nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒01‒31
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. dynamics of assets liquidity and inequality in economies with decentralized markets By Maurizio Iacopetta
  2. Contagion across Eurozone's sovereign spreads and the Core-Periphery divide By Elisabetta Croci Angelini ; Francesco Farina ; Enzo Valentini
  3. Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition By Amromin, Eugene ; Kearns, Caitlin
  4. Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the future By Domanski, Dietrich ; Moessner, Richhild ; Nelson, William R.
  5. Assessing the Change in Labor Market Conditions By Chung, Hess ; Fallick, Bruce C. ; Nekarda, Christopher J. ; Ratner, David
  6. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  7. The euro area crisis: a view form the north By Seppo Honkapohja
  8. How much fiscal discipline in a monetary union By Paul de Grauwe ; Yuemei Ji
  9. Monetary policy and banks in the euro area: the tale of two crises By Lucrezia Reichlin
  10. Catastrophic job destruction during the Portuguese economic crisis By Anabela Carneiro ; Pedro Portugal ; Jose Varejao
  11. Distinguishing Constraints on Financial Inclusion and Their Impact on GDP and Inequality By Era Dabla-Norris ; Yan Ji ; Robert M. Townsend ; D. Filiz Unsal
  12. Segmented Housing Search By Monika Piazzesi ; Martin Schneider ; Johannes Stroebel
  13. Secular Stagnation: The Long View By Barry Eichengreen
  14. Fair prices, sticky information, and the business cycle By Söderberg, Johan
  15. Job Uncertainty and Deep Recessions By Morten O. Ravn ; Vincent Sterk
  16. Demand expectations and the timing of stimulus Policies By Bernardo Guimaraes ; Caio Machado
  17. The Misty Grail: The Search for a Comprehensive Measure of Development and the Reasons of GDP Primacy By Felice, Emanuele
  18. Introducing a New Early Warning System Indicator (EWSI) of banking crises By Alvaro Ortiz Vidal-Abarca ; Alfonso Ugarte Ruiz
  19. Управлять временем – значит управлять развитием, или предложения по реализации мегапроекта «Территория опережающего развития: все для человека». By Валентина Михайловна Бондаренко
  20. Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News. By Cosmin Ilut ; Matthias Kehrig ; Martin Schneider
  21. Monetary Policy and Investment Dynamics: Evidence from Disaggregate Data By Givens, Gregory ; Reed, Robert
  22. Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks By Kiptui, Moses
  23. Inflation and the Pattern of Trade: General Conclusions and Evidence for Russia By Borodin, Konstantin ; Strokov, Anton
  24. Prestige as a Determining Factor of Food Purchases By Palma, Marco ; Ness, Meghan ; Anderson, David
  25. Productividad sectorial en el Perú: un análisis a nivel de firmas By Céspedes, Nikita ; Aquije, Maria E. ; Sánchez, Alan ; Vera-Tudela, Rafael
  26. Effects of the U.S. quantitative easing on the Peruvian economy By Carrera, César ; Pérez-Forero, Fernando ; Ramírez-Rondán, Nelson
  27. Factor Complementarity and Labour Market Dynamics By Federico di Pace ; Stefania Villa
  28. Monetary Integration in SADC: Assessment of Policy Coordination and Real Effective Exchange Rate Stability By Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
  29. Dynamics of Consumption and Dividends over the Business Cycle By Myroslav Pidkuyko
  30. International Spillovers of Large-Scale Asset Purchases By Sami Alpanda ; Serdar Kabaca
  31. Search Costs and Efficiency: Do Unemployed Workers Search Enough? By Pieter Gautier ; Jose L Moraga-Gonzalez ; Ronald Wolthoff
  32. Reinventing foreign aid for inclusive and sustainable development: a survey By Simplice Asongu
  33. Can Inflation Forecast and Monetary Policy Path be Really Useful? The Case of Czech Republic By Magdalena Szyszko ; Karolina Tura
  34. State aid and competitiveness of the hard coal mining industry in the European Union By Izabela Jonek-Kowalska
  35. Simulating world trade in the decades ahead: Driving forces and policy implications By Fontagné, Lionel ; Fouré, Jean ; Keck, Alexander
  36. A new political economy approach for the economic crisis By Giuseppe Vitaletti
  37. Endogenous Search, Price Dispersion, and Welfare By Liang Wang
  38. Ireland’s economic crisis the good, the bad and the ugly By Karl Whelan
  39. The European Crisis and the role of the financial system By Vitor Constancio
  40. Credit policy in times of financial distress By Costas Azariadis
  41. Fundamentally wrong: market pricing of sovereigns and the Greek financial crisis By Heather D. Gibson ; Stephen G. Hall ; George S. Tavlas
  42. The unintended consequences and challenges of the Basel III Leverage Ratio: supplementary leverage ratios By Ojo, Marianne
  43. Local Government Investments and Ineffectiveness of Fiscal Stimulus during Japan's Lost Decades By Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
  44. Recurrent overdrafts: a deliberate decision by some prepaid cardholders? By Hayashi, Fumiko ; Cuddy, Emily
  45. Re-use of collateral in the repo market By Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
  46. Estimating Dual Deposit Insurance Premium Rates and Forecasting Non-performing Loans: Two New Models By Yoshino, Naoyuki ; Taghizadeh-Hesary, Farhad ; Nili, Farhad
  47. Real-time macro monitoring and fiscal policy By Ley, Eduardo ; Misch, Florian
  48. The time for austerity: Estimating the average treatment effect of fiscal policy By Jordà, Òscar ; Taylor, Alan M.
  49. Does austerity pay off? By Born, Benjamin ; Müller, Gernot J. ; Pfeifer, Johannes
  50. Efficient perturbation methods for solving regime-switching DSGE models By Junior Maih
  51. Inflation and Inflation Uncertainty in Turkey By dogru, bulent
  52. Traditional Inflation Dynamics By Malikane, Christopher
  53. Balance Sheet Recessions with Informational and Trading Frictions By Vladimir Asriyan
  54. The inflation targeting policy in Tunisia? Between perception and reality By Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
  55. Accounting for Changes in Between-Group Inequality By Ariel Burstein ; Eduardo Morales ; Jonathan Vogel
  56. News Shocks in Open Economies: Evidence from Giant Oil Discoveries By Rabah Arezki ; Valerie A. Ramey ; Liugang Sheng
  57. Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries By Ross Levine ; Chen Lin ; Wensi Xie
  58. Microeconomic Origins of Macroeconomic Tail Risks By Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
  59. Normalization of Banking By Volodymyr Vysochansky
  60. TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area By Gabriel Fagan ; Paul McNelis
  61. Betting on Exports: Trade and Endogenous Heterogeneity By Alessandra Bonfiglioli ; Gino Gancia
  62. The identification of fiscal and macroeconomic imbalances - unexploited synergies under the strengthened EU governance framework By Kamps, Christophe ; De Stefani, Roberta ; Leiner-Killinger, Nadine ; Rüffer, Rasmus ; Sondermann, David
  63. Time-Varying Wage Risk, Incomplete Markets, and Business Cycles By Shuhei Takahashi
  64. Conservatism and Liquidity Traps By Nakata, Taisuke ; Schmidt, Sebastian
  65. Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia By Hills, Timothy S. ; Nakata, Taisuke
  66. Optimal taxation and debt with uninsurable risks to human capital accumulation By Gottardi, Piero ; Kajii, Atsushi ; Nakajima, Tomoyuki
  67. The inflation expectations of firms: what do they look like, are they accurate, and do they matter? By Bryan, Michael F. ; Meyer, Brent ; Parker, Nicholas B.
