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on Macroeconomics |
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Issue of 2016‒05‒08
sixty-one papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Punnoose Jacob; Anella Munro |
| Abstract: | The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth. |
| Keywords: | DSGE models, prudential policy, monetary policy, small open economy, sticky interest rates, banks, wholesale funding |
| JEL: | E31 E32 E44 F41 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-23&r=mac |
| By: | Nikola Bokan (European Central Bank); Andrea Gerali (Bank of Italy); Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Massimiliano Pisani (Bank of Italy) |
| Abstract: | We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate whereas firmsuse both domestic real estate and physical capital as a collateral. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. |
| Keywords: | Banks, DSGE models, econometric models, financial frictions, open-economy macroeconomics, policy analysis |
| JEL: | E51 E32 E44 F45 F47 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1064_16&r=mac |
| By: | Mallick, Debdulal |
| Abstract: | We document an evolving pattern in the slope of the Phillips curve in Australia at different frequencies under different monetary policy regimes and labor market regulations. Our estimation strategy relies on the frequency domain estimation but is also complemented by the time domain estimation. We document an upward sloping medium-run Phillips curve in the pre-1977 period, a downward sloping long-run Phillips curve from 1977 to 1993, and a flattened Phillips curve from 1993 onwards. Inflation lagged unemployment during the first period but led during the second period. The Phillips curve at business-cycle frequencies is downward sloping in all periods. We explain our results in terms of the monetary targeting in 1976 and the inflation targeting in 1993 by the RBA, respectively, and important changes in labor relations from the mid-1980s to the mid-1990s. The flattened Phillips curve is also observed in several industrialized countries since their adoption of inflation targeting. |
| Keywords: | Phillips curve, Long-run, Business-cycle, Frequency, Spectral method |
| JEL: | C49 E24 E31 E32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71082&r=mac |
| By: | Cole, Stephen |
| Abstract: | Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. The macroeconomic variables are overall more responsive to forward guidance under rational expectations than under adaptive learning. During a period of economic crisis (e.g. a recession), output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared to a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance. |
| Keywords: | Forward Guidance, Monetary Policy, Adaptive Learning, Expectations, Financial Frictions |
| JEL: | D84 E30 E44 E50 E52 E58 E60 |
| Date: | 2016–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70862&r=mac |
| By: | Michal Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski |
| Abstract: | This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a two-country macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, in our model foreign ownership of banks amplifies spillovers from foreign shocks. It also strenghtens the international transmission of monetary and macroprudential policies. We next use the model to replicate the financial crisis in the euro area and show how, by preventing bank capital out ow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also find that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks. |
| Keywords: | foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking |
| JEL: | E32 E44 E58 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2016003&r=mac |
| By: | Avci, S. Burcu; Yucel, Eray |
| Abstract: | Effectiveness of monetary policy depends on the degree to which policy interest rate affects all other financial prices, including the entire term structure of interest rates, credit rates, exchange rates and asset prices. An effective monetary policy framework can be seen as a pre-condition for well-functioning financial markets. However, effectiveness of the monetary policy is not straightforward to measure and requires empirical work to understand the effects of financial infrastructure, competitiveness of financial markets as well as current economic conditions. This paper examines the effectiveness of the monetary policy in Turkey by focusing on the interest rate pass-through behavior by means of an Interacted Panel Vector Autoregressive (IPVAR) approach. The results suggest that policy rate innovations transmit fully in less than eight months. Regulatory quality of the country, competition, liquidity, and profitability of banking sector, dollarization and exchange rate flexibility, inflation, and term structure have a positive effect on interest rate pass-through. Short-term credit ratio, GDP growth, monetary growth, and capital inflows have a negative effect. |
| Keywords: | Interest Rate Pass-through; Deposit and Credit Channels; Policy and Market Rates; Banking Sector; Interacted Panel Vector Autoregressive Methodology |
| JEL: | E43 E44 E58 F41 |
| Date: | 2016–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70848&r=mac |
| By: | Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Chodorow-Reich, Gabriel (Harvard University) |
| Abstract: | By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We use our estimates to quantify the effects of the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point. |
| Keywords: | Unemployment insurance; Measurement error; Unemployment |
| JEL: | E24 E62 J64 J65 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:733&r=mac |
| By: | Gauti B. Eggertsson; Neil R. Mehrotra; Lawrence H. Summers |
| Abstract: | Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth – now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities. |
| JEL: | E31 E52 F3 F44 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22172&r=mac |
| By: | Antonia Lopez-Villavicencio; Valérie Mignon |
| Abstract: | In this paper, we estimate the exchange rate pass-through (ERPT) to consumer prices and assess its dynamics for a sample of 15 emerging countries over the 1994-2015 period. To this end, we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for the inflation environment, monetary policy regime, as well as domestic institutional factors. We show that both the level and volatility of inflation matter in the sense that declining ERPT is evidenced with more stable and anti-inflationary environment. Monetary policy also plays a key role since adopting an inflation target-especially de jure-leads to a significant reduction in ERPT for most countries. Adopting exchange rate targeting regime matters as well, contributing to a diminishing ERPT. Finally, we find evidence that transparency of monetary policy decisions clearly reduces ERPT, while this is not the case for central bank independence. |
| Keywords: | exchange rate pass-through; inflation; emerging countries; monetary policy. |
| JEL: | E31 E52 F31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2016-18&r=mac |
| By: | Drew D. Creal; Jing Cynthia Wu |
| Abstract: | Workhorse Gaussian affine term structure models (ATSMs) attribute time-varying bond risk premia entirely to changing prices of risk, while structural models with recursive preferences credit it completely to stochastic volatility. We reconcile these competing channels by introducing a novel form of external habit into an otherwise standard model with recursive preferences. The new model has an ATSM representation with analytical bond prices making it empirically tractable. We find that time variation in bond term premia is predominantly driven by the price of risk, especially, the price of expected inflation risk that co-moves with expected inflation itself. |
| JEL: | C11 E31 E43 E52 G12 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22183&r=mac |
