nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒04‒09
107 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Beyond the austerity dispute: new priorities for fiscal policy By Luca Agnello; Nikola Altiparmakov; Michal Andrle; Maria Grazia Attinasi; Jan Babecký; Salvador Barrios; John Bluedorn; Vladimir Borgy; Othman Bouabdallah; Andries Brandsma; Adi Brender; Vítor Castro; Cristina Checherita-Westphal; Jérôme Creel; Jasper De Jong; Luiz de Mello; Francesco Di Comite; Olga Diukanova; Luc Eyraud; Serena Fatica; Marien Ferdinandusse; Davide Fiaschi; Maura Francese; Maximilian Freier; Josip Funda; Davide Furceri; Paul Hubert; Anna Iara; João Tovar Jalles; d’Artis Kancs; Tidiane Kinda; Gábor P. Kiss; Petya Koeva-Brooks; Martin Larch; Jesús López Rodríguez; Prakash Loungani; Sandro Momigliano; Carlos Mulas-Granados; Ludovít Ódor; George Palaiodimos; Lucio Pench; Damiaan Persyn; Álvaro Pina; Lesley Potters; Doris Prammer; Jonathan Pycroft; Ernesto Rezk; Marzia Romanelli; Fabrizio Saccomanni; Francesco Saraceno; Gerd Schwartz; Ricardo Sousa; Martino Tasso; Teresa Ter-Minassian; Pietro Tommasino; Anke Weber; Jochen Zimmer
  2. Public spending, monetary policy and growth: Evidence from EU countries By Papaioannou, Sotiris
  3. On the Optimal Inflation Rate By Markus K. Brunnermeier; Yuliy Sannikov
  4. Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages By Jean-Michel Grandmont
  5. The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises By Giancarlo Corsetti; Luca Dedola; ;
  6. Exchange Rate Pass-through in Emerging Countries: Do the Inflation Environment, Monetary Policy Regime and Institutional Quality Matter? By Antonia Lopez-Villavicencio; Valérie Mignon
  7. Theoretical Foundations for Quantitative Easing By Sohei Kaihatsu; Koichiro Kamada; Mitsuru Katagiri
  8. Limited Liability, Asset Price Bubbles and the Credit Cycle: The Role of Monetary Policy By Jakub Mateju; Michal Kejak
  9. Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages By Jean-Michel Grandmont
  10. Macroprudential theory: advances and challenges By Henrique S. Basso; James Costain
  11. Government Spending Shocks and Private Activity: The Role of Sentiments By Bijie Jia; Hyeongwoo Kim
  12. When does the yield curve contain predictive power? Evidence from a data-rich environment By Hännikäinen, Jari
  13. Asymmetric pass-through effects from monetary policy to housing prices in South Africa By Phiri, Andrew
  14. Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model By Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  15. The Theory of Unconventional Monetary Policy By Roger Farmer; Pawel Zabczyk
  16. When more flexiility yields more fragility : the microfoundations of keynesian aggregate unemployment By G; Dosi; M.C. Pereira; A. Roventini; M.E. Virgillito
  17. Spurious periodicities in cliometric series: Simultaneous testing By Kufenko, Vadim
  18. Deflation risk in the euro area and central bank credibility By Gabriele Galati; Zion Gorgi; Richhild Moessner; Chen Zhou
  19. Neoclassical Models in Macroeconomics By Gary D. Hansen; Lee E. Ohanian
  20. Countercyclical versus Procyclical Taylor Principles By Chatelain, Jean-Bernard; Ralf Kirsten
  21. Employment Adjustment and Part-time Jobs: The U.S. and the U.K. in the Great Recession By Borowczyk-Martins, Daniel; Lalé, Etienne
  22. Taxpayers Subsidise Private Money Creation. By Musgrave, Ralph S.
  23. The Theory of Unconventional Monetary Policy By Farmer, Roger E A; Zabczyk, Pawel
  24. The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach By Balcilar, Mehmet; Gupta, Rangan; Segnon, Mawuli
  25. Innovation, Growth and Optimal Monetary Policy By Barbara Annicchiarico; Alessandra Pelloni
  26. Financial Dampening By Johannes F. Wieland; Mu-Jeung Yang
  27. A Bitcoin Standard: Lessons from the Gold Standard By Warren E. Weber
  28. U.S. Inequality, Fiscal Progressivity, and Work Disincentives: An Intragenerational Accounting By Alan J. Auerbach; Laurence J. Kotlikoff; Darryl R. Koehler
  29. Empirical Analysis of Labor Markets over Business Cycles: An International Comparison By Jan Bruha; Jiri Polansky
  30. Animal Spirits in a Monetary Model By Farmer, Roger E A; Platonov, Konstantin
  31. All's Well that Ends Well? Resolving Iceland's Failed Banks By Baldursson, Fridrik Mar; Portes, Richard; Thorlaksson, Eirikur Elis
  32. Beyond carbon pricing: the role of banking and monetary policy in financing the transition to a low-carbon economy By Emanuele Campiglio
  33. Monetary transmission in developing countries: Evidence from India By Prachi Mishra; Peter Montiel; Rajeswari Sengupta
  34. Probably too little, certainly too late. An assessement of the Juncker investment plan By Mathilde Le Moigne; Francesco Saraceno; Sebastien Villemot
  35. Investment-specific shocks, business cycles, and asset prices By Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick; Meinerding, Christoph
  36. Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix By Vasilev, Aleksandar
  37. Union Debt Management By Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
  38. Capital Inflow Transmission of Monetary Policy to Emerging Markets By Adugna Olani
  39. Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model Using an OECD Dataset By Akinwande A. Atanda; Andrea K. Menclova; W. Robert Reed
  40. India; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for India By International Monetary Fund. Asia and Pacific Dept
  41. Rational Sunspots By Guido Ascari; Paolo Bonomolo; Hedibert F. Lopes
  42. The Billion Prices Project: Using Online Prices for Measurement and Research By Alberto Cavallo; Roberto Rigobon
  43. Household Portfolios in a Secular Stagnation World: Evidence from Japan By Kosuke Aoki; Alexander Michaelides; Kalin Nikolov
  44. Education policy and intergenerational transfers in equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Gianluca Violante
  45. How accounting accuracy affects DSGE models By Kim, Minseong
  46. How accounting accuracy affects DSGE models By Kim, Minseong
  47. Existence and uniqueness of solutions to dynamic models with occasionally binding constraints. By Holden, Thomas
  48. Modelling Overnight RRP Participation By Anderson, Alyssa G.; Huther, Jeff W.
  49. What drives the short-run costs of fiscal consolidation? Evidence from OECD countries By Ryan Niladri Banerjee; Fabrizio Zampolli
  50. The evolution of the anchoring of inflation expectations By Ines Buono; Sara Formai
  51. Demographics and Real Interest Rates: Inspecting the Mechanism By Carlos Viana de Carvalho; Andrea Ferrero; Fernanda Necchio
  52. Non-Stationary Dynamic Factor Models for Large Datasets By Barigozzi, Matteo; Lippi, Marco; Luciani, Matteo
  53. The Pre-Great Recession Slowdown in Productivity. By G. Cette; J. Fernald; B. Mojon
  54. Fiscal austerity in ambiguous times By Ferrière, Axelle; Karantounias, Anastasios G.
  55. Blanchard and Kahn’s (1980) solution for a linear rational expectations model with one state variable and one control variable: the correct formula By Kollmann, Robert; Zeugner, Stefan
  56. Towards a Stock-Flow Consistent Ecological Macroeconomics By Tim Jackson; Peter Victor; Asjad Naqvi
  57. Long-term unemployment and the Great Recession: Evidence from UK stocks and flows By Carl Singleton
  58. Presidents and the U.S. Economy: An Econometric Exploration By Alan S. Blinder; Mark W. Watson
  59. Public investment multipliers in EU countries: Does the efficiency of public sector matter? By Papaioannou, Sotiris
  60. Time Consistency and Fed Policy : a presentation at New York Association for Business Economics, New York, N.Y., March 24, 2016 By Bullard, James B.
  61. Blanchard and Kahn's (1980) Solution for a Linear Rational Expectations Model with One State Variable and One Control Variable: the Correct Formula By Robert Kollmann; Stefan Zeugner
  62. TOPSIS Analysis of Changes of Quality of Human Capital in European Union Countries By Adam P. Balcerzak; Michal Bernad Pietrzak
  63. The Discounted Euler Equation: A Note By Alisdair McKay; Emi Nakamura; Jón Steinsson
  64. Australia: a Land of Missed Opportunities? By David Greasley; Nick Hanley; Eoin McLaughlin; Les Oxley
  65. Securitization and Aggregate Investment Efficiency By Afrasiab Mirza; Eric Stephens
  66. Individual inflation expectations in a declining-inflation environment: Evidence from survey data By Malka de Castro Campos; Federica Teppa
  67. From Micro to Macro via Production Networks By Vasco M. Carvalho; ; ;
  68. Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions By Schneider, Friedrich; Buehn, Andreas
  69. Inheritance and Wealth Inequality: Evidence from Population Registers By Elinder, Mikael; Erixson, Oscar; Waldenström, Daniel
  70. Discussion of “Language after liftoff: Fed communication away from the zero lower bound” By Williams, John C.
  71. Inheritance and wealth inequality: Evidence from population registers By Elinder, Mikael; Erixson, Oscar; Waldenström, Daniel
  72. A proposal to revive the European Fiscal Framework By Grégory Claeys; Zsolt Darvas; Alvaro Leandro
  73. Local and Aggregate Fiscal Policy Multipliers By Dupor, William D.
  74. How Does Maternal Pension Wealth Affect Family Old-Age Savings in Germany? By Andreas Thiemann
  75. The Impact of Unconventional Monetary Policy on Firm Financing Constraints : Evidence from the Maturity Extension Program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  76. Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data By Gregory Verdugo
  77. Does socially responsible mutual fund performance vary over the business cycle? New insights on the role of ethical strategy focus and green industry idiosyncratic risk By Juan Carlos Matallín-Sáez; Amparo Soler-Domínguez; Emili Tortosa-Ausina
  78. Tsunami Monetário – Ciclos Monetários Internacionais e Desafios para a Economia Brasileira By Tony Volpon
  79. The Theory of Unconventional Monetary Policy By Roger Farmer; Pawel Zabczyk
  80. Inequality and Financial Fragility By Yuliyan Mitkov
  81. Tax bunching by owners of small corporations By Leon Bettendorf; Arjan Lejour; Maarten van 't Riet
  82. Life-Cycle Saving, Bequests, and the Role of Population in R&D-based Growth By Bharat Diwakar; Gilad Sorek
  83. Opening remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness By Dudley, William
  84. Economic Effects of Uncertainty By Michele Piffer
  85. On controlling chaos in a discrete tâtonnement process By Ahmad K. Naimzada; Serena Sordi
  86. Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India By Rahul Anand; Purva Khera
  87. Moral-Hazard-Free First-Best Unemployment Insurance By Parsons, Donald O.
  88. О некоторых свойствах наблюдаемого экономического роста в Китае (On Some Features of the Observed Economic Growth in China) By Konstantin Yanovskiy; Dmitry Maslov
  89. Friends Without Benefits? New EMU Members and the “Euro Effect†on Trade By Alina Mika; Robert Zymek
  90. The role of production factor quality and technology diffusion in 20th century productivity growth. By A. Bergeaud; G. Cette; R. Lecat
  91. Search frictions and (in)efficient vocational training over the life-cycle By Arnaud Cheron; Anthony Terriau
  92. Terror Attacks and Stock-Market Fluctuations: Evidence Based on a Nonparametric Causality-in-Quantiles Test for the G7 Countries By Mehmet Balcilar; Rangan Gupta; Christian Pierdzioch; Mark Wohar
  93. The Political Economy of Services Trade Agreements By Fiorini, Matteo; Lebrand, Mathilde
  94. Sources of economic growth in Zambia: an empirical investigation By Chirwa, Themba G; Odhiambo, Nicholas M
  95. Business Cycles and Growth By Michaël Assous; Muriel Dal-Pont Legrand; Harald Hagemann
  96. Dynamic Factor Model with Infinite Dimensional Factor Space: Forecasting By Mario Forni; Alessandro Giovannelli; Marco Lippi; Stefano Soccorsi
  97. Exchange Rate Undervaluation and Sectoral Performance of the South African Economy By Njindan Iyke, Bernard
  98. Modelling the Vietnamese Economy By FitzGerald, John; Chi, Pho Thi Kim; Lam, Do Van; Ha, Hoang; Huong, Luong; Dung, Tran
  99. Improving Public Infrastructure in the Philippines By Takuji Komatsuzaki
  100. Do fiscal rules constrain fiscal policy? A meta-regression-analysis By Heinemann, Friedrich; Moessinger, Marc-Daniel; Yeter, Mustafa
  101. Interest rates, Eurobonds and intra-European exchange rate misalignments: The challenge of sustainable adjustments in the Eurozone By Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
