nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒08‒30
95 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach By Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
  2. Is Optimal Monetary Policy Always Optimal? By Davig, Troy; Gürkaynak, Refet S.
  3. Housing Bubbles and Monetary Policy: A Reassessment By Graeme O'Meara
  4. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick; Hudgins, David
  5. Mortgages and Monetary Policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  6. Combining Monetary Policy and Prudential Regulation: an agent-based modeling approach By Michel Alexandre da Silva; Gilberto Tadeu Lima
  7. Distributional Effects of Monetary Policy in Emerging Market Economies By Prasad, Eswar; Zhang, Boyang
  8. Bank of Japan's Monetary Policy in the 1980s: a View Perceived from Archived and Other Materials By Masanao Itoh; Ryoji Koike; Masato Shizume
  9. The Role of Shadow Banking in the Monetary Transmission Mechanism and the Business Cycle By Falk Mazelis; ; ;
  10. Determinate liquidity traps By Demostenes N. Tambakis
  11. The Equilibrium Real Funds Rate: Past, Present and Future By James D. Hamilton; Ethan S. Harris; Jan Hatzius; Kenneth D. West
  12. Structural Reforms and Stabilization Policies in the Euro Area By Alho, Kari E.O.
  13. Interest Rate Risk and Bank Equity Valuations By English, William B.; Van den Heuvel, Skander J.; Zakrajsek, Egon
  14. Uncertainty and the signaling channel of monetary policy By Tang, Jenny
  15. Inflation Targeting: A Victim of Its Own Success? By Christian Gillitzer; John Simon
  16. Financial Fragmentation Shocks By Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria
  17. Central Bank Interventions, Demand for Collateral, and Sovereign Borrowing Costs By Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
  18. Towards a General Theory of Deep Downturns By Joseph E. Stiglitz
  19. What effects exert Economic Globalization and Central Bank Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a dynamic Panel Model By Emna Trabelsi
  20. The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  21. On the Sensitivity of Banking Activity to Macroeconomic Shocks: Evidence from CEMAC Sub-region By Christian-Lambert Nguena; Roger Tsafack-Nanfosso
  22. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick; Trombley, Christopher
  23. The multivariate Beveridge--Nelson decomposition with I(1) and I(2) series By Murasawa, Yasutomo
  24. The trade credit channel and monetary policy transmission: empirical evidence from U.S. panel data By Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
  25. Forecasting Core Inflation: The Case of South Africa By Franz Ruch; Mehmet Balcilar Author-Name-First Mehmet; Mampho P. Modise; Rangan Gupta
  26. Merging mandatory saving and monetary policy By Alfred Duncan
  27. Exchange Rate Regimes and Persistence of Inflation in Thailand By Jiranyakul, Komain
  28. Population ageing and prices in an OLG model with money created by credits By Fedotenkov, Igor
  29. Nominal Rigidities and the Term Structures of Equity and Bond Returns By Lopez, Pier; Lopez-Salido, J. David; Vazquez-Grande, Francisco
  30. Should stay the Mali in Zone franc area ? By Sidibe, Tidiani
  31. Monetary-Financial Stability under EMU By Lane, Philip R.
  32. The intraday interest rate: What's that? By Abbassi, Puriya; Fecht, Falko; Tischer, Johannes
  33. Incomplete Markets and Aggregate Demand By Iván Werning
  34. On the efficiency of labor market reforms: How to solve the Spanish puzzle? By Sacht, Stephen
  35. The Role of Economic Policy Uncertainty in Forecasting US Inflation Using a VARFIMA Model By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  36. Comparing the Forecasting Ability of Financial Conditions Indices: The Case of South Africa By Mehmet Balcilar; Rangan Gupta; Renee van Eyden; Kirsten Thompson
  37. Disentangling qualitative and quantitative central bank influence By Paul Hubert
  38. Forecasting South African Inflation Using Non-Linear Models: A Weighted Loss-Based Evaluation By Pejman Bahramian; Mehmet Balcilar; Rangan Gupta; Patrick T. kanda
  39. The Accuracy of Forecasts Prepared for the Federal Open Market Committee By Chang, Andrew C.; Hanson, Tyler J.
  40. A Critique of Modern Money Theory and the Disequilibrium Dynamics of Banking and Government Finance By Tianhao Zhi
  41. In the Quest of Measuring the Financial Cycle By Miroslav Plasil; Tomas Konecny; Jakub Seidler; Petr Hlavac
  42. Policy tradeoffs in an open economy and the role of G-20 in global macroeconomic policy coordination By Rajeswari Sengupta; Abhijit Sen Gupta
  43. External Equity Financing Shocks, Financial Flows, and Asset Prices By Belo, Frederico; Lin, Xiaoji; Yang, Fan
  44. Are Deep Parameters Policy-Invariant? By Saito, Yuta
  45. Fiscal Policy Effects in a Heterogeneous-Agent OLG Economy with an Aging Population By Shinichi Nishiyama
  46. Revisiting the greenbook's relative forecasting performance By Paul Hubert
  47. Forecasting the oil price using house prices Mechanism and the Business Cycle By Rainer Schulz; Martin Wersing; ;
  48. Aggregate Consequences of Dynamic Credit Relationships By Verani, Stephane
  49. The Roles of Fiscal Rules, Fiscal Councils and Fiscal Union in EU Integration By Calmfors, Lars
  50. Recessions and Recoveries in New Zealand’s Post-Second World War Business Cycles By Hall, Viv B.; McDermott, C. John
  51. The long history of financial boom-bust cycles in Iceland - Part I: Financial crises By Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
  52. The Joint Labor Supply Decision of Married Couples and the Social Security Pension System By Shinichi Nishiyama
  53. The functions of money and the demand for liquidity By Claudio Sardoni
  54. La curva de Phillips para la economía cubana. Un análisis empírico By Malena Portal Boza; Duniesky Feitó Madrigal;
  55. Can a DSGE Model Explain a Costly Disinflation? By Maria Ferrara; Patrizio Tirelli
  56. Back to Gold: Sterling in 1925 By Gerlach, Stefan; Kugler, Peter
  57. Characterising the South African Business Cycle: Is GDP Difference-Stationary or Trend-Stationary in a Markov-Switching Setup? By Mehmet Balcilar; Rangan Gupta; Charl Jooste; Omid Ranjbar
  58. The Growth-Inflation Nexus for the US over 1801-2013: A Semiparametric Approach By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  59. Fiscal Rules and Discretion in a World Economy By Marina Halac; Pierre Yared
  60. Direct Evidence on Sticky Information from the Revision Behavior of Professional Forecasters By Mitchell, Karlyn; Pearce, Douglas
  61. Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations By Christian Gillitzer; Jin Cong Wang
  62. The ins and outs of Greek unemployment in the Great Depression By Daouli, Joan; Demoussis, Michael; Giannakopoulos, Nicholas; Lambropoulou, Nikolitsa
  63. Capital Allocation and Productivity in South Europe By Gopinath, Gita; Kalemli-Ozcan, Sebnem; Karabarbounis, Loukas; Villegas-Sanchez, Carolina
  64. Collusion in Multiobject Auctions: An Experimental Evidence By Michala Moravcova
  65. On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility By Mirdala, Rajmund; Svrčeková, Aneta; Semančíková, Jozefína
  66. Mark-up Pricing, Sectoral Dynamics, and the Traverse Process in a Two-Sector Kaleckian Economy By Shinya Fujita
  67. Labor-Force Heterogeneity and Asset Prices: the Importance of Skilled Labor By Frederico Belo; Xiaoji Lin; Jun Li; Xiaofei Zhao
  68. Nonlinear dynamic interrelationships between real activity and stock returns By Markku Lanne; Henri Nyberg
  69. Fairness and Reflexivity in the Cyprus Bail-In By Zenios, Stavros A.
  70. Cutting the credit line: Evidence from Germany By Goldbach, Stefan; Nitsch, Volker
  71. Technology Adoption, External Financing Frictions, and the Cross Sectional Returns By Lin, Xiaoji; Palazzo, Berardino
  72. Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households By Qizhou Xiong
  73. Impacts of foreign exchange auctions on the informal market rate in Myanmar By Kubo, Koji
  74. How Bad is Involuntary Part-time Work? By Daniel Borowczyk-Martins; Etienne Lalé
  75. Debt Covenant Renegotiation and Investment By Arnold, Marc; Westermann, Ramona
  76. Workforce development and reinvention in the Rochester economy By Dudley, William
  77. Non-Linearities in the relation between oil price, gold price and stock market returns in Iran: a multivariate regime-switching approach By Mamipour, Siab; Vaezi Jezeie, Fereshteh
  78. The Federal Reserve's Discount Window and TAF Programs: "Pushing on a String?" By Berger, Allen N.; Black, Lamont K.; Bouwman, Christa H. S.; Dlugosz, Jennifer
  79. House Money and Entrepreneurship By Sari Kerr; William R. Kerr; Ramana Nanda
  80. European economic sentiment indicator: An empirical reappraisal By Petar Sorić; Ivana Lolić; Mirjana Čižmešija
  81. Inclusive human development in pre-crisis times of globalisation-driven debts By Asongu, Simplice; Efobi, Uchenna; Beecroft, Ibukun
  83. Directed Technical Change and Capital Deepening: A Reconsideration of Kaldor’s Technical Progress Function By Schlicht, Ekkehart
  84. Inequality, mobility and the financial accumulation process: A computational economic analysis By Yuri Biondi; Simone Righi
  85. Measuring hours worked in Germany : contents, data and methodological essentials of the IAB working time measurement concept By Wanger, Susanne; Weigand, Roland; Zapf, Ines
  86. Firm survival, uncertainty and Financial frictions: Is there a Financial uncertainty accelerator? By Joseph P. Byrne; Marina-Eliza Spaliara; Serafeim Tsoukas
  87. Continued Existence of Cows Disproves Central Tenets of Capitalism? By Anagol, Santosh; Etang, Alvin; Karlan, Dean
  88. A Model of Optimal Development: Further Results By Prabir C. Bhattacharya
  89. Competition and financial constraints: a two-sided story By Michele Bernini; Alberto Montagnoli
  90. The Deleveraging of U.S. Firms and Institutional Investors’ Role By Michaely, Roni; Popadak, Jillian; Vincent, Christopher
  91. Evaluating the effectiveness of Common-Factor Portfolios By Carrasco Gutierrez, Carlos Enrique; Issler, João Victor
  92. Comparing Indirect Inference and Likelihood testing: asymptotic and small sample results By Meenagh, David; Minford, Patrick; Wickens, Michael; Xu, Yongdeng
  93. Comparing Indirect Inference and Likelihood testing: asymptotic and small sample results By Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
  94. Quarterly Series for the Portuguese Economy: 1977-2014 By Fátima Cardoso; Ana Sequeira
  95. Testing macro models by indirect inference: a survey for users By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng

  1. By: Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
    Abstract: Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB.s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise.
