nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒10‒25
85 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. A sectoral framework for analyzing money, credit and unconventional monetary policy By Cloyne, James; Thomas, Ryland; Tuckett, Alex; Wills, Samuel
  2. Price dispersion and inflation: new facts and theoretical implications By Sheremirov, Viacheslav
  3. Monetary Development and Transmission in the Eurosystem By Anton, Roman
  4. Monetary and fiscal policy in the Great Moderation and the Great Recession By Allsopp, Christopher; Vines, David
  5. Macroeconomic Dynamics of Belarus in 2014: Currency Stress in the Background of Stagnation By Dzmitry Kruk
  6. Реальные деньги и ÑкономичеÑкий роÑÑ‚ By BLINOV, Sergey
  7. Dollarization and De-dollarization: Formulation of Agenda By Dzmitry Kruk
  8. The Impact of a Low Interest Rate Environment: Empirical Evidence from the Euro Area Bank Lending Survey By Khosravi, Taha
  9. Collective Household Economics: a Wake Up Call for Central Banks? By De Koning, Kees
  10. Objectives and Challenges of Macroprudential Policy By Alfred Duncan; Charles Nolan
  11. Monetary Policy Objectives and Money's Role in U.S. Business Cycles By Eurilton Araújo
  12. Credit Constraints and Growth in a Global Economy By Nicolas Coeurdacier; Stéphane Guibaud; Keyu Jin
  13. Household Debt and Crises of Confidence By Hintermaier, Thomas; Koeniger, Winfried
  14. International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle By Alfred V Guender
  15. In the absence of fiscal union, the Eurozone needs a more flexible monetary policy By Pietro Alessandrini; Michele Fratianni
  16. Real-Exchange-Rate-Adjusted Inflation Targeting in an Open Economy: Some Analytical Results By Richard T. Froyen; Alfred V Guender
  17. QE and the Bank Lending Channel in the United Kingdom By Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
  18. The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework By Luk, Paul; Vines, David
  19. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By García-Schmidt, Mariana; Woodford, Michael
  20. CAPITAL REGULATION IN A MACROECONOMIC MODEL WITH THREE LAYERS OF DEFAULT By Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stéphane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandros P. Vardoulakis
  21. The Long Landing Scenario: Rebalancing from Overinvestment and Excessive Credit Growth. Implications for Potential Growth in China By M. Albert; C. Jude; C. Rebillard
  22. Measuring Recovery: Aggregate Demand and the Slowdown of Brazilian Economic Growth from 2011-2014 By Franklin Serrano and Ricardo Summa
  23. Forecasting Inflation: Phillips Curve Effects on Services Price Measures By Tallman, Ellis W.; Zaman, Saeed
  24. International Business Cycle Synchronization since the 1870s: Evidence from a Novel Network Approach By Antonakakis, Nikolaos; Gogas, Periklis; Papadimitriou, Theophilos; Sarantitis, Georgios
  25. Decomposing the wage losses of displaced workers: the role of the reallocation of workers into firms and job titles By Pedro Portugal; Pedro S. Raposo; Anabela Carneiro
  26. Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence By Laurence Savoie-Chabot; Mikael Khan
  27. Accounting for Labor Productivity Puzzle By Kateryna Bornukova
  28. Animal spirits and credit cycles By Paul de Grauwe; Corrado Macchiarelli
  29. Going to Extremes: Politics after Financial Crises, 1870-2014 By Funke, Manuel; Schularick, Moritz; Trebesch, Christoph
  30. Distributional Effects of Monetary Policy By Veronika Selezneva; Martin Schneider; Matthias Doepke
  31. The 2013 Survey of Consumer Payment Choice: technical appendix By Angrisani, Marco; Foster, Kevin; Hitczenko, Marcin
  32. The Carrot and the Stick: The Business Cycle Implications of Incentive Pay in the Labor Search Model By Julien Champagne
  33. The Determinants of Interest Rates in Microbanks: Age and Scale By Nwachukwu, Jacinta; Asongu, Simplice
  34. Panel remarks at the Brookings Institution By Dudley, William
  35. Firm entry and exit, investment irreversibility, and business cycle dynamics By Pavol Majher
  36. Determinants of the Demand for Cash in Peru: A Non Linear Approach By Ramírez, Juan; Vásquez, José; Pereda, Javier
  37. Wealth-income ratios in a small, late-industrializing, welfare-state economy: Sweden, 1810–2014 By Waldenström, Daniel
  38. Forward Guidance and Heterogeneous Beliefs. By P. Andrade; G. Gaballo; E. Mengus; B. Mojon
  39. Distributional Consequences of Asset Price Inflation in the Euro Area By Adam, Klaus; Tzamourani, Panagiota
  40. Fiscal Policy in Debt Constrained Economies By Amador, Manuel; Aguiar, Mark
  41. The benefits of stabilization policies revisited By D'Orlando, Fabio; Ferrante, Francesco
  42. What Shifts the Beveridge Curve? Recruiting Intensity and Financial Shocks By Simon Mongey; Gianluca Violante; Alessandro Gavazza
  43. Belarusian Business Cycle in Cross-country Comparison: Industry and Aggregate Data By Kirill Shakhnov
  44. The Endogenous Relative Price of Investment By Joel Wagner
  45. Collateral Constraints and the Interest Rate By Donal Smith
  46. Growth, Slowdowns, and Recoveries By Howard Kung; Francesco Bianchi
  47. On the Welfare Cost of Rare Housing Disasters By Shaofeng Xu
  48. Heterogeneity in the Dynamic Effects of Uncertainty on Investment By Sungje Byun; Soojin Jo
  49. The 2013 Survey of Consumer Payment Choice: summary results By Schuh, Scott; Stavins, Joanna
  50. The Effect of Intelligence on Financial Development: A Cross-Country Comparison By Kodila-Tedika, Oasis; Asongu, Simplice
  51. Countering the debt crisis: national parliaments and EU economic governance By Davor Jancic
  52. The Mining for Development Framework for the Philippines By Cielo Magno
  53. Macroeconomic Consequences of Lumpy Investment under Uncertainty By ARATA Yoshiyuki; KIMURA Yosuke; MURAKAMI Hiroki
  54. The international transmission of credit bubbles: theory and policy By Jaume Ventura; Alberto Martin
  55. Agricultural Export and Economic Growth: A Case Study of Pakistan By Abrar ul haq, Muhammd
  56. Space-Time (In)Consistency in the National Accounts: Causes and Cures By Nicholas Oulton
  57. Dynamic Comovements between Housing and Oil Markets in the US over 1859 to 2013: A Note By Nikolaos Antonakakis; Rangan Gupta; John W. Muteba Mwamba
  58. Shock Transmission Through International Banks: Canada By James Chapman; H. Evren Damar
  59. Liquidity Risk and Time-Varying Correlation Between Equity and Currency Returns By Jung, Kuk Mo
  60. Bank Leverage: Does Currency Diversification Really Matter? By Justine Pedrono; Aurélien Violon
  61. Examining Full Collateral Coverage in Canada’s Large Value Transfer System By Lana Embree; Varya Taylor
  62. The behaviour of French Firms during the Crisis: Evidence from the Wage Dynamics Network Survey. By C. Jadeau; E. Jousselin; S. Roux; G. Verdugo
  63. The National Wealth of Sweden, 1810–2014 By Waldenström, Daniel
  64. The market value of a central bank By Ricardo Reis
  65. Trend-Spotting in the Housing Market By Askitas, Nikos
  66. The Links between Economic Growth and Tax Revenue in Ghana: An Empirical Investigation By Njindan Iyke, Bernard; Takumah, Wisdom
  67. Understanding the Determinants of Household Saving: Micro Evidence for Latin America By Ricardo Bebczuk; Leonardo Gasparini; Noelia Garbero; Julian Amendolaggine
  68. More on Three Challenges to Central Bank Orthodoxy By Bullard, James B.
  69. The evolution of inflation expectations in Canada and the US By James Yetman
  70. Secular Stagnation: Theory and Remedies By Jean-Baptiste Michau
  71. Does Unconventional Monetary Policy Affect Inequality? Evidence from Japan By Ayako Saiki; Jon Frost
  72. Consensus forecasters: How good are they individually and why? By Franses, Ph.H.B.F.; Maassen, N.
  73. Escaping the Great recession By Leonardo Melosi; Francesco Bianchi
  74. Risk Sharing in the Presence of a Public Good By Josef Schroth
  75. Macroeconomic Factors and Equity Premium Predictability By Buncic, Daniel; Tischhauser, Martin
  76. Que « produit » l’entreprise d’économie sociale ? By Sybille MERTENS; Michel MAREE
  77. Development and the labor share By Paul Maarek; Elsa Orgiazzi
  78. Financial and Real Sector Leading Indicators of Recessions in Brazil using Probabilistic Models By Fernando N. de Oliveira
  79. The Impacts of Exogenous Oil Supply Shocks on Mediterranean Economies. By Andrea Bastianin; Marzio Galeotti; Matteo Manera
  80. Honesty after a labor relationship By Mariana Blanco; Juan Camilo Cárdenas
  81. SEARCH FOR FIELD By David Martinez-Miera; Rafael Repullo
  82. Oil Contracts, Progressive Taxation and Government Take in the Context of Uncertainty in Crude Oil Prices: The Case of Chad By Bertrand LAPORTE; Guy Dabi GAB-LEYBA
  83. Aplicación de ecuaciones diferenciales en la versión Samuelson-Solow de la curva de Phillips By Fulponi, Juan Ignacio; Lupín, Beatriz
  84. Achieving greater fiscal stability: guidance for the New England states By Kodrzycki, Yolanda; Zhao, Bo
  85. IS A NORMAL COPULA THE RIGHT COPULA? By Dante Amengual; Enrique Sentana

  1. By: Cloyne, James (Bank of England); Thomas, Ryland (Bank of England); Tuckett, Alex (Bank of England); Wills, Samuel (Bank of England)
    Abstract: This paper sets out an empirical framework for examining the dynamics of money and credit at a sectoral level. Our purpose is to understand and monitor the transmission mechanisms of different policies that affect the financial sector, with an eye to practical policy analysis. We use the banking system’s balance sheet as an organising framework and model the stocks of broad money and credit held by different sectors. Each sector is modelled as a separate block with money, credit, and sectoral expenditure modelled jointly together with the relevant financial yields. The sectors are then knitted together using aggregate relationships and identities. Overall the model can be thought of as an estimated disaggregated version of the IS-LM-CC model which additionally incorporates the principle that ‘loans create deposits’. We illustrate, by example, how this framework can be used in practice: first by examining the sectoral transmission of quantitative easing and second, the effect of disturbances to credit markets. We also discuss how other policy tools, such as the Funding for Lending Scheme and macroprudential policies, could be examined in our framework.