  102. The health of nations By Williams, John C.
  103. Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy By David de la Croix; Matthias Doepke; Joel Mokyr
  104. Categorization and Coordination By Vessela Daskalova; Nicolaas J. Vriend; ;
  105. Fiscal Policy in an Unemployment Crisis By Pontus Rendahl; ; ;
  107. SME Financing in the EU: Moving beyond one-size-fits-all By Markus Demary; Joanna Hornik; Gibran Watfe

  1. By: Luca Agnello (University of Palermo); Nikola Altiparmakov (Fiscal Council - Republic of Serbia); Michal Andrle (International Monetary Fund); Maria Grazia Attinasi (European Central Bank); Jan Babecký (Czech National Bank); Salvador Barrios (European Commission); John Bluedorn (International Monetary Fund); Vladimir Borgy (Banque de France); Othman Bouabdallah (European Central Bank); Andries Brandsma (European Commission); Adi Brender (Bank of Israel); Vítor Castro (University of Coimbra and University of Minho); Cristina Checherita-Westphal (European Central Bank); Jérôme Creel (OFCE-Sciences Po); Jasper De Jong (De Nederlandsche Bank); Luiz de Mello (OECD); Francesco Di Comite (European Commission); Olga Diukanova (European Commission); Luc Eyraud (International Monetary Fund); Serena Fatica (European Commission); Marien Ferdinandusse (European Central Bank); Davide Fiaschi (University of Pisa); Maura Francese (International Monetary Fund); Maximilian Freier (European Central Bank); Josip Funda (Hrvatska Narodna Banka); Davide Furceri (International Monetary Fund); Paul Hubert (OFCE-Sciences Po); Anna Iara (European Commission); João Tovar Jalles (OECD); d’Artis Kancs (European Commission); Tidiane Kinda (International Monetary Fund); Gábor P. Kiss (Magyar Nemzeti Bank)); Petya Koeva-Brooks (International Monetary Fund); Martin Larch (European Commission); Jesús López Rodríguez (European Commission); Prakash Loungani (International Monetary Fund); Sandro Momigliano (Banca d'Italia); Carlos Mulas-Granados (International Monetary Fund); Ludovít Ódor (Council for Budget Responsibility, Bratislava); George Palaiodimos (Bank of Greece); Lucio Pench (European Commission); Damiaan Persyn (European Commission); Álvaro Pina (OECD); Lesley Potters (European Commission); Doris Prammer (Bank of Austria); Jonathan Pycroft (European Commission); Ernesto Rezk (National University of Córdoba, Argentina); Marzia Romanelli (Banca d'Italia); Fabrizio Saccomanni (Ministry of Finance, Italy); Francesco Saraceno (OFCE-Sciences Po); Gerd Schwartz (International Monetary Fund); Ricardo Sousa (University of Minho); Martino Tasso (Bank of Italy); Teresa Ter-Minassian (Inter-American Development Bank); Pietro Tommasino (Banca d'Italia); Anke Weber (International Monetary Fund); Jochen Zimmer (Deutsche Bundesbank)
    Abstract: The workshop aimed at moving forward the fiscal policy debate, which in the crisis years was unavoidably focused on how to regain fiscal credibility and to implement sizable and fast consolidation plans. Four main themes have been proposed for the debate during the workshop. First, the two-way link between fiscal consolidation and inequality, with the idea that consolidation efforts cannot be successful in the long run if they entail a socially unsustainable increase in inequality. Second, the importance of preserving, even in contexts in which the fiscal policy stance is necessarily restrictive, growth-enhancing public investments. Third, the challenges posed to fiscal management by a low inflation context, taking into account that a subdued price dynamics not only makes the real burden of debt heavier, but it also has subtle effects, at least in the short term, on several budgetary items. Finally, the need for a simpler and more appropriate set of rules for the governance of the EMU. The latter topic was also the object of the high-level panel at the end of the workshop. While differences in emphasis emerged among the panellists, they agreed that the current framework could be streamlined, and – more importantly – that no set of rules can work if trust and a sense of sharing a common objective is not rebuilt among the Member States.
    Keywords: Gini index, fiscal consolidation, fiscal expansion, narrative approach, cyclically-adjusted primary balance, expenditure-based, tax-based, recession, inequality, distribution, factor income distribution, wage share, measure of individual welfare, non-parametric methods, polarization, distribution dynamics, inequality, income inequality, fiscal stimuli, political (in)stability, wealth distribution, wealth taxation, capital income taxation, household data, public investment, private investment, elasticity, production function, RHOMOLO, multiregional spatial CGE, cohesion policy, fiscal policy, inflation shock, spending indexation, fiscal drag, debt sustainability, mandatory pensions, pension contribution, tax incidence, rational behavior, smoothing lifetime income, fiscal framework, fiscal indicators, cyclical adjustment, fiscal council, fiscal governance, fiscal policy, fiscal rules, european economic and monetary union
    JEL: D9 D63 D31 D33 C14 D30 D31 D63 E6 E31 E32 E62 E64 H2 H5 H23 H24 H54 H55 H60 H62 H63 H68 H77 G01 G15 J3 J32 J58 K31 O5 O32 R13 R58
    Date: 2016–03
  2. By: Papaioannou, Sotiris
    Abstract: This study examines whether differences in monetary policy are associated with diverging effects of public spending on growth. At first stage, we estimate public spending multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we incorporate in the analysis the role of monetary policy and examine whether real interest rates affect the relationship between public spending and growth. The main result of the econometric analysis is that government spending can affect growth positively only when real interest rates become negative. This result remains robust to several changes in the econometric specification and measures of interest rate.
    Keywords: Public spending, Fiscal multipliers, Monetary policy, Economic growth.
    JEL: E43 E62 O40
    Date: 2016–03–15
  3. By: Markus K. Brunnermeier; Yuliy Sannikov
    Abstract: In our incomplete markets economy financial frictions affect the optimal inflation target. Households choose portfolios consisting of risky (uninsurable) capital and money. Money is a bubbly store of value. The market outcome is constrained Pareto inefficient due to a pecuniary externality. Each individual agent takes the real interest rate as given, while in the aggregate it is driven by the economic growth rate, which in turn depends on individual portfolio decisions. Higher inflation due to higher money growth lowers the real interest rate (on money) and tilts the portfolio choice towards physical capital investment. The optimal inflation target boosts growth and welfare and is higher for emerging market economies.
    JEL: E44 E51 E52
    Date: 2016–03
  4. By: Jean-Michel Grandmont (ICEF, Department of Economics, University Ca' Foscari di Venezia at San Giobbe, Italy)
    Abstract: This work introduces a new mechanism that is able to generate procyclical comovements of aggregate labor productivity, employment and real wages, through endogenous variations of workers' effort, in a simple model involving structural unemployment, efficiency wages, financial market imperfections and expectations driven conditionally heteroskedastic sunspots business cycles, near a locally indeterminate steady state. Owing to imperfect effort monitoring, workers' effort level equates their disutility of effort to their expected utility gain of not shirking, in terms of their earned real income, and of the resulting anticipated random consumption. A positive current (consumption) sunspot shock generates a countercyclical uncertainty shock, i.e. a drecrease of the anticipated sunspot volatility, and makes risk averse workers more willing to provide "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, profit maximizing firms' choice of effciency wage contracts generates significant endogenous procyclical variations of effort and employment, in particular when the capital-efficient labor elasticity of substitution is smaller than 1.
    Keywords: Efficiency wages, Unemployment, Expectation driven business cycles, Conditionally heteroskedastic sunspots, Countercyclical uncertainty shocks, Prudence, Procyclical labor effort and productivity
    JEL: E00 E24 E32 J41
    Date: 2016–03
  5. By: Giancarlo Corsetti; Luca Dedola; ;
    Abstract: Sovereign debt crises may be driven by either self-fulfilling expectations of default or fundamental fiscal stress. This paper studies the mechanisms by which either conventional or unconventional monetary policy can rule out the former. Conventional monetary policy is modelled as a standard choice of inflation, while unconventional policy as outright purchases in the debt market. By intervening in the sovereign debt market, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk and thus yielding a lower interest rate. We show that, provided fiscal and monetary authorities share the same objective function, there is a minimum threshold for the size of interventions at which a backstop rules out self-fulfilling default without eliminating the possibility of fundamental default under fiscal stress. Fundamental default risk does not generally undermine the credibility of a backstop, nor does it foreshadow runaway inflation, even when the central bank is held responsible for its own losses.
    Keywords: Sovereign risk and default, Lender of last resort, Seigniorage, inflationary financing
    JEL: E58 E63 H63
    Date: 2014–09–19
  6. By: Antonia Lopez-Villavicencio; Valérie Mignon
    Abstract: In this paper, we estimate the exchange rate pass-through (ERPT) to consumer prices and assess its dynamics for a sample of 15 emerging countries over the 1994-2015 period. To this end, we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for the inflation environment, monetary policy regime, as well as domestic institutional factors. We show that both the level and volatility of inflation matter in the sense that declining ERPT is evidenced with more stable and anti-inflationary environment. Monetary policy also plays a key role since adopting an inflation target—especially de jure—leads to a significant reduction in ERPT for most countries. Adopting exchange rate targeting regime matters as well, contributing to a diminishing ERPT. Finally, we find evidence that transparency of monetary policy decisions clearly reduces ERPT, while this is not the case for central bank independence.
    Keywords: exchange rate pass-through;inflation;emerging countries;monetary policy
    JEL: E31 E52 F31
    Date: 2016–04
  7. By: Sohei Kaihatsu (Director and Senior Economist, Monetary Affairs Department, Bank of Japan (E-mail:; Koichiro Kamada (Associate Director-General and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Mitsuru Katagiri (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail:
    Abstract: This paper presents theoretical foundations for quantitative easing (QE). Since the late 2000s, with no room for lowering policy interest rates, central banks in the major advanced economies have adopted various unconventional monetary policies. QE is one of those unconventional policies and has so far achieved visible results in practice. However, our theoretical understanding of how QE achieves these results remains incomplete. The purpose of this paper is to introduce an inflation-sensitive money provision rule and show theoretically how QE helps an economy escape from a liquidity trap.
    Keywords: Liquidity trap, Quantitative easing, Monetary policy rule
    JEL: E31 E52 E58
    Date: 2016–03
  8. By: Jakub Mateju; Michal Kejak
    Abstract: This paper suggests that the dynamics of the non-fundamental component of asset prices are one of the drivers of the credit cycle. The presented model builds on the financial accelerator literature by including a stock market where investors with limited liability trade stocks of productive firms with stochastic productivities. Investors borrow funds from the banking sector and can go bankrupt. Their limited liability induces a moral hazard problem which shifts demand for risk and drives prices of risky assets above their fundamental value. Embedding the contracting problem in a New Keynesian general equilibrium framework, the model shows that expansionary monetary policy induces loose credit conditions and leads to a rise in both the fundamental and non-fundamental components of stock prices. A positive shock to the non-fundamental component triggers a credit cycle: collateral value rises, and lending and default rates decrease. These effects reverse after several quarters, inducing a credit crunch. The credit boom lasts only while stock market growth maintains sufficient momentum. However, monetary policy does not reduce the volatility of inflation and the output gap by reacting to asset prices.
    Keywords: Credit cycle, limited liability, monetary policy, non-fundamental asset pricing
    JEL: E32 E44 E52 G10
    Date: 2015–12
  9. By: Jean-Michel Grandmont (CREST (EXCESS, UMR CNRS 9194), Paris)
    Abstract: This work introduces a new mechanism that is able to generate procyclical comovements of aggregate labor productivity, employment and real wages, through endogenous variations of workers’ effort, in a simple model involving structural unemployment, efficiency wages, financial market imperfections and expectations driven conditionally heteroskedastic sunspots business cycles, near a locally indeterminate steady state. Owing to imperfect effort monitoring, workers’ effort level equates their disutility of effort to their expected utility gain of not shirking, in terms of their earned real income, and of the resulting anticipated random consumption. A positive current (consumption) sunspot shock generates a countercyclical uncertainty shock, i.e. a drecrease of the anticipated sunspot volatility, and makes risk averse workers more willing to provide ”precautionary effort” by increasing their expected utility gain of not shirking. If workers’ relative prudence is small and decreasing fast near the steady state, profit maximizing firms’ choice of efficiency wage contracts generates significant endogenous procyclical variations of effort and employment, in particular when the capital-efficient labor elasticity of substitution is smaller than 1.
