nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒06‒20
89 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Staying at Zero with Affine Processes: An Application to Term Structure Modelling. By A. Monfort; F. Pegoraro; J.-P. Renne; G. Roussellet
  2. Assessing core inflation indicators: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  3. Measuring persistence in inflation: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  4. Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios? By Gabriela Castro; Ricardo M. Felix; Paulo Julio; Jose R. Maria
  5. Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control By Michael Funke; Petar Mihaylovski; Haibin Zhu
  6. Asset Bubbles and Bailouts By Hirano, Tomohiro; Inaba, Masaru; Yanagawa, Noriyuki
  7. Testing the impact of unemployment on self-employment: empirical evidence from OECD countries By Halicioglu, Ferda; Yolac, Sema
  8. On Positive Value of Information in Risk Sharing By Piotr Denderski; Christian Stoltenberg
  9. How can the labor market accounts for the effectiveness of fiscal policy over the business cycle? By Thierry BETTI; Thomas COUDERT
  10. Political (In)Stability of Social Security Reform By Joanna Tyrowicz; Krzysztof Makarski
  11. The Implementation of Stabilization Policy. By O. Loisel
  12. Expectations as a source of macroeconomic persistence: an exploration of firms' and households' expectation formation By Fuhrer, Jeffrey C.
  13. Costly Credit and Sticky Prices By Lucy Qian Liu; Liang Wang; Randall Wright
  14. Piketty misreads Austen and ignores Smith By Carlos Rodríguez Braun
  15. The contradictory path of the capital accumulation process in Spain under the Euro By Mateo Tomé, Juan Pablo
  16. Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads By Jari Hännäkäinen
  17. The mortgage spread as a predictor of real-time economic activity By Jari Hännäkäinen
  18. Zero Lower Bound and Indicator Properties of Interest Rate Spreads By Jari Hännäkäinen
  19. Mexico’s monetary policy communication and money markets By Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
  20. Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets By Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
  21. How Important Are Terms Of Trade Shocks? By Schmitt-Grohé, Stephanie; Uribe, Martín
  22. Debt into Growth: How Sovereign Debt accelerated the First Industrial Revolution By Ventura, Jaume; Voth, Hans-Joachim
  23. Maduración del Sistema Previsional. Proyecciones y agenda By Cecilia Dassatti; Natalia Mariño
  24. How people pay in Uruguay: the role of transaction characteristics By Rodrigo Lluberas
  25. Firm Inflation Expectations and Monetary Policy in Uruguay By Gerardo Licandro; Miguel Mello
  26. Harmonising Hayek and Posner: revisiting Posner, Hayek & the economic analysis of Law By Ojo, Marianne
  27. Household finance and income inequality in the euro area By Oliver Denk; Alexandre Cazenave-Lacroutz
  28. Finance and income inequality in OECD countries By Oliver Denk; Boris Cournède
  29. Ethnic divisions, political institutions and the duration of declines: A political economy theory of delayed recovery By Bluhm, Richard; Thomsson, Kaj
  30. De la société salariale à la société entrepreneuriale. Une analyse critique From the salarial to the entrepreneurial society: A critical analysis By Sophie BOUTILLIER; Dimitri UZUNIDIS
  31. Fiscal Retrenchment and Sovereign Risk By Felix Strobel
  32. Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis By Kamiar Mohaddes and M. Hashem Pesaran
  33. How responsive are private savings to changes in real interest rate in Ghana? By Opoku, Richard Takyi; Ackah, Ishmael
  34. Heavens above: what equilibrium means for economics. With an appendix on temporality, equilibrium, endogeneity and exogeneity, in the inductive sciences and in economics By Freeman, Alan
  35. Empirical study on the determinants of fiscal vulnerability: evidence for the European Union By Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
  36. THE NECESSITY OF SOLVING THE YOUTH UNEMPLOYMENT By Adrijana Vukovic, Goran Djokovic, Danilo Roncevic
  37. The U.S. economic and monetary policy outlook By Dudley, William
  38. Foreign Exchange Interventions at the Zero Lower Bound in the Czech Economy: A DSGE Approach By Simona Malovana
  39. Collateral constraints and macroeconomic asymmetries By Luca Guerrieri; Matteo Iacoviello
  40. How does labour market structure affect the response of economies to shocks? By Aurelijus Dabusinskas; István Kónya; Stephen Millard
  41. How Effective are Macroprudential Policies? An Empirical Investigation By Akinci, Ozge; Olmstead-Rumsey, Jane
  42. Normalization of unconventional US monetary policy and its implications: Korea’s monetary policy case By Chan-Guk Huh
  43. Improving the Predictive Power of Spreads for Economic Activity: Decomposition Methods By Chang Min Lee; Hahn Shik LEE
  44. Measuring Recovery: Why the Prime-Age EPOP Ratio Tells Us to Not Raise Interest Rates By Nicholas Buffie
  45. Nowcasting and short-term forecasting of Russian GDP with a dynamic factor model By Porshakov , Alexey; Deryugina , Elena; Ponomarenko , Alexey; Sinyakov , Andrey
  46. The distortionary effect of monetary policy : credit expansion vs. lump-sum transfers in the lab By Romain Baeriswyl; Camille Cornand
  47. Empirical Evidence for the Bank Lending Channel in Bosnia and Herzegovina: Does Lending Differ Between Large and Small Banks? By Dejan Kovacevic
  48. Assessing the House Price Dynamics in Lima By Diego Vílchez
  49. Forecasting VARs, Model Selection, and Shrinkage By Kascha, Christian; Trenkler, Carsten
  50. The Influence of Media Use on Laymen’s Monetary Policy Knowledge in Germany By Bernd Hayo; Edith Neuenkirch
  51. Quantitative Easing and Tapering Uncertainty: Evidence from Twitter By Annette Meinusch; Peter Tillmann
  52. Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances By Kennickell, Arthur B.; Kwast, Myron L.; Pogach, Jonathan
  53. Tight Money and the Sustainability of Public Debt By Sergey E. Pekarski
  54. Human development and well-being during the great recession. The non-profit sector as a capability enhancing workplace By Andrea Salustri; Federica Viganò
  55. Banking Integration and Fragmentation in the Interest Rate Channel By filippo gori
  56. Using Engel Curves to Estimate CPI Bias for the Elderly By Scrimgeour, Dean; Gorry, James
  57. Securities Transactions Taxes and Financial Crises By Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
  58. The scale of predictability By Federico M. Bandi; Benoit Perron; Andrea Tamoni; Claudio Tebaldi
  59. Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System By Jaremski, Matthew; Wheelock, David C.
  60. Did abnormal weather affect U.S. employment growth in early 2015? By Foote, Christopher L.
  61. Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  62. Short term inflation forecasting: the M.E.T.A. approach By Giacomo Sbrana; Andrea Silvestrini; Fabrizio Venditti
  63. Main drivers of the recent decline in Italy’s non-construction investment By Fabio Busetti; Claire Giordano; Giordano Zevi
  64. A note on the implementation of the countercyclical capital buffer in Italy By Piergiorgio Alessandri; Pierluigi Bologna; Roberta Fiori; Enrico Sette
  65. Markups’ Cyclical Behavior: The role of Demand and Supply Shocks By António Afonso; João Tovar Jalles
  66. Understanding Benign Liquidity Traps: The Case of Japan By Homburg, Stefan
  67. Stability and transitions in emerging market policy rules By Ashima Goyal; Shruti Tripathi
  68. Separating shocks from cyclicality in Indian aggregate supply By Ashima Goyal; Shruthi Tripathi
  69. Financial stability: Underlining context By Ashima Goyal
  70. The Skill-Biased Effects of Exchange Rate Fluctuations By Michael Siegenthaler; Boris Kaiser
  71. Estimates of Spatial Prices in India and their Sensitivity to Alternative Estimation Methods and Choice of Items By Amita Majumder; Ranjan Ray
  72. Nominal Income and Inflation Targeting By Arayssi, Mahmoud
  73. Profits encourage investment, investment dampens profits, government spending does not prime the pump — A DAG investigation of business-cycle dynamics By Tapia, Jose
  74. General information product theory in economics science By Ledenyov, Dimitri O.; Ledenyov, Viktor O.
  75. Inflation Expectation Decision and Saving Decision in Heterogeneously Endowed Overlapping Generation Model: An Experimental Evidence from Laboratory By Das, Abhishek; Gupta, Gautam
  76. Stabilizing Wage Policy By Mordecai Kurz
  77. The Marginal Propensity to Consume out of Liquidity By Deniz Aydin
  78. The international contagion of short-run interest rates during the Great Depression By MAVEYRAUD Samuel
  79. International Transmission of Credit Shocks in an Equilibrium Model with Production Heterogeneity By Yuko Imura; Julia Thomas
  80. Government and Private E-Money-Like Systems: Federal Reserve Notes and National Bank Notes By Warren E. Weber
  81. The Effects of Greenfield FDI and Cross-Border M&As on Government Size By Ashraf, Ayesha
  82. Expectations and Investment By Nicola Gennaioli; Yueran Ma; Andrei Shleifer
  83. A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012 By Fernando Ferreira; Joseph Gyourko
  84. Savings After Retirement: A Survey By Mariacristina De Nardi; Eric French; John B. Jones
  85. Partisan Conflict and Private Investment By Marina Azzimonti
  86. The economics of radical uncertainty By Ormerod, Paul
  87. Uncertainty: A diagrammatic treatment By Dow, Sheila
  88. Knightian uncertainty and stock-price movements: Why the REH present-value model failed empirically By Frydman, Roman; Goldberg, Michael D.; Mangee, Nicholas
  89. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.

  1. By: A. Monfort; F. Pegoraro; J.-P. Renne; G. Roussellet
    Abstract: We build an Affine Term Structure Model that provides non-negative yields at any maturity and that is able to accommodate a short-term rate that stays at the zero lower bound (ZLB) for extended periods of time while longer-term rates feature high volatilities. We introduce these features through a new univariate non-negative affine process called ARG-Zero, and its multivariate affine counterpart (VARG), entailing conditional distributions with zero-point masses. The affine property of this new class of processes implies both explicit bond pricing and quasi-explicit lift-off probability formulas. We provide an empirical application to Japanese Government Bond (JGB) yields, observed weekly from June 1995 to May 2014 with maturities from six months to ten years. Our four-factor specification is able to closely match yield levels and to capture conditional yield volatilities.
    Keywords: Zero Lower Bound, Affine Process, Term-Structure Model, Lift-Off probabilities
    JEL: E43 G12
    Date: 2015
  2. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: The objective of this paper is to evaluate whether or not four core inflation indicators for Angola meet the conditions that must be met by any candidate to core inflation indicator. Our results suggest that the cross-section price change of the Consumer Price Index for Angola is right skewed and leptokurtic. Moreover, asymmetry and kurtosis are positively and highly correlated which make impossible to isolate and correct separately these two statistical characteristics of the sample. Our findings also suggest that the underlying inflation and the 10% trimmed inflation indicators satisfy the proposed conditions for a core inflation indicator. Therefore these two indicators can be used as useful measures for core inflation in Angola by the Banco Nacional de Angola.
    Keywords: Core inflation indicators; Underlying inflation; Trimmed mean; Assessment criteria.
