nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒02‒16
112 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Cross sectional evidence on the relation between monetary policy, macroeconomic conditions and low-frequency inflation uncertainty By Hartmann, Matthias; Conrad, Christian
  2. Japan’s financial crises and lost decades By Hirakata, Naohisa; Sudo, Nao; Takei, Ikuo; Ueda, Kozo
  3. Bank Risk Taking, Credit Booms and Monetary Policy By Afanasyeva, Elena; Guentner, Jochen
  4. The macroeconomic effects of monetary policy: A new measure for the United Kingdom By Hürtgen, Patrick; Cloyne, James
  5. Dealing with a Liquidity Trap when Government Debt Matters: Optimal Time-Consistent Monetary and Fiscal Policy By Burgert, Matthias; Schmidt, Sebastian
  6. The Long-Run Macroeconomic Impacts of Fuel Subsidies By Michael Plante
  7. Drifts, Volatilities and Impulse Responses Over the Last Century By Wang, Mu-Chun; Amir Ahmadi, Pooyan; Matthes, Christian
  8. News about Aggregate Demand and the Business Cycle By Weder, Mark; Sirbu, Anca; Guo, Jang Ting
  9. Fiscal Devaluation in a Monetary Union By Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
  10. Employment, hours and optimal monetary policy By Dossche, Maarten; Lewis, Vivien; Poilly, Céline
  11. The Greek Economy: Which Way Forward? By Mark Weisbrot; David Rosnick; Stephan Lefebvre
  12. Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB s OMT Program By Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
  13. EU policies addressing current account imbalances in the EMU: An assessment By Dodig, Nina; Herr, Hansjörg
  14. Rational Expectations and the Stability of Balanced Monetary Development By Böhm, Volker
  15. Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
  16. Revisiting the model of credit cycles with good and bad projects By Kiminori Matsuyama; Iryna Sushko; Laura Gardini
  17. Decomposing Beveridge curve dynamics by correlated unobserved components: The impact of labour market reforms in Germany By Klinger, Sabine; Weber, Enzo
  18. The Political Economy of Sovereign Borrowing Explaining the Policy Choices of Highly Indebted Governments By Stephen B. Kaplan; Kaj Thomsson
  19. Credit supply and the housing boom By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  20. Understanding Financial Instability: Minsky Versus the Austrians By Van den Hauwe, Ludwig
  21. Deficits and Inflation; Are Monetary and Financial Institutions Worthy to Consider or Not? By Ishaq, Tahira; Mohsin, Dr Hassan
  22. Aging and deflation from a fiscal perspective By Katagiri, Mitsuru; Konishi, Hideki; Ueda, Kozo
  23. State-of-play in implementing macroeconomic adjustment programmes in the euro area By Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
  24. Forward Guidance in a Simple Model with a Zero Lower Bound By Illing, Gerhard; Siemsen, Thomas
  25. The Czech Housing Market Through the Lens of a DSGE Model Containing Collateral-Constrained Households By Jan Bruha; Jaromir Tonner
  26. Canada: 2014 Article IV Consultation-Staff Report; Staff Statement; and Press Release By International Monetary Fund. Western Hemisphere Dept.
  27. Financial Sector and Output Dynamics in the Euro Area: Non-linearities Reconsidered By Schleer, Frauke; Semmler, Willi
  28. The term structure of interest rates and the macroeconomy: Learning about economic dynamics from a FAVAR By Halberstadt, Arne
  29. Implications of low inflation rates for monetary policy By Rosengren, Eric S.
  30. Aging, the Great Moderation and Business-Cycle Volatility in a Life-Cycle Model By Rohrbacher, Stefan; Heer, Burkhard; Scharrer, Christian
  31. On the Stability of Money Demand By Lucas, Robert E.; Nicolini, Juan Pablo
  32. Multinational Firms and Business Cycle Transmission By Menno, Dominik
  33. Searching for the source of macroeconomic integration across advanced economies By Uluc Aysun
  34. Public versus Private Provision of Liquidity: Is There a Trade-Off? By Winter, Christoph; Röhrs, Sigrid
  35. Trust in Government and Fiscal Adjustments By Weichenrieder, Alfons; Bursian, Dirk; Zimmer, Jochen
  36. Banking market structure and macroeconomic stability: Are low-income countries special? By Bremus, Franziska; Buch, Claudia M.
  37. Are there Business Cycles beyond GDP? Alternative Measures to GDP at Business Cycle Frequencies By Maschke, Philip; Döpke, Jörg
  38. Housing markets and current account dynamics By Gete, Pedro
  39. Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Nonlinear Dynamic Panels By Christian R. Proaño; Christian Schoder; Willi Semmler
  40. Information Complementarities and Sectoral Comovement By Buchen, Teresa
  41. Preferences for Fair Prices, Cursed Inferences, and the Nonneutrality of Money By Erik Eyster; Kristof Madarasz; Pascal Michaillat
  42. Superstar Central Bankers By Neuenkirch, Matthias; Tillmann, Peter
  43. What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk? By Guvenen, Fatih; Karahan, Fatih; Ozkan, Serdar; Song, Jae
  44. What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk? By Fatih Guvenen; Fatih Karahan; Serdar Ozkan; Jae Song
  45. Portugal: First Post-Program Monitoring Discussions-Staff Report; Press Release; and Statement by the Executive Director By International Monetary Fund. European Dept.
  46. The relevance of international spillovers and asymmetric effects in the Taylor rule By Joscha Beckmann; Ansgar Belke; Christian Dreger
  47. How CBO Analyzes the Effects of Changes in Federal Fiscal Policies on the Economy By Congressional Budget Office
  48. The short- and long-run effects of fiscal consolidation in dynamic general equilibrium By Wolters, Maik; Schwarzmüller, Tim
  49. Resource Misallocation and Aggregate Productivity under Progressive Taxation By Jang-Ting Guo; Yutaro Izumi; Yi-Chan Tsai
  50. Dating Business Cycle Turning Points for the French Economy: a MS-DFM approach. By Catherine Doz; Anna Petronevich
  51. Hyperbolical Discounting and Endogenous Growth By Strulik, Holger
  52. Geld: Die Bank gewinnt immer By Häring, Norbert
  53. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By YuichiroWaki; Richard Dennis; Ippei Fujiwara
  54. Increasing returns in matching and labour market dynamics: Comments on indeterminacy and search theory By Guerrazzi, Marco
  55. Republic of Madagascar: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Madagascar By International Monetary Fund. African Dept.
  56. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Neuenkirch, Edith; Hayo, Bernd
  57. Effective demand, exogenous normal utilization and endogenous capacity in the long run. Evidence from a CVAR analysis for the US By Christian Schoder
  58. The Efficiency of Private E-Money-Like Systems: The U.S. Experience with National Bank Notes By Warren E. Weber
  59. Trade and Uncertainty By Novy, Dennis; Taylor, Alan
  60. Sign restrictions and statistical identification under volatility breaks -- Simulation based evidence and an empirical application to monetary policy analysis By Herwartz, Helmut; Plödt, Martin
  61. Do tax cuts increase consumption? An experimental test of Ricardian Equivalence By Rostam-Afschar, Davud; Meissner, Thomas
  62. Bank Credit and Trade: Evidence from Germany By Nitsch, Volker; Goldbach, Stefan
  63. Determinants of the Choice of Exchange Rate Regime in Resource-Rich Countries By Ruslan Aliyev
  64. A Survey on the Effects of Sterilized Foreign Exchange Intervention By Mauricio Villamizar-Villegas; David Perez-Reyna
  65. The Dynamics of Currency Crises - Results from Intertemporal Optimization and Viscosity Solutions By Bauer, Christian; Ernstberger, Philip
  66. Bargaining and Wage Rigidity in a Matching Model for the US By Malcomson, James; Mavroeidis, Sophocles
  67. Costs and benefits of building faster payment systems: the U.K. experience and implications for the United States By Greene, Claire; Rysman, Marc; Schuh, Scott; Shy, Oz
  68. Labor Market Reform and the Cost of Business Cycles By Krebs, Tom; Scheffel, Martin
  69. The estimation uncertainty of permanent-transitory decompositions in co-integrated systems By Schreiber, Sven
  70. Winners and Losers from the euro By Pedro Gomis-Porqueras; Laura Puzzello
  71. Inequality and the Marriage Gap By Siassi, Nawid
  72. Assessing the Macroeconomic Forecasting Performance of Boosting By Wohlrabe, Klaus; Teresa, Buchen
  73. Financial stress transmission in EMU sovereign bond market volatility: A connectedness analysis By Fernando Fernández-Rodríguez; Marta Gómez-Puig; Simón Sosvilla-Rivero
  74. What Determines Borrowing Costs at the Firm-Level: Firm-Specific and Aggregate Information By Fidrmuc, Jarko; Scharler, Johann
  75. Recursive utility and jump-diffusions By Aase, Knut K.
  76. Product Diversity, Demand Structures and Optimal Taxation By Winkler, Roland; Lewis, Vivien
  77. Law of One Price in the euro area: an empirical investigation using Nielsen disaggregated price data By Dmitry Kulikov
  78. Crecimiento económico y capital humano: Un análisis de cointegración para Colombia en el periodo 1960 – 2012 By Jonny Castro Tapias
  79. Labour mobility and labour market adjustment in the EU By Alfonso Arpaia; Aron Kiss; Balazs Palvolgyi; Alessandro Turrini
  80. Is All Infrastructure Investment Created Equal? The Case of Portugal By Alfredo Marvão Pereira; Rui M. Pereira
  81. Outperforming IMF Forecasts by the Use of Leading Indicators By Drechsel, Katja; Giesen, Sebastian; Lindner, Axel
  82. The Early Consequences of the Crisis on Fiscal Convergence in the EU By Roberto Censolo; Caterina Colombo
  83. Crecimiento Económico y Salud en Colombia: Un análisis para el periodo 1981 – 2012 By Leydi Viviana González Núñez; Gustavo Barragán Daza
  84. Monetary policy normalization: graceful exit or bumpy ride? By Rosengren, Eric S.
  85. Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses By Keshab Bhattarai; Sushanta K. Mallick
  86. Forecasting the yield curve: art or science? By Molenaars, Tomas K.; Reinerink, Nick H.; Hemminga, Marcus A.
  87. Enhancing the reliability of performance measures in empirical based research: leverage ratios and theoretical based research By Ojo, Marianne
  88. Forecasting the yield curve - Forecast performance of the dynamic Nelson-Siegel model from 1971 to 2008 By Molenaars, Tomas K.; Reinerink, Nick H.; Hemminga, Marcus A.
