nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒03‒23
104 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Impacto de política monetaria: una revisión empírica 2000 – 2013 By Anzoategui Zapata, Juan Camilo
  2. Fragility of Purely Real Macroeconomic Models By Narayana Kocherlakota
  3. The role of automatic stabilizers in the U.S. business cycle By Alisdair McKay; Ricardo Reis
  4. The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap By Jordan Roulleau-Pasdeloup
  5. Japanization: Is it Endemic or Epidemic? By Takatoshi Ito
  6. Bank Lending, Collateral, and Credit Traps in a Monetary Union By Corbisiero, Giuseppe
  7. Government Wealth Funds and Monetary Policy By Sergey Sinelnikov-Murylev; Pavel Trunin
  8. Secular Labor Reallocation and Business Cycles By Gabriel Chodorow-Reich; Johannes Wieland
  9. Liquidity Trap and Optimal Monetary Policy Revisited By Kohei Hasui; Tomohiro Sugo; Yuki Teranishi
  10. Macroeconomic Shocks and Their Propagation By Valerie A. Ramey
  11. The Bank Lending Channel in a Dual Banking System: Evidence from Malaysia By Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Mohammad Tajik
  12. The Aggregate Implications of Regional Business Cycles By Martin Beraja; Erik Hurst; Juan Ospina
  13. Labor force participation, wage rigidities, and inflation By Francesco Nucci; Marianna Riggi
  14. On Indeterminacy and Growth under Progressive Taxation and Utility-Generating Government Spending By Jang-Ting Guo; Shu-Hua Chen
  15. Aggregate Stability in Monetary Economy with Consumption Tax and Taylor Rule By Fujisaki, Seiya
  16. The EMU and the anchoring of inflation expectations? By Mayes David; Paloviita Maritta; Viren Matti
  17. PIIGS in the Euro Area. An Empirical DSGE Model By Alice, Albonico; Alessia, Paccagnini; Patrizio, Tirelli
  18. Behavioral Macroeconomics Via Sparse Dynamic Programming By Xavier Gabaix
  19. Optimal Inflation, Average Markups and Asymmetric Sticky Prices By Paczos, Wojtek
  20. Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy By Susanto Basu; Brent Bundick
  21. Skewed Wealth Distributions: Theory and Empirics By Jess Benhabib; Alberto Bisin
  22. Accounting for Business Cycles in Canada: I. The Role of Supply-Side Factors By Accolley, Delali
  23. Wholesale Banking and Bank Runs in Macroeconomic Modelling of Financial Crises By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  24. A Simple Model of Subprime Borrowers and Credit Growth By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  25. Credit frictions and the cleansing effect of recessions. By S. Osotimehin; F. Pappadà
  26. Good Booms, Bad Booms By Gary Gorton; Guillermo Ordoñez
  27. Subprime Borrowers, Securitization and the Transmission of Business Cycles By Grodecka, Anna
  28. Monetary policies to counter the zero interest rate: an overview of research By Honkapohja, Seppo
  29. America's First Great Moderation By Joseph Davis; Marc D. Weidenmier
  30. On the Mechanics of New-Keynesian Models By Peter Rupert; Roman Šustek
  31. International housing markets, unconventional monetary policy and the zero lower bound By Huber, Florian; Punzi, Maria Teresa
  32. Non-Linearities in the Relationship between House Prices and Interest Rates: Implications for Monetary Policy By Guay Lim; Sarantis Tsiaplias
  33. International Coordination By Jeffrey A. Frankel
  34. An Anti-Austerity Policy Recipe against Debt Accumulation in the Presence of Hidden Economy By Soldatos, Gerasimos T.
  35. Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy? By Lars E.O. Svensson
  36. Unions in a frictional labor market By Rudanko, Leena; Krusell, Per
  37. How do Average Hours Worked Vary with Development? Cross-Country Evidence and Implications By Alexander Bick; Nicola Fuchs-Schündeln; David Lagakos
  38. Disentangling loan demand and supply shocks in Russia By Deryugina, Elena; Kovalenko, Olga; Pantina, Irina; Ponomarenko, Alexey
  39. Networks and the macroeconomy: an empirical exploration By Acemoglu, Daron; Akcigit, Ufuk; Kerr, William R.
  40. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick M.; Trombley, Christopher
  41. Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015 By Carmen M. Reinhart; Vincent Reinhart; Christoph Trebesch
  42. Dynamic Panics: Theory and Application to the Eurozone By Stangebye, Zachary
  43. The impact of financial crisis and low inflation environment on short-term inflation expectations in Poland By Tomasz Łyziak
  44. Liquidity Regulation and Unintended Financial Transformation in China By Kinda Cheryl Hachem; Zheng Michael Song
  45. An inquiry into manufacturing capacity in Italy after the double-dip recession By Libero Monteforte; Giordano Zevi
  46. Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data By Arito Ono; Kosuke Aoki; Shinichi Nishioka; Kohei Shintani; Yosuke Yasui
  47. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick M.; Hudgins, David
  48. The New Classical Explanation of the Stagflation: A Psychological Way of Thinking By Aurélien Goutsmedt
  49. A real-time GDP data set for Switzerland By Severin Bernhard
  50. The Term Structure of Interest Rates in India By Rajnish Mehra; Arunima Sinha
  51. Challenges to Mismeasurement Explanations for the U.S. Productivity Slowdown By Chad Syverson
  52. On the relative importance of monetary transmission channels in Turkey By Turhan, Ibrahim M.; Gumus, Nihat
  53. International Trade Finance and the Cost Channel of Monetary Policy in Open Economies By Nikhil Patel
  55. Optimal Monetary Policy in the Presence of Sizable Informal Sector and Firm Level Credit Constraint By Waqas Ahmed; Sajawal Khan; Muhammad Rehman
  56. Una stagnazione secolare? Italia, Giappone, Stati Uniti, 1950-2015 By Daniele, Vittorio
  57. Estimating the impact of monetary policy on inequality in China By Sánchez-Fung, José R.
  58. The future of the euro By Duwicquet, Vincent; Mazier, Jacques; Petit, Pascal; Saadaoui, Jamel
  59. 日本企業の資金再配分 By 讀肴揄, 螽∽ク; 坂井, 功治
  60. Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies By Gaetano Gaballo; Ramon Marimon
  61. Deposit dollarization in emerging markets: modelling the hysteresis effect By Krupkina, Anna; Ponomarenko, Alexey
  62. Health-care reform or labor market reform? a quantitative analysis of the Affordable Care Act By Nakajima, Makoto; Tuzemen, Didem
  63. Economic Conditions, Illicit Drug Use, and Substance Use Disorders in the United States By Christopher S. Carpenter; Chandler B. McClellan; Daniel I. Rees
  64. Effekte des Kapitalmarktzinses auf die Preis- und Produktivitätsentwicklung: Eine Analyse der deutschen Volkswirtschaft 1970-2014 / Friedrun Quaas By Quaas, Friedrun; Quaas, Georg
  65. Nowcasting and short-term forecasting of Russian GDP with a dynamic factor model By Porshakov, Alexey; Deryugina, Elena; Ponomarenko, Alexey; Sinyakov, Andrey
  66. Comovement Between Africa and Advanced Economies: 1980-2011 By Carike Claassen, Elsabe Loots and Alain Kabundi
  67. What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending By Kaiji Chen; Jue Ren; Tao Zha
  68. Meta-analysis of Chinese business cycle correlation By Fidrmuc, Jarko; Korhonen, Iikka
  69. The effects of oil price and US economy on Thailand's macroeconomy: The role of monetary transmission mechanism By Razmi, Fatemeh; M., Azali; Chin, Lee; Habibullah, Muzafar Shah
  70. Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity By Alessandro Dovis; Mikhail Golosov; Ali Shourideh
  71. Innovation and competition in Internet and mobile banking: an industrial organization perspective By Mariotto, Carlotta; Verdier, Marianne
  72. The Impacts of Exogenous Oil Supply Shocks on Mediterranean Economies By Andrea Bastianin; Marzio Galeotti; Matteo Manera
  73. Financial Innovation and Money Demand: Evidence from Sub-Saharan Africa By J Paul Dunne and Elizabeth Kasekende
  74. Options-Pricing Formula with Disaster Risk By Robert J. Barro; Gordon Y. Liao
  75. Exchange Rates and Fundamentals: A General Equilibrium Exploration By KANO, Takashi
  76. Price Adjustment to the Exchange Rate Shock in World Commodity Markets By Hyeongwoo Kim; Jintae Kim
  77. Forecast Performance, Disagreement, and Heterogeneous Signal-to-Noise Ratios By Dovern, Jonas; Hartmann, Matthias
  78. Solution and Estimation Methods for DSGE Models By Jesús Fernández-Villaverde; Juan F. Rubio Ramírez; Frank Schorfheide
  79. Business and Development in Myanmar: A Policy Handbook for Private Sector Development By Kamile Puusaag; David Abonyi; Masato Abe
  80. A novel ex-ante leading indicator for the EU industrial production By Donadelli, Michael; Paradiso, Antonio; Riedel, Max
  81. What signal from the Fed? Should the ECB ease further? By Gros, Daniel
  82. Life-Cycle Human Capital Accumulation Across Countries: Lessons From U.S. Immigrants By David Lagakos; Benjamin Moll; Tommaso Porzio; Nancy Qian; Todd Schoellman
  83. The Minimum Wage and the Great Recession: Evidence from the Current Population Survey By Jeffrey Clemens
  84. Estimating the COP Exchange Rate Volatility Smile and the Market Effect of Central Bank Interventions: A CHARN Approach By Juan Manuel Julio; Norberto Rodríguez; Hector Zárate
  85. Estimating South Africa's Output Gap Potential Growth Rate By Johannes W. Fedderke and Daniel K Mengisteab
  86. Adaptive models and heavy tails By Davide Delle Monache; Ivan Petrella
  87. How the baby boomers' retirement wave distorts model-based output gap estimates By Wolters, Maik H.
  88. Stock prices, inflation and inflation uncertainty in the U.S.: Testing the long-run relationship considering Dow Jones sector indexes By Claudiu Albulescu; Christian Aubin; Daniel Goyeau
  89. Aging and Health Financing in the US: A General Equilibrium Analysis By Juergen Jung; Chung Tran; Matthew Chambers
  90. Explaining Industry Differences in IT Investment Per Worker Between Canada and the United States, 2002-2013 By Jasmin Thomas
  91. Hedonic Regression Models for Tokyo Condominium Sales By Diewert, W. Erwin; Shimizu, Chihiro
  92. Financial Soundness Indicators for Financial Sector Stability in Georgia By Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB)
  93. The drivers of real sector growth in Malawi: an empirical investigation By Chirwa, Themba G; Odhiambo, Nicholas M
  94. MisMatch in Human Capital Accumulation By Russell Cooper; Huacong Liu
  95. Improving model-based near-term GDP forecasts by subjective forecasts: A real-time exercise for the G7 countries By Jos Jansen; Jasper de Winter
  96. Nonlinear Pass-Through of Exchange Rate Shocks on Inflation: A Bayesian Smooth Transition VAR Approach By Hernán Rincón-Castro; Norberto Rodríguez-Niño
  97. Recursive Contracts and Endogenously Incomplete Markets By Mikhail Golosov; Aleh Tsyvinski; Nicolas Werquin
  98. Choice of inflation targeting: Some international evidence By Shakhzod Ismailov; Makoto Kakinaka; Hiroaki Miyamoto
  99. The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter? By Wahyoe Soedarmono; Sigid Eko Pramono; Amine Tarazi
  100. Heterogeneous Fall in Productive Capacity in Italian Industry during the 2008-13 Double-Dip Recession By Andrea Locatelli; Libero Monteforte; Giordano Zevi
  101. Simplifying Choices in Defined Contribution Retirement Plan Design By Donald B. Keim; Olivia S. Mitchell
  102. Reflections on Macroeconomics Then and Now : a speech at the "Policy Challenges in an Interconnected World" 32nd Annual National Association for Business Economics Economic Policy Conference, Washington, D.C., March 7, 2016 . By Fischer, Stanley
  103. Sets of Models and Prices of Uncertainty By Lars P. Hansen; Thomas J. Sargent
  104. The importance of time-varying parameters in new Keynesian models with zero lower bound By Julien Albertini; Hong Lan; ;

  1. By: Anzoategui Zapata, Juan Camilo
    Abstract: This paper analyzes for the period 2000 - 2013 the transmission mechanism of monetary policy in Colombia, focusing on how the Bank of the Republic and its inflation targeting strategy affects through the intervention interest rate, the M2 and the consumer loans to total inflation and therefore the purchasing power. This is done through a procedure Johansen cointegration analyzing and short –and long– term vector autoregression model - VECM. For the period of analysis is evidence of price paradox, ie, against increases in the intervention interest rate total inflation responds with a persistent increase. It is also found that for the long term there is an inverse relationship between consumer credit and inflation, the above reflected in a greater financial deepening accompanied by a strong disinflationary policy by the issuer.
