nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒04‒16
eighty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Dynastic Altruism, Population Growth, and Economic Prosperity By Bharat Diwakar; Gilad Sorek
  2. Emisiones Netas de Carbono Provenientes de la Deforestación en Bolivia durante 1990-2000 y 2000-2010: Resultados de un modelo de “Contabilidad de Carbono” By Lykke E. Andersen; Anna Sophia Doyle; Susana del Granado; Juan Carlos Ledezma; Agnes Medinaceli; Montserrat Valdivia; Diana Weinhold
  3. Spanish real wages in the Northern-Western European mirror, 1500-1800. On the timings and magnitude of the Little Divergence in Europe. By Ernesto López Losa; Santiago Piquero Zarauz
  4. Why Has Labor Not Demanded Guaranteed Employment? By Jon D. Wisman; Michael Cauvel
  5. Public Finances Today: Lessons Learned and Challenges Ahead By Salvador Barrios; Serena Fatica; Diego Martinez; Gilles Mourre; Ferhan Salman; Elva Bova; Christina Kolerus; Jules S. Tapsoba; Gilles Mourre; Nikola Altiparmakov; Lukas Reiss; Mariano Bosch; Angel Melguizo Esteso; Carmen Pages-Serra; Renee Philip; Boris Cournède; Antoine Goujard; Álvaro Pina; Wolfgang Merz; Martin Larch; Kristin Magnusson Bernard; Balint Tatar; Nicola Giammarioli; Cristina Checherita-Westphal; Alexander Klemm; Paul Viefers; Pedro Hinojo; Giovanni Ricco; Giovanni Callegari; Jacopo Cimadomo; Enrico D’Elia; Filippo Pericoli; Reda Cherif; Fuad Hasanov; Ernesto Rezk; Diego Martínez López; Anna Kalbhenn; Livio Stracca; Luiz de Mello; George Hondroyiannis; Dimitrios Papaoikonomou; Jan Babecký; Richard Morris; Pietro Rizza; Vladimir Borgy; Kirstine Eibye Brandt; Manuel Coutinho Pereira; Anna Jablecka; Javier J. Pérez; Lukas Reiss; Morten Rasmussen; Karim Triki; Lara Wemens; David Heald; Ludovít Ódor; Tomasz Jedrzejowicz; Marcin Kitala; Xavier Debrun; Tidiane Kinda; Geert Langenus; Fabrizio Balassone; Sandro Momigliano; Marzia Romanelli; Pietro Tommasino; Teresa Ter-Minassian; Marco Buti; Daniele Franco; Karsten Wendorff
  6. Should Central Banks Target Investment Prices? By Susanto Basu; Pierre De Leo
  7. Long-Term Unemployment in Japan By Saori Naganuma; Yosuke Uno
  8. Household Portfolios in a Secular Stagnation World: Evidence from Japan By Kosuke Aoki; Alexander Michaelides; Kalin Nikolov
  9. Securitization and Aggregate Investment Efficiency By Afrasiab Mirza; Eric Stephens
  10. Currency turmoil in an unbalanced world economy By Michel Aglietta; Virginie Coudert
  11. Fiscal Forecasts at the FOMC: Evidence from the Greenbooks By Dean Croushore; Simon van Norden
  12. A composite leading cycle indicator for Uruguay By Pablo Galaso; Sandra Rodríguez
  13. Limited Liability, Asset Price Bubbles and the Credit Cycle: The Role of Monetary Policy By Jakub Mateju; Michal Kejak
  14. SME Financing in the EU: Moving beyond one-size-fits-all By Markus Demary; Joanna Hornik; Gibran Watfe
  15. Nonlinear Pass-Through of Exchange Rate Shocks on Inflation: A Bayesian Smooth Transition VAR Approach By Hernán Rincón-Castro; Norberto Rodríguez-Niño
  16. Modelling the Impacts of a Cut to Company Tax in Australia By J.M. Dixon; J. Nassios
  17. All's Well that Ends Well? Resolving Iceland's Failed Banks By Baldursson, Fridrik Mar; Portes, Richard; Thorlaksson, Eirikur Elis
  18. Inheritance and wealth inequality: Evidence from population registers By Elinder, Mikael; Erixson, Oscar; Waldenström, Daniel
  19. Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds By Patty Duijm; Sophie Steins Bisschop
  20. A comparative analysis of developments in central bank balance sheet composition By Christiaan Pattipeilohy
  21. Sustainable international monetary policy cooperation By Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
  22. Beyond carbon pricing: the role of banking and monetary policy in financing the transition to a low-carbon economy By Emanuele Campiglio
  23. Investment and forward-looking monetary policy: A Wicksellian solution to the problem of indeterminacy By Stephen McKnight
  24. Probably too little, certainly too late. An assessement of the Juncker investment plan By Mathilde Le Moigne; Francesco Saraceno; Sebastien Villemot
  25. Fiscal austerity in ambiguous times By Ferrière, Axelle; Karantounias, Anastasios G.
  26. Non-Stationary Dynamic Factor Models for Large Datasets By Barigozzi, Matteo; Lippi, Marco; Luciani, Matteo
  27. The Impact of Unconventional Monetary Policy on Firm Financing Constraints : Evidence from the Maturity Extension Program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  28. Chargebacks: another payment card acceptance cost for merchants By Hayashi, Fumiko; Markiewicz, Zach; Sullivan, Richard J.
  29. Revisiting Gertler-Gilchrist Evidence on the Behavior of Small and Large Firms By Kudlyak, Marianna; Sanchez, Juan M.
  30. International shocks and domestic prices: how large are strategic complementarities? By Amiti, Mary; Itskhoki, Oleg; Konings, Jozef
  31. Organizational complexity and balance sheet management in global banks By Cetorelli, Nicola; Goldberg, Linda S.
  32. A Review of the Circular Economy and its Implementation By Heshmati, Almas
  33. Inheritance and Wealth Inequality: Evidence from Population Registers By Elinder, Mikael; Erixson, Oxcar; Waldenström, Daniel
  34. The Mechanism of Inflation Expectation Formation among Consumers By Abe, Naohito; Ueno, Yuko
  35. Structure Depreciation and the Production of Real Estate Services By Yoshida, Jiro
  36. Revisiting Sovereign Bond Spreads’Determinants in the EMU By António Afonso,; Manuel Reis
  37. Asset composition of the Philippines' universal and commercial banks : monetary policy or self-discipline? By Kashiwabara, Chie
  38. Empirical Assessment of the Impact of Monetary Policy Communication on the Financial Market By Masahiko Shibamoto
  39. Quantitative Easing Policy, Exchange Rates and Business Activity by Industry in Japan from 2001-2006 By Hiroyuki Ijiri; Yoichi Matsubayashi
  40. "The Empirics of Long-Term US Interest Rates" By Tanweer Akram; Huiqing Li
  41. A Stable 4% Inflation Could Get Canadians One Half Million More Jobs By Pierre Fortin
  42. Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung By Felix Bierbrauer
  43. Subjective wellbeing impacts of national and subnational fiscal policies By Arthur Grimes; Judd Ormsby; Anna Robinson; Siu Yuat Wong
  44. Fiscal and Financial Crises By Michael D. Bordo; Christopher M. Meissner
  45. The Billion Prices Project: Using Online Prices for Measurement and Research By Alberto Cavallo; Roberto Rigobon
  46. International Shocks and Domestic Prices: How Large Are Strategic Complementarities? By Mary Amiti; Oleg Itskhoki; Jozef Konings
  47. Quantitative Models of Sovereign Debt Crises By Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye
  48. Market Reforms in the Time of Imbalance By Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi
  49. Are Online and Offine Prices Similar? Evidence from Large Multi-Channel Retailers By Alberto F. Cavallo
  50. The Deposits Channel of Monetary Policy By Itamar Drechsler; Alexi Savov; Philipp Schnabl
  51. Differences in Quarterly Utilization-Adjusted TFP by Vintage, with an Application to News Shocks By Eric R. Sims
  52. Bringing all Chileans on board By Eduardo Olaberria
  53. Monetary and Fiscal Policy Interactions: Leeper (1991) Redux By Guido Ascari; Anna Florio; Alessandro Gobbi
  54. The Italian economic decline in a Kaldorian theoretical perspective By Guglielmo Forges Davanzati; Rosario Patalano; Guido Traficante
  55. Discussion of "Financial Intermediation in a Global Environment" (Victoria Nuguer). By Kollmann, Robert
  56. Modelling the Clustering Volatility of India's Wholesales Price Index and the Factors Affecting it By Azimi, Mohammad Naim
  57. Public spending, monetary policy and growth: Evidence from EU countries By Papaioannou, Sotiris
  58. Public investment multipliers in EU countries: Does the efficiency of public sector matter? By Papaioannou, Sotiris
  59. Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model By Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  60. How accounting accuracy affects DSGE models By Kim, Minseong
  61. Human Capital and Innovation in a Monetary Schumpeterian Growth Model By Angus C., Chu; Lei, Ning; Dongming, Zhu
  62. Turning a blind eye to policy prescriptions. Exploring the sources of procyclical fiscal behavior at subnational level By Meloni, Osvaldo
  63. An Economic and Stakeholder Analysis for the Design of IPP Contracts for Wind Farms By Salci, Sener; Jenkins, Glenn
  64. Reservation Wages and the Wage Flexibility Puzzle By Felix Koenig; Alan Manning; Barbara Petrongolo
  65. Endogenous Stock Price Fluctuations with Dynamic Self-Control Preferences By Airaudo, Marco
  66. How can it work? On the impact of quantitative easing in the Eurozone By Saraceno, Francesco; Tamborini , Roberto
  67. How Do Exchange Rate Movements Affect Stock Prices? The Case of Turkey By Fela Özbey; Erhan Ä°ÅŸcan; Mehmet Fatih TraÅŸ
  68. Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan By Mathilde Le Moigne; Francesco Saraceno; Sébastien Villemot
  69. L’évolution en Europe du profil des ménages propriétaires pendant la crise By Pierre Madec; Sabine Le Bayon
  70. Crisis and Recovery in the German Economy: The Real Lessons By Servaas Storm; C.W.M. Naastepad
  71. The Cyclically Adjusted Budget: History and Exegesis of a Fateful Estimate By Orsola Costantini
  72. Veiled Repression: Mainstream Economics, Capital Theory,and the Distributions of Income and Wealth By Lance Taylor
  73. An Economical Business-Cycle Model By Pascal Michaillat; Emmanuel Saez
  74. Inequality, the Great Recession, and Slow Recovery By Barry Z. Cynamon; Steven M. Fazzari
  75. Government and Central Bank Interaction under uncertainty : A Differential Games Approach By Engwerda, Jacob; Mahmoudinia, D.; Isfahani, Rahim Dalali
  76. Central Banks' Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  77. Interview of Professor W. Erwin Diewert By ,; Diewert, W. Erwin; Fox, Kevin J.
