nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒01‒29
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Factors generating and transmitting the US financial crisis By Trevor Evans
  2. Liquidity, Government Bonds and Sovereign Debt Crises By Francesco Molteni
  3. Policy alternatives for the relationship between ECB monetary and financial policies and new member states By Michal Jurek; Pawel Marszalek
  4. Taming macroeconomic instability : monetary and macro prudential policy interactions in an agent-based model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  5. Inflation expectations and monetary policy under disagreements By Yoshiyuki Nakazono
  6. Policy and macro signals as inputs to inflation expectation formation By Hubert, Paul; Maule, Becky
  7. Monetary policy and indeterminacy after the 2001 slump By Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
  8. Fiscal Consolidation, Fiscal Policy Transmission, and Current Account Dynamics in South Africa By Christine S. Makanza and J. Paul Dunne
  9. Synthesisof sectoral studies of the currency, energy, and residential property markets By Trevor Evans; Hansjorg Herr
  10. A Note on the Cyclical Behavior of Sectoral Employment in the U.S. By Hiranya Nath
  11. Financialisation and the financial and economic crises: Theoretical framework and empirical analysis for 15 countries. By Nina Dodig; Eckhard Hein; Daniel Detzer
  12. Survey on economic policies during the crisis By Felipe Serrano; Amaia Altuzarra
  13. Excess Finance and Growth: Don't Lose Sight of Expansions ! By Thomas Grjebine; Fabien Tripier
  14. What drives the global official/policy interest rate? By Ratti, Ronald; Vespignani, Joaquin
  15. Shocking language: understanding the macroeconomic effects of central bank communication By Stephen Hansen; Michael McMahon
  16. The macroeconomic effects of oil price shocks on ASEAN-5 economies By Raghavan, Mala
  17. Global Liquidity and Monetary Policy Autonomy By Stefan Angrick
  18. Understanding the deviations of the Taylor Rule: a new methodology with an application to Australia By Hudson, Kerry; Vespignani, Joaquin
  19. Asymmetric Inflation Expectations, Downward Rigidity of Wages and Asymmetric Business Cycles By David Rezza Baqaee
  20. Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation By Van Zandweghe, Willem; Hirose, Yasuo; Kurozumi, Takushi
  21. Investing in Health: A Macroeconomic Exploration of Short-Run and Long-Run Trade-Offs By Junying Zhao; William Scarth; Jeremiah Hurley
  22. Persistent Liquidity By Giulia Ghiani; Max Gillman; Michal Kejak
  23. Optimal time-consistent government debt maturity By Davide Debortoli; Ricardo Nunes; Pierre Yared
  24. Downward Nominal Wage Rigidity in the United States during and after the Great Recession By Fallick, Bruce C.; Lettau, Michael; Wascher, William L.
  25. Firm survival, uncertainty and financial frictions: Is there a financial uncertainty accelerator? By Joseph P. Byrne; Marina-Eliza Spaliara; Serafeim Tsoukas
  26. A new monthly indicator of global real economic activity By Ravazzolo, Francesco; Vespignani, Joaquin
  27. DSGE model-based forecasting of modelled and nonmodelled inflation variables in South Africa By Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
  28. How Did Pre-Fed Banking Panics End? By Tallman, Ellis W.; Gorton, Gary
  29. Private Wealth in a Developing Country: A South African Perspective on Piketty By Anna Orthofer
  30. Forecasting South African Macroeconomic Variables with a Markov-Switching Small Open-Economy Dynamic Stochastic General Equilibrium Model By Mehmet Balcilar; Rangan Gupta; Kevin Kotze
  31. Should we still use the concept of potential growth ? By Catherine Mathieu; Henri Sterdyniak
  32. "Colonial Virginia's Paper Money Regime, 1755-1774: Value Decomposition and Performance" By Farley Grubb
  33. A Bayesian VAR benchmark for COMPASS By Domit, Sílvia; Monti, Francesca; Sokol, Andrej
  34. Case study paper relating financialisation of the built environment to changing urban politics, social geographies, material flows and environmental improvement/degradation in Ankara By Aylin Topal; Ozlem Celik; Galip Yalman
  35. Financial deregulation and the 2007-08 US financial crisis By Özgür Orhangazi
  36. Exploring International Differences in Inflation Dynamics By Yamin Ahmad; Olena Mykhaylova
  37. Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy By Eric M Leeper; Campbell Leith; Ding Liu
  38. Models, Inattention and Expectation Updates By Raffaella Giacomini; Vasiliki Skreta; Javier Turen
  39. Transforming Federal and State Retirement Tax Deductions By Teresa Ghilarducci; Ismael Cid-Martinez
  40. Equilibrium Price Dispersion and the Border Effect By Stevens, Luminita; Chahrour, Ryan
  41. Economic Volatility and Sovereign Yields’ Determinants: a Time-Varying Approach By António Afonso; João Tovar Jalles
  42. The Economic Drivers of Differences in House Price Inflation Rates across MSAs By Fuess, Roland; Zietz, Joachim
  43. Distributional Effects of Social Security Reforms: the Case of France By Raquel Fonseca; Thepthida Sopraseuth
  44. Investment in the Brazilian manufacturing industry and the real exchange rate: An investigation using sectoral-level panel data By Carolina Troncoso Baltar; Celio Hiratuka; Gilberto Tadeu Lima
  45. Financial Intermediation in Economies with Investment Complementarities By José Jorge; Joana Rocha
  46. Contagion and banking crisis — internatonal evidence for 2007-2009 By Dungey, Mardi; Gajurel, Dinesh
  47. Trade, finance and endogenous firm heterogeneity By Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
  48. Oil price volatility and stock returns in the G7 economies By Elena María Díaz; Juan Carlos Molero; Fernando Pérez de Gracia
  49. Aspects of Fiscal Policy in Turkey By Ebru Voyvoda; Erinc Yeldan
  50. The strong porter hypothesis in an endogenous growth model with satisficing managers By Dominique Bianco; Evens Salies
  51. Elastic attention, risk sharing, and international comovements By Nie, Jun; Luo, Yulei; Li, Wei
  52. Macroprudential policy: objectives, instruments and indicators By Javier Mencía; Jesús Saurina
  53. A Estrutura Patrimonial do Sistema Bancário no Brasil no Período Recente (I-2007/I-2014) By Giuliano Contento de Oliveira
  54. Foreign Shocks By Drago Bergholt
  55. Earnings Experience and its Impact on 401(k) Contribution Behavior: The Roles of Earnings Shocks, Spousal Behavior and Pension Plan Details By Teresa Ghilarducci; Joelle Saad-Lessler; Gayle Reznik
  56. How Exporters Grow By Fitzgerald, Doireann; Haller, Stephanie; Yedid-Levi, Yaniv
  57. Driver of choice? the cost of financial products for unbanked consumers By Hayashi, Fumiko; Hanson, Josh; Maniff, Jesse Leigh
  58. Liquidity Traps, Capital Flows By Sushant ACHARYA; Julien BENGUI
  59. What causes housing bubbles? A theoretical and empirical inquiry By Heike Joebges; Sebastian Dullien; Alejandro Márquez-Velázquez
  60. Politically driven cycles in fiscal policy: In depth analysis of the functional components of government expenditures By Vítor Castro; Rodrigo Martins
  61. Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho By Mamello Nchake, Lawrence Edwards and Asha Sundaram
  62. Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results By Maik Heinemann
  63. Effectiveness of Loan-To-Value Ratio Policy and Its Transmission Mechanism ¨C Empirical Evidence from Hong Kong By Eric Wong; Kelvin Ho; Andrew Tsang
