nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒01‒09
122 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  2. Credit Spreads and Credit Policies By Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
  3. Targeting core inflation in emerging market economies By Stan du Plessis
  4. Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations By Peersman, G.; Wagner, W.B.
  5. Fiscal Policy in an Emerging Market Business Cycle Model By Ghate, Chetan; Gopalakrishnan, Pawan; Tarafdar, Suchismita
  6. German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-Euro Area imbalances? By Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
  7. Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes By Gregor Bäurle; Daniel Kaufmann
  8. Fiscal Consolidation and Employment Loss By Nukic, Senada
  9. Testing the Expectations Trap Hypothesis: A Time-Varying Parameter Approach By Naveen Srinivasan
  10. Accounting for Post-Crisis Inflation and Employment: A Retro Analysis By Chiara Fratto; Harald Uhlig
  11. Unravelling India’s Inflation Puzzle By Pankaj Kumar; Naveen Srinivasan
  12. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
  13. Inflation dynamics in a model with firm entry and (some) heterogeneity By Javier Andrés; Pablo Burriel
  14. Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone By Martin, Philippe; Philippon, Thomas
  15. Targeting Inflation from Below - How Do Inflation Expectations Behave? By Michael Ehrmann
  16. Secular stagnation By Bossone, Biagio
  17. Large banks, loan rate markup and monetary policy By Vincenzo Cuciniello; Federico M. Signoretti
  18. Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery By Elton Beqiraj; Massimiliano Tancioni
  19. State Dependency in Price and Wage Setting By Shuhei Takahashi
  20. WAGE INDEXATION AND THE MONETARY POLICY REGIME By Selien De Schryder; Gert Peersman; Joris Wauters
  21. Employment Adjustment and Part-time Jobs: The US and the UK in the Great Recession By Daniel Borowczyk-Martins; Etienne Lalé
  22. The role of fiscal policy in Britain's Great Inflation By Fan, Jingwen; Minford, Patrick; Ou, Zhirong
  23. Bank Liabilities Channel By Quadrini, Vincenzo
  24. Central Banks: Powerful, Political and Unaccountable? By Buiter, Willem H.
  25. Exchange Rate Flexibility under the Zero Lower Bound By Cook, David; Devereux, Michael B
  26. The effect of macroprudential policy on endogenous credit cycles By Clancy, Daragh; Merola, Rossana
  27. The Great Recession: on the Ineffectiveness of Domestic Adjustment Policies and the Need of Multilateral Arrangements By Jorge Rojas
  28. Information Aggregation in a DSGE Model By Hassan, Tarek; Mertens, Thomas M.
  29. The Precautionary Saving Effect of Government Consumption By Ercolani, Valerio; Pavoni, Nicola
  30. Corporate Debt Structure and the Financial Crisis By Fiorella De Fiore; Harald Uhlig
  31. The Role of Sentiment in the Provision of Credit By Björn O. Meyer
  32. Regional Inflation and Financial Dollarization By Brown, M.; de Haas, R.; Sokolov, V.
  33. Fundamental disagreement. By P. Andrade; R. Crump; S. Eusepi; E. Moench
  34. Menu Costs, Aggregate Fluctuations, and Large Shocks By Karadi, Peter; Reiff, Adam
  35. An Emerging Market Financial Conditions Index: A VAR Approach. By Rémy Charleroy; Michael A. Stemmer
  36. "Outside Money: The Advantages of Owning the Magic Porridge Pot" By L. Randall Wray
  37. In search of the transmission mechanism of fiscal policy in the Euro area By Fève, Patrick; Sahuc, Jean-Guillaume
  38. Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies By Mendoza, Enrique G.; Tesar, Linda L.; Zhang, Jing
  39. The Curse of Inflation By Eyster, Erik; Madarász, Kristóf; Michaillat, Pascal
  40. The Changing Transmission of Uncertainty shocks in the US: An Empirical Analysis By Haroon Mumtaz; Konstantinos Theodoridis
  41. A steindlian account of the distribution of corporate profits and leverage: A stock-flow consistent macroeconomic model with agent-based microfoundations By Jo Michell
  42. Money growth and consumer price inflation in the euro area: A wavelet analysis By Mandler, Martin; Scharnagl, Michael
  43. Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification By Asgharian, Hossein; Christiansen, Charlotte; Hou, Ai Jun
  44. Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money By Iwamura, Mitsuru; Kitamura, Yukinobu; Matsumoto, Tsutomu; Saito, Kenji
  45. The Bond Market: An Inflation-Targeter's Best Friend By Rose, Andrew K
  46. Evaluating Fiscal Policy: A Rule of Thumb By Nicolas Carnot
  47. South Africa Economic Update : Fiscal Policy and Redistribution in an Unequal Society By World Bank
  48. Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates By Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
  49. Heterogeneity in Inflation Expectations and Macroeconomic Stability under Satisficing Learning By Jaylson Jair da Silveira; Gilberto Tadeu Lima
  50. International House Price Cycles, Monetary Policy and Risk Premiums By Gregory Bauer
  51. Challenges of bank lending in Romania on short, medium and long-term By Zaman, Gheorghe; Georgescu, George
  52. Understanding Uncertainty Shocks and the Role of Black Swans By Orlik, Anna; Veldkamp, Laura
  53. Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies during the Global Financial Crisis: A Comparison By Cukierman, Alex
  54. A Theory of Wage Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  55. A Slow Recovery with Low Inflation By Allan H. Meltzer
  56. Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises By Roberto Alvarez; Jose De Gregorio
  57. Exiting from Low Interest Rates to Normality: An Historical Perspective By Michael D. Bordo
  58. Identifying the Sources of Model Misspecification By Inoue, Atsushi; Kuo, Chun-Hung; Rossi, Barbara
  59. How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? By Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
  60. Institutions for Macro Stability in Brazil: Inflation Targets and Fiscal Responsibility By José Roberto Afonso; Eliane Cristina Araújo
  61. Government Debt Management: The Long and the Short of It By Elisa Faraglia; Albert Marcet; Rigas Oikonomou; Andrew Scott
  62. The Domestic and International Effects of Interstate U.S. Banking By Cacciatore, Matteo; Ghironi, Fabio; Stebunovs, Viktors
  63. The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies By Carlson, Mark A.; Duygan-Bump, Burcu; Natalucci, Fabio M.; Nelson, William R.; Ochoa, Marcelo; Stein, Jerome L.; Van den Heuvel, Skander J.
  64. Central Bank Communication and the Management of Market Confidence: Two Episodes in 2013 in the U.S. and Japan By Koichiro Kamada
  65. Following the Trend: Tracking GDP when Long-Run Growth is Uncertain By Antolin-Diaz, Juan; Drechsel, Thomas; Petrella, Ivan
  66. Good News is Bad News: Leverage Cycles and Sudden Stops By Ozge Akinci; Ryan Chahrour
  67. Política Monetaria Estadounidense y Tipo De Cambio Real en México, 1996-2012 By Rodolfo Cermeño; Mario Negrete García
  68. Future Directions for the Irish Economy. Conference Proceedings By Graham Stull
  69. Jumps in Bond Yields at Known Times By Don H. Kim; Jonathan H. Wright
  70. MIDAS and bridge equations By Schumacher, Christian
  71. Determinants of the New Zealand Yield Curve: Domestic vs. Foreign Influences By Enzo Cassino; Neil Cribbens; Tugrul Vehbi
  72. Sources of exchange rate fluctuation in Vietnam: an application of the SVAR model By Nguyen Van, Phuong
  73. Financial Development, Long-Term Finance and the Macroeconomy : The Role of Secondary Markets By Uras, R.B.
  74. Corporate Saving in Global Rebalancing By Bacchetta, Philippe; Benhima, Kenza
  75. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  76. How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? By Hans A. Holter; Dirk Krueger; Serhiy Stepanchuk
  77. Estimating the effects of forward guidance in rational expectations models By Richard Harrison
  78. Evaluating the robustness of UK term structure decompositions using linear regression methods By Malik, Sheheryar; Meldrum, Andrew
  79. Commercial Property Price Indexes and the System of National Account By W. Erwin Diewert; Kevin J. Fox; Chihiro Shimizu
  80. Employment Cyclicality and Firm Quality By Lisa B. Kahn; Erika McEntarfer
  81. A Model of Competitive Saving Over the Life-cycle, and its Implications for the Saving Rate Puzzle in China By Guangyu Nie
  82. Intergenerational Developments in Household Saving Behaviour By Mark Vink
  83. A Steadier Course for Monetary Policy By John B. Taylor
  84. Universal Basic Income versus Unemployment Insurance By Alice Fabre; Stéphane Pallage; Christian Zimmermann
  85. Estimating the Preferences of Central Bankers : An Analysis of Four Voting Records By Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D.
  86. Universal Basic Income versus Unemployment Insurance By Fabre, Alice; Pallage, Stéphane; Zimmermann, Christian
  87. Knowledge Spillovers, ICT and Productivity Growth By Corrado, Carol; Haskel, Jonathan; Jona-Lasinio, Cecilia
  88. The Piketty Transition By Carroll, Daniel R.; Young, Eric R.
  89. Mismeasuring Long Run Growth. The Bias from Spliced National Accounts By Prados de la Escosura, Leandro
  90. Turkey’s Transitions : Integration, Inclusion, Institutions By World Bank
  91. The Elephant in the Ground: Managing Oil and Sovereign Wealth By Van Den Bremer, Ton; van der Ploeg, Frederick; Wills, Samuel
  92. Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective By Frederic S. Mishkin; Eugene N. White
  93. Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication By Dräger, L.; Lamla, M.J.; Pfajfar, D.
  94. A Simple Model of Endogenous Growth with Financial Frictions and Firm Heterogeneity By Kazuo MIno
  95. Timor-Leste - Sub-National Spending : Lessons from Experience By World Bank
  96. Creditarea si instabilitatea economica. Studiu de sinteza By Olteanu, Dan Constantin
  98. Re-Distribution, Aggregate Demand, and Growth in an Open Economy: The Crucial Interaction of Portfolio Considerations and External Account Constraints By Razmi, Arslan
  99. How Darwinian should an economy be? By Saint-Paul, Gilles
  100. News media sentiment and investor behavior By Kräussl, Roman; Mirgorodskaya, Elizaveta
  101. Re-Normalize, Don't New-Normalize Monetary Policy By John B. Taylor
  102. Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality By Charles I. Jones
  103. Human capital and optimal redistribution By Koeniger, Winfried; Prat, Julien
  104. Essential Inputs and Unbounded Output: an Alternative Characterization of the Neoclassical Production Function By Andreas Irmen; Alfred Maußner
  105. External Liabilities and Crises By Catão, Luis A. V.; Milesi-Ferretti, Gian Maria
  106. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  107. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  108. New Economic Cycle in Northern Periphery By Marc-Urbain Proulx
  109. Noisy information, distance and law of one price dynamics across US cities By Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
  110. European Integration and the Feldstein-Horioka Puzzle By Margarita Katsimi; Gylfi Zoega
  111. Robust estimation of the VAT pass-through in the Netherlands By Martin Mellens; Hendrik Vrijburg (EUR); Jonneke Dijkstra (EUR)
  112. The Evolution of Payment Costs in Australia By Chris Stewart; Iris Chan; Crystal Ossolinski; David Halperin; Paul Ryan
  113. Unequal distribution of salary from a gender perspective and the impact of recession on the catalan labor market By M.Jesús Gómez Adillón; M.Àngels Cabasés Piqué
  114. Electoral effects on the composition of public spending and revenue: evidence from a large panel of countries By Atsuyoshi Morozumi; Francisco José Veiga; Linda Gonçalves Veiga
  115. Irreversible Investment Under Lévy Uncertainty: An Equation for the Optimal Boundary By Giorgio Ferrari; Paavo Salminen
  116. Economic Consequences of the Ukraine Conflict By Peter Havlik
  117. Does export complexity matter for firms' output volatility? By Daniela MAGGIONI; Alessia LO TURCO; Mauro GALLEGATI
  118. On Shared Prosperity in the Middle East and North Africa By Elena Ianchovichina
  119. An arbitrage-free Nelson-Siegel term structure model with stochastic volatility for the determination of currency risk premia. By S. Mouabbi
  120. Quantile aggregation of density forecasts By Fabio Busetti
  121. An inquiry into the stability of Islamic Financial Services Institutions in terms of volatility, risk and correlations: A case study of Malaysia employing M-GARCH t-DCC and MODWT Wavelet approaches By Kamaruzdin, Thaqif; Masih, Mansur
  122. Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information By Christiane Baumeister; James D. Hamilton

  1. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash in advance constraints. These two frictions give rise to a non-trivial financial market in a monetary economy. A tightening of the collateral constraint results in a credit-crunch generated recession. The model can suitable be used to study the effects on the main macroeconomic variables - and on welfare of each individual - of alternative monetary - and fiscal - policies following the credit crunch. The model reproduces several features of the recent financial crisis, like the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, the collapse in investment and low inflation, in spite of the very large increases of liquidity adopted by the government. The policy implications are in sharp contrast with the prevalent view in most Central Banks, based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity; monetary policy; interest rate
    JEL: E12 E42 E43 E51
    Date: 2014–05–14
  2. By: Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste
    Abstract: How should monetary and fiscal policy react to adverse financial shocks? If monetary policy is constrained by the zero lower bound on the nominal interest rate, subsidising the interest rate on loans is the optimal policy. The subsidies can mimic movements in the interest rate and can therefore overcome the zero bound restriction. Credit subsidies are optimal irrespective of how they are financed. If debt is not state contingent, they result in a permanent increase in the level of public debt and future taxes, and in a permanent reduction in output.