  89. Trade Liberalization and Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms and Comparative Advantage By Wolfgang Lechthaler; Mariya Mileva
  90. Job Polarization and Structural Change By Siegel, Christian; Barany, Zsofia
  91. Thumbscrews for Agencies or Individuals? How to reduce unemployment By Launov, Andrey; Wälde, Klaus
  92. Two-Population Social Cycle Theories By Callahan, Gene; Hoffmann, Andreas
  93. Intertemporal Consumption and Debt Aversion: An Experimental Study By Meissner, Thomas
  94. On the Consequences of Eliminating Capital Tax Differentials By Slavik, Ctirad; Yazici, Hakki
  95. Oil Volatility Risk and Expected Stock Returns By Peter Christoffersen; Xuhui (Nick) Pan
  96. Productivity versus Transparency: Information Technology Adoption in Emerging Markets By K. Sudhir; Debabrata Talukdar
  97. Identification of DSGE Models - A Comparison of Methods and the Effect of Second Order Approximation By Mutschler, Willi
  98. The labor market effect of demographic change: Alleviation for financing social security By Friese, Max
  99. Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy By Era Dabla-Norris; Yan Ji; Robert Townsend; D. Filiz Unsal
  100. Small sample performance of indirect inference on DSGE models By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael
  101. The Impact of EU Accession on Regional Business Cycle Synchronisation and Sector Specialisation By Jürgen Bierbaumer-Polly; Peter Huber; Petr Rozmahel
  102. The predominant role of signal precision in experimental beauty contests By Camille Cornand; Romain Baeriswyl
  103. Análisis de la restructuración institucional del sector petrolero ecuatoriano en el período 2007-2012 By Rony Mauricio Parra Jácome
  104. On Selection of Statistics for Approximate Bayesian Computing or the Method of Simulated Moments By Michael Creel
  105. Human Capital and Optimal Redistribution By Koeniger, Winfried
  106. Conflicto armado, despojo de tierras y actividad ganadera: Indagando entre el testimonio no oficial y las cifras estatales By Alexander Cotte Poveda; Aura María Duarte Rojas
  107. Conflicto armado, despojo de tierras y actividad ganadera: Indagando entre el testimonio no oficial y las cifras estatales en el Departamento del Meta - Colombia By Alexander; Aura María Duarte Rojas
  108. Natural resourcs and the spread of HIV/AIDS: curse or blessing? By Olivier Sterck
  109. Does Financial Integration Increase Welfare? Evidence from International Household-Level Data By Christian Friedrich
  110. Pobreza, violencia y desarrollo económico en la provincia de Sugamuxi By Alexander Cotte Poveda; María del Rosario Castro Rebolledo
  111. Mid-term Effects of the Flat Rate Personal Income Tax in Hungary By Bartha, Zoltán
  112. Aging and pension reform: Extending the retirement age and human capital formation By Vogel, Edgar; Ludwig, Alexander; Börsch-Supan, Axel

  1. By: Hartmann, Matthias; Conrad, Christian
    Abstract: In this study, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. The unobservable inflation uncertainty is quantified by means of the slowly evolving unconditional variance component of inflation in the framework of the semiparametric Spline-GARCH model (Engle and Rangel, 2008). For a cross section of 13 developed economies, we find that long-term inflation uncertainty is high if central bank governors are perceived as less inflation-averse, if the conduct of monetary policy is rather ad-hoc than rule-based and in economies with a low degree of central bank independence.
    JEL: E58 E65 E31
    Date: 2014
  2. By: Hirakata, Naohisa (Bank of Japan); Sudo, Nao (Bank of Japan); Takei, Ikuo (Bank of Japan); Ueda, Kozo (Waseda University)
    Abstract: In this paper we explore the role of financial intermediation malfunction in macroeconomic fluctuations in Japan. To this end we estimate, using Japanese data, a financial accelerator model in which the balance sheet conditions of entrepreneurs in a goods-producing sector and those of a financial intermediary affect macroeconomic activity. We find that shocks to the balance sheets of the two sectors have been quantitatively playing important role in macroeconomic fluctuations by affecting lending rates and aggregate investments. Their impacts are prominent in particular during financial crises. Shocks to the entrepreneurs balance sheets have played a key role in lowering investment in the bubble burst during the early 1990s and in the global financial crisis during the late 2000s. Shocks to the financial intermediaries balance sheets have persistently lowered investment throughout the 1990s.
    JEL: E31 E44 E52
    Date: 2014–12–01
  3. By: Afanasyeva, Elena; Guentner, Jochen
    Abstract: This paper investigates the risk-taking channel of monetary policy on the asset side of banks' balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, e.g. their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract, embed it in a dynamic general equilibrium model, and show that - consistent with our empirical finding - a monetary easing implies an expansion of bank lending for a given amount of borrower collateral. The model also predicts a delayed increase in borrowers' default risk.
    JEL: E44 E52 E32
    Date: 2014
  4. By: Hürtgen, Patrick; Cloyne, James
    Abstract: This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US.
    JEL: E31 E32 E58
    Date: 2014
  5. By: Burgert, Matthias; Schmidt, Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
    JEL: E31 E63 D11
    Date: 2014
  6. By: Michael Plante (FederalReserveBankofDallas)
    Keywords: oil; fuel-price subsidies; developing countries; fiscal policy
    JEL: Q43 E62 H30
    Date: 2013–03
  7. By: Wang, Mu-Chun; Amir Ahmadi, Pooyan; Matthes, Christian
    Abstract: How much have the dynamics of US time series and in the particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "A lot." and "Probably less than you think.", respectively. We use vector autoregression with time-varying parameters and stochastic volatility to tackle these question. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term nominal interest rates) and the growth rate of money.
    JEL: E31 E52 E43
    Date: 2014
  8. By: Weder, Mark; Sirbu, Anca; Guo, Jang Ting
    Abstract: We show that an otherwise standard one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale is able to generate qualitatively as well as quantitatively realistic aggregate fluctuations driven by news shocks to two formulations of future consumption demand or government spending on goods and services. In sharp contrast to many studies in the existing expectations-driven business cycle literature, this result does not rely on non-separable preferences or investment adjustment costs. When the economy is subject to anticipated total factor productivity or investment-specific technology shocks, the relative strength of the intertemporal substitution effect needs to be enhanced for our model to exhibit positive macroeconomic co-movement and business cycle statistics that are consistent with the data.
    JEL: E32 E30 E20
    Date: 2014
  9. By: Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
    Abstract: Between 1999 and the onset of the economic crisis in 2008 real exchange rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reflected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a fiscal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a fiscal devaluation, modeled as a revenue-neutral shift from employers social contributions to the Value Added Tax. We find that a fiscal devaluation carried out in Southern European countries has a strong positive effect on output, but a mild effect on the trade balance of these countries. In addition, the negative effect on Central-Northern countries output is weak.
    JEL: E32 E62 F32
    Date: 2014
  10. By: Dossche, Maarten; Lewis, Vivien; Poilly, Céline
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex 'wage curve' linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as a instrument to dampen inefficient hours fluctuations.
    Keywords: employment,hours,wage curve,optimal monetary policy
    JEL: E30 E50 E60
    Date: 2015
  11. By: Mark Weisbrot; David Rosnick; Stephan Lefebvre
    Abstract: In the past 6 years the Greek economy has gone through a massive adjustment at a steep price. The economy finally grew in 2014, by 0.6 percent, but the recovery is weak, slow and fragile. This paper argues that prolonged mass unemployment and reduced living standards, brought about by years of recession and budget cuts, are unnecessary, and that a robust recovery is feasible. It presents an alternative macroeconomic scenario with a moderate fiscal stimulus, which brings the economy much closer to full employment over the next five years, with a lower net debt than currently projected by the IMF. This alternative is just one of many possible scenarios, some of which might include debt cancellation, or more help from the European Central Bank in maintaining low interest rates, especially in light of its recently announced quantitative easing program. The current program, which forecasts a weak recovery with many downside risks, as well as continued mass unemployment in the years ahead, should be replaced with policies that offer a much stronger and faster recovery.
    Keywords: greece, greek elections, greek economy, syriza, employment, Europe
    JEL: F F01 F02 F53 F55 E E5 E6
    Date: 2015–01
  12. By: Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
    Abstract: This paper explores the potential effectiveness of the ECB s Outright Monetary Transaction (OMT) program in safeguarding an appropriate monetary policy transmission. Since the program aims at manipulating bank lending rates by conducting sovereign bond purchases on secondary markets, a stable relationship between bank lending rates and government bond rates is of prime importance. Using vector autoregressive models with time varying parameters (TVP VAR) we evaluate the stability of this relationship by focusing on the reaction of bank lending rates to movements in government bond rates over the period 2003 2013. Our results suggest that the potential success of OMTs in restoring the monetary transmission mechanism is limited as the link between bank lending rates and government bond rates has substantially weakened since the end of 2008.
    JEL: E42 E43 E58
    Date: 2014
  13. By: Dodig, Nina; Herr, Hansjörg
    Abstract: To handle the sovereign debt crisis in general and macroeconomic imbalances in particular the leading EU institutions (the Troika) adopted two broad approaches: The short-term approach is based on enhancing the Stability and Growth Pact and to imposing fiscal austerity on crisis countries. The medium- to long-term strategy consists of internal devaluation via reducing wage costs. Both approaches were combined with structural adjustment programs in the spirit of the Washington Consensus. The Troika's policy implies an asymmetric adjustment process burdening only crisis countries. This led to the shrinking of demand and output in crisis countries comparable to the Great Depression and brought the European Monetary Union to the edge of deflation. Such polices increase the risk of Japan-style deflation with more than one lost decade.
    Keywords: current account imbalances,Euro area economic policies,internal devaluation,austerity
    JEL: E60 E62 F41
    Date: 2015
  14. By: Böhm, Volker
    Abstract: The expanding/contracting behavior of monetary macroeconomic models is largely driven by government deficits. Their monetary effects on inflation and monetary growth determine the real value of money (or of government debt) in the long run. Only positive stationary (constant) real values of money guarantees stationary positive levels of output and employment in the long run. Within a generalized class of nonlinear monetary macroeconomic models of the AS AD type derived from a microeconomic structure with OLG consumers, such economies generically have no stationary equilibria under perfect foresight/rational expectations when tax revenue is income dependent and endogenous (no lump sum taxes) and when the government follows a stationary spending rule. They usually have two balanced stochastic equilibria, an unstable one with positive levels of employment, output, and positive real value of money plus a stable nonmonetary one under hyperinflation (or a monetary bubble). Under the hypothesis of the model, only the stable ones are empirically observable. The paper shows that these properties are true for a large class of AS-AD models including those with a random budget policy rule whose deficit is zero on average. In contrast, such economies have positive stable balanced stationary equilibria if the government policy has a small strictly positive nonrandom demand component in all cases of uncertainty. Among other things, this confirms the long run effectiveness of deficit spending in random economies under rational expectations known from Keynesian theories. The results are derived using techniques from the theory of random dynamical systems which allows a complete theoretical and numerical analysis of the dynamics of random time series and their stability of the nonlinear stochastic model.
    JEL: E00 C02 E52
    Date: 2014
  15. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross- border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market - unlike other credit markets - allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: interbank liquidity,financial crises,monetary policy,credit supply,credit rationing,information asymmetry,euro area,financial globalization
    JEL: E44 E58 G01 G21 G28
    Date: 2014
  16. By: Kiminori Matsuyama (Northwestern University, USA); Iryna Sushko (Institute of Mathematics, National Academy of Science of Ukraine); Laura Gardini (DESP University of Urbino "Carlo Bo", Urbino (Italy))
    Abstract: The contribution of this paper is twofold. First, it reformulates the model of endogenous credit cycles by Matsuyama (2013, Sections 2-4). It is shown that the same dynamical system that generates the equilibrium trajectory can be obtained under a much simpler set of assumptions. Such a streamlined presentation should help to highlight the key mechanisms through which financial frictions cause instability and persistent fluctuations. Second, it discusses the nature of fluctuations in greater detail for the case where the production function of the final good sector is Cobb-Douglas. For example, the unique steady state possesses corridor stability (i.e., stable against small shocks but unstable against large shocks) for empirically relevant parameter values. This also means that, when a parameter change causes the steady state to lose its stability, its effects are catastrophic and irreversible so that even a small, temporary shock could have large, permanent effects on volatility. Other notable features of the present model include an immediate transition from the stable steady state to a stable asymmetric cycle of period n ≥ 3, along which n ‒1 ≥ 2 consecutive periods of gradual expansion is followed by one period of sharp downturn, or to robust chaotic attractors.