    JEL: C43 E31 E52
    Date: 2015
  3. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: Understanding inflation persistence in Angola is crucial because National Bank of Angola has approved in 2012 a new monetary policy operational framework which upgrades and expands the set of instruments to achieve its monetary goals. The purpose of this paper is to measure the degree of persistence of the headline, food, energy, underlying and 10% trimmed core inflations for Angola and to identify its implications for decision-making. Using both a traditional univariate method and non-parametric approach, our results suggest the presence of a statistically significant level of persistence in five inflation indicators for Angola. Moreover, the degree of persistence is similar both across the five inflation indicators and also across the sample period. Finally, our results also confirm that extracting the most volatile components of the headline inflation indicator does not generate a new inflation indicator that is less volatile and more persistent than the original. These results have important implications for the design, the implementations and the effectiveness of the monetary policy, specialty when under an inflation targeting regime. First, since shocks tend to temporarily deviate inflation from its trend value a permanent policy stance is required. Secondly, a low degree of persistence means that monetary policy aiming price stability can only be implemented in a favorable setting with a permanent policy stance. Moreover, a low degree of persistence means that inflation can be stabilized in a short period time following a shock. Finally results are also relevant for prediction and modeling purposes.
    Keywords: Inflation; Persistence; Angola.
    JEL: C14 C22 E31 E52
    Date: 2015
  4. By: Gabriela Castro (Economics and Research Department, Banco de Portugal); Ricardo M. Felix (Economics and Research Department, Banco de Portugal); Paulo Julio (Economics and Research Department, Banco de Portugal; and CEFAGE-UE, Portugal); Jose R. Maria (Economics and Research Department, Banco de Portugal)
    Abstract: Using PESSOA, a medium-scale DSGE model for a small euro-area economy, we evaluate how fiscal adjustments impact short- and medium-term debt dynamics and output for alternative policy options, and budgetary and economic conditions. Fiscal adjustments may increase the public debt-to-GDP ratio in the short run, even for consolidations carried out in normal times in economies characterized by moderate indebtedness levels. Financial turmoils and hikes in the nationwide risk premia, coupled with high indebtedness levels and stiff fiscal measures, boost the output costs of scal consolidations and severely aect their eectiveness in bringing the public debtto-GDP ratio down in the short term. In the medium run credible fiscal adjustments entail a decline in the public debt ratio, though at potentially very large output losses when carried out under unfavorable budgetary and economic conditions.
    Keywords: Fiscal policy; Fiscal consolidation; Debt ratio; Crisis; DSGE model; Euro Area; Small open economy.
    JEL: E12 E30 E62 H60
    Date: 2015
  5. By: Michael Funke (Hamburg University, CESifo, Munich, and Hong Kong Institute for Monetary Research); Petar Mihaylovski (Hamburg University); Haibin Zhu (JP Morgan Chase Bank)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE Model, Monetary Policy, Financial Market Reform, Shadow Banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–05
  6. By: Hirano, Tomohiro; Inaba, Masaru; Yanagawa, Noriyuki
    Abstract: This paper investigates the relationship between bubbles and governmentbailouts. As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, we show that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.
    Keywords: Bubble Size, Anticipated Bailouts, Production Efficiency, Boom-Bust Cycles, Optimal Bailout Policy
    JEL: E32 E44 E61
    Date: 2015–05
  7. By: Halicioglu, Ferda; Yolac, Sema
    Abstract: The impact of unemployment on self-employment is rather an ambiguous issue in economics. According to refugee effect approach, there are two counter arguments: the theory of income choice argument suggests that increased unemployment may lead to increased self-employment activities whereas the counter argument defends the view that an increase in unemployment rates may decrease the endowments of human capital and entrepreneurial talent causing a rise in unemployment rates further. The empirical evidence on this issue seems to support both hypotheses. This research presents fresh and more comprehensive evidence on this issue from 28 OECD countries using the ARDL approach to co-integration technique over the period 1986-2013. The empirical results indicate that the first hypothesis holds in the case of Belgium, Canada, Sweden and the UK whereas the second hypothesis is valid in the case of Greece, Luxembourg and Portugal. The empirical results for the remaining OECD countries did not reveal any long-run relationship between the variables in question. The empirical results are also evaluated briefly for policy recommendations.
    Keywords: Self-employment, Unemployment, Refugee effect, OECD, Cointegration
    JEL: C22 E24 L2 L26
    Date: 2015
  8. By: Piotr Denderski (VU University Amsterdam, the Netherlands); Christian Stoltenberg (University of Amsterdam, the Netherlands)
    Abstract: We develop a novel argument why better public information can help countries to insure against idiosyncratic risk. Representative agents of developing and industrial countries receive public and private signals on their future income realization and engage in risk-sharing contracts with limited enforceability. Better public information has two opposite effects. First, it has a detrimental effect on risk sharing by limiting risk-sharing possibilities as emphasized by Hirshleifer (1971). Second, it mitigates the adverse selection problem resulting from private information which improves risk sharing. We find that better public information in developing countries ameliorates risk sharing in both developing and industrial countries.
    Keywords: Social value of information; Sovereign risk; Limited enforcement
    JEL: E21 D31 D52
    Date: 2015–06–12
  9. By: Thierry BETTI; Thomas COUDERT (LaRGE Research Center, Université de Strasbourg)
    Abstract: We develop a new-Keynesian model with a two-sector search and matching labor market framework. We investigate the first and second order effects of fiscal policy on labor market and on output. The model includes four fiscal instruments: a labor income tax, a social protection tax paid by firms, public wage and public vacancies. First-order simulations of the model indicate that whatever instrument is used, fiscal expansion significantly increases total employment and reduce unemployment. We explicit the different transmission channels at work. The main contribution is to use a second-order approximation of the model to investigate the effects of fiscal shocks for two states of the economy: a low unemployment state (6%) and a high unemployment state (12%). For the four fiscal instruments, response of employment is greater when the steady-state unemployment rate is high. We also emphasize a new channel for explaining a larger output fiscal multiplier in periods of economic downturn: the wage channel that plays a crucial role for explaining the non-linear effects of fiscal policy.
    Keywords: Labor Market Search, Wage Bargaining, Public Wage, Business Cycle, Fiscal Policy, Second Order.
    JEL: E62 J38
    Date: 2015
  10. By: Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Krzysztof Makarski (National Bank of Poland; Warsaw School of Economics)
    Abstract: In this paper we consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme (i.e. unprivatizing the pension system). We compare politically stable and politically unstable reforms and show that even if the funded system is overall welfare enhancing, the cohort distribution of benefits along the transition path turns unprivatizing social security politically favorable.
    Keywords: pension system reform, time inconsistency, welfare
    JEL: H55 D72 C68 E17 E27
    Date: 2015
  11. By: O. Loisel
    Abstract: In a broad class of locally linearizable dynamic stochastic rational-expectations models, I consider various alternative observation sets for the policy maker, each of them made of the history of some endogenous variables or exogenous shocks until some current or past date. For each observation set, I characterize, within the set of feasible paths (paths that can be obtained as one local equilibrium under a policy-instrument rule consistent with this observation set), the subset of implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under such a rule). In two applications, I show that, for relevant observation sets, optimal feasible monetary policy may not be implementable in the basic New Keynesian model, even when the number of observed variables largely exceeds the number of unobserved shocks; while debt-stabilizing feasible tax policy is, contrary to conventional wisdom, implementable in the standard real-business-cycle model, even in the presence of policy-implementation lags of any length.
    Keywords: stabilization policy, robust local-equilibrium determinacy, observation set, feasible path, implementable path.
    JEL: E52 E61
    Date: 2015
  12. By: Fuhrer, Jeffrey C. (Federal Reserve Bank of Boston)
    Abstract: While there is little question that expectations lie at the heart of much economic decision-making, and therefore at the heart of models of the macroeconomy that hope to reflect such decision-making, how such expectations are formed is an open research question. In earlier work, Fuhrer (2015) showed that empirical estimates of a standard dynamic stochastic general equilibrium (DSGE) model preferred inertia in expectations over price indexation or habit formation as a mechanism to explain the persistence of aggregate time series for output, inflation, and interest rates. A question left open in that paper was why and how expectations might exhibit such inertia. This paper examines the expectations behavior of individual responses in the surveys of the Survey of Professional Forecasters (SPF) and the University of Michigan's Survey Research Center to shed light on that question.
    Keywords: persistence; rational expectations; survey expectations
    JEL: E32 E52
    Date: 2015–05–18
  13. By: Lucy Qian Liu (International Monetary Fund); Liang Wang (University of Hawaii at Manoa); Randall Wright (University of Wisconsin-Madison, FRB Chicago, FRB Minneapolis)
    Abstract: We construct a model where money and credit are alternative payment instruments, use it to analyze sluggish nominal prices, and confront the data. Equilibria entail price dispersion, where sellers set nominal terms that they may keep fixed when aggregate conditions change. Buyers use cash and credit, with the former (latter) subject to inflation (transaction costs). We provide strong analytic results and exact solutions for money demand. Calibrated versions match price-change data well, with realistic durations, large average changes, many small and negative changes, a decreasing hazard, and behavior that changes with inflation, while staying consistent with macro and micro data on money and credit. Policy implications are discussed.
    Keywords: Money, Credit, Sticky Prices, Price Dispersion
    JEL: E31 E51 E52 E42
    Date: 2015–06
  14. By: Carlos Rodríguez Braun (Departamento de Historia e Instituciones Económicas I. Universidad Complutense de Madrid.)
    Abstract: El gran éxito editorial de Thomas Piketty, El capital en el siglo XXI, utiliza referencias literarias, y en particular las novelas de Jane Austen, para ilustrar el problema de la desigualdad. Su análisis es insatisfactorio en dos aspectos principales. En primer lugar, presenta una visión distorsionada de los escritos de Austen, quien de hecho reconoció que la sociedad de su tiempo era más dinámica y móvil que lo que sugiere Piketty. En Segundo lugar, Piketty ignora a un pensador tan relevante como Adam Smith, que está presente en las obras de Jane Asten a través de un principio clave de su teoría del comportamiento y del crecimiento económico: los seres humanos no procuran ser iguales, sino mejores.
    Abstract: Thomas Piketty’s best-seller, Capital in the Twenty-First Century, utilizes literary references, and particularly Jane Austen’s novels, to illustrate the problem of inequality. His analysis is unsatisfactory in two major aspects. First, he presents a distorted picture of Austen’s writings. Austen, in fact, recognized that the society of her time was more dynamic and socially mobile than what Piketty suggests. Second, Piketty ignores a thinker as relevant as Adam Smith, which is present in Jane Austen’s works through a key principle of his theory of conduct and of economic growth: human beings do not strive to be equal, but to be better.
    Keywords: Desigualdad; Capitalismo.; Inequality; Capitalism.
    JEL: B12 D63 E24 N13 P10 Z10
    Date: 2015–04
  15. By: Mateo Tomé, Juan Pablo (Kingston University London)
    Abstract: The object of study is the dynamic of capital accumulation in Spain between 1999 and 2012, a period in which the Spanish economy has had first a system of fixed exchange rates, and then monetary integration within the Eurozone. Investment has been largely driven by the revaluation of assets related to construction (mainly residential), which has generated a profound reshaping of the economic structure. The relationship between investment, productivity and costs is first approached from a macroeconomic perspective, followed with an analysis of the composition by assets and sectors. It is shown that the most dynamic sectors have been those with relative low technical composition of capital, leading to absolute declines in labour productivity, as well as a price-effect that has completely distorted the reproduction of the Spanish economy.