| By: | Gabriele Galati (De Nederlandsche Bank DNB, the Netherlands); Irma Hindrayanto (De Nederlandsche Bank DNB, the Netherlands); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Marente Vlekke (Centraal Planbureau CPB, The Hague, the Netherlands) |
| Abstract: | We adopt an unobserved components time series model to extract financial cycles for the United States and the five largest euro area countries over the period 1970 to 2014. We find that credit, the credit-to-GDP ratio and house prices have medium-term cycles which share a few common statistical properties. We show that financial cycles are longer and more ample than business cycles, and that their length and amplitude vary over time and across countries. |
| Keywords: | unobserved components time series model; Kalman filter; maximum likelihood estimation; band-pass filter; medium-term cycles |
| JEL: | C22 C32 E30 E50 E51 G01 |
| Date: | 2016–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160029&r=mac |
| By: | Silvia Miranda-Agrippino (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | The use of narrow time frames to measure monetary policy surprises using interest rate futures is potentially not sufficient to guarantee their exogeneity as proxies for monetary policy shocks. Raw monetary “surprises" are, in fact, predictable. These findings are interpreted as suggesting that time-varying risk premia and news shocks are likely to be captured in the measurement. The resulting violation of the identifying assumptions in Proxy SVARs induces non-trivial distortions in the estimation of the contemporaneous transmission coefficients: consequences for the estimation of structural IRFs can be dramatic, both qualitatively and quantitatively. This paper analyses the informational content of monetary surprises and proposes a new method to construct futures-based external instruments that conditions on both central banks' and market participants' information sets. Identification of monetary policy shocks via the orthogonal proxies is shown to retrieve contemporaneous transmission coefficients that are in line with macroeconomic theory even in small, potentially informationally insufficient VARs. |
| Keywords: | Monetary Surprises, Identification with External Instruments, Monetary Policy, Expectations, Information Asymmetries, Event Study, Proxy SVAR |
| JEL: | C36 E44 E52 G14 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1613&r=mac |
| By: | BERNIELL, Inés |
| Abstract: | This paper shows that the frequency at which workers are paid affects the within-month patterns of both household expenditure and aggregate economic activity. To identify causal effects, I exploit two novel sources of exogenous variation in pay frequency in the US. First, using a (as-good-as-random) variation in the pay frequency of retired couples, I show that those who are paid more frequently have smoother expenditure paths. Second, I take advantage of the cross-state variation in laws, and compare the patterns of economic activity in states with different legislation on pay frequency of wages. I document that low pay frequencies lead to within-month business cycles when many workers are paid on the same dates, which generates costly congestion in sectors with capacity constraints. These findings have important policy implications in a context where firms and workers do not internalize such congestion externalities, which generates market equilibria with suboptimally low pay frequencies. |
| Keywords: | Pay frequency, Within-month business cycles, Congestion |
| JEL: | J33 E21 E32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:mwp2016/05&r=mac |
| By: | Matthew Chambers (Department of Economics, Towson University); Carlos Garriga (Federal Reserve Bank of St. Louis); Don E. Schlagenhauf (Federal Reserve Bank of St. Louis) |
| Abstract: | The post-WorldWar II witnessed the largest housing boom in recent history. The objective of this paper is to develop a quantitative equilibrium model of tenure choice to analyze the key determinants in the co-movement between home ownership and house prices over the period 1940 to 1960. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the observed postwar housing boom. The paper shows, both theoretically and quantitatively, that the key to explaining the co- movement is an asymmetric productivity change that favors the goods sector relative to the construction sector. Other factors such as demographics, income risk, and government policy are important determinants of the home ownership rate but have relatively small e¤ects on housing prices. |
| Keywords: | Housing Finance, first-time buyers, life-cycle. |
| JEL: | E2 E6 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2016-07&r=mac |
| By: | Arias, Jonas E.; Erceg, Christopher J.; Trabandt, Mathias |
| Abstract: | This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects. |
| Keywords: | Inflation Expectations ; Wages ; Productivity ; Disin ation ; Monetary Policy ; Liquidity Trap ; DSGE Model |
| JEL: | E52 E58 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1162&r=mac |
| By: | Richard T. Froyen; Alfred V Guender (University of Canterbury) |
| Abstract: | This paper re-examines the merits of including an exchange rate response in Taylor-type interest rate rules for small open economies. Taylor (2001) and Taylor and Williams (2011) express what has been the conventional view: inclusion of the real exchange rate will either add little or might negatively affect the rule’s performance. We argue that developments in the theory of optimal monetary policy for open economies taken together with increased instability in world financial markets warrant a re-examination of the issue. Examining three flexible inflation targeting strategies, we find that a small weight on real exchange rate stability in the loss function is sufficient to improve the performance of Taylor-type rules relative to optimal policy. Gains are substantial for domestic and REX inflation targets because a small weight on real exchange rate fluctuations inhibits the aggressive use of the policy instrument under optimal policy. As real exchange rate stability is a built-in feature of a CPI inflation objective, the gains under a CPI inflation target are considerably lower. A central bank that values real exchange rate stability and follows a Taylor-type rule should respond to the real exchange rate. Doing so reduces relative losses irrespective of the specification of the inflation objective. Only a complete disregard for exchange rate stability bears out the view that there is no substantive role for the real exchange rate in Taylor-type rules. |
| Keywords: | CPI, Domestic, REX Inflation Targeting, Taylor-Type Rules, Timeless Perspective, Real Exchange Rate |
| JEL: | E3 E5 F3 |
| Date: | 2016–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:16/10&r=mac |
| By: | Richard T. Froyen; Alfred V Guender (University of Canterbury) |
| Abstract: | Inflation targeting countries generally define the inflation objective in terms of the consumer price index. Studies in the academic literature, however, reach conflicting conclusions concerning which measure of inflation a central bank should target in a small open economy. This paper examines the properties of domestic, CPI, and real-exchange- rate-adjusted (REX) inflation targeting. In one class of open economy New Keynesian models there is an isomorphism between optimal policy in an open versus closed economy. In the type of model we consider, where the real exchange rate appears in the Phillips curve, this isomorphism breaks down; openness matters. REX inflation targeting restores the isomorphism but this may not be desirable. Instead, under domestic and CPI inflation targeting the exchange rate channel can be exploited to enhance the effects of monetary policy. Our results indicate that CPI inflation targeting delivers price stability across the three inflation objectives and will be desirable to a central bank with a high aversion to inflation instability. CPI inflation targeting also does a better job of stabilizing the real exchange rate and interest rate which is an advantage from the standpoint of financial stability. REX inflation targeting does well in achieving output stability and has an advantage if demand shocks are predominant. In general, the choice of the inflation objective affects the trade-offs between policy goals and thus policy choices and outcomes. |