    Keywords: banks; credit policies; credit subsidies; monetary policy; zero bound on interest rates
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2014–05
  3. By: Stan du Plessis (Department of Economics, University of Stellenbosch)
    Abstract: The pre-crisis monetary policy consensus has been challenged on a number of fronts. Even the nominal target, around which the modern consensus developed, has been called into question, with a vigorous recent debate ensuing about nominal income targeting as an alternative. This paper contributes to the controversy by arguing that one important reform of inflation-targeting regimes that deserves more attention is reformulating their targets explicitly in terms of core inflation. Core inflation targeting has a better theoretical grounding from both welfare economics and business cycle perspectives, holds practical advantages for inflation-targeting central banks, and has the promising feature of improving the frankness and accountability of monetary policy.
    Keywords: Inflation, Core inflation, Inflation-targeting, Monetary policy
    JEL: E31 E52 E58
    Date: 2014
  4. By: Peersman, G. (Tilburg University, Center For Economic Research); Wagner, W.B. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending; risk-taking; securitization; SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014
  5. By: Ghate, Chetan; Gopalakrishnan, Pawan; Tarafdar, Suchismita
    Abstract: Emerging market economy business cycles are typically characterized by high consumption and output volatility, strongly counter-cyclical current accounts, and counter-cyclical real interest rates. Evidence from the wider EME and less developed economy business cycle experience suggests however that real interest rates can also be pro-cyclical. We reconcile the pro-cyclicality of real interest rates with the above facts by embedding fiscal policy into a standard emerging market business cycle model. We show that fiscal policy makes real interest rates a-cyclical or pro-cyclical. We use the model to replicate qualitatively some of the key features of the Indian business cycle.
    Keywords: Emerging Market Business Cycles, Fiscal Policy in a Small Open Economy, Indian Business Cycle, Interest Rate Shocks, Macroeconomic Stabilization
    JEL: E32 F32 F41 H2
    Date: 2014–12–08
  6. By: Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
    Abstract: In this paper,we assess the impact ofmajor German structural reforms from1999 to 2008 on key macroeconomic variables within a two-country monetary union DSGE model. Bymany, these reforms, especially the Hartz reforms on the labormarket, are considered to be the root of thereafter observed imbalances in the Euro Area. We find that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German trade balance and the current account was onlyminor. Most importantly, the rest of the Euro Area benefited frompositive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area.
    Keywords: Fiscal Policy,Labor Market Reforms,DSGE modeling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2014
  7. By: Gregor Bäurle; Daniel Kaufmann
    Abstract: We analyse nominal exchange rate and price dynamics after risk premium shocks with short-term interest rates constrained by the zero lower bound (ZLB). In a small-open-economy DSGE model, temporary risk premium shocks lead to shifts of the exchange rate and the price level if a central bank implements an inflation target by means of a traditional Taylor rule. These shifts are strongly amplified and become more persistent once the ZLB is included in the model. We also provide empirical support for this finding. Using a Bayesian VAR for Switzerland, we find that responses of the exchange rate and the price level to a temporary risk premium shock are larger and more persistent when the ZLB is binding. Our theoretical discussion shows that alternative monetary policy rules that stabilise price-level expectations are able to dampen exchange rate and price fluctuations when the ZLB is binding. This stabilisation can be achieved by including either the price level or, alternatively, the nominal exchange rate in the policy rule.
    Keywords: Exchange rate and price dynamics, zero lower bound on short-term interest rates, small-open-economy DSGE model, monetary policy regimes, monetary transmission, Bayesian VAR, sign restrictions
    JEL: C11 C32 E31 E37 E52 E58 F31
    Date: 2014
  8. By: Nukic, Senada
    Abstract: The recent sovereign debt crisis has renewed the interest in fiscal consolidation policies and the associated output losses they entail. However, countries that adopted such policies are also plagued by persistent unemployment, and debt reduction ought to magnify the problem. This paper extends the standard neoclassical growth model to (i) the presence of public debt and (ii) the search and matching frictions in the labor market and quantifies the output and employment losses associated with fiscal consolidation episodes. The main results indicate that these losses can be substantially high. For instance, a 25% debt reduction yields a 50% increase in unemployment along the adjustment path. The paper also shows that policymakers need to carefully consider the intertemporal trade-off between short-run losses and long-run gains from the lower debt in their design of fiscal consolidation plans. Its timing, its size, the choice of fiscal instruments used to achieve it, and the role of monetary policy, also matter.
    Keywords: fiscal consolidation; (un)employment; search and matching frictions; sovereign debt
    JEL: E24 E32 E62
    Date: 2014–11
  9. By: Naveen Srinivasan (Madras School of Economics)
    Abstract: The expectations trap hypothesis is an influential but untested model of monetary policy. The hypothesis conjectures that high inflation during the 1970s was the outcome of a shift in private sector beliefs which were then validated by monetary policy. The subsequent fall in inflation was mainly due to changes in those beliefs. We provide a formal test of the model, using US data from 1948-2008. The flexible least squares approach of Kalaba and Tesfatsion (1988, 1989) is used to evaluate its empirical likelihood. Strong formal support is found for this proposition. Specifically, our results suggest that supply shocks interacting with private sector beliefs about the nature of monetary regime together account for the rise and fall of U.S. inflation.
    Keywords: Monetary policy; Expectations Trap; Time-varying parameters; Flexible Least Squares
    JEL: E31 E42 E52 E58
    Date: 2014–07
  10. By: Chiara Fratto; Harald Uhlig
    Abstract: What accounts for inflation after 2008? We use the prominent pre-crisis Smets-Wouters (2007) model to address this question. We find that due to price markup shocks alone inflation would have been 1% higher than observed and 0.5% higher that the long-run average. Their standard deviation is similar to its pre-crisis level. Price markup shocks were also responsible for the slow recovery of employment, though not for the initial drop. Monetary policy shocks predict an inflation rate 0.5% below average. Government expenditure innovations do not contribute much either to inflation or to employment dynamics.
    JEL: E31 E32 E52
    Date: 2014–11
  11. By: Pankaj Kumar (Indira Gandhi Institute of Development Research); Naveen Srinivasan (Madras School of Economics)
    Abstract: From 2003, the Indian economy enjoyed a boom in growth coupled with moderate inflation for five years. The economy grew at a rate close to 9 percent per year, until it was punctured by the global financial crisis of 2008. Since then, the persistence of inflation in an environment of falling economic growth has come out as a “puzzle” to policymakers’ and many in the financial market. Why has the current slowdown in growth not been disinflationary? This paper contends that there were two important policy errors that are behind the stagflationary outcome. The rapid deterioration in public finances in response to the global economic crisis while stimulating demand temporarily managed to pull down the potential growth rate of the economy. The RBI compounded the problem by being sluggish and soft on inflation after the economy bounced back from the effects of the global economic crisis because it systematically overestimated the potential growth rate of the economy. This meant that by the time monetary policy was tightened, high inflation and inflation expectations had already become entrenched. That is why the current growth slowdown has not been disinflationary
    Keywords: India; Inflation; Potential Output; Taylor Rule
    JEL: E31 E32 E52
    Date: 2014–06
  12. By: Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
    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: Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion, Zero Lower Bound, Financial Crisis, Great Recession
    JEL: E58 E32 C11 C51 C52 C54
    Date: 2014–11
  13. By: Javier Andrés (University of Valencia); Pablo Burriel (Banco de España)
    Abstract: We analyse the incidence of endogenous entry and firm TFP-heterogeneity on the response of aggregate inflation to exogenous shocks. We build up an otherwise standard DSGE model in which the number of firms is endogenously determined and firms differ in their steady state level of productivity. This splits the industry structure into firms of different sizes. Calibrating the different transition rates, across firm sizes and out of the market we reproduce the main features of the distribution of firms in Spain. We then compare the inflation response to technology, interest rate and entry cost shocks, among others. We find that structures in which large (more productive) firms predominate tend to deliver more muted inflation responses to exogenous shocks.
    Keywords: firm dynamics, industrial structure, inflation, business cycles.
    JEL: E31 E32 L11 L16
    Date: 2014–12
  14. By: Martin, Philippe; Philippon, Thomas
    Abstract: We provide a first comprehensive account of the dynamics of Eurozone countries from the creation of the Euro to the Great recession. We model each country as an open economy within a monetary union and analyze the dynamics of private leverage, fiscal policy and spreads. Our parsimonious model can replicate the time-series for nominal GDP, employment, and net exports of Eurozone countries between 2000 and 2012. We then ask how periphery countries would have fared with: (i) more conservative fiscal policies; (ii) macro-prudential tools to control private leverage; (iii) a central bank acting earlier to limit sovereign spreads; and (iv) the possibility to recoup the competitiveness they lost in the boom. To perform these counterfactual experiments, we use U.S. states as a control group that did not suffer from a sudden stop. We find that periphery countries could have stabilized their employment if they had followed more conservative fiscal policies during the boom. This is especially true in Greece. For Ireland, however, given the size of the private leverage boom, such a policy would have required buying back almost all of the public debt. Macro-prudential policy would have been helpful, especially in Ireland and Spain. However, in presence of a spending bias in fiscal rules, macro-prudential policies would have led to less prudent fiscal policies in the boom. Central bank actions would have stabilized employment during the bust but not public debt. Finally, if these countries had been able to regain in the bust the competitiveness they lost in the boom, they would have experienced a shorter and milder recession.
    Keywords: Eurozone crisis; Fiscal policy; Macroprudential policy; private leverage; sudden stop
    JEL: E44 E62 F32 F41 G01
    Date: 2014–10
  15. By: Michael Ehrmann
    Abstract: Inflation targeting (IT) had originally been introduced as a device to bring inflation down and stabilize it at low levels. Given the current environment of persistently weak inflation in many advanced economies, IT central banks must now bring inflation up to target. In this paper, the author tests to what extent inflation expectations are anchored in such circumstances, by comparing (i) IT and non-IT countries, and (ii) across periods when inflation is at normal levels, (persistently) high, or (persistently) weak. He finds that under low and persistently low inflation, some disanchoring can occur - inflation expectations are more dependent on lagged inflation; forecasters tend to disagree more; and inflation expectations get revised down in response to lower-than-expected inflation, but do not respond to higher-than-expected inflation. Since inflation expectations in IT countries are substantially better anchored than those in the control group, policy rates in IT countries need to react less to changes in inflation, making IT central banks considerably less likely to hit the zero lower bound.
    Keywords: Inflation and prices; Inflation targets
    JEL: E52 E58 E31 C53
    Date: 2014
  16. By: Bossone, Biagio
    Abstract: This study analyzes the emergence of secular stagnation as the consequence of a rise in the preference for liquidity. Such a rise is caused by a persistent set of pessimistic expectations. This study also investigates the effectiveness of a broad range of demand-management policies in dealing with secular stagnation. To obtain these results, this study uses a model where agents derive utility from holding assets of different degrees of liquidity. In this environment, rational expectations interact with changes in market sentiment, to produce secular stagnation.
