nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒09‒05
116 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  2. The Transmission of Monetary Policy through Redistributions and Durable Purchases By Sterk, Vincent; Tenreyro, Silvana
  3. Nominal GDP Targeting for Middle-Income Countries By Frankel, Jeffrey
  4. The impact of oil price on South African GDP growth: A Bayesian Markov Switching-VAR analysis By Mehmet Balcilar; Reneé van Eyden; Josine Uwilingiye; Rangan Gupta
  5. Russian Federation: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. European Dept.
  6. Que Nous Révèlent les Fonctions de Réaction à Propos des Préférences des Banques Centrales? By Fiodendji, Komlan
  7. Japan: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. Asia and Pacific Dept
  8. The Inflation Target at the Zero Lower Bound By Chattopadhyay, Siddhartha; Daniel, Betty C.
  9. United Arab Emirates: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. Middle East and Central Asia Dept.
  10. Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy By Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
  11. When does the cost channel pose a challenge to inflation targeting central banks? By Smith, Andrew Lee
  12. Pushing on a String: US Monetary Policy is Less Powerful in Recessions By Tenreyro, Silvana; Thwaites, Gregory
  13. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  14. Inflation-Forecast Targeting: Applying the Principle of Transparency By Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang
  15. Multiple objectives in monetary policy: a de facto analysis for ‘advanced’ countries By David Cobham
  16. Efficacy of New Monetary Framework and Determining Inflation in India: An Empirical Analysis of Financially Deregulated Regime. By Chakraborty, Lekha; Varma, Kushagra Om
  17. (Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier By Vincent Belinga; Constant Lonkeng Ngouana
  18. A Simple Analytical Model of the Adverse Real Effects of Inflation By Eduardo Bastian; Mark Setterfield
  19. Chile: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. Western Hemisphere Dept.
  20. The walking dead Euler equation - Addressing a challenge to monetary policy models By A. POISSONNIER
  21. Colombia: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement By International Monetary Fund. Western Hemisphere Dept.
  22. Government Spending Shocks and Private Activity: The Role of Sentiments By Jia, Bijie; Kim, Hyeongwoo
  23. Is optimal monetary policy always optimal? By Davig, Troy A.; Gurkaynak, Refet S.
  24. Cross-Country Report on Inflation: Selected Issues By International Monetary Fund. European Dept.
  25. Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program By Sumit Agarwal; Gene Amromin; Souphala Chomsisengphet; Tomasz Piskorski; Amit Seru; Vincent Yao
  26. Output response to government spending: evidence from new international military spending data By Sheremirov, Viacheslav; Spirovska, Sandra
  27. Somalia: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Somalia By International Monetary Fund. Middle East and Central Asia Dept.
  28. Testing the Asymmetric Effects of Financial Conditions in South Africa: A Nonlinear Vector Autoregression Approach By Mehmet Balcilar; Kirsten Thompson; Rangan Gupta; Renee van Eyden
  29. A New Interpretation of the Mechanism for the Determination of Interest Rate and Its Policy Implications By Huang, Wenge; Zhang, Jinsong
  30. Colombia: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. Western Hemisphere Dept.
  31. The Case for Fiscal Rules By Harald Badinger; Wolf Heinrich Reuter
  32. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  33. Unemployment Crises By Petrosky-Nadeau, Nicolas; Zhang, Lu
  34. Macro-Financial Stability under EMU By Philip R. Lane;
  35. Solomon Islands: Fourth Review Under the Extended Credit Facility Arrangement By International Monetary Fund. Asia and Pacific Dept
  36. Portugal: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. European Dept.
  37. Global tax policy and the synchronization of business cycles By Sly, Nicholas; Weber, Caroline
  38. Modelling the "Animal Spirits" of Bank's Lending Behaviour By Carl Chiarella; Corrado Di Guilmi; Tianhao Zhi
  39. A Probability-Based Stress Test of Federal Reserve Assets and Income By Christensen, Jens H. E.; Lopez, Jose A.; Rudebusch, Glenn D.
  40. Lower for Longer: Neutral Rates in the United States By Andrea Pescatori; Jarkko Turunen
  41. Potential growth in France and the euro area: an overview of the estimation methods By M. LEQUIEN; A. MONTAUT
  42. Republic of Poland: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. European Dept.
  43. Italy: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. European Dept.
  44. Evaluating underlying inflation metrics for Russia By Deryugina, Elena; Ponomarenko, Alexey; Sinyakov , Andrey; Sorokin , Constantine
  45. Spain: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. European Dept.
  46. Kingdom of the Netherlands—Aruba: Staff Report for the 2015 Article IV Consultation Discussions By International Monetary Fund. European Dept.
  47. The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-Frequency Markov-Switching Vector Autoregressive Approach By Mehmet Balcilar; Rangan Gupta; Mawuli Segnon
  48. Analysing South Africa's Inflation Persistence Using an ARFIMA Model with Markov-Switching Fractional Differencing Parameter By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  49. Economic uncertainty: the implications for monetary policy By Rosengren, Eric S.
  50. Dealing with Debt By Reinhart, Carmen M.; Reinhart, Vincent; Rogoff, Kenneth
  51. Varieties of Capital Flows: What Do We Know By Levy Yeyati, Eduardo; Zuniga, Jimena
  52. From Natural Resource Boom to Sustainable Economic Growth: Lessons for Mongolia By Pranav Gupta; Grace Bin Li; Jiangyan Yu
  53. Secular Labor Reallocation and Business Cycles By Gabriel Chodorow-Reich; Johannes Wieland
  54. Financialisation and the financial and economic crises: Theoretical framework and empirical analysis for 15 countries By Dodig, Nina; Hein, Eckhard; Detzer, Daniel
  55. Inflationary effects of monetary policies in newly industrialized economies with cross-sectoral labor and capital immobility By Chakrabarti, Anindya S.
  56. Thailand: Staff Report for the 2015 Article IV Consultation By International Monetary Fund. Asia and Pacific Dept
  57. The Forecasting Power of the Yield Curve, a Supervised Factor Model Approach By Lorenzo Boldrini; Eric Hillebrand
  58. Explaining and forecasting bank loans. Good times and crisis (in french) By G.Levieuge
  59. Methodological, internal and ontological inconsistencies in the conventional micro-foundation of post-Keynesian theory By Christian Schoder
  60. No evidence of financial accelerator in France By B. CAMPAGNE; V. ALHENC-GELAS; J.-B. BERNARD
  61. Scraped Data and Sticky Prices By Alberto Cavallo
  62. Leveraged Bubbles By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  63. Bosnia and Herzegovina: Financial Sector Assessment Program Technical Note—Systemic Liquidity Management, Financial Safety Net, Insolvency Framework, and Macroprudential Policy By International Monetary Fund. Monetary and Capital Markets Department
  64. Sovereign Debt Relief and Its Aftermath By Reinhart, Carmen M.; Trebesch, Christoph
  65. Capital Allocation and Productivity in South Europe By Gita Gopinath; Sebnem Kalemli-Ozcan; Loukas Karabarbounis; Carolina Villegas-Sanchez
  66. External Balances, Trade and Financial Conditions By Evans, Martin
  67. Peru: Selected Issues By International Monetary Fund. Western Hemisphere Dept.
  68. Does Reserve Accumulation Crowd Out Investments? By Reinhart, Carmen; Reinhart, Vincent; Tashiro, Takeshi
  69. Kauzalní vztah peněžní nabídky a amerického akciového trhu By Širůček, Martin
  70. Financialisation and financial crisis in Iceland By Guðmundsson, Björn Rúnar
  71. En the coherence and the predictive content of the French Bank Lending Survey’s indicators (in French) By G.Levieuge
  72. Experience in Analysis and Forecasting of Cyclical Fluctuations in the Economy (On the Example of the National Bureau of Economic Research in Application to the Economy and the Anti-Crisis Policy of Russia) By Airapetyan, Mamikon; Aleschenko, Natalya; Arushanyan, Vitaliy
  73. From Populist Destabilization to Reform and Possible Debt Relief in Greece By William R. Cline
  74. The Cyclicality of the Opportunity Cost of Employment By Karabarbounis, Loukas; Chodorow-Reich, Gabriel
  75. Political economics of external sovereign defaults By Achury, Carolina; Koulovatianos, Christos; Tsoukalas, John
  76. United Republic of Tanzania: Second Review Under the Policy Support Instrument By International Monetary Fund. African Dept.
  77. Diversification through Trade By Francesco Caselli; Miklós Koren; Milan Lisicky; Silvana Tenreyro
  78. Time-dependent or state-dependent pricing? Evidence from firms’ response to inflation shocks By GUIMARAES, Bernardo; MAZINI, André; MENDONÇA, Diogo de Prince
  79. Does mixed frequency vector error correction model add relevant information to exchange misalignment calculus? Evidence for United States By MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni
  80. From Financial Repression to External Distress: The Case of Venezuela By Reinhart, Carmen; Santos, Miguel Angel
  81. When is Nonfundamentalness in VARs a Real Problem? An Application to News Shocks By Paul Beaudry; Patrick Fève; Alain Guay; Franck Portier
  82. The Dawn of an ‘Age of Deposits’ in the United States By Matthew Jaremski; Peter L. Rousseau
  83. Ireland: Financial Sector Assessment Program-Detailed Assessment of Observance on the Insurance Core Principles By International Monetary Fund. Monetary and Capital Markets Department
  84. Product Switching and the Business Cycle By Andrew B. BERNARD; OKUBO Toshihiro
  85. Dispersion in macroeconomic volatility between the core and periphery of the international trade network By Chakrabarti, Anindya S.
  86. Demand expectations and the timing of stimulus policies By GUIMARAES, Bernardo; MACHADO, Caio
  87. An Overview of Islamic Finance By Mumtaz Hussain; Asghar Shahmoradi; Rima Turk
  88. Bosnia and Herzegovina: Financial System Stability Assessment By International Monetary Fund. Monetary and Capital Markets Department
  89. Sukuk pricing dynamics - factors influencing yield curve of the Malaysian Sukuk By Awaludin, Fadhlee; Masih, Mansur
  90. State highway funding in New England: the road to greater fiscal sustainability By Weiner, Jennifer
  91. Uncertainty and the Geography of the Great Recession By Shoag, Daniel; Veuger, Stan
  92. From Systemic Banking Crises to Fiscal Costs: Risk Factors By David Amaglobeli; Nicolas End; Mariusz Jarmuzek; Geremia Palomba
  93. The Institutions of Federal Reserve Independence By Conti-Brown, Peter
  94. Jordan: Sixth Review Under the Stand-By Arrangement, Request for Waivers of Applicability of Performance Criteria, and Rephasing of Access By International Monetary Fund. Middle East and Central Asia Dept.
  95. Income and Wealth Effects on Private-Label Demand: Evidence From the Great Recession By Jean-Pierre Dubé; Günter J. Hitsch; Peter E. Rossi
  96. Do the High-Income Households Save More? By B. GARBINTI; P. LAMARCHE
  97. Southeast Asia's Long Transition By Coxhead, Ian
  98. Liquidity Creation without Banks By Simas Kucinskas
  99. ¿Hay vida después de las bonanzas? By Cristina Fernández; Leonardo Villar; Paulo Mauricio Sánchez
  100. Assessing interdependence among countries' fundamentals and its implications for exchange rate misalignment estimates: An empirical exercise based on GVAR By MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni
  101. Wealth Inequality and Homeownership in Europe By Leo Kaas; Georgi Kocharkov; Edgar Preugschat
  102. Unveiling the Effects of Foreign Exchange Intervention: A Panel Approach By Gustavo Adler; Noemie Lisack; Rui Mano
  103. Hungary: Technical Assistance Report-Operational Aspects of Establishing an Asset Management Company By International Monetary Fund. Monetary and Capital Markets Department
  104. Main determinants of profit sharing policy in the French life insurance industry By F. Borel-Mathurin; P.-E. Darpeix; Q. Guibert; S. Loisel
  105. The Potential Macroeconomic Impact of the Unconventional Oil and Gas Boom in the United States By Ben Hunt; Dirk Muir; Martin Sommer
  106. The regional economic outlook By Dudley, William
  107. Emerging Market Heterogeneity: Insights from Cluster and Taxonomy Analysis By Zhongxia Zhang; Yuan Gao
  108. Why and How to overcome General Equilibrium Theory By Glötzl, Erhard
  109. Política cambiaria, monetaria y fiscal: ¿ha aprendido Colombia a mitigar los efectos de las crisis? By Leonardo Villar; José Vicente Romero; César Pabón
  110. Computing additive contributions and other issues for chain-linked quarterly aggregates By A. ARNAUD; J. BOUSSARD; A. POISSONNIER; H. SOUAL
  111. The impact of foreign direct investment (FDI) on economic growth By Shafique, Shoaib; Hussain, Zahid
  112. Do Swedish Consumer Confidence Indicators Do What They Are Intended to Do? By Assarsson, Bengt; Österholm, Pär
  113. The Funding of the Irish Domestic Banking System During the Boom By Philip R. Lane;
  114. A formal analysis of the beginnings of coinage in antiquity By Melitz, Jacques
  115. The Impact of Cheap Natural Gas on Marginal Emissions from Electricity Generation and Implications for Energy By J. Scott Holladay; Jacob LaRiviere
  116. Sub-National Government’s Risk Premia: Does Fiscal Performance Matter? By Sergio Sola; Geremia Palomba

  1. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policies. There are two main results. First, real interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.
    Keywords: Financial crises;Financial stability;Econometric models;Automatic stabilizers;Real interest rates;Macroprudential Policy;Monetary policy;United States;Macro-prudential policies, credit frictions, interest rate rigidities, interest, interest rate, interest rates, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–26
  2. By: Sterk, Vincent; Tenreyro, Silvana
    Abstract: The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    Keywords: durable goods; monetary policy; open market operations; redistributive effects of monetary policy; transmission mechanism
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  3. By: Frankel, Jeffrey (Harvard University)
    Abstract: It has been proposed that central banks should target Nominal GDP (NGDP), as an alternative to targeting the money supply, exchange rate, or inflation. But the proposal appears in the context of the largest advanced economies. In fact NGDP Targeting may be more appropriate for middle-sized middle-income countries. The reason is that such countries are more often subject to large supply shocks and terms of trade shocks. Such unexpected shocks can force the credibility-damaging abandonment of CPI targets or exchange rate targets that had been previously declared. But they do not require the abandonment of a nominal GDP target, which automatically divides an adverse supply shock equally between impacts on inflation and real GDP. The argument can be illustrated in a model where the ultimate objective is minimizing a quadratic loss function in output and inflation but a credible rule is needed in order to prevent an inflationary bias that arises under discretion. A NGDP rule dominates IT unless the Aggregate Supply curve is especially steep or the weight placed on price stability is especially high. Parameters estimated for the cases of India and Kazakhstan suggest that the Aggregate Supply curve is flat enough to satisfy the necessary condition. The general argument applies regardless whether the monetary authorities at a particular time seek credible disinflation, credible reflation, or simply a credible continuation of the recent path.