    Keywords: Monetary policy; quantitative easing; business cycles; money; credit; sectoral modelling
    JEL: E40 E51 E52 E58
    Date: 2015–10–09
  2. By: Sheremirov, Viacheslav (Federal Reserve Bank of Boston)
    Abstract: From a macroeconomic perspective, price rigidity is often perceived to be an important source of price dispersion, with significant implications for the dynamic properties of aggregate variables, welfare calculations, and the design of optimal policy. For instance, in standard New Keynesian models, the key cost of business cycles stems from the price dispersion resulting from firms' inability to adjust prices instantaneously. However, different macroeconomic models make conflicting predictions about the level of price dispersion, as well as about its dynamic properties and sensitivity to inflation. These contrasting predictions can help us to discriminate across alternative models. This paper examines the link between price dispersion and inflation, and the role of sales in this relationship.
    Keywords: inflation; price dispersion; sales; sticky prices
    JEL: E17 E31 E37 E40 E52
    Date: 2015–07–01
  3. By: Anton, Roman
    Abstract: Since the launch of the European Economic and Monetary Union (EMU) in January 1999 till today in 2015, the Euro has ascended to become the second largest reference currency in the world. With about €1.6 trillion of currency in circulation it is at present even positioned above the US dollar with €1.3 trillion. The Eurosystem now comprises 19 EU countries with about 340 million people and inherits an outstanding role for the economy of the EMU, world trade, and international finance. Despite its importance, a recent independent empirical review that conclusively analyzes all key factors and efficiencies remains much obsolete. Thus, this research and review sets out to empirically-theoretically compile the last 16 years of the EMU with a focus on monetary developments, functioning of monetary transmission channels (MTCs) and mechanisms, as well as the performance of the Eurosystem and its ECB governed monetary policies (MP). For the first time it reviews a complete set of 16 MTCs and systematically evaluates the functioning of the Eurosystem and its role for the real economy and its people. It finds a high efficiency loss in all MTCs related to fractional reserve banking, excessive EU indebtedness, or legal frameworks such as MFI, financial, or equity law. Scientifically, based on all data and results, there is no way to reach a different conclusion and reminder that stresses the need, exigency and must to replace an old-fashioned reserve banking system by digital full-reserve banking via monetary reform at the earliest feasible date possible.
    Keywords: Europe; EU; EMU; monetary; money; system; fractional; full; reserve; developments; ECB; ESCB; Euro; transmission; trends; process; EU; policy; currency; efficiency; effectiveness; review; research; empirical; financial; crisis, sovereign; debt; reform; union; quantitative; easing; model; systematic; creation; bank; financial; institution; MFI; real; economy; economic; inflation; prices; level; stability; GDP; output; employment; theory; theories; independent; digital; dollar; euro; area; euroland; eurosystem; central; banking;
    JEL: A1 A10 E0 E00 E01 E02 E4 E40 E42 E43 E44 E47 E6 E60 P4 P44
    Date: 2015–10–07
  4. By: Allsopp, Christopher; Vines, David
    Abstract: In this paper we argue for a new approach to monetary and fiscal policy. During the Great Moderation, the inflation targeting regime worked well. Central banks used the interest rate to stabilize inflation, and—subject to inflation being controlled—stabilized the level of demand. Fiscal policy exerted discipline over the public-sector deficits, thereby—indirectly—managing the level of public debt. Such ‘fiscal housekeeping’ worked well, because the monetary authorities were stabilizing the economy. But once private-sector deleveraging led to the Great Recession, and interest rates hit their zero bound, the economy could no longer be managed by monetary policy. Since then, recovery has come to depend on the ‘automatic stabilizers’: as output and tax revenues have fallen, public debt has been created, producing the assets which a deleveraging private sector wishes to hold. But the effect has been very gradual. Recovery would have been faster if fiscal policy had been responsible for the restoration of full employment, in an environment which tolerated the necessary rises in public debt. Conversely, policies of austerity, designed to reduce public debt, have slowed the recovery. Growth will not be resumed until the private sector begins to invest strongly again, creating the financial assets which the private sector wishes to hold, thereby enabling public debt to be retired. This has not yet happened because the private sector, correctly, does not believe that macroeconomic policy is capable of sustaining a strong recovery.
    Keywords: fiscal policy; inflation targeting; monetary policy; quantitative easing; zero lower bound
    JEL: E44 E52 E58 E61 E62
    Date: 2015–10
  5. By: Dzmitry Kruk (Belarusian Economic Research and Outreach Center (BEROC))
    Abstract: Weak potential growth has sustained as the key challenge for Belarusian economy. In 2014, there has not been any substantial progress in this field, although the government declared a start in a preparatory stage for structural reforms. In current macroeconomic policy, the regime of exchange rate targeting has been preserved as the core element. Alongside, monetary and fiscal policies have become more tight and conservative in 2014. For the first time, the government has to retain the growth of real incomes. Furthermore, capital investment has been ‘repressed’ with a view to enhance financial stability. However, this policy design, even empowered by substantial injections from international reserves, could not resist new adverse external shocks. Hence, Belarus again faced currency and financial stress. This background determined charmless macroeconomic results of the year: low growth, high inflation and external imbalances. The combination of accrued structural and short-term problems vitalizes the challenge of long-lasting recession/stagnation in future periods.
    Keywords: ýêîíîìè÷åñêèé ðîñò, Áåëàðóñü, öèêëè÷åñêèé ñïàä, òàðãåòèðîâàíèå îáìåííîãî êóðñà, âíåøíèå øîêè, öåíîâàÿ êîíêóðåíòîñïîñîáíîñòü.
    JEL: E42 E44 E52 E58 E61
    Date: 2015–05
  6. By: BLINOV, Sergey
    Abstract: People recognized the important role played by money a long time ago. But it was only approximately 50 years ago that Milton Friedman convincingly proved that change in the quantity of money in the economy may have a very serious effect on the GDP. This paper reveals a most intimate non-linear linkage between growth of real GDP and growth of real money supply using the example of a number of countries and unions (Russia, Japan, Brazil, Eurozone). It is shown that exponential growth of real money supply corresponds to linear growth of real GDP. Two hypotheses are advanced which explain such a nature of the inter-linkage as well as practical recommendations are given which pertain, first of all, to monetary policy.
    Keywords: GDP, economic growth, money supply, monetary policy, Central Banks
    JEL: E41 E50 E51 E52 E58 O11 O23 O42
    Date: 2015–10–16
  7. By: Dzmitry Kruk (Belarusian Economic Research and Outreach Center (BEROC))
    Abstract: This policy paper deals with the phenomena of dollarization and prospects of de-dollarization policies in Belarus. During last two decades Belarus has been a highly dollarized economy. Recently, the authorities declared a campaign of de-dollarization, which, however, focuses mainly on de-dollarization of payments. Such a policy is unlikely to become effective. We show that Belarus suffers from all possible forms of dollarization that interact with each other, forming a kind of vicious circle. Through this, de-dollarization policies, if needed in general, must be systemic and consider different forms of dollarization. We show that strategically Belarus is situated in ‘boarder-line’ area between the options of autonomous monetary policy and official dollarization. If deferring to autonomous monetary policy, a sequence of systemic de-dollarization policies is crucial for its effectiveness. The mix of the policies depends on the scope of different forms of dollarization. However, there is no precise assessment for real dollarization in Belarus (which is the direction for future research). Hence, we formulate a number of scenarios of such policies for cases with different intensity of real dollarization.
    Keywords: äîëëàðèçàöèÿ, äåäîëëàðèçàöèÿ, ðåàëüíàÿ äîëëàðèçàöèÿ, ôèíàíñîâàÿ äîëëàðèçàöèÿ, äîëëàðèçàöèÿ ðàñ÷åòîâ, ðåæèì ìîíåòàðíîé ïîëèòèêè.
    JEL: E42 E44 E52 E58 E61
    Date: 2015–04
  8. By: Khosravi, Taha
    Abstract: This paper investigates the effect of a protracted period of low monetary policy rates on loosening of banks’ credit standards concerning enterprises, households and consumer loans. Using a balanced panel dataset of 9 countries that have taken part ever since the initiation of the Euro area Bank Lending Survey, this study focuses on three different time frames of pre- (2002Q4-2008Q3), mid- (2008Q4-2010Q4) and post- (2011Q1-2014:Q4) financial crisis. The results indicate that low short term interest rates prior to the crisis produce a disproportionate loosening of credit standards in all three types of loans. In spite of the scope of expansionary monetary policy documented primarily in the post-crisis sample, the data analysed indicates that negative Taylor-rule residuals lead only to a softening of total lending standards for enterprises loans. Additionally, the outcomes of this study indicate that the European Central Bank 3 year long-term refinancing operations brought a fall in the progress of banks’ credit tightening. However, the benefits of this have yet to be experienced in the EA9 real economy. While regrouping the original sample in stressed nations, the results suggest that excessive risk-taking in bank lending behaviour took place, especially during periods of low monetary policy rates both pre- and post-crisis.
    Keywords: Monetary policy, Bank lending Survey, Euro area, LTROs announcement, Panel data.
    JEL: E44 E50 E52 E58 G01
    Date: 2015–10–20
  9. By: De Koning, Kees
    Abstract: In section 1 of this paper, the main policy objectives of four of the world’s most important central banks: the Federal Reserve of the U.S., the European Central Bank, the Bank of England and the Bank of Japan have been summarized. Warranting a closer look is not so much what these policy objectives are and the ground that they cover but, notwithstanding how important they may be, what is left out. After the financial crisis of 2007-2008, central banks have moved decisively towards strengthening the banking sector with the aim of improving the shock absorption capacity readying banks for any future heavy loan losses. ‘Too big to fail’ risks have been addressed. Other sectors of the financial services arena like insurance companies, pension funds and asset management companies, have also become the subject of intense regulatory scrutiny. More needs to be done, but major steps have been taken. Central banks have also provided US$7 trillion of monetary stimulus and kept their lending rates at near zero. The ECB and the Bank of Japan are still in the process of buying government and other types of debt paper, all with the aim of stimulating economic growth. As of August 2015, inflation levels stood at 0.2% in Japan and 0.2% in the Euro Area, -0.1% in the U.K. in September and -0.2% in the U.S. for August. These levels are far below the target level of inflation, which has been set at or slightly above 2% at on annual basis. All this has not prevented the IMF from predicting a slide towards the next global recession. A US$3 trillion company debt burden, especially in emerging markets, may come to haunt the broader financial markets. Have central banks run out of options to stimulate growth? Are their tools still fit for purpose? Should one continue with yet more quantitative easing and/or negative interest rates? Or is perhaps the use of a ‘one-size fits all’ base rate for stimulating households, companies and a government no longer the right approach to managing an economy? Should the borrowing behavior of individual households be treated differently from those of companies? After all individual households do not operate on a for-profit basis. In a paper by this author: “Collective Household Economics and the need for funds approach; the 2007-2008 financial crisis and its effects” it was argued that the demand for long term funds borrowed by individual households (mainly mortgages) was not based on the same parameters as the supply of funds by the banking sector. The demand (or need) for funds was based on population growth, changes in average household size and changes in taste patterns; all non-financial matters. It was also based on affordability levels to service mortgage debt out of incomes. The paper concludes that households need a ‘dynamic stability’ in their long-term debt obligations. This could be achieved with the help of different central bank tools strictly for the benefit of individual households. Such tools could include a volume mortgage lending control mechanism: a traffic light system directed to the lenders side. Another tool could be a dual price setting mechanism for households’ long-term debt. Households would pay for the debt on the basis of CPI level plus a margin, while lenders would receive costs of funds plus their margin. Of course, as the paper showed, differences between these rates will occur, the fix for which could be to use funds backed by the Treasury in some years to bridge the gap. In other years, Treasury will benefit from such differences. Finally, enhanced quality control measures will mean that mortgages are long-term borrowings with full repayments. Creating such an environment will allow central banks to move their base rates more freely and in line with the level of corporate activities. The notion that households, companies and a government all need the same base rate level has proven to be unworkable. The more stable the financial position of individual households, the better the growth prospects for the whole economy.