    Keywords: Impact of monetary policy, VAR model, inflation, price paradox.
    JEL: E4 E43 E52 E58
    Date: 2015–01–15
  2. By: Narayana Kocherlakota
    Abstract: Over the past thirty years, a great deal of business cycle research has been based on purely real models that abstract from the presence of nominal rigidities, and so (at least implicitly) assume that the Phillips curve is vertical. In this paper, I show that such models are fragile, in the sense that their implications change significantly when the Phillips curve is even slightly less than vertical. I consider a wide class of purely real macroeconomic models and perturb them by introducing a non-vertical Phillips curve. I show that in the perturbed models, if there is a lower bound on the nominal interest rate, then current outcomes necessarily depend on agents' beliefs about the long-run level of economic activity. The magnitude of this dependence becomes arbitrarily large as the slope of the Phillips curve becomes arbitrarily large in absolute value (closer to vertical). In contrast, the limiting purely real model ignores this form of monetary non-neutrality and macroeconomic instability. I conclude that purely real models are too incomplete to provide useful guides to questions about business cycles. I describe what elements should be added to such models in order to make them useful.
    JEL: E12 E13 E52 E58 E62
    Date: 2016–01
  3. By: Alisdair McKay; Ricardo Reis
    Abstract: Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures their effect on the dynamics of the business cycle. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data and the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role in the dynamics of the business cycle, whereas tax-and-transfer programs that affect inequality and social insurance can have a larger effect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the U.S. has had little effect on the volatility of aggregate output fluctuations or on their welfare costs despite stabilizing aggregate consumption. The stabilizers have a more important role when monetary policy is constrained by the zero lower bound, and they affect welfare significantly through the provision of social insurance.
    Keywords: Countercyclical �fiscal policy; Heterogeneous agents; Fiscal multipliers
    JEL: E32 E62 H30
    Date: 2015
  4. By: Jordan Roulleau-Pasdeloup
    Abstract: I study the impact of a government spending shock in a New Keynesian model when monetary policy is set optimally. In this framework, the economy is at the Zero Lower Bound but expectations are well managed by the Central Bank. As such, the multiplier effect of government spending increases on expected inflation is small while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 ARRA.
    Keywords: Zero lower bound; New Keynesian; Government spending multiplier
    JEL: E31 E32 E52 E62
    Date: 2016–03
  5. By: Takatoshi Ito
    Abstract: Japanization is defined as a combinations of the following economic conditions: (1) the actual growth rate is lower than the potential growth rate for an extended period; (2) the natural real interest rate is below zero and also below the actual real interest rate; (3) the nominal (policy) interest rate is zero; (4) deflation, i.e., negative inflation rate. As a summary measure for these conditions, the Japanization index, the sum of proxy for GDP gap, inflation rate and the nominal interest rate, is proposed. The growth rate, the inflation rate and the nominal and real interest rate has been declining since 1990. Since 2009, major advanced countries have shared conditions (1)-(3). Only Japan has experienced a prolonged period of (4) deflation. A closer examination of how Japan got into the Japanization state reveals that it is a combination of (a) a hard-landing of the 1990-92 bubble; (b) not dealing with non-performing loans problem promptly and decisively, resulting in a major banking crisis; (c) the absence of a soft landing after the banking crisis; (d) the lack of quantitative easing policies when deflation first occurred; (e) the absence of an inflation target; and (f) the absence of timely, large scale fiscal stimulus. The fact that Abenomics—a mix of aggressive monetary policy, combined with a 2% inflation target and fiscal stimulus—in lifting the economy out of deflation shows it is possible to prevent or cure Japanization.
    JEL: E43 E44 E52 E58 E61 E62 F31
    Date: 2016–02
  6. By: Corbisiero, Giuseppe (Central Bank of Ireland)
    Abstract: This paper provides a theory to investigate the transmission of non-standard monetary policy to corporate lending in a monetary union where financial frictions limit firms’ access to external finance. The model incorporates a banking-sovereign nexus by assuming that sovereign default would generate a liquidity shock severely hitting domestic banks’ balance sheet. I find that this feature crucially impairs the transmission of monetary policy, generating asymmetric lending responses and the risk of contagion across economies. In particular I show that, in some circumstances, the liquidity injected into the risky country’s banks results in financing the sovereign rather than boosting lending, and sovereign risk in one country generates negative spillover effects on lending throughout the monetary union via the collateral channel. The model sheds light on the troubled transmission of the ECB’s policy measures to the economy of stressed countries during the euro sovereign debt crisis.
    Keywords: Bank Lending, Sovereign Risk, Monetary Policy, Crisis, Euro Area
    JEL: E44 E52 F36 G01 G33
    Date: 2016–03
  7. By: Sergey Sinelnikov-Murylev (Russian Foreign Trade Academy); Pavel Trunin (RANEPA)
    Abstract: Both economic theory and economic practice reveal a high degree of interdependence between fiscal and monetary policies. This relationship is especially evident if the government accumulates a considerable amount of money in its accounts with the central bank. The article analyzes the impact of the formation and spending of the Reserve Fund and the National Wealth Fund on the monetary policy of the Bank of Russia. This effect is considered from the point of view of the current economic crisis and the need to spend resources accumulated in sovereign wealth funds. Length: 13 pages
    Keywords: Russian economy, fiscal policy, monetary policy, sovereign wealth funds, forex interventions, international reserves
    JEL: E43 E52 E62 E63
    Date: 2016
  8. By: Gabriel Chodorow-Reich; Johannes Wieland
    Abstract: We study the effect of mean-preserving labor reallocation on business cycle outcomes. We develop an empirical methodology using a local area's exposure to industry reallocation based on the area's initial industry composition and employment trends in the rest of the country over a full employment cycle. Using confidential employment data by local area and industry over the period 1980-2014, we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical results subject to inclusion of two key, empirically plausible frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model results, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level.
    JEL: E24 E32 J6
    Date: 2016–01
  9. By: Kohei Hasui (Kobe University.); Tomohiro Sugo (European Central Bank); Yuki Teranishi (Keio University)
    Abstract: This paper investigates history dependent easing known as a conventional wis- dom of optimal monetary policy in a liquidity trap. We show that, in an economy where the rate of inflation exhibits intrinsic persistence, monetary tightening is earlier as inflation becomes more persistent. This property is referred as early tightening and in the case of a higher degree of inflation persistence, a central bank implements front-loaded tightening so that it terminates the zero interest rate policy even before the natural rate of interest turns positive. As a prominent feature in a liquidity trap, a forward guidance of smoothing the change in inflation rates contributes to an early termination of the zero interest rate policy.
    Keywords: liquidity trap; optimal monetary policy; inflation persistence; early tightening; forward guidance
    JEL: E31 E52 E58 E61
    Date: 2016–02
  10. By: Valerie A. Ramey
    Abstract: This chapter reviews and synthesizes our current understanding of the shocks that drive economic fluctuations. The chapter begins with an illustration of the problem of identifying macroeconomic shocks, followed by an overview of the many recent innovations for identifying shocks. It then reviews in detail three main types of shocks: monetary, fiscal, and technology shocks. After surveying the literature, each section presents new estimates that compare and synthesize key parts of the literature. The penultimate section briefly summarizes a few additional shocks. The final section analyzes the extent to which the leading shock candidates can explain fluctuations in output and hours. It concludes that we are much closer to understanding the shocks that drive economic fluctuations than we were twenty years ago.
    JEL: E3 E5 E6
    Date: 2016–02
  11. By: Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Mohammad Tajik
    Abstract: This paper examines the bank lending channel of monetary transmission in Malaysia, a country with a dual banking system including both Islamic and conventional banks, over the period 1994:01-2015:06. A two-regime threshold vector autoregression (TVAR) model is estimated to take into account possible nonlinearities in the relationship between bank lending and monetary policy under different economic conditions. The results indicate that Islamic credit is less responsive than conventional credit to interest rate shocks in both the high and low growth regimes. By contrast, the relative importance of Islamic credit shocks in driving output growth is much greater in the low growth regime, their effects being positive. These findings can be interpreted in terms of the distinctive features of Islamic banks.
    Keywords: Bank lending channel, Malaysia, Monetary transmission, Threshold VAR
    JEL: C32 E31 E42 E58
    Date: 2016
  12. By: Martin Beraja; Erik Hurst; Juan Ospina
    Abstract: We argue that it is difficult to make inferences about the drivers of aggregate business cycles using regional variation alone because (i) the local and aggregate elasticities to the same type of shock are quantitatively different and (ii) purely aggregate shocks are differenced out when using cross-region variation. We highlight the importance of these confounding factors by contrasting the behavior of U.S. aggregate time-series and cross-state patterns during the Great Recession. In particular, using household and scanner data for the US, we document a strong relationship across states between local employment growth and local nominal and real wage growth. These relationships are much weaker in US aggregates. In order to identify the shocks driving aggregate (and regional) business cycles we develop a semi-structural methodology that combines regional and aggregate data within a model of a monetary union. The methodology uses theoretical restrictions implied by a wage setting equation with nominal wage rigidities. Taking this methodology to the data, we find that a combination of both "demand" and "supply" shocks are necessary to account for the joint dynamics of aggregate prices, wages and employment during the 2007-2012 period in the US while only "demand" shocks are necessary to explain most of the observed cross-state variation. We conclude that the wage stickiness necessary to get demand shocks to be the primary cause of aggregate employment declines during the Great Recession is inconsistent with the flexibility of wages estimated from cross-state variation.
    JEL: E24 E31 E32 R12 R23
    Date: 2016–02
  13. By: Francesco Nucci (Bank of Italy); Marianna Riggi (Bank of Italy)
    Abstract: The fall in US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are shown to account for this phenomenon, with the participation rate being procyclical in the US from the inception of the crisis and countercyclical in the euro area. We rationalize these diverging dynamics by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching model. We show that the "added worker" effect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumer preferences is sufficiently strong. We then draw the implications of variable labor force participation rates for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on inflation stemming from the lack of a downward adjustment in real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation rate associated with wage rigidities.
