nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒02‒11
97 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Membership in the Euro area and fiscal sustainability. Analysis through panel fiscal reaction functions. By Cizkowicz, Piotr; Rzonca, Andrzej; Trzeciakowski, Rafal
  2. Sentiment and the U.S. Business Cycle By Fabio Milani
  3. The Power of Forward Guidance Revisited By Alisdair McKay; Emi Nakamura; Jón Steinsson
  4. The Effect of Regulatory Harmonization on Cross-border Labor Migration: Evidence from the Accounting Profession By Matthew J. Bloomfield; Ulf Brüggemann; Hans B. Christensen; Christian Leuz
  5. Optimal monetary policy response to endogenous oil price fluctuations By Arnoud Stevens
  6. La relación entre los ciclos discretos en la inflación y el crecimiento: Perú 1993-2012 By Barrera-Chaupis, Carlos
  7. Pure Rent Taxation and Growth in a Two-Sector Open Economy By Alberto Petrucci
  8. Housing over time and over the life cycle: a structural estimation By Li, Wenli; Liu, Haiyong; Yang, Fang; Yao, Rui
  9. Fiscal Stimulus and Unemployment Dynamics By Chun-Hung Kuo; Hiroaki Miyamoto
  10. "The Repeal of the Glass-Steagall Act and the Federal Reserve's Extraordinary Intervention during the Global Financial Crisis" By Yeva Nersisyan
  11. Is there any relationship between the rates of interest and profit in the U.S. economy? By Ivan Mendieta-Muñoz
  12. From data to decisions?: exploring how healthcare payers respond to the NHS atlas of variation in healthcare in England By Laura Schang; Alec Morton; Philip DaSilva; Gwyn Bevan
  13. Ben Clifford and Mark Tewdwr-Jones (2013), The Collaborating Planner?: Practitioners in the Neoliberal Age. Bristol: Policy Press. 288 pp., £70, hbk, 9781447305118 By Nancy Holman
  14. The conflict trap in the Greek Civil War 1946-1949: an economic approach By Nicos Christodoulakis
  15. Structural models of the wage curve estimated by panel data and cross-section regressions By Eddie Gerba; Emmanuel V. Pikoulakis; Tomasz Piotr Wisniewski
  16. Estimating US fiscal and monetary interactions in a time varying VAR By Eddie Gerba; Klemens Hauzenberger
  17. Matching a distribution by matching quantiles estimation By Nikolaos Sgouropoulos; Qiwei Yao; Claudia Yastremiz
  18. (When) does austerity work? On the conditional link between fiscal austerity and debt sustainability By Vassilis Monastiriotis
  19. Transitioning to a new Scottish state: immediate set-up costs, how the handover will work, and the long-run viability of Scottish government By Patrick Dunleavy; Sean Kippin; Joel Suss
  20. Hard times, new directions? The impact of local government spending cuts in London (interim report summary) By Amanda Fitzgerald; Ruth Lupton
  21. Transparency and deliberation within the FOMC: a computational linguistics approach By Stephen Hansen; Michael McMahon; Andrea Prat
  22. A procedure for combining zero and sign restrictions in a VAR-identification scheme By Alex Haberis; Andrej Sokol
  23. Productivity dynamics in the Great Stagnation: evidence from British businesses By Rebecca Riley; Chiara Rosazza Bondibene; Garry Young
  24. Gender gaps and the rise of the service economy By L. Rachel Ngai; Barbara Petrongolo
  25. Inventories and the role of goods-market frictions for business cycles By Wouter J. Den Haan
  26. Mortgages and monetary policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  27. The transmission of monetary policy operations through redistributions and durable purchases By Vincent Sterk; Silvana Tenreyro
  28. Shall we dance? Welfarist incorporation and the politics of state-labour NGO relations in China By Jude Howell
  29. Transparency and deliberation within the FOMC: a computational linguistics approach By Stephen Hansen; Michael McMahon; Andrea Prat
  30. Reservation wages and the wage flexibility puzzle By Felix Koenig; Alan Manning; Barbara Petrongolo
  31. Steering urban growth: governance, policy and finance By Graham Floater; Philipp Rode; Bruno Friedel; Alexis Robert
  32. International Spillovers of Monetary Policy: US Federal Reserve's Quantitative Easing and Bank of Japan's Quantitative and Qualitative Easing By Kawai, Masahiro
  33. Semi-strong informational efficiency in the Polish foreign exchange market By Luksz Goczek
  34. Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation By Daniel Melser; Iqbal A. Syed
  35. The Optimal Extraction of Exhaustible Resources By Chari, V. V.; Christiano, Lawrence J.
  36. The Effects of Oil Price Shocks in a New-Keynesian Framework with Capital Accumulation. By Verónica Acurio Vasconez; Gaël Giraud; Florent Mc Isaac; Ngoc Sang Pham
  37. Macroeconomic effects of consumer debt: three theoretical essays. By Olivier Allain
  38. Europa si, Euro no? Le prospettive che abbiamo di fronte By Paolo Pini; Roberto Romano
  39. The limits to wage-led growth in a low-income economy By Razmi, Arslan
  40. Does an informal sector reduce the economic dividends of political stability? Empirical evidence. By Mazhar, Ummad; Jafri, Juvaria
  41. Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test By Efrem Castelnuovo; Luca Fanelli
  42. Limited Nominal Indexation of Optimal Financial Contracts By Meh, Césaire A.; Quadrini, Vincenzo; Terajima, Yaz
  43. Capital Share Risk and Shareholder Heterogeneity in U.S. Stock Pricing By Lettau, Martin; Ludvigson, Sydney; Ma, Sai
  44. Impulse Response Matching Estimators for DSGE Models By Guerron-Quintana, Pablo A.; Inoue, Atsushi; Kilian, Lutz
  45. Capital Regulation in a Macroeconomic Model with Three Layers of Default By Clerc, Laurent; Derviz, Alexis; Mendicino, Caterina; Moyen, Stéphane; Nikolov, Kalin; Stracca, Livio; Suarez, Javier; Vardoulakis, Alexandros
  46. Business Cycle Fluctuations and the Distribution of Consumption By De Giorgi, Giacomo; Gambetti, Luca
  47. The Feldstein-Horioka Puzzle in South Africa: A Fractional Cointegration Approach By Luis A Gil-Alana; Christophe André; Rangan Gupta; Tsangyao Chang; Omid Ranjbar
  48. Pakistan Economy: Caught in a Maelstrom By Amjad, Rashid; Din, Musleh ud
  49. The international transmission of credit bubbles: theory and policy By Alberto Martin; Jaume Ventura
  50. International endogenous growth, macro anomalies, and asset prices By Grüning, Patrick
  51. Global liquidity, house prices and the macroeconomy: evidence from advanced and emerging economies By Cesa-Bianchi, Ambrogio; Cespedes, Luis; Rebucci, Alessandro
  52. ¿Están sincronizados los ciclos económicos en Latinoamérica? By Juliana Ávila Vélez; Álvaro José Pinzón Giraldo
  53. Managing rational routes to randomness By Schmitt, Noemi; Westerhoff, Frank
  54. The evil force of borrowing and the weakness of Quantitative Easing By De Koning, Kees
  55. Global liquidity regulation - Why did it take so long? By Clemens Bonner; Paul Hilbers
  56. Structural reforms at the zero bound By Lukas Vogel
  57. The role of survey data in nowcasting euro area GDP growth By Alessandro Girardi; Andreas Reuter; Christian Gayer
  58. The potential growth impact of structural reforms in the EU. A benchmarking exercise By Janos Varga; Jan in 't Veld
  59. Paridad del Poder Adquisitivo en Colombia: Análisis comparativo de los periodos pre y post crisis del 2008 By Sandy Manrique Parra; Santiago Castillo Acuña
  60. Consumer credit performance over the business cycle in Colombia: some empirical facts By Luis E. Arango; Lina Cardona-Sosa
  61. Development Accounting: Conceptually Flawed and Inconsistent with Empirical Evidence By Theodore R. Breton
  62. Migration in an ageing Europe: What are the challenges? By Jesus Crespo Cuaresma; Peter Huber; Doris A. Oberdabernig; Anna Raggl
  63. Education and Social Mobility in Europe: Levelling the Playing Field for Europe’s Children and Fuelling its Economy By Wilfried Altzinger; Jesus Crespo Cuaresma; Petra Sauer; Alyssa Schneebaum; Bernhard Rumplmaier
  64. Explaining the boom-bust cycle in the U.S. housing market: a reverse-engineering approach By Gelain, Paolo; Lansing, Kevin J.; Natvik, Gisele J.
  65. Time-varying disaster risk models: An empirical assessment of the Rietz-Barro hypothesis By Alfonso Irarrazabal; Juan Carlos Parra-Alvarez
  66. Identifying Priorities in Infrastructure Investmentin Portugal By Alfredo Marvão Pereira; Rui M. Pereira
  67. Time-dependent or state-dependent pricing? Evidence from a large devaluation episode By Celio Feltrin; Bernardo Guimaraes
  68. Preferences for fair prices, cursed inferences, and the nonneutrality of money By Erik Eyster; Kristóf Madarász; Pascal Michaillat
  69. Modeling Labor Markets in Macroeconomics: Search and Matching By Lubik, Thomas A.; Krause, Michael U.
  70. What do data on millions of U.S. workers reveal about life-cycle earnings risk? By Guvenen, Fatih; Karahan, Fatih; Ozkan, Serdar; Song, Jae
  71. Noisy information, distance and law of one price dynamics across US cities By Crucini, Mario J.; Shintani, Mototsugu; Tsuruga, Takayuki
  72. Trends and cycles in small open economies: making the case for a general equilibrium approach By Chen, Kan; Crucini, Mario J.
  73. Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness By Georgiadis, Georgios; Mehl, Arnaud
  74. The role of two frictions in geographic price dispersion: when market friction meets nominal rigidity By Choi, Chi-Young; Choi, Horag
  75. Rehypothecation By Andolfatto, David; Martin, Fernando M.; Zhang, Shengxing
  76. A seniority arrangement for sovereign debt By Chatterjee, Satyajit; Eyigungor, Burcu
  77. Firm turnover and inflation dynamics By Lenno Uusküla
  78. Exchange Rate Dynamics under Financial Market Frictions By Cristina Terra; Hyunjoo Ryou
  79. A network view on interbank market freezes By Gabrieli, Silvia; Georg, Co-Pierre
  80. Unconventional monetary policy in an open economy By Gieck, Jana
  81. A Statistical Analysis of Revisions of Swedish National Accounts Data By Flodberg, Caroline; Österholm, Pär
  82. Shifts in euro area Beveridge curves and their determinants By Bonthuis, Boele; Jarvis, Valerie; Vanhala, Juuso
  83. Business environment analysis of Romania By Stan, Darius
  84. Differences in monetary policies between two hypothetical closed economies:one which is concerned with avoiding a large negative output gap and the other which is not By Gunaratna, Thakshila
  85. Taxes and Private Consumption Expenditure: A Component Based Analysis for Turkey By Kaya, Ayşe; Şen, Hüseyin
  86. Evaluación de la contribución económica del sector de hidrocarburos colombiano frente a diversos escenarios de producción By Leonardo Villar; Felipe Castro; David Forero; Juan Mauricio Ramírez
  87. The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation By Tomas Adam; Miroslav Plasil
  88. Nominal GDP Targeting for Developing Countries By Pranjul Bhandari; Jeffrey A. Frankel
  89. How Does Stock Market Volatility React to Oil Shocks? By Andrea Bastianin; Matteo Manera
  90. Globalization and synchronization of innovation cycles By Kiminori Matsuyama; Iryna Sushko; Laura Gardini
  91. Some International Aspects of Business Cycles: Neisser, Haberler and Modern Open Economy Macroeconomics By Hans-Michael Trautwein
  92. Student loan debt and economic outcomes By Cooper, Daniel H.; Wang, J. Christina
  93. The forecasting power of consumer attitudes for consumer spending By Barnes, Michelle L.; Olivei, Giovanni P.
  94. Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds By Zhao, Bo
  95. The net stable funding ratio requirement when money is endogenous By Kauko, Karlo
  96. Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the U.S. By Pang, Ke; Siklos, Pierre L.