    Keywords: Collective household economics, central bank objectives, central bank tools, base rates, financial stability, financial crisis, home mortgages, mortgage debt levels, inflation, full employment
    JEL: E3 E31 E32 E5 E58
    Date: 2015–10–16
  10. By: Alfred Duncan; Charles Nolan
    Abstract: The establishment of the UK Financial Policy Committee is a landmark development in macroprudential oversight. However, its purview may be overly narrow. Macroprudential policy ought to be concerned with the overall eciency of the nancial system. Macroprudential policymakers should have a role as much concerned with providing authoritative, public advice on areas of policy relevant to aggregate nancial eciency as with imposing additional restrictions on bank lending. Issues of independence and transparency loom large under the current regime as well as with some suggestions we make.
    Keywords: Macroprudential policy; monetary economics; risk; financial markets.
    JEL: E13 E44 G11 G24 G28
    Date: 2015–09
  11. By: Eurilton Araújo
    Abstract: In a sticky-price model in which money can potentially play a key role in business cycles, I estimate monetary policy preference parameters under commitment in a timeless perspective. Empirical findings suggest that inflation stabilization and interest rate smoothing are the main objectives of monetary policy, with a very small role for output gap stabilization. Though the money growth rate is irrelevant as an argument in the Fed's objective function, its presence in structural equations improves model fit. Moreover, marginal likelihood comparisons show that the data favor Taylor rules over optimal policies. Finally, the way of describing monetary policy matters for macroeconomic dynamics
    Date: 2015–09
  12. By: Nicolas Coeurdacier (Département d'économie); Stéphane Guibaud (Département d'économie); Keyu Jin (London School of Economics and Political Science (LSE))
    Abstract: We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints—more severe in fast-growing countries—can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the US and China corroborates our mechanism. Quantitatively, our model explains about a third of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time.
    Keywords: Global Economu; Economical Growth; Credit Constraints
    JEL: E21 E22 F21 F32 F41 O16 P24
    Date: 2015–09
  13. By: Hintermaier, Thomas (University of Bonn); Koeniger, Winfried (University of St. Gallen)
    Abstract: We show that the size of collateralized household debt determines an economy's vulnerability to crises of confidence. The house price feeds back on itself by contributing to a liquidity effect, which operates through the value of housing in a collateral constraint. Over a specific range of debt levels this liquidity feedback effect is strong enough to give rise to multiplicity of house prices. In a dynamic setup, we conceptualize confidence as a realization of rationally entertainable belief-weightings of multiple future prices. This delivers debt-level-dependent bounds on the extent to which confidence may drive house prices and aggregate consumption.
    Keywords: household debt, consumer confidence, collateral constraints, multiple equilibria
    JEL: E21 E32 D91
    Date: 2015–10
  14. By: Alfred V Guender (University of Canterbury)
    Abstract: CPI inflation targeting necessitates a flexible exchange rate regime. This paper embeds an endogenous target rule into a simple open economy macro model to explain the UIP puzzle. The model predicts that the change in the exchange rate is inversely related to the lagged interest rate differential. Openness and aversion to inflation variability determine the strength of this linkage. Foreign inflation and the foreign interest rate also affect exchange rate changes. This hypothesis is tested on data from three small open economies, Canada, Norway, and Switzerland, all of which target CPI inflation and maintain extensive trade and finance links with a larger neighboring country. Supportive evidence is strongest for Switzerland during a clean float period before the outbreak of the Global Financial Crisis.
    Keywords: Uncovered Interest Rate Parity (UIP) Puzzle, Target Rule, Optimal Monetary Policy, Openness, Aversion to Inflation Variability
    JEL: E4 E5 F3
    Date: 2015–08–01
  15. By: Pietro Alessandrini (Universit… Politecnica delle Marche, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR)
    Abstract: This paper makes three points. The first is that inter-member external imbalances are a relevant objective for the performance of a monetary union. The second is that policy should aim at reducing inter-member external disequilibria, by setting targets on current-account imbalances applied symmetrically to both deficit and surplus countries. The correction of external imbalances needs to be taken as seriously as that of fiscal imbalances and debt-to-GDP ratios. The third is that, while the principle of the unified supranational monetary policy should remain the core of the monetary union, the heterogeneity in economic performances and current-account imbalances of member states calls for a more flexible common monetary policy. Our specific proposal is that National Central Banks should add a risk premium cost to official interest rates on banks that accumulate "excessive" borrowings or deposits to compensate, respectively, for outflows and inflows of the monetary base due to the effect of external imbalances.
    Keywords: Eurozone, adjustment mechanism, external imbalances, sterilisation
    JEL: E42 E52 E58
    Date: 2015–10
  16. By: Richard T. Froyen; Alfred V Guender (University of Canterbury)
    Abstract: Under optimal policy from a timeless perspective, a central bank targeting an inflation measure which is adjusted for changes in the real exchange rate (REX inflation) has the ability to stabilize the output gap and inflation against demand disturbances in an open economy. This distinct advantage is lost if a central bank follows a Taylor-type rule. The bank has an incentive to add the real exchange rate to the Taylor rule because it duplicates the performance of the optimal policy for portfolio shocks. The Taylor-type rule becomes a Monetary Conditions Index (MCI) that outperforms Taylor-type rules which accord no weight at all or a higher weight to the real exchange rate. In the current environment of concern about sudden increases in U.S. interest rates, the properly designed MCI would have a considerable advantage.
    Keywords: REX Inflation, Optimal Policy, Taylor-Type Rules, MCI, Openness, Portfolio Shocks
    JEL: E3 E5 F5
    Date: 2015–06–19
  17. By: Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty’ deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: Monetary policy, Bank lending channel, Quantitative Easing
    JEL: E51 E52 G20
    Date: 2015–10
  18. By: Luk, Paul; Vines, David
    Abstract: This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.
    Keywords: fiscal policy; monetary policy; New Keynesian model
    JEL: E52 E61 E62
    Date: 2015–10
  19. By: García-Schmidt, Mariana; Woodford, Michael
    Abstract: A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian" proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance" are likely, in the case of a long-horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
    JEL: E31 E43 E52
    Date: 2015–10
  20. By: Laurent Clerc (Banque de France); Alexis Derviz (Czech National Bank); Caterina Mendicino (Banco de Portugal); Stéphane Moyen (Deutsch Bundesbank); Kalin Nikolov (European Central Bank); Livio Stracca (European Central Bank); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros); Alexandros P. Vardoulakis (Board of Governors of the Federal Reserve System)
    Abstract: We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.
    Keywords: Default risk, financial frictions, macroprudential policy.
    JEL: E3 E44 G01 G21
    Date: 2014–12
  21. By: M. Albert; C. Jude; C. Rebillard
    Abstract: After three decades of rapid growth, the Chinese economy has been slowing; at the same time, concerns about the sustainability of its growth model are mounting, calling for urgent rebalancing. This paper provides an assessment of how, and to what extent, the rebalancing process may impact China’s potential growth in the next fifteen years. After reviewing the main reasons behind China’s high growth and imbalances (and the role of factor price distortions), as well as its rising vulnerabilities (overinvestment, excessive credit growth, and a real estate bubble), we adopt a production function approach to derive potential growth. However we depart from the standard methodology in two important ways: first, we correct China’s capital stock for overinvestment by taking into account the credit cycle; second, we disentangle the effects of sectoral reallocations from within-sector productivity, allowing for a better assessment of the expected shift from manufacturing to services. Our results indicate that growth would be currently slightly higher than its potential, with a positive output gap, thus questioning the rationale for additional stimulus measures. Moreover, in our scenario potential growth would fall more quickly than currently expected by the Consensus, to around 5 percent by 2020.
    Keywords: China, potential growth, overinvestment, credit cycle, sectoral reallocations, rebalancing.
    JEL: E22 E24 E32 E51 O11 O47
    Date: 2015
  22. By: Franklin Serrano and Ricardo Summa
    Abstract: This paper examines the sharp slowdown in the Brazilian economy for the years 2011-2014, in which economic growth averaged only 2.1 percent annually, as compared with 4.4 percent in the 2004-2010 period. The authors argue that the slowdown overwhelmingly results from a sharp decline in domestic demand led by government policy, rather than from a fall in exports and even less from any change in external financial conditions. It concludes that this decision to slow the economy was not necessary as there was no external constraint, such as a balance-of-payments problem, that warranted it.
    Keywords: brazil, growth, latin america, commodities boom, aggregate demand
    JEL: E E5 E6
    Date: 2015–08
  23. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Zaman, Saeed (Federal Reserve Bank of Cleveland)
    Abstract: We estimate an empirical model of inflation that exploits a Phillips curve relationship between a measure of unemployment and a subaggregate measure of inflation (services). We generate an aggregate inflation forecast from forecasts of the goods subcomponent separate from the services subcomponent, and compare the aggregated forecast to the leading time-series univariate and standard Phillips curve forecasting models. Our results indicate notable improvements in forecasting accuracy statistics for models that exploit relationships between services inflation and the unemployment rate. In addition, models of services inflation using the short-term unemployment rate (less than 27 weeks) as the real economic indicator display additional modest forecast accuracy improvements.
