nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒01‒14
129 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Escaping the Great Recession By Bianchi, Francesco; Melosi, Leonardo
  2. Betting the house By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  3. Betting the House By Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
  4. Monetary Policy of Quantitative Easing at the Central Bank’s High Interest Rates By BLINOV, Sergey
  5. Superneutrality of Money under Open Market Operations By Homburg, Stefan
  6. The Effects Of Robo-Signing On The Economy And Unconventional Monetary Policy By Egor S. Malkov
  7. The international monetary and financial system: its Achilles heel and what to do about it By Borio, Claudio
  8. Commodity price shocks and inflation within an optimal monetary policy framework: the case of Colombia By Luis Eduardo Arango; Ximena Chavarro; Eliana González
  9. Are Prices Sticky in Large Developing Economies? An Empirical Comparison of China and India By Chong, Terence Tai Leung; Zhu, Tingting; Rafiq, M.S.
  10. Deflationary shocks and de-anchoring of inflation expectations By Fabio Busetti; Giuseppe Ferrero; Andrea Gerali; Alberto Locarno
  11. Quantitative Easing in Joseph's Egypt with Keynesian Producers By Campbell, Jeffrey R.
  12. Monetary Policy Experience of Pakistan By Hanif, Muhammad Nadim
  13. A large Bayesian vector autoregression model for Russia By Deryugina , Elena; Ponomarenko , Alexey
  14. Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia By Kerry B. Hudson; Joaquin L. Vespignani
  15. Wealth Effects on World Private Financial Saving By Ray C. Fair
  16. An estimated DSGE model with search and matching frictions in the credit market By Danilo Liberati
  17. Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59 By Carlson, Mark A.; Wheelock, David C.
  18. Sources of the Great Recession:A Bayesian Approach of a Data-Rich DSGE model with Time-Varying Volatility Shocks By IIBOSHI Hirokuni; MATSUMAE Tatsuyoshi; NISHIYAMA Shin-Ichi
  19. Disentangling qualitative and quantitative central bank influence By Paul Hubert
  20. Corporate Cash and Employment By Philippe Bacchetta; Kenza Benhima; Céline Poilly
  21. Macroeconomic effects of simultaneous implementation of reforms after the crisis By Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  22. The (Home) Bias of European Central Bankers: New Evidence Based on Speeches By Hamza Bennani; Matthias Neuenkirch
  23. Impact of Demographic Changes on Inflation and the Macroeconomy By Jong-Won Yoon; Jinill Kim; Jungjin Lee
  24. Mexico: 2014 Article IV Consultation-Staff Report; and Press Release By International Monetary Fund. Western Hemisphere Dept.
  25. Long-term unemployment and convexity in the Phillips curve By Speigner, Bradley
  26. Central Banks Voting Records, Financial Crisis and Future Monetary Policy By Roman Horváth; Júlia Jonášová
  27. Business Cycle Variability and Growth Linkage By Inekwe John Nkwoma
  28. Peculiar Results and Theoretical Inconsistency of New Keynesian Models By Kim, Minseong
  29. Understanding Financial Instability: Minsky Versus the Austrians By Van den Hauwe, Ludwig
  30. The Federal Reserve engages the world (1970-2000): an insider's narrative of the transition to managed floating and financial turbulence By Truman, Edwin M.
  31. Wage, Productivity and Unemployment Microeconomics Theory and Macroeconomic Data By Razzak, Weshah
  32. India Development Update, October 2014 By World Bank Group
  33. Global Monetary Tightening: Emerging Markets Debt Dynamics and Fiscal Crises By Julio Escolano; Christina Kolerus; Constant Lonkeng Ngouana
  34. ICT and Non-ICT investments: short and long run macro dynamics By Fabio Bacchini; Maria Elena Bontempi; Roberto Golinelli; Cecilia Jona-Lasinio
  35. A Fair Wage Explanation of Labour Market Volatility By Robert Jump
  36. South Africa: 2014 Article IV Consultation-Staff Report; Informational Annex; Debt Sustainability Analysis; Staff Statement; Press Release; and Statement by the Executive Director for South Africa By International Monetary Fund. African Dept.
  37. Capital Regulation in a Macroeconomic Model with Three Layers of Default. By L. Clerc; A. Derviz; C. Mendicino; S. Moyen; K. Nikolov; L. Stracca; J. Suarez; A. P. Vardoulakis
  38. Grown-up business cycles By Pugsley, Benjamin; Sahin, Aysegul
  39. Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability By Ansgar Belke; Tobias Böing
  40. Monetary Policy and Dark Corners in a stylized Agent-Based Model By Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
  41. Estimating Fiscal Multipliers: News from a Nonlinear World By Giovanni Caggiano; Efrem Castelnuovo; Valentina Colombo; Gabriela Nodari
  42. What if you were German? - DSGE approach to the Great Recession on labour markets By Marek Antosiewicz; Piotr Lewandowski
  43. Predicting US Recessions: Does a Wishful Bias Exist? By Sergey V. Smirnov
  44. Algeria: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Algeria By International Monetary Fund. Middle East and Central Asia Dept.
  45. "Liquidity Preference and the Entry and Exit to ZIRP and QE" By Jan Kregel
  46. The Stochastic Approach to Index Numbers: Needless and Useless By von der Lippe, Peter
  47. Does the Stability and Growth Pact induce a bias in the EC's fiscal forecasts By Niels Gilbert; Jasper de Jong
  48. The allocation of talent: finance versus entrepreneurship By Shakhnov, Kirill
  49. Kingdom of the Netherlands-Netherlands: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Netherlands By International Monetary Fund. European Dept.
  50. Secular stagnation and decline: a simplified model By Krouglov, Alexei
  51. How Close is Asia to an Optimal Currency Area in Terms of Business Cycle Co-Movement? By Alicia Garcia-Herrero
  52. Model of the United States economy with learning MUSEL By Baumann, Ursel; Dieppe, Alistair; González Pandiella, Alberto; Willman, Alpo
  53. Monetary Policy Committee and Monetary Policy Conduct in Nigeria: A Preliminary Investigation By Ekor, Maxwell; Saka, Jimoh; Adeniyi, Oluwatosin
  54. Working Paper - 211 - Bank Lending Channel of Monetary Policy Transmission in Zambia: Evidence from Bank-Level Data By AfDB AfDB
  55. Capital Controls or Macroprudential Regulation? By Anton Korinek; Damiano Sandri
  56. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  57. Comments on monetary policy and an annual Texas economic review By Fisher, Richard W.
  58. The Implications of a graying japan for government policy By Braun, R. Anton; Joines, Douglas H.
  59. Political Uncertainty and Household Savings By Aaberge, Rolf; Liu, Kai; Zhu, Yu
  60. Monetary and macroprudential policy with foreign currency loans By Marcin Kolasa; Krzysztof Makarski; Michał Brzoza-Brzezina
  61. Antinomias da Capital no século XXI By Estrada, Fernando
  62. Turkey: Selected Issues Paper By International Monetary Fund. European Dept.
  63. Just round the corner? Pros, cons, and implementation issues of a fiscal union for the euro area By Fabrizio Balassone; Sandro Momigliano; Marzia Romanelli; Pietro Tommasino
  64. World Bank Research Digest, Vol. 7(3) By World Bank
  65. Destabilizing Carry Trades By Guillaume Plantin; Hyun Song Shin
  66. Ghana Economic Update, October 2014 By Felix Oppong; Dilek Aykut; Gregory Smith; World Bank
  67. Mali: First and Second Reviews Under the Extended Credit Facility Arrangement, Request for Waiver of Performance Criteria, and Request for Modification of Performance Criteria-Staff Report; Press Release; and Statement by the Executive Director for Mali By International Monetary Fund. African Dept.
  68. Does Inflation Slow Long-Run Growth in India? By Kamiar Mohaddes; Mehdi Raissi
  69. The Macroeconomic Effects of Oil Price Fluctuations in ASEAN Countries: Analysis Using a VAR with Block Exogeneity By Vu, Tuan Khai; Nakata, Hayato
  70. Romania’s external debt threats By Zaman, Gheorghe; Georgescu, George
  71. Impact of Dividend Policy, Earning per Share, Return on Equity, Profit after Tax on Stock Prices By Hunjra, Ahmed Imran; Ijaz, Muhammad Shahzad; Chani, Muhammad Irfan; Hassan, Sabih ul; Mustafa, Umer
  72. Requirements for Policy Rules for the Fed By John B. Taylor
  73. Monetary Shocks in Models with Inattentive Producers By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  74. Seychelles: First Review under the Extended Arrangement and Request for Modification of Performance Criteria-Staff Report; Press Release By International Monetary Fund. African Dept.
  75. Measuring financial conditions in major non-euro area economies By Wacker, Konstantin M.; Lodge, David; Nicoletti, Giulio
  76. Medium-Term Fiscal Multipliers during Protracted Recessions By Salvatore Dell'Erba; Marcos Poplawski-Ribeiro; Ksenia Koloskova
  77. The Long Run Effect of Growth on Employment in a Labor Market with Matching Frictions: The Role of Labor Market Institutions. By Valeri Sorolla
  78. Republic of Moldova: Second Post-Program Monitoring Discussions-Staff Report; Staff Statement; Press Release; Statement by the Executive Director By International Monetary Fund. European Dept.
  79. World Bank Research Digest, Vol. 7(4) By World Bank
  80. Private Saving Accelerations By Christian Ebeke
  81. How do financial institutions forecast sovereign spreads? By Cimadomo, Jacopo; Claeys, Peter; Poplawski Ribeiro, Marcos
  82. Trading on Sunspots By Boyan Jovanovic; Viktor Tsyrennikov
  83. Sources of Labor Productivity Growth in the EU and the US: the Role of Intangible and ICT Capital By Massimiliano Iommi
  84. Guinea-Bissau: Request for Disbursement Under the Rapid Credit Facility-Staff Report; Press Release; and Statement by the Executive Director for Guinea-Bissau By International Monetary Fund. African Dept.
  85. Essays on habit formation and inflation hedging By Zhou, Y.
  86. Overleveraging, financial fragility and the banking-macro link: Theory and empirical evidence By Mittnik, Stefan; Semmler, Willi
  87. Tajikistan : Key Issues in Public Finance Management By World Bank
  88. Rethinking wage vs. profit-led growth theory with implications for policy analysis By Thomas I. Palley
  89. World Bank Research Digest, Vol. 7(2) By World Bank
  90. Structural Models With Testable Identification By Nikolay Arefiev
  91. Preventing Bank Runs By Andolfatto, David; Nosal, Ed; Sultanum, Bruno
  92. Côte d’Ivoire: Sixth Review Under the Extended Credit Facility Arrangement and Requests for Waiver of Nonobservance of Performance Criterion, Augmentation of Access, and Twelve-Month Extension of the Current Arrangement - Staff Report; Press Release; and Statement by the Executive Director for the Côte d’Ivoire By International Monetary Fund. African Dept.
  93. Youth Unemployment in Advanced Economies in Europe: Searching for Solutions By Angana Banerji; Sergejs Saksonovs; Hannah Huidan Lin; Rodolphe Blavy
  94. The Risky Capital of Emerging Markets By Joel M. David; Espen Henriksen; Ina Simonovska
  95. Green Growth Opportunities for Bhutan By World Bank
  96. The Effect of Unemployment on Self-Reported Health and Mental Health in Greece from 2008 to 2013: A Longitudinal Study Before and During the Financial Crisis By Drydakis, Nick
  97. Demand Composition and Income Distribution By David Pothier; Damien Puy
  98. Sovereign Risk and Bank Balance Sheets: The Role of Macroprudential Policies By Pablo D'Erasmo; Bora Durdu; Emine Boz
  99. Tajikistan : Fiscal Risks from State-Owned Enterprises By World Bank
  100. Advertisement versus Motivation in Competitive Search Equilibrium By Katsuya Takii
  101. Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria By Ozili, Peterson
  102. Risk, Aggregate Demand, and Commodity Prices: An Application to Colombia By Javier Guillermo Gómez-Pineda; Juan Manuel Julio-Román
  103. Fiscal Multipliers in the 21st Century By Per Krusell and Laurence Malafry
  104. Financial markets industry dynamics and growth By Maurizio Iacopetta; Raoul Minetti; Pietro f peretto
  105. Papua New Guinea: Selected Issues Paper By International Monetary Fund. Asia and Pacific Dept
  106. To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income By Alexander Ljungqvist; Michael Smolyansky
  107. A Macroeconomic Model of Biodiversity Protection By David Martin
  108. A multi-country approach to forecasting output growth using PMIs By Chudik, Alexander; Grossman, Valerie; Pesaran, M. Hashem
  109. Financing Strategies for LDCs Graduation in Asia and the Pacific: Key Sources, Trends and Prospects By Sudip Ranjan Basu; Steve Gui-Diby; Zheng Jian
  110. South Africa: Selected Issues Paper By International Monetary Fund. African Dept.
  111. Zimbabwe: Third Review Under the Staff-Monitored Program and Successor By International Monetary Fund. African Dept.
  112. Macroeconomic and Financial Consequences of the After Crisis Government-Driven Credit Expansion in Brazil By Marco Bonomo; Ricardo Brito; Bruno Martins
  113. Linking distress of financial institutions to macrofinancial shocks By Al-Haschimi, Alexander; Dées, Stéphane; di Mauro, Filippo; Jančoková, Martina
  114. Productividad sectorial en el Perú: un análisis a nivel de firmas By Nikita Céspedes; Maria E. Aquije; Alan Sánchez; Rafael Vera-Tudela
  115. Organized Crime, Propaganda, Blackmails of Riinvest and OSI’s Nepotism, not the Banking Sector, is a Severe Barrier By Mulaj, Isa
  116. A network view on interbank market freezes. By S. Gabrieli; C.-P. Georg
  117. Demographics and the Demand for Currency By Geoffrey R. Dunbar
  118. A Unified Framework for the Estimation of Intra and Inter Country Food Purchasing Power Parities with Application to Cross Country Comparisons of Food Expenditure: India, Indonesia and Vietnam By Amita Majumder; Ranjan Ray; Kompal Sinha
  119. Revising Vietnam's State Budget Law (2002) : Proposals Drawing on International Experience By World Bank
  120. Generational Risk--Is it a Big Deal?: Simulating an 80-Period OLG Model With Aggregate Shocks By Laurence Kotlikoff; Jasmina Hasanhodzic
  121. The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies By Philippe D Karam; Ouarda Merrouche; Moez Souissi; Rima Turk
  122. Language Interference In Heritage Russian: Constructional Violations By Ekaterina Rakhilina; Anastasia Vyrenkova
  123. Nowcasting Tourist Arrivals to Prague: Google Econometrics By Zeynalov, Ayaz
  124. Denmark: Financial System Stability Assessment By International Monetary Fund. Monetary and Capital Markets Department
  125. Dimensional Analysis of Production and Utility Functions in Economics By Kim, Minseong
  126. Optimal forecasts from Markov switching models By Tom Boot; Andreas Pick
  127. Using Entropic Tilting to Combine BVAR Forecasts with External Nowcasts By Krueger, Fabian; Clark, Todd E.; Ravazzolo, Francesco
  128. Нови факти за живота на професор Симеон Демостенов (1886–1966) By Nenovsky, Nikolay
  129. Remittances and Governance: Does the Government Free Ride? By Durga P. Gautam

  1. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers’ behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning fiscal discipline, but this results in a sharp increase in macroeconomic instability once the economy is out of the recession. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. The policy trade-off can be resolved by committing to inflate away only the portion of debt resulting from an unusually large recession.