    Keywords: efficiency wages, unemployment, expectation driven business cycles, conditionally heteroskedastic sunspots, countercyclical uncertainty shocks, prudence, procyclical labor effort and productivity
    JEL: E00 E24 E32 J41
    Date: 2016
  10. By: Henrique S. Basso (Banco de España); James Costain (Banco de España)
    Abstract: This note discusses recent theoretical work analyzing the causes of financial instability, its consequences for the macroeconomy, and thus the potential role for macroprudential policy. After discussing how information asymmetries and strategic complementarities can cause balance sheet losses to propagate through the financial system and over time, we discuss the role of the major classes of macroprudential instruments in preventing instability ex ante and containing it ex post. We conclude with a discussion of current challenges for macroeconomic modeling and for the design of regulation and policy.
    Keywords: banks, financial stability, financial regulation, macroeconomic policy.
    JEL: E44 E6 G2 G28
    Date: 2016–03
  11. By: Bijie Jia; Hyeongwoo Kim
    Abstract: This paper studies the dynamic effects of the fiscal policy shock on private activity using an array of vector autoregressive models for the post-war US data. We are particularly interested in the role of consumer sentiment in the transmission of the government spending shock. Our major findings are as follows. Private consumption and investment fail to rise persistently in response to positive spending shocks especially when shocks are anticipated, while they exhibit persistent and significant increases when the sentiment shock occurs. Employment and real wages in the private sector also respond significantly positively only to the sentiment shock. Consumer sentiment responds negatively to a positive fiscal shock, resulting in subsequent decreases in private activity. That is, our empirical findings imply that the government spending shock generates consumer pessimism, which then weakens the effectiveness of the fiscal policy.
    Keywords: Government Spending; Consumer Sentiment; Private Activity; Sentiment Channel; Vector Autoregressive; Expectational VAR; Survey of Professional Forecasters; Threshold VAR; Counterfactual Simulations
    JEL: E32 E62
    Date: 2016–03
  12. By: Hännikäinen, Jari
    Abstract: This paper analyzes the predictive content of the level, slope and curvature of the yield curve for U.S. real activity in a data-rich environment. We find that the slope contains predictive power, but the level and curvature are not successful leading indicators. The predictive power of each of the yield curve factors fluctuates over time. The results show that economic conditions matter for the predictive ability of the slope. In particular, inflation persistence emerges as a key variable that affects the predictive content of the slope. The slope tends to forecast output growth better when inflation is highly persistent.
    Keywords: yield curve; factor model; data-rich environment; forecasting; macroeconomic regimes; conditional predictive ability
    JEL: C53 E43 E44 E47 E52
    Date: 2016–04–04
  13. By: Phiri, Andrew
    Abstract: Following the recent financial crisis, spurred by the crash of house prices in the US, there has been a renewed interest by academics in examining the pass-through effects of monetary policy instrument to house price inflation. This study examines the asymmetric pass through effects from monetary policy to house price inflation for the case of South Africa. Our study uses a momentum threshold autoregressive model and a corresponding threshold error correction model (MTAR-TECM). The empirical results reveal a negative and significant pass through from interest rates to house price inflation, even though such pass-through effects are relatively weak. Overall, these findings undermine the ability of the South African Reserve Bank (SARB) to control real house price inflation.
    Keywords: asymmetric cointegration; monetary policy instrument; house price inflation; South Africa.
    JEL: C22 C52 E31 E52
    Date: 2016–03–24
  14. By: Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Two examples are the Great Depression of 1929 and the Great Recession of 2008. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large scale crisis events. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a "double dip" recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.
    Keywords: Monetary Policy; Large Crises; Agent Based Model; Financial Accelerator; Zero Lower Bound.
    JEL: C63 E32 E44 E58
    Date: 2016–03–30
  15. By: Roger Farmer; Pawel Zabczyk
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    JEL: E02 E6 G11 G21
    Date: 2016–03
  16. By: G; Dosi (Scuola Superiore Sant'Anna); M.C. Pereira (University of Campinas); A. Roventini (OFCE, Sciences Po, Scuola Superiore Sant'Anna); M.E. Virgillito (Scuola Superiore Sant'Anna)
    Abstract: Wages are an element of cost crucially a ecting the competitiveness of individual rms. Butthe wage bill is also a crucial element of aggregate demand. Hence it could be that more flexible"and fluid labour markets, while allowing for faster inter-firm reallocation of labour, may also render the whole economic system more fragile, more prone to recession, more volatile. In this work we investigate some conditions under which such a conjecture applies. The paper presents an agent-based model that investigates the e ects of two \archetypes of capitalism", in terms of regimes of labour governance { defined by the mechanisms of wage determination, ring, labour protection and productivity gains sharing upon (i) labour market regularities and (ii) macroeconomic dynamics (long-term rates of growth, GDP fluctuations, unemployment rates, inequality, etc..). The model is built upon the \Keynes meets Schumpeter" family of models (Dosi et al.,2010), explicitly incorporating di erent microfounded labour market regimes. Our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes with higher and smoother growth
    Keywords: Involuntary Unemployment,Aggregate Demand, Wage determination, Labour market regimes, Keynesian coordination failures, agent-based models.
    JEL: C63 E02 E12 E24
    Date: 2016–03
  17. By: Kufenko, Vadim
    Abstract: In this paper we revisit the methodological aspects of the issue of spurious cycles: using the well-established clinometric data, we apply an empirical strategy to identify spurious periodicities and cross-validate the results. The analysis of cyclical fluctuations involves numerous challenges, including data preparation and detrending. As a result, there is a risk of statistical artifacts to arise: it is known that summation operators and filtering yield a red noise alike spectral signature, amplifying lower frequencies and thus, longer periodicity, whereas detrending using differencing yields a blue noise alike spectral signature, amplifying higher frequencies and thus, shorter periodicity. In our paper we explicitly address this issue. In order to derive the stationary signals to be tested, we perform outlier adjustment, derive cycles from the series with the asymmetric band pass Christiano-Fitzgerald filter using the upper bands of the Kuznets and the Juglar cycles as cut-offs, and obtain detrended prefiltered signals by differencing the series in the absence of fractional integration. Afterwards, we simultaneously test whether the spectral densities of filtered and detrended prefiltered signals are significantly different from the spectral density of the related noise. The periodicities from the Kuznets range were not simultaneously significant, and thus are likely to be spurious; whereas ones of the Juglar and Kitchin ranges were simultaneously significant. The simultaneous significance test helps to identify spurious periodicities and the results, in general, accord with the durations of the business cycles found in other works.
    Keywords: business cycles,spectral analysis,spurious cycles,fractional integration,simultaneous testing
    JEL: E02 E32 E39 F44
    Date: 2016–03
  18. By: Gabriele Galati; Zion Gorgi; Richhild Moessner; Chen Zhou
    Abstract: This paper investigates how the perceived risk that the euro area will experience deflation has evolved over time, and what this risk implies for the credibility of the ECB. We use a novel dataset on market participants' perceptions of short- to long-term deflation risk implied by year-on-year options on forward inflation swaps. We investigate whether long-term inflation expectations have become de-anchored, by studying whether long-term deflation risk has been affected by changes in oil prices and by short-term deflation risk. Our analysis suggests that the anchoring properties of euro area inflation expectations have weakened, albeit in a still subtle way.
    Keywords: Deflation; inflation expectations; monetary policy; financial crisis
    JEL: E31 E44 E52 E58
    Date: 2016–04
  19. By: Gary D. Hansen; Lee E. Ohanian
    Abstract: This chapter develops a toolkit of neoclassical macroeconomic models, and applies these models to the U.S. economy from 1929 through 2014. We first filter macroeconomic time series into business cycle and long-run components, and show that the long-run component is typically much larger than the business cycle component. We argue that this empirical feature is naturally addressed within neoclassical models with long-run changes in technologies and government policies. We construct two classes of models that we compare to raw data, and also to the filtered data: simple neoclassical models, which feature standard preferences and technologies, rational expectations, and a unique, Pareto-optimal equilibrium, and extended neoclassical models, which build in government policies and market imperfections. We focus on models with multiple sources of technological change, and models with distortions arising from regulatory, labor, and fiscal policies. The models account for much of the relatively stable postwar U.S. economy, and also for the Great Depression and World War II. The models presented in this chapter can be extended and applied more broadly to other settings. We close by identifying several avenues for future research in neoclassical macroeconomics.
    JEL: E13 E2 E6
    Date: 2016–03
  20. By: Chatelain, Jean-Bernard; Ralf Kirsten
    Abstract: Assuming inflation is a forward variable in Taylor (1999) model, this paper finds opposite policy rule recommandations with counter-cyclical policy rule parameters (Taylor principle: inflation rule larger than one and bounded upwards) in the case of optimal policy under commitment versus pro-cyclical policy rule parameters (inflation rule parameter below zero) in the case of discretionary policy. For the observed high inertia of the Fed with variations of the nominal policy rate within the range [0%,4%] during the great moderation, the cost of time-inconsistency is negligible for optimal policy. Time-inconsistency cannot be the ultimate argument to reject counter-cyclical Taylor principle.
    Keywords: Monetary policy,Optimal policy under commitment,Time consistent discretionary policy,Taylor rule
    JEL: C6 E4 E5
    Date: 2016
  21. By: Borowczyk-Martins, Daniel (Sciences Po, Paris); Lalé, Etienne (University of Bristol)
    Abstract: We document that fluctuations in part-time employment play a major role in movements in hours per worker, especially during cyclical swings in the labor market. Building on this result, we propose a novel representation of the intensive margin based on a stock-flow framework. The evolution of part-time employment is predominantly explained by cyclical changes in transitions between full-time and part-time employment, which occur overwhelmingly at the same employer and entail large changes in individuals' working hours. We discuss implications for a large class of macroeconomic models that map individual decisions along the extensive/intensive margins onto aggregate labor market outcomes.
    Keywords: employment, hours, part-time work, Great Recession
    JEL: E24 E32 J21
    Date: 2016–03
  22. By: Musgrave, Ralph S.
    Abstract: Publicly created money, i.e. base money, costs much less to produce than privately created money because amongst other things private banks have to check up on the credit worthiness of borrowers before supplying them with money. In contrast governments do not need to do those checks when creating and spending base money into the economy. It might be claimed that the cost of private money creation is the cost of organising loans and hence that the cost of private money creation as such is not particularly high. That claim does not stand inspection. Despite the high cost of private money, it nevertheless manages to drive public money to near extinction (except in the current very low interest scenario). Reason is that private banks can create and lend out money at below the going rate of interest because they are not burdened with one of the main costs normally involved in lending, namely earning money and abstaining from consumption (so that borrowers can consume.) When an economy is at capacity, the result of that extra lending is inflationary, so government has to withdraw base money from the economy, i.e. rob taxpayers, in order to counteract the inflation, for example by cutting the deficit / raising the surplus or by raising interest rates. In short, private money printing is subsidised by taxpayers, and subsidies reduce GDP, unless there is a good reason for a subsidy. The net result of letting private money displace base money is an artificially low rate of interest and an artificially high level of debt, plus GDP is reduced. Thus GDP would be increased if privately issued money was banned, though its complete elimination is not necessary.
    Keywords: money; bank
    JEL: E4 E41 E42 E5 E58
    Date: 2016–03–20
  23. By: Farmer, Roger E A; Zabczyk, Pawel
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Keywords: Qualitative Easing; Sunspots; Unconventional Monetary Policy
    JEL: E02 E6 G11 G21
    Date: 2016–03
  24. By: Balcilar, Mehmet; Gupta, Rangan; Segnon, Mawuli
    Abstract: This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, the authors apply a mixed-frequency Markov-switching vector autoregressive (MF-MSVAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. The results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. The results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.
    Keywords: business cycles,economic policy uncertainty,mixed frequency,Markov-switching VAR models
    JEL: E32 E37 C32
    Date: 2016
  25. By: Barbara Annicchiarico (DEF, University of Rome "Tor Vergata"); Alessandra Pelloni (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the effects of several tax reforms in an economy in which taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as deductibility of labor costs from business tax, ex-ante budget-neutral tax shifts from direct to indirect taxes, and various tax cuts financed by decreases of government spending. We find the following results. First, neglecting the existence of the underground sector may lead to severely miscalculate the macroeconomic impact effects of tax reforms, especially in the short run, where policy interventions produce direct and indirect effects on the markup. Second, partial deductibility of labor costs from the business tax base proves to be highly expansionary and highly detrimental to the size of the underground sector. Third, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Finally, all the considered tax reforms take the public-debt-to-output ratio toward a prolonged downward path.
    Keywords: Endogenous Growth, R&D, Optimal Monetary Policy, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2016–04–01
  26. By: Johannes F. Wieland; Mu-Jeung Yang
    Abstract: We propose a novel mechanism, “financial dampening,” whereby loan retrenchment by banks attenuates the effectiveness of monetary policy. The theory unifies an endogenous supply of illiquid local loans and risk-sharing among subsidiaries of bank holding companies (BHCs). We derive an IV-strategy that separates supply-driven loan retrenchment from local loan demand, by exploiting linkages through BHC-internal capital markets across spatially-separate BHC member-banks. We estimate that retrenching banks increase loan supply substantially less in response to exogenous monetary policy rate reductions. This relative decline has persistent effects on local employment and thus provides a rationale for slow recoveries from financial distress.