    Keywords: labor force participation, real wage rigidities, habit, inflation, discouragement effect, added worker effect
    JEL: E31 E32 E24
    Date: 2016–02
  14. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector AK model of endogenous growth with utility-generating government purchases of goods and services. In sharp contrast to traditional Keynesian-type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief-driven fluctuations in our endogenously growing macroeconomy. This instability result is obtained regardless of (i) the degree of the public-spending preference externality, and (ii) whether private and public consumption expenditures are substitutes, complements, or additively separable in the household's utility function.
    Keywords: Progressive Income Taxation, Equilibrium (In)determinacy, Utility-Generating Government Spending, Endogenous Growth.
    JEL: E32 E62
    Date: 2016–03
  15. By: Fujisaki, Seiya
    Abstract: We analyze aggregate stability of a monetary economy with an interest-rate control type of monetary policy and endogenous consumption tax rate under balanced-budget rule, in terms of equilibrium determinacy. We find the effect of the response to income in monetary policy on macroeconomic stability depends on whether the consumption tax rate is adequately high.
    Keywords: aggregate stability, endogenous consumption tax rate, Taylor rule.
    JEL: E52 E62
    Date: 2016–03–03
  16. By: Mayes David (Auckland University); Paloviita Maritta (Bank of Finland); Viren Matti (Bank of Finland and Department of Economics, University of Turku)
    Abstract: It has been argued that one advantage of EMU in the EU has been an improvement in the credibility of monetary policy. This paper provides a new way of assessing the credibility of monetary policy by analyzing the dispersion of inflation–unemployment observations over time. In this way, we may reveal whether the short run Phillips curves have shifted due to changes in inflation expectations. This way of analyzing the anchoring of inflation expectations is both simple and free from ambiguities that are related to the choice of the Phillips curve specification and modelling of inflation expectations. The analysis uses data from eleven EMU countries and nine non-EMU countries that are used as points of comparison. The sample periods are 1984-1998 and 1999-2013. The analysis is based on dispersion measures where we use alternative weights for inflation and unemployment and also on a simple Misery index which is just a sum of inflation and unemployment values. The general outcome of the paper is that dispersion (and the Misery index) has decreased during the EMU period. The decrease has, however, been smaller than in control group countries. This implies that while the credibility of monetary policy may have increased under EMU, this just mirrors the general experience in the OECD over the same period.
    Keywords: Misery-index, inflation, unemployment, Phillips curve
    JEL: E31 E61
    Date: 2015–12
  17. By: Alice, Albonico; Alessia, Paccagnini; Patrizio, Tirelli
    Abstract: We build up and estimate a two-region DSGE model of the Euro area, investigating the interactions between the peripheral countries (PIIGS) and the rest of EMU. Our main focus is on the 2008-2009 financial crisis and on the subsequent 2010-sovereign bond crisis. One striking result is that the two crises are characterized by demand shocks in the core Euro area countries, whereas region-specific permanent technology shocks explain most of output growth slowdown in the PIIGS countries. Our results suggest that the capital flows reversals caused important supply-side e¤ects in the Eurozone periphery.
    Keywords: PIIGS, Euro crisis, two-country DSGE, Bayesian estimation
    JEL: C11 C13 C32 E21 E32 E37
    Date: 2016–03–11
  18. By: Xavier Gabaix
    Abstract: This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or "sparse," model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of some of the canonical models in macroeconomics and finance. In the life-cycle model, the agent initially does not pay much attention to retirement and undersaves; late in life, he progressively saves more, generating realistic dynamics. In the consumption-savings model, the consumer decides to pay little or no attention to the interest rate and more attention to his income. Ricardian equivalence and the Lucas critique partially fail because the consumer may not pay full attention to taxes and policy changes. In a Merton-style dynamic portfolio choice problem, the agent endogenously pays limited or no attention to the varying equity premium and hedging demand terms. Finally, in the neoclassical growth model, agents act on a simplified model of the macroeconomy; in equilibrium, fluctuations are larger and more persistent.
    JEL: D03 E21 E6 G02 G11
    Date: 2016–01
  19. By: Paczos, Wojtek
    Abstract: In state-of-the-art New Keynesian model firms are monopolistically competitive and prices are sticky. However, the average markup resulting from the monopolistic competition is usually assumed away either by production subsidy or by the zero-inflation steady state. Also, in models of an open economy the same level of price stickiness is assumed for both countries. In this paper I study the optimal rate of inflation in a two country model keeping the average markup and allowing price stickiness to differ between countries. There are two channels that govern the optimal rate of inflation. First, with local currencies an inflation tax is partly imposed on the foreign country, so it is optimal to inflate. Second, the average markup constitutes a cost of holding money so it is optimal to deflate, to compensate this cost. The paper has four novel findings: 1) in the local currencies regime the first motive dominates and the optimal inflation is positive. 2) In a monetary union the first motive is absent and the optimal inflation is negative and below the Friedman rule. 3) A monetary union improves global welfare even when stickiness is different in two countries. However, when this difference is large, only one country (the one with higher stickiness) benefits from the integration. 4) A monetary union can be welfare improving for each of both countries, if a transfer is introduced from the more sticky to the more flexible country of (depending on the parameters up to) 2% of its GDP.
    Keywords: Monetary Union, International Spillovers, Monetary Policy
    JEL: E52 F41 F42
    Date: 2016
  20. By: Susanto Basu; Brent Bundick
    Abstract: At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data.
    JEL: E32 E52
    Date: 2015–12
  21. By: Jess Benhabib; Alberto Bisin
    Abstract: Invariably across a cross-section of countries and time periods, wealth distributions are skewed to the right displaying thick upper tails, that is, large and slowly declining top wealth shares. In this survey we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanism generating skewness and thick tails. Further, we show how these mechanisms can be micro-founded by the consumption-saving decisions of rational agents in specific economic and demographic environments. Finally we map the large empirical work on the wealth distribution to its theoretical underpinning.
    JEL: B16 E13 E21 E24 E25
    Date: 2016–01
  22. By: Accolley, Delali
    Abstract: After documenting business cycle facts in Canada, I have used a bunch of popular models to explain them. The common features of these models are: the use of the neoclassical growth framework, the assumption that prices are flexible enough to ensure a general equilibrium, and the reliance on supply-side factors, mainly technological change, to explain business cycles. I have also assessed the ability of these models to replicate these business cycle facts.
    Keywords: Macroeconomics, Business Cycle
    JEL: E32
    Date: 2016–03–03
  23. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    Abstract: There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of the existing literature that provides a step toward accomplishing this objective. The model accounts for both the buildup and collapse of wholesale banking, and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instaibility in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.
    JEL: E44
    Date: 2016–01
  24. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: The surge in credit and house prices that preceded the Great Recession was particularly pronounced in ZIP codes with a higher fraction of subprime borrowers (Mian and Sufi, 2009). We present a simple model with prime and subprime borrowers distributed across geographic locations, which can reproduce this stylized fact as a result of an expansion in the supply of credit. Due to their low income, subprime households are constrained in their ability to meet interest payments and hence sustain debt. As a result, when the supply of credit increases and interest rates fall, they take on disproportionately more debt than their prime counterparts, who are not subject to that constraint.
    JEL: E21 E44 G21
    Date: 2016–01
  25. By: S. Osotimehin; F. Pappadà
    Abstract: Recessions are conventionally considered as times when the least productive firms are driven out of the market. How do credit frictions affect this cleansing effect of recessions? We build and calibrate a model of firm dynamics with credit frictions and endogenous entry and exit to investigate this question. We find that there is a cleansing effect of recessions in the presence of credit frictions, despite their effect on the selection of exiting and entering firms. This result holds true regardless of the nature of the recession: average firm-level productivity rises following a negative aggregate productivity shock, as well as following a negative financial shock. The intensity of the cleansing effect of recessions is however lower in the presence of credit frictions, especially when the recession is driven by a financial shock.
    Keywords: cleansing, business cycles, firm dynamics, credit frictions.
    JEL: E32 E44 D21
    Date: 2016
  26. By: Gary Gorton; Guillermo Ordoñez
    Abstract: Credit booms are not rare and usually precede financial crises. However, some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity, which subsequently falls much faster during bad booms. We develop a model in which crises happen when credit markets change to an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises become more likely during booms that display large productivity declines. As productivity decays over a boom as an endogenous result of more economic activity, a crisis may be the result of an exhausted boom and not necessarily of a negative productivity shock. We test the main predictions of the model and identify the component of productivity behind crises.
    JEL: E32 E44 G01 G1
    Date: 2016–02
  27. By: Grodecka, Anna (Financial Stability Department, Central Bank of Sweden)
    Abstract: A growing literature (i.e. Jaffee, Lynch, Richardson, and Van Nieuwerburgh, 2009, Acharya and Schnabl, 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U.S. would have dropped by only about a third and house prices by only a half of what we actually observed, if subprime MBS had been purchased by non-financial agents, rather than held by banks. This is because banks are subject to capital requirements and if MBS remain within the banking system, the fall in their value puts a strain on banks’ balance sheets. The subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets.
    Keywords: Subprime Borrowers; Securitization; Financial Intermediation; Great Recession
    JEL: E32 E44 G01 G13 G21 R21
    Date: 2016–03–01
  28. By: Honkapohja, Seppo
    Abstract: ​Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s.
    Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound
    JEL: E63 E52 E58
    Date: 2015–08–20
  29. By: Joseph Davis; Marc D. Weidenmier
    Abstract: We identify America’s First Great Moderation, a recession-free 16-year period from 1841 until 1856, that represents the longest economic expansion in U.S. history. Occurring in the wake of the debt-deleveraging cycle of the late 1830s, this “take-off” period’s high rates of economic growth and relatively-low volatility enabled the U.S. economy to escape downturns despite the absence of a central bank. Using new high frequency data on industrial production, we show that America’s First Great Moderation was primarily driven by a boom in transportation-goods investment, attributable to both the wider adoption of steam railroads and river boats and the high expected returns for massive wooden clipper ships following the discovery of gold in California. We do not find evidence that agriculture (i.e., cotton), domestic textile production, or British economic conditions played any significant role in this moderation. The First Great Moderation ended with a sharp decline in transportation investment and bank credit during the downturn of 1857-8 and the coming American Civil War. Our empirical analyses indicate that the low-volatility states derived for both annual industrial production and monthly stock prices during the First Great Moderation are similar to those estimated for the Second Great Moderation (1984-2007).
    JEL: E01 E32 N1 N11
    Date: 2016–01
  30. By: Peter Rupert (University of California-Santa Barbara); Roman Šustek (Queen Mary University of London and Centre for Macroeconomics)
    Abstract: We scrutinize the monetary transmission mechanism in New-Keynesian models, focusing on the role of capital, the key ingredient in the transition from the basic framework to DSGE models. The widely held view that monetary policy affects output and inflation in these models through a real interest rate channel is shown to be misguided. A decline in output and inflation is consistent with a decline, increase, or no change in the real interest rate. The expected path of Taylor rule shocks and the New-Keynesian Phillips Curve are key for inflation and output; the real rate largely reflects consumption smoothing.
    Keywords: New-Keynesian models, Monetary transmission mechanism, Real interest rate channel, Capital
    JEL: E30 E40 E50
    Date: 2016–02
  31. By: Huber, Florian; Punzi, Maria Teresa
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investor's portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study.