    Keywords: borrower net worth, composition of credit flows, financial instability, corridor stability, asymmetric cycles, regime-switching, bifurcation analysis of a piecewise smooth nonlinear dynamical system
    JEL: C61 E32 E44
    Date: 2015–02
  17. By: Klinger, Sabine; Weber, Enzo
    Abstract: Between 1979 and 2009, the German labour market moved along a Beveridge curve with changing slope that used to shift outwards but shifted inwards after severe labour market reforms had come into force. We analyse these dynamics and focus on the macroeconomic outcome of the reforms. For that purpose, we construct a new empirical model that links equilibrium unemployment theory to a flexible unobserved components model: we disentangle permanent and transitory components of matching efficiency and separation rate as well as unemployment and vacancies. Cointegration and identification are addressed. We find that matching efficiency and separation rate each account for about half of the inward shift. Thereby, the increase in trend matching efficiency is extraordinary and testifies to a permanent improvement on the labour market. Its visibility, however, was retarded by an overlay with a structural increase in tightness.
    JEL: C32 E24 E32
    Date: 2014
  18. By: Stephen B. Kaplan (Department of Economics/Institute for International Economic Policy, George Washington University); Kaj Thomsson (Maastricht University)
    Abstract: Political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. We challenge and contextualize this view by incorporating the financial constraints faced by governments into an electoral framework. Employing a formal model, we show theorectically that the extent of ownership dispersion among creditors has important effects for governments' policy autonomy. Based on our theoretical results, we argue when highly-indebted governments become more reliant on international bond markets -- as opposed to traditional bank lending -- politicians alter the way they respond to domestic constituents. In an econometric test of 16 Latin American countries from 1961 to 2011, we show that financial decentralization breeds austerity. More specifically, we find that polticians exhibit more fiscal discipline when they fund a greater share of their spending through decentralized bond markets. Furthermore, we find this discipling effect to be particularly strong during election periods.
    Keywords: Political Economy, Collective Action, Latin America, Global Economy, Developing Economies, Debt, Financial Markets, Fiscal Policy, Macroeconomic Policy
    JEL: E44 E62 G01 G10 H30 H60 N16 N26 O54
  19. By: Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The housing boom that preceded the Great Recession was the result of an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices, the surge in household debt, the stability of debt relative to home values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
    Keywords: housing and credit boom; house prices; collateral constraints; leverage restrictions
    JEL: E32 E44
    Date: 2015–02–01
  20. By: Van den Hauwe, Ludwig
    Abstract: In the wake of the Financial Crisis and the subsequent Great Recession several commentators have suggested that the analysis of financial instability provided by various strands of heterodox economics got it "right" and that mainstream economics got it "wrong". In this paper two variants of heterodox views about financial instability are compared critically: the views of the late Hyman P. Minsky on the one hand, and the theses of the Austrian School on the other. Indeed there seem to exist a number of prima facie similarities and analogies between Minsky’s approach to the study of financial instability and that of the Austrian School. In particular attention can be drawn to such elements as, among others, the following: (a) both theories are theories of the upper turning point; (b) both theories give due attention to institutional factors, in particular the role of banks and financial institutions; (c) both approaches reject mainstream static equilibrium theorizing; (d) both approaches adhere to a monetary theory of the business cycle and explain, in their respective ways, the non-neutrality and the endogeneity of money; (e) in both approaches the role of Knightian uncertainty is appreciated; (f) in both approaches an attempt is made to provide the theory of the business cycle with adequate micro-foundations as well as with price-theoretic foundations. At the same time it can be seen that these similarities and analogies are quite superficial. The most important differences between both approaches relate to (a) the fundamental causal analysis of business cycles and the role of the interest-rate mechanism; (b) the identification of the relevant institutional context; (b) the role of capital and capital theory; (c) the quite different appreciation of the role of liquidity and liquidity preference; (d) the link between uncertainty and institutional context and (e) the quite different remedies that are proposed by the two approaches. It is concluded that the apparent similarities between both approaches are superficial, while the divergences are profound and fundamental.
    Keywords: Financial Instability, Business Cycle, Minsky, Austrian School
    JEL: B50 B53 B59 E3 E30 E32
    Date: 2014–12–24
  21. By: Ishaq, Tahira; Mohsin, Dr Hassan
    Abstract: Institutions are important for the analysis of the association between the deficits and inflation. This study used central bank independence and financial markets as institutional variables to investigate whether deficits are inflationary or not in the presence of dependent central bank and fragile financial markets. Panel dataset has been used for eleven Asian economies from 1981 to 2010. Empirical results suggests deficits are inflationary for Asian economies but budget deficits are particularly stronger candidates for inflationary pressure when financial markets are not fully developed and central banks are not free in followings goals and objectives under political pressure in financing the deficits.
    Keywords: fiscal deficits; inflation; institutions; central bank independence; financial markets development.
    JEL: E31 E50 H6 H60
    Date: 2014–09–01
  22. By: Katagiri, Mitsuru (Bank of Japan); Konishi, Hideki (Waseda University); Ueda, Kozo (Waseda University)
    Abstract: Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
    JEL: D72 E30 E62 E63 H60
    Date: 2014–11–01
  23. By: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
    Abstract: Two of the four macroeconomic adjustment programmes, Portugal and Ireland s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    JEL: F32 E62 E22
    Date: 2014
  24. By: Illing, Gerhard; Siemsen, Thomas
    Abstract: In this paper we present a simple framework to model central bank forward guidance in a liquidity trap. We analyze the role of long-run and short-run price stickiness under discretion and commitment in a straightforward and intuitive way. Despite the impact of price rigidity on welfare being non-linear, losses under discretion are lowest with perfectly flexible prices. We show why the zero lower bound may still be binding even long after the shock has gone and characterize conditions when a commitment to hold nominal rates at zero for an extended period is optimal. We then introduce government spending and show that under persistently low policy rates optimal government spending becomes more front-loaded, while pro-cyclical austerity fares worse than discretionary government spending.
    JEL: E40 E52 E58
    Date: 2014
  25. By: Jan Bruha; Jaromir Tonner
    Abstract: We incorporate a housing market with liquidity-constrained households into the Czech National Bank's core forecasting model (g3) to analyze the relationship between housing market and aggregate fluctuations in a small open economy framework. We discuss the historical shock decomposition of house prices and interpret the results in the light of recent empirical work. For a wide range of model calibrations, the interaction between the housing market and the aggregate economy is weak and so the monetary policy implications of house price fluctuations for the Czech Republic are not strong. We interpret this – in line with recent empirical evidence – as an indication that the wealth effects stemming from house ownership are not significant in the Czech Republic. Nevertheless, we show that the collateral mechanism significantly improves the forecasting properties of the extended model, especially for private consumption. This indicates the importance of the collateral effect, which can be caused by assets other than houses.
    Keywords: Aggregate consumption, DSGE models, housing market
    JEL: E32 E37 R31
    Date: 2014–12
  26. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: KEY ISSUES Economic outlook: The Canadian economy has expanded at a solid pace since 2013, but rebalancing of growth away from household consumption and residential investment remains incomplete, owing mainly to weak business investment. Growth momentum is expected to continue alongside a strengthening U.S. recovery despite substantially lower oil prices. Risks to the outlook are modestly tilted to the downside given sluggish global growth, effects unfolding from sharply lower oil prices, and housing market risks. Key domestic vulnerabilities in housing markets and the household sector remain elevated but contained fro m a financial stability perspective. Policies for balanced and sustained recovery: An appropriate policy mix should help facilitate rebalancing to generate a broader and more durable recovery, reduce domestic vulnerabilities, and further strengthen financial system resilience: • Macro policies: Monetary policy can remain accommodative for now given that inflation expectations are well-anchored, stronger business investment is still a missing link, risks to an export-led recovery are to the downside, and housing markets are expected to cool as U.S. interest rates rise and with lower oil prices. Fiscal consolidation should proceed in light of longer-term challenges at the provincial level, but federal authorities should consider adopting a neutral stance going forward, using available fiscal resources for targeted measures to support growth. Structural policies to improve productivity in the economy would increasingly need to complement this policy mix. • Housing sector and financial sector policies: Further macro-prudential policy action may be needed to guard against risks to financial stability if household balance sheet vulnerabilities resume rising. Reforms to limit government exposure to housing markets and encourage appropriate risk retention by the private sector should continue. Improving complex coordination across federal and provincial authorities in supervision and stress- testing of depository institutions and strengthening macro-prudential and crisis management frameworks will reinforce the resilience of Canada’s financial system. Policy response to past advice: Since the 2013 Article IV Consultation mission, the authorities have taken some further steps to limit taxpayer exposure to the housing sector and strengthen mortgage insurance underwriting practices. Some work on FSAP recommendations has also started to enhance stress testing, address data gaps, and towards establishing a cooperative capital markets system. The authorities have also intensified their efforts towards addressing interprovincial trade barriers and export diversification.
    Keywords: Article IV consultation reports;Economic growth;Fiscal policy;Fiscal consolidation;Banking sector;Monetary policy;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Canada;
    Date: 2015–01–30
  27. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specific amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops.
    JEL: E20 E44 G01
    Date: 2014
  28. By: Halberstadt, Arne
    Abstract: Expectations about macroeconomic developments are important determinants of long term interest rates. In this paper, I compare two different assumptions on how agents may form their expectations about the economy and yields in a pseudo real time exercise. Based on the no-arbitrage factor-augmented vector autoregression model developed by Moench (2008), I apply a purely econometric learning scheme as proposed by Laubach, Tetlow, and Williams (2007) in the estimation and compare the results to those of an estimation without discounting. In- and out-of-sample performance indicates that the agents are more inclined to form their expectations according to the learning approach.
    Keywords: Affine Term Structure Models,Factor Models,Learning
    JEL: C38 E43 E44
    Date: 2015
  29. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to Washington and Lee University’s H. Parker Willis Lecture in Political Economy, Lexington, Virginia, November 10, 2014.
    Date: 2014–11–10
  30. By: Rohrbacher, Stefan; Heer, Burkhard; Scharrer, Christian
    Abstract: According to empirical studies, the life cycle of labor supply volatility exhibits a U-shaped pattern. This may lead to the conclusion that demographic change induces a drop in output volatility. We present an overlapping generations model that replicates the empirically observed pattern and study the impact of demographic transition on output volatility. We find that the change in age-composition itself has only a marginal influence on output volatility as the mitigating effect of lower labor supply volatility is compensated by higher labor supply. Instead, the driving force behind the Great Moderation in our model is the downward shift of the age-specific labor supply volatility curve.
    JEL: J10 E32 C68
    Date: 2014
  31. By: Lucas, Robert E. (University of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
    Keywords: Money demand; Monetary base
    JEL: E40 E41
    Date: 2015–02–02
  32. By: Menno, Dominik
    Abstract: This paper studies the effect of foreign direct investment (FDI) on the transmission of international business cycles. I document for the G7 countries between 1991 and 2006 that increases in bilateral FDI linkages are associated with more synchronized investment cycles. I also find that the relation between FDI integration and synchronization of gross domestic product (GDP) is \-- yet positive \-- statistically insignificant after controlling for time fixed effects. I then study a model of international business cycles with an essential role for FDI and shocks to multinational activity. In the model, more FDI openness unambiguously increases investment synchronization while the effect on GDP synchronization is ambivalent. Due to mismeasurement of intangible capital in national accounts, the actual elasticity of output synchronization with respect to FDI integration is underestimated. The effects measured in the data are quantitatively consistent with the model predictions. Finally, I show that more FDI increases households' welfare by reducing aggregate risk on the production side; this effect,however, is partially mitigated by multinational specific shocks.
    JEL: E32 F23 F44
    Date: 2014
  33. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper estimates a two-country open economy DSGE model by using U.S. and Euro Area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macro-economic correlation in the data. I search for the determinants of this correlation by recon?guring the model?s shock processes in two ways. First, I include shocks that symmetrically a¤ect each region. Second I allow for the transmission of shocks between the two regions. While both of these changes considerably improve the model?s per-formance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both speci?cations, comovements of variables are mostly determined by demand and ?nancial shocks. Productivity, cost-push and exchange rate shocks, by contrast, play a limited role.
