nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒12‒08
97 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. On the sources of macroeconomic stability in the euro area. By S. Avouyi-Dovi; J-G. Sahuc
  2. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Haroon Mumtaz; Konstantinos Theodoridis
  3. Excess reserves and monetary policy normalization By Armenter, Roc; Lester, Benjamin
  4. The macroeconomic effects of low and falling inflation at the zero lower bound By Stefano Neri; Alessandro Notarpietro
  5. The Conquest of Israeli Inflation and Current Policy Dilemmas By Cukierman, Alex; Melnick, Rafi
  6. Monetary Policy in a Developing Country: Loan Applications and Real Effects By Charles Abuka; Ronnie K. Alinda; Camelia Moniou; Jose-Luis Peydro; Andrea Filippo Presbitero
  7. Taylor rules, central bank preferences and inflation targeting By Juan Paez-Farrell
  8. The effects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  9. Macroprudential Policy: What Does It Really Mean By Lopez, Claude; Markwardt, Donald; Savard, Keith
  10. The Blighted Youth: The Impact of Recessions and Policies on Life-Cycle Unemployment By López-Martín Bernabé; Takayama Naoki
  11. Banking, Currency, Stock Market and Debt Crises: Revisiting Reinhart & Rogoff Debt Analysis in Spain, 1850-1995 By Maixé-Altés, J. Carles; Iglesias, Emma M.
  12. Taylor rules for CEE-EU countries: How much heterogeneity? By Sydykova, Meerim; Stadtmann, Georg
  13. The Regime-switching volatility of Euro Area Business Cycles By Stéphane Lhuissier
  14. China's Investment Rate: Implications and Data Reliability By Holz, Carsten A.
  15. Squaring the cycle: capital flows, financial cycles, and macro-prudential policy in the euro area By Silvia Merler
  16. Governement Spending Composition, Aggregate Demand, Growth and Distribution By Daniele Tavani; Luca Zamparelli
  17. Inflation targeting in developing economies revisited By John Thorton
  18. The Effect of Bank Shocks on Firm-Level and Aggregate Investment By João Amador; Arne J. Nagengast
  19. Fiscal stimulus in economic unions: what role for states? By Carlino, Gerald A.; Inman, Robert P.
  20. "The Two Approaches to Money: Debt, Central Banks, and Functional Finance" By Giuseppe Mastromatteo; Lorenzo Esposito
  21. The shocks matter: improving our estimates of exchange rate pass-through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  22. Quantity versus Price Bank Competition and Macroeconomic Performance given Bank Concentration By Erotokritos Varelas
  23. Shoe-leather costs in the euro area and the foreign demand for euro banknotes By Alessandro Calza; Andrea Zaghini
  24. Macroprudential and Monetary Policy Interaction: a Brazilian perspective By Fabia A. de Carvalho; Marcos R. de Castro
  25. Non-Keynesian Savings of Russians By Dmitrii Timofeev
  26. The limitations of policy coordination in the euro area under the European Semester By Zsolt Darvas; Alvaro Leandro
  27. Parameter bias in an estimated DSGE model: does nonlinearity matter? By Yasuo Hirose; Takeki Sunakawa
  28. Preferences and pollution cycles By Stefano Bosi; David Desmarchelier; Lionel Ragot
  29. The relevance or otherwise of the central bank’s balance sheet By Miles, David; Schanz, Jochen
  30. On Zombie Banks and Recessions after Systemic Banking Crises By Homar, Timotej; van Wijnbergen, Sweder
  31. Banking panics and protracted recessions By Sanches, Daniel R.
  32. Fiscal Conditions and Long-term Interest Rates By Koji Nakamura; Tomoyuki Yagi
  33. Financial Sector Interconnectedness and Monetary Policy Transmission By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  34. Macroprudential supervision: from theory to policy By Dirk Schoenmaker; Peter Wierts
  35. Planned Fiscal Consolidations and Growth Forecast Errors – New Panel Evidence on Fiscal Multipliers By Ansgar Belke; Dominik Kronen; Thomas Osowski
  36. Energy Business Cycles By Meenagh, David; Minford, Patrick; Oyekola, Olayinka
  37. Financial Intermediation, Capital Accumulation, and Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  38. What are the macroeconomic effects of asset purchases? By Wales, Martin; Wieladek, Tomasz
  39. Creación y Destrucción de Empleos e Informalidad By Céspedes, Nikita
  40. Wages and prices in Italy during the crisis: the firms’ perspective By Francesco D’Amuri; Silvia Fabiani; Roberto Sabbatini; Raffaele Tartaglia Polcini; Fabrizio Venditti; Eliana Viviano; Roberta Zizza
  41. Exchange Rate Fluctuations and Labour Market Adjustments in Canadian Manufacturing Industries By Gabriel Bruneau; Kevin Moran
  42. Loan as a Durable Good and Bank Indirect-Tax Incidence By Soldatos, Gerasimos T.
  43. Loan as a Durable Good and Bank Indirect-Tax Incidence By Soldatos, Gerasimos T.; Varelas, Erotokritos
  44. Monetary Policy According to HANK By Gianluca Violante; Benjamin Moll; Greg Kaplan
  45. Health-care reform or labor market reform? A quantitative analysis of the affordable care act By Nakajima, Makoto; Tuzemen, Didem
  46. Banking Union as a Shock Absorber By Ansgar Belke; Daniel Gros
  47. Monetary and Macroprudential Policies under Fixed and Variable Interest Rates By Margarita Rubio
  48. Zins- und Wohlfahrtseffekte extremer Niedrigzinspolitik für die Sparer in Deutschland By Gerhard Rösl; Karl-Heinz Tödter
  49. The role of component-wise boosting for regional economic forecasting By Lehmann, Robert; Wohlrabe, Klaus
  50. Interest rate pass-through: a nonlinear vector error-correction approach By Michal Popiel
  51. How Risky Is College Investment? By Lutz Hendricks; Oksana Leukhina
  52. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  53. Consumption Uncertainty and Precautionary Saving By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
  54. Dynamic hierarchical models for monetary transmission By Paolo Giudici; Laura Parisi
  55. GDP Nowcasting: Assessing business cycle conditions in Argentina By Laura D´Amato; Lorena Garegnani; Emilio Blanco
  56. Test Paper By Test1 Test2
  57. The Return to College: Selection and Dropout Risk By Lutz Hendricks; Oksana Leukhina
  58. Filling the gap: open economy considerations for more reliable potential output estimates By Zsolt Darvas; András Simon
  59. Debt Sustainability in Sub-Saharan Africa: Unraveling Country-Specific Risks By Bill Battaile; F. Leonardo Hernández; Vivian Norambuena
  60. The systemic roots of Russia’s recession By Marek Dabrowski
  61. Measurement Errors and Monetary Policy: Then and Now By Amir-Ahmadi, Pooyan; Matthes, Christian; Wang, Mu-Chun
  62. Finance, Volatility, and Growth By Lukas Schmid; Howard Kung; Alexandre Corhay
  63. The supply side of household finance By Gabriele Foà; Leonardo Gambacorta; Luigi Guiso; Paolo Emilio Mistrulli
  64. The unbearable divergence of unemployment in europe By Tito Boeri; Juan F. Jimeno
  65. Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks By Leon Rincon, C.E.; Machado, C.; Sarmiento Paipilla, N.M.
  66. The Forward Guidance Puzzle By Marc Giannoni; Christina Patterson; Marco Del Negro
  67. The lean versus clean debate and monetary policy in South Africa By Raputsoane, Leroi
  68. Is globalisation reducing the ability of central banks to control inflation? By Grégory Claeys; Guntram B. Wolff
  69. Asymmetric exchange rate pass-through: Evidence from Peru By Pérez, Fernando; Vega, Marco
  71. Endogenous interest rate with accommodative money supply and liquidity preference By Angel Asensio
  72. Answers to Five Questions Related to U.S. Monetary Policy By Bullard, James B.
  73. Foreign competition and banking industry dynamics: an application to Mexico By Corbae, Dean; D'Erasmo, Pablo
  74. Operating Leverage over the Business Cycle By Arnab Bhattacharjee, Chris Higson, Sean Holly
  75. Heterogeneity of markups at the firm level and changes during the great recession: the case of spain By Cristina Fernández; Aitor Lacuesta; José Manuel Montero; Alberto Urtasun
  76. Series Contabilidad Regional (II): Asalariados, rentas del trabajo y salarios medios By Angel De la Fuente
  77. Testing the Predictability of Consumption Growth: Evidence from China By Liping Gao; Hyeongwoo Kim
  78. Commercial bank failures during The Great Recession: the real (estate) story By Adonis Antoniades
  79. Second-Order Accelerator of Investment: The Case of Discrete Time By Erotokritos Varelas; Eleni Dalla
  80. Decompr: Global Value Chain Decomposition In R By Victor Kummritz; Bastiaan Quast
  81. Political Budget Cycles: Manipulation of Leaders or Bias from Research? A Meta-Regression Analysis By Pierre MANDON; Antoine CAZALS
  82. The Welfare State and the demographic dividend: A cross-country comparison By Gemma Abio Roig; Concepció Patxot Cardoner; Miguel Sánchez-Romero; Guadalupe Souto Nieves
  83. Quality of Institutions and Total Factor Productivity in European Union By Adam P. Balcerzak; Michal Bernard Pietrzak
  84. Monitoring the Unsecured Interbank Funds Market By Miguel Sarmiento; Jorge Cely; Carlos León
  85. Structural and institutional determinants of investment activity in Africa By Chuku, Chuku; Onye, Kenneth; Ajah, Hycent
  86. Fiscal multipliers and time preference By Marcheggiano, Gilberto; Miles, David
  87. Financial Frictions, Trends, and the Great Recession By GUERRON-QUINTANA, Pablo A.; JINNAI, Ryo
  88. Perils of quantitative easing By McMahon, Michael; Peiris, Udara; Polemarchakis, Herakles
  89. An Axiomatic Characterization of the Price-Money Message Mechanism By Ken Urai; Hiromi Murakami
  90. Intergenerational Linkages in Household Credit By Ghent, Andra C.; Kudlyak, Marianna
  91. Keynes´s Approach to Macroeconomic Modelling: a Popperian Reconstruction By Alfonso Palacio Vera
  92. Military Spending and economic growth in Greece and the Arms Race between Greece and Turkey By Dimitrios Paparas; Christian Richter
  93. Money and politic): is there any prospect for democracy in " the monetary pluralism "? By Marie Cuillerai
  94. Solving OLG Models with Asset Choice By Michael Reiter
  95. Foreign shocks By Drago Bergholt
  96. Simulation of the term structure. An application for measuring the interest rate risk. By Mirta González; María Cecilia Pérez
  97. The effects of volatility, fiscal policy cyclicality and financial development on growth : evidence for the Eastern Caribbean By Brüeckner,Markus; Carneiro,Francisco Galrao

  1. By: S. Avouyi-Dovi; J-G. Sahuc
    Abstract: In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post-1994, we estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy.
    Keywords: Macroeconomic volatility, quantity theory of money, monetary policy, DSGE model, euro area.
    JEL: E32 E51 E52
    Date: 2015
  2. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England, and Lancaster University)
    Abstract: We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in)ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
    Keywords: DSGE, Non-linear SVAR, New Keynesian, Non-zero steady state inflation, Epstein-Zin preferences, Stochastic volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2015–11
  3. By: Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.
    Keywords: Excess reserves; Federal funds market; Federal funds rate
    JEL: E42 E43 E52 E58
    Date: 2015–09–15
  4. By: Stefano Neri (Bank of Italy); Alessandro Notarpietro (Bank of Italy)
    Abstract: This paper assesses the macroeconomic consequences of a prolonged period of low and falling inflation when monetary policy is constrained by the zero lower bound (ZLB) on short-term nominal interest rates, the private sector is indebted in nominal terms (debt deflation mechanism) and nominal wages are downward rigid. Cost-push shocks that in normal circumstances would reduce inflation and stimulate output have contractionary effects on economic activity, once the ZLB interacts with the debt deflation mechanism. The contractionary effects are larger and more persistent when nominal wages cannot be reduced and when the private sector is highly indebted.