    Keywords: Inflation forecasting; Phillips curve; disaggregated inflation forecasting models; trend-cycle model
    JEL: C22 C53 E31 E37
    Date: 2015–10–14
  24. By: Antonakakis, Nikolaos; Gogas, Periklis; Papadimitriou, Theophilos; Sarantitis, Georgios
    Abstract: In this study, we examine the issue of business cycle synchronization from a historical perspective in 27 developed and developing countries. Based on a novel complex network approach, the Threshold-Minimum Dominating Set (T-MDS), our results reveal heterogeneous patterns of international business cycle synchronization during fundamental globalization periods since the 1870s. In particular, the proposed methodology reveals that worldwide business cycles de-coupled during the Gold Standard, though they were synchronized during the Great Depression. The Bretton Woods era was associated with a lower degree of synchronization as compared to that during the Great Depression, while worldwide business cycle synchronization increased to unprecedented levels during the latest period of floating exchange rates and the Great Recession.
    Keywords: Business cycle synchronization; Globalisation; Complex networks; Threshold-Minimum Dominating Set
    JEL: E3 E32 F44 N10 O47
    Date: 2015–10–14
  25. By: Pedro Portugal; Pedro S. Raposo; Anabela Carneiro
    Abstract: Using an unusually rich matched employer-employee-job title data set for Portugal, this paper evaluates the sources of wage losses of workers displaced due to firm closure based on the comparison of workers’ wages differentials before and after displacement. Potential wage losses of displaced workers can be related to firm, job title, and match heterogeneity in the pre- and post-displacement jobs. In this vein, we estimate a threeway high-dimensional fixed effects regression model that enables us to decompose the sources of the wage losses into the contribution of firm, job title, and match fixed effects. The worker-firm match plays a very sizable role. We found that the allocation of workers into poorer matches accounts for 38 percent of the total average wage loss. Sorting among firms accounts for 36 percent. Job downgrading also plays a significant role in explaining the wage loss of displaced workers, accounting for the remaining 26 percent.
    JEL: E21 E60 F40
    Date: 2015
  26. By: Laurence Savoie-Chabot; Mikael Khan
    Abstract: In an open economy such as Canada’s, exchange rate movements can have a material impact on consumer prices. This is particularly important in the current context, with the significant depreciation of the Canadian dollar vis-a-vis the U.S. dollar since late 2012. This paper provides a broad overview of the various mechanisms by which exchange rate movements pass through to consumer prices and discusses the implications of exchange rate pass-through (ERPT) for the conduct of monetary policy. It then describes some of the tools used at the Bank of Canada to help quantify ERPT. We conclude by taking a closer look at the current situation in Canada, presenting a range of evidence that suggests ERPT has played an important role in recent inflation dynamics.
    Keywords: Exchange rates, Inflation and prices
    JEL: E31 E52 F31
    Date: 2015
  27. By: Kateryna Bornukova
    Abstract: In the recent decades aggregate labor productivity in the U.S. became countercyclical (labor productivity puzzle). At the same time the U.S. experienced dramatic changes in the structure of households due to increased female labor force participation. I show that changes in the household structure and corresponding changes in labor supply behavior can explain the labor productivity puzzle. I build a model with heterogeneous one- and two-earner households and aggregate technology shocks and calibrate it to the current U.S. data. I impose the household structure change in the model and show that the behavior of labor productivity changes from procyclical to countercyclical, as in the U.S. I also show that individual labor supply volatility depends on the role of the earner in the household. Increase in the proportion of multiple-earner households leads to increase in aggregate labor supply volatility.
    Keywords: business cycles, family labor supply, multiple-earner households
    JEL: C68 E32 E24 J22
    Date: 2015–05
  28. By: Paul de Grauwe; Corrado Macchiarelli
    Abstract: In this paper we extend the behavioral macroeconomic model as proposed by De Grauwe (2012) to include a banking sector. The behavioral model takes the view that agents have limited cognitive abilities. As a result, it is “rational” to use simple forecasting rules and to subject the use of these rules to a fitness test. Agents are then driven to select the rule that performs best. The behavioral model produces endogenous and self-fulfilling movements of optimism and pessimism (animal spirits). Our main result is that the existence of banks intensifies these movements, creating a greater scope for booms and busts. Thus, banks do not create but amplify animal spirits. We find that increases in the equity ratios of banks tend to reduce the importance of animal spirits over the business cycle. The other policy conclusion we derive from our results is that the central bank has an important responsibility for stabilising output: output stabilization is an instrument to “tame the animal spirits”. This has the effect of improving the trade-off between inflation and output volatility.
    Keywords: Animal spirits; Credit cycle; Interest rate spread; Stabilization
    JEL: E44
    Date: 2015
  29. By: Funke, Manuel; Schularick, Moritz; Trebesch, Christoph
    Abstract: Partisan conflict and policy uncertainty are frequently invoked as factors contributing to slow post-crisis recoveries. Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. In this paper we study the political fall-out from systemic financial crises over the past 140 years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis. Importantly, we do not observe similar political dynamics in normal recessions or after severe macroeconomic shocks that are not financial in nature.
    Keywords: economic voting; financial crises; polarization; policy uncertainty
    JEL: D72 E44 G01
    Date: 2015–10
  30. By: Veronika Selezneva (Northwestern University); Martin Schneider (Stanford University); Matthias Doepke (Northwestern University)
    Abstract: We assess the distributional consequences of monetary policy in the current economic environment in the United States. Through its effect on inflation, monetary policy affects the real value of nominal assets and liabilities, and therefore redistributes wealth between borrowers and lenders in the economy. In addition, unconventional policies such as 'quantitative easing' affect real interest rates and the availability of credit, once again leading to redistributional effects. We first document the potential exposure to redistribution effects on the U.S. economy using recent data from the Flow of Funds accounts and the Survey of Consumer Finance. We then quantify the redistribution effects of monetary policy using a rich life-cycle model with idiosyncratic risk, financial constraints, a housing sector, and nominal borrowing and lending. We also discuss the extent to which the recent financial crisis, which has lowered net worth of many households and tightened financial constraints, has changed the nature of distributional consequences of monetary policy.
    Date: 2015
  31. By: Angrisani, Marco (University of Southern California); Foster, Kevin (Federal Reserve Bank of Boston); Hitczenko, Marcin (Federal Reserve Bank of Boston)
    Abstract: This report serves as the technical appendix to the 2013 Survey of Consumer Payment Choice. The Survey of Consumer Payment Choice (SCPC) is an annual study, conducted since 2008 through a partnership between the Consumer Payments Research Center (CPRC) at the Federal Reserve Bank of Boston and the RAND Corporation, designed primarily to collect data on attitudes to and use of various payment instruments by consumers over the age of 18 in the United States. This data report details the technical aspects of the survey design, implementation, and analysis.
    JEL: D12 D14 E4
    Date: 2015–07–01
  32. By: Julien Champagne
    Abstract: This paper considers a real business cycle model with labor search frictions where two types of incentive pay are explicitly introduced following the insights from the micro literature on performance pay (e.g. Lazear, 1986). While in both schemes workers and firms negotiate ahead of time-t information, the object of the negotiation is different. The first scheme is called an “efficiency wage,” since it follows closely the intuition of the shirking model by Shapiro and Stiglitz (1984), while the second is called a “performancepay” wage, since the negotiation occurs over a wage schedule that links the worker’s wage to the worker’s output. The key feature here is that the worker can then adjust the level of effort (i.e. performance) provided in any period. I simulate a shift toward performance-pay contracts as experienced by the U.S. labor market to assess whether it can account simultaneously for two documented business cycle phenomena: the increase in relative wage volatility and the Great Moderation. While the model yields higher wage volatility when performance pay is more pervasive in the economy, it produces higher volatility of output and higher procyclicality of wages, two results counterfactual to what the U.S. economy has experienced during the Great Moderation. These results pose a challenge to the idea that higher wage flexibility through an increase in performance-pay schemes can account for business cycle statistics observed over the past 30 years.
    Keywords: Business fluctuations and cycles; Labour markets
    JEL: E24 J33 J41
    Date: 2015
  33. By: Nwachukwu, Jacinta; Asongu, Simplice
    Abstract: This study investigates the legitimacy of the relatively high interest rates charged by those microfinance institutions (MFIs) which have been transformed into regulated commercial banks using information garnered from a panel of 1232 MFIs from 107 developing countries. Results show that formally regulated micro banks have significantly higher average portfolio yields than their unregulated counterparts. By contrast, large-scale MFIs with more than eight years of experience have succeeded in lowering interest rates, but only up to a certain cut-off point. The implication is that policies which help nascent small-scale MFIs to overcome their cost disadvantages form a more effective pricing strategy than do initiatives to transform them into regulated institutions.
    Keywords: Microfinance, microbanks, non-bank financial institutions, interest rates, age, economies of scale, developing countries
    JEL: E43 G21 G23 G28 N20
    Date: 2015–02–01
  34. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at The Fed at a crossroads: Where to go next?, Brookings Institution, Washington, D.C.
    Keywords: formal rule; prescriptive rule; flexibility; predictability; policymakers; anticipation; zero lower bound; discretionary monetary policy; Taylor rule; John Taylor; rule modification; monetary policy transmission; financial conditions; FOMC communications
    JEL: E52 E58
    Date: 2015–10–15
  35. By: Pavol Majher
    Abstract: This paper studies the role of rms' entry and exit for business cycle dynamics in an environment, where physical capital is partially sunk. Extending a heterogeneous-rm model a la Hopenhayn (1992) by aggregate productivity shocks and partially irreversible investment yields substantial endogenous amplication and propagation. A positive aggregate productivity shock increases the number of entrants and their initial investment levels, because the expected entry value outweighs the implicit sunk cost associated with investment irreversibility. The endogenous propagation of an exogenous stimulus arises via a built-in selection device, as the production growth of new businesses over their lifecycle exceeds the decay due to exits of the least productive rms.
    JEL: D92 E22 E37 L11
    Date: 2015–10
  36. By: Ramírez, Juan (Banco Central de Reserva del Perú); Vásquez, José (Banco Central de Reserva del Perú); Pereda, Javier (Banco Central de Reserva del Perú)
    Abstract: This paper estimates the main determinants of the demand for cash in Peru from 2002 to 2013. Cash data is analyzed in two levels: considering an aggregate level, where all the notes circulating in the economy are included; and considering the type of denomination. Two sub-groups were defined: lower denomination notes (S/. 10, S/. 20 and S/. 50), and higher denomination notes (S/. 100 and S/. 200). We construct a model of the demand for cash following Adam (2000). For each sub-group, we estimate a non-linear relation with the Markov switching model method (MSM). The MSM estimation shows that the analyzed period has two different regimes. Depending on the sub-group and the regime analyzed, the results differ. The general conclusion is that low denomination notes are highly correlated with transactional variables and in a lower degree with interest rates. Meanwhile, the demand for high denomination notes is positively correlated with the ratio of dollarization and the informal sector of the economy. These results are consistent with the Cash Usage Surveys taken by the Central Bank in 2008 and in 2012.