  78. Parameter Bias in an Estimated DSGE Model:Does Nonlinearity Matter? By Yasuo Hirose; Takeki Sunakawa
  79. Consumption Taxes and Divisibility of Labor under Incomplete Markets By Tomoyuki Nakajima; Shuhei Takahashi
  80. Risk Shocks in a Small Open Economy By Caterina Mendicino; Yahong Zhang
  81. The institutional underpinnings of the prospective euro adoption in Poland By Rapacki, Ryszard
  82. Countercyclical versus Procyclical Taylor Principles By Chatelain, Jean-Bernard; Ralf Kirsten
  83. Computation of solutions to dynamic models with occasionally binding constraints. By Holden, Tom
  84. 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
  85. After the financial crisis: Reforms and reform options for finance, regulation and institutional structure By Herr, Hansjörg
  86. Labor selection over the business cycle: An empirical assessment By Hochmuth, Brigitte; Gartner, Hermann; Kohlbrecher, Britta; Merkl, Christian

  1. By: Bharat Diwakar; Gilad Sorek
    Abstract: We show that non-linear dynastic altruism toward future generations yields non-monotonic relation between population growth and economic prosperity, which is polynomial in general. The exact shape of this non-monotonic relation depends on the concavity of parental altruistic utility. Hence, this work contributes to the recent line of modified R&D-based growth models, aimed to align theory with empirical evidence on non-linear relation between population growth and economic prosperity.
    Keywords: Dynastic Altruism; Population Growth; Technological Progress
    JEL: O31 O40
    Date: 2016–03
  2. By: Lykke E. Andersen (Institute for Advanced Development Studies); Anna Sophia Doyle (Institute for Advanced Development Studies); Susana del Granado (Institute for Advanced Development Studies); Juan Carlos Ledezma (Conservation International - Bolivia); Agnes Medinaceli (Institute for Advanced Development Studies); Montserrat Valdivia (Institute for); Diana Weinhold (London School of Economics and Political Science)
    Abstract: Este documento de investigación estima las emisiones netas de carbono provenientes del cambio en el uso de tierra en Bolivia durante los periodos 1990 – 2000 y 2000 – 2010 utilizando un modelo de contabilidad de carbono que incluye deforestación, degradación de bosques, regeneración de bosques, descomposición y recomposición gradual de carbono, así como la heterogeneidad de los contenidos de carbono sobresuelo y bajo-tierra en una grilla de 10 por 10 km. El enfoque permite elaborar mapas detallados de emisiones netas por región y por tipo de vegetación. Se estima que las emisiones netas de CO2 provenientes del cambio en el uso de tierra en Bolivia incrementaron de 65 millones de toneladas por año durante 1990-2000 a 93 millones de toneladas por año durante la década del 2000-2010, aproximadamente. Se encontró que las emisiones de CO2 per cápita y por unidad de PIB se mantienen estables entre los periodos señalados. Sin embargo, si se considera la evidencia de un incremento de la biomasa en bosques maduros, las emisiones netas de CO2 descienden hasta cerca de cero.
    Keywords: Deforestación, regeneración de bosques, emisiones de carbono, modelo de contabilidad de carbono, Bolivia
    JEL: Q23 Q24
  3. By: Ernesto López Losa (Universidad del País Vasco/Euskal Herriko Unibertsitatea, Spain); Santiago Piquero Zarauz
    Abstract: The aim of this paper is twofold. First, to present a new estimation of real wages for Early Modern Spain with regard to a subsistence line -understood as a theoretical minimum of consumption necessary to meet basic human needs and to sustain an active life. Second, to contribute, with new evidence, to the debate on the economic divergence before the Industrial Revolution. In broad terms, our results describe a general picture of low real wages in Spain in the long run, although there are regional variations in levels and timings that challenge previous perceptions, particularly in the case of urban Castile. In terms of international comparisons, our data suggests different chronologies and magnitudes of the Spanish divergence. As we attempt to demonstrate, two issues conditioned the dimension of the gap on real wages between Spain and the European North-Western core, as displayed in the recent literature. The first is related to the available Spanish evidence; the second deals with some methodological choices in the composition of the subsistence baskets –namely, the “oatmeal effect’. The question we discuss here is whether the Spanish Little Divergence was as great and early as it has been suggested; or, turning it around, whether the European North-west was, in respect of real wages, so exceptional before 1800. Calculations will show that the divergence did not appear clearly until the early 18th century, and that North-western European real wages for labourers were not that far from the bare subsistence line as they appeared to be. Our paper provides some different responses to the issue of the timing of the Spanish divergence and questions the conventional wisdom on its magnitude.
    Keywords: Early Modern Europe, Little Divergence, real wages, subsistence ratios, history of wages and prices.
    JEL: N01 N30 N33 E32 J31
    Date: 2016–03
  4. By: Jon D. Wisman; Michael Cauvel
    Abstract: Unemployment has almost always been traumatic for its victims. In earlier times, it threatened extreme privation, if not starvation. Still today, it dramatically decreases its victims’ standard of living, human capital, social standing, and self-respect. It is associated with poorer health, suicide, and family dissolution. Unemployment also entails considerable costs to society such as lost output, increased crime, decayed neighborhoods, and when extreme, political unrest. Why, then, is it tolerated? Why, especially, have workers and their advocates not demanded that employment be guaranteed to all? This article explores why what has always been foremost to workers’ interests – security of employment -- has not remained one of labor’s foremost demands. It finds that the reasons have been complex and varied over time, including degrading work houses, workers’ focus on alternatives to capitalism, the fact that unemployment typically is suffered by a small portion of the workforce, the local character of most worker demands, the eventual provision of safety nets, and most importantly, the dominance of ideology that blames workers for their unemployment or holds that full employment is impossible to attain.
    Keywords: right to employment, employer of last resort, unemployment, worker struggles, ideology
    JEL: E24 J38 H10 N30
    Date: 2016
  5. By: Salvador Barrios (European Commission); Serena Fatica (European Commission); Diego Martinez (Universidad Pablo de Olavide); Gilles Mourre (European Commission); Ferhan Salman (International Monetary Fund); Elva Bova (International Monetary Fund); Christina Kolerus (International Monetary Fund); Jules S. Tapsoba (International Monetary Fund); Gilles Mourre (European Commission); Nikola Altiparmakov (Fiscal Council - Republic of Serbia); Lukas Reiss (Oesterreische Nationalbank); Mariano Bosch (Inter-American Development Bank); Angel Melguizo Esteso (OECD); Carmen Pages-Serra (Inter-American Development Bank); Renee Philip (New Zealand Treasury); Boris Cournède (OECD); Antoine Goujard (OECD); Álvaro Pina (OECD); Wolfgang Merz (Federal Ministry of Finance – Berlin); Martin Larch (European Commission); Kristin Magnusson Bernard (European Commission); Balint Tatar (European Commission); Nicola Giammarioli (European Stability Mechanism); Cristina Checherita-Westphal (European Central Bank); Alexander Klemm (International Monetary Fund); Paul Viefers (Deutsches Institut für Wirtschaftsforschung - Berlin); Pedro Hinojo (Ministry of Economy and Competitiveness, Spain); Giovanni Ricco (London Business School); Giovanni Callegari (European Central Bank); Jacopo Cimadomo (European Central Bank); Enrico D’Elia (Ministero dell'Economia e delle Finanze); Filippo Pericoli (Ministero dell'Economia e delle Finanze); Reda Cherif (International Monetary Fund); Fuad Hasanov (International Monetary Fund); Ernesto Rezk (National University of Córdoba, Argentina); Diego Martínez López (Universidad Pablo de Olavide, Sevilla); Anna Kalbhenn (European Central Bank); Livio Stracca (European Central Bank); Luiz de Mello (OECD); George Hondroyiannis (Bank of Greece); Dimitrios Papaoikonomou (Bank of Greece); Jan Babecký (Czech National Bank); Richard Morris (ECB); Pietro Rizza (Banca d’Italia); Vladimir Borgy (Banque de France); Kirstine Eibye Brandt (Danmarks Nationalbank); Manuel Coutinho Pereira (Banco de Portugal); Anna Jablecka (Narodowy Bank Polski); Javier J. Pérez (Banco de España); Lukas Reiss (Oesterrichische Nationalbank); Morten Rasmussen (Danmarks Nationalbank); Karim Triki (Banque de France); Lara Wemens (Banco de Portugal); David Heald (University of Aberdeen); Ludovít Ódor (Council for Budget Responsibility, Bratislava); Tomasz Jedrzejowicz (Narodowy Bank Polski); Marcin Kitala (Narodowy Bank Polski); Xavier Debrun (International Monetary Fund); Tidiane Kinda (International Monetary Fund); Geert Langenus (National Bank of Belgium); Fabrizio Balassone (Banca d'Italia); Sandro Momigliano (Banca d'Italia); Marzia Romanelli (Banca d'Italia); Pietro Tommasino (Banca d'Italia); Teresa Ter-Minassian (Inter-American Development Bank); Marco Buti (European Commission); Daniele Franco (Ragioneria Generale dello Stato); Karsten Wendorff (Deutsche Bundesbank)
    Abstract: The volume collects the essays presented at the 16th Workshop on Public Finance organised by Banca d’Italia in Perugia from 3 to 5 April 2014. The workshop had two main objectives: (i) examining the changes that public policies should undertake in the coming years to adapt to the challenging new environment; (ii) assessing policy responses to the crisis. In many countries the recent crisis accelerated pre-existing trends and made even more urgent a rethinking of the tax and welfare systems. The workshop contributed to this reassessment offering insights on the consequences of specific reforms carried out in Europe and elsewhere. The reaction to the euro-area sovereign debt crisis included fiscal adjustments as well as institutional reforms. In the workshop, theoretical and empirical works examined timing, effectiveness and composition of the fiscal consolidations carried out, as well as the recent reform of EU governance. The first session focused on the effects of both tax and expenditure policies on tax rates, work related tax expenditures, labor markets, the overall economy and pension reforms. Budgetary adjustments were at the core of the second session. Factors conducive to a successful exit from IMF official assistance, impact of government’s payment delays, propagation of government spending shocks, debt dynamics, the effects on public opinion of fiscal policy and fiscal multipliers were all given space and attention. The third session concentrated on recent changes in fiscal rules, fiscal councils and the possible establishment of an euro-area fiscal union. The panel discussion focused on the progress made and the characteristics of existing fiscal rules.