    Keywords: DSGE models, zero lower bound, debt-deflation channel, down- ward nominal wage rigidities.
    JEL: E21 E31 E37 E52
    Date: 2015–11
  5. By: Cukierman, Alex; Melnick, Rafi
    Abstract: During the five decades since the creation of the Bank of Israel in 1954 Israel experienced high and extremely variable inflation. Price stability (as defined by current international norms) was finally achieved at the beginning of the twenty first century. The paper divides the 1954-2015 sample into six sub-periods characterized by different inflation environments. The first part of the paper documents the impact of those different inflation environments on the average speed of individual price adjustments, the related pass-through from the exchange rate to domestic prices, inflation uncertainty, the extent of dollarization, relative price variability and the cost and time to maturity of the public debt. There are major quantitative differences in the above mentioned variables between the five inflationary sub-periods and the more recent price stability period. Among those are dramatic changes in the anchoring of inflation expectations, in the pass-through coefficient, inflation uncertainty, the speed of price adjustments, relative price variability, the (rather late) disappearance of dollarization in the real estate market and the benefits induced by price stability for the financing of the public debt. The paper provides an explanation for the fact that high inflation was stabilized in “one shot” while the subsequent moderate inflation was stabilized gradually within an inflation targeting framework. It argues that the second stabilization fits into the mold of the opportunistic approach to disinflation. The second part of the paper focuses solely on the period of price stability. It documents major, non-inflation related, structural changes since the turn of the century and discusses current policy dilemmas. Among the major structural changes are a persistent switch from current account deficits to surpluses, increased flexibility in the labor market, a reduction in the size of government, separation of pension and provident funds from the banking system and the emergence of a corporate bond market. Particularly remarkable is the macroeconomic resilience of the Israeli economy to the world financial crisis. As in many developed economies both the inflation gap and the output gap are recently in the negative range implying that, on both counts, monetary policy should be expansionary. The current policy rate is indeed almost at the zero bound. On one hand this policy, along with occasional interventions in the forex market, partially offsets overvaluation pressures on the exchange rate. On the other it reinforces a nine year long cycle of price increases in the real estate market.
    Keywords: dollarization; expectations anchoring; inflation uncertainty; relative price variability
    JEL: E3 E4 E5 G10
    Date: 2015–11
  6. By: Charles Abuka (Bank of Uganda); Ronnie K. Alinda (Bank of Uganda); Camelia Moniou (International Monetary Fund (IMF)); Jose-Luis Peydro (ICREA-Universitat Pompeu Fabra,CREI, Barcelona GSE and CEPR.); Andrea Filippo Presbitero (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR)
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Bank balance sheet channel, Bank lending channel, Developing countries, Monetary policy transmission
    JEL: E42 E44 E52 E58
    Date: 2015–12
  7. By: Juan Paez-Farrell (Department of Economics, University of Sheffield)
    Abstract: The objective of this paper is to infer the policy preferences of three inflation targeting central banks, Australia, Canada and New Zealand, using an estimated New Keynesian small open economy model. While I assume that the monetary authorities optimise, I depart from previous research by assuming that monetary policy is implemented via simple Taylor-type rules, as suggested by most of the empirical literature. I then derive the weights in the objective function that make the resulting optimal interest rate rule coincide with its estimated counterpart. Therefore, from the central bank’s point of view, actual policy is optimal.
    Keywords: Small open economies; monetary policy; policy preferences; Taylor rule; inverse opti-mal control; inflation targeting
    JEL: E52 E58 E61 F41
    Date: 2015–11
  8. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. Specifcally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–08
  9. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. The paper is a shorter version of a report on the same subject. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.
    Keywords: Macroprudential, Systemic Risk
    JEL: E6 F3
    Date: 2015–10
  10. By: López-Martín Bernabé; Takayama Naoki
    Abstract: We construct a theoretical model of labor markets with human capital accumulation to understand and quantify the earnings losses for young workers generated by unemployment: unemployment represents time forgone in terms of human capital accumulation, which adversely affects long-term income prospects of individuals. We show that lifetime earnings losses generated by job-displacement are larger for individuals with lower capacity to accumulate human capital and during an economic downturn, as documented in the empirical literature. At the aggregate level, the framework delivers youth unemployment rates that are higher and more sensitive to fluctuations in aggregate productivity than total unemployment rates. Additionally, in economies with a higher tax-wedge, unemployment rates are more sensitive to aggregate productivity shocks. A higher tax-wedge and minimum wage increase the long-term earnings losses produced by job-displacement, especially for low-skill individuals.
    Keywords: aggregate fluctuations; directed search; unemployment; worker heterogeneity; life cycle; human capital.
    JEL: E24 E32 J63 J64
    Date: 2015–11
  11. By: Maixé-Altés, J. Carles; Iglesias, Emma M.
    Abstract: What type of crisis is generated when debt increases? We study the Spanish debt evolution in the 19th and 20th centuries by introducing currency and stock-market crises in the Reinhart and Rogoff (2011) framework. We find their same results for the determinants of banking and debt crises but substituting external and public debt with perpetual debt. Moreover, we find that currency crises depend strongly and positively on financial centers crises and negatively and mildly on perpetual debt. We justify the negative relationship due to an inflation tax. We also find that stock-market crises depend only positively and strongly on financial centers crises.
    Keywords: Austerity, Macroeconomic Policy, Fiscal Policy, Banking Crises, Currency Crises, Stock Market Crises, Debt Crises, Financial History
    JEL: E44 E60 E62 F34 F44 G01 H63 N10 N20
    Date: 2015–12–04
  12. By: Sydykova, Meerim; Stadtmann, Georg
    Abstract: We derive Taylor rates for those CEE-EU countries which are not part of the Eurozone. The degree of heterogeneity decreased tremendously over time (2005 - 2015). Nevertheless, the business cycles are still not fully synchronized. As a consequence, joining the Eurozone seems to be premature and should not be an option right now.
    Keywords: CEE,monetary policy,currency union,convergence,Taylor rule
    JEL: E52 E58 F15
    Date: 2015
  13. By: Stéphane Lhuissier
    Abstract: We document the strong evidence of time variation in the volatility of euro area business cycles since 1970. Then, we provide the quantitative sources of these changes by using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that: 1) The size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession. 2) Their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) These investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit condtions.
    Keywords: Business Cycles;DSGE;Euro Area;Heteroskedasticity;Markov-switching
    JEL: C11 C51 E32 E42 E52
    Date: 2015–11
  14. By: Holz, Carsten A.
    Abstract: For the past nearly forty years, China has experienced average annual real GDP growth of close to ten percent, much of it driven by investment and capital accumulation. By 2014, gross capital formation had reached 46 percent of aggregate expenditures. This paper documents the role of investment in driving economic growth in China, questions how much longer China can sustain a relatively high investment rate, and examines the arguments that have been offered for an impending drastic reduction in investment. The quality of the investment statistics and of the gross fixed capital formation statistics (the latter as part of the national income and product accounts) is assessed; these data are potentially problematic with no easy way for researchers to improve the data. The paper finally makes the point that investment in China remains broad-based across all economic sectors, with little specialization in sight; the size of the Chinese economy would appear to allow comprehensive development across all economic sectors. At the same time, the relative size of foreign investment in China has become negligible and the China growth story thus has become a domestic one.
    Keywords: investment rate, capital-output ratio, ICOR, national investment strategy, economic growth
    JEL: E1 E22 E6 O11 O53
    Date: 2015–11–26
  15. By: Silvia Merler
    Abstract: Highlights Before the financial and economic crisis, monetary policy unification and interest rate convergence resulted in the divergence of euro-area countries’ financial cycles. This divergence is deeply rooted in the financial integration spurred by currency union and strongly correlated with intra-euro area capital flows. Macro-prudential policy will need to deal with potentially divergent financial cycles, while catering for potential cross-border spillovers from domestic policies, which domestic authorities have little incentive to internalise. The current framework is unfit to deal effectively with these challenges. The European Central Bank should be responsible for consistent and coherent application of macro-prudential policy, with appropriate divergences catering for national differences in financial conditions. The close link between domestic financial cycles and intra-euro area capital flows raises the question of whether macro-prudential policy in the euro area can be compatible with free flows of capital. Financial cycle divergence had its counterpart in the build-up of macroeconomic imbalances, so effective implementation of the Macroeconomic Imbalance Procedure would support and strengthen macro-prudential policy.
    Date: 2015–11
  16. By: Daniele Tavani; Luca Zamparelli
    Abstract: We study a demand-driven growth and distribution model with a public sector, both without and with government debt. Government spending is used to finance the accumulation of public capital and to pay wages to public employees. The interaction between public capital and induced technical change makes long-run growth: (i) hump-shaped in the composition of government spending, (ii) wage-led, and (iii) government spending-led. Provided that the interest rate on government bonds is kept sufficiently below the growth rate, the size of government debt is irrelevant for long-run growth.
    Keywords: Keynesian growth, Government spending composition, Factor shares, Fiscal policys
    JEL: E12 E25 E62 H50
    Date: 2015
  17. By: John Thorton (Bangor University)
    Abstract: In a recent paper, Gonalvez and Salles (2008) (G-S) report that developing countries adopting the inflation targeting regime experienced greater drops in inflation and GDP growth volatility than non-inflation targeting developing countries. In this paper, I find that the G-S results do not hold up when their analytical framework is employed in the context of a more rational and larger sample of developing countries that controls for the comparability of monetary regimes as suggested by Ball (2010). In particular, adoption of an IT regime did not help reduce inflation and growth volatility in developing countries compared to the average experience with other monetary regimes and was no more advantageous in these regards than the adoption of a hard or crawling peg exchange rate regime.
    Keywords: inflation targeting, monetary regimes, developing economies
    JEL: E4 E5
    Date: 2015–07
  18. By: João Amador; Arne J. Nagengast
    Abstract: We show that credit supply shocks have a strong impact on firm-level as well as aggregate investment by applying the methodology developed by Amiti and Weinstein (2013) to a rich dataset of matched bank-firm loans in the Portuguese economy for the period 2005 to 2013. We argue that their decomposition framework can also be used in the presence of small firms with only one banking relationship as long as they account for a small share of the total loan volume of their banks. The growth rate of individual loans in our dataset is decomposed into bank, firm, industry and common shocks. Adverse bank shocks are found to strongly impair firm-level investment, particularly in small firms and in those with no access to alternative financing sources. For the economy as a whole, granular shocks in the banking system account for around 20-40% of aggregate investment dynamics.
    JEL: E32 E44 G21 G32
    Date: 2015
  19. By: Carlino, Gerald A. (Federal Reserve Bank of Philadelphia); Inman, Robert P. (The Wharton School of the University of Pennsylvania)
    Abstract: The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policymaking. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? An analysis of U.S. state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short run but that there are significant job spillovers to neighboring states. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? A structural vector autoregression analysis for the U.S. aggregate economy from 1960 to 2010 shows that federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are both effective, with one- and two-year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.
    Keywords: Fiscal federalism; Intergovernmental aid; Aggregate Stabilization policy; Multiplier analysis
    JEL: E6 H3 H7 R5
    Date: 2015–11–16
  20. By: Giuseppe Mastromatteo; Lorenzo Esposito
    Abstract: The scientific reassessment of the economic role of the state after the crisis has renewed interest in Abba Lerner's theory of functional finance (FF). A thorough discussion of this concept is helpful in reconsidering the debate on the nature of money and the origin of the business cycle and crises. It also allows a reevaluation of many policy issues, such as the Barro-Ricardo equivalence, the cause of inflation, and the role of monetary policy. FF, throwing a different light on these issues, can provide a sound foundation for discussing income, fiscal, and monetary policy rules in the right context of flexibility in the management of national budgets, assessing what kind of policies should be awarded priority, and the effectiveness of tackling the crisis with the different part of public budget. It also allows us to understand ways of increasing efficiency through public investment while reducing the total operational costs of firms. In the specific context of the eurozone, FF is useful for assessing the institutional framework of the euro and how to improve it in the face of protracted low growth, deflation, and weak public finances.
