nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒08‒13
84 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Evolution of US Monetary Policy: 2000-2007 By Michael T. Belongia; Peter N. Ireland
  2. Hysteresis and the European Unemployment Problem Revisited By Galí, Jordi
  3. "Is a Very High Public Debt a Problem?" By Pedro Leao
  4. On the Desirability of Nominal GDP Targeting By Julio Garín; Robert Lester; Eric Sims
  5. Financial Stability and Monetary Policy By Martin Hellwig
  6. What Measure of Inflation Should a Developing Country Central Bank Target? By Anand, Rahul; Prasad, Eswar; Zhang, Boyang
  7. The relative effectiveness of Monetary and Fiscal Policies on growth: what does long-run SVAR model tell us? By Şen, Hüseyin; Kaya, Ayşe
  8. What drives the global official/policy interest rate? By Ronald A. Ratti; Joaquin L. Vespignani
  9. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  10. Maturity Structure and Supply Factors in Japanese Government Bond Markets By Ichiro Fukunaga; Naoya Kato; Junko Koeda
  11. It ain't over till it's over: A global perspective on the Great Moderation-Great Recession interconnection By Fabio Bagliano; Claudio Morana
  12. التمويل بالمشاركة وأثره على التوازن الآني في سوقي النقد والسلع والخدمات By ABDELLAOUI, Okba; BEN AMARA, Naoual; SALHI, Nadjai
  13. Macroprudential policy in a Knightian uncertainty model with credit-, risk-, and leverage cycles By Eddie Gerba; Dawid Zochowski
  14. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.
  15. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  16. Monetary Policy and Foreign Exchange Management: Reforming Central Bank Functions in Myanmar By Nijathaworn, Bandid; Chaikhor, Suwatchai; Chotika-arpa, Suppakorn; Sakkankosone, Suchart
  17. Le multiplicateur keynésien en récession : Pourquoi une relance est-elle davantage nécessaire aujourd'hui en zone Euro ? By Charles, Sébastien; Dallery, Thomas; Marie, Jonathan
  18. Fluctuations in hours of work and employment across age and gender By Guy Laroque; Sophie Osotimehin
  19. Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB By L. Cycon; Michael Koetter
  20. Technological Progress, Investment Frictions and Business Cycle: New Insights from a Neoclassical Growth Model By Michael Donadelli; Vahid Mojtahed; Antonio Paradiso
  21. Characterizing the financial cycle: Evidence from a frequency domain analysis By Strohsal, Till; Proaño, Christian R.; Wolters, Jürgen
  22. Debt Policy Rules in an Open Economy By Keiichi Morimoto; Takeo Hori; Noritaka Maebayashi; Koichi Futagami
  23. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  24. Household Debt and Crises of Confidence By Thomas Hintermaier; Winfried Koeniger
  25. The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar By Khalid Rashid, Alkhater; Syed Abul, Basher
  26. Jump Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? By Olivier Blanchard; Christopher J. Erceg; Jesper Lindé
  27. Inflation forecasting models for Uganda: is mobile money relevant? By Janine Aron; John Muellbauer; Rachel Sebudde
  28. Stylized facts of the business cycle: Universal phenomenon, or institutionally determined? By Kufenko, Vadim; Geiger, Niels
  29. The Role of Covered Bonds in Explaining House Price Dynamics in Spain By Hana Hejlova
  30. Aggregate and distributional effects of increasing taxes on top income earners By Brüggemann, Bettina; Yoo, Jinhyuk
  31. Impact of trilemma indicators on macroeconomic policy: Does central bank independence matter? By Geeta Garg
  32. Bond Supply and Excess Bond Returns in Zero-Lower Bound and Normal Environments: Evidence from Japan By Junko Koeda
  33. Progressive Taxation as an Automatic Destabilizer under Endogenous Growth By Jang-Ting Guo; Shu-Hua Chen
  34. Completing the Monetary Union of Europe as Mid-term Solution of the Euro Crisis By Fischer, Justina A.V.; Pastore, Francesco
  35. Do inflation expectations propagate the inflationary impact of real oil price shocks?: Evidence from the Michigan survey By Benjamin Wong
  36. Clearing Up the Fiscal Multiplier Morass By Eric M. Leeper; Nora Traum; Todd B. Walker
  37. Human Capital Risk, Contract Enforcement, and the Macroeconomy By Krebs, Tom; Kuhn, Moritz; Wright, Mark L. J.
  38. The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts By Benjamin Beckers
  39. Inventory Shocks and the Great Moderation. By James Morley; Aarti Singh
  40. Why do countries adopt fiscal rules? By Yenner Altunbas; John Thornton
  41. Credit and Macroprudential Policy in an Emerging Economy: a Structural Model Assessment By Horacio A. Aguirre; Emilio F. Blanco
  42. Federal Reserve Tools for Managing Rates and Reserves By Antoine Martin; James McAndrews; Ali Palida; David Skeie
  43. Bank's Price Setting and Lending Maturity: Evidence from an Inflation- Targeting Economy By Emiliano Luttini; Michael Pedersen
  44. The dynamics of leverage in a Minskyan model with heterogeneous firms By Corrado Di Guilmi; Laura Carvalho
  45. Banks Exposures and Sovereign Stress Transmission By Carlo Altavilla; Marco Pagano; Saverio Simonelli
  46. A new monthly indicator of global real economic activity By Ravazzolo, Francesco; Vespignani, Joaquin L.
  47. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Juan Rubio-Ramirez; Dario Caldara; Jonas Arias
  48. Monetary Policy and the Risk-Taking Channel By Michele Piffer
  49. Applying an Inflation Targeting Lens to Macroprudential Policy 'Institutions' By Güneş Kamber; Özer Karagedikli; Christie Smith
  50. The labor market effect of demographic change: Alleviation for financing social security By Friese, Max
  51. Revenue decentralization, central oversight and the political budget cycle: Evidence from Israel By Baskaran, Thushyanthan; Blesse, Sebastian; Brender, Adi; Reingewertz, Yaniv
  52. ISBEM: An econometric model for the Italian State Budget Expenditures By Giuseppe Bianchi; Tatiana Cesaroni; Ottavio Ricchi
  53. Exit Strategies and Trade Dynamics in Repo Markets By Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
  54. Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty By Joseph P. Byrne; Shuo Cao.; Dimitris Korobilis.
  55. Bank leverage, credit traps and credit policies By Foulis, Angus; Nelson, Benjamin; Tanaka, Misa
  56. Labour Market Dynamics and Worker Heterogeneity during the Great Recession: Evidence from Europe By Bachmann, Ronald; Bechara, Peggy; Kramer, Anica; Rzepka, Sylvi
  57. Pensions, Education, and Growth: A Positive Analysis By Tetsuo Ono; Yuki Uchida
  58. أثر أزمة منطقة اليورو على الإيرادات النفطية للجزائر للفترة 2005 - 2012 By ABDELLAOUI, Okba; Zergoune, Mohamed
  59. Business cycle synchronization of the Visegrad Four and the European Union By Lubos Hanus; Lukas Vacha
  60. Dynamic predictive density combinations for large data sets in economics and finance By Roberto Casarin; Stefano Grassi; Francesco Ravazzolo; Herman K. van Dijk
  61. On a Bootstrap Test for Forecast Evaluations By Juraj Hucek; Alexander Karsay; Marian Vavra
  62. The impact of liquidity regulation on banks By Banerjee, Ryan; Mio, Hitoshi
  63. Should Latin America save more to grow faster ? By De La Torre,Augusto; Ize,Alain
  64. Macroprudential Policies in a Commodity Exporting Economy By Andrés González; Franz Hamann; Diego Rodríguez
  65. International Tax Cooperation and Implications of Globalization By Leonce Ndikumana
  66. On the sustainability of exchange rate target zones with central parity realignments By Martinez-Garcia, Enrique
  67. Real and financial crises in the Keynes-Kalecki structuralist model: An agent-based approach By Bill Gibson; Mark Setterfield
  68. International liquidity shocks and domestic loan supply in the euro area By Zwick, Lina
  69. Financing Asia’s Growth By Estrada, Gemma; Noland, Marcus; Park, Donghyun; Ramayandi, Arief
  70. Indonesian Macro Policy through Two Crises By Prayudhi Azwar; Rod Tyers
  71. Optimal Contracting with Reciprocal Agents in a Competitive Search Model By Maria Breitwieser
  72. Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment By Giamattei, Marcus
  73. House Money and Entrepreneurship By Sari Pekkala Kerr; William R. Kerr; Ramana Nanda
  74. Uncertainty and Fiscal Cliffs By Andrew Foerster; Troy Davig
  75. FOMC Communication and Interest Rate Sensitivity to News By Jenny Tang
  76. Prudential Regulation, Currency Mismatches and Exchange Rate Regimes in Latin America and the Caribbean By Martín Tobal
  77. How to make a carbon tax reform progressive: The role of subsistence consumption By Klenert, David; Mattauch, Linus
  78. Yards implementation of Basel prudential framework and IFRS: some ideas for African banks. By SIDIBE, Tidiani
  79. Schumpeterian business cycles By Filip Rozsypal
  80. Can Intra-Regional Trade Act as a Global Shock Absorber in Africa? By Brixiova, Zuzana; Meng, Qingwei; Ncube, Mthuli
  81. Monetary Shocks in Models with Inattentive Producers By francesco lippi; Luigi Paciello; Fernando Alvarez
  82. Myanmar: Unlocking the Potential - A Strategy for High, Sustained, and Inclusive Growth By Findlay, Ronald; Park, Cyn-Young; Verbiest, Jean-Pierre
  83. Evidence that Capital Formation is Over-Estimated in ICP 2011 By Theodore R. Breton
  84. The impact of Chinese competition on Africa’s manufacturing By Ping HUA; Sylviane GUILLAUMONT JEANNENEY

  1. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: This paper estimates a VAR with time-varying parameters to characterize the changes in Federal Reserve policy that occurred from 2000 through 2007 and assess how those changes affected the performance of the U.S. economy. The results point to a gradual shift in the Fed's emphasis over this period, away from stabilizing inflation and towards stabilizing output. A persistent deviation of the federal funds rate from the settings prescribed by the estimated monetary policy rule appears more important, however, in causing inflation to overshoot its target in the years leading up to the Great Recession.