    Keywords: arrears, accounts payable, caribbean, expenditure, fiscal policy, fiscal adjustment, financial crises, fiscal measures, fiscal policy uncertainty, fiscal reaction function, fiscal rules, fiscal transmission mechanism, government spending shock, imf lending, impact of public finance, informality, labor market, latin america, macroeconomic, national saving, public debt, public payment delays, impulse responses, payg vs. funded rates of return, pension privatization, pensions, revenue, var, unemployment gaps
    JEL: C32 E6 E31 E60 E61 E62 D80 F33 G01 H6 H8 H60 H61 H62 H55 H63 H81 J08
    Date: 2015–03
  6. By: Susanto Basu (Boston College; NBER); Pierre De Leo (Boston College)
    Abstract: Yes, they should. Central banks nearly always state explicit or implicit inflation targets in terms of consumer price inflation. If there are nominal rigidities in the pricing of both consumption and investment goods and if the shocks to the two sectors are not identical, then monetary policy cannot stabilize inflation and output gaps in both sectors. Thus, the central bank faces a tradeoff between targeting consumption price inflation and investment price inflation. In this setting, ignoring investment prices typically leads to substantial welfare losses because the intertemporal elasticity of substitution in investment is much higher than in consumption. In our calibrated model, consumer price targeting leads to welfare losses that are at least three times the loss under optimal policy. A simple rule that puts equal weight on stabilizing consumption and investment price comes close to replicating the optimal policy. Thus, GDP deflator targeting is not a good approximation to optimal policy. We conclude that significant welfare gains can be achieved if central banks shift to targeting a weighted average of consumer and investment price inflation, although this would require a major change in current central banking practice.
    Keywords: Inflation Targeting; Investment-Specific Technical Change; Investment Price Rigidity; Optimal Monetary Policy
    JEL: E52 E58 E32 E31
    Date: 2016–03–25
  7. By: Saori Naganuma (Bank of Japan); Yosuke Uno (Bank of Japan)
    Abstract: Japan's unemployment rate is now historically low, but long-term unemployment has been slow to decline. Long-term unemployment in Japan, unlike that in the United States, is biased towards "young adult men." This is partly because with shifts in labor demand across industries and employment status, young adult men retrenched by manufacturers have been unable to find the same manufacturing occupations and thus remain jobless for longer periods. Moreover, many in the generation represented by the so-called "freeze in hiring period" have been able to spend more time looking for work due to support from family members. Although the impact of the long-term unemployed on nominal wages is limited, it should be noted that future income levels of the long-term unemployed may remain low, and that the lack of human capital accumulation may exert a negative impact on the growth rate.
    Keywords: Long-term unemployment; Mismatch; Nominal wages
    JEL: E24 J64
    Date: 2016–04–13
  8. 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
  9. 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
  10. By: Michel Aglietta; Virginie Coudert
    Abstract: The world is once again under threat of currency turmoil ignited by a vigorous appreciation of the dollar against all other currencies. This is the harbinger of another long cycle which has been the pattern of exchange rates since the fall of the Bretton Woods system in 1971. Because dollar cycles are driven by momentum dynamics disconnected from fundamentals, they are likely to distort real effective exchange rates between major currencies. The dollar appreciation phase may also wreak havoc in the financial systems of emerging countries that are heavily indebted in dollars. In the present state of the world economy, the prospect of a new dollar cycle is particularly worrisome since most countries, far from deleveraging after the financial crisis, have massively increased their debt relative to GDP in the non-financial sectors. The rise in dollar debt is due to subpar income growth in the world economy which has precluded deleveraging of the already high level of debt reached in 2007 on the one hand, and to the status of the dollar as the de facto exclusive supplier of international liquidity on the other hand. Because US monetary policy is not bound by any international rules, it has supplied liquidity on its own terms, flooding the world with cheap money in order to revive domestic consumption in the US. The catalyst for renewed dollar appreciation has been the divergence in monetary policy between the US on the one side, Japan until early 2013, and the euro area until late 2014 on the other. Monetary policies in these latter countries, working counter to the US before a recent change in course, have created deflation risks that the new trend of dollar appreciation compounded with the slump in the price of oil is expected to correct, spreading the recovery worldwide. However, this is the benign scenario. History would suggest the possibility of a much more unpleasant outcome. Misalignment in exchange rates is a repeated feature of dollar cycles, as much as unsustainable imbalances in the balance of payments. Currently, the gap between US long term interest rates and similar rates in the euro area and Japan is large and expected to widen. Nevertheless, the market’s expectations of future short-term interest rates up to end-2017 are much lower than the Fed’s. If the market expectations are right, this means that the US recovery will be hurt by the dollar turning from being cheap to expensive. If the US recovery stalls, this will mean that secular stagnation will be with us for an indefinite time.
    Keywords: dollar;exchange rate
    JEL: E52
    Date: 2015–07
  11. By: Dean Croushore; Simon van Norden
    Abstract: This paper uses a new data set of fiscal policy forecasts and estimates prepared for the FOMC to understand how they have influenced U.S. monetary policy. We find limited evidence of bias in the Fed Staff’s fiscal forecasts and that these forecasts contain useful information beyond that in the CBO’s forecasts. Forecast errors for the fiscal variables have been only weakly correlated with forecast errors for inflation and output growth, but those for the structural surplus are much more highly correlated with those for the unemployment rate. Some fiscal variables can also account for a significant fraction of the “exogenous” changes in the federal funds rate target studied by Romer and Romer (2004).
    Keywords: fiscal policy, deficits, forecasting, FOMC, Greenbook,
    JEL: E62 H68
    Date: 2016–04–08
  12. By: Pablo Galaso (Universidad de la República); Sandra Rodríguez (Universidad de la República)
    Abstract: This study estimates a composite leading business cycle indicator for the Uruguayan economy following the methodology of The Conference Board. Prediction is based on the analysis of multiple series that have a leading relationship to the Industrial Production Index, which is used as the reference variable of the overall economic activity. Once selected, these series are aggregated into a single composite indicator. Our index covers a 20-year period (from 1994 to 2013). It includes variables covering diverse aspects of economic activity and reaches to advance the two turning points occurred in Uruguay during that period.
    Keywords: leading indicator, business cycle, turning points, Uruguay.
    JEL: C53 E32 E37
    Date: 2016–02–01
  13. 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
  14. 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
  15. By: Hernán Rincón-Castro; Norberto Rodríguez-Niño
    Abstract: Determining the exchange rate pass-through on inflation is a necessity for central banks as well as for firms and households. This is an apparently easy and intuitive task, but it faces high complexity and uncertainty. This paper examines the short and long-term impact of an exchange rate shock on inflation along the distribution chain in the presence of endogeneity, nonlinearity and asymmetry. The econometric model is a smooth transition autoregressive vector estimated by Bayesian methods. This incorporates a model of pricing and the endogenous nature of the exchange rate pass-through (PT). The paper uses monthly data from Colombia for the period 2002 to 2015. The main findings are that PT is incomplete, endogenous and then changes over time, nonlinear and asymmetric in the short and long terms to the state of the economy (i.e., PT is nonlinear state-dependent) and to exchange rate shocks. Findings showed that historically the accumulated PT on inflation of import prices rises from 20% in the first month of the exchange rate shock to a maximum of around 66% in the first year. The equivalent figures on the inflation of producer goods go from 13% to 52%; on the inflation of imported consumer goods from 6% to 48%, and on the CPI inflation from 4% to 30%. At four years, the respective figures for accumulated PT are 98%, 84%, 94% and 80%, but uncertainty about these estimates increases rapidly over time.
    Keywords: Exchange rate pass-through, pricing along the distribution chain, endogeneity, nonlinearity, asymmetry, logistic smooth transition VAR (LST-VAR), Bayesian approach
    JEL: F31 E31 E52 C51 C52
    Date: 2016–03–02
  16. By: J.M. Dixon; J. Nassios
    Abstract: We investigate the impact of a cut to the company tax rate using a miniature version of the Vic-Uni computable general equilibrium model of the Australian economy with additional detail on ownership of physical capital. Because of Australia's system of dividend imputation, a change to the company tax rate only affects the final post-tax rate of return for foreign investors. Therefore a cut to the company tax rate would transfer government revenue to foreigners, and add to pressure on government to reduce spending or to raise personal taxes. We concur with the Treasury's finding that a cut to the company tax rate would attract more foreign investment to Australia, making workers more productive and increasing wages and output. However, there is a lag between new investment activity and capital growth, and a large share of future company profits will accrue to foreign investors. We also find that increased wages will reduce returns to domestically owned capital. While the impact on national production, as measured by GDP, will be positive, this is not a suitable measure of national benefit. The right indicator of national benefit is the impact of a company tax rate cut on national income and we find that this will fall.