    Keywords: Macroeconomic integration, DSGE, Bayesian estimation, U.S., Euro Area
    JEL: E32 F41 F42 F44
    Date: 2015–01
  34. By: Winter, Christoph; Röhrs, Sigrid
    Abstract: Many researchers have recommended to increase public debt in the aftermath of the fi nancial crisis in order to relax borrowing constraints for private households. This advice is based on the common assumption that borrowing conditions of private agents are exogenous to public policy. We study the impact of government debt on the provision of private credit in an economy in which borrowing limits arise because of limited contract enforceability and are thus determined as equilibrium outcomes. As such, they also depend on public policy, in particular on the amount of public debt. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that an increase in government debt crowds out the supply of private credit. We also fi nd that government debt has signi ficantly different implications for aggregate welfare and economic activity in general if borrowing constraints are endogenous.
    JEL: E20 E60 E44
    Date: 2014
  35. By: Weichenrieder, Alfons; Bursian, Dirk; Zimmer, Jochen
    Abstract: The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior the expectation is that mainly high trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy.
    JEL: H62 E62 H60
    Date: 2014
  36. By: Bremus, Franziska; Buch, Claudia M.
    Abstract: Does the structure of banking markets affect macroeconomic volatility and, if yes, is this link different in low-income countries? Banking markets in low-income countries differ from those in developed market economies. Banking systems in lower-income countries are typically smaller and less open. In this paper, we explore the channels through which the structure of banking markets affects macroeconomic volatility. Our research has three main findings. First, we study the relevance of granular effects: if the degree of market concentration in the banking sector is sufficiently high, idiosyncratic volatility at the bank-level can impact aggregate volatility. We find weak evidence for a link between granular banking sector volatility and macroeconomic fluctuations. Second, a higher share of domestic credit to GDP coincides with higher volatility in the short run. Third, a higher level of cross-border asset holdings, i.e. a higher degree of de facto financial integration, increases volatility in low-income countries.
    Keywords: bank market structure,financial integration,granularity,macroeconomic volatility,low-income countries
    JEL: G21 E32
    Date: 2014
  37. By: Maschke, Philip; Döpke, Jörg
    Abstract: We discuss properties of alternatives or complements to GDP as a measure of welfare at business cycle frequencies. We argue that these figures are not useful to measure the welfare costs of business cycles. First, data is not available at an appropriate quality and frequency. Second, since the suggested time series sometimes correlate negatively with each other composite indices will lead by construction to very low welfare costs of business cycles. Third, cross-section and quasi-panel evidence based on different samples of countries reveals no impact of the stance of the business cycle on some suggested welfare measures.
    JEL: D60 E32 I31
    Date: 2014
  38. By: Gete, Pedro (Georgetown University)
    Abstract: I document a strong negative correlation, both across and within countries, between housing and current account dynamics. I use two methodologies to analyze three potential drivers of housing markets. First, in a quantitative two-country model, I input the dynamics of population, loan-to-value and housing price expectations that have been observed in the OECD economies since the mid 1990s. The model generates housing and current account dynamics very similar to the data. Second, I derive sign restrictions to identify the previous shocks in a vector autoregression. The results confirrm the importance of housing demand shocks in driving both housing and current account dynamics.
    JEL: E32 F32 F44 G28 R21
    Date: 2015–01–01
  39. By: Christian R. Proaño (Department of Economics, New School for Social Research); Christian Schoder (Macroeconomic Policy Institute (IMK)); Willi Semmler (Department of Economics, New School for Social Research)
    Abstract: We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the state of the financial market. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifi- cations from the financial sector. For thirteen industrialized economies we study empirically the relationship between the GDP-growth rate, the debt-GDP ratio, and the financial stress index for the period 1980-2010 using quarterly data and dynamic single-country and dynamic panel threshold regression methods. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.
    Keywords: financial stress, sovereign debt, non-linear econometrics, threshold regression, thresh- old panel regression
    JEL: E20 G15 H63
    Date: 2013–10
  40. By: Buchen, Teresa
    Abstract: This paper investigates whether information complementarities can explain the strong patterns of sectoral comovement observed empirically. It tests the theoretical model by Veldkamp and Wolfers (2007), which suggests that fi rms' output decisions are based on aggregate information rather than sector-specifi c information, because the former is less costly. Employing the connectedness index by Diebold and Yilmaz (2009, 2012) as a new measure of sectoral comovement and using data on media coverage of economic news in Germany, we find that a higher volume of economy-wide news indeed signifi cantly increases the comovement of sectoral business expectations. This common shock to expectations is reflected in a delayed increase of sectoral output comovement. Although fi rms tend to be more susceptible to bad news, the tone of media coverage only plays a minor role.
    JEL: C32 D84 E32
    Date: 2014
  41. By: Erik Eyster; Kristof Madarasz; 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 E31 E40
    Date: 2015–02
  42. By: Neuenkirch, Matthias; Tillmann, Peter
    Abstract: The personalities of central bankers moved center stage during the recent financial crisis. Some central bankers even gained "superstar" status. In this paper, we evaluate the pivotal role of superstar central bankers by assessing the difference an outstanding governor makes to economic performance. We employ school grades given to central bankers by the financial press. A superstar central banker is one receiving the top grade. In a probit estimation we first relate the grades to measures of economic performance, institutional features, and personal characteristics. We then employ a nearest neighbor matching approach to identify the central bankers which are closest to those receiving the top grade and compare the economic performance across both groups. The results suggest that a superstar governor indeed matters: a top-graded central banker faces a significantly more favorable output-inflation trade-off than his peers.
    JEL: E52 E58 E50
    Date: 2014
  43. By: Guvenen, Fatih (Federal Reserve Bank of Minneapolis); Karahan, Fatih (Federal Reserve Bank of New York); Ozkan, Serdar (University of Toronto); Song, Jae (Social Security Administration)
    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 incomplete markets literature. 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-Guassian shocks; Normal mixture
    JEL: E24 J24 J31
    Date: 2015–01–30
  44. By: Fatih Guvenen; Fatih Karahan; Serdar Ozkan; Jae Song
    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 incomplete markets literature. 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.
    JEL: E24 J31 J62
    Date: 2015–01
  45. By: International Monetary Fund. European Dept.
    Abstract: The three year Fund-supported program that expired at end-June 2014 succeeded in stabilizing Portugal’s economy and restoring access to sovereign debt markets. Following the deep downturn of 2011–12, the economy has expanded in six of the last seven quarters, albeit at a moderate pace. The cumulative fiscal consolidation over the past three years has been substantial, and the current account is now in surplus. Regained policy credibility and benign market conditions have facilitated the resumption of market access at declining yields. But private consumption is driving the recovery, while the necessary rebalancing of the economy remains elusive. With post-crisis labor slack still extensive, attaining higher growth through private investment and export-led growth continues to be constrained by high corporate debt and weak external competitiveness. Moreover, the momentum for reforms and fiscal adjustment appears to have flagged over the past six months. Notwithstanding past structural reform efforts aimed at improving competitiveness, the slow expansion despite the high labor slack suggests that the unfinished agenda is substantial. Corporate debt is also excessively high, acting as a brake on investment and job creation. While the fiscal targets for 2014 seem well within reach, significantly more ambitious expenditure reforms will be needed to comply with the government’s own medium-term budget framework. Recently regained policy credibility and benign market conditions provide a welcome but only limited window of opportunity to press ahead with necessary reforms. With elections due by October 2015, building consensus around these reforms will prove difficult in the short term. In this context, discussions focused on three key areas necessary to maintaining economic and financial stability and improving medium- term growth prospects: (i) enhancing competitiveness through further reforms to improve the functioning of labor and product markets, and making progress on corporate deleveraging; (ii) safeguarding financial sector stability in a low profitability and low growth environment; and (iii) ensuring fiscal stability in a low profitability and low growth environment; and (iii) ensuring fiscal sustainability against the backdrop of vulnerable debt dynamics and large financing needs.
    Keywords: Post-program monitoring;Fiscal policy;Domestic debt;Corporate sector;Fiscal reforms;Public enterprises;Bank supervision;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;Portugal;
    Date: 2015–01–30
  46. By: Joscha Beckmann; Ansgar Belke; Christian Dreger
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, among them dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule of four major central banks.
    Keywords: Taylor rule, international spillovers, monetary policy interaction, smooth transition models
    JEL: E43 F36 C22
    Date: 2015–01
  47. By: Congressional Budget Office
    Abstract: In certain reports and for some major pieces of legislation, CBO analyzes the short-term and longer-term effects on the overall economy of changes in federal fiscal (tax and spending) policies. This report, which is part of the agency’s ongoing effort to make its analyses transparent, explains the methods that CBO uses in such analyses.
    JEL: E62 E66
    Date: 2014–11–10
  48. By: Wolters, Maik; Schwarzmüller, Tim
    Abstract: We provide a systematic analysis of fiscal consolidation in a dynamic general equilibrium model with a detailed government sector and a share of credit-constrained households. We simulate permanent cuts in government consumption, government investment, and transfer payments as well as permanent increases in the labor, capital and consumption tax rate. We find that ordering these consolidation strategies by multiplier size or their welfare consequences leads to very different rankings. With respect to welfare gains cuts in government consumption rank highest because they yield the largest increase in private consumption in the short- and long-run. This however comes at the cost of large temporary reductions in output. Cutting transfers has the largest positive effects on output, yet the welfare consequences rank lowest since labor input does not decrease so that there is no increase in leisure. Cuts in government investment and capital tax increases have detrimental effects on output in the short- and long-run. From a welfare perspective they do not rank lowest because the slow convergence of the system to the final steady state leads to substantial discounting of the implied long-run drop in consumption. To explain these different outcomes we analyze the short- and long-run transmission channels of the different consolidation instruments. Furthermore, we study how the transmission of fiscal consolidation changes in the case of a binding zero lower bound on nominal interest rates.
    JEL: E62 E63 H61
    Date: 2014
  49. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Yutaro Izumi (Northwestern University); Yi-Chan Tsai (National Taiwan University)
    Abstract: This paper quantitatively examines the long-run macroeconomic effects of resource misallocation in an otherwise standard one-sector neoclassical growth model with heterogeneous firms being subject to progressive taxation as well as endogenous entry and exit decisions. Under a progressive fiscal policy rule, capital and labor inputs move from more productive firms to less productive establishments as the latter face a lower or negative tax rate. We find that since low-productivity firms use an inefficiently high level of productive resources when there are no entry and exit decisions, the overall production and aggregate productivity will fall as the tax progressivity rises. By contrast, more progressive taxation may raise the economy's total output and aggregate productivity when endogenous entry and exit decisions are allowed and the household's labor supply is postulated to be fixed. Our analysis therefore shows that the quantitative implications of progressive taxation are sensitive to the variability of hours worked and the presence of entry regulations.
    Keywords: Resource Misallocation, Aggregate Productivity, Progressive Taxation, Idiosyncratic Distortions.
    JEL: E6 H21 H25 O4
    Date: 2015–02
  50. By: Catherine Doz (Centre d'Economie de la Sorbonne - Paris School of Economics); Anna Petronevich (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: The official institutions (NBER, OECD, CEPR and others) provide business cycle chronology with a lag from 3 months up to several years. Markov-Switching Dynamic Factor Model (MS-DFM) allows to produce the turning points more timely. The Kalman filter estimates of the model can be obtained in one step with limited number of series or in two steps on a much richer dataset. While the choice of correct series is a challenge for the one-step method, the problem of the two-step method is the potential misspecification. In this paper we apply one-step and two-step approaches to the French data and compare their performance. Both methods give qualitatively similar results and prove to reproduce the OECSD business cycle chronology on the 1993-2014 monthly sample well. We find that the two-step method is more precise in determining the beginnings and the ends of recessions. Also, both methods produce extra signals corresponding to downturns which were too short to belong to OECD chronology of recessions.