  97. Political Economy of Macroeconomic Policymaking: Economic Crises and Technocratic Governance By Stephen B. Kaplan

  1. By: Cizkowicz, Piotr; Rzonca, Andrzej; Trzeciakowski, Rafal
    Abstract: We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government non-investment expenditure and direct taxes. In contrast, in the core member states ,which did not benefit from yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to sovereign debt increased during 1996-2007. It was achieved mainly through pronounced adjustments in government non-investment expenditure. Our findings are in accordance with predictions of theoretical model by Aguiar et al. (2014) and are robust to various changes in modelling approach.
    Keywords: fiscal reaction function, sovereign bond yields’ convergence, fiscal adjustment composition
    JEL: C23 E62 F34 H63
    Date: 2015–01
  2. By: Fabio Milani (University of California, Irvine)
    Abstract: Psychological factors are commonly believed to play a role on cyclical economic fluctuations, but they are typically omitted from state-of-the-art macroeconomic models. This paper introduces “sentiment†in a medium-scale DSGE model of the U.S. economy and tests the empirical contribution of sentiment shocks to business cycle fluctuations. The assumption of rational expectations is relaxed. The paper exploits, instead, observed data on expectations in the estimation. The observed expectations are assumed to be formed from a near-rational learning model. Agents are endowed with a perceived law of motion that resembles the model solution under rational expectations, but they lack knowledge about the solution’s reduced- form coefficients. They attempt to learn those coefficients over time using available time series at each point in the sample and updating their beliefs through constant-gain learning. In each period, however, they may form expectations that fall above or below those implied by the learning model. These deviations capture excesses of optimism and pessimism, which can be quite persistent and which are defined as sentiment in the model. Different sentiment shocks are identified in the empirical analysis: waves of undue optimism and pessimism may refer to expected future consumption, future investment, or future inflationary pressures. The results show that exogenous variations in sentiment are responsible for a sizable (about forty percent) portion of historical U.S. business cycle fluctuations. Sentiment shocks related to investment decisions, which evoke Keynes' animal spirits, play the largest role. When the model is estimated imposing the rational expectations hypothesis, instead, the role of structural investment-specific and neutral technology shocks significantly expands to capture the omitted contribution of sentiment.
    Date: 2014
  3. By: Alisdair McKay; Emi Nakamura; Jón Steinsson
    Abstract: In recent years, central banks have increasingly turned to "forward guidance" as a central tool of monetary policy, especially as interest rates around the world have hit the zero lower bound. Standard monetary models imply that far future forward guidance is extremely powerful: promises about far future interest rates have huge effects on current economic outcomes, and these effects grow with the horizon of the forward guidance. We show that the power of forward guidance is highly sensitive to the assumption of complete markets. If agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to far future promises about interest rates. As a consequence, the ability of central banks to combat recessions using small changes in interest rates far in the future, is greatly reduced relative to the complete markets benchmark. We show that the effects of precautionary savings motives can be captured by a simplified version of our model that generates discounting in the representative agent's Euler equation. This discounted Euler equation can be easily included in standard business cycle models.
    JEL: E21 E40 E50
    Date: 2015–01
  4. By: Matthew J. Bloomfield; Ulf Brüggemann; Hans B. Christensen; Christian Leuz
    Abstract: The paper examines the effect of international regulatory harmonization on cross-border labor migration. We analyze directives in the European Union (EU) that harmonized accounting and auditing standards. This regulatory harmonization should make it less costly for those who work in the accounting profession to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that, on average, labor migration in the accounting profession increases relative to comparable professions by roughly 15% after harmonization. The findings illustrate that diversity in rules constitutes an important economic barrier to cross-border labor mobility and, more specifically, that accounting harmonization can have meaningful effect on cross-border migration.
    JEL: D10 E24 F22 F55 J44 J61 J62 K22 L84 M41 M42
    Date: 2015–01
  5. By: Arnoud Stevens (Research Department, NBB)
    Abstract: Should the central bank seek to identify the underlying causes of oil price hikes in determining appropriate policy responses to them? Most likely not. Within a calibrated new-Keynesian model of Oil-Importing and Oil-Producing Countries, I derive the Ramsey policy and analyze optimal monetary policy responses to different sources of oil price fluctuations. I find that oil-specific demand and supply shocks call for similar policy responses, given the low substitutability of oil in production and the incompleteness of international asset markets.
    Keywords: Oil Prices, Optimal Monetary Policy, Ramsey Approach,Welfare Analysis
    JEL: E52 E61 Q43
    Date: 2015–01
  6. By: Barrera-Chaupis, Carlos
    Abstract: We search for evidence against the hypothesis of a non-linear relationship between inflation and growth rates for 1993-2012 Peruvian data. A family of dichotomous models provide the way to model the relationship between the those two variables' cycles. Given the acceleration/de-acceleration phases' persistence, we estimate auto-regressive uni-variate logit models as well as both static and auto-regressive bi-variate probit models. The results suggest the existence of an stochastic relationship between the discrete cycles of inflation and growth rates.
    Keywords: time series models, discrete regression, logit model, construction and evaluation of models, prediction, business fluctuations
    JEL: C22 C25 C51 C52 C53 E32
    Date: 2014–12–22
  7. By: Alberto Petrucci (Department of Economics and Finance, LUISS Guido Carli University)
    Abstract: In this paper, the incidence of a tax on pure rent is analyzed in an OLG two-sector small open economy, in which one sector produces a capital good and one sector a consumer good. Contrary to what is obtained by Feldstein (1977) in a one-sector closed economy, a rent tax does not necessarily foster wealth accumulation and economic growth. The accommodating scheme for the government budget plays a crucial role for the effects of pure rent taxation. A rent tax stimulates nonhuman wealth if distortionary taxes on wealth or on income from nonland inputs are alleviated. The mechanism spurring capital formation is brought into action, instead, only when the rent tax is matched by a fall in capital taxation or, if the capital sector is capital intensive, by an increase in government spending on the capital good.
    Keywords: Land Rent Tax; Capital Good; Consumer Good; OLG; Wealth Accumulation.
    JEL: E62 H22 J22 O41
  8. By: Li, Wenli (Federal Reserve Bank of Philadelphia); Liu, Haiyong (East Carolina University); Yang, Fang (Louisiana State University); Yao, Rui (Baruch College)
    Abstract: Supersedes Working Paper 09-7. We estimate a structural model of optimal life-cycle housing and nonhousing consumption in the presence of labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profies from the Panel Study of Income Dynamics (1984 to 2005) reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0.487. The low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost. We then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011. We show that the responses depend importantly on the housing adjustment cost and the elasticity of sub-stitution between housing and nonhousing consumption. In particular, compared with the benchmark, the impact of the shocks on homeownership rates is reduced, but the impact on nonhousing consumption is magnified when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable.
    Keywords: Life cycle; Housing adjustment costs; Intratemporal substitution
    JEL: E21 R21
    Date: 2015–01–17
  9. By: Chun-Hung Kuo (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: Focusing on both hiring and firing margins, this paper revisits effects of fiscal expansion on unemployment. We develop a DSGE model with search frictions where job separation is endogenously determined. The predictions of the model are in contrast with earlier studies that assume exogenous separation. Our model can capture the empirical pattern of responses of the job finding, separation, and unemployment rates to a government spending shock, obtained from estimating a structural VAR model with the U.S. data. However, our model fails to capture the response of vacancies and the volatility of unemployment.
    Keywords: Fiscal Policy, Unemployment, Labor market, Search and matching, Endogenous separation
    JEL: E24 E62 J64
    Date: 2015–01
  10. By: Yeva Nersisyan
    Abstract: Before the global financial crisis, the assistance of a lender of last resort was traditionally thought to be limited to commercial banks. During the crisis, however, the Federal Reserve created a number of facilities to support brokers and dealers, money market mutual funds, the commercial paper market, the mortgage-backed securities market, the triparty repo market, et cetera. In this paper, we argue that the elimination of specialized banking through the eventual repeal of the Glass-Steagall Act (GSA) has played an important role in the leakage of the public subsidy intended for commercial banks to nonbank financial institutions. In a specialized financial system, which the GSA had helped create, the use of the lender-of-last-resort safety net could be more comfortably limited to commercial banks. However, the elimination of GSA restrictions on bank-permissible activities has contributed to the rise of a financial system where the lines between regulated and protected banks and the so-called shadow banking system have become blurred. The existence of the shadow banking universe, which is directly or indirectly guaranteed by banks, has made it practically impossible to confine the safety to the regulated banking system. In this context, reforming the lender-of-last-resort institution requires fundamental changes within the financial system itself.
    Keywords: Banks; Central Banking; Deregulation; Federal Reserve; Financial Crises; Glass-Steagall Act; Lender of Last Resort; Minsky; Regulation; Securitization; Shadow Banking
    JEL: B50 E50 E58 G10 G18
    Date: 2015–01
  11. By: Ivan Mendieta-Muñoz
    Abstract: This paper studies the empirical relationship between the Federal funds effective rate and the rate of profit or profit-to-capital ratio in the U.S. economy. The linkages between these two variables are studied: 1) at business-cycle frequencies using various filters and employing cross-correlation, regression and simulation analysis; and 2) using Vector Autoregressive models that unveil the dynamic interactions between the variables. The different empirical results reveal that positive shocks in the fed funds interest rate generate negative responses of the rate of profit, thus corroborating previous findings that show that a tight monetary policy is associated with lower aggregate profitability levels.
    Keywords: Fed funds effective real rate; rate of profit; U.S. economy; aggregate profitability
    JEL: E22 E40 E43
    Date: 2014–12
  12. By: Laura Schang; Alec Morton; Philip DaSilva; Gwyn Bevan
    Abstract: Purpose: Although information on variations in health service performance is now more widely available, relatively little is known about how healthcare payers use this information to improve resource allocation. We explore to what extent and how Primary Care Trusts (PCTs) in England have used the NHS Atlas of Variation in Healthcare, which has highlighted small area variation in rates of expenditure, activity and outcome. Methods: Data collection involved an email survey among PCT Chief Executives and a telephone follow-up to reach non-respondents (total response: 53 of 151 of PCTs, 35%). 45 senior to mid-level staff were interviewed to probe themes emerging from the survey. The data were analysed using a matrix-based Framework approach. Findings: Just under half of the respondents (25 of 53 PCTs) reported not using the Atlas, either because they had not been aware of it, lacked staff capacity to analyse it, or did not perceive it as applicable to local decision-making. Among the 28 users, the Atlas served as a prompt to understand variations and as a visual tool to facilitate communication with clinicians. Achieving clarity on which variations are unwarranted and agreeing on responsibilities for action appeared to be important factors in moving beyond initial information gathering towards decisions about resource allocation and behaviour change. Conclusions: Many payers were unable to use information on small area variations in expenditure, activity and outcome. To change this what is additionally required are appropriate tools to understand causes of unexplained variation, in particular unwarranted variation, and enable remedial actions to be prioritised in terms of their contribution to population health.
    Keywords: resource allocation; small-area analysis; unwarranted variations; regional health planning; organisational decision making; quality indicators
    JEL: E6
    Date: 2014–01
  13. By: Nancy Holman
    JEL: E6
    Date: 2014–07
  14. By: Nicos Christodoulakis
    Abstract: The paper provides a quantitative analysis of the armed confrontation that took place in Greece between the Communist Party and the Centre-Right Government during 1946-1949. Using monthly data for battle casualties a dynamic Lotka-Volterra framework is estimated, pointing to the existence of a conflict trap that explains the prolongation of the civil war and its dire consequences for the country. To examine the extent to which the confrontation was influenced by socio-economic factors, a regional analysis finds that political discontent was mainly correlated with pre-war grievances rather than class-structure, while the mobilization of guerilla forces was crucially affected by morphology and the local persecutions by the Government. The economic cost of the conflict is estimated to be close to an annual GDP, and its effect to last for at least a decade, in line with similar findings in contemporary civil wars. The failure to prevent the conflict or stop its escalation is discussed together with some conclusions for the long term repercussions and the current social discontent in Greece.