    Keywords: Crisis; Functional Finance; Debt; Growth; Sustainability of Public Finance; Central Bank Independence
    JEL: B22 E62 E63
    Date: 2015–11
  21. By: Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Nenova, Tsvetelina (Monetary Policy Committee Unit, Bank of England)
    Abstract: A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations ‘pass through’ into import and consumer prices. We show that in a standard open-economy model the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we develop an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with our theoretical model. Applying this framework to the United Kingdom, we find that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations. For example, exchange rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks. This framework helps explain why pass-through can change over time, including why sterling’s post-crisis depreciation caused a sharper increase in prices than expected and sterling’s recent appreciation has had a more muted effect.
    Keywords: Exchange rate pass-through; import prices; consumer prices; inflation; vector autoregression.
    JEL: E31 F41
    Date: 2015–12–01
  22. By: Erotokritos Varelas (Department of Economics, University of Macedonia)
    Abstract: This paper elaborates upon the following three theses: First, given bank sector concentration, the other aspect of this sector that matters for the overall economy is that of price vs. quantity competition by itself. Second, the macroeconomic performance of price competition is superior, enhancing the tax base and bank profit, capitalizing additionally the banks upon public debt induced instability, which the policymaker can minimize through Taylor rule. And, third, the ultimate link between banking competition and macroeconomic performance is the bank regulation shaping bank operation in accordance with the financial needs of fiscal policy.
    Keywords: Bank competition, Bank concentration, Public debt, Macroeconomic stability, Monetary policy.
    JEL: G21 L11 E32 E44 E63
    Date: 2015–12
  23. By: Alessandro Calza (ECB); Andrea Zaghini (Bank of Italy)
    Abstract: We estimate the shoe leather costs of inflation in the euro area by using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe leather costs for very low nominal interest rates, our estimates suggest that these costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, inflation tax is still predominantly borne by domestic agents in the euro area, with transfers of resources from abroad remaining small.
    Keywords: money demand, welfare cost of inflation, currency abroad, euro banknotes
    JEL: E41 C22
    Date: 2015–11
  24. By: Fabia A. de Carvalho; Marcos R. de Castro
    Abstract: This paper discusses the interaction between monetary and macroprudential policy in Brazil under both normative and positive perspectives. We investigate optimal combinations of simple, implementable macroprudential and monetary policy rules that react to the financial cycle using a DSGE model built to reproduce Brazilian particularities, and estimated with Bayesian techniques with data from the inflation targeting regime. We also investigate whether recent macroprudential policy announcements that targeted credit variables had important spillover effects on variables targeted by monetary policy in Brazil. To this end, we use a rich daily panel of private inflation forecasts surveyed by the Central Bank of Brazil’s Investor Relations Office and investigate the impact of announcements of macroprudential policy changes on the gap between inflation forecasts and the inflation target. The paper also presents an overview of the challenges facing macroprudential policy in Brazil after the global financial crisis and glimpses at a few important future challenges
    Date: 2015–11
  25. By: Dmitrii Timofeev (National Research University Higher School)
    Abstract: The Russian recession of 2014-2015 began with a run on the ruble and a rise in the rate of inflation, the precise opposite of a Western-type deflationary slump combined with money hoarding. Does this mean that Russians need different micro-model to describe savings and consumption behavior? This study shows that the workhorse log-linearized rational SDF formula with the CRRA utility function still provides a good explanation for the behavior of Russian consumers. It explains dollarization, domestic equity market avoidance, preference for real estate, and, most importantly, a wary attitude towards the ruble. Expectations derived from past and interactive preferences lock the Russian economy in a state of steadfast distrust in the ruble as prone to inflation. At present, one should not expect a Keynesian-type deflationary cycle in Russia. The next recession is likely to be inflationary, requiring monetary tightening. This reasoning is generalized for other emerging countries. A free-floating currency and inflation targeting do not ensure an easy path for countries with recent experiences of high inflation
    Keywords: savings, monetary policy, business cycle, recession, Russia, Euler equation, CCAPM, stochastic discount factor
    JEL: G11 G18 P24 E31 D91
    Date: 2015
  26. By: Zsolt Darvas; Alvaro Leandro
    Abstract: This paper was requested by the European Parliament’s Economic and Monetary Affairs Committee for the Economic Dialogue with the President of the Eurogroup, 10 November 2015. It was originally published under the title "Economic policy coordination in the euro area under the European Semester". This document is also available on Economic and Monetary Affairs Committee homepage. Copyright remains with the European Union. Highlights The European Semester is a yearly process of the European Union to improve economic policy coordination and ensure the implementation of the EU’s economic rules. Each Semester concludes with recommendations for the euro area as a whole and for each EU member state. We show that implementation of recommendations was poor at the beginning of the Semester in 2011, and has deteriorated since. The European Semester is not particularly effective at enforcing even the EU’s fiscal and macroeconomic imbalance rules. We find that euro-area recommendations with tangible economic goals are not well reflected in the recommendations issued to member states. Finally, we review various proposals to improve the efficiency of the European Semester and conclude that while certain steps could be helpful, policy coordination will likely continue to have major limitations. Executive Summary This paper assesses economic policy coordination in the euro area under the European Semester. In sections 2 and 3, we make a positive (and not normative) assessment by taking Council recommendations made in the context of the European Semester as given and evaluating their implementation and consistency, without assessing their desirability. Section 4, which assesses options to improve compliance with the recommendations, is by definition more subjective. The key conclusion of section 2, which analyses the implementation of European Semester recommendations in comparison with OECD Going for Growth recommendations, is that the European Semester is not effective - Implementation of recommendations given under the European Semester was modest (40 percent in the EU according to our indicator) at its inception in 2011. In spite of the efforts made to improve the European Semester in recent years the implementation index steadily fell to 29 percent by 2014. Euro-area countries, for which policy coordination should be stronger in principle, implemented their recommendations only somewhat more than non-euro area countries (31 percent versus 23 percent for the 2014 recommendations), while the implementation rate fell steadily in both country groups from 2011-14. The rate of implementation of recommendations related to the Stability and Growth Pact (SGP) is typically higher (44 percent on average in 2012-14) than the implementation of recommendations related to the Macroeconomic Imbalance Procedure (32 percent in 2012-14) and other recommendations (29 percent in 2012-14). Even though SGP recommendations have the strongest legal basis, the average 44 percent implementation rate cannot be regarded as large, while the EIP implementation rate is even lower, suggesting that the European Semester is not particularly effective in enforcing the EU’s fiscal and macroeconomic imbalance rules. Despite huge efforts by European institutions to coordinate economic policies within the European Semester, the rate of implementation of these recommendations is not higher than the rate of implementation of the OECD’s unilateral recommendations. Overlaps between the European Semester and OECD recommendations only partly explain this similarity. OECD reform responsiveness rates were practically the same in 2013-14 and in 2007-08, suggesting that reform efforts have not increased compared to the pre-crisis period. Countries tend to undertake more reforms when they are under a financial assistance programme, experience market pressure or face high unemployment. Yet even in those countries, reform momentum fades once the situation normalises. Section 3 takes the 2015 recommendations for the euro area as given and assesses their consistency with the country-specific recommendations (CSRs) to the five largest member states. Our general conclusion is that the 2015 euro-area recommendations with tangible economic goals are not well reflected in the recommendations issued to member states (with the exception of reforming services markets) - On the 2015 euro-area recommendations with tangible economic goals, we conclude that - The reference to the euro-area aggregate fiscal stance is not much more than empty rhetoric. How the optimal aggregate fiscal stance should be determined is not defined. The Council recommends that the aggregate fiscal stance should be in line with sustainability risks and cyclical conditions, but it does not even state what this aggregate stance is. There is no top-down approach to determine national fiscal stances that correspond with the optimal aggregate, and it is therefore accidental if the sum of country-specific fiscal stances corresponds with the optimal aggregate fiscal stance.
    Date: 2015–11
  27. By: Yasuo Hirose; Takeki Sunakawa
    Abstract: How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.
    Keywords: Nonlinearity, Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2015–11
  28. By: Stefano Bosi; David Desmarchelier; Lionel Ragot
    Abstract: We consider a competitive Ramsey economy where a pollution externality affects both consumption demand and labor supply, and we assume the stock of pollution to be persistent over time. Surprisingly, when pollution jointly increases the consumption demand (compensation effect) and lowers the labor supply (leisure effect ), multiple equilibria arise near the steady state (local indeterminacy) through a Hopf bifurcation (limit cycle). This result challenges the standard view of pollution as a fow to obtain local indeterminacy, and depends on the leisure effect which renders the pollution accumulation process more volatile.
    Keywords: pollution, endogenous labor supply, limit cycle, Ramsey model.
    JEL: E32 O44
    Date: 2015
  29. By: Miles, David (Monetary Policy Committee Unit, Bank of England); Schanz, Jochen (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households’ choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
    Keywords: Unconventional monetary policy; quantitative easing.
    JEL: E51 E52
    Date: 2015–12–01
  30. By: Homar, Timotej; van Wijnbergen, Sweder
    Abstract: What costs do zombie banks impose on society? We analyze the effects of government and central bank interventions in 68 systemic banking crises since 1980, of which 28 are part of the recent global financial crisis. Our estimation approach controls for the correlation between intervention measures and the time-invariant component of unobservable crisis severity. We find that timely bank recapitalizations substantially reduce the duration of recessions, underscoring the distortions caused by zombie banks and the costs of regulatory forbearance.
    Keywords: bank recapitalization; economic recovery; financial crises; intervention; regulatory forbearance; zombie banks
    JEL: E44 E58 G21 G28
    Date: 2015–11
  31. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: This paper develops a dynamic model of bank liquidity provision to characterize the ex post efficient policy response to a banking panic and study its implications for the behavior of output in the aftermath of a panic. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of this liquidation cost, the recession associated with a banking panic is protracted. For intermediate values, the recession is more severe but short lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. The author argues that these theoretical predictions are consistent with the observed disparity in crisis-related output losses.
    Keywords: Banking panic; Deposit contract; Suspension of convertibility; Time-consistent policy
    JEL: E32 E42 G21
    Date: 2015–10–21
  32. By: Koji Nakamura (Bank of Japan); Tomoyuki Yagi (Bank of Japan)
    Abstract: We conduct a quantitative analysis of the effects of fiscal conditions and other factors on nominal long-term interest rates based on panel data of 23 member states of the Organisation for Economic Co-operation and Development (OECD) for the period from 1980 to 2013. In addition to labor productivity, labor input, and inflation rates, our analysis shows that the fiscal balance, national burden ratio, and current account balance (= domestic savings) influence nominal long-term interest rates. The elasticity of nominal long-term interest rates to the fiscal balance vary, depending on the levels of government debt outstanding, which are thought to affect perceptions of fiscal sustainability in the future. This implies that the elasticity of nominal long-term interest rates to the fiscal balance is non-linear depending on the levels of government debt outstanding. We also find that a low national burden ratio nurtures future expectations of fiscal consolidation and thus keeps long-term interest rates at low levels. In addition, non-traditional monetary policy measures in recent years are found to keep nominal long-term interest rates at low levels.
    Keywords: long-term interest rates; fiscal conditions; monetary policy
    JEL: E43 E52 H62 H63
    Date: 2015–11–27
  33. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We document that, in the U.S., the share of financial assets that have a direct counterpart in the financial system has increased by between 15.8 and 21.8 percentage points during the period 1952-2011. Using a SVAR and a FAVAR, we find that, during the same period, the impulse responses of several real and financial variables to monetary policy shocks dampened. To relate these two trends, we present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thus affecting the transmission mechanism of monetary policy through the credit channel.
    Keywords: Financial sector interconnectedness, monetary policy transmission mechanism
    JEL: E44 E52 G20
    Date: 2015
  34. By: Dirk Schoenmaker; Peter Wierts
    Abstract: HIGHLIGHTS Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries and sectors. Macroprudential supervision has been discussed since the onset of the great financial crisis, but policymakers are still slow on the ground. While the current monetary policy stance of quantitative easing may be needed to stimulate subdued growth, the risk of financial booms is increasing. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.