    Keywords: capital accumulation; growth; productivity; investment
    JEL: E11 E22 O33 O40
    Date: 2015–06–11
  16. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper re-examines the out-of-sample predictive power of interest rate spreads when the short-term nominal rates have been stuck at the zero lower bound and the Fed has used unconventional monetary policy. Our results suggest that the predictive power of some interest rate spreads have changed since the beginning of this period. In particular, the term spread has been a useful leading indicator since December 2008, but not before that. Credit spreads generally perform poorly in the zero lower bound and unconventional monetary policy period. However, the mortgage spread has been a robust predictor of economic activity over the 2003–2014 period.
    Keywords: business fluctuations, forecasting, interest rate spreads, monetary policy, zero lower bound, real-time data
    JEL: C53 E32 E44 E52 E58
    Date: 2014–06
  17. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: We analyze the predictive content of the mortgage spread for U.S. economic activity. We find that the spread contains predictive power for real GDP and industrial production. Furthermore, it outperforms the term spread and Gilchrist–Zakrajsek spread in a real-time forecasting exercise. However, the predictive ability of the mortgage spread varies over time.
    Keywords: mortgage spread, forecasting, real-time data
    JEL: C53 E37 E44
    Date: 2014–09
  18. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper examines the predictive power of interest rate spreads when the zero lower bound restriction for monetary policy is binding. We show that this restriction has a major eect on the predictive content of some interest rate spreads. Most importantly, we nd that the term spread outperforms the AR benchmark in real-time forecasting exercise when the short-term rate is at the zero lower bound, but not otherwise. On the other hand, our results indicate that the dierence between the 30-year mortgage rate and ten-year Treasury bond rate is a robust predictor of future economic activity.
    Keywords: business fl uctuations, forecasting, interest rate spreads, monetary policy, zero lower bound
    JEL: C53 E32 E44 E52 E58
    Date: 2013–10
  19. By: Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
    Abstract: Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico’s communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit
    Keywords: Central Banks, Economic Analysis, Mexico, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  20. By: Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
    Abstract: We find that futures rates increase (decrease) after both an increase in the reference interest rate and a hawkish (dovish) communication by the BCB. Moreover, BCB words create more “noiseâ€, since they increase volatility of futures rates. Our analysis reveals that BCB communication has increased its effectiveness after the 2008 crisis, while deeds became less relevant.
    Keywords: Brazil, Central Banks, Latin America, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  21. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: According to conventional wisdom, terms of trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business-cycle models. We argue that the view that emerges from empirical SVAR models is strikingly different. We estimate country-specific SVARs using data from 38 poor and emerging countries and find that terms-of-trade shocks explain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the estimated theoretical business-cycle models terms-of-trade shocks explain on average 30 percent of the variance of key macroeconomic indicators, three times as much as in SVAR models.
    Keywords: business cycles.; nontradable goods; real exchange rates; Terms of trade
    JEL: E32 F41 F44
    Date: 2015–06
  22. By: Ventura, Jaume; Voth, Hans-Joachim
    Abstract: Why did the country that borrowed the most industrialize first? Earlier research has viewed the explosion of debt in 18th century Britain as either detrimental, or as neutral for economic growth. In this paper, we argue instead that Britain’s borrowing boom was beneficial. The massive issuance of liquidly traded bonds allowed the nobility to switch out of low-return investments such as agricultural improvements. This switch lowered factor demand by old sectors and increased profits in new, rising ones such as textiles and iron. Because external financing contributed little to the Industrial Revolution, this boost in profits in new industries accelerated structural change, making Britain more industrial more quickly. The absence of an effective transfer of financial resources from old to new sectors also helps to explain why the Industrial Revolution led to massive social change – because the rich nobility did not lend to or invest in the revolutionizing industries, it failed to capture the high returns to capital in these sectors, leading to relative economic decline.
    Keywords: crowding out; debt crises; financial repression; Industrial Revolution; misallocation; productivity; Ricardian equivalence; structural change
    JEL: E22 E25 E62 H56 H60 N13 N23
    Date: 2015–06
  23. By: Cecilia Dassatti (Banco Central del Uruguay); Natalia Mariño (Banco Central del Uruguay)
    Abstract: The aim of this study is to give a diagnose of the current Pension System from a 30-year forecast of its main variables. As a result, we quantify the effect of the System’s maturity on the balance sheet of Banco de Seguros del Estado (currently the only insurance company in charge of the payment of retirement pensions). The relevance of this analysis is based on the proximity of the moment when the number of annuities from the New Pension System increases significantly and the need for a deeper analysis of the current regulatory design
    Abstract: El objetivo de este trabajo es hacer un diagnóstico del Sistema Previsional en base a una proyección de las principales variables del Sistema para un horizonte de 30 años. Como resultado, se obtiene una medida del impacto de la maduración del Sistema sobre el balance del Banco de Seguros del Estado (actualmente la única empresa aseguradora encargada del pago de prestaciones jubilatorias). La relevancia del análisis se justifica en la medida en que se aproxima el momento en el cual el número de jubilados por el sistema mixto aumente significativamente, razón por la cual es pertinente analizar el diseño regulatorio actual.
    Keywords: Pension System, AFAP, Insurance Company, interest rate, mortality table; Sistema Previsional, AFAP, Empresa Aseguradora, tasa de interés técnica, tabla de mortalidad
    JEL: C18 C82 E23 E24 J21 L16 L70
    Date: 2014
  24. By: Rodrigo Lluberas (Banco Central del Uruguay)
    Abstract: A number of changes in the payment system have taken place over the last couple of years that are likely to change dramatically how households pay for their purchases in Uruguay. We use a household expenditure survey with detailed data on household demographics and transaction characteristics to estimate a multiple choice model of household payment instrument use. We find that not including transaction characteristics results in bias estimates of household characteristics effects. Indeed, we find that once we include transaction characteristics, income and age play a minor role in explaining household payment instrument choice in Uruguay
    Keywords: payment instruments, consumer behavior, multinomial logit model
    JEL: D12 E41 G20
    Date: 2014
  25. By: Gerardo Licandro (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: Using a novel monthly survey of firm inflation expectations for Uruguay from October 2009 to June 2013, this paper studies the impact of monetary policy on inflation expectations at the micro level. Using several panel data techniques we consistently find a negative and statistically significant relationship between monetary policy and inflation expectations. We also find a high level of inertia in expectations. Past inflation changes have a positive impact on inflation expectations, while exchange rate changes have a significant but low importance on expectations. We observe a negative link between inflation expectations and expected economic activity, potentially due to past experiences of a monetary financing of crisis. Contrary to intuition, there is no clear link between firm inflation expectations and the median assessment of experts published by the Central Bank.
    Keywords: Monetary transmission, inflation expectations, expectations channel
    JEL: C18 C82 E23 E24 J21 L16 L70
    Date: 2014
  26. By: Ojo, Marianne
    Abstract: This paper is aimed at highlighting Posner and Hayek’s consensus on the importance of decentralization, as well as the significance of the incorporation of non-legal actors as tools for facilitating the efficient allocation of resources in common law. In addition to highlighting the consensus on the views of Posner and Hayek, in respect of de centralization of information within the judicial process, this paper aims to address why de centralization serves as a vital tool in facilitating the objective of common law as an efficiency allocation mechanism. Whilst it is argued that lower court judges may not and should not be given such flexibility to make and unmake the law, the principles and decisions of law lords acting in the capacity of legislature, have also illustrated in several leading cases that the flexibility intended by Parliament may be misinterpreted and wrongly applied in future cases. This has also resulted in the criticism of extrinsic aids to statutory interpretation. This paper analyses and expands on these observations.
    Keywords: legitimate expectations; certainty; flexibility; judicial precedents; statutory interpretation; allocative efficiency; Pepper v Hart; Daubert; common law; regulatory capture; regulation
    JEL: D8 E3 G3 K2 M4
    Date: 2015–06
  27. By: Oliver Denk; Alexandre Cazenave-Lacroutz
    Abstract: The size and composition of assets and liabilities of households differ vastly across the income distribution in euro area countries. This paper shows that differences between income groups in household finance on both sides of the balance sheet contribute to income inequality. The distribution of household credit is two times as unequal and the distribution of stock market wealth four times as unequal as the distribution of household income. Larger credit and stock markets may thus widen income inequality by providing people with high incomes with better investment opportunities and raising the returns on their savings. In addition, financial institutions help people protect their consumption against temporary changes in their income. But they do so unevenly across the distribution, as a household is more likely to be denied credit if it has a low income. No evidence is found of discrimination in credit provision against women or immigrants.<P>Financement des ménages et inégalités de revenu dans la zone euro<BR>La taille et la composition de l’actif et du passif des ménages sont très variables sur la distribution des revenus dans les pays de la zone euro. Ce document montre que les différences entre quintiles de revenu dans le financement des ménages, de part et d’autre du bilan, contribuent aux inégalités de revenu. La distribution du crédit aux ménages est deux fois plus inégale et la distribution du patrimoine boursier quatre fois plus inégale que la distribution des revenus des ménages. L’expansion des marchés du crédit et d’actions pourrait ainsi contribuer aux inégalités de revenu en offrant aux plus hauts revenus de meilleures possibilités d’investissement et une meilleure rentabilité de leur épargne. Par ailleurs, les établissements financiers aident les ménages à protéger leur consommation en période de fluctuations temporaires de leur revenu. Or, ils le font de manière inégale sur la distribution des revenus puisqu’un ménage a plus de risques de se voir opposer un refus si ses revenus sont faibles. Aucun élément ne vient corroborer l’idée d’une discrimination de l’offre de crédit à l’encontre des femmes ou des personnes issues de l’immigration.
    Keywords: income inequality, euro area, immigrants, discrimination, stock market, Women, household credit, wealth inequality, inégalités de richesse, marché boursier, zone Euro, crédit aux ménages, femmes, inégalités de revenu, immigrés, discrimination
    JEL: D14 D63 E21 E51 G2 J16
    Date: 2015–06–17
  28. By: Oliver Denk; Boris Cournède
    Abstract: Using data from OECD countries over the past three decades, this paper shows that financial expansion has fuelled greater income inequality. Higher levels of credit intermediation and stock markets are both related with a more unequal distribution of income. Greater income inequality may not reduce the welfare of even the lowest earners so long as their income growth is not negatively affected. Numerical simulations based on a novel empirical methodology indicate, however, that the financial expansion has put a brake on the income growth of many low- and middle-income households. No evidence is found that financial crises explain the observed relationships. While causality is difficult to establish beyond doubt, the paper finds credit patterns which are inconsistent with reverse causality running from greater income inequality to more household borrowing.<P>Finance et les inégalités de revenus dans les pays de l'OCDE<BR>Ce document, qui s’appuie sur des données portant sur les trente dernières années recueillies dans des pays de l’OCDE, démontre que l’expansion financière a contribué à creuser les inégalités de revenus. La progression de l’intermédiation du crédit et le développement des marchés boursiers sont tous deux corrélés à une répartition plus inégale des revenus. Cette hausse des inégalités de revenus ne nuit pas nécessairement au bien-être des travailleurs, y compris des moins bien rémunérés, pour autant qu’elle n’ait pas d’impact négatif sur la croissance de leurs revenus. Des simulations numériques, réalisées selon une méthodologie empirique novatrice, montrent toutefois que l’expansion financière a entravé la hausse des revenus de nombreux ménages à revenus faibles ou intermédiaires. Rien n’indique que les crises financières puissent expliquer les corrélations observées. S’il est difficile d’établir avec certitude un lien de causalité, le document identifie des caractéristiques de la répartition du crédit parmi la population qui tendent à exclure l’hypothèse de causalité inverse, selon laquelle une plus grande inégalité des revenus entraînerait une hausse de l’emprunt chez les ménages.