    JEL: E52 F41
    Date: 2014–07
  4. 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); Reneé van Eyden (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: One characteristic of many macroeconomic and financial time series is their asymmetric behaviour during different phases of a business cycle. Oil price shocks have been amongst those economic variables that have been identified in theoretical and empirical literature to predict the phases of business cycles. However, the role of oil price shocks to determine business cycle fluctuations has received less attention in emerging and developing economies. The aim of this study is to investigate the role of oil price shocks in predicting the phases of the South African business cycle associated with higher and lower growth regimes. By adopting a regime dependent analysis, we investigate the impact of oil price shocks under two phases of the business cycle, namely high and low growth regimes. As a net importer of oil, South Africa is expected to be vulnerable to oil price shocks irrespective of the phase of the business cycle. Using a Bayesian Markov switching vector autoregressive (MS-VAR) model and data for the period 1960Q2 to 2013Q3, we found the oil price to have predictive content for real output growth under the low growth regime. The results also show the low growth state to be shorter-lived compared to the higher growth state. 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: Macroeconomic fluctuations; oil price shocks; Bayesian Markov switching VAR;
    JEL: C32 E32 Q43
    Date: 2014
  5. By: International Monetary Fund. European Dept.
    Abstract: KEY ISSUES AND RECOMMENDATIONS Context. Growth was anemic in 2014, reflecting preexisting structural bottlenecks exacerbated by geopolitical uncertainty and sanctions. The ruble depreciated for the most part of 2014 and came under severe pressures at the end of the year due to the sharp decline in oil prices and the intensification of sanctions. As a result, inflation accelerated sharply. In response, the shift to a flexible exchange rate was accelerated and monetary policy was tightened significantly. Measures to stabilize the banking system were introduced, including a bank capital support plan. The authorities’ policy response stabilized the economy. However, structural reforms have remained stalled. Near-term macroeconomic policy mix. The fiscal policy stance for 2015 appropriately allows for limited stimulus. Monetary policy normalization should continue at a prudent pace, commensurate with the decline in underlying inflation and inflation expectations. The size of the bank capital support program appears to be sufficiently large, but the parameters of the program should be adjusted to strengthen incentives for banks to seek private capital and reduce cost to the public sector. Medium-term policy challenges. An ambitious and credible medium-term fiscal consolidation program is necessary to adjust to lower oil prices. Changes to the fiscal rule should be considered to support medium-term fiscal sustainability. Boosting potential growth will require implementation of structural reforms. This would include (i) strengthening governance and protection of property rights; (ii) lowering administrative barriers and regulation; (iii) increasing competition in domestic markets; (iv) enhancing customs administration and reducing trade barriers; and (v) improving the transparency and efficiency of public investment procedures. Reinvigorating the privatization agenda, as soon as market conditions permit, would enhance economic efficiency. A deeper and more efficient financial system would improve the allocation of capital thereby enhancing economic growth.
    Keywords: Economic indicators;Balance of payments statistics;Bank resolution;Article IV consultation reports;Economic recession;Financial sector;Fiscal policy;Fiscal reforms;Press releases;Monetary policy;Russian Federation;Staff Reports;oil prices, inflation, monetary fund, debt, balance of payments
    Date: 2015–08–03
  6. By: Fiodendji, Komlan
    Abstract: Since Taylor’s (1993) paper researchers have invested a lot effort to estimation of monetary policy rules. Taylor (1993) showed that a simple reaction function of the central bank, with the interest rate as a monetary policy instrument and inflation and the output gap as explanatory variables, pretty much describes the rate (of Basic interest) of the Federal Reserve (US) between 1987 and 1992. Frequently, the Taylor rule coefficients are interpreted as if they reflect the preferences of the central bank. However, such an interpretation can lead to poor decision making. In this study, we show that the Taylor rule coefficients are complicated terms including preferences parameters as well as parameters associated with the structure of the economy. We illustrate our conclusion that the coefficients of the Taylor rule cannot be interpreted as reflecting the preferences of the central bank by estimating standard forward-looking Taylor rules for the BCEAO and to compare these with our results obtained by the method of Favero and Rovelli (2002), in order to detect the preferences of the central bank. This analysis leads us to the conclusion that the coefficients of the Taylor rule cannot be interpreted as indicators of the preferences of the central bank. Our results reveal that BCEAO authorities have preferences for smoothing interest rates and the stabilization of the output gap, however, the 2% inflation target is a major challenge.
    Keywords: Taylor rule, Preferences, Reaction function, GMM approach, BCEAO
    JEL: E5 E58
    Date: 2015–05
  7. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Abenomics has lifted Japan out of the doldrums and needs to be reinforced to accomplish the desired “once in a lifetime†economic regime shift. Building on initial positive results, policies now need to embark on a sustained effort to meet the unprecedented challenges Japan is facing: ending an entrenched deflationary mindset, raising growth, restoring fiscal and debt sustainability, and maintaining financial stability in the face of adverse demographics. Japan should be at the vanguard of structural reform. More vigorous efforts to raise labor supply and deregulate domestic markets, backed by further endeavors to raise wages and investment and designed to boost confidence and raise domestic demand, will be essential to lift growth, facilitate fiscal consolidation, and unburden monetary policy. A credible medium-term fiscal consolidation plan is needed to remove uncertainty about the direction of policies that may be holding back domestic demand. The overarching goal should be to put debt on a downward path, through gradual but steady consolidation that does not derail growth and inflation momentum. It should be based on prudent economic assumptions and on concrete structural revenue and expenditure measures identified upfront. More explicit monetary guidance would enhance inflation dynamics. Actual and expected inflation remain well below the Bank of Japan’s (BoJ’s) inflation target and monetary policy transmission remains weak. The BoJ needs to stand ready to undertake further easing and should provide stronger guidance to markets through enhanced communication. Absent deeper structural reforms, even with further easing, reaching two- percent inflation in a stable manner is likely to take longer than envisaged, suggesting that the BoJ should put greater emphasis on achieving the inflation target in a stable manner rather than within a specific time frame. The financial sector should be a greater catalyst for growth, and guard against risks from unconventional policies. The soundness of the financial system allows more risk taking and consolidation, while remaining resilient to the likely higher volatility of asset prices, exchange rates and interest rates, and lower liquidity in the JGB market as quantitative easing proceeds. While the 2014 external position was assessed to be broadly aligned with fundamentals, subsequent developments and incomplete policies raise the risk of negative spillovers. With the depreciation of the yen relative to its mid-2014 level, further monetary easing without bolder structural reforms and a credible medium-term fiscal consolidation plan could lead to sluggish domestic demand and overreliance on yen depreciation to pursue domestic policy objectives.
    Keywords: Japan;Article IV consultation reports;Fiscal policy;Fiscal consolidation;Fiscal reforms;Monetary policy;Financial sector;Banks;Economic indicators;Debt sustainability analysis;Staff Reports;Press releases;inflation, market, monetary fund, debt
    Date: 2015–07–23
  8. By: Chattopadhyay, Siddhartha; Daniel, Betty C.
    Abstract: We propose that the monetary authority adopt the inflation target as a time varying policy instrument at the zero lower bound (ZLB) with the same zeal with which they have adopted a fixed inflation target away from the ZLB. Specifically, after an extreme adverse shock reduces demand, the monetary authority promises future inflation by raising the inflation target in the Taylor Rule and announcing its persistence over time. The loss under our proposed policy is very similar to that under optimal monetary policy with the advantage that it is cummuicable using the language of the inflation target and implementable using the Taylor Rule. We also show that the inflation target and its persistence could be raised high enough to keep the economy away from the ZLB, but welfare costs are large.
    Keywords: New-Keynesian Model, Inflation Target, Liquidity Trap
    JEL: E52 E58 E63
    Date: 2014–07–31
  9. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context. Lower oil prices are eroding long-standing fiscal and external surpluses, but the impact on economic activity in the UAE has been limited owing to large buffers. Real estate prices have declined somewhat since mid-2014, but rents are driving up inflation. Following fiscal consolidation in 2013, the fiscal stance was expansionary in 2014. Outlook and risks. The economic outlook is expected to moderate amid lower oil prices. Nonoil growth is projected to slow in 2015, before accelerating in the medium term. Export and revenue losses from lower oil prices will be the most significant transmission channel for the UAE economy. Macroeconomic policy mix. With persistently lower oil prices, gradual fiscal consolidation is important to strengthen long-term fiscal sustainability while cushioning negative effects on growth. It will require rationalization of spending and further mobilization of nonhydrocarbon revenues. Efforts on strengthening the medium-term budget frameworks need to continue. Liquidity management should remain supportive of credit growth. Financial stability. The banking sector is well capitalized, liquid, profitable, and with low NPLs. Timely implementation of the CBU’s plans to phase in Basel III capital and liquidity standards over 2015–19 will be important. Further developing the macroprudential framework and strengthening safety nets and the resolution framework for banks as well as the AML/CFT framework will also be important. Compliance with the loan concentration limits for GREs and local governments should be monitored and no exemption should be granted. Strengthening GRE balance sheets and proactive management of upcoming GRE debt repayments should continue. Economic diversification. Implementation of structural reforms should be pursued to strengthen competitiveness and accelerate private sector-led job creation for nationals. These could focus on further opening up foreign direct investment, improving selected areas of the business environment, and easing access to finance for startups and SMEs.
    Keywords: United Arab Emirates;United Arab Emirates;Staff Reports;Oil prices;Press releases;Liquidity management;Monetary policy;Islamic banking;Fiscal consolidation;Fiscal policy;Article IV consultation reports;Banking sector;Debt sustainability analysis;Economic indicators;monetary fund, government finances, finances, debt
    Date: 2015–08–04
  10. By: Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
    Abstract: This paper investigates the sources of variation in Treasury bonds returns and the role of monetary policy over the last three decades. At the first stage of our analysis, we decompose unexpected excess returns on 2-, 5- and 10-year Treasury bonds in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. Our results indicate that inflation news is the key driver of Treasury bond returns. At the second stage, we evaluate the impact of conventional and unconventional monetary policy on Treasury bond returns and their components. We find that the positive impact of monetary policy easing on Treasury bond returns is largely explained through downward revisions in inflation expectations.
    Keywords: Bond Market Variance Decomposition; Monetary Policy; Financial Crisis.
    JEL: G12 G01 E44 E52
    Date: 2015–09
  11. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in indeterminacy, even if the central bank also targets output. In this case, adding money growth as an intermediate target in the Taylor rule can alleviate this indeterminacy and anchor inflation expectations. Whether the money growth target should be a constant feature of the central bank's policy rule or Markov-Switch depends on the weight the central bank places on output stability relative to inflation stability and the size of money demand shocks.
    Keywords: Cost channel; Money; Regime switching; Taylor principle
    JEL: E30 E40 E50
    Date: 2015–06–01
  12. By: Tenreyro, Silvana; Thwaites, Gregory
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: assymetric effects of monetary policy; monetary policy
    JEL: E1 E31 E32 E52 E58
    Date: 2015–08
  13. By: Honkapohja, Seppo (Bank of Finland); Mitra, Kaushik (University of Birmingham)
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2015–04–07
  14. By: Kevin Clinton; Charles Freedman; Michel Juillard; Ondra Kamenik; Douglas Laxton; Hou Wang
    Abstract: Many central banks in emerging and advanced economies have adopted an inflation-forecast targeting (IFT) approach to monetary policy, in order to successfully establish a stable, low-inflation environment. To support policy making, each has developed a structured system of forecasting and policy analysis appropriate to its needs. A common component is a model-based forecast with an endogenous policy interest rate path. The approach is characterized, among other things, by transparent communications—some IFT central banks go so far as to publish their policy interest rate projection. Some elements of this regime, although a work still in progress, are worthy of consideration by central banks that have not yet officially adopted full-fledged inflation targeting.
    Keywords: Central banks and their policies;Inflation targeting;Monetary policy;Optimal Control, inflation, interest, interest rate, central bank, General,
    Date: 2015–06–24
  15. By: David Cobham
    Abstract: A statistical methodology is developed by which realised outcomes can be used to identify, for calendar years between 1974 and 2012, when policymakers in ‘advanced’ economies have successfully pursued single objectives of different kinds, or multiple objectives. A simple criterion is then used to distinguish between multiple objectives pure and simple and multiple objectives subject to a price stability constraint. The overall and individual country results which this methodology produces seem broadly plausible. Unconditional and conditional analyses of the inflation and growth associated with different types of objectives reveal that multiple objectives subject to a price stability constraint are associated with roughly as good economic performance as the single objective of inflation. A proposal is then made as to how the remit of an inflation-targeting central bank could be adjusted to allow it to pursue other objectives in extremis without losing the credibility effects associated with inflation targeting.
    JEL: E52 E58 F33
    Date: 2015
  16. By: Chakraborty, Lekha (National Institute of Public Finance and Policy); Varma, Kushagra Om (National Institute of Public Finance and Policy)
    Abstract: Against the backdrop of the new monetary policy framework, this paper analyses the determinants of inflation in the deregulated financial regime. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that the supply-side variables are indeed significant and have a considerable effect on inflation. This result has policy implications especially in the context of a shift from discretion to rule-based monetary policy in the context of India.
    Keywords: Inflation ; Supply side ; ARDL
    JEL: C E E H
    Date: 2015–08
  17. By: Vincent Belinga; Constant Lonkeng Ngouana
    Abstract: This paper provides estimates of the government spending multiplier over the monetary policy cycle. We identify government spending shocks as forecast errors of the growth rate of government spending from the Survey of Professional Forecasters (SPF) and from the Greenbook record. The state of monetary policy is inferred from the deviation of the U.S. Fed funds rate from the target rate, using a smooth transition function. Applying the local projections method to quarterly U.S. data, we find that the federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy. Our estimations also suggest that federal government spending may crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation. The latter result reconciles—in a unified framework—apparently contradictory findings in the literature. We discuss the implications of our findings for the ongoing normalization of monetary conditions in advanced economies.