    Keywords: Forecasting, CGE models, profit tax, labour markets
    JEL: C53 C58 D58 E27 J23 O41
    Date: 2016–04
  17. 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
  18. 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
  19. By: Patty Duijm; Sophie Steins Bisschop
    Abstract: Countercyclical long-term investment strategies of insurance companies and pension funds (ICPFs) can support the stability of the financial system. Yet there is limited understanding of how ICPFs invest during market shocks, such as the global financial crisis and the European sovereign debt crisis. The intention of this paper is to fill that lacuna by investigating Dutch ICPFs' equity and sovereign bond portfolios. A first analysis shows that while ICs massively sold equities during the crisis, PFs kept buying equities as markets tumbled. Results from our regression analysis over a longer time horizon suggest procyclical behaviour by ICs, while for PFs we do not find evidence for procyclical or countercyclical investment behaviour. Moreover, both ICs and PFs sold their affected sovereign bonds prior to a rating downgrade. This could be considered as destabilising at a macro-level, as it may accelerate the deteriorating financing conditions of the affected countries.
    Keywords: microprudential; macroprudential; investment behaviour; pension funds; insurance companies; procyclicality; Solvency II; global financial crisis
    JEL: E44 G01 G11 G22 G28
    Date: 2015–12
  20. By: Christiaan Pattipeilohy
    Abstract: In this paper we analyse developments in the composition of central bank balance sheets for a large set of central banks in a unified framework. Since 2007, central banks in advanced economies have experienced pronounced changes in balance sheet composition as a consequence of unconventional monetary policy measures. In addition, we document a convergence in balance sheet composition from 2007 until 2009, as the initial crisis response was fairly homogeneous across advanced economies, mostly driven by financial stability concerns. However, since 2009 design of balance sheet policies has been more diverse, reflecting diverging policy challenges across regions. By contrast, balance sheets of central banks in emerging market economies have remained broadly unchanged in terms of composition in the period under review.
    Keywords: Central bank balance sheet; unconventional monetary policy; dissimilarity analysis
    JEL: E40 E42 E50 E58
    Date: 2016–04
  21. By: Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
    Abstract: We provide new insight on international monetary policy cooperation using a two-country model based on Benigno and Benigno (2006). Assuming symmetry, save for the volatility of (markup) shocks, we show that an incentive feasibility problem exists between the policymakers across national borders: The country faced with a relatively more volatile markup shock has an incentive to deviate from an assumed Cooperation regime to one with Noncooperation. More generally, a similar result obtains if countries differ in size. This motivates our study of a history-dependent Sustainable Cooperation regime which is endogenously sustained by a cross-country, state-contingent contract between policymakers. Under Sustainable Cooperation, the responses of inflation and the output gap in both countries are different from those induced by the Cooperation and Noncooperation regimes reflecting the endogenous welfare redistribution between countries under the state-contingent contract. Such history-contingent welfare redistributions are supported by resource transfers affected through incentive-compatible variations in the terms of trade (or net exports). Such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality.
    Keywords: Monetary policy cooperation, Sustainable plans, Welfare
    JEL: E52 F41 F42
    Date: 2016–04
  22. 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
  23. By: Stephen McKnight (El Colegio de México)
    Abstract: Recent research has shown that forward-looking Taylor rules are subject to indeter- minacy in New Keynesian models with capital and investment spending. This paper shows that adopting a forward-looking Wicksellian rule that responds to the price level, rather than to inflation, is one potential remedy to the indeterminacy problem. This result is shown to be robust to variations in both the labor supply elasticity and the degree of price stickiness, the inclusion of capital adjustments costs, and if output also enters into the interest-rate feedback rule. Finally, it is shown that the superiority of Wicksellian rules over Taylor rules is not only confined to forward-looking policy, but also extends to both backward-looking and contemporaneous-looking specifications of the monetary policy rule.
    Keywords: equilibrium determinacy, interest-rate rules, monetary policy; investment; Taylor rule
    JEL: E22 E31 E52 E58
    Date: 2016–03
  24. 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
  25. 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
  26. 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
  27. 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
  28. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Markiewicz, Zach (Federal Reserve Bank of Kansas City); Sullivan, Richard J. (Federal Reserve Bank of Kansas City)
    Abstract: Although chargebacks are perceived as one of the major cost components for merchants to accept card payments, little research has been conducted on them. To fill that gap, this paper describes the current chargeback landscape by generating detailed statistics on chargebacks for signature-based transactions. Our data are from merchant processors, which, altogether, processed more than 20 percent of all signature-based transactions in the United States. For Visa and MasterCard transactions, chargebacks merchants receive are, on average, 1.6 basis points (bps) of sales number and 6.5 bps of sales value. About 70 to 80 percent of chargebacks are resolved as merchant liability. The most common chargeback reason is fraud, which accounts for about 50 percent of the total chargebacks. The merchant fraud loss rate is 0.7 bps in number and 2.6 bps in value. For American Express and Discover transactions, the total and fraud chargeback rates are somewhat lower. For all of the four networks, the total and fraud chargeback rates are significantly higher for card-not-present transactions than for card-present transactions. They also vary by merchant category. Our fraud results are generally consistent with other available fraud statistics.
    Keywords: Chargebacks; Fraud; Payment cards; Payments
    JEL: E42 L81
    Date: 2016–01–04
  29. By: Kudlyak, Marianna (Federal Reserve Bank of Richmond); Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: Gertler and Gilchrist (1994) provide evidence for the prevailing view that adverse shocks are propagated via credit constraints of small firms. We revisit the behavior of small versus large firms during the episodes of credit disruption and recessions in the sample extended to cover the 2007-09 economic crisis. We find that large firms'' short-term debt and sales contracted relatively more than those of small firms during the 2007-09 episode. Furthermore, the short-term debt of large firms also contracted relatively more in the previous tight money episodes if one takes into account the longer period that it takes for large firms’ debt to reach its post-shock trough. Our findings challenge the view that propagation of shocks in the economy takes place via credit constraints of small firms.
    Keywords: Small and Large firms; Credit Constrains; Propagation of Shocks; Leverage
    JEL: E32 E51 E52
    Date: 2016–03–30
  30. By: Amiti, Mary (Federal Reserve Bank of New York); Itskhoki, Oleg (Princeton University); Konings, Jozef (Katholieke Universitei Leuven, National Bank of Belgium)
    Abstract: How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firms’ price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm’s price response both to its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level data set for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The rare features of these data enable us to construct instrumental variables to address the simultaneity of price setting by competing firms. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 35 percent in response to the price changes of its competitors and with an elasticity of 65 percent in response to its own cost shocks. Furthermore, we find substantial heterogeneity in these elasticities across firms, with small firms showing no strategic complementarities and a complete cost pass-through, and large firms responding to their cost shocks and competitor price changes with roughly equal elasticities of around 50 percent. We show, using a tightly calibrated quantitative model, that these findings have important implications for shaping the response of domestic prices to international shocks.
    Keywords: strategic complementarities; pass-through; exchange rates; prices; mark-up
    JEL: D22 E31 F31
    Date: 2016–03–01
  31. By: Cetorelli, Nicola (Federal Reserve Bank of New York); Goldberg, Linda S. (Federal Reserve Bank of New York)
    Abstract: Banks have progressively evolved from being standalone institutions to being subsidiaries of increasingly complex financial conglomerates. We conjecture and provide evidence that the organizational complexity of the family of a bank is a fundamental driver of the business model of the bank itself, as reflected in the management of the bank’s own balance sheet. Using micro-data on global banks with branch operations in the United States, we show that branches of conglomerates in more complex families have a markedly lower lending sensitivity to funding shocks. The balance sheet management strategies of banks are very much determined by the structure of the organizations the banks belong to. The complexity of the conglomerate can change the scale of the lending channel for a large global bank by more than 30 percent.
    Keywords: global bank; liquidity; transmission; internal capital market; organization; complexity
    JEL: E44 F36 G32
    Date: 2016–03–01
  32. By: Heshmati, Almas (Jönköping International Business School (JIBS), Centre of Excellence for Science and Innovation Studies (CESIS),& Department of Economics, Sogang University.)
    Abstract: Circular economy (CE) is a sustainable development strategy that is being proposed to tackle urgent problems of environmental degradation and resource scarcity. CE’s 3R principles are to reduce, reuse and recycle materials. The principles account for a circular system where all materials are recycled, all energy is derived from renewables; activities support and rebuild the ecosystem and support human health and a healthy society and resources are used to generate value. This study is a review of the rapidly growing literature on CE covering its concept and current practices and assessing its implementation. The review also serves as an assessment of the design, implementation and effectiveness of CE related policies. It first presents the concept of CE and compares it with the current linear economy of taking materials, producing goods and disposing waste. It explains why it is imperative to move away from a linear economy towards regenerative sustainable industrial development with a closed loop. The paper then introduces current practices that have been introduced and discusses standards for the assessment of CE’s development and performance. The main focus here is on providing a summary of the data analysis of key CE indicators to give a picture of CE practices. Third, based on an analysis of literature, the paper identifies the underlying problems and challenges to CE in an entrepreneurial perspective. Finally, the review provides a conclusion on CE’s current development and gives policy suggestions for its future development as part of an entrepreneurial and innovative national level development strategy.
    Keywords: Circular economy; environmental policy; national development strategy; sustainable development strategy; entrepreneurial strategy
    JEL: E01 F18 H23 O44 Q50 Q53 Q55 Q58 R11
    Date: 2016–04–05
  33. By: Elinder, Mikael (Research Institute of Industrial Economics (IFN)); Erixson, Oxcar (Research Institute of Industrial Economics (IFN)); Waldenström, Daniel (Research Institute of Industrial Economics (IFN))
    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: D63 E21 H24
    Date: 2016–03–29
  34. By: Abe, Naohito; Ueno, Yuko
    Abstract: How do we determine our expectations of inflation? Because inflation expectations greatly influence the economy, researchers have long considered this question. Using a survey with randomized experiments among 15,000 consumers, we investigate the mechanism of inflation expectation formation. Learning theory predicts that once people obtain new information on future inflation, they change their expectations. In this regard, such expectations are the weighted average of prior belief and information. We confirm that the weight for prior belief is a decreasing function of the degree of uncertainty. Our results also show that monetary authority information affects consumers to a greater extent when expectations are updated. With such information, consumers change their inflation expectations by 37% from the average. This finding supports improvements to monetary policy publicity.