    Date: 2015–08
  2. By: Davig, Troy; Gürkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Keywords: central banking; fiscal policy; monetary policy; optimal policy; optimal policy mix
    JEL: E02 E52 E58 E61
    Date: 2015–08
  3. By: Graeme O'Meara
    Abstract: This study contributes to the ongoing debate over the causes of housing bubbles. The argument that excessively low interest rates were responsible for the run up in house prices over the last decade has received considerable attention in the literature. However, few papers have attempted to quantify the extent of house price overvaluation in countries that have seen housing booms and busts, in addition to quantifying the looseness of monetary policy. For a sample of 10 OECD countries, we estimate fundamental house prices using demand and supply side characteristics of the housing market. This is supplemented with analysis of price to rent ratios and fundamental price to rent ratios. Loose monetary policy is defined as the deviation of the short term interest rate from the rate which the Taylor rule would prescribe. The empirical results suggest that for some countries deviations from the Taylor rule played a role in the surge in house prices and that a monetary policy stance less discretionary and more closely aligned with a Taylor rule could curtail some of the imbalance in the housing market.
    Keywords: Housing bubbles; Taylor rule; Monetary policy; Interest rates
    JEL: E52 E58 R31 F33
    Date: 2015
  4. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Hudgins, David (Texas A&M University - Corpus Christi)
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis; euro area; fiscal policy; LQ tracking; monetary policy; optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  5. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California–Santa Barbara and NBER); Roman Šustek (Queen Mary University of London and Centre for Macroeconomics)
    Abstract: Mortgages are prime examples of long-term nominal loans. As a result, under incomplete asset markets, monetary policy can affect household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through real interest rates. A stylized general equilibrium model in corporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable-than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs but hurts them under ARMs.
    Keywords: Mortgages, Debt servicing costs, Monetary policy, Residential investment
    JEL: E32 E52 G21 R21
    Date: 2015–08
  6. By: Michel Alexandre da Silva; Gilberto Tadeu Lima
    Abstract: The aim of this paper is to study the interaction between monetary policy and prudential regulation in an agent-based modeling framework. In the model proposed here, firms borrow funds from the banking system in an economy regulated by a central bank. The central bank is responsible for carrying out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate and capital requirement rules are evaluated regarding both macroeconomic and financial stability. Several relevant policy implications are drawn from this analysis. First, the implementation of a cyclical capital component as proposed in Basel III, while successful in reducing financial instability when applied alone, loses its efficacy when combined with some interest rate rules. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms them concerning financial stability and performs as well as them regarding macroeconomic stability. Finally, there is no long-run tradeoff between monetary and financial stability regarding the sensitiveness of the cyclical capital component to the credit-to-output ratio, as well as the smoothing interest rate parameter
    Date: 2015–08
  7. By: Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.
    Keywords: monetary policy rules, exchange rate management, interest rate smoothing, distributional effects, emerging markets, financial frictions, inflation targeting
    JEL: E25 E52 E58 F41
    Date: 2015–08
  8. By: Masanao Itoh (Professor, Otsuma Women's University and IMES, Bank of Japan (E-mail:; Ryoji Koike (Director and Deputy Head of Monetary History Studies Group, IMES, Bank of Japan (E-mail:; Masato Shizume (Professor, Waseda University and IMES, Bank of Japan (E-mail:
    Abstract: This monographic paper summarizes views held by the Bank of Japan (hereafter BOJ or the Bank) in the 1980s regarding economic conditions and monetary policy formulation, perceived from the BOJ archives and other materials from the period. From a historical viewpoint, the authors see the 1980s as a watershed time for the Bank's policy formulation, because the Bank acquired lessons for monetary policy formulation under a large fluctuation in economic and financial conditions and innovated new approaches for monetary policy formulation and money market management as stated below. First, during the 1980s the BOJ had to largely consider the external imbalance in formulating policy, and attention began to shift towards price stability in the medium or long term by the end of the decade. Second, the large fluctuations in asset prices, money supply, and commercial bank lending were closely monitored during this period, but the Bank's assessment about their impacts on macroeconomic consequences in the medium to long term was insufficient. A reflection of these lessons appears to evolve into a perspective on the Bank's monetary policy formulation that financial imbalances should be examined as a risk for achieving price stability in the medium to long term. Third, in light of ongoing financial deregulation during this period, the Bank started to change monetary policy measures from those based on a regulated interest rate framework to those based on market operation with good use of money markets and flexible interest rates.
    Keywords: Monetary policy management, Price stability in the medium and long term, Financial imbalance, External imbalance, Financial deregulation
    JEL: E52 N15
    Date: 2015–08
  9. By: Falk Mazelis; ; ;
    Abstract: This paper investigates the heterogeneous impact of monetary policy shocks on nancial in- termediaries. I distinguish between banks and shadow banks based on their funding constraints. Because credit creation by banks responds to economy-wide productivity endogenously, bank reaction to shocks corresponds to the balance sheet channel. Shadow banks are constrained by their available funding and their behavior is better explained by the lending channel. In line with empirical observations, shadow bank lending moves in the opposite direction to bank lending following monetary policy shocks, which mitigates aggregate credit responses. The propagation of real and nancial shocks is likewise altered when shadow banks are identied as a distinct sector among nancial intermediaries. Following estimation of the model using Bayesian methods, a historical shock decomposition highlights the roles of banks and shadow banks in the run-up to the 2007 - 08 nancial crisis.
    Keywords: Shadow Banking, Monetary Policy Transmission, Credit Channel, Bayesian Methods, Search Frictions
    JEL: E32 E44 E51 G20
    Date: 2015–08
  10. By: Demostenes N. Tambakis
    Abstract: I study the long run determinacy tradeoff - recurrent episodes of passive monetary policy are (in)determinate if their expected duration is long (brief ) - when passive pol- icy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For U.S. baseline parameter values, I find temporary fiscal stimulus is effective, while adverse supply shocks can be expansionary if the central bank's active policy stance is weak and/or if the liquidity trap's average duration exceeds 3 quarters.
    Keywords: Zero bound; Monetary policy; Regime-switching; Determinacy
    JEL: E31 E52 E58 E61
    Date: 2015–07–19
  11. By: James D. Hamilton; Ethan S. Harris; Jan Hatzius; Kenneth D. West
    Abstract: We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, defined as the rate consistent with full employment and stable inflation in the medium term. We draw three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th Century supports a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%. Second, despite this uncertainty, we are skeptical of the “secular stagnation” view that the equilibrium rate will remain near zero for many years to come. The evidence for secular stagnation before the 2008 crisis is weak, and the disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment. Once these headwinds had abated by early 2014, US growth did in fact accelerate to a pace well above potential. Third, the uncertainty around the equilibrium rate implies that a monetary policy rule with more inertia than implied by standard versions of the Taylor rule could be associated with smaller deviations of output and inflation from the Fed’s objectives. Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections.
    JEL: E32 E43 E52
    Date: 2015–08
  12. By: Alho, Kari E.O.
    Abstract: Specifying a structurally built NKM model for EMU, and identifying in it the determinants of the potential output and the short-run cyclical factors, we consider structural reforms and monetary and fiscal policies in the euro area. Especially, we analyse whether structural reforms are deflationary or boost the economy in the short run and create spillovers within the euro area under the zero lower bound (ZLB) of the interest rate. We find that a structural reform towards a more competitive economy by lowering the mark ups in the goods and labour market is beneficial both in the short and long run, and both under normal and the ZLB situation in the financial markets. Coordination of reforms within the euro area is also called for, because the spillovers from reforms are typically negative. The national governments searching for an optimal structural policy can delegate the stabilization efforts to the ECB in a long-run equilibrium, but in the short run this separation does not hold in general. We find that in a recession the reform policy is typically curtailed, while in a boom it initially exceeds the long-run equilibrium of reform activity. Proper fiscal policy can alleviate this problematic feature in structural reform policies.
    Keywords: structural reform, EMU, coordination
    JEL: E63 E61 F42
    Date: 2015–08–24
  13. By: English, William B. (Federal Reserve Board); Van den Heuvel, Skander J. (Federal Reserve Board and University of PA); Zakrajsek, Egon (Federal Reserve Board)
    Abstract: Because they engage in maturity transformation, a steepening of the yield curve should, all else equal, boost bank profitability. We re-examine this conventional wisdom by estimating the reaction of bank stock returns to exogenous fluctuations in interest rates induced by monetary policy announcements. We construct a new measure of the mismatch between the repricing time or maturity of bank assets and liabilities and analyze how the reaction of stock returns varies with the size of this mismatch and other bank characteristics. The results indicate that bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. Share prices of banks that rely heavily on core deposits decline more in response to policy-induced interest rate surprises, a reaction that primarily reflects ensuing deposit disintermediation. Results using income and balance sheet data highlight the importance of adjustments in quantities--as well as interest margins--for understanding the reaction of bank equity values to interest rate surprises.
    JEL: E43 E52 G21
    Date: 2014–04
  14. By: Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: A growing body of evidence supports the view that monetary policy actions communicate information about the state of the economy to an imperfectly informed public. Therefore, it is important for policymakers to understand the implications of this signaling channel for optimal policy as well as for the value of central bank communication. This paper studies, both theoretically and empirically, a setting where such a monetary policy signaling channel arises because the policymaker has more information about economic fundamentals than private agents have. In this environment, policy actions taken in response to fundamentals provide a signal to rational private agents about those fundamentals.