    Keywords: Federal Reserve, Monetary Policy, Bayesian VAR, Time-Varying Parameters
    JEL: C32 E31 E32 E37 E52 E58
    Date: 2015–08–07
  2. By: Galí, Jordi
    Abstract: The unemployment rate in the euro area appears to contain a signi…ficant nonstationary component, suggesting that some shocks have permanent e¤ects on that variable. I explore possible sources of this nonstationarity through the lens of a New Keynesian model with unemployment, and assess their empirical relevance.
    Keywords: insider-outsider models; New Keynesian model; unemployment fluctuations; wage Phillips curve
    JEL: E24 E31 E32
    Date: 2015–07
  3. By: Pedro Leao
    Abstract: This paper has two main objectives. The first is to propose a policy architecture that can prevent a very high public debt from resulting in a high tax burden, a government default, or inflation. The second objective is to show that government deficits do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector necessarily realizes savings, in the form of either government bond purchases or, if a default is feared, "acquisitions" of new money.
    Keywords: Fiscal Policy; Functional Finance; Modern Monetary Theory; Monetary Policy; Public Debt Sustainability; Zero Interest Rates
    JEL: E12 E42 E52 E62 E63
    Date: 2015–07
  4. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
    JEL: E31 E47 E52 E58
    Date: 2015–07
  5. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks’ objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank’s succumbing to financial dominance?
    Keywords: financial stability, Systemic Risk, monetary policy, central banking
    JEL: E58 E44 E42 E52
    Date: 2015–10
  6. By: Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
    Keywords: inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions
    JEL: E31 E52 E61
    Date: 2015–07
  7. By: Şen, Hüseyin; Kaya, Ayşe
    Abstract: This paper studies empirically the relative effectiveness of monetary and fiscal policies on growth. Unlike many previous papers which have focused, to a large extent, on the effect of monetary or fiscal policies separately, this paper considers the comparative efficacy of the two policies on growth by applying the Structural Vector Autoregression (SVAR) model to the quarterly data for Turkey over the period 2001:Q1-2014:Q2. The empirical findings of this paper show that both monetary and fiscal policies do have significant effects on growth. However, monetary policy is more effective than fiscal policy in stimulating growth. More specifically, interest rate ―a monetary policy variable― is the most potent instrument in affecting growth. Then budget deficit ―a fiscal policy variable― becomes the second important variable after interest rate. These findings suggest that although the relative effectiveness in boosting growth is different, both policies significantly affect growth, suggesting that they should be used jointly but in an efficient manner.
    Keywords: Monetary Policy, Fiscal Policy, Growth, Macroeconomic Policy Management, SVAR, Turkey.
    JEL: E52 E58 E62 E63
    Date: 2015–07–31
  8. By: Ronald A. Ratti; Joaquin L. Vespignani
    Abstract: We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of official/policy interest rate. We find that 62% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (21%), oil prices (18%), global output (15%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output and prices and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVAR
    JEL: E44 E50 Q43
    Date: 2015–07
  9. By: Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam); Matthias Weber (University of Amsterdam)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We replace the common assumption of rational expectations in a New Keynesian framework by the assumption that expectations are formed according to a heuristics switching model that has performed well in earlier work. We show how the economy behaves under these assumptions with a special focus on inflation volatility. Contrary to comparable models based on full rationality, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions with a learning to forecast experiment. The experimental results support the behavioral model and the claim that reacting to the output gap in addition to inflation can indeed lower inflation volatility.
    Keywords: Experimental Macroeconomics; Heterogeneous Expectations; Learning to forecast Experiment; Trade-off Inflation and Output Gap
    JEL: C90 E52 D84
    Date: 2015–07–27
  10. By: Ichiro Fukunaga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently International Monetary Fund, E-mail:; Naoya Kato (Associate Director, Institute for Monetary and Economic Studies (currently Research and Statistics Department), Bank of Japan (E-Mail:; Junko Koeda (Associate Professor, School of Political Science and Economics, Waseda University (E-mail:
    Abstract: Using our constructed database on the amount outstanding of Japanese Government Bonds (JGBs) categorized by holder and remaining maturity, we examine the effects of changes in the holders and maturity structures on the term structure of interest rates and the risk premium on long-term bonds. Both approaches using single-equation regressions and a term structure model confirm that the net supply of JGBs, the issuance (supply) by the government minus the demand by the preferred-habitat investors including the Bank of Japan (BOJ), had significant effects on long-term interest rates. The regression approach implies that the net supply effects were stronger in the zero interest rate periods, while this relationship was not found using the model approach. We also calculate the net supply effects of the BOJ's JGB purchases as part of its Quantitative and Qualitative Monetary Easing and compare the results with those obtained from a simple event-study analysis.
    Keywords: Japanese Government Bonds, Term structure of interest rates, Preferred habitat, Unconventional monetary policy
    JEL: E43 E44 E52 E58 G11 G12 H63
    Date: 2015–07
  11. By: Fabio Bagliano; Claudio Morana
    Abstract: A large-scale model of the global economy is used to investigate the structural determinants of the Great Moderation and the transition to the Great Recession (1986-2010). Beside the global economy perspective, the model presents the novel feature of a broad range of included financial variables and risk factors measures. The results point to the relevance of various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions' risk taking behavior (Great Leveraging) and global imbalances (savings glut), in shaping aggregate fluctuations. The paper finally contributes to the literature on early warning indicators, assessing the information content of risk factor innovations for the prediction of the timing and depth of the Great Recession.
    Keywords: Great Moderation, Great Recession, risk factors, early warning system, macro-…nancial instability; FAVAR models
    JEL: E32 E44 G01 G15 C22
    Date: 2015–07
  12. By: ABDELLAOUI, Okba; BEN AMARA, Naoual; SALHI, Nadjai
    Abstract: The study is based on the Link Between partial analysis and the importance of Islamic finance on this level of analysis, and macro-analysis as important through economic policies pursued, and it effects on the funding at the micro-level. We have tried to identify the most important factors influencing settings funding formula to participate, to both owners of financial surpluses or organizers or banks and the impact of this on a function of overall investment, and thus reflect the role of the rate of net return on participation in cases of non-stability in the economy, through its impact on immediate balances in monetary market, goods market and services within an economic model holistic balance in the Islamic economy.
    Keywords: economic balance, net return on participation, monetary multiplier, inflation, recession.
    JEL: E1 E2 E24 E5 G21
    Date: 2014–11–05
  13. By: Eddie Gerba; Dawid Zochowski
    Abstract: We study the impact of uncertainty on financial stability and the business cycle. We extend the work of Boz and Mendoza (2014) by endogenizing credit production, modifying learning mechanism into an adaptive set-up, as well as including financial and monetary policies. In our model households are (intrinsically) rational but take economic decisions under incomplete information. The incompleteness is not caused by their cognitive limitations, as in rational inattention theory (Sims, 2003). Households `learn by doing' and once a sufficient number of realizations of the state variable have materialized, and the incomplete information set is completed. This learning set-up is incorporated into a New Keynesian model with credit market frictions, extended to include uncertainty, where a share of households needs external financing to consume. Because of limited enforceability of financial contracts, households are required to provide collateral for their loans, and so the relationship between the bank and household is tightened for many periods ahead. We find in our framework the build up of risk, leverage, increase in consumption and price of collateral takes longer than in other DSGEs with standard financial friction models. We also find that both the frequency and the amplitude of expansions and contractions are asymmetric - recessions are less frequent and deeper than expansions. Moreover, we find that boom-bust cycles occur as rare events. Using the Cogley and Sargant's (2008) definition of a severe(or systemic) crisis, we find on average two such events per century. We also find that, different from standard boom-bust cycles, a systemic crisis can be followed by a sequence of subsequent contractions, as it makes the economy more unstable. The result is asymmetric distributions of key macroeconomic and financial variables, with high skewness and fat tails. Lastly, we also find that, by reducing the amount of borrowing and leverage in upturns, the LTV-ratio regulation is effective in smoothing the cycles and reducing the effects of a deep contraction on the real-financial variables. We also discuss the role of macroprudential policy in reducing information incompleteness by generating information that helps the agent learn faster the new environment, or provide a smoother transition to the new economic environment.
    Keywords: uncertainty; financial engeneering; deregulation; leverage forecasting; macroprudential policy
    JEL: E44 E58 G14 G21 G32
    Date: 2015
  14. By: Dräger, Lena; Proaño, Christian R.
    Abstract: Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modeled by letting the loanto-value (LTV) ratio that banks demand of entrepreneurs depend on either regional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context.