    JEL: E5 E50 E51 E52 G20 G21
    Date: 2016–03
  27. By: Warren E. Weber
    Abstract: This paper imagines a world in which countries are on the Bitcoin standard, a monetary system in which all media of exchange are Bitcoin or are backed by it. The paper explores the similarities and differences between the Bitcoin standard and the gold standard and describes the media of exchange that would exist under the Bitcoin standard. Because the Bitcoin standard would closely resemble the gold standard, the paper explores the lessons about how it would perform by examining the classical gold standard period, specifically 1880–1913. The paper argues that because there would be virtually no arbitrage costs for international transactions, countries could not follow independent interest rate policies under the Bitcoin standard. However, central banks would still have some limited ability to act as lenders of last resort. Based on the experience during the classical gold standard period, the paper conjectures that there would be mild deflation and constant exchange rates under the Bitcoin standard. The paper also conjectures how long the Bitcoin standard might last if it were to come into existence.
    Keywords: E-Money, Exchange rates, Financial services, Inflation and prices
    JEL: E E4 E41 E42 E5 E58
    Date: 2016
  28. By: Alan J. Auerbach; Laurence J. Kotlikoff; Darryl R. Koehler
    Abstract: This study combines the 2013 Federal Reserve Survey of Consumer Finances data and the Fiscal Analyzer, a highly detailed life-cycle consumption-smoothing program, to a) measure ultimate economic inequality – inequality in lifetime spending power – within cohorts, b) assess fiscal progressivity within cohorts, c) calculate marginal remaining lifetime net tax rates, taking into account all major federal and state tax and transfer policies, d) evaluate the ability of current income to correctly classify households as rich, middle class, and poor, e) determine whether current-year average net tax rates accurately capture actual fiscal progressivity, and f) determine whether current-year marginal tax rates on labor supply accurately capture actual remaining lifetime marginal net tax rates. We find far less inequality in spending power than in wealth or labor earnings due to the fiscal system’s high degree of progressivity. But U.S. fiscal redistribution generally comes with very high work disincentives for households of all ages, regardless of income class. There is, however, substantial dispersion in marginal net tax rates, which seems hard to reconcile with standard norms of optimal taxation. We also find that current income is a very poor proxy for remaining lifetime resources and that current-year net tax rates can provide a highly distorted picture of true fiscal progressivity and work disincentives.
    JEL: A0 D31 D63 D91 E25 E62 H20 H21 H22 H55
    Date: 2016–02
  29. By: Jan Bruha; Jiri Polansky
    Abstract: The goal of this paper is to document and summarize the main cyclical features of labor market macroeconomic data in advanced countries. We report the second moments (correlations, coherences and volatility) of labor market variables for various data transformations (growth rates and cycles). Then we use dynamic factor models to inquire about the number of orthogonal shocks that drives labor market data dynamics. We also investigate the time-varying nature of these features: we ask whether they are stable over time, especially at times of severe crises such as the Great Recession. Finally, we compare these features across countries to see whether there are groups of countries characterized by similar features, such as labor market institutions. We find that certain features are stable over time and across countries (such as Okun's Law), while others are not. We also confirm that labor market institutions influence selected characteristics, but to a limited degree only. We find that one or at most two orthogonal shocks seem to drive the cyclical dynamics of labor market variables in most countries. The paper concludes with our interpretation of these findings for structural macroeconomic models.
    Keywords: Dynamic factor models, Great Recession, labor market institutions, Okun's Law
    JEL: E24 J21 J30
    Date: 2015–12
  30. By: Farmer, Roger E A; Platonov, Konstantin
    Abstract: We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.
    Keywords: animal spirits; belief function; Keynesian economics; Unemployment
    JEL: E12 E3 E4
    Date: 2016–03
  31. By: Baldursson, Fridrik Mar; Portes, Richard; Thorlaksson, Eirikur Elis
    Abstract: Iceland's capital controls were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls have not been lifted yet; until recently this was primarily because of the risk of large outflows of domestic holdings of the failed Icelandic banks. As argued in a precursor to this paper (Baldursson and Portes, 2014), significant restructuring of domestic holdings of foreign creditors of the banks was required before the controls can be lifted. Such a restructuring was finally accomplished in January 2016 and gradual lifting of the capital controls now appears to be within reach. Broadly in line with the recommendations of Baldursson and Portes (2014), the resolution involved a voluntary - in much the same sense as the Greek debt restructuring was voluntary - restructuring of the banks' debt, under which most of the Icelandic krona assets of the banks were relinquished to the state or tied up in Iceland. Resolution of the old banks will cut Iceland's public debt, but it will still be substantially higher than before the crisis. The net international investment position of Iceland is, however, stronger than it has been in decades.
    Keywords: capital controls; cross-border banking; Icelandic banks; resolution of failed banks
    JEL: E58 F31 G21
    Date: 2016–03
  32. By: Emanuele Campiglio
    Abstract: It is widely acknowledged that introducing a price on carbon represents a crucial precondition for filling the current gap in low-carbon investment. However, as this paper argues, carbon pricing in itself may not be sufficient. This is due to the existence of market failures in the process of creation and allocation of credit that may lead commercial banks – the most important source of external finance for firms – not to respond as expected to price signals. Under certain economic conditions, banks would shy away from lending to low-carbon activities even in presence of a carbon price. This possibility calls for the implementation of additional policies not based on prices. In particular, the paper discusses the potential role of monetary policies and macroprudential financial regulation: modifying the incentives and constraints that banks face when deciding their lending strategy - through, for instance, a differentiation of reserve requirements according to the destination of lending - may fruitfully expand credit creation directed towards low-carbon sectors. This seems to be especially feasible in emerging economies, where the central banking framework usually allows for a stronger public control on credit allocation and a wider range of monetary policy instruments than the sole interest rate.
    Keywords: green investment; low-carbon finance; banking; credit creation; green macroprudential regulation; monetary policy
    JEL: E50 G20 Q56
    Date: 2015–03–27
  33. By: Prachi Mishra; Peter Montiel; Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: There are strong a priori reasons to believe that monetary transmission may be weaker and less reliable in low- than in high-income countries. This is as true in India as it is elsewhere. While its floating exchange rate gives the RBI monetary autonomy, the country's limited degree of integration with world financial markets and RBI's interventions in the foreign exchange markets limit the strength of the exchange rate channel of monetary transmission. The country lacks large and liquid secondary markets for debt instruments, as well as a well-functioning stock market. This means that monetary policy effects on aggregate demand would tend to operate primarily through the bank-lending channel. Yet the formal banking sector is small, and does not intermediate for a large share of the economy. Moreover, there is evidence both that the costs of financial intermediation are high and that the banking system may not be very competitive. The presence of all of these factors should tend to weaken the process of monetary transmission in India. This paper examines what the empirical evidence has to say about the strength of monetary transmission in India, using the structural vector autoregression (SVAR) methods that have been applied broadly to investigate this issue in many countries, including high-,middle-, and low-income ones. We estimate a monthly VAR with data from April 2001 to December 2014. Applying a variety of methods to identify exogenous movements in the policy rate in the data, we find consistently that positive shocks to the policy rate result in statistically significant effects (at least at confidence levels typically used in such applications) on the bank-lending rate in the direction predicted by theory. Specifically, a tightening of monetary policy is associated with an increase in bank lending rates, consistent with evidence for the first stage of transmission in the bank-lending channel. While passthrough from the policy rate to bank lending rates is in the right (theoretically-expected) direction, the passthrough is incomplete. When the monetary policy variable is ordered first, effects on the real effective exchange rate are also in the theoretically expected direction on impact, but are extremely weak and not statistically significant, even at the 90 percent confidence level, for any of the four monetary policy variants that we investigate. Finally, we are unable to uncover evidence for any effect of monetary policy shocks on aggregate demand, as recorded either in the industrial production (IIP) gap or the inflation rate. None of these effects is estimated with strong precision, which may reflect either instability in monetary transmission or the limitations of the empirical methodology. Overall, the empirical tests yield a mixed message on the effectiveness of monetary policy in India, but perhaps one that is more favourable than is typical of many countries at similar income levels.
    Keywords: monetary policy, bank lending, exchange rate, interest rate, institutions
    JEL: E5 E4 F4
    Date: 2016–03
  34. By: Mathilde Le Moigne (Ecole normale supérieure); Francesco Saraceno (OFCE-Sciences Po anda Luiss-Sepp); Sebastien Villemot (OFCE, Sciences Po)
    Abstract: This paper aims at quantifying the impact of a stimulus plan based on a public investment push, within a dynamic stochastic general equilibrium model of the Eurozone economy. We estimate an extension of Leeper et al.'s (2010) model with public capital and time-to-build, to quantify the impact of the European Commission's Investment Plan for Europe (the "Juncker plan"). The public investment push is assessed in normal times and starting from the zero lower bound, making different hypotheses on private investment leverage and on capital productivity. Then, in order to assess the effectiveness of the Juncker plan, we compare it with the stimulus plan implemented by the Obama administration in 2009. The main conclusion of the paper is that, had it been implemented at the beginning of the crisis, the Juncker plan would have had a significant positive impact. But as it is being launched very late in the crisis, to be effective the plan should be significantly larger in size.
    Keywords: Public investment,leverage, Juncker plan, zero lower bound
    JEL: E22 E32 E65
    Date: 2016–03
  35. By: Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick; Meinerding, Christoph
    Abstract: We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.
    Keywords: general equilibrium asset pricing,production economy,long-run risk,investment-specific shocks,nominal rigidities
    JEL: E32 G12
    Date: 2016
  36. By: Vasilev, Aleksandar
    Keywords: general equilibrium,unemployment and wages
    JEL: D51 E24
    Date: 2016–02–22
  37. By: Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
    Abstract: We study the role of government debt maturity in a monetary union in the absence of fiscal transfers across countries. Our key finding is that fi scal hedging is only possible when spending represents an aggregate shock in the union. In the case of idiosyncratic disturbances in spending it is not possible to target a portfolio which provides fi scal insurance to the governments: the allocation is one of incomplete financial markets. These implications are in line with the empirical evidence. Using a sample of 5 Euro area countries and historical holding period returns on government debt, we find that fiscal insurance is not signifi cant against country speci fic shocks however, it is signifi cant against aggregate shocks. Our analysis extends the theoretical results of the literature on optimal fiscal policy without state contingent debt to a two country model. We show that in the two country setup and under an incomplete market the optimal tax schedule, consumption and leisure follow a random walk.
    Keywords: Debt Management; Fiscal policy; Government Debt; Maturity Structure; Tax Smoothing
    JEL: E43 E62 H63
    Date: 2016–03
  38. By: Adugna Olani (Queen's University)
    Abstract: In this paper, I examine the effects of advanced economies' conventional monetary policy on gross foreign direct and portfolio investment inflows to emerging economies. I use structural vector autoregressions to analyse and compare the response of each inflow category to world interest rate and emerging economies' monetary and exchange rate shocks. Gross foreign direct inflows respond slowly to shocks while gross portfolio reacts on impact. Furthermore, the reaction of foreign direct investment to the shocks is not as high. These results suggest that monetary and exchange rate policies of emerging economies influence portfolio inflows more than they impact foreign direct investment in ows. These results also imply the existence of fundamental differences in capital flow categories beyond what we know to date. I address the "push" and "pull" debate in categories capital flows by quantitatively comparing the forecast error variance decomposition. I do not find evidence of "push" over "pull" factors in either class of inflows.
    Keywords: Monitary Policy, Capital Flows, Emerging Markets, Exchange Rate, Interest Rates
    JEL: E52 F32 E43 E58 F37
    Date: 2016–03
  39. By: Akinwande A. Atanda; Andrea K. Menclova (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: Rising health care costs are a policy concern across the OECD and relatively little consensus exists concerning their causes. One explanation that has received revived attention is Baumol’s Cost Disease (BCD). However, developing a theoretically-appropriate test of BCD has been a challenge. In this paper, we construct a two-sector model firmly based on Baumol’s axioms. We then theoretically derive two propositions that can be tested using observable variables. In particular, we predict that: 1) the relative price index of the health care sector, and 2) the share of total labor employed in the health care sector should both be positively related to economy-wide productivity. Using annual data from 27 OECD countries over the years 1995-2013, we show that empirical evidence for the existence of BCD in health care is sensitive to model specification and disappears once we address spurious correlation due to contemporaneous trending and other econometric issues.