    Keywords: Policy uncertainty; macroeconomic uncertainty; Markov-switching models; shock-specific policy rules; zero lower bound
    JEL: D83 E31 E52 E62 E63
    Date: 2014–08–01
  2. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (Department of Economics, University of Bonn); Taylor, Alan M. (Department of Economics, University of California,Davis)
    Abstract: Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
    JEL: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20
    Date: 2014–12
  3. By: Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
    Abstract: Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
    JEL: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20
    Date: 2014–12
  4. By: BLINOV, Sergey
    Abstract: This paper investigates the possibility of conducting an unconventional monetary policy of Quantitative easing (QE) at high interest rates using the example and experience of Russia. The Central Bank of the Russian Federation has raised the key interest rate on six occasions during the 12 months of 2014 from 5.5% to 17%. The Central Bank has been coming in for criticism for such an increase. However, this criticism is unfair, as sometimes interest rate reduction or failure to raise interest rate result in adverse consequences. Luckily, interest rate is not the only and often far from being the most efficient tool of successful monetary policy. During the hardest phase of the most recent crisis, the central banks worldwide, for example, U.S. Federal Reserve System, resorted to another tool, i.e. Quantitative easing (QE), rather interest rates (which, by that time, had been virtually dropped down to zero). Some experts recognize those to be an important innovation devised by Ben Bernanke, Head of the U.S. Fed during 2006 - 2014. The Central Bank of Russia now has an opportunity of employing a still more innovative policy, i.e. to have “quantitative easing” at high interest rates rather than at zero rates. The experience of the «Golden Decade» (the decade of robust economic growth in Russia between September 1998 and September 2008) proves the efficiency of such monetary policy. The criterion for «sufficiency» of quantitative easing must be the growth rate of the real money supply. In June 2014, the real money supply decreased. That has happened for the first time since December 2009. It shows that there is a need for urgent action on the part of the Central Bank. To bring about steady economic growth, it is required that such quantitative easing be put in place as would make real money supply grow at a pace no slower than the target growth rate for GDP. According to preliminary estimate, the volume of necessary easing would be in the range between RUR 0.6 and 1.9 trillion. Such a program may make itself felt as soon as 3-4 months after its launch.
    Keywords: Monetary Policy, Central Banking, Interest Rates, Quantitative Easing (QE), Economic Growth, Money Supply
    JEL: E31 E32 E40 E43 E50 E51 E52 E58 E65 G01 N10 O11
    Date: 2014–12–19
  5. By: Homburg, Stefan
    Abstract: Monetary policy is superneutral in an overlapping generations model. Previous authors have argued that superneutrality does not hold in such a setting. However, the standard results rely on the counter-factual premise of helicopter money and are overturned if money creation through open market operations is taken into account.
    Keywords: Superneutrality, open market operations, seigniorage, monetary policy, overlapping generations
    JEL: E24 E43 E52
    Date: 2015–01
  6. By: Egor S. Malkov (National Research University Higher School of Economics)
    Abstract: As Akerlof and Shiller (2009) argue, corruption and bad faith played an important role in determining the severity of the recent recessions in the US. This paper studies the impact of robo-signing, which is a typical example of economic bad faith, on the economy and unconventional monetary policy during the last financial crisis. We modify the DSGE model by Gertler and Karadi (2011) by including the features of robo-signing. The paper concludes that banks’ bad faith magnifies the financial crisis through the transmission channel related to changes in the leverage of financial intermediaries and induces the central bank to conduct a more aggressive unconventional monetary policy. We suggest a theoretical framework for studying cases of economic bad faith during the last financial crisis, and provide a model that well fits the data.
    Keywords: robo-signing, unconventional monetary policy, bad faith, financial crisis.
    JEL: E44 E52 E58 G01 G21
    Date: 2014
  7. By: Borio, Claudio (Bank for International Settlements)
    Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the “excess saving” and “excess demand for safe assets” views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.
    JEL: E40 E43 E44 E50 E52 F30 F40
    Date: 2014–10–01
  8. By: Luis Eduardo Arango; Ximena Chavarro; Eliana González
    Abstract: A small open macroeconomic model, in which an optimal interest rate rule emerges to drive the inflation behavior, is used to model inflation within an inflation targeting framework. This set up is used to estimate the relationship between commodity prices shocks and the inflation process in a country that both export and import commodities. We found evidence of a positive, yet small, impact from food international price shocks to inflation. However, these effects are no longer observable once the sample is split in the periods before and after the boom. The lack of effect from oil and energy price shocks we obtain supports the recent findings in the literature of a substantial decrease in the pass-through from oil prices to headline inflation. Thus, our interpretation is that monetary authority has faced rightly the shocks to commodity prices. Inflation expectations are the main determinant of inflation during the inflation targeting regime. Commodity prices movements are to a great extent included in the information set to form expectations.
    Keywords: Commodity prices, inflation-targeting regime, optimal monetary policy, expectations.
    JEL: E43 E58
    Date: 2014–12–22
  9. By: Chong, Terence Tai Leung; Zhu, Tingting; Rafiq, M.S.
    Abstract: This paper compares the role of macroeconomic and sector-specific factors in price movements for China and India, taking into account the features unique to developing economies. We find that fluctuations in the aggregated prices in China are more persistent than the underlying disaggregated prices. Compared to China, prices in India respond more promptly to macroeconomic and monetary policy shocks. We also show that the urban CPI in China responds more sharply than rural CPI when facing sector-specific shocks, while the opposite is true for India.
    Keywords: Disaggregated Prices; Persistence; Common Factors.
    JEL: E31 E32 E52
    Date: 2013–12–31
  10. By: Fabio Busetti (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia); Andrea Gerali (Banca d'Italia); Alberto Locarno (Banca d'Italia)
    Abstract: A prolonged period of low inflation, particularly in a situation of monetary policy rates near the zero lower bound, can heighten the risk of inflation expectations de-anchoring from the central bank objective. The purpose of this paper is to assess the effects of a sequence of deflationary shocks, such as those that hit the euro area in 2013-14, on expected/realized inflation and output. To do so we consider a simple New Keynesian model where agents, rather than being endowed with rational expectations, have incomplete information about the working of the economy and form expectations through an adaptive learning process (in the sense that they behave like econometricians, using regressions to anticipate the future value of the variables of interest). The model is simulated with euro area data over the period 2014-16 under the assumption both of rational expectations and of learning. The main findings are the followings: (i) under learning, price dynamics in 2015-16 is on average 0.6 percentage points lower than in the case of fully rational agents, as inflation expectations are strongly affected by the repeated deflationary shocks; (ii) the learning process implies a (data-driven) de-anchoring of inflation expectations from the central bank target, which would be perceived by economic agents to fall to 0.8% at the end of 2016; (iii) output expectations would also be lower in the case of learning, resulting in a slower recovery of economic activity.
    Keywords: expected inflation, incomplete information, learning
    JEL: C51 E31 E52
    Date: 2014–11
  11. By: Campbell, Jeffrey R. (Federal Reserve Bank of Chicago)
    Abstract: This paper considers monetary and fiscal policy when tangible assets can be accumulated after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model’s flexible-price allocation mimics Joseph’s saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by tangible assets or the assets themselves, eliminates both liquidity traps and confidence recessions by putting a floor under future consumption. This requires no commitment to a time-inconsistent plan.
    Keywords: Zero Lower Bound; Liquidity Trap; Confidence Recession; Storage; Equilibrium Multiplicity; Competitive Devaluation
    JEL: E12 E63
    Date: 2014–11–05
  12. By: Hanif, Muhammad Nadim
    Abstract: Using monetary policy rate and/or changes in certain liquidity ratios, State Bank of Pakistan influences cost and/or availability of money and credit in the country to achieve (government announced) inflation target without being prejudice to real economic growth target. Earlier, SBP had been following monetary aggregate targeting to achieve its objectives. Reserve money had been used as an operational target. After weakening of broad money growth and inflation relation (as a result of financial sector reforms and restructuring), SBP transferred the operational target to the overnight money market repo rate. Various monetary conditions indicators are used to decide on the direction and magnitude of monetary policy stance. Budget deficit (with its financing mix), money supply (with its composition), local currency prices of imported goods, wheat support price, and expected (higher) inflation play an significant role in generating inflation while real income growth, and (international trade) openness help dampening it. Inflation in Pakistan has been found equals to rate of broad money growth minus the real output growth which simply shows inflation in Pakistan has mainly been a monetary phenomenon. Monetary policy has provided stable background for the economy as we saw standard deviations for inflation and broad money growth to be same during 1951-2010. Financial sector reforms and restructuring (after end 1980s) helped lower the (broad money growth and) inflation volatility in the country.
    Keywords: Monetary Policy
    JEL: E52
    Date: 2014–12–22
  13. By: Deryugina , Elena (BOFIT); Ponomarenko , Alexey (BOFIT)
    Abstract: We apply an econometric approach developed specifically to address the ‘curse of dimensionality’ in Russian data and estimate a Bayesian vector autoregression model comprising 14 major domestic real, price and monetary macroeconomic indicators as well as external sector variables. We conduct several types of exercise to validate our model: impulse response analysis, recursive forecasting and counter factual simulation. Our results demonstrate that the employed methodology is highly appropriate for economic modelling in Russia. We also show that post-crisis real sector developments in Russia could be accurately forecast if conditioned on the oil price and EU GDP (but not if conditioned on the oil price alone).
    Keywords: Bayesian vector autoregression; forecasting; Russia
    JEL: C32 E32 E44 E47
    Date: 2014–12–03
  14. By: Kerry B. Hudson; Joaquin L. Vespignani
    Abstract: This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia’s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world’s largest economy.
    Keywords: Taylor Rule, Monetary Policy, Small Open Economy
    JEL: E40 E52 E50
    Date: 2014–12
  15. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper shows that about 70 percent of the variance of the yearly change in the world private financial saving rate can be explained by lagged changes in world stock and housing prices for the sample period 1982-2013. The results suggest that increased fluctuations in asset prices since 1995 have led to increased fluctuations in the world private financial saving rate. Wealth effects on private demand appear to be large.
    Keywords: Financial saving, World economy, Wealth effects
    JEL: E21 E44 F41
    Date: 2014–12
  16. By: Danilo Liberati (Bank of Italy)
    Abstract: Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures. Finally, since there is still some disagreement about the theoretical mechanism by which the interest rate on loans is derived, we survey and compare these theoretical devices with that proposed by this paper.
    Keywords: Interest rate pass-through, Credit Spread, Search and Matching, Credit Market Frictions, Bayesian techniques
    JEL: C78 E13 E43 E44
    Date: 2014–10
  17. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: The 1950s are often cited as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed’s ability to conduct an independent monetary policy. The Fed was forced to cooperate with the Treasury in the 1930s, and fully ceded monetary policy to Treasury financing requirements during World War II. Nonetheless, the Fed retained a policy tool in the form of reserve requirements, and from the mid-1930s to 1951, changes in required reserve ratios were the primary means by which the Fed responded to expected inflation. The inability of the Fed to maintain a credible commitment to low interest rates in the face of increased government spending and rising inflation led to the Fed-Treasury Accord of March 1951. Following the Accord, the external pressures on the Fed diminished significantly, which enabled the Fed to focus primarily on macroeconomic objectives. We conclude that a successful outcome requires not only a good understanding of how to conduct policy, but also a conducive environment in which to operate.
    JEL: E52 E58 N12
    Date: 2014–10–01
  18. By: IIBOSHI Hirokuni; MATSUMAE Tatsuyoshi; NISHIYAMA Shin-Ichi
    Abstract: In order to investigate sources of the Great Recession (Dec. 2007 to Jun. 2009) of the US economy in the latter portion of the first decade of the 2000s, we modified the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model by embedding financial frictions in both the banking and the corporate sectors. Furthermore, the structural shocks in the model are assumed to possess stochastic volatility (SV) with a leverage effect. Then, we estimated the model using a data-rich estimation method and utilized up to 40 macroeconomic time series in the estimation. In light of a DSGE model, we suggest the following three empirical evidences in the Great Recession:(1) the negative bank net-worth shock gradually spread before the corporate net worth shock burst ; (2) the data-rich approach and the structural shocks with SV found the contribution of the corporate net worth shock to a substantial portion of the macroeconomic fluctuations after the Great Recession, which is unlike the standard DSGE model; and (3) the Troubled Asset Relief Program (TARP) would work to bail out financial institutions, whereas balance sheets in the corporate sector would still not have stopped deteriorating. Incorporating time-varying volatilities of shocks into the DSGE model makes their credible bands narrower than half of the constant volatilities, which result implies that it is a realistic assumption based on the dynamics of the structural shocks. It is plausible that tiny volatilities (or uncertainty) in ordinary times change to an extraordinary magnitude at the turning points of business cycles. Keywords: New Keynesian DSGE model, Data-rich approach, Bayesian estimation, financial friction, stochastic volatility, leverage effect. JEL Classification: E32, E37, C32, C53.
    Date: 2014–12
  19. By: Paul Hubert (OFCE)
    Abstract: We aim at investigating how two different types of central bank communication affect the private inflation expectations formation process. The effects of ECB inflation projections and Governing Council members’ speeches on private inflation forecasts are identified through an Instrumental-Variables estimation using a Principal Component Analysis to generate valid instruments. We find that ECB projections have an effect on private current-year forecasts, while ECB speeches and the ECB rate impact next-year forecasts. When both communication types are interacted and go in the same direction, the inflation outlook signal tends to outweigh the policy path signal conveyed to private agents (and vice-versa).