| Keywords: | CPI, Domestic, REX Inflation Targeting, Openness, Inflation-Output Trade-off |
| JEL: | E3 E5 F3 |
| Date: | 2016–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:16/09&r=mac |
| By: | Ian Gordon |
| Abstract: | This paper documents and seeks to explain the remarkably positive employment trends of a central area of London in the years since the onset of the financial crisis. The volatility of this economy since the 1980s had suggested the likelihood of a sharp loss of jobs, maybe followed by a strong bounce-back, if the finance sector could overcome reputational damage from its role in the debacle of 2007-8. In fact this area proved both the most resilient in the downturn and the most dynamic in the upturn, accounting for all/most net job gains in the UK. This paper considers three types of explanation for this positive outcome - in terms of: fundamental economic strengths allowing it to keep going through generally tough times; an advantaged position in relation to elite choices about resource allocation and restructuring in the face of a general fiscal/commercial squeeze; and (less conventionally) the impact of massive support to/through the banking sector, in first mitigating impacts of the downturn for the financial centre, and then fuelling another global city boom. The last of these is argued to be key to understanding not only why central London has done so well since the crisis, but how it is still liable to be 'the capital of boom and bust'. |
| Keywords: | spatial imbalance, regional economic fluctuation, financial centre, monetary |
| JEL: | R11 R12 E58 E32 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sercdp:0193&r=mac |
| By: | Javier G. Gómez-Pineda (Banco de la República de Colombia) |
| Abstract: | La flotación del peso de 1957 fue la política que más contribuyó a la estabilidad externa dentro del primer programa de crédito contingente de Colombia con el FMI en 1957. En el artículo se especifica y estima un modelo de demanda para los componentes de la ecuación macroeconómica básica durante 1950-1965. En el modelo el control de importaciones se estima como una variable no observada. El modelo se utiliza para estudiar la evolución del balance comercial, la absorción y el producto por medio de ejercicios de descomposición de errores. Dentro de los resultados se encuentra que mientras que la apreciación de la tasa de cambio anterior a 1957 llevó al país a una crisis de pagos, la flotación de 1957 fue el elemento central del programa de estabilización con el FMI pues su efecto fue de lejos el más importante sobre la estabilidad externa dentro de la serie de políticas del programa de estabilización. El movimiento especulativo de capital y el crédito fueron los principales factores impulsores de la absorción, mientras que la flotación de la tasa de cambio tuvo un papel estabilizador sobre el ciclo económico. Los términos de intercambio no desempañaron un papel importante en la explicación del ciclo, a pesar de que comúnmente se les atribuye un papel importante. El control de importaciones ayudó estabilizar el balance comercial, pero una flotación de la tasa de cambio más prolongada habría logrado estabilizar el balance comercial sin racionamiento de las importaciones y sin moratoria de la deuda comercial.******The 1957 flotation of the peso was the policy that contributed most to external stability, among the policies in Colombia’s first stand-by agreement with the IMF. A model for the demand for each of the aggregates in the basic macroeconomic equation during 1950–1965 is specified and estimated. In the model, the imports control policy is estimated as an unobserved variable. The model is used to study the evolution of the trade balance, absorption and output in historical error decomposition exercises. Among the results we find that the appreciation of the exchange rate before 1957 led the country to a payments crisis, while the 1957 flotation was by far the more important policy among the policies in the stabilization program. Speculative capital movements and credit were the main propellers of absorption, while the flotation of the peso had a stabilizing effect on the economic cycle. The terms of trade did not have an important effect on the cycle, although the literature commonly attributes them a critical role. Import controls helped stabilize the trade balance, but a prolonged flotation of the peso would have helped stabilize the trade balance without import rationing or commercial debt arrears. Classification JEL:N1, N16, E12, E32, E58 |
| Keywords: | Acuerdo de crédito contingente, Programa de estabilización, Ajuste de la balanza de pagos, Enfoque absorción ******Stand-by agreement; Stabilization program; Balance of payments adjustment; Absorption approach |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:938&r=mac |
| By: | Koji Nakamura (Bank of Japan); Hiroshi Kawata (Bank of Japan); Masaki Tanaka (Bank of Japan); Lisa Uemae (Bank of Japan) |
| Abstract: | In this paper, we introduce the Consumption Activity Index (CAI). The CAI uses a variety of sales and supply-side statistics on goods and services as its source statistics and is provided as a measure for capturing short-term consumption activity on both monthly and quarterly bases. The CAI traces movements of consumption in the household side of the economy, much like those in the Annual Report on National Accounts (ARNA) - the most comprehensive statistic representing nationwide consumption activity - but delivers in a more timely fashion. Unlike demand-side statistics, this index shows only small fluctuations emanating from sample rotations, and also exhibits a high correlation with a number of confidence survey measures. Various versions of the CAI are available - nominal and real indexes as well as those both including and excluding inbound consumption - and they are designed to help users according to their analytical needs. Based on the above-mentioned properties, the CAI will contribute to proper assessment of the actual movements of consumption activities in Japan. |
| Keywords: | private consumption; business cycles |
| JEL: | E21 E32 |
| Date: | 2016–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojron:ron160502a&r=mac |
| By: | Gaballo, Gaetano; Marimon, Ramon |
| Abstract: | We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB’s TALF credit-easing program in 2009.We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers’ reactions to their offers. Nevertheless, credit crises – where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case. |
| Keywords: | unconventional policies, learning, credit crisis, social experimentation, self-confirming, equilibrium, directed search |
| JEL: | D53 D83 D84 D92 E44 E61 G01 G20 J64 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:ade2016/01&r=mac |
| By: | Nicos Christodoulakis (Athens University of Economics and Business; Hellenic Observatory; London School of Economics); Christos Axioglou (Ministry of Finance, Greece) |
| Abstract: | An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings. |
| Keywords: | euro area; investment; unemployment; capital-labour substitution; production function |
| JEL: | E22 E24 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:205&r=mac |
| By: | Mark Setterfield (New School For Social Research,); Yun K. Kim (University of Massachusetts, Boston); Jeremy Rees (Trinity College, Hartford) |
| Abstract: | We investigate the claim that the way in which debtor households service their debts matters for macroeconomic performance. A Kaleckian growth model is modified to incorporate working households who borrow to finance consumption that is determined, in part, by the desire to emulate the consumption patterns of more affluent households. The impact of this behavior on the sustainability of the growth process is then studied by means of a numerical analysis that captures various dimensions of income inequality. When compared to previous contributions to the literature, our results show that the way in which debtor households service their debt has both quantitative and qualitative effects on the economy’s macrodynamics. |