  64. Understanding Inflation as a Joint Monetary-Fiscal Phenomenon By Campbell Leith; Eric Leeper
  65. Social Insurance, Private Health Insurance and Individual Welfare By Kai Zhao
  66. On the uniform limit condition for discrete-time infinite horizon problems By Brinkhuis, J.
  67. Entry and exit in recent US business cycles By Mikel Casares
  68. Analysis of the economic behaviour of financial organisations By Janusz J. Tomidajewicz
  69. Residential construction lags across the US and their implications for housing supply By Hyunseung Oh; Chamna Yoon
  70. Country Size and Corporate Tax Rate : Rationale and Empirics By Az駑ar, C駘ine; Desbordes, Rodolphe; Wooton, Ian
  71. The varying coefficient Bayesian panel VAR model By Wieladek, Tomasz
  72. The Impact of Nurse Turnover on Quality of Care and Mortality in Nursing Homes: Evidence from the Great Recession By Yaa Akosa Antwi; John R. Bowblis
  73. Oil-Price Density Forecasts of U.S. GDP By Francesco Ravazzolo; Philip Rothman
  74. Wages and Informality in Developing Countries By Costas Meghir; Renata Narita; Jean-Marc Robin
  75. The Asian Infrastructure Investment Bank : Multilateralism on the Silk Road By Mike Callaghan; Paul Hubbard

  1. By: Trevor Evans (Berlin School of Economics and Law, Institute for International Political Economy)
    Abstract: This paper presents an overview of eight studies which examine they key factors which are said to have either generated or transmitted the finanacial crisis in the United States which began in August 2007 and deepened dramatically in September 2008
    Keywords: US economy, financiance and crisis, global imbalances, financial deregulation, income distribution
    JEL: E24 E32 E42 E44 E61 E63 F32
    Date: 2014–08–12
  2. By: Francesco Molteni
    Abstract: This paper analyses the European financial crisis through the lens of sovereign bond liquidity. Using novel data we show that government securities are the prime collateral in the European repo market, which is becoming an essential source of funding for the banking system in the Euro area. We document that repo haircuts on peripheral government bonds sharply increased during the crisis, reducing their liquidity and amplifying the raise in the yields of these securities. We study the systemic impact of a liquidity shock on the business cycle and asset prices through a dynamic stochastic general equilibrium model with liquidity frictions. The model predicts a drop in economic activity, inflation and value of illiquid government bonds. We show that an unconventional policy which consists of purchasing illiquid bonds by issuing liquid bonds can alleviate the contractionary effect of liquidity shock. A Bayesian structural vector autoregressive model for the Irish economy confirms empirically the negative impact of a rise in haircuts on the value of government bonds.
    Keywords: repo;haircuts;government bonds;liquidity shock;quantitative easing
    JEL: E44 E58 G12
    Date: 2015–12
  3. By: Michal Jurek (Department of Money and Banking, Poznan University of Economics); Pawel Marszalek (Department of Money and Banking, Poznan University of Economics)
    Abstract: The global financial crisis has cast doubt on existing within the mainstream economics consensus on monetary policy. So called ‘New Consensus Monetary Policy’ appeared to lack many important operational, political and institutional issues, especially with regard to consistency of the monetary-fiscal policy mix within the eurozone, as well as with reference to policy mix in the individual member countries. When crisis emerged, problems with monetary- fiscal coordination turned to be more complicated. The crisis has proved also inefficiency of the “one size fits all” monetary policy, implemented by the ECB. The divergences of economic performance, business cycles, and financial development – all attending the financialisation process – have become eye striking among the EMU members. Extremely low inflation rates have brought new challenges into focus resulting i.a. from the zero bound on nominal short-term interest rates. Taking this into consideration, the aim of this paper is to investigate the ways in which the monetary and financial policies of the ECB can be conducted in a low interest rates environment. Undertaken analysis allows understanding the strengths and weaknesses of these policies. It also creates a background for formulating alternative policy proposals aimed at dealing with divergence and disparities between EU member countries
    Keywords: central banking, financial system, monetary policy, policy coordination, banking union, euro zone
    JEL: E42 E58 E63
    Date: 2015–09–01
  4. By: Lilit Popoyan (Institute of Economics, (LEM)); Mauro Napoletano (OFCE Sciences Po and Skema Businnes School); Andrea Roventini (Institute of Economics, (LEM))
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macroprudential regulations and their possible interactions with dierent monetary policy rules.The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple- mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplifiedregulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro prudential regulation
    Keywords: Macro-prudential policy, Basel III regulation, financial stability, monetary policy, agent-based computational economics.
    JEL: C63 E52 E6 G01 G21 G28
    Date: 2015–12
  5. By: Yoshiyuki Nakazono (Yokohama City University)
    Abstract: Using a wide range of survey data on Japanese inflation outlook, this study examines two types of disagreements regarding inflation expectations and accordingly, presents monetary policy implications. The analysis reveals three key findings. First, information rigidities are determinants of cross-sectional disagreement among not only households but also experts. Second, survey data indicate dissonance regarding the long-run forecasts of inflation rates between the central bank and economic entities, despite the adoption of a 2% inflation target in January 2013 and the introduction of an unconventional monetary policy (QQE) in April 2013. While short- and mid-term inflation forecasts by households are generally close to the 2% target rate, long-term forecasts fail to converge to the target level. Finally, under the two types of disagreements, the private sector's perception about a monetary policy stance does not significantly differ before and after the introduction of the inflation target and QQE. These findings suggest that the policy regime of the monetary policy dose not abruptly change on basis of perception; that is, there is no upheaval in the agentsf perception about a monetary policy stance enough to induce a regime change.
    Keywords: disagreement; forecast data; inflation expectations; inflation target; information rigidities; unconventional monetary policy
    JEL: E31 E44 E52 E58
    Date: 2016–01–14
  6. By: Hubert, Paul (OFCE — Sciences Po.); Maule, Becky (Bank of England)
    Abstract: How do private agents interpret central bank actions and communication? To what extent do the effects of monetary shocks depend on the information disclosed by the central bank? This paper investigates the effect of monetary shocks and shocks to the Bank of England’s inflation and output projections on the term structure of UK private inflation expectations, to shed light on private agents’ interpretation of central bank signals about policy and the macroeconomic outlook. We proceed in three steps. First, we correct our dependent variables — market-based inflation expectation measures — for potential risk, liquidity and inflation risk premia. Second, we extract exogenous shocks following Romer and Romer (2004)’s identification approach. Third, we estimate the linear and interacted effects of these shocks in an empirical framework derived from the information frictions literature. We find that private inflation expectations respond negatively to contractionary monetary policy shocks, consistent with the usual transmission mechanism. In contrast, we find that inflation expectations respond positively to positive central bank inflation or output projection shocks, suggesting private agents put more weight on the signal that they convey about future economic developments than about the policy outlook. However, when shocks to central bank inflation projections are interacted with shocks to output projections of the same sign, they have no effect on inflation expectations, suggesting that private agents understand the functioning of the central bank reaction function and put more weight on the policy signal when there is no trade-off. We also find that the effects of contractionary monetary shocks are amplified when they are accompanied by positive shocks to central bank inflation projections. The co-ordination of policy decisions and macroeconomic projections thus appears important for managing inflation expectations.
    Keywords: Monetary policy; information processing; signal extraction; market-based inflation expectations; central bank projections; real-time forecasts
    JEL: E52 E58
    Date: 2016–01–22
  7. By: Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical inflation series in the estimation. When using CPI or PCE, we find some support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. Instead, when measuring inflation with core PCE, monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator. We re-formulate the artificial economy as a factor model where the theory's concept of inflation is the common factor to the three empirical inflation series. We find that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy.
    Keywords: Great Deviation, Indeterminacy, Taylor Rules.
    JEL: E32 E52 E58
    Date: 2016–01
  8. By: Christine S. Makanza and J. Paul Dunne
    Abstract: The debate on global current account imbalances continues to develop, with growing interest in the macroeconomic instability and widening current account de…cits faced by emerging markets. Literature establishes that the current account behaves di¤erently depending on macroeconomic circumstances in countries, so approaches to managing external imbalances should be country tailored. Despite this realisation, there is a lack of investigation into drivers of the current account and the impact of macroeconomic policy on current account dynamics in emerging markets. To address this, the study estimates an SVAR model to analyse the e¤ect of …scal shocks on the current account. This helps to understand how …scal shocks shape current account developments, and establishes the usefulness of …scal consolidation in managing current account de…cits by determining whether the twin de…cits approach to managing the external balance holds in middle income countries. The study goes further to analyse the channels through which …scal shocks are transmitted to the current account to understand how current account management policies should be formulated. The study contributes to the literature by providing a case study of South Africa, an emerging economy characterised by large current account de…cits, macroeconomic volatility, a well developed …nancial sector, and a dataset which has not been exploited to understand the external balance. A particularly interesting …nding is that expansionary …scal shocks improve the current account through household savings and public investment , which is a departure from the twin de…cits hypothesis.
    Keywords: Current Account, Fiscal Shocks, Twin Deficit, Twin Divergence, South Afica
    JEL: E62 F32 F41
    Date: 2015
  9. By: Trevor Evans (Institute for International Political Economy, Berlin School of Economics and Law); Hansjorg Herr (Institute for International Political Economy, Berlin School of Economics and Law)
    Abstract: The markets for foreign exchange, energy and residential housing have all been strongly affected by the deregulation and expamsiomm of the financial sector. As a result they have begun to follow the logic of asset markets. This was especially marked in the case of the foreign exchange market from the 1970s, but has also been the case to some extent for residential housing markets since the mid-1990s and more strongly for energy markets since the early 2000s. Deregulation has led to far greater price volatility and the rise of unsustainable price and credit bubbles which, when they burst, can pose a significant threat to financial and economic stability. For this reason, these markets should be subjected to new and appropriate forms of regulation.