    Keywords: helicopter money,liquidity preference,market sentiment,quantitative easing,pessimistic (optimistic) expectations,utility analysis
    JEL: E2 E3 E4 E5 E61 E62 E63 G11 G12
    Date: 2014
  17. By: Vincenzo Cuciniello (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers� credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs� leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks� market power. Third, we find that amplification is stronger the more aggressive the central bank�s response to inflation, as measured by the inflation coefficient in the Taylor rule.
    Keywords: large banks, bank markup, monetary policy
    JEL: E51 E52 G21
    Date: 2014–10
  18. By: Elton Beqiraj; Massimiliano Tancioni
    Abstract: Sovereign and private sector default probabilities are introduced in a monetary model to evaluate whether the consideration of a sovereign risk channel can affect the size and sign of fiÂ…scal multipliers, an hypothesis recently appeared in the literature. The model is estimated using data of EZ peripheral countries. From posterior estimates and simulations we show that i) the relation between fundamentals, sovereign risk and interest rate spreads is weak; ii) in the short term, the risk channel operates in a pro- cyclical direction, amplifying the effects of Â…fiscal contractions; iii) the consideration of a liquidity trap does not reverse this result.
    Keywords: default risk, interest rates, Â…fiscal policy, monetary policy, liquidity trap, Bayesian estimation
    JEL: E52 E62 E63 C11
    Date: 2014–11
  19. By: Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: The frequency of nominal wage adjustments varies with macroeconomic conditions. Existing macroeconomic analyses exclude such state dependency in wage setting, as- suming exogenous timing and constant frequency of wage adjustments under time- dependent setting (e.g., Calvo- and Taylor-style setting). To investigate how state dependency in wage setting influences the transmission of monetary shocks, this paper develops a New Keynesian model in which the timing and frequency of wage changes are endogenously determined in the presence of fixed wage-setting costs. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared to time-dependent setting. Further, with state dependency, monetary nonneutralities decrease with the elasticity of demand for differentiated labor, while the opposite holds under time-dependent setting. Next, this paper examines the empirical importance of state dependency in wage setting. To this end, I augment the model with habit formation, capital accumula- tion, capital adjustment costs, and variable capital utilization. When parameterized to reproduce the fluctuations in wage rigidity observed in the U.S. data, the state- dependent wage-setting model shows a response to monetary shocks quite similar to that of the time-dependent counterpart. The result suggests that for the U.S. economy, state dependency in wage setting is largely irrelevant to the monetary transmission.
    Keywords: Nominal wage stickiness, state-dependent setting, time-dependent set- ting, monetary nonneutralities, New Keynesian models.
    JEL: E31 E32
    Date: 2014–11
  20. By: Selien De Schryder; Gert Peersman; Joris Wauters (-)
    Abstract: We estimate a New Keynesian wage Phillips curve for a panel of 24 OECD countries, and allow the degree of wage indexation to past inflation to vary according to the monetary policy regime. We .find that the extent of wage indexation is significantly lower in an inflation targeting regime, in contrast to monetary targeting, exchange rate targeting and policy regimes without an explicit quantitative anchor. The results put into question whether embedding a constant degree of wage indexation in standard DSGE models is truly structural.
    Keywords: wage indexation, monetary policy regimes, cross-country panel, Phillips curve
    JEL: C23 E42 J30
    Date: 2014–11
  21. 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
  22. By: Fan, Jingwen; Minford, Patrick; Ou, Zhirong
    Abstract: We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes. Fiscal policy has a substantial role in this weighted model. A similar model accounts for the 1980s though the role of fiscal policy gets smaller.
    Keywords: fiscal theory of the price level; identification; indirect inference; testing; UK inflation
    JEL: E31 E37 E62 E65
    Date: 2014–11
  23. By: Quadrini, Vincenzo
    Abstract: The financial intermediation sector is important not only for channeling resources from agents in excess of funds to agents in need of funds (lending channel). By issuing liabilities it also creates financial assets held by other sectors of the economy for insurance purpose. When the intermediation sector creates less liabilities or their value falls, agents are less willing to engage in activities that are individually risky but desirable in aggregate (bank liabilities channel). The paper studies how financial crises driven by self-fulfilling expectations are transmitted, through this channel, to the real sector of the economy.
    Keywords: Banking crises; Macroeconomic volatility; Transmission channel
    JEL: E32 E44 G01
    Date: 2014–11
  24. By: Buiter, Willem H.
    Abstract: Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender-of-last-resort and market-maker-of-last-resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms - areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender-of-last-resort and marketmaker-of-last resort activities. Central banks ought not to engage in quasi-fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.
    Keywords: accountability; independence,; legitimacy; monetary policy; quasi-fiscal; regulation; seigniorage,; supervision
    JEL: E02 E42 E52 E58 E61 E62 E63 G18 G28 H63
    Date: 2014–10
  25. By: Cook, David; Devereux, Michael B
    Abstract: An independent currency and a flexible exchange rate generally helps a country in adjusting to macroeconomic shocks. But recently in many countries, interest rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in countries with flexible exchange rates. This paper argues that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area. With monetary policy constrained by the zero bound, under flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates under an optimal targeting rule. In a zero lower bound environment, in order for a regime of multiple currencies to dominate a single currency, it is necessary to have effective forward guidance in monetary policy.
    Keywords: Forward Guidance; Lower Bound; Monetary Policy; Optimal Currency Area
    JEL: E2 E5 E6
    Date: 2014–10
  26. By: Clancy, Daragh (European Stability Mechanism); Merola, Rossana (International Labour Office)
    Abstract: The financial sector played a key role in triggering the recent crisis. Negative feedback loops between the financial sector and the real economy have further increased the persistence and amplitude of the downturn. We examine such macrofinancial linkages through the lens of the housing market. We develop a model capable of replicating some key stylised facts from the bursting of the Irish property bubble. We show that expectations of future favourable events may accelerate credit growth and potentially result in a more vulnerable economy susceptible to downward revisions to the original expectations. We find that macro-prudential policy, in particular counter-cyclical capital requirements and larger capital buffers, can play a role in insulating the economy from these risks.
    Keywords: DSGE, macro-prudential policy, macro-financial linkages, capital requirements, Ireland.
    JEL: E44 E51 G10 G28
    Date: 2014–11
  27. By: Jorge Rojas (Departamento de Economáa - Pontificia Universidad Católica del Perú)
    Abstract: The Great Recession is the manifestation of some fundamental problems in the real sector of the global economy, related basically to the loss of competitiveness of the U.S. and other central economies reflected in continuous external disequilibria in the form of parallel current account deficits and financial account surpluses. Domestic monetary and fiscal (or domestic adjustment) policies are not working because we are dealing with a global problem that requires multilateral solutions allowing the adjustment of some fundamental relative prices and the closing of some key structural imbalances in order to make a sustainable recovery possible. Besides, the difficulties in finding and engineering a solution show the need to reassess the theoretical paradigms underlying the economic policies preceding the current crisis (e.g., supply-side economics). JEL Classification-JEL: E52, E62, F31, F33, F62, G01.
    Keywords: Monetary Policy, Fiscal Policy, Exchange Rates, Globalization, Financial Crisis.
    Date: 2014
  28. By: Hassan, Tarek; Mertens, Thomas M.
    Abstract: We introduce the information microstructure of a canonical noisy rational expectations model (Hellwig, 1980) into the framework of a conventional real business cycle model. Each household receives a private signal about future productivity. In equilibrium, the stock price serves to aggregate and transmit this information. We find that dispersed information about future productivity affects the quantitative properties of our real business cycle model in three dimensions. First, households' ability to learn about the future affects their consumption-savings decision. The equity premium falls and the risk-free interest rate rises when the stock price perfectly reveals innovations to future productivity. Second, when noise trader demand shocks limit the stock market's capacity to aggregate information, households hold heterogeneous expectations in equilibrium. However, for a reasonable size of noise trader demand shocks the model cannot generate the kind of disagreement observed in the data. Third, even moderate heterogeneity in the equilibrium expectations held by households has a sizable effect on the level of all economic aggregates and on the correlations and standard deviations produced by the model. For example, the correlation between consumption and investment growth is 0.29 when households have no information about the future, but 0.41 when information is dispersed.
    Keywords: Asset Prices; Business Cycles; Dispersed Information; Investment; Noisy Rational Expectations; Portfolio Choice
    JEL: C63 D83 E2 E3 E44 G11
    Date: 2014–06
  29. By: Ercolani, Valerio; Pavoni, Nicola
    Abstract: We study a largely neglected channel through which government expenditures boost private consumption. We set up a lifecycle model in which households are subject to health shocks. We estimate a negative impact of public health care on household consumption dispersion, wealth and saving. According to our model, this result is explained by a change in the level of precautionary saving, with public health care acting as a form of consumption insurance. We compute the implied consumption multipliers by simulating the typical government consumption shock within a calibrated general equilibrium version of our model, with flexible prices. The impact consumption multiplier generated by the decrease in the level of precautionary saving is positive and sizable. When we include the effect of taxation, the sign of the impact multiplier depends on a few features of the model, such as the persistence of the health shocks. The long-run cumulative multiplier is negative across all calibrations.
    Keywords: consumption multipliers; government expenditure by function; precautionary saving
    JEL: E21 E32 E62
    Date: 2014–07
  30. By: Fiorella De Fiore; Harald Uhlig
    Abstract: We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firm's ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.
    JEL: E22 E32 E44 E5
    Date: 2014–12
  31. By: Björn O. Meyer
    Abstract: The provision of credit has been shown to be eminent for macroeconomic activity.Recent research highlighted that optimism may play a role in the provision of credit through leverage cycles. A decomposition of corporate bond spreads allows the modelling of a propensity-to-lend through an excess bond premium. In the US economy, optimism in various sentiment measures causes within a VAR model, including other financial market variables, a fall of this excess bond premium and therefore increase the propensity-to-lend. Use of the Michigan Consumer Sentiment Index and animal spirit indices show a variation of information content in sentiment and different types of animal spirits. The overall reaction to positive animal spirits seems to be dominated by a positive response of the credit provision and its subsequent reversal, while an increase in the MCSI causes a more persistent positive response
    Keywords: credit provision
    JEL: E22 E32 E44
    Date: 2014–09
  32. By: Brown, M. (Tilburg University, Center For Economic Research); de Haas, R. (Tilburg University, Center For Economic Research); Sokolov, V.
    Abstract: Abstract: We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the local currency and financial dollarization. Our results show that regions with higher inflation experience an increase in the dollarization of household deposits and a decrease in the dollarization of (long-term) household credit. The negative impact of inflation on credit dollarization is weaker in regions with less-integrated banking markets, suggesting that the asset-liability management of banks constrains the currency-portfolio choices of households.
    Keywords: Financial dollarization; financial integration; regional inflation
    JEL: E31 E42 E44 F36 G21 P22 P24
    Date: 2013
  33. By: P. Andrade; R. Crump; S. Eusepi; E. Moench
    Abstract: We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two additional ingredients to match the entire term structure of disagreement: First, agents must disentangle low-frequency shifts in the fundamentals of the economy from short-term fluctuations. Second, agents must take into account the dynamic interactions between variables when forming forecasts. While models enriched with these features capture the observed term structure of disagreement irrespective of the source of the informational friction, they fall short at explaining the time-variance of disagreement at medium- and long-term horizons. We also use the term structure of disagreement to analyze the monetary policy rule perceived by professional forecasters and show that it features a high degree of interest-rate smoothing and time variation in the intercept.
    Keywords: Expectations, survey forecasts, imperfect information, term structure of disagreement.
    JEL: D83 D84 E37
    Date: 2014
  34. By: Karadi, Peter; Reiff, Adam
    Abstract: How do frictions in price setting influence monetary non-neutrality? We revisit this classic question in a quantitative menu cost model with multi-product firms that face idiosyncratic shocks with unsynchronized stochastic volatility. The model matches the unconditional distribution of price changes and successfully predicts new evidence on pricing responses to large value-added tax shocks. In particular, it captures both the exploding fraction of price changes and the shape of their conditional distribution, outperforming alternative models. The model generates near money neutrality even to small nominal shocks.