    Keywords: European Central Bank; Monetary Policy; Central Bank Communication; ECB projections; Instrumental variables; Pincipal Component Analysis
    JEL: E52 E58
    Date: 2014–12
  20. By: Philippe Bacchetta; Kenza Benhima; Céline Poilly
    Abstract: In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process and where financial shocks are made of both credit and liquidity shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. With a calibrated version of the model, the model yields a negative comovement that is close to the data.
    Keywords: Liquidity; Financial Shocks; Working Capital
    JEL: E44 G32 E24
    Date: 2014–12
  21. By: Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of simultaneously implementing fiscal consolidation and competition-friendly reforms in a country of the euro area by simulating a large-scale dynamic general equilibrium model. We find, first, that the joint implementation of reforms has additional expansionary effects on long-run economic activity. Increasing competition in the service sector favors a higher income tax base. Given the targeted public debt-to-GDP ratio, labor and capital income tax rates can be reduced more than with fiscal consolidation alone. Second, fiscal consolidation has non-negligible medium-run costs; however, they are reduced by joint implementation with the services reform. The results are robust to alternative assumptions that capture the impact of financial crisis on the financing conditions of households.
    Keywords: competition, fiscal policy, markups, monetary policy, public debt, spread.
    JEL: C51 E30 E63
    Date: 2014–11
  22. By: Hamza Bennani; Matthias Neuenkirch
    Abstract: Speeches are an important vehicle for central bankers to convey individual views on the preferred policy stance. In this paper, we employ an automated text linguistic approach to create an indicator that measures the tone of the 1,618 speeches delivered by members of the Governing Council (GC) during the period 1999M1-2014M4. We then relate this variable to euro-area and national macroeconomic forecasts. Our key findings are as follows. First, inflation and growth expectations have a positive and significant impact on the hawkishness of a speech. Second, the voiced preferences of national central bankers largely coincide with the level of independence their banks had at the time of the Maastricht Treaty. Third, country-specific macroeconomic conditions matter for speeches delivered inside the central banker's home country but not for those made abroad. Fourth, differences in central banker preferences are the key source of variation in their speeches before the financial crisis, whereas divergent national economic conditions are the main factor in the second part of the sample.
    Keywords: Central Bank Communication, European Central Bank, Governing Council, Monetary Policy, National Interests, Speeches
    JEL: E52 E58
    Date: 2014
  23. By: Jong-Won Yoon; Jinill Kim; Jungjin Lee
    Abstract: The ongoing demographic changes will bring about a substantial shift in the size and the age composition of the population, which will have significant impact on the global economy. Despite potentially grave consequences, demographic changes usually do not take center stage in many macroeconomic policy discussions or debates. This paper illustrates how demographic variables move over time and analyzes how they influence macroeconomic variables such as economic growth, inflation, savings and investment, and fiscal balances, from an empirical perspective. Based on empirical findings—particularly regarding inflation—we discuss their implications on macroeconomic policies, including monetary policy. We also highlight the need to consider the interactions between population dynamics and macroeconomic variables in macroeconomic policy decisions.
    Keywords: Demographic transition;Inflation;Population growth;Aging;Human fertility;Mortality;Older people;Labor supply;Monetary policy;Fiscal policy;Demographic Changes, Population Aging, Inflation, Macroeconomic Impact, Savings and Investment, Monetary Policy, Fiscal Policy.
    Date: 2014–11–24
  24. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: KEY ISSUES Outlook and risks: Growth is projected to reach 2.4 percent in 2014, while core inflation remains close to the target. Strong export demand has boosted manufacturing production and employment, and construction activity is starting to recover, supported by an expansion of public infrastructure spending. The main external risk is a rise in capital flow volatility caused by uncertainties related to the unwinding of the U.S. monetary policy stimulus or heightened geopolitical tensions. The main domestic risk is the effectiveness of implementation of the structural reforms. Structural Reforms: Major reforms in the areas of energy, education, anti-trust, telecommunications, and the financial sector have been approved in the past year and a half. The legislative process for the energy and telecommunications reforms has been completed recently, clearing the way for implementation. Staff estimates suggest that the reforms will boost potential output growth by ¾ percentage points to 3½–4 percent per year. Macroeconomic Policies: The current policy mix of easy monetary policy and broadly neutral fiscal policy has helped the recovery this year. The authorities plan to reduce the fiscal deficit gradually in the medium term, with the goal of setting public debt on a downward path. A steady and transparent implementation of the structural reforms will be critical to maintain investors’ confidence and boost potential growth in the medium term. Advice from previous Article IV Consultations: The ambitious structural reforms are consistent with Fund advice from previous consultations. A number of key recommendations in the 2011 FSAP Update have been implemented, including strengthening of consolidated supervision.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal reforms;Monetary policy;Inflation targeting;Flexible exchange rates;Banking sector;Liquidity;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Mexico;
    Date: 2014–11–12
  25. By: Speigner, Bradley (Bank of England)
    Abstract: The notion that the long-term unemployed are relatively detached from the labour market and therefore exert only little downward pressure on wage inflation has regained significant traction recently. This paper investigates whether the conclusion that long-term unemployment is only weakly related to inflation depends on the assumption of linearity in the Phillips curve. Specifically, once convexity is allowed for during the estimation process, long-term unemployment appears to have a significant negative influence on wage inflation, whereas in a linear Phillips curve model it is only the short-term unemployment rate that matters for wage dynamics. The intuition is simple; by the time the long-term unemployment rate rises during a recession, the economy may have already transitioned into a relatively flat region of the Phillips curve, generating the misperception that the marginal effect of long-term unemployment on wage inflation is smaller than that of short-term unemployment. Linear models which do not capture state dependence in the slope of the Phillips curve would therefore bias downwards the estimated importance of long-term unemployment in explaining wage dynamics if the true Phillips curve is convex.
    Keywords: Phillips curve; convexity; natural rate of unemployment; Kalman filter; long-term unemployment; hysteresis
    JEL: C22 E24 E32 J64
    Date: 2014–12–19
  26. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute for East and Southeast European Studies, Regensburg, Germany); Júlia Jonášová (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: We examine whether central banks’ voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, first, we examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, we examine the predictive power of voting records at longer time horizons, i.e., not only for the next monetary policy meeting. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy even at more distant time horizons.
    Keywords: voting records, financial crisis, central bank, monetary policy
    JEL: D78 E52 E58
    Date: 2014–12
  27. By: Inekwe John Nkwoma
    Abstract: This study contributes in bridging the dichotomy between economic growth and business cycle paradigms by providing dynamic characterisation of the link between economic growth, risk aversion, uncertainty and variability in industrial production, consumption and investment. In a system of equations, the study reveals that risk aversion, uncertainty and variability of business cycle components aid to contract growth. In contrast, ambiguous relationship exists between variability of hours worked and economic growth. Uncertainty and risk aversion induce increment in variability of business cycle components. Across countries, economic growth remains sensitive to the level of risk aversion and uncertainty
    Keywords: Growth, Volatility, Business, Cycle, Uncertainty, Risk Aversion
    JEL: G1 E20 E44 O40
    Date: 2014–09
  28. By: Kim, Minseong
    Abstract: In this paper, several flaws of the basic no-capital/labor-only New Keynesian model are discussed. Some flaws were left undiscovered because mass of varieties n in Dixit-Stiglitz aggregator is often considered as not affecting overall outcomes. Only when n=1 would ordinary results of the basic New Keynesian model hold. To save the theory, we consider the case where production function exhibits constant return to scale for its input labor, then concludes that linear production function itself leads to other sets of problems. The aforementioned results are proven by checking several limit cases of the basic New Keynesian model, which itself is the limit case model of several New Keynesian models. Then we show some problems with applying transversality condition to consumption Euler equation of the model.
    Keywords: Dixit-Stiglitz aggregator; CES; New Keynesian model; Inconsistency; production function; consumption Euler equation; IS curve; transversality condition; monetary rule
    JEL: E12 E13 E32 E52
    Date: 2014–12–30
  29. By: Van den Hauwe, Ludwig
    Abstract: In the wake of the Financial Crisis and the subsequent Great Recession several commentators have suggested that the analysis of financial instability provided by various strands of heterodox economics got it "right" and that mainstream economics got it "wrong". In this paper two variants of heterodox views about financial instability are compared critically: the views of the late Hyman P. Minsky on the one hand, and the theses of the Austrian School on the other. It is concluded that the apparent similarities between both approaches are superficial, while the divergences are profound and fundamental.
    Keywords: Financial Instability, Business Cycle, Minsky, Austrian School
    JEL: B50 B53 B59 E3 E30 E32
    Date: 2014–12–24
  30. By: Truman, Edwin M. (Peterson Institute for International Economics)
    Abstract: This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve’s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
    Keywords: Federal Reserve; Federal Open Market Committee; inflation; macroeconomic policies; monetary policy; external balance; exchange rates; exchange market intervention; financial crises; third world debt crises; Mexican crisis; Asian financial crises
    JEL: E4 E42 F3 F31 F32 F33 F34 F5 F52 F53
    Date: 2014–10–01
  31. By: Razzak, Weshah
    Abstract: We confront microeconomic theory with macroeconomic data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labor, unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of U.S. unemployment.
    Keywords: Wage, productivity and unemployment
    JEL: D21 E24
    Date: 2014–11–01
  32. By: World Bank Group
    Keywords: Transport Economics Policy and Planning Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Transport Macroeconomics and Economic Growth
    Date: 2014–10
  33. By: Julio Escolano; Christina Kolerus; Constant Lonkeng Ngouana
    Abstract: This paper finds that tightening global financial conditions can worsen emerging economies’ public debt dynamics through an increasing interest rate-growth differential, particularly if coupled with high global risk aversion. Latin America and emerging Europe are the regions most likely to be adversely affected. In addition, historical evidence—analyzed by means of a Poisson count model—suggests that the frequency of sovereign debt crises increases in emerging economies at the early stage of U.S. monetary tightening cycles, at times in which the term spread also rises. The timing may be related to abrupt switches of expectations about the future course of policy in the early stages of tightening cycles.
    Keywords: Public debt;Emerging markets;Sovereign debt;United States;Monetary policy;Spillovers;Financial crises;Debt dynamics, emerging markets, sovereign debt crisis, unconventional monetary policy, U.S. economy
    Date: 2014–12–12
  34. By: Fabio Bacchini (ISTAT); Maria Elena Bontempi (Alma Mater Studiorum - Università di Bologna); Roberto Golinelli (Alma Mater Studiorum - Università di Bologna); Cecilia Jona-Lasinio (ISTAT)
    Abstract: In this paper, we model business investment distinguishing between ICT (communication equipment, hardware and software) and Non-ICT (machinery and equipment, and non-residential buildings) components and taking into account asset specific characteristics potentially affecting the reactivity of capital accumulation over the business cycle. Business investment and ICT and Non-ICT assets are estimated within a VECM model to test, in a unique framework, the assumptions of the flexible accelerator model (Clark, 1944, and Koyck, 1954) and of the neoclassical model of Hall and Jorgenson (1967), as well as how financial constraints and uncertainty influence investment behaviour (Hall and Lerner, 2010, and Bloom, 2007). Our findings suggest that the long-run relationship with standard macro determinants (output and user cost) is verified for aggregate business capital stock as well as for individual Non-ICT assets but not for ICT. In the short run, liquidity is a key determinant of investment behaviour independently of the asset type. In the long-run, uncertainty significantly affects ICT. Finally, the results of the counterfactual exercises over the latest Italian recession support the idea that ICT is a key policy variable to foster the economic recovery.
    Keywords: Evaluation of Macro models, ICT Investments, Uncertainty, Liquidity constraints
    JEL: C52 C53 E22 E50
    Date: 2014
  35. By: Robert Jump
    Abstract: This paper proposes an explanation for observed differences in the business cycle volatility of employment and unemployment across a sample of OECD countries. Using an incomplete markets variant of the fair wage real business cycle model, increases in the gross replacement rate of public unemployment insurance are shown to increase the volatility of employment, and decrease the volatility of real wages, ceteris paribus. For a sample of 14 OECD countries over the period 1985-2005, the gross replacement rate is found to be positively correlated with the business cycle volatility of hours worked, lending support to the argument. A secondary contribution, which may be of some use in the incomplete markets literature, is the simple manner in which unemployment is endogenised in the model.
    Keywords: Fair Wages; Unemployment; Incomplete Markets
    JEL: E24 E32 J64 J65
    Date: 2014–09
  36. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context. South African citizens’ living standards have improved substantially in the first twenty years of democracy. But in recent years the economy has underperformed peers. The outlook is lackluster, with low growth, high unemployment, and elevated twin deficits. As in many emerging markets, weak external demand and soft commodity prices contributed to these outcomes, but deep-seated structural factors also played an important role. After years of accommodation, fiscal and monetary policies are constrained by rising vulnerabilities. With the elections over, the government has an opportunity to implement structural reforms, essential to address unemployment, poverty, and inequality. Structural reforms. An extensive public infrastructure program will ease binding electricity and transport bottlenecks over time. Besides improved state-owned enterprise efficiency, greater private sector participation would help as public balance sheets are stretched. Normalization of industrial relations, combined with greater competition in product markets, more inclusive labor markets, and reduced skill mismatches, remain indispensable to boost job-rich and sustainable growth, lower vulnerabilities, and enhance the economy’s ability to rebalance toward exports and investment. Fiscal and monetary policies. With rising vulnerabilities, macroeconomic policies are rightly factoring in the risks South Africa faces. As planned in the 2014 Medium-Term Budget Policy Statement, fiscal consolidation is needed to ensure debt stabilization over the medium term. Under staff’s baseline, further measures may be needed. The recent large drop in oil prices and the envisaged fiscal adjustment may enable the South African Reserve Bank to stay accommodative for longer. Higher interest rates may become necessary if global financial conditions tighten sharply. Policies to enhance resilience. The Financial Sector Stability Assessment (FSSA) concludes that financial sector risks are elevated but manageable. It recommends heightened scrutiny of asset quality and liquidity risks. To complement the authorities’ regulatory reform of the financial sector, the FSSA advises enhanced stress tests, group- wide supervision, a strengthened financial safety net, and a clearer allocation of responsibilities and coordination among institutions. The flexible exchange rate regime and a favorable currency composition of external debt are effective buffers against capital flow volatility, but higher reserves and policies to facilitate foreign direct investment would further strengthen resilience.
    Keywords: Article IV consultation reports;Economic conditions;Unemployment;Fiscal policy;Infrastructure;Electric power;Fiscal reforms;Monetary policy;Reserves;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;South Africa;
    Date: 2014–12–11
  37. By: L. Clerc; A. Derviz; C. Mendicino; S. Moyen; K. Nikolov; L. Stracca; J. Suarez; A. P. Vardoulakis
    Abstract: We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This “3D model” shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.