    Date: 2015–11
  35. By: Ansgar Belke; Dominik Kronen; Thomas Osowski
    Abstract: This paper analyzes the effect of planned fiscal consolidation on GDP growth forecast errors from the years 2010 – 2013 using cross section analyses and fixed effects estimations. Our main findings are that fiscal multipliers have been underestimated in most instances for the year 2011 while we find little to no evidence for the years 2010 and especially the latter years 2012/13. Since the underestimation of fiscal multipliers seems to have decreased over time, it may indicate learning effects of forecasters. However, the implications for fiscal policy should be considered with caution as a false forecast of fiscal multipliers does not confirm that austerity is the wrong fiscal approach but only suggests a too optimistic assessment of fiscal multipliers for the year 2011.
    Keywords: fiscal multiplier, austerity, growth forecast errors, panel econometrics
    JEL: C23 E61 E62 G01
    Date: 2015–04
  36. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Oyekola, Olayinka
    Abstract: We find that, when estimated, a two sector computable dynamic stochastic general equilibrium open economy model of the U.S. that formally admits energy into the production process can generate plausible parameter values that can be applied to deal with a broad range of economic issues. As a benchmark, we require that the model fits the data for output, real exchange rate, energy use, and consumption: output because it serves as a measure of a country’s total income; real exchange rate because it serves as a determinant of a country’s relative competitiveness; energy use because it serves as an indicator of special inputs into a country’s production process; and consumption because it serves as a yardstick for evaluating a country’s standard of living. Finally, we argue that this model, with appropriate extensions, some of which we also propose, can help future modelers to tackle other research questions.
    Keywords: Two sector; US DSGE model; Oil price volatility; Open economy; Indirect inference
    JEL: E32 D58 F41 C52 Q43
    Date: 2015–11
  37. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates a simple model of banks into a two-sector neoclassical growth model. The integration yields an analytically tractable framework with two coupled accumulation rules for household capital and bank equity. We analyze steady state properties, transition and recovery patterns, as well as policies to accelerate recoveries. After establishing existence, uniqueness and global stability of the steady state, we identify in particular five key results and predictions, and we provide a quantitative assessment. First, larger financial frictions in financial intermediation may increase banker wealth although total capital is depressed. Second, negative shocks to bank equity cause considerably larger downturns than comparable shocks to household wealth, but their persistence is similar. Third, temporary worsening of shocks to financial frictions (called "trust shocks") induces divergent reactions of household wealth and bank equity, causes a boom in the banking sector, and possibly in the economy – after an initial bust. Fourth, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and counter-cyclical bond financing. Finally, a combination of bailouts and dividend-payout-restrictions ensures a rapid build-up of bank equity after a slump in the banking sector and increases total production.
    Keywords: banking crises; business cycles; bust-boom cycles; capital accumulation; financial intermediation; macroeconomic shocks; recovery policies
    JEL: E21 E32 F44 G21 G28
    Date: 2015–11
  38. By: Wales, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: We examine the impact of large-scale asset purchases of government bonds on real GDP and the CPI in the United Kingdom and the United States with a Bayesian VAR, estimated on monthly data from 2009 M3 to 2013 M5. We identify an asset purchase shock with sign and zero restrictions. In contrast to the impulse response analysis in previous work, the reactions of real GDP and CPI are left unrestricted, so as formally to test whether these variables are affected by asset purchases. We then explore the transmission channels to the domestic economy and emerging markets. Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom). In the United States, this policy lowers yields on long-term government bonds and the real exchange rate. In the United Kingdom, on other hand, interest rate futures and measures of financial market uncertainty are more affected. There is also some evidence that emerging market sovereign bond and corporate bond spreads decline, with industrial production rising in response a positive asset purchase shock in either country.
    Keywords: Unconventional monetary policy; Bayesian VAR; Hierarchical prior; Litterman prior.
    JEL: E50 E51 E52
    Date: 2015–12–01
  39. By: Céspedes, Nikita (Ministerio de Economía y Finanzas del Perú)
    Abstract: En este documento se estudia la tasa de creación de empleo y la tasa de separación en Lima Metropolitana, el contexto de estudio es relevante al existir pocos estudios que caracterizan estos indicadores en economías informales y en desarrollo. Encontramos que estos indicadores del sector formal son en promedio similares a los estimados en economías desarrolladas; sin embargo, en el sector informal los valores calculados son aproximadamente tres veces mayores a los del sector formal. Existe una considerable heterogeneidad de las dos series según diversas variables observables; además, las dos variables están relacionadas con el ciclo económico: la tasa de separación es contracíclica y la tasa de encontrar empleo es procíclica, siendo esta ciclicidad mayor en el sector formal.
    Keywords: Creación de empleo, destrucción de empleo, ciclo económico, informalidad laboral, duración de desempleo, duración de empleo
    JEL: E24 E26 J63 J64 O17
    Date: 2015–11
  40. By: Francesco D’Amuri (Bank of Italy); Silvia Fabiani (Bank of Italy); Roberto Sabbatini (Bank of Italy); Raffaele Tartaglia Polcini (Bank of Italy); Fabrizio Venditti (Bank of Italy); Eliana Viviano (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: Following the two surveys carried out in 2007 and 2009 on firms’ price and wage setting practices, in June 2013 the ESCB’s Wage Dynamics Network (WDN) conducted a third survey aimed at assessing, through a harmonised questionnaire, the most important transformations under way in the national labour markets. This paper documents the results of the survey carried out in Italy. The sovereign debt crisis severely hit the Italian economy, causing a collapse in demand, increased uncertainty and difficulties in accessing external finance. Firms responded by decreasing labour input (adjusting both the intensive and the extensive margins) more often than wages. However, wage-setting practices were also affected by the new economic landscape: the percentage of workers employed in firms enacting wage freezes or cuts has steadily increased since 2010, reaching 17% of the total workforce in the sectors considered in 2013. Furthermore, a large share of companies have adapted their pricing strategy to the new economic environment; the frequency of price adjustments has increased, mainly as a reaction to stronger competition.
    Keywords: labour cost adjustment, pricing strategies
    JEL: E31 J23 J30 J31
    Date: 2015–09
  41. By: Gabriel Bruneau; Kevin Moran
    Abstract: We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand, and the econometric strategy employs a panel two-step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes two full cycles of appreciation and depreciation of the Canadian dollar. Our results indicate that exchange rate fluctuations have significant long-term effects on the labour input of Canada’s manufacturing industries, that these effects are stronger for trade-oriented industries, and that these long-term impacts materialize only gradually following shocks.
    Keywords: Econometric and statistical methods, Exchange rate regimes, Exchange rates, Labour markets, Recent economic and financial developments
    JEL: E E2 E24 F F1 F14 F16 F3 F31 F4 F41 J J2 J23
    Date: 2015
  42. By: Soldatos, Gerasimos T.
    Abstract: This paper maintains that the durable-goods character of loans enables the forward shift of bank indirect taxes à la Coase (1972), increasing thereby the money multiplier and reducing the equity-lending ratio regardless bank industry structure. Consequently, policymakers may use such taxes countercyclically if, of course, the need for depositor insurance is not exaggerated evoking upon the problems of asymmetric information accompanying lending. Also, the “standard” proposition that the ability to shift indirect taxation forward depends negatively on the size of the elasticity of loan demand, is confirmed here, too. The low elasticity of loan demand is related with relationship banking, contemplating thereby that the mix “bank indirect tax-relationship banking” may prove to be critical for capital accumulation and growth depending on the dissemination of such banking. A zero-bank-profit policy is proposed as a stabilization policy beyond the countercyclical manipulation of the tax.
    Keywords: Loan life, Bank indirect-tax incidence, Bank market power, Quantity competition, Capital accumulation
    JEL: E44 G21 H22 H32
    Date: 2015
  43. By: Soldatos, Gerasimos T.; Varelas, Erotokritos
    Abstract: This paper maintains that the durable-goods character of loans enables the forward shift of bank indirect taxes à la Coase (1972), increasing thereby the money multiplier and reducing the equity-lending ratio regardless bank industry structure. Consequently, policymakers may use such taxes countercyclically if, of course, the need for depositor insurance is not exaggerated evoking upon the problems of asymmetric information accompanying lending. Also, the “standard” proposition that the ability to shift indirect taxation forward depends negatively on the size of the elasticity of loan demand, is confirmed here, too. The low elasticity of loan demand is related with relationship banking, contemplating thereby that the mix “bank indirect tax-relationship banking” may prove to be critical for capital accumulation and growth depending on the dissemination of such banking. A zero-bank-profit policy is proposed as a stabilization policy beyond the countercyclical manipulation of the tax.
    Keywords: Loan life, Bank indirect-tax incidence, Bank market power, Quantity competition, Capital accumulation
    JEL: E44 G21 H22 H32
    Date: 2015
  44. By: Gianluca Violante (NYU); Benjamin Moll (Princeton University); Greg Kaplan (Princeton University)
    Abstract: A new framework for analyzing fiscal and monetary policy.
    Date: 2015
  45. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Tuzemen, Didem (Federal Reserve Bank of Kansas City)
    Abstract: An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act, commonly called the Affordable Care Act (ACA). The authors’ model implies a significant reduction in the uninsured rate from 22.6 percent to 5.6 percent. The model predicts a moderate positive welfare gain from the ACA because of the redistribution of income through health insurance subsidies at the exchange as well as the Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA at the expense of 1.6 million full-time jobs, mainly because the link between full-time employment and health insurance is weakened. The model predicts a small negative effect on total hours worked (0.36 percent), partly because of the general equilibrium effect.
    Keywords: Health insurance; Health-care reform; Affordable care act; Labor market; Heterogeneous agents
    JEL: D91 E24 E65 I10
    Date: 2015–09–16
  46. By: Ansgar Belke; Daniel Gros
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in Europe and particularly in the euro area. The institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. It therefore follows that cross-border banks would be useful to deal with regional shocks. But large banks pose the ‘too big to fail’ problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area. The extent to which the (incomplete) banking union now put in place for the euro area provides some shock absorption is also discussed.
    Keywords: banking union, currency union, default, shock absorber, two-tier reinsurance system.
    JEL: E42 E50 F3 G21
    Date: 2015–02
  47. By: Margarita Rubio
    Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
    Date: 2015
  48. By: Gerhard Rösl; Karl-Heinz Tödter
    Abstract: Die repressive Niedrigzinspolitik der EZB führt nach unseren Berechnungen zu geschätzten Zinsverlusten für die deutschen Sparer in einer Größenordnung von 70 Mrd. € pro Jahr. Die Zinsverluste sind höher als die finanziellen Belastungen durch Kapitalertragsteuer und Güterpreisinflation. Dieser Rechnung stehen jedoch die Entlastungen gegenüber, die auf Seiten der (insbesondere öffentlichen) Schuldner zu buchen sind. Wir kalkulieren die gesamten Netto-Wohlfahrtseffekte mehrstufig im Rahmen eines Modells überlappender Generationen. Danach führt die Kapitalertragsteuer zu einer wohlfahrtsmindernden Zusatzlast (deadweight loss) im Gegenwert von 10 Mrd. €, während die Zusatzlast einer permanenten Inflationsrate von 1,5% p.a. bei 33 Mrd. € liegt. Die seit 2010 von der EZB verfolgte krisenbedingte Niedrigzinspolitik ist für Deutschland mit einer Zusatzlast von 39 Mrd. € pro Jahr (1,4% des BIP) verbunden. Damit überschreiten bereits jetzt die kumulierten Wohlfahrtseinbußen in Deutschland die Primäreffekte der Krise, deren Folgen die EZB mit der extremen Niedrigzinspolitik zu bekämpfen versucht.