    Keywords: Asset bubbles, financial crises, foreign exchange rates, energy prices, house prices
    JEL: E32 E44 E65 G18 G21 G28
    Date: 2015–09–01
  10. By: Hiranya Nath (Department of Economics and International Business, Sam Houston State University)
    Abstract: Using data for 14 major sectors of the U.S. private economy and the government from 1958 to 2014, this note examines the cyclical behavior of sectoral employment. In particular, it investigates if relative volatility and comovement of the cyclical component of sectoral employment with real GDP have changed over time. The cyclical components are extracted using the Hodrick-Prescott (H-P) filter and changes in cyclical properties are detected using rolling standard deviations and rolling correlations. The analysis suggests that these properties have changed substantially for a number of service sectors since the early 1980s. In particular, wholesale and retail trade, transportation and utility, information, financial activities, and professional and business services have experienced significant increases in relative volatility. Furthermore, while the positive correlation between the cyclical components of employment and real GDP has become stronger for wholesale trade, transportation and utility, financial activities, and professional and business services, it has become weaker for information services, leisure and hospitality, and other services. Finally, education and health sector employment has switched from being procyclical to countercyclical. Recognizing these changes is important and useful for future research on business cycle behavior of the labor market in the U.S. and for policy formulation.
    Keywords: Cyclical behavior, sectoral employment, rolling standard deviation, rolling correlation, relative volatility, comovement
    JEL: E32 E24
    Date: 2016–01
  11. By: Nina Dodig (Berlin School of Economics and Law and Institute for International Political Economy); Eckhard Hein (Berlin School of Economics and Law and Institute for International Political Economy); Daniel Detzer (Berlin School of Economics and Law and Institute for International Political Economy)
    Abstract: This paper analyses the long-run effects of financialisation and of the recent financial and economic crises for 15 countries. In order to provide a theoretical framework, we first outline three types of regimes under the conditions of financialisation, namely a debt-led private demand boom, an export-led mercantilist, and a domestic demand-led regime. We then take a look at the sectoral financial balances of the main macroeconomic sectors and at the growth contributions of the demand aggregates for each of the 15 countries, focusing in particular on the trade cycle before the crises. This enables us to cluster these countries according to the typology of regimes and describe the development dynamics among various groups, which were complementary and often mutually reinforcing, in the years leading up to the crises. Subsequently, we focus on the period following the outbreak of the crises and, by considering transmission mechanisms and main obstacles to recovery, analyse how countries in each of these clusters were affected. Finally, we focus on the regime shifts which have taken place in the course of the crises and we discuss the implications of these recent developments for the world economy.
    Keywords: finance-dominated capitalism, financialisation, financial and economic crises, trade cycle, financial balances, distribution of income, current account imbalances
    JEL: D31 D33 E44 E63 E65 F40 F43 G01 H12
    Date: 2015–07–01
  12. By: Felipe Serrano (Department of Applied Economics V, University of the Basque Country UPV/EHU); Amaia Altuzarra (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: The Global Financial Crisis has meant for developed countries to return to an economic situation similar to that experienced during the Great Recession. At the root of the crisis, again, is the financial system. Financial innovation, combined with stringent regulatory failures and with an overly loose monetary policy, allowed to expand private credit disproportionately, fuelling a speculative bubble that, when it burst, generated a demand shock that eventually turn a financial crisis into an economic crisis with lasting consequences. This work attempts to examine the economic policies implemented during the crisis. We focus exclusively on demand policies, with special attention to those implemented in the first phase of the crisis. The economic policy implemented to overcome the crisis has passed through different stages. In the first stage, the strategy was a combination of expansionary monetary and fiscal policies. In the second stage, the fiscal stimuli begin to be withdrawn, while an aggressive monetary policy to stimulate private credit through expanding the money supply is maintained. The third stage is scheduled to start in late 2014. This third phase would be characterized by the end of demand policies and the recovery of supply policies or structural adjustment policies, especially for the case of emerging economies as well as economies of southern Eurozone.
    Keywords: fiscal policy, monetary policy, Eurozone, emerging countries, developed countries, financial crisis
    JEL: E02 E52 E58 E62
    Date: 2015–04–01
  13. By: Thomas Grjebine; Fabien Tripier
    Abstract: Accompanying the great recession, a recent empirical literature casts doubt on the existence of a positive relationship between economic and financial growth pointing out the economic costs of excessive financial growth. We show however that if one considers the complete growth cycle, that is by including expansions into a growth cycle accounting procedure, the elasticity between financial and economic growth rates is positive for most financial series, even if high financial growth makes recessions more severe. This elasticity should be however adjusted downward, and may even turn negative, if one considers the persistent effects of financial growth on the expansion of the subsequent cycle. This effect can explain the pattern of economic growth observed during and after financial bubbles.
    Keywords: Growth;Business Cycles;Finance;Financial Cycles;Bubbles
    JEL: E32 E44
    Date: 2015–12
  14. By: Ratti, Ronald (School of Business, University of Western Sydney); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of official/policy interest rate. We find that 62% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (21%), oil prices (18%), global output (15%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output and prices and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVAR
    JEL: E44 E50 Q43
    Date: 2015
  15. By: Stephen Hansen; Michael McMahon
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC have effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: Monetary policy, communication, Vector Autoregression.
    JEL: E52 E58
    Date: 2016–01
  16. By: Raghavan, Mala (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: ASEAN-5’s continued economic growth with high oil and trade intensities means it is a fast growing region with a significant presence in the global energy market. This paper identifies three main drivers of oil price shocks - oil-supply, globalactivity and oil-specific demand shocks for the period 2000-2013. Subsequently, it assesses the effects of the identified oil shocks on the ASEAN-5’s macroeconomic variables and examines the responses of monetary policy. Since the recent shocks are largely demand driven, the impulse responses and historical decomposition for the ASEAN-5 highlight that the effects on inflation are accentuated while the effects on economic growth are less disruptive. The exchange rate responses are mostly positive while the effects on trade are positive for Malaysia, a net oil exporter and are moderately negative for the oil importers. Consequently the ASEAN-5’s central banks could tighten their monetary policy in response to higher inflation without fear of weakening their economies. The empirical results highlight that for monetary policy responses to be more supportive of growth, policy makers in these economies should examine the underlying causes of the future oil shocks.
    Keywords: Macroeconomics, Oil prices, Emerging Asia, Monetary Policy
    JEL: C32 E51 F32 F43 F41 E52
    Date: 2015–10–19
  17. By: Stefan Angrick
    Abstract: This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.
    Keywords: central banking, balance sheets, monetary policy, exchange rates, policy autonomy
    JEL: E51 E58 F41
    Date: 2015
  18. By: Hudson, Kerry (Tasmanian School of Business & Economics, University of Tasmania); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia‘s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world‘s largest economy.
    Keywords: Taylor Rule, Monetary Policy, Small Open Economy
    JEL: E40 E52 E50
    Date: 2015
  19. By: David Rezza Baqaee (Department of Economics, London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Household expectations of the in ation rate are much more sensitive to inflation than to disinflation. To the extent that workers have bargaining power in wage determination, this asymmetry in their beliefs can make wages respond quickly to inflationary forces but sluggishly to deflationary ones. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation in ways consistent with the data. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.
    Date: 2015–12
  20. By: Van Zandweghe, Willem (Federal Reserve Bank of Kansas City); Hirose, Yasuo; Kurozumi, Takushi
    Abstract: What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables suffices for explaining the shift.
    Keywords: Equilibrium indeterminacy; Monetary policy; Inflation
    JEL: C11 E31 E52
    Date: 2015–12–01
  21. By: Junying Zhao; William Scarth; Jeremiah Hurley
    Abstract: This paper aims to unravel the competing effects of the health investment. It explores, both analytically and numerically, the equilibrium shift and transitional dynamics after a one-time policy of health investment. We find that such a policy improves health status in the long run, but harms economic growth in both short and long term. The relative sizes of these competing effects depend on the specific health parameters. Within the plausible range for the value of health relative to consumption, households gain welfare in the long run as long as the eectiveness of labor in health production is large. The expanded health sector policy makes households worse off only if labor is rather unproductive in producing health and households value health relatively little. The findings challenge the policy recommendations of the World Bank (1993) and World Health Organization (2001) in that good health increases neither the productivity of workers nor the economic growth rate. It is hoped that the relative simplicity of our model, compared to the existing theoretical literature, can help close the gap between formal academic work on this topic and actual debates among policy makers in both developed and developing countries.
    Keywords: health capital, health investment, endogenous growth, dynamic system, transitional dynamics
    JEL: E2 E6 O4 I1
    Date: 2015–12
  22. By: Giulia Ghiani (Politecnico di Milano); Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak (CERGE-EI Prague)
    Abstract: Using US post-war data we …find evidence of cointegration between the short term interest rate, inflation, unemployment and money supply growth. Rolling trace tests add robustness by showing lack of cointegration when money or one of the other variables are omitted. Signi…cant non-linear dynamics are found with three endogenous Markov-switching regimes, interpreted as contractions, expansions, and "unconventional" periods. We interpret the results in terms of a persistent liquidity effect with distinct dynamics over time as regimes shift across normal business cycle fluctuations and rare events.