    Keywords: Macroprudential policy; Financial frictions; Default risk.
    JEL: E3 E44 G01 G21
    Date: 2014
  38. By: Pugsley, Benjamin (Federal Reserve Bank of New York); Sahin, Aysegul (Federal Reserve Bank of New York)
    Abstract: We document two striking facts about U.S. firm dynamics and interpret their significance for aggregate employment dynamics. The first observation is the steady decline in the firm entry rate over the last thirty years, and the second is the gradual shift of employment from younger to older firms over the same period. Both observations hold across industries and geographies. We show that, despite these trends, firms’ life-cycle dynamics and business-cycle properties have remained virtually unchanged. Consequently, the reallocation of employment toward older firms results entirely from the cumulative effect of the thirty-year decline in firm entry. This “start-up deficit” has both an immediate and a delayed (by shifting the age distribution) effect on aggregate employment dynamics. Recognizing this evolving heterogeneity is crucial for understanding shifts in aggregate behavior of employment over the business cycle. With mature firms less responsive to business cycle shocks, the cyclical component of aggregate employment growth diminishes with the increasing share of mature firms. At the same time, the trend decline in firm entry masks the diminishing cyclicality during contractions and reinforces it during expansions, which generates the appearance of jobless recoveries where aggregate employment recovers slowly relative to output.
    Keywords: firm dynamics; employment dynamics; business cycles; entrepreneurship
    JEL: E32 J00 L25 L26
    Date: 2014–12–01
  39. By: Ansgar Belke; Tobias Böing
    Abstract: The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a structural vector autoregressive technique following Cecchetti and Rich (2001) and, secondly, one by Ball (1994) based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between –1 and 2 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.
    Keywords: Sacrifice ratio; structural adjustment; Euro area; VAR; episode method; Phillips curve
    JEL: E31 F49
    Date: 2014–11
  40. By: Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
    Abstract: We generalise the stylised macroeconomic Agent-Based model introduced in "Tipping Points in Macroeconomic Agent Based Models" [JEDC 50, 29-61 (2015)], with the aim of investigating the role and efficacy of monetary policy of a 'Central Bank', that sets the interest rate such as to steer the economy towards a prescribed inflation and unemployment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or "dark corners"), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.
    Date: 2015–01
  41. By: Giovanni Caggiano (Department of Economics and Management, University of Padova); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Valentina Colombo (Department of Economics and Management, University of Padova); Gabriela Nodari (Department of Economics, University of Verona; and Australian School of Business, The University of New South Wales)
    Abstract: We estimate nonlinear VARs to assess to what extent fiscal spending multipliers are countercyclical in the United States. We deal with the issue of non-fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures. This measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending. Results based on generalized impulse responses suggest that fiscal spending multipliers in recessions are greater than one, but not statistically larger than those in expansions. However, nonlinearities arise when focusing on “extreme” events, i.e. deep recessions vs. strong expansionary periods.
    Keywords: Fiscal news, fiscal foresight, fiscal spending multiplier, Smooth Transition Vector-AutoRegressions, extreme events
    JEL: C32 E32 E52
    Date: 2014–12
  42. By: Marek Antosiewicz; Piotr Lewandowski
    Abstract: In this paper we utilize an open economy DSGE model to analyse factors behind the Great Recession and its transmission into labour markets of selected Southern European countries. We introduce a number of shocks which form potential sources of macroeconomic disturbances, in particular: foreign demand, productivity, bargaining power, labour demand, labour supply, government spending, and job destruction shocks. Using quarterly data for the 1995-2013 period, we estimate the model for Germany, Greece, Italy, Portugal and Spain. We identify shocks determining macroeconomic and labour market fluctuations in each of the countries studied. We also conduct experiments allowing us to assess to what extent differences between countries with regard to macroeconomic and labour market fluctuations resulted from different shocks affecting them, and to what extent from different resilience of particular economies.
    Keywords: Unemployment, Rigidities, Great Recession, DSGE
    JEL: E32 J20 J60
    Date: 2014–08
  43. By: Sergey V. Smirnov (National Research University Higher School of Economics)
    Abstract: There is evidence in the economic literature that near cyclical peaks an optimistic bias exists in private expert forecasts of real GDP growth rates. Other evidence concerns differences in the accuracy of GDP forecasts made during expansions and those made during contractions. It has also been hypothesized that a wishful bias may hamper the ability to recognize the beginning of a recession in real-time. We tested consensus forecasts of quarterly GDP growth rates taken from SPFs conducted by PhilFed and found that they may be seen as unbiased only for time horizons j=0,1,2; for greater horizons they are over-optimistic. This over-optimism may also be observed for (j=1, 2) for forecasts made at peaks (at these moments the consensus usually points only to a slowdown of the economy but not to a contraction). Lastly, over-optimism may be observed for nowcasts (j=0) during cyclical contractions, including the first two quarters of a recession (in these cases the reality is usually worse than expected). Taken together, all these facts mean that some aversion to predicting US recessions exists. There are two possible reasons for this: a) experts rely too heavily on extrapolations (then changes in medium-long tendencies would be missed in real time); b) there is a wishful bias in forecasts against predicting recessions (this reluctance may be rooted in psychological factors). We give some arguments in favor of the thesis that the second factor is more important.
    Keywords: Business cycles, Turning points, Recessions, Biased forecasts, SPF
    JEL: E32 E37
    Date: 2014
  44. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Inflation has subsided, but longstanding vulnerabilities are becoming increasingly apparent. Economic growth is holding up well, inflation has fallen below the central bank’s target, and fiscal and external buffers remain large. But the economy’s dependence on the hydrocarbon sector has led to serious vulnerabilities that are now coming to light. Stagnating hydrocarbon production and declining oil prices, combined with increasing domestic consumption of hydrocarbon products, are depressing export receipts. Public spending continues to increase, fueling imports and a loss of competitiveness, and placing fiscal policy on an increasingly unsustainable path. As a result, the current account is expected to record a deficit in 2014 for the first time in more than 15 years. Unemployment remains high among youth and women. Algeria needs to consolidate macroeconomic and financial stability. A full-fledged fiscal rule, combined with an ambitious consolidation effort over the medium term, would help put the fiscal stance on a sustainable path. The decline in inflation experienced since the 2012 is a positive outcome that needs to be maintained through continued efforts to absorb liquidity and a more active use of interest rates. The exchange rate policy should avoid deviations of the dinar from its equilibrium level, and should support the deepening of forex markets. The implementation of FSAP recommendations should be pursued, notably to strengthen financial sector stability. An export-oriented strategy is needed to ensure external sustainability. Export diversification is imperative to ensure external sustainability and reduce vulnerability to fluctuating oil prices. Diversification policies should focus on maintaining economic stability and improving competitiveness, increasing openness to trade and capital flows, (particularly FDI), and creating a more export-friendly business climate. Additional reforms are needed to increase hydrocarbon exports, including reforms to increase production and phase-out implicit subsidies on energy and electricity, which are fueling domestic consumption. Algeria’s significant growth potential needs to be more fully realized. Reforms are needed to reduce the dominance of the public sector and transform the private sector into an engine for growth, supported by a deeper financial sector. To increase employment, Algeria will need better-functioning labor markets, a workforce equipped with more relevant skills, and more effective labor market programs. Exchange rate regime. The de facto exchange rate regime is classified as “other managed arrangement.” Algeria has accepted the obligations of Article VIII Sections 2(a), 3, and 4.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal reforms;Labor market reforms;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Algeria;
    Date: 2014–12–11
  45. By: Jan Kregel
    Abstract: The Fed's zero interest policy rate (ZIRP) and quantitative easing (QE) policies failed to restore growth to the US economy as expected (i.e., increased investment spending a la John Maynard Keynes or from an expanded money supply a la Ben Bernanke / Milton Friedman). Senior Scholar Jan Kregel analyzes some of the arguments as to why these policies failed to deliver economic recovery. He notes a common misunderstanding of Keynes's liquidity preference theory in the debate, whereby it is incorrectly linked to the recent implementation of ZIRP. Kregel also argues that Keynes's would have implemented QE policies quite differently, by setting the bid and ask rate and letting the market determine the volume of transactions. This policy note both clarifies Keynes's theoretical insights regarding unconventional monetary policies and provides a substantive analysis of some of the reasons why central bank policies have failed to achieve their stated goals.
    Date: 2014–11
  46. By: von der Lippe, Peter
    Abstract: The New Stochastic Approach (NSA) – unjustly – pretends to promote a better understanding of price index (PI) formulas by viewing them as regression coefficients. As prices in the NSA are assumed to be collected in a random sample (what is particularly at odds with official price statistics), PIs are random variables so that not only a point estimate but also an interval estimate of a PI can be provided. However this often praised "main advantage" of the NSA is hardly of any use from a practical point of view. In the NSA goodness of fit is confused with adequacy of a PI formula. Regression models are mostly farfetched, stipulate restrictive and unrealistic assumptions, replicate only already known PI formulas and they say nothing about axioms satisfied or violated by a PI.
    Keywords: Index theory. price index, Inflation measurement, regression, methodoloy of collecting macroeconomic data
    JEL: C43 C82 E01 E31
    Date: 2014–12–14
  47. By: Niels Gilbert; Jasper de Jong
    Abstract: Enforcement of European fiscal rules, to a large extent, hinges on the fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesise that the EC's forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC's fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3% of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3% threshold.
    Keywords: Forecast errors; Stability and Growth Pact; fiscal policy; political economy
    JEL: C53 H3 H68 E62
    Date: 2014–12
  48. By: Shakhnov, Kirill
    Abstract: The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented individuals efficiently match investors with entrepreneurs, but do not internalize the negative effect on the pool of talented entrepreneurs. Thus, the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The model explains the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.
    Keywords: Talent; Financial sector, Matching, Productivity
    JEL: E44 G14 L26 O15
    Date: 2014
  49. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Addressing the Household Debt Overhang The economy is slowly emerging from its balance sheet recession. Housing prices have steadied, exports are rising on expanding global trade, but consumption continues to contract on an annual basis, held down by household deleveraging and weak incomes. The risks to the outlook are on the downside. Near term risks stem from euro area weakness and geopolitical spillovers, while medium-term growth prospects are clouded by the slow progress in addressing the large household debt overhang. Addressing the household debt overhang is key to securing a robust recovery. Encouraging reprofiling of underwater mortgages, increasing intergenerational transfers, and reducing pension contributions for the young would support orderly household deleveraging. Strengthening the banking sector would reduce housing risks and support credit in the recovery. Stronger capital buffers and more ambitious medium-term targets for reducing LTV ratios and mortgage deductibility would encourage more corporate lending and reduce the risks from the housing sector. Expanding the rental market would ease pressures on home ownership. Deregulating private rentals, improving the targeting of social housing, and liberalizing zoning laws would create a more efficient and resilient housing sector. Accommodative macro policies and structural reforms to raise productivity would support balance sheet adjustment and enhance potential growth. During deleveraging, fiscal policy should aim to be supportive by maintaining a structural balance over the medium term, while avoiding targeting headline balances. Structural reforms to strengthen the SME sector, address labor duality and expand the availability of equity financing are also needed to raise productivity.
    Keywords: Article IV consultation reports;Debt;Private sector;Financial sector;Banks;Housing;Fiscal policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Netherlands;
    Date: 2014–12–05
  50. By: Krouglov, Alexei
    Abstract: Presented is a mathematical model of single-product economy describing a nominal economic growth and a nominal economic decline. Based on the model of economic dynamics, policies handling the gravity of the secular stagnation are furnished. First, transition of the secular stagnation into the secular decline is to be prevented. Second, a two-stage economic policy against the secular stagnation should be entertained. The first stage is to promote a policy of advancing the additional demand for products to counterbalance the additional supply of products by external suppliers. The second stage is to sustain a policy of savings and investments to stipulate an economic growth where the savings and investments are to be committed with a modest acceleration. Two stages of the alleviating economic policy can be executed concurrently.
    Keywords: economic growth; business fluctuations; secular stagnation
    JEL: C61 E32 O11
    Date: 2014–12–18
  51. By: Alicia Garcia-Herrero (Chief Economist, Emerging Markets at BBVA and Visiting Professor at CEBIS (E-mail:
    Abstract: The paper assesses how close Asian countries are to an Optimal Currency Area in terms of business cycle synchronization, with a focus on supply shock asymmetry. Based on a Structural VAR model, the importance of symmetric and asymmetric supply shocks is teasted for all ASEAN+3 countries. In addition, a spatial approach is used to analyze its impact on the whole Asian region and on pairs of Asian countries. The conclusion is that there is evidence of increasing symmetry of supply shocks although the situation differs largely on a country by country basis. Such finding would support a multi-speed process of monetary integration in the region.
    Keywords: Business cycle synchronization, Optimal Currency Area, Asian economic integration, Structural Vector Auto Regression, ASEAN+3
    JEL: E32 F40 F44
    Date: 2014–12
  52. By: Baumann, Ursel; Dieppe, Alistair; González Pandiella, Alberto; Willman, Alpo
    Abstract: The model presented here is an estimated medium-scale model for the United States (US) economy developed to forecast and analyse policy issues for the US. The model is specified to track the deviation of the medium- run developments from the balanced-growth-path via an estimated CES production function for the private sector, where factor augmenting technical progress is not constrained to evolve at a constant rate. The short-run deviations from the medium run are estimated based on three optimising private sector decision making units: firms, trade unions and households. We assume agents optimise under limited-information model-consistent learning, where each agent knows the parameters related to his/her optimization problem. Under this learning approach the effect of a monetary policy shock on output and inflation is more muted but persistent than under rational expectations, but both specifications are broadly comparable to other US macro models. Using the learning version, we .find stronger expansionary effects of an increase in government expenditure during periods of downturns compared to booms. JEL Classification: C51, C6, E5
    Keywords: learning, macro model, open-economy macroeconomics, rational expectations
    Date: 2014–12
  53. By: Ekor, Maxwell; Saka, Jimoh; Adeniyi, Oluwatosin
    Abstract: The study provides an incisive but preliminary investigation into the activities of the monetary policy committee of the central bank of Nigeria and the implications for monetary policy, using the standard deviation measure of volatility and the ordinary least square method. The findings show that the ‘internal’ members and majority of the ‘external’ members have different preferences as shown in the voting patterns. Also, there has been reduction in inflation, money and stock markets volatilities since the operations of the committee became more visible. Furthermore, there is no structural break in both the money and stock markets in the period when the central bank started releasing the personal statements and voting pattern of the committee members. The policy implication of these results is that the transparency with which the monetary policy committee has operated since 2011 has boosted policy credibility due to the reduction in markets volatility. Nevertheless, there is need for the individual committee members to be more visible to the public through different platforms as this will further improve the central bank’s communications strategy.