  68. The Impacts of the Global Crisis on the Turkish Economy and Policy Responses By Hasan Comert ; Selman Colak
  69. Political uncertainty and household savings By Rolf Aaberge ; Kai Liu ; Yu Zhu

  1. By: Maurizio Iacopetta (OFCE )
    Abstract: An algorithm for computing Dynamic Nash Equilibria (DNE) in an extended ver- sion of Kiyotaki and Wright (1989) (hereafter KW) is proposed. The algorithm com- putes the equilibrium pro.le of (pure) strategies and the evolution of the distribution of three types of assets across three types of individuals. It has two features that together make it applicable in a wide range of macroeco- nomic experiments: (i) it works for any feasible initial distribution of assets; (ii) it allows for multiple switches of trading strategies along the transitional dynamics. The algorithm is used to study the relationship between liquidity, production, and inequality in income and in welfare, in economies where assets fetch di¤erent returns and agents have heterogeneous skills and preferences. One experiment shows a case of reversal of fortune. An economy endowed with a low-return asset takes over a similar economy endowed with a high-return asset because, in the former economy, a group of agents abandon a rent-seeking trading behavior and increase their income by trading and producing more intensively. A second experiment shows that a reduction of market frictions leads both to higher income and lower inequality. Other experiments evaluate the propagation mechanism of shocks that hit the assets.returns. A key result is that trade and liquidity tend to squeeze income inequality.
    Keywords: Trading strategies; Liquidity; Matching; Decentralized markets
    JEL: C61 C63 E41 E27 D63
    Date: 2014–12
  2. By: Elisabetta Croci Angelini (University of Macerata ); Francesco Farina (University of Siena ); Enzo Valentini (University of Macerata )
    Abstract: This paper investigates the causes of disproportionate increases of sovereign yields with respect to the interest rate on the 10 years German Bund within the Eurozone. Empirical evidence drawn from the BIS dataset on banks' portfolios shows that rapid financial integration, following the launch of the monetary union, resulted in excess exposure of Core countries' banks in the Peripheral countries' financial assets. In order to endogenize the possibility of contagion effects, we conduct econometric estimates through a GVAR model, where each country's spread depends upon all Eurozone countries' spreads. Results show that after the burst of the financial crisis the Core countries' sovereign yields are essentially determined by the international risk aversion, whereas the spreads of Peripheral countries mainly depend on fundamentals, namely the public debt/GDP ratio and the REER values with respect to the Eurozone average. Macroeconomic failures in public finances and competitiveness seem to originate the exceptional increases in sovereign spreads of the Periphery, through a contagion effect which is limited to this group of Eurozone countries.
    Keywords: Monetary union,International risk aversion,Sovereign bond spreads,Contagion
    JEL: E42 F36 F42 G12 H63
    Date: 2014–12
  3. By: Amromin, Eugene (Federal Reserve Bank of Chicago ); Kearns, Caitlin (University of California - Berkeley )
    Abstract: We explore a policy-induced change in borrower ability to shop for mortgages to investigate whether market competitiveness affects mortgage interest rates. Our paper exploits a discontinuity in the competitive landscape introduced by the Home Affordable Refinancing Program (HARP). Under HARP, lenders that currently service loans eligible for refinancing enjoyed substantial advantages over their potential competitors. Using a fuzzy regression discontinuity design, we show a jump in mortgage interest rates precisely at the HARP eligibility threshold. Our results suggest that limiting competition raised interest rates on 30-year fixed-rate mortgages by 15 to 20 basis points, translating into higher lender profits. The results are distinct from documented effects of consolidation and capacity reduction in mortgage lending and are robust to a number of sample restrictions and estimation choices. We interpret our findings as evidence that increases in pricing power lead to higher interest rates in mortgage markets.
    Keywords: Mortgage crisis; market competition; pricing power; HARP
    JEL: E52 G21
    Date: 2014–11–30
  4. By: Domanski, Dietrich (Bank for International Settlements ); Moessner, Richhild (Bank for International Sentiments ); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: During the 2007-2010 financial crisis, central banks accumulated a vast amount of experience in acting as lender of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the emergency liquidity assistance since 2007 has largely adhered to Bagehot's dictums of lending freely against good collateral to solvent institutions at a penalty rate. But there were many exceptions to these rules. Those exceptions illuminate the situations where the lender of last resort role of central banks is most difficult. They also highlight key challenges in designing lender of last resort policies going forward.
    Keywords: Banking crisis; central bank liquidity; lender of last resort
    JEL: E58 F31 N10
    Date: 2014–05–14
  5. By: Chung, Hess (Board of Governors of the Federal Reserve System (U.S.) ); Fallick, Bruce C. (Federal Reserve Bank of Cleveland ); Nekarda, Christopher J. (Board of Governors of the Federal Reserve System (U.S.) ); Ratner, David (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: This paper describes a dynamic factor model of 19 U.S. labor market indicators, covering the broad categories of unemployment and underemployment, employment, workweeks, wages, vacancies, hiring, layoffs, quits, and surveys of consumers' and businesses' perceptions. The resulting labor market conditions index (LMCI) is a useful tool for gauging the change in labor market conditions. In addition, the model provides a way to organize discussions of the signal value of different labor market indicators in situations when they might be sending diverse signals. The model takes the greatest signal from private payroll employment and the unemployment rate. Other influential indicators include the insured unemployment rate, consumers' perceptions of job availability, and help-wanted advertising. Through the lens of the LMCI, labor market conditions have improved at a moderate pace over the past several years, albeit with some notable variation along the way. In addition, from t he perspective of the model, the unemployment rate declined a bit faster over the past two years than was consistent with the other indicators.
    Keywords: LMCI; U.S. labor market; dynamic factor model; employment; unemployment rate
    JEL: E24 E66 J20 J60
    Date: 2014–12–17
  6. By: Guillermo Escudé (Central Bank of Argentina )
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2014–08
  7. By: Seppo Honkapohja (Bank of Finland )
    Abstract: The paper provides an overview of the sovereign debt crisis. I first consider the build-up of the crisis. I then discuss policy choices when a financial crisis erupts and assess the adjustment processes in the crisis countries, including alternatives to policies of austerity. Finally I take up institutional improvements that can help in resolving the current crisis and avoiding a future one. These include the banking union and the strengthened Stability and Growth Pact and related institutional rules. Current high levels of public and private debt together with still weak bank balance sheets are a major unsolved problem.
    Keywords: financial crisis; sovereign debt; European integration
    JEL: E62 E65 F36
    Date: 2013–07
  8. By: Paul de Grauwe (London School of Economics ); Yuemei Ji (University of Leuven )
    Abstract: The nature of fiscal policies was changed dramatically by the creation of the Eurozone. While prior to the start of the Eurozone, national governments were sovereign in that they could back up the issue of debt by the issue of money, they lost this sovereignty in the Eurozone. This had dramatic effects that were largely overlooked by the designers of the Eurozone. First it made self-fulfilling liquidity crises possible that degenerated into solvency crises. Second, it led to the imposition of intense austerity program. We provide empirical evidence for these two effects. We argue that contrary to what was expected, i.e. that a monetary union loosens fiscal discipline, it actually leads to too much fiscal discipline.
    Keywords: fiscal policy; austerity; Eurozone; EMS
    JEL: E42 E58 F33 F36
    Date: 2013–07
  9. By: Lucrezia Reichlin (London Business School and CEPR )
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to the banking sector, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector by showing that banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP and kept them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises.
    Keywords: Economic recessions; Financial system; ECB policies; Bank behavior
    JEL: E44 E58 G21
    Date: 2013–07
  10. By: Anabela Carneiro (Universidade do Porto and CEF.UP ); Pedro Portugal (Banco de Portugal and NOVA School of Business and Economics ); Jose Varejao (Universidade do Porto and CEF.UP )
    Abstract: In this article we study the resilience of the Portuguese labor market, in terms of job flows, employment and wage developments, in the context of the current recession. We single out the huge contribution of job destruction, especially due to the closing of existing firms, to the dramatic decline of total employment and increase of the unemployment rate. We also document the very large increase in the incidence of minimum wage earners and nominal wage freezes. We explore three different channels that may have amplified the employment response to the great recession: the credit channel, the wage rigidity channel, and the labor market segmentation channel. We uncover what we believe is convincing evidence that the severity of credit constraints played a significant role in the current job destruction process. Wage rigidity is seen to be associated with lower net job creation and higher failure rates of firms. Finally, labor market segmentation seems to have favored a stronger job destruction that was facilitated by an increasing number of temporary workers.