    Keywords: income inequality, finance, financial crisis, income growth, Gini coefficient, stock market, inégalités de revenu, finance, coefficient de Gini, marché boursier, crise financière
    JEL: D14 D63 E21 E51 G01 G2
    Date: 2015–06–17
  29. By: Bluhm, Richard; Thomsson, Kaj
    Abstract: This paper analyzes the duration of large economic declines and provides a theory of delayed recovery. First, we develop a formal political economy model that illustrates a simple mechanism of how weak constraints on the political executive can lead to longer declines in ethnically heterogeneous countries. The model shows how uncertain post-recovery incomes and a winner-take-all threshold effect create a commitment problem rendering a cooperative equilibrium inaccessible. Holding out can benefit groups by reducing the threshold effects in subsequent periods, thus limiting the remaining uncertainty. Placing strong constraints on the executive solves this commitment problem by reducing the uncertainty from the threshold effects, which brings about cooperation earlier on. Second, we then test several empirical predictions from the model using standard data on linguistic heterogeneity and more detailed data on ethnic power configurations. We find that the partial correlations are consistent with the proposed theory. The effect of executive constraints on the length of declines is very large in heterogeneous countries, but practically disappears in ethnically homogeneous societies. The adverse effect of heterogeneity is driven by the number of groups; increasing political concentration works in the opposite direction.
    Keywords: economic crises, delayed recovery, political economy
    JEL: E6 O43 J15
    Date: 2015–05
  30. By: Sophie BOUTILLIER (Clersé (UMR-CNRS 8019), Université du Littoral Côte d’Opale); Dimitri UZUNIDIS (UTC, Greece)
    Abstract: Depuis le début des années 1980, la société entrepreneuriale a émergé. L’emploi salarié reste dans les économies développées la forme principale d’emploi, mais l’emploi devient plus précaire (travail intérimaire, contrat de travail à durée déterminée, augmentation du chômage, etc.). D’un autre côté, la création d’entreprise est conçue dans le cadre de politiques économiques comme un moyen de créer des emplois, d’innover ou de créer une activité économique dans des régions et les secteurs en déclin. L’objet de ce document est de présenter les caractéristiques de la société entrepreneuriale et et d’analyser de façon critique les politiques publiques d’aide à l’entrepreneuriat. Since the beginning of the 1980s the entrepreneurial society has emerged. In developed countries salaried employment is still the main form of employment, but it has become more precarious, due to factors such as an increase in unemployment, temporary employment, fixed-term contracts, etc. On the other hand new business start-ups are now understood by politicians as constituting a tool for job creation, innovation, and the redevelopment of areas or sectors in crisis. The purpose of this document is to present the characteristics of the entrepreneurial company and discuss public policies to support entrepreneurship.lization of new product technologies and services. Codification processes, knowledge sharing and transfer, project financing, informational and risk sharing asymmetries have all been affected by that trend towards opening up innovation models. In that view, the co-evolution of innovation models and knowledge management processes represents a major challenge for firms. This joint evolution raises important issues that both economists and organizational theorists that this contribution seeks to address.
    Keywords: Entrepreneur, Entrepreneuriat, Salariat, Innovation, Changement
    JEL: L26 E2 O3
    Date: 2015
  31. By: Felix Strobel (Humboldt-Universitaet zu Berlin)
    Abstract: How does sovereign risk affect the dynamic consequences of identified contractionary fiscal policy shocks? I apply a regime-switching SVAR on Italian data and find that in periods in which government bond yield spreads are high and volatile, fiscal multipliers are smaller than in the calm regime. This empirical finding supports theoretical arguments that associate fiscal distress with low fiscal multipliers. Creation Date: 2015-06-05
    Keywords: Sovereign Risk, Fiscal Policy, Fiscal Multipliers
    JEL: E62 H60
  32. By: Kamiar Mohaddes and M. Hashem Pesaran
    Abstract: This paper investigates the global macroeconomic consequences of country-specific oil-supply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.
    JEL: C32 E17 F44 F47 O53 Q43
    Date: 2015–06–11
  33. By: Opoku, Richard Takyi; Ackah, Ishmael
    Abstract: This paper seeks to find out the effect of real interest rate on savings in using time series data from 1970-2013. In line with the objectives and using modern econometric techniques, the study estimates a generic savings model. The study also estimated a dynamic error-correction model following the Engle and Granger method to take care of the nonstationarity of the variables. The results of the study suggest that real interest rate exhibit both short-run and long-run significant positive effect on savings, making it a very important variable for savings mobilization in Ghana. The study recommends that financial policy makers in the country must work hard towards realistic interest rate specifically positive rate in real terms. The central bank authorities must also work hard to reduce inflation to probably single digit on consistent basis since real interest rate levels are affected by inflation.
    Keywords: Real Interest Rate, Financial Savings, Financial Repression, Income, Investment.
    JEL: E2 E5 E52 H3
    Date: 2015–06–14
  34. By: Freeman, Alan
    Abstract: This paper presents in formal terms the key notions of the temporalist approach in economics as I have presented it over the years, with an appendix providing a formal definition of such terms as endogenous, exogenous, temporalism, and equilibrium. I thus hope this paper can serve as something of a reference work for these concepts as well as the key terms ‘esoteric’ and ‘exoteric’ which are widely used in my writings. The paper incorporates, but supersedes, the prepublication version of a chapter of the same name originally published in Mosini, V. (ed) 2007. “Equilibrium in Economics: Scope and Limits”, with a previously unpublished appendix. It provides the background to the argument I have made in a number of other pieces, (for example Freeman 2004, most recently Freeman 2015) to the effect that economics plays a religious, not a scientific role, in the social sciences. I argue that the concept of equilibrium in economics plays a special and defining role in this respect which is not adequately recognised either by its defenders, nor by the critics of economics. I term this role esoteric, by which I mean that its primary function is not to explain what we experience or observe, but to justify it. This is a work in progress but summarises, hopefully with as few typographical and mathematical errors as possible, the general arguments that have been developed, or deployed, in my various writings on equilibrium, self-restoration, crisis, and the esoteric function of economics, to this date.
    Keywords: equilibrium, temporalism, TSSI, self-restoration, cycles, crisis, endogenous, exogenous, esoteric, exoteric, religion, science
    JEL: A2 B41 E32 E37
    Date: 2015–06–14
  35. By: Stoian, Andreea; Obreja Brasoveanu, Laura; Dumitrescu, Bogdan; Brasoveanu, Iulian
    Abstract: The aim of this paper is to study the factors that drive fiscal vulnerability in the European Union countries. For this purpose, we employ a logit model with random effects for a balanced panel comprising of 20 countries and on annual data extracted for 2000-2012. We use as a dependent a dummy variable which takes value of 1 if fiscal policy is assessed as being vulnerable, and 0, otherwise. As explanatories, we use two distinct categories which capture the intrinsic and the exogenous sources of fiscal vulnerability. The results show that higher overall taxation and non-distortionary taxes decrease the likelihood of fiscal policy to be vulnerable, whilst the size of total and of productive government expenditures contribute to an increase in the fiscal vulnerability. Tight fiscal policy has an important contribution to decrease in the fiscal vulnerability. The responsiveness of fiscal policy through discretionary actions also is more likely to reduce fiscal vulnerability than through the automatic response of stabilizers. Improved economic conditions mitigate the risk of one country to become more fiscal vulnerable, whilst large financial sector increase the probability. Tighter control of corruption will lead to a decrease in fiscal vulnerability, while stronger rule of law contributes to growth in fiscal vulnerability.
    Keywords: fiscal policy, vulnerability, automatic stabilizers, discretionary, logit, panel, European Union
    JEL: C23 E62 H12
    Date: 2015–05
  36. By: Adrijana Vukovic, Goran Djokovic, Danilo Roncevic (Fakultet za trgovinu i bankarstvo, Alfa univerzitet, Beograd)
    Abstract: Situation and trends in the sector of un/employment of workforce are conditioned primarily by global trends, but they also express the content of economic and political measures that are undertaken in each country, both in the field of economic development, as well as in the labor force employment policy. High unemployment, especially of youth, is one of the main economic and social problems, but is also an indicator of the state of the economy. The labor force remains under-utilized development potential, and unemployment of workforce creates numerous social, demographic and political consequences in society. Unemployment is unsustainable for economic and social reasons. This paper points out the necessity of solving unemployment but it also suggests the methods of solving this problem. Thus, by application of the proposed development policy measures, the unused human resources (human capital) are employed.
    Keywords: youth unemployment, labor, social problems, political instability, economic cost, the problems of youth
    JEL: E24 F41 O10
    Date: 2015–03
  37. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Club of Minnesota’s June luncheon, Minneapolis
    Keywords: normalization; lift-off; interest rate paid on banks’ reserve balances (IOER); daily overnight reverse repo (ON RRP); short-term rates
    JEL: E52 E66
    Date: 2015–06–05
  38. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: The paper contributes to understanding the economic dynamics at the zero lower bound and the exchange rate movements under different central bank intervention regimes. It provides a theoretical framework for modeling foreign exchange interventions at the ZLB within a dynamic general equilibrium model. We find a pronounced volatility of real and nominal macroeconomic variables in response to the domestic demand shock, the foreign demand and financial shocks and the terms-of-trade shock at the ZLB. This effects become severe in response to highly persistent shocks which leads to stronger reaction of variables and prolong period of binding constraint. The FX interventions have proven to be effective in mitigating deflationary pressures and recovering the economic activity in response to all examined shocks at the ZLB. In this sense, the central bank achieves the best performance by fixing the nominal exchange rate temporarily at the ZLB.
    Keywords: zero lower bound, foreign exchange interventions, dynamic stochastic general equilibrium, Bayesian estimation, exchange rate and price dynamics
    JEL: C11 E31 E43 E52 E58 F31
    Date: 2015–05
  39. By: Luca Guerrieri; Matteo Iacoviello
    Abstract: Using Bayesian methods, we estimate a nonlinear general equilibrium model where occasionally binding collateral constraints on housing wealth drive an asymmetry in the link between housing prices and economic activity. The estimated model shows that, as collateral constraints became slack during the housing boom of 2001-2006, expanding housing wealth made a small contribution to consumption growth. By contrast, the housing collapse that followed tightened the constraints and sharply exacerbated the recession of 2007-2009. The empirical relevance of this asymmetry is corroborated by evidence from state- and MSA-level data.
