nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒04‒25
113 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Indeterminacy, Misspecification and Forecastability: Good Luck in Bad Policy? By Luca Fanelli; Marco M. Sorge
  2. Inflation Forecasting and the Distribution of Price Changes By Sartaj Rasool Rather; Sunil Paul; S. Raja Sethu Durai
  3. Volatility Spillover between Oil and Stock Market Returns By B. Anand; Sunil Paul; M. Ramachandran
  4. Asymmetric Price Adjustment - Evidence For India By Sartaj Rasool Rather; S. Raja Sethu Durai; M. Ramachandran
  5. A new framework for detecting the short term fiscal vulnerability for the European Union countries By Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
  6. The Study of Public Debt. Which Are the Distinctions between the Emerging and Advanced Economies in the European Union? By Stoian, Andreea; Iorgulescu, Filip
  7. Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income? By Merike Kukk; Karsten Staehr
  8. The Pass-Through of Sovereign Risk By Bocola, Luigi
  9. A New Predictor of Real Economic Activity: The S&P 500 Option Implied Risk Aversion By Sylvia Sarantopoulou-Chiourea; George Skiadopoulos
  10. Characterizing the Financial Cycle: Evidence from a Frequency Domain Analysis By Till Strohsal; Christian R. Proaño; Jürgen Wolters;
  11. Is There an Asymmetric Impact of Housing on Output? By Tsung-Hsien Michael Lee; Wenjuan Chen; ;
  12. Interest Premium, Sudden Stop, and Adjustment in a Small Open Economy By Peter Benczur; Istvan Konya
  13. Bank Supervision after the Financial Crisis: Signals from the Market for Liquidity By Nyborg, Kjell G.
  14. The equity premium in a production economy; A new perspective involving recursive utility By Aase, Knut K.
  15. An adaptive approach to forecasting three key macroeconomic variables for transitional China By Niu, Linlin; Xua , Xiu; Chen , Ying
  16. Real-time forecasting with a MIDAS VAR By Mikosch, Heiner; Neuwirth , Stefan
  17. State Dependency in Price and Wage Setting By Shuhei Takahashi
  18. Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks By William R. Cline
  19. Producto, desempleo y la Ley de Okun en la República Dominicana By Sánchez-Fung, José R.
  20. Bortkiewicz on Chain Indices and Irving Fisher's Reversal Tests, A Historical Note and a Disapproval of the Time Reversal Test By von der Lippe, Peter
  21. Combined Density Nowcasting in an Uncertain Economic Environment By Knut Are Aastveit; Francesco Ravazzolo; Herman K. van Dijk
  22. The Causal Links between Aid and Government Expenditures By Lukasz Marc
  23. The Effects of Liquidity Regulation on Bank Assets and Liabilities By Patty Duijm; Peter Wierts
  24. The Industrial Organisation of the Dance Industry in the Netherlands: a Transaction Cost Perspective on Hybrid Forms of Organisation By Frank A.G. den Butter; Jelle Joustra
  25. A Tourism Financial Conditions Index By Chia-Lin Chang; Hui-Kuang Hsu; Michael McAleer
  26. Prospects for an EMU between Federalism and Nationalism By Frank A.G. den Butter; Mathieu L.L. Segers
  27. Spillover Dynamics for Systemic Risk Measurement using Spatial Financial Time Series Models By Francisco Blasques; Siem Jan Koopman; Andre Lucas; Julia Schaumburg
  28. Financial Fragility, Sovereign Default Risk and the Limits to Commercial Bank Bail-outs By Sweder van Wijnbergen; Christiaan van der Kwaak
  29. Participation Constraints in Pension Systems By Roel Beetsma; Ward Romp
  30. Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria By Cars Hommes
  31. Interactions between Eurozone and US Booms and Busts: A Bayesian Panel Markov-switching VAR Model By Monica Billio; Roberto Casarin; Francesco Ravazzolo; Herman K. van Dijk
  32. Non-Marginal Cost-Benefit Analysis and the Tyranny of Discounting By Koen Vermeylen
  33. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  34. Low Frequency and Weighted Likelihood Solutions for Mixed Frequency Dynamic Factor Models By Francisco Blasques; Siem Jan Koopman; Max Mallee
  35. Reconciling Consumption Inequality with Income Inequality By Vadym Lepetyuk; Christian A. Stoltenberg
  36. Dynamic Equilibrium at a Congestible Facility under Market Power By Erik T. Verhoef; Hugo E. Silva
  37. Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts By Tiziana Assenza; William A. Brock; Cars H. Hommes
  38. Penalized Indirect Inference By Francisco Blasques; Artem Duplinskiy
  39. Bayesian Forecasting of US Growth using Basic Time Varying Parameter Models and Expectations Data By Nalan Basturk; Pinar Ceyhan; Herman K. van Dijk
  40. A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-standard Monetary Policy in the Euro Area By Geert Mesters; Bernd Schwaab; Siem Jan Koopman
  41. Advances in Financial Risk Management and Economic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer
  42. Equilibrium Selection in Games with Macroeconomic Complementarities By Oddvar M. Kaarbøe; Alexander F. Tieman
  43. The Interest Rate and Capital Durability, and the Importance of Methodological Pluralism By Roder van Arkel; Koen Vermeylen
  44. Fiscal and Monetary Policy Coordination, Macroeconomic Stability, and Sovereign Risk By Dennis Bonam; Jasper Lukkezen
  45. Reflexivity, Expectations Feedback and almost Self-fulfilling Equilibria: Economic Theory, Empirical Evidence and Laboratory Experiments By Cars Hommes
  46. Vector Autoregressions with Parsimoniously Time Varying Parameters and an Application to Monetary Policy By Laurent Callot; Johannes Tang Kristensen
  47. Predicting Covariance Matrices with Financial Conditions Indexes By Anne Opschoor; Dick van Dijk; Michel van der Wel
  48. Modelling and Simulation: An Overview By Michael McAleer; Felix Chan; Les Oxley
  49. From Islands to Hubs of Innovation: Connecting Innovative Regions By Andrea Caragliu; Peter Nijkamp
  50. Nowcasting and Forecasting Economic Growth in the Euro Area using Principal Components By Irma Hindrayanto; Siem Jan Koopman; Jasper de Winter
  51. Financial Fragility and the Fiscal Multiplier By Sweder van Wijnbergen; Christiaan van der Kwaak
  52. An Experimental Investigation of Wage Taxation and Unemployment in Closed and Open Economies By Arno Riedl; Frans van Winden
  53. Posterior-Predictive Evidence on US Inflation using Extended New Keynesian Phillips Curve Models with Non-filtered Data By Nalan Basturk; Cem Cakmakli; Pinar Ceyhan; Herman K. van Dijk
  54. The Methodology of Modern Macroeconomics and the Descriptive Approach to Discounting By Koen Vermeylen
  55. Recessions after Systemic Banking Crises: Does it matter how Governments intervene? By Sweder van Wijnbergen; Timotej Homar
  56. A Tourism Conditions Index By Chia-Lin Chang; Hui-Kuang Hsu; Michael McAleer
  57. Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations By Frost, Joshua; Logan, Lorie; Martin, Antoine; McCabe, Patrick E.; Natalucci, Fabio M.; Remache, Julie
  58. Inflation Dynamics During the Financial Crisis By Gilchrist, Simon; Schoenle, Raphael; Sim, Jae W.; Zakrajsek, Egon
  59. Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007-09 U.S. Financial Crisis By Carlson, Mark A.; Duygan-Bump, Burcu; Nelson, William R.
  60. Changes in source of profits and business strategies? : some evidence from the Philippines' universal banks in the 2000s By Kashiwabara, Chie
  61. When do Fiscal Consolidations Lead to Consumption Booms? Lessons from a Laboratory Experiment By Martin Geiger; Wolfgang Luhan; Johann Scharler
  62. El comercio de cabotaje del vino de Jerez en el siglo XIX: un análisis cuantitativo By Luis Cárdenas del Rey; Andrea Carrera; Laura Vitriago Valdivielso
  63. Cosmic cycles in global, national, and regional economics By Vladimir Belkin
  64. Cosmic cycles of global Conjuncture By Vladimir Belkin
  65. Strategies for Managing Banks’ Legacy Assets: part 1 (of 2) context, setting the scene, Spain 2012 By Jenk, Justin
  66. Strategies for Managing Bank’s Legacy Assets:part 2 (of 2) Assessment of strategies and their implementation By Jenk, Justin
  67. Bifurcation of macroeconometric models and robustness of dynamical inferences By William, Barnett; Guo, Chen
  68. Attention Misallocation, Social Welfare and Policy Implications By Chen, Heng; Luo, Yulei; Pei, Guangyu
  69. Testing for time variation in an unobserved components model for the U.S. economy By Tino Berger; Gerdie Everaert; Hauke Vierke
  70. Djelovanje neizvjesnosti na bankarsko tržište u Republici Hrvatskoj By Vladimir Arčabić
  71. Forbidden Fruits: The Political Economy of Science, Religion, and Growth By Bénabou, Roland; Ticchi, Davide; Vindigni, Andrea
  72. Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations By Peersman, Gert; Wagner, Wolf
  73. Bifurcation of Macroeconometric Models and Robustness of Dynamical Inferences By William Barnett; Guo Chen
  74. Graph representation of balance sheets: from exogenous to endogenous money By Pitrou, Cyril
  75. High public debt in the euro area: still a fact By Stoian, Andreea; Alves, Rui Henrique
  76. The Dynamics of Government Debt and Economic Growth By Swamy, Vighneswara
  77. Government Debt and Economic Growth: Estimating the Debt Thresholds and Debt Intolerance By Swamy, Vighneswara
  78. A Causality Test of the Revenue-Expenditure Nexus in Ghana By Obeng, Samuel
  79. Labor Market Slack and Monetary Policy By David G. Blanchflower; Andrew T. Levin
  80. Effects of Fiscal Shocks in a Globalized World By Alan J. Auerbach; Yuriy Gorodnichenko
  81. Forbidden Fruits: The Political Economy of Science, Religion, and Growth By Roland Bénabou; Davide Ticchi; Andrea Vindigni
  82. Quantitative Models of Wealth Inequality: A Survey By Mariacristina De Nardi
  83. AIG in Hindsight By Robert L. McDonald; Anna Paulson
  84. Cash burns: An inventory model with a cash-credit choice By Fernando Alvarez; Francesco Lippi
  85. Forecast Uncertainty and the Taylor Rule By Christian Bauer; Matthias Neuenkirch
  86. The dynamics of capital accumulation in the US: Simulations after Piketty By De Donder, Philippe; Roemer, John
  87. The return of black box economics - a critique of Keen on effective demand and changes in debt By Severin Reissl
  88. The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses By John Baffes; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocker
  89. A model of the Twin Ds: optimal default and devaluation By Na, Seunghoon; Schmitt-Grohe, Stephanie; Uribe, Martin; Yue, Vivian Z.
  90. Watering a lemon tree: heterogeneous risk taking and monetary policy transmission By Choi, Dong Boem; Eisenbach, Thomas M.; Yorulmazer, Tanju
  91. Insolvency after the 2005 bankruptcy reform By Albanesi, Stefania; Nosal, Jaromir B.
  92. Opening remarks for the Chapter 9 and Alternatives for Distressed Municipalities and States Workshop By Dudley, William
  93. Challenges posed by the evolution of the Treasury market By Potter, Simon M.
  94. Structural Change and Transformation of Growth Regime in the Japanese Economy By Hiroshi Nishi
  95. China and Global Macroeconomic Interdependence By Rod Tyers
  96. Optimal Taxation with Risky Human Capital By Marek Kapicka; Julian Neira
  97. Credit growth and economic activity after the Great Recession By McAndrews, James J.
  98. Money markets and monetary policy normalization By Potter, Simon M.
  99. Consumers' Attitudes and Their Inflation Expectations By Ehrmann, Michael; Pfajfar, Damjan; Santoro, Emilianio
  100. Banking panics and deflation in dynamic general equilibrium By Carapella, Francesca
  101. News Shocks and Labor Market Dynamics in Matching Models By Francesco Zanetti; Konstantinos Theodoridis
  102. Can indeterminacy and self-fulfilling expectations help explain international business cycles? By Stephen McKnight; Laura Povoledo
  103. From real business cycle and new Keynesian to DSGE Macroeconomics: facts and models in the emergence of a consensus By Pedro Garcia Duarte
  104. Financial Conditions and Slow Recoveries By Kevin x.d. Huang; Jie Chen; Zhe Li; Jianfei Sun
  105. The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach By Benjamin Eden
  106. The zero lower bound and parameter bias in an estimated DSGE model By Yasuo Hirose; Atsushi Inoue
  107. Output Growth and Inflation across Space and Time By W. Erwin Diewert; Kevin J. Fox
  108. Positive long-run inflation non-super-neutrality in the Euro area By Andrea Vaona
  109. Malý dynamický faktorový model na krátkodobé prognózovanie slovenského HDP By Tóth, Peter
  110. Debt and Deficit Fluctuations in a Time-Consistent Setup By Grechyna, Daryna
  111. Monetary Policy Instrument and Inflation in South Africa: Structural Vector Error Correction Model Approach By Bonga-Bonga, Lumengo; Kabundi, Alain
  112. Capital flows and asset prices: empirical evidence from emerging and developing economies By Taguchi, Hiroyuki; Sahoo, Pravakar; Nataraj, Geethanjali
  113. Inclusive human development in pre-crisis times of globalisation-driven debts By Asongu, Simplice; EFOBI, Uchenna; BEECROFT, Ibukun

  1. By: Luca Fanelli (University of Bologna); Marco M. Sorge (University of Göttingen and CSEF)
    Abstract: A recent debate in the forecasting literature revolves around the inability of macroecono-metric models to improve on simple univariate predictors, since the onset of the so-called Great Moderation. This paper explores the consequences of equilibrium indeterminacy for quantitative forecasting through standard reduced form forecast models. Exploiting U.S. data on both the Great Moderation and the preceding era, we first present evidence that (i) higher (absolute) forecastability obtains in the former rather than the latter period for all models considered, and that (ii) the decline in volatility and persistence captured by a .nite-order VAR system across the two samples is not associated with inferior (absolute or relative) predictive accuracy. Then, using a small-scale New Keynesian monetary DSGE model as laboratory, we generate arti.cial datasets under either equilibrium regime and investigate numerically whether (relative) forecastability is improved in the presence of indeterminacy. It is argued that forecasting under indeterminacy with e.g. unrestricted VAR models entails misspecification issues that are generally more severe than those one typically faces under determinacy. Irrespective of the occurrence of non-fundamental (sunspot) noise, for certain values of the arbitrary parameters governing solution multiplicity, the pseudo out-of-sample VAR-based forecasts of in.ation and output growth can outperform simple univariate predictors. For other values of these parameters, by contrast, the opposite occurs. In general, it is not possible to establish a one-to-one relationship between indeterminacy and superior forecastability, even when sunspot shocks play no role in generating the data. Overall, our analysis points towards a 'good luck in bad policy' explanation of the (relative) higher forecastability of macroeconometric models prior to the Great Moderation period.