    Keywords: Job Destruction; Credit constraints; Wage rigidity; Segmentation
    JEL: E24 J23 J63
    Date: 2013–07
  11. By: Era Dabla-Norris ; Yan Ji ; Robert M. Townsend ; D. Filiz Unsal
    Abstract: We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to firm-level data from the World Bank Enterprise Survey and World Development Indicators for six countries at varying degrees of economic development – three low income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and trade-offs among inclusion, GDP, inequality, and the distribution of gains and losses.
    JEL: C54 E23 E44 E69 O11 O16 O57
    Date: 2015–01
  12. By: Monika Piazzesi ; Martin Schneider ; Johannes Stroebel
    Abstract: This paper studies housing markets with multiple segments searched by heterogeneous clienteles. We document market and search activity for the San Francisco Bay Area. Variation within narrow geographic areas is large and differs significantly from variation across those areas. In particular, search activity and inventory covary positively within cities and zip codes, but negatively across those units. A quantitative search model shows how the interaction of broad and narrow searchers drives housing market activity at different levels of aggregation and shapes the response to shocks as well as price discounts due to market frictions.
    JEL: E00 G12 R30
    Date: 2015–01
  13. By: Barry Eichengreen
    Abstract: Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.
    JEL: E00 N1
    Date: 2015–01
  14. By: Söderberg, Johan (Dept. of Economics, Stockholm University )
    Abstract: A fair price model in which firms are hesitant to raise their prices due to concerns about adverse consumer reactions is developed and integrated into the standard New Keynesian framework. In the model, monetary neutrality arise as a combination of a fairness constraint putting a limit on how high prices can be set over households’ projections of firms’ marginal cost, and households’ limited ability to accurately observe marginal cost. I show analytically that the model is consistent with a plethora of outcomes, ranging from complete monetary neutrality to generating substantial real effects. When plausible values are assigned to parameters and prices are strategic complements, business cycle dynamics closely resembles that in the sticky information model proposed by Mankiw and Reis (2002).
    Keywords: Price Setting; Fairness Concerns; Sticky Information; Monetary Non-Neutrality
    JEL: E31 E32
    Date: 2015–01–13
  15. By: Morten O. Ravn (Department of Economics University College London (UCL) ; Centre for Macroeconomics (CFM) ; Centre for Economic Policy Research (CEPR) ); Vincent Sterk (Department of Economics University College London (UCL) ; Centre for Macroeconomics (CFM) )
    Abstract: We study a model in which households are subject to uninsurable idiosyncratic employment shocks, firms set prices subject to nominal rigidities, and the labor market is characterized by matching frictions and by downward in flexible wages. We introduce heterogeneity in search efficiency that arises either upon job loss or during an unemployment spell. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive amongst employed households. Lower goods demand produces a decline in job vacancies and the ensuing drop in the job finding rate in turn triggers higher precautionary saving setting in motion an amplification mechanism. The amplification mechanism is absent from standard macroeconomic models and depends on the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession in response to the observed changes in the job separation rate and an increase in search efficiency heterogeneity estimated from the matching function.
    Keywords: job uncertainty, unemployment, incomplete markets
    JEL: E21 E24 E31 E32 E52
    Date: 2012–06
  16. By: Bernardo Guimaraes (Sao Paulo School of Economics - FGV ); Caio Machado (Sao Paulo School of Economics - FGV )
    Abstract: This paper proposes a simple macroeconomic model with staggered investment decisions. The model captures the dynamic coordination problem arising from demand externalities and fixed costs of investment. In times of low economic activity, a firm faces low demand and hence has less incentives for investing, which reinforces firms’ expectations of low demand. In the unique equilibrium of the model, demand expectations are pinned down by fundamentals and history. Owing to the beliefs that arise in equilibrium, there is no special reason for stimulus at times of low economic activity.
    Keywords: Demand expectations, coordination, fiscal stimulus, timing frictions
    JEL: D84 E32 E62
    Date: 2014–12
  17. By: Felice, Emanuele
    Abstract: The last decades have seen a flourishing of new indicators to measure economic progress, but none of them has succeded in replacing GDP. Why? The article reviews what are arguably the three most successful alternatives to GDP (the Human Development Index, the Genuine Progress Indica-tor, and the Happy Planet Index), by focusing on their conceptual foundations (the capability ap-proach, utilitarism, the wealth approach, or a mix of these) − rather than on statistical solidity or mathematical refinement as most of the literature does. After discussing their faults, it is shown that the wealth approach underlying GDP can be easily extended to include environmental and well-being components (non-market wealth measured at market prices), and to substantiate this claim es-timates of environment-augmented GDP for 130 countries are presented and discussed. However, up to the present not even this line of research has been successful. This suggests that among the reasons behind GDP primacy there is not only philosophical consistency or statistical soundness, but also social suitability, being the standard GDP more suitable to reflect the goals of capitalist-market economies. Constructing composite indicators alternative to GDP is trivial, until when the current preference system has not been changed. To achieve this change, a dashboard approach may be preferable to composite indicators, since the former provides the different social groups with in-telligible quantitative instruments.
    Keywords: GDP, human development, sustainability, composite indicators, wealth
    JEL: B40 E01 I00 O10 Q50
    Date: 2015–01–03
  18. By: Alvaro Ortiz Vidal-Abarca ; Alfonso Ugarte Ruiz
    Abstract: In this paper we develop a new Early Warning System (EWS) of Banking Crises based on a new estimated indicator of the gap between the observed private credit ratio and its long-term structural level.
    Keywords: bayesian method, credit gap, early warning indicators, macroprudential measures
    JEL: C33 E44 E51 E58 F47 E61 G01 G21
    Date: 2015–01
  19. By: Валентина Михайловна Бондаренко
    Abstract: В статье обосновывается, что сегодняшнее научное знание утратило свои объяснительные возможности и не способствует определению объективных причин возникновения системного кризиса в мире и в России. Следовательно, не позволяет осуществить поиск и обосновать переход к новой модели экономического роста, несмотря на то, что в нынешнем состоянии Россия обречена на стагнацию, на дальнее замедление темпов роста, на рост безработицы и бедность. Далее в статье говорится, что только выход на мировоззренческий уровень понимания возникновения системного кризиса и всех остальных проблем позволил выйти на формирование новой методологии познания закономерностей в развитии человеческой системы. И уже на основе этой методологии обосновать необходимость и возможность реализации Мегапроекта «Территория опережающего развития: все для человека» <P> The article proves that current scientific knowledge cannot explain the objective causes of the systemic crisis in the world and in Russia. Consequently, it does not allow searching for and justifying the transition to a new model of economic growth. Only access to the philosophical understanding of systemic crisis allowed entering the formation of a new methodology of getting knowledge about patterns in the development of human system. On the basis of this methodology it is possible to justify the necessity and possibility of realization of the megaproject "Territory of advanced development: everything for men".
    Keywords: new methodology of knowledge, single criterion of efficiency, consistency, systemic crisis, the main task of management, two paradigms of development, megaproject
    JEL: P16 E17 O11
  20. By: Cosmin Ilut (Department of Economics, Duke University ); Matthias Kehrig (Department of Economics, University of Texas at Austin ); Martin Schneider (Department of Economics, Stanford University )
    Abstract: We study the distribution of employment growth when hiring responds more to bad shocks than to good shocks. Such a concave hiring rule endogenously generates higher moments observed in establishment-level Census data for both the cross section and the time series. In particular, both aggregate conditional volatility (“macro-volatility”) and the cross-sectional dispersion of employment growth (“micro-volatility”) are countercyclical. Moreover, employment growth is negatively skewed in the cross section and time series, while TFP is not. The estimated response of employment growth to TFP innovations is sufficiently concave to induce significant skewness as well as movements in volatility of employment growth.