    Keywords: Liquidity effect, money supply, inflation, cointegration, Markov-Switching VECM.
    JEL: C32 E40 E52
    Date: 2016–01
  23. By: Davide Debortoli; Ricardo Nunes; Pierre Yared
    Abstract: This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.
    Keywords: Public debt, optimal taxation, fiscal policy
    JEL: H63 H21 E62
    Date: 2016–01
  24. By: Fallick, Bruce C. (Federal Reserve Bank of Cleveland); Lettau, Michael (Bureau of Labor Statistics); Wascher, William L. (Federal Reserve Board of Governors)
    Abstract: Rigidity in wages has long been thought to impede the functioning of labor markets. One recent strand of the research on wage flexibility in the United States and elsewhere has focused on the possibility of downward nominal wage rigidity and what implications such rigidity might have for the macroeconomy at low levels of inflation. The Great Recession of 2008-09, during which the unemployment rate topped 10 percent and price deflation was at times seen as a distinct possibility, along with the subsequent slow recovery and persistently low inflation, has added to the relevance of this line of inquiry. In this paper, we use establishment-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics to investigate the extent to which downward nominal wage rigidity is present in U.S. labor markets. We use several distinct methods proposed in the literature to test for downward nominal wage rigidity, and to assess whether such rigidity is more severe at low rates of inflation and in the presence of negative economic shocks than in more normal economic times. Like earlier studies, we find evidence of a significant amount of downward nominal wage rigidity in the United States. We find no evidence that the high degree of labor market distress during the Great Recession reduced the amount of downward nominal wage rigidity and some evidence that operative rigidity may have increased during that period.
    JEL: E24 J3
    Date: 2016–01–08
  25. By: Joseph P. Byrne; Marina-Eliza Spaliara; Serafeim Tsoukas
    Abstract: Using a large panel of unquoted UK firms over the period 2000-09, we examine the impact of firm-specific uncertainty on corporate failures. In this context we also distinguish between firms which are likely to be more or less dependent on bank finance as well as public and non-public companies. Our results document a significant effect of uncertainty on firm survival. This link is found to be more potent during the recent financial crisis compared with tranquil periods. We also uncover significant firm-level heterogeneity since the survival chances of bank-dependent and non-public firms are most affected by changes in uncertainty, especially during the recent global financial crisis.
    JEL: E44 F32 F34 G32
    Date: 2015–02
  26. By: Ravazzolo, Francesco (Norges Bank and BI Norwegian Business School); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: In modelling macroeconomic time series, often a monthly indicator of global real economic activity is used. We propose a new indicator, named World steel production, and compare it to other existing indicators, precisely the Kilian’s index of global real economic activity and the index of OECD World industrial production. We develop an econometric approach based on desirable econometric properties in relation to the quarterly measure of World or global gross domestic product to evaluate and to choose across different alternatives. The method is designed to evaluate short-term, long-term and predictability properties of the indicators. World steel production is proven to be the best monthly indicator of global economic activity in terms of our econometric properties. Kilian’s index of global real economic activity also accurately predicts World GDP growth rates. When extending the analysis to an out-ofsample exercise, both Kilian’s index of global real economic activity and the World steel production produce accurate forecasts for World GDP, confirming evidence provided by the econometric properties. Specifically, a forecast combination of the three indices produces statistically significant gains up to 40% at nowcast and more than 10% at longer horizons relative to an autoregressive benchmark.
    Keywords: Global real economic activity, World steel production, Forecasting
    JEL: E1 E3 C1 C5 C8
    Date: 2015
  27. By: Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
    Abstract: Inflation forecasts are a key ingredient for monetary policy-making – especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, for example alternative measures of inflation that might be of interest to policy-makers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4 and generate recursive forecasts over 2000Q1 to 2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and nonmodelled) in comparison with forecasts reported by other models such as AR(1). In addition, based on ex-ante forecasts over the period 2012Q1–2013Q4, we find that the DSGE model performs better than the AR(1) counterpart in forecasting actual GDP deflator inflation.
    Keywords: DSGE model; Inflation; Core variables; Noncore variables
    JEL: C11 C32 C53 E27 E47
    Date: 2015
  28. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Gorton, Gary (Yale University and NBER)
    Abstract: How did pre-Fed banking crises end? How did depositors’ beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
    Keywords: Financial crisis; bank runs; banking panic; clearing house; bank-specific information; currency premium
    JEL: E44 E58 N21
    Date: 2016–01–14
  29. By: Anna Orthofer
    Abstract: The point of departure of Thomas Piketty’s influential Capital in the Twenty-First Century was the dramatic growth of private wealth-income ratios in the advanced economies between 1970 and 2010. Using official balance sheet data for South Africa—the first country to publish such data in the developing world—, this paper examines to what extent this reemergence of private wealth was also experienced in the developing-country context. First, we find that the South African current wealth-income ratio is very close to its level in 1975 (255 and 240 percent), and thus much lower than those of Piketty’s sample of advanced economies (where they increased from 200-300 to 400-700 percent). Second, we show that the discrepancy is explained not only by South Africa’s relatively low savings rates, but also by the reduction of wealth before and during the transition to democracy in the 1990s. Since the late 1990s, however, private wealth recovered significantly, indicating that South Africa might resemble the advanced economies more closely in the future.
    Keywords: saving, Wealth
    JEL: E01 E10 E21
    Date: 2015
  30. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey; IPAG Business School, Paris, France and Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, Faculty of Commerce, University of Cape Town, South Africa.)
    Abstract: The aim of this paper is to investigate structural changes in the South African economy using an estimated small open-economy dynamic stochastic general equilibrium (DSGE) model. The structure of the model follows recent work in this area and incorporates the expectations of agents and a number of shocks that are assumed to affect the economy at various points in time. In addition, the dynamic linkages between the respective variables in the model may be explained in terms of the microfoundations that characterise the behaviour of firms, households and the central bank. After estimating the model, we allow for the parameters in a number of different structural equations to change periodically over time. Different versions of the model are assessed using various statistical criteria to identify the model that is able to explain the changing dynamics in the South African economy. The results suggest that the central bank has responded in a consistent manner over the sample period; however, there are periods of time where it does not focus too greatly on output pressure. This impacts on some of the impulse response functions where we note that a monetary policy shock has a slightly larger effect on inflation, while the risk-premium shock has a larger effect on output, inflation and interest rates.
    Keywords: Monetary policy, inflation targeting, Markov-switching, dynamic stochastic general equilibrium model, Bayesian estimation, small open-economy
    JEL: E32 E52 F41
    Date: 2016–01
  31. By: Catherine Mathieu (OFCE-Sciences Po); Henri Sterdyniak (OFCE-SciencesPo)
    Abstract: The concepts of potential output level and growth survived the 2008 crisis and are still widely used in economic policy debates. The paperdiscusses thetheoretical foundations and empirical assessments of these concepts. Potential output may refer to different concepts, depending on the constraints taken into account. Potential output cannot be assessed without a complex macroeconomic analysis.The paper discusses recent empirical work on potential growth estimates, especially how theyintroduce abreakin potential growth after the 2008 crisis, and how the methods used often justifypro-cyclical policies. For the future,the problem isnot a slowdown in potential growth butthe inability of developed economies,underglobalisation constraints, to reach afull-employment growth
    Keywords: potential growth, euro area governance
    JEL: E63 O47
    Date: 2015–12
  32. By: Farley Grubb (Department of Economics, University of Delaware)
    Abstract: I decompose Virginia's paper money into expected real-asset present value, risk discount, and transaction premium or "moneyness" value. The value of Virginia's paper money was determined primarily by its real-asset present value. The transaction premium was small. Positive risk discounts occurred in years when treasurer malfeasance was suspected. Virginia's paper money was not a fiat currency, but a barter asset, with just enough "moneyness" value to make it the preferred medium of exchange for local transactions. Compared with alternative models, my decomposition model of inside monies is superior conceptually and statistically for explaining the performance of American colonial paper monies.
    Keywords: asset money, bills of credit, counterfeiting, fiat currency, quantity theory of money, transaction premium, treasury notes, zero-coupon bonds
    JEL: E42 E51 H60 G12 N12 N22
    Date: 2016
  33. By: Domit, Sílvia (Bank of England); Monti, Francesca (Bank of England); Sokol, Andrej (Bank of England)
    Abstract: We estimate a Bayesian VAR analogue to the Bank of England’s DSGE model (COMPASS) and assess their relative performance in forecasting GDP growth and CPI inflation in real time between 2000 and 2012. We find that the BVAR outperformed COMPASS when forecasting both GDP and its expenditure components. In contrast, the performance of these models was similar when forecasting CPI. We also find that, despite underpredicting inflation at most forecast horizons, the BVAR density forecasts outperformed those of COMPASS. Both models overpredicted GDP growth at all forecast horizons, but the BVAR outperformed COMPASS at forecast horizons up to one year ahead. The BVAR’s point and density forecast performance is also comparable to that of a Bank of England in-house statistical suite for both GDP and CPI inflation and to the Inflation Report projections. Our results are broadly consistent with the findings of similar studies for other advanced economies.