    Keywords: cross-border banking,euro area,monetary unions,DSGE,monetary policy
    JEL: F41 F34 E52
    Date: 2015
  15. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied US bank-level dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: bank lending channel; monetary transmission; global banking; cross-country analysis
    JEL: E44 E52 F42 G15 G21
    Date: 2015–08–01
  16. By: Nijathaworn, Bandid (Thai Institute of Directors); Chaikhor, Suwatchai (Bank of Thailand); Chotika-arpa, Suppakorn (Bank of Thailand); Sakkankosone, Suchart (Bank of Thailand)
    Abstract: Myanmar’s macroeconomic policy framework does not adequately support the new functions of the Central Bank of Myanmar. The monetary policy regime is deficient and institutions that complement the working of a market-based economy lacking. This paper identifies 10 priority areas for reform to allow the central bank to effectively perform its emerging new functions in support of economic growth and stability. This is a three-front effort: dismantle nonmarket arrangements, especially in the finance sector; implement a monetary policy framework and operational procedures, including financial markets development; and enhance central bank policy capacity. The latter includes elevating the policy process, central banking functions, and institutional roles to match the tasks of a modern monetary authority in a market-based economy.
    Keywords: central bank; financial markets; monetary policy; Myanmar
    JEL: E51 E52 E58
    Date: 2015–05–01
  17. By: Charles, Sébastien; Dallery, Thomas; Marie, Jonathan
    Abstract: The Great Recession has revived economic policy debates from the 1930s between the advocates of a balanced budget under all circumstances and the supporters of counter-cyclical fiscal policies. Since 2012, a consensus has emerged that fiscal policy is more effective in recessions that during periods of growth. Now, new studies have explained why fiscal multipliers are usually higher in times of recession. These results confirm the pressing need for fiscal stimulus in Europe.
    Keywords: Multiplier, Recession, Post-Keynesians
    JEL: E12 E62 F41
    Date: 2015–04
  18. By: Guy Laroque (Institute for Fiscal Studies); Sophie Osotimehin (Institute for Fiscal Studies)
    Abstract: This paper documents the heterogeneity in labor market volatility across ages and gender in the United States over 1976-2014. We separate fluctuations in hours worked into fluctuations in the average number of hours per worker (the intensive margin) and fluctuations in the number of individuals at work (the extensive margin) and examine the relative importance of these two margins for each demographic group. We then compute the contribution of each demographic group to the change in aggregate hours worked over the business cycle. We discuss the implications of our findings for theories of labor market fluctuations.
    JEL: E24 E32 J21
    Date: 2015–01
  19. By: L. Cycon; Michael Koetter
    Abstract: With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
    Keywords: unconventional monetary policy, asset purchase programs, ECB, interest rate channel, internal capital markets
    JEL: G01 G21 E42 E43 E52
    Date: 2015–07
  20. By: Michael Donadelli; Vahid Mojtahed; Antonio Paradiso
    Abstract: This paper examines whether there is direct link between investment frictions and technological progress. An augmented version of a standard stochastic Solow model is presented. In this novel version the TFP is a function of a set of “ad hoc” variables in deviation from their equilibrium trend: (i) relative price of investment goods with respect to consumption goods (i.e. investment frictions); (ii) human capital index and (iii) trade openness. Empirical results show that investment frictions have an important role in influencing productivity growth. This finding may help in solving an important puzzle raised by the recent business cycle accounting literature, which points out that frictions have a marginal role in driving business cycles. The continuous fluctuations around the long-run trend of exogenous variables entering as driving forces in the technological progress implies that productivity shocks are state dependent. In other words, the true effect on the stock of knowledge and output depends on the exogenous variables’ cyclical phase. This provides novel, realistic and country-specific policy implications.
    Keywords: technological progress, macroeconomic fluctuations, investment frictions, trade openness, education
    JEL: E32 C32 O47
    Date: 2015
  21. By: Strohsal, Till; Proaño, Christian R.; Wolters, Jürgen
    Abstract: A growing body of literature argues that the financial cycle is considerably longer in duration and larger in amplitude than the business cycle and that its distinguishing features became more pronounced over time. This paper proposes an empirical approach suitable to test these hypotheses. We parametrically estimate the whole spectrum of financial and real variables to obtain a complete picture of their cyclical properties. We provide strong statistical evidence for the US and slightly weaker evidence for the UK validating the hypothesized features of the financial cycle. In Germany, however, the financial cycle is, if at all, much less visible.
    Keywords: Financial Cycle,Business Cycle,Indirect Spectrum Estimation,Bootstrapping Inference
    JEL: C22 E32 E44
    Date: 2015
  22. By: Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Faculty of Economics and Business Administration, The University of Kitakyushu); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: In a small open economy model of endogenous growth with public capital accu- mulation, we examine the effects of a debt policy rule under which the government must reduce its debt-GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long run debt-GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).
    Keywords: Fiscal policy, Public debt, Welfare, Small open economy, Indeterminacy, Limit cycles
    JEL: E62 H54 H63
    Date: 2013–05
  23. By: Marcel Fratzscher (DIW Berlin, Humboldt-University Berlin and CEPR (E-mail:; Marco Lo Duca (European Central Bank (E-mail:; Roland Straub (European Central Bank (E-mail:
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2015–07
  24. By: Thomas Hintermaier; Winfried Koeniger
    Abstract: We show that the size of collateralized household debt determines an economy’s vulnerability to crises of confidence. The house price feeds back on itself by contributing to a liquidity effect, which operates through the value of housing in a collateral constraint. Over a specific range of debt levels this liquidity feedback effect is strong enough to give rise to multiplicity of house prices. In a dynamic setup, we conceptualize confidence as a realization of rationally entertainable belief-weightings of multiple future prices. This delivers debt-level-dependent bounds on the extent to which confidence may drive house prices and aggregate consumption.
    Keywords: Household debt, Consumer confidence, Collateral constraints, Multiple equilibria
    JEL: E21 E32 D91
    Date: 2015–07
  25. By: Khalid Rashid, Alkhater; Syed Abul, Basher
    Abstract: Supporters of the Arab oil-exporting countries’ decades-long fixed exchange rate regime argue that since, oil is traded in United States (US) dollars, pegging to the dollar is optimal. However, the weakening relationship between oil prices and the US economy in terms of the Federal Reserve’s expansionary monetary stance amid soaring oil prices for much of the previous decade has raised questions about the viability of the peg. Using Qatar as a case study, this paper empirically analyzes whether the synchronization pattern of business cycles has recently changed between Qatar and the US. The results of the analysis show a pronounced desynchronization or decoupling of business cycles between Qatar and the US during 2001–2010. Moreover, the dissimilarly of demand shocks between the two countries suggests that the imported monetary policy stance of the Federal Reserve has not been viable for Qatar in recent years. A natural implication of our findings is the need for a truly independent monetary policy oriented towards domestic goals.
    Keywords: Oil price, Business cycle synchronization, Counter-cyclical monetary policy, Exchange rate regimes.
    JEL: E32 E61 F44
    Date: 2015–06–03
  26. By: Olivier Blanchard; Christopher J. Erceg; Jesper Lindé
    Abstract: We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
    JEL: E62 F41
    Date: 2015–07
  27. By: Janine Aron; John Muellbauer; Rachel Sebudde
    Abstract: Forecasting inflation is challenging in emerging markets, where trade and monetary regimes have shifted, and the exchange rate, energy and food prices are highly volatile. Mobile money is a recent financial innovation giving financial transaction services via a mobile phone, including to the unbanked. Stable models for the 1-month and 3-month-ahead rates of inflation in Uganda, measured by the consumer price index for food and non-food, and for the domestic fuel price, are estimated over 1994-2013. Key features are the use of multivariate models with equilibrium-correction terms in relative prices; introducing non-linearities to proxy state dependence in the inflation process; and applying a ‘parsimonious longer lags’ (PLL) parameterisation to feature lags up to 12 months. International influences through foreign prices and the exchange rate (including food prices in Kenya after regional integration) have an important influence on the dependent variables, as does the growth of domestic credit. Rainfall deviation from the long-run mean is an important driver for all, most dramatically for food. The domestic money stock is irrelevant for food and fuel inflation, but has a small effect on non-food inflation. Other drivers include the trade and current account balances, fiscal balance, terms of trade and trade openness, and the international interest rate differential. Parameter stability tests suggest the models could be useful for short-term forecasting of inflation. There is no serious evidence of a link between mobile money and inflation.
    Keywords: Error Correction Models; Model Selection; Multivariate Time Series
    JEL: E31 E37 E52 C22 C51 C52 C53
    Date: 2015
  28. By: Kufenko, Vadim; Geiger, Niels
    Abstract: This paper empirically investigates and theoretically reflects on the generality of the "stylized facts" discussed in business cycle analysis. Using OECD data for 1960 - 2010, the duration of business cycles as well as three models capturing core macroeconomic relations are estimated: based on the Phillips curve (the inflation-unemployment nexus), Okun's law (in the context of the relation between output growth and unemployment) and the inflation-output relation. Results are validated by relevant statistical tests. Observed durations vary from 4 to 8 years, and estimated coefficients differ in signs and magnitudes. Bearing these substantial variations in mind, an explanation of this heterogeneity is attempted by referring to proxies for various institutional variables for the goods, labour and money markets. The findings suggest that core coefficients in the relations, such as the slope of the Phillips curve, show significant correlation with some of these variables, but no uniform results are obtained. In the detailed theoretical discussion and interpretation it is thus argued that the notable differences between countries call the universality of the "stylized facts" into question, but also that these variations cannot be explained exhaustively by the institutional proxy variables employed here.