    Keywords: Monetary policy committee decisions, voting, volatility
    JEL: E5
    Date: 2014
  54. By: AfDB AfDB
    Date: 2014–12–30
  55. By: Anton Korinek; Damiano Sandri
    Abstract: We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.
    JEL: E44 F34 F41
    Date: 2014–12
  56. By: Matheus Grasselli (CERMICS); Adrien Nguyen Huu (CERMICS)
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Date: 2014–12
  57. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Abstract: Remarks before the Dallas Business Club, Dallas, TX, December 3, 2014.
    Date: 2014–12–03
  58. By: Braun, R. Anton (Federal Reserve Bank of Atlanta); Joines, Douglas H. (University of Southern California)
    Abstract: Japan is in the midst of a demographic transition that is both rapid and large by international standards. As recently as 1990, Japan had the youngest population among the Group of 6 large, developed countries. However, the combined effects of aging of the baby boomer generation and low fertility rates have produced very rapid aging. Japan now finds itself with the oldest population among the Group of 6, and its population will continue to age at a rapid pace in future years. Aging is already placing a burden on government finances, and Japan's ability to confront the negative fiscal implications of future aging is constrained by its very high debt-to-GDP ratio. We find that Japan faces a severe fiscal crisis if remedial action is not undertaken soon, and we analyze alternative strategies for correcting Japan's fiscal imbalances.
    Keywords: Japan; fiscal policy; aging; government
    JEL: E62 H51 H55 H63
    Date: 2014–11–01
  59. By: Aaberge, Rolf (Statistics Norway); Liu, Kai (Norwegian School of Economics); Zhu, Yu (University of Dundee)
    Abstract: Despite macroeconomic evidence pointing to a negative aggregate consumption response due to political uncertainty, few papers have used microeconomic panel data to analyze how households adjust their consumption after an uncertainty shock. We study household savings and expenditure adjustment from an unexpected, large-scale and rapidly evolving political shock that occurred largely in May 1989 in Beijing, China. Using monthly micro panel data, we present evidence that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China. Households responded mainly by reducing semi-durable expenditure and frequency of major durable adjustment. The uncertainty effect is more pronounced among older, wealthier, and more socially advantaged households. We interpret our findings using existing models of precautionary behavior. By focusing on time variation in uncertainty, our identification strategy avoids many of the potential problems in empirical studies of precautionary savings such as self-selection and life-cycle effects.
    Keywords: China, household savings, political uncertainty
    JEL: D91 J3 E21
    Date: 2014–12
  60. By: Marcin Kolasa (National Bank of Poland); Krzysztof Makarski (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: In a number of countries a substantial proportion of loans is denominated in foreign currency. In this paper we demonstrate how their presence affects the economy. To this end we construct a small open economy model with financial frictions where loans can be taken in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy but do not impact on the effectiveness of macroprudential policy. We also demonstrate that FCLs increase welfare when domestic interest rate shocks are strong and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.
    Date: 2014
  61. By: Estrada, Fernando
    Abstract: Thomas Piketty's "Capital in the 21st century" has been the most important book economy in recent times. Its aim integrates the debate theories of growth, income distribution, inequality and differences between the extremes income and income of the majority. The work predicts a slow increase in the share of capital income and inequality. His proposal for a global tax on capital is a way to evaluate such tendencies.
    Keywords: Piketty, Capital in the 21st century, Capitalism, Distribution, Theory of economics
    JEL: D3 D31 D33 E2 E22 E25
    Date: 2015
  62. By: International Monetary Fund. European Dept.
    Keywords: Monetary policy;Banking sector;Foreign exchange reserves;Inflation targeting;Current account deficits;Savings;Macroprudential Policy;Selected Issues Papers;Turkey;
    Date: 2014–12–05
  63. By: Fabrizio Balassone (Bank of Italy); Sandro Momigliano (Bank of Italy); Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing though to a limited extent elements of cross-country risk sharing. Nevertheless, further steps are probably needed. Proposals to create a sort of rainy-day fund present major practical difficulties associated, inter alia, to the uncertainty characterizing the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be centralizing specific public functions (for instance, by introducing a common unemployment benefit scheme). We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.
    Keywords: fiscal union, intergovernmental transfers, risk sharing
    JEL: E42 E62 F15 F42 H77
    Date: 2014–11
  64. By: World Bank
    Keywords: Public Sector Economics Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Public Sector Development Macroeconomics and Economic Growth Finance and Financial Sector Development - Banks & Banking Reform Macroeconomics and Economic Growth - Economic Theory & Research
    Date: 2013–05
  65. By: Guillaume Plantin (Sciences Po Paris and CEPR (E-mail: guillaume.; Hyun Song Shin (Bank for International Settlements)
    Abstract: We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.
    Keywords: currency carry trades, inflation targeting, financial instability
    JEL: E58 G15
    Date: 2014–12
  66. By: Felix Oppong; Dilek Aykut; Gregory Smith; World Bank
    Keywords: Poverty Reduction - Rural Poverty Reduction Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Macroeconomics and Economic Growth - Regional Economic Development Finance and Financial Sector Development - Debt Markets
    Date: 2014–10
  67. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Context: Economic recovery is under way but remains fragile. The buildup of the large- scale donor support has been hampered by serious lapses in public financial management (PFM), which raised governance concerns. As a result, the first review, initially scheduled for June, was delayed and donor budget support was temporarily put on hold. Program performance: With remedial measures now in place to address the PFM weaknesses, the program remains on track. The authorities are requesting waivers for performance criteria (PC) on: tax revenue, which was missed owing to a shortfall in revenue from the gold sector and weaknesses in tax administration; and non- concessional borrowing, to accommodate an investment project in hydroelectricity, which is narrowly non-concessional. They are also requesting a modification for end- December 2014 PCs on bank and market financing of the government and gross tax revenue owing to this weakness in tax revenue and the incorporation of off-budget spending as part of the remedial measures for the PFM lapses. Main policy recommendations: • Strictly implement budget and procurement rules to restore business, consumer and donor confidence. • Maintain macroeconomic stability by keeping the basic fiscal balance close to zero and the overall fiscal balance in line with debt sustainability. • Raise tax revenue by close to 0.5 percent of GDP annually. • Improve public financial management. • Accelerate reforms to improve the business environment, including by strengthening governance and anti-corruption efforts.
    Keywords: Extended Credit Facility;Fiscal policy;Budgets;Fiscal reforms;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Press releases;Performance criteria modifications;Performance criteria waivers;Mali;
    Date: 2014–12–11
  68. By: Kamiar Mohaddes; Mehdi Raissi
    Abstract: This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989–2013, and use the cross-sectionally augmented distributed lag (CSDL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation—to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggest the need for the Reserve Bank of India to balance the short-term growthinflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.
    Keywords: Inflation;India;Economic growth;Consumer price indexes;Time series;Panel analysis;India, inflation, growth, threshold effects, cross-sectional heterogeneity and dependence.
    Date: 2014–12–15
  69. By: Vu, Tuan Khai; Nakata, Hayato
    Abstract: We use a VAR with block exogeneity to study the effects of oil price fluctuations on the economies of six ASEAN countries. Our method has an advantage over those used in the literature in that it allows us to focus on the effects of oil shocks while avoiding making unnecessary, and often ad hoc and unrealistic, assumptions about the structure of the economies under question. We decompose the factors that drive oil prices into oil supply shocks, oil demand shocks coming from the global real economic activity and oil-market specific demand shocks. We find that, in terms of output and price variabilities, the oil importing countries such as Singapore, Thailand and the Philippines are more sensitive to the situation in the world oil market than the oil exporting countries such as Indonesia, Malaysia. We find evidence that the monetary authorities of ASEAN countries have responded to changes in oil prices due to oil-market specific demand shocks. We also find that much of the surge in world market oil prices in 2007-2008 was mainly due to global aggregate demand shocks and oil-market specific shocks, and by working through oil prices these shocks were important factors that caused the high inflation in ASEAN countries in the first half of 2008.
    Keywords: oil price fluctuations, VAR, block exogeneity, ASEAN economies
    JEL: F41 Q43 F33
    Date: 2014–12
  70. By: Zaman, Gheorghe (Institute of National Economy, Romanian Academy); Georgescu, George (Institute of National Economy, Romanian Academy)
    Abstract: The paper focuses on the sharp increase in the external debt level, both sovereign and private, threatening Romania’s financial stability, associated with weaknesses and risks arising from an unpredictable business environment and an unfavourable global and regional context. The study highlights inter-conditional ties between short-term and long-term debt, public and private debt, internal and external public debt. The increase in long-term external debt stock (more than two times during 2007-2013) has led to a significant rise in the related annual service (17.8% of GDP in 2013), deteriorating the financial framework of Romania and the growth perspectives. Excessive levels of the external indebtedness and critical debt-to-GDP ratio are recorded in the case of Romania as compared to international standards and national specific, exposing the debt position to higher default risk. Despite large external borrowings, due to the lack of their efficiency, the results, in terms of economic development and competitiveness gains, are much below expectations. The easiness of appeal to external borrowings by successive governments and the debt rollover year by year contradicts the principle of intergenerational ethics.
    Keywords: global crisis; external debt sustainability; macroeconomic efficiency; vulnerabilities of external debt; sovereign risk
    JEL: B22 E62 F34 G15 H63 H68
    Date: 2014–12
  71. By: Hunjra, Ahmed Imran; Ijaz, Muhammad Shahzad; Chani, Muhammad Irfan; Hassan, Sabih ul; Mustafa, Umer
    Abstract: Purpose: The volatility in stock prices is one of the most discussed topics in finance. Many studies have been conducted to find the factors which cause fluctuation in stock prices and different results have been found. In this study an attempt has been made to see the affect of dividend yield, dividend payout ratio, return on equity, earning per share and profit after tax on stock prices in Pakistan. For this purpose four non financial sectors (Sugar, Chemical, Food and personal care, Energy) have been selected. A sample of 63 companies listed at Karachi stock exchange was analyzed for the period of 2006-2011. Methodology: Ordinary least square regression model has been applied on panel data. Findings: The results indicate dividend yield and dividend payout ratio which are both measures of dividend policy have significant impact on stock price. Dividend yield is negatively related with stock price and dividend payout ratio is positively related with stock price which means that these results are against dividend irrelevance theory. For other independent variables profit after tax and earnings per share have significant positive impact on stock price and return on equity which shows positive insignificant impact on stock price. Recommendations: This paper shows new insights for policy makers to improve the performance of Karachi stock exchange.
    Keywords: Dividend policy, Stock price, Dividend irrelevance theory
    JEL: E3 E4 E44 E5 E58
    Date: 2014–03–13
  72. By: John B. Taylor (Stanford University)
    Abstract: This testimony reviews my analysis and evaluation of the legislation, "Requirements for Policy Rules for the Federal Open Market Committee" (Section 2 of The Federal Reserve Accountability and Transparency Act). The legislation takes account of research on the practical experiences with monetary policy. It incorporates different views about the instruments and transmission process while maintaining the principle that central bank decisions should be based on strategy or a rule with limits placed on discretion and excessive intervention in a transparent and accountable way. It builds on lessons learned from earlier legislative initiatives requiring reporting on the monetary policy instruments, including the requirement to report ranges for the monetary and credit aggregates which were removed from the Federal Reserve Act in 2000.
    Date: 2014–02
  73. By: Fernando Alvarez; Francesco Lippi; Luigi Paciello
    Abstract: We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis’s (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non- negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
    JEL: E12 E5
    Date: 2014–12
  74. By: International Monetary Fund. African Dept.
    Abstract: Program implementation and economic fundamentals continue to be strong, but the external position weakened in mid-2014. Projected growth for 2014 has been revised down to 2.8 percent from 3.7 percent, due to weaker demand for Seychelles’ two main exports—tourism and canned tuna. At the same time, strong growth in personal earnings and private sector credit have fueled a surge in imports, putting further pressure on the balance of payments. As a result, the exchange rate depreciated an estimated 11 percent in nominal effective terms from early August to late-October.
    Keywords: Extended arrangement reviews;Fiscal policy;Fiscal reforms;Public enterprises;Monetary policy;Economic indicators;Staff Reports;Letters of Intent;Press releases;Performance criteria modifications;Seychelles;
    Date: 2014–12–22
  75. By: Wacker, Konstantin M.; Lodge, David; Nicoletti, Giulio
    Abstract: In this paper, we develop financial conditions indices (FCIs) for 3 industrialized (US, Japan, UK) and 5 emerging (China, Brazil, Russia, India, Turkey) economies. The FCIs are formed as the principal component of a range of financial series for each country and are constructed to account for fluctuations in the business cycle. We show that these FCIs can help predict growth developments and thereby provide a potential leading indicator for the external environment of the Euro area. While we draw upon established methodological considerations in the literature, our main contribution lies in providing FCIs which are available for a broad set of countries, including many emerging economies, and whose movements can intuitively be interpreted. This latter fact allows us to track developments in the 8 investigated financial markets over the last decade. JEL Classification: C43, E37, E44, G1
    Keywords: FCI, financial conditions index, forecasting, principal component analysis
    Date: 2014–11
  76. By: Salvatore Dell'Erba; Marcos Poplawski-Ribeiro; Ksenia Koloskova
    Abstract: The paper examines the consequences of fiscal consolidation in times of persistently low growth and high unemployment by estimating medium-term fiscal multipliers during protracted recessions (PR) in a sample of 17 OECD countries. Based on Jorda’s (2005) local projection methodology, we find that cumulative fiscal multipliers related to output, employment and unemployment at five-year horizons are significantly above one during PR episodes. These results suggest that medium-term fiscal consolidation plans to reduce public debt burdens should proceed gradually if economic activity remains below trend for a prolonged period.
    Keywords: Economic recession;Fiscal stimulus and multipliers;Fiscal consolidation;Employment;Unemployment;Labor markets;Economic growth;OECD;Developed countries;fiscal consolidations; cumulative multipliers; labour market; protracted recessions
    Date: 2014–12–05
  77. By: Valeri Sorolla
    Abstract: In this paper we analyze the long run effect of exogenous technological growth on the employment rate in a labor market with matching frictions when there is either individual or collective wage setting and different timing for setting wages, labor and capital. We obtain that the effect depends on the timing of setting wages with respect to capital and labor and on the way the unemployment benefit is financed. The type of wage negotiation (individual or collective) does not change really much the effect. The result that appears in most cases is that growth has a negative effect on the long run rate of employment meaning that, in general, growth is bad for employment.