    Keywords: Forecasting; Bayesian VARs; macro-modelling
    JEL: C53 E12 E17
    Date: 2016–01–25
  34. By: Aylin Topal (Middle East Technical University); Ozlem Celik (Middle East Technical University); Galip Yalman (Middle East Technical University)
    Abstract: This paper examines transformation of urban development in its repercussions in urban politics in Ankara since the 1920s with particular emphasis on the post-1980 period. It focuses on management mentality and finance mechanisms of housing policy in the city. This case study paper on Ankara shows that integration of urban land and housing with financial markets has been one of the central tendencies of neoliberal political economy particularly in the 2000s. The paper also notes that the case study epitomizes changing role of the state in creating urban rent and enabling and fortifying the link between the construction and banking sectors.
    Keywords: Ankara, housing, city planning, financialization, built environment, TOKI, Justice and Development Party.
    JEL: E44 R31 R21 G21
    Date: 2015–09–01
  35. By: Özgür Orhangazi (Department of Economics, Kadir Has University, Istanbul)
    Abstract: Financial deregulation was a significant factor in preparing the conditions for the 2007-08 financial crisis. In the run up to the crisis, deregulation created an environment in which mortgage lending expanded and speculation in other financial markets were heightened, even though riskiness was steadily increasing. In this paper, I review the history of regulation and deregulation in the US and discuss the channels through which financial deregulation contributed to the 2007-08 crisis. I begin with a brief overview of the history of regulation and deregulation in the US economy. Then, I discuss the channels through which financial deregulation contributed to the financial crisis. I review policy suggestions of those who see financial deregulation as the main contributor of the financial crisis and provide a critical assessment of these, while broadly situating financial deregulation within the context of the broader changes in capitalism since early 1980s.
    Keywords: financial deregulation, financial crisis, financialization, Great Recession
    JEL: E6 G1
    Date: 2014–08–14
  36. By: Yamin Ahmad (Department of Economics, University of Wisconsin-Whitewater); Olena Mykhaylova (Department of Economics, College of the Holy Cross)
    Abstract: Standard closed-economy DSGE models have difficulty replicating the persistence of inflation. We use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 161 countries. We find persistence to be high (low) on average for developed (developing) countries, while volatility is low (high) on average for the same country groupings. We then employ a two-country DSGE framework to investigate the extent to which structural open economy features, such as incomplete exchange rate pass-through, the existence of nontraded goods, and international financial market incompleteness, can help in replicating the persistence and volatility of consumer prices. Our simulation results indicate that nominal price inertia in both wholesale and retail sectors has the potential to reconcile both the persistence and volatility of simulated inflation series with the data. When we simulate inflation series in the version of the model calibrated to a developing-developed country pair by allowing for different price contract durations and export currency choices, we are able to replicate the empirical differences reported in the first part of the paper.
    Keywords: Inflation dynamics, persistence, volatility, DSGE modeling, simulations
    JEL: E31 F41 C22
    Date: 2015–09
  37. By: Eric M Leeper; Campbell Leith; Ding Liu
    Abstract: We develop a New Keynesian model with government bonds of mixed matu- rity and solve for optimal time-consistent policy using global solution techniques. This reveals several non-linearities absent from LQ analyses with one-period debt. Firstly, the steady-state balances an in ation and debt stabilization bias to gener- ate a small negative debt value with a slight undershooting of the in ation target. This falls far short of rst-best (`war chest') asset levels. Secondly, starting from debt levels consistent with currently observed debt to GDP ratios the optimal pol- icy will gradually reduce that debt, but the policy mix changes radically along the transition path. At high debt levels there is a reliance on a relaxation of monetary policy to reduce debt through an expanded tax base and reduced debt service costs, while tax rates are used to moderate the increases in in ation. However, as debt levels fall, the use of monetary policy in this way diminishes and the authority turns to scal policy to continue debt reduction. This endogenous switch in the policy mix occurs at higher debt levels, the longer the average debt maturity. Allowing the policymaker to optimally vary debt maturity in response to shocks and across varying levels of debt, we nd that variations in maturity are largely used to sup- port changes in the underlying time-consistent policy mix rather than the speed of scal correction. Finally, introducing a mild degree of policy maker myopia can re- produce steady-state debt to GDP ratios and in ation rates not dissimilar to those observed empirically, without changing any of the qualitative results presented in the paper.
    Keywords: New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy; Credibility; Time Consistency; Maturity Structure.
    JEL: E62 E63
    Date: 2016–01
  38. By: Raffaella Giacomini (Department of Economics University College London (UCL); Centre for Macroeconomics (CFM)); Vasiliki Skreta (Department of Economics University College London (UCL)); Javier Turen (Department of Economics University College London (UCL))
    Abstract: We formulate a theory of expectation updating that fits the dynamics of accuracy and disagreement in a new survey dataset where agents can update at any time while observing each other's expectations. Agents use heterogeneous models and can be inattentive but, when updating, they follow Bayes' rule and assign homogeneous weights to public information. Our empirical findings suggest that agents do not herd and, despite disagreement, they place high faith in their models, whereas during a crisis they lose this faith and undergo a paradigm shift. This simple, "micro-founded" theory could enhance the explanatory power of macroeconomic and finance models.
    Keywords: Bayesian learning, Information rigidities, heterogeneous agents, expectation formation, disagreement, forecast accuracy, herding
    JEL: E27 E37 D80 D83
    Date: 2015–12
  39. By: Teresa Ghilarducci; Ismael Cid-Martinez (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Published in the Marquette Benefits and Social Welfare Law Review, this paper discusses how the United States' system of voluntary, tax-favored retirement accounts has failed to produce adequate retirement savings. It recommends switching the ineffective and regressive system of tax deductions for contributions to qualified retirement accounts to providing every American with a tax credit. This revenue-neutral policy change would provide an equitable and effective means of ensuring that all working Americans have retirement savings.
    Keywords: Retirement, 401(k), Tax, Deductions
    JEL: H55 J26 J32 D63 E21
    Date: 2015–06
  40. By: Stevens, Luminita (Federal Reserve Bank of Minneapolis); Chahrour, Ryan (Boston College)
    Abstract: We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.
    Keywords: Law of one price; Border effect; Real exchange rate
    JEL: E30 F30 F41
    Date: 2015–12–18
  41. By: António Afonso; João Tovar Jalles
    Abstract: Using quarterly data for 10 Euro Area countries we assess the determinants of government bond yield spreads; compute bivariate time-varying coefficient models of each determinant; and use these estimates to explain economic volatility. We find that better fiscal positions or higher than expected growth prospects reduce the yield spreads, while increases in the VIX, and bid ask, debt-to-GDP ratio or real effective exchange rate increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the Global Financial Crisis. Finally, for the case of the budget balance and real GDP growth (bid ask spread, debt-to-GDP ratio, real effect exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) is economic volatility. Key Words – volatility, fiscal policy, bond spreads, weighted least squares, time-varying coefficients
    JEL: C23 E62 G01 H62
    Date: 2016–01
  42. By: Fuess, Roland; Zietz, Joachim
    Abstract: This study examines why monetary policy at the national level can have vastly different effects on appreciation rates of single family houses across metropolitan statistical areas (MSAs). The study employs Case/Shiller monthly house price index data for 19 MSAs from 1992:06 to 2014:12 and FHFA quarterly house price index data for 94 MSAs from 1992:3 to 2014:4. We model the importance of MSA-specific demand and supply characteristics through a set of interaction terms between these factors and monetary policy. The empirical analysis is cast in terms of a state-space approach with a stochastic trend component to absorb the impact of omitted variables. Robustness checks use panel data estimators with interaction terms. A lower federal funds rate is associated with home price run-ups in MSAs that are characterized by higher demand and tighter supply conditions.
    Keywords: House price inflation, demand and supply factors, federal funds rate, monetary policy, state-space models
    JEL: C21 C23 E50 R10
    Date: 2015–12
  43. By: Raquel Fonseca; Thepthida Sopraseuth
    Abstract: This paper uses a calibrated dynamic life-cycle model to quantify the long-run distributional impact of two opposite Social Security reforms: modifying the parameters of a defined benefit (DB) plan (such as in France with Ayrault’s reform) or switching to a notional defined contribution (NDC) plan (such as in Italy). Both reforms yield an inequal distribution of welfare losses. Low-skilled workers are the main losers of the reforms. This is so for different reasons in each reform. In the case of Ayrault’s reform, low-skilled individuals delay retirement by 2 years, up to age 62. In switching to a NDC scheme, low-skilled workers’pensions fall substantially. In NDC schemes, inequalities along the working-life are directly translated into inequalities in pension levels. The switch from a DB plan to the Italian reform yields substantial welfare losses, pensions drastically fall, and individuals save more. Since low-skilled workers do not save as much as middle or high-skilled workers, the switch to NDC schemes leads to a more unequal society in terms of asset distribution.