    JEL: E52
    Date: 2013–10–13
  15. By: Christian Gillitzer (Reserve Bank of Australia); John Simon (Reserve Bank of Australia)
    Abstract: Since the introduction of inflation targeting, inflation expectations have become firmly anchored at target and there has been a flattening of the Phillips curve. These changes mean that a 'divine coincidence' between headline inflation and output gap stabilisation is less apparent than when inflation targeting was introduced. This has led some to call for a fundamental re-engineering of inflation-targeting regimes: either adopting explicit dual mandates or replacing headline inflation with a target inflation measure more closely related to domestic output gaps. We argue instead for an evolution in the practice of CPI inflation targeting. In practice, many central banks have already moved in this direction with the adoption of flexible inflation-targeting frameworks.
    Keywords: inflation targeting; Phillips curve; Australia
    JEL: E31 E52 E58
    Date: 2015–08
  16. By: Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria
    Abstract: We define "financial fragmentation shocks" as fluctuations in credit market frictions in a small euro area economy. The shock changes the financial integration status quo of the monetary union, given its negligible international spillover. An increase in credit market frictions triggers a recession in the small economy. Perfect competition and the absence of nominal rigidities attenuate output volatility. Expectations also matter: real impacts weaken when long fragmentation time spans are perceived to be short lived. Contrarily to ""risk shocks", defined as fluctuations in borrowers' riskiness, fragmentation shocks do not imply strongly countercyclical bankruptcy rates. The results are based on PESSOA, a general equilibrium model with a Bernanke-Gertler-Gilchrist financial accelerator mechanism.
    JEL: E27 E44
    Date: 2015
  17. By: Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
    Abstract: We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a "collateral trade", which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.
    JEL: E44 E52 E63 G21
    Date: 2015
  18. By: Joseph E. Stiglitz
    Abstract: This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence? The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration. Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.
    JEL: D59 D90 E20 E21 E30 E32 E44 E49 E50 E52 E60 F41 G01
    Date: 2015–08
  19. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: This paper outlines the implications of central bank transparency coupled with economic globalization on the effectiveness of monetary policy at achieving low and stable inflation, through an empirical analysis on a sample of 34 OECD central banks. Our results are threefold: (i) There is a dampening and highly significant negative impact of economic globalization (measured by the composite index of Dreher et al., 2008) on inflation (ii) An appropriate and efficient U shape test proposed by Lind and Mehlum (2010), indicates a robust optimal intermediate degree of transparency, but suggests new evidence as to its level differently from van der Cruijsen et al. (2010). Indeed, the optimal level is higher and seems to vary according to the set of controls included in the regression. The estimations were run using a bias corrected Least Square Dummy variable (hereafter, LSDVC), developed by Bruno (2005) for short dynamic panels with fixed effects, and extended to accommodate unbalanced data. Alternative results using Generalized Method of Moments (hereafter GMM) estimators: (Arellano and Bond, 1991, hereafter AB; Blundell and Bond, 1998, hereafter BB) are also provided. (iii) We find, overall, that LSDVC and BB estimators exhibit satisfactory fit, while AB estimator doesn't confirm the hypothesis of a quadratic relationship between transparency and inflation.
    Date: 2015–05–28
  20. By: Foley-Fisher, Nathan (Federal Reserve Board); Ramcharan, Rodney (University of Southern California); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.
    Keywords: Quantitative easing; Unconventional monetary policy; Preferred habitat; Financial constraints
    JEL: E5 G3
    Date: 2015–08–13
  21. By: Christian-Lambert Nguena (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche); Roger Tsafack-Nanfosso (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche)
    Abstract: This paper qualitatively and quantitatively assesses the degree of resilience in the financial intermediary sector of the Economic and Monetary Community of Central African States (CEMAC) to macroeconomic shocks and discusses the relevant policy implications. Using GMM and a battery of estimations techniques, the panel-based investigations broadly show that the sub-region is vulnerable to macroeconomic shocks. Lower bank provisions result on the one hand from shortages or decreases in long-term financing, real exchange, GDP per capita growth rate and on the other hand from increases of interest rates. Whereas the change in interest rate increases net income commission, the effect is negative from lower levels of short-term financing. The incidence of changes in interest rates on the interest rate margin of banks is ambiguous. The findings broadly confirm the need to incorporate macroeconomic shocks in financial policy decision making. The paper contributes at the same to the knowledge on stock management in monetary zones and the need to: (1) timely intervene to mitigate potential shocks and; (2) increase control to sustain the credibility of the banking system.
    Date: 2014–02–28
  22. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Trombley, Christopher (Texas A&M University - Corpus Christi)
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles; growth cycles; frequency domain; optimal currency area; macroeconomic synchronization; monetary policy; single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  23. By: Murasawa, Yasutomo
    Abstract: The consumption Euler equation implies that the output growth rate and the real interest rate are of the same order of integration; i.e., if the real interest rate is I(1), then so is the output growth rate and hence log output is I(2). To estimate the natural rates and gaps of macroeconomic variables jointly, this paper develops the multivariate Beveridge--Nelson decomposition with I(1) and I(2) series. The paper applies the method to Japanese data during 1980Q1--2013Q3 to estimate the natural rates and gaps of output, inflation, interest, and unemployment jointly.
    Keywords: gap; natural rate; trend--cycle decomposition; unit root
    JEL: C32 C82 E32
    Date: 2015–08–28
  24. By: Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
    Abstract: We investigate whether a trade credit channel mitigates monetary policy tightenings intended to slow economic activity. Unlike prior research, we study this issue using quarterly firm-level data for nearly the universe of non-financial public corporations and using more precise measures of their credit market access. We estimate firm-level models of the supply and demand for trade credit from 1988 to 2008. Our evidence suggests that policy tightenings evoke a flow of trade credit from public firms commensurate with their credit market access which goes primarily to private firms, a previously undocumented finding.
    Keywords: trade credit, trade credit channel, monetary policy transmission
    JEL: E5 E52 G1
    Date: 2015–08–10
  25. By: Franz Ruch (South African Reserve Bank); Mehmet Balcilar Author-Name-First Mehmet (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus); Mampho P. Modise (National Treasury, 40 Church Square, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Forecasting and estimating core inflation has recently gained attention, especially for inflation targeting countries, following research showing that targeting headline inflation may not be optimal; a Central Bank can miss the signal due to the noise. Despite its importance there is sparse literature on estimating and forecasting core inflation in South Africa, with the focus still on measuring core inflation. This paper emphasises predicting core inflation using large time-varying parameter vector autoregressive models (TVP-VARs), factor augmented VAR, and structural break models using quarterly data from 1981Q1 to 2013Q4. We use mean squared forecast errors (MSFE) and predictive likelihoods to evaluate the forecasts. In general, we find that (i) small TVP-VARs consistently outperform all other models; (ii) models where the errors are heteroscedastic do better than models with homoscedastic errors; (iii) models assuming that the forgetting factor remains 0.99 throughout the forecast period outperforms models that allow for the forgetting factors to change with time; and (iv) allowing for structural break does not improve the predictability of core inflation. Overall, our results imply that additional information on the growth rate of the economy and interest rate is sufficient to forecast core inflation accurately, but the relationship between these three variables needs to be modelled in a time-varying (nonlinear) fashion.
    Keywords: Core inflation; forecasting; small- and large-scale vector autoregressive models; constant and time-varying parameters
    JEL: C22 C32 E27 E31
    Date: 2015
  26. By: Alfred Duncan
    Abstract: Alfred Duncan investigates the Labour Party’s Variable Savings Rate policy, where KiwiSaver contributions would become compulsory, and contribution rates adjusted by the Reserve Bank in conjunction with changes in the Official Cash Rate to achieve Monetary Policy objectives.
    Date: 2014–09–01
  27. By: Jiranyakul, Komain
    Abstract: This study explored the degree of inflation persistence in Thailand using both monthly headline and sectoral CPI indices during the 1985-2012 period. The results showed that the degree of inflation persistence for the headline inflation did not exist under the fixed exchange rate regime, even though some sectoral inflation series exhibited persistence. Under the floating regime, the headline inflation persistence was low, but various sectoral inflation rates showed low to moderate persistence. Therefore, inflation persistence for the entire sample period was caused by the switch from fixed to floating regime. Furthermore, there seemed to be no monetary accommodation of inflation persistence under the floating regime. Based upon the results from this study, inflation targeting implemented in May 2000 to combat inflation might not fully reduce inflation to the target of price stability.
    Keywords: Inflation persistence, exchange rate regimes, monetary policy, inflation targeting
    JEL: C22 E31
    Date: 2015–08
  28. By: Fedotenkov, Igor
    Abstract: This paper provides an explanation of why population ageing is associated with deflationary processes. For this reason, we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model, with post-Keynesian monetary theory. The model links demographic factors, such as fertility rates and longevity, to prices. We show that lower fertility rates lead to a smaller demand for credits, and lower money creation, which causes a decline in prices. Changes in longevity affect prices via real savings and capital market. Furthermore, we address a few links between interest rates and inflation, which arise in the general equilibrium, and are not thoroughly discussed in the literature. Long-run results are derived analytically; short-run dynamics is simulated numerically.
    Keywords: Population ageing, inflation, OLG model, inside money, credits
    JEL: E12 E31 J10
    Date: 2015–07–10
  29. By: Lopez, Pier (Banqe de France); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.)); Vazquez-Grande, Francisco (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration claims (bonds). The simultaneous presence of market and home consumption habits allows for uniting nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables.
    Keywords: Equity and bond yields; habit formation; nominal rigidities; structural term structure modeling
    JEL: E43 E44 G12
    Date: 2015–06–25
  30. By: Sidibe, Tidiani
    Abstract: The debate on the relevance of monetary cooperation agreements with France was back in the saddle by former Malian Prime Minister Moussa MARA July 23, 2015 during a radio broadcast; and Chadian President Idriss Deby Itno during the 55th anniversary of his country's 2015 Tuesday, August 11 The latter threw a big spanner in the franc zone, arguing that currency allows us to develop. Also, some harsh criticism, consider that the CFA franc, pegged to a strong euro hampers the competitiveness of our exports of raw materials quoted in dollars or pounds on the main financial centers in New York, London. This article shows the opposite, highlighting the arguments of stability and credibility enjoyed by the CFA franc. Indeed, the real effective exchange rate (REER) of the CFA franc jouie good parity level relative to trading partners, which means that the CFA franc is neither undervalued nor overestimates. Member countries become more competitive. The foreign reserves of the central banks (BCEAO and BEAC) represented the end of December 2014, only 4.9 months of imports. Monetary cooperation with France is not a zero sum game, it's a win-win partnership. Priority should be given to macroeconomic convergence.