    Keywords: monetary policy transmission; price change distribution; state-dependent pricing; value-added tax
    JEL: E31 E52
    Date: 2014–09
  35. By: Rémy Charleroy (Centre d'Economie de la Sorbonne); Michael A. Stemmer (Centre d'Economie de la Sorbonne)
    Abstract: The recent financial crisis has heightened the interest in the impact of financial sector developments on the macroeconomic condition of countries. By employing a rolling-window Vector Auto-Regressive method based on monthly data for a time span between January 2001 and March 2013, this article sets up a comprehensive financial conditions index for a set of major emerging countries. The index sheds light on the various triggers of financial crises during this period and captures both domestic developments as well as global spillover effects. Index dynamics exhibit an overall abrupt slowdown due to the 2007-2008 Financial Crisis, precipitated primarily through a global liquidity squeeze and overall financial sector strain. In some countries, rising volatility of financial conditions thereafter has substantially been sparked by nominal effective exchange rate movements. Tested on its forecasting applicability, the inclusion of macroeconomic and financial variables enables the index to also perform well as a leading indicator for business cycles.
    Keywords: Emerging Markets, financial conditions index, VAR, leading indicator.
    JEL: C32 C53 E44 F42
    Date: 2014–10
  36. By: L. Randall Wray
    Abstract: Over the past two decades there has been a revival of Georg Friedrich Knapp's "state money" approach, also known as chartalism. The modern version has come to be called Modern Money Theory. Much of the recent research has delved into three main areas: mining previous work, applying the theory to analysis of current sovereign monetary operations, and exploring the policy space open to sovereign currency issuers. This paper focuses on "outside" money--the currency issued by the sovereign--and the advantages that accrue to nations that make full use of the policy space provided by outside money.
    Keywords: Central Bank Independence; Chartalism; Fiat Money; Functional Finance; Innes; Keynes; Knapp; Modern Money Theory; Outside Money; Sovereign Currency; State Money
    JEL: B1 B2 B3 B5 E5 E6
    Date: 2014–12
  37. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.
    Keywords: Fiscal multipliers, DSGE Models, Hand-to-Mouth, Edgeworth Complementarity, Euro Area, Bayesian Econometrics.
    JEL: C32 E32 E62
    Date: 2014–11–07
  38. By: Mendoza, Enrique G. (University of Pennsylvania); Tesar, Linda L. (University of Michigan); Zhang, Jing (Federal Reserve Bank of Chicago)
    Abstract: What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a “race to the bottom” in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.
    Keywords: European debt crisis; tax competition; capacity utilization; fiscal austerity
    JEL: E61 E62 E66 F34 F42
    Date: 2014–10–06
  39. By: Eyster, Erik; Madarász, Kristóf; Michaillat, Pascal
    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.
    Keywords: cursedness; fairness; markup; nonneutrality of money
    JEL: E10 E31
    Date: 2014–12
  40. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England)
    Abstract: This paper investigates if the impact of uncertainty shocks on the US economy has changed over time. To this end, we develop an extended Factor Augmented VAR model that simultaneously allows the estimation of a measure of uncertainty and its time-varying impact on a range of variables. We find that the impact of uncertainty shocks on real activity and financial variables has declined systematically over time. In contrast, the response of inflation and the short-term interest rate to this shock has remained fairly stable. Simulations from a non-linear DSGE model suggest that these empirical results are consistent with an increase in the monetary authorities' anti-inflation stance and a 'flattening' of the Phillips curve.
    Keywords: FAVAR, Stochastic volatility, Uncertainty shocks, DSGE model
    JEL: C15 C32 E32
    Date: 2014–12
  41. By: Jo Michell (University of the West of England)
    Abstract: Post Keynesian economics has largely forgotten Steindl's insight that monopolisation of the corporate sector redistributes profits to those firms least likely to invest them productively. Agent-based methods can be used to incorporate Steindl's insights into a simple stock-flow consistent model of monetary circuit. This model illustrates the 'maldistribution of profits' and 'enforced indebtedness' of heterogeneous firms alongside the tendency towards stagnation that occurs with rising monopolisation. The model also demostrates Minsky's assertion that firms' leverage rises over the business cycle can be reconciled with Kalecki's macroeconomic identities showing that profits are 'financed' by the investment expenditures of firms.
    Keywords: Stock-flow consistent, heterogeneous agents, Post-Keynesian
    JEL: C63 E22 E25 E42
    Date: 2014–11
  42. By: Mandler, Martin; Scharnagl, Michael
    Abstract: Our paper studies the relationship between money growth and consumer price inflation in the euro area using wavelet analysis. Wavelet analysis allows to account for variations in the money growth-inflation relationship both across the frequency spectrum and across time. We find evidence of strong comovements between money growth and inflation at low frequencies with money growth as the leading variable. However, our analysis of time variation at medium-to-long-run frequencies indicates a weakening of the relationship after the mid 1990s which also reflects in a deterioration of the leading indicator property and a decline in the cross wavelet gain. In contrast, most of the literature, by failing to account for the effects of time variation, estimated stable long-run relationships between money growth and inflation well into the 2000s.
    Keywords: money growth,inflation,wavelet analysis
    JEL: C30 E31 E40
    Date: 2014
  43. By: Asgharian, Hossein (Department of Economics, Lund University); Christiansen, Charlotte (CREATES, Aarhus University); Hou, Ai Jun (School of Business, Stockholm University)
    Abstract: We investigate the long-run stock-bond correlation using a novel model that combines the dynamic conditional correlation model with the mixed-data sampling approach. The long-run correlation is affected by both macro-finance variables (historical and forecasts) and the lagged realized correlation itself. Macro-finance variables and the lagged realized correlation are simultaneously significant in forecasting the long-run stock-bond correlation. The behavior of the long-run stock-bond correlation is very different when estimated taking the macro-finance variables into account. Supporting the flight-to-quality phenomenon for the total stock-bond correlation, the long-run correlation tends to be small/negative when the economy is weak.
    Keywords: DCC-MIDAS model; Long-run correlation; Macro-finance variables; Stock-bond correlation
    JEL: C32 C58 E32 E44 G11 G12
    Date: 2014–11–20
  44. By: Iwamura, Mitsuru; Kitamura, Yukinobu; Matsumoto, Tsutomu; Saito, Kenji
    Abstract: This paper discusses the potential and limitations of Bitcoin as a digital currency. Bitcoin as a digital asset has been extensively discussed from the viewpoints of engineering and security design. But there are few economic analyses of Bitcoin as a currency. Bitcoin was designed as a payments vehicle and as a store of value (or speculation). It has no use bar as money or currency. Despite recent enthusiasm for Bitcoin, it seems very unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin (i.e. the exchange rate against the major currencies). We diagnose the instability of market price of Bitcoin as being a symptom of the lack of flexibility in the Bitcoin supply schedule ‐ a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics and suggests a new monetary policy rule (i.e. monetary policy without a central bank) for stabilizing the values of Bitcoin and other cryptocurrencies.
    Keywords: Bitcoin, Cryptocurrency, Currency competition, Friedrich A. Hayek, Proof of work
    JEL: B31 E42 E51
    Date: 2014–11
  45. By: Rose, Andrew K
    Abstract: This paper explores the relationship between inflation and the existence of a publicly-traded, long-maturity, nominal, domestic-currency bond market. Bond holders suffer from inflation and could be a potent anti-inflationary force; I ask whether their presence is apparent empirically. I use a panel data approach, examining the difference in inflation before and after the introduction of a bond market. My primary focus is on countries with inflation targeting regimes, though I also examine countries with hard fixed exchange rates and other monetary regimes. Inflation-targeting countries with a bond market experience inflation approximately three to four percentage points lower than those without a bond market. This effect is economically and statistically significant; it is also insensitive to a variety of estimation strategies, including using political and fiscal instrumental variables. The existence of a bond market has little effect on inflation in other monetary regimes, as do indexed or foreign-denominated bonds.
    Keywords: currency; domestic; effect; empirical; fixed; long; maturity; nominal; panel; risk
    JEL: E52 E58
    Date: 2014–09
  46. By: Nicolas Carnot
    Abstract: This paper introduces a simple rule for appraising the economic soundness of fiscal policies. It connects fiscal policy to a long-run debt objective, taken as an anchor, while arbitraging symmetrically between this debt objective and output stabilisation. The rule offers a benchmark to assess the evolution of primary expenditure, net of the impact of discretionary revenue measures, taken as a proper operational target for annual fiscal policy. The properties and implications of this rule of thumb are analysed drawing on qualitative arguments and retrospective simulations.
    JEL: E62 H60 H77
    Date: 2014–08
  47. By: World Bank
    Keywords: Environmental Economics and Policies Banks and Banking Reform Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth Environment
    Date: 2014–11
  48. By: Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
    Abstract: Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon.
    Keywords: Bayesian shrinkage, inflation forecast combination, internal forecasts, rolling window estimation
    JEL: C22 C53 C11 E31
    Date: 2014–11–20
  49. By: Jaylson Jair da Silveira; Gilberto Tadeu Lima
    Abstract: Drawing on a considerable empirical and experimental literature that finds persistent and endogenously time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting strategies – one based on costly full rationality or perfect foresight, the second based on costless bounded rationality or adaptive foresight – in a basic macroeconomic model. Drawing in particular on the significant evidence that forecast errors have to pass some threshold before agents abandon their previously selected inflation forecasting strategy, we assume that agents switch between these forecasting strategies based on satisficing evolutionary dynamics. We find that convergence to a long-run equilibrium configuration consistent with output growth, unemployment and inflation at their natural levels is achieved even when heterogeneity in inflation expectations (with predominance of the adaptive foresight strategy) is an attractor of a noisy satisficing evolutionary dynamics. Therefore, in accordance with the empirical evidence, persistent heterogeneity in inflation expectations (with prevalence of bounded rational expectations) emerges as a long-run equilibrium outcome.
    Keywords: Heterogeneous inflation expectations; perfect foresight; adaptive foresight; noisy satisficing evolutionary dynamics
    JEL: E31 C62 C73
    Date: 2014–11–26
  50. By: Gregory Bauer
    Abstract: Using a panel logit framework, the paper provides an estimate of the likelihood of a house price correction in 18 OECD countries. The analysis shows that a simple measure of the degree of house price overvaluation contains a lot of information about subsequent price reversals. Corrections are typically triggered by a sharp tightening in the monetary policy interest rate relative to a baseline level in each country. Two different assessments of the current and future baseline estimates of monetary policy interest rates are provided: a simple Taylor rule and one extracted from a term structure model. A case study based on the Canadian housing market is presented.
    Keywords: Econometric and statistical methods, Housing
    JEL: C2 E43 R21
    Date: 2014
  51. By: Zaman, Gheorghe; Georgescu, George
    Abstract: The research focuses on several challenges on short, medium and long term bank lending in Romania, taking into consideration a series of economic and social criteria as well as different types of loans. At the same time, special attention is paid to the post-accession into the EU impact and to the financial and economic effects of the international crisis. The main results of the research are expected to point out the necessity of structural improvements in the field of long-term loans contributing to investments boosting as a vital prerequisite for Romania’s economy sustainable development. Meanwhile it is worth mentioning the intensity and duration of the crisis in Romania compared to other developed and emerging EU member countries. The importance of addressing causes that hinder the monetary policy transmission channels, lending sustainable re-launching, more involvement of banks in European funds absorption and growing market share for banks with domestic capital, are highlighted as main conclusions resulting from the study.
    Keywords: bank lending; international crisis; post-accession and crisis impact; monetary policy transmission channels; long-term credits; investments
    JEL: E43 E52 E58 F34 G21
    Date: 2014–10
  52. By: Orlik, Anna; Veldkamp, Laura
    Abstract: A fruitful emerging literature reveals that shocks to uncertainty can explain asset returns, business cycles and financial crises. The literature equates uncertainty shocks with changes in the variance of an innovation whose distribution is common knowledge. But how do such shocks arise? This paper argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Using real-time GDP data, we measure uncertainty as the conditional standard deviation of GDP growth, which captures uncertainty about the distribution’s estimated parameters. When the forecasting model admits only normally-distributed outcomes, we find small, acyclical changes in uncertainty. But when agents can also estimate parameters that regulate skewness, uncertainty fluctuations become large and counter-cyclical. The reason is that small changes in estimated skewness whip around probabilities of unobserved tail events (black swans). The resulting forecasts resemble those of professional forecasters. Our uncertainty estimates reveal that revisions in parameter estimates, especially those that affect the risk of a black swan, explain most of the shocks to uncertainty.
    Keywords: forecasting; rare events; Uncertainty
    JEL: C1 E3 G1
    Date: 2014–09
  53. By: Cukierman, Alex
    Abstract: This paper compares the behavior of Euro-Area (EA) banks’ credit and reserves with those of US banks following respective major crisis triggers (Lehman’s collapse in the US and the 2009 admission by Papandreou, that Greece’s deficit was substantially higher than previously believed, in the EA). The paper shows that, although the behavior of banks’ credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different. In particular, while US banks’ reserves have been on an uninterrupted upward trend since Lehman’s collapse, those of EA banks fluctuated markedly in both directions. The paper argues that, at the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed.