    Keywords: Zero Lower Bound,Shadow interest rate,Housing Market,Time-varying parameter VAR
    JEL: C32 E23 E32
    Date: 2016
  32. By: Guay Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: Understanding the impact of changes in interest rates on house prices is important for managing house price bubbles and ensuring housing affordability. This paper investigates the effect of interest rates on regional house price to income measures based on a non-linear smooth transition VAR model of inter-regional house price dynamics. To minimize the impact of housing mix changes on estimated effects, we apply the model to an Australian dataset of regional hedonic house price indices that account for both changes in housing mix and quality over time. The empirical analysis provides evidence that house price to income ratios depend non-linearly on interest rates, and moreover that there is an interest rate ‘transition point’ below which a house price bubble is probable. We investigate the implications for monetary policy of stable and unstable house price regimes and propose a housing lending rate lower bound that achieves long-run house price stability in the presence of regime uncertainty. To check the generality of the result, we also apply the model to aggregate Australian and US data. Classification-C30, E43, E52, G21, R10, R31
    Keywords: House prices, interest rates, monetary policy, nonlinear VAR, housing affordability, bubbles
    Date: 2016–01
  33. By: Jeffrey A. Frankel
    Abstract: After a 30-year absence, calls for international coordination of macroeconomic policy are back. This time the issues go by names like currency wars, taper tantrums, and fiscal compacts. In traditional game theory terms, the existence of spillovers implies that countries are potentially better off if they coordinate policies than under the Nash non-cooperative equilibrium. But what is the nature of the spillover and the coordination? The paper interprets recent macroeconomic history in terms of four possible frameworks for proposals to coordinate fiscal policy or monetary policy: the locomotive game, the discipline game, the competitive depreciation game and the competitive appreciation game. (The paper also considers claims that monetary coordination has been made necessary by the zero lower bound among advanced countries or financial imperfections among emerging markets.) Perceptions of the sign of spillovers and the direction of proposed coordination vary widely. The existence of different models and different domestic interests may be as important as the difference between cooperative and non-cooperative equilibria. In some cases complaints about foreigners’ actions and calls for cooperation may obscure the need to settle domestic disagreements.
    JEL: F42
    Date: 2016–01
  34. By: Soldatos, Gerasimos T.
    Abstract: Contrary to what the literature on the linkage between debt accumulation and hidden economy suggests, this paper advocates that the two relationships, tax-hidden economy size and inflation-hidden economy size, have to be inverse because it is the relative, not the absolute hidden economy size that matters, and it is this that should be the yardstick for empirical work on the subject. It is also this that should be the yardstick for policymaking against debt accumulation by following the anti-austerity policy recipe that debt manipulation should be relying more on money than on taxation, that as soon as more money facilitates hidden activities, tax design should be counteracting this trend too, and that the Laffer curve should be peaking at an average tax rate which is less than one. This rule derives as a matter of preserving such official-cum-hidden economy technical-cum-allocative efficiency over the course of the business cycle that keeps the overall economy always in general equilibrium.
    Keywords: Public debt, Non-observed/Hidden sector, Taxation, Income elasticity of money demand, Structural efficiency
    JEL: E26 E32 E61 H63
    Date: 2015
  35. By: Lars E.O. Svensson
    Abstract: “Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation. LAW has a cost if no crisis occurs, but, importantly, it also has an additional cost if a crisis occurs, because the cost of a crisis is higher if the economy initially is weaker due to LAW. This additional cost, disregarded by the previous literature, is the main part of the costs of LAW. With that additional cost, for existing empirical estimates, costs of LAW exceed benefits by a substantial margin, even if monetary policy is non-neutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.
    JEL: E52 E58 G01
    Date: 2016–01
  36. By: Rudanko, Leena (Federal Reserve Bank of Philadelphia); Krusell, Per (Stockholm University, CEPR, and NBER)
    Abstract: We analyze a labor market with search and matching frictions in which wage setting is controlled by a monopoly union. Frictions render existing matches a form of firm-specific capital that is subject to a hold-up problem in a unionized labor market. We study how this hold-up problem manifests itself in a dynamic infinite horizon model with fully rational agents. We find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions because of hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely, however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to future wages is important for outcomes: With full commitment to future wages, the union achieves efficient hiring in the long run but hikes up wages in the short run to appropriate rents from firms. Without commitment, and in a Markov perfect equilibrium, hiring is well below its efficient level both in the short and the long run. We demonstrate the quantitative impact of the union in an extended model with partial union coverage and multiperiod union contracting.
    Keywords: Labor unions; Frictional labor markets; Time inconsistency; Limited commitment
    JEL: E02 E24 J51 J64
    Date: 2016–02–29
  37. By: Alexander Bick; Nicola Fuchs-Schündeln; David Lagakos
    Abstract: How do average hours worked vary across the world income distribution? To answer this question, we build a new internationally comparable database of hours worked covering countries of all income levels. We document that average hours worked per adult are substantially higher in low-income countries than in high-income countries. This pattern holds for both men and women, for adults of all ages and education levels, and along both the extensive margin (employment rates) and intensive margin (hours per worker). Our results imply that labor productivity and welfare differences across countries are larger than suggested by differences in consumption per capita.
    JEL: E01 E24 J21 J22
    Date: 2016–01
  38. By: Deryugina, Elena; Kovalenko, Olga; Pantina, Irina; Ponomarenko, Alexey
    Abstract: ​This article presents three alternative models for decomposing loan developments into components associated with changes in loan demand and supply fundamentals. Two models are based on macro data (error correction model and structural vector autoregression with sign restrictions) and one is based on bank-specific Bank Lending Survey results. We conclude that although loan growth in Russia converges to a long-run equilibrium determined by macroeconomic (demand) factors the convergence is likely to be driven by bank-side (supply) shocks. We identify large and unexplained supply shocks in loan fluctuations during the crisis of 2008–2009, signifying an impairment of credit markets. We also find contractionary shocks unrelated to demand fundamentals or balance sheet structures in 2013, although in general loan developments in 2013 and the first half of 2014 were not at all extraordinary.
    Keywords: loan demand, loan supply, cointegration, structural VAR, sign restrictions, Bank Lending Survey, Russia
    JEL: C32 E51 G21
    Date: 2015–03–05
  39. By: Acemoglu, Daron; Akcigit, Ufuk; Kerr, William R.
    Abstract: The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input-supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various di¤erent types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.
    Keywords: economic fluctuations, geographic collocation, input-output linkages, networks, propagation, shocks
    JEL: E32
    Date: 2015–12–09
  40. By: Crowley, Patrick M.; Trombley, Christopher
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles, growth cycles, frequency domain, optimal currency area, macroeconomic synchronization, monetary policy, single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  41. By: Carmen M. Reinhart; Vincent Reinhart; Christoph Trebesch
    Abstract: Capital flow and commodity cycles have long been connected with economic crises. Sparse historical data, however, has made it difficult to connect their timing. We date turning points in global capital flows and commodity prices across two centuries and provide estimates from alternative data sources. We then document a strong overlap between the ebb and flow of financial capital, the commodity price super-cycle, and sovereign defaults since 1815. The results have implications for today, as many emerging markets are facing a double bust in capital inflows and commodity prices, making them vulnerable to crises.
    JEL: E30 E44 F44 G01 N10 N20
    Date: 2016–02
  42. By: Stangebye, Zachary
    Abstract: It is shown in a standard quantitative model of sovereign debt and default that sentiment shocks can alter the distribution of fundamental defaults. The channel through which this occurs is a new type of dynamic lender coordination problem in sovereign debt markets that I call a dynamic panic. During a dynamic panic of this kind, expectations of future negative investor sentiments dilute the price of long-term debt; the sovereign's optimal response to such a panic can be to borrow aggressively, which justifies investors' fears of dilution. Such panics generate naturally many of the unique features the recent Eurozone crisis, and so I explore policy implications in this environment. I find that rate ceilings are an ineffective policy tool but that liquidity provision, appropriately implemented, can eliminate such panics.
    Keywords: Sovereign Debt Crises, Confidence-Driven Crises, Long-Term Debt
    JEL: E44 F34 G01 H63
    Date: 2015–04–14
  43. By: Tomasz Łyziak
    Abstract: To what extent financial crisis whose sharp face begun in 2008 and low inflation environment that started in 2013 affect inflation expectations in Poland? Have inflation expectations of the private sector become more forward-looking? Is monetary policy still able to influence expectations as compared with the pre-crisis period? Those are the main questions addressed in this paper. To answer them we analyse survey-based measures of inflation expectations of consumers, enterprises and financial sector analysts. Estimation of simple and extended hybrid models of inflation expectations combined with verification of orthogonality of expectational errors with respect to available information leads us to the conclusion that since 2008 inflation expectations of enterprises and financial sector analysts have become more forward-looking, better exploiting available information and more sensitive to interest rate changes and developments in the real economy. At the same time formation of consumer inflation expectations has not been affected significantly.
    Keywords: Inflation expectations, survey, Poland.
    JEL: D84 E31
    Date: 2016
  44. By: Kinda Cheryl Hachem; Zheng Michael Song
    Abstract: China increased bank liquidity standards in the late 2000s. The interbank market became tighter and more volatile and credit soared, contrary to expectations. To explain this, we argue that shadow banking developed among Chinaʼs small and medium-sized banks to evade the higher liquidity standards. The shadow banks, which were not subject to interest rate ceilings on traditional bank deposits, then poached deposits from big commercial banks. In response, big banks used their substantial interbank market power to restrict credit to the shadow banks and increased their lending to non-financials. A calibration of our unified framework generates a quantitatively important credit boom and higher and more volatile interbank interest rates as unintended consequences of higher liquidity standards.
    JEL: E44 G28
    Date: 2016–01
  45. By: Libero Monteforte (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: This paper investigate the effects of the prolonged double-dip recession on the productive capacity of the Italian manufacturing sector, employing three methods: a production function approach, a survey-based methodology and a statistical filtering of the industrial production series. We estimate that between 2007 and 2013 capacity contracted by 11�17%, depending on the method. We also conduct an exercise to quantify the loss with respect to a counterfactual evolution of capacity in a �no-crisis� scenario in which pre-2008 trends are extrapolated: in this case the loss is close to 20% for all methods. Finally, we identify the main sectors of activity responsible for the reduction in capacity in the baseline and counterfactual scenarios, and find that they don�t always coincide, reflecting uneven dynamics across sectors before and during the recession.
    Keywords: productive capacity, manufacturing
    JEL: E32 L16 L60
    Date: 2016–01
  46. By: Arito Ono (Chuo University); Kosuke Aoki (University of Tokyo); Shinichi Nishioka (Bank of Japan); Kohei Shintani (Bank of Japan); Yosuke Yasui (Bank of Japan)
    Abstract: This paper examines the effects of long-term interest rates on bank loan supply. Using a simple mean-variance model of bank portfolio selection subject to the value-at-risk (VaR) constraint, we make theoretical predictions on two transmission channels through which lower long-term interest rates increase loan supply: (i) the portfolio balance channel and (ii) the bank balance sheet channel. We construct a unique and massive firm-bank loan-level panel dataset for Japan spanning the period 2002-2014 and test our theoretical predictions to find the following. First, an unanticipated reduction in long-term interest rates increased bank loan supply, which lends support to the existence of the portfolio balance channel. Second, banks that enjoyed larger capital gains on their bond holdings due to a decline in interest rates significantly increased their loan supply, which lends support to the existence of the bank balance sheet channel. Further, the bank balance sheet channel was stronger in the case of loans to smaller, more leveraged, and less creditworthy firms, which suggests that a stronger balance sheet leads banks to increase their loan supply to credit-constrained and riskier firms.