    Keywords: Zone franc, central bank , currency, monetary maturity, foreign exchange reserves, real effective exchange rate ( REER) , exchange parity, unlimited convertibility guarantee, transaction accounts , devaluation , monetary policy, opportunity cost , common currency ECOWAS.
    JEL: E52 E58
    Date: 2015–08–25
  31. By: Lane, Philip R.
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability.
    Keywords: EMU; financial stability; macroprudential
    JEL: E50 F30 F32
    Date: 2015–08
  32. By: Abbassi, Puriya; Fecht, Falko; Tischer, Johannes
    Abstract: We study the intraday interest rate in a CCP-based GC pooling repo market and its key determinants. Since collateral used in this market is identical to collateral eligible for the daylight overdraft facility of the Eurosystem, any intraday rate in this market cannot be a result of collateral constraints keeping banks from using the overdraft for arbitrage. Nevertheless, we find that in the crisis period a statistically and economically significant intraday spread (up to 60 basis points) prevailed that was only somewhat mitigated by the ECB's unconventional monetary policy measures. Our results show that this spread was mainly determined by the market liquidity of the repo market, suggesting that the intraday spread is largely a liquidity premium.
    Keywords: intraday interest rate,central counterparty,overnight repos,central bank intervention,financial crisis
    JEL: E43 E50 G01 G10 G21
    Date: 2015
  33. By: Iván Werning
    Abstract: I study aggregate consumption dynamics under incomplete markets, focusing on the relationship between consumption and the path for interest rates. I first provide a general aggregation result under extreme illiquidity (no borrowing and no outside assets), deriving a generalized Euler relation involving the real interest rate, current and future aggregate consumption. This provides a tractable way of incorporating incomplete markets in macroeconomic models, dealing only with aggregates. Although this relation does not necessarily coincide with the standard representative-agent Euler equation, I show that it does for an important benchmark specification. When this is the case, idiosyncratic uncertainty and incomplete markets leave their imprint by affecting the discount factor in this representation, but the sensitivity of consumption to current and future interest rates is unaffected. An immediate corollary is that “forward guidance” (lower future interest rates) is as powerful as in representative agent models. I show that the same representation holds with positive liquidity (borrowing and outside assets) when utility is logarithmic. I show that away from these benchmark cases, consumption is likely to become more sensitive to interest rate, and especially future interest rates. Finally, I apply my approach to a real business cycle economy, providing an exact analytical aggregation result that complements existing numerical results.
    JEL: D52 E0
    Date: 2015–08
  34. By: Sacht, Stephen
    Abstract: In this paper we shed light on the relationship between labor market policy, entrepreneurship and youth unemployment prior to and in the aftermath of the global financial crisis in Spain. We discuss the situation, where labor market and macroeconomic policies were largely inefficient in reducing high levels of (youth) unemployment after 2007. We rise the question why in a situation of low inflation rates, an increase in (youth) unemployment had been observed although the labor market becomes more flexible due to the associated structural reform in 2010. We call this the Spanish Puzzle. The main reason for this observation can be found in the phenomena of downward nominal rigidity and the existence of a liquidity trap. Given the recovery of the Spanish economy in 2015, this development is grounded on (besides the increase in private consumption and a trade surplus) several policy measurements in order to strengthen entrepreneurial activity in 2013. The corresponding boost in private investment expenditure can be identified as the sustainable main driver for job creation in the long run.
    Keywords: Spain,Labor Market Policy,Entrepreneurship,Youth Unemployment,Macroeconomic Policy
    JEL: E24 E61 J13 L26
    Date: 2015
  35. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We compare inflation forecasts of a vector fractionally integrated autoregressive moving average (VARFIMA) model against standard forecasting models. U.S. inflation forecasts improve when controlling for persistence and economic policy uncertainty (EPU). Importantly, the VARFIMA model, comprising of inflation and EPU, outperforms commonly used inflation forecast models.
    Keywords: Inflation; long-range dependency; economic policy uncertainty;
    JEL: C53 E37
    Date: 2014
  36. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria); Kirsten Thompson (Department of Economics, University of Pretoria)
    Abstract: In this paper we test the forecasting ability of three estimated financial conditions indices (FCIs) with respect to key macroeconomic variables of output growth, inflation and interest rates. We do this by forecasting the aforementioned macroeconomic variables based on the information contained in the three alternative FCIs using a Bayesian VAR (BVAR), nonlinear logistic vector smooth transition autoregression (VSTAR) and nonparametric (NP) and semi-parametric (SP) regressions, and compare the results with the standard benchmarks of random-walk, univariate autoregressive and classical VAR models. The three FCIs are constructed using rolling-window principal component analysis (PCA), dynamic model averaging (DMA) in the context of a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model, and a time-varying parameter vector autoregressive (TVP-VAR) model with constant factor loadings. Our results suggest that the VSTAR model performs best in the case of forecasting manufacturing production and inflation, while a SP specification proves to be the best for forecasting the interest rate. More importantly, statistics testing for significant differences in forecast errors across models corroborate the finding of superior predictive ability of the nonlinear models.
    Keywords: Financial conditions index; dynamic model averaging; nonlinear logistic smooth transition vector autoregressive model;
    Date: 2015
  37. By: Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: We aim at investigating how two different types of central bank communication affect the private inflation expectations formation process. The effects of ECB inflation projections and Governing Council members’ speeches on private inflation forecasts are identified through an Instrumental-Variables estimation using a Principal Component Analysis to generate valid instruments. We find that ECB projections have an effect on private current-year forecasts, while ECB speeches and the ECB rate impact next-year forecasts. When both communication types are interacted and go in the same direction, the inflation outlook signal tends to outweigh the policy path signal conveyed to private agents (and vice-versa).
    Date: 2014–12
  38. By: Pejman Bahramian (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria)
    Abstract: The conduct of inflation targeting is heavily dependent on accurate inflation forecasts. Non-linear models have increasingly featured, along with linear counterparts, in the forecasting literature. In this study, we focus on forecasting South African infl ation by means of non-linear models and using a long historical dataset of seasonally-adjusted monthly inflation rates spanning from 1921:02 to 2013:01. For an emerging market economy such as South Africa, non-linearities can be a salient feature of such long data, hence the relevance of evaluating non-linear models' forecast performance. In the same vein, given the fact that 1969:10 marks the beginning of a protracted rising trend in South African inflation data, we estimate the models for an in-sample period of 1921:02-1966:09 and evaluate 24 step-ahead forecasts over an out-of-sample period of 1966:10-2013:01. In addition, using a weighted loss function specification, we evaluate the forecast performance of different non-linear models across various extreme economic environments and forecast horizons. In general, we find that no competing model consistently and significantly beats the LoLiMoT's performance in forecasting South African inflation.
    Keywords: Inflation; forecasting; non-linear models; weighted loss function; South Africa
    JEL: C32 E31 E52
    Date: 2014
  39. By: Chang, Andrew C. (Board of Governors of the Federal Reserve System (U.S.)); Hanson, Tyler J. (Hopper)
    Abstract: We analyze forecasts of consumption, nonresidential investment, residential investment, government spending, exports, imports, inventories, gross domestic product, inflation, and unemployment prepared by the staff of the Board of Governors of the Federal Reserve System for meetings of the Federal Open Market Committee from 1997 to 2008, called the Greenbooks. We compare the root mean squared error, mean absolute error, and the proportion of directional errors of Greenbook forecasts of these macroeconomic indicators to the errors from three forecasting benchmarks: a random walk, a first-order autoregressive model, and a Bayesian model averaged forecast from a suite of univariate time-series models commonly taught to first-year economics graduate students. We estimate our forecasting benchmarks both on end-of-sample vintage and real-time vintage data. We find find that Greenbook forecasts significantly outperform our benchmark forecasts for horizons less than one quarter ahead. However, by the one-year forecast horizon, typically at least one of our forecasting benchmarks performs as well as Greenbook forecasts. Greenbook forecasts of the personal consumption expenditures and unemployment tend to do relatively well, while Greenbook forecasts of inventory investment, government expenditures, and inflation tend to do poorly.
    Keywords: Bayesian model averaging; Federal Open Market Committee; forecast accuracy; Greenbook; NIPA; national income and product accounts; real-time data
    JEL: C53 E17 E27 E37 F17
    Date: 2015–07–09
  40. By: Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The Modern Money Theory, originated from the seminal work of Knapp (1905) that established the “chartalism school of monetary theory” and later on, synthesized by so-called “neo-chartalists” such as Wray (2012), is a descriptive economic theory that examines the procedures and consequences of using government-issued tokens as the unit of money. Despite its high relevance in today's policy arena that demands a thorough understanding over the modern fiat monetary system, MMT is generally not well-received by mainstream academics due to some of its radical claims. In an experimental and preliminary manner, this paper proposes a set of disequilibrium models that aims to take a further investigation over the balance sheet effects of those transactions discussed by MMT from a dynamic perspective. We contend that some of the claims made by MMT are fallacious due to its omission of dynamic and behavioural aspects. The framework proposed in this paper would also be useful for future research from a dynamic MMT perspective.
    Keywords: Modern Money Theory (MMT); endogenous money; interbank market; fiscal policy; disequilibrium dynamics
    JEL: E12 E52 E62 G21
    Date: 2015–08–01
  41. By: Miroslav Plasil; Tomas Konecny; Jakub Seidler; Petr Hlavac
    Abstract: The recent financial crisis has demonstrated the importance of the linkages between the financial sector and the real economy. This paper sets out to develop two complementary methods for assessing the position of the economy in the financial cycle in order to identify emerging imbalances in timely manner. First, we construct a composite indicator using variables representing risk perceptions in the financial sector and calibrate this indicator to capture the credit losses the Czech banking sector experienced during the recent crisis. Second, we focus on the transitions of loans from one risk category to another, which allows us to capture the financial cycle from the perspective of the debt-paying ability of non-financial corporations. Both financial cycle measures can be used by policy makers for a wide range of policy decisions, including that on the setting of the countercyclical capital buffer.