    Keywords: credit; crisis; Euro Area; monetary policy; reserves; US
    JEL: E51 E52 E58 G1
    Date: 2014–12
  54. By: Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
    Abstract: We present a new theory of wage adjustment, based on worker loss aversion. In line with prospect theory, the workers’ perceived utility losses from wage decreases are weighted more heavily than the perceived utility gains from wage increases of equal magnitude. Wage changes are evaluated relative to an endogenous reference wage, which depends on the workers’ rational wage expectations from the recent past. By implication, employment responses are more elastic for wage decreases than for wage increases and thus firms face an upward-sloping labor supply curve that is convexly kinked at the workers’ reference price. Firms adjust wages flexibly in response to variations in labor demand. The resulting theory of wage adjustment is starkly at variance with past theories. In line with the empirical evidence, we find that (1) wages are completely rigid in response to small labor demand shocks, (2) wages are downward rigid but upward flexible for medium sized labor demand shocks, and (3) wages are relatively downward sluggish for large shocks.
    Keywords: downward wage sluggishness; loss aversion
    JEL: D03 D21 E24
    Date: 2014–12
  55. By: Allan H. Meltzer
    Abstract: This paper examines explanations of the low inflation and slow growth of the economic recovery after the 2008 financial crisis.
    Date: 2013–08
  56. By: Roberto Alvarez (University of Chile); Jose De Gregorio (Peterson Institute for International Economics)
    Abstract: Latin American performance during the global financial crisis was unprecedented. Many developing and emerging countries successfully weathered the worst crisis since the Great Depression. Was it good luck? Was it good policies? In this paper we compare growth during the Asian and global financial crises and find that a looser monetary policy played an important role in mitigating crisis. We also find that higher private credit, more financial openness, less trade openness, and greater exchange rate intervention worsened economic performance. Our analysis of Latin American countries confirms that effective macroeconomic management was key to good economic performance. Finally, we present evidence from a sample of 31 emerging markets that high terms of trade had a positive impact on resilience.
    Keywords: Latin America, Emerging Markets, Developing Countries, Global Financial Crisis, Macroeconomic Policies
    JEL: E58 E63 F3
    Date: 2014–11
  57. By: Michael D. Bordo (Rutgers University)
    Abstract: This paper examines the Federal Reserve's recent policy of quantitative easing by looking back at the experience of the 1930s and 1940s when the Fed, under Treasury control, kept interest rates at levels comparable to today and its balance sheet increased similarly. The paper also presents macroeconomic evidence based on the labor market, the growth of the money supply, and the behavior of real GDP and the unemployment rate in addition to a comparison of the Federal funds rate with the Taylor Rule rate and the shadow funds rate. Because of issues connected to its large balance sheet, the Fed may use tools other than the federal funds rate to tighten monetary policy. Returning to a higher (more normal) rate environment will remove some of the distortions that have accompanied the long period of abnormally low interest rates. But rising rates will also present problems for public finance and for the distribution of income that all but guarantees political rancor in the future.
    Date: 2014–11
  58. By: Inoue, Atsushi; Kuo, Chun-Hung; Rossi, Barbara
    Abstract: In this paper we propose empirical methods for detecting and identifying misspecifications in DSGE models. We introduce wedges in a DSGE model and identify potential misspecification via forecast error variance decomposition (FEVD) and marginal likelihood analyses. Our simulation results based on a small-scale DSGE model demonstrate that our method can correctly identify the source of misspecification. Our empirical results show that the medium-scale New Keynesian DSGE model that incorporates features in the recent empirical macro literature is still very much misspecified; our analysis highlights that the asset and labor markets may be the source of the misspecification.
    Keywords: DSGE models; empirical macroeconomics; model misspecification
    JEL: C32 E32
    Date: 2014–09
  59. By: Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
    Abstract: How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
    Keywords: Fiscal Policy; Government Debt; Laffer Curve; Progressive Taxation
    JEL: E62 H20 H60
    Date: 2014–11
  60. By: José Roberto Afonso; Eliane Cristina Araújo
    Abstract: Monetary and fiscal institutions have played a decisive role in the stabilisation of the Brazilian economy since the mid-1990s. Brazil’s experience of designing and managing institutions to this end is likely to be of interest to other emerging and low- or middle-income economies. In Brazil institutional reforms were predominantly made in response to a succession of internal and, particularly, external crises. Indeed, perhaps nowhere in the world has inflation received as much attention from economists as in Brazil. The consequent accumulation of theoretical and practical knowledge resulted in a wealth of theories about the nature of Brazilian inflation. As such, the Brazilian experience offers many lessons to be learned, both in the sense of what could be done and what is better avoided. When it abandoned the exchange rate anchor, Brazil was one of the first emerging economies to adopt a system of inflation targets. In the area of fiscal policy, a succession of institutional changes – from changes in the budget and management of the public debt to the fiscal adjustment of regional governments – culminated in the adoption of the Fiscal Responsibility Law shortly after the introduction of new monetary and exchange policies. However, consolidation of the new currency, the Real, and accelerated growth shortly after the turn of the century, followed by the global financial crisis, meant that the agenda of structural reforms was abandoned. New aspects were introduced to economic policy, such as a strong link between the growth of public debt and credit supply.Recent stagnation, with repeated years of low growth, inflation pushing at the ceiling of its target, and primary surplus below its target, sets new challenges for the Brazilian economy.
    Date: 2014
  61. By: Elisa Faraglia; Albert Marcet; Rigas Oikonomou; Andrew Scott
    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. <br><br>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: 2014–11
  62. By: Cacciatore, Matteo; Ghironi, Fabio; Stebunovs, Viktors
    Abstract: This paper studies the domestic and international effects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of financial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of firm-level and aggregate output volatility. In turn, trade and financial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international fluctuations after the United States began its transition to interstate banking in the late 1970s.
    Keywords: Business cycle volatility; Current account; Deregulation; Interstate banking; Producer entry; Real exchange rate
    JEL: E32 F32 F41 G21
    Date: 2014–05
  63. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Natalucci, Fabio M. (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.)); Ochoa, Marcelo (Board of Governors of the Federal Reserve System (U.S.)); Stein, Jerome L. (Board of Governors of the Federal Reserve System (U.S.)); Van den Heuvel, Skander J. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.
    Keywords: Financial stability; safe assets; money-like instruments; central bank policies
    Date: 2014–11–25
  64. By: Koichiro Kamada (Bank of Japan)
    Abstract: Confidence has a strong influence on security prices and volatility, but has received little attention in mainstream macroeconomics. Kamada and Miura (2014) have recently revived this concept in their double-layered model of private and public information and shown how herding behavior emerges in sovereign bond markets. This article looks at two episodes that occurred in 2013 in the U.S. and Japan and uses their model to explain how the interest rate hikes and subsequent increase in volatility emerged. The analysis indicates that central bank communication is a promising policy tool to manage market confidence, but at the same time, could create unintended market turbulence.
    Keywords: Central bank; communication; market confidence; bond market; volatility
    JEL: D40 D83 E58 G12
    Date: 2014–12–01
  65. By: Antolin-Diaz, Juan; Drechsel, Thomas; Petrella, Ivan
    Abstract: Using a Bayesian dynamic factor model that allows for changes in both the long-run growth rate of output and the volatility of business cycles, we document a significant decline in long-run growth in the United States and in other advanced economies. Our evidence supports the view that this slowdown started prior to the Great Recession. When applied to real-time data, the proposed model is capable of detecting shifts in long-run growth in a timely and reliable manner. Furthermore, taking into account the variation in long-run growth improves the short-run forecasts and "nowcasts" of US GDP typically produced using this class of models.
    Keywords: Bayesian methods; dynamic factor models; long-run growth; mixed frequencies; real-time forecasting
    JEL: C11 C38 C53 E37
    Date: 2014–11
  66. By: Ozge Akinci (Board of Governors of the Federal Reserve System); Ryan Chahrour (Boston College)
    Abstract: We show that a model with imperfectly forecastable changes in future productivity and an occasionally-binding collateral constraint can match a set of stylized facts about Sudden Stop events. "Good" news about future productivity raises leverage during times of expansions, increasing the probability that the constraint binds, and a Sudden Stop occurs, in future periods. During the Sudden Stop, the nonlinear effects of the constraint induce output, consumption and investment to fall substantially below trend, as they do in the data. Also consistent with data, the economy exhibits a boom period prior to the Sudden Stop, with output, consumption, and investment all above trend.
    Keywords: News Shocks, Sudden Stops, Leverage, Boom-Bust Cycle
    JEL: E32 F41 F44 G15
    Date: 2014–12–05
  67. By: Rodolfo Cermeño (Division of Economics, CIDE); Mario Negrete García
    Abstract: This paper explores empirically the relationship between the Monetary Policy in the U.S. and the real exchange rate MXN/USD over the period 1996-2012 with monthly data. We consider a cointegration approach using a model of real exchange rate fundamentals as in Goldfajn and Valdes (1999), where the international interest rate is used as an indicator of the monetary policy in the U.S. We find evidence of cointegration and a negative long run elasticity of real exchange rate with respect to the international interest rate. On the other hand, the results from error correction estimates indicate that the adjustment process that follows a disequilibrium in the long run relationship of the real exchange rate and its fundamentals lasts approximately ten periods.
    Keywords: Monetary policy, real exchange rate, unit roots and cointegration
    JEL: C22 C32 E52 F31
    Date: 2013–11
  68. By: Graham Stull
    Abstract: Ireland's successful conclusion of the financial assistance programme provides an important opportunity to assess the prospects of the Irish economy to achieve good growth, to prevent future banking crises and to lock in budgetary and fiscal improvements that were achieved over the course of the Programme. It is also a natural opportunity to assess the adjustment undertaken under the programme, with a view to identifying lessons learned that can contribute to the academic debate, or that can serve as policy guidance for other countries facing similar economic challenges.
    JEL: E62 G21 G28 G30 L52 N14 O52
    Date: 2014–07
  69. By: Don H. Kim; Jonathan H. Wright
    Abstract: We construct a no-arbitrage term structure model with jumps in the entire state vector at deterministic times but of random magnitudes. Jump risk premia are allowed for. We show that the model implies a closed-form representation of yields as a time-inhomogenous affine function of the state vector. We apply the model to the term structure of US Treasury rates, estimated at the daily frequency, allowing for jumps on days of employment report announcements. Our model can match the empirical fact that the term structure of interest rate volatility has a hump-shaped pattern on employment report days (but not on other days). The model also produces patterns in bond risk premia that are consistent with the empirical finding that much of the time-variation in excess bond returns accrues at times of important macroeconomic data releases.
    JEL: C32 E43 G12
    Date: 2014–11
  70. By: Schumacher, Christian
    Abstract: This paper compares two single-equation approaches from the recent nowcast literature: Mixed-data sampling (MIDAS) regressions and bridge equations. Both approach are used to nowcast a low-frequency variable such as quarterly GDP growth by higher-frequency business cycle indicators. Three differences between the approaches are discussed: 1) MIDAS is a direct multi-step nowcasting tool, whereas bridge equations are based on iterated forecasts; 2) MIDAS equations employ empirical weighting of high-frequency predictor observations with functional lag polynomials, whereas the weights of indicator observations in bridge equations are partly fixed stemming from time aggregation. 3) MIDAS equations can consider current-quarter leads of high-frequency indicators in the regression, whereas bridge equations typically do not. However, the conditioning set for nowcasting includes the most recent indicator observations in both approaches. To discuss the differences between the approaches in isolation, intermediate specifications between MIDAS and bridge equations are provided. The alternative models are compared in an empirical application to nowcasting GDP growth in the Euro area given a large set of business cycle indicators.