    Keywords: Pension reforms, life-cycle heterogeneous-agent model, distributional effects
    JEL: E24 H31 H55 J26
    Date: 2015
  44. By: Carolina Troncoso Baltar; Celio Hiratuka; Gilberto Tadeu Lima
    Abstract: This paper studies the impact of the real exchange rate on investment in the Brazilian industry. We develop a model that considers the effect of changes in the real exchange rate on the industrial investment. The determinants of the real exchange rate can affect differently the demand for the products and the industrial sectors’ competitiveness. The composition of these effects varies among industrial sectors, with different repercussions on investment. A panel data analysis is applied to estimate the model for the different Brazilian industrial sectors from 1996 to 2010 and the main result is that investment responsiveness to exchange rate varies among sectors.
    Keywords: real exchange rate, investment
    JEL: E2 O5
    Date: 2014–09
  45. By: José Jorge (Faculdade de Economia, Universidade do Porto, cef.up); Joana Rocha (Faculdade de Economia, Universidade do Porto)
    Abstract: When individual returns are increasing in the aggregate level of investment, decentralized individuals fail to internalize the positive externality of their investment on the return of others. This paper shows how financial intermediation mitigates this coordination failure for individuals with private information. When providing financial products with low risk, intermediaries induce individuals with unfavorable private information to invest more. The increase in investment generates positive externalities, thereby raising social welfare and making banks socially desirable.
    Keywords: Keywords: Banking, Macroeconomics, Incomplete Information, Coordination, Complementarities, Externalities
    JEL: G21 E44 D82 D62 C72
    Date: 2016–01
  46. By: Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania); Gajurel, Dinesh (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: Policy makers aim to avoid banking crises, and although they can to some extent control domestic conditions, internationally transmitted crises are difficult to tackle. This paper identifies international contagion in banking during the 2007- 2009 crisis for 50 economies. We identify three channels of contagion - systematic, idiosyncratic and volatility - and find evidence for these in 41 countries. Banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion. The results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 27 percent, whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system. Thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises, reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy.
    Keywords: Global financial crisis, financial contagion, banking institutions, asset pricing, GARCH
    JEL: F30 G21 E58
    Date: 2014–09–09
  47. By: Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
    Abstract: We study how financial frictions affect firm-level heterogeneity and trade in a model where productivity differences across monopolistically competitive firms are endogenous and depend on investment decisions at the entry stage. By increasing entry costs, financial frictions soften competition and lower the value of investing in bigger projects with more dispersed outcomes. Hence, credit frictions make firms more homogeneous and hinder the volume of exports both along the intensive and the extensive margin. Export opportunities, instead, shift expected profits to the tail and increase the value of technological heterogeneity. We test these predictions using comparable measures of sale dispersion within 365 manufacturing industries in 119 countries, built from highly disaggregated US import data. Consistent with the model, financial development increases sale dispersion, especially in more financially vulnerable industries; sale dispersion is also increasing in measures of comparative advantage. These results are quantitatively important for explaining the effect of financial development and factor endowments on export sales.
    Keywords: Financial Development, Firm Heterogeneity, International Trade
    JEL: F12 F16 E24
    Date: 2015–12
  48. By: Elena María Díaz (University of Navarra); Juan Carlos Molero (University of Navarra); Fernando Pérez de Gracia (University of Navarra)
    Abstract: This study examines the relationship between oil price volatility and stock returns in the G7 economies (Canada, France, Germany, Italy, Japan, the UK and the US) using monthly data for the period 1970 to 2014. In order to measure oil volatility we consider alternative specifications for oil prices (world, nominal and real prices). We estimate a vector autoregressive model with the following variables: interest rates, economic activity, stock returns and oil price volatility taking into account the structural break in the year 1986. We find a negative response of G7 stock markets to an increase in oil price volatility. Results also indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.
    Keywords: stock returns, oil price volatility, G7 economies, Vector autoregressive (VAR) model
    JEL: C40 G12 Q43
    Date: 2016–01–11
  49. By: Ebru Voyvoda (Middle East Technical University); Erinc Yeldan (I.D. Bilkent University)
    Abstract: This report studies the aspects of fiscal policy in post -1980 Turkey. The 1990s had been a period of acute deterioration of the public sector balances with increased indebtedness and the rising interest burden. On the other hand, the post-2001 period witnessed a significant narrowing of the fiscal budget deficits. This is often hailed as a discriminatory success of the Turkish Republic, during when the European economies suffer from a public debt crisis. Currently Turkey stands as the largest candidate country which certainly comprises differences with the EU Member States and to other candidate countries. Yet, the Turkish experience in economic policy making in the neo-liberal era should provide repercussions for the European geography, especially in the aftermath of the global financial crisis of 2008-9.
    Keywords: Fiscal Policy, Turkey, Debt Sustainability, IMF
    JEL: H10 H50 H62 H63
    Date: 2015–07–01
  50. By: Dominique Bianco (Université Nice Sophia Antipolis); Evens Salies (OFCE)
    Abstract: Few endogenous growth models have focused attention on the strong Porter hy-pothesis, that stricterenvironmental policies induce innovations, the benefits ofwhich exceed the costs. A key assumption in this hypothesis is that policy strict-ness pushes firms to overcome some obstacles to profit maximization. We model this hypothesis by incorporating pollution and taxation in the Aghion and Griffith (2005) analysis of growth with satisficing managers. Our theoretical results predictthe strong Porter hypothesis. Moreover, they suggest that the stringency of environmental policy should adjust to changes in the level of potential competition in the intermediate inputs sector.
    Keywords: Strong porter analysis; Environmental Policy; Endogenous growth
    JEL: D43 E3 O31 O41 O4
    Date: 2016–01
  51. By: Nie, Jun (Federal Reserve Bank of Kansas City); Luo, Yulei; Li, Wei
    Abstract: In this paper we examine the effects of elastic information-processing capacity (or optimal inattention) proposed in Sims (2010) on international consumption and income correlations in a tractable small open economy (SOE) model with exogenous income processes. We find that in the presence of capital mobility in financial markets, optimal inattention due to fixed information-processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty. In addition, we show that RI can also improve the model's predictions for the other key moments of the joint dynamics of consumption and income. Finally, we show that the main conclusions of our benchmark model do not change in an extension with capital accumulation.
    Keywords: Rational inattention; Elastic capacity; Risk sharing; International consumption correlations
    JEL: D83 E21 F41 G15
    Date: 2015–12–01
  52. By: Javier Mencía (Banco de España); Jesús Saurina (Banco de España)
    Abstract: This document presents the analytical framework recently developed by the Banco de España for the implementation of its macroprudential policy. The methodology described uses a broad set of indicators that enables macroprudential risks to be monitored through risk mapping. This framework will provide support for the Banco de España’s broad macroprudential policy stance. Este documento presenta el marco analítico desarrollado recientemente por el Banco de España para la puesta en marcha de su política macroprudencial. La metodología descrita incorpora un amplio conjunto de indicadores que permiten realizar un seguimiento de los riesgos macroprudenciales a través de un mapa de riesgos. El marco servirá de soporte para definir la orientación general de la política macroprudencial del Banco de España.
    Keywords: early warning indicators, macroprudential policy stance, macroeconomic actual conditions
    JEL: G21 G32
    Date: 2016–01
  53. By: Giuliano Contento de Oliveira
    Abstract: Este trabalho discute a evolução da estrutura patrimonial do sistema bancário no Brasil no período recente – entre março de 2007 e março de 2014 –, bem como analisa aspectos metodológicos dos dados de balanço dos bancos no Brasil. O estudo revela a ocorrência de importantes transformações na estrutura patrimonial desse sistema, tanto do lado das operações ativas como do das operações passivas. A análise de dados e indicadores selecionados mostra que o sistema bancário no Brasil, analisado em seu conjunto, migrou para uma posição patrimonial menos líquida exatamente em um contexto marcado por maior incerteza. Isso foi possível, fundamentalmente, em razão do comportamento não apenas anticíclico, mas também dinamizador do crédito assumido pelos bancos públicos, destacadamente Caixa Econômica Federal (CEF) e Banco do Brasil (BB). Enquanto a expansão do crédito bancário verificada no Brasil entre 2003 e 2008 foi capitaneada pelos bancos privados, depois da eclosão da crise financeira global de 2008, a continuidade dessa trajetória foi liderada pelos bancos públicos, acompanhada apenas moderadamente pelas instituições privadas. This brief essay discusses the balance sheet evolution of the banking system in Brazil in the recent period, between March 2007 and March 2014, as well as analyses methodological aspects of balance sheet data of the banks in Brazil. The study shows substantial changes in the banking system balance sheet, both in assets as liabilities. The analysis of selected data and indicators shows that the banking system in Brazil, as a whole, changed to a balance sheet position with liquidity level minor exactly in a context of high uncertainty. It was possible because of the anti cyclical and the accelerator behavior of credit by public banks; especially Caixa Econômica Federal and Banco do Brasil. While the growth of banking credit was commanded by private banks between 2003 and 2008, after the global financial crisis of 2008 the public banks led this process, with a modest participation of private banks.