    Keywords: business cycles, time varying volatility, asymmetric adjustment, skewness
    JEL: D2 D8 E2 J2
    Date: 2014–06
  21. By: Givens, Gregory ; Reed, Robert
    Abstract: We use disaggregated data on the components of private fixed investment (PFI) to estimate industry-level responses of real investment and capital prices to unanticipated monetary policy. The response functions derive from a restricted large-scale VAR estimated over 1959-2007. Our results point to significant cross-sector heterogeneity in the behavior of PFI prices and quantities. For assets belonging to the equipment category of fixed investment, we find that quantities rather than prices absorb most of the fallout from a policy shock. By contrast, the price effects tend to be higher and the output effects lower for nonresidential structures.
    Keywords: Investment, Monetary policy, Disaggregate data, VAR
    JEL: E22 E32 E52
    Date: 2015–01–20
  22. By: Kiptui, Moses
    Abstract: The purpose of this study is to determine the factors contributing to real exchange rate fluctuations in Kenya; whether the real exchange rate responds more to real or to nominal shocks. A vector autoregression framework is applied in the analysis yielding impulse responses and decompositions of the forecast error variance. The results demonstrate the important role played by real shocks in causing exchange rate fluctuations, in particular highlighting the predominant role played by demand shocks. It is also shown that shocks hitting the Kenyan economy are asymmetric to shocks affecting the US economy. Thus, the Kenyan economy is buffeted by idiosyncratic shocks which are more country specific. Consequently, it can be argued that the exchange rate plays an important role as a shocks absorber in the Kenyan context.
    Keywords: Real and Nominal shocks, exchange rates, vector autoregressions, Kenya
    JEL: C32 E31 F31 F42
    Date: 2015–01–20
  23. By: Borodin, Konstantin ; Strokov, Anton
    Abstract: The purpose of this article is to investigate the effect of differences in the inflation rates of trade-partner countries on their foreign trade patterns. The results of the analysis of a simple trade model served as the basis for an empirical study of Russia's foreign trade. For the purposes of experimental verification, we built Russia's export and import gravity models, using trade data for 2005-2012, as well as indicators reflecting the ratio of inflation rates in Russia and its trade-partner countries by the main commodity groups (inflation data for 1995-2012). The results of the empirical verification have basically confirmed the conclusions derived from the trade model analysis: Russia intensifies its export of fuel and raw-material commodities to countries with lower inflation rates and, simultaneously, increases its import of engineering, chemical, and agricultural products from countries with lower inflation rates.
    Keywords: trade pattern, inflation, gravity model, Russia, International Relations/Trade, F14, E31,
    Date: 2014–06
  24. By: Palma, Marco ; Ness, Meghan ; Anderson, David
    Abstract: This study investigated how prestige seeking behavior influences food choices to the point of becoming a symbol of social status. Participants in the study were classified into unobserved latent classes according to their prestige and social status seeking behavior. The majority of the participants were classified as “Utilitarian Buyers” who purchase goods based on their functionality and are not concerned with the prestige or social status of conspicuous products. In addition, there were three other latent classes found and based on their characteristics they were described as “Ambitious Shoppers”, “Affluent Elitists”, and “Prestige Lovers”. Evidence was found of prestige seeking behavior motivated by invidious comparison or higher-class individuals seeking to differentiate themselves from lower-class individuals; and also motivated by pecuniary emulation, or individuals from a lower class buying prestigious goods in order to be perceived as members of a higher class. Findings from this study revealed that the effects of differentiating food labeling attributes had a higher impact for individuals classified into classes with prestige-seeking behavior to attain an elevated social status.
    Keywords: Experimental Economics, Pecuniary Consumption, Prestige, Willingness to Pay, Food Consumption/Nutrition/Food Safety, C91, D11, D12, E21,
    Date: 2015
  25. By: Céspedes, Nikita (Banco Central de Reserva del Perú ); Aquije, Maria E. (SUNAT ); Sánchez, Alan (GRADE ); Vera-Tudela, Rafael (SNI )
    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 O47
    Date: 2014–12
  26. By: Carrera, César (Banco Central de Reserva del Perú ); Pérez-Forero, Fernando (Banco Central de Reserva del Perú ); Ramírez-Rondán, Nelson (Banco Central de Reserva del Perú )
    Abstract: Emerging economies were largely affected because of FED's quantitative easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for a small open economy (SOE) such as Peru. We identify QE policy shocks in a SVAR with Block Exogeneity (Zha, 1999) and we impose a mixture of zero and sign restrictions (Arias et al., 2014). In addition, following Pesaran and Smith (2014), we implement a counterfactual exercise in order to gauge the differences between two scenarios: with and without QE policies. Overall, we find that QE policies had significant effects over financial variables such as aggregate credit and the exchange rate. On the other hand, we find small but significant effects over inflation and output in the medium run.
    Keywords: Quantitative Easing, Structural Vector Autoregressions, Sign Restrictions, Counterfactual analysis
    JEL: E43 E51 E52 E58
    Date: 2014–12
  27. By: Federico di Pace (University of St Andrews ); Stefania Villa (KU Leuven & University of Foggia )
    Abstract: We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, the endogenous mechanisms of the model – factor complementarity, deep habits and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, factor-biased productivity innovations are important exogenous sources of labour market dynamics. Third, demand-side innovations induce markup fluctuations consistent with the deep habits mechanism.
    Keywords: CES, Deep Habits, Search and Matching, Bayesian estimation
    JEL: E24 E25 E32 J64
    Date: 2014–11–19
  28. By: Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
    Abstract: This paper evaluates the strength of policy coordination in Southern African Development Community (SADC) as well as real effective exchange rate stability as indicative of sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting OCA conditions face more stable exchange rates. The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators, and real effective exchange rate (REER) equilibrium and misalignment analysis are carried out to arrive at the conclusions. The PMG model shows that there are common policy variables that influence REERs in the region. However, the REER equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further improvement of policy coordination in the region. The findings in this paper have important policy implications for economic stability and policy coordination as SADC proceeds with monetary integration.
    Keywords: Real Effective Exchange Rate, Monetary Integration, Policy Coordination, SADC
    JEL: C23 E63 F15 F31
    Date: 2014
  29. By: Myroslav Pidkuyko
    Abstract: We examine a trivariate time series model that is subject to a regime switch, where the shifts are governed by an unobserved, two-state variable that follows a Markov process. The analysis is performed in a Bayesian framework developed by Albert and Chib (1993), where the unobserved states are treated as missing data and then analyzed via Gibbs sampling. This approach generates the posterior conditional distribution of all the parameters given the hidden states, and the posterior conditional distribution of the states given the parameters. This allows us to obtain the estimated values of all the parameters of interest.
    Keywords: asset pricing; learning, consumer durable goods; economic uncertainty; business cycles; timing premium;
    JEL: E13 E21 E27 E32 E37 E44 G12 G14
    Date: 2014–12
  30. By: Sami Alpanda ; Serdar Kabaca
    Abstract: This paper evaluates the international spillover effects of large-scale asset purchases(LSAPs) using a two-country dynamic stochastic general-equilibrium model with nominal and real rigidities, and portfolio balance effects. Portfolio balance effects arise from imperfect substitution between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs lower both domestic and foreign long-term yields, and stimulate economic activity in both countries. International spillover effects become larger as the steady-state share of long-term U.S. bond holdings increases in the rest-of-the-world portfolio, as the elasticity of substitution between short- and long-term bonds decreases, or as the elasticity of substitution between domestic and foreign bonds increases. We also find that U.S. asset purchases that generate the same output effect as U.S. conventional monetary policy have larger international spillover effects. This is because portfolio balance effects appear to be stronger under unconventional policy, and foreigners’ U.S. bond holdings are heavily weighted toward long-term bonds.
