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

  1. Measuring the Effects of the ‘Normalization’ of US Monetary Policy on Central America and the Dominican Republic By Checo, Ariadne; Pradel, Salome; Ramirez, Francisco A.
  2. What Does Anticipated Monetary Policy Do? By D'Amico, Stefania; King, Thomas B.
  3. Lending Standards, Credit Booms, and Monetary Policy By Elena Afanasyeva; Jochen Guntner
  4. Capital Flows to Latin America and the Caribbean: 2014 Overview By -
  5. The Anomaly of U-3: Why the Unemployment Rate is Overstating the Strength of Today’s Labor Market By Nick Buffie
  6. Unconventional monetary policy and the dollar: conventional signs, unconventional magnitudes By Glick, Reuven; Leduc, Sylvain
  7. Mozambican Monetary Policy and the Yield Curve of Treasury Bills - An Empirical Study By Machava, Agostinho; Brännäs, Kurt
  8. The effectiveness of nonstandard monetary policy measures: evidence from survey data By Altavilla, Carlo; Giannone, Domenico
  9. Optimal Management of Markets for Bankable Emission PermitsOptimal Management of Markets for Bankable Emission Permits By Jussi Lintunen; Olli-Pekka Kuusela
  10. Collateral Values and Corporate Employment By Nuri Ersahin; Rustom M. Irani
  11. Cash management and payment choices: a simulation model with international comparisons By Arango , Carlos; Bouhdaoui, Yassine; Bounie , David; Eschelbach, Martina; Hernandez , Lola
  12. Effect of interest rate on economic performance: Evidences from Islamic and Non-Islamic Economies By Mushtaq, Saba; Siddiqui, Danish Ahmed
  13. Financial Repression and Laffer Curves By Kanat S. Isakov; Sergey E. Pekarski
  14. Exploiting the monthly data flow in structural forecasting By Giannone, Domenico; Monti, Francesca; Reichlin, Lucrezia
  15. Effects of US quantitative easing on emerging market economies By Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
  16. How false beliefs about exchange rate systems threaten global growth and the existence of the Eurozone By White, William R.
  17. Complementary Currency Systems: Employability and Welfare By Maëlle Della Peruta; Dominique Torre
  18. Fiscal policy in Brazil: from counter-cyclical response to crisis By HOLLAND, Márcio
  19. The new normal for the U.S. economy By Harker, Patrick T.
  20. Technical Appendix to "Macroeconomic effects of public sector unions" By Vasilev, Aleksandar
  21. The Middle Muddle: Conceptualizing and Measuring the Global Middle Class By Arjun Jayadev; Rahul Lahoti; Sanjay Reddy
  22. Total Factor Productivity and the Institutional Possibility Frontier: An Outline of a Link between Two Theoretical Perspectives on Institutions, Culture and Long Run Growth By Ilya Lokshin
  23. Upgrading of Hungarian subsidiaries in machinery and automotive global value chains By Andrea Elteto; Andrea Szalavetz; Gabor Tury; Aniko Magashazi

  1. By: Checo, Ariadne; Pradel, Salome; Ramirez, Francisco A.
    Abstract: Since the beginning of the international financial crisis in major developed economies, central banks of these countries implemented several monetary policy (MP) measures, oriented to stabilize the financial system and mitigate the effects on the real side of the economy. As more data on the recovery of US economy becomes available, the speech of FED authorities is turning to consider the rising of the FED fund rates (FFR), defined as “normalization”. The effects of the US MP normalization are unclear – mainly for economies with low degrees of financial development – since the reversion of a monetary policy to a pre-crisis stance would take place under a US growth scenario. We estimate the impact of the normalization on Central America and the Dominican economies, summarizing the information of nearly 80 variables in a few common factors and considering both effects through real and financial channels. We estimate a factor augmented VAR, to measure the impact of US MP shocks to these economies, using a sign restriction approach in the identification process of such shocks. Then we use measured shocks to map the effects on domestic variables. Our results indicate that this eventuality will affect these economies mostly through its effects on the real side of the economy due to its impact on external demand and the reduced role of exchange rate as a shock absorber, where countries with less flexible exchange rate regimes being more affected. On the financial side, domestic interest rate will rise and net international reserves will fall, as central banks limit volatility in exchange rates.