    Keywords: Dynamic factor models, Markov switching models, business cycle turning points.
    JEL: C32 C34 E32
    Date: 2015–02
  51. By: Strulik, Holger
    Abstract: This paper provides the exact analytical solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, an equivalence result holds. If hyperbolical discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias and the entailed time-inconsistency of savings plans are harmless for economic growth. The result is robust to the introduction of non-homothetic utility and a variable elasticity of intertemporal substitution in consumption.
    JEL: O40 D91 E21
    Date: 2014
  52. By: Häring, Norbert
    Abstract: Ein Finanzjournalist, der seit gut 15 Jahren ber die Arbeit der Bundesbank und der Europ ischen Zentralbank berichtet, stellt Fragen, die in der akademischen Diskussion nur von Au enseitern gestellt werden. Eine davon. Wenn Notenbanken einfach nach belieben Geld drucken k nnen, wie kann es dann sein, dass zu wenig Geld in Umlauf kommt und Deflation droht? Die Antwort auf diese und andere respektlose Fragen beleuchtet einen Aspekt, dem die akademischen konomen ausweichen. Cui bono? Wer profitiert davon? Die Europ ische Zentralbank erscheint in diesem Lichte als Lobbyistin der Gesch ftsbanken, nicht als H terin des Gemeinwohls.
    JEL: E44 E52 G21
    Date: 2014
  53. By: YuichiroWaki (University of Queensland); Richard Dennis (University of Glasgow); Ippei Fujiwara (Keio University/ANU)
    Abstract: This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.
    Date: 2015–01
  54. By: Guerrazzi, Marco
    Abstract: In this note I discuss the condition for indeterminacy in the context of search models with increasing returns in the matching technology. Building on the theoretical framework set forth by Giammarioli (2003), I argue that increasing returns with respect to vacancies at the aggregate level is only a necessary requirement for indeterminate equilibrium paths. Specifically, I show that sunspot equilibria can actually be obtained by imposing an additional condition between the private and the social elasticity of the matching function with respect to unemployment.
    Keywords: Search theory; Matching function; Indeterminacy; General equilibrium.
    JEL: E10 E24 J64
    Date: 2015–02–06
  55. By: International Monetary Fund. African Dept.
    Abstract: KEY ISSUES Context: Madagascar is one of the poorest countries in the world. Weak economic growth has contributed to persistent and increasing poverty with deteriorating social indicators. In a fragile environment, the uncertainty linked to political instability, weak institutions, and weak governance has eroded the foundation for solid economic growth, with short-term rent-seeking having taken precedence over longer-term nation building. Outlook and Risks: The authorities are at a crossroads. A well-prioritized medium-term economic program that is implemented concertedly would increase growth and reduce poverty. This will require resources in order to undertake essential investment in infrastructure, as well as to increase social spending on education and health. However, there are downside risks, whereby a slow pace of reform implementation would keep Madagascar on a path of economic stagnation and persistent poverty. Fiscal Policy: There is a need to increase fiscal space in order to raise the level and efficiency of pro-poor/pro-growth spending while preserving debt sustainability. This will involve a broadening of the tax base, supported by a comprehensive revenue mobilization strategy, improving the composition and quality of budgetary spending, and reinforcing public financial management. Monetary and Exchange Rate Policies: To facilitate an active monetary policy and safeguard macroeconomic stability, it will be important to increase central bank independence, strengthen its oversight mechanisms, and recapitalize the central bank. A floating regime remains appropriate, but it will be important to ensure that the foreign exchange market is liquid and reflects market conditions. Structural Reforms: There is a need to strengthen the economic climate, including through improved governance and social development policies that would send a clear signal, both within society and to development partners, confirming the government’s commitment to reform. To help build public support for continued reforms, it would be advisable to build an early track record of “small victories/quick winsâ€.
    Keywords: Article IV consultation reports;Economic conditions;Economic growth;Fiscal policy;Fiscal reforms;Monetary policy;Central bank autonomy;Economic indicators;Staff Reports;Press releases;Madagascar;
    Date: 2015–01–30
  56. By: Neuenkirch, Edith; Hayo, Bernd
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about monetary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We conclude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    JEL: D83 E52 E58
    Date: 2014
  57. By: Christian Schoder (Macroeconomic Policy Institute (IMK))
    Abstract: Using Cointegrated Vector Auto-Regression analysis, we provide evidence for the US manufacturing sector that production capacities adjust endogenously to current output in the long run. The rate of capacity utilization, i.e. the output-capacity ratio, is found to be stationary since production capacities respond endogenously to changes in current output and not vice versa. Hence, the principle of effective demand in a growth context, by which a permanent demand shock has a permanent growth effect, is consistent with the stylized fact of a stationary rate of capacity utilization since production capacities are endogenous in the long run.
    Keywords: Effective demand, stationary utilization rate, endogenous capacity, cointegrated vector autoregression
    JEL: E12 E22 C22
    Date: 2013–10
  58. By: Warren E. Weber
    Abstract: Beginning in 1864, in the United States notes of national banks were the predominant medium of exchange. Each national bank issued its own notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with national bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange (a uniform currency). It finds that bank notes made transacting easier and were not subject to overissuance. National bank notes were perfectly safe because they were insured by the federal government. Further, national bank notes were a uniform currency. Notes of different banks traded at par with each other and with greenbacks. This paper describes the mechanism that was put in place to achieve uniformity. The U.S. experience with national bank notes suggests that a privately-issued e-money system can operate efficiently but will require government intervention, regulation, and supervision to minimize counterfeiting, promote safety and provide the mechanism necessary for different media of exchange to exchange at par with each other.
    Keywords: Bank notes, E-Money, Financial services
    JEL: E41 E42 E58
    Date: 2015
  59. By: Novy, Dennis; Taylor, Alan
    Abstract: We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. In response to an uncertainty shock firms optimally adjust their inventory by cutting orders of foreign intermediates disproportionately strongly. In the aggregate, this leads to a bigger contraction in international trade flows than in domestic activity. We confront the model with newly-compiled U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and fluctuations in international trade.
    JEL: F10 E30 F40
    Date: 2014
  60. By: Herwartz, Helmut; Plödt, Martin
    Abstract: Apart from a priori assumptions on instantaneous or long run effects of structural shocks, sign restrictions have become a prominent means for structural vector autoregressive (SVAR) analysis. Moreover, second order heterogeneity of systems of times series can be fruitfully exploited for identification purposes in SVARs. We show by means of a Monte Carlo study that taking statistical information into account offers a more accurate quantification of the true structural relations. In contrast, resorting only to commonly used sign restrictions bears a higher risk of failing to recover these structural relations. As an empirical illustration we employ the statistical and the sign restriction approach in a stylized model of US monetary policy. By combining identifying information from both approaches we strive for improved insights into the effects of monetary policy on output. Our results point to a decline in real GDP after a monetary tightening at an intermediate horizon.
    JEL: C32 E47 C10
    Date: 2014
  61. By: Rostam-Afschar, Davud; Meissner, Thomas
    Abstract: This paper tests whether the Ricardian Equivalence proposition holds in a life cycle consumption laboratory experiment. This proposition is a fundamental assumption underlying numerous studies on intertemporal choice and has important implications for tax policy. Using nonparametric and panel data methods, we find that the Ricardian Equivalence proposition does not hold in general. Our results suggest that taxation has a significant and strong impact on consumption choice. Over the life cycle, a tax relief increases consumption on average by about 22% of the tax rebate. A tax increase causes consumption to decrease by about 30% of the tax increase. These results are robust with respect to variations in the difficulty to smooth consumption. In our experiment, we find the behavior of about 62% of our subjects to be inconsistent with the Ricardian proposition. Our results show dynamic effects; taxation inuences consumption beyond the current period.
    Keywords: Ricardian Equivalence,Taxation,Life Cycle,Consumption,Laboratory Experiment
    JEL: D91 E21 H24 C91
    Date: 2014
  62. By: Nitsch, Volker; Goldbach, Stefan
    Abstract: The massive decline in international trade in 2008/09 is often attributed to the global deterioration in financial conditions after the bankruptcy of a US investment bank, Lehman Brothers. This paper examines the association between external finance and firm activity in Germany in more detail. In particular, we explore a novel data set that matches a full sample of quarterly bank-firm lending data with detailed information on borrowers and lenders. Our results indicate that foreign sales are insensitive to variations in external finance. While German banks affected by the crisis have significantly reduced their credit supply, exporting firms seem to be particularly good borrowers, which have been offered alternative financing options.
    JEL: F40 E44 G21
    Date: 2014
  63. By: Ruslan Aliyev
    Abstract: This research studies the specific determinants of the choice of exchange rate regime in resource-rich countries. We run multinomial logit regressions for an unbalanced panel data set of 145 countries over the 1975-2004 period. We find that resource-rich countries are more likely to adopt a fixed exchange rate regime compared to resource-poor countries. Furthermore, we provide evidence that output volatility contributes to the likelihood of choosing a fixed exchange rate regime positively in resource-rich countries and negatively in resource-poor countries. We believe that in resource-rich countries a fixed exchange rate regime is mainly preferred due to its stabilization function in the face of turbulent foreign exchange inflows. Moreover, our results reveal that the role of democracy and independent central banks in choosing more flexible exchange rate regimes is stronger in resource-rich countries. In resource-rich countries that possess non-democratic institutions and non-independent central banks, the government is less accountable in spending natural resource revenues and fiscal dominance prevails. In this situation, fluctuations in natural resource revenues are more easily transmitted into the domestic economy and therefore a fixed exchange rate becomes a more favorable option.
    Keywords: monetary policy; exchange rate regime; natural resource-rich countries;
    JEL: E52 E58 Q3
    Date: 2014–12
  64. By: Mauricio Villamizar-Villegas; David Perez-Reyna
    Abstract: In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention.
    Keywords: Sterilized foreign exchange intervention, impossible trinity, portfolio balance channel, signaling channel, uncovered interest rate parity.
    JEL: E52 E58 F31
    Date: 2015–01–16
  65. By: Bauer, Christian; Ernstberger, Philip
    Abstract: We apply an in nite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend o speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.
    JEL: E58 F30 C61
    Date: 2014
  66. By: Malcomson, James (University of Oxford); Mavroeidis, Sophocles (University of Oxford)
    Abstract: The Mortensen and Pissarides (1994) matching model with all wages negotiated each period is shown inconsistent with macroeconomic wage dynamics in the US. This applies even when heterogeneous match productivities, time to build vacancies and credible bargaining are incorporated. Wage rigidity consistent with micro evidence that wages of job changers are more flexible than those of job stayers allows the model to capture these dynamics and is not inconsistent with parameter calibrations in the literature. Such wage rigidity affects only the timing of wage payments over the duration of matches, so conclusions about characteristics based on calibrations continue to apply.
    Keywords: matching frictions, wage bargaining, wage rigidity
    JEL: E2 J3 J6
    Date: 2015–01
  67. By: Greene, Claire (Federal Reserve Bank of Boston); Rysman, Marc (Boston University); Schuh, Scott (Federal Reserve Bank of Boston); Shy, Oz (Federal Reserve Bank of Boston)
    Abstract: This paper studies the economic cost-benefit analysis behind the decision by the United Kingdom on how to implement its Faster Payments Service (FPS), which allows consumers and businesses to rapidly transfer money between bank accounts, and draws implications for the U.S. payments system.