    Keywords: Bayesian model averaging, countercyclical capital buffer, credit risk, factor model, financial cycle
    JEL: C11 E32 E37 E58
    Date: 2015–07
  42. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Abhijit Sen Gupta (Asian Development Bank)
    Abstract: In this paper we investigate the different nuances of India's capital account management through empirical analyses as well as descriptive discussions. In particular we study the evolution of the capital control regime in India since 1991, and explore the rationale behind liberalizing certain flows restricting others and the means employed to do so. Increased integration with global financial markets has amplified the complexity of macroeconomic management in India. We analyze the trade-offs faced by Indian policy makers between exchange rate stability, monetary autnomy and capital account opnenness, within the framework of the well-known Impossible Trinity or Trilemma and find that over time India has adopted an intermediate regime balancing the different policy objectives while at the same time accumulating massive international reserves. We also calculate the exchange market pressure (EMP) index in India, and track its evolution over the last couple of decades. We evaluate the extent to which the EMP index has been influenced by major macroeconomic factors and find that a deteriorating trade balance and decline in portfolio equity inflows are associated with a higher EMP while positive changes in stock market returns lower the EMP.
    Keywords: Capital controls, Macroeconomic trilemma, Financial integration, Foreign exchange intervention, Sterilization, Exchange market pressure, Reserve adequacy
    JEL: E4 E5 F3 F4
    Date: 2015–08
  43. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University); Yang, Fan (University of Hong Kong)
    Abstract: The ability of corporations to raise external equity finance varies with macroeconomic conditions, suggesting that the cost of equity issuance is time-varying. Using cross sectional data on U.S. publicly traded firms, we construct an empirical proxy of an aggregate shock to the cost of equity issuance, which we interpret as a financial shock. We show that this shock captures systematic risk, and that exposure to this shock helps price the cross section of stock returns including book-to-market, investment, and size portfolios. We propose a dynamic investment-based model with stochastic equity issuance costs and a collateral constraint to interpret the empirical findings. Our central finding is that time variation in external equity financing costs is important for the model to quantitatively capture the joint dynamics of firms' asset prices, real quantities, and financing flows. In the model, growth firms, high investment firms, and large firms, can substitute more easily debt financing for equity financing when it becomes more costly to raise external equity, hence these firms are less risky in equilibrium. The model also replicates the failure of the unconditional CAPM in pricing the cross section of stock returns.
    JEL: E23 E44 G12
    Date: 2014–09
  44. By: Saito, Yuta
    Abstract: To see the variance of the intertemporal elasticity of substitution, we do an experiment described by the following steps. First, we calibrate several models with heterogeneous agents and generate aggregate time series data. Then, we estimate the elasticity in the New Keynesian Model using the data from former models. Finally, we check and compare the estimated parameters. Our main finding is that there is some possiblity of misestimating the parameter due to the differences of fiscal policy regimes and heterogeneous agents.
    Keywords: Policy-Variance; Heterogenous Agent Model
    JEL: E0
    Date: 2014–02
  45. By: Shinichi Nishiyama
    Abstract: This paper incorporates the aging population projected by the U.S. Social Security Administration to a heterogeneous-agent OLG model with idiosyncratic wage shocks and analyzes its effects on individual households, the government budget, and the overall economy. The fiscal gap caused by the demographic change is 2.94% of GDP under the intermediate projection. The effect of the aging population is large by itself and depends significantly on how the government finances the cost of the demographic change. There is a strong trade-off between efficiency and equity, and this paper quantitatively assesses the pros and cons of stylized fiscal reform plans.
    Keywords: dynamic general equilibrium, heterogeneous agents, overlapping generations, aging population, fiscal policy
    JEL: D91 E62 H31
    Date: 2015
  46. By: Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: Since Romer and Romer (2000), a large literature has dealt with the relative forecasting performance of Greenbook macroeconomic forecasts of the Federal Reserve. This paper empirically reviews the existing results by comparing the different methods, data and samples used previously. The sample period is extended compared to previous studies and both real-time and final data are considered. We confirm that the Fed has a superior forecasting performance on inflation but not on output. In addition, we show that the longer the horizon, the more pronounced the advantage of Fed on inflation and that this superi- ority seems to decrease but remains prominent in the more recent period. The second objective of this paper is to underline the potential sources of this supe- riority. It appears that it may stem from better information rather than from a better model of the economy.
    Date: 2014–10
  47. By: Rainer Schulz; Martin Wersing; ;
    Abstract: We show that house prices from Aberdeen in the UK improve in- and out-of-sample oil price forecasts. The improvements are of a similar magnitude to those attained using macroeconomic indicators. We ex- plain these forecast improvements with the dominant role of the oil industry in Aberdeen. House prices aggregate the dispersed knowl- edge of the future oil price that exists in the city. We obtain similar empirical evidence for Houston, another city dominated by the oil in- dustry. Consistent with our explanation, we nd that house prices from economically more diversied areas in the UK and the US do not improve oil price forecasts.
    Keywords: oil price forecasting, house prices, knowledge spillover
    JEL: C53 E32 Q47 R31
    Date: 2015–08
  48. By: Verani, Stephane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Which financial frictions matter in the aggregate? This paper presents a general equilibrium model in which entrepreneurs finance a firm with a long-term contract. The contract is constrained efficient because firm revenue is costly to monitor and entrepreneurs may default. The cost of monitoring firms and the entrepreneurs' outside options determine the significance of moral hazard relative to limited enforcement for financial contracting. Calibrating the model to the U.S. economy, I find that the relative welfare loss from financial frictions is about 5 percent in terms of aggregate consumption with moral hazard, while it is 1 percent with limited enforcement. Reforms designed to strengthen contract enforcement increase aggregate consumption in the short-run, but their long-run effects are modest when monitoring costs are high. Weak contract enforcement contributes to aggregate fluctuations by amplifying the effect of aggregate technological shocks, but moral hazard does not.
    Keywords: Business cycles; financial contracting; financial development; firm dynamics; limited enforcement; private information
    JEL: D82 E32 G32 L14
    Date: 2015–08–14
  49. By: Calmfors, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: EU-level fiscal rules have not been able to prevent the large-scale accumulation of government debt in many eurozone countries. One explanation was major flaws in the rules. Some of these flaws have now been corrected. But the failure of the rules depended also on fundamental problems of time inconsistency. The same time-inconsistency problems that the rules were designed to address also apply to the rules themselves. Fiscal councils may be subject to less of such problems than rules. Still it is unlikely that a monetary union where bail-outs of governments are part of the system is viable in the long run. The sustainability of the euro may require a restoration of the no-bail-out clause and a strengthening of the banking union in ways that would allow it to cope with the financial repercussions that could arise from allowing government bankruptcies
    Keywords: Fiscal rules; Fiscal councils; European integration
    JEL: E61 E63 F55
    Date: 2015–08–05
  50. By: Hall, Viv B.; McDermott, C. John
    Abstract: We compute classical real GDP business cycles and growth cycles, contrast classical recessions with ‘technical’ recessions, and assess the sensitivity of our peaks and troughs to data revisions. Using this information we find that, on average, real GDP and employment cycles have had an 89% association. Other key findings are (i) New Zealand’s average pattern of recovery has differed from that for U.S. NBER cycles, but their most recent recession and recovery paths have been unusually similar; (ii) the strength of New Zealand's business cycle recoveries has been independent of the depth, duration, or severity of the preceding recession; and (iii) investment is an important component of expansions, and in the current cycle it has been residential investment and plant and equipment investment that have been unusually slow to recover their levels at prior business cycle peaks.
    Keywords: Classical business cycles, Growth cycles, Employment cycles, Recessions, Economic recoveries,
    Date: 2015
  51. By: Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
    Abstract: Iceland suffered a severe financial crisis in 2008 which can only be described as the perfect storm, with the currency falling by more than 50% and over 90% of the domestic financial system collapsing. What followed was a deep recession. This was not the first financial crisis experienced in Iceland, however. In fact, over a period spanning almost one and a half century (1875-2013), we identify over twenty instances of financial crises of different types. Recognising that crises tend to come in clusters, we identify six serious multiple financial crisis episodes occurring every fifteen years on average. These episodes seem to share many commonalities and the tragic but universal truth that “we’ve been there before” when it comes to financial crises really becomes all too clear. We find that these episodes usually involve a large collapse in domestic demand that in most cases serves as a trigger for theensuing crisis. What typically follows is a currency crisis, sometimes coinciding with a sudden stop of capital inflows and an inflation crisis, and most often a banking crisis. In line with international evidence, we find that contractions coinciding with these large financial crises tend to be both deeper and longer than regular business cycle downturns. Although the crisis episodes share many common elements, each one of them is also different to some extent. We are therefore not able to find financial variables that consistently provide an early-warning signal of an upcoming financial crisis across all the six episodes. However, we find that some key macroeconomic variables give a somewhat more robust signal. Our results also suggest that five of the six multiple crisis episodes coincide with a global financial crisis of some type, and that the most serious global episodes coincide with a twoto threefold increase in the probability of a financial crisis in Iceland. A companion paper (Part II) extends our analysis of the Icelandic financial boom-bust cycle to identifying financial cycles in our long data set, i.e. cycles that are of lower frequency and last longer than common business cycles and are characterised by co-movement of many key financial variables and often have peaks closely associated with financial crises.
    Date: 2015–08
  52. By: Shinichi Nishiyama
    Abstract: The current U.S. Social Security program redistributes resources from high-wage workers to low-wage workers through its progressive benefit schedule and from two-earner couples and singles to one-earner couples through its spousal and survivors benefits. This paper extends a standard general-equilibrium overlapping-generations model with uninsurable wage shocks to analyze the effect of the spousal and survivors benefits on the labor supply of married households and the overall economy. The heterogeneousagent model calibrated to the current U.S. economy predicts that, in the long run, removing spousal and survivors benefits would increase the female labor participation rate by 1.4%, the total working hours of women by 1.6–1.7%, and the total output of the economy by 0.5–0.6%. Under the balanced-budget assumption, a phased-in cohort-by-cohort removal of these benefits would make all age cohorts, on average, better off, although the policy change would make a majority of young married households worse off in the short run.