    Keywords: civil war; Greece; production function; equilibrium and stability condition
    JEL: C62 E23 N44 O52
    Date: 2014–03
  15. By: Eddie Gerba; Emmanuel V. Pikoulakis; Tomasz Piotr Wisniewski
    Abstract: Introducing equilibrium unemployment to the solution of the intertemporal allocation of non-leisure time, we derive two wage-setting models which we estimate by panel data and cross-section regressions applied on aggregative data. The results support the empirical relation known as the wage-curve, thus enriching and strengthening the microfoundations of that relation.
    Keywords: wage curve; intertemporal allocation; two-sector model
    JEL: E22 E23 E24
    Date: 2014–02–26
  16. By: Eddie Gerba; Klemens Hauzenberger
    Abstract: We contribute to the growing empirical literature on monetary and fiscal interactions by applying a sign restriction identification scheme to a structural TVP-VAR in order to disentangle and evaluate the policy shocks and policy transmissions. This in turn allows us to study the Great Recession in a consistent fashion. Four facts stand out from our findings. We observe significant differences in the endogenous responses to shocks in particular between the Volcker period and the Great Recession, and find that monetary policy reacts more aggressively during Volcker chairmanship and fiscal policy during the Great Recession to stabilize the economy. Second, impulse responses confirm that there is a high degree of interactions between monetary and fiscal policies over time. Third, in the forecast error variance decomposition we find that while government revenues largely influence decisions on government spending, government spending does not influence tax decisions. Fourth and final, our analysis of the fiscal transmission channel reveals that tax cuts, because of their crowding-in effects, are more effective in expanding output than government spending rises, since the tax multiplier is higher and more persistent. In light of the current recession and the zero lower bound of the interest rate, tax cuts can, by providing the right incentives to the private sector, result in high and very persistent growth in output if private agent expectations regarding the length and the financing structure of the fiscal expansion are delicately managed jointly by the two authorities.
    Keywords: time varying parameter VAR; sign restrictions; Markov-Chain Monte Carlo; US economic structure; fiscal transmission channel
    JEL: C11 C32 C52 E61 E63
    Date: 2014
  17. By: Nikolaos Sgouropoulos; Qiwei Yao; Claudia Yastremiz
    Abstract: Motivated by the problem of selecting representative portfolios for backtesting counterparty credit risks, we propose a matching quantiles estimation (MQE) method for matching a target distribution by that of a linear combination of a set of random variables. An iterative procedure based on the ordinary least squares estimation (OLS) is proposed to compute MQE. MQE can be easily modified by adding a LASSO penalty term if a sparse representation is desired, or by restricting the matching within certain range of quantiles to match a part of the target distribution. The convergence of the algorithm and the asymptotic properties of the estimation, both with or without LASSO, are established. A measure and an associated statistical test are proposed to assess the goodness-of-match. The finite sample properties are illustrated by simulation. An application in selecting a counterparty representative portfolio with a real data set is reported. The proposed MQE also finds applications in portfolio tracking, which demonstrates the usefulness of combining MQE with LASSO.
    Keywords: goodness\-of\-match; LASSO; ordinary least squares estimation; portfolio tracking; representative portfolio; sample quantile
    JEL: C1 E6
    Date: 2014–05–25
  18. By: Vassilis Monastiriotis
    Abstract: The Eurozone crisis has given a new impetus to academic and policy debates about the merits and ills of fiscal consolidation policies (austerity). Fuelled by the huge contraction experienced by some ‘bailout countries’, and especially Greece, a new consensus seems to have emerged, that “austerity doesn’t work”. Yet, many Eurozone countries have seen a relatively fruitful implementation of fiscal consolidation programmes, with fiscal pressures being successfully curtailed and the adverse growth effects of austerity being very short-lived. The literature has only recently shifted its attention to the qualitative characteristics of fiscal consolidation to explain variations in economic performance (growth) across countries in the course of austerity. Still, attention to political-institutional and structural-economic factors is generally lacking. This paper makes a contribution in this direction, by showing that two domestic-context parameters – trade openness and quality of government – exert significant influence on the impact that austerity has on growth and debt-sustainability. Factoring-in these parameters allows us to contextualise a number of ‘stylised facts’ of the Eurozone crisis, including the huge recession and large snowball effect for Greece, the relatively painless fiscal consolidation in parts of the Eurozone north, and the surprising decline in nominal interest rates seen is some of the most agile Eurozone countries.
    Keywords: austerity; growth; debt sustainability; quality of government
    JEL: J1 N0 E6
    Date: 2014–06
  19. By: Patrick Dunleavy; Sean Kippin; Joel Suss
    Abstract: The co-Director of Democratic Audit, Professor Patrick Dunleavy was asked by the leading Scottish newspaper, the Sunday Post, to write a report on the costs of transitioning to a new government in the event of a ‘Yes’ vote in Scotland’s independence referendum. The report argues that an independent Scotland would face immediate set-up costs of up to £200 million in creating new administrative structures that duplicate UK institutions, but could also streamline many public bodies. During the transition process, Scottish government could agree contracts or service deals with London to maintain existing back office support system (mainly involving IT) in collecting taxes, paying benefits and organizing complex defence systems. In the medium term (by 2018 to 20021) Scotland would need to build its own, new IT systems to allow policy control to be fully exercised from Edinburgh, in each of these areas. These tasks would certainly cost several hundred million pounds, but they would also be investments in modern systems, and not just “set up” costs. Significant policy savings may also accrue, and offset some of this burden. A key influence on Scotland’s costs would be the conduct of negotiations between Scottish ministers and the remaining UK (rUK) government. A hostile approach by London ministers would force rapid changes and greatly add to Scotland’s costs. A more careful, phased approach would make these costs a lot less. Every transition to a new state has some uncertainty and a degree of risk. But there are no bases for extreme anxiety about an independence transition in Scotland. The Scottish government’s record in public management is a good one, its published plans for transition are relatively specific and reasonable, and the long-run viability of a Scottish state looks strong. The main current uncertainties arise from the London government’s apparent reluctance to do any planning for, or to make clear to Scottish voters, how a transition to independence would be handled at their end. The report has already been covered extensively, including in the Scotsman, the Guardian, by the BBC, the Spectator and others.
    JEL: E6
    Date: 2014–06
  20. By: Amanda Fitzgerald; Ruth Lupton
    Abstract: Key Points: London local government has taken a 33 per cent real terms cut in service funding from central government between 2009/10 and 2013/14. Councils have been making strenuous efforts to make large savings without cutting front line services, and to protect services for those who need them most. Most savings have come through efficiencies, the sorts of savings which Councils have argued are neither detrimental to, nor noticeable at, the frontline. However, Councils have, reluctantly, had to reduce their own role in the provision of discretionary services. More of these services are being delivered by voluntary and community sector partners, so the landscape of local service provision has seen some change. The need for Councils to pare their own provision back to statutory services, increasingly targeting those most in need, may, ultimately, result in less local variation rather than more. In this the cuts could be running counter to the promotion of the localism agenda. A focus on the most in need, seen in greater targeting of services, could also further fuel rising demand, as lower level need goes unaddressed. Council officers and Members are concerned that the 'limits of efficiency' have been reached, and there is little scope for further large-scale savings without significant effects on frontline services.
    Keywords: regions and area inequalities; cities; london; area inequalities; social policy; inner london; outer london; london local government; metropolitan governance
    JEL: N0 E6
    Date: 2014–01
  21. By: Stephen Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: monetary policy; deliberation; FOMC; transparency; career concerns
    JEL: D78 E52 E58
    Date: 2014–06
  22. By: Alex Haberis; Andrej Sokol
    Abstract: In this paper we describe a procedure for implementing zero restrictions within the context of a sign restrictions identification scheme for VARs. The procedure introduces an additional step into the algorithm outlined in Fry and Pagan (2011) and Rubio-Ramirez et al (2006) for implementing sign restrictions. This extra step involves rotating a candidate identification matrix using Givens rotation matrices to introduce zero restrictions. We then check whether the elements of the candidate matrix satisfy the sign restrictions as usual. We illustrate how our procedure works by generating artificial data from the theoretical model of An and Schorfheide (2007), which implies certain restrictions on the impact of its structural shocks on the model's endogenous variables. We exploit our knowledge of that pattern to identify structural shocks from the reduced-form errors of a VAR estimated on the simulated data. Imposing zero restrictions, as well as sign restrictions, can be useful – and in some cases essential – for identifying economically-interpretable – `structural' – shocks from the reduced-form innovations to a VAR. This is because it is often the case that an economic theory used to motivate these identifying restrictions implies certain variables do not respond at all to some shocks. For example, in the An and Schorfheide (2007) model we consider, shocks to government spending have no effect on inflation or the nominal interest rate – i.e. the impulse response is zero. Therefore, to obtain accurate, empirical estimates of the government spending shock in this model using a structural VAR estimated on data for its observable variables, it would be necessary to impose a zero restriction on the response of inflation and the nominal interest rate to the shock identified with government spending.
    JEL: C32 C51 E12
    Date: 2014–06–05
  23. By: Rebecca Riley; Chiara Rosazza Bondibene; Garry Young
    Abstract: We investigate labor productivity dynamics amongst British businesses in the wake of the credit crisis of 2007/8. The external restructuring of firms (i.e. changes in market share, firm entry and exit) contributed to a fall in productivity growth relative to trend amongst small businesses in bank dependent industries, consistent with the idea that an adverse credit supply shock caused inefficiencies in resource allocation across firms. But, the major part of the decline in UK productivity growth following the credit crisis was accounted for by a widespread productivity shock within firms, pointing to the importance of other factors in explaining the Great Stagnation.
    Keywords: productivity growth; reallocation; Great Recession and Stagnation; credit shock
    JEL: E32 L11 O47
    Date: 2014–05
  24. By: L. Rachel Ngai; Barbara Petrongolo
    Abstract: This paper investigates the role of the rise of services in the narrowing of gender gaps in hours and wages in recent decades. We document the between-industry component of the rise in female work for the U.S., and propose a model economy with goods, services and home production, in which women have a comparative advantage in producing market and home services. The rise of services, driven by structural transformation and marketization of home production, acts as a gender-biased demand shift raising women's relative wages and market hours. Quantitatively, the model accounts for an important share of the observed trends.
    Keywords: gender gaps; structural transformation; marketization
    JEL: E24 J16 J22
    Date: 2014–04
  25. By: Wouter J. Den Haan
    Abstract: Changes in the stock of inventories are important for �fluctuations in aggregate output. However, the possibility that firms do not sell all produced goods and inventory accumulation are typically ignored in business cycle models. This paper captures this with a goods-market friction. Using US data, "goods-market efficiency" is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed can substantially magnify and propagate shocks. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline parameter values, then goods-market frictions are quantitatively not very important.
    Keywords: matching models; search frictions; magnification propagation
    JEL: E12 E24 E32
    Date: 2013–12–30
  26. By: Carlos Garriga; Finn E. Kydland; Roman Šustek
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment
    JEL: E32 E52 G21 R21
    Date: 2013–12–05
  27. By: Vincent Sterk; Silvana Tenreyro
    Abstract: A large literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    JEL: E1 E31 E32 E52 E58
    Date: 2013–11
  28. By: Jude Howell
    Abstract: State-labour NGOs relations in China have been particularly fraught. In 2012 these took an interesting twist, as some local governments made overtures to labour NGOs to co-operate in providing services to migrant workers. This article argues that this shift is part of a broader strategy of `welfarist incorporation’ to redraw the social contract between state and labour. There are two key elements to this: first, relaxation of the registration regulations for social organisations; second, governmental purchasing of services from social organisations. These overtures have both a state and market logic to maintain social control and stabilise relations of production.