    Keywords: Cash, money demand, dollarization, informality, Markov switching model
    JEL: E41 E51 Y E52
    Date: 2015–10
  37. By: Waldenström, Daniel
    Abstract: This paper uses new data on Swedish national wealth over a period of two hundred years to study whether the patterns in wealth-income ratios previously found by Piketty and Zucman (2014) for some very rich and large Western economies extend to smaller countries that were historically backward and developed a different set of political and economic institutions during the twentieth century. The findings point to both similarities and differences. In the pre-industrial era, Sweden had much lower wealth levels than the rest of Europe, and the main explanation is that the Swedes were too poor to save their income. Over the twentieth century, Swedish aggregate trends and levels are much more similar to those of the rest of Europe, but the structure of national wealth differs. In Sweden, government wealth grew much faster and became more important, not least through its relatively large public pension system. This suggests an explicit role of historical economic and political institutions for the long-run evolution of wealth-income ratios.
    Keywords: Economic history; Household portfolios; Institutions; National wealth; Pension wealth; Welfare state
    JEL: D30 E01 E02 N30
    Date: 2015–10
  38. By: P. Andrade; G. Gaballo; E. Mengus; B. Mojon
    Abstract: We analyze the effects of forward guidance when agents have heterogeneous interpretations of whether forward guidance contains a commitment on future policy actions. Using survey expectations, we document that forward guidance lowered disagreement about future short-term interest rates to historically low levels while it did not affect much disagreement about future inflation and future consumption. We introduce heterogenous beliefs on future policy and fundamentals in an otherwise standard New-Keynesian model. We show that, because the commitment type of the central bank is unobserved, agreement on the future path of interest rates can coexist with disagreement on the length of the trap. Such heterogeneity of beliefs can strongly mitigate the effectiveness of forward guidance. It also alters the optimal policy at the zero lower bound compared to a situation where beliefs are homogenous.
    Keywords: monetary policy, forward guidance, communication, heterogeneous beliefs, disagreement.
    JEL: E31 E52 E65
    Date: 2015
  39. By: Adam, Klaus; Tzamourani, Panagiota
    Abstract: We study the distributional consequences of housing price, bond price and equity price increases for Euro Area households using data from the Household Finance and Consumption Survey (HFCS). The capital gains from bond price and equity price increases turn out to be concentrated among relatively few households, while the median household strongly benefits from housing price increases. The capital gains from bond price increases (relative to household net wealth) do not correlate with household net wealth (or income). Bond price increases thus leave net wealth inequality largely unchanged. In contrast, equity price increases largely benefit the top end of the net wealth (and income) distribution, thus amplify net wealth inequality. Housing price increases display a hump shaped pattern over the net wealth distribution, with the poorest and richest households benefitting least. With regard to the latter finding there exists considerable heterogeneity across Euro Area countries.
    Keywords: asset price inflation , wealth redistribution
    JEL: D31 E21 E52 E58
    Date: 2015
  40. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Aguiar, Mark (Princeton University)
    Abstract: We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and the domestic households are impatient relative to the international interest rate. The front loading of tax distortions allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism, providing a link with the closed-economy literature that has explored disagreement between the government and its citizens regarding inter-temporal tradeoffs.
    Keywords: Fiscal policy; Sovereign debt; Limited commitment
    JEL: E62 F32 F34
    Date: 2015–10–16
  41. By: D'Orlando, Fabio; Ferrante, Francesco
    Abstract: Traditional theoretical literature which neglects the benefits of stabilization policies (e.g., Lucas 1987 and 2003) ultimately relies on the small impact that macroeconomic volatility has on aggregate income and consumption. In this article, we argue that such an approach is both theoretically and empirically weak. From the theoretical viewpoint, the cost of volatility should be measured including not only monetary magnitudes, but also those psychological costs whose relevance has been stressed by behavioural economics and which are correlated with the number of unemployment episodes. We refer here to the implications for experienced utility of loss aversion, the endowment effect and hedonic adaptation. This theoretical problem is coupled with the empirical finding that the effects of downturns are not randomly distributed and serially uncorrelated, i.e., they affect more frequently those who have less (in terms of skills, income and wealth) and who suffer greater wellbeing losses from each shock. It follows that the traditional (and Lucas) analysis disregards the main causes of wellbeing losses determined by downturns. Hence, it cannot be considered as a theoretically sound basis for denying the usefulness of policies aimed at preventing downturns and/or of micro regulation policies aimed at preventing the impact of downturns and labour force reallocation on the labour market.
    Keywords: Behavioural economics, employment protection legislation, endowment effect, hedonic adaptation, loss aversion, recessions, redistribution, unemployment
    JEL: E24 E32 I38 J63 J65 J68
    Date: 2015–10–18
  42. By: Simon Mongey (NYU); Gianluca Violante (NYU); Alessandro Gavazza (London School of Economics)
    Abstract: Labor market data show a substantial deterioration of aggregate matching efficiency around the Great Recession, even after controlling for compositional changes among job seekers. We augment the multiworker-firm version of the equilibrium random-matching model of the labor market with endogenous firm entry and exit, a choice of recruiting intensity when hiring, and a dividend constraint that induces some firms to borrow and some of those with debt to default. We use the model to study whether aggregate financial shocks can account for the observed drop in matching efficiency--and the ensuing shift in the Beveridge curve--through a reduction in the average recruiting intensity in the economy. Central to this mechanism is the role of young firms which contribute disproportionately to job creation, display the highest recruitment effort per vacancy and, at the same time, are heavily dependant on external finance.
    Date: 2015
  43. By: Kirill Shakhnov
    Abstract: The paper documents stylized facts about Belarusian business cycle based on aggregate and industry data and puts it into an international content. First, the aggregate fluctuations in Belarus are mostly driven by the wedge, which resembles a time-varying investment tax. Second, the fluctuation in relative prices of an industry is typically more important than volume fluctuation. Furthermore, the impact of price fluctuations is partially offset by volume fluctuation. Third, the aggregate cycle is smoother than the industry-specific one. In particular, agriculture, construction and finance experience a very sharp drop in a recession.
    Keywords: bussiness cycle, industry data, Belarus
    JEL: E32 L11
    Date: 2015–10
  44. By: Joel Wagner
    Abstract: This paper takes a full-information model-based approach to evaluate the link between investment-specific technology and the inverse of the relative price of investment. The two-sector model presented includes monopolistic competition where firms can vary the markup charged on their product depending on the number of firms competing. With these changes to the standard two-sector model, both total factor productivity as well as a series of non-technological shocks can impact the high-frequency volatility of the relative price of investment. Utilizing a Bayesian estimation approach to match the model to the data, we find that investment-specific technology can explain at most half of the growth rate of the relative price of investment. Last of all, we compare the benchmark model results with endogenous movement in the relative price of investment to a model where all movement in the relative price of investment is derived exogenously. This is done by allowing technologies across sectors to move together over time. Comparison of these two methods finds that the exogenous approach is incapable of capturing changes in the relative price of investment as found in the data. This paper adds to the growing list of research, like that of Fisher (2009) and Basu et al. (2013), that suggests that the quality-adjusted relative price of investment may be a poor indicator of investment-specific technology.
    Keywords: Business fluctuations and cycles
    JEL: E32 L11 L16
    Date: 2015
  45. By: Donal Smith
    Abstract: This paper establishes a transmission mechanism between credit constraints and persistently low real interest rates. In doing so, it establishes a link between two strands of macroeconomic literature that have become prominent since the nancial crisis; nancial frictions literature and zero lower bound literature. In order to analyse the credit constraints and interest rate interaction, the paper presets a perpetual youth overlapping generations model, which is extended to incorporate an endogenous nancial friction in the form of a collateral constraint. Analytical expressions and elementary diagrams are presented to illustrate the results of the model. It is found that a tightening of the nancial friction reduces the steady state rate of interest, and that non-lineaities exist in this relationship. This result occurs endogenously in the model subsequent to a change in the constraint. The model also supports hypotheses from the secular stagnation literature by way of illustrating that population ageing and higher debt levels canleave an economy more likely to encounter episodes of persistent low interest rates.
    Keywords: Financial Frictions, Overlapping Generations, Interest Rate
    JEL: E21 E43 D91
    Date: 2015–10
  46. By: Howard Kung (London Business School); Francesco Bianchi (Cornell University)
    Abstract: We construct and estimate a model that features endogenous growth and technology diffusion. The spillover effects from research and development provide a link between business cycle fluctuations and long-term growth. Therefore, productivity growth is related to the state of the economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic growth. During the Great Recession, technology diffusion dropped sharply, while long-term growth was not significantly affected. The opposite occurred during the 2001 recession. The growth mechanism induces positive comovement between consumption and investment.
    Date: 2015
  47. By: Shaofeng Xu
    Abstract: This paper examines the welfare cost of rare housing disasters characterized by large drops in house prices. I construct an overlapping generations general equilibrium model with recursive preferences and housing disaster shocks. The likelihood and magnitude of housing disasters are inferred from historic housing market experiences in the OECD. The model shows that despite the rarity of housing disasters, Canadian households would willingly give up 5 percent of their non-housing consumption each year to eliminate the housing disaster risk. The evaluation of this risk, however, varies considerably across age groups, with a welfare cost as high as 10 percent of annual non-housing consumption for the old, but near zero for the young. This asymmetry stems from the fact that, compared to the old, younger households suffer less from house price declines in disaster periods, due to smaller holdings of housing assets, and benefit from lower house prices in normal periods, due to the negative price effect of disaster risk.
    Keywords: Asset Pricing, Economic models, Housing
    JEL: E21 E44 G11 R21
    Date: 2015
  48. By: Sungje Byun; Soojin Jo
    Abstract: How does aggregate profit uncertainty influence investment activity at the firm level? We propose a parsimonious adaptation of a factor-autoregressive conditional heteroscedasticity model to exploit information in a subindustry sales panel for an efficient and tractable estimation of aggregate volatility. The resulting uncertainty measure is then included in an investment forecasting model interacted with firm-specific coefficients. We find that higher profit uncertainty induces firms to lower capital expenditure on average, yet to a considerably different degree: for example, both small and large firms are expected to reduce investment much more than medium-sized firms. This highlights significant and substantial heterogeneity in the uncertainty transmission mechanism.