    Keywords: inflation expectations, Bayesian updating, rational expectation, randomized survey experiments
    JEL: E31 C81 D80
    Date: 2016–03
  35. By: Yoshida, Jiro
    Abstract: This study simultaneously analyzes the real estate production function and economic depreciation of structures by using data from Japan and the U.S. The estimated share of structure value is used to infer returns to scale, the land-structure substitution, and the structure depreciation rate. Real estate exhibits approximately constant returns in Japan, but decreasing returns in the U.S. Land and structures are substitutes in both countries. The land value ratio is 10% in Centre County, PA, but 60%-70% in Japan, reflecting the scarcity of land. The property depreciation rate is larger for newer and denser properties located further away from the downtown area in a smaller city. The property depreciation rate is smaller than the structure depreciation rate due to the effect of land and a survivorship bias. The bias-corrected structure depreciation rates significantly vary by property type and country: approximately 7% for residential properties and 10% for commercial properties in Japan in contrast with 1% for residential structures in the U.S. The median life-span of structures is 30-35 years for residential and 20-30 years for commercial properties in Japan.
    Keywords: capital consumption, returns to scale, elasticity of substitution, housing, commercial real estate, hedonic analysis, survivorship bias, demolition, Japan, USA
    JEL: R32 D24 E23
    Date: 2016–03
  36. By: António Afonso,; Manuel Reis
    Abstract: We study the determinants of 10-year sovereign bond yield spreads of 11 EMU member states, covering the lifetime of the euro, up until the end of 2014. Panel and SUR analyses coupled with qualitative variables show that the pricing of European debt has not been static across time and EMU countries, and market participants became increasingly aware of macroeconomic and fiscal fundamentals. Key Words : Sovereign bond spreads; panel data; EMU
    JEL: C23 E43 G12 H60 E62
    Date: 2016–04
  37. By: Kashiwabara, Chie
    Abstract: The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has improved its monetary policy measures since the 2000s. After rationalizing the country's banking sector since late-1990s, its monetary policy and the uniiversal/commercial banks' (UCBs) behavior in allocating their assets has changed since mid-2000s. Though further and more detailed studies are nesessary, based on the results of simple correlation analyses conducted in this paper suggest a possible mixture of the country's monetary policy and their own decision-making in asset allocations, instead of a "follow-through" attitude.
    Keywords: Monetary policy, Banks, Monetary policy measure, Universal and commercial banks, The Philippines
    JEL: E42 E52 G38
    Date: 2016–03
  38. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper proposes an empirical framework to explore the role of monetary policy communication. We develop an econometric methodology to impose restrictions for the identification of communication effects distinct from the effects of policy decisions. The empirical results support the hypothesis that both policy decision and communication factors are required to adequately capture the financial market reactions to monetary policy news. By applying a text mining approach focused on phrases that appear in press conferences on policy meeting days, we find that the communication factors identified are characterized by the policy intentions and preferences of the central bank.
    Keywords: Monetary policy communication, Policy surprise, Financial market, Event study, Text mining
    JEL: E52 E58 C30
    Date: 2016–04
  39. By: Hiroyuki Ijiri (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: This study empirically investigates the dynamic effect of Japan's quantitative easing (QE) policy on industry-specific business activity using a time-varying parameter model and monthly data spanning 2001-2006. This model yields more reliable and precise results than earlier fixed effects models using quarterly data. Its first major finding is that the effect of QE on yen-dollar exchange rates varied during the period and is most evident in its final phases, whereas its effect on stock prices persisted almost continuously. Second, QE's effect on Japan's real economy-that is, on industrial production- varies by industry and over time. Most notably, QE raised production via yen-dollar depreciation in the machinery sector (e.g. General and Transport machinery), Chemical, Nonferrous metal, and Iron and steel during its latter phases. This study is the first to investigate how unconventional monetary policy influences Japan's real economy by analyzing the yen-dollar exchange rate during the second half of QE implementation in Japan.
    Keywords: Quantitative easing (QE) policy, Time-Varying Parameter vector autoregressive (TVP-VAR) model, exchange rates, stock prices, export.
    JEL: E44 E52 E58
    Date: 2016–03
  40. By: Tanweer Akram; Huiqing Li
    Abstract: US government indebtedness and fiscal deficits increased notably following the global financial crisis. Yet long-term interest rates and US Treasury yields have remained remarkably low. Why have long-term interest rates stayed low despite the elevated government indebtedness? What are the drivers of long-term interest rates in the United States? John Maynard Keynes holds that the central bank's actions are the main determinants of long-term interest rates. A simple model is presented where the central bank's actions are the key drivers of long-term interest rates through short-term interest rates and various monetary policy measures. The empirical findings reveal that short-term interest rates, after controlling for other crucial variables such as the rate of inflation, the rate of economic activity, fiscal deficits, government debts, and so forth, are the most important determinants of long-term interest rates in the United States. Public finance variables, such as government fiscal balances or government indebtedness, as a share of nominal GDP appear not to have any discernable effect on long-term interest rates.
    Keywords: Government Bond Yields; Long-Term Interest Rates; Short-Term Interest Rates; Monetary Policy
    JEL: E43 E50 E60 G12
    Date: 2016–03
  41. By: Pierre Fortin
    Abstract: The Inflation-Control Agreement between the Government and the Bank of Canada is reviewed and renewed every five years. In this paper, I propose that the upcoming 2016 agreement increase the inflation target by 2 percentage points, from the current 2% to 4%. I first note that the room to stimulate economic activity and employment when the Bank of Canada judges that it is needed has narrowed dangerously in the past 25 years. I argue that the only fully effective means of freeing the Bank from the operational straightjacket into which it has fallen is setting the inflation target at 4% instead of 2%. I then report of evidence that the strong resistance of Canadian employers and employees to money wage cuts generates a significant permanent trade-off between inflation and unemployment at the macro level when inflation is less than 5%. Combining these two strands of observations, I conclude that moving to 4% inflation would generate about one half million more permanent jobs for Canadians and, over time, add some $50 billion per year to domestic income.
    Keywords: Inflation target, zero lower bound, anchoring of expectations, downward nominal wage rigidity, Bank of Canada, inflation-control agreement, monetary policy.
    JEL: E5 E6 H3 J3
    Date: 2016
  42. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Felix Bierbrauer gibt einen Überblick der Theorie optimaler Steuern. Der Schwerpunkt liegt auf der Weiterentwicklung dieser Theorie seit der Jahrtausendwende. Er stellt aber auch die konzeptionellen Grundlagen dar sowie die klassischen Resultate zur optimalen Besteuerung von Arbeitseinkommen, Kapitaleinkommen und Konsumausgaben. Die Theorie hat in den letzten Jahren eine quantitative Dimension hinzugewonnen, die es beispielsweise erlaubt, die Einkommensteuerzahlungen von Spitzenverdienern im Status quo und unter einem optimal gestalteten Einkommensteuertarif miteinander zu vergleichen. Die jüngere Literatur hat außerdem geklärt, unter welchen Bedingungen die Beschäftigungsaufnahme von Geringverdienern subventioniert werden sollte. Der New-Dynamic-Public-Finance-Ansatz hat ein neues und wichtiges Argument entwickelt, das für eine Besteuerung von Kapitaleinkommen spricht. Weitere Themen der jüngeren Literatur sind der Wettbewerb verschiedener Regierungen um leistungsfähige und mobile Steuerzahler sowie die Interdependenz von optimaler Steuerpolitik und optimal gestalteten Staatsausgaben.
    Keywords: Optimale Besteuerung, Einkommensteuern, Verbrauchsteuern, Besteuerung von Kapitaleinkommen, Öffentliche Güter
    JEL: E21 H21 H24 H40
    Date: 2016–02
  43. By: Arthur Grimes (Motu Economic and Public Policy Research); Judd Ormsby (Motu Economic and Public Policy Research); Anna Robinson (Motu Economic and Public Policy Research); Siu Yuat Wong (University of Auckland)
    Abstract: We study the association between fiscal policy and subjective wellbeing using fiscal data on 35 countries and 130 country-years, combined with over 170,000 people’s subjective wellbeing scores. While past research has found that ‘distortionary taxes’ (e.g. income taxes) are associated with slow growth relative to ‘non-distortionary’ taxes (GST/VAT), we find that distortionary taxes are associated with higher levels of subjective wellbeing than non-distortionary taxes. This relationship holds when we control for macro-economic variables and country fixed effects. If this relationship is causal, it would offer an explanation as to why governments pursue these policies even when they harm economic growth. We find that richer people’s subjective wellbeing is less harmed by indirect taxes than for people with lower incomes, while “unproductive expenditure” is associated with higher wellbeing for the middle class relative to others, possibly reflecting middle class capture. We see little evidence for differential effects of fiscal policy on people living in different sized settlements. Devolving a portion of expenditure to subnational government is associated with higher subjective wellbeing but devolving tax collection to subnational government is associated with monotonically lower subjective wellbeing.
    Keywords: Subjective wellbeing; Fiscal policy; Decentralised government
    JEL: D60 E62 H50 H70 O57
    Date: 2016–04
  44. By: Michael D. Bordo; Christopher M. Meissner
    Abstract: Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics towards modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). We discuss the evolution in economic theorizing on crises since the 1950s, and then provide an overview of the long-run evolution of connections between different types of crises. Next we explore the empirics of financial crises. We discuss the methodological issue of crisis measurement encompassing the definition, dating, and incidence of financial crises. Leading data sets differ markedly in terms of their historical frequency of crises leading to classification uncertainty. There is a range of estimates of output losses from financial crises in the literature, and these are also dependent upon definitions. We find economically significant output losses from various types of crises using a consistent methodology across time and data sets. Predicting crises also remains a challenge. We survey the Early Warnings Indicators literature finding that a broad range of variables are potential predictors. Credit booms have been emphasized recently, but other factors still matter. Finally, we identify a new policy trilemma. Countries can have two of the following three choices: a large financial sector, fiscal bailouts devoted to financial crises, and discretionary fiscal policy aimed at raising demand during the recessions induced by financial crises.