    Keywords: International topics; Transmission of monetary policy; Economic models
    JEL: E52 F41
    Date: 2015
  31. By: Pieter Gautier ; Jose L Moraga-Gonzalez ; Ronald Wolthoff
    Abstract: Many labor market policies affect the marginal benefits and costs of job search. The impact and desirability of such policies depend on the distribution of search costs. In this paper, we provide an equilibrium framework for identifying the distribution of search costs and we apply it to the Dutch labor market. In our model, the wage distribution, job search intensities, and firm entry are simultaneously determined in market equilibrium. Given the distribution of search intensities (which we directly observe), we calibrate the search cost distribution and the flow value of non-market time; these values are then used to derive the socially optimal firm entry rates and distribution of job search intensities. From a social point of view, some unemployed workers search too little due to a hold-up problem, while other unemployed workers search too much due to coordination frictions and rentseeking behavior. Our results indicate that jointly increasing unemployment benefits and the sanctions for unemployed workers who do not search at all can be welfare-improving.
    Keywords: job search; search cost heterogeneity; labor market frictions; wage dispersion; welfare
    JEL: J64 J31 J21 E24 C14
    Date: 2015–01–08
  32. By: Simplice Asongu (Yaoundé/Cameroun )
    Abstract: This survey essay reviews over 200 papers in arguing that in order to achieve sustainable and inclusive development, foreign aid should not orient developing countries towards industrialisation in the perspective of Kuznets but in the view of Piketty. Abandoning the former’s view that inequality will fall with progress in industrialisation and placing more emphasis on inequality in foreign aid policy will lead to more sustainable development outcomes. Inter alia: mitigate short-term poverty; address concerns of burgeoning population growth; train recipient governments on inclusive development; fight corruption and mismanagement and; avoid the shortfalls of celebrated Kuznets’ conjectures. We discuss how the essay addresses post-2015 development challenges and provide foreign aid policy instruments with which discussed objectives can be achieved. In summary, the essay provides useful policy measures to avoid past pitfalls. ‘Output may be growing, and yet the mass of the people may be becoming poorer’ (Lewis, 1955). ‘Lewis led all developing countries to water, proverbially speaking, some African countries have so far chosen not to drink’ (Amavilah, 2014). Piketty (2014) has led all developing countries to the stream again and a challenging policy syndrome of our time is how foreign aid can help them to drink.
    Keywords: Foreign aid; Piketty; Kuznets; Development
    JEL: B20 F35 F50 O10
    Date: 2014–09
  33. By: Magdalena Szyszko (Wyzsza Szkola Bankowa w Poznaniu, Poland ); Karolina Tura (Uniwersytet Ekonomiczny w Poznaniu, Poland )
    Abstract: Producing and revealing inflation forecasts is believed to be the best way of implementing a forward-looking monetary policy. The article focuses on inflation forecast targeting (IFT) at the Czech National Bank (CNB) in terms of its efficiency in shaping consumers’ inflation expectations. The goal of the study is to verify accuracy of the inflation forecasts, and their influence on inflation expectations. The research is divided into four stages. At the first stage central bank credibility is examined. At the second stage – accuracy of the inflation forecasts. The next step covers a qualitative analysis of IFT implementation. Finally the existence of the interdependences of inflation forecast, optimal policy paths and inflation expectations are analyzed. Credibility of the central bank, accuracy of the forecast and decision-making procedures are the premises for the existence of relationship between forecasts and expectations. The research covers July 2002 - end of 2013. Its methodology includes the qualitative analysis of decision-making of the CNB, quantitative methods (Kia and Patron formula, MAE forecasts errors, quantification of expectations, non-parametric statistics). The results show the existence of interdependences between inflation forecasts and expectations of moderate strength. The preconditions of such interdependences are partially fulfilled. The research opens the field for cross-country comparisons and for quantification of IFT implementation.
    Keywords: inflation forecasts, inflation forecast targeting, policy path, inflation expectations
    JEL: E52 E58 E61
    Date: 2014–12
  34. By: Izabela Jonek-Kowalska (The Silesian University of Technology, Poland )
    Abstract: The hard coal mining industry in the European Union (EU) is in decline, mostly due to a lack of price competitiveness. It is maintained, to a great extent, by state aid; a key objective of the industry’s existence is to provide energy security and guarantee employment in the mining regions. In Poland, the hard coal mining industry is currently undergoing a serious crisis that threatens the two largest mining enterprises with bankruptcy. In addition, due to the European Union’s restrictions concerning the circumstances of granting state aid, these enterprises cannot count on the financial support for the repair restructuring that they used on a large scale until 2011. Therefore, in this article, the main objective is to determine the influence of state aid on the competitiveness of the hard coal mining industry in 12 countries of the EU, including Poland in specific. In order to achieve the stated objective, the article is divided into three parts. The first part consists of a literature review and legal regulations that are related to state aid for the hard coal mining industry in the EU are presented. The second part identifies the amount of state aid for the mining industry in the examined countries. Next, the influence of the state aid on the economic-financial conditions and competitiveness of the industry in the examined countries is examined. The third assesses the financial results of 24 Polish hard coal mines. The data of Eurostat and EURACOAL were used in the research. Furthermore, the primary data from the Polish mines of power hard coal were also used. The research methodology includes the indicators from the area of effectiveness and productivity assessment, as well as production quality assessment in the mining industry. The research results make it possible to extend knowledge in the range of the influence of the state on the competitiveness of the traditional industries and their restructuring.
    Keywords: state aid, competitiveness of industries, hard coal mining industry in Poland and the EU, Polish mining enterprises
    JEL: D22 E65 F30
    Date: 2014–12
  35. By: Fontagné, Lionel ; Fouré, Jean ; Keck, Alexander
    Abstract: Constructing fully traceable scenarios based on assumptions grounded in the literature, we are also able to isolate the relative impact of key economic drivers. We find that the stakes for developing countries are particularly high: The emergence of new players in the world economy, intensification of South-South trade and diversification into skill-intensive activities may continue only in a dynamic economic and open trade environment. Current trends towards increased regionalization may be reversed, with multilateral trade relationships gaining in importance. Hypothetical mega-regionals could slow down, but not frustrate the prevalence of multilateralism. Continuing technological progress is likely to have the biggest impact on future economic developments around the globe. Population dynamics are influential as well: For some countries, up-skilling will be crucial, for others labour shortages may be addressed through migration. Several developing countries would benefit from increased capital mobility; others will only diversify into dynamic sectors, when trade costs are further reduced.
    Keywords: international trade,macroeconomic projections,CGE simulations
    JEL: E27 F02 F17 F47
    Date: 2014
  36. By: Giuseppe Vitaletti (Tuscia University, Italy )
    Abstract: This paper formulates and discusses the hypothesis of a long run unbalance between Saving and Investment. Various remedies are proposed for such a problem, in the actual situation of economic crisis, depending on such unbalance. Among them there are: an agreement at G20 political level, for the structural equilibrium of single countries balances of trade; at the same political level, understandings aimed at making real interest tend to zero structurally; the option for a very high ratio between public debt and GDP; the conditional measures which reduces the growth of public debt, and allows, at a later time, the target of stabilisation of the ratio between Debt and GDP.
    Keywords: crisis, foreign commerce, public debt, public deficit, rents
    JEL: E E2 E6 F
  37. By: Liang Wang (University of Hawaii at Manoa )
    Abstract: This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous price dispersion, which is generated by sellers posting prices and buyers costly searching for low prices. We identify three channels through which inflation affects welfare. The interaction of real balance channel and price posting channel generates a welfare cost, at 10% annual inflation, equal to 3.23% of steady state consumption; if either channel is shut down, the welfare cost decreases to less than 0.15%. Search channel reduces welfare cost by more than 50%. The aggregate effect of inflation on welfare is nonmonotonic.