    Keywords: business cycles,empirical analysis,institutions,stylized facts
    JEL: E02 E32 E39 F44
    Date: 2015
  29. By: Hana Hejlova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: This paper tries to explain different nature of the dynamics during the upward and downward part of the last house price cycle in Spain. Covered bonds are introduced as an instrument which may accelerate a house price boom, while it may also serve as a source of correction to overvalued house prices in downturn, where important rigidities may be present In a serious economic stress, lack of investment opportunities motivates investors to buy covered bonds due to the strong guarantees provided, which may in turn help to revitalize the credit and housing markets. To address such regime shift, house price dynamics is modelled within a framework of mutually related house price, credit and business cycles using smooth transition vector autoregressive model, in which volume of covered bonds issued is included. Linear behaviour of such system is rejected, indicating the need to model house prices in a nonlinear framework. Also, importance of modelling house prices in the context of credit and business cycl es is confirmed and causality from issuance of covered bonds to house price dynamics is found in this nonlinear structure. Finally, potential threat to financial stability resulting from rising asset encumbrance both in the upward and downward part of the house price cycle is identified. It is suggested that the collateral valuation used for the dynamic adjustment of the cover pool is done using forward looking predictions of house prices and that the rate of asset encumbrance is monitored jointly with stress testing the house prices.
    Keywords: House price dynamics, credit cycle, asymmetric behaviour, rigidities on housing market, covered bonds, smooth transition vector autoregressive models
    JEL: E32 G21 G23 E44 E58 C32
    Date: 2015–06
  30. By: Brüggemann, Bettina; Yoo, Jinhyuk
    Abstract: We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual US tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
    Keywords: Top Income Taxation,Heterogeneous Agents,Incomplete Markets,Income and Wealth Inequality
    JEL: E21 E62 H21 H24
    Date: 2015
  31. By: Geeta Garg (Indira Gandhi Institute of Development Research)
    Abstract: As countries have become increasingly integrated in their capital accounts and moved away from fixed exchange rates, pressures mount on central banks to maintain an independent monetary policy. Amidst the constraints imposed by this monetary policy trilemma, the ability of central banks to take decisions independent of domestic political pressures becomes crucial. The literature suggests that the trilemma choices when opted carefully render the independence of central banks unnecessary in stabilizing macroeconomic outcome. For a sample of 42 high and middle income countries analyzed over a period of 30 years ranging from 1982 till 2011, this paper shows that while an efficient trilemma policy choice can help lower inflation and improve growth, the independence of central banks from the domestic political pressure, as measured in terms of the actual number of turnover of central bank governors, still matters. This is especially true of middle income countries. A less independent central bank can worsen the outcome derived from an effective trilemma policy choice. In addition, this paper shows that the institutional changes such as Inflation Targeting (IT) helps lower inflation without depending upon the level of Central Bank Independence (CBI) in a country as is suggested in the literature while the occurrence of general elections (ELEC) in any country exacerbates the macroeconomic outcome if a country grants lower autonomy to its central bankers.
    Keywords: Central Bank Independence, Trilemma, Monetary Independence, Exchange Rate Stability, Capital Account Openness, Inflation targeting, Elections
    JEL: E0 E5 E6
    Date: 2015–07
  32. By: Junko Koeda (Faculty of Political Science and Economics, Waseda University)
    Abstract: We estimate a discrete-time version of Vayanos and Vila’s (2009) preferred habitat model, using Japanese government bond yield data. The estimated results indicate that bond excess returns become more sensitive to supply factors in the absence of a zero lower bound constraint unless arbitrageurs become willing to take on more risk.
    Keywords: Term structure model, Japanese government bonds, preferred habitat, supply factors
    JEL: C13 C32 E43 E44 E52
    Date: 2015–07
  33. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: It has been shown that in an otherwise standard one-sector real business cycle model with an indeterminate steady state under laissez faire, sufficiently progressive income taxation may stabilize the economy against aggregate fluctuations caused by agents' animal spirits. We show that this previous finding can be overturned within an identical model which allows for sustained endogenous growth. Specifically, progressive taxation may operate like an automatic destabilizer that leads to equilibrium indeterminacy and sunspot-driven cyclical fluctuations in an endogenously growing macroeconomy. This instability result is obtained under two tractable progressive tax policy formulations that have been considered in the existing literature.
    Keywords: Progressive Income Taxation, Automatic Stabilizer, Equilibrium Indeterminacy, Endogenous Growth.
    JEL: E62 O41
    Date: 2015–07
  34. By: Fischer, Justina A.V. (University of Mannheim); Pastore, Francesco (University of Naples II)
    Abstract: This research note discusses the Euro crisis in Greece in light of the referendum of July the 5th. It lays out the social and political costs of a GREXIT, but also of a continuing austerity policy. It proposes a reform policy fostering growth in Greece and discusses the role of conditionality. Finally, the important role of mid-left parties is highlighted.
    Keywords: IMF, Germany, Greece, Euro, Europe, Monetary Union
    JEL: E12 E62 F15 F16 F33 F55 H12 H50 H63 O42 O43
    Date: 2015–07
  35. By: Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: This paper presents evidence that inflation expectations, as measured by the Michigan Survey of consumers, only play a minimal role in the propagation of real oil price shocks into inflation. This is despite evidence which confirms in flation expectations are sensitive to real oil price shocks. Further analysis exploring structural breaks suggest at some point after the mid-1990s, inflation expectations may have played no part in propagating real oil price shocks into inflation.
    JEL: C32 D84 E31
    Date: 2015–04
  36. By: Eric M. Leeper (Indiana University); Nora Traum (North Carolina State University); Todd B. Walker (Indiana University)
    Abstract: We use Bayesian prior and posterior analysis of a monetary DSGE model, extended to include fiscal details and two distinct monetary-fiscal policy regimes, to quantify government spending multipliers in U.S. data. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Posterior mean estimates of short-run output multipliers are comparable across regimes—about 1.4 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—means of 1.9 versus 0.7 in present value.
    Keywords: government spending; monetary-fiscal interactions; prior predictive analysis; Bayesian estimation
    Date: 2015–07
  37. By: Krebs, Tom (University of Mannheim); Kuhn, Moritz (University of Bonn); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital. We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.
    Keywords: human capital risk, limited enforcement, life insurance
    JEL: E21 E24 D52 J24
    Date: 2015–07
  38. By: Benjamin Beckers
    Abstract: This paper contributes to the debate of whether central banks can \lean against the wind" of emerging stock or house price bubbles. Against this background, the paper evaluates if new advances in real-time bubble detection, as brought forward by Phillips et al. (2011), can timely detect bubble emergences and collapses. Building on simulations, the paper shows that the detection capabilities of all indicators are sensitive to their exact specifications and to the characteristics of the bubbles in the sample. Therefore, the paper suggests a combination approach of different bubble indicators which helps to account for the uncertainty around start and end dates of asset price bubbles. Additionally, the paper then investigates if the individual and combination indicators carry predictive content for inflation and output growth when the real-time availability of all variables is taken into account. It finds that a combination indicator is best suited to uncover the most common stock and house price bubbles in the U.S. and shows that this indicator improves output forecasts.
    Keywords: Asset price bubbles, financial stability, leaning-against-the-wind, monetary policy, real-time forecasting, unit root monitoring test
    JEL: C22 C53 E44 E47 G12
    Date: 2015
  39. By: James Morley (University of New South Wales); Aarti Singh (University of Sydney)
    Abstract: Why did the volatility of U.S. real GDP decline by more than the volatility of final sales with the Great Moderation in the mid-1980s? One explanation is that firms shifted their inventory behavior towards a greater emphasis on production smoothing. We investigate the role of inventories in the Great Moderation by estimating an unobserved components model that identifies inventory and sales shocks and their propagation in the aggregate data. Our estimates provide no support for increased production smoothing. Instead, smaller transitory inventory shocks are responsible for the excess volatility reduction in output compared to sales. These shocks behave like informational errors related to production that must be set in advance and their reduction also helps explain the changed forecasting role of inventories since the mid-1980s. Our findings provide an optimistic prognosis for a continuation of the Great Moderation, despite the dramatic movements in output during the recent economic crisis.