    Keywords: Econometric and statistical methods; International topics; Domestic demand and components
    JEL: E22 D80 C22 C23
    Date: 2015
  49. By: Schuh, Scott (Federal Reserve Bank of Boston); Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: This report presents key findings from the 2013 Survey of Consumer Payment Choice. In 2013, the average number of consumer payments per month did not change significantly from the average number in 2012. The number of check payments continued to decline, and although the number of noncheck payments increased to offset the decline in checks, the number of transactions conducted with each noncheck payment instrument type did not change significantly in 2013 for any single instrument type. Thus, the shares of payments made with each of the major instrument types did not change significantly. Debit cards and cash continued to account for the two largest shares of consumer payments in 2013 (31.1 and 26.3 percent, respectively), and the credit card share reached 22.5 percent. Adoption of mobile banking and the number of mobile payments increased significantly over 2012, with almost half of consumers having access to mobile banking in 2013, and over a third reporting that they had used mobile payments during the year.
    JEL: D12 D14 E42
    Date: 2015–07–27
  50. By: Kodila-Tedika, Oasis; Asongu, Simplice
    Abstract: We assess the correlations between intelligence and financial development in 123 countries using data averages from 2000-2010. Human capital is measured in terms of IQ, cognitive ability & cognitive skills, while financial development is appreciated both from financial intermediary and stock market development perspectives. Short-term financial measures are private and domestic credits whereas long-term financial indicators include: stock market capitalization, stock market value traded and turnover ratio. The following findings are established. (1) With respect to private credit, the positive correlations of IQ and cognitive ability are broadly similar while that of cognitive skills is substantially higher in terms of magnitude. (2) The correlation between intelligence and other financial variables are broadly similar. (3) The underlying findings are broadly confirmed in terms of sign of correlation, though the magnitude of correlation is higher (lower) with the addition of social capital or ethnic fractionalization (institutions or income). (4) When continents are excluded to control for extreme effects, baseline results are confirmed and the following on order of continental importance in financial development is established in increasing magnitude: Africa, Americas, Oceania, Europe & Asia.
    Keywords: Financial development, Intelligence, Skill, Human Capital
    JEL: E01 G20 I20 I29
    Date: 2015–02–01
  51. By: Davor Jancic
    Abstract: While the sovereign debt crisis was ravaging the Eurozone and while the European Council was dominating the decision-making scene, even the most informed onlookers harboured little expectation that this would have a positive impact on the democratisation of the European Union.
    JEL: E6
    Date: 2014–06
  52. By: Cielo Magno (School of Economics, University of the Philippines Diliman)
    Abstract: Mineral extraction alone is not sufficient to trigger sustainable development in developing countries. The mainstream paradigm on mining for development suggests that mineral-rich developing countries need to formulate a fiscal policy that can balance the need to maximize fiscal revenue while ensuring that the country has an attractive investment climate. The presence of mining companies in poor remote communities is sufficient to initiate development. In this discussion, it is suggested that the fiscal policy should take into account the state of governance where mining is being conducted, the extent of linkages mining creates in the local economy and whether the Regalian doctrine applies to ownership of minerals. The raise-to-the-bottom approach in designing fiscal policies does not necessarily benefit mineral-rich developing countries. In the case of the Philippines, a more comprehensive development framework is necessary to ensure that mining contribute to the sustainable development of the Philippines. The framework should include: (1) good governance of the public and extractive sectors which entails institutionalization of transparency and accountability mechanisms, implementation of the United Nations guiding principles on business and human rights and strengthening of government's regulatory capacity; (2) effective allocative capacity and capacity to effectively manage the returns from the sector by the government so that the proceeds from mining contribute to sustainable development and ensure intergenerational equity; (3) establishment of linkages between the extractive sector and the rest of the economy to maximize the benefit of the extractive activity; and (4) fiscal policy that reflects fair share in the extraction of resources, the state of mining governance and the environment where extraction is conducted. Fair share in mining includes payment for the minerals owned by the government on top of the regular taxes the government imposes to all industries.
    Keywords: mining, natural resource extraction, extractive industry, sustainable development, taxation
    JEL: E62 L72 O13 H23
    Date: 2015–10
  53. By: ARATA Yoshiyuki; KIMURA Yosuke; MURAKAMI Hiroki
    Abstract: The stability of aggregate investment is central to our understanding of macroeconomic dynamics. It is also important to understand the impact of individual behaviors on aggregate patterns. Empirical studies have shown that individual investment behavior, at the plant level, is characterized by lumpiness and infrequency. The existing literature about the uncertainty-investment relationship has shown that uncertainty negatively affects investment decisions, i.e., when facing high uncertainty, firms prefer to "wait and see." The aim of this paper is to investigate how the lumpiness of investment activity under uncertainty affects the stability of the macroeconomy. We show that heterogeneity in capital adjustment processes of micro-agents contributes to the stability at the macroscopic level, and that this macro-stability is undermined in uncertain circumstances with interacting agents. In other words, while heterogeneous behaviors always enhance the stability of aggregate investment, coordination of interacting investors weakens this stabilizing force. As a result, a slight shock is sufficient to induce instability when investors are highly sensitive to uncertainty over economic environment. This is an explanation of simultaneous reduction of investment activities under high uncertainty, leading to a prolonged economic downturn.
    Date: 2015–10
  54. By: Jaume Ventura (CREI); Alberto Martin (CREI, UPF and Barcelona GSE)
    Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal.
    Date: 2015
  55. By: Abrar ul haq, Muhammd
    Abstract: The main concern of this study is to analyze the impact of agricultural exports on macroeconomic performance of Pakistan. This study estimated the relationship between Gross domestic product (GDP) and agricultural and non-agricultural exports for Pakistan employing Johansen co-integration technique by using secondary data for the period 1972-2008.The main findings of the study depict that agricultural exports have a negative relationship with economic growth of Pakistan while non-agricultural exports have positive relation with economic growth. On the basis of empirical results this study suggested that Pakistan have to do structural changes in agricultural exports by converting its agricultural exports into value added products.
    Keywords: Pakistan, Agricultural exports, non-agricultural exports, economic growth, Capital
    JEL: E00 Q00
    Date: 2015
  56. By: Nicholas Oulton (Centre for Macroeconomics (CFM))
    Abstract: Space-time consistency in the national accounts means that the relative size or standard of living of a country today is the same whether we measure it by an earlier PPP extrapolated to the present using relative inflation rates from the national accounts or by the current PPP. Empirically, space-time inconsistency is extensive. Theoretically, space-time consistency prevails if the consumer’s utility function (or the revenue (GDP) function) is homothetic and if Divisia price indices are used to deflate nominal consumption (or GDP), both over time and across countries. Hence the inconsistency we observe is due to either (a) non-homotheticity in consumption (or production); (b) approximation error when discrete chain indices are used instead of continuous Divisia indices; or (c) errors in domestic price indices and PPPs. Based on detailed data from the 1980 and 2005 International Comparisons Program and the Penn World Table, I conclude that errors in price indices and PPPs are the major cause of inconsistency.
    Keywords: PPP, Divisia, Konus, price index, path-dependance, consistency
    JEL: C43 E01 E23 I31 O47
    Date: 2015–04
  57. By: Nikolaos Antonakakis (University of Portsmouth, Webster Vienna Private University and Johannes Kepler University); Rangan Gupta (Department of Economics, University of Pretoria); John W. Muteba Mwamba (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, 2006, South Africa)
    Abstract: In this study we examine the dynamic comovements between housing and oil market returns in the US over the period 1859-2013, while controlling for real GDP growth, in flation and interest rate that are known to affect both these markets. As such, we provide a bird's-eye view on the interdependencies between these two markets from a historical perspective. The results of our empirical analysis reveal that comovements between housing and oil market returns are consistently negative over time, apart from several US recessions the US economy experienced in the 19th century, wherein correlations are positive.
    Keywords: Housing market, oil market, dynamic comovements
    JEL: C32 E60 E66 G10
    Date: 2015–10
  58. By: James Chapman; H. Evren Damar
    Abstract: In this paper, we investigate how liquidity conditions in Canada may affect domestic and/or foreign lending of globally active banks and whether this transmission is influenced by individual bank characteristics. We find that Canadian banks expanded their foreign lending during the recent financial crisis, often through acquisitions of foreign banks. We also find evidence that internal capital markets play a role in the lending activities of globally active Canadian banks during times of heightened liquidity risk.
    Keywords: Financial institutions; Financial stability
    JEL: E44 F36 G21 G32
    Date: 2015
  59. By: Jung, Kuk Mo
    Abstract: Using data on twenty major OECD countries over time, this paper documents a new evidence on real equity and real currency prices: higher real returns in the home equity market relative to foreign counterparts are generally associated with real home currency depreciation at a monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This paper also proposes one plausible explanation for this time-varying correlation structure. The suggested model is based on a long-run risks type model, combined with time-varying liquidity risks in stock markets. With recursive preference for the early resolution of uncertainty and a negative link between the level of short-run economic growth and equity market liquidity volatility, the model demonstrates that severe short-run economic uncertainty overturns the otherwise negative link between the real currency and real relative equity returns.
    Keywords: foreign exchange rates, long run risks models, liquidity risks
    JEL: E43 F31 G12 G15
    Date: 2015–10
  60. By: Justine Pedrono (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Aurélien Violon (Banque de France - ACPR)
    Abstract: Theoretically, as currency diversification affects directly the total composition of banks collateral, it changes their debt capacity and their resilience to economic shocks. Thus, currency diversification should be relevant to the leverage and the leverage procyclicality. However, empirical investigations on this subject are still missing. Using very confidential data on credit institutions located in France between 1999 and 2014, we examine whether currency diversification is pertinent for both the leverage procyclicality and the determination of leverage. Our results confirm previous analysis on leverage procyclicality and capital structure decision. Regarding currency diversification, our results suggest that the currency dimension is relevant: higher currency diversification implies lower leverage. Finally, including the currency mismatch dimension in our analysis supports the theoretical conclusion. Currency mismatch is mostly irrelevant for the definition of the leverage.
    Keywords: procyclical leverage, capital structure, currency diversification, currency mismatch
    Date: 2015–10–16
  61. By: Lana Embree; Varya Taylor
    Abstract: The Large Value Transfer System (LVTS) is Canada’s main electronic interbank funds transfer system that financial institutions use daily to transmit thousands of payments worth several billions of dollars. The LVTS is different than real-time gross settlement (RTGS) systems because, while each payment is final and irrevocable, settlement occurs on a multilateral net basis at the end of the day. Furthermore, LVTS payments are secured by a collateral pool that mutualizes losses across participants in the event of a default. In this paper, we use the Bank of Finland Simulator to examine the implications of fully collateralizing LVTS payments, similar to an RTGS. An important caveat to consider, however, is that the simulations do not take into account the anticipated change in payment behaviour in response to a change in collateral requirements. In this regard, we include a queuing mechanism to at least reflect more efficient use of liquidity. The results indicate that collateral requirements vary by participant and some participants actually require less collateral in the simulation than what is required under the current LVTS design.