    Keywords: fast payments systems; cost-benefit analysis; account-to-account (A2A) transfers; person-to-person (P2P) payments
    JEL: E41 E42 E51 G12 G21
    Date: 2014–10–10
  68. By: Krebs, Tom; Scheffel, Martin
    Abstract: This paper studies the effect of labor market reform on the welfare cost of business cycles. Motivated by the German labor market reforms of 2003-2005, the so-called Hartz reforms, the paper focuses on two labor market institutions: the unemployment insurance system determining search incentives and the system of job placement services affecting matching efficiency. The paper develops a tractable search model with idiosyncratic labor market risk and risk-averse workers, and derives a closed-form solution for the welfare cost of business cycles as a function of the various parameters of interest. An improvement in job placement services leads to a reduction in the welfare cost of business cycles, but a change in unemployment benefit generosity has in general an ambiguous effect. A quantitative analysis based on a calibrated version of the model suggests that the German labor market reforms of 2003-2005 reduced the non-cyclical unemployment rate by 3 percentage points and reduced the welfare cost of business cycles by 30 percent.
    JEL: E20 J20 E30
    Date: 2014
  69. By: Schreiber, Sven
    Abstract: The topic of this paper is the estimation uncertainty of the Stock-Watson and Gonzalo-Granger permanent-transitory decompositions in the framework of the co-integrated vector autoregression. We suggest an approach to construct the confidence interval of the transitory component estimate in a given period (e.g. the latest observation) by conditioning on the observed data in that period. To calculate asymptotically valid confidence intervals we use the delta method and two bootstrap variants. As an illustration we analyze the uncertainty of (US) output gap estimates in a system of output, consumption, and investment.
    JEL: C32 C15 E32
    Date: 2014
  70. By: Pedro Gomis-Porqueras; Laura Puzzello
    Abstract: This paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro using the synthetic control method. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. The Netherlands is estimated would have been as well off without the euro. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain these income effects. We find that early euro adopters with a business cycle more synchronized to that of the union, and more open to intra-union trade and migration lost less or gained more from the euro. A key role in the transmission of post-euro income losses across union members has been played by the integration of capital markets.
    Keywords: Monetary Union; Synthetic Control Method; Per Capita Income; euro
    JEL: C21 C23 E65 F33 N14
    Date: 2015–01–22
  71. By: Siassi, Nawid
    Abstract: Marriage is one of the most important determinants of economic prosperity, yet most existing theories of inequality ignore the role of the family. This paper documents that the cross-sectional distributions of earnings and wealth display a high degree of concentration, even when disaggregated into single and married households. At the same time, there is a large marriage gap: married people earn on average 27 percent more income, and they hold 34 percent more net worth. To account for these empirical facts, I develop a theory based on an otherwise standard incomplete-markets OLG model with ex-ante identical agents, who (i) are randomly selected into single or married households at the beginning of their economic lives; (ii) face uninsurable labor market risk henceforth; (iii) and make Pareto-efficient decisions if married. In a calibrated version of the model, I show that positive assortative matching, an effective tax bonus for married couples and directed bequests are key to explaining the marriage gap in earnings and wealth. A policy experiment of moving from joint tax filing for married couples to separate filing yields output and welfare gains.
    JEL: D31 E21 D91
    Date: 2014
  72. By: Wohlrabe, Klaus; Teresa, Buchen
    Abstract: The use of large datasets for macroeconomic forecasting has received a great deal of interest recently. Boosting is one possible method of using high-dimensional data for this purpose. It is a stage-wise additive modelling procedure, which, in a linear specification, becomes a variable selection device that iteratively adds the predictors with the largest contribution to the fit. Using data for the United States, the euro area and Germany, we assess the performance of boosting when forecasting a wide range of macroeconomic variables. Moreover, we analyse to what extent its forecasting accuracy depends on the method used for determining its key regularisation parameter, the number of iterations. We find that boosting mostly outperforms the autoregressive benchmark, and that $K$-fold cross-validation works much better as stopping criterion than the commonly used information criteria.
    JEL: C53 E27 C52
    Date: 2014
  73. By: Fernando Fernández-Rodríguez (Department of Quantitative Methods in Economics - Universidad de Las Palmas de Gran Canaria); Marta Gómez-Puig (Department of Economic Theory - Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the timevarying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.
    Keywords: Sovereign debt crisis, Euro area, Market Linkages, Vector Autoregression, Variance Decomposition.
    JEL: C53 E44 F36 G15
    Date: 2015–02
  74. By: Fidrmuc, Jarko; Scharler, Johann
    Abstract: We analyze the relationship between firm-specific shocks and aggregate fluctuations. In particular, profitability of firms affected by a negative shock worsens. To the extent that the banks cannot distinguish between aggregate and firm-specific profitability shocks, they will adjust interest rates for all borrowers. We test the influence of individual and bank specific data on lending rate using individual data for firm-bank relationships in Germany between 2005 and 2007. We provide the evidence that firm lending conditions depend on both individual and aggregate profitability. This result is consistent with the interpretation that banks use firm-specific as well as aggregate information when setting corporate lending rates.
    JEL: E32 G21 L14
    Date: 2014
  75. By: Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We derive the equilibrium interest rate and risk premiums using recursive utility for jump-diffusions. Compared to to the continuous version, including jumps allows for a separate risk aversion related to jump size risk in addition to risk aversion related to the continuous part. The jump part also introduces moments of higher orders that may matter in many circumstances. We consider the version of recursive utility which gives the most unambiguous separation of risk preference from time substitution, and use the stochastic maximum principle to analyze the model. This method uses forward/backward stochastic differential equations. We demonstrate how the stochastic process for the market portfolio is determined in terms the corresponding processes for future utility and aggregate consumption. It is indicated that this model has the potential to give reasonable explanations of empirical puzzles.
    Keywords: Recursive utility; jump dynamics; the stochastic maximum principle
    JEL: D51 D53 D90 E21 G10 G12
    Date: 2015–01–30
  76. By: Winkler, Roland; Lewis, Vivien
    Abstract: This paper studies optimal taxation in a general equilibrium macro model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.
    JEL: E22 E61 H21
    Date: 2014
  77. By: Dmitry Kulikov
    Abstract: This paper examines the Law of One Price using Nielsen disaggregated price data covering 13 euro area countries and 45 different product categories over the time period 2008 to 2012. The empirical methodology is based on a non-structural log-linear regression with spatial effects in both the geographical and product-variety dimensions, estimated by the Bayesian methods. The models link the relative prices of homogenous products in the sample of euro area countries to four distinct groups of factors: product-specific consumption preferences, country-specific macroeconomic and regional characteristics, volatility of prices and volumes, and spatial effects. The estimated reduced-form Law of One Price models uncover a strong interdependence of relative prices both on the geographical scale and across “similar” product varieties, going beyond the included set of explanatory variables and warranting further empirical investigation.
    Keywords: disaggregated prices, spatial dependence, Bayesian estimation, Law of One Price
    JEL: C21 D40 E31
    Date: 2015–01–20
  78. By: Jonny Castro Tapias
    Abstract: En este documento se busca determinar si el capital humano medido como años de escolaridad promedio, tiene un impacto positivo en el crecimiento económico en el largo plazo para el periodo 1950 – 2012, usando series de tiempo se busca determinar la relación de largo plazo entre el capital, medido como formación bruta de capital fijo, el capital humano y el producto interno bruto. Usando la técnica de cointegracion de Johansen (1988, 1991) y los modelos de corrección de errores (MCE). La estimación de los modelos de crecimiento económico han empleados variables macroeconómicas para determinar los componentes del crecimiento económico, partiendo del modelo neoclásico de (Solow, 1956), y teniendo en cuenta los postulados de Mankiw, Romer & Weil (1992). Los resultados muestran que de hecho existe un efecto positivo en el largo plazo entre la producción y el capital humano, pero se nota un impacto negativo en la innovación tecnológica, lo que sugiere que se debe tener políticas que incentiven la formación de la educación y la inversión para tener mejores rendimientos en el crecimiento económico en el largo plazo.
    JEL: C22 E24 I25 O47
    Date: 2014–12–05
  79. By: Alfonso Arpaia; Aron Kiss; Balazs Palvolgyi; Alessandro Turrini
    Abstract: This paper assesses the role of labour mobility in the EU as an adjustment mechanism. It presents stylised facts on mobility and migration at national and sub-national level, analyses the determinants of mobility flows by means of gravity equations, and studies the dynamic response of mobility to asymmetric demand shocks by means of vector auto regression (VAR) analysis in the vein of Blanchard and Katz (1992). It is found that EU membership increases mobility significantly. Membership in the euro area, while not raising the magnitude of mobility flows per se, is associated with a stronger reaction of labour mobility to unemployment differences across countries. The dynamics of labour mobility in response to asymmetric demand shocks is analysed on country-level data on a panel of EU countries. Results indicate that mobility absorbs about a quarter of the shock within 1 year and about 60 per cent after 10 years. The analysis also shows that the response of migration to shocks has been growing over time, becoming almost twice as important after EMU completion. A version of the VAR model allowing for the analysis of the response of wages indicates that the response of real wages to asymmetric demand shocks has also increased after EMU.
    JEL: C22 C53 E37
    Date: 2014–12
  80. 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 analyze the effects of infrastructure investment on economic performance in Portugal using a newly developed data set. We employ a vector autoregressive approach to estimate the elasticity and marginal products of investments on twelve different types of infrastructure investment on private investment, employment and output. We find that the largest long-term accumulated effects come from investments in railroads, ports, airports, health, education, and telecommunications. For all of these infrastructures, the output multipliers are sizable enough to suggest that these investments would pay for themselves in the form of additional tax revenues. We find also that for investments in airports and health infrastructures the bulk of the effects are short-term demand side effects while for railroads and health the bulk of the effects come from long-term supply side effects. Finally, investments in health and airports show a clear pattern of decreasing marginal returns with railroads, ports, and telecommunications showing a relative stable pattern. In terms of the other infrastructure assets, we find that the economic effects of investments in municipal roads, highways, and electricity and gas are not significant or relevant. Investments in national roads, waste and waste water, and refinery infrastructures have positive economic effects but not large enough to also have a positive budgetary effects. Clearly, not all infrastructure investments are created equal along several and rather relevant dimensions from a policy perspective.
    Keywords: Infrastructure Investment, Multipliers, Economic Performance, Budgetary Effects, VAR, Portugal.
    JEL: C32 E22 E62 H54 H60 O47 O52
    Date: 2015–02–05
  81. By: Drechsel, Katja; Giesen, Sebastian; Lindner, Axel
    Abstract: This study analyzes the performance of the IMF World Economic Outlook forecasts for world output and the aggregates of both the advanced economies and the emerging and developing economies. With a focus on the forecast for the current and the next year, we examine whether IMF forecasts can be improved by using leading indicators with monthly updates. Using a real-time dataset for GDP and for the indicators we nd that some simple single-indicator forecasts on the basis of data that are available at higher frequency can signi cantly outperform the IMF forecasts if the publication of the Outlook is only a few months old.
    JEL: C52 C53 E37
    Date: 2014
  82. By: Roberto Censolo; Caterina Colombo
    Abstract: This article investigates the early signs of the impact of the 2008 crisis on fiscal convergence within the EU area. Over the 2004-2012 period we compare the convergence pattern before and after the crisis by considering the key fiscal aggregates and the main economic and functional components of total government expenditure. We show that the effects of the 2008 financial crisis have been transmitted differently on the fiscal frame in the EU area, signalling an overall tendency to diverge of the Periphery EU countries from the Core. In particular, it emerges a greater persistence among the Periphery countries of the backlash of the crisis on government budgets, causing a further divergence in the debt positions between Core and Periphery, and disarranging effects on government spending in the Peripheral countries, with crowding out of the productive components of public expenditure.