    JEL: E62 G01 N1
    Date: 2016–03
  45. 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
  46. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firm price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm’s price response to both its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level dataset for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The rare features of these data enable us to construct instrumental variables to address the simultaneity of price setting by competing firms. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 35% in response to the price changes of its competitors and with an elasticity of 65% in response to its own cost shocks. Furthermore, we find substantial heterogeneity in these elasticities across firms, with small firms showing no strategic complementarities and a complete cost pass-through, while large firms responding to their cost shocks and competitor price changes with roughly equal elasticities of around 50%. We show, using a tightly calibrated quantitative model, that these findings have important implications for shaping the response of domestic prices to international shocks.
    JEL: D22 E31 F31
    Date: 2016–03
  47. By: Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye
    Abstract: This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multi-period debt, (v) a default penalty that includes both a reputation loss and a physical output loss and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.
    JEL: E32 E44 E62 F34
    Date: 2016–03
  48. By: Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi
    Abstract: We study the consequences of product and labor market reforms in a two-country model with endogenous producer entry and labor market frictions. We focus on the role of business cycle conditions and external constraints at the time of reform implementation (or of a credible commitment to it) in shaping the dynamic effects of such policies. Product market reform is modeled as a reduction in entry costs and takes place in a non-traded sector that produces services used as input in manufacturing production. Labor market reform is modeled as a reduction in firing costs and/or unemployment benefits. We find that business cycle conditions at the time of deregulation significantly affect adjustment. A reduction of firing costs entails larger and more persistent adverse short-run effects on employment and output when implemented in a recession. By contrast, a reduction in unemployment benefits boosts employment and output by more in a recession compared to normal times. The impact of product market reforms is less sensitive to business cycle conditions. Credible announcements about future reforms induce sizable short-run dynamics, regardless of whether the announcement takes place in normal times or during an economic downturn. Whether the immediate effect is expansionary or contractionary varies across reforms. Finally, lack of access to international lending in the wake of reform can amplify the costs of adjustment.
    JEL: E24 E32 F41 J64 L51
    Date: 2016–03
  49. By: Alberto F. Cavallo
    Abstract: Online prices are increasingly being used for a variety of inflation measurement and research applications, yet little is know about their relation to prices collected offline, where most retail transactions take place. This paper presents the results of the first large-scale comparison of online and offline prices simultaneously collected from the websites and physical stores of 56 large multi-channel retailers in 10 countries. I find that price levels are identical about 72% of the time for the products sold in both locations, with significant heterogeneity across countries, sectors, and retailers. The similarity is highest in electronics and clothing and lowest for drugstores and office-supply retailers. There is no evidence of prices varying with the location of the ip address or persistent browsing habits. Price changes are un-synchronized but have similar frequencies and average sizes. These results have implications for National Statistical Offices and researchers using online data, as well as those interested in the effect of the internet on retail prices in different countries and sectors.
    JEL: E31 F4 L1
    Date: 2016–03
  50. By: Itamar Drechsler; Alexi Savov; Philipp Schnabl
    Abstract: We propose and test a new channel for the transmission of monetary policy. We show that when the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. We present a model in which imperfect competition among banks gives rise to these relationships. An increase in the nominal interest rate increases banks' effective market power, inducing them to increase deposit spreads. Households respond by substituting away from deposits into less liquid but higher-yielding assets. Using branch-level data on all U.S. banks, we show that following an increase in the Fed funds rate, deposit spreads increase by more, and deposit supply falls by more, in areas with less deposit competition. We control for changes in banks' lending opportunities by comparing branches of the same bank. We control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change, even if it is fully expected. Our results imply that monetary policy has a significant impact on how the financial system is funded, on the quantity of safe and liquid assets it produces, and on its lending to the real economy.
    JEL: E52 E58 G12 G21
    Date: 2016–04
  51. By: Eric R. Sims
    Abstract: This paper documents large differences across vintages in the properties of the widely-used quarterly utilization-adjusted TFP series produced by Fernald (2014), who provides updated data each quarter on his website. The most recent vintage of the adjusted TFP series has correlations with earlier vintages of the series that are less than 0.6. Compared to earlier vintages, the most recent vintage of the adjusted TFP data is more weakly correlated with output and more strongly negatively correlated with hours worked. I revisit the empirical analysis from Barsky and Sims (2011), who use an earlier vintage of Fernald's adjusted TFP data to identify impulse responses to news shocks about future productivity in a structural VAR. The vintage of adjusted TFP data matters for their estimated impulse responses, and in some specifications the differences using the most recent vintage of the adjusted TFP data are qualitatively large in a way that is more favorable to theories of news-driven business cycles.
    JEL: E22 E23 E32 O47
    Date: 2016–04
  52. By: Eduardo Olaberria
    Abstract: The Chilean economy has had an extraordinary performance over the last decades with strong growth and declining poverty rates. However, the economy is now slowing at a time when inequality remains very high, making future social progress challenging. This paper discusses how to achieve greater social inclusiveness against the background of weaker medium-term growth. First, it argues that Chile needs to increase income redistribution through its tax and transfer system towards levels prevailing in other OECD increases. Although existing social transfers are effective in combatting poverty, their size remains small and many households at the bottom of the ladder are not reached by them. Second, the paper argues that labour earnings should be less disparate, as they explain around 70% of income inequality. This should be done by updating labour legislation, but also by empowering low-skill workers and enabling them to increase their productivity, through the acquisition of adequate skills. Finally, focus should be placed on closing wide gender gaps.This working paper relates to the 2015 OECD Economic Survey of Chile ( Amener tous les Chiliens à bord L'économie chilienne a eu une performance extraordinaire au cours des dernières décennies, avec une forte croissance et la baisse des taux de pauvreté. Cependant, l'économie se ralentit à un moment où l'inégalité reste très élevé, ce qui rend l'avenir du progrès social difficile. Ce chapitre traite de la façon d'atteindre une plus grande inclusion sociale dans le contexte de ralentissement de la croissance à moyen terme. Premièrement, elle soutient que le Chili a besoin d'augmenter la redistribution des revenus par le biais de son système fiscal et de transferts vers des niveaux qui prévalent dans d'autres augmentations de l'OCDE. Bien que les transferts sociaux existants soient efficaces dans la lutte contre la pauvreté, leur taille reste faible et de nombreux ménages au bas de l'échelle ne sont pas atteints par eux. Deuxièmement, le chapitre fait valoir que les revenus du travail devraient être moins disparate, car ils expliquent environ 70% de l'inégalité des revenus. Cela devrait être fait en mettant à jour la législation du travail, mais aussi en donnant aux travailleurs peu qualifiés et en leur permettant d'accroître leur productivité, grâce à l'acquisition de compétences adéquates. Enfin, l'accent devrait être mis sur la réduction des écarts entre les sexes larges. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de Chili 2015 ( ique-chili.htm).
    Keywords: income tax, income distribution, social mobility, social benefits, gender equity, impôt, équité entre les sexes, prestations sociales, mobilité sociale, répartition des revenus
    JEL: D31 D63 E24 H24 H53
    Date: 2016–04–12
  53. By: Guido Ascari; Anna Florio; Alessandro Gobbi
    Abstract: Abstract: A natural generalisation of the original Leeper (1991) taxonomy leads to the concepts of globally active (or passive) and globally switching policies to explain the determinacy properties of a model where both monetary and fiscal policies may switch according to a Markov process. Monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. This new taxonomy also links the determinacy analysis to the model dynamics because it qualifies under which conditions expectations and wealth effectsarise in the Markov-switching model.
    Keywords: Monetary Policy and Fiscal Policy Interaction, Markov Switching, Non-linear models.
    JEL: E5
    Date: 2016–03–15
  54. By: Guglielmo Forges Davanzati (University of Salento (IT)); Rosario Patalano; Guido Traficante
    Abstract: This paper analyses the Italian economic decline in a Kaldorian theoretical framework. On the theoretical ground we propose an interpretation of the Italian economic decline based on the continuous decline of domestic demand and the constant reduction of the rate of growth of labour productivity. This interpretation is consistent with the concept of decline, which involves a long-run perspective. We also consider the role of the banking sector as a factor driving aggregate demand and, in turn, labour productivity. We estimate a VAR for the period 2002-2015 to analyse jointly the evolution of public consumption, real GDP, private investments, credit supply, labour compensation and productivity. Our main empirical finding is that aggregate demand and credit supply significantly affect the path of labour productivity, consistently with Kaldor's second law.
    Keywords: Kaldor, Italy, aggregate demand, labour productivity
    JEL: B52 E12 E60
    Date: 2016–03
  55. By: Kollmann, Robert
    Abstract: The 2007-09 global financial crisis has led to a rethinking of the role of financial intermediaries for economic fluctuations. Before the financial crisis, the workhorse macro models used by policy institutions and by academic researchers abstracted from banks (e.g., Christiano et al. (2005)). The crisis has stimulated much research that incorporates banks into quantitative dynamic stochastic general equilibrium (DSGE) models. Given the global nature of the banking industry, and of the financial crisis, that research has frequently focused on open economy models; see, e.g., Devereux and Sutherland (2011), Kollmann et al. (2011, 2013), Perri and Quadrini (2011), Ueda (2012), Dedola et al. (2013), Kamber and Thoenissen (2013) and Kollmann (2013). In this new class of DSGE models, bank capital is a key state variable for real activity; negative shocks to bank capital are predicted to increase the spread between banks’ lending and deposit rates, and to trigger a fall in bank credit, investment and output; with a globalized banking system, losses on bank assets in one country can thus lead to a worldwide recession. The paper by Victoria Nuguer makes a very interesting contribution to the new literature on open economy DSGE models with banks. Her paper highlights the role of country asymmetries for the transmission of banking shocks, and for the optimal policy response to those shocks. While most related studies assume symmetric countries, Victoria Nuguer considers a world with two countries of vastly different size. Victoria Nuguer’s paper thereby provides important insights into the role of country asymmetries for the transmission of financial shocks, and for optimal policy. Her paper also suggests fascinating avenues for future research.