    JEL: E6
    Date: 2015
  29. By: Stephen Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: Monetary policy; deliberation; FOMC; transparency; career concerns
    JEL: D78 E52 E58
    Date: 2014–06
  30. By: Felix Koenig; Alan Manning; Barbara Petrongolo
    Abstract: Wages are only mildly cyclical, implying that shocks to labour demand have a larger short-run impact on unemployment rather than wages, at odds with the quantitative predictions of the canonical search and matching model. This paper provides an alternative perspective on the wage flexibility puzzle, explaining why the canonical model can only match the observed cyclicality of wages if the replacement ratio is implausibly high. We show that this failure remains even if wages are only occasionally renegotiated, unless the persistence in unemployment is implausibly low. We then provide some evidence that part of the problem comes from the implicit model for the determination of reservation wages. Estimates for the UK and West Germany provide evidence that reservation wages are much less cyclical than predicted even conditional on the observed level of wage cyclicality. We present evidence that elements of perceived “fairness” or “reference points” in reservation wages may address this model failure.
    Keywords: Reservation wages; wage cyclicality; reference points.
    JEL: E24 J31 J64
    Date: 2014–12
  31. By: Graham Floater; Philipp Rode; Bruno Friedel; Alexis Robert
    Abstract: We live in an urban age. Over half the world’s population now lives in urban areas, while the urban population is expected to reach 60% by 2030. At the same time, the importance of cities for national economic growth and climate change continues to increase. Three groups of cities will be particularly important for the global economy and climate: Emerging Cities, Global Megacities and Mature Cities. When combined, these 468 cities are projected to contribute over 60% of global GDP growth and over half of global energy-related emissions growth between 2012 and 2030 under business as usual. However, not all countries and cities will benefit from the potential economic gains of urban growth under business as usual. The winners and losers of urban expansion will depend on the policy decisions that national and sub-national governments make over the next few years. Evidence suggests that urban growth that is poorly managed by governments can lead to a range of economic, social and environmental costs, such as traffic congestion, inefficient public transport, air pollution with associated health impacts, and inadequate infrastructure for basic services such as energy, water and waste.
    JEL: R14 J01 E6
    Date: 2014–11
  32. By: Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: This paper assesses the impact of unconventional United States (US) and Japanese monetary policies on emerging economies, and explores policy coordination issues to promote macroeconomic and financial stability in developed and emerging economies. The paper first considers a theoretical framework that allows us to analyze the impact of one country's monetary policy on other economies. There are two important theoretical predictions. One is that the greater the positive impact of monetary policy easing on a country's real output, the less its beggar-thy-neighbor impact on other countries. The other is that news on future changes in monetary policy can affect exchange rates and stock prices today as financial markets are inherently forward looking. The paper then examines the impact of the US Fed's QE policy on emerging economies, including the introduction of QE, the expectation of its tapering, and the anticipation of an eventual hike in the interest rate. It also discusses the implications of "Abenomics," particularly qualitative and quantitative easing (QQE) by the Bank of Japan (BOJ), for Asian emerging economies. It finds that the impact of BOJ QQE has been positive and, in contrast to US QE1, has not created negative consequences for emerging economies. The paper finally explores policy implications for both developed and emerging economies and suggests policies to be adopted at the country, regional and global levels, emphasizing the importance of communication among central banks and with the market and the need to strengthen global financial safety nets.
    Keywords: monetary policy; quantitative and qualitative easing; monetary policy spillover and coordination; us federal reserve; bank of japan
    JEL: E52 E58 F41 F42
    Date: 2015–01–23
  33. By: Luksz Goczek (University of Warsaw)
    Abstract: During the financial crisis a notion that the Polish exchange rate is not determined effectively was very dominant, because of a contagion effect of the global financial crisis on the Polish economy. In addition, many foreign exchange market analysts explained developments in the Polish exchange market trough a hypothesis that the Polish zloty exchange rate follows other exchange rates. This contradicts market efficiency as this would lead to profitable arbitrage possibility based on past information on other currency prices and possibly gives a rationale for government intervention. In contrast, a foreign exchange market that is efficient needs no government involvement and its participants cannot earn abnormal gains from foreign exchange transactions. Therefore, the aim of the article is to examine the efficiency of the Poland's foreign exchange market. In order to test for market efficiency a cointegration analysis is used. The main argument builds on the semi-strong form of the market efficiency hypothesis. On an informational effective market a pair of prices cannot be cointegrated, because this would imply predictability of one asset price based on the past prices of the other asset. The main hypothesis of the article is verified using Unit Root tests and Johansen Cointegration Test on the pair of EURPLN and USDPLN exchange rates. It is shown that the null hypothesis cannot be rejected; therefore, the Polish foreign exchange market is efficient in the semi-strong sense.
    Keywords: foreign exchange market efficiency, cointegration analysis
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2015–01
  34. By: Daniel Melser (Moody's Analytics); Iqbal A. Syed (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large US scanner data set on supermarket products and applying flexible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance or during sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias leads to the underestimation of inflation by around 0.30 percentage points each year for the products examined.
    Keywords: Consumer price index (CPI), matched-model index, price skimming strategy, quality change bias, sample rotation
    JEL: C43 D22 E31
    Date: 2014–12
  35. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Christiano, Lawrence J. (Federal Reserve Bank of Minneapolis)
    Abstract: Policymakers concerned about rapid swings in commodity prices seek economic guidance about causal factors and future trends, but standard models—based on Harold Hotelling’s classic 1931 theory—are unable to explain actual data on price variability for a wide range of commodities. In this paper, we review this “Hotelling puzzle” and suggest modifications to current theory that may improve explanations of commodity price changes and provide better policy advice.
    Keywords: Commodities; Prices;
    JEL: E31
    Date: 2014–12–11
  36. By: Verónica Acurio Vasconez (Centre d'Economie de la Sorbonne); Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics); Florent Mc Isaac (Centre d'Economie de la Sorbonne); Ngoc Sang Pham (Centre d'Economie de la Sorbonne)
    Abstract: The economic implications of oil price shocks have been extensively studied since the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model was available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) the influence of the energy productivity of capital on the depth and length of this impact. We build, estimate and simulate a New-Keynesian model with capital accumulation, which takes the case of an economy where oil is imported from abroad, and where these stylized facts can be accounted for. Moreover, the Bayesian estimation of the model on the US economy (1984-2007) suggests that the output elasticity of oil might have been above 10%, stressing the role of oil use in US growth at this time. Finally, our simulations confirm that an increase in energy efficiency significantly attenuates the effects of an oil shock —a possible explanation of why the third oil shock (1999-2008) did not have the same macro-economic impact as the first two ones.
    Keywords: New-Keynesian model, DSGE, oil, capital accumulation, stagflation, energy productivity.
    JEL: C68 E12 E23 Q43
    Date: 2014–12
  37. By: Olivier Allain (Université Paris Descartes, Sorbonne Paris Cité et Centre d'Economie de la Sorbonne)
    Abstract: Post-Keynesian economists have quite recently begun to draw attention to the consumer debt. However, as they omit the principal payment, they implicitly assimilate this debt as perpetual loans. The goal of this article is mainly methodological. We first develop a ‘Keynesian’ overlapping generations framework assuming that people borrow when they are young and service their debt (interests and principal) in the following periods. Defaults on the principal are also taken into account. We then analyze the theoretical properties of the equilibriums (multiplier effect, stability conditions) resulting from the introduction of this framework in three types of models that differ in regard of who are the debtors and who are the creditors: workers can borrow from capitalists (essay 1) or from their peer (essay 2); capitalists can borrow from their peer (essay 3).
    Keywords: Consumer debt, Keynesian models, equilibrium instability, overlapping generation models.
    JEL: E12 E2 E21
    Date: 2014–12
  38. By: Paolo Pini; Roberto Romano
    Abstract: The current debate on European economic policy is quite original and with uncertain outcomes. The economic crisis started in 2008 feeds a political and academic debate not so deeply developed since the great crisis of the ‘30s. More Euro or less Euro? More market or less market? More State or less State? Did the expansionary austerity fail, or did it create the conditions for a more robust and balanced growth? Given the progressive crisis of the European monetary system and the risk of implosion of the Euro currency, isn’t it better to manage an exit strategy from the Euro “on the leftâ€, rather than wait and see a “right wing†exit? These are all issues concerning the architecture of the European institutions, and of the underlining economic policies. On one side, some argue that it is impossible to reform the European fiscal and monetary policy; while, in opposition with this view, others sustain the necessity to pursue a more stringent and strongly reformed political and economic union integration. In Italy the debate seems to become even more polarized than in other European countries, not recognizing however that the country suffers from a domestic crisis within the general crisis, with very deep roots in the past and not easily affordable in the short run. The decline in productivity and wages, the industrial de-specialization, the lack of strategy to introduce structural reforms, these are all factors which condition the final outcome of each proposal. What it would be necessary is surely a macroeconomic policy up to the challenge of the deep global economic crisis, as well as fiscal and monetary policies adequate to the different regional specificities within the Eurozone. By now, the exit strategy from the Euro “on the leftâ€, with respect to a Euro-exit “on the rightâ€, is an outcome to be considered with more accuracy, but it remains an intellectual exercise. We think that the Euro-exit is a possible and traumatic outcome we should ward off, not only because it is a too risky outcome, but mainly because it does not bring with it the solutions to the domestic issues Italy should tackle. At the end, the power of ideas must prevail over vested class interests
    Keywords: Euro; Europe; Economic policy
    JEL: E5 E6 O52
    Date: 2015–01–20
  39. By: Razmi, Arslan (The University of Massachusetts at Amherst)
    Abstract: Neo-Kaleckian literature has actively debated whether growth is wage- or profit-led in capitalist economies. However, existing studies tend to ignore the non-tradable sector and heterogeneity within the tradable sector. This paper shows that incorporating these features renders wage-led growth in an open developing economy unfeasible in the traditional (Kaleckian) sense of the term. This result -- which follows even if one sets aside the competitiveness considerations generally seen as impeding such growth -- occurs due to the presence of a homogeneous goods-producing tradable sector that sets the ceiling to steady state growth. A corollary, in light of findings from the "new new trade theory" literature, is that increasing South-South trade may tend to narrow room for wage-led growth regardless of the other desirable effects of higher wages.
    Keywords: Wage-led growth, non-tradables, neo-Kaleckian models, development, output heterogeneity.
    JEL: F43 O41 E12
    Date: 2015
  40. By: Mazhar, Ummad; Jafri, Juvaria
    Abstract: Political stability is generally hailed as an asset that yields positive economic dividends. In particular, the macroeconomic environment is likely to benefit from political stability. On the other hand, the existence of a sizeable shadow (or informal) economy represents institutional weaknesses and may undermine the macroeconomic environment. The latter effect is more likely if the shadow economy reduces the government’s tax revenues and disturbs the balance of demand and supply for formal businesses. This paper tests these contradictory tendencies. Circumventing the issues related to reverse causality and endogeneity of the informal sector, we define a qualitative variable for the size of the informal sector. The qualitative variable assumes a value of 1 for all the countries having an informal sector exceeding 25 percent of GDP on average over our sample period. Using a large data set of 162 countries over the 1999 to 2007 period we find that an informal sector can undermine the positive effect of political stability. The results are robust against alternative specifications and satisfy the usual assumptions of valid empirical analysis.
    Keywords: Political stability; Informal sector or shadow economy; Inflation; Openness; tax revenue.
    JEL: E6 E61
    Date: 2014
  41. By: Efrem Castelnuovo (University of Padova); Luca Fanelli (University of Bologna)
    Abstract: We propose a novel identification-robust test for the null hypothesis that an estimated new-Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot-driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross-equation restrictions (CER) that the new Keynesian system places on its reduced form solution under determinacy. If the CER are not rejected, sunspot-driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second-step and invert an Anderson and Rubin-type test for the orthogonality restrictions (OR) implied by the system of Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite sample performance of the suggested identification-robust two-steps testing strategy by some Monte Carlo experiments and then apply it to a new-Keynesian AD/AS model estimated with actual U.S. data. In spite of some evidence of weak identification as for the ÒGreat ModerationÓ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness occurred in the late 1970s. Our identification-robust full-information confidence set for the structural parameters computed on the ÒGreat ModerationÓ regime turn out to be more precise than the intervals previously reported in the literature through Òlimited informationÓ methods.