    Keywords: Nash Bargaining, Competitive Search, Indivisibility, Multiplicity, Uniqueness
    JEL: D51 E40
    Date: 2014–10
  38. By: Karl Whelan (University College Dublin )
    Abstract: This paper provides an overview of Ireland’s macroeconomic performance over the past decade. In addition, to presenting the underlying facts about the boom, bust and (currently limited) recovery, the paper also discusses some common fallacies and misrepresentations of economic events in Ireland. The paper concludes with some broader lessons from the Irish experience for Eurozone economic policy and some observations on the role that EMU and the ECB have played in Ireland’s crisis.
    Keywords: Ireland; Euro Area; Euro Crisis; Banking
    JEL: E52 E62 G01
    Date: 2013–07
  39. By: Vitor Constancio (European Central Bank )
    Abstract: The paper aims to provide a deep rationale for banking union in the Euro Area. It shows that the banking sectors of core and peripheral countries were responsible for financing the credit boom that created the imbalances and vulnerabilities that later were at the centre of the crisis. The increase of debt ratios in the periphery until 2007 was more significant for the private sector than for the public sector. The crisis has been as much a banking crisis as a sovereign debt crisis and to avoid similar future risks a European Supervisor and a Resolution Authority are essential.
    Keywords: European crisis; banking union; fiscal and macroeconomic imbalances
    JEL: H63 E52 F36 G01
    Date: 2013–07
  40. By: Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis )
    Abstract: This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit conditions which cause transitions from an optimal but fragile steady state to a suboptimal state with zero unsecured credit. The main findings are: (i) Countercyclical reserve policies protect the optimum equilibrium against modest shocks but are powerless against large shocks. (ii) If we ignore private information and central banks inefficiencies, this class of models bears out Bagehot’s 1873 claim in Lombard Street: panics are averted if central banks stand ready to lend at a rate somewhat above the one associated with the optimal state.
    Keywords: bank panics; last resort; capital requirements; credit conditions
    JEL: E52 E58 E44
    Date: 2013–07
  41. By: Heather D. Gibson (Bank of Greece ); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria ); George S. Tavlas (Bank of Greece )
    Abstract: We investigate the impact of the economic fundamentals, sovereign credit ratings, political uncertainty, and the ECB’s Securities Markets Program (SMP) on Greek sovereign spreads. Our findings show that sovereign downgrades and political uncertainty appear to have been drivers of the sharp rises in Greek sovereign spreads from 2008-9 onwards, over-and-above the impact of the economic fundamentals. Our findings also show that prior to 2008-2009, the markets failed to incorporate Greece’s deteriorating fundamentals into the price of Greek sovereigns. We demonstrate that, once markets reassessed their pricing of Greek credit risk, the change in the influence of the fundamentals came swiftly and abruptly, exhibiting overshooting characteristics. The SMP reduced spreads while it was in operation.
    Keywords: euro area financial crisis; sovereign spreads
    JEL: E63 G12
    Date: 2013–07
  42. By: Ojo, Marianne
    Abstract: The U.S standard leverage ratio, which is not as stringent as the U.S Supplementary Leverage Ratio, did not include Off Balance Sheet exposures - unlike the Basel leverage ratio. Hence the 3% Supplementary Leverage Ratio was established as part of measures to facilitate the inclusion of Off Balance Sheet exposures in July 2013 - even though many still consider the scope of such inclusion as not being extensive enough - since Secured Financing Transaction Exposures are still excluded. Furthermore, the Enhanced Supplementary Leverage Ratio increased the 3% leverage ratio to 5% (a 2% buffer) for globally systemic important banks (GSIBs) bank holding companies and 6 % for their banking subsidiaries. In respect of securities financing transaction exposures, however, U.S banks are considered to enjoy competitive advantage, since the exclusion of such exposures still persist - even though it is also argued that recent liquidity coverage and net stable funding ratio provisions should serve to address these exposures - this also being in line with the complementary functions of liquidity standards and leverage ratios within the risk-based capital adequacy framework. As well as contributing to the extant literature on supplementary leverage ratios, this paper will seek to illustrate why calibration between the risk capital adequacy framework, liquidity standards, and Basel leverage ratio is even more important than merely a focus on the relationship between the risk capital adequacy framework and the Basel leverage ratio. Meanwhile as regards Europe, there are also concerns relating to sovereign credit risks and the “inadequate pricing” of such risks which results in under capitalisation of banks, as well as potential consequences relating to serious distortions in financial stability whose effects could have repercussions extending beyond the Euro zone and globally. This paper considers two headings which have generated controversial discussions - particularly in respect of Basel III leverage ratio implementation, namely, under capitalisation of banks and the issue of calibration. It aims to illustrate why these constitute areas which are still in need of redress - even though tremendous efforts have been made to align the Basel III Leverage Ratio with the Supplementary Leverage Ratios. The paper will also demonstrate that whilst there are concerns related to the issue of calibration, certain jurisdictions such as the UK, have also introduced supplementary leverage ratios - as well as considered alternatives to the Basel leverage ratio.
    Keywords: supplementary leverage ratios; short term funding; financial stability; OBS exposures; Standardised Approach to Counterparty Credit Risk (SA-CCR); credit conversion factors (CCF)
    JEL: E6 G14 G2 G28 K2
    Date: 2015–01–15
  43. By: Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
    Abstract: This paper provides an explanation of the reason why previous works suggest that the effect of fiscal stimulus measure is, if any, small during the lost decades in Japan. To show this, it focuses on public investment by local governments which occupies a substantial portion of the total investment. Specifically, we divide it into subsidized and non-subsidized expense, and empirically study the differences between their decision-making processes from the perspective of fiscal stimulus measures. The results of this analysis reveal that subsidized expense is countercyclical to the economic situation of the nation as a whole, but on the other hand, no connection with business cycles is seen at prefectural level. Contrastingly, non-subsidized expense shows no reaction to the state of the macro economy. In the 2000s, in particular, it is shown to be procyclical in relation to economic fluctuation at prefectural level, due to the fiscal rigidity of local governments. Based on the fact that the majority of Japan's public investment is carried out by local governments, it becomes clear that, as a problem prior to the evaluation of its policy effects, public investment is not implemented with adequate timing to offset business cycles in the first place.
    Keywords: Local governments, Public investment, Subsidized expense, Non-subsidized expense, Lost decades
    JEL: E62 H72
    Date: 2015–01
  44. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City ); Cuddy, Emily
    Abstract: Overdrafts have been an ongoing concern of policymakers, and they are one of the main issues being considered for prepaid card rules that the Consumer Financial Protection Bureau (CFPB) is currently drafting. Despite regulatory interventions and heated debate between proponents and opponents of further intervention, little research has been conducted to understand the overdraft behavior of prepaid cardholders. This paper attempts to fill that gap by analyzing a large micro-level dataset of general purpose reloadable (GPR) prepaid cardholders. We find that a small percentage of GPR prepaid cardholders regularly make overdraft transactions and incur overdraft fees, but they tend to spend and load more funds on their card as well as use their card for a longer period of time than do cardholders who do not make overdraft transactions. Our results suggest that some cardholders may be making a deliberate decision to overdraw their account and pay overdraft fees.
    Keywords: Overdrafts; General purpose reloadable prepaid cards; Unbanked and underbanked
    JEL: D12 E42 G21
    Date: 2014–10–01
  45. By: Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
    Abstract: This paper introduces a methodology to estimate the re-use of collateral based on actual transaction data. With a comprehensive dataset from the Swiss franc repo market we are able to provide the first systematic empirical study on the re-use of collateral. We find that re-use was most popular prior to the financial crisis, when roughly 10% of the outstanding interbank volume was based on re-used collateral. Furthermore, we show that re-use increases with the scarcity of collateral. By giving an estimate of collateral re-use and explaining its drivers, the paper contributes to the ongoing debate on collateral availability.