    Keywords: Financial repression, interest rate policy, EZB, savings losses, welfare, OLGmodel, intertemporal distortions, deadweight loss, retirement consumption
    JEL: E58 E21 I31
    Date: 2015–01
  49. By: Lehmann, Robert; Wohlrabe, Klaus
    Abstract: This paper applies component-wise boosting to the topic of regional economic forecasting. By using unique quarterly gross domestic product data for one German state for the period from 1996 to 2013, in combination with a large data set of 253 monthly indicators, we show how accurate forecasts obtained from component-wise boosting are compared to a simple benchmark model. We additionally take a closer look into the algorithm and evaluate whether a stable pattern of selected indicators exists over time and four different forecasting horizons. All in all, boosting is a viable method for forecasting regional GDP, especially one and two quarters ahead. We also find that regional survey results, indicators that mirror the Saxon economy and the Composite Leading Indicators by the OECD, get frequently selected by the algorithm.
    Keywords: boosting; regional economic forecasting; gross domestic product
    JEL: C53 E17 E37 R11
    Date: 2015–12–03
  50. By: Michal Popiel (Queen's University)
    Abstract: This paper analyzes pass-through from money market rates to consumer retail loan and deposit rates in Canada from 1983 to 2015 using a nonlinear vector error-correction model. In contrast to empirical frameworks used in previous studies, this model permits estimation of long-run pass-through coefficients while simultaneously accounting for asymmetric adjustments and short-run dynamics. It also allows testing of commonly made assumptions such as exogeneity of the market rate. I find that pass-through was complete for all rates before the financial crisis although only after the mid 1990s for the 1 year mortgage rate. Since the end of the 2008--09 recession, pass-through remains complete in the mortgage market but has significantly declined for deposit rates. Furthermore, many rates adjust asymmetrically but the direction of rigidity differs among rates and time periods.
    Keywords: Interest rate pass-through, cointegration, asymmetric adjustment, nonlinear vector error-correction model
    JEL: C32 E43 E52 G21
    Date: 2015–12
  51. By: Lutz Hendricks (University of North Carolina, Chapel Hill); Oksana Leukhina (University of Washington)
    Abstract: This paper is motivated by the fact that nearly half of U.S. college students drop out without earning a bachelor’s degree. Its objective is to quantify how much uncertainty college entrants face about their graduation outcomes. To do so, we develop a quantitative model of college choice. The innovation is to model in detail how students progress towards a college degree. The model is calibrated using transcript and financial data. We find that more than half of college entrants can predict whether they will graduate with at least 80% probability. As a result, stylized policies that insure students against the financial risks associated with uncertain graduation have little value for the majority of college entrants.
    Keywords: education, college dropout risk
    JEL: E24 J24 I21
    Date: 2015–11
  52. By: Peiris, M.Udara (International College of Economics and Finance, National Research University-Higher School of Economics, Moscow, Russia and Department of Economics, University of Warwick); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets Key words: quantitative easing ; exchange rates JEL classication numbers: E50 ; F41.
    Date: 2015
  53. By: Dimitris Christelis (University of Naples Federico II, CSEF, CFS, CEPAR and Netspar); Dimitris Georgarakos (Deutsche Bundesbank, CFS and University of Leicester); Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Maarten van Rooij (De Nederlandsche Bank and Netspar)
    Abstract: Using survey data from a representative sample of Dutch households, we estimate the strength of the precautionary saving motive by eliciting subjective expectations on future consumption. We find that expected consumption risk is higher for the young and the self-employed, and is correlated positively with income risk. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in a Euler equation for consumption, and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates both indicate a coefficient of relative prudence of around 2.
    Keywords: Consumption Risk, Euler Equation, Prudence, Precautionary Saving, Subjective Expectations.
    JEL: D12 D14 D81 E21 C14
    Date: 2015–11–05
  54. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is thus essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. Parisi et al. (2015) analyzed the Chong error correction model, extended it and proposed an alternative, simpler to interpret, one-equation model, and applied it to the recent time period, characterized by close-to-zero monetary rates. In this paper we extend the previous models in a dynamic sense, modelling monetary transmission effects by means of dynamic linear models. The main contribution of this work consists in a novel methodology that provides a mechanism to identify the time dynamics of interest rates, linking them to monetary rates and to macroeconomic, country-specific variables. In addition, it introduces a predictive performance assessment methodology, which allows to compare the proposed models on a fair ground. From an applied viewpoint, the paper applies the proposed models to interest rates on different loans, showing how the monetary policy and the specific situation of each country differently impact lendings, not only across countries but also across time.
    Keywords: Forecasting Bank Interest Rates, Dynamic Time Series Models, Hierarchical Models
    Date: 2015–11
  55. By: Laura D´Amato (Central Bank of Argentina); Lorena Garegnani (Central Bank of Argentina); Emilio Blanco (Central Bank of Argentina)
    Abstract: Having a correct assessment of current business cycle conditions is one of the mayor challenges for monetary policy conduct. Given that GDP figures are available with a significant delay, central banks are increasingly using Nowcasting as a useful tool for having an immediate perception of economic conditions. Thus we develop a GDP growth nowcasting exercise using two approaches: bridge equations and a dynamic factor model. Both outperform a typical AR(1) benchmark in terms of forecasting accuracy. Moreover, the factor model outperforms the nowcast using bridge equations. Following Giacomini and White (2004) we confirm that these differences are statistically significant.
    Keywords: bridge equations, dynamic factor models, nowcasting
    JEL: C22 C53 E37
    Date: 2015–11
  56. By: Test1 Test2
    Abstract: TEST ABSTRACT this is a test
    Keywords: TEST
    JEL: C1 E3 E62 H62 N5 O13 Q3
    Date: 2015–11
  57. By: Lutz Hendricks (University of North Carolina, Chapel Hill); Oksana Leukhina (University of Washington)
    Abstract: This paper studies the effect of graduating from college on lifetime earnings. We develop a quantitative model of college choice with uncertain graduation. Departing from much of the literature, we model in detail how students progress through college. This allows us to parameterize the model using transcript data. College transcripts reveal substantial and persistent heterogeneity in students’ credit accumulation rates that are strongly related to graduation outcomes. From this data, the model infers a large ability gap between college graduates and high school graduates that accounts for 54% of the college lifetime earnings premium.
    Keywords: education, college premium, college dropout risk
    JEL: E24 J24 I21
    Date: 2015–11
  58. By: Zsolt Darvas; András Simon
    Abstract: Highlights   This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model including both a Phillips curve and a current account equation to estimate ‘sustainable output’ for 45 countries. Our estimates for many countries differ substantially from the potential output estimates of the European Commission, IMF and OECD. We assemble a comprehensive real-time dataset to estimate our model on data which was available in each year from 2004-15. Our model was able to identify correctly the sign of pre-crisis output gaps using real time data for countries such as the United States, Spain and Ireland, in contrast to the estimates of the three institutions, which estimated negative output gaps real-time, while their current estimates for the pre-crisis period suggest positive gaps. In the past five years the annual output gap estimate revisions of our model, the European Commission, IMF, OECD and the Hodrick-Prescott filter were broadly similar in the range of 0.5-1.0 percent of GDP for advanced countries. Such large revisions are worrisome, because the European fiscal framework can translate the imprecision in output gap estimates into poorly grounded fiscal policymaking in the EU.
    Date: 2015–10
  59. By: Bill Battaile; F. Leonardo Hernández; Vivian Norambuena
    Abstract: Sub-Saharan African countries as a group showed a considerable reduction in public and externalindebtedness in the early 2000s as a result of debt relief programs, higher economic growth and improved fiscal management for some countries. More recently, however, vulnerabilities in some countries are on the rise, including a few with very rapid debt accumulation. This paper looks at the heterogeneous experiences across Sub-Saharan African countries and the detailed dynamics that have driven changes in public debt since the global financial crisis. Borrowing to support fiscal deficits since 2009, including through domestic markets and Eurobond issuance, has driven a net increase in public debt for all countries except oil exporters benefitting from buoyant commodity prices and fragile states receiving post-2008 HIPC relief. Current account deficits and FDI inflows drove the external debt dynamics, with high balance of payments problems associated with very rapid external debt accumulation in some cases. Pockets of increasing vulnerabilities of debt financing profiles and sensitivity of debt burden indicators to macro-fiscal shocks require close monitoring. Specific risks that policy-makers in Sub-Saharan Africa need to pay attention to going forward include the recent fall in oil prices, the slowdown in China and the sluggish recovery in Europe, dependence on non-debt creating flows and accounting for contingent liabilities.
    Date: 2015–11
  60. By: Marek Dabrowski
    Abstract: Highlights - The Russian economy grew rapidly between 2000 and 2007, but growth decelerated after the 2008-09 global financial crisis, and since mid-2014 Russia has moved into recession. A number of short-term factors have caused recession - lower oil prices, the conflict with Ukraine, European Union and United States sanctions against Russia and Russian counter-sanctions. However Russia's negative output trends have deeper structural and institutional roots. They can be tracked back about a decade to when previous market-reform policies started to be reversed in favour of dirigisme, leading to further deterioration of the business and investment climate. Russia must address its short-term problems, but in the medium-to-long term it must deal with its fundamental structural and institutional disadvantages - oil and commodity dependence and an unfriendly business and investment climate underpinned by poor governance. Compared to many other commodity producers, Russia is better placed to diversify its economy, mostly due to its excellent human capital. Ruble depreciation makes this task easier. 1. From growth slowdown to GDP decline Recession in Russia has become a fact. Seasonally adjusted quarterly GDP peaked in the second quarter of 2014 and then started declining. In the third and fourth quarters of 2014, the pace of decline was very slow (Figure 1) and therefore growth for 2014 overall remained positive (+0.6 percent, Figure 2). However, the first half of 2015 brought an acceleration of the negative trend. Real GDP declined by 2.2 percent in Q1 2015 and by 4.6 percent in Q2 2015, compared to the respective quarters of 2014. Recession was no surprise. Figure 2 shows that after the global financial crisis of 2008-09 Russian growth did not resume its pre-crisis pattern. From 2010-12 growth was muted but reasonable, with annual GDP growth of 5.4 percent, 4.3 percent and 3.4 percent respectively (although from a low level in 2009). However, already in 2013 – well before the conflict with Ukraine and resulting international sanctions, and the oil-price decline – there was economic stagnation. To understand the causes of the trend of declining growth, we must look at the history of the Russian transition and its partial reversal. Figure 1 - Russian quarterly GDP in 2008 prices, billion rubles, seasonally adjusted, 2007-15 Source - Bruegel based on Rosstat, http -// Figure 2 - Annual dynamics of real GDP in Russia, in percent, 1991-2014 Source - Bruegel based on Gaidar Institute for Economic Policy, Moscow, http -// 2. The first turning point - the Yukos crackdown Russia was never a star reformer. Its economic transition in the 1990s was long and painful (see Figure 2) because of the complicated legacy of the Soviet system (structural distortions, macroeconomic imbalances and the absence of market institutions) and because of insufficient political support for radical, market-oriented reforms (Dabrowski et al, 2004). Nevertheless, at the beginning of the new millennium, those reforms started to bear fruit. In 1999, the Russian economy entered a phase of post-transition growth recovery, which accelerated in the subsequent years on the back of increasing oil prices. Furthermore, the first years of Vladimir Putin’s presidency (2000-03) brought completion of many overdue reforms, such as land reform, simplification of the tax system (the flat 13 percent personal income tax rate), elimination of fiscal imbalances, continuing privatisation, limited opening to foreign investors, deregulation and adoption of several pieces of market-oriented legislation. At that time, Russia could be considered a country that completed its basic transition agenda and managed to build a market economy based on private ownership, even if several distortions and imperfections continued to exist. The turning point came in 2003 with politically motivated crackdown on the largest Russian private company, Yukos (its assets were subsequently taken over by the state-owned Rosneft). As result, the private sector share of GDP decreased from 70 to 65 percent between 2004 and 2005[1]. In the following years, this trend of state takeover continued, especially in the oil and gas industry. For example, in 2005 Gazprom acquired the private oil company Sibneft, which was transformed into Gazprom’s daughter company Gazprom Neft. The activities of foreign oil and gas firms were marginalised. The best-known case was the downsizing of the shares held by Shell, Mitsubishi and Mitsui in the Sakhalin-2 project in favour of Gazprom (Sprenger, 2010). Figure 3 - Russia - Freedom House Nations in Transit selected scores, 1999-2015 Source - Bruegel based on http -// and http -// Note - Each indicator is ranked 1 to 7, with 1 meaning freedom and democracy and 7 meaning consolidated authoritarian regime. The Democracy Score summarises sectoral scores. While the Yukos takeover did not stop investment and growth immediately, it initiated Russia's gradual departure from market-oriented reforms towards the building of a sort of hybrid system that is heavily controlled and dominated by the state bureaucracy and the ruling elite.