    Keywords: Great Moderation; inventories; production smoothing; unobserved components model
    JEL: C32 E22 E32
    Date: 2015–06
  40. By: Yenner Altunbas (Bangor University); John Thornton (Bangor University)
    Abstract: This paper examines which economic, institutional and political characteristics of countries affect the likelihood that a numeral rule will be adopted as part of a fiscal strategy to limit the level of public debt. We estimate a panel binary response model over the period 1970-2012 for 110 countries, of which 58 opted to adopt such a rule. Our results suggest that the probability such a rule will be adopted is greater if a country has a high level of public debt, a relatively inflexible exchange rate regime, has already adopted inflation targeting, has deep credit markets, and if other countries already have adopted a debt rule. There are some differences in decision factors between high-income and lower-income countries, with the level of economic development and the openness of the economy playing opposite roles in each country group, and the impact of monetary unions on debt rule adoption being much stronger in the former group. The results are robust to testing for reverse causality, including by using different econometric techniques
    Keywords: Fiscal rules, Fiscal strategy
    JEL: E62 H11
    Date: 2015–06
  41. By: Horacio A. Aguirre; Emilio F. Blanco
    Abstract: We build a small structural open economy model, augmented to depict the credit market and interest rate spreads (distinguishing by credit to firms and families); monetary policy with sterilized intervention in the foreign exchange market; and macroprudential policy as capital requirements. We estimate the model using Bayesian techniques with quarterly data for Argentina in 2003-2011; it can be extended to other emerging economies, allowing for comparative empirical analysis. Results indicate that shocks to lending rates and spread weigh on macroeconomic variables; likewise, the credit market is affected by macroeconomic shocks. Capital requirements, beyond their strictly prudential role, appear to have contributed to lower volatility of key variables such as output, prices, credit and interest rates. The interaction of monetary policy, foreign exchange intervention and prudential tools appears to be synergic: counting on a larger set of tools helps dampen volatility of both macroeconomic and financial system variables, taking into account the type of shocks faced during the estimation period.
    Keywords: macroprudential policy, semi-structural model, Bayesian estimation
    Date: 2015–07
  42. By: Antoine Martin (Federal Reserve Bank of New York (E-mail:; James McAndrews (Federal Reserve Bank of New York (E-mail:; Ali Palida (Federal Reserve Bank of New York (E-mail:; David Skeie (Federal Reserve Bank of New York (E-mail:
    Abstract: Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic downturn led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market interest rates in this situation. We study several of these tools, namely interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the relative intensity of the frictions that banks face, which are bank balance sheet costs and interbank monitoring costs in our model. We show that when both costs are large, using the RRP and TDF concurrently most effectively raises short- term rates. While public money supplied by the Federal Reserve in the form of reserves can alleviate bank liquidity shocks by reducing interbank lending costs, large levels of reserve increase banks' balance sheet size and can induce greater bank moral hazard. RRPs can reduce levels of costly bank equity that banks are endogenously required to hold as a commitment device against risk-shifting returns on assets.
    Keywords: monetary policy, fixed-rate full allocation overnight reverse repurchases, term deposit facility, interest on excess reserves, FOMC, banking
    JEL: E42 E43 G12 G20
    Date: 2015–07
  43. By: Emiliano Luttini; Michael Pedersen
    Abstract: Acknowledging that pass-through of the policy interest rate may be different amongst the private banks, this paper presents evidence of monetary pass-through conditional on different banks characteristics. A simple theoretical model is used to argue that the inflation rate also has to be taken into account when analyzing monetary pass-through. The focus is on nominal and real interest rates for commercial and consumer loans with different payback horizons. Taking a closer look at the construction of the interest rate data available, it becomes clear that short-term consumption rates are quite rigid and, thus, by construction react less to changes in the policy rate. Evidence from panel estimations with Chilean data for the period 2008 to 2014 suggests that short-term commercial rates react quite fast to changes in the monetary policy rate, while those at long-term seem to react more to inflation. Particularly size and deposit strength affect banks when fixing nominal commercial rates, while the determination of rates of consumer loans is particularly influenced by bank size and capital strength. With respect to real interest rates, commercial loans are affected by deposit strength, noninterest income and external obligations, while mortgages are affected by liquidity strength and provisions. The evidence provided in the present study reveals that the degree to which different bank characteristics affect pass-through of changes in the monetary policy rate and inflation depends to a great extent on the horizons of the loans.
    Date: 2015–07
  44. By: Corrado Di Guilmi; Laura Carvalho
    Abstract: This paper introduces heterogeneous microeconomic behavior into a demand-driven macroeconomic model in order to study the joint dynamics of leverage and capital accumulation. By identifying the links between firm level variables and aggregate quantities, the paper contributes toward a reformulation of the Minskyan formal analysis that explicitly considers the role of microeconomic factors in generating macroeconomic instability. The aggregation of heterogeneous agents is not only performed numerically, as in traditional agent-based models, but also by means of an innovative analytical methodology, originally developed in statistical mechanics and recently imported into macroeconomics. The distinctive feature is in that the joint analysis of the numerical and analytical solutions of the model sheds light on the effects of financial fragility at the firm level on the dynamics of the macroeconomy. In particular, the analysis of steady-state and stability properties of the system provide additional insights on the role of behavioral and size heterogeneity of firms for the stocks of aggregate debt and capital.
    Keywords: financial fragility; aggregate demand; agent-based model; master equation.
    JEL: E32 G01
    Date: 2015–07–31
  45. By: Carlo Altavilla (European Central Bank and CSEF); Marco Pagano (University of Naples "Federico II", CSEF and EIEF); Saverio Simonelli (University of Naples "Federico II" and CSEF)
    Abstract: The domestic sovereign exposures have amplified the transmission of sovereign stress to the solvency risk of banks and to their lending activity, both during and after the Euro debt crisis. We estimate the magnitude of this amplification mechanism relying on novel ECB monthly data on sovereign exposures and lending policies of 245 euro-area banks from 2007 to 2015. For the median bank in stressed countries, the amplification due to sovereign exposures almost doubled the response of the bank’s CDS premium to the sovereign CDS premium, and the response of its loan rate to the sovereign yield. Moreover, the losses on domestic sovereign holdings associated with a 1-standard-deviation rise of the 10-year sovereign yield account for 9% of the actual drop in total loans in stressed countries. No such amplification effects are detected in non-stressed countries. Finally, both yield-seeking and moral suasion motives appear to have affected banks’ portfolio choices in stressed countries: in response to higher domestic sovereign yields, banks increased their domestic sovereign holdings more if public- than private-owned, domestic- than foreign-owned, and poorly than well-capitalized.
    Keywords: sovereign exposures, sovereign risk, credit risk, bank lending, euro debt crisis
    JEL: E44 F3 G01 G21 H63
    Date: 2015–07–30
  46. By: Ravazzolo, Francesco (Norges Bank); Vespignani, Joaquin L. (Unversity of Tasmania)
    Abstract: In modelling macroeconomic time series, often a monthly indicator of global real economic activity is used. We propose a new indicator, named World steel production, and compare it to other existing indicators, precisely the Kilian’s index of global real economic activity and the index of OECD World industrial production. We develop an econometric approach based on desirable econometric properties in relation to the quarterly measure of World or global gross domestic product to evaluate and to choose across different alternatives. The method is designed to evaluate short-term, long-term and predictability properties of the indicators. World steel production is proven to be the best monthly indicator of global economic activity in terms of our econometric properties. Kilian’s index of global real economic activity also accurately predicts World GDP growth rates. When extending the analysis to an out-of-sample exercise, both Kilian’s index of global real economic activity and the World steel production produce accurate forecasts for World GDP, confirming evidence provided by the econometric properties. Specifically, a forecast combination of the three indices produces statistically significant gains up to 40% at nowcast and more than 10% at longer horizons relative to an autoregressive benchmark.
    JEL: C1 C5 C8 E1 E3
    Date: 2015–06–01
  47. By: Juan Rubio-Ramirez (Duke University); Dario Caldara (Federal Reserve Board); Jonas Arias (Federal Reserve Board)
    Abstract: Following Leeper, Sims, and Zha (1996), we identify monetary policy shocks in SVARs by restricting the systematic component of monetary policy. In particular, we impose sign and zero restrictions only on the monetary policy equation. Since we do not restrict the response of output to a monetary policy shock, we are agnostic in Uhlig's (2005) sense. But, in contrast to Uhlig (2005), our results support the conventional view that a monetary policy shock leads to a decline in output. Hence, our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions.
    Date: 2015
  48. By: Michele Piffer
    Abstract: Before the 2007 crisis, the trade-off between output and inflation played a leading role in the discussion of monetary policy. Instead, issues relating to financial stability played a less pronounced role in shaping the stance of monetary policy andwere limited to asset price dynamics. This Round-Up argues that the great interest that emerged after the 2007 crisis in the effects of monetary policy on financial stability reflects the shift in attention from asset price dynamics to risk-taking incentives of financial intermediaries. The Round-Up reviews the economic literature that contributed to this shift in the interpretation of the main trade-offs faced by central banks in setting interest rates.
    Date: 2015
  49. By: Güneş Kamber; Özer Karagedikli; Christie Smith (Reserve Bank of New Zealand)
    Abstract: We describe the origins of inflation targeting in New Zealand, and then use the four key attributes of inflation targeting - independence, the inflation target, transparency, and accountability - as an organizing device to analyze macroprudential policy 'institutions' - the rules, regulations and governance frameworks that implement macroprudential policies.
    Date: 2015–06
  50. By: Friese, Max
    Abstract: The paper shows the effect of demographic change on per capita burden of financing a PAYG social security system in the standard OLG model with frictional labor markets. Rising longevity and decreasing fertility both induce a rise in the employment level via increased capital accumulation and job openings. Simulations of the theoretical model show that this labor market effect indirectly crowds out part of the initial demographic shock's direct impact on per capita financing burden. This holds true for the generation at the period of impact as well as for the following generations.
    Keywords: OLG,demographic change,frictional labor market,PAYG social security,tax burden
    JEL: E24 E62 H55
    Date: 2015
  51. By: Baskaran, Thushyanthan; Blesse, Sebastian; Brender, Adi; Reingewertz, Yaniv
    Abstract: This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999-2009. We find that high dependence on central government transfers - as reflected in a low share of locally raised revenues in the municipality's budget - exacerbates political budget cycles, while tight monitoring - exercised through central government appointment of external accountants to debt accumulating municipalities - eliminates them. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.