    Keywords: Transmission of Monetary Policy, Normalization, Interest Rates, Central America
    JEL: E32 E37 E5 E58
    Date: 2015–11
  2. By: D'Amico, Stefania (Federal Reserve Bank of Chicago); King, Thomas B. (Federal Reserve Bank of Chicago)
    Abstract: Forward rate guidance, which has been used with increasing regularity by monetary policymakers, relies on the manipulation of expectations of future short-term interest rates. We identify shocks to these expectations at short and long horizons since the early 1980s and examine their effects on contemporaneous macroeconomic outcomes. Our identification uses sign restrictions on survey forecasts incorporated in a structural VAR model to isolate expected deviations from the monetary policy rule. We find that expectations of future policy easing that materialize over the subsequent four quarters — similar to those generated by credible forward guidance — have immediate and persistent stimulative effects on output, inflation and employment. The effects are larger than those produced by an identical shift in the policy path that is not anticipated. Our results are broadly consistent with the mechanism underlying forward guidance in New Keynesian models, but they suggest that those models overstate the persistence of the inflation response. Further, we find that changes in short-rate expectations farther in the future have weaker macroeconomic effects, the opposite of what most New Keynesian models predict.
    Keywords: Monetary policy; Keynesian models;
    JEL: E12 E5
    Date: 2015–11–10
  3. By: Elena Afanasyeva; Jochen Guntner
    Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Motivated by this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed the partial equilibrium contract in a New Keynesian DSGE model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
    JEL: D53 E44 E52
    Date: 2015–12–08
  4. By: - (Comisión Económica para América Latina y el Caribe (CEPAL) United Nations)
    Abstract: Divergence in macro trends and in monetary policy in advanced economies was a dominant driver of rates and currencies in emerging markets in 2014. Diverging macroeconomic developments were reflected in different monetary policy actions in 2014, with the European Central Bank (ECB) and the Bank of Japan (BOJ) moving in the opposite direction of the U.S. Federal Reserve. The unwinding of the U.S. monetary stimulus, while the ECB and the BOJ step up their monetary stimulus, has underpinned an appreciation by the U.S. dollar, in which most commodities are priced. Latin American markets, which started the year under pressure from fears of the U.S. Federal Reserve tapering off its quantitative easing program and concerns over stability, ended 2014 under pressure from a stronger U.S. dollar. However, there are many signs that a slowdown in LAC financial markets – particularly debt markets, which have been breaking records in debt issuance for the past six years – is under way. The region’s growth prospects look somewhat brighter in 2015 relative to 2014, but a strengthening U.S. dollar, uneven global growth and weakness in commodity prices are skewing the risk toward the downside for the 2015 forecasts across the region.
    Date: 2015–02
  5. By: Nick Buffie
    Abstract: By examining the historical relationship between the unemployment rate and alternative measures of labor market slack, it is determined that today’s labor market has far more slack than is typically associated with an unemployment rate of 5.0 percent. It is therefore unlikely that the economy is at or near full employment.
    Keywords: employment, unemployment, unemployment rate, slack, U-3
    JEL: J E E2 E24
    Date: 2015–12
  6. By: Glick, Reuven (Federal Reserve Bank of San Francisco); Leduc, Sylvain (Federal Reserve Bank of San Francisco)
    Abstract: We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three times that following conventional policy changes prior to the 2007-08 financial crisis.
    JEL: E43 E5 F31
    Date: 2015–11–29
  7. By: Machava, Agostinho (Department of Economics, Umeå University); Brännäs, Kurt (Department of Economics, Umeå University)
    Abstract: While there is a relatively large empirical literature on the link between monetary policy and yield curve for developed economies, studies on emerging and developing economies are very rare. This paper contributes to reducing this gap by studying the effectiveness of monetary policy in Mozambique. Using monthly data it examines the pass-through of changes in the policy rate to the yield curve of treasury bills in the period 2006 - 2015. The main finding is that there is a pass-through from policy rate to treasury bill. However, the transmission from short to long term maturities in the yield curve is weak and slow.