    Keywords: mixed-data sampling (MIDAS),bridge equations,GDP nowcasting
    JEL: C51 C53 E37
    Date: 2014
  71. By: Enzo Cassino; Neil Cribbens; Tugrul Vehbi (The Treasury)
    Abstract: This paper examines the relationship between the New Zealand government yield curve and the contribution of global and domestic factors influencing it. We apply the Nelson and Siegel method, which has been widely used internationally for fitting a yield curve, to decompose it into three independent factors – level, slope and curvature. We then analyse the link between each New Zealand yield curve factor, the global factors and observable domestic and international macroeconomic variables. We find that approximately half the movement in the level factor for New Zealand, which drives the yield curve at long maturities, is explained by the global level factor. Meanwhile, the global slope factor explains around a third of the movement in New Zealand’s slope factor. Of the remaining domestically driven components, it is difficult to identify a significant role for any specific domestic macroeconomic variables. However, domestic variables have a larger impact on the slope and curvature factors as shorter maturities are more directly under the control of the monetary authority and react to macroeconomic fundamentals. The output gap in particular is highly relevant in explaining the slope of the yield curve.
    Keywords: Term structure; Interest rate; Global yield; Dynamic factor model
    JEL: G1 E4 C5
    Date: 2014–11
  72. By: Nguyen Van, Phuong
    Abstract: Vietnam has been implementing the export-oriented economy, in which the central bank of Vietnam, well-known as the State Bank of Vietnam (SBV), adopted the managed float exchange rate regime in 1990. Therefore, the exchange rate movement plays an important role in stimulating the Vietnamese export activities. By applying the long-run SVAR model, pioneered by Blanchard and Quah (1989), this research examines how the real and nominal shocks impact the nominal and real exchange rate (USD/VND) in Vietnam. Based on monthly data concerning USD/VND exchange rate and, the price levels in Vietnam and the United States from May 1995 to December 2013, our empirical results reveal that: the real shock primarily leads the real and nominal exchange rate (USD/VND) to fluctuate over time. Meanwhile, the nominal shock has a temporary effect on the movement in the real exchange rate in Vietnam. Our research also finds that the long-run Purchasing Power Parity (PPP) does not hold in Vietnam.
    Keywords: State Bank of Vietnam, the exchange rate, unit root test, SVAR
    JEL: E50 E58 E60 E69
    Date: 2014–12–12
  73. By: Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: The paper develops a dynamic general equilibrium model of financial markets and macroeconomy. In the model, long-term debt is extended to firms in a primary market and then traded in a secondary market among financiers. Two financial frictions that are ex-ante and ex-post with respect to the secondary market trading date raise the cost of debt finance. In stationary equilibrium, while ex-ante frictions are always counterproductive, financing costs that are ex-post could promote macroeconomic growth. I show that a model consistent with the U.S. financial development experience of the last 30 years is likely to exhibit declining ex-post frictions
    Keywords: microfoundations of financial frictions; long-term investment,; secondary
    JEL: E44 G2 O16 O47
    Date: 2014
  74. By: Bacchetta, Philippe; Benhima, Kenza
    Abstract: In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country.
    Keywords: Capital Flows; Credit Constraints; Financial Crisis; Global Imbalances
    JEL: E22 F21 F41 F44
    Date: 2014–06
  75. By: Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
    Abstract: We study a 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 set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit micro data on purchases from a large U.S. retailer by a panel of households to quantify the model and compare it to the counterfactual benchmark of the monopolistic competition setting. We show that our model with customer markets has markedly dierent implications in terms of the equilibrium price distribution, and better fits the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to policy relevant shocks is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of firms' demand to these shocks.
    Keywords: customer markets; price setting; product market frictions
    JEL: E12 E30 L16
    Date: 2014–10
  76. By: Hans A. Holter; Dirk Krueger; Serhiy Stepanchuk
    Abstract: How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
    JEL: E62 H20 H60
    Date: 2014–11
  77. By: Richard Harrison (Centre for Macroeconomics (CFM); Bank of England)
    Abstract: Simulations of forward guidance in rational expectations models should be assessed using the “modest interventions” framework introduced by Eric Leeper and Tao Zha. That is, the estimated effects of a policy intervention should be considered reliable only if that intervention is unlikely to trigger a revision in private sector beliefs about the way that policy will be conducted. I show how to constrain simulations of forward guidance to ensure that they are regarded as modest policy interventions and illustrate the technique using a medium-scale DSGE model estimated on US data. I find that, in many cases, experiments that generate the large responses of macroeconomic variables that many economists deem implausible – the so-called “forward guidance puzzle” – would not be viewed as modest policy interventions by the agents in the model. Those experiments should therefore be treated with caution, since they may prompt agents to believe that there has been a change in the monetary policy regime that is not accounted for within the model. More reliable results can be obtained by constraining the experiment to be a modest policy intervention. The quantitative effects on macroeconomic variables are more plausible in these cases.
    Date: 2014–11
  78. By: Malik, Sheheryar (International Monetary Fund); Meldrum, Andrew (Bank of England)
    Abstract: This paper evaluates the robustness of UK bond term premia from affine term structure models. We show that this approach is able to match standard specification tests. In addition, term premia display countercyclical behaviour and are positively related to uncertainty about future inflation, consistent with previous findings for the United States. Premia are robust to correction for small sample bias and the inclusion of macro variables as unspanned factors. Including survey information about short rate expectations, which is a common way of improving identification of affine term structure models, however, results in inferior performance using UK data, as measured by standard specification tests and the economic plausibility of the estimated premia. Finally, we show that imposing the zero lower bound within a shadow rate term structure model does not have a large impact on estimates of long-maturity term premia.
    Keywords: Affine term structure model; term premia; bias correction; interest rate surveys; unspanned macro risks; shadow rate model
    JEL: E43 G10 G12
    Date: 2014–12–05
  79. By: W. Erwin Diewert (University of British Columbia and School of Economics, Australian School of Business, the University of New South Wales); Kevin J. Fox (School of Economics, Australian School of Business, the University of New South Wales); Chihiro Shimizu (Reitaku University and University of British Columbia)
    Abstract: The paper studies the problems associated with the construction of price indexes for commercial properties that could be used in the System of National Accounts. Property price indexes are required for the stocks of commercial properties in the Balance Sheets of the country. Related service price indexes for the land and structure input components of a commercial property are required in the Production Accounts of the country if the Multifactor Productivity of the Commercial Property Industry is calculated as part of the System of National accounts. The paper reviews existing methods for constructing an overall Commercial Property Price Index (CPPI) and concludes that most methods are biased (due to their neglect of depreciation) and more importantly, not able to provide separate land and structure subindexes. A class of hedonic regression models that is not subject to these problems is discussed.
    Keywords: Commercial property price indexes, Net Operating Income, discounted cash flow, System of National Accounts, Balance Sheets, methods of depreciation, land and structure prices, hedonic regressions, repeat sales method
    JEL: C2 C23 C43 D12 E31 R21
    Date: 2014–10
  80. By: Lisa B. Kahn; Erika McEntarfer
    Abstract: Who fares worse in an economic downturn, low- or high-paying firms? Different answers to this question imply very different consequences for the costs of recessions. Using U.S. employer-employee data, we find that employment growth at low-paying firms is less cyclically sensitive. High-paying firms grow more quickly in booms and shrink more quickly in busts. We show that while during recessions separations fall in both high-paying and low-paying firms, the decline is stronger among low-paying firms. This is particularly true for separations that are likely voluntary. Our findings thus suggest that downturns hinder upward progression of workers toward higher paying firms - the job ladder partially collapses. Workers at the lowest paying firms are 20% less likely to advance in firm quality (as measured by average pay in a firm) in a bust compared to a boom. Furthermore, workers that join firms in busts compared to booms will on average advance only half as far up the job ladder within the first year, due to both an increased likelihood of matching to a lower paying firm and a reduced probability of moving up once matched. Thus our findings can account for some of the lasting negative impacts on workers forced to search for a job in a downturn, such as displaced workers and recent college graduates.
    JEL: E24 E32 J23 J3 J63
    Date: 2014–11
  81. By: Guangyu Nie
    Abstract: This paper develops a life-cycle model with multi-dimensional matching in a frictionless marriage market where a single man's rank is determined by his age and wealth relative to others'. Using stable matching patterns, we analyze how people's marital age and saving behavior jointly respond to marriage market shocks. In particular, with wealth as a status good for mating competition, an otherwise standard age profile of savings exhibits an unusual pattern with younger households having relatively high saving rates compared to the middle-aged. This result is consistent with recent empirical findings from China. In addition, both the age gap between spouses and the aggregate saving rate rise when the sex ratio increases. Neglecting the response in marital ages will lead to an overstatement of the effect of the sex ratio imbalance on the increase of the aggregate saving rate.
    JEL: J11 J12 D10 E21
    Date: 2014–11–29
  82. By: Mark Vink (The Treasury)
    Abstract: This paper examines the saving behaviour of different generations of households in New Zealand over the period 1984 to 2010 using data from the Household Economic Survey. The paper employs a life-cycle framework to estimate regression models that identify the influence of age and birth year on household saving rates. Consistent with the life-cycle hypothesis, the results show that household saving rates exhibit a hump shape over the life cycle. The results also indicate significant differences in the average saving rates of households from different birth cohorts. From the baby boomers onward, the average saving rates of each generation exceed those of the generation preceding it. Although there are differences between the Household Economic Survey and national accounts saving measures, which present a caveat to the analysis, the paper’s findings provide some insight into demographic influences on national household saving trends. The results suggest that the movement of the baby boomers into their higher saving years has contributed positively to aggregate saving rates, but that future effects of population ageing are likely to be negative. On the other hand, it is possible that the lift in saving rates over recent generations will provide an ongoing positive contribution to aggregate saving rates throughout the projection period ending 2030.
    Keywords: Household saving, life cycle, age, cohorts
    JEL: D14 D91 E21
    Date: 2014–11
  83. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: This testimony before the Joint Economic Committee of the United States Congress discusses the adverse impacts of the Federal Reserve's recent departure from a rules-based monetary policy and the gains to be made by returning to a steadier monetary policy.
    Date: 2013–04
  84. By: Alice Fabre; Stéphane Pallage; Christian Zimmermann
    Abstract: In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.
    Keywords: Universal basic income, Idiosyncratic shocks, Unemployment insurance, Heterogeneous agents, Moral hazard
    JEL: E24 D7 J65
    Date: 2014
  85. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Mahieu, R.J. (Tilburg University, Center For Economic Research); Raes, L.B.D. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper analyzes the voting records of four central banks (Sweden, Hungary, Poland and the Czech Republic) with spatial models of voting. We infer the policy preferences of the monetary policy committee members and use these to analyze the evolution in preferences over time and the differences in preferences between member types and the position of the Governor in different monetary policy committees.
    Keywords: Ideal points; Voting records; Central Banking; NBP; CNB; MNB; Riksbank
    JEL: E58 E59 C11
    Date: 2013
  86. By: Fabre, Alice (Aix-Marseille University); Pallage, Stéphane (University of Québec at Montréal); Zimmermann, Christian (Federal Reserve Bank of St. Louis)
    Abstract: In this paper we compare the welfare effects of unemployment insurance (UI) with a universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.
    Keywords: universal basic income, idiosyncratic shocks, unemployment insurance, heterogeneous agents, moral hazard
    JEL: E24 D7 J65
    Date: 2014–11
  87. By: Corrado, Carol; Haskel, Jonathan; Jona-Lasinio, Cecilia
    Abstract: This paper looks at the channels through which intangible assets affect productivity. The econometric analysis exploits a new dataset on intangible investment (INTAN-Invest) in conjunction with EUKLEMS productivity estimates for 10 EU member states from 1998 to 2007. We find that (a) the marginal impact of ICT capital is higher when it is complemented with intangible capital, and (b) non-R&D intangible capital has a higher estimated output elasticity than its conventionally-calculated factor share. These findings suggest investments in knowledge-based capital, i.e., intangible capital, produce productivity growth spillovers via mechanisms beyond those previously established for R&D.
    Keywords: economic growth; ICT; intangible assets; intangible capital; productivity growth; spillovers
    JEL: E01 E22 O47
    Date: 2014–07
  88. By: Carroll, Daniel R. (Federal Reserve Bank of Cleveland); Young, Eric R. (University of Virginia)
    Abstract: We study the effects on inequality of a "Piketty transition" to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and the effect is negative. Finally, following Piketty’s thought experiment, we study how the transition might occur without declining returns; here, we find inequality decreases substantially if financial innovation acts to reduce idiosyncratic return risk, and does not change much at all if it acts to increase capital’s share of income.