    Date: 2015–12
  54. By: Drago Bergholt
    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
    Date: 2015–11
  55. By: Teresa Ghilarducci; Joelle Saad-Lessler; Gayle Reznik (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: When it comes to making contributions to their retirement savings, people's anxiety overcomes inertia. This study finds that while workers may tend toward a path of least resistance, economic shocks, spousal behavior, and changes in pension plan details continuously cause changes in 401(k) contributions.
    Keywords: Retirement, 401(k), Pensions, Shocks
    JEL: H55 J26 J32 D63 E21
    Date: 2015–05
  56. By: Fitzgerald, Doireann (Federal Reserve Bank of Minneapolis); Haller, Stephanie (University College Dublin); Yedid-Levi, Yaniv (University of British Columbia)
    Abstract: We show that after firms enter new export markets, there are striking dynamics of quantities, but no dynamics of prices, controlling for both costs and selection. This points to an important role for demand in the growth of successful exporters, and to a nonprice mechanism through which quantity demanded grows. A model where firms engage in costly investment in customer base through marketing and advertising, and learn about their idiosyncratic demand, can qualitatively match these facts, along with a declining exit hazard. We structurally estimate the model and find that costs of adjusting customer base are key to explaining how exporters grow.
    Keywords: Firm dynamics; Exporter dynamics; Customer base
    JEL: E20 F10 L10
    Date: 2016–01–21
  57. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Hanson, Josh (Federal Reserve Bank of Kansas City); Maniff, Jesse Leigh (Federal Reserve Bank of Kansas City)
    Abstract: This paper examines whether some of the unbanked consumers' choice of general purpose reloadable (GPR) prepaid cards over checking accounts and alternative financial service (AFS) products can be explained by the cost incurred by those consumers. We compare the three types of products by constructing consumer models based on the actual behavior of GPR prepaid cardholders and applying those models to the fee schedules of actual products offered in the market. Overdrafts are a major factor affecting the cost rankings. For consumers who regularly or occasionally overdraw their accounts, checking accounts are more costly than GPR cards or AFS products. In contrast, for consumers who do not need overdraft capability and short-term credit, GPR cards are more costly than checking accounts. The cost difference across the products clearly explains the former type of consumers' choice of financial products, while it does not explain the latter type of consumers' choice.
    Keywords: General purposes reloadable prepaid cards (GPR); Checking accounts; Alternative financial services (AFS); Overdraft; Unbanked
    JEL: D12 E42 G21
    Date: 2015–11–01
  58. By: Sushant ACHARYA; Julien BENGUI
    Abstract: This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy's adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period where many advanced economies were pushed to the zero bound on interest rates. We establish three main results: (i) When the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. (ii) A free capital flow regime falls short of supporting efficientent demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. (iii) When it comes to capital flow management, individual countries' incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes.
    Keywords: Capital flows, international spillovers, liquidity traps, uncovered interest parity, capital flow management, policy coordination, optimal monetary policy
    JEL: E52 F32 F42 F44
    Date: 2015
  59. By: Heike Joebges; Sebastian Dullien; Alejandro Márquez-Velázquez
    Abstract: The paper investigates in how far lax monetary policy (defined as deviations fromprescriptive monetary policy rules or past trends) and/or financial innovation can be seenas a cause for housing price bubbles in industrialized countries. From a theoreticalperspective, it is found that there are hardly any clearly formulated economic models whichassign a role to lax monetary policy in bubble formation, while there are a number ofmodels which assign a role to financial innovation or liberalization. In the empirical part,the paper first presents cross-country-time-series SUR regressions for a sample of 16industrialized countries. According to the results, there is no robust, significant role for therelevance of loose monetary policy, measured by deviations from the Taylor rule. Instead,deviations from the past trend of the real policy rate affect housing prices, but the size ofthe effect depends on the regulation and development of the financial sector. In a thirdstep, three case studies of the United States, Austria and the United Kingdom arepresented, representing countries which have experienced a) lax monetary policy and abubble b) lax monetary policy without a bubble and c) no deviation from the Taylor ruleand a bubble. The case studies hint that specific changes in regulations played a role forthe emergence or absence of bubbles, yet these regulations might not be appropriatelycovered by standard quantitative indicators for financial market (de-)regulation.
    Keywords: working paper, finance-and-trade, House prices, monetary policy, asset price bubbles, financial regulation
    JEL: E44 G18 G28 R30
    Date: 2015–11
  60. By: Vítor Castro (Faculty of Economics, University of Coimbra, and Economic Policies Research Unit (NIPE)); Rodrigo Martins (Faculty of Economics, University of Coimbra and Group for Monetary and Fiscal Studies (GEMF))
    Abstract: This article analyses the incidence of politically driven cycles on the functional components and sub-components of government expenditures over a group of 18 European countries during the period 1990-2012. An LSDVC estimator is employed in the empirical analysis. The results point out to the presence of political opportunism at aggregated and disaggregated levels of public expenditures, but no significant evidence of partisan or other political effects is found. The expenditure components that have proved to be more related to that behaviour are public services, health, education and social protection. These include items able to generate more visible outcomes to voters and, consequently, of increasing government’s chance of re-election.
    Keywords: Government Expenditures; Political Cycles; Elections; Europe, Fiscal Policy
    JEL: E60 H72 D78
    Date: 2016
  61. By: Mamello Nchake, Lawrence Edwards and Asha Sundaram
    Abstract: We study the relationship between price-setting behavior and the degree of competition in a setting where markets and information flows are relatively imperfect. Using a unique dataset that combines survey data on retail outlets in Lesotho, and detailed historical information on their product prices, we find a non-monotonic relationship between the frequency of price changes and perceived competition, measured by the number of reported competitors. This non-monotonic relationship is consistent with a model of increasing costs of coordinating price changes under tacit collusion with few competitors, and a breakdown of collusion at higher levels of competition.
    Keywords: price rigidity, Competition, Survey data, Micro price data, Emerging economies
    JEL: E30 D40 D22 L21
    Date: 2015
  62. By: Maik Heinemann (University of Potsdam)
    Abstract: This paper examines the effects of financial frictions in the context of financial integration. We employ a general equilibrium model with heterogeneous entrepreneurs and address the question of capital flows from poor to rich countries and focus on the consequences for domestic capital accumulation, output and welfare. Motivated by the mixed results from the literature, entrepreneurs in our model face capital risk, earn risky profits and receive riskless wage income. Moreover, borrowing constraints impede consumption smoothing and limit the access to external funds for scaling up production. In the first of three scenarios we focus on uninsurable risk only. We show that for plausible parametrizations, capital does flow from poor to rich and that an increase in the interest rate necessarily leads to larger levels of the domestic capital stock and output in the steady state under financial integration. We derive two rules of thumb which explain the described outcome with high accuracy. In the second scenario we consider tight borrowing constraints and in the third scenario we increase the persistence of shocks. Both changes strongly affect the results derived in the first scenario and mainly lead to tighter parameter restrictions.
    Keywords: Incomplete markets; Borrowing constraints; Financial integration
    JEL: D52 E22 F41 G11
    Date: 2015–11–01
  63. By: Eric Wong (Hong Kong Monetary Authority); Kelvin Ho (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority)
    Abstract: This paper provides a non-technical summary of two recent empirical studies to shed light on key important issues regarding the implementation of loan-to-value (LTV) policy as a macroprudential tool, including its effectiveness, potential drawbacks and its transmission mechanism to improve financial stability. Empirical evidence suggests that LTV policy is effective in reducing systemic risk associated with boom-and-bust cycles in property markets. Although the LTV policy may be associated with higher liquidity constraints on homebuyers, we show that the mortgage insurance programme (MIP) can mitigate this drawback without undermining the effectiveness of LTV policy. Thus, MIPs play an important role in enhancing the net benefits of LTV policy. Concerning the transmission mechanism, empirical evidence suggests that the policy pass-through to property market activities may be weak. By contrast, there is clear evidence that tightening LTV cap would reduce household leverage and credit growth, and that lower leverage plays a major role in strengthening banks¡¯ resilience to property price shocks. This finding supports the view that household leverage would be an optimal target of LTV policy.