    Keywords: European Union; fiscal convergence; government spending composition; financial crisis
    JEL: E61 F02 H11
    Date: 2015–02–05
  83. By: Leydi Viviana González Núñez; Gustavo Barragán Daza
    Abstract: Este documento realiza un análisis empírico de como el crecimiento económico de Colombia afecta el desarrollo de la salud en el país, utilizando variables macroeconómicas en una periodicidad anual entre 1981 – 2012. Para este artículo se tienen dos tipos de modelo, el primero, es un modelo de regresión aplicado como mínimos cuadrados ordinarios, mínimos cuadrados dinámicos y mínimos cuadrados completamente modificados, y el segundo es un modelo vectorial autoregresivo (VAR). Los resultados permiten concluir que variaciones en el PIB y la tasa de desempleo, anteceden a cambios en la tasa de mortalidad y que el crecimiento económico y la tasa de desempleo tienen una relación negativa con el desarrollo de la salud.
    JEL: E32 I1 I31 N3
    Date: 2014–12–12
  84. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Wisconsin Bankers Association's 2015 Wisconsin Economic Forecast Luncheon, Madison, Wisconsin, January 8, 2015.
    Date: 2015–01–08
  85. By: Keshab Bhattarai (University of Hull Business School, UK; The Rimini Centre for Economic Analysis, Italy); Sushanta K. Mallick (Queen Mary, University of London, UK)
    Abstract: Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. Analysis of business cycle results from the VAR and BVAR-DSGE models illustrate the degree of interactions and interdependence in the global economy in the short to medium runs.
    Date: 2015–01
  86. By: Molenaars, Tomas K.; Reinerink, Nick H.; Hemminga, Marcus A.
    Abstract: The objective of our work is to analyze the forecast performance of the dynamic Nelson-Siegel yield curve model and, for comparison, the first order autoregressive (AR(1)) model applied to a set of US bond yield data that covers a large timespan from November 1971 to December 2008. As a reference we take the random walk model applied to the yield data. For our analysis, we make use of a simple parameter representing the relative forecast performance to compare forecasting results of different methods. Our findings indicate that none of the yield curve models convincingly beats the random walk model. Furthermore, our results show that deriving conclusions on basis of model testing for a limited time period is inadequate.
    Keywords: Term structure of interest rates; Yield curve modeling; Dynamic Nelson-Siegel model; Out-of-sample forecasting evaluations.
    JEL: C5 E4 G17
    Date: 2015–02–05
  87. By: Ojo, Marianne
    Abstract: As well as incorporating and exploring the role of formal analytical methods as a means of highlighting and discovering foundational and fundamental strategy issues, such as the determinants/causes of performance differences between banking institutions and other corporate structures across various jurisdictions, this paper aims to contribute to the literature on how limitations of empirical based research can be mitigated. Such causes of performance differences will incorporate a consideration of what these determinants are, how they operate, how performance should be measured, the extent to which such differences persist, the extent to which such performance measures should be relied upon. Performance measures to be incorporated in this paper will focus primarily on firm performance measures, such as leverage ratios, as well as a brief discussion of macro-economic indicators. From this perspective, the rise of macroeconomics, micro economic inefficiency debates - as well as the validity of such debates will be considered. In its aim to accentuate why many doubts have arisen as regards the reliability of the Basel III Leverage Ratio as a performance measure, and principally in respect of calibration issues, this paper will also provide an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in several jurisdictions such as the United Kingdom and the United States. The paper will also aim to highlight the role of enforcement and the enforceability of rules, ratios and standards, in ensuring that more comparable, consistent, objective and ultimately reliable performance measures are generated.
    Keywords: Basel III; Capital Requirements Directive IV; leverage ratios; enforcement; supervision; Binding Technical Standards; Keynesian revolution; macroeconomics; micro economic inefficiency
    JEL: D8 E3 G2 G3 G38 K2 M4
    Date: 2015–02–02
  88. By: Molenaars, Tomas K.; Reinerink, Nick H.; Hemminga, Marcus A.
    Abstract: We define a parameter representing the relative forecast performance to compare forecasting results of different methods. By using this parameter, we analyze the performance of the dynamic Nelson-Siegel model and, for comparison, the first order autoregressive (AR(1)) model applied to a set of US bond yield data that covers a time span from November 1971 to December 2008. As a reference, we take the random walk model applied to the yield data. Our findings indicate that none of the models can convincingly beat the random walk model. Furthermore, there is no advantage in using the more advanced and complicated dynamic Nelson-Siegel model over a simple AR(1) model.
    Keywords: Term structure of interest rates; Yield curve modeling; Dynamic Nelson-Siegel model; Out-of-sample forecasting evaluations.
    JEL: C5 E4 G17
    Date: 2013–07–11
  89. By: Wolfgang Lechthaler; Mariya Mileva
    Abstract: We develop a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to study wage inequality during the adjustment after trade liberalization. We find that trade liberalization increases wage inequality both in the short run and in the long run. In the short run, inter-sectoral wage inequality is high but then recedes. The skill premium does not change much in the short run but increases substantially in the medium and long run. Incorporating worker training in the model considerably reduces the effects of trade liberalization on wage inequality. The effects on wage inequality are much more adverse when trade liberalization is unilateral instead of bilateral or restricted to specific sectors instead of including all sectors.
    Keywords: trade libaralization; wage inequality, adjustment dynamics
    JEL: E24 F11 F16 J31 J62
    Date: 2015–01
  90. By: Siegel, Christian; Barany, Zsofia
    Abstract: Job polarization is a widely documented phenomenon in developed countries since the 1980s: employment has been shifting from middle to low- and high-income workers, while average wage growth has been slower for middle-income workers than at both extremes. We document 1) that polarization has started as early as the 1950s in the US, and 2) that this process is closely linked to the shift from manufacturing to services. Based on these observations we propose a structural change driven explanation for polarization. Productivity growth through raising national income leads to a partial marketization of home production, and a disproportionate increase in the demand for high-end (luxury) services. To attract more workers into the low- and high-skilled services, the wages in these two sectors have to grow at a faster pace than in the middle.
    JEL: E24 J22 O41
    Date: 2014
  91. By: Launov, Andrey; Wälde, Klaus
    Abstract: To which extent does an increase in effectiveness of a public employment agency on the one hand and a reduction of unemployment benefits on the other reduce unemployment? Using the recent labour market reform in Germany we find that an improved agency explains substantial part of the observed post-reform unemployment decline: 34%. If disincentive effects of the agency reform were avoided, this impact would have become 51%. Contribution of benefit reduction, to the contrary, is modest: 7%. We underline public employment agency as a much more promising target in restructuring welfare states, in contrast to commonly discussed unemployment benefits.
    JEL: E24 J65 J68
    Date: 2014
  92. By: Callahan, Gene; Hoffmann, Andreas
    Abstract: Discerning family resemblances in the world of theories can be useful for several reasons. For one thing, noticing that two theories share the traits of a family of theories may help us to understand each of them better. Secondly, noticing the family resemblances may help us to model them more easily. In particular, the modern software development technique of object-oriented programming leverages family resemblances among different software “objects” to increase the ease of development, and so dovetails very well with the effort to pick out “families” on a more theoretical level. In this paper, we note the large family of two-population social cycle theories, all based on a pattern of disruptions and adjustments akin to the well-known predator-prey model.
    Keywords: social cycle theory, predator-prey, Lotka-Volterra, business cycle theory, agent-based modeling
    JEL: A12 B31 B4 E32
    Date: 2015–01
  93. By: Meissner, Thomas
    Abstract: This paper tests how subjects behave in an intertemporal consumption/saving experiment when borrowing is allowed and whether subjects treat debt differently than savings. Two treatments create environments where either saving or borrowing is required for optimal consumption. Since both treatments share the same optimal consumption levels, actual consumption choices can be directly compared across treatments. The experimental findings imply that deviations from optimal behavior are higher when subjects have to borrow than when they have to save in order to consume optimally, suggesting debt-aversion. Signifiant underconsumption is observed when subjects have to borrow in order to reach optimal consumption. Only weak evidence is found suggesting that subjects over-consume when saving is necessary for optimal consumption.
    JEL: C91 E21 D91
    Date: 2014
  94. By: Slavik, Ctirad; Yazici, Hakki
    Abstract: In the United States structure and equipment capital are e ffectively taxed at different rates. Recently, President Obama joined the group of policy makers and economists who propose to eliminate these di erentials. This paper analyzes the consequences of such a reform using an incomplete markets model with equipment-skill complementarity. We fi nd that the reform increases average welfare by 0.1%. Importantly, we fi nd that the reform does not involve the usual effi ciency vs. equality trade-o ff: it improves both.
    JEL: E62 H21 H25
    Date: 2014
  95. By: Peter Christoffersen (University of Toronto, Rotman School of Management and CREATES); Xuhui (Nick) Pan (Tulane University, A.B. Freeman School of Business)
    Abstract: After the financialization of commodity futures markets in 2004-05 oil volatility has become a strong predictor of returns and volatility of the overall stock market. Furthermore, stocks' exposure to oil volatility risk now drives the cross-section of expected returns. The difference in average return between the quintile of stocks with low exposure and high exposure to oil volatility is significant at 0.66% per month, and oil volatility risk carries a significant risk premium of -0.60% per month. In the post-financialization period, oil volatility risk is strongly related with various measures of funding liquidity constraints suggesting an economic channel for the effect.
    Keywords: option-implied volatility, oil prices, volatility risk, cross-section, factor-mimicking portfolios, financial intermediaries
    JEL: G12 G13 E44 Q02
    Date: 2014–12–02
  96. By: K. Sudhir (Cowles Foundation & School of Management, Yale University); Debabrata Talukdar (State University of New York at Buffalo)
    Abstract: Firms make investments in technology to increase productivity. But in emerging markets, where a culture of informality is widespread, information technology investments leading to greater transparency can impose a cost through higher taxes and need for regulatory compliance. We examine this tradeoff between productivity and transparency by examining IT adoption in the Indian retail sector.  We find that computer technology adoption is lower when firms have motivations to avoid transparency. Specifically, technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing. So firms have a higher productivity gain threshold to adopt computers in corrupt business environments with patchy and variable enforcement of the tax laws. Not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption. Thus in addition to their direct effects on the economy, enforcement, auditing and corruption can have indirect effects through their negative impact on adoption of productivity enhancing technologies that also increase operational transparency.
    Keywords: Retailing, Information technology, Productivity, Corruption, Informal economy, Emerging markets, Propensity score matching, Treatment effects models
    JEL: C31 D22 D33 E26 H26 L81 M15 O33 O53
    Date: 2015–01
  97. By: Mutschler, Willi
    Abstract: Several formal methods have been proposed to check identification in DSGE models via (i) the autocovariogram (Iskrev 2010), (ii) the spectral density (Komunjer and Ng 2011; Qu and Tkachenko 2012), or (iii) Bayesian indicators (Koop et al 2012). Even though all methods seem similar, there has been no study of the advantages and drawbacks of implementing the different methods. The contribution of this paper is threefold: First, we derive all criteria in the same framework following Schmitt-Groh and Uribe (2004). While Iskrev (2010) already uses analytical derivatives, Komunjer and Ng (2011) and Qu and Tkachenko (2012) rely on numerical methods. For a rigorous comparison we thus show how to implement analytical derivatives into all criteria. We argue in favor of using analytical derivatives, whenever feasible, due to its robustness and greater speed than relying on numerical procedures. Second, we apply all methods on DSGE models that are known to have lack of identification. Our findings suggest that most of the times the methods come to the same conclusion, however, the issue of numerical errors due to nonlinearities and very large matrices may lead to unreliable or contradictory conclusions. The example models show that by evaluating different criteria we also gain inside into the dynamic structure of the DSGE model. We argue that in order to thoroughly analyze identification, one has to be aware of the advantages and drawbacks of the different methods. Third, we extend the methods to higher approximations given the pruned-state-space representation studied by Andreasen, Fern ndez-Villaverde and Rubio Ram rez (2014). It is argued that this can improve overall identification of a DSGE model via imposing additional restrictions on the mean and variance. In this way we are able to identify previously unidentified models.