    Keywords: Central banks and their policies;Econometric models;Sensitivity analysis;Shock identification;Monetary policy;Fiscal stimulus and multipliers;Fiscal policy;Government expenditures;Spending multiplier, accommodative monetary policy, local projections, government spending, interest rates, interest, Quantitative Policy Modeling, Comparative or Joint Analysis of Fiscal and Monetary or Stabilization Policy,
    Date: 2015–05–27
  18. By: Eduardo Bastian (Federal University of Rio de Janeiro (UFRJ)); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.
    Keywords: Inflation, strato-inflation, hyper-inflation, indexation, conflicting claims, uncertainty, growth.
    JEL: E31 O41 E12
    Date: 2015–08
  19. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: Chile’s GDP growth slowed sharply in 2014, as lower copper prices hurt the mining sector while non-mining investment suffered from the decline in business confidence after the launch of an ambitious set of reforms by the new administration. The strong fiscal and monetary policy response helped stabilize the economy, but output is expected to recover only gradually to a lower medium-term growth rate than forecasted in the 2014 Article IV Consultation staff report, and the balance of risks remains tilted to the downside.
    Keywords: Economic indicators;Economic growth;Chile;Article IV consultation reports;Balance of payments statistics;Bank supervision;Fiscal policy;Monetary policy;Fiscal reforms;Press releases;Staff Reports;investment, inflation, central bank, market, finance
    Date: 2015–08–06
  20. By: A. POISSONNIER (Insee)
    Abstract: Despite some strong cases built against it, the Euler equation on consumption remains a cornerstone of monetary policy models. In this paper I test the representative household's consumption-savings trade-off in two original directions. I first use households' specific interest rates for both US and France. These rates have a better explanatory power of the representative consumer's behaviour than the monetary policy rate. I also use a less restrictive approach to measure households' expectations based on survey data. However, the challenge posed by the Euler equation to monetary policy models remains.
    Keywords: Euler equation, consumption
    JEL: E21 D91
    Date: 2015
  21. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: EXECUTIVE SUMMARY Background: Colombia’s strong economic policy framework, comprising an inflation- targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a fiscal policy guided by a structural balance rule, has underpinned strong economic performance in recent years. These policies and institutions also help smooth the large terms of trade shock the country is facing, allowing a gradual adjustment to a new equilibrium. Outlook: In the baseline scenario, growth is expected to decelerate to 3.4 percent in 2015 but gradually return toward potential (4¼ percent) over the medium term and inflation to remain at the midpoint of the central bank’s 2–4 percent target range. The current account deficit would gradually narrow in line with the expected mild rebound in oil prices and the sustained growth in Colombia’s trading partners, while net private capital inflows would remain strong. The authorities are firmly committed to maintaining their sound policy framework and strengthening policy buffers in the period covered by the proposed arrangement. Risks: Risks associated with emerging markets have increased since the 2014 Article IV consultation. Despite strong fundamentals, Colombia is facing a permanent adjustment to weaker external conditions while being vulnerable to tail risks, especially a surge in financial volatility, protracted growth slowdown in trading partners, and a further decline in oil prices. Flexible Credit Line (FCL): The authorities are requesting a successor two-year FCL arrangement for 500 percent of quota (SDR 3.87 billion), which they intend to treat as precautionary, and cancellation of the current arrangement which expires on June 23, 2015. The access requested would provide Colombia with reasonable cover in an adverse external scenario. The authorities consider access to the FCL to be temporary and have signaled their intention to phase out its use as external risks recede. Staff assesses that Colombia meets the qualification criteria for access to Fund resources under the FCL arrangement, and recommends its approval by the Executive Board. Fund liquidity: The proposed commitment of SDR 3.87 billion would have only a marginal impact on the Fund’s liquidity position. Process: An informal meeting to consult with the Executive Board on a possible FCL arrangement for Colombia was held on May 22, 2015.
    Keywords: Staff Reports;Press releases;Flexible Credit Line;Extended arrangement cancellations;Extended arrangement requests;Balance of payments statistics;Colombia;Economic conditions;Economic growth;Economic indicators;credit line, markets, inflation, monetary fund, emerging markets
    Date: 2015–08–03
  22. By: Jia, Bijie; Kim, Hyeongwoo
    Abstract: This paper studies the dynamic effects of the fiscal policy shock on private activity using an array of vector autoregressive models for the post-war US data. We are particularly interested in the role of consumer sentiment in the transmission of the government spending shock. Our major findings are as follows. Private consumption and investment fail to rise persistently in response to positive spending shocks especially when shocks are anticipated, while they exhibit persistent and significant increases when the sentiment shock occurs. Employment and real wages in the private sector also respond significantly positively only to the sentiment shock. Consumer sentiment responds negatively to a positive fiscal shock, resulting in subsequent decreases in private activity. That is, our empirical findings imply that the government spending shock generates consumer pessimism, which then weakens the effectiveness of the fiscal policy.
    Keywords: Government Spending; Consumer Sentiment; Private Activity; Sentiment Channel; Vector Autoregressive; Expectational VAR; Survey of Professional Forecasters; Threshold VAR
    JEL: E32 E62
    Date: 2015–08
  23. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Gurkaynak, 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.
    Date: 2014–12–01
  24. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper examines the causes and drivers of low inflation in European inflation targeting countries outside the euro area, focusing on the Czech Republic, Poland, Sweden, and Switzerland. It estimates the effects on inflation from the output gap and external factors, including oil price changes, nominal effective exchange rate (NEER) fluctuations, and euro area inflation spillovers. It is observed that external factors have been significant drivers of low inflation recently, though their contributions to inflation and the channels through which they operate vary across countries. Policy responses and options are also discussed, taking into account country-specific circumstances.
    Keywords: Poland;Sweden;Switzerland;Czech Republic;inflation, external factors, core inflation, output gap, disinflation
    Date: 2015–07–14
  25. By: Sumit Agarwal; Gene Amromin; Souphala Chomsisengphet; Tomasz Piskorski; Amit Seru; Vincent Yao
    Abstract: We examine the ability of the government to impact mortgage refinancing activity and spur consumption by focusing on the Home Affordable Refinancing Program (HARP). The policy allowed intermediaries to refinance insufficiently collateralized mortgages by extending government credit guarantee on such loans. We use proprietary loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower. A difference-in-difference empirical design reveals a substantial increase in refinancing activity by the program, inducing more than three million eligible borrowers with primarily fixed-rate mortgages – the predominant contract type in the U.S. – to refinance their loans. Borrowers received a reduction of around 140 basis points in interest rate due to HARP refinancing amounting to about $3,500 in annual savings per borrower. More than 20% of interest rate savings from refinancing was allocated to durable (auto) spending, with larger spending response among less wealthy and creditworthy. Regions more exposed to the program saw a relative increase in non-durable and durable consumer spending, a decline in foreclosure rates, and a faster recovery in house prices. A variety of identification strategies reveal that competitive frictions in the refinancing market may have hampered HARP’s impact. On average, these frictions reduced take-up rate among eligible borrowers by 10% and cut interest rate savings by 16 basis points, with both these effects being twice as large among the most indebted borrowers. These findings have implications for future policy interventions, pass-through of monetary policy through household balance sheets, and design of the mortgage market.
    JEL: E21 E65 G18 G21 H3 L85
    Date: 2015–08
  26. By: Sheremirov, Viacheslav (Federal Reserve Bank of Boston); Spirovska, Sandra
    Abstract: Fiscal policy, among other measures, was widely used to stimulate employment and to put the U.S. economy back on track in response to the Great Recession and in a number of previous recessions in both the United States and in Europe. It is striking how much disagreement there was — and still is — among policymakers and academics alike about the inner workings of fiscal policy and its effect on output and employment. Estimating fiscal multipliers is methodologically challenging, as government spending often reacts to current or anticipated changes in economic conditions, and requires bold identifying assumptions. Barro (1981), Hall (1986, 2009), Rotemberg and Woodford (1992), and Barro and Redlick (2011), among others, rely on military spending as an exogenous component of government expenditure. However, in the United States after World War II (and even more so after the Korean War), there has not been enough variation in military spending to estimate the multiplier with a high degree of precision. This paper uses data from a large panel of countries with significant time variation in military spending to shed light on the magnitude of the government spending multiplier.
    Keywords: fiscal multiplier; military spending
    JEL: E32 E43 E62 F44 H56
    Date: 2015–07–01
  27. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: KEY ISSUES Context: Somalia is a fragile state emerging from a protracted civil war. In 1991, the government was toppled by armed opposition groups, leading to implosion of the central government and devolution of power to administrative regions. The Fund recognized the Federal Government of Somalia on April 12, 2013, paving the way for staff to provide policy advice and technical assistance. While Somalia has been welcomed back as an active member of the Fund, it remains ineligible for financial assistance pending the clearance of its longstanding arrears. The political and security situation remains challenging. Complex clan politics and high turnover in the members of the economic team have undermined policymaking. A new government took office on February 18, 2015, and presidential elections are planned for September 2016. Key policy issues: The Article IV discussions focused on immediate and medium-term actions for building institutions and policy frameworks for fiscal and financial management. Specifically, • Capacity building and governance. Concerted action is needed to build institutions and improve governance in order to support sustainable, inclusive growth, and poverty reduction. In particular, urgent efforts are required to set in place sound mechanisms and institutions to ensure that prospective natural resource wealth, notably hydrocarbons, is well managed. Considerable donor assistance is required for helping Somalia to meet these daunting challenges. • Fiscal. Decisive steps are necessary to build fiscal discipline, underpinned by realistic budgeting and effective implementation systems, including commitment controls. The 2015 budget needs to be revised in light of revenue shortfalls. An emergency revenue mobilization plan and an expenditure review are warranted. • Financial sector. Efforts are needed to develop the currently rudimentary financial system. Swift action is required so that remittances can be channeled through the international banking system. Currency reform should not be implemented until prerequisites are in place. Given the extent of dollarization and the absence of monetary policy instruments, the central bank is unable to conduct monetary policy. Past IMF advice: The latest Article IV consultation was on November 13, 1989, and focused on the low priority attached by the government in place then on the need for better controlling unproductive spending, and on the need for better economic and social services.
    Keywords: Article IV consultation reports;Economic conditions;Fiscal policy;Governance;External debt;Financial sector;Economic indicators;Balance of payments statistics;Staff Reports;Press releases;Somalia;
    Date: 2015–07–29
  28. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Kirsten Thompson (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: The negative consequences of financial instability for the world economy during the recent financial crisis have highlighted the need for a better understanding of financial conditions. We use a financial conditions index (FCI) for South Africa previously constructed from 16 financial variables to test whether the South African economy responds in a nonlinear and asymmetric way to unexpected changes in financial conditions. To this end, we make use of a nonlinear logistic smooth transition vector autoregressive model (LSTVAR), which allows for a smooth evolution of the economy, governed by a chosen switching variable between periods of high and low financial volatility. We find that the South African economy responds nonlinearly to financial shocks, and that manufacturing output growth and Treasury Bill rates are more affected by financial shocks during upswings. Inflation responds significantly more to financial changes during recessions.
    Keywords: Financial conditions index; nonlinear vector autoregression; LSTVAR; asymmetry;
    JEL: C32 G01 E44 E32
    Date: 2014
  29. By: Huang, Wenge; Zhang, Jinsong
    Abstract: This paper first indicates that saving equals to the liquidity preference plus the supply of loanable funds and the liquidity preference is just opposite to the supply of loanable funds. Meanwhile, the paper proposes a new model in which interest rate is determined by the investment demand curve and the symmetrical curve of the liquidity preference curve about Y axis. On such basis, the paper notes that the existence of liquidity preference makes effective demand always deficient. Thus market failure becomes the norm and the government is obliged to take aim at the interest rate which is determined by the desired investment and desired saving. So far the paper has thoroughly clarified how interest rate is determined and constructed a new and compact macroeconomic analytical framework. Further, the paper attempts to discuss the new model’s inspiration to Taylor rule and other deductions brought by the new model.
    Keywords: liquidity preference, supply of loanable funds, saving, determination of interest rate, insufficient effective demand
    JEL: E12 E43 E52
    Date: 2015–06–30
  30. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: This 2015 Article IV Consultation highlights that Colombia has enjoyed strong growth over the past several years, among the highest in Latin America. Credible fiscal and inflation targeting frameworks have supported sound macroeconomic policy management, which underpinned robust economic performance during the last decade. Social indicators have improved steadily over this period. Public debt remained low. The current account deficit widened to 5.2 percent in 2014, but capital inflows were buoyant. Growth is expected to gradually rise toward its potential over the medium term, supported by the government’s public–private partnership-based infrastructure program and a gradual recovery in oil prices and external demand.
    Keywords: Colombia;debt, inflation, monetary fund, financial stability, macroeconomic policies
    Date: 2015–06–08
  31. By: Harald Badinger (Department of Economics, Vienna University of Economics and Business); Wolf Heinrich Reuter (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper estimates the effects of fiscal institutions on fiscal policy outcomes, addressing issues related to measurement and endogeneity in a novel way. Recently developed indices, based on partially ordered set theory, are used to quantify the stringency of fiscal rules. Identification of their effects is achieved by exploiting the exogeneity of institutional variables (checks and balances, government fragmentation, inflation targeting), which are found to be relevant determinants of fiscal rules. Our two-stage least squares estimates for (up to) 79 countries over the period 1985-2012 provide strong evidence that countries with more stringent fiscal rules have higher fiscal balances (lower deficits), lower interest rate spreads on government bonds, and lower output volatility.
    Keywords: Fiscal rules, fiscal balances, interest rates, volatility
    JEL: E62 H30 H60
    Date: 2015–08
  32. By: Guillermo Escudé (Central Bank of Argentina)
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2015–03
  33. By: Petrosky-Nadeau, Nicolas (Carnegie Mellon University and Federal Reserve Bank of San Francisco); Zhang, Lu (OH State University)
    Abstract: A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the unemployment crisis in the Great Depression. The limited responses of wages from credible bargaining to labor market conditions, along with the congestion externality from matching frictions, cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series. The welfare gain from eliminating business cycle fluctuations is large.
