nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒04‒04
103 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Macroeconomic Impact of Financial and Uncertainty Shocks By Dario Caldara; Cristina Fuentes-Albero; Simon Gilchrist; Egon Zakrajšek
  2. A Note on Simple Monetary Policy Rules with Labour Market and Financial Frictions By Sarunas Girdenas
  3. The Role of Learning for Asset Prices, Business Cycles, and Monetary Policy By Winkler, Fabian
  4. Unconventional US Monetary Policy: New Tools, Same Channels? By Martin Feldkircher; Florian Huber
  5. Discussion of ‘Market Reforms in the Time of Imbalance’ (M. Cacciatore, R.Duval, G. Fiori, F. Ghironi). By Kollmann, Robert; Vogel, Lukas
  6. The European Central Bank: Building a Shelter in a Storm By Kang Dae Woong; Nick Ligthart; Ashoka Mody
  7. Structural Reform in Germany By Krebs, Tom; Scheffel, Martin
  8. Too-Big-To-Fail Before the Fed By Gary Gorton; Ellis W. Tallman
  9. "Japan's Liquidity Trap" By Tanweer Akram
  10. Effectiveness of Monetary Policy in the Euro Area: The Role of US Economic Policy Uncertainty By Mehmet Balcilar; Riza Demirer; Rangan Gupta; Reneé van Eyden
  11. Is optimal monetary policy always optimal? By Davig, Troy A.; Gurkaynak, Refet S.
  12. Are countries prepared for the next recession? By De Koning, Kees
  13. Expectations and Systemic Risk in EMU Government Bond Spreads By Canofari, Paolo; Marini, Giancarlo; Piersanti, Giovanni
  14. Inequality, Financialisation and Credit Booms - a Model of Two Crises By Cardaci, Alberto; Saraceno, Francesco
  15. Business Cycle Asymmetries and the Labor Market By Kohlbrecher, Britta; Merkl, Christian
  16. Capital Controls as an Alternative to Credit Policy in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  17. Central Bank Independence and the Dynamics of Public Debt? By Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
  18. The dynamic effects of forward guidance shocks By Bundick, Brent; Smith, Andrew Lee
  19. Negative Consequences of Smooth Devaluation By BLINOV, Sergey
  20. Aggregate Employment, Job Polarization and Inequalities: A Transatlantic Perspective By Dieter Nautz; Aleksei Netsunajev; Till Strohsal;
  21. Futures market approach to understanding equity premium puzzle By Kim, Minseong
  22. What if Brazil Hadn't Floated the Real in 1999? By Carlos Viana de Carvalho; André D. Vilela
  23. Economic Uncertainty and Structural Reforms By Alessandra Bonfiglioli; Gino Gancia
  24. Optimal Debt Management in a Liquidity Trap By Hafedh BOUAKEZ; Rigas OIKONOMOU; Romanos PRIFTIS
  25. Does Central Bank Independence Affect Stock Market Volatility? By Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
  26. Road accidents and business cycles in Spain By Jesús Rodríguez-López; Gustavo A. Marrero; Rosa Marina González-Marrero; Teresa Leal-Linares
  27. Growth Stabilises: Investment a Major Driver, Except in Countries Plagued by Recession By Amat Adarov; Vasily Astrov; Serkan Çiçek; Rumen Dobrinsky; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Simona Jokubauskaite; Sebastian Leitner; Isilda Mara; Olga Pindyuk; Leon Podkaminer; Sandor Richter; Hermine Vidovic
  28. Does Phillips Exist in Palestine? An Empirical Evidence By Ismael, Mohanad; Sadeq, Tareq
  29. Demand shocks, new keynesian model and supply effects of monetary policy By Elliot Aurissergues
  30. Pareto-Improving Optimal Capital and Labor Taxes By Katharina Greulich; Sarolta Laczó; Albert Marcet
  31. Safe Asset Scarcity and Aggregate Demand By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  32. Assessment of the Impact of Fiscal Policy on the Current Account – the Twin Deficit Hypothesis in the Case of Macedonian Economy By Vesna Stojcevska; Mite Miteski
  33. The Consumption Response to Liquidity-Enhancing Transfers: Evidence from Italian Earthquakes By Antonio Acconcia; Giancarlo Corsetti; Saverio Simonelli;
  34. "Labour, profit and housing rent shares in Italian GDP: long-run trends and recent patterns" By Roberto Torrini
  35. Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach By Potjagailo, Galina
  36. Wage and Price Setting in Macedonia: Evidence from Survey Data By Gani Ramadani; Nikola Naumovski
  37. Education Policy and Intergenerational Transfers in Equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Giovanni L. Violante
  38. China’s slowdown and global financial market volatility: is world growth losing out? By Cashin, Paul; Mohaddes, Kamiar; Raissi, Mehdi
  39. The Effect of Real Estate Prices on Banks' Lending Channel By Hazama, Makoto; Hosono, Kaoru; Uesugi, Iichiro
  40. Monetary Policy and Defaults in the US By Michele Piffer
  41. The Sustainable Welfare Index for Italy, 1960-2013. By Mirko Armineto
  42. Benefits and Costs of Higher Capital Requirements for Banks By William R. Cline
  43. Monetary policy spillovers and currency networks in cross-border bank lending By Stefan Avdjiev; Elod Takats
  44. Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data By Ono, Arito; Aoki, Kosuke; Nishioka, Shinichi; Shintani, Kohei; Yasui, Yosuke
  45. E commerce as a tool for resource expansion: postal partnerships, data protection legislation and the mitigation of implementation gaps By Ojo, Marianne
  46. Covered interest parity: evidence from Russian money market By Kuga Iakov; Elena Kuzmina
  47. The International Monetary Fund: 70 Years of Reinvention By Reinhart, Carmen M.; Trebesch, Christoph
  48. Oil price pass-through along the price chain in the euro area By Castro, César; Jiménez-Rodríguez, Rebeca
  49. On tax evasion, entrepreneurial generosity and fungible assets By Bittschi, Benjamin; Borgloh, Sarah; Moessinger, Marc-Daniel
  50. Using Computer Simulators for Teaching Macroeconomics at the Undergraduate Level By Angelov, Aleks; Vasilev, Aleksandar
  51. Are Monetary Policy Disturbances Important in Ghana? Some Evidence from Agnostic Identification By Njindan Iyke, Bernard
  52. The Savings Multiplier By Mehlum, Halvor; Torvik, Ragnar; Valente, Simone
  53. Determinants of Monetary Transmission in Armenia By Sargsyan Hayk
  54. Robust permanent income in general equilibrium By Luo, Yulei; Nie, Jun; Young, Eric R.
  55. Fiscal sustainability and the financial cycle By Claudio Borio; Marco Jacopo Lombardi; Fabrizio Zampolli
  56. Money and Velocity During Financial Crises: From the Great Depression to the Great Recession By Richard G. Anderson; Michael Bordo; John V. Duca
  57. The Calmfors-Driffill Hypothesis with Labour Market Frictions and Regulated Goods Markets By José Ramón García; Valeri Sorolla
  58. Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets? By Ichiro Muto; Nao Sudo; Shunichi Yoneyama
  59. A Review of the Literature on Monetary Neutrality By Tang, Maggie May-Jean
  60. Network Contagion and Interbank Amplification during the Great Depression By Kris James Mitchener; Gary Richardson
  61. Mobile Phones in Conflicts of Financial Intermediation By Asongu, Simplice; Tchamyou, Vanessa
  62. Addressing a Root Cause of Sub Saharan Africa’s Poverty Tragedy: Horizons for post-2015 Common Capital Flight Policies By Asongu, Simplice
  63. Growth and the role of economic policies By Harker, Patrick T.
  64. How reliable are cointegration-based estimates for wealth effects on consumption? Evidence from Switzerland By Alain Galli
  65. Can banks default overnight? Modeling endogenous contagion on O/N interbank market By Pawe{\l} Smaga; Mateusz Wili\'nski; Piotr Ochnicki; Piotr Arendarski; Tomasz Gubiec
  66. Large Firm Dynamics and the Business Cycle By Vasco M. Carvalho; Basile Grassi; ;
  67. Nonparametric Euler Equation Identification andEstimation By Juan Carlos Escanciano; Stefan Hoderlein; Arthur Lewbel; Oliver Linton
  68. Assessing financial stability risks from the real estate market in Italy By Federica Ciocchetta; Wanda Cornacchia; Roberto Felici; Michele Loberto
  69. Inflation Targeting and Exchange Rate Management In Less Developed Countries By Marco Airaudo; Edward F. Buffie; Luis-Felipe Zanna
  70. Stochastic Trends, Debt Sustainability and Fiscal Policy By Karim Barhoumi; Reda Cherif; Nooman Rebei
  71. Inflation expectations curve: a tool for monitoring inflation expectations By Michelle Lewis
  72. Urban costs, wages, and selection By Dalvai, Wilfried
  73. Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU By Esposito, Piero; Messori, Marcello
  74. Unconventional Policy Instruments in the New Keynesian Model By Zineddine Alla; Raphael A. Espinoza; Atish R. Ghosh
  75. Social infrastructure investment: private finance and institutional investors By Inderst, Georg
  76. Неокласична економска теорија и проблеми економског развоја By Bukvić, Rajko; Pavlović, Radica
  77. Dynamic Factor Models, Cointegration, and Error Correction Mechanisms By Barigozzi, Matteo; Lippi, Marco; Luciani, Matteo
  78. 証券化による発行者の資産リスクの変動と資本市場の評価—J-REITのケース・スタディ— By 江上, 雅彦; 細野, 薫
  79. Unemployment Insurance with Limited Commitment Wage Contracts and Savings By Rigas OIKONOMOU
  80. Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan. By Ahad, Muhammad
  81. International Business Cycles and Risk Sharing with Uncertainty Shocks and Recursive Preferences By Kollmann, Robert
  82. Quantitative Easing and United States Investor Portfolio Rebalancing Towards Foreign Assets By João Barata Ribeiro Blanco Barroso
  83. Has Globalization Really Increased Business Cycle Synchronization? By Eric Monnet; Damien Puy
  84. Forecasting with Large Unbalanced Datasets: The Mixed Frequency Three-Pass Regression Filter By Christian Hepenstrick; Massimiliano Marcellino
  85. Cash flow and risk premium dynamics in an equilibrium asset-pricing model with recursive preferences By Doh, Taeyoung; Wu, Shu
  86. Liquidity Requirements, Liquidity Choice and Financial Stability By Douglas W. Diamond; Anil K Kashyap
  87. Long run equilibrium adjustment between inflation and stock market returns in South Africa: A nonlinear perspective By Phiri, Andrew
  88. Sentiment and Bitcoin Volatility By Jaroslav Bukovina; Matus Marticek
  89. Global-Soziale Marktwirtschaft und die Flüchtlingsfrage By von Weizsäcker, Carl Christian
  90. Preference evolution and the dynamics of capital markets By Curatola, Giuliano
  91. International spillovers and policies By Musalem, Alberto G.
  92. How to decode Unemployment Persistence: An econometric framework for identifying and comparing the sources of persistence By Møller, Niels Framroze
  93. The Welfare Multiplier of Public Infrastructure Investment By Giovanni Ganelli; Juha Tervala
  94. Foreign acquisition and internal organization By Paulo Bastos; Natália P. Monteiro; Odd Rune Straume
  95. Mainstreaming of ecosystem services into sectoral and macroeconomic policies and programmes of Republic of Kazakhstan By Roe, Terry L.; Smith, Rodney B.W.
  96. Finanças Públicas Portuguesas Sustentáveis no Estado Novo (1933-1974)? By Ricardo Ferraz
  97. Learning from Potentially-Biased Statistics: Household Inflation Perceptions and Expectations in Argentina By Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
  98. Towards a better governance in the EU? By Catherine Mathieu; Henri Sterdyniak
  99. The Value of Public Information in a Two-Region Model By Olga Kuznetsova
  100. Cyclical properties of supply-side and demand-side shocks in oil-based commodity markets By Tomas Krehlik; Jozef Barunik
  101. Political Business Cycles 40 Years after Nordhaus By Eric Dubois
  102. When Do Structural Reforms Work? On the Role of the Business Cycle and Macroeconomic Policies By Anna Rose Bordon; Christian Ebeke; Kazuko Shirono
  103. Corporate Tax: A brief assessment of some exemptions. By Rao, R. Kavita; Tandon, Suranjali; Mukherjee, Sacchidananda

  1. By: Dario Caldara; Cristina Fuentes-Albero; Simon Gilchrist; Egon Zakrajšek
    Abstract: The extraordinary events surrounding the Great Recession have cast a considerable doubt on the traditional sources of macroeconomic instability. In their place, economists have singled out financial and uncertainty shocks as potentially important drivers of economic fluctuations. Empirically distinguishing between these two types of shocks, however, is difficult because increases in economic uncertainty are strongly associated with a widening of credit spreads, an indication of a tightening in financial conditions. This paper uses the penalty function approach within the SVAR framework to examine the interaction between financial conditions and economic uncertainty and to trace out the impact of these two types of shocks on the economy. The results indicate that (1) financial shocks have a significant adverse effect on economic outcomes and that such shocks were an important source of cyclical fluctuations since the mid-1980s; (2) uncertainty shocks, especially those implied by uncertainty proxies that do not rely on financial asset prices, are also an important source of macroeconomic disturbances; and (3) uncertainty shocks have an especially negative economic impact in situations where they elicit a concomitant tightening of financial conditions. Evidence suggests that the Great Recession was likely an acute manifestation of the toxic interaction between uncertainty and financial shocks.