| Keywords: | Consumer debt, emulation, income distribution, Golden Age regime, Neoliberal regime, expenditure cascades, growth |
| JEL: | E12 E44 O41 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:31&r=mac |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70356&r=mac |
| By: | Delle Monache, (Bank of Italy); Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck; Bank of England); Fabrizio Venditti (Bank of Italy) |
| Abstract: | We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks. |
| Keywords: | inflation, time-varying parameters, score driven models, state space models, dynamics factor models. |
| JEL: | E31 C22 C51 C53 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1515&r=mac |
| By: | Johannsen, Benjamin K.; Mertens, Elmar |
| Abstract: | Modeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time– series approach which includes a “shadow rate”—a notional rate that is less than the ELB during the period in which the bound is binding—without imposing no–arbitrage assumptions. The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years. |
| Keywords: | Bayesian Econometrics ; Effective Lower Bound ; Shadow Rate ; State-Space Model ; Term Structure of Interest Rates |
| JEL: | C32 C34 C53 E43 E47 |
| Date: | 2016–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-33&r=mac |
| By: | Givens, Gregory |
| Abstract: | This paper checks whether the coefficient estimates of a famous DSGE model are robust to macroeconomic data revisions. The effects of revisions are captured by rerunning the estimation on a real-time data set compiled using the latest time series available each quarter from 1997 through 2015. Results show that point estimates of the structural parameters are generally robust to changes in the data that have occurred over the past twenty years. By comparison, estimates of the standard errors are relatively more sensitive to revisions. The latter implies that judgements about the statistical significance of certain parameters depend on which data vintage is used for estimation. |
| Keywords: | Data Revisions, Real-Time Data, DSGE Estimation |
| JEL: | C32 C82 E32 E52 |
| Date: | 2016–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70932&r=mac |
| By: | Jörg Döpke (University of Applied Sciences Merseburg); Ulrich Fritsche (University Hamburg); Christian Pierdzioch (Helmut-Schmidt-University Hamburg) |
| Abstract: | We use a machine-learning approach known as Boosted Regression Trees (BRT) to reexamine the usefulness of selected leading indicators for predicting recessions. We estimate the BRT approach on German data and study the relative importance of the indicators and their marginal effects on the probability of a recession. We then use receiver operating characteristic (ROC) curves to study the accuracy of forecasts. Results show that the short-term interest rate and the term spread are important leading indicators, but also that the stock market has some predictive value. The recession probability is a nonlinear function of these leading indicators. The BRT approach also helps to recover how the recession probability depends on the interactions of the leading indicators. While the predictive power of the short-term interest rates has declined over time, the term spread and the stock market have gained in importance. We also study how the shape of a forecaster’s utility function affects the optimal choice of a cutoff value above which the estimated recession probability should be interpreted as a signal of a recession. The BRT approach shows a competitive out-of-sample performance compared to popular Probit approaches |
| Keywords: | : Recession forecasting; Boosting; Regression trees; ROC analysis |
| JEL: | C52 C53 E32 E37 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2015-004&r=mac |
| By: | Alessio Moro; Solmaz Moslehi; Satoshi Tanaka |
| Abstract: | Using new home production data for the U.S., we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would be lower by 5.8% in 2010. |
| Keywords: | Structural Change, Home Production, Services Sector |
| JEL: | E20 E21 L16 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-19&r=mac |
| By: | Lagos, Ricardo (Federal Reserve Bank of Minneapolis); Zhang, Shengxing (London School of Economics) |
| Abstract: | We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence. |
| Keywords: | Asset prices; Liquidity; Monetary policy; Monetary transmission |
| JEL: | D83 E52 G12 |
| Date: | 2016–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:734&r=mac |
| By: | Rajmund Mirdala |
| Abstract: | Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability. |
| Keywords: | exchange rate pass-through, inflation, Euro Area, VAR, impulse-response function |
| JEL: | C32 E31 F41 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2016:i:171&r=mac |
| By: | Daniel Borowcyzk-Martins; Etienne Lalé |
| Abstract: | We extend a standard incomplete-market model featuring unemployment risk by allowing for an additional risk of involuntary part-time employment. A calibration of the model consistent with U.S. institutions and labor market dynamics shows that involuntary part-time work entails lower welfare losses relative to unemployment. This finding relies critically on the premium enjoyed by part-time workers in returning to full-time work. |
| Keywords: | Involuntary part-time work, Unemployment, Welfare |
| JEL: | E21 E32 J21 |
| Date: | 2016–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:16/673&r=mac |
| By: | Li, Jian; Chavas, Jean-Paul; Etienne, Xiaoli; Li, Chongguang |
| Abstract: | This paper investigates the linkages between commodity price bubbles and macroeconomic factors, with an application to agricultural commodity markets in China from 2006 to 2014. Price bubbles are identified using a newly-developed recursive right-tailed unit root test. A Zero-inflated Poisson Model is used to analyze the factors contributing to bubbles. Results show that a) there were speculative bubbles in most of the Chinese agricultural commodities during the sample period, though their presences are rather infrequent; b) economic growth, money supply and inflation have positive effects on bubble occurrences, while interest rate has a negative effect; c) among all macroeconomic factors considered, economic growth and money supply have the greatest effects on bubble occurrences. Our findings shed new light on the nature and formation of bubble behavior in the Chinese agricultural commodity markets. |
| Keywords: | price bubbles, macroeconomic factors, agricultural commodity, right-tailed unit root test, Zero-inflated Poisson model, China, Demand and Price Analysis, Risk and Uncertainty, G12, G13, Q13, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235068&r=mac |
| By: | FitzGerald, John; Chi, Pho Thi Kim; Lam, Do Van; Ha, Hoang; Huong, Luong; Dung, Tran |
| Abstract: | This paper considers the factors determining the long-run behaviour of the Vietnamese economy. Using a macro-economic model of the Vietnamese economy it considers some of the factors that have contributed to growth over the last decade and also some of the policy options for the rest of the decade. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp526&r=mac |
| By: | Boppart, Timo; Krusell, Per |