    JEL: E24 E32 J63 J64
    Date: 2013–12
  34. By: Philip R. Lane (Department of Economics, Trinity College Dublin);
    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 Ofinancial 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
  35. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: KEY ISSUES Recent Developments and Outlook. Solomon Islands held its parliamentary elections on November 19, 2014 and elected a new government led by Prime Minister Manasseh Sogavare, representing the Democratic Coalition for Change. The country’s Gold Ridge mine, its only gold mine, remains closed and the chances of it re-opening are limited given current gold prices. At the same time, the logging industry is being adversely affected by the depletion of forestry resources. As a result, the near-term outlook has worsened. While lower oil prices constitute a windfall to consumers and producers, diversifying sources of growth and boosting the competitiveness of the economy are key to strengthening medium-term growth prospects. The risks to the outlook are to the downside. Program Performance. Performance under the Extended Credit Facility (ECF) arrangement has been broadly satisfactory. Performance criteria for end-June 2014 were met by large margins. Indicative targets (ITs) for end September 2014 were also met, except for those on health and education spending, which were both narrowly missed in June and September 2014. Despite delays, the authorities have made progress in implementing the structural reform agenda. Policy Recommendations ? In the medium term, recalibrate ambitious spending plans in line with implementation capacity, revenue envelope, financing availability, and the need to preserve fiscal buffers for resilience against shocks given the serious setback in mining prospects linked to the closure of the only gold mine. ? Strengthen the quality of public spending and fiscal management by advancing Public Financial Management (PFM) reform, including improving the transparency and accountability in the use of constituency funds. ? Maintain the current monetary stance but stand ready to tighten policy if credit growth and inflationary pressures surge. ? Strengthen financial regulation and supervision, including supervision of the National Provident Fund, and improve private sector access to credit.
    Keywords: Extended Credit Facility;Economic indicators;Basket of currency peg;Letters of Intent;Monetary policy;Fiscal policy;Government expenditures;Press releases;Solomon Islands;Solomon Islands;Staff Reports;revenue, monetary fund, debt, exchange rate, investment
    Date: 2015–04–15
  36. By: International Monetary Fund. European Dept.
    Abstract: This 2015 Article IV Consultation highlights that Portugal’s significant flow imbalances have largely been corrected in the wake of the sovereign debt crisis, with employment increasing, output expanding, and the current account balance posting surpluses for the first time in decades. The economy has expanded at close to 1 percent per year on average since early 2013, with growth driven largely by consumption. The near-term outlook is benefiting from the trifecta of record-low interest rates, a weakening euro, and low oil prices. Output is expected to increase by 1.6 percent in 2015 and by 1.5 percent in 2016, with outlook for inflation improving as well.
    Keywords: Economic indicators;Banking sector;Article IV consultation reports;Corporate sector;Debt;Debt sustainability analysis;Fiscal reforms;Fiscal policy;Staff Reports;Press releases;Portugal;monetary fund, market, external debt, banking system
    Date: 2015–05–18
  37. By: Sly, Nicholas (Federal Reserve Bank of Kansas City); Weber, Caroline
    Abstract: Using a 30-year panel of quarterly GDP fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by 1/2 a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations’ GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations.
    Keywords: Bilateral Tax Treaties; Fiscal policy; GDP; Tax treaties
    JEL: E62 F42 H32 H87
    Date: 2015–08–01
  38. By: Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Corrado Di Guilmi (Economics Discipline Group, UTS Business School, University of Technology, Sydney); Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The idea of “animal spirits” has been widely treated in the literature with particular reference to investment in the productive sector. This paper takes a different view and analyses from a theoretical perspective the role of banks’ collective behaviour in the creation of credit that, ultimately, determines the credit cycle. In particular, we propose a dynamic model to analyse how the transmission of waves of optimism and pessimism in the supply side of the credit market interacts with the business cycle. We adopt the Weidlich-Haag-Lux approach to model the opinion contagion of bankers. We test different assumptions on banks’ behaviour and find that opinion contagion and herding amongst banks play an important role in propagating the credit cycle and destabilizing the real economy. The boom phases trigger banks’ optimism that collectively lead the banks to lend excessively, thus reinforcing the credit bubble. Eventually the bubbles collapse due to an over-accumulation of debt, leading to a restrictive phase in the credit cycle.
    Keywords: animal spirits; contagion; pro-cyclical credit cycle; financial fragility
    JEL: E12 E17 E32 G21
    Date: 2015–08–01
  39. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed's associated interest rate risk--including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed's losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.
    JEL: E43 E52 E58 G12
    Date: 2013–12
  40. By: Andrea Pescatori; Jarkko Turunen
    Abstract: We use a semi structural model to estimate neutral rates in the United States. Our Bayesian estimation incorporates prior information on the output gap and potential output (based on a production function approach) and accounts for unconventional monetary policies at the ZLB by using estimates of “shadow†policy rates. We find that our approach provides more plausible results than standard maximum likelihood estimates for the unobserved variables in the model. Results show a significant trend decline in the neutral real rate over time, driven only in part by a decline in potential growth whereas other factors (including excess global savings) matter. Neutral rates likely turned negative during the Global Financial Crisis and are expected to increase only gradually looking forward.
    Keywords: Monetary policy;United States;Neutral interest rate, output, interest, output gap, interest rates, General, Monetary Policy (Targets, Instruments, and Effects),
    Date: 2015–06–24
  41. By: M. LEQUIEN (Insee); A. MONTAUT (Insee)
    Abstract: At the end of 2013, the French GDP is only slightly higher than in the pre-crisis peak of 2008. Which part of the loss of activity is definitive? Providing an answer to this question brings to the fore two unobserved variables: potential GDP and output gap. These variables are difficult to estimate, especially on recent years, which calls for several estimation techniques. Four approaches are mobilized here: (A) the usual production function approach with two factors, capital and labor; (B) a variant thereof with a factor production, labor; (C) a multivariate filter improved with economic indicators and (D) a direct estimation of the output gap through a principal component analysis. According to these approaches, potential growth in France would lie between 0.7 % and 1.3% in 2014 and the output gap would be negative, between -2.3 and -3.5 GDP points in 2013, which signals capacity for economic rebound but confirms as definitive most of the loss of activity observed since the crisis. For the euro area, potential growth would stand between 0.2% and 0.7% in 2014 and the demand deficit would be close to the French one. These approaches all have pros and cons. They deliver different readings of the recent past. Thus, approaches (B) and (D) signal a loss of potential GDP concentrated at the time of crisis, followed by a recovery stronger than suggested by the two others approaches.
    Keywords: potential growth, potential output, output gap, production function, employment equation, state space model, principal component analysis, financial crisis
    JEL: C32 E22 E32 E60 O47
    Date: 2014
  42. By: International Monetary Fund. European Dept.
    Abstract: This 2015 Article IV Consultation highlights that the economy of Poland has recovered from the 2012–13 slowdown. Growth accelerated to 3.4 percent in 2014, and further to 3.6 percent in the first quarter of 2015, on the back of buoyant domestic demand, supported by improving labor market and financial conditions. However, inflation has remained negative since July 2014 owing to low commodity prices and weak imported inflation. The outlook is for continued robust growth and subdued inflation amid downside risks. Economic expansion is expected to continue, with growth projected at 3.5 percent in 2015 and over the medium term.
    Keywords: Poland;inflation, monetary fund, monetary policy, market, credit growth
    Date: 2015–07–14
  43. By: International Monetary Fund. European Dept.
    Abstract: This 2015 Article IV Consultation highlights that Italy’s economy is emerging gradually from a prolonged recession. Financial market sentiment and confidence indicators have improved substantially since end-2014. Despite the recent bouts in volatility, sovereign bond yields have fallen to precrisis levels buoyed by the European Central Bank’s quantitative easing. Bank and corporate funding costs have declined. Rising business and consumer confidence has stemmed the decline in domestic demand. Against this backdrop, the economy is expected to recover moderately, with real GDP projected to expand by 0.7 percent in 2015, supported by domestic demand and net exports.
    Keywords: Italy;debt, market, investment, public debt, balance sheets
    Date: 2015–07–07
  44. By: Deryugina, Elena (BOFIT); Ponomarenko, Alexey (BOFIT); Sinyakov , Andrey (BOFIT); Sorokin , Constantine (BOFIT)
    Abstract: We apply several tests to the underlying inflation metrics used in practice by central banks and/or proposed in the scientific literature, in an attempt to find the best-performing indicators. We find that although there is no single best measure of underlying inflation, indicators calculated on the basis of dynamic factor models are generally among the best performers. These best performers not only outdid the simpler traditional underlying indicators (trimmed and exclusion-based measures) but also proved to be economically meaningful and inter-pretable.
    Keywords: underlying inflation; core inflation; monetary inflation; dynamic factor model; Russia
    JEL: C32 E31 E32 E52
    Date: 2015–08–18
  45. By: International Monetary Fund. European Dept.
    Abstract: Context. The recovery has strengthened and employment is increasing, driven by the rebound in consumption and investment. Reforms and strong policy implementation have supported the return of confidence, and significant external tailwinds are helping. However, the level of unemployment remains very high and without further reforms the growth momentum is expected to slow in the medium-term. This reflects still sizable public and private debt overhangs and persistent structural problems, including remaining impediments in the labor market and the low productivity of Spain’s many small firms. Policies. Sustaining the current high levels of growth and job creation over the medium term and further reducing vulnerabilities will require additional policy efforts. Key priorities include the following: Enhancing labor market performance. Maintaining wage growth in line with developments in productivity and external competitiveness, ensuring wages adequately reflect differing business conditions across firms, lowering duality, and enhancing the skills of the long-term unemployed will improve prospects for higher and more inclusive growth also in the medium term. Supporting growth of small firms. Removing obstacles for Spain’s many small firms to grow will allow them to benefit from economies of scale both in domestic and external markets and raise productivity. Facilitating private deleveraging. Continuing to reduce firm and, especially, household debt will foster investment and growth. Further strengthening the banking system will ensure that banks can support growth as credit demand recovers. Anchoring confidence. Sustaining a gradual and growth-friendly fiscal consolidation, well coordinated across all levels of governments, will help maintain strong market confidence and put public debt on a firmly declining path.
    Keywords: Economic indicators;Economic recovery;Debt sustainability analysis;Banking sector;Balance of payments statistics;Article IV consultation reports;Labor markets;Press releases;Fiscal reforms;Fiscal policy;Spain;Staff Reports;Unemployment;market, debt, labor market, investment, monetary fund
    Date: 2015–08–14
  46. By: International Monetary Fund. European Dept.
    Abstract: This 2015 Article IV Consultation highlights that Aruba has been recovering from a severe double-dip recession. The economy faced two major shocks over the past five years—the global financial crisis and shutdown of the Valero oil refinery in 2012. After a strong recovery in 2013 with growth reaching 4.75 percent, the pace of activity moderated in 2014. In 2015, growth is projected to rise to 2.25 percent. The tourism sector—the mainstay of the Aruban economy—is envisaged to grow, albeit at a slower rate. Moreover, domestic demand is slated to recover notably amid subsiding policy uncertainty and as key public-private partnership projects move forward.
    Keywords: Economic recovery;Economic indicators;Fiscal consolidation;Debt sustainability analysis;Aruba;Article IV consultation reports;Press releases;Staff Reports;Netherlands;Monetary policy;Fiscal policy;Tourism;debt, monetary fund, market, external debt
    Date: 2015–05–07
  47. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey; Department of Economics, University of Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Mawuli Segnon (Department of Economics, University of Kiel, Germany)
    Abstract: This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, we apply a mixed-frequency Markov-switching vector autoregressive (MF-MSVAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. Our results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. Our results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.
    Keywords: Business cycles, Economic policy uncertainty, Mixed frequency, Markovswitching VAR models
    JEL: E32 E37 C32
    Date: 2015–08
  48. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria Author-Email:
    Abstract: We test the inertial properties of South African inflation in a Markov-Switching autoregressive fractionally integrated moving average model. This allows us to test for long memory and study the persistence of inflation in multiple regimes. We show that inflation is more volatile and persistent during high inflation episodes relative to low inflation episodes. We estimate that it takes approximately 70 months for 50 percent of the shocks to dissipate in a high inflation regime compared to 10 months in a low inflation regime.
    Keywords: Inflation persistence; MS-ARFIMA; inflation regimes
    JEL: E31 C20
    Date: 2014
  49. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at The Global Interdependence Center's Seventh Annual Rocky Mountain Economic Summit, Victor, Idaho, July 10, 2015.
    Date: 2015–07–10
  50. By: Reinhart, Carmen M. (Harvard University); Reinhart, Vincent (American Enterprise Institute); Rogoff, Kenneth (Harvard University)
    Abstract: This paper explores the menu of options for renormalizing public debt levels relative to nominal activity in the long run, should governments eventually decide to do so. Orthodox ones for medium-term debt stabilization, the standard fare of officialdom, include enhancing growth, running primary budget surpluses, and privatizing government assets. Heterodox polices include restructuring debt contracts, generating unexpected inflation, taxing wealth, and repressing private finance. We examine 70 episodes across 22 advanced economies from 1800 to 2014 where there were significant and sustained reductions in public debt relative to nominal GDP. In the event, advanced countries have relied far more on heterodox approaches than many observers choose to remember.
    JEL: E43 H63
    Date: 2015–02
  51. By: Levy Yeyati, Eduardo (Harvard University and Universidad Torcuato di Tella); Zuniga, Jimena (Universidad Torcuato di Tella)
    Abstract: Capital flows have been the subject of key policy concern since the Brady plan launched the emerging markets asset class. Their massive volume, coupled with their volatile and procyclical nature, is often associated with a variety of financial and real risks: excess exchange rate volatility (gradual overvaluation and sharp corrections), dollar liquidity crunches, distressed asset sales, and crisis propensity. These risks have changed over time. Emerging market crises in the 1990s and 2000s were inherently driven by financial dollarization and balance sheet effects, the latter were intimately related with capital inflows in the form of growing foreign liability positions. But, now that financial dollarization has receded in the emerging market word (either through debt deleveraging or international reserve accumulation), the focus shifted to the macroeconomic effects of cross market flows, including extended periods of exchange rate misalignment and the amplification of business cycles in a context of large and persistent terms-of-trade shocks and global liquidity swings. Hence, the difficulty of evaluating capital flows based on data mostly from the 1990s and early 2000s. Hence, also, the emphasis on the recent empirical literature that revisits the issue with fresh data and an open mind.