    Keywords: Mozambique; Factor model; Policy rate; Effect; Estimation
    JEL: C32 C51 C58 E43 G20
    Date: 2015–12–07
  8. By: Altavilla, Carlo (European Central Bank); Giannone, Domenico (Federal Reserve Bank of New York)
    Abstract: We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures announced by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using survey data collected at the individual level, we analyze the change in forecasts of Treasury and corporate bond yields around the announcement dates of nonstandard monetary policy measures. We find that professional forecasters expect bond yields to drop significantly for at least one year after the announcement of accommodative policies.
    Keywords: Survey of Professional Forecasters; large-scale asset purchases; quantitative easing; Operation Twist; forward guidance; tapering
    JEL: E58 E65
    Date: 2015–12–01
  9. By: Jussi Lintunen (Natural Resources Institute Finland); Olli-Pekka Kuusela (Natural Resources Institute Finland)
    Abstract: We examine the optimal management of emission permit markets when banking but not borrowing of permits is allowed. The regulator maximizes expected social welfare through an optimal allocation rule in an infinite horizon setting. The policy is second-best as the emission cap is set before the uncertainty about the current state of the economy is resolved. In this setting, the role of banking is to decrease the regulator’s risk as it generates an endogenous price floor in the permit markets. We show that the regulator’s optimal policy adjusts the emissions cap irrespective of the existing number of permits in the bank, with the implication that the regulator neutralizes the effect of the existing bank on future permit prices. We derive the optimality conditions for the second-best emission cap with banking and solve the model analytically in the case of IID shocks. Our results show that the discount factor together with the slopes of the marginal damages and benefits determine the welfare gains from allowing baking of permits. Finally, to address the current state of the EU Emission Trading Scheme (EU ETS) and guide the design of future permit markets, we solve the model numerically with persistent shock process and show that the optimal emission cap is positively correlated with business cycles, meaning that during downturns the regulator should tighten the cap. The expected emissions and permit prices also correlate positively with economic activity
    Keywords: Cap and Trade, Climate Change, Business Cycle, Second Best, Prices vs. Quantities
    JEL: E32 Q54 Q58
    Date: 2015–05
  10. By: Nuri Ersahin; Rustom M. Irani
    Abstract: We examine the impact of real estate collateral values on corporate employment. Our empirical strategy exploits regional variation in local real estate price growth, firm-level data on real estate holdings, as well as establishment-level data on employment and the location of firms' operations from the U.S. Census Bureau. Over the period from 1993 until 2006, we show that a typical U.S. publicly-traded firm increases employment expenditures by $0.10 per $1 increase in collateral. We show this additional hiring is funded through debt issues and the effects are stronger for firms likely to be financially constrained. These firms increase employment at establishments outside of their core industry focus and away from the location of real estate holdings, leading to regional spillover effects. We document how shocks to collateral values influence labor allocation within firms and how these effects show up in the aggregate.
    Keywords: Financial Constraints; Collateral Lending Channel; Employment
    JEL: D22 D24 E44 G31 G32
    Date: 2015–12
  11. By: Arango , Carlos (Bank of Canada); Bouhdaoui, Yassine (Vrije Universiteit Brussel); Bounie , David (Telecom ParisTech, Economics and Social Sciences); Eschelbach, Martina (Deutsche Bundesbank); Hernandez , Lola (De Nederlandsche Bank)
    Abstract: Despite various payment innovations, today, cash is still heavily used to pay for low-value purchases. This paper proposes a simulation model based on two optimal cash management and payment policies in the payments economics literature to explain cash usage. First, cash is preferred to other payment instruments whenever consumers have enough balances at hand. Second, it is optimal for consumers to hold a stock of cash for precautionary reasons. Exploiting survey payment diaries from Canada, France, Germany and the Netherlands, the results of the simulations show that both optimal policies are well suited to understand the high shares of low-value cash payments in Canada, France and Germany. Yet, they do not perform as well in the case of the Netherlands, overestimating the share of low-value cash payments. We discuss how the differences in payment markets across countries may explain the limitations of the two optimal policies.