    Keywords: Financial Institutions, Payment clearing and settlement systems
    JEL: E E4 E47 G G2 G21
    Date: 2015
  62. By: C. Jadeau; E. Jousselin; S. Roux; G. Verdugo
    Abstract: In coordination with the ECB and 24 other national central banks of the European Union, the Banque de France interrogated 1150 French firms to understand how the crisis affected their economic environment and their human resources practices during the 2010-2013 period. A majority of workers were employed by firms which indicate that their activity was mostly affected by a decrease in demand considered as long-lasting by more than 40% of them, especially in the construction sector and among small firms. In contrast, less than 20% of firms (weighted by their employment) report that the unavailability of credit had an effect on their activity. Over the period, despite the economic downturn, the amount of total costs increased for 70% of firms (weighted by their employment) mainly through an increase in labour costs and secondly in the cost of supplies. In particular, base wages continued to increase for a large share of firms, suggesting strong downward wage rigidities. Many firms indicate substantial difficulties in adjusting the labour force: throughout the crisis it became more difficult to hire qualified employees, to adjust working hours or to move workers to different job positions. The joint presence of difficulties in finding employees and unemployment growth suggest that structural unemployment increased in France in recent years. Other factors considered as significantly constraining for employment growth by a large majority of firms are uncertainty about economic conditions, risks that labour laws are changed, high payroll taxes and firing costs.
    Keywords: wage adjustment, France, wage dynamics network.
    JEL: E24 D4 L11
    Date: 2015
  63. By: Waldenström, Daniel
    Abstract: This study presents a new database, the Swedish National Wealth Database (SNWD), which contains annual data on private, public and national wealth and sectoral saving rates in Sweden over the past two centuries. The paper reviews previous investigations of national wealth, compares their estimates with the new ones and discusses method approaches and measurement problems. Then the main data series are presented for assets and liabilities and their subcomponents, for the private and public domestic and foreign sectors. Complementing the traditional focus on economic flow variables in the past literature on long-run economic developments, this new database offers potentially new perspectives of a number of important issues in the modern economic history of Sweden.
    Keywords: economic history; household portfolios; national wealth; pension wealth; saving
    JEL: E01 H31 N33 N34
    Date: 2015–10
  64. By: Ricardo Reis (Columbia University)
    Abstract: The fiscal capacity of a central bank is given by the present value of the seignorage from issuing banknotes plus the market value of its assets minus non-required reserves. Its size determines the solvency of a central bank and constrains unconventional monetary policy. We estimate this capacity for the US, as well as its elasticity with respect to inflation. To do so, we use balance-sheet information to measure the market value of central bank assets and how it will fall with inflation. We also estimate annual seignorage and how it varies with inflation and use options data for inflation to recover stochastic discount factors with which to value cash flows to the central bank. Our results suggest that the fiscal capacity of the Fed is large, but insensitive to plausible changes in inflation.
    Date: 2015
  65. By: Askitas, Nikos (IZA)
    Abstract: I create a time series of weekly ratios of Google searches, in the US, on buying and selling in the Real Estate Category of Google Trends. I call this ratio the Google US Housing Market BUSE Index or simply the BUSE index. It expresses the number of "buy"-searches for each "sell"-search which, by means of certain regularity assumptions on the distribution of Internet users, I think is a good proxy of the number of prospective home buyers for each prospective home seller in the pool of prospective housing market participants. I show this ratio to have several unique, desirable properties which make it useful for understanding and nowcasting the US housing market. Firstly it has a significant correlation with the US national S&P/Case-Shiller Home Price Index. Since the latter is monthly and published as a three-month moving average with a two month lag and the Google Trends data is weekly we can have a short term nowcasting of housing prices in the US. In the seasonal variations of this ratio the BUSE index recaptures traces of prospect theory whose applicability in the housing market has been well documented. I show how these Google data can be used to create a consistent narrative of the post bubble burst dynamics in the US housing market and propose the BUSE index as an instrument for monitoring housing market conditions.
    Keywords: nowcasting, housing market, Google Trends, Google Search, S&P/Case-Shiller Home Price, complexity, behaviour, data science, computational social science, complex systems
    JEL: C81 E65 G21 R31
    Date: 2015–10
  66. By: Njindan Iyke, Bernard; Takumah, Wisdom
    Abstract: This paper explores the causal influence of tax revenue on economic growth in Ghana. Our point of departure from the existing studies lies in the fact that we examine causality instead of the impact. The causality analysis performed in this paper builds on a multivariate setup, allowing for key control variables to intermediate the nexus between tax revenue and economic growth. Such a rich environment can overcome variable omission bias; thus allowing for efficient estimates of the test statistics of the Granger causality. In addition, we employed the Toda-Yamamoto test instead of the canonical Granger causality test to avoid pre-testing bias. Using a quarterly dataset which spans the period 1986Q1-2014Q4, we found strong evidence of unidirectional causal flow from tax revenue to economic growth in Ghana. This finding agrees with the existing finding that taxation can influence economic growth. The policy implication is quite clear. Ghana is a net borrower since the country regularly suffers from budget deficits. The policymaker can implement policies that enhance the tax scope in order to increase the revenue from taxation. For a country whose economy has a large share of black market activities, such a policy may be challenging to implement. Thus, such policies will require collective efforts from the policymaker and the players in the economy. To induce people to buy into these kinds of policies, the policymaker must first embrace accountability of the revenue raised from taxation. Productive government spending will appeal to the players of the Ghanaian economy whereas unproductive and unaccountable government spending will not.
    Keywords: Causality, Economic Growth, Tax Revenue, Ghana
    JEL: E6 H2
    Date: 2015–10–01
  67. By: Ricardo Bebczuk (CEDLAS - UNLP); Leonardo Gasparini (CEDLAS - UNLP); Noelia Garbero (CEDLAS - UNLP); Julian Amendolaggine (CEDLAS - UNLP)
    Abstract: This study centers on the household saving rate in Latin America by constructing a new database from 27 household surveys in 10 countries. At the statistical level, about half of the households present negative saving. This fact, coupled with the discrepancy with national accounts data, suggests some degree of income underreporting and/or consumption overreporting. The estimations highlight the overriding positive role of income in shaping saving decisions. Many other controls prove to be significant as well. In terms of household saving promotion, our paper leaves little room for optimism.
    JEL: D91 E21
    Date: 2015–10
  68. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During the 57th NABE annual meeting, St. Louis Fed President James Bullard discussed the orthodox view of current monetary policy, which emphasizes that the FOMC's objectives have essentially been met while monetary policy settings remain far from normal. He also discussed three challenges to that view, which relate to strict inflation targeting, low real interest rates and globalization. He noted that the orthodoxy suggests a prudent policy of returning policy settings to more normal levels gradually over time, providing plenty of monetary accommodation during the transition to guard against macroeconomic risks.
    Date: 2015–10–13
  69. By: James Yetman
    Abstract: We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989-1998 to 2.2% for 2004-2013. By contrast, it has remained close to 2% since the mid-1990 for Canadian forecasts. Second, the variance of estimates of the long-run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada's adoption of inflation targets. And third, forecasters in Canada look much more alike than those in the US in terms of the weight that they place on the anchor. One explanation for these results is that an explicit inflation targeting regime (Canada) provides for less uncertainty about future monetary policy actions than a monetary policy regime where there was no explicit numerical inflation target (the US before 2012) to anchor expectations.
    Keywords: Inflation expectations, decay function, inflation targeting
    Date: 2015–10
  70. By: Jean-Baptiste Michau (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS)
    Abstract: This paper relies on a Ramsey model with money to o¤er a simple theory of secular stagnation. The permanent failure of the economy to produce at full capacity results from three features: (i) The combination of the zero lower bound on the nominal interest rate and of an in ‡ation ceiling imposes a lower bound on the real interest rate; (ii) Some dynastic households have a high propensity to save, due to a preference for wealth; (iii) A downward wage rigidity breaks the de ‡ationary spiral resulting from the lack of demand. In this framework, I derive the paradox of ‡exibility, of thrift, and of toil. If the in ‡ation ceiling cannot be raised, then the government needs to rely on …scal policy to escape secular stagnation. However, a conventional …scal stimulus is not an e¢ cient response to a permanent liquidity trap, and can even be welfare reducing. The solution is instead to tax household wealth and to subsidize income from physical capital, through an investment subsidy or a reduction in the taxation of corporate income. This optimal policy is revenue neutral and implements the …rst-best allocation of resources. However, to avoid a jump in the price level upon implementation of the optimal policy, the government needs to redeem the money that had previously been supplied to …nance public de…cits.
    Keywords: Liquidity trap,Monetary and fiscal policy,Secular stagnation
    Date: 2015–10–10
  71. By: Ayako Saiki (De Nederlandsche Bank); Jon Frost (De Nederlandsche Bank)
    Abstract: Inequality has been largely ignored in the literature and practice of monetary policy, but is gaining more attention recently. Here, we exclusively focus on the impact of unconventional monetary policy (UMP) on inequality. We look at how the recent UMP in Japan affected inequality, using household survey data. Our vector auto regression results show that UMP widened income inequality after Q4 2008 as the Bank of Japan (BoJ) resumed its zero-interest rate policy and reinstated UMP. This is largely due to the portfolio channel. To the best of our knowledge, this is the first study to empirically analyze the distributional impact of UMP. Japan’s extensive experience with UMP may hold important policy implications for other countries.
    Date: 2014–10
  72. By: Franses, Ph.H.B.F.; Maassen, N.
    Abstract: We analyze the monthly forecasts for annual US GDP growth, CPI inflation rate and the unemployment rate delivered by forty professional forecasters collected in the Consensus database for 2000M01-2014M12. To understand why some forecasters are better than others, we create simple benchmark model-based forecasts. Evaluating the individual forecasts against the model forecasts is informative for how the professional forecasters behave. Next, we link this behavior to forecast performance. We find that forecasters who impose proper judgment to model-based forecasts also have highest forecast accuracy, and hence, they do not perform best just by luck.
    Keywords: macroeconomic forecasts, expert adjustment
    JEL: E27 E37
    Date: 2015–10–12
  73. By: Leonardo Melosi (Federal Reserve Bank of Chicago); Francesco Bianchi (Cornell University)
    Abstract: High uncertainty is an inherent implication of the zero lower bound, while deflation is not because of inflationary pressure due to uncertainty about how debt will be stabilized. We show that policy uncertainty empirically accounts for the absence of deflation in the US economy. Announcing fiscal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning fiscal discipline, at the cost of increasing macroeconomic instability. The policy trade-off can be resolved by committing to inflating away only the portion of debt accumulated during the recession.