| Abstract: | What explains how hard people work? Going back in time, a main fact to address is the steady reduction in hours worked. The long-run data, for the U.S. as well as for other countries, show a striking pattern whereby hours worked fall steadily by a little below a half of a percent per year, accumulating to about a halving of labor supply over 150 years. In this paper, we argue that a stable utility function defined over consumption and leisure can account for this fact, jointly with the movements in the other macroeconomic aggregates, thus allowing us to view falling hours as part of a macroeconomy displaying balanced growth. The key feature of the utility function is an income effect (of higher wages) that slightly outweighs the substitution effect on hours. We also show that our proposed preference class is the only one consistent with the stated facts. The class can be viewed as an enlargement of the well-known "balanced-growth preferences" that dominate the macroeconomic literature and that demand constant (as opposed to falling) hours in the long run. The postwar U.S. experience, over which hours have shown no net decrease and which is the main argument for the use of "balanced-growth preferences", is thus a striking exception more than a representative feature of modern economies. |
| Keywords: | balanced growth; hours worked; Kaldor facts; Labor Supply; preferences |
| JEL: | E21 J22 O11 O40 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11235&r=mac |
| By: | Sophie Piton |
| Abstract: | This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. Using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. It then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA. |
| Keywords: | Non-tradable prices;Balassa-Samuelson effect;Real interest rate |
| JEL: | F41 F45 E43 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2016-09&r=mac |
| By: | Kim, Minseong |
| Abstract: | For deriving equilibrium of sticky-price/monopolistic competition New Keynesian models, first-order conditions are often used. This paper shows that they may not be sufficient and presents a case out of a simple model where there exists no equilibrium. This is true even when Taylor rule is assumed. |
| Keywords: | New Keynesian, sticky price, monopolistic competition, consistency, first-order conditions |
| JEL: | B41 C61 C62 E13 E52 |
| Date: | 2016–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70753&r=mac |
| By: | Matthias Morys |
| Abstract: | We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing Greece, Romania, Serbia/Yugoslavia and Bulgaria from political independence to WW II, we find surprising parallels to the present: repeated cycles of entry to and exit from monetary unions, government debt build-up and default, and financial supervision by West European countries. Gold standard membership was more short-lived than in any other part of Europe due to fiscal dominance. Granger causality tests and money growth accounting show that the prevailing pattern of fiscal dominance was only broken under international financial control, when strict conditionality scaled back the treasury’s influence; only then were central banks able to conduct a rule-bound monetary policy and stabilize their exchange-rates. The long-run record of Greece suggests that the perennial economic and political objective of monetary union membership can only be achieved if both monetary and fiscal policy is effectively delegated abroad. |
| Keywords: | fiscal dominance, gold standard, financial supervision, South-East Europe |
| JEL: | N13 N14 N23 N24 E63 F34 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:16/05&r=mac |
| By: | Dr. Thomas Drosdowski (GWS - Institute of Economic Structures Research); Britta Stöver (GWS - Institute of Economic Structures Research); Dr. Marc Ingo Wolter (GWS - Institute of Economic Structures Research) |
| Abstract: | The concept of participation can be used to evaluate and assess socioeconomic changes. Most analysis that apply participation as reference point for socioeconomic development concentrate on the individual level. We try to give evidence for reasons and explanations for accomplished or changing individual participation using socio-economic modelling on the meso and macro level. The proposed indicator measures the existing and changing conditions of participation. First results show that participation conditions have shown a general upward tendency since 2006. The projection results suggest that the improvement of participation conditions continues till the end of 2016. Afterwards, the indicator will gradually decline reaching the zero line in 2021, which is mainly caused by a slow-down of the initially very positive economic situation. However, participation conditions are not likely to decline to a level as low as in the mid-2000s. |
| Keywords: | participation, indicator set, modelling, capability, socio-economic development |
| JEL: | E17 E2 I31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gws:dpaper:16-4&r=mac |
| By: | Brad J. Hershbein (W.E. Upjohn Institute for Employment Research); Lisa B. Kahn (Yale University) |
| Abstract: | Routine-biased technological change (RBTC), whereby routine-task jobs are replaced by machines and overseas labor, shifts demand towards high- and low-skill jobs, resulting in job polarization of the U.S. labor market. We test whether recessions accelerate this process. In doing so we establish a new fact about the demand for skill over the business cycle. Using a new database containing the near-universe of electronic job vacancies that span the Great Recession, we find evidence of upskilling—firms demanding more-skilled workers when local employment growth is slower. We find that upskilling is sizable in magnitude and largely due to changes in skill requirements within firm-occupation cells. We argue that upskilling is driven primarily by firm restructuring of production towards more-skilled workers. We show that 1) skill demand remains elevated after local economies recover from the Great Recession, driven primarily by the same firms that upskilled early in the recovery; 2) among publicly traded firms in our data, those that upskill more also increase capital stock by more over the same time period; and 3) upskilling is concentrated within routine-task occupations -- those most vulnerable to RBTC. Our result is unlikely to be driven by firms opportunistically seeking to hire more-skilled workers in a slack labor market, and we rule out other cyclical explanations. We thus present the first direct evidence that the Great Recession precipitated new technological adoption. |
| Keywords: | Job polarization, job postings, RBTC, recessions, routine-biased technological change, upskilling, vacancies |
| JEL: | D22 E32 J23 J24 M51 O33 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:upj:weupjo:16-254&r=mac |
| By: | Senay, Ozge; Sutherland, Alan |
| Abstract: | Recent literature on monetary policy shows that, when international financial trade is restricted to a single non-contingent bond, there are significant trade-offs that prevent optimal policy from simultaneously closing all internal and external welfare gaps. Optimal policy therefore deviates from inflation targeting in order to offset real exchange rate misalignments. These simple models are, however, not good representations of modern financial markets. This paper develops a more realistic two-country model of incomplete markets, where there is international trade in nominal bonds denominated in the currencies of the two countries and equity claims on profit streams in the two countries. The analysis shows that the welfare benefits of optimal policy relative to inflation targeting are quantitatively smaller than found in simpler models of financial incompleteness. It is nevertheless found that optimal policy implies quantitatively significant stabilisation of the real exchange rate gap and trade balance gap compared to inflation targeting. |
| Keywords: | Country portfolios; Financial market structure; Optimal monetary policy |
| JEL: | E52 E58 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11198&r=mac |
| By: | Fried, Stephie; Novan, Kevin; Peterman, William B. |