    Date: 2015–10
  61. By: Amir-Ahmadi, Pooyan (Goethe University Frankfurt); Matthes, Christian (Federal Reserve Bank of Richmond); Wang, Mu-Chun (University of Hamburg)
    Abstract: Should policymakers and applied macroeconomists worry about the difference between real-time and final data? We tackle this question by using a VAR with time-varying parameters and stochastic volatility to show that the distinctionbetween real-time data and final data matters for the impact of monetary policy shocks: The impact on final data is substantially and systematically different (in particular, larger in magnitude for different measures of real activity) from theimpact on real-time data. These differences have persisted over the last 40 years and should be taken into account when conducting or studying monetary policy.
    Keywords: real-time data; time-varying parameters; stochastic volatility; impulse responses
    Date: 2015–11–05
  62. By: Lukas Schmid (Duke University); Howard Kung (London Business School); Alexandre Corhay (University of British Columbia, Sauder School of Business)
    Abstract: Is there a fundamental link between macroeconomic risk and growth? Is there a causal link between finance and growth? These questions are central for the design of stabilization policies and for welfare. How- ever, no consensus has yet emerged in the literature. We contribute to that debate by developing a general equilibrium stochastic endogenous growth model that allows to examine the impact of financial frictions on volatility and growth. In the model, growth is driven by the endogenous accumulation of physical and intangible capital, both of which are subject to distinct financial frictions. We characterize the conditions under which finance and volatility foster growth. We find that in the presence of relatively mild financial frictions, alleviating financial constraints leads to both higher average as well as more volatile growth rates, so that a trade-off between volatility and growth emerges. When financial frictions primarily affect physical capital accumulation, the ensuing cycles occur at business cycle frequency. On the other hand, frictions to intangible capital accumulation imply amplified low-frequency movements. The welfare implications depend on preferences: with recursive preferences, low-frequency volatility is very costly
    Date: 2015
  63. By: Gabriele Foà (Yale University); Leonardo Gambacorta (Bank for International Settlements); Luigi Guiso (Einaudi Institute for Economics and Finance); Paolo Emilio Mistrulli (Bank of Italy)
    Abstract: We propose a new, data-based test for the presence of biased financial advice when households choose between fixed and adjustable rate mortgages. If households are wary, the relative cost of the two types should be a sufficient statistic for a household contract choice: the attributes of the bank that makes the loan should play no role. If households rely on banks' advice to guide their choice, banks may be tempted to bias their counsel to their own advantage. In this case bank-specific supply characteristics will play a role in the household's choice above any role they play through relative prices. Testing this hypothesis on a sample of 1.6 million mortgages originated in Italy between 2004 and 2010, we find that the choice between adjustable and fixed rates is significantly affected by change in banks' supply factors, especially in periods during which banks do not change the relative price of the two mortgage types. This supports the view that banks are able to affect customers' mortgage choices not only by pricing but also through an advice channel.
    Keywords: mortgage choice, financial advice, household finance
    JEL: D14 E43 G11 G12 G21
    Date: 2015–11
  64. By: Tito Boeri (INPS AND UNIVERSITÀ BOCCONI); Juan F. Jimeno (Banco de España)
    Abstract: Unemployment in Europe is not only “too high”, it is also too different across countries that belong to a monetary union. In this paper we i) document this increasing heterogeneity, ii) try to explain it and iii) draw from our diagnosis indications as to the appropriate set of policies to reduce unemployment and labour market disparities. Our analysis suggests that the divergence in labour market outcomes across Europe is the by-product of interactions between, on the one hand, shocks of varying size and nature, and, on the other hand, country-specific labour market institutions. We argue that EU policy coordination and conditionality during the Great Recession and the euro area debt crisis did not properly take into account these interactions. We also propose a change in the European policy approach for fighting unemployment.
    Keywords: unemployment, conditionality, employment policies
    JEL: E60 J65 J68
    Date: 2015–11
  65. By: Leon Rincon, C.E. (Tilburg University, Center For Economic Research); Machado, C.; Sarmiento Paipilla, N.M. (Tilburg University, Center For Economic Research)
    Abstract: We model the allocation of central bank liquidity among the participants of the interbank market by using network analysis’ metrics. Our analytical framework considers that a super-spreader simultaneously excels at receiving (borrowing) and distributing (lending) central bank’s liquidity for the whole network, as measured by financial institutions’ hub centrality and authority centrality, respectively. Evidence suggests that the Colombian interbank funds market exhibits an inhomogeneous and hierarchical network structure, akin to a core-periphery organization, in which a few financial institutions fulfill the role of central bank’s liquidity super-spreaders. Our results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks. Also, concurrent with literature on lending relationships in interbank markets, we confirm that the probability of being a super-spreader is mainly determined by financial institutions’ size. We provide additional elements for the implementation of monetary policy and for safeguarding financial stability.
    Keywords: interbank; liquidity; monetary policy; financial stability; networks; super-spreader; central bank
    JEL: E5 G2 L14
    Date: 2015
  66. By: Marc Giannoni (Federal Reserve Bank of New York); Christina Patterson (MIT); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers and yet we know little about its effectiveness. We show that standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the "forward guidance puzzle," and explain why this is the case. We document the impact of forward guidance announcements on 1) a broad cross section of financial markets data, and 2) on the panel of Blue Chip forecasts. We find that this effect has been very heterogeneous across announcements and relate this heterogeneity to the type of forward guidance, whether delphic (news about the economy) or odyssean. We also discuss various explanations to the puzzle that have been advanced in the literature.
    Date: 2015
  67. By: Raputsoane, Leroi
    Abstract: This paper contributes to the lean versus clean debate by examining whether or not monetary policy in South Africa leans against the wind or cleans up after the bubble has bust. This is achieved by analysing the behaviour of asset prices during the different phases of monetary policy stance. The models that allow the behaviour of the asset prices to differ during periods of tight and easy monetary conditions as well as during periods of contractionary and expansionary monetary conditions are specified. The results provide evidence of an asymmetric behaviour between monetary policy interest rate and asset prices during the periods of easy and tight monetary conditions. The empirical results further provide evidence of symmetric behaviour between the monetary policy interest rate and asset prices during the periods of contractionary and expansionary monetary conditions. Thus monetary policy in South Africa supports the proposition of leaning against the wind as opposed to the proposition of cleaning up after the bubble has burst.
    Keywords: Lean versus clean debate, Monetary policy regimes, Financial distress
    JEL: C51 E52 E61 G01
    Date: 2015–11–30
  68. By: Grégory Claeys; Guntram B. Wolff
    Abstract: Highlight After soaring in the 1970s, inflation in Organisation of Economic Cooperation and Development countries stabilised, coming down from 9 percent on average in the early 1980s to about 2 percent in the years before the crisis, and to a lower level in recent years. This trend coincided with the acceleration of globalisation, triggering a debate about whether global integration (of goods, labour and financial markets) could be one of the main drivers of the disinflation process and whether central banks’ ability to control inflation could be weaker as a result. We explore the different ways in which globalisation could have an impact on inflation and monetary policy transmission channels. We conclude that inflation dynamics can be affected by globalisation and that central banks should take external factors into account in their decision-making processes and in their economic models. Even if the transmission mechanisms are affected by globalisation and in particular by financial integration, ultimately, central banks retain their ability to control medium-term inflation, as long as they adopt flexible exchange rates. Executive Summary After soaring in the 1970s and early 1980s, inflation has declined significantly in all advanced countries and is now at very low levels. This movement coincided with the acceleration of globalisation, triggering a recent debate on whether globalisation could be one of the main drivers of the disinflation process, and whether the ability of central banks to control inflation could be undermined as a result. The acceleration in globalisation has mainly taken three forms that could affect inflation dynamics and monetary policy - trade integration, labour market integration and financial integration. Openness in terms of trade and finance has led to a greater sensitivity of domestic price levels to external price shocks. Trade with low-cost countries has increased massively in the last two decades, which has logically resulted in a reduction in the price of imported goods. Global competition between firms might have also reduced the pricing power of domestic companies, while the integration of billions of workers into the global labour market has likely reduced the bargaining power of domestic workers. The empirical literature shows that the contribution of globalisation to the global disinflation movement since the 1990s has been positive, but rather limited for the moment. A more important question is whether these integration trends affect the transmission mechanisms of monetary policy and reduce the ability of central banks to fulfil their mandate. The transmission channels of monetary policy could potentially be affected at various levels. First, central banks could lose their ability to control inflation if inflation becomes a function of global slack instead of being a function of domestic slack. Second, central banks could lose control of short-term rates if rates become a function of global liquidity instead of the liquidity provided by the domestic central bank. And third, central banks could lose their hold over domestic inflation and economic activity if long-term interest rates depend only on the balance between savings and investment at the global level, and not at the domestic level. It is true that the negative relationship between domestic slack and domestic inflation has changed and that that the slope of the Phillips curve has flattened since the mid-1980s. However, recent empirical studies have failed to demonstrate that globalisation had been one of the main drivers behind this trend. A more plausible explanation seems to lie in the monetary policy changes that have taken place since the mid-1980s, with the adoption of credible inflation-targeting regimes in many advanced countries. Concerning the control of central banks over the domestic yield curve, it is clear that as long as central banks retain some kind of domestic monopoly over the issuance of base money, they will be able to control the shorter end of the domestic yield curve. For long-term rates, this is less clear, however. The conundrum episode of 2004-06 in the US suggests that long-term rates can become less sensitive to short-term rates and that external factors can affect them significantly. Since the beginning of the crisis, central banks also showed that they were willing to use less conventional monetary tools in order to influence the whole yield curve, in particular when they are constrained at the short end of the curve by the zero lower bound. In any case, even if financial integration could result in a reduction of the role of the long-term interest rate channel, for countries that accept flexible rates globalisation should at the same time increase the role of the exchange rate as a transmission mechanism, because of the increased sensitivity to differences in interest rates of the demand for domestic and foreign assets. Given the potentially greater effects of external shocks on more open economies and the potential alteration of monetary policy transmission channels in more integrated financial markets, globalisation forces central banks to take external developments into account in their monetary policy decisions.
    Date: 2015–11
  69. By: Pérez, Fernando (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: We study the response of prices to exchange rate shocks for the Peruvian economy in a non-linear context. For that purpose we specify a Structural Vector Autorregressive model (SVAR) and compute impulse-responses functions for prices after exchange rate shocks. We follow Hamilton (2010) and Kilian & Vigfusson (2011), who explore the presence of asymmetric effects on USA output after oil prices shocks that either decrease or increase oil prices. In our setup we analyze shocks that either appreciate or depreciate the local currency under censored exchange rate changes. The results exhibit a remarkable asymmetry in the response of consumer prices and wholesale import good prices, both on impact and on propagation. In absolute value, the effect of a depreciation shock on the consumer price index after one year is about twice the size of that corresponding to an appreciation shock. Roughly speaking, the one-year passthrough to prices is 20 percent under depreciations and only 10 percent after appreciations.
    Keywords: Exchange rate pass-through, asymmetric impulse responses, non-linear models
    JEL: C32 E31 F31
    Date: 2015–11
  70. By: Sam Tang (Business School, University of Western Australia)
    Abstract: A key question in development economics is why developing countries as a group experience so much growth volatility. This paper introduces a new technique to measure medium-term macroeconomic volatility that is defined by the trend-growth volatility of output. It shows that medium-term volatility, can be derived by subtracting the average short-term volatility from the total variations of output growth, Applying the new measure to the World Bank’s output data reveals an inverted-U shaped relationship between medium-term volatility and economic development, indicating that economic development is likely to increase trend-growth volatility for developing countries.