    Keywords: Baumol’s Cost Disease, OECD, health care industry, panel data
    JEL: I11 J30 E24
    Date: 2016–04–03
  40. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: The Indian economy is on a recovery path, helped by a large terms of trade gain, positive policy actions, improved confidence, and reduced external vulnerabilities. A faster-than-expected decline in inflation created space for nominal policy rate cuts. Persistently high inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures. In addition, supply bottlenecks and structural challenges constrain medium-term growth and hinder job creation. Risks are weighted to the downside, with external risks mainly from intensified global financial market volatility and slower global growth. On the domestic side, a further weakening of bank and corporate balance sheets could pose risks to economic recovery and weigh on financial stability, while setbacks in the pace of structural reforms could dampen growth and undermine sentiment. In contrast, lower-for-longer global energy prices constitute an upside risk for India.
    Keywords: Asia and Pacific;India;inflation, monetary fund, reserve, banking sector, market
    Date: 2016–03–02
  41. By: Guido Ascari; Paolo Bonomolo; Hedibert F. Lopes
    Abstract: Abstract The instability of macroeconomic variables is usually ruled out by rational expectations. We propose a generalization of the rational expectations framework to estimate possible temporary unstable paths. Our approach yields drifting parameters and stochastic volatility. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy and instability. We apply our methodology to US inflation dynamics in the ‘70s through the lens of a simple New Keynesian model. When unstable RE paths are allowed, the data unambiguously select them to explain the stagflation period in the ‘70s.Thus, our methodology suggests that US inflation dynamics in the ‘70s is better described by unstable rational equilibrium paths.
    Keywords: Rational Expectations, Sunspots, Instability, Indeterminacy, Inflation, Monetary Policy.
    JEL: E31 E52
    Date: 2016–03–15
  42. By: Alberto Cavallo; Roberto Rigobon
    Abstract: New data-gathering techniques, often referred to as “Big Data” have the potential to improve statistics and empirical research in economics. In this paper we describe our work with online data at the Billion Prices Project at MIT and discuss key lessons for both inflation measurement and some fundamental research questions in macro and international economics. In particular, we show how online prices can be used to construct daily price indexes in multiple countries and to avoid measurement biases that distort evidence of price stickiness and international relative prices. We emphasize how Big Data technologies are providing macro and international economists with opportunities to stop treating the data as “given” and to get directly involved with data collection.
    JEL: E31 F3 F4
    Date: 2016–03
  43. By: Kosuke Aoki (University of Tokyo); Alexander Michaelides (Imperial College Business School, CEPR, CFS and NETSPAR); Kalin Nikolov (European Central Bank)
    Abstract: We document low stock market participation rates and high proportions of money in Japanese household portfolios. To replicate these facts, we introduce a money demand motive in a life-cycle portfolio choice model and calibrate the model's structural parameters to match Japanese household financial data. Using counterfactual analysis we find that low expected stock returns, low expected inflation and high fixed costs of stock market participation are the main determinants of Japanese household portfolios.
    Keywords: Life Cycle Models; Portfolio Choice; Inflation; Money Demand; Stock Market Participation; Uninsurable Labor Income Risk; Japanese portfolios
    JEL: E41 G11
    Date: 2016–03–28
  44. By: Brant Abbott (Institute for Fiscal Studies); Giovanni Gallipoli (Institute for Fiscal Studies and University of British Columbia); Costas Meghir (Institute for Fiscal Studies and Yale University); Gianluca Violante (Institute for Fiscal Studies)
    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, Financial Aid, Intergenerational Transfers, Altruism, Paternalism, Credit Constraints, Equilibrium.
    JEL: E24 I22 J23 J24
    Date: 2016–03
  45. By: Kim, Minseong
    Abstract: This paper explores how accounting consistency affects DSGE models. As many DSGE models descended from real business cycle models, I explore a simple labor-only RBC model with an exogenous external sector introduced. The conclusion reached in this paper is that once an external sector is introduced, DSGE models may suffer from accounting inconsistency, unless disequilibrium or some non-orthodox theory of price level, real monetary supply or bonds is accepted.
    Keywords: accounting consistency, DSGE, external sector, fiscal deficit
    JEL: B41 E13 E62 F41
    Date: 2016–03–29
  46. By: Kim, Minseong
    Abstract: This paper explores how accounting consistency affects DSGE models. As many DSGE models descended from real business cycle models, I explore a simple labor-only RBC model with an exogenous external sector introduced. The conclusion reached in this paper is that once an external sector is introduced, DSGE models may suffer from accounting inconsistency, unless disequilibrium or some non-orthodox theory of price level, real monetary supply or bonds is accepted.
    Keywords: accounting consistency, DSGE, external sector, fiscal deficit
    JEL: B41 E13 E62 F41
    Date: 2016–03–29
  47. By: Holden, Thomas
    Abstract: We present the first necessary and sufficient conditions for there to be a unique perfect-foresight solution to an otherwise linear dynamic model with occasionally binding constraints, given a fixed terminal condition. We derive further conditions on the existence of a solution in such models. These results give determinacy conditions for models with occasionally binding constraints, much as Blanchard and Kahn (1980) did for linear models. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates, even when agents believe that the central bank will eventually attain its long-run, positive inflation target. This illustrates that a credible long-run inflation target does not render the Taylor principle sufficient for determinacy in the presence of the zero lower bound. However, we show that price level targeting does restore determinacy in these situations.
    Keywords: occasionally binding constraints,zero lower bound,existence,uniqueness,price targeting,Taylor principle,linear complementarity problem
    JEL: C62 E3 E4 E5
    Date: 2016–04–04
  48. By: Anderson, Alyssa G.; Huther, Jeff W.
    Abstract: We examine how market participants have used the Federal Reserve’s overnight reverse repurchase (ON RRP) exercise and how short-term interest rates have evolved between December 2013 and November 2014. We show that money market fund (MMF) participation is sensitive to the spread between market repo rates and the ON RRP offering rate as well as Treasury bill issuance, government sponsored enterprise (GSE) participation is more heavily driven by calendar effects, dealers tend to only participate when rate spreads are negative, and banks generally do not participate. We also find that the effect of the ON RRP on overnight interest rates is more significant in the collateralized market than the uncollateralized market.
    Keywords: Federal Reserve System operations ; Monetary policy ; federal funds ; money market funds ; overnight RRP ; repurchase agreements
    JEL: E52 E58 G21 G23
    Date: 2016–02
  49. By: Ryan Niladri Banerjee; Fabrizio Zampolli
    Abstract: In a panel of OECD countries, we investigate the short-term effects of fiscal consolidation on output and employment, and how these vary with the state of the business cycle, monetary policy, the level of public debt, the current account, and the strength of the financial cycle. The estimation makes use of local projection methods and fiscal consolidation shocks identified through the narrative approach. Our main finding is that short-term fiscal multipliers remain for the most part below unity, even in bad states, suggesting that important offsetting factors were at play in past consolidation episodes. In particular, we do not find evidence that fiscal multipliers are above unity when the output gap is negative or monetary policy is tight. Instead, we find evidence of lower than average multipliers when the current account is in deficit and public debt is high (although in the latter case employment costs tend to be larger). One factor found to raise the costs of fiscal consolidation is weak private credit growth. Even in this case, however, point estimates indicate that fiscal multipliers are not larger than one. Our results suggest that fiscal consolidation multipliers are not necessarily, or everywhere, larger than average in the aftermath of the global financial crisis.
    Keywords: fiscal consolidation, fiscal multipliers, narrative approach, panel data, local projections
    Date: 2016–03
  50. By: Ines Buono (Bank f Italy); Sara Formai (Bank f Italy)
    Abstract: We investigate the degree of anchoring in inflation expectations for different advanced economies using data from professional forecasters' surveys. We define expectations as anchored when movements in short-run expectations do not trigger movements in expectations at longer horizons. Using time-varying parameter regressions, we provide evidence that anchoring has varied noticeably across economies and over time. In particular, we find that starting from the second half of 2008, inflation expectations in the euro area, unlike in the US and in the UK, have shown signs of a de-anchoring.
    Keywords: anchoring, inflation expectations, nonparametric estimation
    JEL: E31 E52 D84 C14
    Date: 2016–03
  51. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); Andrea Ferrero (University of Oxford); Fernanda Necchio (FRB San Francisco)
    Abstract: The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity - or expectations thereof - puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.
    Date: 2016–03
  52. By: Barigozzi, Matteo; Lippi, Marco; Luciani, Matteo
    Abstract: We develop the econometric theory for Non-Stationary Dynamic Factor models for large panels of time series, with a particular focus on building estimators of impulse response functions to unexpected macroeconomic shocks. We derive conditions for consistent estimation of the model as both the cross-sectional size, n, and the time dimension, T, go to infinity, and whether or not cointegration is imposed. We also propose a new estimator for the non-stationary common factors, as well as an information criterion to determine the number of common trends. Finally, the numerical properties of our estimator are explored by means of a MonteCarlo exercise and of a real-data application, in which we study the effects of monetary policy and supply shocks on the US economy.
    Keywords: Dynamic Factor model ; , common trends ; impulse response functions ; unit root processes
    JEL: C00 C01 E00
    Date: 2016–03–04
  53. By: G. Cette; J. Fernald; B. Mojon
    Abstract: In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have nfluenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.
    Keywords: Productivity, ICT, Europe, convergence, capital flows, mis-allocation.
    JEL: E23 E32 O47 O52
    Date: 2016
  54. By: Ferrière, Axelle (European University Institute); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta)
    Abstract: How should public debt be managed when uncertainty about the business cycle is widespread and debt levels are high, as in the aftermath of the last financial crisis? This paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that, without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimal policies that resemble "austerity" measures. Optimal policy prescribes front-loaded fiscal consolidations and convergence to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks; that is, when the intertemporal elasticity of substitution is sufficiently low.
    Keywords: endogenous government expenditures; distortionary taxes; balanced budget; austerity; fiscal consolidation; martingale; ambiguity aversion; multiplier preferences
    JEL: D80 E62 H21 H63
    Date: 2016–03–01
  55. By: Kollmann, Robert; Zeugner, Stefan
    Abstract: This note corrects Blanchard and Kahn’s (1980) solution for a linear dynamic rational expectations model with one state variable and one control variable.
    Keywords: linear dynamic rational expectations model, model solution
    JEL: C0 C6 E3
    Date: 2016
  56. By: Tim Jackson; Peter Victor; Asjad Naqvi
    Abstract: Modern western economies (in the Eurozone and elsewhere) face a number of challenges over the coming decades. Achieving full employment, meeting climate change and other key environmental targets, and reducing inequality rank amongst the highest of these. The conventional route to achieving these goals has been to pursue economic growth. But this route has created two critical problems for modern economies. The first is that higher growth leads (ceteris parabis) to higher environmental impact. The second is that fragility in financial balances has accompanied relentless demand expansion. The prevailing global response to the first problem has been to encourage a decoupling of output from impacts by investing in green technologies (green growth). But this response runs the risk of exacerbating problems associated with the over-leveraging of households, firms and governments and places undue confidence in unproven and imagined technologies. An alternative approach is to reduce the pace of growth and to restructure economies around green services (post-growth). But the potential dangers of declining growth rates lie in increased inequality and in rising unemployment. Some more fundamental arguments have also been made against the feasibility of interest-bearing debt within a post-growth economy. The work described in this paper was motivated by the need to address these fundamental dilemmas and to inform the debate that has emerged in recent years about the relative merits of green growth and post-growth scenarios. In pursuit of this aim we have developed a suite of macroeconomic models based on the methodology of Post-Keynesian Stock Flow Consistent (SFC) system dynamics. Taken together these models represent the first steps in constructing a new macroeconomic synthesis capable of exploring the economic and financial dimensions of an economy confronting resource or environmental constraints. Such an ecological macroeconomics includes an account of basic macroeconomic variables such as the GDP, consumption, investment, saving, public spending, employment, and productivity. It also accounts for the performance of the economy in terms of financial balances, net lending positions, money supply, distributional equity and financial stability. This report illustrates the utility of this new approach through a number of specific analyses and scenario explorations. These include an assessment of the Piketty hypothesis (that slow growth increases inequality), an analysis of the ‘growth imperative’ hypothesis (that interest bearing debt requires economic growth for stability), and an analysis of the financial and monetary implications of green investment policies. The work also assesses the scope for fiscal policy to improve social and environmental outcomes.
    Date: 2016–03
  57. By: Carl Singleton
    Abstract: Long-term unemployment more than doubled during the UK’s Great Recession. Only a small fraction of this persistent increase can be explained by the changing composition of the unemployment pool. Aggregate exit rates from unemployment exhibit negative duration dependence. A stocks-flows decomposition, which allows for this fact in a limited way, indicates the importance of participation flows, especially from unemployment to inactivity, in accounting for long-term unemployment’s recessionary rise. How changes in transition rates contributed to this rise suggests a general shift in the labour force attachment of the long-term unemployed, which cannot be accounted for by observable characteristics.