| Abstract: | This paper examines the non-environmental welfare effects of introducing a revenue- neutral carbon tax policy. Using a life cycle model, we find that the welfare effects of the policy differ substantially for agents who are alive when the policy is enacted compared to those who are born into the new steady state with the carbon tax in place. Consistent with previous studies, we demonstrate that, for those born in the new steady state, the welfare costs are always lower when the carbon tax revenue is used to reduce an existing distortionary tax as opposed to being returned in the form of lump-sum payments. In contrast, during the transition, we find that rebating the revenue with a lump sum transfer is less costly than using the revenue to reduce the distortionary labor tax. Additionally, we find that the tax policy is substantially more regressive over the transition than in the steady state, regardless of what is done with the revenue. Overall, our results demonstrate that estimates of the non-environmental welfare costs of carbon tax policies that are based solely on the long-run, steady state outcomes may ultimately paint too rosy of a picture. Thus, when designing climate policies, policymakers must pay careful attention to not only the long-run outcomes, but also the transitional welfare costs and regressivity of the policy. |
| Keywords: | Carbon taxation ; overlapping generations |
| JEL: | E62 H21 H23 |
| Date: | 2016–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-38&r=mac |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | After short-term interest rates in many advanced economies fell below 1 percent, central banks turned to quantitative easing (QE) to support economic growth. They purchased massive and unprecedented amounts of long-term bonds in an effort to reduce long-term borrowing costs. Nevertheless, recovery from the Great Recession proved disappointingly slow. Recently, some central banks have pushed short-term interest rates slightly below zero to provide an additional boost to growth. The slow recovery and the turn to negative rates have raised questions about the benefits of QE bond purchases and whether their effectiveness has reached a limit. Gagnon reviews the outpouring of research on QE and its effects and finds overwhelming evidence that QE does ease financial conditions and supports economic growth. The channels are similar to those of conventional monetary policy. QE can be especially powerful during times of financial stress, but it has a significant effect in normal times with no observed diminishing returns. Rarely, if ever, have economists studying a specific question reached such a widely held consensus so quickly. But this consensus has yet to spread more broadly within the economics profession or the wider world. |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb16-4&r=mac |
| By: | Galor, Oded; Özak, Ömer |
| Abstract: | This research explores the origins of the distribution of time preference across regions. It advances the hypothesis, and establishes empirically that geographical variations in the natural return to agricultural investment have had a persistent effect on the distribution of time preference across societies. In particular, exploiting a natural experiment associated with the expansion of suitable crops for cultivation in the course of the Columbian Exchange, the research establishes that pre-industrial agro-climatic characteristics that were conducive to higher return to agricultural investment, triggered selection and learning processes that had a persistent positive effect on the prevalence of long-term orientation in the contemporary era. |
| Keywords: | Time preference, Delayed Gratification, Economic Growth, Culture, Agriculture, Economic Development, Evolution, Comparative Development, Human Capital, Education, Smoking |
| JEL: | D14 D9 E2 I12 I25 J24 J26 O1 O3 O4 Z1 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70719&r=mac |
| By: | Nancy L. Stokey |
| Abstract: | Technical change, even if it is limited in scope, can have employment, output, price and wage effects that ripple through the whole economy. This paper uses a flexible and tractable framework, with heterogeneous workers and technologies, and many tasks/goods, to analyze the general equilibrium effects of technical change for a limited set of tasks. Output increases and price falls for tasks that are directly affected. The effects on employment depend on the elasticity of substitution across tasks/goods. For high elasticities, employment expands to a group of more skilled workers. Hence for tasks farther up the technology ladder, employment falls, output declines, and prices and wages rise. For low elasticities, employment at affected tasks contracts among less skilled workers, as they shift to complementary tasks with unchanged technologies. In all cases, the output, price and wage changes are damped for more distant tasks, both above and below the affected group. |
| JEL: | D50 E24 O33 O40 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22176&r=mac |
| By: | Raphael Anton Auer; Cédric Tille |
| Abstract: | The US financial crisis and the later eurozone crisis have substantially impacted capital flows into and out of financial centers like Switzerland. We focus on the pattern of capital flows involving the Swiss banking industry. We first rely on balance-of-payment statistics and show that net banking inflows rose during the acute phases of the crises, albeit with a contrasting pattern. In the wake of the collapse of Lehman Brothers, net inflows were driven by a substantial retrenchment into the domestic market by Swiss banks. By contrast, net inflows from mid-2011 to mid-2012 were driven by large flows into Switzerland by foreign banks. We then use more detailed data from Swiss banking statistics which allow us to differentiate the situation across different banks and currencies. We show that, during the US financial crisis, the bank flows cycle was driven strongly by exposures in US dollars, and to a large extent by Swiss-owned banks. During the eurozone crisis, by contrast, the flight to the Swiss franc and move away from the euro was also driven by banks that are located in Switzerland, yet are foreign-owned. In addition, while the demand for the Swiss franc was driven by both foreign and domestic customers from mid-2011 to early 2013, domestic demand took a prominent role thereafter. |
| Keywords: | capital flows, safe haven, Switzerland, financial globalization, international banking. |
| JEL: | E51 G15 G21 F21 F32 F36 F65 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2016-05&r=mac |
| By: | Jaime Alcaide Arranz (Department of Quantitative Economics, Universidad Complutense de Madrid); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid) |
| Abstract: | En las últimas décadas ha tenido lugarun importante desarrollo de la banca islámica y de las finanzas islámicas en general. En países como Malasia, Arabia Saudí o Bangladesh ésta ha experimentado una expansión significativa frente a la banca convencional. En Indonesia, el país con la mayor población musulmana del mundo, el desarrollo de la banca islámica está siendo más tardío. El análisis de su nacimiento e impulso pone de manifiesto las ventajas y desafíos del sector. Su peso es aún relativamente reducido pero el avance del sector financiero islámico, con un mayor impulso del mercado de capitales islámico siguiendo el ejemplo de Malasia, podría ser un factor positivo para una mejor canalización del ahorro hacia la inversión productiva en el país. En cualquier caso es conveniente que se produzcan mejoras en términos de eficiencia en el sector bancario en general y en la banca islámica en particular. |
| Keywords: | Banca islámica, Finanzas islámicas, Sector financiero, Indonesia |
| JEL: | N25 D52 E58 G15 G21 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1607&r=mac |
| By: | Claudio Raddatz; Rodrigo Vergara |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchep:59&r=mac |
| By: | Jörg Breitung; Sven Schreiber |
| Abstract: | We extend the frequency-specific Granger-causality test of Breitung et al. (2006) to a more general null hypothesis that allows causality testing at unknown frequencies within a prespecified range of frequencies. This setup corresponds better to empirical situations encountered in applied research and it is easily implemented in vector autoregressive models. We also provide tools for estimating the phase shift/delay at some prespecified frequency or frequency band. In an empirical application dealing with the dynamics of US temperatures and CO2 emissions we find that emissions cause temperature changes only at very low frequencies with more than 30 years of oscillation. Furthermore we analyze the indicator properties of new orders for German industrial production by assessing the delay at the frequencies of interest. |