    JEL: E32 E37 E44
    Date: 2016–03
  2. By: Sarunas Girdenas (Department of Economics, University of Exeter)
    Abstract: We consider a New-Keynesian model with ?financial and labour market frictions where ?firms borrowing is limited by the enforcement constraint. The wage is set in a bargaining process where the fi?rm?s shareholder and worker share the production surplus. As debt service is considered to be a part of production costs, ?firms borrow to reduce the surplus which allows to lower the wage. We study the model?s response to ?nancial shock under two Taylor-type interest rate rules: ?first one responds to in?ation and borrowing, second - to in?ation and unemployment. We have found that the second rule delivers better policy in terms of the welfare measure. Additionally, we show that the feedback on unemployment in this rule depends on the extent of workers? bargaining power.
    Keywords: Labour Market Frictions, Financial Frictions, Optimal Monetary Policy, Monetary Policy Rules.
    JEL: E52 E43 E24
    Date: 2016
  3. By: Winkler, Fabian
    Abstract: The importance of financial frictions for the business cycle is widely recognized, but it is less recognized that their effects depend heavily on the underlying asset pricing theory. This paper examines the implications of learning-based asset pricing. I construct a model in which firms’ ability to access credit depends on their market value, and investors rely on past observation to predict future stock prices. Agents' expectations remain model-consistent conditional on their beliefs about stock prices, which disciplines the expectation formation process. The model matches several asset price properties such as return volatility and predictability and also leads to a powerful feedback loop between asset prices and real activity, substantially amplifying business cycle shocks. Agents' expectational errors on asset prices spill over to forecasts of economic activity, resulting in forecast error predictability that closely matches survey data. A reaction of monetary po li cy to asset prices is welfare-improving under learning but not under rational expectations.
    Keywords: Asset Pricing ; Credit Constraints ; Learning ; Monetary policy ; Survey Data
    JEL: D83 E32 E44 E52 G12
    Date: 2016–01–20
  4. By: Martin Feldkircher (Oesterreichische Nationalbank (OeNB)); Florian Huber (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs.
    Keywords: Unconventional monetary policy, transmission channel, Bayesian TVP-SV-VAR
    JEL: C32 E52 E32
    Date: 2016–03
  5. By: Kollmann, Robert; Vogel, Lukas
    Abstract: To raise employment and output growth in Europe, the leading multilateral economic institutions (EU Commission, IMF, OECD) routinely recommend ‘structural reforms’ of product and labor markets that increase competition and employment flexibility. Existing model-based analyses of those reforms generally use standard New Keynesian dynamic stochastic general equilibrium (DSGE) models in which pro-competition reforms are represented as exogenous reductions in markups (see, e.g., Everaert and Schule (2008), Roeger et al. (2008), Gomes et al. (2014) and Kollmann et al. (2015)). The Cacciatore, Duval, Fiori and Ghironi paper greatly improves the toolbox for modeling structural reforms in a DSGE framework, by allowing for richer and more realistic firm dynamics and labor market frictions than conventional policy models. This enables the paper to highlight important transmission channels of reforms that are ignored by conventional models. Cacciatore, Duval, Fiori and Ghironi provide a very valuable contribution that highlights the role of firm entry and exit and of labor market frictions for the macroeconomic effects of structural reforms. Their work also suggests promising avenues for future research.
    Keywords: Structural reforms, firm dynamics, labor market frictions, current account, household heterogeneity, nominal rigidities
    JEL: E24 E3 F2 F3 F4 J2 J3 J6 L1 L4
    Date: 2015
  6. By: Kang Dae Woong (Princeton University); Nick Ligthart (College of Europe in Bruges, Belgium); Ashoka Mody (Princeton University)
    Abstract: As the financial crisis gathered momentum in 2007, the United States Federal Reserve brought its policy interest rate aggressively down from 5¼ percent in September 2007 to virtually zero by December 2008 In contrast, although facing the same economic and financial stress, the European Central Bank’s first action was to raise its policy rate in July 2008. The ECB began lowering rates only in October 2008 once near global financial meltdown left it with no choice. Thereafter, the ECB lowered rates slowly, interrupted by more hikes in April and July 2011. We use the “abnormal†increase in stock prices—the rise in the stock price index that was not predicted by the trend in the previous 20 days—to measure the market’s reaction to the announcement of the interest rate cuts.Stock markets responded favorably to the Fed interest rate cuts but, on average, they reacted negatively when the ECB cut its policy rate The Fed’s early and aggressive rate cuts established its intention to provide significant monetary stimulus. That helped renew market optimism, consistent with the earlier economic recovery.In contrast, the ECB started building its shelter only after the storm had started. Markets interpreted even the simulative ECB actions either as “too little, too late†or as signs of bad news. We conclude that by recognizing the extraordinary nature of the circumstances, the Fed’s response not only achieved better economic outcomes but also enhanced its credibility. The ECB could have acted similarly and stayed true to its mandate. The poorer economic outcomes will damage the ECB’s long-term credibility
    JEL: E5
    Date: 2015–12
  7. By: Krebs, Tom (University of Mannheim); Scheffel, Martin (University of Cologne)
    Abstract: This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional service sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the small size of the professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short-run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term fiscal surpluses is positive for any interest (discount) rate less than 9 percent.
    Keywords: structural reform, Germany
    JEL: E24 E60 J2 J3
    Date: 2016–03
  8. By: Gary Gorton; Ellis W. Tallman
    Abstract: “Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
    JEL: E02 E32 E42 E52 E58
    Date: 2016–03
  9. By: Tanweer Akram
    Abstract: Japan has experienced stagnation, deflation, and low interest rates for decades. It is caught in a liquidity trap. This paper examines Japan's liquidity trap in light of the structure and performance of the country's economy since the onset of stagnation. It also analyzes the country's liquidity trap in terms of the different strands in the theoretical literature. It is argued that insights from a Keynesian perspective are still quite relevant. The Keynesian perspective is useful not just for understanding Japan's liquidity trap but also for formulating and implementing policies that can overcome the liquidity trap and foster renewed economic growth and prosperity. Paul Krugman (1998a, b) and Ben Bernanke (2000; 2002) identify low inflation and deflation risks as the cause of a liquidity trap. Hence, they advocate a credible commitment by the central bank to sustained monetary easing as the key to reigniting inflation, creating an exit from a liquidity trap through low interest rates and quantitative easing. In contrast, for John Maynard Keynes (1936; reissued 2007) the possibility of a liquidity trap arises from a sharp rise in investors' liquidity preference and the fear of capital losses due to uncertainty about the direction of interest rates. His analysis calls for an integrated strategy for overcoming a liquidity trap. This strategy consists of vigorous fiscal policy and employment creation to induce a higher expected marginal efficiency of capital, while the central bank stabilizes the yield curve and reduces interest rate volatility to mitigate investors' expectations of capital loss. In light of Japan's experience, Keynes's analysis and proposal for generating effective demand might well be a more appropriate remedy for the country's liquidity trap.
    Keywords: Liquidity Trap; Japan; Monetary Policy; Interest Rates
    JEL: E02 E40 E43 E50 E52 E58 E60
    Date: 2016–03
  10. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; IPAG Business School, France); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, USA.); Rangan Gupta (Department of Economics, University of Pretoria); Reneé van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper examines the role of U.S. economic policy uncertainty on the effectiveness of monetary policy in the Euro area. Using a structural Interacted Vector Autoregressive (IVAR) model conditional on high and low levels of U.S. economic policy uncertainty, we find that uncertainty regarding policy changes in the U.S. dampens the effect of monetary policy shocks in the Euro area, with both price and output reacting more significantly to monetary policy shocks when the level of U.S. policy uncertainty is low. We argue that the U.S. government’s actions regarding policy changes in the U.S. is a source of uncertainty for Euro area investors and high levels of policy uncertainty that spill over from the U.S. drive Euro area investors to adopt a wait-and-see approach, leading to a relatively weaker (and sometimes insignificant) response of price and output to monetary tightening in the Euro area. The findings underscore the importance of market integration and coordination of economic policy changes on the effectiveness of monetary policy on the macroeconomy on both sides of the Atlantic. Our results thus, provide evidence in favour of the policy ineffectiveness hypothesis in the Euro area contingent on the economic policy uncertainty of the U.S.
    Keywords: Economic Policy Uncertainty, Monetary Policy, Interacted Structural Vector Autoregressive Model
    JEL: C32 C51 C54 E30 E31 E32 E52
    Date: 2016–03
  11. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Gurkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Keywords: Monetary policy;
    JEL: E02 E52 E58 E61
    Date: 2015–07–30
  12. By: De Koning, Kees
    Abstract: ‘Act now on world turmoil’, says the International Monetary Fund in a recent speech by David Lipton , the watchdog’s second in command. The global economy is ‘clearly at a delicate juncture’ and the ‘risk of economic derailment has grown’. ‘A sharp retrenchment in trade is taking place’ as economies around the world have slowed down. ‘Credit boom shows signs of bursting’ warns the Bank for International Settlements. Global debts now stand at over 200% of GDP, exceeding levels seen before the financial crisis of 2007. With warnings from these global institutions, it may be appropriate to raise the questions: ‘Are countries prepared for the next recession?’ ‘Are central banks equipped to deal with such recessions or have central banks used all their ammunition?’ The IMF was set up with a primary purpose to ensure stability in the system of exchange rates and international payments. It advises governments through its surveillance reports for its 188 member states and it has at its disposal about $1.2 trillion to help countries in financial difficulties. It is a government-to-government organization, acting as lender of last resort to governments, when needed. The main objectives of central banks are external and internal. An external aim is to maintain stability of the currency against other currencies. The internal aim is to ensure that the value of the currency is maintained in purchasing power terms. Another internal aim is to supervise banks and act as lender of last resort for the banking sector, sometimes including non-banks operating in the financial sector, like pension funds. Finally some central banks have domestic economic objectives, like the aim to achieve a high level of employment. In this institutional set up, there appears to be a missing link. Which institution has been or should be designated as lender of last resort to individual households? Privately owned banks cannot fulfill such role as their aim is to recover all money due when a loan facility is no longer serviced on time. Central banks cannot do it either, as their role is to supervise the banking sector. The U.S. experience as described by Dr. Bernanke in his book: ‘The Courage to Act’ was that no consensus could be reached over the manner of how to deal with foreclosure proceedings and home repossessions. In the U.S. over the period 2006-2013 21.3 million households, who faced foreclosure procedures, were left to their own devices and 5.8 million households paid the ultimate price in having their homes repossessed. This paper will set out the case for establishing a new tool of economic policy: a National Mortgage Bank (NMB), to be used only as and when the collective of individual households acting as long-term borrowers see their financial position weakened due to the threats of a recession. The tool can both be used as a preventive instrument as well as a corrective one. Without its existence such actions cannot be taken. It will be the households’ equivalent of lender of last resort.
    Keywords: Recession, National Mortgage Bank (NMB), home mortgages, lender of last resort for individual households, foreclosure proceedings and home repossesions
    JEL: E3 E32 E52 E58 G21 G28
    Date: 2016–03–20
  13. By: Canofari, Paolo (LUISS School of European Political Economy); Marini, Giancarlo (University of Rome II - Faculty of Economics); Piersanti, Giovanni (Università degli Studi di Teramo)
    Abstract: This paper explores the determinants of 10-years sovereign bond spreads over the German Bund benchmark in the Euro Zone from 2000 to 2013, relying on cross-country quarterly data panel analysis. The paper focal point is the role of contagion and euro break-up risks in widening the sovereign bond yield differentials among EU member countries. Using a novel synthetic index capable of monitoring the sustainability of currency unions, the paper finds that market expectations of a euro’s break up and contagion from Greece were fundamentals drivers of sovereign risk premia in peripheral countries.