    Date: 2015
  71. By: Angel Asensio (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The paper offers theoretical discussion and modelling showing that -in accordance to the post Keynesian approach to endogenous money- the credit-worthy demand for loans determines the supply of loans at the prevailing interest rate, while -in accordance with Keynes's liquidity preference theory- the rate of interest is endogenously determined as to equalize the demand and supply of liquidity-money in terms of stocks. As a consequence, the markup reflected in the spread between the central bank refinancing interest rate and the market interest rate is endogenously determined by the total demand and supply of liquidity-money. The paper also argues that, while the central bank effectively controls the base interest rate, additional conditions are required to control the liquidity-money market interest rate, owing to the conventional nature of the rate of interest Keynes pointed out.
    Keywords: Accommodationism,Credit-money,Endogenous money,Horizontalism,Interest rate,Liquidity preference,Monetary policy,Verticalism
    Date: 2015–11–20
  72. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During an event hosted by the Fort Smith Chamber of Commerce and the University of Arkansas – Fort Smith, St. Louis Fed President James Bullard said that any decision on whether to increase the policy rate from near-zero levels will be data-dependent. He also discussed five key questions for the FOMC—on global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar.
    Date: 2015–11–20
  73. By: Corbae, Dean (University of Wisconsin‒Madison); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia)
    Abstract: The authors develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. They apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the authors’ framework. After calibrating the model to Mexican data, the authors examine the welfare consequences of government policies that promote global competition. They find relatively high economy-wide welfare gains from allowing foreign bank entry.
    Keywords: Global banks; Foreign bank competition; Bank industry dynamics
    JEL: E60 F30 F41 G01 G21
    Date: 2015–09–18
  74. By: Arnab Bhattacharjee, Chris Higson, Sean Holly
    Abstract: Operating leverage describes the extent to which a firm’s operating costs are fixed in the short run. The effect of operating leverage is to amplify the impact on profit of a change in revenues; an effect which is further amplified by financial leverage and by asymmetry in the tax system. In this paper we provide empirical estimates of operating leverage at the firm level, using a long panel of data on UK quoted firms. We report sectoral differences in operating leverage around the business cycle, and show that these can be partly explained in terms of costly labour adjustment and asymmetric price adjustment.
    Keywords: operating margin, panel data, fixed and flexible costs, business cycles
    JEL: E32 D4 G30
    Date: 2015–11–24
  75. By: Cristina Fernández (Banco de España); Aitor Lacuesta (Banco de España); José Manuel Montero (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: We broaden the conceptual framework of estimating markups at the sectoral level developed by Roeger (1995), and extended by Crépon et al. (2005) with labour market imperfections, to account for firm-level heterogeneity derived from differences in productivity. We estimate this model with a comprehensive panel of Spanish non-financial corporations for the period 2001-2007 to find that perfect competition is widely rejected in the data. More interestingly, within each sector, firms with higher productivity present higher markups. Further, we use this empirical setting to estimate changes in firm-level markups over the course of the crisis (2008/2012). Our results indicate that for around 50% of sectors average markups increased, following a decrease in the number of firms, while for around 35% of industries the relevance of within-sector markup heterogeneity decreased at the same time that the variance of within-sector TFP increased. This last result suggests that the simple changes in the number and composition of competing firms cannot explain within-sector markups and we require additional factors to account for recent developments. For instance, we provide evidence that both an increase in consumer product substitutability and in fixed entry costs during the crisis might be a good explanation.
    Keywords: markups, production function, market power, heterogeneity
    JEL: C23 C26 D24 E31 L11 L16
    Date: 2015–12
  76. By: Angel De la Fuente
    Abstract: En este trabajo se elaboran series homogeneas de diversos agregados de empleo asalariado y remuneracion de asalariados para España y sus regiones durante el periodo 1986-2014 mediante el enlace de las diversas bases de la Contabilidad Regional de España.
    Keywords: Análisis Macroeconómico , Documento de Trabajo , España
    JEL: E01 R1
    Date: 2015–12
  77. By: Liping Gao; Hyeongwoo Kim
    Abstract: Chow (1985, 2010, 2011) reports indirect evidence in favor of the permanent income hypothesis using time series observations in China. We revisit this issue by evaluating direct measures of the predictability of consumption growth in China during the post-economic reform regime (1978-2009) as well as the postwar US data for comparison. Our in-sample analysis provides strong evidence against the PIH for both countries. Out-of-sample forecast exercises show that consumption changes are highly predictable, which sharply contrasts the implication of Chow (1985, 2010, 2011).
    Keywords: Permanent Income Hypothesis; Consumption; Diebold-Mariano-West Statistic
    JEL: E21 E27
    Date: 2015–12
  78. By: Adonis Antoniades
    Abstract: The primary driver of commercial bank failures during the Great Recession was exposure to the real estate sector, not aggregate funding strains. The main "toxic" exposure was credit to non-household real estate borrowers, not traditional home mortgages or agency MBS. Private-label MBS contributed to the failure of large banks only. Failed banks skewed their portfolios towards product categories that performed poorly on aggregate. In addition, within each product category they held assets of lower quality than those held by survivor banks.
    Keywords: bank failures, Great Recession, real estate, mortgage-backed securities, credit lines, credit growth
    Date: 2015–11
  79. By: Erotokritos Varelas (Department of Economics, University of Macedonia); Eleni Dalla (Department of Economics, University of Macedonia)
    Abstract: TThis paper presents a discrete time version of Hillinger’s (1992, 2005) second order accelerator model that investigates the dynamic behavior of capital, for pedagogical purposes. Such a version is put forward as a means of improving student acquaintance with the analysis of investment cycles -defined as quasi-periodic cyclic movements of these variables- and with the convergence towards the steady-state when capital is subjected to trigonometric oscillations. In addition, we extend the analysis, introducing the exogenous interest rate on loans in the behavioral equation of investors. It is inferred that the introduction of this credit term results in a lower equilibrium level of capital.
    Keywords: Hillinger’s second order accelerator model, investment cycles,educational macroeconomics.
    JEL: A20 A22 A23 E10 E32 E40
    Date: 2015–12
  80. By: Victor Kummritz (IHEID, The Graduate Institute of International and Development Studies, Geneva); Bastiaan Quast (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: Global Value Chains have become a central unit of analysis in research on international trade. However, the complex matrix transformations at the basis of most Value Chain indicators still constitute a significant entry barrier to the field. The R package decompr solves this problem by implementing the algorithms for the analysis of Global Value Chains as R procedures, thereby simplifying the decomposition process. Two methods for gross export flow decomposition using Inter-Country Input-Output tables are provided. The first method concerns a decomposition based on the classical Leontief (1936) insight. It derives the value added origins of an industry's exports by source country and source industry, using easily available gross trade data. The second method is the Wang-Wei-Zhu algorithm, which splits bilateral gross exports into 16 value added components. These components can broadly be divided into domestic and foreign value added in exports. Using the results of the two decompositions, decompr provides a set of Global Value Chain indicators, such as the now standard Vertical Specialisation ratio. This article summarises the methodology of the algorithms, describes the format of the input and output data, and exemplifies the usefulness of the two methods on the basis of a simple example data set.
    Keywords: Global Value Chains, Trade in Value Added, Export Decomposition
    JEL: E01 F13 F14 F23 L14
    Date: 2015–01–17
  81. By: Pierre MANDON; Antoine CAZALS
    Abstract: Despite a long history of research on political budget cycles, their existence and magnitude are still in question. By conducting a systematic analysis of the existing literature we intend to clarify the debate. Based on data collected from over 1,700 regressions and 58 studies, our meta-analysis suggests that leaders do manipulate fiscal tools in order to be re-elected but to an extent that is significantly exaggerated by scholars. However, we show the incumbents' strategy differ depending on which tools they leverage. Finally, we discuss in further details how authors' methodological choices and country institutions affect political budget cycles.
    Keywords: Political cycles ; Budget manipulation ; Meta-analysis
    JEL: H0 E62 D78 D72 C82
    Date: 2015–12
  82. By: Gemma Abio Roig (Universitat de Barcelona); Concepció Patxot Cardoner (Universitat de Barcelona); Miguel Sánchez-Romero (Wittgenstein Centre (IIASA, VID/OAW and WU)); Guadalupe Souto Nieves (Universitat Autònoma de Barcelona)
    Abstract: The sustainability of the welfare state is in doubt in many developed countries due to drastic population ageing. The extent of the problem and the margin for reforms depend - among other factors - on the size of the ageing process and the size of the public transfer system. The latter has a crucial impact on the extent to which the first demographic dividend previous to the ageing process turns into a second demographic dividend. The contribution of the different factors driving the demographic dividend is, ultimately, an empirical question. In this paper we contribute to the debate, exploding the cross-country comparison potentialities of the National Transfer Accounts (NTA) database. In particular, we introduce different configurations of the welfare state transfers – Sweden, United States and Spain - into a realistic demography Overlapping Generations (OLG) model and simulate its effects on the second demographic dividend.
    Keywords: Ageing, demographic dividend, intergenerational transfers, national transfer accounts, overlapping generations model, welfare state.
    JEL: J11 J18 E21 H53
    Date: 2015
  83. By: Adam P. Balcerzak (Nicolaus Copernicus University, Poland); Michal Bernard Pietrzak (Nicolaus Copernicus University, Poland)
    Abstract: The key challenge for medium- and long-term policy in European Union countries is to use the potential of knowledge-based economy (KBE), which is a condition for maintaining high total factor productivity in Europe. For this reason, the relationship between quality of institutional system and total factor productivity in the EU countries has been examined. The quality of institutional system is defined here from the perspective of incentives that influence the use of the potential of KBE. In order to determine the level of effectiveness of the institutional system in the analyzed countries the method for linear ordering of objects was applied based on data from Fraser Institute. The main hypothesis of the article was formed as follow: the quality of institutional system in the context of KBE has significant influence on the level of total factor productivity in the EU. In order to verify the hypothesis, the parameters of the Cobb-Douglas production function were estimated, which allowed to evaluate TFP for EU countries. The calculation made in the article was based on Eurostat data. Then, the identification of the relationship between the quality of institutional system and the level of TFP was made with the application of panel model. The research made for the years 2000-2010 allowed to verify the hypothesis.
    Keywords: Knowledge-based economy, TFP, quality of intuitions, European Union, panel model
    JEL: D24 E02
    Date: 2015–12
  84. By: Miguel Sarmiento; Jorge Cely; Carlos León
    Abstract: A core goal of regulators and financial authorities is to understand how market prices convey information on the financial health of its participants. From this viewpoint we build an Early-Warning Indicators System (EWIS) that allows for identifying those financial institutions perceived as risky counterparts by the participants of the interbank market. We use micro-level data from bilateral overnight unsecured loans performed in the interbank market between January 2011 and December 2014. The EWIS identifies those participants that systematically pay high prices for liquidity in this market. We employ coverage tests to estimate EWIS’ robustness and consistency. We find that financial institutions with an elevated frequency of signals tend to exhibit a net borrower liquidity position in the interbank market, hence suggesting they are facing recurrent liquidity needs. Those institutions also exhibit higher probability of insolvency measured by the Z-score indicator. Thus, our results support the existence of market discipline based on peer-monitoring. Overall, the EWIS may assist financial authorities in focusing their attention and resources on those financial institutions perceived by the market as those closer to distress.
    Keywords: Early warning indicators, interbank markets, market discipline, bank risk.