    Keywords: DSGE, Forecasting, Indeterminacy, Misspecification, VAR system
    JEL: C53 C62 E17
    Date: 2015–04–19
  2. By: Sartaj Rasool Rather (Madras School of Economics); Sunil Paul (Madras School of Economics); S. Raja Sethu Durai (Madras School of Economics)
    Abstract: This study shows that replacing the traditional measure of asymmetry that is skewness in the inflation forecasting model with an alternative asymmetry measure that captures the joint influence of both skewness and variance on inflation significantly improves the forecast at various horizons. The empirical evidence suggests that it is more appropriate to use such measure of asymmetry in inflation forecast model as it has edge over simple measure of skewness in predicting inflation. These findings are consistent with the prediction of menu cost model that the variance of cross sectional distribution of relative price changes amplifies the impact of skewness on inflation.
    Keywords: skewness, relative price changes, asymmetry, inflation forecasting
    JEL: E30 E31 E52
    Date: 2015–03
  3. By: B. Anand (Department of Economics, Pondicherry University, Puducherry); Sunil Paul (Madras School of Economics); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: In the recent past, international crude oil markets have witnessed significant fluctuations and such fluctuations tend to have ramifications on the economy as a whole. In this regard, this paper makes an attempt to model such volatility spillover from oil price returns to the returns `of the Indian stock market. The study also makes a comparative analysis of the volatility transmission mechanism between the periods prior to and after the eruption of global financial crisis. The empirical analysis employs BEKK parameterization of bivariate GARCH model and various tools of continuous wavelet transform to understand the dynamics of volatility spillover between these two markets. The empirical evidence suggests that the fluctuations in the crude oil price returns exert significant impact on the volatility of stock market returns. More importantly, such volatility spillovers are found to be much stronger during the post financial crisis period and the results obtained from the wavelet analysis indicate the dominance of high frequency components in the oil-stock market relationship.
    Keywords: Crude oil, Volatility Spillover, BEKK, Continuous Wavelet Transform
    JEL: C32 C1 E0
    Date: 2014–11
  4. By: Sartaj Rasool Rather (Madras School of Economics); S. Raja Sethu Durai (Department of Economics, Pondicherry University, Puducherry); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: We construct an error correction mechanism to examine whether firms’ price adjustment is asymmetric as anticipated by Ball and Mankiw (1994). We have used monthly time series data on prices of 418 commodities, which constitute 97 percent of commodity price basket used in the construction of wholesale price index in India. The empirical evidence indicates that the price adjustment of most of the firms exhibits strong asymmetry; shocks that increases firms’ desired prices causes quicker and larger rise in prices whereas shocks that lower desired prices causes smaller or no fall in prices. Also, we identify a threshold value for each firm below which it does not allow its relative price to fall. These evidences imply that larger relative price variability can trigger inflation even in the absence of demand shocks. Moreover, the distribution of output is likely to be negatively skewed even if the demand shocks are symmetric.
    Keywords: Menu cost, asymmetric price adjustment, relative price, error correction
    JEL: C32 E31 E52
    Date: 2014–11
  5. By: Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
    Abstract: The aim of this study is to develop a new framework (V-L-D) for detecting the short term vulnerabilities in fiscal policy for the European Union countries. The methodology relies ontwo distinct indicators: one showing the vulnerabilities signalled by the size of the cyclically adjusted budget and public debtand one indicatingthe vulnerabilities through their annual changes.V-L-D is able to categorize fiscal vulnerability into five distinct classes having scores from 0 (no fiscal vulnerability) to 4 (extreme fiscal vulnerability). From 1990-2013, we found310 episodes of fiscal vulnerability for the 28 European Union countries out of which 128 episodes of low vulnerability, 94 of moderate, 62 of strong and 26 of extreme fiscal vulnerability. We also explored the correlation between financial market sentiment and fiscal vulnerability. We used V-L-D as a predictor and Credit Default Swaps (CDS)as dependent and proxy for the market sentiment in a balanced panel model consisting in 17 European countries with random effects over the period 2008-2013. The results indicatethat CDS are higher and significant for strong and extreme vulnerability periodscompared with times having zero vulnerability. The CDS for low and moderate fiscal vulnerabilityare also higher but they are not significant, suggesting that investorsoverprice the risk randomly during low and moderate vulnerability.Employing a logit model for a panel consisting of 12 European countries over 2008-2013, we also found that governments are less likely to adjust fiscal policy when it is strong or extremely vulnerable and that the probability of fiscal consolidation increaseswhen market sentiment is negative and CDS are higher.
    Keywords: fiscal policy, budgetary deficit, fiscal sustainability, primary balance, debt dynamics, European Union
    JEL: E62 H12 H6
    Date: 2015–01
  6. By: Stoian, Andreea; Iorgulescu, Filip
    Abstract: The aim of our paper is to provide a comprehensive study of public debt in various aspects across the European Union,emphasizing the existing distinctions between the emerging and advanced economies in Europe. Using annual data ranging from 1995 to 2013 we develop investigation manifold. Firstly, we study the descriptive statistics of key variables affecting public debt dynamics. We found that the ex-communistcountries recorded lower public debt ratios, negative flow costs and primary deficits. By comparison, the advanced economies managed to run primary surpluses in order to balance larger public debt-to-GDP ratios and the positive flow cost. Secondly, using the accounting approach we analyzed the dynamics of public debt. The results indicated unstable dynamics for the cases of CzechRepublic, Latvia, Lithuania, Poland, Slovakia, Slovenia, Cyprus, France, Germany, Greece, Ireland, Italy, Malta, Portugal, Spain and the United Kingdom. Then, employing a logit model with fixed effects, we also showed that running primary deficits is more likely to increase the probability of having unstable dynamics of public debt. Thirdly, we examined the distribution of the flow cost and revealed that there is an increased probability of extreme values which, in the case of large debt ratios, might lead to high debt burdens for the European countries. We also found that the uncertainty of the future debt burden is driven by the variability of the real GDP growth rate.
    Keywords: public debt, flow cost, primary balance, sustainability, European Union
    JEL: E62 H62 H63
    Date: 2015–02
  7. By: Merike Kukk (Tallinn University of Technology); Karsten Staehr (Tallinn University of Technology Eesti Pank)
    Abstract: Pissarides & Weber (1989) proposed the use of data on income and food consumption for estimating the extent of income underreporting and possibly tax evasion by the self-employed. This paper is the first to investigate the importance of the way in which self-employed households are identified. Using household budget data from Estonia, the underreporting by self-employed households is computed with different identification methods. The share of unreported income is estimated to be at least twice as large when self-employed households are identified using the share of business income than is the case when they are identified using their employment status. Further analysis confirms that the share of reported business income is indeed a better indicator of income underreporting than the reported employment status. The results may facilitate better governance by helping data collectors to identify households prone to income underreporting. Keywords: income underreporting, business income, self-employed, tax auditing, Engel curveJEL codes: H26, E21, E26, H24
    Keywords: income underreporting, business income, self-employed, tax auditing, Engel curve
    JEL: H26 E21 E26 H24
    Date: 2014–01–17
  8. By: Bocola, Luigi (Federal Reserve Bank of Minneapolis)
    Abstract: This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB’s longer-term refinancing operations. The presence of strong precautionary motives at the time of policy enactment implies that bank lending to firms is not very sensitive to these credit market interventions.
    Keywords: Sovereign debt crises; Financial constraints; Risk; Credit policies
    JEL: E32 E44 G01 G21
    Date: 2015–04–16
  9. By: Sylvia Sarantopoulou-Chiourea (University of Piraeus); George Skiadopoulos (Queen Mary University of London and University of Piraeus)
    Abstract: We propose a new predictor of real economic activity (REA), namely the representative investor's implied relative risk aversion (IRRA) extracted from S&P 500 option prices. IRRA exploits the forward-looking information in option prices. It increases as risk averse investors enter the market, leading to a decrease in market risk premium thus predicting a REA improvement. In line with our hypothesis, IRRA predicts U.S. REA even when we control for well-known REA predictors. Results hold over both short and long horizons and regardless of the way we conduct inference. Moreover, IRRA forecasts REA out-of-sample over the 2008-2009 great economic recession peak.
    Keywords: Option prices, Risk aversion, Risk-neutral moments, Real Economic Activity
    JEL: E44 G13 G17
    Date: 2015–03
  10. By: Till Strohsal; Christian R. Proaño; Jürgen Wolters;
    Abstract: A growing body of literature argues that the financial cycle is considerably longer in duration and larger in amplitude than the business cycle and that its distinguishing features became more pronounced over time. This paper proposes an empirical approach suitable to test these hypothe- ses. We parametrically estimate the whole spectrum of financial and real variables to obtain a complete picture of their cyclical properties. We provide strong statistical evidence for the US and slightly weaker evidence for the UK validating the hypothesized features of the financial cycle. In Germany, however, the financial cycle is, if at all, much less visible.
    Keywords: Financial Cycle, Business Cycle, Indirect Spectrum Estimation, Bootstrapping Inference
    JEL: C22 E32 E44
    Date: 2015–04
  11. By: Tsung-Hsien Michael Lee; Wenjuan Chen; ;
    Abstract: Numerous papers have tried to understand housing’s role in the economy and have not reached an agreement. In this paper we turn to the asymmetric relationship between housing and the overall economic activity. We find that the relation between building permits and GDP is regime-dependent. Causality analysis suggests that the housing variable leads output only in the regime associated with periods when the housing and business cycles are experiencing contractions. Our findings not only echo the argument that housing leads the business cycles, but also show that it has time-varying effect on the overall economic activity.
    Keywords: Housing, Business Cycles, Regime-switching, Causality
    JEL: C32 C34 E32
    Date: 2015–04
  12. By: Peter Benczur (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and European Commission, Joint Research Centre (JRC) Central European University); Istvan Konya (Institute of Economics Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University)
    Abstract: We study the adjustment process of a small open economy to a sudden worsening of external conditions. To model the sudden stop, we use a highly non-linear specification that captures credit constraints in a convenient way. The advantage of our approach is that the effects of the shock become highly conditional on the external debt position of the economy. We adopt a two-sector model with money-in-the-utility, which allows us to study sectoral asymmetries in the adjustment process, and also the role of currency mismatch. We calibrate the model to the behavior of the Hungarian economy in the 2000s and its crisis experience in 2008-11 in particular. We also calculate four counterfactuals: two with different exchange rate policies (a more flexible float and a perfect peg), and then these two policy regimes with smaller initial indebtedness. Overall, our model is able to fit movements of key aggregate and sectoral macroeconomic variables after the crisis by producing a large and protracted deleveraging process. It also offers a meaningful quantification of the policy tradeoff between facilitating the real adjustment by letting the currency depreciate and protecting consumption expenditures by limiting the adverse effect of exchange rate movements on household balance sheets.
    Keywords: interest premium, sudden stop, small open economy
    JEL: E21 E41 E5 F3
    Date: 2015–01
  13. By: Nyborg, Kjell G. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: The financial turmoil that we have been living with since August 2007 has left central banks, regulators, politicians, and economists with two big, overriding questions: How do we best get out of the crisis and how should banks be regulated and markets organized to avoid such crises in the future. This paper deals with the second question. Specifically, the paper deals with the third pillar of Bank supervision under Basel II, namely market discipline. The idea of this pillar, as summarized by Emmons, Gilbert, and Vaughan (2001), is for supervisors and regulators to make use of information about the financial health of banks that is contained in securities prices. In particular, as explained by Emmons et al: “The recent market discipline discussion centers on proposals to require some banks to issue a standardized form of subordinated debt.” Flannery (1998) discusses this more broadly and reviews the evidence on the effectiveness of using market information in prudential supervision. My proposal here is that the market discipline approach could usefully look for information about banks’ financial health outside of the securities markets. The market that I would suggest is especially valuable is the market for liquidity. This is motivated by the simple observation that the financial crisis of 07/08 has manifested itself in -- and rippled outwards from -- this market. Below, I briefly outline some features of the market for liquidity during the crisis and draw some comparisons to times of normalcy, before turning to my proposal. Some of what we see during the crisis period arguably can be explained by imperfections such as adverse selection, leading to credit rationing and relatively high unsecured rates. There are also imperfections present in the market for liquidity during times of normalcy (see, e.g., Bindseil, Nyborg, and Strebulaev~(2008)). Thus, as new regulation gets shaped in the wake of the crisis, it would appear that it is valuable to put measures in place to control these imperfections so that they do not flare up again. The suggestions I make in this paper are motivated by this concern.
    Keywords: Bank Supervision; Financial Crisis; Market for Liquidity
    JEL: E58 G00 G21
    Date: 2015–04–10
  14. By: Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We study a rational expectations' competitive equilibrium in a production economy, i.e., a system of prices at which firms' profit maximizing production decisions and individuals' preferred affordable consumption choices equate supply and demand in every market. We derive the equilibrium price of the firm and the equilibrium short term interest rate, the optimal per capita consumption in society, as well as the risk premium on equity. First a simple linear production technology with constant coefficients is studied, then a more general technology, and finally a general production economy with recursive utility is analyzed by the use of the stochastic maximum principle. While the two first models can not explain the empirics well using conventional preferences, the latter model is found to be much more promising in this regard. Wa also demonstrate a simple proof for the ICAPM.
    Keywords: Equity risk premium; production economy; recursive utility; CAPM; CCAPM; ICAPM
    JEL: D51 D53 D90 E21 G10 G12
    Date: 2015–04–10
  15. By: Niu, Linlin (BOFIT); Xua , Xiu (BOFIT); Chen , Ying (BOFIT)
    Abstract: We propose the use of a local autoregressive (LAR) model for adaptive estimation and forecasting of three of China’s key macroeconomic variables: GDP growth, inflation and the 7-day interbank lending rate. The approach takes into account possible structural changes in the data-generating process to select a local homogeneous interval for model estimation, and is particularly well-suited to a transition economy experiencing ongoing shifts in policy and structural adjustment. Our results indicate that the proposed method outperforms alternative models and forecast methods, especially for forecast horizons of 3 to 12 months. Our 1-quarter ahead adaptive forecasts even match the performance of the well-known CMRC Langrun survey forecast. The selected homogeneous intervals indicate gradual changes in growth of industrial production driven by constant evolution of the real economy in China, as well as abrupt changes in interestrate and inflation dynamics that capture monetary policy shifts.
    Keywords: Chinese economy; local parametric models; forecasting
    JEL: E43 E47
    Date: 2015–04–10
  16. By: Mikosch, Heiner (BOFIT); Neuwirth , Stefan (BOFIT)
    Abstract: This paper presents a MIDAS type mixed frequency VAR forecasting model. First, we propose a general and compact mixed frequency VAR framework using a stacked vector approach. Second, we integrate the mixed frequency VAR with a MIDAS type Almon lag polynomial scheme which is designed to reduce the parameter space while keeping models fexible. We show how to recast the resulting non-linear MIDAS type mixed frequency VAR into a linear equation system that can be easily estimated. A pseudo out-of-sample forecasting exercise with US real-time data yields that the mixed frequency VAR substantially improves predictive accuracy upon a standard VAR for dierent VAR specications. Forecast errors for, e.g., GDP growth decrease by 30 to 60 percent for forecast horizons up to six months and by around 20 percent for a forecast horizon of one year.