    Keywords: Monetary unions; speculative attacks; self-fulfilling expectations; multiple equilibria; shadow exchange rate; financial crisis; contagion; spreads; sovereign default risk; euro break up risk
    JEL: C32 C33 E42 E44 E62 F31 F33 F41 G01 G12 H63
    Date: 2014–06–01
  14. By: Cardaci, Alberto (Lombardy Advanced School of Economic Research, Milan); Saraceno, Francesco (LUISS School of European Political Economy)
    Abstract: We develop a macroeconomic model with an agent-based household sector and a stock-flow consistent structure, in order to analyse the impact of rising income inequality on the likelihood of a debt crisis for diff erent institutional settings. In particular, we study how economic crises emerge in the presence of di fferent credit conditions and policy reactions to rising income disparities. Our simulations show the relevance of the degree of financialisation of an economy. In fact, when inequality grows, a Scylla and Charybdis kind of dilemma seems to arise: on the one hand, low credit availability implies a drop in aggregate demand and output; on the other hand, a higher willingness to lend and lower perceptions of system risk result in greater instability and a debt-driven boom and bust cycle. The model allows us to replicate the credit-led consumption booms that paved the way for both the crisis of 1929 and the recent financial crisis. In addition, our paper yields a new insight on the appropriate policy reaction: tackling inequality by means of a more progressive tax system compensates for the rise in income disparities thereby stabilising the economy. This is a better solution compared to a more proactive fiscal policy which, instead, only leads to a larger duration of the boom and bust cycle.
    Keywords: Inequality; Household Debt; Credit Markets; Agent-Based Models; StockFlow Consistency
    JEL: C63 D31 E21 E62 G01
    Date: 2016–02–19
  15. By: Kohlbrecher, Britta (University of Erlangen-Nuremberg); Merkl, Christian (University of Erlangen-Nuremberg)
    Abstract: This paper shows that the matching function and the Beveridge curve in the United States exhibit strong nonlinearities over the business cycle. These patterns can be replicated by enhancing a search and matching model with idiosyncratic productivity shocks for new contacts. Large negative aggregate shocks move the hiring cutoff point into a part of the idiosyncratic density function with higher density and thereby generate large, asymmetric job-finding rate and unemployment reactions. Our proposed mechanism is of high relevance as it leads to time varying effects of certain policy interventions.
    Keywords: business cycle asymmetries, matching function, Beverdige curve, job-finding rate, unemployment, effectiveness of policy
    JEL: E24 E32 J63 J64
    Date: 2016–03
  16. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University)
    Abstract: We develop a sticky price, small open economy model with financial frictions a la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the possibility of which is rigorously examined as a policy tool for the emerging economies, can be an alternative to credit policy employed by advanced economy central banks in mitigating the negative shock.
    Keywords: Capital control, Credit policy, Balance sheets, Small open economy, Nominal rigidities, New Keynesian, DSGE, Financial intermediaries, Financial frictions, Crisis
    JEL: E44 E58 F32 F41
    Date: 2015–03
  17. By: Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
    Abstract: Inspired from a simple theoretical macroeconomic model, proposed by Ozkan et al. (2010), which shows a positive link between public debt issues and central bank independence, we empirically investigate if central bank independence affects the way that net stock of government securities and public debt are altered by important macroeconomic variables. Our research has been focused on various levels of independence of the central bank of 22 countries from 1992 to 2000, where significant changes in the index of independence for a large number of central banks have been occurred. By applying dynamic panel data analysis, we show that central bank independence has a significant impact on the effects of deficit, GDP growth and government bonds yield on government bond issues and public debt. The latter result implies that higher levels of central bank independence make countries more affected by market conditions.
    Keywords: Central bank independence, public debt, panel data.
    JEL: E52 E58
    Date: 2016
  18. By: Bundick, Brent (Federal Reserve Bank of Kansas City); Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using a two-step procedure, which embeds high-frequency futures contracts in a structural vector autoregression. An exogenous extension of the zero lower bound duration increases economic activity and prices. We show that a standard model of nominal price rigidity largely replicates these empirical results. To calibrate our theoretical model, we generate a model-implied futures curve which allows us to closely link our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a standard model of monetary policy.
    Keywords: Forward guidance; Federal funds futures; Zero lower bound
    JEL: E32 E52
    Date: 2016–01–15
  19. By: BLINOV, Sergey
    Abstract: In 2015, many countries had to deal with the weakening of their currencies. Issues regarding exchange rate management by the Central Banks have again become the focal point of heated debate. This article compares two approaches to devaluation of local currency under the pressure of external circumstances: smooth devaluation and swift or instantaneous devaluation (drastic, stepped-up). Negative consequences of the «smooth» weakening of the exchange rate are shown, including the example of George Soros' famous attack on the British pound in 1992. Using «only» £5 bn. then, Soros managed to break the resistance of the Bank of England, which ended up investing £15 bn. to fight him. The ideas of Robert Shiller, the Nobel Laureate, have been reviewed which allow this phenomenon to be explained. Recommendations are given regarding a more rational way of managing exchange rate using the example of actions taken by the Bank of Kazakhstan in February 2014.
    Keywords: Monetary Policy, Central Banking, Business Cycles, International Finance, Foreign Exchange
    JEL: E30 E52 E58 E65 F30 F31
    Date: 2016–03–23
  20. By: Dieter Nautz; Aleksei Netsunajev; Till Strohsal;
    Abstract: This paper introduces structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers’ inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank’s target in the short run. Our results indicate that the recent decline of long-term inflation expectations does not result from deanchoring macro-news but can be attributed to downward adjustments of consumers’ expectations about the central bank’s inflation target.
    Keywords: Inflation Expectations, Michigan Survey, Structural VAR, Markov Switching Heteroskedasticity
    JEL: E31 E52 E58
    Date: 2016–03
  21. By: Kim, Minseong
    Abstract: In this paper, another factor that affects equity risk premium is derived from a simple classical monetary model, which basically adds back labor-leisure to a simple consumption-only consumption-based asset pricing model. If every present/future good is traded at time $t=0$, just as in traditional Arrow-Debreu general equilibrium models and understanding bonds as essentially trading labor with future goods, it is inevitable that risk-free bonds have lower interest rate than ideal risk-free bonds of classical monetary models.
    Keywords: equity premium puzzle, Arrow-Debreu, futures market, equity risk premium
    JEL: E21 E44 G12 G13
    Date: 2016–03–15
  22. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); André D. Vilela (Banco Central do Brasil)
    Abstract: We estimate a dynamic, stochastic, general equilibrium model of the Brazilian economy taking into account the transition from a currency peg to inflation targeting that took place in 1999. The estimated model exhibits quite different dynamics under the two monetary regimes. We use it to produce counterfactual histories of the transition from one regime to another, given the estimated history of structural shocks. Our results suggest that maintaining the currency peg would have been too costly, as interest rates would have had to remain at extremely high levels for several quarters, and GDP would have collapsed. Accelerating the pace of nominal exchange rate devaluations after the Asian Crisis would have lead to higher inflation and interest rates, and slightly lower GDP. Finally, the first half of 1998 arguably provided a window of opportunity for a smooth transition between monetary regimes.
    Date: 2015–11
  23. By: Alessandra Bonfiglioli; Gino Gancia
    Abstract: Does economic uncertainty promote the implementation of structural reforms? We answer this question using one of the most exhaustive cross-country panel data set on reforms in six major areas and measuring economic uncertainty with stock market volatility. To address endogeneity concerns, we propose various identi?cation strategies, instrumenting uncertainty with world shocks to volatility and with natural disasters, terrorist attacks, political coups and revolutions. Across all speci?cations, we ?nd that uncertainty has a positive and signi?cant e¤ect on the adoption of reforms. This result is robust to the inclusion of a large number of controls, such as political variables, economic variables, crisis indicators, and a host of country, reform and time ?fixed effects.
    Keywords: reforms, uncertainty
    JEL: E02 E60 L51
    Date: 2015–10
  24. By: Hafedh BOUAKEZ (Department of Applied Economics and CIRPEE, HEC Montreal,); Rigas OIKONOMOU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE)); Romanos PRIFTIS (European Commission, Modelling Unit, Directorate General for Economic and Financial Aff airs)
    Abstract: We study optimal debt management in the face of shocks that can precipitate the economy into a liquidity trap and call for an increase in public spending in order to mitigate the resulting recession. Our approach follows the sizable literature of macroeconomic models of debt management, which we extend to the case where the zero lower bound on the short-term interest rate binds. We wish to identify the conditions under which removing long debt from the secondary market can become an optimal policy outcome. We show that the optimal debt-management strategy is to issue short-term debt if the government faces a sizable exogenous increase in public spending and if its initial liability is not very large. In this case, our results run against the standard prescription of the debt-management literature. Finally, we show that when the government sets optimally the level of public spending, the optimality of long-term debt is restored.
    Keywords: Debt Management, Debt Maturity, Fiscal Policy, Liquidity Trap, Monetary Policy, Tax Smoothing
    JEL: E43 E62 H63
    Date: 2016–01–31
  25. By: Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
    Abstract: This paper addresses the issue of impacts of central banks’ conservativeness/independence on stock market volatility. Using a simple theoretical macroeconomic model, we analytically find a positive link between stock prices volatility and central bank conservativeness. By applying panel data analysis on a set of 29 countries from 1998 to 2005, sufficient evidence for this positive relationship is provided using two different measures of stock market volatility.
    Keywords: Central bank independence, stock market volatility, panel data.
    JEL: E52 E58 G1
    Date: 2016
  26. By: Jesús Rodríguez-López (U. Pablo de Olavide); Gustavo A. Marrero (U. La Laguna and CAERP); Rosa Marina González-Marrero (U. La Laguna); Teresa Leal-Linares (Universidad de Huelva)
    Abstract: As of 2006 Spanish authorities implemented a Penalty Point System (PPS), consisting in a credit system for licensed drivers conditional upon the fulfillment of traffic rules. The PPS has been blessed as responsible for the decline of road fatalities in Spain. In this paper, we argue that part of the decline was due to the occurrence of two confluent facts that affect traffic density: (1st) the Great recession starting in 2008, and (2nd) an increase in fuel prices during the spring of 2008, implying a rise in the operating costs of motor vehicles. Using cointegration techniques, the GDP growth rate and the fuel price appear to be statistically significant with accidents. Importantly, PPS is found to be significant in reducing accidents with mortal victims. In view of these results, we conclude that road accidents in Spain are very sensible to the business cycle, and that the PPS influenced the quality (fatality) rather than the quantity of accidents in Spain.
    Keywords: Road accidents, Penalty Point System, Business cycle, Cointegration, Autoregressive Distributed Lags Models.
    JEL: R49 E32 C22
    Date: 2016–03
  27. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw); Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Serkan Çiçek (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Simona Jokubauskaite (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Isilda Mara (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: GDP growth in the EU Member States of Central and Eastern Europe (EU-CEE), the Western Balkans (WB) and Turkey will remain stable or even increase. The trend growth path will be around 3%. EU-CEE countries will thus continue to catch up to the EU average, however at low speed. Russia and Ukraine, on the other hand, will show a considerably worse performance growth will return in 2017 at the earliest. These are the main results of the newly released medium-term macroeconomic forecast by the Vienna Institute for International Economic Studies (wiiw). In 2015, the EU-CEE group registered the highest rate of economic growth since the outbreak of the financial crisis, 3.4% (see Table 1). In 2016-2017 the group will experience some modest growth deceleration on account of the recent consumption boom subsiding and a temporary decline in EU transfers. As for 2018, the EU-CEE countries will pick up some speed driven by an inflow of new investments and transfers. Uncertainties concerning the global economy do not allow us to predict average growth of more than 3% over the medium term. Countries in the Western Balkans also improved their performance in 2015 and will maintain positive growth rates in 2016 and beyond. However unimpressive it may be, compared to their need for catching-up, the average growth rate in the WB countries (excluding Serbia) will not lag behind that in the EU-CEE countries. Turkey will maintain a fragile stability despite relatively high inflation and a high current account deficit, while coping with increasing challenges emerging, for instance, from the war in Syria, the refugee crisis and the loss of export and tourism revenue owing to the Russian trade sanctions. Russia and Belarus will face yet another year of recession in 2016. Russia will continue to suffer from low oil prices, high inflation, currency depreciation, sanctions and fiscal austerity. As usual, structural change and institutional reforms will be slow and half-hearted, incapable of offsetting the losses. Ukraine’s economic growth, after the dramatic fall over the past years, will stabilise as the economy will by and large have completed the adjustment process that was triggered by the country decoupling from Russia and the occupied territories. The Russian annexation of the Crimea and the conflict in East-Ukraine look set to last. Export markets lost will not be regained even in the medium term, nor should one expect the volume of exports to the EU to make up for the shortfall quickly. The divergence of economic performance between the EU-CEE and the WB plus Turkey on the one hand and the CIS-3 (Russia, Belarus, Kazakhstan) and Ukraine on the other hand will continue in 2016 and beyond. The difference between the two large country groups, however, will not take on more pronounced dimensions as the recent collapse of the major commodity prices may turn into stagnation. The leading role attributed to household demand in driving economic growth in the EU-CEE and WB countries will be matched by investments. A medium-term investment revival is expected in most of the CESEE countries in both the public and private sectors. FDI has already shown some signs of emerging from stagnation in the EU-CEE and WB countries. Credit conditions for private borrowers have improved. Moreover, gross fixed capital formation is responding to the transfer of EU funds that are bound to decline in 2016, but will recover later, once access to EU transfers provided under the 2014-2020 financing framework picks up. As fiscal consolidation and more rapid economic growth have been achieved, fiscal space has widened in several countries, thus granting governments more room in which to implement and support investments. Even highly indebted countries have managed to adopt a less restrictive fiscal stance. The CIS-3 and Ukraine are outliers in this respect as well; they have started cutting back on expenditures so as to reduce their fiscal deficits. Exports may increase if external demand recovers, but imports may grow even more rapidly as consumption and investment expand in the EU-CEE and WB economies. Thus, net exports will not be a strong driver of economic growth. Foreign investors’ income may rise overall, while remittances and labour income from abroad will remain important sources of current account revenues. Special sections of the Forecast shed light on other topical issues low oil prices are mainly supply-driven; the Juncker Initiative will not take the place of EU transfers; outmigration and demography are leading to labour shortages in EU-CEE countries; the recent inflow of refugees may, in the medium term, put pressure on existing migrant workers in Austria.