    Keywords: :Matching Frictions Unemployment, Growth, Wage Setting Systems.
    JEL: E24 O41
    Date: 2014–12–22
  78. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES Governance in the banking system remains poor and the condition of some large banks is fragile. The budget faces a tight financing situation, and—without corrective measures—the deficit is projected to widen significantly in 2015. Russia’s new restrictions on imports from Moldova are exacerbating the ongoing slowdown in activity, easing inflationary pressures, and weakening export performance. Discussions mainly focused on policies to address the significant risks in the banking sector, return to a path of fiscal consolidation, and boost potential growth and preserve external stability. Financial sector. The recommendations of the recent FSAP should be implemented, in particular regarding the enforcement of regulatory requirements. A plan to deal with weak banks needs to be developed. Fiscal policy. Returning to a path of fiscal consolidation, with a view to lower reliance on exceptionally high donor support over the medium term is important. This objective can be achieved by containing the budget deficit below 3 percent of GDP in 2015, gradually reducing it 1½ percent by 2018. Monetary policy. The supportive monetary policy stance should be maintained but the NBM should stand firm against pressures to facilitate its financing of the budget. Exchange rate movements driven by fundamentals should not be resisted. Structural reforms. Structural reforms are needed to boost potential output growth and reduce vulnerabilities. Strengthening external stability requires efforts to diversify export products and markets, and sources of financing.
    Keywords: Post-program monitoring;Fiscal policy;Fiscal consolidation;Fiscal reforms;Banking sector;Monetary policy;Bank supervision;Economic indicators;Staff Reports;Press releases;Moldova;
    Date: 2014–12–17
  79. By: World Bank
    Keywords: Poverty Reduction - Rural Poverty Reduction Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Macroeconomics and Economic Growth Finance and Financial Sector Development - Banks & Banking Reform Macroeconomics and Economic Growth - Economic Theory & Research
    Date: 2013–08
  80. By: Christian Ebeke
    Abstract: Domestic private saving rates have been on a declining trend in many Emerging Markets (EMs), raising questions about countries’ ability to generate sufficient domestic resources to finance investment. This paper examines how countries have managed to achieve protracted increases in the private saving rate. The results show that episodes of sustained accelerations of private savings are mostly the result of very strong macroeconomic performance. Econometric investigations using matching estimators do not reject the result that stronger economic growth mostly precedes episodes of saving accelerations.
    Keywords: Private savings;Domestic savings;Growth acceleration;Emerging markets;Econometric models;Private saving; accelerations; economic performance
    Date: 2014–12–15
  81. By: Cimadomo, Jacopo; Claeys, Peter; Poplawski Ribeiro, Marcos
    Abstract: This paper assesses how financial market participants form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the UK between January 1993 and December 2011, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—as significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. Overall, the findings suggest that credible fiscal plans affect expectations of market experts, reducing the pressure on sovereign bond markets. JEL Classification: E62, G10, H30
    Keywords: Consensus Economics Forecast, market expectations, sovereign bond spreads, survey data
    Date: 2014–12
  82. By: Boyan Jovanovic; Viktor Tsyrennikov
    Abstract: In a model with multiple Pareto-ranked equilibria we add trade in assets that pay based on the realization of a sunspot. Asset trading restricts the equilibrium set in a way that raises welfare by eliminating equilibria with a high likelihood of disasters. When the probability of a disaster is high enough, the coordination game becomes like a prisoner’s dilemma situation in which the high-output equilibrium disappears because the portfolios that agents choose induce them to produce less. We derive an upper bound on the disaster probability, we derive asset pricing implications including the disaster premium, and we study the effect on stock prices of news shocks to beliefs.
    JEL: E32 G1
    Date: 2014–12
  83. By: Massimiliano Iommi (ISTAT)
    Abstract: This paper provides a growth accounting analysis of the sources of labor productivity growth in the business sector of 13 EU Member States and the US in the years 1995-2009. The aim of the analysis is to provide new evidence on the role of intangible and ICT capital as drivers of economic growth. We adopt the approach first proposed by Corrado, Hulten and Sichel and we extend the standard growth accounting model treating a broad range of firm expenditures for intangibles as investments that create future value. Our main results are the following: Capitalizing intangibles increases labor productivity growth in the period 1995-2009 with respect to labor productivity growth estimated from current national accounts data; Capital deepening was the dominant source of growth in 11 out of the 14 countries included in the analysis and in the other three its contribution was very close to the contribution of multi factor productivity growth; The contribution of ICT capital and Intangible non-ICT capital to labor productivity growth was quite high in all countries that performed relatively well in terms of labor productivity growth; When focusing on the US and the EU15 countries, there is a positive relationship between the growth of ICT and Intangible non-ICT capital deepening and the growth of multifactor productivity.
    Keywords: Productivity growth, Intangibles, ICT
    JEL: O47 E22 E01
    Date: 2014
  84. By: International Monetary Fund. African Dept.
    Abstract: This paper discusses Guinea-Bissau’s Request for Disbursement Under the Rapid Credit Facility (RCF). In 2012 and 2013, Guinea-Bissau suffered a severe balance of payments shock as the international price of raw cashew nuts—the main export product—fell by about 20 percent per year. The authorities have requested assistance under the RCF to help address the urgent balance of payments and fiscal financing needs for 2014. The IMF staff supports the authorities’ request for assistance under the RCF in view of their currently limited capacity to implement policies of an upper credit tranche-quality economic program, the large and urgent balance of payments need, and the catalytic effect of IMF support for other external financing.
    Keywords: Rapid Credit Facility;Fiscal policy;Budgets;Fiscal reforms;Tax collection;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Press releases;Guinea-Bissau;
    Date: 2014–11–07
  85. By: Zhou, Y. (Tilburg University, School of Economics and Management)
    Abstract: The thesis consists of four chapters. Chapter 1 reviews recent contributions on habit formation in the literature and investigates its implications for investors. Chapter 2 revisits the “Floor-Leverage” rule for investors with ratchet consumption preference proposed by Scott and Watson (2011). It shows that the original Floor-Leverage rule is infeasible and has a high probability of bankruptcy and that a relatively inexpensive option strategy can hedge against such bankruptcy risk. Chapter 3 investigates the optimal portfolio and consumption policies for a finite-horizon investor in a life-cycle model with habit formation and inflation. It considers two types of habit formation, real habit formation and nominal habit formation, and shows that the effects of inflation on the optimal strategy are marginal under the former, but substantial under the latter. Chapter 4 studies portfolio choice for a finite-horizon investor whose labor income is cointegrated with inflation. This long-run relationship is crucial for the inflation-hedging property of human capital and the overall portfolio strategy.
    Date: 2014
  86. By: Mittnik, Stefan; Semmler, Willi
    Abstract: We investigate consequences of overleveraging and financial-sector stress on real economic activities. When banks become vulnerable, due to high leveraging, and there is a strong feedback between the real and the financial sector, a regime of high financial stress may arise. The vulnerability of the banking system in a high lever- age and a high-stress regime can, through macro feedback effects, result in unstable dynamics. To assess this question empirically, we employ a nonlinear, multi-regime vector autoregression approach (MRVAR), to explore the consequences of instabilities arising from regime dependent shocks. We analyze data on industrial production and the IMF Financial Stress Index. In order to assess how output is affected by the individual risk drivers making up the IMF index, we study eight economies - the U.S., Canada, Japan and the UK, and for the four largest euro-zone economies, namely, Germany, France, Italy, and Spain -, using Granger-causality and nonlinear impulse-response analysis. Our results strongly suggest that financial-sector stress, exerts a strong, nonlinear influence on economic activity, but that individual risk drivers affect economic activity rather differently across stress regimes and across countries.
    JEL: E2 E6 C13
    Date: 2014
  87. By: World Bank
    Keywords: Public Sector Corruption and Anticorruption Measures Public Sector Expenditure Policy Finance and Financial Sector Development - Debt Markets Public Sector Economics Macroeconomics and Economic Growth - Subnational Economic Development Public Sector Development
    Date: 2014–06
  88. By: Thomas I. Palley
    Abstract: The distinction between wage-led and profit-led growth is a major feature of Post-Keynesian economics and it has triggered an extensive econometric literature aimed at identifying whether economies are wage or profit-led. That literature treats the economy’s character as exogenously given. This paper questions that assumption and shows an economy’s character is endogenous and subject to policy influence. This generates a Post-Keynesian analogue of the Lucas critique whereby the econometrically identified character of the economy depends on policy rather than being a natural characteristic. Over the past twenty years, policy has made economies appear more profit-led by lowering workers’ share of the wage bill and tax rates on shareholder income. Increasing workers’ wage bill share increases growth and capacity utilization regardless of whether the economy is wage-led, profit-led or conflictive. That speaks to making it the primary focus of policy efforts.
    Keywords: wage-led, profit-led, Lucas critique, income distribution, financialization
    JEL: E12 O41 O33
    Date: 2014
  89. By: World Bank
    Keywords: Macroeconomics and Economic Growth - Climate Change Economics Private Sector Development - Emerging Markets Health, Nutrition and Population - Population Policies Information and Communication Technologies - ICT Policy and Strategies Finance and Financial Sector Development Finance and Financial Sector Development - Banks & Banking Reform
    Date: 2013–02
  90. By: Nikolay Arefiev (National Research University Higher School of Economics)
    Abstract: For linear Gaussian simultaneous equations models with orthogonal structural shocks, I show that, if appropriate instruments are available, there exists a set of inclusion and exclusion restrictions sucient for the full identication, such that each identication restriction from this set is testable. This result does not depend on the assumption whether the model is recursive or cyclical, although the causal representation of cyclical models is not unique. To prove this, I provide a reduced form rank condition for the identication of simultaneous equations models, propose a graphical interpretation of the rank condition, provide graphical interpretations of various sucient conditions for identication of structural vector autoregressions, and formulate new conditional independence tests
    Keywords: Identication, instrumental variables, data-oriented identication, sparse structural models, structural vector autoregression, SVAR, simultaneous equations model, SEM, probabilistic graphical model, PGM.
    JEL: C30 E31 E52
    Date: 2014
  91. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago); Sultanum, Bruno (Pennsylvania State University)
    Abstract: Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment.
    Keywords: Bank runs; optimal deposit contract; financial fragility
    JEL: D82 E58 G21
    Date: 2014–09–01
  92. By: International Monetary Fund. African Dept.
    Abstract: All end-June performance criteria and indicative targets under the ECF arrangement were met, and all structural benchmarks were completed, albeit with minor delays. However, there was a nonobservance of the continuous performance criterion on the ceiling on new nonconcessional external debt in July with the issuance of the US$750 million Eurobond (exceeding the US$500 million program ceiling).
    Keywords: Fiscal policy;Fiscal consolidation;Revenue mobilization;Fiscal reforms;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Letters of Intent;Press releases;Performance criteria waivers;Extended arrangement reviews;Pakistan;
    Date: 2014–12–22
  93. By: Angana Banerji; Sergejs Saksonovs; Hannah Huidan Lin; Rodolphe Blavy
    Abstract: The SDN will assess the youth unemployment problem in advanced European countries, with a special focus on the euro area. It will document the main trends in youth and adult unemployment in 22 European countries before and after the global financial crisis. It will identify the main drivers of youth and adult unemployment, focusing in particular on the role of the business cycle and structural characteristics of the labor market. It will outline the main elements of a comprehensive strategy to address the problem.
    Keywords: Unemployment;Europe;Euro Area;Labor markets;Labor market characteristics;Business cycles;Labor market policy;Developed countries;Youth employment, Okun’s law, business cycle, labor market factors
    Date: 2014–12–05
  94. By: Joel M. David; Espen Henriksen; Ina Simonovska
    Abstract: Emerging markets exhibit high returns to capital, the ‘Lucas Paradox,’ alongside volatile growth rate regimes. We investigate the role of long-run risks, i.e., risk due to fluctuations in economic growth rates, in leading to return differentials across countries. We take the perspective of a US investor and outline an empirical strategy to identify risky growth shocks and quantify their implications. Long-run risks account for 60-70% of the observed return disparity between the US and a group of the poorest countries. At the individual country level, our model predicts average returns that are highly correlated with those in the data (0.61).
    JEL: E22 F21 G12 O4
    Date: 2014–12
  95. By: World Bank
    Keywords: Environment - Climate Change Mitigation and Green House Gases Environmental Economics and Policies Economic Theory and Research Environment - Wildlife Resources Transport Economics Policy and Planning Transport Macroeconomics and Economic Growth
    Date: 2014–08
  96. By: Drydakis, Nick (Anglia Ruskin University)
    Abstract: The current study uses six annual waves of the Longitudinal Labor Market Study (LLMS) covering the 2008-2013 period to obtain longitudinal estimations suggesting statistically significant negative effects from unemployment on self-reported health and mental health in Greece. The specifications suggest that unemployment results in lower health and the deterioration of mental health during the 2008-2009 period compared with the 2010-2013 period, i.e., a period in which the country's unemployment doubled as a consequence of the financial crisis. Unemployment seems to be more detrimental to health/mental health in periods of high unemployment, suggesting that the unemployment crisis in Greece is more devastating as it concerns more people. Importantly, in all specifications, comparable qualitative patterns are found by controlling for unemployment due to firm closure, which allows us to minimize potential bias due to unemployment-health related reverse causality. Moreover, in all cases, women are more negatively affected by unemployment in relation to their health and mental health statuses than are men. Greece has been more deeply affected by the financial crisis than any other EU country, and this study contributes by offering estimates for before and during the financial crisis and considering causality issues. Because health and mental health indicators increase more rapidly in a context of higher surrounding unemployment, policy action must place greater emphasis on unemployment reduction and supporting women's employment.
    Keywords: self-reported health, self-reported mental health, unemployment, financial crisis
    JEL: C23 C33 E24 I12
    Date: 2014–12
  97. By: David Pothier; Damien Puy
    Abstract: This paper highlights how changes in the composition of demand affect income dispersion in the short run. We first document how the share of aggregate spending dedicated to labour-intensive goods and services shrinks (expands) during downturns (booms), and argue that this contributes to the observed pro-cyclicality of employment and output in labour-intensive industries. Using a two-sector general equilibrium model, we then assess how this demand composition channel influences the cyclical properties of the income distribution. Consistent with empirical evidence, we find income inequality to be countercyclical due to changes in the level of employment and (to a lesser extent) relative factor prices. The model also shows that wealth redistribution policies can potentially involve a trade-off between equality and output, depending on how they affect the composition of aggregate demand.