    Keywords: portfolio balance channel, bank balance sheet channel, value-at-risk constraint
    JEL: E44 E52 G11 G21
    Date: 2016–03–02
  47. By: Crowley, Patrick M.; Hudgins, David
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis, euro area, fiscal policy, LQ tracking, monetary policy, optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  48. By: Aurélien Goutsmedt (Centre d'Economie de la Sorbonne)
    Abstract: The stagflation phenomenon is regarded as one of the cause of the Keynesian paradigm breakdown in the 1970s. The New Classical school took advantage of this breakdown. However, its discourse on the stagflation was not so clear and remained in a implicit shape. The paper aim at rebuilding the New Classical tale of the stagflation that stroke the United-States economy in the 1970s. We show that psychological ideas (expectations, beliefs, credibility) lay in the heart of the explanation. In the same time, oil shocks were left in the background. Besides, the New Classical school put much more emphasis on the inflation issue and experienced some difficulties to deal with the increase in unemployment
    Keywords: History of macroeconomics; Macroeconomics; New Classical School; Stagflation
    JEL: B22 E32 E52 N12
    Date: 2016–02
  49. By: Severin Bernhard
    Keywords: GDP revisions, national accounts, monetary policy
    JEL: C22 C82 E32 E37 E52
    Date: 2016
  50. By: Rajnish Mehra; Arunima Sinha
    Abstract: We examine the term structure of interest rates in India to see if the yield curve can be rationalized based on the ‘expectations hypothesis’. Although we find evidence of predictability for holding period returns, we reject the null hypothesis that the expectations hypothesis holds for the period under consideration. Contrary to the finding in the US, the volatility of Indian bond returns is consistent with the expectations hypothesis. Returns on long-term bonds are less volatile than those of short-term bonds. The volatility puzzle documented by Shiller on US data is not observed in Indian bond returns.
    JEL: E43 E44 G12 G15
    Date: 2016–02
  51. By: Chad Syverson
    Abstract: The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at least in part illusory, because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges to this “mismeasurement hypothesis.” First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies (ICTs, the type of goods most often cited as sources of mismeasurement). Second, estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown. The largest—by some distance—is less than one-third of the purportedly mismeasured GDP. Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.
    JEL: E2 O3 O4
    Date: 2016–02
  52. By: Turhan, Ibrahim M.; Gumus, Nihat
    Abstract: The main objective of this study is to provide additional evidence on the operation and relative importance of monetary transmission channels in Turkey. The results of the VAR analysis conducted using monthly data between January 2004 and November 2013 suggest that the traditional channels of interest rates, exchange rates, and credit do work in Turkish economy. However, the most striking finding of the study is the relative importance of exchange rate channel in the transmission of monetary policy decision into real economy. Variance decomposition analysis shows that the explained variance by real effective exchange rates is higher for all variables as compared to the variance explained by interest rates. However, interest rates seem to be still a useful tool to manage monetary policy given its role in controlling the changes in exchange rates. The granger causality analysis points into the fact that while interest rates have a role in leading the volatility of exchange rates, exchange rates have an impact on foreign debt holdings of banks and credit growth. On the other hand, foreign debt positions of banks and other sector firms together with credit growth granger causes industrial production. The study has some remarkable ramifications in terms of monetary policy design.
    Keywords: Monetary transmission mechanism, monetary policy, interest rate channel, exchange rate channel
    JEL: E52 E58 G18
    Date: 2014–05–12
  53. By: Nikhil Patel
    Abstract: This paper models the interaction between international trade finance and monetary policy in open economies and shows that trade finance affects the propagation mechanism of all macroeconomic shocks that are identified to be drivers of business cycles in advanced economies. The model is estimated with Bayesian techniques using output, price and bilateral trade data from the US and the Eurozone. The estimation exercise shows that trade finance conditions, which in turn are driven by US interest rates, are critical in explaining economic fluctuations. Quantitatively, trade finance has a larger impact on spillover effects of shocks to foreign countries, implying that incorporation of trade finance is particularly important when modeling small open economies.
    Keywords: trade finance, monetary policy, DSGE
    Date: 2016–01
  54. By: Gerdie Everaert; Lorenzo Pozzi; Ruben Schoonackers (-)
    Abstract: This paper investigates the degree of time variation in the excess sensitivity of aggregate con- sumption growth to anticipated aggregate disposable income growth using quarterly US data over the period 1953-2014. Our empirical framework contains the possibility of stickiness in aggregate consumption growth and takes into account measurement error and time aggregation. Our empirical specification is cast into a Bayesian state space model and estimated using Markov Chain Monte Carlo (MCMC) methods. We use a Bayesian model selection approach to deal with the non-regular test for the null hypothesis of no time variation in the excess sensitivity parameter. Anticipated disposable income growth is calculated by incorporating an instrumental variables estimation approach into our MCMC algorithm. Our results suggest that the excess sensitivity parameter in the US is stable at around 0.24 over the entire sample period.
    Keywords: Excess sensitivity, time-variation, consumption, income, MCMC, Bayesian model selection
    JEL: E21 C11 C22 C26
    Date: 2016–01
  55. By: Waqas Ahmed (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Muhammad Rehman (State Bank of Pakistan)
    Abstract: We analyze optimality of pro-cyclical monetary policy in the presence of informal sector and firm level constraint. Our findings suggest that in case of export demand shock pro-cyclical monetary policy suits only when shock is severe and domestic firms have high leverage ratio. However, the conventional monetary policy helps cushioning the loss in output when the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to keep domestic employment or consumption from falling (when negative shock hits the economy). We cannot find any disproportionate impact of monetary policy on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly.
    Keywords: Informal sector, credit constraint, exchange rate and monetary policy
    JEL: F0 F4 O17 O23 E52
  56. By: Daniele, Vittorio
    Abstract: This paper discusses the hypothesis of secular stagnation. Firstly, the debate on stagnation, from Alvin Hansen (1938) to Marxists and more recent interpretations is illustrated. Then, the demographic and macroeconomic trends of Italy, Japan and the United States are examined in relationship with the secular stagnation hypothesis.
    Keywords: Stagnazione secolare; disuguaglianze; crescita economica; Italia; invecchiamento popolazione
    JEL: B10 B22 B24 B5 E22 O11
    Date: 2015–11–10
  57. By: Sánchez-Fung, José R.
    Abstract: ​The paper estimates the impact of monetary policy on income inequality in China. The empirical modelling finds that a battery of monetary indicators, including a monetary overhang measure derived from a money demand equation, and the change in the unemployment rate lead to increases in the Gini coefficient. However, only unemployment is statistically significant. The lack of significance of the monetary indicators is robust to alternative specifications with variability in nominal aggregate demand instead of unemployment.
    Keywords: monetary policy, inequality, inflation, unemployment, China
    JEL: E52 D31
    Date: 2015–05–13
  58. By: Duwicquet, Vincent; Mazier, Jacques; Petit, Pascal; Saadaoui, Jamel
    Abstract: The euro crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, few alternative mechanisms are available. Nevertheless, fiscal policy could play an active role. The chapter is organized as follow. In the first part, we give a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and we discuss the structural character of these misalignments. In the second part, we analyse the deadlock of the actual European institutional framework and propose two alternative exit strategies, a first step towards a fiscal federalism or, on the opposite, a new monetary regime based on a multi-euro system.
    Keywords: Euro Crisis, Exchange Rate Misalignments, Fallback Strategies.
    JEL: E1 E12 E42 F41 F42
    Date: 2015–02
  59. By: 讀肴揄, 螽∽ク; 坂井, 功治
    Abstract: 企業セクター全体における借入金の変化は、借入金を増加させた企業の資金フロー(credit creation)と借入金を減少させた企業の資金フロー(credit destruction)の様々な組み合わせによってもたらされる。企業の資金調達行動には、2つの資金フローを合計したネットの変化では表すことができない異質性があり、企業間で絶え間ない資金再配分(credit reallocation)が生じている可能性がある。これらの異質性および資金再配分の性質を理解することは、企業の資金調達行動のメカニズムを理解するうえで重要な意義をもつ。本稿では、『法人企業統計季報』(財務省)に収録されている1980年度第1四半期から2014年度第1四半期までの日本企業を対象とし、Davis and Haltiwanger (1992)の雇用再配分の分析手法を援用して、企業の資金調達行動の異質性および資金再配分の性質を検証する。得られた結果は以下の5点である。第一に、景気変動のどの局面においても、ネットの資金量の変化を相当程度上回る資金再配分(credit reallocation)が生じており、資金調達行動は企業間で非常に異質である。第二に、credit destructionの変動はcreationの変動よりも大きい。この結果は、credit creationにはサーチやスクリーニングなどの様々な費用が生じるとする情報の非対称性の理論やサーチ・マッチング理論と整合的である。第三に、資金再配分の規模は1990年代に急激に低下しており、この時期に貸出市場の資金再配分機能が低下していたとする議論と整合的である。第四に、日本企業の資金再配分は景気変動と有意な相関をもつ。具体的には、credit creationとreallocationは景気と順相関である一方で、destructionは景気と逆相関である。第五に、中小企業においては、credit destructionが景気と逆相関である一方で、creationとreallocationは景気変動と有意な相関をもたない。これは、情報の非対称性の問題がより深刻な中小企業においては、景気拡張期の正の需要ショックに対するcredit creationの反応が大企業より小さい可能性を示唆している。
    Keywords: 企業金融, 金融機関, 貸出市場, 資金配分, 景気変動
    JEL: E44 E51 G30
    Date: 2016–02
  60. By: Gaetano Gaballo; Ramon Marimon
    Abstract: We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB's TALF credit-easing program in 2009. We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers' reactions to their offers. Nevertheless, credit crises - where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case.
    JEL: D53 D83 D84 E44 E61 G01 G20 J64
    Date: 2016–02
  61. By: Krupkina, Anna; Ponomarenko, Alexey
    Abstract: We apply empirical modelling set-ups developed to capture the hysteresis effect in the data on deposit dollarization in a cross-section of emerging market economies. Specifically, we estimate a nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on the current value of dollarization and previous episodes of sharp depreciation of the national currency over the past five years. When exchange rates are stable, convergence to a higher equilibrium level of dollarization begins when the 45–50% thresh-old of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence to the higher equilibrium implies quarterly increases of 1.2–3 percentage points in the ratio of foreign currency deposits to total deposits.
    Keywords: dollarization, hysteresis, nonlinear model, emerging markets
    JEL: C23 E41 F31
    Date: 2015–11–10
  62. By: Nakajima, Makoto; Tuzemen, Didem (Federal Reserve Bank of Kansas City)
    Abstract: An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act (ACA). Our model implies a significant reduction in the uninsured rate from 22.6 percent to 5.6 percent. {{p}} The model predicts a moderate positive welfare gain from the ACA, due to redistribution of income through Health Insurance Subsidies at the Exchange as well as Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA, in expense of 1.6 million full-time jobs, mainly because the link between full-time employment and health insurance is weakened. The model predicts a small negative effect on total hours worked (0.36%), partly because of the general equilibrium effect.
    Keywords: Health insurance; Affordable Care Act; Labor market;
    JEL: D91 E24 E65 I10
    Date: 2015–09–01
  63. By: Christopher S. Carpenter; Chandler B. McClellan; Daniel I. Rees
    Abstract: We provide the first analysis of the relationship between economic conditions and the use of illicit drugs other than marijuana. Drawing on US data from 2002-2013, we find mixed evidence with regard to the cyclicality of illicit drug use. However, there is strong evidence that economic downturns lead to increases in substance use disorders involving hallucinogens and prescription pain relievers. These effects are robust to a variety of specification choices and are concentrated among prime-age white males with low educational attainment. We conclude that the returns to spending on the treatment of substance use disorders are particularly high during economic downturns.