    Keywords: Housing; Collateral Constraints; Occasionally Binding Constraints; Nonlinear Estimation of DSGE Models; Great Recession
    JEL: E32 E44 E47 R21 R31
    Date: 2015
  40. By: Aurelijus Dabusinskas (Lietuvos Bankas); István Kónya (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University); Stephen Millard (Bank of England, Durham University Business School and Centre for Macroeconomics)
    Abstract: The recent crisis in the Eurozone has led to much discussion about the structure of labour markets in different Eurozone economies. In particular, there has been much talk of the need for structural labour market reform in the Eurozone periphery. But, there are many aspects of labour market structure – eg, wage flexibility, flexibility in hiring and firing, benefits, etc – and it is not clear a priori which aspects really matter. In this paper, we analyse how cross-country differences in labour market characteristics – in particular, wage and employment rigidities – shape the response of different countries to a variety of macroeconomic shocks. To address this question, we use a calibrated small open economy model in which we set the parameters governing the structural characteristics of the labour market based on three European countries: Estonia, Finland and Spain. We found that, given our labour market calibrations, we would expect output and unemployment to be much more adversely affected by the shocks associated with the financial crisis in countries with high unemployment benefit replacement ratios and high job turnover rates.
    Keywords: Labour market structure, Labour market flexibility
    JEL: E24
    Date: 2015–04
  41. By: Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.)); Olmstead-Rumsey, Jane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In recent years, policymakers have generally relied on macroprudential policies to address financial stability concerns. However, our understanding of these policies and their efficacy is limited. In this paper, we construct a novel index of domestic macroprudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately. The effectiveness of these policies in curbing bank credit growth and house price inflation is then assessed using a dynamic panel data model. The main findings of the paper are: (1) Macroprudential policies have been used far more actively after the global financial crisis in both advanced and emerging market economies. (2) These policies have primarily targeted the housing sector, especially in the advanced economies. (3) Macroprudential policies are usually changed in tandem with bank reserve requirements, capital flow management measures, and monetary policy. (4) Empirical analysis suggests that macroprudential tightening is associated with lower bank credit growth, housing credit growth, and house price inflation. (5) Targeted policies--for example, those specifically intended to limit the growth of housing credit--seem to be more effective. (6) In emerging economies, capital inflow restrictions targeting the banking sector are also associated with lower credit growth, although portfolio flow restrictions are not.
    Keywords: Bank credit; house prices; macroprudential policy; dynamic panel data model
    JEL: E32 F41 F44 G15
    Date: 2015–06–01
  42. By: Chan-Guk Huh (Department of International Trade, Chungnam National University)
    Abstract: This study offers some empirical evidence that changes in the US monetary policy affect Korean financial market volatilities, and the efficacy of the Bank of Korea’s policy interest rate to market long-term rate channel of monetary policy since 2000, with emphasis on the post–2008 period, notable for unconventional US monetary policy. In addition, some structural issues related to the financial health of Korean central bank’s balance sheet are reviewed. Results suggest that capital inflow had weakened the efficacy of monetary policy since 2008. The resulting expanded domestic liquidity appears to have contributed to the trend of steady growth in Korean household indebtedness. Given the severe fluidity of the external monetary/financial situation in the short term, having more flexibility in policy rates in both directions seems advisable. It would also be desirable to grant more autonomy to the Bank of Korea in disposing its operating profits so that it could build up its equity reserves. This measure would enhance monetary policy credibility in the medium term by allaying concerns that monetary policy deliberations might be encumbered by potential operating losses, which could lead to onerous consequences for the Bank of Korea.
    Keywords: Monetary policy, Unconventional, U.S., Korea
    JEL: E52 E58 E44
  43. By: Chang Min Lee (seoul national universtiy); Hahn Shik LEE (Sogang University)
    Abstract: In this paper, we examine whether and to what extent the predictive power of credit and/or term spreads for real economic activity can be enhanced by using additional information via decomposition. In doing so, we first apply the wavelet analysis to present evidence that the business-cycle component of the credit spread can better predict the probability of a recession than the usual time-domain analysis. In particular, we investigate the predictive power of the credit spread, given the recent empirical findings that it has a useful explanatory power for future economic fluctuations. We suggest that the wavelet decomposition can enhance the predictive power of the credit spread compared to the usual regression model. We also consider a decomposition of the term spread into the expectations effect and the term premium, based on the liquidity premium theory, and discuss evidence that the decomposition might lead to a better prediction for business-cycle fluctuations than the usual term spread.
    Keywords: Credit Spread, Business Cycle, Wavelet Decomposition, Liquidity premium theory
    JEL: E32 E43 C25
  44. By: Nicholas Buffie
    Abstract: Working people between the ages 25 to 54 are typically referred to as “prime-age” workers, meaning that most are old enough to be done with school but are too young to be retired. This is the period in people’s lives when they are most likely to be employed. By examining the employment-to-population (EPOP) ratio for prime-age Americans, we can eliminate the problems posed by the Bureau of Labor Statistics’ (BLS) definition of “unemployment” and the changing age distribution of the population.
    Keywords: recovery, recession, EPOP, employment-to-population, ratio, prime-age, race, ethnicity, sex
    JEL: E J J0 J2 J15 J16 J21 J11 E5 E6 E58
    Date: 2015–06
  45. By: Porshakov , Alexey (BOFIT); Deryugina , Elena (BOFIT); Ponomarenko , Alexey (BOFIT); Sinyakov , Andrey (BOFIT)
    Abstract: Real-time assessment of quarterly GDP growth rates is crucial for evaluation of economy’s current perspectives given the fact that respective data is normally subject to substantial publication delays by national statistical agencies. Large information sets of real-time indicators which could be used to approximate GDP growth rates in the quarter of interest are in practice characterized by unbalanced data, mixed frequencies, systematic data revisions, as well as a more general curse of dimensionality problem. The latter issues could, however, be practically resolved by means of dynamic factor modeling that has recently been recognized as a helpful tool to evaluate current economic conditions by means of higher frequency indicators. Our major results show that the performance of dynamic factor models in predicting Russian GDP dynamics appears to be superior as compared to other common alternative specifications. At the same time, we empirically show that the arrival of new data seems to consistently improve DFM’s predictive accuracy throughout sequential nowcast vintages. We also introduce the analysis of nowcast evolution resulting from the gradual expansion of the dataset of explanatory variables, as well as the framework for estimating contributions of different blocks of predictors into now-casts of Russian GDP.
    Keywords: GDP nowcast; dynamic factor models; principal components; Kalman filter; nowcast evolution
    JEL: C53 C82 E17
    Date: 2015–05–28
  46. By: Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland); Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon Saint-Etienne, Ecully, F-69130, France; Université Lyon 2, Lyon, F-69007, France)
    Abstract: In an experimental monetary general equilibrium economy, we assess two processes of monetary injection : credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.
    Keywords: laboratory experiment, money neutrality, credit expansion, lump-sum monetary transfers
    JEL: C92 E52 E58
    Date: 2015
  47. By: Dejan Kovacevic (Central bank of Bosnia and Herzegovina)
    Abstract: The paper investigates transmission of different foreign and domestic shocks to bank lending activity in Bosnia and Herzegovina through the bank lending channel. The bank lending channel is analyzed in a time series cross sectional data framework for the period 2006q1-2014q1, investigating reactions of small vs. large banks to those shocks. First, the evidence has been found that both groups of banks decreased their lending activity in the aftermath of the crisis. There is some evidence that liquidity shock after the onset of the crisis is mainly transmitted through large banks that are affiliates of the large Western European banking groups. Second, strong evidence is found that loosening of domestic monetary conditions through required reserves rate change had a positive effect on lending supply, especially for small banks operating in the country.
    Keywords: Financial crisis, monetary policy, bank lending channel, credit growth
    JEL: C13 C23 E58 E52
  48. By: Diego Vílchez (Central Reserve Bank of Peru)
    Abstract: This paper uses a two-step procedure to analyze the long-run dynamics between real house prices and their fundamentals in Lima, Peru. In this framework, first a hedonic price index is calculated, and then used for estimating a quarterly vector error correction model over the period 1998-2014. The price determinants considered in this application are: Real mortgage interest rate, real gross domestic product, and trading volume. The reduced form of the model is employed for generating alternative price forecasts. In addition, a structural decomposition of the system allows us to identify and give an economic interpretation to the permanent and transitory shocks.Finally, this analysis is also applied to different tranches of the price distribution to assess if the interrelationships in the system vary across them. Results imply that income and trading volume shocks contribute the most at explaining the dynamics in prices. Also, under reasonable assumptions for the modeled fundamentals, predictions suggest that real house prices would undergo an important deceleration during the following years. Some signs of differenced behavior throughout the price distribution in the housing market cannot be ruled out in this analysis
    Keywords: House prices, hedonic index, vector autoregression
    JEL: R21 E31 C32
  49. By: Kascha, Christian; Trenkler, Carsten
    Abstract: This paper provides an empirical comparison of various selection and penalized regression approaches for forecasting with vector autoregressive systems. In particular, we investigate the effect of the system size as well as the effect of various prior specification choices on the relative and overall forecasting performance of the methods. The data set is a typical macroeconomic quarterly data set for the US. We find that these specification choices are crucial for most methods. Conditional on certain choices, the variation across different approaches is relatively small. There are only a few methods which are not competitive under any scenario. For single series, we find that increasing the system size can be helpful - depending on the employed shrinkage method.
    Keywords: VAR Models , Forecasting , Model Selection , Shrinkage
    JEL: C32 C53 E47
    Date: 2015
  50. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: We analyse German citizens’ knowledge about monetary policy and the European Central Bank (ECB), as well as the public’s use of mass communication media to obtain information about the ECB. We employ a unique representative public opinion survey of German households conducted in 2011. We find that a person’s desire to be informed about the ECB, together with the use of various media channels to keep informed, are decisive for both (i) the person’s perception of how much he or she knows about the ECB and (ii) the person’s actual knowledge. The media-related influence varies by level of education and is stronger for subjective knowledge. Women are significantly less interested in and knowledgeable about the ECB. We conclude that the ECB is not only well advised to continue with education programmes designed to convince the public of the importance of knowing about monetary policy, but to take the gender-specific differences into account in doing so.
    Keywords: ECB, Economic knowledge, Subjective knowledge, Information
    JEL: A20 E52 E58
    Date: 2015
  51. By: Annette Meinusch (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: In this paper we analyze the extent to which peoples' changing beliefs about the timing of the exit from Quantitative Easing (“tapering") impact asset prices. To quantify beliefs of market participants, we use data from Twitter, the social media application. Our data set covers the entire Twitter volume on Federal Reserve tapering in 2013. Based on the time series of beliefs about an early or late tapering, we estimate a VAR model with appropriate sign restrictions on the impulse responses to identify a belief shock. The results show that shocks to tapering beliefs have profound effects on interest rates, exchange rates and asset prices. We also derive measures of monetary policy uncertainty and disagreement of beliefs, respectively, and estimate their impact. The paper is the first to use social media data for analyzing monetary policy and also adds to the rapidly growing literature on macroeconomic uncertainty shocks.
    Keywords: success, Tapering, unconventional monetary policy, uncertainty, quantitative easing, social media
    JEL: E32 E44 E52
    Date: 2015
  52. By: Kennickell, Arthur B. (Board of Governors of the Federal Reserve System (U.S.)); Kwast, Myron L. (FDIC); Pogach, Jonathan (FDIC)
    Abstract: We use the Federal Reserve's 2007, 2009 re-interview of 2007 respondents, and 2010 Surveys of Consumer Finances (SCFs) to examine the experiences of small businesses owned and actively managed by households during these turbulent years. This is the first paper to use these SCFs to study small businesses even though the surveys contain extensive data on a broad cross-section of firms and their owners. We find that the vast majority of small businesses were severely affected by the financial crisis and the Great Recession, including facing tight credit constraints. We document numerous and often complex interdependencies between the finances of small businesses and their owner-manager households, including a more complicated role of housing assets than has been reported previously. We find that workers who lost their job responded in part by starting their own small business, and that factors correlated with the survival of a small business differed greatly depending upon whether the firm was established or new. Our results strongly reinforce the importance of relationship finance to small businesses, and the primary role of commercial banks in such relationships. We find that both cross-section and panel data are needed to understand the complex issues associated with the creation, survival and failure of small businesses.