    Keywords: cash management; payment choices; international comparison
    JEL: C61 E41 E47
    Date: 2015–11–25
  12. By: Mushtaq, Saba; Siddiqui, Danish Ahmed
    Abstract: Saving and investment are most important tools for economic growth and interest rate is the most important determinant of saving and investment according to classical, neo-classical and contemporary economists however in Islam riba or interest is considered forbidden, so the aim of this study is to know the effect of religious factor on financial decision of country’s population and its impact on economic growth. As interest rate is forbidden in Islam so country with majority Muslim population should not consider interest rate while saving and investing. We used Panel least square and fixed effect model separately for 57 non-Islamic and 17 Islamic countries from 2005 to 2013. Results suggested that in Islamic countries, people don’t care about interest rate while saving however growth in GDP per capita income seems to effect positively to the saving decision. However for non-Islamic economies GDP per capita growth as well as interest rate both has positive impact on saving. However in the case of investment, interest rate affects negatively while growth in GDP per capita affects positively for both Islamic and non-Islamic countries. Hence there seems to be a need of different policies for Muslim countries in order to increase economic growth as religious factor has effects on financial decisions.
    Keywords: Interest rate Economic performance Islamic Panel data
    JEL: E43 Z12
    Date: 2015–12–09
  13. By: Kanat S. Isakov (National Research University Higher School of Economics); Sergey E. Pekarski (National Research University Higher School of Economics)
    Abstract: This paper uses a simple calibrated general equilibrium model to evaluate the revenue from financial repression and its impact on Laffer curves for consumption, capital and labor taxes. By imposing a requirement for households to hold public debt with a below-market rate of return the government distorts optimal household allocation and raises extra revenues. Tighter financial repression shifts Laffer curves for labor and consumption down, but increases revenue from capital income taxation. Total budget revenue increases, which allow financing more public goods and can be welfare-improving
    Keywords: financial repression; tax distortions; Laffer curve.
    JEL: E62 G28 H21 H24 H31 H63
    Date: 2015
  14. By: Giannone, Domenico (Federal Reserve Bank of New York); Monti, Francesca (Bank of England); Reichlin, Lucrezia (London Business School)
    Abstract: This paper develops a framework that allows us to combine the tools provided by structural models for economic interpretation and policy analysis with those of reduced-form models designed for nowcasting. We show how to map a quarterly dynamic stochastic general equilibrium (DSGE) model into a higher frequency (monthly) version that maintains the same economic restrictions. Moreover, we show how to augment the monthly DSGE with auxiliary data that can enhance the analysis and the predictive accuracy in now-casting and forecasting. Our empirical results show that both the monthly version of the DSGE and the auxiliary variables offer help in real time for identifying the drivers of the dynamics of the economy.
    Keywords: DSGE models; forecasting; temporal aggregation; mixed-frequency data; large data sets
    JEL: C33 C53 E30
    Date: 2015–12–01
  15. By: Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
    Abstract: We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five” countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets.
    Keywords: US Quantitative Easing, Spillovers, Emerging Market Economies, Bayesian VAR, Panel VAR, Non-recursive Identification, Fragile Five Countries
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2015–12
  16. By: White, William R. (OECD)
    Abstract: The current belief system that says “all will be well” if domestic price stability can be maintained is fundamentally flawed. If this can be achieved only through monetary, credit and debt expansion, the end result will be an increased risk of systemic crisis. Moreover, false beliefs about how exchange rate systems function, at both the global level and within the Eurozone, imply international “spillover” effects that increase both the likelihood and the seriousness of such crises. Gross international capital flows pose as many (perhaps more) dangers than do net flows (ie current account imbalances). And false beliefs about exchange rate regimes not only compromise crisis prevention, but they also hinder crisis management and resolution. At the global level, we still lack the instruments to do either effectively should current problems worsen. In the Eurozone, the crisis which began in 2010 has not been well managed and remains fundamentally unresolved.
    JEL: B52 E5 F42
    Date: 2015–09–01
  17. By: Maëlle Della Peruta (University of Nice Sophia Antipolis, France; GREDEG CNRS); Dominique Torre (University of Nice Sophia Antipolis, France; GREDEG CNRS)
    Abstract: Complementary currency systems have developed around the world. Some are associated with local communities and aimed at developing local economic activity, social links or employability among the unemployed people. This paper uses a theoretical model to provides answers to practical questions associated with the implementation of complementary currencies aimed at eliminating the "scar effect" and facilitating recruitment in the formal sector. What are the condition for a successful complementary currency? Should credit be managed in the same way depending whether welfare or employment the chosen objective? The results point to the role of confidence in the adoption of a complementary currency, and also interest in a controlled level of mutual credit if employment is the main objective of complementary currency implementation.