    JEL: E32 I12
    Date: 2016–02
  64. By: Quaas, Friedrun; Quaas, Georg
    Abstract: Die EZB tut alles, um ihr Inflationsziel von 2 Prozent zu erreichen - bislang ohne Erfolg. Stattdessen machen sich unerwünschte Nebeneffekte breit. So wird vermutet, dass niedrige Zinssätze auf dem Kapitalmarkt der Produktivität einer Volkswirtschaft schaden. Auf die Frage, warum die Konsumenten-Preise trotz niedriger Zinssätze und eines wachsenden Geldangebotes nicht steigen, geben die Standardmodelle der neoklassischen Synthese eine eindeutige Antwort: Es fehlt die Nachfrage einer wachsenden Wirtschaft. Das neoklassische Paradigma ist jedoch offen für weitere, möglicherweise präzisere Antworten. So wird vermutet, dass die Inflation erst einsetzt, wenn der Konsum der Reichen ansteigt. Beide Hypothesen - der negative Einfluss niedriger Zinsen auf die Produktivität und der Luxuskonsum als Preistreiber - wären eine überraschende Bereicherung der makroökonomischen Theorie. Die langfristige Entwicklung der deutschen Volkswirtschaft bestätigt zwar die Aussagen der Standardmodelle, nicht aber jene Ergänzungen.
    JEL: B53 E13 E31
    Date: 2016
  65. By: Porshakov, Alexey; Deryugina, Elena; Ponomarenko, Alexey; Sinyakov, Andrey
    Abstract: Real-time assessment of quarterly GDP growth rates is crucial for evaluation of economy’s current perspectives given the fact that respective data is normally subject to substantial publication delays by national statistical agencies. Large information sets of real-time indicators which could be used to approximate GDP growth rates in the quarter of interest are in practice characterized by unbalanced data, mixed frequencies, systematic data revisions, as well as a more general curse of dimensionality problem. The latter issues could, however, be practically resolved by means of dynamic factor modeling that has recently been recognized as a helpful tool to evaluate current economic conditions by means of higher frequency indicators. Our major results show that the performance of dynamic factor models in predicting Russian GDP dynamics appears to be superior as compared to other common alternative specifications. At the same time, we empirically show that the arrival of new data seems to consistently improve DFM’s predictive accuracy throughout sequential nowcast vintages. We also introduce the analysis of nowcast evolution resulting from the gradual expansion of the dataset of explanatory variables, as well as the framework for estimating contributions of different blocks of predictors into now-casts of Russian GDP.
    Keywords: GDP nowcast, dynamic factor models, principal components, Kalman filter, nowcast evolution
    JEL: C53 C82 E17
    Date: 2015–05–28
  66. By: Carike Claassen, Elsabe Loots and Alain Kabundi
    Abstract: This paper analyses business cycle comovement between African economies and advanced economies. It covers the period 1980 to 2011. The empirical analysis is based on the Dynamic Factor Model applied to annual data for African and G7 countries, covering the period 1980 to 2011. The results indicate that middle-income African countries show consistent business cycle variance shares, both before and after controlling for the influence of the G7. This implies that while middle-income African countries have coupled to the G7 business cycle since the 1980s, they have also coupled among themselves. Trade appears to be the important factor underlying the comovement. This is not the case for oil exporting countries and low-income economies that have, after controlling for the influence of the G7, all decoupled during the Great Recession. The case for fragile states is not conclusive, although these states do rely much more on trade with other African groups than with the G7.
    Keywords: dynamic factor analysis, Business Cycle, decoupling
    JEL: E32 F44 G01 O55
    Date: 2016
  67. By: Kaiji Chen; Jue Ren; Tao Zha
    Abstract: We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China.
    JEL: E02 E5 G11 G12 G28
    Date: 2016–01
  68. By: Fidrmuc, Jarko; Korhonen, Iikka
    Abstract: We summarize previous research on China’s business cycle correlation with other countries with the help of meta-analysis techniques. We survey 71 related papers along with all the characteristics of the estimations as well as those of the authors. We confirm that especially Pacific Rim countries have relatively high business cycle correlation with China. However, it appears that many characteristics of the studies and authors do influence the reported degree of business cycle synchronization. For instance, Chinese-language papers report higher correlation coefficients. Despite of this, we do not detect a robust publication bias in the papers.
    Keywords: business cycle synchronization, meta-analysis, China
    JEL: E32 F44
    Date: 2015–03–04
  69. By: Razmi, Fatemeh; M., Azali; Chin, Lee; Habibullah, Muzafar Shah
    Abstract: This article investigates the channels of monetary transmission mechanism alongside oil price and the US industrial production, as two causes of recent crisis, during the pre-and post-crisis of 2007-2009 in Thailand. The channels of monetary transmission mechanism barely have an effect on consumer price index and industrial production while oil price strongly affects both industrial production and consumer price index and the US industrial production robustly influences consumer price index during pre-crisis. However, oil price and the US industrial production greatly lose their effects on consumer price index and industrial production after the crisis period, the oil price is still mostly explains the variation of the consumer price index. The stock price is most effective conduit for monetary policy to industrial production during post-crisis period.
    Keywords: Monetary transmission, external shocks, global financial crisis, oil price, US economy
    JEL: E0
    Date: 2015
  70. By: Alessandro Dovis; Mikhail Golosov; Ali Shourideh
    Abstract: We study optimal fiscal and redistributive policies in an open economy without commitment. Due to its redistributive motives, the government’s incentive to default on its external debt is affected by inequality. We show that in equilibrium the economy endogenously fluctuates between two regimes. In the first regime, the government borrows from abroad, spends generously on transfers and keeps the inequality low. In the second regime, it implements austerity-like policies by cutting transfers, reducing foreign debt and increasing the inequality. The equilibrium dynamics resembles the populist cycles documented in many developing countries.
    JEL: E60 F30 F34
    Date: 2016–01
  71. By: Mariotto, Carlotta; Verdier, Marianne
    Abstract: Over the recent years, the development of Internet banking and mobile banking has had a considerable impact on competition in the retail banking industry. In some countries, the regulatory framework has been adapted to allow non-banks to operate in retail payments and compete with banks for deposits. Several platforms or large retailers have started to offer innovative financial products to their customers. In this paper, we survey the issues related to innovation and competition in Internet banking and mobile banking and discuss some perspectives for future research.
    Keywords: bank competition, bank regulation, non-banks, payment systems, Internet banking, mobile banking, platform markets
    JEL: E42 G21 L96
    Date: 2015–11–25
  72. By: Andrea Bastianin (University of Milan and FEEM); Marzio Galeotti (University of Milan and IEFE-Bocconi); Matteo Manera (University of Milan-Bicocca and FEEM)
    Abstract: The security of energy supply is a key geopolitical factor in the relationship between the European Union and the southern neighborhood countries of the Middle East and North Africa region. We study the response of eight Mediterranean economies to exogenous oil supply shocks. We focus on the effects on economic activity - as measured by real Gross Value Added - for the whole economy, as well as for selected industries. We show that there are clear patterns characterizing the response of different economies to an unexpected reduction in global oil production. The main determinants of these patterns are the degree of energy intensity and energy dependence of the country, as well as the composition of its Gross Value Added.
    Keywords: Oil Supply Shocks, Mediterranean, Growth
    JEL: C22 E32 Q43 Q41
    Date: 2015–10
  73. By: J Paul Dunne and Elizabeth Kasekende
    Abstract: While the effect of financial innovation on money demand has been widely researched in industrialised countries, because of its major role in monetary policy, few studies have focussed on developing countries. This is surprising given the considerable growth in financial innovation in Sub-Saharan Africa in recent years and its potential implications for developing country macroeconomic policy. This paper investigates the development of financial innovation and its impact on money demand in the region using panel data estimation techniques for 34 countries between 1980 and 2013. The results indicate that there is a negative relationship between financial innovation and money demand. This implies that financial innovation plays a crucial role in explaining money demand in Sub-Saharan Africa and given innovations such as mobile money in the region this can have important implications for future policy design.
    Keywords: Money demand, financial innovation
    JEL: E41
    Date: 2016
  74. By: Robert J. Barro; Gordon Y. Liao
    Abstract: A new options-pricing formula applies to far-out-of-the money put options on the overall stock market when disaster risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. In the applicable region, the elasticity of the put-options price with respect to maturity is close to one. The elasticity with respect to exercise price is greater than one, roughly constant, and depends on the difference between the power-law tail parameter and the coefficient of relative risk aversion, γ. The options-pricing formula conforms with data from 1983 to 2015 on far-out-of-the-money put options on the U.S. S&P 500 and analogous indices for other countries. The analysis uses two types of data—indicative prices on OTC contracts offered by a large financial firm and market data provided by OptionMetrics, Bloomberg, and Berkeley Options Data Base. The options-pricing formula involves a multiplicative term that is proportional to the disaster probability, p. If γ and the size distribution of disasters are fixed, time variations in p can be inferred from time fixed effects. The estimated disaster probability peaks particularly during the recent financial crisis of 2008-09 and the stock-market crash of October 1987.
    JEL: E44 G12 G13
    Date: 2016–01
  75. By: KANO, Takashi
    Abstract: Engel and West (2005) claim that the observed near random-walk behavior of nominal exchange rates is an equilibrium outcome of a present-value model of a partial equilibrium asset approach when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating discount factors close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor creates a theoretical trade-off within a neoclassical, two-country, incomplete-market monetary model; on the one hand, the unit discount factor generates near random-walk nominal exchange rates, while, on the other hand, it counterfactually implies perfect consumption risk sharing as well as flat money demand. Bayesian posterior simulation exercises based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the canonical model; in particular, the market discount factor is identified as being much smaller than one.
    Keywords: Exchange rate, Present-value model, Economic fundamental, Random walk, Two-country model, Incomplete market, Cointegrated TFPs, Perfect risk sharing
    JEL: E31 E37 F41
    Date: 2016–03–07
  76. By: Hyeongwoo Kim; Jintae Kim
    Abstract: We empirically investigate dynamic responses of 49 IMF primary commodity prices to the US dollar exchange rate shock using recursively identified vector autoregressive models. Our major empirical findings are as follows. First, price adjustments toward the new equilibrium tend to be gradual with a few exceptions. We propose and estimate two measures of price-stickiness, which provide strong evidence of short-run price rigidity in most commodities. Second, our dynamic elasticity analysis implies that price responses are quite heterogeneous even in the long-run. Some commodity prices over-adjust to the exchange rate shock, which implies higher volatility of those prices than that of the exchange rate. Third, for those commodities that over-adjust, prices in the rest of the world would rise significantly when the US dollar depreciates unexpectedly, suggesting a role for price stabilization policies.
    Keywords: World Commodity Prices; Price Stickiness; Dynamic Elasticity; Vector Autoregression; Impulse-Response Function
    JEL: E31 F31 Q02
    Date: 2016–03
  77. By: Dovern, Jonas; Hartmann, Matthias
    Abstract: We propose an imperfect information model for the expectations of macroeconomic forecasters that explains differences in average disagreement levels across forecasters by means of cross sectional heterogeneity in the variance of private noise signals. We show that the forecaster-specific signal-to-noise ratios determine both the average individual disagreement level and an individuals' forecast performance: forecasters with very noisy signals deviate strongly from the average forecasts and report forecasts with low accuracy. We take the model to the data by empirically testing for this implied correlation. Evidence based on data from the Surveys of Professional Forecasters for the US and for the Euro Area supports the model for short- and medium-run forecasts but rejects it based on its implications for long-run forecasts.
    Keywords: disagreement; expectations; imperfect information; signal-to-noise ratio.
    Date: 2016–03–14
  78. By: Jesús Fernández-Villaverde; Juan F. Rubio Ramírez; Frank Schorfheide
    Abstract: This paper provides an overview of solution and estimation techniques for dynamic stochastic general equilibrium (DSGE) models. We cover the foundations of numerical approximation techniques as well as statistical inference and survey the latest developments in the field.