| Keywords: | Granger causality, frequency domain, filter gain |
| JEL: | C32 C53 E32 Q54 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:165-2016&r=mac |
| By: | Taoual, Safiyah (Kingston University London) |
| Abstract: | This paper explores the significance of Islamic Sukuk instruments for stability in the GCC. As a result of the financial crisis of 2007-2008, interest in financial stability has increased. Islamic scholars suggest that Islamic financial institutions and products have the potential to contribute in achieving a more stable economic environment. This paper analyses Sukuk, an Islamic financial instrument with both bond and equity traits; and how it can contribute to achieving a more sound and resilient economic environment in the GCC. Findings suggest that Sukuk do have the potential to effectively contribute to the GCC’s economic stability; as long as they adhere to the pure Islamic financial principles and avoid trying to be comparable to conventional bonds. Currently, however there appears a heavy reliance on shorter term issuances, along with the majority of issuances in the USD, a heavy reliance on real estate as both a means of financing an underlying collateral in Islamic securitization; elements which could be destabilising especially during destress. The originality of this paper lies in its empirical contribution, as it, for the first, time sets out systematically the characteristics of Sukuk issuance in the GCC region with respect to Sukuk maturity, issuance currency and sectoral distribution. It also assesses the various Sukuk structures and the underlying risks involved; as well as the impact of collateral in Islamic securitization. |
| Keywords: | Islamic Finance; Sukuk; Financial stability; GCC; Development |
| JEL: | E44 L79 O16 P50 Z12 |
| Date: | 2016–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kngedp:2016_007&r=mac |
| By: | Ergys Islamaj (Development Prospects Group-The World Bank); Ayhan Kose (Development Prospects Group-The World Bank) |
| Abstract: | This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income. |
| Keywords: | Consumption Sensitivity, Financial Integration, Risk Sharing, Intertemporal Smoothing. |
| JEL: | E21 F02 F4 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1602&r=mac |
| By: | Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University); Christian Alexander Mongeau Ospina (Italian Association for the Study of Economic Asymmetries) |
| Abstract: | Building on the well-established “rockets and feathers” literature, and on the recently developed nonlinear autoregressive distributed lag (NARDL) modelling, we investigate the asymmetries in gasoline pricing on a comprehensive sample of monthly data from twelve Eurozone countries running from 1994:1 to 2014:12. The empirical results feature two robust patterns. Firstly, while the effects of exchange rate variations display a positive asymmetry (i.e., devaluations have a greater impact with respect to revaluations), crude price variations induce negative asymmetry (i.e., reductions in the price of crude oil have a greater impact than price rises). Secondly, the positive asymmetry to exchange rate changes is much stronger in core Eurozone countries. The negative asymmetry with respect to crude oil prices confirms the results of recent empirical research and theoretical models. |
| Keywords: | asymmetric cointegration, asymmetric price adjustment, pass-through, gasoline price, European gasoline market, signaling. |
| JEL: | C22 D43 D82 E31 L71 Q41 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ais:wpaper:1602&r=mac |
| By: | Santos, João; Domingos, Tiago; Sousa, Tânia; St. Aubyn, Miguel |
| Abstract: | Neoclassical models disregard the role of energy in production, equating a factor's output elasticity with its cost share, but failing to explain growth without a residual term. In contrast, ecological economics acknowledges energy's importance in production, regardless of its cost share. The aggregate production function (APF) concept, central to neoclassical theory, is also disputed. We apply cointegration analysis to test for APFs between output, capital, and labor. We investigate the inclusion of energy inputs, measuring energy's capacity to generate productive work (useful exergy). Plausible APFs must verify cointegration and Granger-causality between output and inputs; and non-negative output elasticities. This method recognizes cases where: a) plausible APFs don't exist; b) energy impacts growth directly; c) energy impacts growth indirectly, through other inputs. We apply the method to Portugal (1960-2009), considering standard and quality-corrected capital and labor measures. Plausible APFs are rarely obtained for capital-labor models. When they are, the residual growth component is large, and output elasticities disagree with historical cost shares. However, the residual is virtually eliminated for capital-labor-energy models with two cointegration relationships: a) a capital-labor APF, with output elasticities matching historical cost shares; b) a function estimating capital from useful exergy. These models reconcile energy's significance in production with cost-share neoclassical assumptions. |
| Keywords: | Cointegration; Aggregate production function; Cost shares; Solow residual; Useful exergy |
| JEL: | C01 E13 O47 Q43 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70850&r=mac |
| By: | Kazuki Tomioka; Rod Tyers |
| Abstract: | This paper examines the contributions of foreign growth (particularly in China), on Japan's domestic economic performance and inequality. While the standard approach to external sources of inequality has emphasized transmission through trade and labor markets, here the emphasis is on financial flows. We begin by exploring this link using a three factor, three sector, two-region dynamic computable general equilibrium model (CGE), in which the regions are interlinked by both trade and financial flows. To provide an empirical perspective, a lag-augmented vector autoregression (LA-VAR) and a sign restricted vector autoregression (Sign restricted VAR) are estimated. We find convincing evidence through numerical simulations that strong growth in a near neighbor not only retards domestic performance but also raises home inequality. Empirical results suggest that growth in China has a significant delayed effect in aggravating Japanese inequality and its importance in explaining Japanese inequality increases in magnitude over time. |
| Keywords: | Japanese inequality, Foreign growth, Stagnation, Financial linkages, CGE, Lag augmented, Sign restriction, VAR. |
| JEL: | C32 C68 E25 F21 F41 F60 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-21&r=mac |
| By: | Borrás, Susana (Copenhagen Business School); Jordana, Jacint (IBEI & Universitat Pompeu Fabra) |
| Abstract: | In spite of recent advancements regarding regional innovation policy rationales and evidence, there are few analyses about the actual features of existing regional innovation policies. Nevertheless, a policy analysis perspective is important in order to recognise their distinctive patterns across regions, and to understand how rationales and evidence can be translated into policy-making. To this purpose, this paper develops a framework to study the extent to which regional innovation policies have changed during the past few years. Since the mid-2000s there has been an important development of innovation policy rationales, advocating for more specialisation; likewise, greater data availability at the regional level has allowed more sophisticated assessment of innovation performance. Finally, the crisis since 2008 has had ravaging effects in some regions, with job losses and severe economic sluggishness. Therefore, it is reasonable to expect transforming dynamics in regional innovation policies. Against this backdrop, the paper compares the institutional frameworks and budgetary priorities of four Spanish regions during the period 2001-2014: Catalonia, the Basque country, Galicia, and Andalusia. In so doing, it aims at studying the extent to which regional governments have readily addressed past and new challenges related to their regional innovation system, and if so, how. |