    Keywords: CESEE, economic forecast, Europe, Central and Eastern Europe, Southeast Europe, Western Balkans, new EU Member States, CIS, Russia, Ukraine, Kazakhstan, Turkey, growth divergence, external risks, macroeconomic imbalances, consumption-led growth, unemployment, inflation, competitiveness, public debt, private debt, current account
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2016–03
  28. By: Ismael, Mohanad; Sadeq, Tareq
    Abstract: The famous trade-off between inflation rate and unemployment rate is known as the Phillips relation. It is considered as important base for decision makers to stabilize the economy through inflation rate and unemployment rate. Although the Phillips curve is critisized by many researchers, there is a lack of studies that consider emerging-countries economies. The objective of this paper is to find evidence for the relationship between unemployment and inflation in Palestine. According to literature, the relationship is negative in a traditional Phillips curve. We find an inverse relationship between inflation rate and unemployment rate where inflation causes fluctuations in unemployment. In addition, it is shown that inflation rate affects unemployment rate positively only in the short run. This result is unique for Palestinian economy.
    Keywords: Cointegration; stationary; Phillips curve; Error Correction Model.
    JEL: C13 E31 E47
    Date: 2016–03–23
  29. By: Elliot Aurissergues (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: Demand shocks likely play a key role in driving business cycles. However, in the standard new keynesian model, the monetary policy reaction to these shocks have a supply side effect. The change in real rate affects the marginal utility of consumption generating an income effect on labor supply. Wages, inflation and through monetary policy, aggregate demand will increase. This supply side effect have a surprising importance for the model, especially when the sensi- tivity of aggregate demand to interest rate is low. A demand shock will have a large impact (close to one) on output, but a very small one on the output gap. The limited monetary policy movement induced by the taylor rule remains very close to the natural rate of interest. There are nearly no differences between the sticky price and the flexible price model. It represents a very disappointing result, the entire purpose of sticky prices being to generate inefficiencies when the aggregate demand is hit. Coupled with very tiny empirical support for this supply side effect of monetary policy, it suggests to explore the theoretical possibilities to kill this ef- fect. First, we review the two ways the literature have proposed, nonseparable preferences and sticky wages. The main drawback is a strong reliance on very specific assumption for the labor market. We explore an alternative approach. We attempt a radical departure from traditionnal assumption about the optimizing behavior of the representative agent. Instead of optimizing simulatneously with respect to hours, consumption and saving, the household decomposes the problem in two steps. First, the agent chooses between labor income and hours. Second, he optimizes between consumption and saving. The interest is to disentangle the income effect which affects the labor equation and those affecting the intertemporal choice. Thus it is possible to reduce the wealth effect on labor supply whereas keeping a low sensitivity of consumption to interest rate. This flexible approach also allows to challenge the effect of interest rate on wealth offering a potential explanation for small effects of interest rate on both labor supply and consumption whereas keeping large income effects.
    Keywords: Demand shock, comovement, labor supply, elasticity of intertemporal substitution, wealth effect
    Date: 2016–02
  30. By: Katharina Greulich; Sarolta Laczó; Albert Marcet
    Abstract: We study Pareto-optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth. We show a natural modification of the standard Ramsey problem to guarantee that long-run capital taxes are zero. We focus on Pareto-improving policies and we find that a gradual reform is crucial in achieving a Pareto improvement: labor taxes should be cut and capital taxes should remain high for a very long time before reaching zero. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. This policy redistributes wealth in favor of workers so that all agents benefit, and it favors quick capital growth after the reform. The labor tax cut is financed by deficits which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are relatively large and they can be shifted entirely to capitalists or workers by varying the length of the transition. We address a number of technical issues such as sufficiency of Lagrangian solutions in a Ramsey problem, relation of Pareto-improving allocations with welfare functions, asymptotic behavior, and solution algorithms.
    Keywords: fiscal policy, Pareto-improving tax reform, redistribution
    JEL: E62 H21
    Date: 2016–03
  31. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    Abstract: We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming environment. Acute safe asset scarcity forces the economy into a “safety trap†recession. In the open economy, safe asset scarcity spreads from one country to the other via capital flows, equalizing interest rates. Acute global safe asset scarcity forces the economy into a global safety trap. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output adjustment across countries. Policies that increase the net supply of safe assets somewhere are output enhancing everywhere.
    JEL: E0 F3 F4 G1
    Date: 2016–03
  32. By: Vesna Stojcevska (National Bank of the Republic of Macedonia); Mite Miteski (National Bank of the Republic of Macedonia)
    Abstract: For a small open economy with fixed exchange rate regime, the twin deficit hypothesis is always an interesting and relevant research topic. The aim of this research is to evaluate the effects of the government budget shocks on the current account movement in the case of the Macedonian economy, hoping to shed light on the influence of the fiscal policy on the external position of the economy, as well as to provide useful guidance for policy makers about the sensitivity of the current account balance to changes in the primary budget balance. By using a VAR model on quarterly data for the period from 1998 to 2013, this paper points to a positive relationship between the two balances, but the empirical results also indicate that connection is only contemporaneous, implying that fiscal policy stance does not cause long lasting changes in the balance of payments position of the Macedonian economy. However, our results do not undemand the need for fiscal cautiousness, especially in an economy with a fixed exchange rate regime.
    Keywords: Government Budget Deficit, Balance of Goods and Services, Real Exchange Rate, Twin Deficit Hypothesis, VAR
    JEL: C32 E62 F31 F32 F41
    Date: 2016–01
  33. By: Antonio Acconcia; Giancarlo Corsetti; Saverio Simonelli;
    Abstract: Exploiting three Italian earthquakes as quasi-experiments, we analyze the response of homeowners’ consumption to targeted transfers, financing housing reconstruction over time. Like loans, these transfers mainly affect the liquidity of households’ wealth in the short run: we show that they have no effect on consumption over a multi-year horizon. Yet, the access to reconstruction funds has significantly heterogeneous effects on impact: it strongly raises non-durable consumption by households with low liquidity and bank debt (the ‘wealthy-hand-to-mouth’); it makes no difference for liquid households. Consistently, in either group, consumption is insensitive to transfer funds that accrue directly to firms.
    Keywords: Consumption, Liquidity, Mortgage, Quasi-experiment, Public Transfers.
    JEL: E21 E62
    Date: 2015–03–25
  34. By: Roberto Torrini (ANVUR and Bank of Italy)
    Abstract: The share of labour increased in the first half of the 1970s, declined slowly to its 1960s level in 2001, and since then has been rising. Between 1975 and 2001, the decline in the labour share was due in part to the recovery in profits, and in part to a steady increase in housing rents on GDP, to 13 per cent of value added (5% in 1975) and almost 40 per cent of capital income (20% in the mid-1970s). Net of housing rents, the share of profits fell to a historical low during the great recession. In the business sector net of housing, recovery of the labour share, magnified by the recent recession, was evident in manufacturing and industries other than regulated sectors (energy, transport, communications and finance), where privatizations and changes to regulation provoked a marked drop in the labour share in the late 1990s. I tentatively explain the trend reversal in the labour share, which started well before the onset of the crises, as due to a compression in the mark-ups on marginal costs and the difficulty experienced by Italian firms to be rewarded for their innovation efforts (product quality upgrading) in a more competitive environment.
    Keywords: factor shares, returns on capital, productivity, mark-ups
    JEL: E25 E22 E24 L32 L33 J30
    Date: 2016–03
  35. By: Potjagailo, Galina
    Abstract: I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries.
    Keywords: monetary policy,Euro area,Central and Eastern Europe,exchange rate regime,financial transmission,FAVAR
    JEL: C33 E52 E58 F42
    Date: 2016
  36. By: Gani Ramadani (National Bank of the Republic of Macedonia); Nikola Naumovski (National Bank of the Republic of Macedonia)
    Abstract: This paper presents the main findings of a survey on wage and price formation of firms in Macedonia conducted in the first half of 2014. The main objective was to identify some relevant characteristics about the dynamics of wages and prices in Macedonia, clarifying the relationship between them, and to draw some conclusions on firms’ response to various adverse shocks in adjusting labour costs, prices and their various components. The most important conclusions are that: i) wages tend to remain unchanged longer than prices; ii) the most significant factor producing frequent wage adjustment is tenure rather than inflation; iii) time concentration of wage and price changes is significantly lower in Macedonia than in the surveyed EU countries as a result of the considerably low automatic indexation of wages and large share of firms that operate in highly price competitive pressures; iv) downward nominal wage rigidity could be considered relatively high associated with the extent of permanent contracts, and is more important compared to the low downward real wage rigidity; v) there is a weak price-wage link which corresponds with inflation being the least important factor driving wage changes; and vi) in case of adverse shocks firms tend to adjust costs and prices rather than margins and output.
    Keywords: survey data, wage and price setting, wage rigidity, indexation, Macedonia
    JEL: D21 E30 J31
    Date: 2014–09
  37. By: Brant Abbott (University of British Columbia); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Cowles Foundation, Yale University); Giovanni L. Violante (New York University)
    Abstract: This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Driven by both altruism and paternalism, parents make inter vivos transfers to their children. Both cognitive and non-cognitive skills determine the non-pecuniary cost of schooling. Labor supply during college, government grants and loans, as well as private loans, complement parental resources as means of funding college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by 4-5 percentage points in the long-run. Further expansions of government- sponsored loan limits or grants would have no salient aggregate effects because of substantial crowding-out: every additional dollar of government grants crowds out 30 cents of parental transfers plus an equivalent amount through a reduction in student’s labor supply. However, a small group of high-ability children from poor families, especially girls, would greatly benefit from more generous federal aid.
    Keywords: Education, Education policy, Public finance, Financial aid, Inter vivos transfers, Altruism, Overlapping generations, Credit constraints, Labor supply, Equilibrium
    JEL: E24 I22 J23 J24
    Date: 2013–02
  38. By: Cashin, Paul (International Monetary Fund); Mohaddes, Kamiar (University of Cambridge); Raissi, Mehdi (International Monetary Fund)
    Abstract: China’s GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0:23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0:29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.
    JEL: C32 E32 F44 O53
    Date: 2016–03–17
  39. By: Hazama, Makoto; Hosono, Kaoru; Uesugi, Iichiro
    Abstract: The shocks to real estate prices potentially have effects on banks' balance sheets, their lending behavior, and eventually economic activities. We examine the existence of the bank lending channel in Japan during the 2007–2013 global financial crisis. We identify the heterogeneous shocks to real estate prices that affect banks by summarizing the land prices of their borrowing firms. We use a comprehensive database on firm-bank relationships as well as information on land prices for more than 20,000 locational points in Japan. We find that after controlling for fixed effects, a bank that faces a rise in land prices increases its capital, total loans, real estate loans, and loans backed by real estate collateral. We also find that the increased land prices do not significantly change the amount of non-real estate loans or loans without real estate collateral. Further, after controlling for time-varying firm fixed effects, increased land prices cause banks to reduce their transactional relationships with firms both in terms of extensive and intensive margins. We provide several possible explanations for the difference in the results between bank-level estimations and matched bank-firm estimations.
    Keywords: Bank Lending Channel, Real Estate Prices, Portfolio Reallocation
    JEL: E44 E51 G21
    Date: 2016–03
  40. By: Michele Piffer
    Abstract: This paper uses a structural VAR model to study the effect of monetary policy on the delinquency rate of business loans and consumer credit. The VAR is identified using at the same time several external instruments, which cover different approaches from the literature. Delinquency rates, defined as the rate of loans whose repayment is overdue for more than a month relative to total loans, are found to decrease in response to a monetary expansion. The results are consistent with a general equilibrium effect formalized in the paper using a standard model of optimal defaults. According to the model, the decrease in defaults is driven by the fact that monetary expansions increase aggregate demand and push up profits and income, thereby improving the repayment possibility of borrowers.