    JEL: C11 C13 C32 C52 C61 C63 E32 E52
    Date: 2016–01
  79. By: Kamile Puusaag (United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)); David Abonyi (United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)); Masato Abe (United Nations Economic and Social Commission for Asia and the Pacific (ESCAP))
    Abstract: Myanmar holds considerable promise, for businesses both domestic and foreign, as well as for development practitioners, confident of seeing a rapid transformation in economic conditions and quality of life in general. Nevertheless, while the country has attracted substantial interest from around the world, there are still many gaps in knowledge. In-depth information about the conditions facing the private sector, as well as the perspectives of the various members of the private sector, is still in the process of being uncovered. Against this background, the central purpose of this policy handbook is to provide policymakers, business communities, development organizations, and other interested parties with a thorough overview of the private sector environment in Myanmar today. The publication outlines the challenges faced by businesses in Myanmar, elaborates on the nature of the challenges and why they are significant, and offers a set of recommendations to improve the business environment in order to foster greater development of the private sector, and indeed, the country as a whole. Undeniably, the internal economic conditions and business environment will play a key role in determining the private sector’s future. Additionally, however, it is important to note that much of the excitement surrounding Myanmar stems from its 2011 shift towards greater economic openness to the rest of the world. Moreover, the upcoming ASEAN Economic Community 2015 is also likely to have a tremendous impact on the private sector in Myanmar. As a result, this policy handbook puts a sizeable focus on discussing issues affecting trade and investment in goods and services. It is ESCAP’s hope that this publication can serve as a reference point for those seeking such information, and that the publication can provide a wide-ranging understanding of the private sector’s current situation and how to help provide it with an equally-promising future.
    Keywords: Myanmar, business, private sector, development, policy handbook
    JEL: F0 F1 F2 F4 E2
    Date: 2015–02
  80. By: Donadelli, Michael; Paradiso, Antonio; Riedel, Max
    Abstract: We build a novel leading indicator (LI) for the EU industrial production (IP). Differently from previous studies, the technique developed in this paper is able to produce an ex-ante LI that is immune to "overlapping information drawbacks". In addition, the set of variables composing the LI relies on a dynamic and systematic criterion. This ensures that the choice of the variables is not driven by subjective views. Our LI anticipates swings (including the 2007-2008 crisis) in the EU industrial production - on average - by 2 to 3 months. The predictive power improves if the indicator is revised every five or ten years. In a forward-looking framework, via a general-to-specific procedure, we also show that our LI represents the most informative variable in approaching expectations on the EU IP growth.
    Keywords: leading indicator,EU industrial production,Granger causality,turning points,forward-looking models
    JEL: E32 C22 C52
    Date: 2015
  81. By: Gros, Daniel
    Abstract: The Federal Reserve left rates unchanged at its closely-watched meeting on September 17th, although many had argued that the real economy data, especially on the labour market, would have justified an exit (from the zero interest policy). In this CEPS Commentary, Daniel Gros observes that no similar decision on exit is in sight in the euro area, despite the fact that some have argued that the ECB should consider further easing measures (pushing the deposit rate deeper into negative territory or increasing the size of its asset purchase programme). He asks, in fact, whether further easing measures should be even discussed at this point.
    Date: 2015–09
  82. By: David Lagakos; Benjamin Moll; Tommaso Porzio; Nancy Qian; Todd Schoellman
    Abstract: How much does life-cycle human capital accumulation vary across countries? This paper seeks to answer this question by studying U.S. immigrants, who come from a wide variety of countries but work in a common labor market. We document that returns to potential experience among U.S. immigrants are higher on average for workers coming from rich countries than for those coming from poor countries. To understand this fact we build a model of life-cycle human capital accumulation that features three potential theories, working respectively through cross-country differences in: selection, skill loss, and human capital accumulation. To distinguish between theories, we use new data on the characteristics of immigrants and non-migrants from a large set of countries. We conclude that the most likely theory is that immigrants from poor countries accumulate relatively less human capital in their birth countries before migrating. Our findings imply that life cycle human capital stocks are on average much larger in rich countries than poor countries.
    JEL: E24 J61 O11 O15
    Date: 2016–01
  83. By: Jeffrey Clemens
    Abstract: I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups. I first estimate a standard difference-in-differences model on samples restricted to relatively low-skilled individuals, as described by their ages and education levels. I also employ a triple-difference framework that utilizes continuous variation in the minimum wage's bite across skill groups. In both frameworks, estimates are robust to adopting a range of alternative strategies, including matching on the size of states' housing declines, to account for variation in the Great Recession's severity across states. My baseline estimate is that this period's full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group's employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.
    JEL: E24 J21 J31 J38 K31
    Date: 2015–12
  84. By: Juan Manuel Julio; Norberto Rodríguez; Hector Zárate
    Abstract: In this paper we estimated a volatility model for COP/US under two different samples, one containing the information before the “discretional interventions” started, and the other using the whole sample. We use a nonparametric approach to estimate the mean and “volatility smile” return functions using daily data. For the pre-interventions sample, we found a nonlinear expected return function and, surprisingly, a non-symmetric “volatility smile”. These lack of linearity and symmetry are related to absolute returns above 1,5% and 1,0%, respectively. We also found that the “discretional interventions” did not shift the mean response function, but moved the expected returns along the line towards the required levels. In contrast, the “volatility smile” tends to increase in a non-symmetric way after accounting for “discretional interventions”. The Sep/29/2004 announcement does not seem to have had any effect on the expected conditional mean or variance functions, but the Dec/17/2004 announcement seems to be related to non-symmetric effects on the volatility smile. We concluded that the announcement of discretional intervention by the monetary authority was more efficient when time and amount were unannounced.
    Keywords: Volatility Smile, Exchange Rate Risk, Nonparametric Estimation, Central Bank Intervention.
    JEL: C14 C22 E58 F31 E44
  85. By: Johannes W. Fedderke and Daniel K Mengisteab
    Abstract: This paper estimates the potential output of the South African economy using several univariate filters as well as taking a production function approach. Our aim is to compare the sensitivity of the results to the different methodologies and different measurements of output. We find that the potential output is sensitive to the different methodologies and different measures of output. A Cobb-Douglas specification of the production function is employed, dividing the economy into eight sectors. We find that the production function produced results similar to the band-pass filters but with gaps of lower amplitudes. We then use the Hodrick-Prescott, Christiano-Fitzgerald, and a Kalman filter to observe the natural growth rate of the South African economy from 1960 to 2015. We find estimates of the natural growth rate in the 1.9% - 2.3% range. However, there is also evidence to suggest that the rate is under considerable downward pressure in the post-2010 period. The strongest decline is in the real sectors of the economy (Manufacturing, Mining), the greatest resilience in the service sectors (financial in particular).
    Keywords: manufacturing, mining, South Africa
    Date: 2016
  86. By: Davide Delle Monache (Bank of Italy); Ivan Petrella (Bank of England)
    Abstract: This paper introduces an adaptive algorithm for time-varying autoregressive models in the presence of heavy tails. The evolution of the parameters is determined by the score of the conditional distribution. The resulting model is observation-driven and is estimated by classical methods. Meaningful restrictions are imposed on the model parameters so as to attain local stationarity and bounded mean values. In particular, we consider time variation in both coefficients and volatility, emphasizing how the two interact. Moreover, we show how the proposed approach generalizes the various adaptive algorithms used in the literature. The model is applied to the analysis of inflation dynamics. Allowing for heavy tails leads to significant improvements in terms of fit and forecast. The adoption of the Student's-t distribution proves to be crucial in order to obtain well-calibrated density forecasts. These results are obtained using the US CPI inflation rate and are confirmed by other inflation indicators as well as the CPI of the other G7 countries.
    Keywords: adaptive algorithms, inflation, score driven models, student-t, time-varying parameters.
    JEL: C22 C51 C53 E31
    Date: 2016–02
  87. By: Wolters, Maik H.
    Abstract: Hours per capita measures based on the private sector as usually included in the set of observables for estimating macroeconomic models are affected by low-frequent demographic trends and sectoral shifts that cannot be explained by standard models. Further, model-based output gap estimates are closely linked to the observable hours per capita series. Hence, hours per capita that are not measured in concordance with the model assumptions can distort output gap estimates. This paper shows that sectoral shifts in hours and the changing share of prime age individuals in the working-age population lead indeed to erroneous output gap dynamics. Regarding the aftermath of the global financial crisis model-based output gaps estimated using standard hours per capita series are persistently negative for the US economy. This is not caused by a permanently depressed economy, but by the retirement wave of baby boomers which lowers aggregate hours per capita. After adjusting hours for changes in the age composition to bring them in line with the model assumptions, the estimated output gap gradually closes in the years following the global financial crisis.
    Keywords: output gap estimates,DSGE models,hours per capita measurement,demographic trends,Bayesian estimation
    JEL: C11 C54 E32 J11
    Date: 2016
  88. By: Claudiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Christian Aubin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Daniel Goyeau (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the period 2002M7 to 2015M10. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and we assess the inflation uncertainty based on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long-run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. In addition we show that for several sector stock indexes the negative effect of inflation and its uncertainty vanishes after the crisis setup. However, in the short-run the results provide evidence in the favor of a negative impact of uncertainty, while the inflation has no significant influence on stock prices, except for the consumption indexes. The consideration of business cycle effects confirms our findings, which proves that the results are robust, both for the long-and the short-run relationships.
    Keywords: stock prices,inflation uncertainty,cointegration with structural breaks,unobserved component model,US JEL codes: C22, E31, G15
    Date: 2016–03–03
  89. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University); Matthew Chambers (Department of Economics, Towson University)
    Abstract: We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36.6 percent increase in health expenditures by 2060. The group based health insurance (GHI) market shrinks, while the individual based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion.
    Keywords: Population aging, health expenditures, Medicare/Mediaid, Affordable Care Act 2010, Grossman model of health capital, endogenous health spending and financing, general equilibrium.
    JEL: H51 I13 J11 E21 H62
    Date: 2016–03
  90. By: Jasmin Thomas
    Abstract: In the past, attention has been focused on the aggregate ICT investment per worker gap, but 49.8 per cent of lower business sector IT investment per worker in Canada relative to the United States in 2013 was explained by two industries: information and cultural industries and professional, scientific and technical services. The main objective of this report is to shed light on the possible reasons for the gap in these sectors, including data measurement and comparability issues stemming from methodological differences between statistical agencies in Canada and the United States, and differences in potential explanatory variables of IT investment, such as human capital, taxation, profits, firm creation rates, industrial structure, and regulation, among others.
    Keywords: Investment, Information and Communication Technology, Information Technology, ICT, IT, Productivity, Industries, Professional Services, Cultural Industries
    JEL: E22 O16 D24 L60 L70 L80 L90 N72 N32 N12
    Date: 2016–03
  91. By: Diewert, W. Erwin; Shimizu, Chihiro
    Abstract: The paper fits a hedonic regression model to the sales of condominium units in Tokyo over the period 2000-2015. The problem is complicated by the need to decompose the selling price of a unit into a component that can be attributed to the structure area of the unit and another component that can be attributed to the unit's share of land value. There is very little information on the value of condominium land and so this paper develops a methodology for reducing this knowledge gap. The paper extends the builder's model which was developed in Eurostat (2013)[11]. Characteristics which prove to be important in explaining condominium prices are: the floor space area of the unit, the total land area of the building, the number of units in the building, the total number of stories in the building, the height of the sold unit, the age of the structure and the amount of excess land. The paper also derives an estimate for the annual geometric structure depreciation rate for condominiums in Tokyo.