| Keywords: | Catalonia; Basque country; Galicia; Andalusia; regional innovation system; smart specialisation; policy change; regional advantage; policy mixes; policy instruments; regulatory governance; Spain |
| JEL: | E61 O31 O38 |
| Date: | 2016–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lucirc:2016_012&r=mac |
| By: | David CASHIN; UNAYAMA Takashi |
| Abstract: | We test the Life Cycle/Permanent Income Hypothesis (LCPIH) using Japan's 2014 value-added tax (VAT) rate increase as a natural experiment. The VAT rate increase represents an unanticipated and proportional reduction in lifetime resources for several reasons: few goods and services are exempt from the VAT; the tax rate increase was uncompensated; it was fully passed on to households in the form of higher prices; and the VAT increase was not anticipated prior to Prime Minister Shinzo Abe's October 2013 announcement. Contrary to the excess smoothness literature, we find that consumption fell in proportion to the income shock upon announcement, implying that we cannot reject the LCPIH. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:16052&r=mac |
| By: | Fernando E. Alvarez; Katarína Borovičková; Robert Shimer |
| Abstract: | We develop a dynamic model of transitions in and out of employment. A worker finds a job at an optimal stopping time, when a Brownian motion with drift hits a barrier. This implies that the duration of each worker's jobless spells has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers in the parameters of this distribution and prove that the distribution of these parameters is identified from the duration of two spells. We use social security data for Austrian workers to estimate the model. We conclude that dynamic selection is a critical source of duration dependence. |
| JEL: | E24 J64 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22188&r=mac |
| By: | Nikolaos Antonakakis (Department of Economics and Finance, University of Portsmouth; Department of Business and Management, Webster Vienna Private University); Christina Christou (University of Pireaus, Department of Banking & Financial Management, Greece); Juncal Cunado (University of Navarra, School of Economics, Spain); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | This study examines the convergence patterns of Euro Area (EA) 17 countries’ sovereign bond yield spreads (relative to German bund) over the period of March 2002 to December 2015, by employing the convergence algorithm developed by Phillips and Sul (2007). The empirical findings suggest rejection of full convergence across the EA17 countries’ bond yields spreads, and the presence of a certain number of clubs. In particular, three subgroup convergence clubs emerge, with Cyprus, Spain, France, Greece, Ireland, Lithuania, Luxembourg, Latvia, Portugal and Slovenia in the first; Belgium, Italy and Malta in the second; and Austria, Finland, Netherlands and Slovakia in the third club. Moreover, there is also evidence that the first two clubs could be merged to form a larger convergence club. The transitional curves indicate that, despite short-run divergences, EU17 sovereign bond yield spreads tend to converge over the long, with the exception of those in Greece and Cyprus, indicating the strong attempts of most of the countries under investigation to adopt fiscal policies that eventually contribute to a convergence pattern. |
| Keywords: | Sovereign bond yield spreads, Club convergence, Euro Area |
| JEL: | C33 E61 G12 H77 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201616&r=mac |
| By: | Shahbaz, Muhammad; Chaudhary, A. R.; Ozturk, Ilhan |
| Abstract: | This paper reinvestigates the relationship between urbanization and energy consumption in case of Pakistan for the period of 1972Q1-2011Q4 by employing the STIRPAT (Stochastic Impact by Regression on Population, Affluence and Technology) model. We have employed the ARDL bounds testing approach to cointegration in the presence of structural breaks stemming in the series to count for these missing elements in other studies. Finally, the VECM Granger causality approach has been applied to examine the causal relationship between the variables. Our results show that urbanization adds in energy consumption. Affluence (economic growth) increases energy demand. Technology has positive impact on energy consumption. An increase in transportation is positively linked with energy consumption. The causality analysis indicates the unidirectional causality running from urbanization to energy consumption. |
| Keywords: | Urbanization, Energy Demand, STIRPAT, Pakistan |
| JEL: | E00 |
| Date: | 2016–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70313&r=mac |
| By: | Tilak, Doshi; Fred, Joutz; Lakuma, Corti Paul; Lwanga, Musa; Baltasar, Manzano |
| Abstract: | Recent natural resource discoveries in East Africa provide an enormous opportunity for development. We focus on oil discoveries in Uganda and their expected impact on government revenues. We analyze alternative spending policies of natural resource revenues using a calibrated dynamic, stochastic, general equilibrium model (DSGE). We use detailed publicly-available information on the upstream oil sector and the fiscal regime to derive realistic cost and government revenue profiles across a range of oil price scenarios. This enables us to project annual production, fixed and variable costs, and government revenues for given global oil price paths. We compare the potential effects of income transfers versus public investment spending, as well as front-loaded versus gradual public investment policies. We also assess the impacts of alternative assumptions on the efficiency of public investment due to constraints on absorptive capacity. In terms of economic welfare, income transfers dominate public investments (whether gradual or front-loaded) given the typically low discount factors for households in low-income developing countries. Similarly, front-loaded investment policies dominate gradual investment policies given the low discount factors. However, our simulations show that as individuals care more about the future (i.e. have a lower discount rate), the welfare order of policies change, as the productivity effect of public investment produces a higher increase in consumption and welfare even though this increase is lagged in time. |
| Keywords: | Environmental Economics and Policy, Farm Management, Land Economics/Use, Research and Development/Tech Change/Emerging Technologies, |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcrs:234556&r=mac |
| By: | Karen Davtyan (AQR Research Group-IREA. University of Barcelona) |
| Abstract: | The distributional effect of monetary policy is estimated in the case of the USA. In order to identify a monetary policy shock, the paper employs contemporaneous restrictions with ex-ante identified monetary policy shocks as well as log run identification. In particular, a cointegration relation has been determined among the considered variables and the vector error correction methodology has been applied for the identification of the monetary policy shock. The obtained results indicate that contractionary monetary policy decreases income inequality in the country. These results could have important implications for the design of policies to reduce income inequality by giving more weight to monetary policy. |
| Keywords: | Income inequality; monetary policy; cointegration; identification. JEL classification: C32; D31; E52 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201606&r=mac |