    Date: 2015–05
  52. By: Pranav Gupta; Grace Bin Li; Jiangyan Yu
    Abstract: Some resource-rich developing countries are in the process of harnessing immense mining resources towards inclusive growth and prosperity. Nevertheless, tapping into natural resources could be challenging given the large front-loaded investment, volatile capital flows and exposure to global commodity markets. Public investment is needed to remove the often-large infrastructure gap and unlock the economic potential. However, too rapid fiscal outlays could push the economy to its limit of absorptive capacity and increase macro-financial vulnerabilities. This paper utilizes a structural model-based approach to analyze macroeconomic impacts of different public investment strategies on key fiscal and non-fiscal variables such as debt, consumption, sovereign wealth fund, and real exchange rates. We apply the model to Mongolia and draw policy recommendations from the analysis. We find that fiscal policy adjustment, particularly moderating infrastructure investment and optimizing investment efficiency is needed to maintain macroeconomic and external stability, as well as to boost the long-term sustainable growth for Mongolia.
    Keywords: Mongolia;Natural resources management, Debt sustainability, Public investment, investment, debt, revenues, budget, International Lending and Debt Problems, Exhaustible Resources and Economic Development,
    Date: 2015–04–30
  53. By: Gabriel Chodorow-Reich; Johannes Wieland
    Abstract: We study the effect of mean-preserving idiosyncratic industry shocks on business cycle outcomes. We develop an empirical methodology using a local area's exposure to industry reallocation based on the area's initial industry composition and employment trends in the rest of the country over a full employment cycle. Using confidential employment data by local area and industry over the period 1980-2014, we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical results subject to inclusion of two key, empirically plausible frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model results, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level.
    Date: 2015–01
  54. By: Dodig, Nina; Hein, Eckhard; Detzer, Daniel
    Abstract: This paper analyses the long-run effects of financialisation and of the recent financial and economic crises for 15 countries. In order to provide a theoretical framework, we first outline three types of regimes under the conditions of financialisation, namely a debtled private demand boom, an export-led mercantilist, and a domestic demand-led regime. We then take a look at the sectoral financial balances of the main macroeconomic sectors and at the growth contributions of the demand aggregates for each of the 15 countries, focusing in particular on the trade cycle before the crises. This enables us to cluster these countries according to the typology of regimes and describe the development dynamics among various groups, which were complementary and often mutually reinforcing, in the years leading up to the crises. Subsequently, we focus on the period following the outbreak of the crises and, by considering transmission mechanisms and main obstacles to recovery, analyse how countries in each of these clusters were affected. Finally, we focus on the regime shifts which have taken place in the course of the crises and we discuss the implications of these recent developments for the world economy.
    Keywords: finance-dominated capitalism,financialisation,financial and economic crises,trade cycle,financial balances,distribution of income,current account imbalances
    JEL: D31 D33 E44 E63 E65 F40 F43 G01 H12
    Date: 2015
  55. By: Chakrabarti, Anindya S.
    Abstract: This paper studies the effects of monetary policies in newly industrialized economies characterized by extremely low level of labor and capital mobility between urban and rural sectors. Policies are executed in the urban sector which sends waves of adjustments in the rest of the economy. I show that with liquidity constraints and immobility in labor and capital, the sector- specific effects are markedly different from those in a one-sector economy. In particular, they are asymmetric and the rural sector lags behind the urban sector during the adjustment process. This explains temporary phases of significantly high inflaction with uneven sectoral effects which often accompany major reforms in the banking and monetary institutions of such economies, e.g. in case of India. Finally, as the consumption patterns alter in such an economy undergoing structural changes, the sectoral distribution of liquidity is affected inducing dissimilar responses to shocks, both within and between sectors.
  56. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: This 2015 Article IV Consultation highlights that after a sharp contraction in the first quarter of 2014, Thailand’s economy experienced a modest recovery in subsequent quarters, to expand by 0.7 percent in the year as a whole. Inflation decelerated toward the end of 2014 and became negative in January 2015 owing to a sharp decline in oil prices. The recovery is expected to continue in 2015 with growth projected at 3.7 percent on account of some rebound in consumption, including from lower fuel prices, and in private investment as backlogs of project approvals have been largely cleared by various government agencies.
    Keywords: Debt sustainability analysis;Bank supervision;Article IV consultation reports;Energy prices;Economic indicators;Press releases;Staff Reports;Monetary policy;Fiscal policy;Fiscal reforms;Thailand;Subsidies;inflation, debt, investment, monetary fund, exchange
    Date: 2015–05–07
  57. By: Lorenzo Boldrini (Aarhus University and CREATES); Eric Hillebrand (Aarhus University and CREATES)
    Abstract: We study the forecast power of the yield curve for macroeconomic time series, such as consumer price index, personal consumption expenditures, producer price index, real disposable income, unemployment rate, and industrial production. We employ a state-space model in which the forecasting objective is included in the state vector. This amounts to an augmented dynamic factor model in which the factors (level, slope, and curvature of the yield curve) are supervised for the macroeconomic forecast target. In other words, the factors are informed about the dynamics of the forecast objective. The factor loadings have the Nelson and Siegel (1987) structure and we consider one forecast target at a time. We compare the forecasting performance of our specification to benchmark models such as principal components regression, partial least squares, and ARMA(p,q) processes. We use the yield curve data from G¨urkaynak, Sack, and Wright (2006) and Diebold and Li (2006) and macroeconomic data from FRED. We compare the models by means of the conditional predictive ability test of Giacomini and White (2006). We find that the yield curve has more forecast power for real variables compared to inflation measures and that supervising the factor extraction for the forecast target can improve forecast performance.
    Keywords: state-space system, Kalman filter, factor model, supervision, forecasting, yield curve. JEL classification: C32, C38, E43
    Date: 2015–08–24
  58. By: G.Levieuge
    Abstract: This paper aims to develop a parsimonious model to explain and forecast bank loans to non-financial companies during calm periods as well as in situations of financial turmoil. In doing so, we are led to gauge the marginal informational content of simple leading indicators, and to investigate potential non-linearity in credit dynamics. This framework is applied to the French context, over a period including financial, banking and sovereign debt crises. In accordance with firms and banks’ balance sheets effects, the growth rate of equity prices appears to be one of the most interesting leading indicator as well as a significant threshold variable for explaining regime switching. However, our results highlight the difficulties to accurately predict the right credit dynamics regimes. A simple VAR model finally performs better.
    Keywords: Credit ; Forecast ; VECM ; Threshold VAR ; leading indicators.
    JEL: E51 E47 C22
    Date: 2015
  59. By: Christian Schoder (Department of Economics, New School for Social Research)
    Abstract: By the aid of a simple but widely accepted model, the conventional micro-foundation of behavioral hypothesis postulated in post-Keynesian theory in the Kaleckian tradition is critically reviewed. Inconsistencies are identied along three dimensions: A methodological inconsistency arises from presenting macroeconomic arguments formally and microeconomic arguments verbally. An internal inconsistency prevails when the micro-considerations for dierent behavioral rules are mutually inconsistent. An ontological inconsistency arises since the postulated behavioral rules are invariant to endogenous changes in the micro-environment whereas the micro-considerations imply them to adjust endogenously. We arrive at two conclusions: First, re-visiting the issue of micro-foundation within the post-Keynesian framework may be a rewarding line of research. Second, the post-Keynesian research paradigm should be open to various forms of consistent micro-foundations as long as the economic mechanism characterized by the model are post-Keynesian.
    Keywords: Post-Keynesian economics, micro-foundations, economic methodology, ontology
    JEL: B41 B50 E12
    Date: 2015–08
  60. By: B. CAMPAGNE (Insee); V. ALHENC-GELAS (Insee); J.-B. BERNARD (Insee)
    Abstract: In this paper, we investigate the role of financial acceleration phenomena in France over the period 1987-2013. Constructing a threshold-VAR model allowing for two credit regimes, we formally test for the presence of a financial acceleration and present generalized impulse response functions. Using the volatility of the French stock index CAC40 and the lending spread between small and large firms as credit stress indicators, we show weak evidence of the existence of a global financial accelerator in France and also provide a simple method for computing contributions in threshold-VAR. We insist on the difficulty to construct stable financial sphere - real economy interactions models for France or to identify adequate credit stress indicators.
    Keywords: credit constraint, flight to quality, generalized impulse response function, threshold VAR (TVAR)
    JEL: C15 C32 E32 E51
    Date: 2015
  61. By: Alberto Cavallo
    Abstract: This paper introduces Scraped Data as a new source of micro-price information to measure price stickiness. Scraped data, collected from online retailers, have no time averaging or imputed prices that can affect pricing statistics in traditional sources of micro-price data. Using daily prices of 80 thousand products collected in five countries with varying degrees of inflation, including the US, I find that relative to previous findings in the literature, scraped online prices tend to be stickier, with fewer price changes close to zero percent, and with hump-shaped hazard functions that initially increase over time. I show that the sampling characteristics of the data, which minimize measurement biases, explain most of the differences with the literature. Using the cross-section of countries, I also show that only the relative frequency of price increases over decreases correlates with inflation.
    JEL: E30 E60
    Date: 2015–08
  62. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: What risks do asset price bubbles pose for the economy? This paper studies bubbles in housing and equity markets in 17 countries over the past 140 years. History shows that not all bubbles are alike. Some have enormous costs for the economy, while others blow over. We demonstrate that what makes some bubbles more dangerous than others is credit. When fueled by credit booms, asset price bubbles increase financial crisis risks; upon collapse they tend to be followed by deeper recessions and slower recoveries. Credit-financed housing price bubbles have emerged as a particularly dangerous phenomenon.
    Keywords: bank lending; boom; bust; crises; debt overhang; local projections
    JEL: C14 C32 E44 E51 G01 N10 N20
    Date: 2015–08
  63. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: EXECUTIVE SUMMARY1 There are constraints on the ability of both banks and the Central Bank of Bosnia and Herzegovina (CBBH) to manage liquidity. The system lacks a central bank liquidity window, and the secondary market for government securities is also small and illiquid. Despite the existing infrastructure, money market and interbank markets are also relatively small, reflecting both high levels of bank liquidity and the fact that foreign banks’ internal risk management practices aim to minimize exposures vis-à-vis the domestically-owned banks. Given the currency board arrangement (CBA), the aforementioned limitations call for conservative liquidity management and liquidity buffers for banks. The use of reserve requirements should be better tailored towards prudential purposes. There is scope to amend the system to support systemic liquidity management. First, n times of stress, the CBBH could consider increasing the flexibility of RR holdings and introducing daily or period- minimum holding thresholds. This should be combined with higher penalty rates, accompanied by enhanced supervision, before sanctions are applied. Second, for the RR base, the CBBH should consider residual maturities and set a minimum daily requirement. Lastly, the CBBH should consider the adequacy of existing RR levels, since they were significantly lowered during the financial crises. Liquidity regulations should be streamlined and the adoption of the LCR would strengthen liquidity management. For the purpose of maturity calculations of liquidity ratios, it would important to take into account early deposit withdrawal options. The minimum liquidity ratio should be raised above the RR to ensure that it is binding. Upon adoption of the LCR, care would be needed in treating RRs as high quality liquid assets (HQLA), given their uncertain availability to meet liquidity pressures. Also, there could be a need to calibrate the haircut applied to public securities for the purposes of the LCR, given the shallow market, the assumptions for deposits/borrowed funds run-off rates, and the treatment of liabilities maturing after 30 days with a prepayment clause. Given the high level of euroization, currency-specific LCRs should also be considered. The banking agencies have statutory authority to require corrective actions by banks, but enforcement powers are limited. The agencies have developed guidance on the use of corrective powers, including setting out triggers for corrective actions based on breaches of capital, liquidity, and asset quality requirements. However, their authority to impose financial penalties for noncompliance, or to permanently suspend board members and controlling owners is limited, except under provisional administration. Similarly, the authority for replacing or restricting the powers of controlling owners outside of provisional administration is also limited. The deposit insurance framework is a relatively well developed paybox scheme, but further enhancements of the deposit insurance arrangements would be beneficial.
    Keywords: Macroprudential Policy;Liquidity management;Financial safety nets;Financial Sector Assessment Program;Bosnia and Herzegovina;Bank supervision;Banking sector;bank, banks, banking, insurance, deposit insurance
    Date: 2015–08–03
  64. By: Reinhart, Carmen M. (Harvard University); Trebesch, Christoph (Ludwig Maximilian U Munich and CESifo, Munich)
    Abstract: This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920-1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978-2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings.
    JEL: E60 F30 H60 N00
    Date: 2015–06
  65. By: Gita Gopinath; Sebnem Kalemli-Ozcan; Loukas Karabarbounis; Carolina Villegas-Sanchez
    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.
    JEL: D24 E22 F41 O16 O47
    Date: 2015–08
  66. By: Evans, Martin
    Abstract: This paper examines the persistent deterioration in the international external position of the U.S. over the past 60 years. I develop a model without Ponzi schemes and arbitrage opportunities that accounts for both the secular rise and the cyclical variations in the U.S. international debt position. The model estimates quantify the role played by financial and real factors in driving these dynamics, and their impact on the steady state debt position. I find that financial factors raise the steady state debt level by three percent of GDP, and account for 80 percent the cyclical variations. In contrast, real factors associated with trade flows are the dominant drivers of the secular rise in the debt position. I argue that these empirical findings are at odds with recent models of global imbalances that focus on demographics and asymmetric financial development. They also represent a substantial challenge to the view that the U.S. external position is on a sustainable path.
    Keywords: Global Imbalances, External Positions, Current Accounts, Trade Flows, Valuation Effects, Stochastic Discount Factors, International Asset Pricing
    JEL: E0 E6 F3 F32 F34 F41
    Date: 2015–08–19
  67. By: International Monetary Fund. Western Hemisphere Dept.
    Abstract: This Selected Issues paper describes recent investment dynamics in Peru, and assesses the relationship between private investment and its fundamentals. Over the last decade, average growth in Peru exceeded 6 percent, anchored by a substantial contribution from investment. A series of structural reforms in the 1990s, growing political stability, and the implementation of a solid macroeconomic framework in the early 2000s set the stage for this investment boom. Actions were also taken to strengthen public investment implementation and to enhance the overall investment climate. Now that commodity prices have softened and interest rates are expected to rise, addressing the next generation of structural reforms will be crucial to sustain investment and growth.