    Keywords: inequality; heterogeneity; zero-growth
    JEL: D31 D33 D52 E21
    Date: 2014–12–03
  89. By: Prados de la Escosura, Leandro
    Abstract: Comparisons of economic performance over space and time largely depend on how statistical evidence from national accounts and historical estimates are spliced. To allow for changes in relative prices, GDP benchmark years in national accounts are periodically replaced with new and more recent ones. Thus, a homogeneous long-run GDP series requires linking different temporal segments of national accounts. The choice of the splicing procedure may result in substantial differences in GDP levels and growth, particularly as an economy undergoes deep structural transformation. An inadequate splicing may result in a serious bias in the measurement of GDP levels and growth rates. Alternative splicing solutions are discussed in this paper for the particular case of Spain, a fast growing country in the second half of the twentieth century. It is concluded that the usual linking procedure, retropolation, has serious flows as it tends to bias GDP levels upwards and, consequently, to underestimate growth rates, especially for developing countries experiencing structural change. An alternative interpolation procedure is proposed.
    Keywords: growth measurement; historical national accounts; Spain; splicing GDP
    JEL: C82 E01 N13 O47
    Date: 2014–09
  90. By: World Bank
    Keywords: Infrastructure Economics and Finance Infrastructure Economics and Finance - Infrastructure Finance Macroeconomics and Economic Growth Banks and Banking Reform Governance - Governance Indicators Social Protections and Labor - Labor Policies Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets
    Date: 2014–12
  91. By: Van Den Bremer, Ton; van der Ploeg, Frederick; Wills, Samuel
    Abstract: Oil exporters typically do not consider below-ground assets when allocating their sovereign wealth fund portfolios, and ignore above-ground assets when extracting oil. We present a unified framework for considering both. Subsoil oil should alter a fund’s portfolio through additional leverage and hedging. First-best spending should be a share of total wealth, and any unhedged volatility must be managed by precautionary savings. If oil prices are pro-cyclical, oil should be extracted faster than the Hotelling rule to generate a risk premium on oil wealth. We then discuss how the management of Norway’s fund can practically be improved with our analysis.
    Keywords: hedging; leverage; oil; optimal extraction; portfolio allocation; sovereign wealth fund
    JEL: E21 G11 G15 O13 Q32 Q33
    Date: 2014–10
  92. By: Frederic S. Mishkin; Eugene N. White
    Abstract: Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules—notably Bagehot’s rule—that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre-emptive actions to forestall worse crises but were combined with measures to mitigate moral hazard.
    JEL: E58 G01 N10 N20
    Date: 2014–12
  93. By: Dräger, L.; Lamla, M.J.; Pfajfar, D. (Tilburg University, Center For Economic Research)
    Date: 2013
  94. By: Kazuo MIno (Kyoto University)
    Abstract: This paper constructs a simple model of endogenous growth with ?financial frictions and ?firm heterogeneity. In the presence of fi?nancial constraints and heterogeneity in pro- duction efficiency of fi?rms, the fi?rms whose efficiency exceeds the cutoff level produce and the entrepreneurs who own those fi?rms become borrowers. We show that even if production technology of each fi?rm has an Ak property, the aggregate economy has transition dynamics and that the balanced growth rate depends on the aggregate distribution of wealth between rentiers and entrepreneurs.
    Keywords: financial frictions, firm heterogeneity, endogenous growth, wealth distribution
    JEL: E01 O40
    Date: 2014–12
  95. By: World Bank
    Keywords: Macroeconomics and Economic Growth - Subnational Economic Development Banks and Banking Reform Finance and Financial Sector Development - Debt Markets Public Sector Economics Public Sector Expenditure Policy Public Sector Development
    Date: 2014–11
  96. By: Olteanu, Dan Constantin (Institutul National de Cercetari Economice al Academiei Române)
    Abstract: The study summarizes the main theories concerning the bidirectional relationship between the evolution of credit and the economic stability, focusing on the "unorthodox" trends of thought, the only ones explaining the negative effects of credit and indebtedness on the sustainability of economic growth. We have shown that the distortions caused by the credit are rooted in three sources: (i) the pyramidal system of lending, and the economic growth dependance of continuous supply of credit; (ii) the over-indebtedness of companies and households, followed by debt deflation; (iii) the development of financial market
    Keywords: Credit, Indebtedness, Debt deflation
    JEL: E51 E30
    Date: 2014–07
  97. By: Perica Janković (University Union Nikola Tesla, Faculty of business studies and righ, Belgrade)
    Abstract: The financial crisis is a result of the irresponsible business policy of the relevant state institutions for the financial market control (the US Federal Reserve and the US Security and Exchange Commission) and the lack of competence of rating agencies, as well as fundamental weaknesses that have existed for years in the area of financial control and regulation in the United States. The mentioned weaknesses originate in the idea of unlimited liberalization of financial markets, with minimal regulation and weak business control of the investment banks and funds.
    Keywords: Regulatory bodies, rating agencies, hypothecary crisis
    JEL: E52 G23 G24 G28
    Date: 2014–04
  98. By: Razmi, Arslan (The University of Massachusetts at Amherst)
    Abstract: A large body of literature inspired by the seminal contribution of Marglin and Bhaduri (1988) has debated the distributional determinants of demand and growth. A general conclusion has been that open economy considerations weaken the potential for a wage-led growth regime. How- ever, this literature has largely ignored asset portfolio considerations and the stock and flow interactions that result from the feedback from savings to wealth and from wealth to the current account. This paper develops a theoretical framework that a fuller system of (instantaneous) flow equilibria embedded in a medium-run framework with stable steady state stocks of real and financial assets. The balance of payments constraint that results ensures that simply raising the wage does not yield a higher stock of real capital. A lower mark-up may increase the steady state stock of capital but only through the relative price channel. These results are much stronger than those derived by existing literature, and more importantly, emerge regardless of whether the demand regime is wage-led or profit-led in autarky.
    Keywords: Wage-led growth, stagnationism, exhilarationism, neo-Kaleckian models, distribution, accumulation.
    JEL: F32 F43 E64
    Date: 2014
  99. By: Saint-Paul, Gilles
    Abstract: This paper studies aggregate dynamics in a cobweb model where learning takes place through a selection mecanism, 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", because the firm types that will be more adequate in future (uncertain) environments have to be drawn from the pool of existing ?rms. If selection is too extreme in the current environment, the firms that are best adapted to a given future environmental change, yet performing poorly in present circumstances, will be very scarce, and it will take longer for the economy to produce a large number of such firms in the new environment
    Keywords: adaptive learning; cobweb model; evolution; mutation; selection
    JEL: E32 P10
    Date: 2014–11
  100. By: Kräussl, Roman; Mirgorodskaya, Elizaveta
    Abstract: This paper investigates the impact of news media sentiment on financial market returns and volatility in the long-term. We hypothesize that the way the media formulate and present news to the public produces different perceptions and, thus, incurs different investor behavior. To analyze such framing effects we distinguish between optimistic and pessimistic news frames. We construct a monthly media sentiment indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and/or the lead paragraph. Our results indicate that pessimistic news media sentiment is positively related to global market volatility and negatively related to global market returns 12 to 24 months in advance. We show that our media sentiment indicator reflects very well the financial market crises and pricing bubbles over the past 20 years.
    Keywords: Investor behavior,News media sentiment,Financial market crises,Pricing bubbles,Framing effects,MMFs,SEC,securities,net asset value,financial crisis,shadow banking,systemic risk,financial crisis
    JEL: G01 G10 E32
    Date: 2014
  101. By: John B. Taylor
    Abstract: In this paper I argue that central banks should re-normalize monetary policy, including the de facto independence of policy, rather than new-normalize policy to some so called new normal. I explain his view and show that it follows from a review of the actual practice of monetary policy in recent years. I also consider some objections that might be raised to this position. I focus mainly on the United States and go back to the time before the recent financial crisis.
    Date: 2014–04
  102. By: Charles I. Jones
    Abstract: Since the early 2000s, research by Thomas Piketty, Emmanuel Saez, and their coathors has revolutionized our understanding of income and wealth inequality. In this paper, I highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally. One of the key links between data and theory is the Pareto distribution. The paper describes simple mechanisms that give rise to Pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries. For example, it is in this context that the role of the famous r-g expression is best understood.
    JEL: E0
    Date: 2014–12
  103. 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
  104. By: Andreas Irmen (CREA, Université du Luxembourg); Alfred Maußner (University of Augsburg)
    Abstract: The Inada (1963) conditions constitute a defining property of the neoclassical production function with capital and labor as arguments. Are these conditions justifiable on economic grounds? Yes, they are: we show that a production function with positive, yet diminishing marginal products and constant returns to scale satisfies the Inada conditions if i) both inputs are essential and ii) an unbounded quantity of either input leads to unbounded output. This allows for an alternative characterization of the neoclassical production function that altogether dispenses with the Inada conditions. Moreover, we establish that the marginal product of capital vanishes as capital goes to infinity if labor is an essential input. Given the intuitive appeal of the latter feature, we conclude that the neoclassical growth model is a theory of eventual stagnation.
    Keywords: Neoclassical Growth Model, Capital Accumulation, Stagnation, Inada Conditions
    JEL: E10 O10 O40
    Date: 2014
  105. By: Catão, Luis A. V.; Milesi-Ferretti, Gian Maria
    Abstract: We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities to GDP is a significant crisis predictor. This is primarily due to the net position in debt instruments--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises sensu stricto.
    Keywords: currency crises; current account imbalances; foreign exchange reserves; international investment positions; sovereign deebt
    JEL: E44 F32 F34 G15 H63
    Date: 2014–07
  106. 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
  107. By: Koeniger, Winfried (University of St. Gallen); Prat, Julien (CREST)
    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: optimal taxation, human capital
    JEL: E24 H21 I22 J24
    Date: 2014–11
  108. By: Marc-Urbain Proulx
    Abstract: Within the vast northern periphery of Quebec, the annual capital almost doubled over the 2000s. This impulse of a new cycle of growth coincides with a slowdown in job creation. Such effects on the mode of development is part of a multi-dimensional and transitional movement within global peripheries requested to supply, of their raw materials, high urbanization in emerging economies. For this purpose in Quebec, the Nordic economic sectors of construction, extraction, processing, and services react differently during the observed period. According to our analysis, four elements are added to the difficulties of the forest industry to explain the disappointing conclusion about Nordic employment, namely: the technological intensification, the importation of equipment and materials, the commuting workers (fly in - fly out), and the low attractiveness of the manufacturing sector. Our reading leads us to propose two avenues for reflection on real territorial development.
    JEL: E32 R11
    Date: 2014–11
  109. By: Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
    Abstract: Using US micro price data at the city level, we provide evidence that both the volatility and the persistence of deviations from the law of one price (LOP) are rising in the distance between US cities. A standard, two-city, stochastic equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance. To account for the latter fact, we augment the standard model with noisy signals about the state of nominal aggregate demand that are asymmetric across cities. We further show that the main predictions of the model continue to hold even if we allow for the interaction of imperfect information, sticky prices, and multiple cities.
    Keywords: Real exchange rates, Law of one price, Relative prices, Trade cost
    JEL: E31 F31 D40
    Date: 2014–12
  110. By: Margarita Katsimi (Athens University of Economics and Business; CESifo, Munich); Gylfi Zoega (Department of Economics, Mathematics & Statistics, Birkbeck; University of Iceland)
    Abstract: We estimate the Feldstein-Horioka equation for the period 1960-2012 and find structural breaks that coincide with the introduction of the European single market in 1993, the introduction of the euro in 1999 and the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, we find that the pattern of capital flows within the euro zone reflect differences in output per capita, the rate of growth of output per capita and budget balances.
    Keywords: Feldstein-Horioka puzzle, European integration.
    JEL: E2
    Date: 2014–11
  111. By: Martin Mellens; Hendrik Vrijburg (EUR); Jonneke Dijkstra (EUR)
    Abstract: This paper introduces the Common Correlated Effects Estimator into the study of Value-Added-Tax pass-through and compares this method to various other methodologies used in the literature. To this end, we study two Value-Added-Tax increases in the Netherlands, in January 2001 and October 2012. We show that the Common Correlated Effects Estimator produces robust estimates, especially when divergent macroeconomic trends make identification more difficult. Furthermore, we show that the choice of the control group is of lesser importance once sufficient control variables are included. Our results indicate, in accordance with most findings in the literature, that we cannot reject the null-hypothesis of a full pass-through for both Dutch tax-hikes.