    Keywords: Forecasting; mixed frequency data; MIDAS; VAR; real time
    JEL: C53 E27
    Date: 2015–04–13
  17. By: Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: The frequency of nominal wage adjustments varies with macroeconomic conditions, but existing New Keynesian models exclude such state dependency in wage setting, assuming time-dependent setting. This paper develops a New Keynesian model in which fixed wage-setting costs generate state-dependent wage setting. I find that state- dependent wage setting reduces the real impacts of monetary shocks compared to time- dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the U.S., the state- and time-dependent models show similar responses to monetary shocks. The result suggests that state dependency in wage setting is largely irrelevant to the U.S. monetary transmission.
    Keywords: Nominal wage stickiness, state-dependent setting, time-dependent setting, monetary nonneutralities, New Keynesian models
    JEL: E31 E32
    Date: 2015–03
  18. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lower-cost debt is exactly offset by an induced increase in the unit cost of higher-cost equity capital as a consequence of the associated rise in risk. Statistical tests for large US banks in 2002–13 find that less than half of this M&M offset attains in practice. Higher capital requirements would thus impose increases in lending costs, with associated output costs from lower capital formation. These costs to the economy would need to be compared with benefits from lower risk of banking crises to arrive at optimal levels of capital requirements.
    Keywords: Financial Regulation, Bank Capital Requirements, Capital Structure
    JEL: E44 G21 G28 G32
    Date: 2015–04
  19. By: Sánchez-Fung, José R.
    Abstract: The paper investigates Okun’s Law for the Dominican Republic during the second part of the twentieth century and the first decade of the twenty first. The econometric modelling estimates an Okun coefficient implying that, on average, for every 1 percent growth in real output the unemployment rate decreases 0.5 percentage points. But recursive modelling reveals that Okun’s coefficient has being falling during the last forty years from -0.88 in 1966 to -0.5 in 2013. The drop in the magnitude of Okun’s coefficient and the inertia in the number of workers registered out of the labour supply could help in illuminating episodes of ‘jobless growth’ observed for the Dominican Republic. The analysis also reveals that the implicit average rate of real output growth consistent with stable unemployment is 4.5% per annum.
    Keywords: Okun’s Law; output; unemployment; Dominican Republic.
    JEL: E24
    Date: 2015–04
  20. By: von der Lippe, Peter
    Abstract: Ladislaus von Bortkiewicz has criticized chain indices and Irving Fisher's time and factor reversal tests. However, his arguments (published in German articles) though well ahead of his time and still relevant today are widely fallen in oblivion. He was not the only German statistician who criticized Fisher' approach but the first who extensively and successfully used mathematics to substantiate it and to derive a formula for the "chain drift". We present his ideas together with some own arguments against the time reversal test. To study Bortkiewicz's and other criticisms of Fisher's reversal tests and chain indices remains worthwhile, because reference to the time reversal test is still unshakably popular today and it only recently became mandatory to compile chain indices in official statistics.
    Keywords: Index Numbers, Time Reversal Test, Factor Reversal Test, Fisheer's ideal index, chain indices, transititvity
    JEL: C43 C82 E01 E31
    Date: 2015–04–22
  21. By: Knut Are Aastveit (Norges Bank, Norway); Francesco Ravazzolo (Norges Bank, and BI Norwegian Business School, Norway); Herman K. van Dijk (Erasmus University Rotterdam, and VU University Amsterdam, the Netherlands)
    Abstract: We introduce a Combined Density Nowcasting (CDN) approach to Dynamic Factor Models (DFM) that in a coherent way accounts for time-varying uncertainty of several model and data features in order to provide more accurate and complete density nowcasts. The combination weights are latent random variables that depend on past nowcasting performance and other learning mechanisms. The combined density scheme is incorporated in a Bayesian Sequential Monte Carlo method which re-balances the set of nowcasted densities in each period using updated information on the time-varying weights. Experiments with simulated data show that CDN works particularly well in a situation of early data releases with relatively large data uncertainty and model incompleteness. Empirical results, based on US real-time data of 120 leading indicators, indicate that CDN gives more accurate density nowc asts of US GDP growth than a model selection strategy and other combination strategies throughout the quarter with relatively large gains for the two first months of the quarter. CDN also provides informative signals on model incompleteness during recent recessions. Focusing on the tails, CDN delivers probabilities of negative growth, that provide good signals for calling recessions and ending economic slumps in real time.
    Keywords: Density forecast combination; Survey forecast; Bayesian Filtering; Sequential Monte Carlo Nowcasting, Real-time Data
    JEL: C11 C13 C32 C53 E37
    Date: 2014–12–09
  22. By: Lukasz Marc (VU University Amsterdam)
    Abstract: The most recent literature on aid effectiveness finds a positive effect of aid on growth. To the extent that aid goes through the budget, this either reflects an aid-financed increase in government expenditures (quantity effect) or an improvement in the use of government resources as a result of donor involvement and lower taxes (quality effect). This study investigates the causal link between on-budget aid and government expenditures using a large cross-country panel data set for 53 countries and recent methodology to test Granger causality in heterogeneous panels. I find that in most countries donors do not change aid in response to changes in the level of government expenditures and that recipient governments react to aid by changing the way they use their own resources rather than by increasing spending. Contrary to conventional wisdom, there is little support for a quantity effect: aid Granger causes government expenditures in only eight countries. This suggests that aid substitutes for domestic government revenue and that aid is effective largely through the quality effect.
    Keywords: foreign aid, government expenditures, Granger causality, fungibility
    JEL: E62 F35 H50 O23
    Date: 2014–01–20
  23. By: Patty Duijm (Duisenberg School of Finance, De Nederlandsche Bank, Amsterdam, the Netherlands); Peter Wierts (De Nederlandsche Bank, Amsterdam, the Netherlands)
    Abstract: Under Basel III rules, banks become subject to a liquidity coverage ratio (LCR) from 2015 onwards, to promote short-term resilience. We investigate the effects of such liquidity regulation on bank liquid assets and liabilities. Results indicate co-integration of liquid assets and liabilities, to maintain a minimum short-term liquidity buffer. Still, microprudential regulation has not prevented an aggregate liquidity cycle characterised by a pro-cyclical pattern in the size of balance sheets and risk taking. Our error correction regressions indicate that adjustment in the liquidity ratio is balanced towards the liability side, especially when the liquidity ratio is below its long-term equilibrium. This finding contrasts established wisdom that the LCR is mainly driven by changes in liquid assets. Policy implications focus on the need to complement microprudential regulation with a macroprudential approach. This involves monitoring of aggregate liquid assets and liabilities and addressing pro-cyclical behaviour by restricting leverage.
    Keywords: market liquidity, funding liquidity, liquidity regulation, liquidity coverage ratio, Basel III, banks, microprudential, macroprudential, co-integration, error correction models
    JEL: E44 G21 G28
    Date: 2014–02–06
  24. By: Frank A.G. den Butter (VU University Amsterdam); Jelle Joustra (VU University Amsterdam, the Netherlands)
    Abstract: The organization of Electronic Dance Music (EDM) events has become a major export product in the Netherlands. In order to respond quickly to the new trends and needs, innovative forms of cooperation between producers are to be set up for the organization of exciting new events. A case study on how these EDM events are actually organised in the Netherlands shows that the best way to do it is through hybrid forms of organisation, which combine horizontal forms of organisation through the market and vertical forms through the hierarchy. As EDM events are characterised by much asset specificity, the perspective of transaction cost economics indicates why this industry relies on hybrid forms of organisation. Trust between the collaborating partners, intrinsic motivation to be professional in the design and creation of new, ground-breaking music sensations and an extensiv e use of social media play a key role in lowering the transaction costs in the dance industry.
    Keywords: Industrial organization, coordination costs, transaction cost economics, resource based view, cooperation in hybrid organizations, Electronic Dance Music (EDM) events, trust, use of social media
    JEL: D23 D85 E23 L23 L24 L82 O31 P13
    Date: 2014–07–24
  25. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Hui-Kuang Hsu (National Pingtung Institute of Commerce, Taiwan); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain)
    Abstract: The paper uses monthly data on financial stock index returns, tourism stock sub-index returns, effective exchange rate returns and interest rate differences from April 2005 – August 2013 for Taiwan that applies Chang’s (2014) novel approach for constructing a tourism financial indicator, namely the Tourism Financial Conditions Index (TFCI). The TFCI is an adaptation and extension of the widely-used Monetary Conditions Index (MCI) and Financial Conditions Index (FCI) to tourism stock data. However, the method of calculation of the TFCI is different from existing methods of constructing the MCI and FCI in that the weights are estimated empirically. The empirical findings show that TFCI is estimated quite accurately using the estimated conditional mean of the tourism stock index returns. The new TFCI is straightforward to use and interpret, and provides interesting insights in predicting the current economic and financial environment for tourism stock index returns that are based on publicly available information. In particular, the use of market returns on the tourism stock index as the sole indicator of the tourism sector, as compared with the general activity of economic variables on tourism stocks, is shown to provide an exaggerated and excessively volatile explanation of tourism financial conditions.
    Keywords: Monetary Conditions Index, Financial Conditions Index, Model-based Tourism Financial Conditions Index, Unbiased Estimation
    JEL: B41 E44 E47 G32
    Date: 2014–05–13
  26. By: Frank A.G. den Butter (VU University Amsterdam, The Netherlands); Mathieu L.L. Segers (Utrecht University, Utrecht, The Netherlands)
    Abstract: Which ways and means are available for the macroeconomic and fiscal coordination and/or integration within the EMU-framework? Which are the pros and cons of these scenarios? This paper combines economic theory, empirical analysis and insights regarding EMU’s institutional history in order to come to a compromise proposal for an EMU between nationalism and federalism. We take the present status quo acts as a starting point. We describe the tension between the arguments in economic theory on policy coordination and the way contagion can be avoided. In addition we assess the practical political implementation of these arguments. We sketch concrete options for a ‘deepening of economic coordination’ in the EMU, as announced by Van Rompuy in his 2013 London speech, without moving to a full-fledged federalist EPU.
    Keywords: history of EMU, Kronungstheorie, optimal currency area, policy coordination, contagion, EPU, social preferences, EMU’s future
    JEL: E61 F55 G15 H77 N14
    Date: 2014–01–09
  27. By: Francisco Blasques; Siem Jan Koopman; Andre Lucas; Julia Schaumburg (VU University Amsterdam)
    Abstract: We introduce a new model for time-varying spatial dependence. The model extends the well-known static spatial lag model. All parameters can be estimated conveniently by maximum likelihood. We establish the theoretical properties of the model and show that the maximum likelihood estimator for the static parameters is consistent and asymptotically normal. We also study the information theoretic optimality of the updating steps for the time-varying spatial dependence parameter. We adopt the model to empirically investigate the spatial dependence between eight European sovereign CDS spreads over the period 2009--2014, which includes the European sovereign debt crisis. We construct our spatial weight matrix using cross-border lending data and include country-specific and Europe-wide risk factors as controls. We find a high, time-varying degree of spatial spillovers in the sovereign CDS spread data. There is a downturn in spatial dependence after the first half of 2012, which is consistent with policy measures taken by the European Central Bank. The findings are robust to a wide range of alternative model specifications.
    Keywords: Spatial correlation, time-varying parameters, systemic risk, European debt crisis, generalized autoregressive score
    JEL: C13 C32 C53 E17
    Date: 2014–08–14
  28. By: Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam)
    Abstract: This paper resulted in a publication in the <A href="">'Journal of Economic Dynamics and Control'</A>, 2014, 43, 218-240.<P> We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. We introduce long term government debt, which gives rise to the possibility of capital losses on bank balance sheets. The negative feedback effects from falling bond prices on the economy are shown to increase with the average duration of the government bonds, as higher interest rates on new debt lead to capital losses on banks' holding of existing long term (government) debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. We introduce sovereign default risk through the existence of a maximum sustainable level of debt, derived from the maximum level of taxation that is politically feasible. When close to this limit, sovereign discounts emerge reflecting potential defaults on debt, creating a strong link between sovereign default risk and financial fragility emerges. A debt-financed recapitalisation of the financial intermediaries causes bond prices to drop triggering capital losses at the bank under intervention. This mechanism shows the limits to conventional bank bail-outs in countries with fragile public creditworthiness, limits that became very visible during the Great Recession in Southern Europe.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2013–10–25
  29. By: Roel Beetsma (University of Amsterdam); Ward Romp (University of Amsterdam)
    Abstract: We explore voluntary participation in pension arrangements. Individuals only participate when participation is more attractive than autarky. The bene􀏐it of participation is that risks can be shared with future generations. We apply our analysis to a pay-as-you-go system, a funded system without buffers and a funded system with buffers. Buffers play a particularly interesting role, because they raise the sensitivity of the contributions to the asset returns. In particular, compared to a system without buffer requirements, they require higher contributions when asset returns are low. Moreover, individual contributions may be increasing or decreasing in the size of the young cohort, depending on whether the fund has more or less reserves than required. We con􀏐ine ourselves to recursive settings and study equilibria characterised by thresholds on the contribution that young generations are prepared to make assuming that the future young apply the same threshold. For standard parameter settings two such equilibria exist, of which only the one with the higher threshold is consistent with the initial young being prepared to start the system. Finally, we explore the social welfare maximising policy parameter settings for various levels of uncertainty and risk aversion.
    Keywords: Participation constraints, pension funds, pay-as-you-go, buffers, risk-sharing
    JEL: E62 H55
    Date: 2013–09–23
  30. By: Cars Hommes (CeNDEF, University of Amsterdam)
    Abstract: Rational expectations assumes perfect, model consistency between beliefs and market realizations. Here we discuss behaviorally rational expectations, characterized by an observable, parsimonious and intuitive form of consistency between beliefs and realizations. We discuss three case-studies. Firstly, a New Keynesian macro model with a representative agent learning an optimal, but misspecied, AR(1) rule to forecast inflation consistent with observed sample mean and first-order autocorrelations. Secondly, an asset pricing model with heterogeneous expectations and agents switching between a mean-reverting fundamental rule and a trend-following rule, based upon their past performance. The third example concerns learning-to-forecast laboratory experiments, where under positive feedback individuals coordinate expectations on non-rational, almost self-fulling equilibria with persistent price fluctuations very different from rational equilibria.