    Keywords: Economic models;Economic growth;Investment;Selected Issues Papers;Peru;Real effective exchange rates;Taxation;Tax system reviews;private investment, capital, interest, public investment
    Date: 2015–05–27
  68. By: Reinhart, Carmen (Harvard University); Reinhart, Vincent (American Enterprise Institute); Tashiro, Takeshi (Japanese Ministry of Economy Trade and Industry and RIETI, Tokyo)
    Abstract: It is understood that investment serves as a shock absorber in times of crisis. The duration of the drag on investment, however, is perplexing. For the Asian economies we study, average investment/GDP is about 6 percentage points lower during 1998-2014 than its average level in the decade before the Asian crisis; the decline is greater if China is excluded. We document how in the wake of crisis home bias in finance increases markedly as public and private sectors look inward when external financing becomes prohibitively costly or undesirable from a financial stability perspective. Reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out and leakages, driven importantly by rising home bias in finance and by official capital outflows. We present evidence from Asia and advanced European economies with managed currencies to support this interpretation.
    JEL: E20 F30 F40 F50 G15 H60
    Date: 2015–07
  69. By: Širůček, Martin
    Abstract: Monograph on the Causal Relation of Money Supply and American Stock Market deals with the effect of the change of nominal money supply on the American stock index in the studied period 1967–2014. The „Industrial“ stock index Dow Jones Industrial Average, which is considered a barometer of the development of American economy and stock market was chosen as a representative of the American stock market since it includes 30 largest American corporations with the highest liquidity (blue chips). The nominal money supply is represented by the wider monetary aggregate M2, which the mentioned authors use in their analyses too, analyzing additionally also the relation of MZM monetary aggregate preferred by some authors in performing stock analyses. The empirical part of the study monitors the effect of nominal money supply in the period from January 1967 to December 2014. Within this empirical part, the studied period is divided into six time segments to capture current events on the market because the sufficiently long and current horizon covers interesting situations on the market. In a partial analysis, attention is paid also to the existence of price bubbles on the stock markets. The aim of the empirical analyses is to decide whether the nominal money supply on the given market represents a significant factor causing the occurrence of price bubbles. Using both Czech and foreign sources, the empirical analyses apply standard methodological procedures the results of which are in the final part of the study confronted with relevant expert resources and embedded in a wider framework. Thus, the results of the study allow to discuss whether the nominal money supply is actually a significant factor for equity investors, which determines stock prices, and whether this factor is pivotal for explaining the development of stock markets either during a long period of time or in the period of equity bubbles. The study also suggests other possible directions for the solution of the concerned issue the results of which can be compared with the results of this work.
    Keywords: money supply, liquidity, stock market, causality, Granger test peněžní nabídka, likvidita, akciový trh, kauzalita, Grangerův test
    JEL: E44 G11 G15
    Date: 2015–08–30
  70. By: Guðmundsson, Björn Rúnar
    Abstract: Financialisation in Iceland should be seen as an evolving process driven by a mixture of global and domestic forces. Responding to fundamental issues underlying macroeconomic imbalances, the authorities introduced policies that proved particularly supportive of financial expansion at a time when cross-border capital movements were rapidly on the rise. Consequently, the rise in financial activity has had profound effects on income distribution and corporate and household behaviour. Following the 2008 financial meltdown, which was triggered by excessive growth of the financial sector, financialisation in Iceland has reversed to a degree, allowing for a shift away from financial-led towards increasingly export-led growth.
    Keywords: economic development,financialisation,financial crisis
    JEL: E02 E21 E22 E25 F36 G01 O11
    Date: 2015
  71. By: G.Levieuge
    Abstract: The objective of this paper is to assess the relevance and the predictive content of the indicators stemming from the ten-year-old quarterly Bank Lending Survey (BLS) on credit distribution. First, we validate the coherence of the BLS indicators by cross-checking indicators that are supposed to deliver similar information, and by comparing them to a broad set of actual macroeconomic and financial variables. Second, econometric tests reveal that the demand-side indicators of the BLS, but not the supply-side ones, are particularly relevant for explaining and forecasting loans to non-financial companies in France.
    Keywords: Credit ; Forecast ; VECM ; Threshold VAR ; leading indicators.
    JEL: E51 E47 C22
    Date: 2015
  72. By: Airapetyan, Mamikon (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Aleschenko, Natalya (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Arushanyan, Vitaliy (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The development of the global and national economies, including the economies of Russia, held in the framework of large - 34-year-old infrastructure, small - a 4.3-year business and midget - 6-month tactical global economic cycles. World economy and country, including the Russian economy, including sectors, industries and enterprises exist simultaneously in the same rhythm and mode of global economic development - '200-year cyclical waves". In a stand-alone assessment tacos th development are distorted and do not reflect an adequate picture of the economic re-majoring, and therefore can not form the basis of the analysis and forecasting of the development. At the turn of XIX-XX centuries. It adds two simultaneous and large areas of "experience analysis and forecasting cyclical fluctuations in the economy." The first direction is represented institutionally NBER since 1920, which led to the domination of the American school in the world of business cycles, systems analysis and forecasting of the economy. Second - Russian - the direction has no institutional representation, although represented by such large - world-renowned scientists in the field of studies of economic cycles and crises, as M. Tugan-Baranowski, Bunyatyan M. and N. Kondratiev. This situation requires a radical revision aimed at "legalization" of this trend in the Russian and world economic thought in the theory and practice of public administration. This study developed a methodological model of the global economic - cycle infrastructure, the application of which will effectively analyse and predict cyclical fluctuations, to conduct an adequate anti-crisising policies. Experience in analysis and forecasting of cyclical fluctuations in the economy (for example, the National Bureau of Economic Research in the annex to the economy and the anti-crisis policy of Russia).
    Keywords: global economic cycles, 200-year cyclical waves
    Date: 2015–04
  73. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Using his European Debt Simulation Model (EDSM), Cline examines whether and to what extent additional debt relief is needed in Greece under the new circumstances. Greece’s debt burden is significantly lower than implied by the ratio of its gross debt to GDP, because of concessional interest rates on debt owed predominantly to the euro area official sector. The IMF’s call for debt relief recognizes the lower interest burden but argues that the gross financing requirement is on track to exceed a sustainable range of 15 to 20 percent. But in the Fund’s June Debt Sustainability Analysis that threshold would not be exceeded until after 2030. A sustainability diagnosis based on such a distant future date would seem at best illustrative rather than definitive. The euro area creditors might, nonetheless, be well advised to provide two types of interest relief: an earmarked portion of interest otherwise due to finance a public works employment program; and additional interest relief to compensate for budget shortfalls caused by growth below plan levels. The sovereign debt situation should be alleviated by carrying out the bank recapitalization directly from the European Stability Mechanism to the banks, rather than through the sovereign as the intermediary. The large increase in the ratio of gross debt to GDP imposed by bank recapitalization is mostly an optical illusion because there would be a corresponding rise in state assets, but this increase could, nonetheless, further erode perceptions of sustainability.
    Date: 2015–08
  74. By: Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Chodorow-Reich, Gabriel (Harvard University)
    Abstract: The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefit levels, eligibility and take-up of benefits, consumption by labor force status, hours per worker, taxes, and preference parameters. Our estimated opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in many leading models of the labor market than that observed in the data, irrespective of the level of the opportunity cost.
    Keywords: Opportunity cost of employment; Unemployment fluctuations
    JEL: E24 E32 J64
    Date: 2015–08–26
  75. By: Achury, Carolina; Koulovatianos, Christos; Tsoukalas, John
    Abstract: We develop a dynamic recursive model where political and economic decisions interact, to study how excessive debt-GDP ratios affect political sustainability of prudent fiscal policies. Rent seeking groups make political decisions - to cooperate (or not) - on the allocation of fiscal budgets (including rents) and issuance of sovereign debt. A classic commons problem triggers collective fiscal impatience and excessive debt issuing, leading to a vicious circle of high borrowing costs and sovereign default. We analytically characterize debt-GDP thresholds that foster cooperation among rent seeking groups and avoid default. Our analysis and application helps in understanding the politico-economic sustainability of sovereign rescues, emphasizing the need for fiscal targets and possible debt haircuts. We provide a calibrated example that quantifies the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.
    Keywords: sovereign debt,rent seeking,world interest rates,international lending,incentive compatibility,tragedy of the commons,EU crisis,Grexit,Graccident
    JEL: H63 F34 F36 G01 E44 E43 D72
    Date: 2015
  76. By: International Monetary Fund. African Dept.
    Abstract: This paper discusses Tanzania’s Second Review Under the Policy Support Instrument (PSI). Tanzania’s macroeconomic performance remains strong. Program performance since the last review has been uneven. All end-2014 assessment criteria were met, though the indicative target on tax revenue collection was missed. Good progress was made on structural benchmarks. Shortfalls in domestic revenue continued in early 2015, and delays were incurred in mobilizing external financing and adjusting expenditure in the context of the mid-year budget review. The IMF staff recommends completion of the second PSI review and modification of assessment criteria on net international reserves and net domestic financing for end-June 2015.
    Keywords: Tanzania;deficit, revenue, monetary fund, instrument, budget
    Date: 2015–07–10
  77. By: Francesco Caselli; Miklós Koren; Milan Lisicky; Silvana Tenreyro
    Abstract: A widely held view is that openness to international trade leads to higher GDP volatility, as trade increases specialization and hence exposure to sector-specific shocks. We revisit the common wisdom and argue that when country-wide shocks are important, openness to international trade can lower GDP volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversification) and provide a new answer to the question of whether and how international trade affects economic volatility.
    JEL: E32 F4 F41 F44
    Date: 2015–08
  78. By: GUIMARAES, Bernardo; MAZINI, André; MENDONÇA, Diogo de Prince
    Abstract: This paper proposes a test for distinguishing between time-dependent and state-dependent pricing based on whether the timing of pricing changes is affected by realized or expeted inflation. Using Brazilian data and exploring a large discrepancy between realized and expected inflation in 2002-3, we obtain a strong relation between expected inflation and duration of price spells, but little effect of inflation shocks on the frequency of price adjustment. The results thus support models with timedependent pricing, where the timing for following changes is optimally chosen whenever firms adjust prices
    Date: 2015–03–25
  79. By: MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni
    Abstract: Real exchange rate is an important macroeconomic price in the economy and a ects economic activity, interest rates, domestic prices, trade and investiments ows among other variables. Methodologies have been developed in empirical exchange rate misalignment studies to evaluate whether a real e ective exchange is overvalued or undervalued. There is a vast body of literature on the determinants of long-term real exchange rates and on empirical strategies to implement the equilibrium norms obtained from theoretical models. This study seeks to contribute to this literature by showing that it is possible to calculate the misalignment from a mixed ointegrated vector error correction framework. An empirical exercise using United States' real exchange rate data is performed. The results suggest that the model with mixed frequency data is preferred to the models with same frequency variables
    Date: 2015–03–25
  80. By: Reinhart, Carmen (Harvard University); Santos, Miguel Angel (Harvard University)
    Abstract: The literature on external default has stressed the existence of the so-called debt-intolerance puzzle: developing nations tend to default at debt-to-GDP ratios well bellow those of developed countries. The underestimation or plain omission of domestic debt may account for a fraction of that puzzle. We calculate fiscal revenues coming from financial repression using different methodologies for the case of Venezuela, and look at their correspondence with comprehensive measures of capital flight. In particular, we add to the standard measure of capital flight the over-invoicing of imports, rife in periods of exchange controls. We find that financial repression accounts for public revenues similar to those of OECD economies, in spite of the latter having much higher domestic debt-to-GDP ratios. We also find that financial repression and capital flight are significantly higher in years of exchange controls and interest rate caps. We interpret this as significant evidence suggesting a link between domestic disequilibrium and a weakening of the net foreign asset position via capital flight.
    JEL: E66 F32 F34
    Date: 2015–04
  81. By: Paul Beaudry; Patrick Fève; Alain Guay; Franck Portier
    Abstract: When the VAR representation of a times series has a non-fundamental representation, standard SVAR techniques cannot be used to exactly identify the effects of structural shocks. This problem is know to potentially arise when one of the structural shocks represents news about the future. However, as we shall show, in many case the non-fundamental representation of a time series may be very close to its fundamental representation implying that standard SVAR techniques may provide a very good approximation of the effects of structural shocks even when the non-fundamentalness is formally present. This leads to the question: When is non-fundamentalness a real problem? In this paper we derive and illustrate a diagnostic based on a $R^2$ which provides a simple means of detecting whether non-fundamentalness is likely to be a quantitatively important problem in an applied settings. We use the identification of technological news shocks in US data as our running example.
    JEL: E3
    Date: 2015–08
  82. By: Matthew Jaremski; Peter L. Rousseau
    Abstract: U.S. Bank deposits by individuals grew from 4% of GDP at the time of the National Banking Acts in 1863-64 to 23% by the time of the Federal Reserve’s founding. A comprehensive collection of bank- level data shows that most gains occurred immediately after the Acts, Specie Resumption in 1879, and the Election of 1896, and occurred across banks of all ages and types. Checking accounts, clearinghouses, rising incomes, and urbanization contributed to the increasing preference for deposits, but greater confidence in banks also seems to have been central, with highly capitalized banks from earlier entry cohorts seeing the largest gains.
    JEL: E21 G21 N21
    Date: 2015–08
  83. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This paper discusses findings of the Detailed Assessment of Observance on the Insurance Core Principles on Ireland. It highlights that the Central Bank of Ireland (CBI) has made significant progress in updating the regulatory regime, and the impending implementation of Solvency II (SII) is expected to address most of the regulatory gaps noted in the assessment. The Central Bank Supervision and Enforcement Act of 2013 has significantly enhanced CBI’s supervision and enforcement powers. CBI’s preparation for SII is well advanced, and a dedicated SII project has been in place since 2010.
    Keywords: Financial Sector Assessment Program;Reports on the Observance of Standards and Codes;Ireland;Ireland;Insurance supervision;Insurance regulations;insurance, insurers, reinsurance, central bank, governance
    Date: 2015–05–13
  84. By: Andrew B. BERNARD; OKUBO Toshihiro
    Abstract: This paper explores the role of product adding and dropping within manufacturing firms over the business cycle. While a substantial body of work has explored the importance of the extensive margins of firm entry and exit in employment and output flows, only recently has research begun to examine the adjustment across products within firms and its importance for firm and aggregate output and employment flows. Using a novel, annual firm-product data set covering all Japanese manufacturing firms with more than four employees from 1992 to 2006, we provide the first evidence on annual changes in product adding and dropping by continuing firms over the business cycle. We find very high rates of product adding and dropping by continuing firms between the last year of the recession and the first year of the subsequent expansion and offer an explanation and supporting evidence based on a "trapped factors" model of firm behavior.