    Keywords: Condominium property price indexes, System of National Accounts, Balance Sheets, methods of depreciation, land and structure price indexes, hedonic regressions
    JEL: C2 C23 C43 E31 R21
    Date: 2016–01
  92. By: Asian Development Bank (ADB); Asian Development Bank (ADB) (Economic Research and Regional Cooperation Department, ADB); Asian Development Bank (ADB) (Economic Research and Regional Cooperation Department, ADB); Asian Development Bank (ADB)
    Abstract: Georgia is a country with one of the highest costs of finance in developing Europe and Central Asia, reflected in the large interest spreads and a high risk premium on private loans. With support from the Investment Climate Facilitation Fund under the Regional Cooperation and Integration Financing Facility, this report provides a broad and comprehensive overview of the Georgian financial sector’s health and the challenges facing the financial sector in Georgia. Over medium-term policy actions, the report recommends facilitating property registration, improving credit information-sharing mechanism, ensuring security of bank deposits, and legislating improvements in reporting standards for firms as means to increase domestic savings, reduce borrowing cost, and improve the credit risk. Over the long run, the government needs to pay particular attention to diversifying the industrial base of the country, setting clear development goals to encourage banks to finance innovation, and creating a solid legal base for developing capital markets as an alternative source of firms’ financing.
    Keywords: financial sector, financial soundness indicators, asia, pacific, investment climate, core indicators, encouraged indicators, nonfinancial sectors, capital adequacy, georgia finance, banking, financial institutions, georgia financial markets, adb
    Date: 2015–09
  93. By: Chirwa, Themba G; Odhiambo, Nicholas M
    Abstract: The paper empirically investigates the key macroeconomic determinants of growth in Malawi, using the recently developed ARDL bounds-testing approach. The paper is motivated by the social and economic hardships that Malawi has been facing in recent years. The study reveals that the key macroeconomic determinants that were significantly associated with economic growth include investment, human capital development, population growth, real exchange rate depreciation, inflation, and international trade. We find that, in the short-run, investment, population growth, real exchange rate depreciation, and international trade are positively associated with economic growth, while inflation is negatively associated with economic growth. However, the long-run results reveal that investment, human capital development, and international trade are positively associated with economic growth, while population growth and inflation are negatively associated with economic growth. These results have significant policy implications; since the economic strategies needed to increase economic growth in Malawi should focus on promoting incentives that attract investment, improve the quality of education, reduce population growth, ensure currency and inflation stability, and promote export diversification.
    Keywords: Malawi; Autoregressive Distributed Lag Models; Economic Growth
    Date: 2016–03
  94. By: Russell Cooper; Huacong Liu
    Abstract: This paper studies the allocation of heterogeneous agents to levels of educational attainment. The goal is to understand the magnitudes and sources of mismatch in this assignment, both in theory and in the data. The paper presents evidence of substantial mismatch between ability and educational attainment across 21 OECD countries, with a focus on Germany, Italy, Japan and the US. In the model, mismatch originates from: (i) taste shocks, (ii) binding borrowing constraints and (iii) noisy measures of ability in test scores. The model is estimated using a simulated method of moments approach. The main finding is that measured mismatch arises largely from noise in test scores and does not reflect borrowing constraints. Differences in tastes for education across households play a minor role in explaining mismatch. Further, the estimation allows us to decompose the college wage premium, isolating cross-country differences in selection effects from the return to education.
    JEL: E24 J24 O43
    Date: 2016–02
  95. By: Jos Jansen; Jasper de Winter
    Abstract: We investigate to what extent it is feasible to improve model-based near-term GDP forecasts by combining them with judgmental (quarterly) forecasts by professional analysts (Consensus survey) in a real-time setting. Our analysis covers the G7 countries over the years 1999-2013. We consider as combination schemes the weighted average and the linear combination. Incorporating subjective information delivers sizable gains in forecasting ability of statistical models for all countries except Japan in 1999-2013, even when subjective forecasts are somewhat dated. Accuracy gains are much more pronounced in the volatile period after 2008 due to a marked improvement in predictive power of Consensus forecasts. Since 2008, Consensus forecasts are superior at the moment of publication for most countries. For some countries Consensus forecasts can be enhanced by model-based forecasts in between the quarterly release dates of the Consensus survey, as the latter embody more recent monthly information.
    Keywords: Forecast combination; encompassing test; nowcasting; factor models; judgment
    JEL: C33 C53 E37
    Date: 2016–03
  96. By: Hernán Rincón-Castro (Banco de la República de Colombia); Norberto Rodríguez-Niño (Banco de la República de Colombia)
    Abstract: Determining the exchange rate pass-through on inflation is a necessity for central banks as well as for firms and households. This is an apparently easy and intuitive task, but it faces high complexity and uncertainty. This paper examines the short and long-term impact of an exchange rate shock on inflation along the distribution chain in the presence of endogeneity, nonlinearity and asymmetry. The econometric model is a smooth transition autoregressive vector estimated by Bayesian methods. This incorporates a model of pricing and the endogenous nature of the exchange rate pass-through (PT). The paper uses monthly data from Colombia for the period 2002 to 2015. The main findings are that PT is incomplete, endogenous and then changes over time, nonlinear and asymmetric in the short and long terms to the state of the economy (i.e., PT is nonlinear state-dependent) and to exchange rate shocks. Findings showed that historically the accumulated PT on inflation of import prices rises from 20% in the first month of the exchange rate shock to a maximum of around 66% in the first year. The equivalent figures on the inflation of producer goods go from 13% to 52%; on the inflation of imported consumer goods from 6% to 48%, and on the CPI inflation from 4% to 30%. At four years, the respective figures for accumulated PT are 98%, 84%, 94% and 80%, but uncertainty about these estimates increases rapidly over time. Classification JEL:F31, E31, E52, C51, C52
    Keywords: Exchange rate pass-through, pricing along the distribution chain, endogeneity, nonlinearity, asymmetry, logistic smooth transition VAR (LST-VAR), Bayesian approach
    Date: 2016–03
  97. By: Mikhail Golosov; Aleh Tsyvinski; Nicolas Werquin
    Abstract: In this chapter we study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions. We comprehensively overview one of the most important tools for the analysis such problems — the theory of recursive contracts. Recursive formulations allow to reduce often complex models to a sequence of essentially static problems that are easier to analyze both analytically and computationally. We first provide a self-contained treatment of the basic theory: the Revelation Principle, formulating and simplifying the incentive constraints, using promised utilities as state variables, and analyzing models with persistent shocks using the first-order approach. We then discuss more advanced topics: duality theory and Lagrange multiplier techniques, models with lack of commitment, and martingale methods in continuous time. Finally, we show how a variety of applications in public economics, corporate finance, development and international economics featuring incomplete risk-sharing can be analyzed using the tools of the theory of recursive contracts.
    JEL: C61 E2 E61
    Date: 2016–02
  98. By: Shakhzod Ismailov (Central Bank of Uzbekistan); Makoto Kakinaka (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: Inflation targeting has attracted attention to researchers and policy makers since the first attempt in New Zealand in 1990. This paper discusses a country's choice of inflation targeting by examining its driving forces with the dataset of 82 countries. The empirical result shows that countries' decision of adoption of inflation targeting depends highly on their development stage. For high-income or developed countries, the significant motive of monetary authority to choose inflation targeting is the desire to keep or enhance anti-inflation credibility, and inflation targeting could be a natural option under more floats with the absence of nominal exchange rate anchor. On the other hand, low-income or developing countries with the large size of public debts are not likely to choose inflation targeting, so that fiscal fragility would discourage monetary authority to adopt restrictive monetary policy under inflation targeting.
    Keywords: inflation targeting, exchange rate arrangements, anti-inflation credibility, fiscal fragility
    Date: 2016–03
  99. By: Wahyoe Soedarmono (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business); Sigid Eko Pramono (bank indonesia - bank indonesia); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper is the first to examine whether the loan loss provisioning behavior of Islamic banks is procyclical. From a dynamic panel data methodology, the empirical results show that loan loss provisioning in Islamic banks is indeed procyclical, as higher economic growth leads to a decline in loan loss provisions. A closer investigation is also conducted to examine whether capital management, income smoothing, or signaling behavior can alter the procyclicality of loan loss provisions. Specifically, our results document that only capital management behavior can overcome the procyclicality of loan loss provisions. This paper therefore advocates the importance of strengthening discretionary behavior in Islamic banks in terms of capital management using loan loss provisions, particularly during economic boom.
    Keywords: Islamic banks,loan loss provisions,procyclicality
    Date: 2016–03–01
  100. By: Andrea Locatelli (Bank of Italy); Libero Monteforte (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: Between 2008 and 2013 productive capacity was considerably downsized in the Italian manufacturing sector. This paper analyses the micro-data collected for the Bank of Italy surveys to identify the main drivers of the reduction in the whole 2008-13 period and in four sub-periods (pre-crisis 2001-07, first phase of the crisis 2008-09, recovery 2010-11, and second crisis 2012-13). Our main findings are that i) losses of productive capacity varied widely across manufacturing sub-sectors with differences in pre-crisis trends tending to persist in a few sub-sectors during the double-dip recession; ii) large firms were more successful in avoiding major capacity losses, especially in the first phase of the crisis; iii) the share of sales on foreign markets was negatively correlated with performance in 2008-09, but the correlation turned positive in 2012-13; iv) among the Italian macro-regions, the Centre weathered the long recession better; v) subsidiaries underperformed firms not belonging to any group; and vi) the negative effects on productive capacity of credit constraints, which discouraged investments, were felt by Italian firms particularly in 2012-13.
    Keywords: productive capacity, manufacturing, microdata
    JEL: E32 L16 L60
  101. By: Donald B. Keim; Olivia S. Mitchell
    Abstract: In view of the growth and popularity of defined contribution pensions, along with the government’s growing attention to retirement plan costs and investment choices provided, it is important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.
    JEL: D14 E21 G11 J32
    Date: 2016–01
  102. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2016–03–10
  103. By: Lars P. Hansen; Thomas J. Sargent
    Abstract: A decision maker constructs a convex set of nonnegative martingales to use as likelihood ratios that represent parametric alternatives to a baseline model and also non-parametric models statistically close to both the baseline model and the parametric alternatives. Max-min expected utility over that set gives rise to equilibrium prices of model uncertainty expressed as worst-case distortions to drifts in a representative investor's baseline model. We offer quantitative illustrations for baseline models of consumption dynamics that display long-run risk. We describe a set of parametric alternatives that generates countercyclical prices of uncertainty.
    JEL: C01 C02 C14 C52 E3
    Date: 2016–02
  104. By: Julien Albertini; Hong Lan; ;
    Abstract: The optimization of turbine density in wind farms entails a trade-off between the usage of scarce, expensive land and power losses through turbine wake effects. A quantification and prediction of the wake effect, however, is challenging because of the complex aerodynamic nature of the interdependencies of turbines. In this paper, we propose a parsimonious data driven econometric wake model that can be used to predict production losses of existing and potential wind parks. Motivated by simple engineering wake models, the predicting variables are wind speed, turbine alignment angle, and distance. By utilizing data from two wind parks in Germany, a significantly better prediction of wake effect losses is attained compared to the standard Jensen model. A scenario analysis reveals that a distance between turbines can be reduced up to three times the rotor size without entailing substantial production losses. In contrast, a suboptimal configuration of turbines with respect to the main wind direction can result in production losses that are five times higher.
    Keywords: Wind energy; wake modeling; wind farm designmultiplesystem approach, dual-self model, drift–diffusion model, response times
    JEL: E3 J6
    Date: 2016–03

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