    JEL: E31 H22
    Date: 2014–12
  112. By: Chris Stewart (Reserve Bank of Australia); Iris Chan (Reserve Bank of Australia); Crystal Ossolinski (Reserve Bank of Australia); David Halperin (Reserve Bank of Australia); Paul Ryan (Reserve Bank of Australia)
    Abstract: This paper examines the costs borne by financial institutions, merchants, and consumers in making, facilitating and accepting consumer-to-business payments. It examines the resource costs incurred by these sectors, how these have changed since 2006, and how fees and other transfers determine which sectors ultimately bear these costs. It also examines how resource costs vary at different transaction sizes and, for merchants, how costs differ between small and large entities. The results suggest that the resource costs of the payments system have fallen as a per cent of GDP since 2006. On a per transaction basis, direct debit remains the lowest-cost payment instrument while cheques remain the most expensive. At the point of sale, payments using cash, eftpos and contactless MasterCard & Visa debit cards have broadly similar costs for transactions under about $20; above $20, eftpos is the lowest-cost payment method. The results indicate that the relationship between resource and private costs varies significantly across instruments. The greater share of the overall cost is borne by merchants. The consumer undertaking a transaction typically pays a small proportion of its cost; consumers face a similar cost for credit card payments as for debit card payments despite the higher cost of credit cards to the economy. Finally, the results suggest that small businesses incur higher costs than large merchants.
    Keywords: banks; consumers; financial institutions; merchants; retail payments; surcharging
    JEL: E4 G2 L2
    Date: 2014–12
  113. By: M.Jesús Gómez Adillón; M.Àngels Cabasés Piqué
    Abstract: In order to highlight the uneven impact of recession on the labor market in Catalonia (Spain), especially regarding wage structure, this study examines the evolution of its main variables in the period 2005-2012 from a gender perspective. For ten years prior to recession, female employment improved, mainly due to the expansion of the tertiary sector and public sector and numerous new political and legislative actions. These actions aimed at the interdiction of certain long-held and deep-rooted historical distinctions. These distinctions have not been solved yet for this group: the so called vertical inequalities (concentration of women in lower occupational categories), horizontal (traditionally female occupations) and salary (and lower contribution bases attached to them). We can delve into the structure of wages in Catalonia (Spain) in order to detect and quantify the differences due to gender difference and to analyze the distribution of intergroup and intragroup inequality between men and women. We calculated two measures of inequality such as the Gini index and the Pietra index to quantify the dispersion in the distribution of wages between men and women and for this purpose the model of concentration Kakwani has been adjusted and it has provided a high goodness grip. It is clear that the salary evolution by gender, in the period 2005 - 2012, is different and that it manifests inequalities in the average yearly income despite legislative and social progress in labor matters, which are incorporated in recent years. The conclusions of this study, in line with other studies, confirm that the overall wage dispersion has shown a countercyclical behavior, although, a major incorporation of women with a higher level of education and qualification in the labor market can be observed in the recession period (2005 - 2012). Analyzing the impact of the current recession and quantifying the gender wage inequality between women and men is very important as a framework for effective European action in this area, because is necessary the implementation of positive action in favor of women to correct inequalities, as a smart, sustainable and inclusive growing factor is needed as recommended at European Council of 30 November 2009.
    Keywords: labor market; wages; gender inequality
    JEL: E24 J21 J31
    Date: 2014–11
  114. By: Atsuyoshi Morozumi (University of Nottingham, CFCM); Francisco José Veiga (Universidade do Minho - NIPE); Linda Gonçalves Veiga (Universidade do Minho - NIPE)
    Abstract: This paper examines the effects of elections on central governments’ fiscal policy conducts. We construct a unique database of disaggregated spending and revenue series at the central government level, for a panel of up to 107 countries over the 1975-2010 period. Using this data, we show that under some specific political environments, incumbents generate political budget cycles, predominantly by increasing current, rather than capital, spending and reducing taxes, most often income taxes. However, when democracies are matured, in election years, central governments reallocate their expenditure and revenue components, without changing their total levels. Specifically, they reallocate spending from capital spending to grants to other government units, while reducing income taxes and increasing consumption taxes instead.
    Keywords: Political budget cycles; Spending and revenue composition; Central government; Opportunism
    JEL: E6 D7 H5
    Date: 2014
  115. By: Giorgio Ferrari (Center for Mathematical Economics, Bielefeld University); Paavo Salminen (Department of Natural Sciences/Mathematics and Statistics, Åbo Akademi University)
    Abstract: We derive a new equation for the optimal investment boundary of a general irreversible investment problem under exponential Lévy uncertainty. The problem is set as an infinite time-horizon, two-dimensional degenerate singular stochastic control problem. In line with the results recently obtained in a diffusive setting, we show that the optimal boundary is intimately linked to the unique optional solution of an appropriate Bank-El Karoui representation problem. Such a relation and the Wiener-Hopf factorization allow us to derive an integral equation for the optimal investment boundary. In case the underlying Lévy process hits any point in R with positive probability we show that the integral equation for the investment boundary is uniquely satisfied by the unique solution of another equation which is easier to handle. As a remarkable by-product we prove the continuity of the optimal investment boundary. The paper is concluded with explicit results for profit functions of (i) Cobb-Douglas type and (ii) CES type. In the first case the function is separable and in the second case non-separable.
    Keywords: free-boundary, irreversible investment, singular stochastic control, optimal stopping, Lévy process, Bank and El Karoui's representation theorem, base capacity
    JEL: C02 E22 D92 G31
    Date: 2014–11
  116. By: Peter Havlik (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary The Ukraine conflict is having serious consequences not only for Russia and Ukraine, but it also potentially threatens to damage the still frail economic recovery in Europe. In Ukraine, which is the main victim of the conflict, the economy may decline by up to 8% this year. In Russia, the costs of the conflict are estimated to be in the tune of 1% of GDP in 2014-2016, primarily on account of increased investment risks. The effects on the individual EU countries differ depending on their exposure to the Russian market the Baltic States, Finland and several other new EU Member States are generally most affected. The impact on Austria is expected to be relatively modest. Austria is not overly exposed to the Russian market. For the EU as a whole, there are five industries where the share of Russia in total exports exceeds 3% textiles, pharmaceuticals, electrical equipment, machinery and transport equipment. On the assumption of a 10% loss in exports of goods and services to Russia, the estimated GDP loss would be about 0.4% for Lithuania and Estonia, and less than 0.1% for Austria. In absolute figures, Germany might lose around EUR 3 billion, followed by Italy (EUR 1.4 billion), France, Great Britain and Poland (EUR 0.8 billion each). Austria could lose close to EUR 300 million in this scenario. The estimated impact of Russia’s ban on agro-food imports from the EU imposed in August 2014 is expected to be the highest in the Baltics. These losses are undoubtedly painful, yet manageable (a trade decline bigger than 10% would obviously lead to greater losses). The question is whether these losses are justifiable and will achieve the desired effects – to change Russia’s behaviour in Ukraine and beyond.
    Keywords: sanctions, foreign trade, economic growth
    JEL: E61 F15 F51
    Date: 2014–11
  117. By: Daniela MAGGIONI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Alessia LO TURCO (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Mauro GALLEGATI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: With this paper we provide, for the first time to our knowledge, micro-level evidence on the negative linkage between firm complexity and volatility. A higher sophistication level of a firm's export basket reduces its output fluctuations. When focusing on a sample of exporting and non exporting firms, the average complexity of the production mix equally affects stability of sales of both groups. The stabilising role of firms' production sophistication is driven by complex products' higher income elasticity, technological diversification and market entry barriers.
    Keywords: Capabilities, Demand and supply channels, Output fluctuations, Product Sophistication
    JEL: D22 E32 F43 O12
    Date: 2014–12
  118. By: Elena Ianchovichina
    Keywords: Poverty Reduction - Achieving Shared Growth 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: 2014–05
  119. By: S. Mouabbi
    Abstract: This paper uses a risk-averse formulation of the uncovered interest rate parity to determine exchange rates through interest rate differentials, and ultimately extract currency risk premia. The method proposed consists of developing an affine Arbitrage-Free class of dynamic Nelson-Siegel term structure models with stochastic volatility to obtain the domestic and foreign discount rate variations, which in turn are used to derive a representation of exchange rate depreciations. No-arbitrage restrictions allow to endogenously capturing currency risk premia. Empirical findings suggest that estimated currency risk premia are able to account for the forward premium puzzle and their properties are examined.
    Keywords: term structure of interest rates; affine; exchange rates; risk premia.
    JEL: E43 F31 G15
    Date: 2014
  120. By: Fabio Busetti (Bank of Italy)
    Abstract: Quantile aggregation (or 'Vincentization') is a simple and intuitive way of combining probability distributions, originally proposed by S. B. Vincent in 1912. In certain cases, such as under Gaussianity, the Vincentized distribution belongs to the same family as that of the individual distributions and can be obtained by averaging the individual parameters. This paper compares the properties of quantile aggregation with those of the forecast combination schemes normally adopted in the econometric forecasting literature, based on linear or logarithmic averages of the individual densities. In general we find that: (i) larger differences among the combination schemes occur when there are biases in the individual forecasts, in which case quantile aggregation seems preferable overall; (ii) the choice of the combination weights is important in determining the performance of the various methods. Monte Carlo simulation experiments indicate that the properties of quantile aggregation fall between those of the linear and the logarithmic pool, and that quantile averaging is particularly useful for combining forecast distributions with large differences in location. An empirical illustration is provided with density forecasts from time series and econometric models for Italian GDP.
    Keywords: Fan charts, macroeconomic forecasts, model combination.
    JEL: C53 E17
    Date: 2014–10
  121. By: Kamaruzdin, Thaqif; Masih, Mansur
    Abstract: Islamic Finance as an industry in recent times has been celebrated for its stability and resilience. With the philosophy of risk sharing and strict rules governing its activities to be in line with Islamic Law (the Shariah), the industry is seen as an alternative to the conventional finance with its tainted image of profit maximizing at any cost causing the Global Financial Crisis of 2008 - 2009. Given this claim it would be interesting to investigate the stability of the Islamic Financial Services Institutions (IFSIs) in comparison to the conventional sector. The Malaysian IFSIs were chosen as a case study as the Malaysia‟s Islamic Finance industry developed in the world with strict Shariah screening. As such, the Malaysian IFSIs are investigated to gain insights into their performance in terms of volatility and correlations with the market and then compared to their competitors by employing an M-GARCH t-DCC and also MODWT Wavelet technique to further dissect this volatility into their contributions from the point of view of different time scales. The findings are that IFSIs are much more volatile than their competitors with seemingly independent spikes in volatility unique to themselves but are low in correlation to the market implying that IFSIs volatility may be independent of the market due to assets that require the risk taking in order to justify earnings. IFSIs may need to cooperate in developing risk management standards and practices to mitigate risk that are unique to themselves as well as review the contracts and assets that may expose the IFSIs to too much risk.
    Keywords: Islamic Finance, Islamic Financial Services Institutions, Volatility, Risk, Correlation, Diversification, M-GARCH t-DCC and MODWT Wavelet
    JEL: C22 C58 E44 G2
    Date: 2014–07–23
  122. By: Christiane Baumeister; James D. Hamilton
    Abstract: This paper makes the following original contributions to the literature. (1) We develop a simpler analytical characterization and numerical algorithm for Bayesian inference in structural vector autoregressions that can be used for models that are overidentified, just-identified, or underidentified. (2) We analyze the asymptotic properties of Bayesian inference and show that in the underidentified case, the asymptotic posterior distribution of contemporaneous coefficients in an n-variable VAR is confined to the set of values that orthogonalize the population variance-covariance matrix of OLS residuals, with the height of the posterior proportional to the height of the prior at any point within that set. For example, in a bivariate VAR for supply and demand identified solely by sign restrictions, if the population correlation between the VAR residuals is positive, then even if one has available an infinite sample of data, any inference about the demand elasticity is coming exclusively from the prior distribution. (3) We provide analytical characterizations of the informative prior distributions for impulse-response functions that are implicit in the traditional sign-restriction approach to VARs, and note, as a special case of result (2), that the influence of these priors does not vanish asymptotically. (4) We illustrate how Bayesian inference with informative priors can be both a strict generalization and an unambiguous improvement over frequentist inference in just-identified models. (5) We propose that researchers need to explicitly acknowledge and defend the role of prior beliefs in influencing structural conclusions and illustrate how this could be done using a simple model of the U.S. labor market.
    JEL: C11 C32 E24
    Date: 2014–12

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