    Keywords: Confidence set, Determinacy, Identification failures, Indeterminacy, Misspecification, new-Keynesian business cycle model, VAR system.
    JEL: C31 C22 E31 E52
    Date: 2014–07
  42. By: Meh, Césaire A.; Quadrini, Vincenzo; Terajima, Yaz
    Abstract: We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic and Ueda 1997. More constrained firms sign contracts that are less indexed to inflation and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with price uncertainty. An implication of this is that economies with higher inflation uncertainty are less vulnerable to a price shock of a given magnitude. The micro predictions of the model are tested empirically using macro and firm-level data from Canada.
    Keywords: Inflation uncertainty; Nominal indexation; Optimal contracts
    JEL: E21 E31 E44 E52
    Date: 2015–01
  43. By: Lettau, Martin; Ludvigson, Sydney; Ma, Sai
    Abstract: Value and momentum portfolios exhibit strong opposite signed exposure to an aggregate risk factor based on low frequency fluctuations in the capital share. This strong opposite signed exposure helps explain why both strategies earn high average returns yet are negatively correlated. But the finding is puzzling from the perspective of canonical asset pricing theories. We show that opposite signed exposure to capital share risk coincides with opposite signed exposure of value and momentum to the income shares of households in the top 10 versus bottom 90 percent of the stock wealth distribution. We use a model of shareholder heterogeneity to explain why the capital share is likely to be an important cross-sectional risk factor, and show how the result can be explained if investors located in different percentiles of the wealth distribution exhibit a central tendency to pursue different investment strategies. Models with capital share risk explain up to 85% of the variation in average returns on size-book/market portfolios and up to 95% of momentum returns and the pricing errors on both sets of portfolios are lower than those of the Fama-French three- and four-factor models, the intermediary SDF model of Adrian, Etula, and Muir (2014), and models based on low frequency exposure to aggregate consumption risk. In a horse race where long-horizon capital share betas are included alongside betas for these other factors, the capital share beta remains strongly significant while the others are driven out.
    Keywords: capital share; heterogeneous agents; inequality; labor share; momentum; value premium
    JEL: E25 G11 G12
    Date: 2015–01
  44. By: Guerron-Quintana, Pablo A.; Inoue, Atsushi; Kilian, Lutz
    Abstract: One of the leading methods of estimating the structural parameters of DSGE models is the VAR-based impulse response matching estimator. The existing asymptotic theory for this estimator does not cover situations in which the number of impulse response parameters exceeds the number of VAR model parameters. Situations in which this order condition is violated arise routinely in applied work. We establish the consistency of the impulse response matching estimator in this situation, we derive its asymptotic distribution, and we show how this distribution can be approximated by bootstrap methods. Our methods of inference remain asymptotically valid when the order condition is satisfied, regardless of whether the usual rank condition for the application of the delta method holds. Our analysis sheds new light on the choice of the weighting matrix and covers both weakly and strongly identified DSGE model parameters. We also show that under our assumptions special care is needed to ensure the asymptotic validity of Bayesian methods of inference. A simulation study suggests that the frequentist and Bayesian point and interval estimators we propose are reasonably accurate infinite samples. We also show that using these methods may affect the substantive conclusions in empirical work.
    Keywords: bootstrap; DSGE; impulse response; nonstandard asymptotics; robust inference; structual estimation; VAR; weak identification
    JEL: C32 C52 E30 E50
    Date: 2014–12
  45. By: Clerc, Laurent; Derviz, Alexis; Mendicino, Caterina; Moyen, Stéphane; Nikolov, Kalin; Stracca, Livio; Suarez, Javier; Vardoulakis, Alexandros
    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: Default risk; Financial frictions; Macroprudential policy
    JEL: E3 E44 G01 G21
    Date: 2014–12
  46. By: De Giorgi, Giacomo; Gambetti, Luca
    Abstract: This paper sheds new light on the interactions between business cycles and the consumption distribution. We use CEX consumption data and a factor model to characterize the cyclical dynamics of the consumption distribution. We first establish that our approach is able to closely match business cycle fluctuations of consumption from the National Account. We then study the responses of the consumption distribution to TFP shocks and economic policy uncertainty shocks. Importantly, we find that the responses of the right tail of the consumption distribution, mostly comprising higher educated individuals, to shocks that drive cyclical fluctuations are larger and quicker than in other parts of the distribution. We note that the cost of business cycle fluctuations is larger than the one found using aggregate consumption, and that the shocks we analyze reduce consumption inequality on impact.
    Keywords: consumption; inequality
    JEL: C3 D12 E21 E63
    Date: 2014–12
  47. By: Luis A Gil-Alana (University of Navarra, Faculty of Economics and NCID, Edificio Amigos, E-31080 Pamplona, Spain); Christophe André (Economics Department, Organisation for Economic Co-operation and Development (OECD), Paris, France); Rangan Gupta (Department of Economics, University of Pretoria); Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan); Omid Ranjbar (Ministry of Industry, Mine and Trade, Tehran, Iran)
    Abstract: The Feldstein-Horioka (FH) puzzle, that is the strong correlation between saving and investment in a world where obstacles to capital mobility are limited, has been studied extensively since it was exposed in 1980. Even though the theoretical and empirical literature has examined many of its potential causes, the puzzle persists. This paper aims at shedding further light on the issue by investigating the relationship between saving and investment in South Africa since 1946 using fractional integration and cointegration techniques to account for high persistence in the series. We find evidence of fractional cointegration between saving and investment, indicating some degree of persistence in the gap between the two variables. We also find a structural break in saving and investment ratios to GDP around 1980, which roughly coincides with the start of a financial deregulation process in South Africa. While fractional cointegration holds before the break, it does not thereafter. In other words, while the FH puzzle is observed before the start of financial deregulation, it subsequently disappears. This suggests financial deregulation may have loosened the link between saving and investment.
    Keywords: Feldstein-Horioka Puzzle, Long-Memory, Fractional Cointegration, South Africa
    JEL: C22 C32 E21 E22 F41
    Date: 2015–01
  48. By: Amjad, Rashid; Din, Musleh ud
    Abstract: This paper investigates why Pakistan was not able to weather and quickly recover from the global financial crisis compared to other South Asian countries and the larger Asia-Pacific region. The paper argues that in fact Pakistan's macroeconomic difficulties preceded the crisis due to the spike in global food and fuel prices with its current account and fiscal deficits rising sharply - a situation further exacerbated due to the global economic slowdown. In spite of contractionary macroeconomic policies under an IMF programme it was not able to breakout of low economic growth and double digit inflation. A three pronged strategy is suggested to move the economy out of this maelstrom with a focus on prudent macroeconomic management, structural reforms and growth - enhancing public investments.
    Keywords: economic impact of global financial crisis: stagflation; prudent macroeconomic management; structural reforms
    JEL: E32
    Date: 2014
  49. By: Alberto Martin; Jaume Ventura
    Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal.
    Keywords: financial globalization, international capital flows, exchange rates, interest rates, asset bubbles, capital controls
    JEL: E32 E44 O40
    Date: 2015–01
  50. By: Grüning, Patrick
    Abstract: This paper studies a two-country production economy with complete and frictionless financial markets and international trade of final goods in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists ("incumbents") and potential new firms ("entrants") compete in developing patents domestically. I find that this induces negative spillover in consumption, i.e. home country's consumption decreases in response to positive productivity shocks in the foreign country. Second, there is positive spillover in R&D expenditures, i.e. home country's R&D expenditures increase in response to positive foreign productivity shocks, which is consistent with empirical evidence on international technology diffusion. Furthermore, the stylized fact in international macroeconomics that the cross-country correlation of consumption growth is significantly lower than the one of output growth is explained by the model. Fourth, net exports are negatively correlated with output as in the data. Fifth, the model matches the high comovement of the risk-free rates and stock returns across countries. Finally, the model produces a positive value premium.
    Keywords: Innovation,Product Market Competition,Endogenous Growth,Long-run Risk,International Finance
    JEL: E22 F31 G12 O30 O41
    Date: 2015
  51. By: Cesa-Bianchi, Ambrogio (Bank of England); Cespedes, Luis (Universidad Adolfo Ibanez); Rebucci, Alessandro (Johns Hopkins University Carey Business School)
    Abstract: In this paper we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronised across countries than in advanced economies. We also find that they correlate with capital flows more closely than in advanced economies. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank-to-bank cross-border credit flows and by using the external instrumental variable approach introduced by Stock and Watson and Mertens and Ravn. We find that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing; in emerging markets, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.
    Keywords: Capital flows; emerging markets; global liquidity; house prices; external instrumental variables
    JEL: C32 E44 F44
    Date: 2015–01–23
  52. By: Juliana Ávila Vélez; Álvaro José Pinzón Giraldo
    Abstract: Se identifican los ciclos económicos de Brasil, Chile, Colombia, Ecuador, México, Perú y Venezuela, utilizando el criterio del CEPR y el algoritmo Bry-Boschan (1971), aplicado al Producto Interno Bruto (PIB) y al Índice de Producción Industrial (IPI), respectivamente. Se mide el grado de sincronización del ciclo de dichas economías por medio del indicador de Harding y Pagan (2006) y de las correlaciones cruzadas de los componentes transitorios de las variables. El periodo muestral inicia en 1980 y termina en 2014. Se encuentra que el ciclo económico promedio según el PIB tiene una duración de 4 años, mientras que según el IPI su duración es de 4,4 años. Los ciclos identificados con los dos indicadores son asimétricos. Con los dos indicadores se identifican cuatro grandes crisis recientes que afectaron a Latinoamérica: 1982, 1998, 2000 y 2008. Sin embargo, al analizar las combinaciones de pares de países por separado, no se encuentra una alta sincronización entre ellos, con unas pocas excepciones como Chile-México y Chile-Colombia.
    Keywords: Ciclos económicos, concordancia, cronología, sincronización.
    JEL: E23 E32 F15 F50
    Date: 2015–01–23
  53. By: Schmitt, Noemi; Westerhoff, Frank
    Abstract: Within the seminal cobweb model of Brock and Hommes, firms adapt their price expectations by a profit-based switching behavior between free näive expectations and costly rational expectations. Brock and Hommes demonstrate that fixed-point dynamics may turn into increasingly complex dynamics as the firms' intensity of choice increases. We show that policy-makers are able to manage rational routes to randomness by adjusting profit taxes. As suggested by our analytical and numerical analysis, policy-makers should increase (decrease) profit taxes if destabilizing expectations generate higher (lower) profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability. Our results are not restricted to cobweb models: a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets.