    Keywords: Expectation feedback, self-fullling beliefs, heuristic switching model, experimental economics
    JEL: D84 D83 E32 C92
    Date: 2013–12–16
  31. By: Monica Billio (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice, Italy); Roberto Casarin (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice, Italy); Francesco Ravazzolo (Norges Bank and BI Norwegian Business School, Norway); Herman K. van Dijk (Erasmus University Rotterdam, and VU University Amsterdam, The Netherlands)
    Abstract: Interactions between the eurozone and US booms and busts and among major eurozone economies are analyzed by introducing a panel Markov-switching VAR model well suitable for a multi-country cyclical analysis. The model accommodates changes in low and high data frequencies and endogenous time-varying transition matrices of the country-specific Markov chains. The transition matrix of each Markov chain depends on its own past history and on the history of the other chains, thus allowing for modeling of the interactions between cycles. An endogenous common eurozone cycle is derived by aggregating country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move strategy algorithm is defined to draw common time-varying Markov-switching chains. Our results show that the US and eurozone cycles are not fully synchronized over the 1991-2013 sample period, with evidence of more recessions in the Eurozone. Shocks affect the US 1-quarter in advance of the eurozone, but these spread very rapidly among economies. An increase in the number of eurozone countries in recession increases the probability of the US to stay within recession, while the US recession indicator has a negative impact on the probability to stay in recession for eurozone countries. Turning point analysis shows that the cycles of Germany, France and Italy are closer to the US cycle than other countries. Belgium, Spain, and Germany, provide more timely information on the aggregate recession than Netherlands and France.
    Keywords: Bayesian Model, Panel VAR, Markov-switching, International Business Cycles, Interaction Mechanism
    JEL: C11 C15 C53 E37
    Date: 2013–09–16
  32. By: Koen Vermeylen (University of Amsterdam)
    Abstract: This paper uses the Kaldor-Hicks compensation principle to compute the present value (PV) of a non-marginal future event. Three theoretical results stand out: First, decreasing returns to capital create a wedge between the PV of future generations' willingness to pay (WTP) and the PV of their willingness to accept compensation (WTA); second, the discount rates implicit in the computation of the PVs are endogenous, and rising (declining) over time for the future generations' WTP (WTA); and third, decreasing returns to capital may make it impossible to compensate future generations according to their WTA, effectively defeating the tyranny of discounting. A back-of-the-envelope calibration suggests that this last result is realistic in the case of climate change. A cost-benefit analysis based on the Kaldor-Hicks compensation principle may therefore be impossible if futu re generations are entitled to a world without climate change; and an environmental trust fund - no matter how large it is - may be insufficient to adequately compensate future generations.
    Keywords: climate change, cost-benefit analysis, discounting, WTP, WTA
    JEL: D61 E13 H43 Q51 Q54
    Date: 2013–12–16
  33. By: Jasper Lukkezen (Utrecht University, and CPB); Coen Teulings (University of Amsterdam, and CPB)
    Abstract: This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reduced form model of the economy from a linear VAR with a non-linear welfare function and obtain analytic solutions for optimal policy. The variables in our reduced form model –growth, unemployment, primary surplus– have a natural rate that cannot be affected by policy. Policy can only reduce fluctuations around these natural rates. Our welfare function contains future GDP and unemployment, the relative weights of which determine the optimal response. The optimal policy rule demands an immediate and large policy response that is procyclical to growth shocks and countercyclical to unemployment shocks. This result holds true when the weight of unemployment in the welfare function is reduced to zero. The rule currently followed by policy makers responds procyclically to both growth and unemployment shocks, and does so much slower than the optimal rule, leading to significant welfare losses.
    Keywords: optimal control, optimal policy, fiscal policy rules, fiscal consolidation, debt sustainability
    JEL: E6 H6
    Date: 2013–05–06
  34. By: Francisco Blasques; Siem Jan Koopman; Max Mallee (VU University Amsterdam, the Netherlands)
    Abstract: The multivariate analysis of a panel of economic and financial time series with mixed frequencies is a challenging problem. The standard solution is to analyze the mix of monthly and quarterly time series jointly by means of a multivariate dynamic model with a monthly time index: artificial missing values are inserted for the intermediate months of the quarterly time series. In this paper we explore an alternative solution for a class of dynamic factor models that is specified by means of a low frequency quarterly time index. We show that there is no need to introduce artificial missing values while the high frequency (monthly) information is preserved and can still be analyzed. We also provide evidence that the analysis based on a low frequency specification can be carried out in a computationally more efficient way. A comparison study with existing mixed frequency procedures is presented and discussed. Furthermore, we modify the method of maximum likelihood in the context of a dynamic factor model. We introduce variable-specific weights in the likelihood function to let some variable equations be of more importance during the estimation process. We derive the asymptotic properties of the weighted maximum likelihood estimator and we show that the estimator is consistent and asymptotically normal. We also verify the weighted estimation method in a Monte Carlo study to investigate the effect of differen t choices for the weights in different scenarios. Finally, we empirically illustrate the new developments for the extraction of a coincident economic indicator from a small panel of mixed frequency economic time series.
    Keywords: Asymptotic theory, Forecasting, Kalman filter, Nowcasting, State space
    JEL: C13 C32 C53 E17
    Date: 2014–08–11
  35. By: Vadym Lepetyuk (Bank of Canada, Canada); Christian A. Stoltenberg (University of Amsterdam)
    Abstract: The rise in within-group consumption inequality in response to the increase in within-group income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard incomplete markets models tend to predict too much consumption inequality. We show that a model with two-sided lack of commitment and chance attitudes, as emphasized by prospect theory, can explain the relationship and can avoid the systematic bias of the expected utility models. The chance attitudes, such as optimism and pessimism, imply that the households attribute a higher weight to high and low outcomes compared to their objective probabilities. For realistic values of risk aversion and of chance attitudes, the incentives for households to share the idiosyncratic risk decrease. The latter effect endogenously amplifies the increase in consumption inequality relative to the expected utility model, thereby improving the fit to the data.
    Keywords: Consumption Inequality, Prospect Theory, Limited Enforcement, Risk Sharing
    JEL: E21 D31 D52
    Date: 2013–08–17
  36. By: Erik T. Verhoef (VU University Amsterdam, the Netherlands); Hugo E. Silva (VU University Amsterdam, the Netherlands)
    Abstract: Various contributions to the recent literature on congestion pricing have demonstrated that when services at a congestible facility are provided by operators with market power, the case in point often being a few airlines jointly using a congested airport, optimal congestion pricing rules deviate from the familiar Pigouvian rule that tolls be equal to the marginal external costs. The reason is that an operator with market power has an incentive to internalize the congestion effects that its customers and vehicles impose upon one-another, so that Pigouvian tolling would lead to overpricing of congestion. More recent contributions to this literature, however, have brought to the fore that when congestion at the facility takes on the form of dynamic bottleneck congestion à la Vickrey (1969), where trip scheduling is the key behavioural margin, there may exist no Nash e quilibrium in arrival schedules for oligopolistic operators also under rather plausible assumptions on parameters. This paper investigates whether in such cases, an equilibrium does exist for another congestion technology, namely the Henderson-Chu dynamic model of flow congestion. We find that a stable and unique equilibrium exists also in cases where it fails to exist under bottleneck congestion (notably when the value of schedule late exceeds the value of travel delays). Our results suggest that self-internalization with only two firms leads to a considerable efficiency gain compared to the atomistic equilibrium (83% or more of the gain from first-best pricing in our numerical exercises).
    Keywords: Congestion pricing, dynamic congestion, market power, internalization
    JEL: R41 R48 D62
    Date: 2015–03–31
  37. By: Tiziana Assenza (Università Cattolica del Sacro Cuore, Milano, and University of Amsterdam, CeNDEF, The Netherlands); William A. Brock (University of Wisconsin, Madison, USA, and University of Missouri, Columbia); Cars H. Hommes (University of Amsterdam, CeNDEF, and Tinbergen Institute, The Netherlands)
    Abstract: We introduce a simple equilibrium model of a market for loans, where households lend to firms based on heterogeneous expectations about their loan default probability. Agents select among heterogeneous expectation rules, based upon their relative performance. A small fraction of pessimistic traders already has a large aggregate effect, leading to a crisis characterized by high contract rates for loans and low output. Our stylized model illustrates how animal spirits and heterogeneous expectations amplify boom and bust cycles and how endogenous coordination on pessimistic expectations amplifies crises and slows down recovery. Taking heterogeneous expectations and bounded rationality into account is crucial for the timing of monetary or fiscal policy.
    Keywords: Heterogeneous Expectations, Crises, Animal Spirits
    JEL: E32 D83 D84
    Date: 2013–12–17
  38. By: Francisco Blasques (VU University Amsterdam, the Netherlands); Artem Duplinskiy (VU University Amsterdam, the Netherlands)
    Abstract: Parameter estimates of structural economic models are often difficult to interpret at the light of the underlying economic theory. Bayesian methods have become increasingly popular as a tool for conducting inference on structural models since priors offer a way to exert control over the estimation results. This paper proposes a penalized indirect inference estimator that allows researchers to obtain economically meaningful parameter estimates in a frequentist setting. The asymptotic properties of the estimator are established for both correctly and incorrectly specified models. A Monte Carlo study reveals the role of the penalty function in shaping the finite sample distribution of the estimator. The advantages of using this estimator are highlighted in the empirical study of a state-of-the-art dynamic stochastic general equilibrium model.
    Keywords: Penalized estimation, Indirect Inference, Simulation-based methods, DSGE models
    JEL: C15 C13 D58 E32
    Date: 2015–01–19
  39. By: Nalan Basturk (Maastricht University, the Netherlands); Pinar Ceyhan (Erasmus University Rotterdam); Herman K. van Dijk (Erasmus University Rotterdam, VU University Amsterdam, the Netherlands)
    Abstract: Time varying patterns in US growth are analyzed using various univariate model structures, starting from a naive model structure where all features change every period to a model where the slow variation in the conditional mean and changes in the conditional variance are specified together with their interaction, including survey data on expected growth in order to strengthen the information in the model. Use is made of a simulation based Bayesian inferential method to determine the forecasting performance of the various model specifications. The extension of a basic growth model with a constant mean to models including time variation in the mean and variance requires careful investigation of possible identification issues of the parameters and existence conditions of the posterior under a diffuse prior. The use of diffuse priors leads to a focus on the likelihood fu nction and it enables a researcher and policy adviser to evaluate the scientific information contained in model and data. Empirical results indicate that incorporating time variation in mean growth rates as well as in volatility are important in order to improve for the predictive performances of growth models. Furthermore, using data information on growth expectations is important for forecasting growth in specific periods, such as the the recession periods around 2000s and around 2008.
    Keywords: Growth, Time varying parameters, Expectations data
    JEL: C11 C22 E17
    Date: 2014–09–01
  40. By: Geert Mesters (VU University Amsterdam, the Netherlands); Bernd Schwaab (European Central Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands)
    Abstract: We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been affected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We find evidence that the bond market interventions had a direct and temporary effect on the yield curve lasting up to ten weeks, and find limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors.
    Keywords: dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank
    JEL: C32 C33 E52 E58
    Date: 2014–06–17
  41. By: Shawkat Hammoudeh (Drexel University, Philadelphia, United States); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Italy)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic uncertainty and financial crises. The purpose of this special issue on “Advances in Financial Risk Management and Economic Policy Uncertainty” is to highlight some areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of financial risk management when there is economic uncertainty, especiallythe power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy: the role of micro and macroeconomic factors, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices: a regime switching approach, a regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates, a practical approach to constructing price-based funding liquidity factors, realized range volatility forecasting: dynamic features and predictive variables, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk: an application of CoVaR, model-free volatility indexes in the financial literature: a review, robust hedging performance and volatility risk in option markets: application to Standard and Poor’s 500 and Taiwan index options, price cointegration between sovereign CDS and currency option markets in the global financial crisis, whether zombie lending should always be prevented, preferences of risk-averse and risk-seeking investors for oil spot and futures before, during and after the global financial crisis, managing financial risk in Chinese stock markets: option pricing and modeling under a multivariate threshold autoregression, managing systemic risk in The Netherlands, mean-variance portfolio methods for energy policy risk management, on robust properties of the SIML estimation of volatility under micro-market noise and random sampling, asymmetric large-scale (I)GARCH with hetero-tails, the economic fundamentals and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong, prediction and simulation using simple models characterized by nonstationarity and seasonality, and volatility forecast of stock indexes by model averaging using high frequency data.
    Keywords: Financial risk management, Economic policy uncertainty, Financial econometrics, Empirical finance
    JEL: C58 D81 E60 G32
    Date: 2014–06–23
  42. By: Oddvar M. Kaarbøe (University of Bergen); Alexander F. Tieman (Vrije Universiteit Amsterdam)
    Abstract: We apply the stochastic evolutionary approach of equilibrium selection tomacroeconomic models in which a complementarity at the macro level ispresent. These models often exhibit multiple Pareto-ranked Nash equilibria,and the best response-correspondence of an individual increases with ameasure of the aggregate state of the economy. Our main theoretical resultshows how the equilibrium that is singled out by the evolutionary dynamicsis directly related to the underlying externality that creates themultiplicity problem in the underlying macroeconomic stage game. We alsoprovide clarifying examples from the macroeconomic literature.
    JEL: C63 C72 C73 E19 L16
  43. By: Roder van Arkel (Research Institute, Social Trade Organisation, Utrecht, The Netherlands); Koen Vermeylen (University of Amsterdam)
    Abstract: Champions of sustainable growth often call for more durable production technologies with less capital depreciation. As investment in more durable capital is encouraged by lower interest rates, we investigate whether policy makers can steer the economy towards a path with low interest rates in order to stimulate more durable capital formation. We study this question from the viewpoint of two different macroeconomic paradigms, with three different modeling strategies, and get three fundamentally different and even contradicting answers. As none of these paradigms can claim to be superior to the other one, we argue that all modeling strategies may yield valuable insights, which leads to nuanced and careful policy advice. The paper is therefore an illustration of the importance of methodological pluralism in addressing macro-environmental questions where the interest rat e takes center stage.
    Keywords: interest rate, capital durability, depreciation rate, sustainability, methodological pluralism
    JEL: B4 E22 E43 O44 Q5
    Date: 2013–12–16
  44. By: Dennis Bonam (VU University Amsterdam, The Netherlands); Jasper Lukkezen (Utrecht University, Utrecht, and CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands)
    Abstract: In standard macroeconomic models, debt sustainability and price level determinacy are achieved when fiscal policy avoids explosive debt and monetary policy controls inflation, irrespective of the relative strengths of each policy stance. We examine how these policy requirements for equilibrium stability and determinacy change in the presence of sovereign risk. An increase in sovereign risk reduces lender's willingness to hold government debt and raises consumption and inflation. Therefore, inflation and debt dynamics are determined jointly. To ensure stable macroeconomic conditions, both the fiscal and monetary stance must shift to offset debt sustainability concerns. We find that the adoption of a deficit target helps alleviate such concerns and raises the scope for macroeconomic stability.