    Keywords: Financial intermediation, globalization, transmission of banking shocks, optimal monetary policy, asymmetric economies
    JEL: E3 E6 F3 F4 G15 G2
    Date: 2016
  56. By: Azimi, Mohammad Naim
    Abstract: This paper proposes to examine the clustering volatility of India’s Wholesale Price Index throughout the period 1960 to 2014 by applying the ARCH(1) and GARCH(1) model. The pre-conditional requirement for the computation of ARCH (1,1) required us to perform several other tests i.e. Dickey Fuller, Ordinary Least Squared Regression and post OLS tests for investigating the ARCH effect in the first difference of WPI. The statistical analysis reveals a p-value of the GARCH mean model by 0.569 which is not significant at α 0.05 to explain that the previous period’s volatility can influence the WPI and the coefficient of WPI at first difference exhibits a value of less than 1 which is nice in magnitude with a p-value of ARCH by 0.005 at ∂ 0.05 which is significant to explain the volatility of WPI. The diagnostic test of autocorrelation in the residuals reveals that the residuals are white noise by exhibiting a corresponding probability value of 0.3757. Since, the overarching objective of this paper is to examine the clustering volatility of the aforementioned variable with regards to internal shocks, there might have been other factors of external shocks on WPI that are deliberately overlooked in this paper.
    Keywords: Clustering Volatility, ARCH model, GARCH model, WPI, Gaussian distribution
    JEL: C1 C15 D4 E2
    Date: 2015–11–29
  57. 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
  58. 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
  59. 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
  60. 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
  61. By: Angus C., Chu; Lei, Ning; Dongming, Zhu
    Abstract: This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on R&D investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which in turn reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.
    Keywords: monetary policy, economic growth, R&D, human capital
    JEL: E41 O3 O4
    Date: 2016–03
  62. By: Meloni, Osvaldo
    Abstract: This paper analyses the fiscal behavior of subnational districts in Argentina over the business cycle. I address two questions. Is the fiscal policy of Argentine districts procyclical? If so, what is the theory that best explain procyclicality? The answers come from the estimation of a Vector Error Correction model of a panel that spans 22 years and 24 districts. I found that all categories of revenues and public expenditures, except for Capital Expenditures, were procyclical. The main sources of procyclicality are the political networks, the changes in the amount of oil and gas grants, federal interventions and discretionary intergovernmental transfers.
    Keywords: Procyclical fiscal policy, Argentine provinces, Vector Error Correction
    JEL: E32 H72
    Date: 2016–04–06
  63. By: Salci, Sener; Jenkins, Glenn
    Abstract: In this paper we introduce a method for quantifying the benefits and costs of implementing a grid-connected onshore wind project that is owned and operated by an independent power producer (IPP). The proposed policy analysis tool is applied to the appraisal of a wind farm in Santiago Island, Cape Verde. The policy analysis is conducted from the perspectives of the electric utility, the country’s economy, the government and the private sector investor. The key question is whether the design of the power purchase agreement (PPA) will yield a high enough rate of return to the project to be bankable, while at the same time yielding a positive net financial and economic present value to the electric utility and the country respectively. The PPA results in a negative outcome for the economy of Cape Verde in almost all circumstances. In contrast the owners of the IPP are guaranteed a very substantial return for their modest investment under all circumstances.
    Keywords: electricity, wind power, power purchase agreement, public–private partnership, Santiago (Cape Verde)
    JEL: D61 E22 L94 O55 Q42
    Date: 2016–04
  64. By: Felix Koenig (London School of Economics and CEP-LSE); Alan Manning (London School of Economics and CEP-LSE); Barbara Petrongolo (Queen Mary University of London and CEP-LSE)
    Abstract: Wages are only mildly cyclical, implying that shocks to labour demand have a larger short-run impact on unemployment rather than wages, at odds with the quantitative predictions of the canonical search model - even if wages are only occasionally renegotiated. We argue that one source of the wage flexibility puzzles is plausibly the model for the determination of reservation wages, and consider an alternative reservation wage model based on reference dependence in job search. This extension generates less cyclical reservation wages than the canonical model, as long as reference points are less cyclical than forward-looking components of reservation wages such as the arrival rate of job offers. We provide evidence that reservation wages significantly respond to backward-looking reference points, as proxied by rents earned in previous jobs. In a model calibration we show that backward-looking reference dependence markedly reduces the predicted cyclicality of both wages and reservation wages and can reconcile theoretical predictions of the canonical model with the observed cyclicality of wages and reservation wages.
    Keywords: Job search, Reservation wages, Wage cyclicality, Reference dependence
    JEL: E24 J63 J64
    Date: 2016–03
  65. By: Airaudo, Marco (School of Economics)
    Abstract: This paper studies the global equilibrium dynamics implied by a Lucas’ tree asset pricing model where the representative agent has dynamic self-control preferences, as defined by Gul and Pesendorfer (Econometrica, 2004). It shows that endogenous cycles of period 2 and higher, as well as chaotic dynamics exist provided temptation utility is sufficiently important (with respect to standard commitment utility) and sufficiently convex. For parameterizations leading to complex deterministic dynamics, the model also admits stationary and non-stationary sunspot equilibria.
    Keywords: Asset Pricing; Temptation; Self-Control; Endogenous Cycles; Chaotic Dynamics; Sunspot Equilibrium
    JEL: C62 E32 G12
    Date: 2016–01–21
  66. By: Saraceno, Francesco (LUISS School of European Political Economy); Tamborini , Roberto (University of Trento)
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads - the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary Policy; ECB; Deflation; Zero-­Lower-­Bound; Fiscal Policy
    JEL: E30 E40 E50
    Date: 2016–03–15
  67. By: Fela Özbey (Çukurova University, FEAS); Erhan Ä°ÅŸcan (Çukurova University); Mehmet Fatih TraÅŸ (Çukurova University)
    Abstract: One particular area in financial economics that has received a great deal of attention is the link between exchange rate and the stock prices. The interaction between exchange rate and stock prices has been of special interest because they are regarded among the leading economic variables. The effect of exchange rate on the stock market can work in two avenues. Many studies have documented that changes in the exchange rate have the capacity to increase the volatility of the stock prices, while some other researchers indicated the effect of exchange rate on average returns. In this study, we investigate both of these issues for the case of Istanbul Stock Exchange, using monthly US Dollar-Turkish Lira (USD-TRY) exchange rate and the Istanbul Stock Exchange (BIST) 100 indicex for the period 2009M01-2015M11, employing GARCH approach. Our main findings show that an increase in exchange rate decreases expected returns and increases the riskiness of BIST 100 in Turkey.
    Keywords: Exchange Rate, Stock Prices, Turkish Stock Market, Volatility.
    JEL: C22 C58 E44
  68. By: Mathilde Le Moigne (École normale supérieure - Paris); Francesco Saraceno (OFCE); Sébastien Villemot (OFCE)
    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
  69. By: Pierre Madec (OFCE); Sabine Le Bayon (OFCE)
    Abstract: La volonté de posséder son « chez soi » et de se constituer un patrimoine est largement généralisée en Europe. La baisse des taux d’intérêt au cours des années 2000 et la concurrence accrue entre établissements bancaires ont favorisé la distribution du crédit, avant que la crise financière de 2007 ne remette en question ces évolutions. Malgré des mesures publiques de soutien au secteur immobilier, la chute du crédit (dans un contexte d’assainissement du bilan des banques et de ralentissement de la croissance du revenu des ménages) s’est accompagnée, après une décennie de boom immobilier, d’une baisse des prix immobiliers dans de nombreux pays européens. L’exception notable étant l’Allemagne où après dix ans de baisse, les prix se sont stabilisés au milieu des années 2000 et remontent même depuis 2010. Face à ces évolutions, nous observons ici dans quelle mesure d’une part la mobilité des ménages a évolué et d’autre part comment le contexte macroéconomique a modifié le profil des ménages qui achètent.
    Keywords: Propriétaires (logement); Ménages français; Financement du logement
    JEL: D14 E21 R21 R31 R38
    Date: 2014–09
  70. By: Servaas Storm (Delft University of Technology, The Netherlands); C.W.M. Naastepad (Delft University of Technology, The Netherlands)
    Abstract: Owing to its strong dependence on exports, Germany was among the economies hit hardest by the financial crisis. But unlike almost all other countries, Germany emerged from the crisis quickly and stronger than before. What lies behind this success story, if at all it is one? The commonplace—neoliberal—answer is that Germany’s success is the hard-won reward for strict economic management, combining fiscal conservatism and structural reforms of welfare and the labour market. The latter, by reducing labour costs, fostered competitiveness, boosted growth, and increased employment. “Progressive†economists arguing that Germany beggared its Eurozone neighbours by squeezing workers’ wages, share a similar view. However, this particular explanation of Germany’s resilience is wrong and unhelpful. Germany’s export success cannot be explained in terms of its (labour) cost competitiveness, but is caused by strong non-price competitiveness. This, in turn, is due—much more than is normally recognized—by the remaining distinctly non-neoliberal dimensions of Germany’s economic model (including a Keynesian crisis response). German and European policymakers preaching austerity and structural labor-market changes as the model for other Eurozone countries, misunderstand Germany’s rebound from crisis, with serious costs to Eurozone populations.
    JEL: E00 E02 E12 F02 F15
  71. By: Orsola Costantini (Institute for New Economic Thinking)
    Abstract: This paper traces the evolution of the concept of the cyclically adjusted budget from the 1930s to the present. The idea of balancing the budget over the cycle was first conceived in Sweden in the 1930s by the economists of the Stockholm School and was soon reinterpreted and incorporated into the fiscal program of the American political coalition supporting the New Deal, especially by the Committee for Economic Development during and after World War II. In the 1960s, Keynesian economists associated with the Kennedy and Johnson administrations reformulated the notion. Despite their claims at the time, their version differed only in degree from the earlier CED approach, the transformation being largely conditioned by changing political circumstances. In the 1980s, however, the concept changed substantially. Methods for calculating it transformed dramatically, as the notion became a device to limit and direct governments' fiscal policies in a wide sense, that is, including institutional (or “structural†) reforms. The final section of the paper considers the shifting uses of the notion in the European Growth and Stability Pact.