    Keywords: cobweb models,discrete choice approach,intensity of choice,profit taxes,stability analysis,policy implications
    JEL: D84 E30 Q11
    Date: 2015
  54. By: De Koning, Kees
    Abstract: The U.S. housing market crash in 2007-2008 was not caused overnight by an over-supply of new homes that could not be sold. It was caused by the new money flows into mortgages ever since 1998. What changed in 1998 was that mortgage funds were not only used for building new homes at a price in line with CPI inflation, but the volume of such funds injected allowed the housing stock to appreciate in price over and above the CPI inflation level. In 1998 still only 16.3% of funds provided were used to increase the housing stock prices over CPI inflation, while 83.7% was used to build new homes. By 2004 and 2006 the percentage allocated to housing stock prices had grown to 68% of all new mortgage funds injected in the housing market. Such poor allocation of funds had two effects. It lowered the efficiency of money used as economic growth only occurs as a consequence of economic activities: the building of new homes. Secondly for those households that needed to borrow funds to enter the housing market, the inflated house prices required a higher and higher percentage of incomes to be allocated for an acquisition, leaving less disposable income for other consumption. Median incomes generally only grow at or slightly above CPI levels. Banks, Fannie Mae and Freddy Mac showed no restraint in volume control, while the fragmented banking supervision authorities also did not see the need to interfere to manage the volume of lending. No single individual household could possibly control the volume of such lending. In 2007 the bubble burst when the liquidity for mortgage-backed securities dried up. The consequences were dramatic. Overfunding turned into underfunding. Over the period 2006-2013 22.1 million households faced foreclosure proceedings over their home loans. This equals more than one out of every six U.S. households. 5.8 million homes were repossessed, affecting one out of every 8-mortgage holder. Over the period January 2008- October 2009 7.8 million Americans lost their jobs. In 2013 the real median household income was 8% lower than the 2007 pre-recession level of $56,435. Notwithstanding the lowering of interest rates to historically its lowest level, individual households reduced their mortgage portfolio by $1.2 trillion over the period 2008-third quarter 2014. The U.S. government (Federal, State and local) saw its tax revenues drop by $1.5 trillion or 29% over the period 2007-2009. The main action of the Federal Reserve apart from lowering interest rates was its program of Quantitative Easing. At the end of 2014 it had $2.461 trillion of U.S. government debt on its books and another $1.737 trillion in mortgage bonds. Prevention through volume control measures on the lending side would have been the most effective method to avoid the recession and all its consequences. However this did not happen. The experience of lower interest rates combined with QE can only be described as having a very slow impact. The reason was and is that individual households were hit where it hurts most: in their disposable income levels. A different type of QE could have been applied, which directly would have addressed such income levels. It is based on paying out a fixed amount per household by the Fed over a period of two to three years and repayment would be made out of future tax revenues over a ten year period. In this paper this method has been called: the Economic Growth Incentive Method (EGIM). The poorer households would have benefitted the most from such measure. QE in its current form has benefitted the banks and the wealthier individual households.
    Keywords: Quantitative Easing, U.S. housing market, housing stock inflation,economic growth, individual households, mortgage borrowing, Fannie Mae, Freddy Mac, banking supervision, over and underfunding, foreclosure, unemployment, government tax revenues, economic growth incentive method.
    JEL: E21 E24 E3 E32 E5 E52 E58 G21 G28
    Date: 2015–02–07
  55. By: Clemens Bonner; Paul Hilbers
    Abstract: The purpose of this paper is to assess the history of global liquidity regulation until the revised Basel III proposals in 2013 and to analyze the interaction of capital regulation and banks' liquidity buffers. Our analysis suggests that regulating capital is associated with declining liquidity uffers. The interaction of liquidity regulation and monetary policy as well as the view that regulating capital also addresses liquidity risks were important factors hampering harmonized liquidity regulation. It appears that crisis-related supervisory momentum is an important factor behind most agreements on regulatory harmonization. In line with that, the drying up of funding and the subsequent liquidity problems during the 2007-08 financial crisis played a large role in the development of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
    Keywords: Regulation; Policy; Liquidity; Banks
    JEL: G18 G21 E42
    Date: 2015–01
  56. By: Lukas Vogel
    Abstract: This paper uses the European Commission’s QUEST macroeconomic model to analyse the impact of structural reforms on economic activity in an environment in which the zero bound on monetary policy rates is temporarily binding. The simulations suggest that although such reforms can have a negative impact on economic activity in the short run, these effects tend to be small and short-lived when a variety of transmission channels are considered. The results also do not support the idea that postponing structural reforms improves economic conditions, in such and environment.
    JEL: E20 E30 E60 F40
    Date: 2014–11
  57. By: Alessandro Girardi; Andreas Reuter; Christian Gayer
    Abstract: This paper evaluates the impact of new releases of financial, real activity and survey data on the nowcasting of euro area GDP growth. We show that financial data are only essential for improving nowcasting in the first two months of a nowcast quarter. This contrasts with survey and real data, which are indispensable components throughout the entire nowcasting exercise. When treating variables as if they were all published at the same time and without any time lag, financial series lose all their significance, while survey data remain important. This evidence suggests that survey data offer more than just timeliness for the purpose of nowcasting GDP growth. The latter holds true for financial data only when restricting the analysis to the 2008-09 financial crisis.
    JEL: C22 C53 E37
    Date: 2014–12
  58. By: Janos Varga; Jan in 't Veld
    Abstract: This paper presents a quantitative model-based assessment of the potential impact of structural reforms in the EU Member States. By comparing structural indicators of labour and product markets, a gap is defined for each indicator relative to the 3 best performers. Scenarios are then simulated in which half the gap vis-à-vis best performance is closed, to avoid setting unrealistic and/or unattainable targets. The simulations show large potential gains in output and employment, raising EU GDP by 3 % after five years and 6% after ten years. While competitiveness gains are smaller under simultaneous reforms, higher demand effects help to support growth in trading partners.
    JEL: C53 E10 F47 O20 O30 O41
    Date: 2014–12
  59. By: Sandy Manrique Parra; Santiago Castillo Acuña
    Abstract: Este artículo busca analizar la relación del poder de compra entre Colombia y Estados Unidos, identificando los efectos e implicaciones de la crisis económica del 2008 sobre la paridad del poder adquisitivo. Revisando estudios aplicados para Colombia y para países europeos, se establece un análisis comparativo entre el periodo previo y el periodo posterior a la crisis, empleando herramientas econométricas para el análisis de series de tiempo como las pruebas de raíces unitarias y las pruebas de cointegración, las cuales permiten establecer una visión acerca de la relación entre los niveles de precios de ambas economías y la tasa de cambio nominal en común. Se encuentra que la paridad del poder adquisitivo solo se cumple en el periodo posterior a la crisis, concluyendo que las políticas que regulan el mercado financiero y el mercado monetario permiten alcanzar estabilidad en los precios.
    JEL: C22 E31 E44 F31
    Date: 2014–12–19
  60. By: Luis E. Arango; Lina Cardona-Sosa
    Abstract: This paper studies the behavior of the survival function of accruing loans during the slowdown experienced by the Colombian economy between January-2008 and March-2009 as documented by Alfonso et al. (2013). We use a dataset with information of different vintage loans between July-2007 and March-2014 from a private credit union that operates in Medellín, the second largest city in Colombia, and its metropolitan area. The analysis suggests that the survival function of accruing loans reduces before and during the slowdown event: if the probability of survival at month ten of a consumer credit vintage is below the 97.5% and below 95% at month fifteen, the probability of a future slowdown is not negligible.
    Keywords: accruing loans, nonperforming loans, survival function, economic slowdown
    JEL: C41 E32 E44 G21
    Date: 2015–01–14
  61. By: Theodore R. Breton
    Abstract: Development accounting depends on two simplifying assumptions, that economies can be represented by a common aggregate production function and that aggregate factors of production are paid their social marginal products. An aggregate production function can explain income across countries, but the mathematics of the aggregate production function and the empirical evidence both indicate that aggregate factors are paid a small fraction of their social marginal products. As a consequence, development accounting underestimates the income differences due to human capital and overestimates the differences due to TFP. This error cannot be corrected because human capital’s social marginal product is not observable.
    Keywords: Development Accounting, Human Capital, External Effects
    JEL: E13 O11 O
    Date: 2014–08–20
  62. By: Jesus Crespo Cuaresma; Peter Huber; Doris A. Oberdabernig; Anna Raggl
    Abstract: We use new migration modelling and projection techniques in order to quantify the effect of migration in the context of ageing societies in Europe over the forthcoming decades. Using new empirical results, data and projections of migration flows developed in the framework of the WWWforEUROPE project, we inform the policy discussion concerning the role of demographic change, inequality dynamics, labour market integration of migrants and the sustainability of public finances in the continent.
    Keywords: Academic research, Challenges for welfare system, Demographic change, Economic growth path, European economic policy, Full employment growth path, Labour markets, Migration, Policy options, Sustainable growth, Welfare state
    JEL: E24 F22 H52 J62
    Date: 2015–01
  63. By: Wilfried Altzinger; Jesus Crespo Cuaresma; Petra Sauer; Alyssa Schneebaum; Bernhard Rumplmaier
    Abstract: The persistence of socioeconomic outcomes across generations acts as a barrier to a society’s ability to exploit its resources efficiently. In order to derive policy measures which aim at accelerating intergenerational mobility, we review the existent body of research on the causes, effects and the measurement of intergenerational mobility. We also present recent empirical works which study intergenerational mobility in Europe, around the Globe, and its relevance for economic growth. We recommend four policy measures to reduce the negative impacts of intergenerational persistence in economic outcomes: universal and high-quality child care and pre-school programs; later school tracking and increased access to vocational training to reduce skill mismatch and facilitate technological development; integration programs for migrants; and simultaneous investment in schooling and later social security programs.
    Keywords: Academic research, Ageing, Demographic change, European economic policy, Full employment growth path, Labour markets, Migration, Policy options
    JEL: E24 F22 H52 J62
    Date: 2015–01
  64. By: Gelain, Paolo (Norges Bank); Lansing, Kevin J. (Federal Reserve Bank of San Francisco); Natvik, Gisele J. (BI Norwegian Business School)
    Abstract: We use a simple quantitative asset pricing model to “reverse-engineer” the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. Our results lend support to the view that the U.S. housing boom was a classic credit-fueled bubble involving over-optimistic projections about future housing values, relaxed lending standards, and ineffective mortgage regulation.
    Keywords: Housing bubbles; Mortgage debt; Borrowing constraints; Lending standards; macroprudential policy.
    JEL: D84 E32 E44 G12 O40 R31
    Date: 2015–01
  65. By: Alfonso Irarrazabal (BI Norwegian Business School); Juan Carlos Parra-Alvarez (Aarhus University and CREATES)
    Abstract: This paper revisits the fit of disaster risk models where a representative agent has recursive preferences and the probability of a macroeconomic disaster changes over time. We calibrate the model as in Wachter (2013) and perform two sets of tests to assess the empirical performance of the model in long run simulations. The model is solved using a two step projection-based method that allows us to find the equilibrium consumption-wealth ratio and dividend-yield for different values of the intertemporal elasticity of substitution. By fixing the elasticity of substitution to one, the first experiment indicates that the overall fit of the model is adequate. However, we find that the amount of aggregate stock market volatility that the model can generate is sensible to the method used to solve the model. We also find that the model generates near unit root interest rates and a puzzling ranking of volatilities between the risk free rate and the expected return on government bills. We later solve the model for values of the elasticity of substitution that differ from one. This second experiment shows that while a higher elasticity of substitution helps to increase the aggregate stock market volatility and hence to reduce the Sharpe Ratio, a lower elasticity of substitution generates a more reasonable level for the equity risk premium and for the volatility of the government bond returns without compromising the ability of the price-dividend ratio to predict excess returns.
    Keywords: Rare events, disaster risk, recursive preferences, intertemporal elasticity of substitution, projection methods, asset pricing.
    JEL: D51 E44 G12
    Date: 2015–02–02
  66. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Rui M. Pereira (Department of Economics, The College of William and Mary)
    Abstract: In this paper we use a vector autoregressive approach to analyze the effects of infrastructure investment on economic performance using a newly developed data set for Portugal. We find that investments in other transportation infrastructures – railroads, ports and airports – and social infrastructures – health and education infrastructures, have the largest effects with long-term multipliers of 14.99 and 8.46, respectively. Investments in road transportation – roads and freeways - and on utilities – electricity, gas, water, refineries, and telecommunications – induce much smaller effects with multipliers of 2.75 and 3.52, respectively. We also show that for other transportation and social infrastructure investments, the short term effects are small relative to the accumulated effects and yet, in absolute terms, they exceed the long-term effects for road transportation and utilities. Finally, we show that investments in other infrastructures and in social infrastructures will pay for themselves in the form of long term enhanced tax revenues under rather reasonable effective tax rates. Overall, we have clearly identified other transportation infrastructures and social infrastructures as the key target areas for policy intervention in this context.
    Keywords: Infrastructure Investment, Multipliers, Economic Performance, Budgetary Effects, VAR, Portugal.
    JEL: C32 E22 E62 H54 H60 O47 O52
    Date: 2015–02–05
  67. By: Celio Feltrin (Sao Paulo School of Economics - FGV); Bernardo Guimaraes (Sao Paulo School of Economics - FGV; Centre for Macroeconomics (CFM))
    Abstract: State-dependent and time-dependent price setting models yield distinct implications for how frequency and magnitude of price changes react to shocks. This note studies pricing behavior in Brazil following the large devaluation of the Brazilian Real in 1999 to distinguish between models. The results are consistent with state-dependent pricing.