    Keywords: dynamic general equilibrium, heterogeneous agents, overlapping generations, female labor supply
    JEL: D91 E62 H55
    Date: 2015
  53. By: Claudio Sardoni (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: Many Keynesian economists focus their attention on money as a store of value as a defence from uncertainty. Many others monetary economists, also quite close to the Keynesian approach in several respects, emphasise the importance of money as standard of value and means of payment. By drawing on Hicks's and Kaldor's contributions, this paper suggests an approach in which money is characterized by its two functions of standard of value and means of payment, which are inherently connected to one another. The role of store of value, in economies with well developed financial markets, can be normally played by other assets as liquid and risk-less as money. Therefore, the demand for liquidity as a defence against uncertainty should be kept distinct from the demand for money strictly defined.
    Keywords: Money, Liquidity, Uncertainty, Financial Markets.
    JEL: E4 E5 G1
    Date: 2015–08
  54. By: Malena Portal Boza (Universidad Autónoma de Baja California); Duniesky Feitó Madrigal (Universidad Autónoma de Baja California); (Universidad Autónoma de Baja California)
    Abstract: This paper analyzes the Phillips curve for the Cuban economy during the period 1990-2009 focusing on the economic crisis of this period derived from the fall of the socialist camp and the disappearance of the Council of Mutual Economic Assistance (CMEA). The results indicate that although the theory of the Phillips Curve was used in many countries to keep unemployment at low levels while high inflation was tolerated, Cuba's experience has shown that a country can have simultaneous inflation and high unemployment.
    Keywords: Phillips Curve, unemployment, inflation, Cuban Economy.
    JEL: E24 N16 P24
    Date: 2015–05–01
  55. By: Maria Ferrara; Patrizio Tirelli
    Abstract: This paper shows that a medium-scale DSGE model is able to explain a contemporaneous reduction of output and consumption during a disinflation policy, as it is in the empirical evidence. To this aim, we introduce Rotemberg (1982) adjustment costs and the limited asset market participation assumption.
    Keywords: Disináation, Rotemberg price adjustment, Monetary Policy
    JEL: E31 E5
    Date: 2015–08
  56. By: Gerlach, Stefan; Kugler, Peter
    Abstract: Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar – Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes’ view that Sterling was overvalued after the return to gold.
    JEL: E5 F31 N1
    Date: 2015–08
  57. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria); Omid Ranjbar (Ministry of Industry, Mine and Trade, Tehran, Iran)
    Abstract: We test for a unit root in de-trended GDP in a two-state Markov switching specification using a modified Augmented Dickey-Fuller test. Our results show that a first difference GDP specification is preferred over the de-trended specification. In addition, the null of difference-stationary GDP cannot be rejected. By implication, shocks to GDP are permanent which validates specifying trend GDP with a stochastic component -something that is inherently assumed in a number of research papers that estimate potential GDP growth and that model GDP in general equilibrium specifications.
    Keywords: Markov-switching; difference-stationary; trend-stationary;
    JEL: C22 C25 E32
    Date: 2015
  58. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We try and detect whether there exists a threshold level of inflation for the US economy over 1801-2013, beyond which it has a negative effect on economic growth. We use a combination of nonparametric (NP) and instrumental variable semiparametric (SNP-IV) methods to obtain inflation thresholds for the United States. The results suggest that the relationship between growth and inflation is hump shaped—that higher levels of inflation reduce growth more. Our results consistently show that inflation above two per cent negatively affects growth.
    Keywords: Inflation; growth; nonparametric; semiparametric
    JEL: E31 O49 C14
    Date: 2014
  59. By: Marina Halac; Pierre Yared
    Abstract: Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare centralized rules — chosen jointly by all countries — to decentralized rules. If governments' present bias is small, centralized rules are tighter than decentralized rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, centralized rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits and money burning enhance welfare, and inefficiencies arise if some countries adopt stricter rules than imposed centrally.
    JEL: D02 D82 E6 H1 P16
    Date: 2015–08
  60. By: Mitchell, Karlyn; Pearce, Douglas
    Abstract: We provide direct evidence on the sticky information model of Mankiw and Reis (2002) by examining how frequently individual professional forecasters revise their forecasts. We draw interest rate and unemployment rate forecasts from the monthly Wall Street Journal surveys conducted between 2003 and 2013. Consistent with the sticky information model we find that forecasters frequently leave their forecasts unrevised but find evidence that revision frequency increases following larger changes in the information set. We also find revision frequencies became more sensitive to new information after the 2008 financial crisis but only weak evidence that frequent revisers forecast more accurately.
    Keywords: Expectations, Sticky Information, Survey Forecasts
    JEL: E52
    Date: 2015–07
  61. By: Christian Gillitzer (Reserve Bank of Australia); Jin Cong Wang (Reserve Bank of Australia)
    Abstract: Understanding the relationship between housing wealth and consumption is important, because it informs the extent to which fluctuations in house prices might affect the broader economy. We investigate the relationship between housing wealth and consumption using postcode-level variation in house prices and administrative data on new passenger vehicle registrations as a proxy for consumption. In our preferred specification, we estimate an elasticity of new passenger vehicle registrations with respect to gross housing wealth of 0.4–0.5, and an average marginal propensity to consume (MPC) for new passenger vehicles of about 0.06 cents per dollar change in gross housing wealth. Assuming new vehicle registrations and total consumption have the same sensitivity to changes in housing wealth implies an MPC for total consumption of 2 cents per dollar change in gross housing wealth. But US evidence indicates that new vehicle consumption is particularly sensitive to changes in housing wealth. Assuming the same is true for Australia, our estimates imply an MPC for total consumption of less than 0.25 cents. Notably, we find evidence that the relationship between house prices and new vehicle registrations is heterogenous in income, with low-income households having a higher propensity to purchase a new vehicle following a rise in housing wealth than high-income households. This implies that the distribution of changes in house prices is relevant for understanding its effect on aggregate consumption.
    Keywords: consumption; house prices
    JEL: E21 E32 E60
    Date: 2015–08
  62. By: Daouli, Joan; Demoussis, Michael; Giannakopoulos, Nicholas; Lambropoulou, Nikolitsa
    Abstract: We investigate the unemployment inflows and outflows using micro-data from the Greek Labour Force Survey (1998-2013). Focusing on the post-2008 recessionary period, aggregate unemployment decompositions show that both, inflow and outflow rates affect unemployment variations. In particular, early in the recession the inflow rate dominates while later the outflow rate takes over. These findings remain unaltered when unemployment persistence and low transition rates are taken into account. Furthermore, applying multinomial regression techniques we find that the ins and outs of unemployment vary with individual-specific heterogeneity (gender, age, education, etc.). This heterogeneity however exhibits a differentiated impact in the pre- and post-2008 periods. Overall, the design of an effective employment policy in Greece needs to take into consideration the exceptionally low job finding rate (10%) and its composition in the ongoing labour market crisis.
    Keywords: Unemployment, worker flows, transition probabilities, unemployment decomposition
    JEL: C5 C50 E32 J6
    Date: 2015–05–01
  63. By: Gopinath, Gita (Harvard University); Kalemli-Ozcan, Sebnem (University of Maryland); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Villegas-Sanchez, Carolina (ESADE - Universitat Ramon Llull)
    Abstract: Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.
    Keywords: Misallocation; Productivity; Dispersion; Capital flows; Europe
    JEL: D24 E22 F41 O16 O47
    Date: 2015–07–31
  64. By: Michala Moravcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: This paper analyzes the impact of German macroeconomic news announcements on the Czech financial market – as proxied by EUR/CZK exchange rate returns – over three sub-periods: the financial crisis period (2008–2009), the post-crisis period (2010–11/2013) and the currency intervention period (11/2013-2014). Both symmetric and asymmetric models from the class of generalized autoregressive conditional heteroscedasticity (GARCH) models are applied. Macroeconomic shocks (GDP, ZEW, IFO, factory orders, industrial production, Purchasing manager’s indexes (PMI) from service and production sectors) are constructed as deviations form expected values. The results suggest that announcement of German GDP and IFO index calm the exchange rate volatility during the 7-year total examined time period. Splitting the time series into 3 individual sub-periods the results suggest that announcements of GDP, factory orders decrease and announcements of industrial production, IFO index increase the conditional volatility during financial crises. Furthermore, announcements of GDP and ZEW index calm the exchange rate’s conditional volatility during the post-crises period. Finally, announcements of GDP data and PMI index form production sector increase conditional variance during the central bank’s currency interventions. Moreover, announcement of higher IFO index depreciates the CZK value during the post-crisis period.
    Keywords: exchange rate volatility, heteroscedasticity, GARCH, EGARCH, macroeconomic news
    Date: 2015–08
  65. By: Mirdala, Rajmund; Svrčeková, Aneta; Semančíková, Jozefína
    Abstract: Effects of international financial integration on the volatility of the total output and its main components have been a subject of rigorous academic discussion for decades. Even nowadays recent empirical literature suggests that its long-term benefits on economic growth are associated with spurious and vague side effects in terms of macroeconomic volatility. This paper examines the relationship between international financial integration and output fluctuation. An analysis was conducted on a large sample of developed and developing countries over the past 40 years. We follow the approach employed by Kose et al. (2003) and use cross-sectional median of financial liberalization to subdivide developing economies into two groups: more financially liberalized (MFL) and less financially liberalized (LFL) economies. Our results indicate that while the volatility of output growth rates experienced a decreasing trend over time, financial integration had a significant contribution to output fluctuations. However, the relationship was stronger in developing countries.
    Keywords: financial integration, financial liberalization, output volatility, consumption volatility, capital flows
    JEL: E44 F36 F41 G15
    Date: 2015–04
  66. By: Shinya Fujita
    Abstract: Kaleckian models, which study the relation between functional income distribution and demand formation, have focused on how macro-level distribution affects macro-level performance. In the real economy, however, labour–management negotiations are held at the industry level and thus the relation between sectoral distribution and sectoral/macroeconomic performance should be considered. This study presents a two-sector Kaleckian model with intermediate inputs and investigates how a distributive change in one sector affects sectoral/macroeconomic capacity utilization and capital accumulation. The results of the presented comparative static analysis and traverse analysis demonstrate that one sector’s change in the mark-up rate shifts each sector’s rate of capacity utilization in the opposite direction, while the impact of one sector’s change in the mark-up rate on performance differs by sector. The analyses also demonstrate that the effect of a change in the mark-up rate on capital accumulation depends on the firm’s animal spirits.