    Keywords: Monetary shocks, risk-taking channel, SVAR with external instruments
    JEL: E52 E58
    Date: 2016
  41. By: Mirko Armineto (Sapienza University of Rome)
    Abstract: This paper presents a new alternative measure to GDP – the Sustainable Welfare Index (SWI) – a modified version of the Index of Sustainable Economic Welfare (ISEW) developed by Daly and Cobb (1989). Expressed in monetary terms, it provides a synthetic indicator of progress, with a comprehensive view of social and economic welfare and of environmental sustainability. While its methodology has been revised several times – a new version including additional items is also referred to as Genuine Progress Indicator (GPI) – ISEW represents an appropriate starting point for the extension developed in this paper. SWI is calculated for Italy over the period 1960-2013, providing a novel series of data mapping the growth and decline of the national sustainable welfare. The proposed SWI allows a direct comparison with GDP data and includes methodological adjustments with respect to ISEW. In measurement terms it focuses on flows and eliminates variables reflecting stock values; it circumscribes the coverage of social and environmental factors relevant for identifying sustainable welfare and is calculated as the sum of 14 separate components. Empirical results show that from 1960 to 1991 per capita GDP and per capita SWI have evolved in parallel, with the aggregate monetary value of sustainable welfare being significantly lower than GDP figures. Italy’s SWI reached its peak in 1991, then stabilised with significant oscillations and has shown a sharp decline since the start of the 2008 crisis; in 2013 per capita GDP is back to the level of 1997, while per capita SWI is back to 1985. Italy’s SWI appears to confirm the so-called “threshold” hypothesis (Easterlin, 1974; Daly, 1977; Max-Neef, 1995), describing a situation in which the negative effects of economic growth on social and environmental conditions overcome the benefits of additional units of GDP. This evidence is supported by a detailed theoretical and methodological discussion and by a sensitivity analysis.
    Keywords: Socio-economic development, Welfare measures, Beyond GDP, Index of Sustainable Economic Welfare (ISEW), Italy
    JEL: I31 Q57 E01
    Date: 2016
  42. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: This study provides new estimates of the likely economic losses from banking crises. It also provides new estimates of the economic cost of increasing bank capital requirements, based on the author’s earlier estimate (Cline 2015) of the empirical magnitude of the Modigliani-Miller effect in which higher capital reduces unit cost of equity capital. The study applies previous official estimates (BCBS 2010a) of the impact of higher capital on the probability of banking crises to derive a benefits curve for additional capital, which is highly nonlinear. The benefit and cost curves are examined to identify the socially optimal level of bank capital. This optimum is estimated at about 7 percent of total assets, with a more cautious alternative (75th percentile) at about 8 percent, corresponding to about 12 and 14 percent of riskweighted assets, respectively. These levels are, respectively, about one-fourth to one-half higher than the Basel III capital requirements for the large global systemically important banks (G-SIBs).
    Keywords: Financial Regulation, Bank Capital Requirements, Capital Structure
    JEL: E44 G21 G28 G32
    Date: 2016–03
  43. By: Stefan Avdjiev; Elod Takats
    Abstract: We demonstrate that currency networks in cross-border bank lending have a significant impact on the size, distribution and direction of international monetary policy spillovers. Using the recently enhanced BIS international banking statistics, which simultaneously provide information on the lender, borrower and currency composition of cross-border bank claims, we map the major currency networks in international banking. Next, we show that during the 2013 Fed taper tantrum, exposure to dollar lending was associated with safe haven flows to the United States, virtually unchanged flow dynamics vis-à-vis other advanced economies, and strong outflows from emerging markets. Furthermore, this pattern was shaped by interbank lending rather than by lending to non-banks.
    Keywords: Currency networks, cross-border banking flows, international monetary policy spillovers
    Date: 2016–03
  44. By: Ono, Arito; Aoki, Kosuke; Nishioka, Shinichi; Shintani, Kohei; Yasui, Yosuke
    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
  45. By: Ojo, Marianne
    Abstract: This chapter is aimed at illustrating how the potential of E commerce as a tool for resource expansion, can be maximized where information gaps, asymmetries, and more specifically, implementation gaps are addressed and mitigated. Engaging stakeholders, as well as bright line rules - distinguished from principles, at relevant phases and stages of mediation process between agents and stakeholders, would not only serve to foster greater accountability, but also ensure that better enforcement mechanisms are in place. Hence chapter illustrates how the stakeholder theory can be considered to be consistent with value maximization. Whilst incomplete contracts provide benefits of flexibility, they have also been criticized for facilitating lack of clarity in respect of objectives, focus and accountability in the decision making process. Furthermore, through the engagement of stakeholders, as well as appropriate forms of regulation, the chapter will also, simultaneously, illustrate how a “properly constructed Balanced Scorecard” can comprehensively communicate enterprises' business strategies.
    Keywords: expectation gap; Balanced Scorecard; implementation gap; corporate governance; audits
    JEL: E3 G2 G3 G38 K2 M4
    Date: 2016–03
  46. By: Kuga Iakov; Elena Kuzmina
    Abstract: This paper tests covered interest parity at Russian money market over period of 2010-2014 and studies scale and sources of deviations from it. We use both offered and actual interbank interest rates for four different terms. Average deviations from the parity vary between 8 and 105 basis points depending on rates and terms. We test credit risk, turbulence and monetary policy as explanation of these deviations and assessed them quantitatively. For example, one standard deviation change in credit risk is responsible for 50 per cent of the average deviation from parity compared to 72 per cent due to monetary policy spread and (minus) 22 per cent due to turbulence for one week offered rate spread. Risk and turbulence effects grow with maturity and higher for actual rate spreads.
    JEL: E43 F31 G15
    Date: 2016–03–15
  47. By: Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: A sketch of the International Monetary Fund’s 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a “demand driven” theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively “new” IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became they key focus since the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in the developing nations and now migrated to advanced ones. As a consequence, the IMF has engaged in “serial lending”, with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency, most widespread among low income countries in chronic arrears to the official sector, but most evident in the case of Greece since 2010. We conclude that these practices impair the IMF’s role as an international lender of last resort.
    Keywords: IMF; currency crashes; financial crises; sovereign default; lender of last resort; international borrowing
    JEL: E5 F33 F4 F55 G01 G2 G15 N0
    Date: 2015–12–10
  48. By: Castro, César; Jiménez-Rodríguez, Rebeca
    Abstract: This paper analyzes how oil price shocks are transmitted downstream to producer and consumer prices in the euro area at the highest disaggregate level. In doing so, we first generate an appropriate database that identifies each industrial production sector with its corresponding price of consumer goods for the euro area. We next estimate a constrained vector autoregressive model. Our findings show a statistically significant increase in producer prices after an oil price shock for branches with high oil consumptions, although this statistical pass-through is only partial. However, there is no evidence of a significant oil price pass-through to consumer prices for most branches, which suggests the adaptability of European producers from the most branches to higher oil price pressures without transmitting them to consumers (exceptions: mining, chemical and metal).
    Keywords: Oil price; Industrial prices; Consumer prices; Disaggregation
    JEL: E31 Q4
    Date: 2016–03–22
  49. By: Bittschi, Benjamin; Borgloh, Sarah; Moessinger, Marc-Daniel
    Abstract: We estimate the effects of income from various sources on charitable giving using administrative German income tax data. We demonstrate that charitable contributions are not uniformly affected by different income types. While business and capital income exhibit a positive effect, the remaining income sources do not influence charity on statistically signifcant levels. This exercise is not new and has been conducted for (at least) three different purposes: 1) Relying on the described results, a public finance researcher would state that business and capital income are more prone to tax evasion than the remaining income sources. 2) An entrepreneurship researcher would conclude that business owners are more generous than employees, and 3) a researcher testing the validity of the life cycle theory (or its behavioral counterpart) would refute the fungibility of income. In contrast, we argue that none of these approaches can answer the intended question if solicitation effects of fundraising or measurement error of the income sources are not taken into account. Applying a fixed effect poisson model, we demonstrate that under certain assumptions the results can have a meaningful interpretation.
    Keywords: tax evasion,entrepreneurial behavior,charitable giving,income fungibility,administrative data,fixed effects poisson model
    JEL: D91 E21 H26 H41 L26
    Date: 2016
  50. By: Angelov, Aleks; Vasilev, Aleksandar
    Abstract: The integration of technology in the educational process is becoming increasingly important for improving the 21st century student’s understanding and retention of academic material. Being able to readily apply the theory covered in class and to automatically receive immediate feedback is invaluable. And with gamification now permeating into nearly every area of our lives, computer games are proving to be an effective way to successfully engage any audience. Presently, there are only a few freely available macroeconomic simulators on the Internet which are suitable for undergraduate students. The two most prominent ones are the European Central Bank’s €conomia and the Chair the Fed game. But both of them focus solely on monetary policy. Thus, there is no educational simulator that allows students to examine the effects of fiscal policy. This is particularly problematic since Bulgaria and several other countries in the region, which are not part of the Eurozone, operate under a currency board, meaning that they do not have much control over their monetary policy, so the emphasis there is mainly on conducting fiscal policy. Hence, we developed the “Keynesian Macroeconomic Simulator of Fiscal Policy”.
    Keywords: simulators,fiscal policy
    Date: 2016–02–09
  51. By: Njindan Iyke, Bernard
    Abstract: This paper investigated whether monetary policy disturbances matter in Ghana. A previous study pursued this question but the evidence brought forth was plagued with the exchange rate and price puzzles. We argued, in this paper that these puzzles arise because of identification scheme of the kind utilized in that paper. We showed that a better approach to overcoming these puzzles is by using the agnostic identification scheme. Using a quarterly time series over the 1990Q1 – 2015Q3, and an efficient algorithm for solving sign restricted SVARs, we found that short-term interest rate responded largely and positively, real output and consumer prices reacted negatively, nominal exchange rate reacted by appreciating after just 2 quarters, and dropped gradually to its baseline, and monetary base and commodity prices reacted by dropping below zero and remained there, following a contractionary monetary policy disturbance. The reaction of nominal exchange rate is rather lethargic, taking into account the strong rise in the short-term interest rate, pointing to: some existing structural and institutional rigidities in the Ghanaian economy that inhibit the size of capital inflows expected, the country’s dismal sovereign bond rating, or the increase in the short-term interest rate is not high enough to mitigate the cost of capital investment.
    Keywords: Agnostic Identification; Monetary Disturbances; Structural Shocks; Ghana
    JEL: C11 C32 E52
    Date: 2016–02–01
  52. By: Mehlum, Halvor; Torvik, Ragnar; Valente, Simone
    Abstract: We develop a theory of macroeconomic development based on the novel concept of savings multiplier: capital accumulation changes relative prices and income shares between generations, creating further incentives to accumulate and thereby rising saving rates as the economy develops. The savings multiplier hinges on two mechanisms. First, accumulation raises wages and leads to redistribution from the consuming old to the saving young. Second, higher wages raise the price of services consumed by the old, and the anticipation of such price rise prompts the young to increase their savings. Our theory captures important aspects of China's development and suggests new channels through which the one child policy and the dismantling of cradle-to-grave social benefits have fuelled China's savings and accumulation rates.
    Keywords: Overlapping generations, Growth, Savings.
    JEL: D91 E21 O11
    Date: 2016–03–18
  53. By: Sargsyan Hayk
    Abstract: A well-functioning monetary policy transmission mechanism is a guarantee for a successful monetary policy, therefore examination of the impacts of its main determinants in Armenia was of a great interest, and served as an inspiration for the given research. Following the research objectives, a proxy variable for the strength of monetary pass-through in Armenia was estimated, and then the resulted variable was used in an empirical model to assess the long-run and short run relationship with its main factors.
    JEL: E52 E58
    Date: 2016–03–18
  54. By: Luo, Yulei; Nie, Jun (Federal Reserve Bank of Kansas City); Young, Eric R.
    Abstract: This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to quantitatively explore how the preference for robustness (RB) affects the interest rate, the dynamics of consumption and income, and the welfare costs of model uncertainty in general equilibrium. We show that RB significantly reduces the equilibrium interest rate, and reduces the relative volatility of consumption growth to income growth when the income process is stationary. Furthermore, we find that the welfare costs of model uncertainty are nontrivial for plausibly estimated income processes and calibrated RB parameter values. Finally, we extend the benchmark model to consider the separation of risk aversion and intertemporal substitution and regime-switching in income growth.
    Keywords: Interest rates; Savings; Income; Consumption; General equilibrium
    JEL: C61 D81 E21
    Date: 2015–10–29
  55. By: Claudio Borio; Marco Jacopo Lombardi; Fabrizio Zampolli
    Abstract: A frequently neglected aspect of financial booms and busts - financial cycles - is their impact on fiscal positions. And yet, the latest financial crisis and history show that these cycles can wreak havoc with public finances. After reviewing the impact of financial cycles on fiscal positions, we offer a new tool to estimate cyclically adjusted balances, illustrate its performance, explore its strengths and weaknesses, and sketch out a way forward to measuring sustainability in a more holistic way.