    Keywords: Fiscal and monetary policy coordination, equilibrium determinacy and stability, sovereign risk, policy rules
    JEL: E52 E62 E63
    Date: 2014–01–07
  45. By: Cars Hommes (University of Amsterdam)
    Abstract: We discuss recent work on bounded rationality and learning in relation to Soros' principle of reflexivity and stress the empirical importance of non-rational, almost self-fulfilling equilibria in positive feedback systems. As an empirical example, we discuss a behavioral asset pricing model with heterogeneous expectations. Bubble and crash dynamics is triggered by shocks to fundamentals and amplified by agents switching endogenously between a mean-reverting fundamental rule and a trend-following rule, based upon their relative performance. We also discuss learning-to-forecast laboratory experiments, showing that in positive feedback systems individuals coordinate expectations on non-rational, almost self-fulfilling equilibria with persistent price fluctuations very different from rational equilibria. Economic policy analysis may benefit enormously by focussing on efficiency and welfare gains in correcting mispricing of almost self-fulfilling equilibria.
    Keywords: Expectation feedback, self-fulfilling beliefs, heuristic switching model, experimental macroeconomics
    JEL: D84 D83 E32 C92
    Date: 2013–12–17
  46. By: Laurent Callot (VU University Amsterdam); Johannes Tang Kristensen (University of Southern Denmark, Denmark)
    Abstract: This paper proposes a parsimoniously time varying parameter vector autoregressive model (with exogenous variables, VARX) and studies the properties of the Lasso and adaptive Lasso as estimators of this model. The parameters of the model are assumed to follow parsimonious random walks, where parsimony stems from the assumption that increments to the parameters have a non-zero probability of being exactly equal to zero. By varying the degree of parsimony our model can accommodate constant parameters, an unknown number of structural breaks, or parameters with a high degree of variation. We characterize the finite sample properties of the Lasso by deriving upper bounds on the estimation and prediction errors that are valid with high probability; and asymptotically we show that these bounds tend to zero with probability tending to one if the number of non zero increments grows slower than √T . By simulation experiments we investigate the properties of the Lasso and the adaptive Lasso in settings where the parameters are stable, experience structural breaks, or follow a parsimonious random walk. We use our model to investigate the monetary policy response to inflation and business cycle fluctuations in the US by estimating a parsimoniously time varying parameter Taylor rule. We document substantial changes in the policy response of the Fed in the 1980s and since 2008.
    Keywords: Parsimony, time varying parameters, VAR, structural break, Lasso
    JEL: C01 C13 C32 E52
    Date: 2014–11–07
  47. By: Anne Opschoor (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Michel van der Wel (Erasmus University Rotterdam)
    Abstract: This discussion paper resulted in a publication in the <A HREF="">'Journal of Empirical Finance'</A> (2014). Volume 29, pages 435-447. <P> We model the impact of financial conditions on asset market volatility and correlation. We propose extensions of (factor-)GARCH models for volatility and DCC models for correlation that allow for including indexes that measure financial conditions. In our empirical application we consider daily stock returns of US deposit banks during the period 1994-2011, and proxy financial conditions by the Bloomberg Financial Conditions Index (FCI) which comprises the money, bond, and equity markets. We find that worse financial conditions are associated with both higher volatility and higher average correlations between stock returns. Especially during crises the additional impact of the FCI indicator is considerable, with an increase in correlations by 0.15. Moreover, including the FCI in volatility and correlation modeling improves Value-at-Risk forecasts, particularly at short horizons.
    Keywords: Dynamic correlations, Volatility modeling, Financial Conditions Indexes, Bank holding companies
    JEL: G17 G23 E44
    Date: 2013–08–09
  48. By: Michael McAleer (Erasmus University Rotterdam, The Netherlands, Complutense University of Madrid, Spain, and Kyoto University, Japan); Felix Chan (Curtin University, Australia); Les Oxley (University of Waikato, New Zealand)
    Abstract: The papers in this special issue of Mathematics and Computers in Simulation cover the following topics: improving judgmental adjustment of model-based forecasts, whether forecast updates are progressive, on a constrained mixture vector autoregressive model, whether all estimators are born equal: the empirical properties of some estimators of long memory, characterising trader manipulation in a limit-order driven market, measuring bias in a term-structure model of commodity prices through the comparison of simultaneous and sequential estimation, modelling tail credit risk using transition matrices, evaluation of the DPC-based inclusive payment system in Japan for cataract operations by a new model, the matching of lead underwriters and issuing firms in the Japanese corporate bond market, stochastic life table forecasting: a time-simultaneous fan chart application, adaptive survey designs for sampling rare and clustered populations, income distribution inequality, globalization, and innovation: a general equilibrium simulation, whether exchange rates affect consumer prices: a comparative analysis for Australia, China and India, the impacts of exchange rates on Australia's domestic and outbound travel markets, clean development mechanism in China: regional distribution and prospects, design and implementation of a Web-based groundwater data management system, the impact of serial correlation on testing for structural change in binary choice model: Monte Carlo evidence, and coercive journal self citations, impact factor, journal influence and article influence.
    Keywords: Modelling, simulation, forecasting, time series models, trading, credit risk, empirical finance, health economics, sampling, groundwater systems, exchange rates, structural change, citations
    JEL: C15 C63 E27 E37 E47 F37 F47
    Date: 2013–05–21
  49. By: Andrea Caragliu (Politecnico di Milano, Italy); Peter Nijkamp (VU University Amsterdam)
    Abstract: This paper enters the debate on the islands of innovation through the lens of the standard Lucas (1988) growth model. It begins with a review of the theoretical details of the model and of the ensuing main empirical results, which can be identified when estimating such model on a sample of 261 EU27 NUTS2 regions. Next, empirical results are interpreted in the light of recent EU innovation and education policies. Our results point to the paramount importance of taking into account patterns of connectivity between “islands” of innovation and other regions. On the basis of our empirical estimates, we claim that future further concentration of innovative activity could achieve maximum returns by enhancing connectivity between spatial innovation leaders and lagging regions. This situation may be characterised as targeting “hubs”, rather than “islands”, of innovation, and is in agreement with “open innovation policy”.
    Keywords: human capital, cognitive capital, knowledge spillovers, islands of innovation
    JEL: C21 E24 R11
    Date: 2013–09–12
  50. By: Irma Hindrayanto (De Nederlandsche Bank); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Jasper de Winter (De Nederlandsche Bank, the Netherlands)
    Abstract: Many empirical studies have shown that factor models produce relatively accurate forecasts compared to alternative short-term forecasting models. These empirical findings have been established for different macroeconomic data sets and different forecast horizons. However, various specifications of the factor model exist and it is a topic of debate which specification is most effective in its forecasting performance. Furthermore, the forecast performances of the different specifications during the recent financial crisis are also not well documented. In this study we investigate these two issues in depth. We empirically verify the forecast performance of three factor model approaches and report our findings in an extended empirical out-of-sample forecasting competition for quarterly growth of gross domestic product in the euro area and its five largest countries over the period 1992-2012. We also introduce two extensions of existing factor models to make them more suitable for real-time forecasting. We show that the factor models have been able to systematically beat the benchmark autoregressive model, both before as well as during the financial crisis. The recently proposed collapsed dynamic factor model shows the highest forecast accuracy for the euro area and the majority of countries that we have analyzed. The forecast precision improvements against the benchmark model can range up to 77% in mean square error reduction, depending on the country and forecast horizon.
    Keywords: Factor models, Principal component analysis, Forecasting, Kalman filter, State space method, Publication lag, Mixed frequency
    JEL: C32 C53 E17
    Date: 2014–08–22
  51. By: Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam)
    Abstract: We investigate the effectiveness of `Keynesian' fiscal stimuli when government deficits and debt rollovers are (possibly partially) financed by balance sheet constrained financial intermediaries. Because financial intermediaries operate under a leverage constraint, deficit financing of fiscal stimulus packages will cause interest rates to rise as private loans are crowded out by government debt in the credit provision channel. This lowers investment and (future) capital stocks, which affects output negatively for a prolonged period. Anticipations of these future consequences cause the price of capital and bonds to drop immediately when the policy is announced, inflicting capital losses on banks which leads to further tightening of leverage constraints and credit market conditions. This balance sheet effect triggers a negative amplification cycle further lowe ring the fiscal multiplier. Longer maturity debt leads to larger capital losses and lower Keynesian multipliers. When in addition sovereign default risk is introduced, additional capital losses may occur and outcomes deteriorate further after a deficit financed stimulus package, eventually implying a cumulative Keynesian multiplier close to zero or even negative. We do not argue that multipliers are always negative; but financial fragility and sovereign risk problems may severely lower them, possibly to the point of becoming negative.
    Keywords: Financial Intermediation, Macrofinancial Fragility, Fiscal Policy, Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2014–01–14
  52. By: Arno Riedl; Frans van Winden (University of Amsterdam)
    Abstract: We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.<P>This discussion paper resulted in a publication in the <A href=""><I>European Economic Review</I></A>.(51(4) 871-900.)
    Keywords: Experiments; international economics; wage taxation; unemployment
    JEL: C90 D50 E24 F41
  53. By: Nalan Basturk (Erasmus University Rotterdam); Cem Cakmakli (University of Amsterdam, Koc University); Pinar Ceyhan (Erasmus University Rotterdam); Herman K. van Dijk (Erasmus University Rotterdam, VU University Amsterdam)
    Abstract: This discussion paper resulted in a publication in the <A href="">'Journal of Applied Econometrics'</A>, 2014, 29(7), 1164-1182.<P> Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended Phillips Curve (PC) models. It is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic PC models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities. Forward as well as backward looking expectation mechanisms for inflation are incorporated and their relative importance evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long run stability between inflation and marginal costs. Backward-looking inflation appears stronger than forward-looking one. Levels and volatilities of inflation are estimated more precisely using rich PC models. Estimated inflation expectations track nicely the observed long run inflation from the survey data. The extended PC structures compare favorably with existing basic Bayesian Vector Autoregressive and Stochastic Volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of disinflation in recent years.
    Keywords: New Keynesian Phillips curve, unobserved components, time varying parameters, level shifts, inflation expectations, survey data
    JEL: C11 C32 E31 E37
    Date: 2013–07–16
  54. By: Koen Vermeylen (University of Amsterdam)
    Abstract: Critics of modern macroeconomics often raise concerns about unwarranted welfare conclusions and data mining. This paper illustrates these concerns with a thought experiment, based on the debate in environmental economics about the appropriate discount rate in climate change analyses: I set up an economy where a social evaluator wants to determine the optimal time path of emission levels, and seeks advice for this from an old-style neo-classical macroeconomist and a new neo-classical (modern) macroeconomist; I then describe how both economists analyze the economy, their policy advice, and their mistakes. I then use the insights from this thought experiment to point out some pitfalls of the modern macroeconomic methodology.
    Keywords: modern macroeconomics, methodology, descriptive, prescriptive, discount rate
    JEL: B22 B41 E13 O44 Q52 Q54
    Date: 2013–12–16
  55. By: Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam)
    Abstract: Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect.
    Keywords: Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization
    JEL: E44 E58 G21 G28
    Date: 2013–03–04
  56. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Hui-Kuang Hsu (National Pingtung Institute of Commerce, Taiwan); Michael McAleer (National Tsing Hua University, Taiwan, Erasmus University Rotterdam, the Netherlands, and Complutense University of Madrid, Spain)
    Abstract: This paper uses monthly data from April 2005 to August 2013 for Taiwan to propose a novel tourism indicator, namely the Tourism Conditions Index (TCI). TCI accounts for the spillover weights based on the Granger causality test and estimates of the multivariate BEKK model for four TCI indicators to predict specific tourism and economic environmental indicators for Taiwan. The foundation of the TCI is the Financial Conditions Index (FCI), which is derived from the Monetary Conditions Index (MCI). The empirical findings show that TCI weighted by spillovers reveal greater significance in forecasting the Composite Index (CI), an economic environmental indicator, than the Tourism Industry Index (TII), which is an existing indicator for the tourism industry that is listed on the Taiwan Stock Exchange (TWSE). Moreover, previous values of the alternative TCI and TII are shown to contain useful information in predicting both tourism and economic environmental factors. Overall, the new Tourism Conditions Index is straightforward to use and also provides useful insights in predicting tourism arrivals and the current economic environment.
    Keywords: Monetary Conditions Index (MCI), Financial Conditions Index (FCI), Tourism Conditions Index (TCI), BEKK, Spillovers, Granger causality
    JEL: B41 E44 E47 G32
    Date: 2014–01–07
  57. By: Frost, Joshua (Federal Reserve Bank of New York); Logan, Lorie (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Board of Governors of the Federal Reserve System (U.S.)); Natalucci, Fabio M. (Board of Governors of the Federal Reserve System (U.S.)); Remache, Julie (
    Abstract: We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP facility, as they seek to balance the objectives of setting an effective floor on money market rates during t he normalization process and limiting any adverse secondary effects.
    Keywords: Federal Reserve Board and Federal Reserve System; monetary policy; interest on excess reserves; money market funds; overnight RRP; repo; reverse repo
    JEL: E52 E58 G21 G23
    Date: 2015–02–19
  58. By: Gilchrist, Simon (Boston University); Schoenle, Raphael (Brandeis University); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.)); Zakrajsek, Egon (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. We develop a model, in which firms face financial frictions, while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.
    JEL: E31 E32 E44 E51
    Date: 2015–03–03
  59. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks.
    Keywords: Lender of last resort; central banks; financial crises; liquidity regulation
    JEL: E58 G01 G28
    Date: 2015–02–10
  60. By: Kashiwabara, Chie
    Abstract: In the 2000s, the Philippines' local banking sector have conducted very conservative lending behavior and at the same time, gradually but continuously improved their profitability in terms of ROE (return on equity). A set of analyses on the flow of funds and segment reports (information) of local universal banks, whose loans outstanding to the industrial sector have dominated more than three fourths of the total outstanding, shows that (1) they have actively manage assets overseas, (2) their profitability has come from investment activities in the securities markets, and (3) some universal banks have shifted their resources into the consumer/retail segment. Although further refinement in the dataset is needed for a more detailed analysis, diverse business strategies would be expected among the local universal banks in the near future.
    Keywords: Philippines, Banks, Monetary policy, Credit channel, Bank loan
    JEL: E42 E52 G38
    Date: 2015–03
  61. By: Martin Geiger; Wolfgang Luhan; Johann Scharler
    Abstract: According to the expectations channel, a fiscal consolidation may give rise to less contractionary, or even expansionary effects on consumption, despite a decline in current disposable income. Intuitively, people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs. We design a laboratory experiment to study the conditions under which the expectations channel operates. Our results indicate that fiscal consolidations that occur in an unsustainable fiscal environment exert less contractionary effects on consumption, which supports the expectations channel. We also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future, whereas increasing subjects' level of awareness by running a transparent policy has only little influence on the outcomes.