    Keywords: Re-use of collateral, repo, money market, financial stability, Switzerland
    JEL: E58 G01 G18 G21 G32
    Date: 2015
  46. By: Yoshino, Naoyuki (Asian Development Bank Institute ); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute ); Nili, Farhad (Asian Development Bank Institute )
    Abstract: Risky banks that endanger the stability of the financial system should pay higher deposit insurance premiums than healthy banks and other financial institutions that have shown good financial performance. It is necessary, therefore, to have at least a dual fair premium rate system. In this paper, we develop a model for calculating dual fair premium rates. Our definition of a fair premium rate in this paper is a rate that could cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting non-performing loans (NPLs), we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction setting. The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions some banks show negative performance or vice versa. Our final results show that stable banks should pay lower deposit insurance premium rates.
    Keywords: dual deposit insurance premium rates; non-performing loans; idiosyncratic shocks; fair premium rates
    JEL: E44 G21 G28
    Date: 2015–01–15
  47. By: Ley, Eduardo ; Misch, Florian
    Abstract: This paper considers the effects of inaccurate real-time output data on fiscal policy, both with respect to budgetary planning and fiscal surveillance. As newer and better information becomes available, output data available in real time get revised and are likely to conflict with final figures that are only released some years later. By contrast, fiscal policy is inevitably based on real-time figures. The paper develops a simple but comprehensive modeling framework to formalize the linkages between output data revisions and fiscal policy and combines it with a newly compiled dataset from the International Monetary Fund's World Economic Outlook, comprising final and real-time output data for 175 countries, over a period of 17 years. Based on a simulation exercise, it finds that output data revisions alone may significantly undermine the reliability of real-time estimates of the overall and structural fiscal balances, and that output data revisions may result in unplanned and substantial debt accumulation. The paper also shows that there are significant differences across country income groups.
    Keywords: Real-time Output Data,Fiscal Policy,Data Revisions,Public Debt
    JEL: E01 E62 H68
    Date: 2014
  48. By: Jordà, Òscar ; Taylor, Alan M.
    Abstract: After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government's shift to austerity policies in 2010 on subsequent growth.
    Keywords: Rubin Causal Model,allocation bias,average treatment effect,booms,fiscal multipliers,identification,inverse probability weighting,local projection,matching,output fluctuations,propensity score,regression adjustment,slumps
    JEL: C54 C99 E32 E62 H20 H5 N10
    Date: 2014
  49. By: Born, Benjamin ; Müller, Gernot J. ; Pfeifer, Johannes
    Abstract: Policy makers often implement austerity measures when the sustainability of public finances is in doubt and, hence, sovereign yield spreads are high. Is austerity successful in bringing about a reduction in yield spreads? We employ a new panel data set which contains sovereign yield spreads for 31 emerging and advanced economies and estimate the effects of cuts of government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in response to the spending cuts, at least in the short-run. In contrast, austerity pays off, if conditions are more benign.
    Keywords: austerity,confidence,fiscal policy,fiscal stress,local projections,panel VAR,sovereign risk,yield spreads
    JEL: C32 E43 E62
    Date: 2014
  50. By: Junior Maih (Norges Bank (Central Bank of Norway)and Centre for Applied Macro and Petroleum economics, BI Norwegian Business School )
    Abstract: In an environment where economic structures break, variances change, distributions shift, conventional policies weaken and past events tend to reoccur, economic agents have to form expectations over different regimes. This makes the regime-switching dynamic stochastic general equilibrium (RS-DSGE) model the natural framework for analyzing the dynamics of macroeconomic variables. We present effcient solution methods for solving this class of models, allowing for the transition probabilities to be endogenous and for agents to react to anticipated events. The solution algorithms derived use a perturbation strategy which, unlike what has been proposed in the literature, does not rely on the partitioning of the switching parameters. These algorithms are all implemented in RISE, a exible object-oriented toolbox that can easily integrate alternative solution methods. We show that our algorithms replicate various examples found in the literature. Among those is a switching RBC model for which we present a third-order perturbation solution.
    Keywords: DSGE, Markov switching, Sylvester equation, Newton algorithm, Pertubation, Matrix polynominal
    JEL: C6 E3 G1
    Date: 2015–01–16
  51. By: dogru, bulent
    Abstract: Abstract: In this study, the relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analyses for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed.
    Keywords: Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model
    JEL: C4 C40 E40
    Date: 2014
  52. By: Malikane, Christopher
    Abstract: We derive a traditional Phillips curve under the assumption that firms optimize their prices in the context where a fraction of their output is contracted on previous prices, and where they face potential losses and gains from such contracts. Our derivation delivers an augmented exact specification that is of an accelerationist type. Specifically, our baseline TPC features one lag of inflation and the labour share, two lags of the output gap and one lag of supply shocks. With rule-of-thumb behaviour considered, our traditional Phillips curve admits higher lags of these variables. We estimate these traditional Phillips curves for six developed and five emerging market economies and find that the degree of price rigidity is significant and has the correct sign. We conclude that this optimization-based traditional Phillips curve is a credible rival to its forward-looking new Keynesian counterpart.
    Keywords: Traditional price Phillips curves, backward-looking behaviour
    JEL: E31
    Date: 2014–08–30
  53. By: Vladimir Asriyan
    Abstract: Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro contingent contracts and the illiquidity premia they need to pay creditors for holding such contracts. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the policy implications of the theory and I find that subsidizing contingencies in private contracts is welfare improving; in particular, policies that solely target borrowers' leverage are sub-optimal.
    Keywords: balance sheet recessions, contingent contracts, liquidity, informational frictions, trading frictions, financial regulation
    JEL: E32 E44 G01
    Date: 2015–01
  54. By: Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
    Abstract: In this paper, we tried to examine and provide a clear answer on the possibility of the Central Bank of Tunisia to adopt the inflation targeting (IT) monetary policy. But the transition to the new optimum monetary framework remains a challenge in itself and requires the filling of certain pre-conditions. To do this, we first started by clarifying the conduct of monetary policy in Tunisia and the institutional and structural pre-requisites progress to make in adoption view of this new strategy, which allows more inflation mastering in a context of crisis and post-revolution. Regarding the transmission mechanisms, we conducted an empirical study of dynamic structural VAR models to conclude whether there is a stable and predictable relationship between monetary policy instruments and inflation, which is considered as a strong technical condition in favor of IT.
    Keywords: Inflation targeting, transmission mechanisms, structural VAR, Tunisia.
    JEL: C3 E5
    Date: 2014
  55. By: Ariel Burstein ; Eduardo Morales ; Jonathan Vogel
    Abstract: We provide an assignment model to decompose changes in between-group wage inequality into changes in the composition of the workforce, the productivity/demand for tasks, computerization, and labor productivity. The model incorporates comparative advantage between many groups of workers, many types of equipment, and many tasks and yet may be parameterized and estimated in a transparent manner. Our identification of parameters, measurement of shocks, and the equilibrium equation determining wages are all very similar to what have been used in previous reduced-form analyses. We use U.S. data on the allocation of workers to occupations and computer usage as well as changes in average wages across worker groups between 1984 and 2003 to parameterize our model. We find that computerization and changes in task productivity/demand, which are both measured without directly using data on changes in wages, jointly explain the majority of the rise in the skill premium and more disaggregated measures of between-eduation group inequality as well as roughly half of the rise in the relative wage of women over this time period. We show how to link the strength of these two forces to changes in the extent of international trade.
    JEL: E24 F16 J2
    Date: 2015–01
  56. By: Rabah Arezki ; Valerie A. Ramey ; Liugang Sheng
    Abstract: This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output–the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.
    JEL: E00 F32 F41
    Date: 2015–01
  57. By: Ross Levine ; Chen Lin ; Wensi Xie
    Abstract: Do stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on firm profitability, employment, equity issuances, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy.