    JEL: C10 E10 C50
    Date: 2014
  98. By: Friese, Max
    Abstract: The paper shows the effect of demographic change on per capita burden of financing a PAYG social security system in the standard OLG model with frictional labor markets. Rising longevity and decreasing fertility both induce a rise in the employment level via increased capital accumulation and job openings. Simulations of the theoretical model show that this labor market effect indirectly crowds out part of the initial demographic shock's direct impact on per capita financing burden. This holds true for the generation at the period of impact as well as for the following generations.
    Keywords: OLG,demographic change,frictional labor market,PAYG social security,per capita burden of financing social security
    JEL: E24 H55 J64
    Date: 2015
  99. By: Era Dabla-Norris; Yan Ji; Robert Townsend; D. Filiz Unsal
    Abstract: We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to a firm-level data from the World Bank Enterprise Survey for six countries at varying degrees of economic development—three low-income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses.
    Keywords: Financial services;Income inequality;Gross domestic product;Income distribution;Low-income developing countries;Emerging markets;General equilibrium models;Financial inclusion, inequality, income distribution, hetergenous agents.
    Date: 2015–01–27
  100. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School)
    Abstract: Using Monte Carlo experiments, we examine the performance of indirect inference tests of DSGE models in small samples, using various models in widespread use. We compare these with tests based on direct inference (using the Likelihood Ratio). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the indirect inference test is by far the greater, necessitating re-estimation to ensure that the model is tested in its fullest sense. We also find that the small-sample bias with indirect estimation is around half of that with maximum likelihood estimation.
    Keywords: Bootstrap; DSGE; Indirect Inference; Likelihood Ratio; New Classical; New Keynesian; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2015–01
  101. By: Jürgen Bierbaumer-Polly (WIFO); Peter Huber (WIFO); Petr Rozmahel
    Abstract: According to difference-in-difference estimates business cycle synchronisation and similarity in sector structures between acceding and pre-existing regions reduced after Eastern Enlargement. Results for Northern enlargement are more ambiguous. In both enlargements, however, region pairs affected by enlargement with highly synchronised business cycles before enlargement experienced smaller increases in business cycle synchronisation and weaker reductions of structural differences relative to similar unaffected region pairs than region pairs with less synchronised business cycles. Similarly, affected regions that were more similar in terms of sector structure before enlargement experienced larger reductions in structural differences and business cycle synchronisation than similar unaffected region pairs.
    Keywords: business cycle correlation, sector specialisation, EU enlargement, difference-in-difference
    Date: 2015–01–29
  102. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland;)
    Abstract: The weight assigned to public information in Keynesian beauty contest depends on the signal precision and on the degree of strategic complementarities. This experimental study shows that the response of subjects to changes in the signal precision and in the degree of strategic complementarities is qualitatively consistent with theoretical predictions, though quantitatively weaker. The weaker subjects’ response to changes in the signal precision, however, mainly drives the weight observed in the experiment, making strategic complementarities and overreaction an issue of second order.
    Keywords: heterogeneous information, beauty contest, experiment, public information
    JEL: C92 D82 D84 E58
    Date: 2014
  103. By: Rony Mauricio Parra Jácome (Centro de Prospectiva Estrategica, Instituto de Altos Estudios Nacionales)
    Abstract: El presente trabajo presenta un análisis de la nueva configuración institucional en el sector petrolero bajo la interpretación de los diferentes instrumentos de política pública, considerados como condicionantes de las instituciones que moldean las políticas públicas Esto permite, contextualizar y caracterizar los diferentes modelos de instrumentos que se aplican dentro de la configuración institucional. En un primer momento se identifica la arquitectura del Estado con el fin de conocer el papel de intervención de cada organismo dentro de su estructura piramidal, luego se analizan los cambios en el ministerio rector de la política petrolera a partir de la reforma a la Ley de Hidrocarburos del Ecuador vigente desde el 2010 y finalmente el estudio decanta en la configuración de las empresas públicas de hidrocarburos, siendo estas instrumentos de acción y ejecución de la directriz de política pública en el sector.
    Keywords: Política pública, planificación y reformas institucionales, hidrocarburos, empresas públicas
    JEL: E61 L52 L71 Q40
    Date: 2015–01
  104. By: Michael Creel
    Abstract: This paper presents a cross validation method for selection of statistics for Approximate Bayesian Computing, and for related estimation methods such as the Method of Simulated Moments. The method uses simulated annealing to minimize the cross validation criterion over a combinatorial search space that may contain many, many elements. An example, for which optimal statistics are known from theory, shows that the method is able to select optimal statistics out of a large set of candidate statistics.
    Keywords: Approximate Bayesian Computation; likelihood-free methods; selection of statistics;method of simulated moments
    JEL: E24 O41
    Date: 2015–01–22
  105. By: Koeniger, Winfried
    Abstract: We show that more human capital improves incentives in a standard optimal taxation problem: common assumptions about preferences and technology imply that the disutility of labor decreases less strongly in unobserved ability if agents have more human capital. Human capital thus reduces the informational rents of high ability types and relaxes the incentive constraints. Since parents do not take the effect of human capital on incentives into account when choosing how much to invest into their children, there is a rationale for education subsidies.
    JEL: E24 H21 J24
    Date: 2014
  106. By: Alexander Cotte Poveda; Aura María Duarte Rojas
    Abstract: Este trabajo estudia la relación existente entre el conflicto armado, el despojo de tierras y la actividad ganadera en los municipios del Departamento del Meta. Mediante el análisis de conglomerados, el uso de regresiones y la confrontación del relato de algunas de las víctimas del conflicto armado y el despojo de las tierras, se muestran los principales hallazgos de la investigación. La comparación de los diferentes resultados indica que la actividad ganadera y el despojo de las tierras están asociados con el conflicto armado. De otro lado, se encuentra evidencia que revela la relación entre la presencia de grupos armados, cultivos ilícitos y la inestabilidad sobre el desarrollo económico y social del departamento.
    Keywords: Despojo de tierras, Violencia, Conflicto armado
    JEL: O4 E23 C33
    Date: 2015–01–26
  107. By: Alexander; Aura María Duarte Rojas
    Abstract: Este trabajo estudia la relación existente entre el conflicto armado, el despojo de tierras y la actividad ganadera en los municipios del Departamento del Meta. Mediante el análisis de conglomerados, el uso de regresiones y la confrontación del relato de algunas de las víctimas del conflicto armado y el despojo de las tierras, se muestran los principales hallazgos de la investigación. La comparación de los diferentes resultados indica que la actividad ganadera y el despojo de las tierras están asociados con el conflicto armado. De otro lado, se encuentra evidencia que revela la relación entre la presencia de grupos armados, cultivos ilícitos y la inestabilidad sobre el desarrollo económico y social del departamento.
    Keywords: Conflicto armad, Despojo de tierras, Violencia
    JEL: O4 E23 C33
    Date: 2015–01–20
  108. By: Olivier Sterck
    Abstract: This paper answers two questions: "What impact have natural resources had on the spread of the HIV/AIDS epidemic so far?" and "What role can natural resource rents play in order to finance the long-run response to HIV/AIDS?"  Using a panel dataset, de Soysa and Gizelis (2013) provided evidence that oil-rich countries are more deeply affected by the HIV epidemic.  They concluded that government of resource-rich countries failed to implement effective public policies for dealing with the HIV/AIDS epidemic.  In this paper, I show that their results are not robust and are spurious because the dependent variables and explanatory variables considered in their analysis are non-stationary.  After correcting for these issuse, I find no specific relationship between resource rents and the spread of HIV/AIDS.  I conclude by discussing the potential of resources rents for financing the long-term liability brought about by the HIV/AIDS epidemic in sub-Saharan Africa.
    Keywords: HIV/AIDS, natural resources, resource curse, epidemics, spurious regression, non-stationarity
    JEL: I1 I18 E6 Q32
    Date: 2014–03–01
  109. By: Christian Friedrich
    Abstract: Despite a vast empirical literature that assesses the impact of financial integration on the economy, evidence of substantial welfare gains from consumption risk sharing remains elusive. While maintaining the usual cross-country perspective of the literature, this paper explicitly accounts for household heterogeneity and thus relaxes three restrictive assumptions that have featured prominently in the past. By making use of international household-level data and a subjective measure of financial well-being, the analysis takes into account idiosyncratic shocks to the household, allows for a household-specific evaluation of labor income risk and facilitates explicit tests of the underlying insurance channels. Using two balanced panels of more than 17,000 and 31,000 households from up to 22 European countries over the periods 1994-2000 and 2004-2008, respectively, I first document a negative welfare effect arising from labor income risk. I then show that financial integration significantly mitigates this effect for the average household in the sample. Finally, I examine the underlying insurance channels and find that, during the 1990s, the benefits of financial integration occurred primarily in the form of better access to credit for households with only weak ties to the financial system. During the 2000s, however, the largest gains from financial integration emerged on the asset side and benefited in particular households that had already invested in financial markets.
    Keywords: International topics; International financial markets; Labour markets; Recent economic and financial developments
    JEL: E21 F3 I31
    Date: 2015
  110. By: Alexander Cotte Poveda; María del Rosario Castro Rebolledo
    Abstract: Esta investigación tiene como objetivo analizar los determinantes de la violencia que inciden sobre el desarrollo económico de los municipios de la provincia de Sugamuxi para el período 2000-2010. La metodología utilizada se basó en la construcción de un modelo de datos panel dinámico, con diferentes estimaciones que capturan los efectos y la evolución del capital humano, la incidencia de la producción per cápita, las variables de la violencia, la pobreza y sus diferentes efectos sobre el desarrollo económico de los municipios. Se encontró que los diferentes modelos estimados corroboran la hipótesis de que la violencia tiene incidencia negativa sobre el desarrollo económico de los municipios de la provincia de Sugamuxi, lo que corrobora la evidencia y los efectos de la violencia sobre el desarrollo. Los resultados sugieren que las diferentes formas de violencia tienen efectos perversos sobre el desarrollo, mientras que los diferentes niveles de educación inciden positivamente sobre el desarrollo económico de los municipios.
    Keywords: Pobreza, desarrollo económico, violencia y economía, datos de panel, Colombia.
    JEL: O10 O15 O4 E23 C33
    Date: 2015–01–26
  111. By: Bartha, Zoltán
    Abstract: The objective of the paper is to examine whether the advantages and disadvantages mentioned in the literature of the flat rate income tax could be observed in Hungary. Personal income tax data provided by the Hungarian National Tax and Customs Administration was used to check the arguments. It was found that the flat tax indeed favours richer taxpayers, and because of the family tax credits, it heavily favours families with children. Tax revenues declined as tax rates were cut, while the GDP growth rate was close to stagnant. Both of these developments go against the expectations of the flat tax supporters, although it has to be mentioned that the changes were made in the midst of a European- and world-wide depression, which could have distorted the pure effects of the new tax code. Although in many countries the flat rate tax was a positive signal for investors boosting foreign direct investments, the Hungarian government introduced extra taxes on some of the transnational companies in order to balance the budget (and compensate for the lost personal income tax revenues), which meant that there was a decline in the mood of the investors. There is some indication that some illegal activities are shifted to the legal domain: the ratio of those tax reporters who earned an annual income of HUF 2 million or higher has gone from 62.5% to 66.6% in the period of 2010-12.
    Keywords: flat rate income tax, Hungary, tax statistics, income distribution
    JEL: E64 H24
    Date: 2014–09
  112. By: Vogel, Edgar; Ludwig, Alexander; Börsch-Supan, Axel
    Abstract: Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations - France, Germany and Italy - to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of a consumption equivalent variation.
    Keywords: population aging,human capital,welfare,pension reform,retirement age,open economy
    JEL: C68 E17 E25 J11 J24
    Date: 2014

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