan and beyond Due to the scale of the disasters and the number of affected agents, the effects’ multiplicities, spillovers, and long time horizon, the constant evolution of the nuclear crisis, the lack of “full” information and models of analysis, etc. the overall impacts of the 2011 disasters is far from being completely evaluated. Besides most information and publications are in Japanese. The goal of this paper is to assess the socio-economic and environmental impact of Match 2011 earthquake, tsunami and Fukushima nuclear accident in Japan. Firstly, a short description of the three events is presented. Next, the overall impacts on population, health and displacement assessed. Third, the effects of economy are evaluated. After that, diverse impacts on agri-food chains are presented. Finally, the impact on natural environment is assessed. A wide range of official governmental, farmers, industry and international organisations, and Tokyo Electric Power Company data as well as information from publications in media, research and experts reports, etc. have been extensively used.
    Keywords: social, economic, agri-food chain, environmental impact, Great East Japan Earthquake, March 11, 2011 earthquake and tsunami, Fukushima nuclear accident, disaster risk managment, Japan
    JEL: D0 E0 F5 H0 I0 J0 L1 O1 Q1 Q13 Q16 Q17 Q18 Q4 Q5 R0 Z0
    Date: 2014–12–13
  118. By: Dechert, Andreas
    Abstract: Untersuchungsgegenstand dieser Arbeit sind Euribor-Zinssätze, zwischen denen wir fraktionale Kointegrationsbeziehungen vermuten. Dazu klären wir im ersten Schritt den Begriff der fraktionalen Integration und stellen sowohl semiparametrische als auch nicht-parametrische Verfahren zur Bestimmung der Anzahl der Kointegrationsbeziehungen vor. Des Weiteren geben wir eine Möglichkeit zur Schätzung der Kointegrationsbeziehungen an. Diese Methoden dienen dazu, die Markterwartungshypothese zu überprüfen, da diese nach Campbell und Shiller (1987) bei p Anzahl nicht-stationären Zinszeitreihen p - 1 Kointegrationsbeziehungen impliziert.
    Keywords: Fraktionale Integration,Fraktionale Kointegration,Markterwartungshypothese,Polynomiale Trends
    JEL: C32 C14 E43
    Date: 2014

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