    Keywords: Expansionary Fiscal Consolidation, Expectations, Intertemporal Choice, Experimental Macroeconomics
    JEL: C91 E21 E62
    Date: 2015–04
  62. By: Luis Cárdenas del Rey; Andrea Carrera; Laura Vitriago Valdivielso
    Abstract: In this paper, we tackle the most relevant aspects of the evolution in the market for sherry wine by studying the coastal trade in the region of Cadiz during the period 1857-1900. We develop a database using the information contained in the Estadísticas Generales del Comercio de Cabotaje en España (General Statistics of Coastal Trade in Spain) over the second half of the nineteenth century. We use these data to divide the period into different phases, in order to study the major historical features of the domestic market of sherry. Then we formulate a series of hypotheses to be tested empirically. In particular, we investigate the causal links between the dynamics of coastal trade and exports, as well as major historical events such as the outbreak of phylloxera or the global crisis of the late twentieth century. We find empirical evidence to support our hypotheses by estimating econometric time-series models.
    Keywords: Jerez wine, coastal trade, economic history, XIX century, business cycle, time-series models
    JEL: C22 E32 N53 N73
    Date: 2015–04
  63. By: Vladimir Belkin (Ural Branch of the Russian Academy of Sciences; Russian Presidential Academy of National Economy and Public Administration, Chelyabinsk branch.)
    Abstract: Subject matter of the research is the economic cycles of the world, national, and regional economies. Purpose of the work is to show their close relationship with the cycles of solar activity. The author used the methods of correlation and graphical analysis. It relies on the objectivity of the methodology of industrial relations, namely, their dependence on the parameters of the magnetic field of the Earth. As a result, the article identified the following close relationship: 1. cycles of unemployment in the states of New York, Texas and California with the maxima and minima of solar activity; 2. changing the polarity of the magnetic fields of the sun and economic crises in the U.S.; 4. extrema of monthly Wolf numbers and cycles of world output; 5. long waves of the global product and solar activity. On this basis, the author made a forecast deterioration in the global conjuncture in 2014–2015 years. The results can be used in the predicting the dynamics of the world, national and regional economies.
    Keywords: world product cycles, regional economy, the cyclical development of the economy, regional economic cycles, cycles of regional unemployment, unemployment cycles, solar activity cycles, long waves of the world market fluctuations, cycles of deflation
    JEL: E0
    Date: 2014–03
  64. By: Vladimir Belkin (Russian Presidential Academy of National Economy and Public Administration, Chelyabinsk branch; Ural Branch of the Russian Academy of Sciences.)
    Abstract: The author has revealed strong links between Juglar and Kitchin cycles of world product (1961 - 2013) and U.S. GDP (1798–2013), on the one hand, and the cycles of solar activity – on the other. On this basis, he developed a forecast deterioration in the global conjuncture in 2014–2015 years. The author reveals the close relationship heliobiology and helioeconomy.
    Keywords: solar activity cycles, cycles of global conjuncture, cycles of GDP, long waves in the economy, forecasting economic crises
    JEL: E0
    Date: 2014–04
  65. By: Jenk, Justin
    Abstract: This two-part working paper series represents a distillation of practical approaches with regard to the successful management of so-called “legacy assets” which include both impaired as well as non-performing loans, particularly in those in the real estate and property sectors. This two-part set uses case examples, based on developments in Spain during 2012 with the eventual foundation of SAREB, drawing on national, other European and North American experiences as well as expert practices. The set should be considered in their entirety. Part 1 sets the context of Spain in 2012 during the height of the credit-sovereign crisis. (Part 2 provides an assessment of the strategies, implementation issues and decisions that led to the eventual establishment of SAREB).
    Keywords: legacy assets, legacy asset management, non-performing loans, pricing, asset resolution, bank stabilization, bad bank, bank resolution, strategy, resolution strategy, Spain, BdE, SAREB, US,Resolution Trust Corporation, Sweden, Securum, Swedbank, Ireland, NAMA, derecognition, deconsolidation, financing, purchase, IRR.
    JEL: A1 D0 E0 F0 G0 H0 N2 P0
    Date: 2015–01
  66. By: Jenk, Justin
    Abstract: This two-part working paper series represents a distillation of practical approaches with regard to the successful management of so-called “legacy assets” which include both impaired as well as non-performing loans, particularly in those in the real estate and property sectors. This two-part set uses case examples, based on developments in Spain during 2012 with the eventual foundation of SAREB, drawing on national, other European and North American experiences as well as expert practices. The set should be considered in their entirety. Part 1 paper outlines the context in Spain in 2012 during the height of the credit-sovereign crisis. Part 2 provides an assessment of the strategies, implementation issues and decisions that led to the eventual establishment of SAREB.
    Keywords: legacy assets, legacy asset management, non-performing loans, pricing, asset resolution, bank stabilization, bad bank, bank resolution, strategy, resolution strategy, competition, implementation, Spain, BDE, SAREB, US, Resolution Trust Corporation, TARP, Sweden, Securum, Swedbank, Ireland, NAMA, Germany, SoFFin, FMSA, IRR, decosolidation, derecognition, financing, purchase, Asset Protection Schemes, SPVs, Internal Restructuring Units, Asset Management Company, Workout, Valuation, Pricing, Central Financing, Asset Management
    JEL: A1 D0 E0 F0 H0 N2 P0
    Date: 2015–02
  67. By: William, Barnett; Guo, Chen
    Abstract: In systems theory, it is well known that the parameter spaces of dynamical systems are stratified into bifurcation regions, with each supporting a different dynamical solution regime. Some can be stable, with different characteristics, such as monotonic stability, periodic damped stability, or multiperiodic damped stability, and some can be unstable, with different characteristics, such as periodic, multiperiodic, or chaotic unstable dynamics. But in general the existence of bifurcation boundaries is normal and should be expected from most dynamical systems, whether linear or nonlinear. Bifurcation boundaries in parameter space are not evidence of model defect. While existence of such bifurcation boundaries is well known in economic theory, econometricians using macroeconometric models rarely take bifurcation into consideration, when producing policy simulations from macroeconometrics models. Such models are routinely simulated only at the point estimates of the models’ parameters. Barnett and He (1999) explored bifurcation stratification of Bergstrom and Wymer’s (1976) continuous time UK macroeconometric model. Bifurcation boundaries intersected the confidence region of the model’s parameter estimates. Since then, Barnett and his coauthors have been conducting similar studies of many other newer macroeconometric models spanning all basic categories of those models. So far, they have not found a single case in which the model’s parameter space was not subject to bifurcation stratification. In most cases, the confidence region of the parameter estimates were intersected by some of those bifurcation boundaries. The most fundamental implication of this research is that policy simulations with macroeconometric models should be conducted at multiple settings of the parameters within the confidence region. While this result would be as expected by systems theorists, the result contradicts the normal procedure in macroeconometrics of conducting policy simulations solely at the point estimates of the parameters. This survey provides an overview of the classes of macroeconometric models for which these experiments have so far been run and emphasizes the implications for lack of robustness of conventional dynamical inferences from macroeconometric policy simulations. By making this detailed survey of past bifurcation experiments available, we hope to encourage and facilitate further research on this problem with other models and to emphasize the need for simulations at various points within the confidence regions of macroeconometric models, rather than at only point estimates.
    Keywords: Bifurcation, Hopf, robustness, dynamical inference, policy simulations
    JEL: E3 E37 E52 E58
    Date: 2015–04–20
  68. By: Chen, Heng; Luo, Yulei; Pei, Guangyu
    Abstract: We examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern. In this setting, the attention allocation may not be monotone in endowed attention capacity. Agents may decrease their attention on or even ignore the more accurate signal when capacity increases. As a result, social welfare may decrease when they have more attention to process information. And it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
    Keywords: Coordination game, social welfare, rational inattention
    JEL: D8 D81 D83 E5
    Date: 2015–04–22
  69. By: Tino Berger; Gerdie Everaert; Hauke Vierke (-)
    Abstract: This paper analyzes the amount of time variation in the parameters of a reduced-form empirical macroeconomic model for the U.S. economy. We set up an unobserved components model to decompose output, inflation and unemployment in their stochastic trend and business cycle gap components. The latter are related through the Phillips curve and Okun's Law. Key parameters such as the potential output growth rate, the slope of the Phillips curve and the strength of Okun's Law, are allowed to change over time in order to account for potential structural changes in the U.S. economy. Moreover, stochastic volatility is added to all components to account for shifts in macroeconomic volatility. A Bayesian stochastic model specification search is employed to test which parameters are time-varying and which unobserved components exhibit stochastic volatility. Using quarterly data from 1959Q2 to 2014Q3 we find substantial time variation in Okun's Law, while the Phillips curve slope appears to be stable. The potential output growth rate exhibits a drastic and persistent decline. Stochastic volatility is found to be important for cyclical shocks to the economy, while the volatility of permanent shocks remains stable.
    JEL: C32 E24 E31
    Date: 2015–04
  70. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: Neizvjesnost od početka globalne financijske krize postaje sve važniji fenomen u makroekonomiji. Šokovi neizvjesnosti se sve češće ističu kao novi uzroci poslovnih ciklusa te se neizvjesnost prelijeva na realni sektor kroz različite kanale djelovanja ekonomskih subjekata. Ovaj rad proučava makroekonomsko djelovanje neizvjesnosti u Republici Hrvatskoj. Fokus rada je na bankarskom tržištu, jer se promatra štednja i zaduživanje triju sektora: kućanstava, poduzeća i države. Kao mala otvorena ekonomija, Hrvatska je izuzetno osjetljiva na inozemne šokove. Zbog toga se promatra utjecaj neizvjesnosti iz Europske unije. U radu se konstruiraju dva pokazatelja domaće neizvjesnosti: volatilnost obvezničkog indeksa CROBIS te neizvjesnost potrošača temeljem ankete HNB-a. Sva tri pokazatelja neizvjesnosti odgovaraju temeljnim stiliziranim činjenicama: neizvjesnost je kontraciklična te je vodeća varijabla u odnosu na BDP. U radu se pokazuje kako rast neizvjesnosti različito djeluje na kućanstva i poduzeća u odnosu na državu. Kućanstva i poduzeća smanjuju štednju i zaduživanje, ali s vremenskom zadrškom od deset mjeseci. Država, s druge strane najprije pokušava djelovati preventivno povećavajući štednju i smanjujući zaduživanje. Međutim, već u kratkom roku (nakon šest mjeseci) dolazi do promjene trenda te se štednja države smanjuje, dok se zaduživanje povećava. Takvi rezultati navode na zaključak kako u Hrvatskoj kanal preventivne štednje kućanstava ili ne postoji, ili je vrlo slab, budući da se štednja smanjuje nakon porasta neizvjesnosti. Nadalje, kućanstva i poduzeća čekaju s odlukama o štednji i zaduživanju sve dok se neizvjesnost ne prelije na realni sektor. Ipak, neizvjesnost se nije pokazala kao ključna determinanta pri donošenju odluka o štednji i zaduživanju. Naime, šok neizvjesnosti objašnjava do 15% varijacije u štednji i zaduživanju. Značajniji je za kućanstva, dok je utjecaj na odluke države vrlo ograničen ili gotovo trivijalan (manji od 5%).
    Keywords: Neizvjesnost, mjere neizvjesnosti, bankarski sektor, preventivna štednja, inozemni šokovi, VAR model
    JEL: E21 E22 E44 C32
    Date: 2015–04–20
  71. By: Bénabou, Roland; Ticchi, Davide; Vindigni, Andrea
    Abstract: We analyze the joint dynamics of religious beliefs, scientific progress and coalitional politics along both religious and economic lines. History offers many examples of the recurring tensions between science and organized religion, but as part of the paper’s motivating evidence we also uncover a new fact: in both international and cross-state U.S. data, there is a significant and robust negative relationship between religiosity and patents per capita. The political-economy model we develop has three main features: (i) the recurrent arrival of scientific discoveries that generate productivity gains but sometimes erode religious beliefs; (ii) a government, endogenously in power, that can allow such innovations to spread or instead censor them; (iii) a religious organization or sector that may invest in adapting the doctrine to new knowledge. Three long-term outcomes emerge. First, a "Secularization" or "Western-European" regime with declining religiosity, unimpeded science, a passive Church and high levels of taxes and transfers. Second, a "Theocratic" regime with knowledge stagnation, extreme religiosity with no modernization effort, and high public spending on religious public goods. In-between is a third, "American" regime that generally (not always) combines scientific progress and stable religiosity within a range where religious institutions engage in doctrinal adaptation. It features low overall taxes, together with fiscal advantages or societal laws benefiting religious citizens. Rising income inequality can, however, lead some of the rich to form a successful Religious-Right alliance with the religious poor and start blocking belief-eroding discoveries and ideas.
    Keywords: beliefs; blocking; censorship; Church; discovery; economic growth; inequality; innovation; knowledge; politics; redistribution; religion; religious right; science; secularization; state; technical progress; theocracy; tolerance
    JEL: E02 H11 H41 O3 O43 P16 Z12
    Date: 2015–04
  72. By: Peersman, Gert; Wagner, Wolf
    Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risk-taking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: bank lending; risk taking; securitization; SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2015–04
  73. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Guo Chen (Department of Economics, The University of Kansas)
    Abstract: This survey provides an overview of the classes of macroeconometric models for which these experiments have so far been run and emphasizes the implications for lack of robustness of conventional dynamical inferences from macroeconometric policy simulations. By making this detailed survey of past bifurcation experiments available, we hope to encourage and facilitate further research on this problem with other models and to emphasize the need for simulations at various points within the confidence regions of macroeconometric models, rather than at only point estimates.Length: 52 pages
    Date: 2015–04
  74. By: Pitrou, Cyril
    Abstract: A graph representation of the financial relations in a given monetary structure is proposed. It is argued that the graph of debt-liability relations is naturally organized and simplified into a tree structure, around banks and a central bank. Indeed, this optimal graph allows to perform payments very easily as it amounts to the suppression of loops introduced by pending payments. Using this language of graphs to analyze the monetary system, we first examine the systems based on commodity money and show their incompatibility with credit. After dealing with the role of the state via its ability to spend and raise taxes, we discuss the chartalist systems based on pure fiat money, which are the current systems. We argue that in those cases, the Treasury and the central bank can be meaningfully consolidated. After describing the interactions of various autonomous currencies, we argue that fixed exchanged rates can never be maintained, and we discuss the controversial role of the IMF in international financial relations. We finally use graph representations to give our interpretation on open problems, such as the monetary aggregates, the sectoral financial balances and the endogenous nature of money. Indeed, once appropriately consolidated, graphs of financial relations allow to formulate easily unambiguous statements about the monetary arrangements.
    Keywords: monetary theory; graph theory; chartalism; endogenous money; central bank; sectoral financial balances; budgetary policy; monetary policy
    JEL: E42 E50 E52 E58 F33 F34
    Date: 2015–04–14
  75. By: Stoian, Andreea; Alves, Rui Henrique
    Abstract: In this paper, we investigate the issues regarding the stabilization of public debt and its decrease down to 60 per cent of GDP for selected European Union countries using the primary balance derived from the public debt dynamic model as a leading indicator. We find that there is a high probability of stabilizing public debt at its 2014 level conditional on achieving an increased GDP growth rate . In addition, results indicate that it would take at least 10 years for many of the analyzed countries to decrease their public debt ratio to 60 per cent of GDP. We also draw conclusions on what really matters for fiscal sustainability and on implications for national and European fiscal policies.