    JEL: D22 E02 G21 G3 G38 K22
    Date: 2015–01
  58. By: Daron Acemoglu ; Asuman Ozdaglar ; Alireza Tahbaz-Salehi
    Abstract: We document that even though the normal distribution is a good approximation to the nature of aggregate fluctuations, it severely underpredicts the frequency of large economic downturns. We then provide a model that can explain these facts simultaneously. Our model show that the propagation of microeconomic shocks through input-output linkages can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns (macroeconomic tail risks) from infinitesimal to substantial. For example, an economy subject to thin-tailed micro shocks but with “unbalanced” input-output linkages (where some sectors or firms play a much more important role than others as inputs suppliers to the rest of the economy) may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. This is despite the fact that a central limit theorem-type result would imply that aggregate output is normally distributed. We characterize what types of input-output linkages and distributions of microeconomic shocks lead to sizable macroeconomic tail risks, and also show how the same economic forces cause the output of many sectors to simultaneously fall by large amounts.
    JEL: C67 E32
    Date: 2015–01
  59. By: Volodymyr Vysochansky (Uzhhorod University )
    Abstract: The article considers free banking formation approach in self-regulated monetary system and its benefits for economic agents and society in general.
    Keywords: banking, money, commodity units, deposit, reserve, monetary system
    JEL: E42 G1 G21
    Date: 2014–12–30
  60. By: Gabriel Fagan (Institute for International Integration Studies, Trinity College Dublin ); Paul McNelis (Graduate School of Business Administration, Fordham University, New York )
    Abstract: This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops.We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common centralbank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bankfinancing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates thecollapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However,a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates thetendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.Length: 68 pages
    Keywords: Sudden stops, Target Balances, European Monetary Union
    JEL: E52 E62 F41
    Date: 2014–12
  61. By: Alessandra Bonfiglioli ; Gino Gancia
    Abstract: We study the equilibrium determinants of firm-level heterogeneity in a model in which firms can choose between different probability distributions when drawing productivity at the entry stage and explore the implications in closed and open economy. One novel result is that export opportunities, by increasing payoffs in the tail, induce firms to draw technology from riskier distributions. When more productive firms also pay higher wages, trade amplifies wage dispersion by inducing firms to take more risk ex-ante and hence making them more unequal ex-post. Our model is consistent with new evidence on how firm-level heterogeneity varies across U.S. industries.
    Keywords: firm heterogeneity, productivity dispersion, wage inequality, international trade
    JEL: F12 F16 E24
    Date: 2014–12
  62. By: Kamps, Christophe ; De Stefani, Roberta ; Leiner-Killinger, Nadine ; Rüffer, Rasmus ; Sondermann, David
    Abstract: In the light of the lessons learned from the euro area sovereign debt crisis, the EU fiscal and macroeconomic governance framework was overhauled in 2011. Against this background, this paper analyses whether the broadened surveillance of fiscal and macroeconomic indicators under the strengthened governance framework would have facilitated the identification of emerging imbalances, had it been in place before the crisis. The findings suggest that the strengthened governance framework would have given earlier signals about emerging excessive fiscal and macroeconomic imbalances. Euro area countries thus would have been obliged to take preventive and corrective action at an earlier stage, provided that the stricter rules had been effectively implemented. At the same time, the paper concludes that the increased reliance of the EU fiscal governance framework on unobservable magnitudes such as the structural budget balance, which are difficult to measure in real time, will continue to impede the timely identification of underlying fiscal imbalances. It is suggested that the new macroeconomic imbalance procedure could have given earlier indications about the emergence of excessive macroeconomic imbalances, which in turn posed risks for fiscal sustainability. Looking forward, these preliminary findings suggest possible synergies between the, until now largely unrelated, fiscal and macroeconomic governance frameworks. JEL Classification: H3, H6, E02, E61
    Keywords: Macroeconomic Imbalance Procedure, real-time potential output estimates, Stability and Growth Pact, structural balance
    Date: 2014–11
  63. By: Shuhei Takahashi (Institute of Economic Research, Kyoto University )
    Abstract: Idiosyncratic earnings risk shows cyclical variation. In order to analyze its implication with respect to labor market dynamics, this paper develops an incomplete asset markets model in which individuals make consumption-saving and employment choices each period in the presence of time-varying person-specific wage risk. I measure the model's risk variation using wage data in the Panel Study of Income Dynamics. When including variation in both idiosyncratic wage risk and aggregate total factor productivity, the model produces a weakly negative correlation between total hours worked and average labor productivity close to the U.S. data. In contrast, in the absence of wage risk fluctuations, the model generates a counterfactually strong positive correlation.
    Keywords: Idiosyncratic wage risk, uncertainty shocks, hours-productivity correlation
    JEL: D31 E31
    Date: 2015–01
  64. By: Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) ); Schmidt, Sebastian (European Central Bank )
    Abstract: Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.
    Keywords: Discretion; inflation conservatism; inflation targeting; liquidity traps; zero lower bound
    JEL: E52 E62
    Date: 2014–11–12
  65. By: Hills, Timothy S. (Board of Governors of the Federal Reserve System (U.S.) ); Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9.
    Keywords: Fiscal policy; government spending multipliers; interest rate smoothing; liquidity trap; zero lower bound
    JEL: E32 E52 E61 E62 E63
    Date: 2014–11–20
  66. By: Gottardi, Piero (European University Institute ); Kajii, Atsushi (Kyoto University ); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta )
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–11–01
  67. By: Bryan, Michael F. (Federal Reserve Bank of Atlanta ); Meyer, Brent (Federal Reserve Bank of Atlanta ); Parker, Nicholas B. (Federal Reserve Bank of Atlanta )
    Abstract: The purpose of this paper is to answer the three questions in the title. Using a large monthly survey of businesses, we investigate the inflation expectations and uncertainties of firms. We document that, in the aggregate, firm inflation expectations are very similar to the predictions of professional forecasters for national inflation statistics, despite a somewhat greater heterogeneity of expectations that we attribute to the idiosyncratic cost structure firms face. We also show that firm inflation expectations bear little in common with the “prices in general” expectations reported by households. Next we show that, during our three-year sample, firm inflation expectations appear to be unbiased predictors of their year-ahead observed (perceived) inflation. We also show that firms know what they don’t know—that the accuracy of firm inflation expectations is significantly and negatively related to their uncertainty about future inflation. And lastly, we demonstrate, by way of a cross-sectional Phillips curve, that firm inflation expectations are a useful addition to a policymaker’s information set. We show that firms’ inflation perceptions depend (importantly) on their expectations for inflation and their perception of firm-level slack.
    Keywords: inflation; survey inflation expectations; price formation
    JEL: C81 C90 E31 E37 E60
    Date: 2014–12–01
  68. By: Hasan Comert (Department of Economics, METU ); Selman Colak
    Abstract: This paper focuses on the impacts of the recent global crisis on the Turkish economy and the policy measures taken in response to the crisis. Turkish economy was adversely affected by the crisis through mainly three channels, namely expectations channel, trade channel and financial channel. The distinctive characteristic of the crisis was a severe export shock which can account for an important part of the decline in production in Turkey. Beside this, a significant sudden stop in financial flows worsened the credit conditions in the economy. As a result, the Turkish economy witnessed one of its worst economic down-turns after the Second World War. In fact, the Turkish growth performance was one of the worsts among developing countries. However, as opposed to previous crises, the financial markets in Turkey and many other developing countries did not experience a collapse. We argue that this is mainly related to the small magnitude and short duration of the financial shocks hitting Turkey and other developing countries relative to the ones in the previous decades. In this sense, the Turkish economy might not have been fully tested during the last global crisis. How the economy will behave in case of a larger financial shock is still unknown.
    Keywords: Turkish Economy, Developing Countries, Recent Global Crises, Financial Flows, Monetary and Fiscal Policies.
    JEL: F32 E63 E66 G01
    Date: 2014–12
  69. By: Rolf Aaberge ; Kai Liu ; Yu Zhu (Statistics Norway )
    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 from a sample of the Urban Household Survey, we present evidence that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China. Our estimates also suggest the channel through which increase in savings is achieved: the increase in savings is driven by reductions in 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. Our findings on the channel of adjustment also coincide with the predictions from models on consumer durables adjustment combined with income uncertainty.
    Keywords: China; household savings; uncertainty
    JEL: D91 J3 E21
    Date: 2014–12

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