    Date: 2015–08
  85. By: Chakrabarti, Anindya S.
    Abstract: At the country level, macroeconomic volatility tends to correlate with trade openness although the direction of correlation is not stable across samples. Here I consider trade networks as sum of all pairwise trade linkages to emphasize that different linkages contribute differently to the transmission or mitigation of shocks, and show that across the network volatility is inversely related to centrality, a summary measure of strength of the linkages specific to a country. I study a multi-country, multi-sector trade model subject to idiosyncratic productivity and liquidity shocks, and characterize volatility as an explicit function of centrality, diversification and the Herfindahl of the trade network in equilibrium. With sufficient skewness in trade linkages across countries, similar shocks generate different levels of repercussions across the network. The conventional effect of diversification holds true that countries with better diversified portfolio fluctuate less compared. Centrality directly contributes to better aggregation of shocks. Combined effect of these two channels dominates the opposite effect that a more central country is also more exposed to shocks. The model calibrated to the E.U. generates and closely replicates the negative relationship between centrality and volatility. The theoretical model is then extended to capture stochasticity and sparsity in the trade networks.
  86. By: GUIMARAES, Bernardo; MACHADO, Caio
    Abstract: This paper proposes a simple macroeconomic model with staggered investment decisions. The model captures the dynamic coordination problem arising from demand externalities and fixed costs of investment. In times of low economic activity, a firm faces low demand and hence has less incentives for investing, which reinforces firms’ expectations of low demand. In the unique equilibrium of the model, demand expectations are pinned down by fundamentals and history. Owing to the beliefs that arise in equilibrium, there is no special reason for stimulus at times of low economic activity.
    Date: 2015–03–16
  87. By: Mumtaz Hussain; Asghar Shahmoradi; Rima Turk
    Abstract: Islamic finance has started to grow in international finance across the globe, with some concentration in few countries. Nearly 20 percent annual growth of Islamic finance in recent years seems to point to its resilience and broad appeal, partly owing to principles that govern Islamic financial activities, including equity, participation, and ownership. In theory, Islamic finance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risk taking, and strong link to real activities. Empirical evidence on the stability of Islamic banks, however, is so far mixed. While these banks face similar risks as conventional banks do, they are also exposed to idiosyncratic risks, necessitating a tailoring of current risk management practices. The macroeconomic policy implications of the rapid expansion of Islamic finance are far reaching and need careful considerations.
    Keywords: Financial stability;Financial services industry;Financial instruments;Banks;Bonds;Central banks and their policies;Fiscal policy;Monetary policy;Islamic finance;Islamic banking;International financial markets;Risk management;Sukuk, finance, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), Government Policy and Regulation,
    Date: 2015–06–02
  88. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This paper discusses key findings of the Financial System Stability Assessment on Bosnia and Herzegovina (BiH). The financial system in BiH is still dealing with the aftershocks of the global financial crisis as well as deep-seated vulnerabilities. A high system-wide nonperforming loan ratio reflects the impact of the crisis, low growth since then, and a history of lax lending policies. Bank governance problems, weak supervision powers, and related-party loans are obstacles to addressing asset quality problems and re-establishing bank profitability. Banking and insurance oversight have improved since the 2006 Financial Sector Assessment Program, but supervisors’ corrective and enforcement powers are weak and identifying ultimate beneficial owners and related-party lending is problematic.
    Keywords: Press releases;Reports on the Observance of Standards and Codes;Insurance;Liquidity management;Currency boards;Financial safety nets;Financial sector;Financial system stability assessment;Bosnia and Herzegovina;Capital markets;Banks;Bank resolution;Macroprudential Policy;bank, banking, risk
    Date: 2015–07–09
  89. By: Awaludin, Fadhlee; Masih, Mansur
    Abstract: The greater financial integration particularly over the past decade has led to more synchronized movements of financial markets across the globe. As the domestic debt capital market, particularly the Malaysian Government Securities (MGS) and Government Investment Issue (GII or Government Sukuk), shariah compliant Malaysian sovereign papers deepen, the movements of the domestic yield curve are expected to be increasingly influenced by movements in foreign bond yields as both domestic and foreign investors respond to global developments and sentiments. Based on standard time series techniques, our findings tend to indicate that GII as well as MGS are weakly endogenous subject to changes in US Treasury which are most probably transmitted through changing their investment preference and expectation of liquidity and risk premium that they are willing to pay by holding local currency bonds and sukuk. This may create shifting in yield curve and significant capital outflows or inflows that may destabilize financial condition that requires policy changes. Finally, the findings also reaffirmed that the sukuk is still priced based on the conventional way of pricing bonds.
    Keywords: Sukuk, Yield curve; Malaysian Government Securities (MGS), Government Investment Issue (GII); time series techniques
    JEL: C22 C58 E43
    Date: 2015–08–26
  90. By: Weiner, Jennifer
    Abstract: Many of the region's roads and bridges are in need of significant repair and improvement. There is concern that current revenue sources are inadequate relative to the projected expense of maintaining and keeping New England's roads, bridges, and other transportation assets in good condition. How to address the projected gap in transportation revenues and expenditures is largely a policy choice. Most states rely on the motor fuel excise tax or "gas tax" but this revenue source is widely recognized as not fiscally sustainable. The tax does not automatically grow with inflation, whereas the costs associated with maintaining, constructing, and reconstructing roads tend to increase as prices and wages rise. And, as vehicle fuel efficiency increases, the gas tax will generate less revenue for a given amount of road use than in the past. This research compares existing gas taxes in the New England states and examines alternative tax structures that could improve fiscal sustainability. It simulates tax revenues under various alternatives and compares them to estimates of revenues generated by actual gas taxes in the New England states between 1993 and 2012. Forward-looking projections for selected alternatives are also provided.
    Date: 2015–08–01
  91. By: Shoag, Daniel (Harvard University); Veuger, Stan (American Enterprise Institute)
    Abstract: We document the link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession. The cross sectional variation in uncertainty robustly matches the distribution of employment outcomes during this period. When we instrument for this cross sectional variation using preexisting institutions, we find evidence for a causal role for uncertainty in increasing unemployment. A simple model of hiring and firing under uncertainty rationalizes these results, and the within-state distribution of effects across industries, occupations, and individuals is consistent with this model's predictions. Together, these results suggest that increased uncertainty contributed to the severity of the Great Recession.
    Date: 2015–03
  92. By: David Amaglobeli; Nicolas End; Mariusz Jarmuzek; Geremia Palomba
    Abstract: This paper examines the risk factors associated with fiscal costs of systemic banking crises using cross-country data. We differentiate between immediate direct fiscal costs of government intervention (e.g., recapitalization and asset purchases) and overall fiscal costs of banking crises as proxied by changes in the public debt-to-GDP ratio. We find that both direct and overall fiscal costs of banking crises are high when countries enter the crisis with large banking sectors that rely on external funding, have leveraged non-financial private sectors, and use guarantees on bank liabilities during the crisis. The better quality of banking supervision and the higher coverage of deposit insurance help, however, alleviate the direct fiscal costs. We also identify a possible policy trade-off: costly short-term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may be actually cost-effective over time.
    Keywords: Banking crisis;Financial crisis;Contingent liabilities;fiscal costs, banking, banking crises, debt, public debt, bank, General,
    Date: 2015–07–20
  93. By: Conti-Brown, Peter (Stanford University)
    Abstract: The Federal Reserve System has come to occupy center stage in the formulation and implementation of national and global economic policy. And yet, the mechanisms through which the Fed creates that policy are assumed but rarely analyzed. These assumptions--of scholars, central bankers, and other policy-makers--are that the Fed's independent authority to make policy is created by law: specifically, the Federal Reserve Act with its creation of removability protection for actors within the Fed, long tenures for Fed Governors, and budgetary autonomy from Congress. This article analyzes these assumptions about law and argues that nothing about them is as it seems. Removability protection does not exist for the Fed Chair, but exists in unconstitutional form for the Reserve Bank presidents; the fourteen-year terms of the Governors are never served, giving every President since FDR twice the appointments the Federal Reserve Act anticipated; and the budgetary independence designed in 1913 bears little relationship to the budgetary independence of 2015. The article thus challenges the prevailing accounts of agency independence in administrative law and central bank independence in economics and political science, both of which focus on statutory mechanisms of creating Fed independence. It argues, instead, that the life of the Act--how its statutory terms are interpreted, how the legal and economic contexts change with the times, and how individual personalities influence policy-making--is more important to understanding Fed independence than the birth of the Act, the language passed by Congress. Fed independence is not simply a creature of statute, but an ecosystem of formal and informal institutional arrangements, within and beyond the control of the ac-tors and organizations most interested in controlling Fed policy.
    Date: 2015–04
  94. By: International Monetary Fund. Middle East and Central Asia Dept.
    Abstract: This paper discusses Jordan’s Sixth Review Under the Stand-By Arrangement, Request for Waivers of Applicability of Performance Criteria (PC), and Rephasing of Access. PC Program performance remains broadly on course. All end-March 2015 PCs are expected to be met. Structural performance saw improvement, including the pre-approval of a credit bureau and the establishment of a new public investment framework. There is an urgent need for broad-based policy actions in the labor market to put the unemployed into jobs, increase female labor force participation, and reform public-sector compensation and hiring practices. The IMF staff supports the completion of the sixth review and the related purchase.
    Keywords: Debt sustainability analysis;Economic indicators;Financial management;Staff Reports;Press releases;Letters of Intent;Jordan;Labor market reforms;Monetary policy;Fiscal reforms;Fiscal policy;Stand-by arrangement reviews;market, inflation, monetary fund, deficit, current account deficit
    Date: 2015–05–07
  95. By: Jean-Pierre Dubé; Günter J. Hitsch; Peter E. Rossi
    Abstract: We measure the causal effects of income and wealth on the demand for private-label products. Prior research suggests that these effects are large and, in particular, that private-label demand rises during recessions. Our empirical analysis is based on a comprehensive household-level transactions database matched with price information from store-level scanner data and wealth data based on local house value indices. The Great Recession provides a key source of the variation in our data, with a large and geographically diverse impact on household incomes over time. We estimate income and wealth effects using “within” variation of income and wealth at the household level. Our estimates can be interpreted as income and wealth effects consistent with a consumer demand model based on utility maximization. We establish a precisely measured negative effect of income on private-label shares. The effect of wealth is negative but not precisely measured. However, the estimated effect sizes are small, in contrast with prior academic work and industry views. An examination of the possible supply-side response to the recession shows only small changes in the relative price of national-brand and private-label products. Our estimates also reveal a large positive trend in private-label shares that predates the Great Recession. We examine some possible factors underlying this trend, but find no evidence that this trend is systematically related to specific private-label quality tiers or to the overall rate of private-label versus national-brand product introductions.
    JEL: D1 D12 E21 E3 L0 L00 L1 L10 L11 L16
    Date: 2015–08
  96. By: B. GARBINTI (Insee); P. LAMARCHE (Insee)
    Abstract: Do high income households save more? This simple question is crucial when answering many public policy questions such as: are consumption taxes regressive? What is the effect of a tax increase targeting high income? Should we subsidize retirement savings?,& Saving rates have always been found positively linked to current income. Nevertheless, saving behavior might be related to a long-term decision and hence not be only linked to current income. Indeed, households could tend to smooth their consumption. For instance, in case of exceptionally high income, they could increase their savings. Thus saving should be determined by another concept of income: permanent income, defined as actualized sum of expected income without transitory variations. We study the link between saving rate and income using French data and combining five different methods always used separately so far. Hence we were able to compare results from different methods obtained on same data and check for robustness. Our results show consistently that saving rate is positively correlated with current and permanent income.
    Keywords: Saving rates, consumption, permanent income, lifetime income, long run
    JEL: C81 D12 D9 E21
    Date: 2014
  97. By: Coxhead, Ian (University of WI)
    Abstract: Southeast Asia's 620m people are experiencing a remarkable transition from widespread poverty to comparative wealth. The region's long-run GDP growth rate is second only to that of East Asia, far ahead of average rates for other developing regions. This rate of economic expansion has been sustained in spite of internal shocks and global market volatility. Tens of millions have been lifted out of poverty as a result. This impressive record contradicts pessimistic predictions from many global growth models. Is Southeast Asia different, and if so in what ways? In the early 21st century the region is undergoing broad and deep regional and global integration with relatively stable macroeconomic conditions. Nevertheless, numerous old problems remain, and new issues have arisen. Sustaining growth and reducing vulnerability to shocks remains a daunting challenge for the future.
    Date: 2014–07
  98. By: Simas Kucinskas (VU University Amsterdam, the Netherlands)
    Abstract: I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same government liquidity regulation that is required to make a banking system constrained efficient. However, whereas banks are potentially subject to costly panics, mutual funds are not run-prone and hence superior from a welfare perspective if runs happen with a non-zero probability.
    Keywords: Liquidity creation; liquidity insurance; hidden trades; bank runs; mutual funds; narrow banking; financial stability
    JEL: D91 E61 G21 G23 G28
    Date: 2015–08–20
  99. By: Cristina Fernández; Leonardo Villar; Paulo Mauricio Sánchez
    Abstract: Usando una base de datos del Banco Mundial con información anual sobre 131 países a lo largo de los últimos cincuenta años, este trabajo plantea una nueva metodología para identificar bonanzas temporales de recursos a nivel mundial, que contempla no sólo bonanzas de precios, sino también bonanzas ocasionadas por aumentos en el volumen de exportación. Otra virtud de nuestra metodología es que permite diferenciar por el tipo de recurso que origina la bonanza: productos agrícolas, sector minero-energético, capitales de corto plazo e inversión extranjera directa. Tras identificar los distintos tipos de bonanzas temporales de recursos, el trabajo analiza el comportamiento del ciclo económico y de las principales variables macroeconómicas, durante los períodos de bonanza y en los dos años subsecuentes. Este análisis resulta de la mayor relevancia para los países de Suramérica en un momento como el actual, en el cual la caída en los precios de los productos básicos coincide con un punto de inflexión en la política monetaria de Estados Unidos, teniendo como consecuencia el fin de la bonanza de bonanzas que venía impulsando las economías de estos países en los años anteriores del presente siglo.