    Keywords: Long-term unemployment, Worker flows, Labour force participation, Great Recession
    JEL: E24 E32 J64
    Date: 2016–02–23
  58. By: Alan S. Blinder (Princeton University); Mark W. Watson (Princeton University)
    Abstract: The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics-- hen the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.
    Date: 2014–07
  59. By: Papaioannou, Sotiris
    Abstract: This study examines whether differences in public sector efficiency are associated with diverging effects of public investment on growth. At first stage, we estimate public investment multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we construct measures of public sector efficiency which are used in the econometric analysis to study the relationship between public investment and growth. The main result of the econometric analysis is that the efficiency of public sector indeed matters in raising the influence of public investment on growth. This result remains robust to several changes in the econometric specification and to various measures of government efficiency which used as explanatory variables in the econometric estimations.
    Keywords: Public investments, Fiscal multipliers, Public sector efficiency, Economic growth.
    JEL: E62 H30 O40
    Date: 2016–03–22
  60. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard discussed whether the FOMC's decision earlier this month to leave the policy rate unchanged was an example of time-inconsistent policymaking, given that the state of the U.S. economy then was arguably consistent with the FOMC's Summary of Economic Projections (SEP) from December, which could have led some to believe an increase was warranted. During a presentation to the New York Association for Business Economics, he said that some key changes to the SEP in March were enough to justify a somewhat different policy stance than would otherwise have been warranted. He concluded that it is reasonable to interpret the FOMC as remaining time-consistent at the March meeting.
    Date: 2016–03–24
  61. By: Robert Kollmann; Stefan Zeugner
    Abstract: This note corrects Blanchard and Kahn’s (1980) solution for a linear dynamic rational expectations model with one state variable and one control variable.
    JEL: C00 C60 E30
    Date: 2016–03
  62. By: Adam P. Balcerzak (Nicolaus Copernicus University, Poland); Michal Bernad Pietrzak (Nicolaus Copernicus University, Poland)
    Abstract: Purpose of the article: In the case of highly developed countries quality of human capital (QHC) is currently considered as one of the most important factors determining international competitiveness and growth of economies. The fundamental role of the QHC can be seen in the EU policy documents such as Europe 2020 strategy. In this context the main purpose of the article is to evaluate the QHC in the EU countries at the macroeconomic level and to make comparison between so called “new” member states that joined the EU after the year 2004 and the “old” EU countries. Methodology/methods: QHC is considered as a multidimensional phenomenon. As a result, in the research Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) was applied. The method enables to evaluate the objects in terms of economic phenomena that have multidimensional character based on the set of detailed economic attributes (variables). In the research eight diagnostic variables were used. The synthetic index describing the relative level of QHC in the analysed economies was estimated, which enabled to propose a rating of the countries and group them into homogenous subsets. Scientific aim: The scientific aim of the article was to evaluate the progress obtained by the “new” member states after joining the EU. As a result, two ratings grouping the EU countries from the once with the highest level of QHC to the once with its lowest level in the year 2004 and 2012 were determined. Findings: The comparison of the ratings in the year 2004 and 2012 shows that most of the “new” member states have made a significant progress in the analysed period. Conclusions: The conducted multidimensional research enabled to quantify QHC in the EU countries in the year 2004 and 2012 with application of multidimensional perspective. As a result it enabled to evaluate the changes of that phenomenon in the period and to point the countries that are the leaders in the field.
    Keywords: Quality of Human Capital, macroeconomic perspective, TOPSIS method, European Union countries
    JEL: C38 E24
    Date: 2016–03
  63. By: Alisdair McKay; Emi Nakamura; Jón Steinsson
    Abstract: We present a simple model with unemployment risk and borrowing constraints which yields a "discounted Euler equation." This feature of the model mutes the extent to which news about far future real interest rates (i.e., forward guidance) affects current outcomes. We show that this simple model approximates the outcomes of a rich model with uninsurable income risk and borrowing constraints in response to a forward guidance shock. The model is simple enough to be easily incorporated into standard DSGE models. We illustrate this with an application to the zero lower bound.
    JEL: E21 E40 E50
    Date: 2016–03
  64. By: David Greasley (Emeritus Professor of Economic History, University of Edinburgh); Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); Eoin McLaughlin (Department of Geography and Sustainable Development, University of St. Andrews); Les Oxley (Department of Economics, University of Waikato)
    Abstract: Comprehensive Investment (CI) may provide an indicator of future changes in a country’s per capita consumption. We explore the utility of the CI indicator for Australia by constructing CI data since 1861 and by estimating their relationship with changes in future consumption over periods of 50 years ahead. The CI measures include changes in natural, produced and human capital, and make allowance for exogenous technological progress.The results are used to consider how Australia’s natural capital exploitation influenced the consumption of future generations. Further, we gauge if low CI relative to other leading OECD countries resulted in lower consumption levels in Australia over time than feasible, had it saved more.
    Keywords: Australia, sustainable development, comprehensive investment, genuine savings, consumption, technological progress.
    JEL: E01 E21 N10 N17 O11 O44 Q01
    Date: 2016–03
  65. By: Afrasiab Mirza (Birmingham Business School, University of Birmingham); Eric Stephens (Department of Economics, Carleton University)
    Abstract: This paper studies the welfare properties of competitive equilibria in an economy with incomplete markets subject to idiosyncratic and aggregate shocks. We focus on the role of securitization, whereby borrowers can reduce idiosyncratic asset risk, which enables increased leverage and investment. In the absence of frictions in the securitization process, we show that the ability to securitize assets completes markets. When there are frictions in the market for securitized assets, requiring originators to hold some skin-in-the-game, markets remain incomplete and risk-sharing is limited. In this case, fire-sales are required to repay debt and finance new investments when the economy is hit by a negative shock. Moreover, the equilibrium may be constrained inefficient due to the existence of a pecuniary externality that can result in over or under-investment. In the over-investment case, the imposition of a leverage restriction generates a Pareto improvement by raising prices in the event of a fire-sale. Forcing originators to hold additional skin-in-the-game can also increase prices in a fire-sale, however such a policy is shown to reduce welfare.
    Keywords: Securitization, pecuniary externalities, collateral constraints, financial frictions, macroprudential regulation, fire-sales, incomplete markets
    JEL: D52 D53 E44 G18 G23
    Date: 2016–03–25
  66. By: Malka de Castro Campos; Federica Teppa
    Abstract: The paper analyses individual inflation expectations in the Netherlands over the period 2008-2014. The empirical evidence is based on the DNB Household Survey, a longitudinal online panel survey representative of Dutch-speaking population. The focus is on inflation measures based on information about the general price level, the aggregate real estate price and the price of the own house. Both individual background microeconomic characteristics and macroeconomic variables are taken into account in our empirical models devoted to explain the main determinants of inflation expectations. We find that inflation expectations decrease over the years, suggesting that individuals can pick up the direction of the price change, but respondents do not report high risk of deflation. The target inflation of 2 percent seems to be well anchored in individual expectations.
    Keywords: Inflation Risk; Survey Data; Subjective expectations
    JEL: C23 C5 C8 D12 D84
    Date: 2016–03
  67. By: Vasco M. Carvalho; ; ;
    Abstract: A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perpective on production linkages can offer novel insights on the sources of aggregate fluctuations. To do this, I show (i) how production networks can be mapped to a standard general equilibrium setup; (ii) how to approach input-output from this networked perspective and (iii) how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.
    Keywords: Production Networks; Comovement; Business Cycles; Input-Output Linkages.
    Date: 2014–10–17
  68. By: Schneider, Friedrich (University of Linz); Buehn, Andreas (Institute for Advanced Sustainability Studies (IASS))
    Abstract: This paper presents various methods for estimating the size of the shadow economy and analyzes their strengths and weaknesses. The purpose of the paper is twofold. Firstly, it demonstrates that no ideal method exists to estimate the size and development of the shadow economy. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy and provides a comparison of the size of the shadow economy using different estimation methods.
    Keywords: MIMIC approach, methods to estimate the shadow economy, advantages and disadvantages of the measurement methods, shadow economy estimates
    JEL: D78 E26 H2 H11 H26 K42 O5 O17
    Date: 2016–03
  69. By: Elinder, Mikael (Uppsala University); Erixson, Oscar (Uppsala University); Waldenström, Daniel (Uppsala University)
    Abstract: We use new population-wide register data on inheritances and wealth in Sweden to estimate the causal impact of inheritances on wealth inequality. We find that inheritances reduce relative wealth inequality (e.g., the Gini coefficient falls by 5–10 percent) but that absolute dispersion increases. Examining different parts of the wealth distribution, we find that the top decile's wealth share decreases substantially, whereas the wealth share of the bottom half increases from a negative to a positive share. In essence, wealthier heirs inherit larger amounts, but less wealthy heirs inherit more relative to their pre-inheritance wealth. We also find that post-inheritance behavioral adjustments mitigate the equalizing effect of inheritances because less wealthy heirs consume larger shares of their inheritances. Moreover, we find that the Swedish inheritance tax reduced the equalizing inheritance effect but that the redistribution of tax revenues could reverse this result. Finally, we show that inheritances increase wealth mobility.
    Keywords: bequests, estates, net worth, inheritance taxation, wealth distribution
    JEL: H24 D63 E21
    Date: 2016–03
  70. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation at U.S. Monetary Policy Forum, New York, New York, February 26, 2016
    Date: 2016–02–26
  71. By: Elinder, Mikael; Erixson, Oscar; Waldenström, Daniel
    Abstract: We use new population-wide register data on inheritances and wealth in Sweden to estimate the causal impact of inheritances on wealth inequality. We find that inheritances reduce relative wealth inequality (e.g., the Gini coefficient falls by 5-10 percent) but that absolute dispersion increases. Examining different parts of the wealth distribution, we find that the top decile's wealth share decreases substantially, whereas the wealth share of the bottom half increases from a negative to a positive share. In essence, wealthier heirs inherit larger amounts, but less wealthy heirs inherit more relative to their pre-inheritance wealth. We also find that post-inheritance behavioral adjustments mitigate the equalizing effect of inheritances because less wealthy heirs consume larger shares of their inheritances. Moreover, we find that the Swedish inheritance tax reduced the equalizing inheritance effect but that the redistribution of tax revenues could reverse this result. Finally, we show that inheritances increase wealth mobility.
    Keywords: bequests; estates; inheritance taxation; net worth; wealth distribution
    JEL: D63 E21 H24
    Date: 2016–03
  72. By: Grégory Claeys; Zsolt Darvas; Alvaro Leandro
    Abstract: Highlights • Pro-cyclical fiscal tightening might be one reason for the anaemic economic recovery in Europe, raising questions about the effectiveness of the EU’s fiscal framework in achieving its two main objectives - public debt sustainability and fiscal stabilisation. • In theory, the current EU fiscal rules, with cyclically adjusted targets, flexibility clauses and the option to enter an excessive deficit procedure, allow for large-scale fiscal stabilisation during a recession. However, implementation of the rules is hindered by the badly-measured structural balance indicator and incorrect forecasts,leading to erroneous policy recommendations. The large number of flexibility clauses makes the system opaque. • The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives, more transparent, easier to implement and which have a higher potential to be complied with. • The best option, re-designing the fiscal framework from scratch, is currently unrealistic. Therefore we propose to eliminate the structural balance rules and tointroduce a new public expenditure rule with debt-correction feedback, embodied in a multi-annual framework, which would also support the central bank’s inflation target. A European Fiscal Council could oversee the system.
    Date: 2016–03
  73. By: Dupor, William D. (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, I estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, I construct a new panel dataset of state-level federal defense contracts. Second, I sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, I estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local multiplier estimates, I find that the two differ dramatically. I infer that the local multiplier estimates alone do not provide useful information about the aggregate effects of policy. Finally, I use the panel aspect of the data to dramatically increase the precision of estimates of the aggregate multiplier (relative to using the aggregate data alone) by including a spillover term in the panel regressions. My baseline aggregate findings are a long-run multiplier on income equal to 1.6, a moderate long-run effect on employment, and no effect on income or employment effect in the short run. The results suggest that lags in the effects of defense spending are so long that they render countercyclical spending policies ineffective. In addition, I find negative short-run spillovers on employment of spending across state borders.
    Date: 2016–03–29
  74. By: Andreas Thiemann
    Abstract: This paper examines how families adjust their private old-age savings in response to a change in individual pension wealth. The regression discontinuity approach exploits two expansions of the child care pension benefit, in 1992 and in 1999, as natural experiments. The empirical analysis is based on three waves of the Survey of Income and Expenditure (EVS): 1998, 2003 and 2008. All results indicate that families do not adjust their private old-age savings in response to the increase in their pension wealth. From a political point of view, this suggests that the increase in individual pension wealth does not crowd-out old-age private savings. Hence, child care pension benefits increase a mother's old-age income without causing negative savings effects.