    Keywords: political budget cycles,soft budget constraint,local governments,decentralization
    JEL: D72 H72 H74 E62
    Date: 2015
  52. By: Giuseppe Bianchi; Tatiana Cesaroni; Ottavio Ricchi
    Abstract: In this paper we describe a pilot econometric model for the Italian State Budget Expenditures (ISBEM). In search for leading indicators, we consider a newly available data set of the Italian State Budget financial microdata at monthly frequency that we use to estimate and forecast annual budget data. Early work on the issue is encompassed with the provision of a dynamic multiple equations model for the budget cycle linking data coming various budget phases (i.e. appropriations, expenditures commitments and payments) and disaggregated by budget macro aggregates. The model, that consists of several “pseudo” behavioral equations and identities, can be used for simulation exercises as well as forecasting purposes.
    Keywords: Fiscal forecasting, budget state expenditures, intra annual cash data, econometric models.
    JEL: C53 E62 H50
    Date: 2015
  53. By: Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
    Abstract: How can a central bank control interest rates in an environment with large excess reserves? In this paper, we develop a dynamic general equilibrium model of a secured money market and calibrate it to the Swiss franc repo market to study this question. The theoretical model allows us to identify the factors that determine demand and supply of central bank reserves, the money market rate and trading activity in the money market. In addition, we simulate various instruments that a central bank can use to exit from unconventional monetary policy. These instruments are assessed with respect to the central bank's ability to control the money market rate, their impact on the trading activity and the operational costs of an exit. All exit instruments allow central banks to attain an interest rate target. However, the trading activity differs significantly among the instruments and central bank bills and reverse repos are the most cost-effective.
    Keywords: exit strategies, money market, repo, monetary policy, interest rates
    JEL: E40 E50 D83
    Date: 2015
  54. By: Joseph P. Byrne; Shuo Cao.; Dimitris Korobilis.
    Abstract: This paper extends the Nelson-Siegel linear factor model by developing a flexible macro-finance framework for modeling and forecasting the term structure of US interest rates. Our approach is robust to parameter uncertainty and structural change, as we consider instabilities in parameters and volatilities, and our model averaging method allows for investors’ model uncertainty over time. Our time-varying parameter Nelson-Siegel Dynamic Model Averaging (NS-DMA) predicts yields better than standard benchmarks and successfully captures plausible time-varying term premia in real time. The proposed model has significant in-sample and out-of-sample predictability for excess bond returns, and the predictability is of economic value.
    Keywords: Term Structure of Interest Rates; Nelson-Siegel; Dynamic Model Averaging; Bayesian Methods; Term Premia.
    JEL: C32 C52 E43 E47 G17
    Date: 2015–02
  55. By: Foulis, Angus (Bank of England); Nelson, Benjamin (Bank of England); Tanaka, Misa (Bank of England)
    Abstract: We construct an overlapping generations macroeconomic model with which to study the causes, consequences and remedies to ‘credit traps’ — prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalisation, and the misallocation of credit. In our model, credit traps arise when shocks to bank equity capital tighten banks’ borrowing constraints, causing them to allocate credit to easily collateralisable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. We use the model to study policy options, both ex ante(avoiding credit traps) and ex post (escaping them). Ex ante, restrictions on bank leverage can help to enhance the economy’s resilience to the shocks that can cause credit traps. Further, a policymaker focused on maximising the economy’s resilience to credit traps would set leverage countercyclically, allowing an expansion of leverage in minor downturns and reducing leverage in upswings. However, ex post, relaxing a leverage cap will not help escape the trap. Instead, a range of unconventional policies are needed. We study publicly intermediated lending, discount window lending, and recapitalisation, and compare the efficacy of these policies under different conditions.
    Keywords: Unconventional credit policy; leverage regulation; financial intermediation; financial crisis.
    JEL: E58 G01 G21
    Date: 2015–07–31
  56. By: Bachmann, Ronald (RWI); Bechara, Peggy (RWI); Kramer, Anica (RWI); Rzepka, Sylvi (RWI)
    Abstract: Using harmonized micro data, this paper investigates the effects of the early phase (2008-10) of the recent economic crisis on transitions between labour market states in Europe. Our analysis focuses on individual heterogeneity, on the type of employment contract, and on cross-country differences. Our analysis shows that specific worker groups, such as men and young persons, were particularly strongly hit by the crisis. Furthermore, more transitions from employment, and especially temporary employment to unemployment, were the main factor behind the rise in unemployment; while reduced unemployment outflows did not contribute substantially to the increase in unemployment during the early phase of the crisis.
    Keywords: recession, labour market transitions, Markov transition matrices, worker heterogeneity
    JEL: J6 E24
    Date: 2015–07
  57. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping generations model to capture the nature of the competition between generations regarding two redistribution policies, public education and public pensions. From a political economy viewpoint, we investigate the effects of population aging on these policies and economic growth. We show that greater longevity results in a higher pension-to-GDP ratio. However, an increase in longevity produces an initial increase followed by a decrease in the public education- to-GDP ratio. This, in turn, results in a hump-shaped pattern of the growth rate.
    Keywords: economic growth; population aging; public education; public pen-sions
    JEL: D78 E24 H55
    Date: 2014–12
  58. By: ABDELLAOUI, Okba; Zergoune, Mohamed
    Abstract: Like most developing underdeveloped countries Algerian exports is characterized by unilateralism that nature granted a comparative advantage in the production of hydrocarbons, that accounted for 98% of the export structure. In light of the survival nature of the rentier economy and structure of exports in the short and medium term as it is, with no clear strategies for action to change this structure, the Algerian economy and its growth, and economic policies made known remain closely linked to fluctuations in oil prices and global demand. This study highlights the periods of crisis as an exceptional situation affects tion centers financially and economically, causing cases of economic recession, which may live up to a ceiling of recession, affecting the most national macroeconomic variables, and moving from local dye to a regional and global scale through economic infection channels, perhaps the most important is the business deals channel, which considered exports including one of the most important vulnerability and impact entrances. Accordingly, we follow in this study the impact of The euro zone crisis on the Algerian oil revenues, and through the econometric model formulated.
    Keywords: financial crisis, oil revenue, exchange rate, inflation
    JEL: E31 F31 G0 H2
    Date: 2015–04–30
  59. By: Lubos Hanus (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: In this paper, we map the process of synchronization of the Visegrad Four within the framework of the European Union using wavelet techniques. We show that the relationship of among countries is dynamic and that it varies over time and across frequencies. We study the synchronization applying the wavelet cohesion measure with time-varying weights. This novel approach allows us to study the dynamic relationship among countries from a different perspective than the usual time-domain models. Analyzing monthly data from 1990 to 2014, the results for the Visegrad region show an increasing co-movement with the European Union after the countries began preparing for accession to the European Union. Participation in a currency union possibly increases the co-movement. Furthermore, we find a high degree of synchronization in long-term horizons by analyzing the Visegrad Four and Southern European countries' synchronization with the core countries of the European Union.
    Keywords: business cycle synchronization, time-frequency, wavelets, co-movement, Visegrad Four, European Union
    JEL: E32 C40 F15
    Date: 2015–07
  60. By: Roberto Casarin (University Ca’ Foscari of Venice); Stefano Grassi (University of Kent); Francesco Ravazzolo (Norges Bank (Central Bank of Norway) and Centre for Applied Macro and Petroleum economics at BI Norwegian Business School); Herman K. van Dijk (Econometric Institute Erasmus University Rotterdam, Econometrics Department VU University Amsterdam and Tinbergen Institute)
    Abstract: A Bayesian nonparametric predictive model is introduced to construct time-varying weighted combinations of a large set of predictive densities. A clustering mechanism allocates these densities into a smaller number of mutually exclusive subsets. Using properties of the Aitchinson’s geometry of the simplex, combination weights are defined with a probabilistic interpretation. The classpreserving property of the logistic-normal distribution is used to define a compositional dynamic factor model for the weight dynamics with latent factors defined on a reduced dimension simplex. Groups of predictive models with combination weights are updated with parallel clustering and sequential Monte Carlo filters. The procedure is applied to predict Standard & Poor’s 500 index using more than 7000 predictive densities based on US individual stocks and finds substantial forecast and economic gains. Similar forecast gains are obtained in point and density forecasting of US real GDP, Inflation, Treasury Bill yield and employment using a large data set.
    Keywords: Density Combination, Large Set of Predictive Densities, Compositional Factor Models, Nonlinear State Space, Bayesian Inference, GPU Computing
    JEL: C11 C15 C53 E37
    Date: 2015–07–31
  61. By: Juraj Hucek (National Bank of Slovakia, Economic and Monetary Analyses Department); Alexander Karsay (National Bank of Slovakia, Economic and Monetary Analyses Department); Marian Vavra (National Bank of Slovakia, Research Department)
    Abstract: This occasional paper considers the problem of forecasting, nowcasting, and backcasting the Slovak real GDP growth rate using approximate factor models. Three different versions of approximate factor models are proposed. Forecast comparison with other models such as bridge equation models and ARMA models is also provided. Our results reveal that factor models clearly outperform an ARMA model and can compete with bridge models currently used at the Bank. Therefore, we tend to incorporate factor models into the regular forecasting process at the Bank.Finally, we hold the view that future research should be devoted to further improvements of bridge models since these models are simple to construct, easy to understand, and widely used in central banks.