    Keywords: Fiscal policy, primary balance, public debt, fiscal sustainability, European Union
    JEL: E62 E63 H62
    Date: 2014–02
  76. By: Swamy, Vighneswara
    Abstract: The dynamics of government debt and economic growth, once a subject of interest mostly to very few macroeconomists is suddenly of immense attention for many researchers in the backdrop of Euro zone sovereign debt crisis and Reinhart & Rogoff’s related research. This study investigates the government debt – growth relationship and contributes to literature in the following ways: First, we extend the horizon of analysis to several country groupings and make the study inclusive of economic, political and regional diversities based on a sizeable dataset. Second, we provide evidence for the presence of a causal link going from debt to growth with the use of ‘instrumental variables approach’ unlike the RR approach. Third, we overcome the issues related to data adequacy, coverage of countries, heterogeneity, endogeneity, and non-linearities by conducting a battery of robustness tests. We find that a 10-percentage point increase in the debt-to-GDP ratio is associated with 2 to 23 basis point reduction in average growth. Our results establish the nonlinear relationship between debt and growth.
    Keywords: Government Debt, economic growth, panel data, nonlinearity, country groupings
    JEL: C33 C36 E62 H63 O40 O5
    Date: 2015–04–16
  77. By: Swamy, Vighneswara
    Abstract: The surge of government debt during the post-global financial crisis and the ongoing euro zone sovereign debt crisis has begun raising concerns whether government debt levels have hit the tipping points. This study offers to contribute in the following ways: First, we find out whether the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90%. Second, we estimate different thresholds for groups of economies based on their debt regimes, political economy structures and types of political governance, geographical considerations, and income levels. Third, we find out whether there is a declining negative effect beyond the debt threshold. Our results find the debt thresholds to vary in the range of 84 to 114 percent of GDP. We estimate that every additional 10 percent rise in debt-to-GDP ratio beyond the debt threshold costs 10 to 30 basis points of annual average real GDP growth. We find that different groups of countries experience debt threshold at different levels. Debt thresholds are dependent not necessarily on economic factors alone, but on other factors such as political economies and governance structures, geographies etc. Debt thresholds are sensitive to horizon of analysis.
    Keywords: Government Debt, economic growth, debt thresholds, panel data, nonlinearity, country groupings
    JEL: C33 C36 E62 H63 O40 O50
    Date: 2015–04–16
  78. By: Obeng, Samuel
    Abstract: Abstract The paper investigates the revenue-expenditure nexus for Ghana. The study covers the period 1980-2013. It examines whether increases in government revenue cause increases in government expenditure or increases in government expenditure cause increases in government revenue. It also examines if changes in government expenditure and revenue have feedback effects on each other. The stationarity test indicates that both variables are stationary at the levels when the test is done with a constant and a trend, and are first difference stationary when the test is done with a constant but no trend. The paper analyses the long-run relationship between government expenditure and government revenue using the Ordinary Least Squares (OLS) method. The short-run relationships between the two variables are tested in a Vector Autoregressive (VAR) framework. The results show a very strong long-and short-run relationship between the variables. The second period lag of the revenue variable shows a negative relationship between government revenue and government expenditure. This indicates the possibility of the absence of Fiscal illusion in every two years of increased government expenditure. Granger causality test is done to determine the direction of the causal relationship between government expenditure and government revenue. The test gives a unidirectional causality running from revenue to expenditure. This implies government revenue causes government expenditure. Therefore, evidence of Tax-spend hypothesis is found. The implication is that, government must improve its revenue generation efforts in order for it to fund its ever increasing expenditure and to control the frequent fiscal slippages.
    Keywords: Keywords: government revenue, government expenditure, OLS, VAR, Granger-causality
    JEL: E62 H0 H50 H59 H60 H62 H68
    Date: 2015–01–24
  79. By: David G. Blanchflower; Andrew T. Levin
    Abstract: In the wake of a severe recession and a sluggish recovery, labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.
    JEL: E24 E32 E52 E58 J21
    Date: 2015–04
  80. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: While theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have been stubbornly finding depreciation. Using daily data on U.S. defense spending (announced and actual payments), we document that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. We examine responses of other variables at the daily frequency and explore how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.
    JEL: E62 F41
    Date: 2015–04
  81. By: Roland Bénabou; Davide Ticchi; Andrea Vindigni
    Abstract: We analyze the joint dynamics of religious beliefs, scientific progress and coalitional politics along both religious and economic lines. History offers many examples of the recurring tensions between science and organized religion, but as part of the paper's motivating evidence we also uncover a new fact: in both international and cross-state U.S. data, there is a significant and robust negative relationship between religiosity and patents per capita. The political-economy model we develop has three main features: (i) the recurrent arrival of scientific discoveries that generate productivity gains but sometimes erode religious beliefs; (ii) a government, endogenously in power, that can allow such innovations to spread or instead censor them; (iii) a religious organization or sector that may invest in adapting the doctrine to new knowledge. Three long-term outcomes emerge. First, a "Secularization" or "Western-European" regime with declining religiosity, unimpeded science, a passive Church and high levels of taxes and transfers. Second, a "Theocratic" regime with knowledge stagnation, extreme religiosity with no modernization effort, and high public spending on religious public goods. In-between is a third, "American" regime that generally (not always) combines scientific progress and stable religiosity within a range where religious institutions engage in doctrinal adaptation. It features low overall taxes, together with fiscal advantages or societal laws benefiting religious citizens. Rising income inequality can, however, lead some of the rich to form a successful Religious-Right alliance with the religious poor and start blocking belief-eroding discoveries and ideas.
    JEL: E02 H11 H41 N0 O3 O43 P16 Z1 Z12
    Date: 2015–04
  82. By: Mariacristina De Nardi
    Abstract: In the data, wealth is very unequally distributed, even more so than labor earnings and income, and the saving rate of wealthy people is high. Many dynamic models used for quantitative policy evaluation imply that once households get rich, they dissave. As a result, these models generate too little wealth concentration in the hands of the wealthiest compared with the observed data. This raises the question of the robustness of the policy lessons that we learn from environments in which key aspects of saving behavior in the model are not consistent with those in the observed data. Mechanisms that raise the saving rate of richer people, and thus generate more realistic saving behavior and wealth concentration in dynamic quantitative models, have been proposed. These mechanisms include heterogeneity in patience, transmission of human capital and voluntary bequests across generations, entrepreneurship or high returns to capital coupled with borrowing constraints, and high earnings risk for the top earners. More work is needed to evaluate these explanations both individually and jointly and to quantitatively assess their importance. Additionally, more work to explore alternative or complementary mechanisms is warranted.
    JEL: D14 D31 E21 H2
    Date: 2015–04
  83. By: Robert L. McDonald; Anna Paulson
    Abstract: The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. Two large bets on real estate made with funding that was vulnerable to bank-run like behavior on the part of funders pushed AIG to the brink of bankruptcy. AIG used securities lending to transform insurance company assets into residential mortgage-backed securities and collateralized debt obligations, ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multi-sector collateralized debt obligations, backed by real estate assets, ultimately losing more than $30 billion. These activities were apparently motivated by a belief that AIG’s real estate bets would not suffer defaults and were “money-good.” We find that these securities have in fact suffered write-downs and that the stark “money-good” claim can be rejected. Ultimately, both liquidity and solvency were issues for AIG.
    JEL: E00 G01 G18 G2
    Date: 2015–04
  84. By: Fernando Alvarez; Francesco Lippi
    Abstract: We present a model that characterizes the relationship between optimal dynamic cash management and the choice of the means of payment. The novel feature of the model is the sequential nature of the payments choice: in each instant the agent can choose to pay with either cash or credit. This framework predicts that the current level of the stock of cash determines whether the agent uses cash or credit. Cash is used whenever the agent has enough of it, credit is used when cash holdings are low, a pattern recently documented by households data from several countries. The average level of cash and the average share of expenditures paid in cash depend on the opportunity cost of cash relative to the cost of credit. The model produces a rich set of over-identifying restrictions for consumers’ cash-management and payment choices which can be tested using recent households survey and diary data.
    JEL: E41
    Date: 2015–04
  85. By: Christian Bauer; Matthias Neuenkirch
    Abstract: In this paper, we derive a modification of a forward-looking Taylor rule, which integrates two variables measuring the uncertainty of inflation and GDP growth forecasts into an otherwise standard New Keynesian model. We show that certainty-equivalence in New Keynesian models is a consequence of log-linearization and that a second-order Taylor approximation leads to a reaction function which includes the uncertainty of macroeconomic expectations. To test the model empirically, we use the standard deviation of individual forecasts around the median Consensus Forecast as proxy for forecast uncertainty. Our sample covers the euro area, Sweden, and the United Kingdom and the period 1992Q4-2014Q2. We find that while all three central banks react significantly to inflation forecast uncertainty by reducing their policy rates in times of higher inflation expectation uncertainty with an average effect of more than 25 basis points, they do not have significant reactions to GDP growth forecast uncertainty. We conclude with some implications for optimal monetary policy rules and central bank watchers.
    Keywords: Certainty-Equivalence, Consensus Forecasts, Forecast Uncertainty, Global Financial Crisis, Optimal Monetary Policy, Taylor Rule
    JEL: E52 E58
    Date: 2015
  86. By: De Donder, Philippe; Roemer, John
    Abstract: We calibrate a sequence of four nested models to study the dynamics of wealth accumulation. Individuals maximize a utility function whose arguments are consumption and investment. They desire to accumulate wealth for its own sake – this is not a life-cycle model. A competitive firm produces a single good from labor and capital; the rate of return to capital and the wage rate are market-clearing. The second model introduces political lobbying by the wealthy, whose purpose is to reduce the tax rate on capital income. The third model introduces differential rates of return to capitals of different sizes. The fourth model introduces inheritance and intergenerational mobility.
    Keywords: Piketty, dynamics of wealth accumulation, intergenerational mobility, Kantian equilibrium
    JEL: D31 D58 E37
    Date: 2015–04–16
  87. By: Severin Reissl
    Abstract: In a paper for the Review of Keynesian Economics, Steve Keen recently provided a restatement of his claim that "effective demand equals income plus the change in debt". The aim of the present article is to provide a detailed critique of Keen's argument using an analytical framework pioneered by Wolfgang Stützel which has recently been developed further.Using this framework, it is shown that there is no strictly necessary relationship whatsoever between effective demand and changes in the level of gross debt. Keen's proposed relation is shown not to hold under all circumstances, and it is demonstrated that where it does hold this is due to variations in the `velocity of debt'-variable he introduces. This variable, however, lacks theoretical underpinning. The article also comments on Keen's proposal that trade in financial assets should be included in effective demand, arguing that this undermines the concept of effective demand itself. It is also shown that many weaknesses in Keen's argument stem from a lack of terminological clarity which originates in his interpretation of the works of Hyman Minsky.
    Keywords: Effective Demand, endogenous money, debt
    JEL: E12 E20 E44 E51
    Date: 2015
  88. By: John Baffes (World Bank, Development Prospects Group); M. Ayhan Kose (World Bank, Development Prospects Group); Franziska Ohnsorge (World Bank, Development Prospects Group); Marc Stocker (World Bank, Development Prospects Group)
    Abstract: Following four years of relative stability at around $105 per barrel, oil prices have declined sharply since June 2014. This paper presents a comprehensive analysis of the sources of the recent decline in prices, and examines its macroeconomic, financial and policy implications. The recent drop in prices is a significant, but not an unprecedented event as it has some significant parallels with the price collapse in 1985‐86. The recent decline has been driven by a number of factors: several years of upward surprises in the production of unconventional oil; weakening global demand; a significant shift in OPEC policy; unwinding of some geopolitical risks; and an appreciation of the U.S. dollar. Although the relative importance of each factor is difficult to pin down, OPEC’s renouncement of price support and rapid expansion of oil supply from unconventional sources appear to have played a crucial role since mid‐2014. The oil price drop will lead to substantial income shifts from oil exporters to oil importers resulting in a net positive effect for global activity over the medium term. Although several factors could counteract its impact on global growth and inflation, the drop in oil prices will pose significant challenges for monetary, fiscal, and structural policies.
    Keywords: commodity prices, 2014 oil price decline, macroeconomic implications, supply factors, demand factors, unconventional oil production, global output, and global inflation.
    JEL: Q40 Q41 Q43 F40 E32 E62
    Date: 2015–04
  89. By: Na, Seunghoon (Columbia University); Schmitt-Grohe, Stephanie (Columbia University, CEPR, and NBER); Uribe, Martin (Columbia University and NBER); Yue, Vivian Z. (Emory University and Federal Reserve Bank of Atlanta)
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages, thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. In contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates.
    Keywords: sovereign default; exchange rates; optimal monetary policy; capital controls; downward nominal wage rigidity; currency pegs
    JEL: E43 E52 F31 F34 F41
    Date: 2015–04–01
  90. By: Choi, Dong Boem (Federal Reserve Bank of New York); Eisenbach, Thomas M. (Federal Reserve Bank of New York); Yorulmazer, Tanju
    Abstract: We build a general equilibrium model with financial frictions that impede the effectiveness of monetary policy in stimulating output. Agents with heterogeneous productivity can increase investment by levering up, but this increases interim liquidity risk. In equilibrium, the more productive agents choose higher leverage, invest more, and take on higher liquidity risk. Therefore, these agents respond less than the agents with lower productivity to monetary policy that reduces the equilibrium interest rate. Overall quality of investment deteriorates, which can generate a negative spiral, dampening the effect of a monetary stimulus: Worse overall quality leads to lower liquidation values, increasing the cost of liquidity risk. This reduces the demand for loanable funds, further decreasing the interest rate, which then leads to further quality deterioration. When this feedback is strong, monetary policy can lose its effectiveness in stimulating aggregate output even if it leads to significant drops in the interest rate.
    Keywords: monetary policy transmission; financial frictions; heterogeneous agents; financial intermediaries
    JEL: E52 E58 G20
    Date: 2015–04–01
  91. By: Albanesi, Stefania (Federal Reserve Bank of New York); Nosal, Jaromir B.
    Abstract: Using a comprehensive panel dataset on U.S. households, we study the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the most substantive reform of personal bankruptcy in the United States since the Bankruptcy Reform Act of 1978. The 2005 legislation introduced a means test based on income to establish eligibility for Chapter 7 bankruptcy and increased the administrative requirements to file, leading to a rise in the opportunity cost and, especially, the financial cost of filing for bankruptcy. We study the effects of the reform on bankruptcy, insolvency, and foreclosure. We find that the reform caused a permanent drop in the Chapter 7 bankruptcy rate relative to pre-reform levels, owing to the rise in filing costs associated with the reform, which can be interpreted as resulting from liquidity constraints. We find that the decline in bankruptcy filings resulted in a rise in the rate and persistence of insolvency as well as an increase in the rate of foreclosure. We find no evidence of a link between the decline in bankruptcy and a rise in the number of individuals who are current on their debt. We document that these effects are concentrated at the bottom of the income distribution, suggesting that the income means tests introduced by BAPCPA did not serve as an effective screening device. We show that insolvency is associated with worse financial outcomes than bankruptcy, as insolvent individuals have less access to new lines of credit and display lower credit scores than individuals who file for bankruptcy. Since bankruptcy filings declined much more for low-income individuals, our findings suggest that, for this group, BAPCPA may have removed an important form of relief from financial distress.