    Keywords: Macroeconomics, Fiscal policy, Cyclically Adjusted Budget, EU, Keynesian Economics, History of Economic Thought, Economic History
    JEL: B2 C1 E12 E13 E62 H62 H68 N1 N12 N14
    Date: 2015–10
  72. By: Lance Taylor (New School for Social Research)
    Abstract: The Cambridge UK vs USA capital theory debates of the 1960s showed that the workhorse mainstream growth model relies on unsustainable assumptions. Its standard interpretation is not consistent with the last four decades of data. Part of an estimated increase in the ratio of personal wealth to income in recent years is due to higher asset prices. The other side of the accounts reveals that financialization and growing business debt partially offset the greater net worth of households. Attempts to interpret growth in wealth principally as a consequence of capitalization of rents are misleading. An alternative growth model based on Cambridge ideas can help correct these misinterpretations.
    Keywords: Income distribution, wealth distribution, Cambridge controversies
    JEL: D3 E1
    Date: 2015–12
  73. By: Pascal Michaillat (Department of Economics and Centre for Macroeconomics, London School of Economics); Emmanuel Saez (Department of Economics, University of California, Berkeley)
    Abstract: In recent decades, advanced economies have experienced low and stable inflation and long periods of liquidity trap. We construct an alternative business-cycle model capturing these two features by adding two assumptions to a money-in-the-utility-function model: the labor market is subject to matching frictions, and real wealth enters the utility function. These assumptions modify the two core equations of the standard New Keynesian model. With matching frictions, we can analyze equilibria in which inflation is fixed and not determined by a forward-looking Phillips curve. With wealth in the utility, the Euler equation is modified and we can obtain steady-state equilibria with a liquidity trap, positive inflation, and labor market slack. The model is simple enough to inspect the mechanisms behind cyclical fluctuations and to study the effects of conventional and unconventional monetary and fiscal policies. As a byproduct, the model provides microfoundations for the classical IS-LM model. Finally, we show how directed search can be combined with costly price adjustments to generate a forward-looking Phillips curve and recover some insights from the New Keynesian model.
    JEL: E12 E24 E32 E63
    Date: 2014–09
  74. By: Barry Z. Cynamon (Federal Reserve Bank of St. Louis Center for Household Financial Stability); Steven M. Fazzari (Washington University in St. Louis)
    Abstract: Rising inequality reduced income growth for the bottom 95 percent of the US personal income distribution beginning about 1980. To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5 percent. In the Great Recession, the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.
    JEL: D12 D31 E21
  75. By: Engwerda, Jacob (Tilburg University, Center For Economic Research); Mahmoudinia, D. (Tilburg University, Center For Economic Research); Isfahani, Rahim Dalali
    Abstract: Today, debt stabilization in an uncertain environment is an important issue. In particular, the question how fiscal and monetary authorities should deal with this uncertainty is very important. Especially for some developing countries such as Iran, in which on average 60 percent of government revenues comes from oil, and consequently uncertainty about oil prices has a large effect on budget planning, this is an important question. For this reason, we extend in this paper the well-known debt stabilization game introduced by Tabellini (1986). We incorporate deterministic noise into that framework. We solve this extended game under a Non-cooperative, Cooperative and Stackelberg setting assuming a feedback information structure. The main result shows that under all three regimes, more active policies are used to track debt to its equilibrium level and this equilibrium level becomes smaller, the more fiscal and monetary authorities are concerned about noise. Furthermore, the best-response policy configuration if policymakers are confronted with uncertainty seems to depend on the level of anticipated uncertainty.
    Keywords: fiscal and monetary policy interaction; differential game; dynamic system; uncertainty
    JEL: E61 E62 E52 C7 C6
    Date: 2016
  76. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: In this paper, we examine the relationship between market participants' perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  77. By: ,; Diewert, W. Erwin; Fox, Kevin J.
    Abstract: In this paper, Fox interviews Diewert on his academic career. His contributions to the development of flexible functional forms, superlative index numbers, the difference approach to index number theory, the measurement of waste, the user cost of capital, the measurement of Total Factor Productivity, the use of generalized concavity in economics, the measurement of financial sector outputs and inputs and the comparative statics of maximizing behavior are covered. His work on the development of international manuals on the Consumer Price Index, the Producer Price Index, on Property Prices and on the International Comparison of Prices is also noted. His pioneering work on the nonparametric of preferences and of technologies is also mentioned.
    Keywords: Flexible functional forms, superlative index numbers, measurement of waste, user cost of capital, Total Factor Productivity measurement, generalized c
    JEL: C23 C43 C51 C61 D12 D24 D90 E01 E31 E41
    Date: 2016–04–08
  78. By: Yasuo Hirose (Faculty of Economics, Keio University); Takeki Sunakawa (Graduate School of Public Policy, University of Tokyo)
    Abstract: How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.
    Keywords: Nonlinearity, Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2016–03
  79. By: Tomoyuki Nakajima (Institute of Economic Research, Kyoto University and Canon Institute for Global Studies.); Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: We analyze lump-sum transfers financed through consumption taxes in a heterogeneous- agent model with uninsured idiosyncratic wage risk and endogenous labor supply. The model is calibrated to the U.S. economy. We find that consumption inequality and uncertainty decrease with transfers much more substantially under divisible than indi- visible labor. Increasing transfers by raising the consumption tax rate from 5% to 35% decreases the consumption Gini by 0.04 under divisible labor, whereas it has almost no effect on the consumption Gini under indivisible labor. The divisibility of labor also affects the relationship among consumption-tax financed transfers, aggregate saving, and the wealth distribution.
    Keywords: Transfers; Consumption taxes; Inequality; Uncertainty; Divisibility of labor; Incomplete markets
    JEL: E62 D31 J22 C68
    Date: 2016–03
  80. By: Caterina Mendicino (European Central Bank - Directorate General Research - Monetary Policy Research); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: Recent literature suggests that risk shocks –idiosyncratic uncertainty on asset returns – plays an important role in explaining business cycle ?uctuations. In this paper, we study the effect of risk shocks in a small open economy with tradable and non-tradable sectors of production. Following Christiano, Motto and Rostagno (2014), we assume that ?rms are subject to uncertainty when converting raw capital into effective capital. Due to the ?nancial frictions, when risk is high ?rms pay higher borrowing costs. This leads to a decline in investment and output. We conduct Bayesian estimation and draw implications on the sources of the Canadian business cycle. Our ?ndings suggest that a signi?cant fraction of the ?uctuations in output, investment, risk premium and ?rms’ net worth can be accounted for by risk shocks.
    Keywords: Risk; Financial frictions; Business Cycles.
    JEL: E31 E32
    Date: 2016–04
  81. By: Rapacki, Ryszard
    Abstract: This paper aims to assess both the explicit and implicit convergence criteria for Poland's possible membership in the Economic and Monetary Union, with special emphasis on institutional underpinnings of the country's prospects of adopting the euro. While the former set of criteria (embedded in the Maastricht Treaty) comprises fiscal and monetary indicators of nominal convergence, the latter highlight the resilience of a country to adverse asymmetric shocks and its ability to compete internationally, and point to the importance of labor mobility in particular and institutional quality in general as key shock-absorbing mechanisms and main drivers of a sustainable comparative advantage of a country. The paper focuses therefore on the evaluation of existing institutions and their evolution in Poland vis-à-vis the standards prevailing in the euro zone, as key determinants of the country's readiness to become an EMU member. The theoretical background of the assessment involved comprises two chief pillars: the optimum currency area theory (OCA) and the 'diversity of capitalism' (DoC) approach.
    Keywords: euro adoption,convergence
    JEL: E66 B52
    Date: 2015
  82. 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
  83. By: Holden, Tom
    Abstract: We construct the first algorithm for the perfect foresight solution of otherwise linear models with occasionally binding constraints, with fixed terminal conditions, that is guaranteed to return a solution in finite time, if one exists. We also provide a proof of the inescapability of the “curse of dimensionality” for this problem when nothing is known a priori about the model. We go on to extend our algorithm to deal with stochastic simulation, other non-linearities, and future uncertainty. We show that the resulting algorithm produces fast and accurate simulations of a range of models with occasionally binding constraints.
    Keywords: occasionally binding constraints,zero lower bound,computation,DSGE,linear complementarity problem
    JEL: C61 C63 E3 E4 E5
    Date: 2016–04–04
  84. 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
  85. By: Herr, Hansjörg
    Abstract: The finance dominated type of capitalism that has developed from the late 1970s and early 1980s on finds its nucleus in the deregulation of the national and international financial system and the switch to a shareholder oriented corporate governance system. Other aspects such as labour market deregulations (including policies to weaken trade unions), the aim of completely free trade around the globe, increasing freedom and power of multinational companies, and privatisation of formerly state functions also belong to the new regime. This finance dominated economic regime seems to be exhausted. The reforms implemented after the subprime crisis and the Great Recession are not sufficient to overcome the deeply rooted problems of the existing system. Reforms to the financial system did not substantially affect the functioning of the shadow banking system and the basic structures of the financial system were not changed. Both, the international financial system as well as the shareholder oriented corporate governance system were largely spared from reforms. Further labour market deregulations are still on the agenda of governments and international institutions. Policies to change income and wealth distribution are not on the political agenda. What is needed is a comprehensive reform agenda which searches for a new relationship between institutions, government policies, and markets.
    Keywords: financialisation,financial market regulation,demand management,income distribution
    JEL: E12 E44 F33 G28 P10
    Date: 2016
  86. By: Hochmuth, Brigitte; Gartner, Hermann; Kohlbrecher, Britta; Merkl, Christian
    Abstract: This paper is the first to analyze how much the probability of selecting a worker from a pool of applicants fluctuates over the business cycle. We use the German Job Vacancy Survey to construct the selection rate on the regional, industry, and national level and show that it is negatively correlated with unemployment. In addition, panel estmations reveal a positive comovement between the selection rate and market tightness, which is in line with the theoretical prediction from labor selection models.
    Keywords: Labor Selection,Job-finding Rate,Labor Market Dynamics,Business Cycle
    JEL: E24 E32 J64
    Date: 2016

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