    Keywords: Demand;Income distribution;Income inequality;Business cycles;General equilibrium models;
    Date: 2014–12–15
  98. By: Pablo D'Erasmo (University of Maryland / FRB Philadelphi); Bora Durdu (Federal Reserve Board); Emine Boz (International Monetary Fund)
    Abstract: This paper explores the role of bank balance sheets, sovereign default risk, and capital adequacy requirements in amplifying aggregate fluctuations. The paper, first, proposes a unified model of defaultable sovereign debt and bank balance sheets to capture regularities on bank credit to firms, banks' holdings of sovereign bonds, and the behavior of sovereign debt and default. The model captures the procyclical bank credit and countercyclical bank holdings of sovereign bonds. Since the sovereign defaults indiscriminately, bank losses due to a default hampers its lending to firms, thereby, generating an endogenous cost of default. The paper then conducts counterfactual policy experiments in line with Basel III. Our preliminary findings suggest that the introduction of leverage ratios is superior to increasing the capital requirement on risk weighted assets where sovereign bonds are assigned a zero weight.
    Date: 2014
  99. By: World Bank
    Keywords: Public Sector Expenditure Policy Banks and Banking Reform Finance and Financial Sector Development - Debt Markets Public Sector Economics Governance - National Governance Public Sector Development
    Date: 2014–06
  100. By: Katsuya Takii (Osaka School of International Public Policy (OSIPP), Osaka University)
    Abstract: We analyze equilibrium wage contracts in a competitive search model where a firm motivates workers to invest in a match-specific skill. If skill is not critical for production, the contract is first best. If critical, the contract coincides with an efficiency wage contract and cannot attain even second best. Unlike standard efficiency wage models, the wage plays a dual role, advertisement and motivation, which induces a novel source of inefficiency: the competition to attract workers forces a wage to be chosen that increases the ex ante utility of workers at the expense of ex post utility.
    Keywords: Search Theory, Incentive, Advertisement, Specific Skill
    JEL: E24 J64 M50
    Date: 2014–12
  101. By: Ozili, Peterson
    Abstract: This study, empirically, investigates the determinants of bank profitability. Overall, I find that the Basel capital regime had no significant effect on bank profitability. This result is significant because it lends support to the view that modified Basel accord in different countries might be aimed to meet other prudential objectives other than the intended objective - to reduce excessive bank risk-taking. Second, after employing NIM and ROA profitability metrics, I find that the determinants of bank profitability, and its significance, depends on the profitability metric employed. Third, I find that loan quality significantly influences bank interest margin while bank size and cost efficiency significantly influences return on asset. Finally, bank capital adequacy is observed to be a significant determinants of bank profitability.
    Keywords: Bank Profitabilty, Basel Capital Regulation
    JEL: E5 E58 G2 G21 N2 N20 N27
    Date: 2015–01
  102. By: Javier Guillermo Gómez-Pineda; Juan Manuel Julio-Román
    Abstract: We embed a small open economy model for Colombia into the global risk model of Gómez-Pineda, Guillaume, and Tanyeri (2014). The small open economy model is estimated by Bayesian methods and used for analysis and projections. The model enable us to give a consistent treatment of shocks to global risk, country risk, and oil and commodity prices. This treatment is consistent because these shocks affect the global economy as a whole, as dictated by a structural global model, in contrast with other treatments that deal with “rest of the world" shocks as univariate auto regressive processes. The a-priori parameter distributions were found by calibrating for impulse response functions, the evolution of latent variables, equation fit, error decompositions, and model forecast performance. Among other results, we found that the identified episodes of retrenchment and buoyancy in global risk were transmitted to Colombia's country risk premium and that global risk shocks are important drivers of Colombia's output and unemployment gaps. Furthermore, aggregate demand-related shocks are not important as drivers of non-core inflation in Colombia, in contrast with the findings for other countries. Classification JEL: F32, F37, F41, F31, F47, E58
    Date: 2014–12
  103. By: Per Krusell and Laurence Malafry
    Abstract: The recent experience of a Great Recession has brought the effectiveness of fiscal policy back into focus. Fiscal multipliers do, however, vary greatly over time and place. between wealth inequality and the magnitude of fiscal multipliers. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes and debt and study the effects of changing policies and various forms of inequality on the fiscal multiplier. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also negatively related to the average wealth level in the economy. This explains the correlation between wealth inequality and fiscal multipliers.
    Date: 2014–12–05
  104. By: Maurizio Iacopetta (OFCE); Raoul Minetti (Michigan State University); Pietro f peretto (Duke University)
    Abstract: We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new …rms and by the in-house investment of incumbent …rms. Firms managers engage in tunneling and empire building activities. Active shareholders monitor man- agers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conicts among …rms stakeholders inhibit the entry of new …rms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.
    Keywords: endogenous growth; Market Structure; Financial Frictions; Corporate governance
    JEL: E44 O40 G30
    Date: 2014–12
  105. By: International Monetary Fund. Asia and Pacific Dept
    Keywords: Fiscal policy;Fiscal sustainability;Medium-term strategy;Fiscal analysis;Selected Issues Papers;Papua New Guinea;
    Date: 2014–12–02
  106. By: Alexander Ljungqvist; Michael Smolyansky
    Abstract: Do corporate tax increases destroy jobs? And do corporate tax cuts boost employment? Answering these questions has proved empirically challenging. We propose an identification strategy that exploits variation in corporate income tax rates across U.S. states. Comparing contiguous counties straddling state borders over the period 1970 to 2010, we find that increases in corporate tax rates lead to significant reductions in employment and income. We find little evidence that corporate tax cuts boost economic activity, unless implemented during recessions when they lead to significant increases in employment and income. Our spatial-discontinuity approach permits a causal interpretation of these findings by both establishing a plausible counterfactual and overcoming biases resulting from the fact that tax changes are often prompted by changes in economic conditions.
    JEL: E3 E62 H2 H25 H31 H32 H71
    Date: 2014–12
  107. By: David Martin (Department of Economics, Davidson College)
    Abstract: Many biodiversity researchers have responded to the financial constraints faced by policy makers to develop models based upon the “Noah’s Ark” metaphor, implying that society can save only a limited amount of biodiversity. Unfortunately, as Herman Daly (Land Economics, 1991) pointed out, such microeconomic rules can allow an ark to sink albeit in some optimal fashion. So, I step back to look at the macroeconomic question, how big should the ark be? I start with Norgaard’s (Ecological Economics, 2010) framework, which is based upon the concept of a production possibility frontier combined with a sustainability criterion. I develop a model from that starting point by shifting to an isoquant framework while maintaining the strong sustainability criterion. I demonstrate how this model allows for identifying and addressing the key biodiversity protection policy criteria at the macroeconomic level. One key conclusion from this modeling is that Daly’s analysis remains remarkably prescient. Publication Status: Published in Theoretical Economics Letters, 2013, 3(5A):39-44.
    Keywords: Biodiversity Protection; Natural Capital; Conservation; Macroeconomics; Sustainable Development
    JEL: Q57
    Date: 2013–05
  108. By: Chudik, Alexander (Federal Reserve Bank of Dallas); Grossman, Valerie (Federal Reserve Bank of Dallas); Pesaran, M. Hashem (University of Southern California)
    Abstract: This paper derives new theoretical results for forecasting with Global VAR (GVAR) models. It is shown that the presence of a strong unobserved common factor can lead to an undetermined GVAR model. To solve this problem, we propose augmenting the GVAR with additional proxy equations for the strong factors and establish conditions under which forecasts from the augmented GVAR model (AugGVAR) uniformly converge in probability (as the panel dimensions N,T→ ∞ such that N/T→κ for some 0
    JEL: C53 E37
    Date: 2014–11–01
  109. By: Sudip Ranjan Basu (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Steve Gui-Diby (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Zheng Jian (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: The United Nations recognizes that productivity capacity building is the key for self-sustained growth and graduation of LDCs in Asia and the Pacific. To achieve this objective, substantial financing must be mobilized to invest in infrastructure, social development and climate change challenges. Despite the significant progresses made by the Asia-Pacific LDCs in restoring macroeconomic stability, deepening the banking sector and attracting FDI and remittances, for many, fiscal spaces remain narrow and financial markets largely inefficient and undiversified. An ambitious financing strategy would be needed to close the financing gap for graduation and to promote sustainable development, which includes strengthening of fiscal space, financial intermediation and exploring innovative financing mechanisms such as blended finance, promoting new form of development partnership and climate finance. In particular, the paper shows that an estimated total of $19 billion could be raised annually by the Asia-Pacific LDCs through targeted efforts to broaden tax bases, create enabling environment for FDI and reduce transaction costs of remittances, among others. An additional USD $15 billion could further be raised if DAC members fulfil their commitment of contributing 0.15-0.20 per cent of GNI for LDCs development.
    Keywords: Financing, LDCs, infrastructure, ODA, Asia Pacific.
    JEL: E50 E60 E62 F02 F35
  110. By: International Monetary Fund. African Dept.
    Abstract: Concluding Observations *Our estimates suggest that South Africa’s potential growth has declined postglobal financial crisis. Potential growth is estimated to have fallen from an average of 3½-4 percent during 2000-08 to 2¼-2½ percent in 2010-14, implying an output gap between -0.5 to -1.3 percent of GDP in 2014. Structural factors seem to account for the bulk of the decline in actual growth in recent years, with the decline in productivity growth playing an important role in the decline of both the actual and potential growth rates. *Uncertainties associated with estimates of potential growth are large. All estimates, even those with structural underpinnings, involve some filtering and require judgment to interpret the findings. In addition, while some methodologies (e.g., the multivariate filter) generally produce more robust results than others, data revisions or inclusion of new data often leads to revisions (sometimes large) to earlier estimates (see, e.g., Kramer and Farrell, 2014). Our estimation results therefore should be taken with caution. *An improvement in the electricity supply and other structural reforms would raise South Africa’s potential growth. Higher electricity availability would help alleviate electricity constraints. This is anticipated to happen slowly over the next few years because although Eskom’s two new large power plants are expected to come on line starting from 2015 and other capacity is being added, other parts of the system will have to be taken off for maintenance on the old system and grid upgrades may take time. Higher energy availability would lead to higher overall production capacity of the whole economy and likely an impact on private investment. Reducing days lost to strikes, and advancing structural reforms, especially in product and labor markets and addressing skill mismatches (see the Article IV consultation staff report for more discussions), would also help reduce structural unemployment and raise potential growth.
    Keywords: Economic growth;Interest rates;Bonds;Exports;Export performance;Fiscal consolidation;Selected Issues Papers;South Africa;
    Date: 2014–12–11
  111. By: International Monetary Fund. African Dept.
    Abstract: EXECUTIVE SUMMARY Outlook. Zimbabwe’s economy is at a crossroads. The post-hyperinflation rebound has ended and the outlook is for sluggish growth in 2015. Sustained growth and poverty reduction will require comprehensive reforms over the medium term. Following the slowdown in reform implementation in the post-election period, new momentum for policy reform is building up. This presents a window of opportunity for a deeper engagement and a potential path toward normalizing relations with the international community. Performance under the SMP. The SMP that expired in June 2014 provided an important anchor for macroeconomic policies. Zimbabwe succeeded in keeping macroeconomic conditions relatively stable, despite difficult political and economic circumstances. The authorities’ renewed commitment to the policies under the program was key to meeting all targets and benchmarks for the third review. Successor SMP. The main objective of the new program is to strengthen the country’s external position, as a prerequisite for arrears clearance, resumption of debt service, and restored access to external financing. To that end, the authorities will strive to consolidate the fiscal position, accumulate international reserves, and mobilize international support for resolving the country’s external debt situation. They will also aim to restore confidence in the financial sector, as well as improve public debt and financial management. Finally, the authorities plan to make progress in a number of key structural reform areas in order to enhance the business climate, boost productivity and competitiveness, and build confidence. Risks. The most salient domestic risks stem from possible policy slippages that may undermine support for the authorities’ strategy to normalize relations with creditors. The lack of progress on reforms would further worsen the external position, set back the country’s capacity to repay, and ultimately hurt the chances for economic recovery. Even in the absence of policy slippages, adverse political developments may complicate the authorities’ efforts to garner broad support for their strategy. The benefits to economic prospects from a successful implementation of the program and resumed relations with creditors would outweigh the downside risks that, if materialized, would maintain the current status quo.
    Keywords: Staff-monitored programs;Fiscal policy;External payments arrears;Fiscal reforms;Fiscal sustainability;Bank resolution;Bank supervision;Economic indicators;Staff Reports;Letters of Intent;Press releases;Zimbabwe;
    Date: 2014–11–21
  112. By: Marco Bonomo; Ricardo Brito; Bruno Martins
    Abstract: Government-driven credit had an important role in countervailing private credit crunch in Brazil during the recent financial crisis. However, government credit concessions continued to expand after the economy recovered. This paper investigates some important features of this expansion using a huge repository of loan contracts between banks and firms, composing an unbalanced panel of almost 1 million firms between 2004 and 2012. We show that earmarked funds have been particularly important for sectors intensive in positive social externalities. However, those sectors were not the main beneficiaries of the strong expansion in earmarked credit observed since the crisis. Our results also show that larger, older and less risky firms have benefited most from the government sponsored credit expansion. Additionally, although a higher access to earmarked credit tends to lead to higher leverage, the effect on investment appears to be insignificant for publicly traded firms. Since interest rates on earmarked loans are lower than the market interest rates, firms with higher access to this type of loan tend to lower cost of debt
    Date: 2014–12
  113. By: Al-Haschimi, Alexander; Dées, Stéphane; di Mauro, Filippo; Jančoková, Martina
    Abstract: This paper links granular data of financial institutions to global macroeconomic variables using an infinite-dimensional vector autoregressive (IVAR) model framework. The approach taken allows for an assessment of the two-way links between the financial system and the macroeconomy, while accounting for heterogeneity among financial institutions and the role of international linkages in the transmission of shocks. The model is estimated using macroeconomic data for 21 countries and default probability estimates for 35 euro area financial institutions. This framework is used to assess the impact of foreign macroeconomic shocks on default risks of euro area financial firms. In addition, spillover effects of firm-specific shocks are investigated. The model captures the important role of international linkages, showing that economic shocks in the US can generate a rise in the default probabilities of euro area firms that are of a significant magnitude compared to recent historical episodes such as the financial crisis. Moreover, the potential heterogeneity across financial firms’ response to shocks, which motivates an approach based on granular information, is investigated. By linking a firm-level framework to a global model, the IVAR approach provides promising avenues for developing tools that can explicitly model spillover effects among a potentially large group of firms, while accounting for the two-way linkages between the financial sector and the macroeconomy, which were among the key transmission channels during the recent financial crisis. JEL Classification: C33, G33
    Keywords: corporate sector credit risk, default frequencies, GVAR, infinite-dimensional VAR
    Date: 2014–12
  114. By: Nikita Céspedes (Banco Central de Reserva del Perú); Maria E. Aquije; Alan Sánchez (GRADE); Rafael Vera-Tudela
    Abstract: En este documento se estima la función de producción y la productividad a nivel de firmas de la economía peruana. Los datos corresponden a todas las empresas formales que reportan datos entre el 2002 y 2011, información que permite corregir los tradicionales problemas de endogeneidad de regresores y selección de la muestra, aspectos presentes en los estudios vigentes que estiman los parámetros de la función de producción en el Perú. Encontramos que la participación del factor capital en el ingreso es alrededor de 0.64, siendo heterogéneo según los principales sectores económicos. La productividad es mayor en los sectores secundarios y terciarios, en empresas grandes y en Lima Metropolitana.