    Keywords: Great Recession; small business
    Date: 2015–02–27
  53. By: Sergey E. Pekarski (National Research University Higher School of Economics)
    Abstract: In the celebrated paper “Some unpleasant monetarist arithmetic”, Sargent and Wallace (1981) showed that tight monetary policy is not feasible unless it is supported by appropriate fiscal adjustment. In this paper, we explore a simple forward-looking monetary model to show that an anticipated decrease in the growth rate of base money is not necessarily characterized by “unpleasant arithmetic”. This is due to a possible transitory gain in seigniorage, which keeps public debt on a sustainable path. High interest rates worsen the fiscal stance, but actually support the feasibility of anticipated tighter monetary policy. Thus an increase in the present discounted value of budget deficits does not necessarily have inflationary consequences.
    Keywords: public debt sustainability; tight money paradox; unpleasant monetarist arithmetic
    JEL: E41 E52 E61 E63
    Date: 2015
  54. By: Andrea Salustri (Fondazione Economia-Università Tor Vergata); Federica Viganò (Free University of Bozen)
    Abstract: The current financial crisis poses severe challenges to the economic system. Specifically, the increasing unemployment and the contraction of firms’ labor demand induce a higher social vulnerability, leading to capability deprivation of individuals (Sen 1999), new sources of poverty, and social exclusion. Consequently, labor productivity is reduced and, due to the fiscal pressure, labor costs increase. The analysis sheds a light on a perverse adjustment mechanism that might run the economic system into a vicious circle: enterprises during crises tend to reduce labor costs by firing employees; people run the risk of an economic marginalization and tend to abandon the labor force in favor of household production. In this scenario, the non-profit sector can exert a crucial role as, by lowering the monetary costs of labor and capital, it can offer employees a capability developing workplace context, where they can experience a reduction of their vulnerability by finding an alternative source of employment. Specifically, we propose a model aimed at regulating the interaction between the formal and the informal sector (NPOs, third sector, cooperatives). The main innovation regards the existence of n non-profit activities that can lower the monetary costs of labor and capital by paying a share of wages and dividends in real terms. In this perspective there is room for the public sector to assign a value to the economic activities that foster social capital, contribute to reduce inequality and increase individual and collective well-being. A statistical analysis of the Italian economic system based on this framework stresses the importance of citizens and firms’ participation at political, economic and social level in finding an equitable, sustainable and durable way out of the crisis. Specifically, we focus on the importance to restate the assessment measure of poverty: not only income and expenditures figures, but also contextual factors and capability development opportunity count for building equitable and sustainable life conditions.
    Keywords: Non-profit institutions, Welfare, well-being and poverty, Vulnerability and social exclusion, Cooperatives Enterprises, Informal Economy, Household Production
    JEL: L33 I3 P13 E26 D13
  55. By: filippo gori (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
    Keywords: Monetary policy, banking integration, financial fragmentation.
    JEL: E31 E44 E52 F36
    Date: 2014–03–05
  56. By: Scrimgeour, Dean (Department of Economics, Colgate University); Gorry, James (Department of Economics, Colgate University)
    Abstract: We use shifts in food Engel curves among the U.S. elderly to estimate the extent of Consumer Price Index (CPI) bias specific to this population. Over the last thirty years the share of total expenditure devoted to food has declined more rapidly for elderly-headed households than for other households. This decline is not explained by a more rapid increase in measured total expenditure for the elderly, or by relative change in other covariates such as household composition. We present this as evidence that the true cost of living increased more slowly for the elderly than for the nonelderly over this period, in contrast to conventional wisdom that the elderly face a higher inflation rate.
    Keywords: Engel curve, CPI bias, cost of living, retirement, elderly
    JEL: E31 J14
    Date: 2015–06–01
  57. By: Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
    Abstract: This paper assesses the impact that a widely-based Securities Transaction Tax (STT) could have on the likelihood of systemic financial crises. We apply the methodology developed by Demirgüç-Kunt and Detragiache (1998) [IMF Staff Papers 45 (1)] to a panel dataset of 34 OECD countries for the sample 1973−2012, using a measure of a country’s average bid-ask spread in financial markets as a proxy for the likely effect of a STT on transactions costs. Our results indicate that the establishment of a STT could sizeably increase the risk of financial crises.
    Keywords: Securities Transaction Tax, Tobin Tax, Regulation, Financial crises,
    JEL: E13 G15 G17
    Date: 2015–06–11
  58. By: Federico M. Bandi; Benoit Perron; Andrea Tamoni; Claudio Tebaldi
    Abstract: Stock return predictive relations found to be elusive when using raw data may hold true for different layers in the cascade of economic shocks. Consistent with this logic, we model stock market returns and their predictors as aggregates of uncorrelated components (details) operating over different scales and introduce a notion of scale-specific predictability, i.e., predictability on the details. We study and formalize the link between scale-specific predictability and aggregation. Using both direct extraction of the details and aggregation, we provide strong evidence of risk compensations in long-run stock market returns - as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets - at frequencies lower than the business cycle. The reported tent-shaped behavior in long-run predictability is shown to be a theoretical implication of our proposed modelling approach.
    Keywords: : long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis,
    JEL: C22 E32 E44 G12 G17
    Date: 2015–05–29
  59. By: Jaremski, Matthew (Department of Economics, Colgate University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Established by a three person Reserve Bank Organization Committee (RBOC) in 1914, the structure of the Federal Reserve System has remained essentially unchanged ever since, despite criticism at the time and over ensuing decades. This paper examines the selection of cities for Reserve Banks and branches, and of district boundaries. We show that each aspect of the Fed’s structure reflected the preferences of national banks, including adjustments of district boundaries after the Fed was established. Further, using newly-collected information on the locations of each national bank’s correspondents, we find that banker preferences mirrored established interbank connections. The Federal Reserve was thus formed on top of the structure that it was meant to replace.
    Keywords: Federal Reserve System; Federal Reserve Banks; Reserve Bank Organization Committee; interbank networks; correspondent banking.
    JEL: E58 N21 N22
    Date: 2015–06–09
  60. By: Foote, Christopher L. (Federal Reserve Bank of Boston)
    Abstract: A current policy concern centers on how the severe winter weather experienced in some parts of the country may have affected the economy earlier this year. As of 2015:Q1, monthly payroll growth has slowed by more than 100,000 jobs compared to 2014:Q4, while GDP declined at an annual rate of 0.7 percent. To measure the potential effect of weather on recent employment growth, the author estimates a regression model using state-level employment and weather data from 1981 onward. The coefficients from this model are combined with data on recent weather to generate an estimate of how weather is likely to have affected employment growth earlier this year. The specification of the regression model builds on some recent research by Boldin and Wright (2015), who show that abnormal weather is likely to have the biggest effect on employment if it occurs on or just before the 12th day of each month, due to the timing conventions of the government's employment surveys.
    JEL: E24 J23
    Date: 2015–06–04
  61. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–06
  62. By: Giacomo Sbrana (NEOMA Business School); Andrea Silvestrini (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Forecasting inflation is an important and challenging task. In this paper we assume that the core inflation components evolve as a multivariate local level process. This model, which is theoretically attractive for modelling inflation dynamics, has been used only to a limited extent to date owing to computational complications with the conventional multivariate maximum likelihood estimator, especially when the system is large. We propose the use of a method called “Moments Estimation Through Aggregation” (M.E.T.A.), which reduces computational costs significantly and delivers prompt and accurate parameter estimates, as we show in a Monte Carlo exercise. In an application to euro-area inflation we find that our forecasts compare well with those generated by alternative univariate constant and time-varying parameter models as well as with those of professional forecasters and vector autoregressions.
    Keywords: inflation, forecasting, aggregation, state space models
    JEL: C32 C53 E31 E37
    Date: 2015–06
  63. By: Fabio Busetti (Bank of Italy); Claire Giordano (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: This paper examines the causes of the exceptionally marked fall in non-construction investment in Italy since 2007. Non-financial private services were the main driver of the decline in the aggregate investment rate, but all sectors weighed in negatively; the reallocation of value added away from industry was a further drag on investment. In concordance with survey findings, an aggregate model of investment indicates that even during the recent double recession the most important driver of capital accumulation was demand conditions. The user cost of capital had a substantial negative impact in the acute phases of the sovereign debt crisis, but since 2013 its contribution has been positive, thanks to the ECB’s expansionary monetary policy. The constraints on capital accumulation imposed by tight credit supply conditions were particularly severe in 2009 and 2012. Finally, uncertainty provided a sizeable drag on investment growth not only during the global financial crisis but also in the last two years. The significance of these determinants of investment is confirmed also by a disaggregated model for the thirteen manufacturing branches.
    Keywords: non-construction investment, uncertainty, credit constraints
    JEL: E22 E27
    Date: 2015–06
  64. By: Piergiorgio Alessandri (Bank of Italy); Pierluigi Bologna (Bank of Italy); Roberta Fiori (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: This paper analyzes the challenges posed by the implementation of the countercyclical capital buffer framework in Italy and proposes ways of meeting them. In the first part of the analysis we review the limitations of the standardized Basel III credit-to-GDP gap; we then propose possible solutions, which while remaining in the spirit of Basel, can better capture the state of the credit cycle in real time. In the second part of the paper we propose a step by step approach for reducing the uncertainty that may arise when looking at the indicators which, in addition to the credit-to-GDP gap, are designed to help authorities take decisions about the buffer rate; we also analyze the relationship between the selected indicators and a continuous variable of banking system riskiness. While the analysis is conducted with reference to Italian data, the proposed analytical framework is applicable to any country.
    Keywords: countercyclical capital buffer, financial cycle, credit cycle, macroprudential policy, capital requirements, banks, banking crises
    JEL: E32 G01 G21 G28
    Date: 2015–06
  65. By: António Afonso; João Tovar Jalles
    Abstract: We assess how demand and supply shocks (identified via the Blanchard and Quah (1989) SVAR approach) in 14 OECD countries affect mark-ups. We find that individual responses of markups to demand shocks push down the markup for most countries (confirmed in the panel analysis). On the other hand, a supply shock has a more mixed effect.
    Keywords: Blanchard-Quah, mark-up, VAR, impulse response function, local projection.
    JEL: C23 E32 E62
    Date: 2015–05
  66. By: Homburg, Stefan
    Abstract: Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach zero, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan’s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.
    Keywords: Liquidity trap, Japan, interest rate determination, monetary policy, quantitative easing, forward guidance, dynamic general equilibrium, secular stagnation.
    JEL: E31 E43 E52
    Date: 2015–06
  67. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectation a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations optimization is better than following a rule. If backward looking-behavior dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops.