    Keywords: Two-sector model, Mark-up pricing, Traverse analysis
    JEL: E12 E22 O41
    Date: 2015–08
  67. By: Frederico Belo; Xiaoji Lin; Jun Li; Xiaofei Zhao
    Abstract: We introduce labor-force heterogeneity in a neoclassical investment model. In the baseline model, we highlight the fact that labor adjustment costs are higher for high skilled workers than for low skilled workers. The model predicts that the negative hiring-expected return relation should be steeper in industries that rely more on high skilled workers because firm's hiring responds less elastically to changes in the discount rate when labor adjustment costs are higher. In an extended version of the model we show that the previous prediction also holds in the presence of additional sources of labor-force heterogeneity such as higher wage rigidity of high skilled workers. Empirically, we document that the negative hiring-expected return relation is between 1.7 and 3.2 times larger in industries that rely more on high skilled workers, than in industries that rely more on low skilled workers. This result is robust: it holds in U.S data, in international data, across sub-samples, and in both firm-level and portfolio-level analyses. Taken together, our results show that labor-force heterogeneity affects asset prices in financial markets.
    JEL: E13 E22 E23 E24 E44 G12
    Date: 2015–08
  68. By: Markku Lanne (University of Helsinki and CREATES); Henri Nyberg (University of Helsinki and University of Turku)
    Abstract: We explore the differences between the causal and noncausal vector autoregressive (VAR) models in capturing the real activity-stock return-relationship. Unlike the conventional linear VAR model, the noncausal VAR model is capable of accommodating various nonlinear characteristics of the data. In quarterly U.S. data, we find strong evidence in favor of noncausality, and the best causal and noncausal VAR models imply quite different dynamics. In particular, the linear VAR model appears to underestimate the importance of the stock return shock for the real activity, and the real activity shock for the stock return.
    Keywords: Noncausal VAR model, non-Gaussianity, generalized forecast error variance decomposition, business cycles, fundamentals.
    JEL: C32 C58 E17 E44
    Date: 2015–08–18
  69. By: Zenios, Stavros A. (University of Cyprus and University of PA)
    Abstract: The Cyprus debt crisis provides some unique lessons on crisis management. By the time an assistance program was agreed with the Troika, the problem had become so complex that a depositor bail-in was implemented. This was a policy first for Eurozone and is now becoming a blueprint for dealing with future banking crises. This paper examines the events for the one-year period before the two eurogroup meetings on Cyprus on 17 and 25 March 2013 and the resulting resolution of the two systemic banks of the country with depositor bail-in. We show how delays in dealing with the crisis exacerbated the problem but also how the tools brought in to solve the problem created significant adverse side effects. Available evidence questions the validity of confidential studies guiding the policy decisions on depositor haircut and argues that the implemented bail-in violated international principles of fairness.
    JEL: E32 E44 E63 F32 F34 G33
    Date: 2014–03
  70. By: Goldbach, Stefan; Nitsch, Volker
    Abstract: The massive decline in international trade in 2008/09 is often attributed to the global deterioration in financial conditions after the bankruptcy of a US investment bank, Lehman Brothers. This paper examines the association between external finance and firm activity in Germany in more detail. In particular, we explore a novel data set that matches a full sample of quarterly bank-firm lending data with detailed information on borrowers and lenders. Our results indicate that foreign sales are insensitive to variations in external finance. While German banks affected by the crisis have significantly reduced their credit supply, we only observe a causal (negative) effect on domestic sales. Exporting firms, in contrast, seem to be particularly good borrowers.
    Keywords: trade finance,export finance,relationship lending
    JEL: E44 E32 G21 F40
    Date: 2015
  71. By: Lin, Xiaoji (OH State University); Palazzo, Berardino (Boston University)
    Abstract: We explore the asset pricing implications of technological change in a model with costly technology adoption and external financing frictions. Firms adopt the latest technology embodied in new capital to reach the technology frontier, but entail adoption costs and external financing costs. The central finding is that optimal technology adoption is an important determinant of the cross section of stock returns. The model predicts that technology adopting firms are less risky than non-adopting firms. Intuitively, by restricting firms from freely upgrading the existing vintage capital to the technology frontier, costly technology adoption and external financing frictions reduce firms' real and financial flexibilities, and hence generate the risk dispersion between technology adopting firms and non-adopting firms. The model is qualitatively and in many cases quantitatively consistent with the key empirical regularities in the cross sectional returns.
    JEL: E23 E44 G12
    Date: 2015–01
  72. By: Qizhou Xiong
    Abstract: This paper estimates relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of the European Central Bank. Given that the risky share is a fractional response variable belonging to [0, 1], this paper proposes a censored fractional response estimation method using extremal quantiles to approximate the censoring thresholds. Considering that participation in risky asset markets is costly, I estimate both the heterogeneous relative risk aversion and participation cost using a working sample that includes both risky asset holders and non-risky asset holders by treating the zero risky share as the result of heterogeneous self-censoring. Estimation results show lower participation costs and higher relative risk aversion than what was previously estimated. The estimated median relative risk aversions of eight European countries range from 4.6 to 13.6. However, the results are sensitive to households’ perception of the risky asset market return and volatility.
    Keywords: european household finance, relative risk aversion, censored fractional response model, extremal quantile regression
    JEL: C21 C24 E44 G11
    Date: 2015–08
  73. By: Kubo, Koji
    Abstract: Since the abolition of the official peg and the introduction of a managed float in April 2012, the Central Bank of Myanmar has operated the daily two–way auctions of foreign exchange aimed at smoothing exchange rate fluctuations. Despite the reforms to the foreign exchange regime, however, informal trading of foreign exchange remains pervasive. Using the daily informal exchange rate and Central Bank auction data, this study examines the impacts of auctions on the informal market rate. First, a VAR analysis indicates that the official rate did not Granger cause the informal rate. Second, GARCH models indicate that the auctions did not reduce the conditional variance of the informal rate returns. Overall, the auctions have only a quite modest impact on the informal exchange rate.
    Keywords: Myanmar, Foreign exchange, Monetary policy, Foreign exchange auctions, Informal market rate, GARCH model
    JEL: E65 F31 O24
    Date: 2015–08
  74. By: Daniel Borowczyk-Martins; Etienne Lalé
    Abstract: Using data from the Current Population Survey, we document that separations from full-time employment account for the bulk of the variation in involuntary part-time work, and that since the Great Recession full-time workers are at a greater risk of working part-time involuntarily than being unemployed. We quantify the effects of a higher incidence of involuntary part-time work by means of an incomplete-market search model, wherein short spells of involuntary part-time employment can have long-lasting negative effects on consumption. Our model predicts significant welfare losses under the assumption that public insurance is provided in unemployment but not in involuntary part-time work.
    Keywords: Employment, Involuntary part-time work, Welfare, Great Recession.
    JEL: E21 E32 J21
    Date: 2015–08–19
  75. By: Arnold, Marc; Westermann, Ramona
    Abstract: This paper analyzes the impact of debt renegotiation outside corporate distress on renegotiation patterns, corporate policies, and firm value. We study a structural model of a levered firm that can renegotiate covenant protected debt at investment and upon corporate distress. Renegotiation at investment reduces the agency costs of debt because it induces a firm value maximizing investment financing policy and mitigates the overinvestment problem. Incorporating renegotiation outside corporate distress is crucial to explain empirical frequency patterns of debt renegotiation and the relation between observed covenant structures and firm characteristics. It also offers a rich set of novel empirical predictions.
    Keywords: Debt Covenants, Corporate Investment, Renegotiation, Capital Structure
    JEL: D92 E44 G12 G32 G33
    Date: 2015–07
  76. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks before the Rochester Business Alliance, Rochester, New York.
    Keywords: workforce development; skill gap; economic reinvention
    JEL: E24 E66
    Date: 2015–08–12
  77. By: Mamipour, Siab; Vaezi Jezeie, Fereshteh
    Abstract: Iran Stock Exchange is the most important component of Iran capital market and more attention has been paid to it in recent years. Many factors affect the Iran stock exchange. In this paper, the effects of oil price and gold price on stock market index are investigated and a three regime Markov Switching Vector Error Correction model is used to examine the nonlinear properties model during the period January 2003 to December 2014. The results of the study shows that the relationships between variables can be analyzed in three different status, so that the three regimes, respectively, represents the “great depression”, “mild depression” and “expansion” period. The results of the model show that the impact of oil price on stock returns is negative and significant in all three regimes; this means that with rising oil price, stock market returns are reduced. But the relationship between gold price and stock market returns varies during the period, according to market conditions. It means that positive shock inflicted on the price of gold in the short-run (10 months) leads to reduce the stock returns and in the medium-term and long-run, it leads to increase the stock returns.
    Keywords: Stock Market Price, Oil Price, Gold Price, Markov Switching-Vector Error Correction Model (MS-VECM)
    JEL: C32 E32 E37 G17
    Date: 2015–06–10
  78. By: Berger, Allen N. (University of SC and University of PA); Black, Lamont K. (DePaul University); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Dlugosz, Jennifer (Washington University in St Louis)
    Abstract: The Federal Reserve injected unprecedented liquidity into banks during the crisis using the discount window and Term Auction Facility. We examine these facilities' use and effectiveness. We find: small bank users were generally weak, large bank users were not; the funds substituted to a limited degree for other funds; these facilities increased aggregate lending which would have decreased in their absence. The funds enhanced lending of expanding banks and reduced the decline at contracting banks. Small banks increased small-firm lending, while large banks enhanced large-firm lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.
    JEL: E58 G21 G28
    Date: 2014–04
  79. By: Sari Kerr; William R. Kerr; Ramana Nanda
    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.