    Keywords: state-dependent pricing, time-dependent pricing, currency devaluation, frequency of price changes
    JEL: E31 E32
    Date: 2015–01
  68. By: Erik Eyster; Kristóf Madarász; Pascal Michaillat
    Abstract: This paper explains the nonneutrality of money from two assumptions: (1) consumers dislike paying prices that exceed some fair markup on firms’ marginal costs; and (2) consumers under infer marginal costs from available information. After an increase in money supply, consumers underappreciate the increase in nominal marginal costs and hence partially misattribute higher prices to higher markups; they perceive transactions as less fair, which increases the price elasticity of their demand for goods; firms respond by reducing markups; in equilibrium, output increases. By raising perceived markups, increased money supply inflicts a psychological cost on consumers that can offset the benefit of increased output.
    Keywords: nonneutrality of money; fairness; cursedness; markups
    JEL: E10 E3 E31 E40
    Date: 2015–02
  69. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Krause, Michael U. (Universityof Cologne)
    Abstract: We present and discuss the simple search and matching model of the labor market against the background of developments in modern macroeconomics. We derive a simple representation of the model in a general equilibrium context and how the model can be used to analyze various policy issues in labor markets and monetary policy.
    JEL: E24 E32 J23 J64
    Date: 2014–12–15
  70. By: Guvenen, Fatih; Karahan, Fatih (Federal Reserve Bank of New York); Ozkan, Serdar; Song, Jae (Federal Reserve Bank of New York)
    Abstract: We study the evolution of individual labor earnings over the life cycle, using a large panel data set of earnings histories drawn from U.S. administrative records. Using fully nonparametric methods, our analysis reaches two broad conclusions. First, earnings shocks display substantial deviations from lognormality—the standard assumption in the literature on incomplete markets. In particular, earnings shocks display strong negative skewness and extremely high kurtosis—as high as 30 compared with 3 for a Gaussian distribution. The high kurtosis implies that, in a given year, most individuals experience very small earnings shocks, and a small but non-negligible number experience very large shocks. Second, these statistical properties vary significantly both over the life cycle and with the earnings level of individuals. We also estimate impulse response functions of earnings shocks and find important asymmetries: Positive shocks to high-income individuals are quite transitory, whereas negative shocks are very persistent; the opposite is true for low-income individuals. Finally, we use these rich sets of moments to estimate econometric processes with increasing generality to capture these salient features of earnings dynamics.
    Keywords: earnings dynamics; life-cycle earnings risk; nonparametric estimation; kurtosis; skewness; non-Gaussian shocks; normal mixture
    JEL: E24 J24 J31
    Date: 2015–02–01
  71. By: Crucini, Mario J. (Vanderbilt University); Shintani, Mototsugu (Vanderbilt University); Tsuruga, Takayuki (Kyoto University and CAMA)
    Abstract: Using US micro price data at the city level, we provide evidence that both the volatility and the persistence of deviations from the law of one price (LOP) are rising in the distance between US cities. A standard, two-city, stochastic equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance. To account for the latter fact, we augment the standard model with noisy signals about the state of nominal aggregate demand that are asymmetric across cities. We further show that the main predictions of the model continue to hold even if we allow for the interaction of imperfect information, sticky prices, and multiple cities.
    JEL: D40 E31 F31
    Date: 2014–11–01
  72. By: Chen, Kan (International Monetary Fund); Crucini, Mario J. (Vanderbilt University)
    Abstract: Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross- section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.
    JEL: E32 F41
    Date: 2014–11–01
  73. By: Georgiadis, Georgios (European Central Bank); Mehl, Arnaud (European Central Bank)
    Abstract: We investigate whether the classic Mundell-Flemming "trilemma" has morphed into a "dilemma" due to financial globalisation. According to the dilemma hypothesis, global financial cycles determine domestic financial conditions regardless of an economy's exchange rate regime and monetary policy autonomy is possible only if capital mobility is restricted. We find that global financial cycles indeed reduce domestic monetary policy effectiveness in more financially integrated economies. However, we also find that another salient feature of financial globalisation has the opposite effect and amplifies monetary policy effectiveness. Economies increasingly net long in foreign currency experience larger valuation effects on their external balance sheets in response to exchange rate movements triggered by monetary policy impluses. Overall, we find that the net effect of financial globalisation since the 1990s has been to amplify monetary policy effectiveness in the typical advanced and emerging market economy. Specifically, our results suggest that the output effect of a tightening in monetary policy has been stronger by 40% due to financial globalisation. Insofar as valuation effects can only play out if an economy's exchange rate is flexible, the choice of the exchange rate regime remains critical for monetary policy autonomy under capital mobility and in the presence of global financial cycles. Thus, our results suggest that the classic trilemma remains valid.
    JEL: E52 F30 F41
    Date: 2015–01–01
  74. By: Choi, Chi-Young (University of Texas at Arlington); Choi, Horag (Monash University)
    Abstract: This paper empirically investigates and theoretically derives the implications of two frictions, market friction and nominal rigidity, on the dynamic properties of intra-national relative prices, with an emphasis on the interaction of the two frictions. By analyzing a panel of retail prices of 45 products for 48 cities in the U.S., we make two major arguments. First, the effect of each type of friction on the dynamics of intercity price gaps is quite different. While market frictions arising from physical distance and transportation costs contribute significantly to volatile and persistent movements of intercity price disparities, nominal rigidity is associated with higher persistence, but not with a greater volatility of the intercity price disparity. This empirical evidence is different from what is predicted by standard theoretical models based on price stickiness. Second, the strength of the marginal effect of a market friction hinges on the extent of nominal rigidity, in a counteracting manner. The marginal effect of a market friction dwindles as the extent of price stickiness increases. We provide an alternative theoretical explanation for this finding by extending the state- dependent pricing(SDP)model of Dotsey et al.(1999) and show that our two-city model with nominal rigidity andd market frictions can successfully explain the salient features of the dynamic behavior of intercity price differences.
    JEL: E31 F15 L16 R12
    Date: 2014–12–01
  75. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Martin, Fernando M. (Federal Reserve Bank of St. Louis); Zhang, Shengxing (London School of Economics)
    Abstract: Rehypothecation refers to the practice of re-using (selling or pledging as collateral) an asset that has already been pledged as collateral for a loan. We develop a dynamic general equilibrium monetary model where an “asset shortage” motivates the rehypothecation of assets. We find that in high inflation-high interest rate economies, rehypothecation improves economic welfare, but that there is generally too much of it. We find that regulatory constraints that limit the practice can improve economic welfare.
    Keywords: rehypothecation; money; collateral
    JEL: E4 E5
    Date: 2014–12–13
  76. By: Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Eyigungor, Burcu (Federal Reserve Bank of Philadelphia)
    Abstract: A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority" or “first-in-time" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default.
    Keywords: Debt dilution; Seniority; Sovereign default
    JEL: E44 F34 G12 G15
    Date: 2015–01–31
  77. By: Lenno Uusküla
    Abstract: This paper examines the role of firm turnover in explaining inflation dynamics. I augment a New-Keynesian DSGE model with endogenous entry and exogenous stochastic exit and estimate with the Bayesian full information approach for the US economy. Results show that shocks to the entry cost explain more than half of the inflation variance at the business cycle frequencies. When it is cheap to create firms, the number of new firms goes up and inflation increases as labour intensive creation of firms pushes up the demand for labour. Only gradually, when the number of firms is high and the number of new firms goes down again, does inflation fall, as stressed by the standard mechanism for an increasing number of firms
    Keywords: inflation, New-Keynesian Phillips curve, firm turnover
    JEL: E32 C11 E23
    Date: 2015–02–03
  78. By: Cristina Terra; Hyunjoo Ryou (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper extends Dornbusch's overshooting model by proposing a generalized interest parity condition (GIP), which captures a sluggish adjustment on the asset market. The exchange rate model under the GIP is able to reproduce the delayed overshooting and the hump-shaped response to monetary shocks of both nominal and real exchange rates. Fur- thermore, we present empirical results for OECD member countries which fit the theoretical predictions.
    Keywords: Exchange rates; Interest rate parity; Overshooting; Purchasing power parity puzzle; Monetary policy
    JEL: E52 F31 F41 F47
    Date: 2015
  79. By: Gabrieli, Silvia; Georg, Co-Pierre
    Abstract: We study the liquidity allocation among European banks around the Lehman 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 in the network structure 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
  80. By: Gieck, Jana
    Abstract: The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument.
    Keywords: Unconventional Monetary Policy,Quantitative Easing,Asset Swaps,Open Economy DSGE,Currency Wars,Policy Coordination
    JEL: E02 E44 E52 G21 G28
    Date: 2014
  81. By: Flodberg, Caroline (National Institute of Economic Research); Österholm, Pär (National Institute of Economic Research)
    Abstract: In this paper, we study revisions of Swedish national accounts data. Three aspects of the revisions are considered: volatility, unbiasedness and forecast efficiency. Our results indicate that the properties of the revisions are more problematic for the production side than for the expenditure side. The high volatility of the revisions on the production side indicates that it, based on the initial data release, generally is difficult to make clear cut statements concerning production in different industries within the business sector; it is also likely to make forecasting more difficult. Concerning unbiasedness, there appears to be shortcomings for a number of variables, including GDP; this finding implies that it could be possible to improve the production of the Swedish national accounts data.
    Keywords: Real-time data; Volatility; Unbiasedness; Forecast efficiency
    JEL: E01
    Date: 2015–02–04
  82. By: Bonthuis, Boele (University of Amsterdam & Deutsche Bundesbank); Jarvis, Valerie (European Central Bank); Vanhala, Juuso (Bank of Finland Research)
    Abstract: This paper analyses euro area Beveridge curves at the euro area aggregate and country level over the past 25 years. Using an autoregressive distributed lag model we find a significant outward shift in the euro area Beveridge curve since the onset of the crisis, but considerable heterogeneity at country level. We test for factors underlying these developments using the local projections method of Jordà (2005). Skill mismatch, high shares of workers in the construction sector, as well as high pre-crisis financial slack and home ownership rates appear strong determinants of outward shifts in Beveridge curves in response to a negative shock. Higher female participation rates mitigate these effects.
    Keywords: Beveridge curve; crisis; mismatch; unemployment; labour shortages; vacancies
    JEL: E24 E32 J62 J63
    Date: 2015–02–03
  83. By: Stan, Darius
    Abstract: For much of human history, most people have been deprived of liberty without economic and investment opportunities being driven by poor living. Today, however, say that living in the most prosperous in history. In trying to remove poverty, disease, ignorance around the world, given the fact that in large part, the restriction on economic freedom is an important obstacle in trying to define an array in this analysis of the economic potential enlightening in the economic freedom in Romania. In 2014, the principles of economic freedom were again measured and collected in the Index of Economic Freedom, the source directories published by The Wall Street Journal and The Heritage Foundation. We also sought to highlight in an easy to use analysis, we can easily track progress in the development of Romania for economic openness, prosperity, opportunity. The paper will reveal the elementary analysis of the 10 freedoms - from property rights to entrepreneurship - in a report than 186 countries.
    Keywords: economic freedom indicators, opportunity, poverty, investment
    JEL: E22 E52 N20 P46 R0
    Date: 2014–11–20
  84. By: Gunaratna, Thakshila
    Abstract: This research is focused on the effect of varying output gap target bounds on monetary policy. Here, a mathematical theory known as the ‘Viability Theory’ is employed to approach this problem in the context of satisficing policies, as discussed by Nobel Prize winning Herbert Simon, [see Simon (1955)]. A closed economy’s monetary policy problem of controlling inflation is considered to be this sort of satisficing policy problem. The viability theory is used to form viability kernels (using VIKAASA), which are a collection of points from which evolutions can start and remain within a certain constraint set K given some restricted controls, [see Krawczyk and Kim(2009)]. Using VIKAASA one can build such kernels for various exogenously defined constraint sets K and policy instruments. This study contributes in filling a gap of knowledge about what the viable economic states are if the output gap is targeted. The main results of this research show that, when smaller than historically acceptable output gaps are targeted, the central banks should avoid high level inflation at extreme positive output gaps, while at lower output gap limits very small inflation should also be avoided. The former prescription should be realised by having higher level interest rates and the latter by having lower level interest rates. Early interest rates adjustments are always recommended for central banks to avoid extreme situations.