    Keywords: DSGE; emerging market; rigidities; stability; optimization; Taylor rule
    JEL: E26 E52
    Date: 2015–02
  68. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruthi Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Simultaneity issues as well as incorrect measurement of shocks and of the cyclical variable bias estimated slopes of the Indian aggregate supply curve (AS). Our initial Generalized Method of Moments estimation, based on a filtered output gap variable and including supply shocks, also gives an unrealistic downward sloping AS. But we find measures of asymmetries in price changes outperform traditional measures of supply shocks. Estimation using marginal costs as a proxy for the output gap gives a positive coefficient that reduces in size on including our comprehensive supply shock variable, implying the correct AS has a small positive slope, but is subject to multiple shifts. The semi-structural specification, closer to firms' actual decisions, gives estimates of structural parameters such as degree of price stickiness and extent of forward-looking price adjustment. The results more correctly separate shocks from cyclicality, help to interpret India's growth and inflation experience, and have implications for policy.
    Keywords: Indian aggregate supply, slope, shocks, firms' price-setting, marginal costs
    JEL: E31 E32
    Date: 2015–03
  69. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper argues that context is important in discussions of financial stability. It explores weaknesses in domestic and international reforms and ways of overcoming them, based on mitigating the fundamental failures finance is subject to. Relevant market failures need to be taken into account even in the design of monetary policy regimes such as inflation targeting. Rather than blind following of international prescriptions better alignment to domestic structure and needs whether in monetary policy, restructuring financial regulators, capital adequacy criteria and bank balance sheets is required. It argues marginal changes in India's financial regulatory structure will suffice, brings out a possible trade-off between capital adequacy and leverage caps following from special features of Indian regulations some of which need to be preserved, gives the history behind the rise in non-performing assets, and points to technological changes that may make financial inclusion more compatible with financial stability. The possibility of coordinating on simple leverage reducing measures with good incentive possibilities should be taken up in global dialogue, and regional alternatives supported as a corrective for asymmetries in bargaining power.
    Keywords: Financial stability and reforms; market failures; leverage caps; non-performing assets; inflation targeting
    JEL: G18 G28 F36 E50
    Date: 2015–05
  70. By: Michael Siegenthaler (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Boris Kaiser (Department of Economics, University of Bern, Switzerland)
    Abstract: This paper examines the linkages between real exchange rate movements and firms’ skill demand. Real exchange rate movements may affect unskilled workers differently than skilled workers because of skill-specific adjustment costs, or because exchange rates lead to changes in relative factor prices and firms’ competition intensity. Using panel data on Swiss manufacturers, we find that an appreciation increases high-skilled and reduces low-skilled employment in most firms, while total employment remains roughly unchanged. We find evidence that exchange rates influence firms’ skill intensity because they affect outsourcing activities, innovation efforts, and firms’ compensation schemes.
    Keywords: Labor Demand, Skill Intensity, Employment, Real Exchange Rates, Firms’ Foreign Exposure
    JEL: E24 F16 F31
    Date: 2015–06
  71. By: Amita Majumder; Ranjan Ray
    Abstract: This paper provides Indian evidence on sub-national PPP s that point to considerable spatial price heterogeneity within the country. This paper shows that the CPD model, proposed in the cross country context, can be adapted to the household context to estimate spatial prices in the intra country context. The proposed CPD based model is shown to be formally equivalent to certain well known fixed weight price indices under certain parametric configurations. The empirical contribution includes a systematic comparison between the spatial price indices from alternative models, namely the CPD and utility based models, and the result that the utility based methods point to a much greater extent of spatial price heterogeneity than is suggested by the CPD type models. The results also record the sensitivity of the spatial price indices to the choice of items in the utility based approach. The pair wise comparison of estimates suggests that item selection may be more important than model selection in its impact on the spatial price estimates, though the latter is important as well. The study provides estimates of rural urban differentials in spatial price indices that suggest some interesting differences between the constituent states. The results make a strong case for further research on the topic of sub-national PPPs in the context of large heterogeneous countries.
    Keywords: Household Regional Product Dummy Model, QAIDS, Spatial Price Index, Sub-national PPP
    JEL: C12 C18 D12 E30 E31
    Date: 2015–02
  72. By: Arayssi, Mahmoud
    Abstract: In this paper a macro- economic model in the area of monetary policy game theory is extended to one-sided dismissal rules concerning observed nominal output and inflation targets for the central banker. These rules specify firing the central banker if some observed policy targets have been exceeded. Such rules are shown to reduce inflationary bias if the central banker perceives her reappointment chances as being strong and is preferred to discretionary monetary policy. Various policy targets are considered and it is shown that nominal output targeting may be preferred to inflation targeting under certain conditions.
    Keywords: Monetary Policy; Game Theory; Nominal Output Targeting; Inflation Targeting; Full Discretion; Dismissal Rule.
    JEL: E58 G18
    Date: 2014–06
  73. By: Tapia, Jose
    Abstract: Major views about the business cycle are tested by using NIPA data of the US economy for the years 1929-2013. Direct acyclic graphs (DAGs) are used for identification purposes, i.e., as tool to elucidate causal issues. Re-sults show that (a) investment is not autonomous, as it is stimulated by profits and consumption, and damped by government spending; (b) profits are reduced by past investment; (c) both business investment and profits have negative effects on government spending which consequently appears as an endogenous rather than as an exogenous variable. Regularities identified in the data are sufficient to generate the cycle. Considering the results, the “regularity” of the business cycle, and the fact that after growing between 2008 and 2012, profits stagnated in 2013 and declined in 2014, it can be concluded with reasonable confidence that a recession will occur in the next few years.
    Keywords: business cycle; macroeconomics; recessions; forecasting
    JEL: E0 E00 E01
    Date: 2015
  74. By: Ledenyov, Dimitri O.; Ledenyov, Viktor O.
    Abstract: The information, including the knowledge in the science, business and society, is being generated, transmitted, received and analyzed by the humans in the various countries over the centuries. The information is a most valuable asset in possession by the economic agents in the modern economies of the scales and scopes in the information societies in an information age. The authors introduce a notion on the general information product (GIP) in the macroeconomics, thoughtfully defining the GIP in the frames of the Ledenyov theory on the GIP(t) in the economies of scales and scopes for the first time. The multiple possible origins of the fluctuations of the dependence of the general information product on the time GIP(t) in the economies of scales and scopes are researched comprehensively. Authors consider the GIP(t) as a main parameter, which evaluates the performance of the economies of the scales and scopes from macroeconomics perspective. Authors assume that the accurate characterization of the dependence GIP(t) can be made in agreement with the Ledenyov theory on the GIP(t) in the economies of scales and scopes. Authors believe that the Ledenyov indicator GIP(t) instead of the Kuznets indicator GDP(t), can be successfully used to accurately measure the state/performance by any economy of scale and scope in the time domain. Authors think that the GIP(t) is a discrete-time digital signal (the Ledenyov digital wave), but it is not the continuous-time signals (the continuous waves), because of the discrete digital nature of information generation process. The article considers the empirical theoretical approaches and reveals the possible practical technical limitations in relation to the modeling of the new types of the discrete-time digital signals generators for the Ledenyov digital waves generation in the economies of the scales and scopes at the time of globalization.
    Keywords: dependence of general information product on time GIP(t), dependence of general domestic product on time GIP(t), discrete-time digital waves, discrete-time digital signals generators, spectrum analysis / amplitude / frequency / wavelength / period / phase of discrete-time digital signal, mixing / harmonics / nonlinearities of discrete-time digital signal, continuous-time signals, Juglar fixed investment cycle, Kitchin inventory cycle, Kondratieff long wave cycle, Kuznets infrastructural investment cycle, econophysics, econometrics, nonlinear dynamic economic system, economy of scale and scope, macroeconomics.
    JEL: E0 E01 E02 E10 E17 E20 E27 E30 E32 E37 E40 E44 E47 E50 E58 E6 E60 F40 F44 O3 O30 O33
    Date: 2015–06–11
  75. By: Das, Abhishek; Gupta, Gautam
    Abstract: In this paper we use a heterogeneously endowed Overlapping Generation model (OLG) in an experimental framework. . In our experimental OLG economy young subjects are asked either to predict the inflation rate for the next period or to decide his/her savings for the current period. We find that for both the decisions neither higher amount of government expenditure nor the higher amount of money supply by monetary authority will move inflation rate towards equilibrium. We also find that that if there is much uncertainty, Friedman Conjecture will not work.
    Keywords: OLG-model; Expectations; Inflation; Stability; Monetary policy; Experiments
    JEL: C92 E21 E31 E52
    Date: 2015–06–12
  76. By: Mordecai Kurz (Stanford University)
    Abstract: A rapid recovery from deflationary shocks that result in transition to the Zero Lower Bound (ZLB) requires that policy generate an inflationary counter-force. Monetary policy cannot achieve it and the lesson of the 2007-2015 Great Recession is that growing debt give rise to a political gridlock which prevents restoration to full employment with deficit financed public spending. Even optimal investments in needed public projects cannot be undertaken at a zero interest rate. Hence, failure of policy to arrest the massive damage of eight year’s Great Recession shows the need for new policy tools. I propose such policy under the ZLB called "Stabilizing Wage Policy" which requires public intervention in markets instead of deficit financed expenditures. Section 1 develops a New Keynesian model with diverse beliefs and inflexible wages. Section 2 presents the policy and studies its efficacy. The integrated New Keynesian (NK) model economy consists of a lower s ub-economy under a ZLB and upper sub-economy with positive rate, linked by random transition between them. Household-firm-managers hold heterogenous beliefs and inflexible wage is based on a four quarter staggered wage structure so that mean wage is a relatively inflexible function of inflation, of unemployment and of a distributed lag of productivity. Equilibrium maps of the two sub-economies exhibit significant differences which emerge from the relative rates at which the nominal rate, prices and wage rate adjust to shocks. Two key results: first, decline to the ZLB lower sub- economy causes a powerful debt-deflation spiral. Second, output level, inflation and real wages rise in the lower sub-economy if all base wages are unexpectedly raised. Unemployment falls. This result is explored and explained since it is the key analytic result that motivates the policy. A Stabilizing Wage Policy aims to repair households' balance sheets, expedite recovery and exit from the ZLB. It raises base wages for policy duration with quarterly cost of living adjustment and a prohibition to alter base wages in order to nullify the policy. I use demand shocks to cause recession under a ZLB and a deleveraging rule to measure recovery. The rule is calibrated to repair damaged balance sheets of US households in 2007-2015. Sufficient deleveraging and a positive rate in the upper sub-economy without a wage policy are required for exit hence at exit time inflation and output in the lower sub-economy are irrelevant for exit decision. Simulations show effective policy selects high policy intensity at the outset and given the 2007-2015 experience, a constant 10% increased base wages raises equilibrium mean wage by about 5.5%, generates a controlled inflation of 5%-6% at exit time and attains recovery in a fraction of the time it takes for recovery without policy. Under a successful policy inflation exceeds the target at exit time and when policy terminates, inflation abates rapidly if the inflation target is intact. I suggest that a stabilizing wage policy with a constant 10% increased base wages could have been initiated in September 2008. If controlled inflation of 5% for 2.25 years would have been politically tolerated, the US would have recovered and exited the ZLB in 9 quarters and full employment restored by 2012. Lower policy intensity would have resulted in smaller increased mean wage, lower inflation but increased recession’s duration. The policy would not have required any federal budget expenditures, it would have reduced public deficits after 2010 and the US would have reached 2015 with a lower national debt. The policy negates the effect of demand shocks which cause the recession and the binding ZLB. It attains it’s goal with strong temporary intervention in the market instead of generating demand with public expenditures. It does not solve other long term structural problems that persist after exit from the ZLB and which require other solutions.