    Keywords: Función de Producción, Productividad, Perú, Residuo de Solow, Olley-Pakes
    JEL: C23 E23
    Date: 2014–12
  115. By: Mulaj, Isa
    Abstract: A report by Riinvest titled “Banking Sector: Facilitator or Barrier?”, funded by the Kosovo Foundation for an Open Society – KFOS (an affiliation of Open Society Institute – OSI), was prepared by Fadil Aliu (project manager), Alban Hashani (senior researcher), Lumir Abdixhiku (senior researcher), Diellza Gashi (researcher), Ilire Mehmeti (researcher), and Shkëlqim Cani (international consultant from the University of Tirana – former Governor of the Central Bank of Albania). The report was published in Fall 2014. The main findings of the report in question, are: i) foreign capital is dominant in 6 out of 8 commercial banks operating in Kosovo, or 89.2% of total assets in this sector are managed by foreign banks; ii) all banks have enhanced their activity, increased deposits, assets, and lending; iii) the coverage of the loans by collateral, as of 2011, was 236.1%, the highest in the region (Southeast Europe – SEE), thus the loans in Kosovo, in general, were paid back more than in any country in the region; iv) the banking sector in Kosovo is mainly concentrated in three banks that own 74% of assets, 74% of deposits, and 71.7% of loans. Riinvest identifies this as a very high concentration in the banking sector; v) highest interest rates in SEE (14.1% for individual loans, and 16.65% to business entities – SMEs); vi) the lowest SME to GDP ratio (28.3%), indicating a very low credit intermediation and weak access to bank loans by SMEs; vii) highest profit ratio: Return on Equity (ROE) 14.5% versus the average by 4% in SEE, and Return on Assets (ROA) 1.4% versus 0.3%.
    Keywords: Kosovo, banking sector, interest rates, Riinvest, KFOS, organized crime, pseudo research
    JEL: E43 G21 G28 R11
    Date: 2014–12–20
  116. By: S. Gabrieli; C.-P. Georg
    Abstract: We study the liquidity allocation among European banks around the Lehman Brothers’ insolvency using a novel dataset of all interbank loans settled via the Eurosystem’s payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.
    Keywords: Interbank loans, network topology, financial stability.
    JEL: D85 E5 G1 G21
    Date: 2014
  117. By: Geoffrey R. Dunbar
    Abstract: I use data from the Bank of Canada’s Bank Note Distribution System and exploit a natural experiment offered by the timing of Easter in the Gregorian calendar to analyze the effects of demographic change for currency demand. I find that the main drivers of low-denomination bank note demand are merchants. Merchants and the youngest age group, aged 15-24, are also a significant source of demand for twenty-dollar bank notes and for the total dollar value of withdrawals. In contrast, increases in the demographic age groups 25-54 and 55 plus tend to lower bank note withdrawals. Finally, I find no evidence that employment status is related to bank note demand, but that there is a difference between the bank note demand of men aged 15-24 and women aged 15-24: increases in the share of women aged 15-24 lead to increases in bank note demand.
    Keywords: Bank notes; Econometric and statistical methods
    JEL: E41 C31 C36
    Date: 2014
  118. By: Amita Majumder; Ranjan Ray; Kompal Sinha
    Abstract: This paper proposes a preference based methodology, analogous to the estimation of equivalence scales in the demographic demand literature, for the estimation of the item specific intra country PPPs (i.e. spatial prices) and inter country PPPs in a unified framework using unit records of household food expenditures from three Asian countries: India, Indonesia and Vietnam, covering contemporaneous time periods. The study addresses a key limitation of the ICP exercise, namely, treating all countries, large and small, as homogeneous entities. Moreover, it (i) directly calculates bilateral PPPs between countries based on their expenditure patterns and prices alone and (ii) directly estimates the Price Level Indices (PLI) and their standard errors allowing formal tests of the hypothesis of PLI being unity. The usefulness of the estimated PPPs is illustrated by applying them to comparisons of real food expenditures between the three countries, and benchmarking the comparisons with those using the ICP PPPs.
    Keywords: Item specific PPP, Spatial Prices, QAIDS, Inequality adjusted Expenditures.
    JEL: C12 D12 E31 O53 O57
    Date: 2014–09
  119. By: World Bank
    Keywords: Banks and Banking Reform Macroeconomics and Economic Growth - Subnational Economic Development Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress Finance and Financial Sector Development - Debt Markets Public Sector Economics Public Sector Development
    Date: 2014–04
  120. By: Laurence Kotlikoff (Boston University); Jasmina Hasanhodzic (Boston University)
    Abstract: We calibrate and simulate 80, 40, and 20-period OLG models with aggregate shocks to assess generational risk. We overcome the curse of dimensionality by building on the Judd, Maliar, and Maliar algorithm, which limits a model's solution to its ergodic states, with no reliance on sparse grids, state-variable aggregation, or local approximations. We find that intrinsic generational risk is quite small, that government policies can produce generational risk, and that bond markets can share generational risk, including risks generated by policy. Our results hold with rare disasters, high risk aversion, persistent shocks, and stochastic depreciation.
    Date: 2014
  121. By: Philippe D Karam; Ouarda Merrouche; Moez Souissi; Rima Turk
    Abstract: We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.
    Keywords: Banks;Bank liquidity;Credit ratings;Access to capital markets;Loans;Bank financing;Liquidity management;Credit ratings, Liquidity management, Credit supply, Multinational banks, Internal capital markets
    Date: 2014–11–19
  122. By: Ekaterina Rakhilina (National Research University Higher School of Economics); Anastasia Vyrenkova (National Research University Higher School of Economics)
    Abstract: The problem of incomplete language acquisition and heritage languages is approached from several perspectives: who are heritage speakers, how are they different from native speakers and L2 learners, is heritage language a particular system? This paper aims at answering these and other questions focusing on constructional deviations in the output of heritage speakers and linguistic strategies that these speakers perform in their production. The research is corpus-based and offers a thorough comparative analysis of English and Russian constructions.
    Keywords: incomplete acquisition, heritage languages, corpus-based study, constructional deviations.
    JEL: E32
    Date: 2014
  123. By: Zeynalov, Ayaz
    Abstract: It is expected that what people are searching for today is predictive of what they have done recently or will do in the near future. This research will analyze the eligibility of Google search data to nowcast tourist arrivals to Prague. The present research will report whether Google data is potentially useful in nowcasting or short-term forecasting using by Support Vector Regressions (SVRs), which maps data to a higher dimensional space and employs a kernel function.
    Keywords: Google trends, nowcasting, tourism forecasting
    JEL: C53 E17 L83
    Date: 2014
  124. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: EXECUTIVE SUMMARY The Danish authorities have taken important steps in recent years to improve financial system resilience. Financial regulation and supervision have been strengthened. A new bank resolution framework that includes bail-in of creditors has been adopted and deployed to resolve small and medium-sized banks. An institutional framework for macroprudential policy has also been adopted. Recent legislation requires maturity extension of covered bonds in stress situations, with the aim of reducing refinancing risk in the mortgage finance system. Although stress tests suggest that financial stability risks are contained, the financial system’s large size and interconnectedness call for additional measures to further strengthen resilience. In a severe stress scenario, solvency levels at large banks and mortgage credit institutions (MCIs) remain well above regulatory requirements, owing to high current capital ratios. Stress tests also suggest that concentration risk and extreme increases in covered bond spreads would be manageable. However, this analysis cannot fully capture second-round and non-linear effects, and so may underestimate contagion risks that are material in light of the large size and interconnectedness of balance sheets in Denmark. For this reason, staff recommends the measures described below to further enhance systemic resilience. Given that covered bonds backed by mortgage loans are at the heart of the financial system, risks in mortgage finance should be reduced. The mortgage finance system has a long history of good performance based on important strengths, including a “balance principle” that limits most non-credit risks. However, the rapid growth of adjustable-rate and interest-only (IO) mortgage loans have increased the share of long-term loans funded by short-term covered bonds (refinancing risk), increased the risk of payment difficulties when interest rates rise (credit risk), and reduced resilience to house price declines. It would be advisable to use regulatory policies to encourage longer bond maturities, ensure that eventual interest-rate increases are better reflected in loan pricing and approvals, and increase buffers in loans with interest-only periods, e.g. by reducing the loan-to-value (LTV) ceiling. The proposed prudential limits on MCIs’ higher-risk activities are welcome. Prudential supervision is generally sound, but there is scope for further improvement. The intensity of the risk-based approach and the early and firm enforcement policy are areas of strength. However, additional resources are needed to increase the frequency of onsite inspections, including for AML/CFT supervision, and the operational independence of the Danish Financial Supervisory Authority (DFSA) should be ensured. In banking supervision, the information on operational and market risk that is reported routinely should be broadened, and systemic review of Pillar III disclosures should be implemented. In insurance supervision, a minimum solvency level should be established, and assessments of companies’ governance and management—as well as the supervision of market conduct, fraud, and AML/CFT—should be enhanced.
    Keywords: Financial sector;Stress testing;Banks;Bank supervision;Bank resolution;Insurance;Macroprudential Policy;International cooperation;Financial system stability assessment;Denmark;
    Date: 2014–12–09
  125. By: Kim, Minseong
    Abstract: This paper explores dimensional analysis of production and utility functions in economics. As raised by Barnett, dimensional analysis is important in consistency checks of economics functions. However, unlike Barnett's dismissal of CES and Cobb-Douglas production functions, we will demonstrate that under constant return-to-scale and other assumptions, production function can indeed be justified dimensionally. And then we consider utility functions.
    Keywords: dimensional analysis; production function; utility function; consistency in economics
    JEL: B41 C00 C02 E10 E13
    Date: 2015–01–06
  126. By: Tom Boot; Andreas Pick
    Abstract: We derive optimal weights for Markov switching models by weighting observations such that forecasts are optimal in the MSFE sense. We provide analytic expressions of the weights conditional on the Markov states and conditional on state probabilities. This allows us to study the effect of uncertainty around states on forecasts. It emerges that, even in large samples, forecasting performance increases substantially when the construction of optimal weights takes uncertainty around states into account. Performance of the optimal weights is shown through simulations and an application to US GNP, where using optimal weights leads to significant reductions in MSFE.
    Keywords: Markov switching models; forecasting; optimal weights; GNP forecasting
    JEL: C25 C53 E37
    Date: 2014–12
  127. By: Krueger, Fabian (Heidelburg Institute for Theoretical Studies); Clark, Todd E. (Federal Reserve Bank of Cleveland); Ravazzolo, Francesco (Norges Bank and the BI Norwegian Business School)
    Abstract: This paper shows entropic tilting to be a flexible and powerful tool for combining medium-term forecasts from BVARs with short-term forecasts from other sources (nowcasts from either surveys or other models). Tilting systematically improves the accuracy of both point and density forecasts, and tilting the BVAR forecasts based on nowcast means and variances yields slightly greater gains in density accuracy than does just tilting based on the nowcast means. Hence entropic tilting can offer—more so for persistent variables than not-persistent variables—some benefits for accurately estimating the uncertainty of multi-step forecasts that incorporate nowcast information.
    Keywords: Forecasting; Prediction; Bayesian Analysis
    JEL: C11 C53 E17
    Date: 2015–01–07
  128. By: Nenovsky, Nikolay
    Abstract: Симеон Сергеевич Демостенов е дългогодишен професор по политическа икономия в Софийския университет в периода между двете световни войни и може би най– задълбоченият български икономист от руски произход. Роден е на 8 ноември 1886 г., според доскоро възприемана информация – в гр. Казан, но новооткрити документи посочват како негово родно място Москва (Вж. Прило- жение, писмо 2). След като пристига в България през 1920 г., Симеон Демостенов се отдава изключително на чистата икономическа теория, най-вече на теорията и историята на парите. Рядко се включва в дискусиите върху проблеми от текущия стопански живот, както и в дейността на двете български икономически друже- ства (Българско икономическо дружество и Дружество на икономистите академи- ци). Съсредоточаването на Демостенов върху чистата теория може да се обясни с факта, че там са неговите сравнителни предимства – той е чужденец и недос- татъчно познава българската стопанска действителност. Известен е като привър- женик на субективната школа в политическата икономия в нейния австрийски вариант. (Преди Октомврийската революция, още като руски гражданин, Симеон Демостенов специализира при Карл Менгер). Признат е като изключителен по- знавач на литературата за теориите за парите.
    Keywords: economic thought, Austrian economics, Bulgaria, Russia
    JEL: B31 E42
    Date: 2013–08–10
  129. By: Durga P. Gautam (West Virginia University, College of Business and Economics)
    Abstract: Through what channel and to what extent does the inflow of remittances affect the quality of governance in the recipient countries? Recent studies suggest that a rise in remittances reduces public goods provision. Scholars generally agree that remittances increase consumption expenditure of the recipient households. This implicit positive correlation between remittances and the ratio of household to government consumption indicates an increasing share of private goods in household consumption. The decreasing share of public goods, on the other hand, tends to reduce households0 incentives to monitor and hold the government accountable. As a result, the external benefits generated by household consumption induce the government to substitute the provision of public goods for remittances, thereby raising the scope of expected benefits for a rational government official from illegitimate transactions with a private partner. Using recently advanced kernel regression methods, we find that remittances lead to higher corruption and poor governance in countries with higher private consumption. These results provide supports for the ongoing global efforts to redirect remittance flows from household consumption toward productive investments.
    Keywords: remittances, corruption, institutions, nonparametric regression, public goods, consumption
    JEL: F24 D73 C14 H3 E6
    Date: 2014–12

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