    Keywords: Viability theory; Viability kernels; Monetary policy problem
    JEL: C63 E52 E58
    Date: 2014–10–17
  85. By: Kaya, Ayşe; Şen, Hüseyin
    Abstract: The purpose of this paper is to analyze empirically the short- and long-run effects of tax shocks on private consumption expenditure on component basis in Turkey. To do so, first, we decomposed private consumption expenditure into four major sub-categories, including food, education, and transportation, among others. And then, we employed a Structural VAR (SVAR) model which was calibrated to quarterly data set for the period 2003:Q1-2013:Q3. Specifically, our empirical findings show that the effects of tax shocks on the components of private consumption expenditure differ in the short- and long-run. In the short-run, all the taxes which we considered have a significant effect on the components of private consumption expenditure, whereas in the long-run only two taxes the VAT and the personal income tax– affect it. However, it is important to highlight that the components of private consumption expenditure are much more affected by the VAT in the both short- and long-run. In brief, the findings reveal that the effects of tax shocks on private consumption expenditure shows difference, changing according to sorts of taxes, components of the expenditure, and the length of period.
    Keywords: Tax Shocks, VAT, Special Consumption Tax, Personal Income Tax, Private Consumption Expenditure, Fiscal Policy, Turkey.
    JEL: E21 E62 H20 H30
    Date: 2015–02–03
  86. By: Leonardo Villar; Felipe Castro; David Forero; Juan Mauricio Ramírez
    Abstract: En Colombia, el sector de hidrocarburos ha mostrado un crecimiento importante en los últimos años convirtiéndose en una actividad determinante para la economía nacional. Este documento cuantifica la contribución económica del sector en los últimos diez años y realiza un análisis prospectivo de su impacto a partir de diferentes escenarios de producción de petróleo y gas. Los efectos macroeconómicos del sector de hidrocarburos se estiman utilizando el Modelo de Equilibrio General Computable de Fedesarrollo. Además se realiza un análisis de los impactos del sector en términos de encadenamientos productivos y la distribución de regalías. Por último, el documento plantea una serie de recomendaciones de política orientadas a fortalecer el sector y mitigar los efectos ante una eventual caida en la producción.
    Keywords: Hidrocarburos, Modelos de Equilibrio General Computable, Encadenamientos Productivos, RegalíasColombia
    JEL: C67 C68 L71 E62
    Date: 2014–12–30
  87. By: Tomas Adam; Miroslav Plasil
    Abstract: This paper investigates empirically to what extent financial variables can explain macroeconomic developments in the Czech Republic and how the results are sensitive to some (usually reasonable or routinely made) modeling choices. To this end, the dynamic model averaging/selection framework is applied to a universe of (potentially large) time-varying parameter VAR models, which allows one to assess the explanatory power of financial variables at each point in time. Based on a set of 27 competing models and an extensive ensemble of alternative specifications of those models, we find that financial variables were particularly relevant in explaining developments in the lead-up to and during economic downturns. By contrast, in tranquil times, models containing only traditional macroeconomic variables explained macroeconomic dynamics reasonably well. Within the broad set of financial variables considered, credit to the private sector, bank profitability, and leverage seem to be among the most relevant indicators.
    Keywords: Dynamic model averaging, macro-financial linkages, vector autoregression
    JEL: C32 C53 E44
    Date: 2014–12
  88. By: Pranjul Bhandari; Jeffrey A. Frankel
    Abstract: The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.
    JEL: E5 F41
    Date: 2015–01
  89. By: Andrea Bastianin (University of Milan and FEEM); Matteo Manera (University of Milan-Bicocca and FEEM)
    Abstract: We study the impact of oil price shocks on U.S. stock market volatility. We derive three different structural oil shock variables (i.e. aggregate demand, oil-supply, and oil-demand shocks) and relate them to stock market volatility, using bivariate structural VAR models, one for each oil price shock. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by sudden changes in aggregate and oil-specific demand, while the impact of supply-side shocks is negligible.
    Keywords: Volatility, Oil Shocks, Oil Price, Stock Prices, Structural VAR
    JEL: C32 C58 E44 Q41 Q43
    Date: 2015–01
  90. By: Kiminori Matsuyama (Northwestern University, USA); Iryna Sushko (Institute of Mathematics, National Academy of Science of Ukraine); Laura Gardini
    Abstract: We propose and analyze a two-country model of endogenous innovation cycles. In autarky, innovation fluctuations in the two countries are decoupled. As the trade costs fall and intra-industry trade rises, they become synchronized. This is because globalization leads to the alignment of innovation incentives across firms based in different countries, as they operate in the increasingly global (hence common) market environment. Furthermore, synchronization occurs faster (i.e., with a smaller reduction in trade costs) when the country sizes are more unequal, and it is the larger country that dictates the tempo of global innovation cycles with the smaller country adjusting its rhythm to the rhythm of the larger country. These results suggest that adding endogenous sources of productivity fluctuations might help improve our understanding of why countries that trade more with each other have more synchronized business cycles.
    Keywords: Endogenous innovation cycles and productivity co-movements; Globalization, Home market effect; Synchronized vs. Asynchronized cycles; Synchronization of coupled oscillators; Basins of attraction; Two-dimensional, piecewise smooth, noninvertible maps
    JEL: C61 E32 F12 F44 O31
    Date: 2015–02
  91. By: Hans-Michael Trautwein (University of Oldenburg - International Economics & ZenTra)
    Abstract: Despite the transnational character of the Great Depression of the years 1929-33, there are few works in the inter-war literature that deal in depth with the propagation of business cycles across national borders and systemic risks of depression in the world economy. Two notable exceptions are Hans Neisser’s monograph on Some International Aspects of the Business Cycle (1936) and chapter 12 in Gottfried Haberler’s Prosperity and Depression (1937), which carries the heading “International Aspects of Business Cycles”. Both works differ substantially from each other and from the modern way of thinking about international business cycles in Open Economy Macroeconomics. This paper argues that Neisser’s and Haberler’s approaches provide more straightforward routes to capturing some of the transnational aspects of the recent Great Recession (of 2008/09) than the modern standard approach. At the first stage, the two older approaches are presented and compared with each other. At the second stage, they are contrasted with the current state of open-economy macroeconomics, as represented by Uribe & Schmitt-Grohé (2014), a textbook in the making that puts international macro in a business cycle framework. Since Haberler’s account accentuates the role of transport costs, imperfections of capital markets and monetary policies, it can be used as a catalogue of criteria for checking what modern attempts to connect international trade, international finance and economic growth have got (back) in sight. More importantly, both Haberler’s and Neisser’s approach also serve to identify what has been lost out of sight.
    Keywords: international business cycles, open economy macroeconomics, Hans Neisser, Gottfried Haberler
    JEL: B22 E32 F41 F44
    Date: 2015–02
  92. By: Cooper, Daniel H. (Federal Reserve Bank of Boston); Wang, J. Christina (Federal Reserve Bank of Boston)
    Abstract: This policy brief examines the impact of student loan debt on individuals' homeownership status and wealth accumulation, employing a rich set of financial and demographic variables that are not available in many of the existing studies that use credit bureau data. It is important to understand whether and, if so, how student loan debt affects households' economic decisions because student loan debt has now surpassed credit card debt to become the second largest amount of household debt outstanding after mortgage debt.
    JEL: E20 E21
    Date: 2014–10–01
  93. By: Barnes, Michelle L. (Federal Reserve Bank of Boston); Olivei, Giovanni P. (Federal Reserve Bank of Boston)
    Abstract: The widely studied Reuters/Michigan Index of Consumer Sentiment is constructed from the answers to five questions from the more comprehensive Reuters/Michigan Surveys of Consumers. Yet little work has been done on what predictive power the information taken from this more thorough compilation of consumer attitudes and expectations may have for forecasting consumption expenditures. The authors construct a limited set of real-time summary measures for 42 questions selected from these broader Surveys corresponding to three broad economic determinants of consumption—income and wealth, prices, and interest rates, and then use regression analysis to evaluate and test the ability of these summary measures to predict future changes in real consumer expenditures, even when controlling for current and future fundamentals. They explain a nontrivial portion of consumption and other real activity forecast errors from professional forecasts. This is consistent with these measures' ability to predict consumption even when conditioning on a broader set of fundamentals as well as professional forecasters' judgmental forecast adjustments.
    JEL: E21 E27 E52 E66
    Date: 2014–10–30
  94. By: Zhao, Bo (Federal Reserve Bank of Boston)
    Abstract: Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, U.S. states have often found themselves exhausting their RDFs and having to raise tax rates or reduce expenditures while still experiencing a downturn. Therefore, how much each state should save in its RDF has become an increasingly important policy question. To address this issue, this paper applies several new methodologies to develop target RDF levels for each U.S. state, based on the estimated short-term revenue component associated with business cycles and also on policymakers' preferences for stable tax rates and expenditures.
    Keywords: rainy day funds; budget stabilization funds; revenue cyclicality
    JEL: E32 E63 H71 H72
    Date: 2014–10–01
  95. By: Kauko, Karlo (Bank of Finland Research)
    Abstract: The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt.
    Keywords: net stable funding ratio; endogenous money; liquidity regulation
    JEL: E51 G21 G28
    Date: 2015–01–26
  96. By: Pang, Ke (BOFIT); Siklos, Pierre L. (BOFIT)
    Abstract: Relying on quarterly data since 1998 we estimate, for China and the U.S., small scale econometric models that economize on the number of variables employed and yet are rich enough to provide useful insights about spillover effects between the two countries under different maintained assumptions about the exogeneity of the macroeconomic relationship between them. We conclude that inflation in China responds to credit shocks. Indeed, the monetary transmission mechanism in China resembles that of the US even if the channels through which monetary policy affects their respective economies differ. We also find that the monetary policy stance of the PBOC was helpful in mitigating the impact of the global financial crisis of 2008-9. Finally, spillovers from the US to China are significant and originate from both through the real and financial sectors of the US economy.
    Keywords: spillovers; monetary policy in China; dynamic factor models; credit
    JEL: C32 E52 E58
    Date: 2015–01–18
  97. By: Stephen B. Kaplan (Department of Economics/Institute for International Economic Policy, George Washington University)
    Abstract: How do economic crisis a§ect national-level policy choices? Are technocratic advisors more likely to enter government during periods of severe economic volatility? If so, how does such governance a§ect economic policymaking and social responsiveness? In this paper, I evaluate the role of technocratic advisors on Latin American reforms. Building on the political psy- chology literature, I argue that collective crisis memories in technocratic communities have a disproportionate inaÌuence on elite-level policymaking. Employing an originally constructed data index, the Index of Economic Advisors, I conduct a large-N cross-national test from 1960-2011 to examine whether economic crises lead to more technocrats serving in presidential cabinets, and Önd that crises often professionalize presidential teams. The statistical results also show that technocratsiÌgovernance approaches are conditioned by the nature of past shocks. An in- aÌationary crisis history makes budget austerity more likely. DeaÌationary spirals have been far less common in Latin America, but comparative case study evidence of Argentina in the early 2000s shows that these shocks often catalyze sustained Öscal expansion. This investigation has signiÖcant implications for the study of democracy and development. Technocratic governance might help provide economic stability following crises, but an enduring political focus on past crises can limit policy aÌexibility and social responsiveness.
    Keywords: Political Economy, Development, Austerity, Latin America, Economic Crises, Political Psychology, Technocrats, Fiscal Policy, Macroeconomic Policy
    JEL: B22 E31 E60 E62 E65 H30 H60 N16 O54 O57

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