    Keywords: Banking, Hong Kong, Loan-To-Value, Macroprudential Policy
    Date: 2015–10
  64. By: Campbell Leith; Eric Leeper
    Abstract: We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary-fiscal regime. The article concludes with directions in which theoretical and empirical developments may go. The article is prepared for the Handbook of Macroeconomics, volume 2 (John B. Taylor and Harald Uhlig, editors, Elsevier Press).
    Date: 2016–01
  65. By: Kai Zhao (University of Connecticut)
    Abstract: This paper studies the impact of social insurance on private insurance and individualwelfare in a dynamic general equilibrium model with uncertain medical expenses and individual health insurance choices. I find that social insurance (modeled as a combination of the minimum consumption floor and the Medicaid program) crowds out private health insurance coverage, and this crowd-out is important for understanding the welfare consequences of social insurance. When the crowding out effect on private insurance is taken into account, the welfare gain from social insurance becomes substantially smaller and under some certain conditions it becomes a welfare loss. The intuition for these results is that the crowding out effect partially offsets the insurance benefits provided by social insurance. The findings of the paper suggest that it is important to consider the endogenous responses on private insurance choices when examining any social insurance policy reform. They also imply that the existence of social insurance programs may be one reason why some Americans do not buy any health insurance.
    Keywords: Saving, Uncertain Medical Expenses, Health Insurance, Means Testing
    JEL: E20 E60 H30 I13
    Date: 2016–01
  66. By: Brinkhuis, J.
    Abstract: In this note, a simplified version of the four main results for discrete-time infinite horizon problems, theorems 4.2-4.5 from Stokey, Lucas and Prescott (1989) [SLP], is presented. A novel assumption on these problems is proposed—the uniform limit condition, which is formulated in terms of the data of the problem. It can be used for example before one has started to look for the optimal value function and for an optimal plan or if one cannot find them analytically: one verifies the uniform limit condition and then one disposes of criteria for optimality of the value function and a plan in terms of the functional equation and the boundedness condition. A comparison to [SLP] is made. The version in [SLP] requires one to verify whether a candidate optimal value function satisfies the boundedness condition; it is easier to check the uniform limit condition instead, as is demonstrated by examples. There is essentially no loss of strength or generality compared to [SLP]. The necessary and sufficient conditions for optimality coincide in the present paper but not in [SLP]. The proofs in the present paper are shorter than in [SLP]. An earlier attempt to simplify, in Acemoglu (2009) --here the limit condition is used rather than the uniform limit condition-- is not correct.
    Keywords: Dynamic optimization, Discrete time, Infinite horizon, Bellman equation, Total discounted return, Counterexample
    JEL: E00 O1
    Date: 2015–12–03
  67. By: Mikel Casares (Departamento de Economía-UPNA)
    Abstract: I show evidence indicating that the variability of the total number of business units (establishments) has significantly increased in recent US business cycles, accounting for nearly 2/3 of real GDP fluctuations during the 2003-2012 decade. Next, I examine the role of business creation and destruction in an estimated DSGE-style model extended with endogenous entry and exit. Shocks on both entry and, especially, exit have played a crucial role on explaining the latest boom-bust cycle in the US economy. I also find that the estimated innovations of total factor productivity are positive and high in 2010-2012, which might be the consequence of the dramatic increase in the exit rates observed during the recession of 2008-2009.
    Keywords: Entry and exit, DSGE models, US business cycles
    Date: 2015
  68. By: Janusz J. Tomidajewicz (Poznan University of Economics, Department of Economic and Local Government Policy)
    Abstract: The general objective of this study is to highlight the differences in the economic behaviour of financial organisations and, in particular, in the structure and nature of financial services provided by institutions with different forms of ownership. We assume that their economic behaviour manifests itself through decisions about: selecting the type and scope of the functions performed for the real economy, determining the market segment (target customer group) for services provided and methods of and criteria for making decisions about the way to conduct financial activities. We try to determine the economic behaviour of financial entities belonging to the following ownership forms: public financial institutions, collectively-owned financial institutions and private financial institutions.
    Keywords: economic behaviour, financial institutions, ownership forms
    JEL: L33 G18 E02
    Date: 2015–07–01
  69. By: Hyunseung Oh (Vanderbilt University); Chamna Yoon (Baruch College, CUNY)
    Abstract: Housing supply decisions consist of both an extensive margin (new housing starts) and an intensive margin (construction intensity of incomplete houses). While it is well known that housing starts have declined dramatically during the 2006--2009 housing bust, the intensive margin of residential investment has not been studied in the literature. In this paper, we document that construction intensity of incomplete houses has also fallen significantly during the bust. Using the Census micro data for construction lags of single-family houses across the US, we show that average construction lags for completed houses increased during the bust, and that this increase comes from long deferrals of several houses under construction, especially those that were unsold at the early stage of construction. Motivated by these new facts, we study a time-to-build model of residential construction where investment in each stage is irreversible. The model predicts that as the level of uncertainty increases, the ``wait-and-see'' channel becomes relatively more important for the intensive margin than for housing starts. Calibrated to match the house price dynamics during the recent recession, the model accounts for the majority of the observed increase in construction lags, which suggests that the real-options mechanism played an important role in the dynamics of residential investment during the recent bust. Several housing supply implications based on the model follow.
    Keywords: Housing, Real options, Investment, Time to build, Adjustment costs
    JEL: E1 E3
    Date: 2016–01–20
  70. By: Az駑ar, C駘ine; Desbordes, Rodolphe; Wooton, Ian
    Abstract: This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.
    Keywords: country size, corporate tax rate, foreign direct investment, tax competitio
    JEL: E62 F23 H25
  71. By: Wieladek, Tomasz (Bank of England)
    Abstract: Interacted panel VAR (IPVAR) models allow coefficients to vary as a deterministic function of observable country characteristics. The varying coefficient Bayesian panel VAR generalises this to the stochastic case. As an application of this framework, I examine if the impact of commodity price shocks on consumption and the CPI varies with the degree of exchange rate, financial, product and labour market liberalisation on data from 1976 Q1–2006 Q4 for 18 OECD countries. The confidence bands are smaller in the deterministic case and as a result most of the characteristics affect the transmission mechanism in a statistically significant way. But only financial liberalisation is an important determinant of commodity price shocks in the stochastic case. This suggests that results from IPVAR models should be interpreted with caution.
    Keywords: Bayesian panel VAR; commodity price shocks
    JEL: C33 E30
    Date: 2016–01–08
  72. By: Yaa Akosa Antwi (Indiana University - Purdue University Indianapolis); John R. Bowblis (Miami University)
    Abstract: We estimate the causal effect of nurse turnover on mortality and the quality of nursing home care with a fixed effect instrumental variable estimation that uses the unemployment rate as an instrument for nursing turnover. We find that ignoring endogeneity leads to a systematic underestimation of the effect of nursing turnover on mortality and quality of care in a sample of California nursing homes. Specifically, 10 percentage point increase in nurse turnover results in a facility receiving 2.2 additional deficiencies per annual regulatory survey, reflecting a 19.3 percent increase. Not accounting for endogeneity of turnover leads to results that suggest only a 1 percent increase in deficiencies. We also find suggestive evidence that turnover results in lower quality in other dimensions and may increase mortality. An implication of our mortality results is that turnover may be a mechanism for the procyclicality of mortality rates.
    Keywords: Employee turnover, unemployment rate, quality of care, nursing home
    JEL: I11 J21 E24
    Date: 2016–01
  73. By: Francesco Ravazzolo; Philip Rothman
    Abstract: We carry out a pseudo out-of-sample density forecasting study for U.S. GDP with an autoregressive benchmark and alternatives to the benchmark than include both oil prices and stochastic volatility. The alternatives to the benchmark produce superior density forecasts. This comparative density performance appears to be driven more by stochastic volatility than by oil prices. We use our density forecasts to compute a recession risk indicator around the Great Recession. The alternative model that includes the real price of oil generates the earliest strong signal of a recession; but it also shows increased recession risk after the Great Recession.
    Date: 2015–10
  74. By: Costas Meghir (Economics department); Renata Narita (Universidade de São Paulo (USP)); Jean-Marc Robin (Département d'économie)
    Abstract: We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.
    Keywords: Equilibrium wage-posting model; Brazilian labor; Formal labor market
    JEL: E26 J24 J31 O15
    Date: 2015–04
  75. By: Mike Callaghan; Paul Hubbard
    Abstract: China’s first attempt to establish a multilateral financial institution was met with some suspicion and caution in the west. According to one interpretation, China is frustrated with the United States’ reluctance to cede it power at the International Monetary Fund (IMF) and the World Bank, and so is attempting to usurp the United States’ economic leadership by creating its own institutions to rival the Bretton Woods institutions, starting with the Asian Infrastructure Investment Bank (AIIB). The AIIB, according to its critics, will not be a true multilateral institution committed to common objectives. Instead it will be a vehicle for China to advance its own unilateral strategic objectives in Asia at the expense of the US.
    JEL: E02 F21 G24
    Date: 2016–01

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