    Keywords: Bonanzas Temporales, Ciclo Económico, Sudamérica, América del Sur
    JEL: E21 E22 E27
    Date: 2015–08–24
  100. By: MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni
    Abstract: Exchange rates are important macroeconomic prices and changes in these rates a ect economic activity, prices, interest rates, and trade ows. Methodologies have been developed in empirical exchange rate misalignment studies to evaluate whether a real e ective exchange is overvalued or undervalued. There is a vast body of literature on the determinants of long-term real exchange rates and on empirical strategies to implement the equilibrium norms obtained from theoretical models. This study seeks to contribute to this literature by showing that the global vector autoregressions model (GVAR) proposed by Pesaran and co-authors can add relevant information to the literature on measuring exchange rate misalignment. Our empirical exercise suggests that the estimate exchange rate misalignment obtained from GVAR can be quite di erent to that using the traditional cointegrated time series techniques, which treat countries as detached entities. The di erences between the two approaches are more pronounced for small and developing countries. Our results also suggest a strong interdependence among eurozone countries, as expected
    Date: 2015–03–25
  101. By: Leo Kaas (Department of Economics, University of Konstanz, Germany); Georgi Kocharkov (Department of Economics, University of Konstanz, Germany); Edgar Preugschat (Technical University Dortmund, Germany)
    Abstract: The recently published Household Finance and Consumption Survey has revealed large differences in wealth inequality between the countries of the Euro area. We find a strong negative correlation between wealth inequality and homeownership rates across countries. We use two decomposition methods to shed more light on this correlation. First, a Gini decomposition by homeownership status shows that the negative relationship is mostly driven by large between-group inequality across owners and renters. Second, to control for other observables, we conduct a detailed counterfactual decomposition of cross-country inequality differences. We confirm the major role for homeownership rates in accounting for the wealth inequality differences. Our analysis suggests that the cross-country variation is mostly driven by differences in the savings behavior of households in the bottom half of the wealth distribution and that those differences in savings are to a large extent channeled through housing wealth.
    Keywords: Wealth Inequality, Homeownership, Housing, Euro Area
    JEL: D31 E21 G11
    Date: 2015–08–27
  102. By: Gustavo Adler; Noemie Lisack; Rui Mano
    Abstract: We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.
    Keywords: Central banks and their policies;Foreign exchange intervention;Foreign exchange;Reserves;exchange rate, exchange, exchange rates, central bank,
    Date: 2015–06–23
  103. By: International Monetary Fund. Monetary and Capital Markets Department
    Keywords: Corporate governance;Asset management;Financial institutions;Hungary;Hungary;Technical Assistance;monetary fund, market, lending, loans
    Date: 2015–04–10
  104. By: F. Borel-Mathurin; P.-E. Darpeix; Q. Guibert; S. Loisel
    Abstract: We use a brand new data-set built from French supervisory reports to investigate the drivers of the participation rates (equivalent to annual yields) served on euro-denominated life-insurance contracts over the period 1999-2013. Our analysis confirms practitioners’ insight on the alignment with the 10-year French government bond and we analyze the departure of the participation rates away from this reference. Our data indicate that financial margins are more strictly targeted than participation. We find evidence that surrenders are fairly uncorrelated with participation, suggesting that other levers are used to monitor them. If higher asset returns can imply better yield for policyholders, riskier portfolios do not necessarily translate into better participation.
    Keywords: participation rate, taux de revalorisation, profit sharing policy, life insurance, panel data, regulatory database..
    JEL: G22 G11 E21 E49
    Date: 2015
  105. By: Ben Hunt; Dirk Muir; Martin Sommer
    Abstract: This paper uses two of the IMF's structural macroeconomic models to estimate the potential global impact of the boom in unconventional oil and natural gas in the United States. The results suggest that the impact on the level of U.S. real GDP over roughly the next decade could be significant, but modest, ranging between 1 and 1½ percent. Further, while the impact on the U.S. energy trade balance will be large, most results suggest that its impact on the overall U.S. current account will be negligible. The impact outside of the United States will be modestly positive on average, but most countries dependent on energy exports will be affected adversely.
    Keywords: Energy prices;Demand for money;Monetary policy;United States;business cycle, energy consumption, general equilibrium models, macroeconomic interdependence, oil shocks, policy, energy, oil, gas, energy production, price, Computable and Other Applied General Equilibrium Models, Forecasting and Simulation, Forecasting and Simulation, Forecasting and Simulation, Energy and the Macroeconomy,
    Date: 2015–05–01
  106. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks by William C. Dudley, President and Chief Executive Officer, New York, New York.
    Keywords: Empire State Manufacturing Survey; Business Leaders Survey; Household Debt and Credit Report; workforce development; small business credit; Puerto Rico; Lower Hudson Valley; Binghamton; Albany; Rochester; Buffalo; New York Feds Asian Professional Network Alliance
    JEL: E66
    Date: 2015–08–26
  107. By: Zhongxia Zhang; Yuan Gao
    Abstract: This paper studies growth patterns in Emerging Market Economies (EMs) from the perspective on clusters and taxonomies. First, it documents developments over the past five decades in EMs and uses a cluster analysis to better understand convergence and the investment-growth nexus. Second, it looks at the performance of EMs since 2000 and develops a taxonomy to classify countries according to their factor endowments as well as their real and financial external linkages. The taxonomy offers insights on growth dynamics pre and post the global financial crisis. Results highlight the high degree of heterogeneity in EMs and the need for more granular and targeted near and long-term policy advice.
    Keywords: Emerging markets;growth, heterogeneity, cluster analysis, taxonomy, Economic Growth of Open Economies, Macroeconomic Analyses of Economic Development,
    Date: 2015–07–15
  108. By: Glötzl, Erhard
    Abstract: For more than 100 years economists have tried to describe economics in analogy to physics, more precisely to classical Newtonian mechanics. The development of the Neoclassical General Equilibrium Theory has to be understood as the result of these efforts. But there are many reasons why General Equilibrium Theory is inadequate: 1. No true dynamics. 2. The assumption of the existence of utility functions and the possibility to aggregate them to one “Master” utility function. 3. The impossibility to describe situations as in “Prisoners Dilemma”, where individual optimization does not lead to a collective optimum. This paper aims at overcoming these problems. It illustrates how not only equilibria of economic systems, but also the general dynamics of these systems can be described in close analogy to classical mechanics. To this end, this paper makes the case for an approach based on the concept of constrained dynamics, analyzing the economy from the perspective of “economic forces” and “economic power” based on the concept of physical forces and the reciprocal value of mass. Realizing that accounting identities constitute constraints in the economy, the concept of constrained dynamics, which is part of the standard models of classical mechanics, can be applied to economics. Therefore it is reasonable to denote such models as Newtonian Constraint Dynamic Models (NCD-Models). Such a framework allows understanding both Keynesian and neoclassical models as special cases of NCD-Models in which the power relationships with respect to certain variables are one-sided. As mixed power relationships occur more frequently in reality than purely one-sided power constellations, NCD-models are better suited to describe the economy than standard Keynesian or Neoclassic models. A NCD-model can be understood as “Continuous Time”, “Stock Flow Consistent”, “Agent Based Model”, where the behavior of the agents is described with a general differential equation for every agent. In the special case where the differential equations can be described with utility functions, the behavior of every agent can be understood as an individual optimization strategy. He thus seeks to maximize his utility. However, while the core assumption of neoclassical models is that due to the “invisible hand” such egoistic individual behavior leads to an optimal result for all agents, reality is often defined by “Prisoners Dilemma” situations, in which individual optimization leads to the worst outcome for all. One advantage of NCD-models over standard models is that they are able to describe also such situations, where an individual optimization strategy does not lead to an optimum result for all agents. This will be illustrated in a simple example. In conclusion, the big merit and effort of Newton was, to formalize the right terms (physical force, inertial mass, change of velocity) and to set them into the right relation. Analogously the appropriate terms of economics are force, economic power and change of flow variables. NCD-Models allow formalizing them and setting them into the right relation to each other.
    Keywords: Newtonian Constrained Dynamics, Disequilibrium Dynamics, Economics of Power, Closure, Prisoners Dilemma, Economics and Physics
    JEL: B22 B41 C02 C60 C72 E10
    Date: 2015–03–29
  109. By: Leonardo Villar; José Vicente Romero; César Pabón
    Abstract: El presente documento realiza una revisión y análisis de los procesos de transformación de políticas procíclicas en políticas contracíclicas que han logrado llevar a cabo las autoridades económicas en los tres frentes descritos durante las dos últimas décadas, para lo cual hace énfasis especial en la comparación del manejo que tuvo la crisis de fines del siglo XX (1998-2001), durante la cual dominaron las políticas procíclicas, y el manejo contracíclico que pudo hacerse en 2008-2009, durante la recesión mundial posterior a la crisis de Lehman Brothers.
    Keywords: Macroeconomía, Política Monetaria, Política Fiscal, Política Macroprudencial, Política Cambiaria
    Date: 2015–07–31
  110. By: A. ARNAUD (Insee); J. BOUSSARD (Insee); A. POISSONNIER (Insee); H. SOUAL (Insee)
    Abstract: Since 2007, the French Quarterly National Accounts use a chain-linking method to measure volumes in replacement of volumes in constant prices of the reference year. This paper gathers 7 years of experience of the Quarterly National Accounts unit on this particular topic. We first recall the annual overlap method used in France in comparison with the one quarter overlap method sometimes preferred in other countries. Based on numerical simulations, we show the distribution of two well-known effects: trend effects when elemental prices have different dynamics and non-additivity. In particular, the variance of these effects increases away from the reference year. We also expose two new reasons to prefer the annual overlap method to the one quarter overlap: first, additive contributions to growth can be computed; second, unpleasant interactions with seasonal and trading day adjustment can be avoided.
    Keywords: chain-linking, annual overlap, one quarter overlap, contribution to growth, seasonal and trading day adjustment
    JEL: C43 C82 E01
    Date: 2014
  111. By: Shafique, Shoaib; Hussain, Zahid
    Abstract: Foreign direct investment (FDI) has gotten distinguished and the most gainful strategy for drawing streams originating from external assets. The use of this technique has likewise transformed into a significant piece of making financing capital flow into nations around the world. For developing nations far and wide, this productive impact joined with foreign transactions has developed constantly well and is referred to as an instrument for investment development (Muhammad, 2007). FDI has numerous benefits on creating better economic output, for example, it raises profit level for entrepreneurs, reduces unemployment and opens avenues for fares and innovative headways for financial gurus and nations
    Keywords: fdi, growth, economic policy, developing countries
    JEL: E2 E24 F15 F18
    Date: 2015–07–04
  112. By: Assarsson, Bengt (National Institute of Economic Research); Österholm, Pär (National Institute of Economic Research)
    Abstract: In this paper, we investigate whether the two main consumer confidence indicators available for Sweden – that of the National Institute of Economic Research and that of the European Commission – can nowcast Swedish household consumption expenditure. In a simulated out-of sample nowcast exercise, we find that the consumer confidence indicator of the National Institute of Economic Research appears most useful for this purpose. The root mean square error of the nowcast from the model employing this indicator is the lowest of all the studied models which rely on survey data. The nowcasting performance of the model using the consumer confidence indicator of the European Commission is less impressive; while it outperforms the simplest possible benchmark model, its root mean square error is considerably higher than that of the model relying on the consumer confidence indicator of the National Institute of Economic Research. An implication of our findings is that while the European Commission’s survey programme may have been successful in creating a set of harmonised data for the member countries of the European Union, it is not obvious that the harmonised indicators are the most relevant ones for analysis, nowcasting or forecasting in each country.
    Keywords: Household consumption; Nowcasting
    JEL: E21 E27
    Date: 2015–09–01
  113. By: Philip R. Lane (Department of Economics, Trinity College Dublin);
    Abstract: This paper analyses the funding of the Irish domestic banking system during the boom period. We highlight: the shifting roles of deposit and bond funding; the prominence of foreign banks as funding counterparties; the role of interoffice funding; and the scale of US dollar and Sterling funding. From August 2007, the deterioration in funding conditions is clearly evident across a range of indicators.
    Keywords: bank funding, international capital flows, Irish crisis
    JEL: F36 E50
    Date: 2015–08
  114. By: Melitz, Jacques
    Abstract: This is the first attempt to model the beginnings of coinage in Ionia, Lydia and Greece before the fifth century B.C. Apart from bringing together all of the influences on the essential choices facing the government and the private sector within a coherent whole, the effort yields one important result. Contrary to popular assumption, early coinage was not highly profitable. The Lydian government and the Ionian and Greek city-states provided an extreme-ly wide array of denominations of coins in a single precious metal at considerable cost. Their willingness to bear this cost must have reflected a political strategy of promoting coinage. Such a political strategy would also be easy to explain. In addition, the paper examines the fact that the early Ionian and Lydian coins were composed of electrum, a subject of consider-able interest and importance in itself.
    Keywords: ancient coinage; ancient monetary history; full-bodied coins; seignorage; small change
    JEL: E40 E42 N10 N20
    Date: 2015–08
  115. By: J. Scott Holladay (Department of Economics, University of Tennessee); Jacob LaRiviere (Department of Economics, University of Tennessee)
    Abstract: We use quasi-experimental variation due to the introduction of fracking to estimate the impact of a decrease in natural gas prices on marginal air pollution emissions from electricity producers. We find natural gas generation has displaced coal fired generation as the marginal fuel source signicantly changing the marginal emissions prole. The impact of cheap natural gas varies across U.S. regions as a function of the existing stock of electricity generation. We demonstrate the impact of these changes on the environmental benets of energy policy by simulating the installation wind and solar generating capacity in dierent regions around the U.S. We construct an hourly data set of potential renewable generation for both wind and solar power and combine that with our estimated marginal emissions. CO2 emissions offset by wind and solar power have fallen over most, but not all of the country due to cheap natural gas.
    Keywords: energy, air pollution, natural gas, renewable energy
    JEL: E32 R10
    Date: 2015–07
  116. By: Sergio Sola; Geremia Palomba
    Abstract: This paper examines the determinants of sub-national governments risk premia using secondary market data for U.S., Canada, Australia and Germany. It finds that, as for central governments, fiscal fundamentals matter in the pricing of risk premia, and sub-national governments with higher public debt and larger deficits pay higher premia. However, this relationship is not uniform across countries. Market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government. Specifically, we show that in pricing risk premia of sub-national governments, markets are less responsive to fiscal fundamental when sub-national governments depend on high transfers from the central government, i.e., when there is some form of implicit guarantee from the center. Using primary market data, the paper also looks at whether transfer dependency from the central government influences sub-national governments’ incentive to access markets. We show that high transfer dependency lowers the probability of sub-national governments to borrow on capital markets.
    Keywords: Interest rates;Government debt;Fiscal policy;Sub-national governments, market, markets, debt, bonds, primary market, Financial Markets and the Macroeconomy, Asset Pricing, General,
    Date: 2015–05–29

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