    Keywords: Old-age savings, pension wealth, regression discontinuity design
    JEL: D14 E21 H55
    Date: 2016
  75. By: Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.
    Keywords: unconventional monetary policy ; firm‐financial constraints ; bond markets
    JEL: E52 G23 G32
    Date: 2016–02
  76. By: Gregory Verdugo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, OFCE - OFCE - Sciences Po)
    Abstract: We study the response of real wages to the business cycle in eight major Eurozone countries before and during the Great Recession. Average real wages are found to be acyclical, but this reflects, in large part, the effect of changes in the composition of the labour force related to unemployment variations over the cycle. Using longitudinal micro data from the ECHP and SILC panels to control for composition effects, we estimate the elasticities of real wage growth to unemployment increases
    Keywords: Wage adjustment,Wage cyclicality,Great recession,Wage rigidity
    Date: 2016
  77. By: Juan Carlos Matallín-Sáez (Department of Finance & Accounting, Universitat Jaume I, Castellón, Spain); Amparo Soler-Domínguez (Department of Finance & Accounting, Universitat Jaume I, Castellón, Spain); Emili Tortosa-Ausina (IVIE, Valencia and Department of Economics, Universidad Jaume I, Castellón, Spain)
    Abstract: This paper analyses the performance of US social responsible (SR) mutual funds in relation to the fund’s ethical strategy focus and whether the business cycle is in a state of expansion or recession. Our results show that in aggregated terms the abnormal performance of SR funds is negative and there are no significant differences based on their ethical strategy focus: environmental, ESG, religious and undefined. In general we also find no significant differences in performance according the state of the business cycle. In terms of methodology our analysis shows the relevance of considering a benchmark to cover idiosyncratic risks linked to the asset classes in which the fund invests according to its ethical commitments. This effect is especially relevant in the case of environmental funds due to the poor performance of the renewable energy industry since the 2008 financial crisis as a result of changes in green government policy and lower oil prices. Thus, part of the mutual fund performance will not be linked to managers but rather to the behaviour of these asset classes.
    Keywords: Mutual fund, performance, business cycle, environmental, ESG, SRI
    JEL: G23 G11 M14 Q56
    Date: 2016
  78. By: Tony Volpon
    Abstract: This paper analyses China's central role in determining monetary cycles across countries since the 1997 Asian financial crisis. At first, China`s accumulation strategy, based on the repression of domestic consumption demand, generated an excess supply without a compensating increase in domestic demand. The solution was found in establishing a pattern of trade deficits and surpluses between China and its partners, on the one hand, and consuming countries, especially the United States, on the other hand, resulting in an arrangement that reorganized aggregate demand and supply among countries in a mutually beneficial way. However, on the financial side, there has been a progressive mismatch of risks that eventually led to the global financial crisis of 2008. Particularly, countries with current account surpluses, through the accumulation of foreign exchange reserves by their central banks, agreed to cover the exchange rate risk, but not the credit risk being generated by consumers. This "residual" credit risk was then accumulated within the financial system, which saw dramatic growth until the crisis of 2008. With the outbreak of the crisis, this system of commercial and financial intermediation collapsed. To take its place in an attempt to generate new sources of aggregate demand, and due to political constraints to fiscal expansion, each member of the system, in its own way, replaced the pre-crisis arrangements with unconventional monetary policy measures. This led to "liquidity tsunamis" of foreign capital during the post-crisis period, particularly for emerging economies. Despite restoring the global liquidity level, these policies still did not re-established the pre-crisis levels of economic growth and exchange rates
    Date: 2016–03
  79. By: Roger Farmer (Department of Economics University of California-Los Angeles (UCLA)); Pawel Zabczyk (Bank of England; CCBS; Centre for Macroeconomics (CFM))
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Date: 2016–03
  80. By: Yuliyan Mitkov (Rutgers University)
    Abstract: I study how the distribution of wealth influences the government’s response to a banking crisis and the fragility of the financial system. When the wealth distribution is unequal, the government’s bailout policy during a systemic crisis will be shaped in part by distributional concerns. In particular, government guarantees of deposits will tend to be credible for relatively poor investors, but may not be credible for wealthier investors. As a result, wealthier investors will have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are more likely to experience a run and receive a bailout. Thus, without political frictions and under a government that is both benevolent and utilitarian, bailouts will tend to benefit wealthy investors at the expense of the general public. Rising inequality can strengthen this pattern. In some cases, more progressive taxation reduces financial fragility and can even raise equilibrium welfare for all agents.
    Keywords: Bailouts, Inequality, Financial stability, Limited commitment
    JEL: E61 G21 G28
    Date: 2016–03–24
  81. By: Leon Bettendorf; Arjan Lejour; Maarten van 't Riet
    Abstract: In the Netherlands owners of small corporations face taxation of corporate, labour and capital income. Taxation of the latter may be deferred. We study their options for income shifting using bunching techniques. Based on individual tax records over the period 2007-2011 we report four main findings. The first is that the distribution of gross labour income strongly peaks at the legal 'minimum' level. Second, taxable labour income bunches at the cut-offs of the tax brackets. The elasticity of taxable income at the top tax cut-off ranges from 0.06 to 0.11. Third, we show that distributed profits strongly responded to the temporary tax cut from 25 to 22% in 2007, which doubled tax revenues on dividends. Fourth, using a Heckman selection model we find that the size of own equity has a positive effect on the probability of distributing profits and the size. We reconfirm the importance of intertemporal income shifting for business owners.
    JEL: E62 H24 H68
    Date: 2016–03
  82. By: Bharat Diwakar; Gilad Sorek
    Abstract: This study shows how the two alternative saving motives, life-cycle consumption smoothing and parental bequests, determine the relation between population growth and R&D-based economic growth, i.e. the sign of the "weak scale-effect". We take a textbook R&D-based growth model of infinitely living agents with no weak-scale effect, and analyze it in an Overlapping Generations framework - with and without bequest saving-motive. We show how the different saving motives determine the relation between population growth and per-capita income growth, which proves to be ambiguous in general, and may also be non-monotonic. Hence, we conclude that the counterfactual weak-scale effect that is present in the second and third generations of R&D-based growth models of infinitely-living agents depends on their specific demographic structure, and thus is not inherent to R&D-based growth theory itself.
    Keywords: R&D-based Growth, Weak Scale Effect, Overlapping Generations
    JEL: O31 O40
    Date: 2016–03
  83. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Conference on Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness, Federal Reserve Bank of New York, New York City.
    Keywords: bank regulation; Large Institution Supervision Coordinating Committee (LISCC); horizontal evaluations; capital adequacy; liquidity resiliency; preparedness for recovery and resolution; Comprehensive Capital Analysis and Review (CCAR); Comprehensive Liquidity Analysis and Review (CLAR); Supervisory Assessment of Recovery and Resolution Preparedness (SRP)
    Date: 2016–03–18
  84. By: Michele Piffer
    Abstract: This Roundup discusses the literature on the effects of uncertainty on economic activity. Uncertainty will be generally referred to as the agents’ inability to form clear expectations about the future path of relevant economic variables. After motivating the analysis from a policy perspective, the Roundup outlines the key channels through which uncertainty exerts an impact on the economy. It then discusses in an intuitive manner the challenges in empirically estimating such effect, and the recent developments in the literature.
    Date: 2016
  85. By: Ahmad K. Naimzada; Serena Sordi
    Abstract: The simple pure exchange model with two individuals and two goods by Day and Pianigiani (1991), extensively analyzed by Day (1994, Ch. 10) and taken up again by Mukherjy (1999), is discussed and extended with the purpose of showing that chaos in a discrete tâtonnement process of this kind can be controlled if the auctioneer uses a smooth, nonlinear formulation of the price evolution process such that the price adjustment is a sigmoid-shaped function of the excess demand, with given upper and lower limits. This formulation o¤ers some advantages over previous speci?cations. In particular, given the speed of adjustment and the excess demand function, we show that, acting on the lower and/or upper limits that constrain price dynamics, the auctioneer can (i) stabilize the dynamics, (ii) reduce the complexity of the attractor and (iii) increase the economic signi?cance of the adjustment process.
    Keywords: Price adjustment, tâtonnement, chaos, control
    JEL: C62 D50
    Date: 2016–02
  86. By: Rahul Anand; Purva Khera
    Abstract: This paper investigates the implications of lowering formal regulations in labor and product markets on informality and macroeconomic outcomes in India. We estimate a DSGE model with an informal sector, and rigidities in the formal labor and product markets. Along with increasing GDP and employment, deregulation also leads to lower informality and greater product market competition. Slow reallocation of resources between the formal and informal sectors leads to some adverse impacts in the short run that can be minimized by implementing a combined package of reforms. These impacts are shown to be greater in an economy with a larger informal sector.
    Keywords: Labor market reforms;India;Labor markets;Products;Unemployment;Informal sector;Hiring;Labor market regulations;structural reforms, product market deregulation, labor market deregulation, unemployment, wage bargaining, informality, DSGE, Indian economy, Bayesian estimation
    Date: 2016–03–02
  87. By: Parsons, Donald O. (George Washington University)
    Abstract: Unemployment insurance replacement rates world-wide are well below 100 percent, a fact often attributed to search moral hazard concerns. As Blanchard and Tirole (2008) have illustrated, however, neither search nor layoff moral hazard (firing cost) distortions need arise in first-best insurance plans. Their counterexample depends on the functional form of the state utility function--utility with a single argument, consumption plus monetized leisure. The monetized leisure model is unattractive if leisure is a choice variable, however, and a review of the optimal UI literature reveals a surprising variety of alternative utility function assumptions. A standard neoclassical utility function is used to characterize the utility function conditions required to generate moral-hazard-free (MHF) first-best contracts. Two conditions emerge: (i) the necessary condition that leisure and consumption be substitutes (the cross-derivative of consumption and leisure be negative) and (ii) the sufficient condition that leisure be an inferior good, Rosen (1985). Leisure appears to be a normal good, which rules out the possibility of first-best moral-hazard-free (FB MHF) utility structures, but the first-best UI replacement rate remains very much an open question. The rich empirical literature on the "retirement consumption paradox" suggests that the rate is below 100 percent, easing moral hazard concerns, if not eliminating them.
    Keywords: unemployment insurance, utility functions, moral hazard, firing costs, consumption, retirement
    JEL: J65 J41 J33 J08
    Date: 2016–03
  88. By: Konstantin Yanovskiy (Gaidar Institute for Economic Policy); Dmitry Maslov (Gaidar Institute for Economic Policy)
    Abstract: Экономический рост современного Китая впечатляет многих. Эта страна предлагается в качестве модели для подражания экономистами с совершенно противоположными взглядами: от либертарианских до этатистских. Авторы попытались показать, что: - китайский экономический рост менее устойчив, чем кажется; - власти страны, особенно в последние годы, совершают действия, подрывающие стабильность роста; Феномен быстрого экономического роста с огромным притоком иностранных инвестиций и бурным ростом экспортоориентированного сектора. Ключевую роль для Китая сыграло прекращение массовых репрессий при легализации бизнеса, создании индивидуальных неформальных гарантий для отечественных и иностранных предпринимателей. То есть предприниматель не лишался свободы и имущества только из-за воли властей, которая была не ограничена законом или какой-либо внутренней или внешней силой. Изменение политической ситуации вместе с накопленным запасом финансовой прочности создали соблазн усилить контроль над экономикой путем отказа от гарантий сначала для отечественного бизнеса, а затем и для иностранного. Именно это и происходит сейчас: когда начались аресты не только предпринимателей – граждан Китая, но и предпринимателей-нерезидентов. In this article authors focused on factors of Chinese economic miracle. Majority of economists are deeply impressed by high rate of China's economic growth. They are going to search for explanations of the coming new successes of this country. The missed point of these assessments is lack of attention to the new trend of poor formalized China institutions' development. Clearly observable in the modern Peoples Republic of China deterioration of entrepreneur's personal immunity informal guaranties means broken guaranties for private property. The government failure to defend (at least not make a threat) to private property could cause negative influence on China's economic growth in very Long Run.
    Keywords: China model, foreign direct investment, personal owners' rights informal guaranties; informal rules violation; arbitrary arrests
    JEL: P16 P37 P52 N45 D73
    Date: 2016
  89. By: Alina Mika; Robert Zymek
    Abstract: We re-visit the evidence about the trade benefits of European Monetary Union (EMU), focusing on the experience of countries which adopted the common currency since 2002. Based on “state of the art†gravity estimations for the period 1992-2013, we reach three main conclusions. First, estimates from an appropriately specified and estimated gravity equation provide no evidence of a euro effect on trade flows among early euro adopters up to the year 2002. Second, this finding is robust to extending the sample period to incorporate data up to 2013, covering five additional euro accessions. Third, while there is no robust evidence of a euro effect, there is evidence that intra-EU trade flows have expanded faster than the global average during the 2002-2013 period. Using the functional form of a theory-consistent gravity equation, we perform pseudo out-of-sample forecasts of trade flows for recent euro joiners. In line with our estimation results, we show that pseudo forecasts of the change in trade flows after euro accession, assuming no euro effect, outperform forecasts based on the expectation of a significantly positive effect. This suggests that euro accession countries should not expect a significant boost to their trade from joining EMU.