    Date: 2015
  74. By: Josef Schroth
    Abstract: This paper studies an economy where agents can spend resources on consuming a private good and on funding a public good. There is asymmetric information regarding agents’ relative preference for private versus public good consumption. I show how private good consumption should be coordinated across agents within each period to ensure efficient contributions to fund the public good. If agents contributed similar amounts in the past, then coordination takes the form of positively correlated contributions in the current period. If an agent contributed more in the past, then coordination prescribes state-contingent socially wasteful private good consumption in the current period for that agent.
    Keywords: Financial stability, Financial system regulation and policies, Fiscal Policy
    JEL: E62 H21 H23 H77 D82 D86
    Date: 2015
  75. By: Buncic, Daniel; Tischhauser, Martin
    Abstract: Neely et al. (2014) have recently demonstrated how to efficiently combine information from a set of popular technical indicators together with the standard Goyal andWelch (2008) predictor variables widely used in the equity premium forecasting literature to improve outof- sample forecasts of the equity premium using a small number of principal components. We show that forecasts of the equity premium can be further improved by, first, incorporating broader macroeconomic data into the information set, second, improving the selection of the most relevant factors and combining the most relevant factors by means of a forecast combination regression, and third, imposing theoretically motivated positivity constraints on the forecasts of the equity premium. Applying standard out-of-sample forecast evaluation tests, we find that in particular our proposed forecast combination approach, which combines forecasts of the most relevant Neely et al. (2014) and macroeconomic factors and further imposes positivity constraints on the equity premium forecasts, generates statistically significant and economically sizable improvements over the best performing model of Neely et al. (2014). Out-of-sample R2 values can be as high as 1.75%, with (annualised) gains in certainty equivalent returns of up to 3.35%, relative to the ALL factors forecasts of Neely et al. (2014).
    Keywords: Equity premium predictability, Factor models, Macroeconomic variables, Adaptive Lasso, Sign restrictions, Forecast combination, Asset allocation
    JEL: G12 G17 C53 E44
    Date: 2015–10
  76. By: Sybille MERTENS (Chaire Cera Cooperative and Social Entrepreneurship, HEC - Ecole de Gestion de l'Université de Liège, Belgique); Michel MAREE (Centre d'Economie Sociale, HEC - Ecole de gestion de l'Université de Liège)
    Abstract: A social enterprise stands out in comparison with other private providers of goods and services because it is managed according to non-capitalist objectives, which has important consequences in terms of quantification: whether to generate management indicators (profitability ratios, structure ratios, etc.) or to create statistics on a macroeconomic level, conventional measurements often prove to be poorly adapted for providing an accurate quantitative understanding of what a social enterprise produces. In this article, we demonstrate that because of its complexity, the accurate evaluation of the production of social enterprise is hindered by a major conceptual and theoretical problem. We first review how the production of the social enterprise is now taken into account by the conventions of the national accounting. We later illustrate that it is necessary to introduce the notion of “broadened production” if we want to take into account all the dimensions of what the social enterprise really produces. Finally, we concluded by showing how this “broadened production” can unfortunately not be the object of a unique monetary measurement, and that it is therefore necessary to let go of the idea that it would be possible to measure the actual contribution of the social enterprise to the gross domestic product. We instead plead for recognition of the complexity of the production activity of social enterprise and formulate propositions that support the measurement of this production within another framework than national accounting.
    Keywords: social enterprise, production, performance, statistics, national accounting
    JEL: L33 E01
    Date: 2015–05
  77. By: Paul Maarek (Université de Cergy-Pontoise, THEMA); Elsa Orgiazzi (Université de Rennes I and CREM)
    Abstract: We highlight a U-shaped relationship between development and the labor share of income. We exploit the “within dimension” of a panel dataset for the labor share in the manufacturing sectors of developing countries. Data is also available at the disaggregated level for 28 manufacturing subsectors. We show that the U-shaped pattern of the labor share is also observed at the subsector level suggesting that it does not correspond to reallocation forces across sectors during the development process. We show that standard theories of develop- ment economics that feature duality on the labor market generate such a pattern. At earlier stages of development, productivity gains are not compensated by wage increases as most of the workforce’s outside opportunities remain in the traditional sector where firms’ productivity is low. At later stages, the labor share increases as the result of wage competition in the modern, high productivity sector.
    Keywords: Development; The labor share; Dual labor market
    JEL: E25 J42 O17
    Date: 2015
  78. By: Fernando N. de Oliveira
    Abstract: We examine the usefulness of various financial and real sector variables to forecast recessions in Brazil between one and eight quarters ahead. We estimate probabilistic models of recession and select models based on their out-of-sample forecasts, using the Receiver Operating Characteristic (ROC) function. We find that the predictive out-of-sample ability of several models vary depending on the numbers of quarters ahead to forecast and on the number of regressors used in the model specification. The models selected seem to be relevant to give early warnings of recessions in Brazil
    Date: 2015–09
  79. By: Andrea Bastianin; Marzio Galeotti; Matteo Manera
    Abstract: The security of energy supply is a key geopolitical factor in the relationship between the European Union and the southern neighborhood countries of the Middle East and North Africa region. We study the response of eight Mediterranean economies to exogenous oil supply shocks. We focus on the effects on economic activity - as measured by real Gross Value Added - for the whole economy, as well as for selected industries. We show that there are clear patterns characterizing the response of different economies to an unexpected reduction in global oil production. The main determinants of these patterns are the degree of energy intensity and energy dependence of the country, as well as the composition of its Gross Value Added.
    Keywords: Oil supply shocks, Mediterranean, Growth.
    JEL: C22 E32 Q41 Q43
    Date: 2015
  80. By: Mariana Blanco; Juan Camilo Cárdenas
    Abstract: At the end of a controlled experiment where research assistants were hired for coding news from online newspapers, the experimenter-employer asked a number of them to roll a die and report the result in order to be paid in cash an amount linear on the reported number from 1 to 6 that could go from 1.6 to 9.4 USD. Another (control) group of similar students, recruited in a similar manner, were also invited to perform the same die-roll task, but they had no prior labor relationship with the experimenter-employer. Our treatment group showed in average higher levels of honesty as their distribution of reported numbers was less skewed to the right, that is, the long-term labor relationship group was more likely to report numbers that are closer to the uniform (honest) distribution than our control, and than other reported numbers in this kind of experiments. We conjecture that the previous experimenter-subject relationship of the treatment group induced higher levels of honesty among the participants. One of the possible reasons is that the labor relationship created for the group of ”treatment” students included a series of shocks that involved the possibility of involuntary unemployment, bringing incentives for the students to signal honesty as a trait that could be valued in the labor market. This paper contributes to the growing literature on understanding the motives for honesty and cheating.
    Keywords: Honesty, Cheating, Labor relationships, Unemployment, Experiments
    JEL: D73 C93 D01 E24 J24
    Date: 2015–10–22
  81. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We present a model of the connection between real interest rates, credit spreads, and the structure and the risk of the banking system. Banks intermediate between entrepreneurs and investors, and choose the monitoring intensity on entrepreneurs. projects. We characterize the equilibrium for a fixed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring (shadow) Banks and riskier entrepreneurs by monitoring (traditional) banks. We also show that a savings glut reduces interest rates and spreads, increases the relative size of the shadow banking system and the probability of failure of the traditional banks. The model provides a framework for understanding the emergence of endogenous boom and bust cycles, as well as the procyclical nature of the shadow banking system, the existence of countercyclical risk premia, and the low levels of interest rates and spreads leading to the buildup of risks during booms.
    Keywords: Savings glut, real interest rates, credit spreads, bank monitoring, shadow banks, financial stability, banking crises, boom and bust cycles.
    JEL: G21 G23 E44
    Date: 2015–09
  82. By: Bertrand LAPORTE (Centre d'Etudes et de Recherches sur le Développement International(CERDI)); Guy Dabi GAB-LEYBA
    Abstract: Concession Contracts (CC) and Production Sharing Contracts (PSC) have quite different implications for Government Take and the properties of the tax system, such as progressivity. In general, taxation via CC introduces significant distortions in activity, particularly due to the balance of royalties which tax production irrespective of the profitability of the project. So CC is normally regressive while PSC is normally progressive, because PSC taxation depends more directly on the profitability of the project. Chad has the distinction of having introduced PSC in the 2007 Chad oil code, while maintaining a royalty on production. Despite this feature, we show with a Cash Flow model and Monte Carlo simulations that the application of the 2007 oil code introduced more progressivity into taxation. This feature is particularly interesting in the current context of falling crude oil prices, because it maintains a favorable tax regime for exploration and exploitation by multinational oil companies. As a result, the Chad government should reactivate a counter-cyclical policy of oil revenue reserves when the crude oil price increases again.
    JEL: N5 H21 E62 E27
    Date: 2015–10
  83. By: Fulponi, Juan Ignacio; Lupín, Beatriz
    Abstract: La Curva de Phillips es uno de los temas centrales de la Macroeconomía. Desde que Phillips diseñó este Modelo, en el año 1958, el mismo ha sido objeto de diversas interpretaciones y actualizaciones teóricas. Por medio de esta Curva, de pendiente negativa, es posible estudiar la relación entre desempleo y salarios nominales generales de la economía. De ella, se desprende que si se desea mantener un nivel bajo de desempleo, habrá inflación -como variación de salarios- alta. Asimismo, si el objetivo es mantener los precios a un nivel estable -inflación baja-, deberá ser a costa de un desempleo alto. Éstas son dos cuestiones básicas de política económica, que los gobiernos pueden controlar a través de medidas de corte keynesiana. Si bien el estudio original se refirió a un período y a una economía en particular, el Modelo acertó en muchas ocasiones posteriores, como la situación de los Estados Unidos en los años '70, aun cuando se supone que la inflación es multicausal -como por ejemplo, por "tirón de la demanda", por exceso de dinero circulante, por costos o inflación estructural-. En el presente Trabajo, se analiza el aporte realizado por Samuelson y Solow (1960), el que adiciona el concepto de markup como relación entre los niveles de precios y de salarios. Mediante la aplicación de ecuaciones diferenciales, deduce las tasas de inflación, de aumento en salarios nominales y de cambio en la productividad del trabajo.
    Keywords: Ecuaciones Diferenciales; Curva de Phillips; Inflación; Desempleo;
    Date: 2015–06
  84. By: Kodrzycki, Yolanda; Zhao, Bo (Federal Reserve Bank of Boston)
    Abstract: This report considers the New England states’ past preparedness for revenue downturns caused by business cycle fluctuations and assesses policy actions that could promote greater fiscal stability in the future.
    Date: 2015–10–01
  85. By: Dante Amengual (CEMFI, Centro de Estudios Monetarios y Financieros); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.
    Keywords: Cokurtosis, coskewness, indirect inference, Kuhn-Tucker test, momentum strategies, non-linear dependence, short-term reversals, supremum test, underidentified parameters.
    JEL: C32 C38 E37
    Date: 2015–08

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