    Keywords: factor models, principal components, bridge equations, short-term forecasting, GDP
    JEL: C22 C38 C52 C53 E27
    Date: 2015–07
  62. By: Banerjee, Ryan (Bank for International Settlements); Mio, Hitoshi (Bank of Japan)
    Abstract: We present the first study to estimate the causal effect of liquidity regulation on bank balance sheets. It takes advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high-quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector.
    Keywords: -
    JEL: E32 E51 F30 G21 G28
    Date: 2015–07–24
  63. By: De La Torre,Augusto; Ize,Alain
    Abstract: Latin America?s historically low saving rates and sub-par growth performance raise the question of whether the region should save more to grow faster. Economists generally resist acknowledging a policy-exploitable causal connection going from saving to growth because domestic saving is perceived to be fully endogenous, optimally determined, or fully substitutable by foreign saving. However, to the extent that these three assumptions do not hold, three channels can be established through which higher domestic saving?by curbing persistent current account deficits?can promote medium-term growth. The channels are first, a real interest rate channel, whereby higher saving reduces the cost of capital and enhances macro sustainability; second, a real exchange rate channel, through which higher saving leads to a more competitive real exchange rate; and third, an endogenous saving channel, whereby saving follows growth and, hence, subsequently compounds the effect of the first two channels. Econometric evidence supports all three channels and suggests that the lower-saving countries in Latin America and the Caribbean, especially those with recurrently weak balance of payments and persistent domestic demand pressures on the non-tradable sector, would benefit the most from boosting their saving rates.
    Keywords: Access to Finance,Economic Theory&Research,Debt Markets,Emerging Markets,Currencies and Exchange Rates
    Date: 2015–08–06
  64. By: Andrés González; Franz Hamann; Diego Rodríguez
    Abstract: Colombia is a small open and commodity exporter economy, sensitive to international commodity price fluctuations. During the surge in commodity prices, as income from the resource sector increases total credit expands, boosting demand for tradable and nontradable goods, appreciating the currency and shifting resources from the tradable sector to the nontradable. Although this adjustment is efficient, the presence of financial frictions in the economy exacerbates the resource allocation process through credit. In this phase, as total credit expands, the appreciation erodes the net worth of the tradable sector and boosts the nontradable one, and thus credit gets concentrated in that sector. A sudden reversal of commodity prices causes a rapid adjustment of resources in the opposite direction. However, the ability of the tradable sector to absorb the freed resources is limited by its financial capacity. In this scenario, macroprudential policies may help to restrain aggregate credit dynamics and thus prevent or act prudently in anticipation to the effects of large oil price shock reversals. In this work we write a model that accounts for these facts and quantify the role of three policy instruments: short term interest rate, FX intervention and financial regulation. We explore this issues in a DSGE model estimated for the Colombian economy and find that both FX intervention and regulation policies complement the short-term interest rates in smoothing the business cycle by restraining credit, raising market interest rates and smoothing economic activity. However, these additional instruments have undesirable sectoral implications. In particular, the use of these policies implies that credit to the tradable sector dries and becomes more expensive, weakening its financial position, which in turn implies a sharper fall of this sector during the price reversal and a longer recovery. These effects, nonetheless, appear to be quantitatively small according to the estimated model.
    Keywords: credit, leverage, financial accelerator, business cycle, monetary policy, macro-prudential policies, Colombia
    Date: 2015–07
  65. By: Leonce Ndikumana
    Abstract: Recent developments in globalization raise important issues regarding taxation policy and economic development. First, trends in capital income tax raise concerns about a possible race to the bottom or harmful competition. Second, lack of tax policy coordination results in large losses in tax revenue due to profit shifting by multinational corporations. These practices undermine revenue mobilization in the least developed countries, which also suffer from capital flight and other forms of illicit financial flows. This paper discusses how improved governance of the global financial system and enhanced harmonization in taxation policies may help address these important development problems.
    Keywords: Taxation; tax evasion; globalization; saving; capital; economic development
    JEL: E21 H26 O16 O19 F13
    Date: 2014–12
  66. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler’s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.
    JEL: E58 F31 F33 F41 G15
    Date: 2015–06–01
  67. By: Bill Gibson (University of Vermont); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: Agent-based models are inherently microstructures - with their attention to agent behavior in a field context - and only aggregate up to systems with recognizable macroeconomic characteristics. One might ask why the traditional Keynes-Kalecki or structuralist (KKS) model would bear any relationship to the multi-agent modeling approach. This paper shows how KKS models might benefit from agent-based microfoundations, without sacricing traditional macroeconomic themes, such as aggregate demand, animal sprits and endogenous money. Above all, the integration of the two approaches gives rise to the possibility that a KKS system - stable over many consecutive time periods - might lurch into an uncontrollable downturn, from which a recovery would require outside intervention. As a by-product of the integration of these two popular approaches, there emerges a cogent analysis of the network structure necessary to bind real and financial agents into a integrated whole. It is seen, contrary to much of the existing literature, that a highly connected financial system does not necessarily lead to more crashes of the integrated system.
    Keywords: Systemic risk; crash; herding; Bayesian learning; endogenous money; preferential attachment; agent-based models.
    JEL: D58 E37 G01 G12 B16 C00
    Date: 2015–08
  68. By: Zwick, Lina
    Abstract: After two decades of increased financial market integration, particularly driven by the banking sector, during the recent financial crisis capital flows decreased sharply, and especially banking flows were affected. At the same time loan volume in Euro Area countries slowed down, evoking concerns that domestic banks might have restricted their domestic lending activities due to international liquidity shortages. To probe this explanation, this paper analyzes the macroeconomic effects of adverse international liquidity shocks for eleven Euro Area countries between 2003 and 2013 on a quarterly basis. The international liquidity shocks are identified by applying a panel vector autoregressive (VAR) model with sign restrictions. The analysis reveals no significant decline in loan volume after such a shock. Rather, domestic banks presumably react by withdrawing money from abroad, thereby buffering the impact of the sharp decrease of capital inflows on the domestic economy.
    Keywords: international capital flows,Panel VAR,loan supply restrictions,home bias
    JEL: F32 F34 G21
    Date: 2015
  69. By: Estrada, Gemma (Asian Development Bank); Noland, Marcus (Peterson Institute for International Economics); Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank)
    Abstract: Recent key challenges highlight the need to revisit Asia’s financial development. These include the region’s growth slowdown since the global crisis, compounded by a less benign external environment; internal structural challenges, such as population aging; and the maturing of much of the region into middle-income status. The evolving shift in the region’s growth paradigm from one based primarily on investment to one based on both investment and productivity growth also underscores the urgency for financial development. For economic growth to benefit more from a sound and efficient financial system, financial development should be complemented with structural and policy reforms in other areas. This means that financial development and inclusion work best in a policy environment that is conducive to growth and development.
    Keywords: economic growth; finance sector; financial development; financial inclusion; productivity
    JEL: E44 G20 G28
    Date: 2015–07–01
  70. By: Prayudhi Azwar (Business School, University of Western Australia and Bank Indonesia); Rod Tyers (Business School, University of Western Australia and Research School of Economics Australian National University, and Centre for Applied Macroeconomic Analysis (CAMA) Crawford School of Government ANU)
    Abstract: Indonesia’s open, developing economy fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Although the origins of both crises were external, during the AFC the coincidence of financial contagion with domestic political upheaval saw the Indonesian economy collapse. By contrast, during the decade-later GFC, when most nations slumped into recession the Indonesian economy slowed but did not recess, achieving real growth of 6.1% (2008) and 4.5% (2009) and recording one of the world’s best performances for the period. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the states of the global economy during the crises and the compositions of the external shocks in each case. This said, both shocks have capital flight elements and it is shown that the key policy responses include floating the exchange rate and fiscal expansions that are, where necessary, money financed. There is, nonetheless, evidence of evolution in Indonesian macroeconomic policy making between the crises that allowed its strong performance to be sustained.
    Date: 2015
  71. By: Maria Breitwieser (Department of Economics, GSDS, University of Konstanz, Germany)
    Abstract: The presented paper offers a simple search model of the labor market to explain the empirical findings on the role of reciprocity for labor market outcomes as reported by Dohmen et al. (2009). In an agency setting where profit-maximizing firms compete for heterogeneous reciprocal workers, with full information about workers’ types, reciprocal workers who are willing to engage in gift exchange are approached by more firms, get higher wages and exert higher efforts than selfish workers.
    Keywords: reciprocity, gift exchange, competitive search equilibrium, optimal contracts, wage differentials, unemployment
    JEL: D03 D21 E24 J31 J64
    Date: 2015–07–28
  72. By: Giamattei, Marcus
    Abstract: Disinflation can be implemented gradually or via Cold Turkey - an immediate change of policy - with the latter being mainly recommended by theory and empirical literature. But Cold Turkey may only be superior because it is endogenously selected for favorable environments. To eliminate this endogeneity and to disentangle the credible push through of a disinflation policy from ex-ante credibility, I run an experiment where a central banker has to decide for a disinflationary strategy and four forecasters try to coordinate on it. The design abstracts from any rigidities and provides full information so that Cold Turkey is the Nash equilibrium. But Cold Turkey fails to be the most successful strategy because forecasters react sluggishly due to limited reasoning. Cold Turkey does not speed up learning or increase reasoning, is less successful and is reversed more often.