    Keywords: financial cycle, financial crisis, cyclically adjusted fiscal balance
    Date: 2016–03
  56. By: Richard G. Anderson; Michael Bordo; John V. Duca
    Abstract: This study offers a single, consistent model that tracks the velocity of broad money (M2) since 1929, including the Great Depression, the global financial crisis, and the Great Recession. The model emphasizes the roles of changes in uncertainty and risk premia, financial innovation, and major banking regulations. Our findings suggest an enhanced role of a broad, liquid money aggregate as a policy guide during crises and their unwinding. Following crises, policymakers face the challenge of not only unwinding their balance sheet so as to prevent excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from relevant financial reforms.
    JEL: E41 E50 G11
    Date: 2016–03
  57. By: José Ramón García; Valeri Sorolla
    Abstract: In this paper we present an unemployment model with labour market frictions and monopolistic competition in the goods market. We consider different collective wage-setting systems and compare wages, the unemployment rate and labour market tightness at firm, sector and national (centralized) levels. We find that the Calmfors-Driffill hypothesis is maintained under labour market frictions. In other words, unemployment will be thighest when the bargaining occurs at an industry-wide level. We find, both empirically and analytically, that regulation in the goods market plays a crucial role in explaining these findings. It may contribute to explaining the historical relationship between wage bargaining institutions and unemployment. Additionally, we show that the Calmfors-Drifill results are conditioned by the tax structure and the progressivity of labour income taxes. This fact might explain the lack of robustness in the findings relating to the relationship between wage bargaining institutions and unemployment of many empirical studies on the Calmfors-Driffill hypothesis.
    Keywords: Disequilibrium Unemployment, monopolistic competition, wage setting systems, policy reforms
    JEL: E24 O41
    Date: 2016–03
  58. By: Ichiro Muto (Bank of Japan); Nao Sudo (Bank of Japan); Shunichi Yoneyama (Bank of Japan)
    Keywords: Lost Decades; Total Factor Productivity; Balance Sheet Problem
    JEL: E20 E51
  59. By: Tang, Maggie May-Jean
    Abstract: Long-run monetary neutrality (LRMN) is an idea expressed from the quantity theory of money, which posits that a permanent change in money stock has no real effect in the long-run. The LRMN theory is an empirical matter with regard to monetary policy, where it helps to define the monetary transmission and is able to identify the effectiveness of monetary policy by investigating the role of money in the long run. As a result, the study of LRMN has attracted great interest for a long period of time.
    Keywords: Long-run monetary neutrality, literature review
    JEL: E4
    Date: 2016–03–18
  60. By: Kris James Mitchener; Gary Richardson
    Abstract: Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.
    JEL: E44 G01 G21 L14 N22
    Date: 2016–03
  61. By: Asongu, Simplice; Tchamyou, Vanessa
    Abstract: To the best our knowledge, in the first empirical macroeconomic examination of the nexus between financial intermediation and mobile phones, Asongu employs two conflicting financial system definitions in the assessment of how mobile phones have stimulated financial development in Africa. Within the framework of the dominant International Monetary Fund’s International Financial Statistics (2008) definition, mobile phones are established to be negatively associated with financial intermediary dynamics of depth, activity and size. Conversely, when the previously neglected informal financial sector is integrated into the conception, definition and measurement of the financial system, mobile phones are positively (negatively) correlated with the informal (formal) financial intermediation sector. The empirical evidence is based on 52 African countries. Causality in the established linkages has been confirmed in subsequent studies by the same author. At least three policy implications derive from the findings. First, the role of informal financial intermediation is increasing to the detriment of formal financial mechanisms. Second, in order to capture the positive effect of mobile phones on finance, it is imperative to integrate the missing informal financial sector component into the IMF definition of the financial system. Third, it is a wake-up call for more scholarly research on: (i) macroeconomic financial development implications of mobile phone penetration and (ii) monetary policy instruments in the face of burgeoning ‘mobile phone’-oriented financial intermediation.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Africa
    JEL: E00 G20 L96 O17 O33
    Date: 2015–08
  62. By: Asongu, Simplice
    Abstract: An April 2015 World Bank report on attainment of the Millennium Development Goal (MDG) extreme poverty target has revealed that extreme poverty has been decreasing in all regions of the world with the exception of sub-Saharan Africa (SSA), in spite of the sub-region enjoying more than two decades of growth resurgence. This study builds on a critic of Piketty’s ‘capital in the 21st century’ and recent methodological innovations on reverse Solow-Swan to review empirics on the adoption of common policy initiatives against a cause of extreme poverty in SSA: capital flight. The richness of the dataset enables the derivation of 14 fundamental characteristics of African capital flight based on income-levels, legal origins, natural resources, political stability, regional proximity and religious domination. The main finding reveals that regardless of fundamental characteristic, from a projection date of 2010, a genuine timeframe for harmonizing policies is between 2016 and 2023. In other words, the beginning of the psot-2015 agenda on sustainable development goals coincides with the timeframe for common capital flight policies.
    Keywords: Econometric modeling; Capital flight; Poverty; Africa
    JEL: C50 E62 F34 O19 O55
    Date: 2015–11
  63. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: President Patrick T. Harker gives his economic outlook and views on monetary policy at the meeting of the Money Marketeers of New York University. In his speech, "Growth and the Role of Economic Policies," he also discusses the prospects of long-term economic growth in the U.S. and the role of economic policies in affecting those prospects.
    Keywords: Economic growth; Monetary policy; Economic policy; Technology; Capital;
    Date: 2016–03–22
  64. By: Alain Galli
    Abstract: According to economic theory, the intertemporal budget constraint of households implies that a permanent increase in wealth should have a positive effect on consumer spending. Given the comparatively strong increase in Swiss household wealth over the past few years, the question of the extent to which changes in wealth influence expenditures of households has become of special interest for Switzerland. In this paper, I show that while the link among consumption, wealth and income was quite strong from 1981 to 2000, it has been very unstable since 2001. This fact suggests that the gap among the three variables, i.e., the deviation from long-run equilibrium, that has opened over the last few years is less likely to close. The results apply to aggregate wealth effects as well as to separate financial and housing wealth effects. Furthermore, I document several fragility issues related to the use of the cointegration approach to estimating wealth effects. These issues highlight the importance of carefully checking the robustness of the results, instead of looking just at one cointegration estimation method and only one time period. They also highlight the need for a non-cointegration approach to estimating wealth effects.
    Keywords: Wealth effects, consumption-to-wealth ratio, cointegration, cay residual
    JEL: D12 E21 E44
    Date: 2016
  65. By: Pawe{\l} Smaga; Mateusz Wili\'nski; Piotr Ochnicki; Piotr Arendarski; Tomasz Gubiec
    Abstract: We propose a new model of the liquidity driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modeling and systemic risk analysis. We construct a model where banks are allowed to use both the interbank and the securities markets to manage their liquidity demand and supply as driven by prudential requirements in a volatile environment. The network of interbank loans is dynamic and simulated every day. We show how only the intrasystem cash fluctuations, without any external shocks, may lead to systemic defaults, what may be a symptom of the self-organized criticality of the system. We also analyze the impact of different prudential regulations and market conditions on the interbank market resilience. We confirm that central bank's asset purchase programs, limiting the declines in government bond prices, can successfully stabilize bank's liquidity demand. The model can be used to analyze the interbank market impact of macroprudential tools.
    Date: 2016–03
  66. By: Vasco M. Carvalho; Basile Grassi; ;
    Abstract: Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models – the firm size distribution – and show that the resulting closed form solutions for aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and (iii) time-varying second moments. We explore the key role of moments of the firm size distribution – and, in particular, the role of large firm dynamics – in shaping aggregate fluctuations, theoretically, quantitatively and in the data.
    Keywords: Large Firm Dynamics; Firm Size Distribution; Random Growth; Aggregate Fluctuations
    Date: 2016–04–30
  67. By: Juan Carlos Escanciano; Stefan Hoderlein; Arthur Lewbel; Oliver Linton
    Abstract: We consider nonparametric identification and estimation of pricing kernels, or equivalently of marginal utility functions up to scale, in consumption based asset pricing Euler equations.Ours is the first paper to prove nonparametric identification of Euler equations under low level conditions (without imposing functional restrictions or just assuming completeness). We also propose a novel nonparametric estimator based on our identification analysis, which combines standard kernel estimation with the computation of a matrix eigenvector problem. Our esti-mator avoids the ill-posed inverse issues associated with existing nonparametric instrumental variables based Euler equation estimators. We derive limiting distributions for our estimator and for relevant associated functionals. We provide a Monte Carlo analysis and an empirical application to US household-level consumption data.
    Keywords: Euler equations, marginal utility, pricing kernel, Fredholm equations, integral equations, nonparametric identification, asset pricing.
    JEL: C14 D91 E21 G12
    Date: 2015–10–01
  68. By: Federica Ciocchetta (Bank f Italy); Wanda Cornacchia (Bank f Italy); Roberto Felici (Bank f Italy); Michele Loberto (Bank f Italy)
    Abstract: We provide an analytical framework for assessing financial stability risks arising from the real estate sector in Italy. This framework consists of two blocks: three complementary early warning models (EWMs) and a broad set of indicators related to the real estate market, to credit and to households. We focus separately on households and on firms engaged in construction, management and investment services in the real estate sector. Since in Italy there have been no real estate-related systemic banking crises, as vulnerability indicator we consider a continuous indicator represented by the ratio between the annual flow of bad debts related to the real estate sector and banks’ capital and reserves. We contribute to the recent literature on EWMs by implementing a Bayesian Model Averaging (BMA) based on linear regression models with a continuous dependent variable of vulnerability and an ordered logit model with a discrete dependent variable of vulnerability classes. Both models exhibit good predictive abilities. Based on the BMA projections for the period from the third quarter of 2015 to the second quarter of 2016, banking vulnerability related to the real estate sector is expected to gradually decline.
    Keywords: real estate markets, early warning models, bayesian model averaging, banking crises, macroprudential policy
    JEL: C35 C52 E44 E58 G21 G28
    Date: 2016–03
  69. By: Marco Airaudo; Edward F. Buffie; Luis-Felipe Zanna
    Abstract: We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.
    Date: 2016–03–08
  70. By: Karim Barhoumi; Reda Cherif; Nooman Rebei
    Abstract: We study empirically the reaction of fiscal policy to changes in the permanent and transitory components of GDP in a panel of countries. We find evidence that government spending tends to be counter-cyclical conditional on temporary shocks and pro-cyclical conditional on permanent shocks. We also find no evidence that developing countries are systematically different from developed ones in terms of fiscal policy. We present a theory featuring a fiscal reaction function to the output gap and a measure of debt sustainability. The fiscal impulse response to a permanent (temporary) shock to GDP is positive (negative) as the effect on debt sustainability (current output gap) dominates. The results are mostly sensitive to the relative weight of debt sustainability in the fiscal reaction function as well as to the extent of real rigidities in the economy.
    Date: 2016–03–10
  71. By: Michelle Lewis (Reserve Bank of New Zealand)
    Abstract: Inflation expectations play an important role in monetary policy, where well-anchored expectations make it easier than otherwise to achieve the inflation target. This Note uses various surveyed measures of inflation expectations and yield curve modelling techniques to develop a framework for monitoring inflation expectations. From the resulting expectations curves, measures of the perceived inflation target focus and the expected time for inflation to return to target are estimated.
    Date: 2016–03
  72. By: Dalvai, Wilfried
    Abstract: In most countries housing and commuting costs amount for one-third or more of households' budgets. These urban costs have substantial effects on wages and income inequality. Urban costs play an important role for locational and economic decisions of individuals and firms. This paper enriches the topic on urban costs with cornerstones in much recent micro-modeling in international trade and regional and urban economics by analyzing the effects of urban costs and firm heterogeneity with endogenous markups on wages and selection. With increasing commuting technology only more productive and less firms survive. Firms have higher costs because they have to pay higher wages to compensate workers for the higher urban costs. Despite higher wages welfare decreases with larger urban costs because consumer surplus decreases an there are larger expenses for housing and commuting. Wage premia are hump-shaped with respect to urban costs.
    Keywords: urban costs,heterogenous firms,wages,selection,college wage premium,inequality
    JEL: F12 R12 E24
    Date: 2016
  73. By: Esposito, Piero (LUISS School of European Political Economy); Messori, Marcello (LUISS School of European Political Economy)
    Abstract: One of the main problems facing the European Monetary Union is the macroeconomic imbalances between ‘core’ and ‘peripheral’ member states. Though they predated the union’s creation, these problems were highlighted between 1999 and the advent of the international financial crisis. One significant indicator of these imbalances is the often divergent trade and current account disequilibria of these two groups of countries. With the events of 2007-08 and the subsequent ‘flight to quality’ of financial capital, the current account deficits of ‘peripheral’ member states became unbearable. By the end of 2014, all ‘peripheral’ countries had eliminated or drastically reduced their deficits. We show that this result is more dependent on the contraction of their GDP and relative reduction in their average real wages than on a productivity increase in their economy. To reach this conclusion, the paper empirically describes the determinants of the structural evolution in trade and current account imbalances and then offers econometric evidence of the impact of different components of unit labor cost on net exports. Based on this evidence, the paper points out the fragility of the European adjustments and suggests some policy implications.