    Keywords: euro, trade, gravity, poisson
    JEL: F14 F15 F17 F33
    Date: 2016–02–02
  90. By: A. Bergeaud; G. Cette; R. Lecat
    Abstract: 20th century growth has been an exceptional period in the history of mankind, relying mostly on increase in total factor productivity (TFP). Using a 1890-2013 17-OECD country database, this paper improves the measurement of TFP by taking into account production factor quality, i.e. the education level of the working-age population for labor and the age of equipment for the capital stock. However, our main contribution is to assess the role of technology diffusion to TFP growth through two emblematic general purpose technologies, electricity and information and communication technologies (ICT). Using both growth decomposition methodology and instrumental variables estimates, this paper finds that, among factor quality, education levels have posted the largest contribution to growth, while the age of capital has a significant, although limited, contribution. Quality-adjusted production factors explain less than half of labor productivity growth in the largest countries but Japan, where capital deepening posted a very large contribution. As a consequence, the “one big wave” of productivity growth (Gordon, 1999), as well as the ICT productivity wave for the countries which experienced it, remains only partially explained by quality-adjusted factors, although education and technology diffusion contribute to explain the US earlier wave in the 1930s-1940s. Finally, technology diffusion, as captured through our two general purpose technologies, leaves between 0.6 and 1 point of yearly growth, as well as a large share of the two 20th century technology waves, unexplained. These results support both a significant lag in the diffusion of general purpose technologies and a wider view on growth factors, encompassing changes in the production process, management techniques or financing practices.
    Keywords: Productivity, Total factor productivity, Education, Technological Change, Technology diffusion, Global History.
    JEL: N10 O47 E20
    Date: 2016
  91. By: Arnaud Cheron (IGDR - Institut de Génétique et Développement de Rennes - UR1 - Université de Rennes 1 - Biosit - Structure Fédérative de Recherche en Biologie-Santé de Rennes - UR1 - Université de Rennes 1 - INSERM - INSERM - CNRS - Centre National de la Recherche Scientifique - CNRS - Centre National de la Recherche Scientifique); Anthony Terriau (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine)
    Abstract: This paper examines life cycle vocational training investments in the context of a model with search frictions. We emphasize that related externalities are agedependent, and this can require an hump-shaped subsidy rate of training costs to restore social efficiency. These results are illustrated using a calibration on the french economy
    Keywords: life cycle, search frictions, vocational training
    Date: 2015–11
  92. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; and IPAG Business School, Paris France); Rangan Gupta (Department of Economics, University of Pretoria); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Germany); Mark Wohar (Department of Economics, University of Nebraska-Omaha, USA and Loughborough University, UK)
    Abstract: We use a novel non-parametric causality-in-quantiles test to study the effects of terror attacks on stock-market returns and volatility in G7 countries. We also use the novel test to study the international repercussions of terror attacks. Test results show that terror attacks often have significant effects on returns, whereas the effect on volatility is significant only in few cases. The effects on returns in many cases become stronger in terms of significance for the upper and lower quantiles of the conditional distribution of stock-market returns. As for international repercussions, we find that terror attacks mainly affect the tails of the conditional distribution of stock-market returns. We find no evidence of a significant cross-border effects of terror attacks on stock-market volatility.
    Keywords: Stock markets, returns, volatility, nonparametric causality-in-quantiles test, terror attacks; G7 countries
    JEL: C22 C53 G10
    Date: 2016–02
  93. By: Fiorini, Matteo; Lebrand, Mathilde
    Abstract: This paper studies the determinants of liberalization commitments in the context of trade in services used as intermediate inputs. Compared to goods, services inputs are mostly complementary to other factors of production and non-tradable. We build a theoretical trade policy framework in which (i) foreign investment as a way to contest a market for non-tradable services can be restricted by the government and (ii) the role of services as complementary inputs explains unilateral commitment to services trade liberalization. Commitment helps governments to avoid political pressures that would result in protectionist measures leading downstream producers to inefficiently reduce their production. In addition we provide new results on the influence of lobbying by both national firms and foreign multinationals. We discuss how the bargaining power of the government, the size of national services sectors and the difference in valuation between national and foreign contributions affect the willingness of the government to sign a services trade agreement.
    Keywords: Services Trade, Trade Agreements, FDI, Lobby
    JEL: D43 F13 F21 L80
    Date: 2016
  94. By: Chirwa, Themba G; Odhiambo, Nicholas M
    Abstract: In this paper, the key macroeconomic determinants of economic growth in Zambia are investigated using the recently developed ARDL bounds-testing approach. The study has been motivated by the unsustainable growth trends that Zambia has been experiencing in recent years. Our study finds that the key macroeconomic determinants that are significantly associated with economic growth in Zambia include, amongst others, investment, human capital development, government consumption, international trade and foreign aid. The study???s results reveal that in the short run, investment and human capital development are positively associated with economic growth, while government consumption, international trade and foreign aid are negatively associated with economic growth. However, in the long run, the study finds investment and human capital development to be positively associated with economic growth, while only foreign aid is negatively associated with economic growth. These results have significant policy implications. They imply that short-run economic policies should focus on creating incentives that attract investment and increase the quality of education, the effectiveness of government institutions, the promotion of international trade and the effectiveness of development aid. In the long run, development strategies should focus on attracting the accumulation of long-term investment, improving the quality of education and the effectiveness of development aid.
    Keywords: Zambia; Autoregressive Distributed Lag Models; Economic Growth
    Date: 2016–04
  95. By: Michaël Assous (PHARE; University of Paris 1); Muriel Dal-Pont Legrand (GREDEG CNRS; Université Nice Sophia Antipolis); Harald Hagemann (University of Hohenheim, Stuttgart)
    Keywords: Business cycle, growth
  96. By: Mario Forni; Alessandro Giovannelli; Marco Lippi; Stefano Soccorsi
    Abstract: Abstract. The paper compares the pseudo real-time forecasting performance of threeDynamic Factor Models: (i) The standard principal-component model, Stock and Watson(2002a), (ii) The model based on generalized principal components, Forni et al. (2005),(iii) The model recently proposed in Forni et al. (2015) and Forni et al. (2016). We employa large monthly dataset of macroeconomic and financial time series for the US economy,which includes the Great Moderation, the Great Recession and the subsequent recovery.Using a rolling window for estimation and prediction, we find that (iii) neatly outperforms(i) and (ii) in the Great Moderation period for both Industrial Production and Inflation,and for Inflation over the full sample. However, (iii) is outperfomed by (i) and (ii) over thefull sample for Industrial Production.
    Date: 2016–03
  97. By: Njindan Iyke, Bernard
    Abstract: The paper uncovers the channels through which real exchange rate undervaluation influences the performance of the South African economy. We decompose the South African economy into three sectors, namely: agriculture, industry, and service. Using the OLS (with Newey-West and robust standard errors), and GMM estimation techniques; an annual time series data covering the period 1962-2014; and a standard regression model for each sector, we find: (i) real exchange rate undervaluation to exert positive impact on economic performance by enhancing agricultural sector, and industrial sector performance; (ii) real exchange rate undervaluation to exert a negative impact on economic performance by reducing the performance of the service sector.
    Keywords: Exchange Rate Undervaluation, Sectoral Performance, South Africa
    JEL: C22 F21 F31
    Date: 2016–03–01
  98. By: FitzGerald, John; Chi, Pho Thi Kim; Lam, Do Van; Ha, Hoang; Huong, Luong; Dung, Tran
    Abstract: This paper considers the factors determining the long-run behaviour of the Vietnamese economy. Using a macro-economic model of the Vietnamese economy it considers some of the factors that have contributed to growth over the last decade and also some of the policy options for the rest of the decade.
    Date: 2016–03
  99. By: Takuji Komatsuzaki
    Abstract: This paper explores the macroeconomic effects of improving public infrastructure in the Philippines. After benchmarking the Philippines relative to its neighbors in terms of level of public capital and quality of public infrastructure, and public investment efficiency, it uses model simulations to assess the macroeconomic implications of raising public investment and improving public investment efficiency. The main results are as follows: (i) increasing public infrastructure investment results in sustained gains in output; (ii) the effects of improving public investment efficiency are substantial; and (iii) deficit-financed increases in public investment lead to higher borrowing costs that constrain output increases over time, underscoring the importance of revenue mobilization.
    Keywords: Infrastructure;Philippines;Asia and Pacific;Public Investment Efficiency, investment, public investment, tax, stock, capital stock, Infrastructures,
    Date: 2016–02–29
  100. By: Heinemann, Friedrich; Moessinger, Marc-Daniel; Yeter, Mustafa
    Abstract: We implement a meta-regression-analysis for the budgetary impact of numerical fiscal rules. Based on 30 studies published in the last decade, we offer a consensus estimate with respect to the level of statistical significance, provide suggestive evidence for the effect size, and identify study features of relevance for the measured impact of fiscal rules. Overall, the results document a constraining impact of rules. However, this impact is weakened if refined identification strategies are employed. Moreover, the results provide evidence for a publication bias in which journals are more likely to report constraining and statistically significant effects compared to working papers. We further provide recommendations for future research on the budgetary impact of fiscal rules.
    Keywords: fiscal rules,meta-regression-analysis,public finances
    JEL: H50 H6 H63
    Date: 2016
  101. By: Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Centre National de la Recherche Scientifique - Université Lille 1 - Sciences et technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS - Centre National de la Recherche Scientifique); Jamel Saadaoui (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles.
    Keywords: Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate
    Date: 2016–03–23
  102. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the National Interagency Community Reinvestment Conference, Los Angeles, California, February 10, 2016
    Date: 2016–02–10
  103. By: David de la Croix; Matthias Doepke; Joel Mokyr
    Abstract: In the centuries leading up to the Industrial Revolution, Western Europe gradually pulled ahead of other world regions in terms of technological creativity, population growth, and income per capita. We argue that superior institutions for the creation and dissemination of productive knowledge help explain the European advantage. We build a model of technological progress in a pre-industrial economy that emphasizes the person-to-person transmission of tacit knowledge. The young learn as apprentices from the old. Institutions such as the family, the clan, the guild, and the market organize who learns from whom. We argue that medieval European institutions such as guilds, and specific features such as journeymanship, can explain the rise of Europe relative to regions that relied on the transmission of knowledge within extended families or clans.
    JEL: E02 J24 N10 N30 O33 O43
    Date: 2016–03
  104. By: Vessela Daskalova; Nicolaas J. Vriend; ;
    Abstract: The use of coarse categories is prevalent in various situations and has been linked to biased economic outcomes, ranging from discrimination against minorities to empirical anomalies in financial markets. In this paper we study economic rationales for categorizing coarsely. We think of the way one categorizes one's past experiences as a model of the world that is used to make predictions about unobservable attributes in new situations. We first show that coarse categorization may be optimal for making predictions in stochastic environments in which an individual has a limited number of past experiences. Building on this result, and this is a key new insight from our paper, we show formally that cases in which people have a motive to coordinate their predictions with others may provide an economic rationale for categorizing coarsely. Our analysis explains the intuition behind this rationale.
    Keywords: categorization, prediction, decision-making, coordination, learning.
    JEL: D83 C72
    Date: 2014–06–30
  105. By: Pontus Rendahl; ; ;
    Abstract: This paper shows that large fiscal multipliers arise naturally from equilibrium unemployment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation.
    Keywords: Fiscal multiplier, liquidity trap, zero lower bound, unemployment inertia.
    Date: 2014–05–13
  106. By: Sebastiano Fadda (dpt. Economia)
  107. By: Markus Demary (Cologne Institute for Economic Research); Joanna Hornik (College of Europe, Department of European Economic Studies); Gibran Watfe (College of Europe, Department of European Economic Studies)
    Abstract: The proposal for a European Capital Markets Union (CMU) carries large potential economic benefits from enhancing the financing possibilities for Small and Medium-Sized Enterprises (SMEs). By deepening the capital markets and strengthening crossborder integration, the European Commission hopes to stimulate economic growth and boost employment. In this paper, we discuss to what extent these goals can be achieved, in light of the complex business environment of European SMEs. We outline the different types of SMEs in terms of their financing structures as well as the pervasive differences across the EU, concluding that any policy approach must take into account the diversity of the companies’ financing needs and the market realities in the Member States. We argue that the CMU is likely to have a heterogeneous impact, with some types of SMEs and certain regions gaining more than others.
    Keywords: Capital Markets Union, SME financing, European integration
    JEL: O16 F21 E61 G32
    Date: 2016–03

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