    Keywords: New Keynesian Model; wage scale; reference wage; inflexible wages; sticky prices; heterogenous beliefs; market belief; Rational Belie fs; Great Recession; Depression; monetary policy; Stabilizing Wage Policy
    JEL: D21 E12 E24 E3 E4 E52 E6 H3 J3 J6
    Date: 2015–05
  77. By: Deniz Aydin (Stanford University)
    Abstract: This paper presents novel tests of competing models of intertemporal consumption behavior using unique European administrative panel data on income, spending and assets. I estimate the marginal propensity to consume (MPC) out of ‘liquidity’ -the debt response to a change in borrowing capacity- using changes in credit card limits in a randomized controlled trial implemented in September 2014 involving fifty-five thousand individuals. I obtain four empirical results: First, borrowing constraints change consumption dynamics even when they are not strictly binding. Two-thirds of the population accumulate a significant average of 20 cent of debt per dollar limit increase, relative to the control group. Second, the heterogeneity of the MPC is exclusively in line with precautionary models, a decreasing function of cash-on-hand. Third, the debt response to liquidity and credit card utilization are stationary. Fourth, additional liquidity is spent mostly on durables and services using installments, with a smaller fraction spent on non-durables and taken out as cash advances. I then use a workhorse Bewley model with realistic income risk and show that the joint dynamics of consumption, debt and the balance sheet in response to a change in borrowing constraints can be used to calibrate and test intertemporal models. Debt response to liquidity shocks identifies preference parameters via a simulated moments estimator. Hump-shaped debt response and mean-reverting credit card utilization are not consistent with myopia as the underlying preferences.
    Keywords: consumption, debt, borrowing con- straints, precautionary saving, permanent income hypothesis, field experiment.
    JEL: C93 D12 D14 D91 E21 E44 E51 G21
    Date: 2015–06
  78. By: MAVEYRAUD Samuel
    Abstract: The aim of this article is to clearly identify the mechanisms of the money market spillovers between the United States, the United Kingdom and France during the interwar period. To describe these mechanisms in detail, a BEKK model, in which we introduce a structural break, is adopted. Our analysis sheds new light on key historical issues: Was the crisis imported into the US? Did France set off interest rate volatility in the rest of the world during the thirties? Does the propagation process of interest rate volatility corroborate the “Golden Fetters” hypothesis?
    Keywords: Contagion, Gold Exchange standard, interest rates
    JEL: N12 N14 N22 N24 E4
    Date: 2015
  79. By: Yuko Imura; Julia Thomas
    Abstract: Many policy-makers and researchers view the recent financial and real economic crises across North America, Europe and beyond as a global phenomenon. Some have argued that this global recession has a common source: the U.S. financial crisis. This paper investigates the extent to which a credit shock in one country is transmitted to its trade partners. To this end, we develop a quantitative two-country dynamic stochastic general equilibrium model wherein intermediate-good producers face persistent idiosyncratic productivity shocks and occasionally binding collateralized borrowing constraints for investment loans. We find that a negative credit shock to one country induces a sharp contraction in that country’s economy, whereas the resulting recession in the economy of its trading partner is quantitatively minor. Transmission through goods trade is limited by the calibrated average trade share, which we find insufficient to deliver a sizable recession abroad. The degree of credit-shock transmission depends on the home bias in international trade and the type of goods countries trade with each other. We show that lower home bias dampens the domestic recession following a credit shock, but it amplifies international transmission. Similarly, when traded goods are less substitutable, the domestic recession is less severe, while real consequences abroad are greater. Our model also predicts that credit shocks cause larger declines in international trade than do productivity shocks. These results shed light on the great trade collapse over 2008-09, suggesting that tightened financial constraints may have been a contributing factor.
    Keywords: Business fluctuations and cycles, Economic models, Financial markets, Financial stability, International topics
    JEL: E E2 E22 E3 E32 E4 E44 F F4 F41 F44
    Date: 2015
  80. By: Warren E. Weber
    Abstract: The period from 1914 to 1935 in the United States is unique in that it was the only time that both privately-issued bank notes (national bank notes) and central bank-issued bank notes (Federal Reserve notes) were simultaneously in circulation. This paper describes some lessons relevant to e-money from the U.S. experience during this period. It argues that Federal Reserve notes were not issued to be a superior currency to national bank notes. Rather, they were issued to enable the Federal Reserve System to act as a lender of last resort in times of financial stress. It also argues that the reason to eventually eliminate national bank notes was that they were potentially a source of bank reserves. As such, they could have threatened the Federal Reserve System’s control of the reserves of the banking system and thereby the Fed’s control of monetary policy.
    Keywords: Bank notes, E-Money, Financial services
    JEL: E E4 E41 E42 E5 E58
    Date: 2015
  81. By: Ashraf, Ayesha
    Abstract: This study examines the effects of greenfield FDI and cross-border mergers and acquisitions (M&As) on government size in host countries of FDI. Using panel data for up to 135 countries for the period from 2003-2012, the study specifically tests the compensation hypothesis, suggesting that by increasing economic insecurity, economic openness leads to larger government size. It is found that greenfield FDI increases labour market volatility and thereby economic insecurity while M&As are not significantly associated with labour market volatility. The main results of this study are that greenfield FDI has a robust positive effect on government size, while M&As have no statistically significant effect on government size in the total sample of developed and developing countries, as well as in the sub-samples of developed and developing countries.
    Keywords: greenfield FDI; cross-border M&As; government size
    JEL: E62 F21 F23
    Date: 2015–06–02
  82. By: Nicola Gennaioli; Yueran Ma; Andrei Shleifer
    Abstract: Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs’ expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin’s Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.
    JEL: E22 E32 G3
    Date: 2015–06
  83. By: Fernando Ferreira; Joseph Gyourko
    Abstract: Utilizing new panel micro data on the ownership sequences of all types of borrowers from 1997-2012 leads to a reinterpretation of the U.S. foreclosure crisis as more of a prime, rather than a subprime, borrower issue. Moreover, traditional mortgage default factors associated with the economic cycle, such as negative equity, completely account for the foreclosure propensity of prime borrowers relative to all-cash owners, and for three-quarters of the analogous subprime gap. Housing traits, race, initial income, and speculators did not play a meaningful role, and initial leverage only accounts for a small variation in outcomes of prime and subprime borrowers.
    JEL: E0 G0 H0 J0 R0
    Date: 2015–06
  84. By: Mariacristina De Nardi; Eric French; John B. Jones
    Abstract: The saving patterns of retired U.S. households pose a challenge to the basic life-cycle model of saving. The observed patterns of out-of-pocket medical expenses, which rise quickly with age and income during retirement, and heterogeneous lifespan risk, can explain a significant portion U.S. savings during retirement. However, more work is needed to disentangle these precautionary saving motives from other motives, such as the desire to leave bequests. An important complementary question is why households do not buy more insurance against these risks. Going beyond total savings and looking at its components, including housing, and looking at other portfolio choices can help shed light on these questions.
    JEL: D1 D14 D31 E21 H2 I14
    Date: 2015–06
  85. By: Marina Azzimonti
    Abstract: American politics have been characterized by a high degree of partisan conflict in recent years. Combined with a divided government, this has led not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. The unusually slow recovery from the Great Recession during the same period suggests the possibility that the two phenomena may be related. In this paper, I investigate the hypothesis that political discord depresses private investment. To this end, I first present a reduced-form political economy model to illustrate how news about political disagreement affects investment through agents' expectations. I then construct a novel high-frequency indicator of partisan conflict consistent with the model. The index, computed monthly between 1981 and 2015, uses a semantic search methodology to measure the frequency of newspaper articles reporting lawmakers' disagreement about policy. Using a 2SLS approach, I estimate that a 10% increase in the partisan conflict index is associated with a 3.4% decline in aggregate private investment in the US.
    JEL: C11 C26 E02 E22 E32 E62 H3 P48
    Date: 2015–06
  86. By: Ormerod, Paul
    Abstract: In situations of what we now describe as radical uncertainty, the core model of agent behaviour, of rational autonomous agents with stable preferences, is not useful. Instead, a different principle, in which the decisions of an agent are based directly on the decisions and strategies of other agents, becomes the relevant core model. Preferences are not stable, but evolve. It is not a special case in such circumstances, but the general one. The author provides empirical evidence to suggest that as a description of behaviour in the modern world, economic rationality is applicable in a declining number of situations. He discusses models drawn from the modern literature on cultural evolution in which imitation of others is the basic strategy, and suggests a heuristic way of classifying situations in which the different models are relevant. The key point is that in situations where radical uncertainty is present, we require theoretical 'null' models of agent behaviour which are different from those of economic rationality. Under uncertainty, fundamentally different behavioural rules are 'rational'. The author gives an example of a very simple pure sentiment model of the business cycle, in which agents use very simple heuristic decision rules. It is nevertheless capable of approximating a number of deep features of output growth over the cycle.
    Keywords: uncertainty,imitation,evolution,agent-based model,sentiment,business cycle
    JEL: D81 E32
    Date: 2015
  87. By: Dow, Sheila
    Abstract: In spite of superficial similarities, the way in which uncertainty is understood as a feature of the crisis by mainstream economics is very different from Keynesian fundamental uncertainty. The difference stems from the mainstream habit of thinking in terms of a full-information benchmark, where uncertainty arises from ignorance. By treating uncertain knowledge as the norm, Keynesian uncertainty theory allows analysis of differing degrees of uncertainty and the cognitive role of institutions and conventions. The paper offers a simple diagrammatic representation of these differences, and uses this framework to depict different understandings of the crisis, its aftermath and the appropriate policy response.
    Keywords: uncertainty,risk,ambiguity,Keynes
    JEL: B41 B5 E00 G01
    Date: 2015
  88. By: Frydman, Roman; Goldberg, Michael D.; Mangee, Nicholas
    Abstract: Macroeconomic models that are based on either the rational expectations hypothesis (REH) or behavioral considerations share a core premise: all future market outcomes can be characterized ex ante with a single overarching probability distribution. This paper assesses the empirical relevance of this premise using a novel data set. We find that Knightian uncertainty, which cannot be reduced to a probability distribution, underpins outcomes in the stock market. This finding reveals the full implications of Robert Shiller's ground-breaking rejection of the class of REH present-value models that rely on the consumption-based specification of the risk premium. The relevance of Knightian uncertainty is inconsistent with all REH models, regardless of how they specify the market's risk premium. Our evidence is also inconsistent with bubble accounts of REH models' empirical difficulties. We consider a present-value model based on a New Rational Expectations Hypothesis, which recognizes the relevance of Knightian uncertainty in driving outcomes in real-world markets. Our novel data is supportive of the model's implications that rational forecasting relies on both fundamental and psychological factors.
    Keywords: Knightian uncertainty,structural change,fundamentals,psychology,present-value model,stock prices
    JEL: E44 G12
    Date: 2015
  89. By: Tröger, Tobias H.
    Abstract: This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets - the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks' debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
    Keywords: banking union,macro-prudential supervision,real estate lending,bail-in,market discipline
    JEL: E44 G01 G18 G21 G28 K22 K23
    Date: 2015

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