    JEL: E40 G14 G21
    Date: 2015–11–30
  85. By: Chuku, Chuku; Onye, Kenneth; Ajah, Hycent
    Abstract: This paper considers the structural and institutional determinants of investment activity in selected African countries within a neoclassical framework. Generalized method of moments and a family of panel data estimation techniques are utilized in addition to nonparametric kernel regression techniques to uncover the relationship. Three main findings emerge; (i) financial openness and institutional quality are reasonably robust structural and institutional determinants of investment activity in Africa respectively, (ii) there is evidence of nonlinearity in the relationship and there exist a threshold level of financial openness that achieves the highest level of investment, (iii) using interaction terms, the inhibiting effect of financial openness is potentially less in countries with higher levels of institutional quality, (iv) promoting institutional quality is an effective policy towards facilitating investment activity in Africa.
    Keywords: Investments, financial openness, institutional quality, nonparametric regression, GMM
    JEL: E22 O13 Q18
    Date: 2015
  86. By: Marcheggiano, Gilberto (Monetary Policy Committee Unit, Bank of England); Miles, David (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper explores the links between fiscal multipliers and household discount rates. We report evidence of a large and statistically significant relationship between reported rates of time preference across countries and the government expenditure multiplier. This study uses recent cross-country data on reported rates of time preferences gathered by Wang, Rieger and Hens (2011). We find that a higher reported rate of time preference is strongly associated with a larger government expenditure multiplier. Our findings may help to explain some of the differences in view over the optimal path for fiscal consolidation in Europe today, between the Germanic and Northern European countries (whose representatives appear to favour a faster fiscal retrenchment) and those in the South (who would like their required fiscal adjustment to occur less rapidly).
    Date: 2015–12–01
    Abstract: We study the causes behind the shift in the U.S. economy's trend following the Great Recession. To this end, we propose a model featuring endogenous productivity la Romer and a financial friction la Kiyotaki-Moore. Adverse financial disturbances during the recession and the lack of strong tailwinds post crisis resulted in a severe contraction and the downward shift in the economy's trend. Had financial conditions remained stable during the crisis, the economy would have grown at its average growth rate. From a historical perspective, the Great Recession was unique because of the size and persistence of adverse shocks, and the lackluster performance of favorable shocks since 2010.
    Date: 2015–10–05
  88. By: McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CEP (LSE), CfM (LSE) and CAMA (ANU)); Peiris, Udara (CEF, National Research University Higher School of Economics, Russian Federation.); Polemarchakis, Herakles (University of Warwick)
    Abstract: Quantitative easing compromises the control of the central bank over the stochastic path of inflation
    Keywords: Quantitative easing ; credit easing ; in flation JEL Classification Numbers: D50 ; E31 ; E52
    Date: 2015
  89. By: Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (Graduate School of Economics, Osaka University)
    Abstract: The axiomatic characterization of price or market equilibrium is one of the most important problems in the general equilibrium theory. There does not seem to exist, however, so many papers on the axiomatic characterization problem of monetary equilibrium. The overlapping-generations model with a double innity of commodities and agents is one of the most fundamental frameworks for intro- ducing money into an economic model, although a simple game-theoretic or welfare characterization on the role of money under competitive mechanism is widely known to be difficult. In this paper, we show that the informational efficiency axiomatic characterization as in Hurwicz (1960), Mount and Reiter (1974) and Sonnenschein (1974) is possible for the price-money competitive mechanism for overlapping-generations economies among the class of all allocation mechanisms with messages. Espe- cially, the category theoretic universal mapping characterization in Sonnenschein (1974) is generalized and applied to the overlapping-generations framework through our monetary version of Debreu-Scarf's core limit theorem of Urai and Murakami (2015). Our argument is also closely related to the replica characterization approaches of Walrasian social choice mechanism like Thomson (1988) and Nagahisa (1994), and provide a comprehensive perspective on them.
    Keywords: Axiomatic Characterization, Resource Allocation Mechanism, Informational Efficiency, Monetary Equilibrium, Overlapping-Generations Model, Replica Core Equivalence, Universal Mapping Property
    JEL: C60 C71 D51 D82 E00
    Date: 2015–12
  90. By: Ghent, Andra C. (University of Wisconsin, Madison); Kudlyak, Marianna (Federal Reserve Bank of Richmond)
    Abstract: We document economically important correlations between children’s future credit outcomes and their parents’ credit risk scores, default, and the extent of credit constraints – intergenerational linkages in household credit. Using observations on siblings, we find that the linkages are due to unobserved household heterogeneity rather than parental credit conditions directly affecting children’s credit outcomes. In particular, in the sample of siblings, there is no correlation between parental and child credit attributes after controlling for household fixed effects. The linkages are stronger in cities with lower intergenerational income mobility, implying that common factors drive both. Finally, existing measures of state-level educational policy interventions appear to have limited effects on the strength of intergenerational linkages.
    Keywords: Household Finance; Intergenerational Mobility; Credit Constraints; Income Inequality
    JEL: D14 E21 G10
    Date: 2015–11–05
  91. By: Alfonso Palacio Vera (Departamento de Economía Aplicada III (Política Económica). Universidad Complutense de Madrid.)
    Abstract: We review Keynes´s attempt to deal with the `problem of induction´ since his Treatise on Probability and then argue that Popper´s `solution´ to the former, known as Popper´s evolutionary of knowledge and learning, is compatible with Keynes´s adoption of a conventional theory of knowledge in his later economic writings. We also argue that Keynes´s macro-theory as it appears in both his General Theory and his 1937 QJE paper can be (re)interpreted as an instance of a reformulated version of the `subjectivist´ version of Popper´s `Rationality Principle´ (RPs) according to which agents´ behaviour is appropriate or adequate to the problem-situation as the theorist believes that agents believe the former is. A number of further results follow from the previous arguments.
    Abstract: Repasamos el intento de Keynes de abordar el "problema de la inducción" en su Treatise on Probability y señalamos que la solución propuesta por Popper al mismo, conocido como la teoría popperiana del conocimiento y el aprendizaje es compatible con la adopción por parte de Keynes de una teoría convencionalista del conocimiento en su última etapa. También señalamos que la Teoría General y su artículo del año 1937 en el QJE pueden ser interpretados como un caso concreto de la versión `subjetivista´ del "Principio de Racionalidad" Popperiano, de acuerdo con el cual el comportamiento de los agentes económicos es adecuado al problema-situación tal y como el modelizador cree que los agentes perciben este último. De esta interpretación obtenemos una serie de resultados adicionales.
    Keywords: Popper, Keynes, Rationality Principle, Macro-models, and Induction.; Popper, Keynes, principio de racionalidad, modelos macroeconómicos e inducción.
    JEL: A12 B41 E12
    Date: 2015–12
  92. By: Dimitrios Paparas (Land, Farm and Agribusiness Management Department, Harper Adams University); Christian Richter (Faculty of Management Technology, The German University in Cairo)
    Abstract: In this paper we empirically test the relationship between military spending and economic growth for Greece and Turkey during 1957-2013, and examine the validity of arms race hypothesis between the two countries.
    Keywords: National Government Expenditures, National Security and War, Arms race, Greece, Turkey, Economic Growth, ADF, VAR
    JEL: H5 H56 O40 E62
    Date: 2015–10
  93. By: Marie Cuillerai (LLCP - Laboratoire d'études et de recherches sur les logiques contemporaines de la philosophie - Université Paris VIII - Vincennes Saint-Denis)
    Abstract: Les monnaies alternatives proposent une nouvelle articulation de l’économique et du politique selon deux axes opposés. D’un côté, un courant libéral veut contrer le monopole étatique de l’émission monétaire et les Banques centrales. De l’autre, le pluralisme monétaire revendique une rupture avec la domination de l’économie néolibérale. Le long de ce spectre, la souveraineté monétaire est remise en question et dans le cas des monnaies sociales, certaines expériences ambitionnent de corriger les défauts de régulation de l’Etat social. Cet article cherche à montrer comment les monnaies sociales déplacent les critères traditionnels de la démocratie hérités de la Modernité. Dans un premier temps, un repérage sémantique montre que les monnaies sociales bousculent l’opposition privé/public, macro/micropolitique. Les formes d’organisation de ces collectifs sont mises en perspective avec la micropolitique de Deleuze, et la microphysique des pouvoirs de Foucault. La dimension démocratique des monnaies sociales se situe-t-elle seulement dans l’organisation qui préside à leur institution, ou dans les pratiques et les usages qui en découlent ? Leur perspective conduit à un débat sur la définition de la monnaie comme institution d’une dette sociale, car elle voit la dette comme une technologie de la gouvernementalité néolibérale. La deuxième partie de l’article compare les notions de monnaie-dette de vie, et de monnaie du commun. Entre monnaie dette et monnaie du commun, s’agit-il d’une nuance sur la symbolique de la monnaie, ou cette alternative exprime-t-elle deux conceptions différentes d’une politique émancipatrice ?
    Abstract: Alternative currency systems offer a new articulation of economic and politics in two opposite directions. On one side, a liberal current wants to counter the State monopoly on the monetary issue and central banks. On the other side, monetary pluralism is wishing to sedition with the dominance of neoliberal economy. Along this spectrum, monetary sovereignty is questioned and, in the case of social currencies, some experiences are seeking to correct social regulation of the welfare state. This article seeks to demonstrate how social currencies are moving beyond the traditional criteria of democracy inherited from modernity. At first, a semantic identification shows that social currencies are scrambling traditional oppositions as public/private, macro/micro. Then, forms of organization of these groups are put into perspective with the micropolitics of Deleuze and Foucault’s microphysic of power. Does the democratic dimension of social currencies only lies in organization who presides at their institution? Or is it dwelling in the practices and usages? Their philosophical perspective led to a debate on the definition of the currency as a institution of a social debt as “debt of life”, because they sees debt as a technology of neoliberal governmentality. The second part of the article compares the concepts of debt-currency, and “currency of common”. Between currency debt and the common currency, is it a shade on the symbolism of the currency, or this alternative expresses two different designs of an emancipatory politics?
    Keywords: Sovereignty, Micropolitique , Exchange ,Democracy , Debt ,Démocratie ,Dette , Institution,Micropolitique , Monnaie , Souveraineté
    Date: 2015–01–30
  94. By: Michael Reiter (Institute for Advanced Studies)
    Abstract: The paper presents a computationally efficient method to solve overlapping generations models with asset choice. The method is used to study an OLG economy with many cohorts, up to 3 different assets, stochastic volatility, short-sale constraints, and subject to rather large technology shocks. On the methodological side, the main findings are that global projection methods with polynomial approximations of degree 3 are sufficient to provide a very precise solution, even in the case of large shocks. Globally linear approximations, in contrast to local linear approximations, are sufficient to capture the most important financial statistics, including not only the average risk premium, but also the variation of the risk premium over the cycle. However, global linear approximations are not sufficient to reliably pin down asset choices. With a risk aversion parameter of only 4, the model generates a price of risk, measured as the Sharpe ratio, that is about two thirds of that of US stocks. Being subject to three types of shocks, the equilibiurm allocation, even with 3 assets, differs substantially from an allocation under sequentially complete markets. In particular, the oldest cohorts are more more heavily exposed to negative shocks.
    Date: 2015
  95. By: Drago Bergholt (Norges Bank)
    Abstract: How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.
    Keywords: DSGE, small open economy, international business cycles, Bayesian estimation
    JEL: C11 E30 F41 F44
    Date: 2015–11–25
  96. By: Mirta González (Central Bank of Argentina); María Cecilia Pérez (Central Bank of Argentina)
    Abstract: In order to provide a tool for risk management improvement and appropriate regulation, a methodology for measuring interest rate risk is applied in this paper. After estimating and simulating the interest rate term structure, the value at risk and expected shortfall are calculated on a portfolio. An application of alpha-stable distributions has allowed representing the asymmetric, leptokurtic and heavy tailed shape of financial returns and occurrence of extreme scenarios.
    Keywords: interest rate risk, regulation, risk management, term structure
    JEL: C15 C16 E43 E59 G11 G12
    Date: 2015–11
  97. By: Brüeckner,Markus; Carneiro,Francisco Galrao
    Abstract: This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980?2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.
    Keywords: Pro-Poor Growth,Economic Theory&Research,Emerging Markets,Economic Conditions and Volatility,Inequality
    Date: 2015–12–03

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