    Keywords: imbalances; disequilibria; euro area; competitiveness; productivity; labor; economic policy; monetary union
    JEL: F15 F16 F36 O52
    Date: 2016–03–15
  74. By: Zineddine Alla; Raphael A. Espinoza; Atish R. Ghosh
    Abstract: This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence’ breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations.
    Date: 2016–03–10
  75. By: Inderst, Georg
    Abstract: Investment in infrastructure is important to the society and the economy. The focus of the current debates is primarily on economic infrastructure, especially on transport and energy networks. In contrast, investment in social sectors, such as education and health, has so far received surprisingly little attention. This should change. This short paper makes observations and comments on the role of private finance and the activity of institutional investor in this field. It highlights the specific investment characteristics of social infrastructure, and the barriers for more investment. There is much room for higher private participation in social infrastructure investment.
    Keywords: Social infrastructure investment, infrastructure finance, infrastructure policy, pension funds, institutional investors
    JEL: E22 G11 G23 G28 H54
    Date: 2015–12
  76. By: Bukvić, Rajko; Pavlović, Radica
    Abstract: Serbian Abstract. У раду се разматрају карактеристике савремене владајуће неокласичне економске теорије и њен однос према проблемима економског развоја. Показује се да, с претпоставкама једнаке вредности и значаја свих делатности, и свемоћи саморегулишућег тржишта, она нема могућности и снаге да објасни факторе економског развоја, настанка и ширења сиромаштва, како у некој засебно узетој земљи тако и у међународним односима. Као нова парадигма, која треба да је замени, истиче се Други канон, који се заснива на вишевековној традицији и биолошким метафорама. Он води порекло из епохе Ренесансе, потврђен је вишевековним искуством савремених развијених привреда, кроз примену политика које оне данас забрањују за примену неразвијеним земљама, док их оне саме користе. За разлику од неокласичних политика, оваплоћених у (нео)либералној политици Вашингтонског договора, које доводе до деиндустријализације, политике Другог канона, засноване на политикама обрасца Маршаловог плана, доводе насупрот томе до индустријализације као претпоставке изласка неразвијених земаља из кризе и сиромаштва. Замена неокласичне економске парадигме појављује се у том смислу и као претпоставка увећања квалитета макроекономског образовања и дужна је да обезбеди боље разумевање економских проблема и процеса. English Abstract. Paper considers the characteristics of contemporary dominant neoclascical economic theory and theie relation to economic development. It was showed that it, with presumptions of the same value and significance of all economic activities, and borderless power of selfregulated market, not have possibilities and force to explain factors of economic development, genesis and widening of poverty, as in one separate country as in international relations. As new paradigm, that should to change neoclascical, it is emphasized Other canon, that is on many centuries tradition and biological metaphors grounded. That dates back to the Renessaince, was proved through experience of the now developed economies, through the use of policies that in contemporary world are vorbidden for the underdeveloped coutries, while the developed that use. Contrary to neoclassical policies, realized in (neo)liberal politics of Washington consensus, that lead to deindustrialization, policies of the Other canon, on policies like Marshall plan grounded, lead contrary to industrialization as the condition to leave the underdeveloped countries from crisis and poverty. Change of neoclassical economic paradigm in this sense is the condition for the growth of the quality of macroeconomic education and should to ensure better understanding of economic problems and processes.
    Keywords: Неокласична економика, Други канон, индустријализација, неолиберализам, Вашингтонски договор, Маршалов план Neoclassical economics, Other canon, industrialization, neoliberalism, Washington consensus, Marshall plan
    JEL: E13 O10 P27
    Date: 2014–04–08
  77. By: Barigozzi, Matteo; Lippi, Marco; Luciani, Matteo
    Abstract: The paper studies Non-Stationary Dynamic Factor Models such that: (1) the factors F are I(1) and singular, i.e. F has dimension r and is driven by a q-dimensional white noise, the common shocks, with q
    Keywords: Cointegration for singular vectors ; Dynamic Factor Models for I(1) variables ; Granger Representation Theorem for singular vectors
    JEL: C01 E00
    Date: 2016–02–16
  78. By: 江上, 雅彦; 細野, 薫
    Abstract: 証券化の前後によって、発行者の資産価値はどのように変動するのか、つまり当該発行者 の資産リスクはどう変化するのか、また資本市場において投資家は資産売却という変化に 対してどのように対応するのか?こうした問いに答えるために、本稿では、J-REIT 設立のアナウンスメント前後のスポンサーの資産価値を厳密に推計し、そのボラティリテ ィや市場インデックスとの連動性を分析した。分析の結果、J-REIT設立のアナウン スの前後で、資産価値のボラティリティの変化に一定の傾向は見出されないものの、アナ ウンス後に不動産業の株式市場インデックスとの連動性は弱まる傾向があることを見出し た。また、不動産業以外の企業がスポンサーの場合には、本業の属する株式市場インデッ クスとの連動性が高まるケースが見られた。
    Keywords: 証券化, J-REIT, 資産価値, 資産リスク
    JEL: G32 G12 E44
    Date: 2016–03
  79. By: Rigas OIKONOMOU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))
    Abstract: I present a model of optimal contracts between firms and workers, under limited commitment and with worker savings. In the model, firms provide insurance against unemployment through targeting a frontloaded path of wages which encourages wealth accumulation. I provide analytical results characterising the wage and savings schedules and the path of consumption during employment and unemployment. I then consider how unemployment benefits affect risk sharing through private markets. I find that benefits should be frontloaded; the government has the incentive to drive the allocation to the point where the firm's participation constraint binds. At this point wages are equal to productivity in every period, wealth exceeds the buffer stock level, and consumption and savings drop over time. The drop in the level of consumption during unemployment is mitigated. Finally, I compare the optimal contract model to the standard heterogeneous agent model whereby wealth is utilized for self-insurance purposes. I show that the two models are equivalent under the optimal UI policy.
    Keywords: Unemployment Insurance, Incomplete Markets, Optimal Contracts, Limited Commitment, Household Self-Insurance
    JEL: D52 E21 H31 H53 J41
    Date: 2016–02–29
  80. By: Ahad, Muhammad
    Abstract: This study has investigated money demand function incorporating financial development, industrial production, income and exchange rate over the period of 1972-2012 for Pakistan. The newly introduced cointegration approach (Bayer-Hanck combined cointegration) and Johansen cointegration approach have been used to test cointegration among variables. The Vector Error Correction Model (VECM) model has applied to explain the direction of causality in the long run and short run. The Unit root problem has been tested by ADF and PP unit root tests. The results reveal that long run relationship exists between money demand, financial development, income, industrial production and exchange rate. Financial development is the main factor to determine the money demand function in both long and short run. The results indicate that feedback effect is found between financial development and money demand.
    Keywords: Financial Development, Money demand, Cointegration, Causality, Pakistan
    JEL: E41 G20
    Date: 2015
  81. By: Kollmann, Robert
    Abstract: This paper analyzes the effects of output volatility shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country, two-good world with consumption home bias, recursive preferences, and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, to compensate for the greater riskiness of the country’s output stream. This risk sharing transfer raises the country’s consumption, lowers its trade balance and appreciates its real exchange rate. In the recursive preferences framework here, volatility shocks account for a non-negligible share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption and the real exchange rate.
    Keywords: uncertainty shocks, international business cycles, international risk sharing, external balance, exchange rate, consumption-real exchange rate anomaly
    JEL: E3 F3 F4
    Date: 2016
  82. By: João Barata Ribeiro Blanco Barroso
    Abstract: We show robust evidence that quantitative easing policies by the Federal Reserve cause portfolio rebalancing by US investors towards foreign assets in emerging market economies. These effects are on top of any effects such polices might have through global or specific conditions of the recipient economies. To control for such conditions, we use capital flows from the rest of the world to the same recipient economy as a proxy variable. We gather a comprehensive dataset for Brazilian capital flows and a smaller dataset for other emerging market economies from completely independent sources. Both datasets show that more than 50% of US flows to the recipient economies in the period is accounted for by quantitative easing policies. We use the detailed datasets to break down this overall effect on the specific asset categories and sectors of the recipient economies.
    Date: 2016–03
  83. By: Eric Monnet; Damien Puy
    Abstract: This paper assesses the strength of business cycle synchronization between 1950 and 2014 in a sample of 21 countries using a new quarterly dataset based on IMF archival data. Contrary to the common wisdom, we find that the globalization period is not associated with more output synchronization at the global level. The world business cycle was as strong during Bretton Woods (1950-1971) than during the Globalization period (1984-2006). Although globalization did not affect the average level of co-movement, trade and financial integration strongly affect the way countries co-move with the rest of the world. We find that financial integration de-synchronizes national outputs from the world cycle, although the magnitude of this effect depends crucially on the type of shocks hitting the world economy. This de-synchronizing effect has offset the synchronizing impact of other forces, such as increased trade integration.
    Date: 2016–03–08
  84. By: Christian Hepenstrick; Massimiliano Marcellino
    Abstract: In this paper, we propose a modification of the three-pass regression filter (3PRF) to make it applicable to large mixed frequency datasets with ragged edges in a forecasting context. The resulting method, labeled MF-3PRF, is very simple but compares well to alternative mixed frequency factor estimation procedures in terms of theoretical properties, finite samle performance in Monte Carlo experiments, and empirical applications to GDP growth nowcasting and forecasting for the USA and a variety of other countries.
    Keywords: Dynamic Factor Models, Mixed Frequency, GDP Nowcasting, Forecasting, Partial Least Squares
    JEL: E37 C32 C53
    Date: 2016
  85. By: Doh, Taeyoung (Federal Reserve Bank of Kansas City); Wu, Shu
    Abstract: Under linear approximations for asset prices and the assumption of independence between expected consumption growth and time-varying volatility, long-run risks models imply constant market prices of risks and often generate counterfactual results about asset return and cash flow predictability. We develop and estimate a nonlinear equilibrium asset pricing model with recursive preferences and a flexible econometric specification of cash flow processes. While in many long-run risks models time-varying volatility influences only risk premium but not expected cash flows, in our model a common set of risk factors drive both expected cash flow and risk premium dynamics. This feature helps the model to overcome two main criticisms against long-run risk models following Bansal and Yaron (2004): the over-predictability of cash flows by asset prices and the tight relation between time-varying risk premia and growth volatility. Our model extends the approach in Le and Singleton (2010) to a setting with multiple cash flows. We estimate the model using the long-run historical data in the U.S. and find that the model with generalized market prices of risks produces cash flow and return predictability that are more consistent with the data.
    Keywords: Recursive preferences; Consumption risks
    JEL: E21 G12
    Date: 2015–10–01
  86. By: Douglas W. Diamond; Anil K Kashyap
    Abstract: We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank’s ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank’s incentives so that runs are less likely. Optimal regulation would not mimic these rules.
    JEL: E44 G01 G18 G21
    Date: 2016–03
  87. By: Phiri, Andrew
    Abstract: Following the global financial crisis of 2007-2008, the empirical investigation into financial variables affecting the performance of stock markets has gained prominence in the field of research. This study becomes the first to investigate the asymmetric cointegration effects of inflation on the stock market returns for the Johannesburg Stock Exchange (JSE) using monthly data collected from 2003:01 to 2014:12. The empirical model used in the study is the recently developed momentum threshold autoregressive (MTAR) model. Indeed, our results advocate for a negative, nonlinear cointegration relationship between inflation and stock returns in South Africa with causality running uni-directional from inflation to stock returns. Our empirical results suggest two things. Firstly, investors cannot hedge against rising inflation by investing in equity stocks listed on the JSE. Secondly, monetary policy, through the use of inflation targets, can provide a stable financial environment for the growth of equity markets in South Africa.
    Keywords: Inflation; Stock market returns; Momentum threshold autoregressive (MTAR) model; Threshold error correction (TEC) model; Johannesburg Stock Exchange (JSE); South Africa; Sub-Saharan Africa (SSA); Developing economies
    JEL: C22 C51 C52 E31 G10
    Date: 2016–03–24
  88. By: Jaroslav Bukovina (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Matus Marticek (Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper augments the current research suggesting the less rational factors like attractiveness of Bitcoin and speculative investments to be influential for excessive volatility. In particular, it examines the sentiment as a driver of Bitcoin volatility. The paper contributes with economic rationale about a link between sentiment and Bitcoin. Further, the authors propose a unique decomposition of Bitcoin price to rational and less rational components. The paper tests this theoretical prediction with unique sentiment intraday data in the period of 12/12/2013 – 12/31/2015. The findings of the paper show the marginal presence of sentiment during the overall studied period. However, the explanato- ry power of sentiment significantly increases during the period of excessive volatility, especially dur- ing the bubble period at the end of the year 2013 and beginning of 2014. Moreover, the findings show that positive sentiment is more influential for Bitcoin excessive volatility.