    Keywords: Complementary currencies, scar effect, employability, mutual credit
    JEL: A13 D61 E42
    Date: 2015–12
  18. By: HOLLAND, Márcio
    Abstract: The main goal of this article is to identify the dynamic effects of fiscal policy on output in Brazil from 1997 to 2014, and, more specifically, to estimate those effects when the output falls below its potential level. To do so, we estimate VAR (vector autoregressive) models to generate impulse-response functions and causality/endogeneity tests. Our most remarkable results indicate the following channel of economic policy in Brazil: to foster output, government spending increases causing increases in both tax rates and revenue and the short-term interest rate. A fiscal stimulus via spending seems efficient for economic performance as well as monetary policy; however, the latter operates pro-cyclically in the way we defined here, while the former is predominantly countercyclical. As the monetary shock had a negative effect on GDP growth and GDP growth responded positively to the fiscal shock, it seems that the economic policy has given poise to growth with one hand and taken it with the other one. The monetary policy is only reacting to the fiscal stimuli. We were not able to find any statistically significant response of the output to tax changes, but vice versa seems work in the Brazilian case.
    Date: 2015–11–27
  19. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: President Patrick T. Harker gives opening remarks at the Bank’s 2015 Policy Forum: The New Normal for the U.S. Economy. He highlights how technology/innovation, social issues, and monetary policy all have important implications for policy over the long term. He also shares his own policy perspectives.
    Keywords: Technology; Innovation; Economy;
    Date: 2015–12–04
  20. By: Vasilev, Aleksandar
    Abstract: N/A
    Keywords: N/A
    JEL: C68
    Date: 2013–06
  21. By: Arjun Jayadev (University of Massachusetts at Boston); Rahul Lahoti (Georg-August-University Göttingen); Sanjay Reddy (The New School for Social Research and Initiative for Policy Dialogue)
    Abstract: Interest in the emergence of a global middle class has resulted in a number of attempts to identify and enumerate who belongs to it . Current research provides wildly different estimates about the size and evolution of the global middle class because of a lack of consensus on appropriate identification criteria for a person to be deemed to be middle class. We identify three competing and often conflated understandings in the literature on the subject. We further argue that for at least two of these understandings, the literature has been using inappropriate thresholds for identification. Using data from the Global Consumption and Income Project, we provide estimates of the size, composition and evolution of the global middle class for three competing understandings and contrast these to existing estimates.
    JEL: D30 D31 D60 D63 E21 O50 O10
    Date: 2015–12–08
  22. By: Ilya Lokshin (National Research University Higher School of Economics)
    Abstract: The paper proposes an outline for the link between two theoretical perspectives on the prerequisites of high institutional quality and long run growth. One framework is based on the tradeoff between disorder and dictatorship and introduces the notion of the institutional possibility frontier, another perspective focuses upon the role of total factor productivity as a parameter underlying long run growth. The connection between these frameworks is proposed and elaborated. The paper sheds some light on the nature of total factor productivity and designates the directions for further research on fundamental conditions of high-quality development
    Keywords: total factor productivity, institutional possibility frontier, social capital
    JEL: E02 Y90
    Date: 2015
  23. By: Andrea Elteto (Institute of World Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Andrea Szalavetz (Institute of World Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Gabor Tury (Institute of World Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Aniko Magashazi (Corvinus University of Budapest, International Relations, Multidisciplinary Doctoral School)
    Abstract: Global networks shape international production and trade. The main question of our paper is how Hungarian companies can improve their positions within these global value chains. The production and export of automotive and machinery industry are dominated by foreign multinational enterprises, therefore these sectors were chosen as examples. Research is based on interviews that explore local manufacturing subsidiaries' product, process and functional upgrading experience. Our findings show that there are differences among the firms in terms of extent of upgrading. This depends on one hand, on the owner’s global strategy and on the type of final products. On the other hand local capabilities are of crucial importance among the factors that influence the volume of intangible transfers. Furthermore, our interviews suggested that upgrading is not a unidirectional process: previously gained mandates can also be lost. Economic policy should support the business development and entrepreneurial learning and provide adequate conditions for suppliers and subsidiaries of leading multinational enterprises.
    Keywords: global value chains, machinery industry, automotive industry, Hungary
    JEL: D22 D24 E23 F16 F23 L6 L62 O52
    Date: 2015–11

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