    JEL: E44 G21 L26 M13 R12 R31 R32
    Date: 2015–08
  80. By: Petar Sorić (Faculty of Economics and Business, University of Zagreb); Ivana Lolić (Faculty of Economics and Business, University of Zagreb); Mirjana Čižmešija (Faculty of Economics and Business, University of Zagreb)
    Abstract: In the last five decades the European Economic Sentiment Indicator (ESI) has positioned itself as a high-quality leading indicator of overall economic activity. Relying on data from five distinct business and consumer survey sectors (industry, retail trade, services, construction and the consumer sector), ESI is conceptualized as a weighted average of the chosen 15 response balances. However, the official methodology of calculating ESI is quite flawed because of the arbitrarily chosen balance response weights. This paper proposes two alternative methods for obtaining novel weights aimed at enhancing ESI's forecasting power. Specifically, the weights are determined by minimizing the root mean square error in simple GDP forecasting regression equations; and by maximizing the correlation coefficient between ESI and GDP growth for various lead lengths (up to 12 months). Both employed methods seem to considerably increase ESI's forecasting accuracy in 26 individual European Union countries. The obtained results are quite robust across specifications.
    Keywords: Business and Consumer Surveys, Economic Sentiment Indicator, Nonlinear Optimization with Constraints, Leading Indicator
    JEL: C53 C61 E32 E37
    Date: 2015–08–18
  81. By: Asongu, Simplice; Efobi, Uchenna; Beecroft, Ibukun
    Abstract: The paper verifies the Azzimonti et al. (2014) conclusions on a sample of 53 African countries for the period 1996-2008. Authors of the underlying study have established theoretical underpinnings for a negative nexus between rising public debt and inequality in OECD nations. We assess the effects of four debt dynamics on inequality adjusted human development. Instrumental variable and interactive regressions were employed as empirical strategies. Two main findings were established which depend on whether debt is endogenous to or interactive with globalisation. First, when external debt is endogenous to globalisation, the effect on inclusive human development is negative, whereas when it is interactive with globalisation, the effect is positive. This may reflect the false economics of pre-conditions. The magnitudes of negative estimates from endogenous related effects were higher than the positive marginal interactive effects. Policy implications were discussed.
    Keywords: Debts,globalisation,inequality,inclusive development,Africa
    JEL: E60 F40 F59 D60 O55
    Date: 2014–12
  82. By: Nadav Ben Zeev (BGU)
    Keywords: business cycles; investment-specific technology; news shocks; boom-bust period
    JEL: E32
    Date: 2015
  83. By: Schlicht, Ekkehart
    Abstract: This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor’s technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizsäcker (1966, 1966b). The hybrid model so obtained accounts for balanced growth in a way that appears less arbitrary than the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions.
    Keywords: directed technical change; directed technological change; bias in innovation; technical progress function; neoclassical production function; Harrod neutrality; Hicks neutrality; Cambridge theory of distribution; marginal productivity theory; Kaldor; Kennedy; von Weizsäcker; Solow model
    JEL: O30 O40 E12 E13 E25 B59 B31
    Date: 2015–06–19
  84. By: Yuri Biondi; Simone Righi
    Abstract: Our computational economic analysis investigates the relationship between inequality, mobility and the financial accumulation process. Extending the baseline model by Levy et al., we characterise the economic process trough stylised return structures generating alternative evolutions of income and wealth through historical time. First we explore the limited heuristic contribution of one and two factors models comprising one single stock (capital wealth) and one single flow factor (labour) as pure drivers of income and wealth generation and allocation over time. Then we introduce heuristic modes of taxation in line with the baseline approach. Our computational economic analysis corroborates that the financial accumulation process featuring compound returns plays a significant role as source of inequality, while institutional configurations including taxation play a significant role in framing and shaping the aggregate economic process that evolves over socioeconomic space and time.
    Keywords: inequality, economic process, compound interest, simple interest, taxation, minimal insti- tution, computational economics, econophysics
    JEL: C46 C63 D31 E02 E21 E27 D63 H22
    Date: 2015–07
  85. By: Wanger, Susanne (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weigand, Roland (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Zapf, Ines (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This article presents the IAB working time measurement concept, which determines the hours worked in Germany and their individual components. These statistics are essential for a proper analysis of aggregate labour market trends and cyclical fluctuations. We outline the conceptual and methodological framework of the measurement, which evolves further due to its integration in the system of national accounts and due to innovations to the statistical procedures applied. An overview of single components and their data sources is given, while the resulting time series of hours worked and the volume of work are depicted according to their long run trends, cyclical variation and reaction in the 2008/09 financial and economic crisis." (Author's abstract, IAB-Doku) ((en))
    Keywords: IAB-Arbeitszeitrechnung - Methode, Arbeitszeit, Arbeitsvolumen
    JEL: C82 E01 J2
    Date: 2015–08–17
  86. By: Joseph P. Byrne; Marina-Eliza Spaliara; Serafeim Tsoukas
    Abstract: Using a large panel of unquoted UK firms over the period 2000-09, we examine the impact of firm-specific uncertainty on corporate failures. In this context we also distinguish between firms which are likely to be more or less dependent on bank finance as well as public and non-public companies. Our results document a significant effect of uncertainty on firm survival. This link is found to be more potent during the recent financial crisis compared with tranquil periods. We also uncover significant firm-level heterogeneity since the survival chances of bank-dependent and non-public firms are most affected by changes in uncertainty, especially during the recent global financial crisis.
    JEL: E44 F32 F34 G32
    Date: 2015
  87. By: Anagol, Santosh (University of PA); Etang, Alvin (Yale University); Karlan, Dean (Yale University)
    Abstract: We examine the returns from owning cows and buffaloes in rural India. We estimate that when valuing labor at market wages, households earn large, negative average returns from holding cows and buffaloes, at negative 64% and negative 39% respectively. This puzzle is mostly explained if we value the household's own labor at zero (a stark assumption), in which case estimated average returns for cows is negative 6% and positive 13% for buffaloes. Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong? We discuss potential explanations, including labor market failures, for why livestock investments may persist.
    JEL: E21 M40 O12 Q10
    Date: 2014–01
  88. By: Prabir C. Bhattacharya
    Abstract: This paper reports additional results to those presented in an accompanying paper that set out a framework for thinking about optimal development of a developing economy with an informal sector.
    JEL: C02 C61 E27 O11 O17
    Date: 2015
  89. By: Michele Bernini (National Institute of Economic and Social Research, London, UK); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Keywords: Financial constraints; Credit rationing; Competition; Transition
    JEL: D22 E22 G1 P20 A
    Date: 2015–08
  90. By: Michaely, Roni; Popadak, Jillian; Vincent, Christopher
    Abstract: Corporate leverage has decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing debt, increases in institutional investments, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades constructed from individual-investor flows as exogenous variation in institutional ownership for estimation. Supporting the hypothesis institutions contributed to deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger institutional governance. Firms deleverage by reducing debt and transitioning to debt associated with enhanced monitoring and efficiency. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher without institutions' influence.
    Keywords: Finance, Financial Stability, Corporate Leverage, Institutional Investors, Mutual Funds, Hedge Funds, Corporate Governance, Agency Costs, Capital Structure, Debt Structure
    JEL: E44 G3 G32 G34 G38 K22
    Date: 2015–08–15
  91. By: Carrasco Gutierrez, Carlos Enrique; Issler, João Victor
    Abstract: In this paper we use the standard factor models to compose common-factor portfolios by a novel linear transformation extracted from large data sets of asset returns. Although the transformation proposed here retains the basic properties of the usual common factors, some interesting new properties are further included in them. The advantages of using common-factor portfolios in asset pricing are: (i) they produce a dimension reduction in the asset- pricing data-base while preserving the usual restrictions imposed by the asset-pricing equation, and (ii) from the empirical perspective, their performance is better than those of standard factor models. The practical importance is confirmed in two applications: the performance of common-factor portfolios is shown to be superior to those of the asset returns and factors commonly used in the finance literature.
    Keywords: Common Factors, Common Features, CCAPM, Stochastic Discount Factor, Linear Multifactor Model.
    JEL: C32 E21 E44 G12
    Date: 2015
  92. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng
    Abstract: Indirect Inference has been found to have much greater power than the Likelihood Ratio in small samples for testing DSGE models. We look at asymptotic and large sample properties of these tests to understand why this might be the case. We find that the power of the LR test is undermined when reestimation of the error parameters is permitted; this offsets the effect of the falseness of structural parameters on the overall forecast error. Even when the two tests are done on a like-for-like basis Indirect Inference has more power because it uses the distribution restricted by the DSGE model being tested.
    Keywords: Indirect Inference; Likelihood Ratio; DSGE model; structural parameters; error processes
    JEL: C12 C32 C52 E1
    Date: 2015–07
  93. By: Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
    Abstract: Indirect Inference has been found to have much greater power than the Likelihood Ratio in small samples for testing DSGE models. We look at asymptotic and large sample properties of these tests to understand why this might be the case. We find that the power of the LR test is undermined when re-estimation of the error parameters is permitted; this offsets the effect of the falseness of structural parameters on the overall forecast error. Even when the two tests are done on a like-for-like basis Indirect Inference has more power because it uses the distribution restricted by the DSGE model being tested.
    Keywords: DSGE model; error processes; indirect inference; likelihood ratio; structural parameters
    JEL: C12 C32 C52 E1
    Date: 2015–08
  94. By: Fátima Cardoso; Ana Sequeira
    Abstract: This article presents quarterly historical series (1977-2014) which are consistent with the latest version of National Accounts published by Statistics Portugal. The information provided covers a wide set of variables and corresponds to the quarterly historical series update, regularly published by Banco de Portugal. It includes data for 2014 and incorporates the revision of the previous data according to ESA 2010. Simultaneously, we describe in detail the methodological procedures applied in the construction of the series, aiming for a greater comparability over time. The series released in this paper are distributed in three blocks: expenditure, disposable income and the labour market.
    JEL: C82 E0
    Date: 2015
  95. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
    Abstract: With Monte Carlo experiments on models in widespread use we examine the performance of indirect inference (II) tests of DSGE models in small samples. We compare these tests with ones based on direct inference (using the Likelihood Ratio, LR). We find that both these tests have power so that a substantially false model will tend to be rejected by both; but that the power of the II test is substantially greater, both because the LR is applied after re-estimation of the model error processes and because the II test uses the false model's own restricted distribution for the auxiliary model's coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability.
    Keywords: bootstrap; DSGE; indirect inference; likelihood ratio; New Classical; New Keynesian; Wald Statistic
    JEL: C12 C32 C52 E1
    Date: 2015–08

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