    Keywords: personal bankruptcy; insolvency; foreclosure
    JEL: D12 D14 E65 K35
    Date: 2015–04–01
  92. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Chapter 9 and Alternatives for Distressed Municipalities and States Workshop, Federal Reserve Bank of New York, New York City.
    Keywords: infrastructure; fiscal surplus; Volcker-Ravitch state fiscal crisis taskforce; debt financing; operating deficits; budget; pensions
    JEL: E62
    Date: 2015–04–14
  93. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the 2015 Primary Dealer Meeting, New York City.
    Keywords: Treasury market structure; Treasury Market Practices Group (TMPG); interdealer Treasury market; electronic trading; Automated trading; High-frequency trading (HFT); Central Limit Order Book (CLOB); Fixed Income Clearing Corporation (FICC); October 15 (2014)
    JEL: E52
    Date: 2015–04–13
  94. By: Hiroshi Nishi
    Abstract: The purpose of this study is to empirically examine the relationship between structural change and economic growth in Japan during the past 40 years. While using the growth in real value added and labour productivity as measurement of economic growth, we consider the structural change in value added as the structural change in output and that in capital and labour as the structural change in inputs. Specifically, we use the Japan Industrial Productivity database 2014 compiled by the Research Institute of Economy, Trade and Industry, and show (1) the pace of structural change in inputs and output, (2) the evolution of sectoral dispersion of economic growth, (3) the changing distribution of sectoral contribution to aggregate economic growth, and (4) empirical evidence of the relationship between structural change and economic growth. Our main conclusion is that the Japanese growth regime has transformed from a heterogeneity decreased regime with overall growth process to a heterogeneity increased one with uneven growth process since the 1990s; the impact that structural change in output had on economic growth was positive, although its magnitude has weakened since then.
    Keywords: wage gap; Growth regime, Sectoral heterogeneity, Structural change, Japanese economy
    JEL: B50 E12 L16 O41
    Date: 2015–04
  95. By: Rod Tyers (Business School, University of Western Australia)
    Abstract: China is transitioning toward more inward-focussed growth, causing adverse changes in the product and financial terms of trade in the advanced economies. At the same time, international financial markets tussle between tightening forces associated with the US recovery on the one hand and unconventional monetary expansion in Europe and Japan on the other. The way these shocks interact is examined in this paper using a global macro model with national portfolio rebalancing and asset differentiation and a representation of unconventional monetary policy. Results are found to be sensitive to the contributions of productivity and capital accumulation to China’s growth. When these are offered in realistic combination, the combined shocks are deflationary in the US and China, implying that contractionary US monetary policy is not imminent. Monetary responses in the US and China then combine with price targeting regimes in the EU and Japan to expand liquidity globally, amplifying impacts on financial markets and the global distribution of real investment.
    Date: 2015
  96. By: Marek Kapicka (U.C. Santa Barbara and CERGE-EI); Julian Neira (Department of Economics, University of Exeter)
    Abstract: We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences, where both ability and learning effort are private information of the agents. The optimal policies balance several goals: redistribution across agents, insurance against human capital shocks, incentives to accumulate human capital, and incentives to work. We show that, in the optimum, i) high-ability agents face risky consumption in order to elicit learning effort while low-ability agents are insured, ii) high-ability agents face a higher savings tax to discourage them from self-insuring, iii) under certain conditions, the inverse marginal labor income tax rate follows a random walk, and iv) the “no distortion at the top” result does not apply if discouraging labor supply increases incentives to invest in human capital. Quantitatively, we find large welfare gains for the U.S. from switching to an optimal tax system.
    Keywords: optimal taxation, income taxation, human capital
    JEL: E6 H2
    Date: 2015
  97. By: McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Press Briefing on Student Loans, Federal Reserve Bank of New York, New York City
    Keywords: credit markets; bank-dependent; credit supply; credit growth
    JEL: E66
    Date: 2015–04–16
  98. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Money Marketeers of New York University, New York City.
    Keywords: policy normalization: System Open Market Account (SOMA); Open Market Trading Desk; overnight reverse repurchase agreement (ON RRP); interest on excess reserve balances (IOER); desk; flexibility; investment capacity; testing; data collection; liftoff
    JEL: E52
    Date: 2015–04–15
  99. By: Ehrmann, Michael (Bank of Canada); Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.)); Santoro, Emilianio (University of Copenhagen)
    Abstract: This paper studies consumers' inflation expectations using micro-level data from the Surveys of Consumers conducted by University of Michigan. It shows that beyond the well-established socio-economic factors such as income, age or gender, other characteristics such as the households' financial situation and their purchasing attitudes are important determinants of their forecast accuracy. Respondents with current or expected financial difficulties, pessimistic attitudes about major purchases, or expectations that income will go down in the future have a stronger upward bias in their expectations than other households. However, their bias shrinks by more than that of the average household in response to increasing media reporting about inflation. Equivalent results are found during recessions.
    Keywords: Consumer Attitudes; Inflation Expectations; News on Inflation
    JEL: C53 D84 E31
    Date: 2015–03–10
  100. By: Carapella, Francesca (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, panics precipitate, economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. When money supply is unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from falling. Deposit insurance can achieve the same goal but amplifies business cycle fluctuations by inducing moral hazard.
    Keywords: banking panics; deflation; deposit insurance
    JEL: E53 E58 G21 N12
    Date: 2015–03–04
  101. By: Francesco Zanetti; Konstantinos Theodoridis
    Abstract: We enrich a baseline RBC model with search and matching frictions on the labor market and real frictions that are helpful in accounting for the response of macroeconomic aggregates to shocks.  The analysis allows shocks to have an unanticipated and a new (i.e. anticipated) component.  The Bayesian estimation of the model reveals that the model which includes news shocks on macroeconomic aggregates produces a remarkable fit of the data.  News shocks in stationary and non-stationary TFP, investment-specific productivity and preference shocks significantly affect labor market variables and explain a sizeable fraction of macroeconomic fluctuations at medium- and long-run horizons.  Historically, news shocks have played a relevant role for output, but they have had a limited influence on unemployment.
    Keywords: Anticipated productivity shocks, Bayesian SVAR methods, labour market search frictions
    JEL: E32 C32 C52
    Date: 2015–04–17
  102. By: Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England, Bristol)
    Abstract: We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. We find that a combination of productivity and sunspot shocks can account for the observed counter-cyclical behavior in international relative prices and quantities, while simultaneously generating volatilities that match the data. The indeterminacy model can also resolve the Backus-Smith puzzle without requiring a low value of the trade elasticity.
    Keywords: Indeterminacy; Sunspots; International Business Cycles; Net Exports; Terms of Trade; Real Exchange Rate; Backus-Smith Puzzle
    JEL: E32 F41 F44
    Date: 2015–01–04
  103. By: Pedro Garcia Duarte
    Abstract: Macroeconomists have emphasized the force of facts in forging a consensus understanding of business cycle fluctuations. According to this view, rival economists could no longer hold disparate views on the topic because “facts have a way of not going away” (Blanchard 2009). But how can macroeconomists observe the workings of an economy? Essentially through building and manipulating models. Thus the construction of macroeconomic facts –or “stylized facts”–, empirical regularities that come to be widely accepted, opens up technical spaces where macroeconomists negotiated their theoretical commitments and eventually allowed a consensus to emerge. I argue that this is an important element in the history of the DSGE macroeconomics.
    Keywords: DSGE models; history of macroeconomics; new Keynesian macroeconomics; real business cycles
    JEL: B22 B23 E32
    Date: 2015–04–17
  104. By: Kevin x.d. Huang (Vanderbilt University); Jie Chen (Shanghai University of Finance and Economics); Zhe Li (Shanghai University of Finance and Economics); Jianfei Sun (Shanghai Jiao Tong University)
    Abstract: We argue that financial frictions and financial shocks can be an important factor behind the slow recoveries from the three most recent recessions. To illustrate this point, we augment a simple RBC model with a collateral constraint whose tightness is randomly disturbed by a shock that prescribes the general financial condition in the economy. We present evidence that such financial shock has become more persistent since the mid 1980s. We show that this can be an important contributor to the recent slow recoveries, and that a main mechanism may have to do with just-in-time-uses of capital and labor in the face of tight credit conditions during the recoveries. To assess the importance of such financial shock relative to other shocks in contributing to the slow recoveries, we enrich a New Keynesian model, which features various structural shocks and frictions widely considered in the literature, with the financial frictions and financial shocks studied in our parsimonious model. Our structural estimates of this comprehensive model indicate that financial shocks can play a dominant role in accounting for the slow recoveries, especially in employment growth rate.
    Keywords: Collateral constraint; Financial shock; Slow recovery; Capital shortage; Extensive margin; Intensive margin
    JEL: E2 E3
    Date: 2014–06–06
  105. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare.
    JEL: E0 E5
    Date: 2014–01–10
  106. By: Yasuo Hirose (Keio University); Atsushi Inoue (Vanderbilt University)
    Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the probability of hitting the ZLB increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.
    JEL: E3 E5
    Date: 2014–09–09
  107. By: W. Erwin Diewert (University of British Columbia and UNSW); Kevin J. Fox (School of Economics, UNSW Business School, UNSW)
    Abstract: It is common for comparisons to be made of output growth and inflation across groups of countries, yet such comparisons can result in inconsistencies. We address two problems: (i) how to measure aggregate real output and inflation for groups of countries and (ii) how to construct measures of real GDP for a group of countries where the country measures of real GDP are consistent across time and space. A method is proposed for harmonizing conflicting estimates of OECD member-country real GDP, ensuring consistency over space and overall group consistency over time. A new measure of OECD inflation is also proposed.
    Keywords: Purchasing Power Parities, PPPs, ICP, OECD country statistics, inflation, price and volume indexes, Fisher indexes, country competitiveness
    JEL: C43 C82 E01
    Date: 2015–03
  108. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: By means of structural VARs we investigate the long-run nexus between inflation and output in the Eurozone under different identification schemes and model specifications. The Eurozone is an interesting case study due to its very low inflation rate and to the official adherence of its monetary authority to the classical dichotomy. We find a strong positive long-run connection between inflation and output, supporting recent theoretical models arguing that this might exist at low long-run inflation rates.
    Keywords: long-run, non-vertical Phillips curve, empirical evidence
    JEL: E31 E40 E50 J64
    Date: 2015–04
  109. By: Tóth, Peter
    Abstract: In this article we estimate a small dynamic factor model (DFM) for the short-term forecasting of Slovak GDP. The model predicts the developments of real activity in the next two quarters on the basis of monthly data, which are published earlier than GDP. The regular release of various monthly indicators allows about a weekly update of the short-term outlook. Our DFM contains six monthly indicators, which are retail sales, sales in industry and construction, employment in selected industries, health care contributions of employers, export and the PMI for the eurozone. These approximate the production, expenditure and income side of GDP. The forecast accuracy of the factor model prevails over simple approaches not relying on monthly data, such as the random walk and the autoregressive models of the GDP series.
    Keywords: dynamic factor model, GDP, short-term forecasting
    JEL: C52 C53 E23 E27
    Date: 2014–10–02
  110. By: Grechyna, Daryna
    Abstract: This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment by the government (Ramsey problem) and no commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that the cyclical properties of fiscal variables are similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent), and to different sets of the parameters. The cyclical properties of fiscal variables, regardless of commitment assumptions, can be determined by the parameters of the utility function.
    Keywords: optimal taxation; time-consistent policy; market incompleteness.
    JEL: E61 E62 H21 H63
    Date: 2015–03
  111. By: Bonga-Bonga, Lumengo; Kabundi, Alain
    Abstract: Since the adoption of inflation rate targeting policy, there has been a great concern on the effectiveness of monetary policy to curb inflation in South Africa. The effectiveness of the repo rate as a policy instrument to control the level of inflation has been widely criticised not only in the South African context but also internationally. With the critics pointing out from a substantial lag for monetary policy changes to affect inflation to the inability of the policy instrument to effectively affect inflation level. In assessing the effectiveness of the monetary policy in South Africa, this paper makes use of the structural vector error correction model (SVECM) to characterise the dynamics of inflation to monetary policy shocks. The results of the impulse response function obtained from the SVECM found that while positive shocks to monetary policy decrease output but do not decrease credit demand and inflation in South Africa.
    Keywords: Inflation rate targeting, Policy instruments, Structural Vector Error Correction Model.
    JEL: C22 E52
    Date: 2015–04–10
  112. By: Taguchi, Hiroyuki; Sahoo, Pravakar; Nataraj, Geethanjali
    Abstract: This paper aims at providing empirical evidence on the effect of capital flows on asset prices including its channel under different currency regimes, focusing on ten emerging and developing economies in the world with data availability and stationarity for the 2000s, by a generalized impulse response analysis under a vector auto-regression model. The main findings are as  follows. Portfolio capital inflows have a significantly positive effect on stock prices in all sample economies except two transition economies, which implies that the direct channel from capital inflows into stock markets is at least working in sample economies regardless of their currency regimes; The indirect channel –the channel in which capital inflows raise share prices through an increase in domestic monetary base– works differently under different currency regimes: it works in the economies with peg regime through their intervention to foreign exchange markets, whereas the indirect channel seems to be shut down in those with floating regime probably by sterilizing the intervention.
    Keywords: capital flows, asset prices, emerging and developing Economies
    JEL: E51 E52 F32
    Date: 2015
  113. By: Asongu, Simplice; EFOBI, Uchenna; BEECROFT, Ibukun
    Abstract: The paper verifies the Azzimonti et al. (2014) conclusions on a sample of 53 African countries for the period 1996-2008. Authors of the underlying study have established theoretical underpinnings for a negative nexus between rising public debt and inequality in OECD nations. We assess the effects of four debt dynamics on inequality adjusted human development. Instrumental variable and interactive regressions were employed as empirical strategies. Two main findings were established which depend on whether debt is endogenous to or interactive with globalisation. First, when external debt is endogenous to globalisation, the effect on inclusive human development is negative, whereas when it is interactive with globalisation, the effect is positive. This may reflect the false economics of pre-conditions. The magnitudes of negative estimates from endogenous related effects were higher than the positive marginal interactive effects. Policy implications were discussed.
    Keywords: Debts; globalisation; inequality; inclusive development; Africa
    JEL: D60 E60 F40 F59 O55
    Date: 2014–12–13

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