    Keywords: Disinflation,Credibility,Cold Turkey,Gradualism,Limited Reasoning,Endogenous Treatments
    JEL: E52 E58 C72 C92
    Date: 2015
  73. By: Sari Pekkala Kerr (Wellesley College); William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We examine the relationship between house prices and entrepreneurship using micro data from the US Census Bureau. Increases in house prices are often thought to drive entrepreneurship through unlocking the collateral channel for bank loans, but this interpretation is challenged by worries regarding omitted variable biases (e.g., rising local demand) or wealth effects (i.e., that people with more valuable homes are more likely to enter entrepreneurship for reasons other than access to collateral). We construct an empirical environment that utilizes very localized price changes, exploits variations in initial home values across residents in the same zip code, and embeds multiple comparisons (e.g., owners vs. renters, homestead exemption laws by state). For the United States during the 2000-2004 period, the link of home prices to the rate of entrepreneurship through home equity channels is modest in economic magnitude. This is despite a focus on a time period that experienced the largest concentration of US home price growth over the last two decades. Even when we do connect home equity to entrepreneurship, part of the effect is linked to an increased demand for entrepreneurship. While housing collateral plays a role in the entry that we observe, it does not seem to be a major barrier to entrepreneurship in our context.
    Keywords: house prices, mortgages, collateral channel, entrepreneurship, entry
    JEL: E44 G21 L26 M13 R12 R31 R32
    Date: 2015–02
  74. By: Andrew Foerster (Federal Reserve Bank of Kansas City); Troy Davig (Federal Reserve Bank of Kansas City)
    Abstract: Motivated by the US Fiscal Cliff in 2012, this paper considers the short- and longer-term impact of uncertainty generated by fiscal policy. Empirical evidence shows increases in economic policy uncertainty lower investment and employment. Investment that is longer-lived and subject to a longer planning horizon responds to policy uncertainty with a lag, while capital that depreciates more quickly and can be installed with few costs falls immediately. A DSGE model incorporating uncertainty over future tax regimes produces responses to fiscal uncertainty that match key features of the data. The model features uncertainty over the average tax rate and rational expectations about the resolution of uncertainty with specific outcomes and timing. Uncertainty injects noise into the economy and lowers the level of economic activity
    Date: 2015
  75. By: Jenny Tang (Federal Reserve Bank of Boston)
    Abstract: This paper examines whether communications by the Federal Open Markets Committee play a role in determining the types of macroeconomic news that financial markets pay attention to. To do so, I construct a novel measure of labor-related word use in FOMC statements and meeting minutes. I find that these word use measures are related to the amount by which interest rates' response to labor-related news exceeds their response to all other news. This relationship is especially strong for interest rates of longer maturities.
    Date: 2015
  76. By: Martín Tobal (Banco de México)
    Abstract: In this paper, the author reports some of the results from a survey on limits and reserve requirements involving FX positions and the flexibility of their exchange rate regimes. The survey reveals new facts. Countries that have more intensively implemented these measures have taken the bulk of their policies in the transition towards exchange rate flexibility. The author shows that, in flexible regimes, policymakers have higher motivations for implementing FX regulation to achieve exchange rate stability. Yet, policy makers’ concerns differ substantially across countries and implementation characteristics are heterogeneous across policies constraining the same relationship in the balance sheet.
    Keywords: Prudential regulation, currency mis-matches, exchange rate regimes, Latin America,Caribbean.
    JEL: E58 F31
    Date: 2014–11
  77. By: Klenert, David; Mattauch, Linus
    Abstract: A major obstacle for introducing carbon pricing are its distributional implications: climate policy is believed to be regressive. We illuminate the role of carbon-intensive subsistence consumption for the prospect of making carbon pricing progressive. The distributional impacts of a carbon tax reform depend on the revenue recycling options: we prove that lump-sum transfers proportional to income and linear income tax cuts make the reform regressive and that this is due only to subsistence consumption. By contrast, returning the revenue as uniform lump-sum transfers renders the carbon tax reform progressive.
    Keywords: carbon tax reform, distribution, revenue recycling, inequality, non-homothetic preferences
    JEL: D3 D60 E62 H22 H23
    Date: 2015–08–03
  78. By: SIDIBE, Tidiani
    Abstract: This article is striving to present the Basel prudential framework (Basel II and Basel III) following the international financial crisis from 2007 to 2008 and interfer ences with IAS / IFRS-IASB. Clearly these two sites for African banks are structuring projects under the path taken by their European counterparts. The purpose of this document is to present the two standards in a brief and succinct manner to facilitate understanding and issues related thereto to readers; and show some interference between them and justify the usefulness of conducting two projects simultaneously in order to save budgetary burdens.
    Keywords: Credit risk; market risk; operational risk; securitization; equity; weighted net assets; Basel, IAS / IFRS; prudential ratios; standard method; internal ratings.
    JEL: E58 G18 G21 G28
    Date: 2015–07–29
  79. By: Filip Rozsypal (University of Cambridge)
    Abstract: This paper presents an economy where business cycles and long term growth are both endogenously generated by the same type of iid shocks. I embed a multi-sector real business cycle model into an endogenous growth framework where innovating firms replace incumbent production firms. The only source of uncertainty is the imperfectly observed quality of innovation projects. As long as the goods are complements, a successful innovation in one sector increases demand for the output of other sectors. Higher profits motivate higher innovation efforts in the other sectors. The increase in productivity in one sector is thus followed by increases in productivity in the other sectors and the initial innovation generates persistent movement in aggregate productivity.
    Date: 2015
  80. By: Brixiova, Zuzana (African Development Bank); Meng, Qingwei (African Development Bank); Ncube, Mthuli (University of Oxford)
    Abstract: The global financial crisis and the subsequent uneven recovery have underscored the need for Africa's resilience to output and other shocks originated in the rest of the world. A comparison of two regional economic communities – the East African Community (EAC) and the Southern Africa Customs Union (SACU) – suggests that deeper intra-regional, and in particular intra-industry, trade ties have contributed to the EAC's resilience to external output shocks. More broadly, intra-regional and intra-African trade with fast-growing economies, together with geographically diversified trade links, can strengthen the capacity of African countries to absorb global output shocks. Besides helping shield countries from external shocks, intra-regional trade also supports economic diversification and participation in regional value chains.
    Keywords: intra-regional trade, output co-movement, regional economic communities, Africa
    JEL: E32 F4 F15
    Date: 2015–07
  81. By: francesco lippi (University of Sassari); Luigi Paciello (Einaudi Institute (EIEF)); Fernando Alvarez (University of Chicago)
    Abstract: We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis's (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non-negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
    Date: 2015
  82. By: Findlay, Ronald (Columbia University); Park, Cyn-Young (Asian Development Bank); Verbiest, Jean-Pierre (Mekong Institute)
    Abstract: Recognizing the need to formulate policy strategies for the changes it faces, Myanmar started a multifaceted reform process in 2011. But speeding up development requires a multipronged but more coherent strategy targeted at strong and resilient growth, employment generation and, ultimately, rapid reduction of poverty. The government needs to carefully prioritize and sequence reforms, and identify and address the constraints to allow acceleration of economic growth by expanding the large domestic market and developing a vibrant manufacturing export sector that can generate substantial employment. This paper briefly reviews Myanmar’s history and its legacy, examines the economy and some of the main policy reforms undertaken since 2011, assesses development potential, and outlines medium- and long-term growth strategy based on the country’s specific context and international best experiences and practices.
    Keywords: economic diversification; macroeconomic stability; Myanmar; natural resource-based sectors; regionally balanced development; social inclusion
    JEL: E02 E61 O14 O25
    Date: 2015–07–01
  83. By: Theodore R. Breton
    Abstract: Using the ICP 2011’s cross-country data on input prices and project cost shares, I show that the construction prices in ICP 2011 are substantially underestimated in low and middle income countries. As a consequence, the PPP-adjusted construction in these countries is overestimated on average by about 100% and gross fixed capital formation as a share of GDP is overestimated by 25-30%. I also examine the ICP 2005 construction prices and show that there are similar problems with the ICP 2005 data.
    Keywords: ICP 2011; ICP 2005, construction prices; PPP; construction data; capital data
    JEL: E30 O47
    Date: 2015–07–22
  84. By: Ping HUA (Centre National de la Recherche Scientifique(CNRS)); Sylviane GUILLAUMONT JEANNENEY (Centre d'Etudes et de Recherches sur le Développement International(CERDI))
    Abstract: In this paper, the impact of Chinese competition on Africa’s manufacturing value added is analyzed through a model of manufacturing. Using panel data on 44 African countries covering the period 2000 to 2013, and controlling for the usual determinants of industrialization – such as the size of the domestic market, the quality of infrastructure and governance – we find that exports of manufactured goods by China and other countries to African countries mainly exert a negative effect on African manufacturing, while a moderate real appreciation of African currencies vis-à-vis the renminbi positively influences manufacturing value added, probably due to the reduced cost of imported machine and transport equipment from China (which accounted for 36% of total African imports from China in 2013) and to the reduced price of imported consumption goods increasing the remuneration of poor workers and therefore improving their productivity. However, a strong real appreciation (of more than 33%) instead exerts a negative effect on African’s manufacturing, as traditional theory predicts.
    Keywords: manufacturing, China, Africa, real exchange rates.
    JEL: O55 L6 E6
    Date: 2015–07

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