    Keywords: Bitcoin, volatility, sentiment, Bitcoin bubble
    JEL: E49
    Date: 2016–03
  89. By: von Weizsäcker, Carl Christian
    Abstract: Auslöser meiner Überlegungen ist die akute Flüchtlingskrise. Es spricht manches dafür, dass sich diese Krise nicht einfach mit einigen administrativen Maßnahmen der Zuwanderungsbeschränkung in kurzer Frist in Luft auflösen wird. Vermutlich ist sie Symptom für eine neue Welle der weltweiten Angleichung von Lebensbedingungen, die sich unter anderem in großen Wanderungen niederschlägt. Es ist dann im Interesse des "Nordens" diesen Angleichungsprozess zu beschleunigen, um so den Anreiz des Wanderns aus dem "Süden" in den "Norden" zu dämpfen. Eine zentrale Komponente des nördlichen Erfolgsmodells, die "Soziale Marktwirtschaft", sollte daher möglichst rasch globalisiert werden. Diesem Ziel einer möglichst zügigen Verwirklichung einer "Global-Sozialen Marktwirtschaft" dient am besten ein Kulturwandel im Süden in Richtung auf das das nördliche Erfolgsmodell. Dieser Kulturwandel kann vor allem angestoßen werden durch Exporterfolge des Südens in den Norden. Hierzu eignet sich eine Außenwirtschaftspolitik des Nordens, die einen Exportüberschuss des Südens hervorbringt und auf diese Weise im Süden möglichst viele produktive Arbeitsplätze schafft. Der Norden würde von einer solchen Politik nicht nur deshalb gewinnen, weil auf diese Weise der Süd-Nord-Wanderungsdruck gemildert wird. Darüber hinaus kann der Norden auch durch eine verbesserte internationale Arbeitsteilung gewinnen. Allerdings ist es für den Erfolg einer solchen Politik auch erforderlich, dass sich der Norden auf die damit verbundenen institutionellen Veränderungen einlässt. Insbesondere muss akzeptiert werden, dass sich die komparativen Vorteile in der Güterproduktion verschieben und dass auch Institutionen wie zum Beispiel die staatliche Schuldenbremse modifiziert, grundlegend geändert oder ganz abgeschafft werden.
    JEL: F22 F43 E43
    Date: 2016
  90. By: Curatola, Giuliano
    Abstract: This paper introduces endogenous preference evolution into a Lucas-type economy and explores its consequences for investors' trading strategy and the dynamics of asset prices. In equilibrium, investors herd and hold the same portfolio of risky assets which is biased toward stocks of sectors that produce a socially preferred good. Price-dividend ratios, expected returns and return volatility are all time varying. In this way, preference evolution helps rationalize the observed under-performance and local biases of investors' portfolios and many empirical regularities of stock returns such a time variation, the value-growth effect and stochastic volatility.
    Keywords: asset pricing,general equilibrium,heterogeneous investors,interdependent preferences,portfolio choice
    JEL: D51 D91 E20 G12
    Date: 2016
  91. By: Musalem, Alberto G. (Federal Reserve Bank of New York)
    Abstract: Remarks at the People’s Bank of China-Federal Reserve Bank of New York Joint Symposium, Hangzhou, Zhejiang, China.
    Keywords: Mundell-Fleming logic; macroeconomic transmission; financial transmission; transmission channels; currency stability; trilemma
    Date: 2016–03–15
  92. By: Møller, Niels Framroze
    Abstract: Most econometric analyses of persistence focus on the existence of non-stationary unemployment but not the origin of this. The present research contains a multivariate econometric framework for identifying and comparing different sources of unemployment persistence (e.g. hysteresis versus a slowly moving equilibrium rate). A small example, considering historical data (1988-2006) for the UK, demonstrates how the method can be applied in practice. Although this primarily serves as an illustration, the evidence clearly suggests that persistence was due to a slowly moving equilibrium (driven by the price of crude oil) and not to hysteresis mechanisms.
    Keywords: Cointegration, Equilibrium unemployment, Macroeconomic persistence, UK unemployment, Unemployment hysteresis
    JEL: C1 C32 E24
    Date: 2016–03
  93. By: Giovanni Ganelli; Juha Tervala
    Abstract: We analyze the welfare multipliers of public spending (the consumption equivalent change in welfare for one dollar change in public spending) in a DSGE model. The welfare multipliers of public infrastructure investment are positive if infrastructure is sufficiently effective. When the medium-term output multipliers are consistent with the empirical estimates (1-1.4), the welfare multiplier is 0.8. That is, a dollar spent by the government for investment raises domestic welfare by equivalent of 0.8 dollars of private consumption. This suggests that the welfare gains of public infrastructure investment, if chosen wisely, may be substantial.
    Keywords: Public investment;Welfare;Public Infrastructure, investment, consumption, multipliers, elasticity, Open Economy Macroeconomics, Publicly Provided Private Goods, Infrastructures, All Countries,
    Date: 2016–02–29
  94. By: Paulo Bastos (World Bank); Natália P. Monteiro (Department of Economics/NIPE, University of Minho); Odd Rune Straume (Department of Economics/NIPE, School of Economics and Management, University of Minho)
    Abstract: We study the effect of foreign takeovers on firm organization. Using a comprehensive data set of Portuguese firms and workers spanning two decades, we find that foreign acquisitions lead to: (1) an expansion in the scale of operations; (2) a higher number of hierarchical layers; (3) increased span of control among top managers; and (4) increased wage inequality across layers. These results accord with a theory of knowledge-based hierarchies in which foreign takeovers improve management practices and reduce communication costs within the acquired firms. Evidence from auxiliary survey data provides support to this mechanism by suggesting that acquired firms are more likely to use information technologies that reduce internal communication costs.
    Keywords: Foreign direct investment, internal organization, wage inequality, information technologies.
    JEL: D24 E23 F23 M10 M16 O30
    Date: 2016
  95. By: Roe, Terry L.; Smith, Rodney B.W.
    Abstract: Final Report, Ecosystem Services Economics(ESE): The United Nations Environment Program
    Keywords: Agricultural and Food Policy, Environmental Economics and Policy, Land Economics/Use,
    Date: 2015
  96. By: Ricardo Ferraz (Centro de Investigação GHES (do consórcio CSG) do ISEG e Assembleia da República)
    Abstract: No período 1933-1974 vigorou em Portugal um regime político que defendeu o princípio de "finanças sãs". Tendo por base este pressuposto, o objectivo do presente estudo foi o de aferir do ponto de vista aplicado, se as finanças públicas portuguesas foram sustentáveis no referido horizonte temporal. Deste modo, recorrendo a testes de estacionaridade e de cointegração, concluiu-se que as finanças públicas portuguesas foram sustentáveis no período do Estado Novo (1933-1974), embora essa sustentabilidade não possa ser considerada forte.
    Keywords: Estado Novo, Sustentabilidade das Finanças Públicas.
    JEL: E60 H60
    Date: 2016–03
  97. By: Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
    Abstract: When forming expectations, households may be influenced by the possibility that the information they receive is biased. In this paper, we study how individuals learn from potentially-biased statistics using data from both a natural and a survey-based experiment obtained during a period of government manipulation of inflation statistics in Argentina (2006-2015). This period is interesting because of the attention to inflation information and the availability of both official and unofficial statistics. Our evidence suggests that rather than ignoring biased statistics or navively taking them at face value, households react in a sophisticated way, as predicted by a Bayesian learning model, effectively de-biasing the official data to extract all its useful content. We also find evidence of an asymmetric reaction to inflation signals, with expectations changing more when the inflation rate rises than when it falls. These results are useful for understanding the formation of inflation expectations in less extreme contexts than Argentina, such as the United States and Europe, where experts may agree that statistics are unbiased but households do not.
    JEL: C83 C93 E31 E58
    Date: 2016–03
  98. By: Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE)
    Abstract: The 2007 global financial crisis developed from 2009 into a sovereign debt crisis in the euro area. These crises highlighted weaknesses and drawbacks in terms of EU governance which were already there from the beginning. Since 2010, the EU authorities have introduced a number of new mechanisms such as the Euro plus Pact, the Fiscal Pact, the “European semester”, the European stability mechanism, and more recently the banking union. Do these mechanisms improve EU governance? The EU remains so far an area of low growth and large imbalances. This volume is a release of twelve papers given at the 10th EUROFRAME Conference on economic policies in the European Union, held in Warsaw on 24 May 2013. In this volume, twentyfour economists give and discuss different views on how to improve governance in the EU: stricter fiscal rules and market discipline, redemption fund, fiscal federalism or ECB’s guarantee for public debts and more co-ordinated and growth targeted domestic fiscal policies. Other papers discuss the effects of fiscal policies, the right timing for fiscal consolidation, or propose new resources for the EU budget. This volume wishes to bring together a wide spectrum of contributions to the European debates on how to improve governance in the EU.
    Keywords: EU governance; Fiscal pact
    Date: 2014–04
  99. By: Olga Kuznetsova (National Research University Higher School of Economics)
    Abstract: Economic literature is far from having a consensus about the social value of public information. Nevertheless, most studies agree that strategic complementarity increases the weight of public signals in private actions. In our paper we show that this result is not general. In a two-region model we relax the autarky assumption, common to previous studies, and suppose that strategic complementarity is present both inside and between the regions. When strategic complementarity is strengthened, the agents redistribute increased weight of public information between the signals from different regions. If the weight of the domestic public signal is sufficiently high, an increase in strategic complementarity may lower it. In this paper we study the welfare properties of this information structure and show that transparency in our model may be detrimental only if strategic complementarity is weak. Furthermore, we compare equilibrium information policies with the social optimum and show that policymakers in small regions tend to be too transparent, while policymakers in large regions tend to be too opaque.
    Keywords: strategic complementarity, information policy, public information
    JEL: D82 E61
    Date: 2016
  100. By: Tomas Krehlik; Jozef Barunik
    Abstract: Oil markets influence profoundly world economies through determination of prices of energy and transports. Using novel methodology devised in frequency domain, we study the information transmission mechanisms in oil-based commodity markets. Taking crude oil as a supply-side benchmark and heating oil and gasoline as demand-side benchmarks, we document new stylized facts about cyclical properties of transmission mechanism. Our first key finding is that shocks with shorter than one week response are increasingly important to the transmission mechanism over studied period. Second, demand-side shocks are becoming increasingly important in creating the short-run connectedness. Third, the supply-side shocks resonating in both long-run and short-run are important sources of connectedness.
    Date: 2016–03
  101. By: Eric Dubois (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The aim of this article is to survey the huge literature that has emerged in the last four decades following Nordhaus's (1975) publication on political business cycles (PBCs). I first propose some developments in history of thought to examine the context in which this groundbreaking contribution saw the light of the day. I also present a simplified version of Nordhaus's model to highlight his key results. I detail some early critiques of this model and the fields of investigations to which they gave birth. I then focus on the institutional context and examine its influence on political business cycles, the actual research agenda. Finally, I derive some paths for future research.
    Keywords: political business cycles,politico-economic cycles,electoral cycles,opportunistic cycles,conditional political business cycles
    Date: 2016–02–01
  102. By: Anna Rose Bordon; Christian Ebeke; Kazuko Shirono
    Abstract: Structural reforms are expected to lift growth and employment, but their effects are surprisingly difficult to pin down empirically. One reason is their potential endogeneity to the economic environment in which they are conducted. For example, the impact of a reform implemented shortly before a cyclical upswing is difficult to distinguish from the recovery itself. Similarly, macroeconomic policies conducted along a structural reform could affect the estimated impact. Exploring various options, this paper develops robust estimates of the impact of labor and product market reforms by using local projection techniques while controlling for endogeneity of reforms and other biases. The results suggest that labor and product market reforms have a lagged but positive impact on employment creation, and the positive effect remains even after controlling for the endogeneity of the decision to reform. Supportive macroeconomic policies are found to increase the effect of labor and product market reforms, consistent with the view that some structural reforms are best initiated in conjunction with supportive fiscal or monetary policy.
    Date: 2016–03–15
  103. By: Rao, R. Kavita (National Institute of Public Finance and Policy); Tandon, Suranjali (National Institute of Public Finance and Policy); Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: Government of India proposes to reduce the number of tax incentives built into the corporate tax regime and alongside reduce the statutory tax rate on corporate tax to 25 percent. Beneficiaries of the incentive regime tend to argue that these regimes provide tangible benefits which induce higher level of activity within the economy and hence, phasing these out can be detrimental for the Indian economy. An attempt is made in this paper to briefly assess what can be inferred from available evidence on the effectiveness of the incentive regimes. The focus is on three such schemes, incentives provided for investment in backward areas, incentives for special economic zones and incentives provided for expenditure on research and development.
    Keywords: Area based exemption ; SEZ ; R D ; Corporate tax
    JEL: H25 E62 H32
    Date: 2016–03

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